[00:00:01] Speaker 00:
Inray Botello, Hawaii Enterprises, Inc.

[00:00:06] Speaker 00:
Frederick Ehrensmeyer, appearing for Appellants.

[00:00:09] Speaker 00:
Chuck Choi, appearing for Appellees.

[00:00:15] Speaker 00:
All right.

[00:00:16] Speaker 00:
Appellant.

[00:00:21] Speaker 02:
And would you like to reserve any time?

[00:00:24] Speaker 05:
I would like to reserve six minutes, please.

[00:00:25] Speaker 02:
All right.

[00:00:26] Speaker 02:
Thank you.

[00:00:31] Speaker 05:
Your Honors, this appeal arises from a trial on a very specific and limited issue, and that was whether or not the Chapter 11 plan proposed by the creditor, I mean the debtor, met the best interest of the creditor test under 11 USC 1129A.

[00:00:54] Speaker 05:
Under that statute, there is an evidentiary standard.

[00:00:58] Speaker 05:
There's a burden that's placed upon the debtor, the proponent of the plan.

[00:01:05] Speaker 05:
The burden is an evidentiary burden by a preponderance of evidence.

[00:01:11] Speaker 05:
And the debtor must show that creditors would not receive more in a liquidation scenario, hypothetically speaking.

[00:01:24] Speaker 04:
I mean, that's kind of baked into the obligation.

[00:01:28] Speaker 04:
I mean, the problem with this in large part is that this is a hypothetical exercise.

[00:01:32] Speaker 04:
So it doesn't have the laser focus that you would hope that specific find because you're projecting.

[00:01:41] Speaker 05:
It is, of course, but at the same time, that hypothesis must be based on evidence.

[00:01:48] Speaker 04:
There was quite a bit of evidence.

[00:01:51] Speaker 04:
Just running through the numbers and trying to keep the numbers straight.

[00:01:55] Speaker 04:
I mean, you've got four liquidation analysis and then

[00:01:59] Speaker 04:
Judge Farris's findings from there.

[00:02:02] Speaker 05:
OK, so first of all, I would submit that a liquidation analysis in and of itself is not evidence.

[00:02:09] Speaker 05:
It is a hypothesis.

[00:02:11] Speaker 05:
In order to determine whether or not that liquidation analysis, in fact, meets the standard, now we need evidence.

[00:02:19] Speaker 05:
Now we need testimony.

[00:02:20] Speaker 05:
And that burden is a prima facie burden that falls on the proponent first, only after that burden is met.

[00:02:30] Speaker 05:
does the burden then shift to the opposing party to come forth with their own evidence?

[00:02:35] Speaker 02:
So what are you saying that Judge Farris did, Ron?

[00:02:39] Speaker 05:
Three things, Your Honor.

[00:02:41] Speaker 05:
First of all, number one, Judge Farris made a finding that the liquidation analysis of the dairy assets alone, which included the leashes, excuse me, the structures, all the livestock, the equipment, everything combined, he said $700,000.

[00:03:01] Speaker 05:
Now that was based on, he pointed to the $700,000 figure.

[00:03:05] Speaker 05:
That was based on a contract that my client entered into in 2020.

[00:03:10] Speaker 05:
It still wanted to pursue.

[00:03:11] Speaker 05:
It still wanted to pursue.

[00:03:12] Speaker 05:
At the time that the petition was filed, it was our position that that was still an enforceable contract.

[00:03:19] Speaker 05:
That was the basis of our claims in the bankruptcy.

[00:03:24] Speaker 04:
So that's a big component of this.

[00:03:26] Speaker 04:
So let's break that one down.

[00:03:28] Speaker 04:
Why is that wrong?

[00:03:31] Speaker 04:
Why does a later offer that was accepted and sought to be enforced trumped by a prior appraisal of the leasehold interest, which, as the testimony indicated, seemed to be drawn itself in a very hypothetical manner, ignoring the lease restriction and relying upon the zoning

[00:03:56] Speaker 05:
But I certainly think all of those are relevant factors.

[00:04:01] Speaker 05:
And I don't criticize Judge Farris for his criticism of our expert valuation.

[00:04:08] Speaker 05:
What I do criticize him for, however, is the lack of any competing evidence set forth on a prima facie basis by the debtor in this case.

[00:04:18] Speaker 04:
But this is what's important, at least when I was breaking it down, is that that's

[00:04:24] Speaker 04:
A lot of this case is if your valuations depend upon the separate value of the dairy lease and also the separate valuations of the dairy cows.

[00:04:40] Speaker 04:
Judge Farris hearing the evidence morphed that into took your $700,000, which as you indicated wraps up everything, the lease, the structures and the cows.

[00:04:52] Speaker 04:
which has a significant impact on his valuation leading him to believe that the liabilities were clearly in excess of.

[00:05:02] Speaker 04:
So you indicated all those are relevant.

[00:05:04] Speaker 04:
Why is it clearly erroneous then?

[00:05:08] Speaker 05:
Well, it's a question of the circumstances.

[00:05:11] Speaker 05:
And I believe in the decision, Judge Ferris used language.

[00:05:16] Speaker 05:
I don't remember the exact words, but he speculated there's no way that the value would have come up between 2020 and the time of trial.

[00:05:25] Speaker 05:
But what was important and what I believe he overlooked was the circumstances in 2020.

[00:05:32] Speaker 05:
coming out of the worst drought that the dairy had ever experienced and facing the loss of the only dairy processor on the island.

[00:05:42] Speaker 05:
Metalgold was headed for bankruptcy.

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It looked like they were shuttering.

[00:05:46] Speaker 05:
And in fact, that was likely going to happen.

[00:05:50] Speaker 05:
My clients had a unique business proposal where they were going to produce on their own.

[00:05:55] Speaker 05:
They were going to make cheese and different in-house products.

[00:05:58] Speaker 05:
And so that was all factored in.

[00:06:00] Speaker 05:
By the time of trial, this metal gold processing plant had been resurrected out of bankruptcy.

[00:06:09] Speaker 05:
It was functioning.

[00:06:09] Speaker 05:
It was paying a higher price, in fact, for milk.

[00:06:14] Speaker 04:
And yet still having to obtain dip financing to survive in the evidence was, what, $150,000 per month burn rate just to keep the cattle in place.

[00:06:27] Speaker 05:
Well, yes.

[00:06:29] Speaker 05:
But I'm talking about the processing plant, which is metal gold.

[00:06:33] Speaker 04:
Right.

[00:06:34] Speaker 04:
That's to the good part of the lever.

[00:06:36] Speaker 04:
That improved in the interim between the appraisal and that.

[00:06:40] Speaker 04:
But there's a whole other side, which is really what seems like Judge Farris focused on, which is these cows are not getting enough.

[00:06:47] Speaker 04:
The pasture isn't enough for the beef cattle.

[00:06:51] Speaker 04:
All of this burn rate for the dairy.

[00:06:53] Speaker 04:
There's nobody else stepping up.

[00:06:55] Speaker 04:
you know to buy as a dairy which caps the valuation of that asset.

[00:07:02] Speaker 04:
So you've got the classic there's two sides of this it seems and he picked one.

[00:07:10] Speaker 05:
You know I again it's speculating whether anyone would would step up to purchase these assets we know that it's not speculating that no one did.

[00:07:19] Speaker 04:
I mean, between the appraisal in 2020 and the hearing, there was no other entity that stepped up and said, I would like to, in a classic bankruptcy situation, I would like to acquire these assets.

[00:07:33] Speaker 05:
There was never a real opportunity to do so.

[00:07:35] Speaker 05:
The place was under contract.

[00:07:37] Speaker 05:
By the time we were in bankruptcy, Bauman Sadehi had basically engineered a process to use the bankruptcy court to complete essentially a sale, a purchase.

[00:07:48] Speaker 05:
And I will say his attorneys did an excellent job of using the process.

[00:07:52] Speaker 05:
I don't know that it was what bankruptcy was intended for, but it's the result nevertheless.

[00:07:58] Speaker 04:
But that gets to your point, and it's a very important one that you led with, and I agree hard.

[00:08:02] Speaker 04:
This is a very limited appeal.

[00:08:04] Speaker 04:
It is.

[00:08:05] Speaker 04:
I mean, we're only on liquidation.

[00:08:07] Speaker 04:
When you say that in the tone with which you say it, I understand that good faith may have been there, improper purpose, whatever, but that's not what's been appealed.

[00:08:16] Speaker 04:
That's right.

[00:08:20] Speaker 05:
Which is why I'd like to move on to my second point before I run out of time.

[00:08:24] Speaker 05:
And that's Judge Farris's speculation about, well, if we were to liquidate cattle,

[00:08:32] Speaker 05:
In my experience, I believe he used the words in his decision.

[00:08:36] Speaker 05:
In my experience, I think a trustee is gonna be required to advance freight costs.

[00:08:42] Speaker 05:
Again, this is another issue where there really was no evidence saying one way or the other.

[00:08:49] Speaker 05:
So he sided with the proponent of the plan who again had the burden.

[00:08:53] Speaker 05:
They needed to take a position and prove their position.

[00:08:57] Speaker 05:
We stepped in with,

[00:08:59] Speaker 05:
conflicting evidence suggesting otherwise.

[00:09:03] Speaker 05:
Point is, there was no admissible evidence demonstrating that, well, supporting Judge Farris' assumption.

[00:09:12] Speaker 05:
And that's what it was.

[00:09:13] Speaker 05:
It was an assumption based on the lack of evidence.

[00:09:17] Speaker 05:
If, in fact, that was the case, where was the witness testimony?

[00:09:21] Speaker 05:
You know, we had some some witness testimony from the debtor about I believe the value of livestock in Idaho and the cost to ship livestock on an airplane, but what we didn't have is any admissible evidence.

[00:09:37] Speaker 05:
demonstrating that, okay, cattle cannot be purchased on island, delivery taken there and shipped to the mainland.

[00:09:46] Speaker 04:
Like Mr. Botello testified, you're into your six minutes and I don't want to catch off, but I do have a question that's been bothering me and it's important if I do want to know.

[00:09:56] Speaker 04:
I appreciate that, but the bigger problem that I have is getting back

[00:10:01] Speaker 04:
Judge Ferris decided the 700,000 for the dairy, the lease, the structure, everything, and the cattle.

[00:10:09] Speaker 04:
And yet the numbers that were run and then used included both evaluation for slaughter of dairy cows and ranch cows.

[00:10:19] Speaker 04:
Isn't that double counting under Judge Ferris's

[00:10:24] Speaker 04:
model right you're selling the the dairy for 700,000 and giving as part of that sale you generate 700,000 for the cattle the dairy cattle there as well

[00:10:35] Speaker 04:
Don't you have to take them out?

[00:10:36] Speaker 04:
And there's nothing to slaughter them from the dairy side of this.

[00:10:40] Speaker 05:
And I believe that that's where I see error in the decision.

[00:10:43] Speaker 05:
That $700,000 figure.

[00:10:44] Speaker 05:
Right.

[00:10:46] Speaker 05:
You disagree with that.

[00:10:47] Speaker 04:
But if that $700,000 is valid, you need to back out the $1,100 dairy cattle that are to be slaughtered.

[00:10:53] Speaker 04:
That's true.

[00:10:54] Speaker 02:
That makes the number even worse.

[00:10:56] Speaker 05:
That kind of moots, really, any error on the cost, doesn't it?

[00:11:00] Speaker 05:
I mean, if you accept the $700,000 figure, which we don't.

[00:11:07] Speaker 05:
Last point, I'd like to reserve a few minutes.

[00:11:09] Speaker 05:
Last point, the $700,000 was for the dairy asset.

[00:11:16] Speaker 05:
That's only half of the equation.

[00:11:19] Speaker 05:
The other half, Judge Ferris recognized the evidence was thin.

[00:11:22] Speaker 05:
That's the ranch.

[00:11:24] Speaker 05:
I'm not going to say the ranch lease.

[00:11:26] Speaker 05:
That is the ranch assets.

[00:11:28] Speaker 05:
Again, the leases, all of the improvements, all of the beef livestock.

[00:11:34] Speaker 05:
And there was substantial testimony by Mr. Botello about how beef livestock are typically marketed and sold on the island to mainland purchasers who then ship them away.

[00:11:45] Speaker 05:
That was in the record.

[00:11:49] Speaker 05:
That is inconsistent with Judge Farris's speculation regarding requiring a trustee to advance shipping costs.

[00:11:59] Speaker 01:
But Council, those are my three points and I'm sorry, Council.

[00:12:04] Speaker 01:
If you're right, and if there was another way, would the difference in the price that you're suggesting that they would have been able to obtain

[00:12:15] Speaker 01:
demonstrated that the assets, if done a different way, liquidated, would have generated enough to actually return money to unscrupulous creditors?

[00:12:26] Speaker 01:
Or are you talking about a difference of several hundred thousand dollars, which in the grand scheme of things wasn't sufficient to overcome the million dollars that Judge Farris indicated would have to be generated in order for the unscrupulous creditors to receive it?

[00:12:42] Speaker 05:
So I believe that everything, when taken in totality, there would have been funds left to pay creditors.

[00:12:51] Speaker 05:
On this specific issue of the livestock, if delivery were taken in Hawaii as opposed to on the mainland, what I would suggest, and again, this is not in evidence, but as a practical matter, the market value of those cattle

[00:13:05] Speaker 05:
would have been reduced by approximately the cost of shipping.

[00:13:09] Speaker 05:
But that would have been the price paid on the dock in Hawaii.

[00:13:16] Speaker 05:
But in any event, cattle plus equipment plus leases, all of this stuff taken in total, there would have been funds left.

[00:13:26] Speaker 05:
And the record here just isn't sufficient to say that there wouldn't have been.

[00:13:31] Speaker 05:
Nothing further.

[00:13:32] Speaker 02:
Thank you.

[00:13:37] Speaker 02:
Mr. Choi.

[00:13:42] Speaker 03:
Thank you.

[00:13:43] Speaker 03:
The question by Judge Gan is frankly on the nose.

[00:13:51] Speaker 03:
This is a largely, I would, futile exercise on the part of the appellants to

[00:14:08] Speaker 03:
try to hit a nut, 2.2 million, the total admin priority and secured debts that must be paid before general and secured creditors receive a dollar.

[00:14:25] Speaker 03:
And that's a very high hurdle.

[00:14:28] Speaker 03:
The 2.2 million nut will never be reached if

[00:14:36] Speaker 03:
This appellate panel agrees with Judge Ferris that the value of the dairy lease is not 1.15 million as asserted in a purported market value appraisal that was three years old as of the time of trial.

[00:15:02] Speaker 03:
There's testimony in the record where the appraiser

[00:15:06] Speaker 03:
acknowledges that it's not a liquidation valuation.

[00:15:12] Speaker 03:
So the evidentiary value of that appraisal was low and Judge Farris correctly disregarded that appraisal.

[00:15:22] Speaker 03:
Similarly, the expert for the appellant, Gary Genski, who

[00:15:30] Speaker 03:
ironically introduced Baman Sadegi, the current majority owner of Botello Hawaii Enterprises, to Mr. Keis Kea, the principal behind the Kea parties.

[00:15:47] Speaker 03:
In 2002, Mr. Sadegi brought Mr. Kea over to the Big Island for Mr. Sadegi's dairy operation.

[00:15:57] Speaker 03:
They parted ways in 2007, and Mr. Kea, the record shows, has been trying to purchase the dairy operation since 2015 or 16.

[00:16:11] Speaker 03:
The point here is that the dairy lease

[00:16:17] Speaker 03:
is not worth 1 million plus.

[00:16:20] Speaker 03:
And the judge correctly found that.

[00:16:22] Speaker 03:
And if you look at the dairy assets, there's really no dispute regarding the valuation of the equipment.

[00:16:29] Speaker 03:
Keep in mind, Your Honors, the ranch lease is just pasture land.

[00:16:37] Speaker 03:
I've never done a chapter 12.

[00:16:39] Speaker 03:
I've never done a farm case.

[00:16:43] Speaker 03:
Judge Gann's colleague, Judge

[00:16:45] Speaker 03:
Collins, who I drew in a Guam bankruptcy, in a call said, Chuck, if you come to Arizona, we have ostrich farm cases.

[00:16:56] Speaker 03:
Well, in Hawaii, this is my first experience with cattle.

[00:17:03] Speaker 03:
Equipment and cattle.

[00:17:12] Speaker 03:
The ranch lease similarly has no value.

[00:17:17] Speaker 04:
Can I back up though?

[00:17:18] Speaker 04:
Because I'm still trying to get clarity as to the valuation aspect.

[00:17:22] Speaker 04:
And when you mentioned the FF and E really wasn't disputed.

[00:17:28] Speaker 04:
It was very narrow.

[00:17:29] Speaker 04:
It was $20,000.

[00:17:32] Speaker 04:
And then the cattle isn't.

[00:17:34] Speaker 04:
When Judge Ferris used the $700,000 figure for the dairy,

[00:17:39] Speaker 04:
Do you agree that all of that was wrapped up to that $700,000, that there really was no other valuation to be given for the dairy equipment and the dairy cattle?

[00:17:53] Speaker 04:
Or is that in addition to the $700,000?

[00:17:56] Speaker 04:
It was all wrapped up, Your Honor.

[00:17:58] Speaker 03:
And it's consistent with our evidence.

[00:18:02] Speaker 03:
Our liquidation analysis, which was backed by declarations from various parties, including the debtor, penciled in about $100,000 for the FF&E.

[00:18:14] Speaker 03:
We had a range, $250,000 to $500,000 for the leases.

[00:18:20] Speaker 03:
So if you do some rough math, and I understand we're lawyers and there's a reason why we're not engineers and scientists, if you do the rough math, that's $100,000 for

[00:18:33] Speaker 03:
FF&E, quarter million for the lease.

[00:18:37] Speaker 03:
I'm up to 350.

[00:18:39] Speaker 03:
And then a quarter million or so for the slaughter value of the dairy cattle.

[00:18:45] Speaker 03:
It's undisputed.

[00:18:46] Speaker 03:
There is no market in the state of Hawaii for dairy cows for the simple reason that this is the last dairy

[00:18:54] Speaker 03:
commercial dairy within the state and so that's why you were talking about the slaughter value only yes yes that's what the testimony was that's what the testimony was and there's plenty of evidence in the record regarding the last or the second to the last commercial dairy in the state of hawaii which was started by very prominent apparently uh dairymen from idaho they invested a tremendous amount of money into the big island

[00:19:25] Speaker 03:
they ended up liquidating their dairy cattle.

[00:19:29] Speaker 03:
They shipped a couple thousand over, but as the Sadegi Declaration and the articles and other evidence show, the remaining 1,000 had to be essentially sold, given away on the island of Hawaii.

[00:19:46] Speaker 03:
We only have 2,000 or so cows, about 1,100 on the dairy side,

[00:19:53] Speaker 03:
and about 1,100 on the ranch side.

[00:19:57] Speaker 03:
If the panel agrees the ranch lease doesn't have a million dollar feed value as claimed by Mr. Genski, then really we'll never- We didn't have any value from your side on the ranch lease, I think, right?

[00:20:11] Speaker 02:
We just had argument.

[00:20:13] Speaker 03:
We had in the liquidation analysis- A range.

[00:20:17] Speaker 03:
A range of 250 to 500,000, even if you take that $500,000

[00:20:23] Speaker 03:
high range, we fall way short of the amount necessary to have any proceeds from a hypothetical liquidation reach general unsecured creditors.

[00:20:45] Speaker 03:
The argument that there was no evidence in support of the liquidation analysis, I think, is just refuted by, yes, Your Honor.

[00:20:57] Speaker 01:
So the appellant is suggesting that we should not have, that Judge Farris should not have relied upon the value of the offer because circumstances had substantially changed.

[00:21:14] Speaker 01:
during the time, from the time of the offer until the trial.

[00:21:19] Speaker 01:
And it appears, I think, I'm correct, that Judge Farris didn't believe circumstances were better.

[00:21:27] Speaker 01:
And I just wondered if you could point out what evidence you think was presented that would have supported that conclusion.

[00:21:38] Speaker 03:
Your honor, there's evidence in the record regarding annual sales from the debtor, from both the dairy and the ranch operation.

[00:21:50] Speaker 03:
There is also judges finding that the leases, by definition, couldn't be worth more because three years had elapsed since

[00:22:04] Speaker 03:
the time that Mr. Kea and Mr. Botello or the Botello family entered into that $700,000 contract for the purchase and sale of the dairy assets.

[00:22:16] Speaker 01:
Did the fact that there had to be a white knight, so to speak, come in and offer money to keep the debtors facilities operating suggest that things had also deteriorated financially?

[00:22:34] Speaker 03:
Well, certainly, if you look at the record, it's pretty apparent that this debtor has been in financial distress for the better part of the decade that preceded the purchase and sale contract between Botello Hawaii Enterprises and Mr. Kea.

[00:23:03] Speaker 03:
The debtor was already years before the petition date liable to a mainland feed company to the tune of a half a million dollars.

[00:23:15] Speaker 03:
The debtor was not able to sell, except to Mr. Kea, the dairy.

[00:23:27] Speaker 03:
Mr. Kea needed financing to acquire the dairy.

[00:23:34] Speaker 03:
There were no offers for the ranch.

[00:23:38] Speaker 03:
Judge Spraker mentioned a burn rate of 150,000.

[00:23:41] Speaker 03:
I'm going to correct, Your Honor, a little bit.

[00:23:43] Speaker 03:
It's actually 90,000.

[00:23:45] Speaker 03:
But the point is, it's 90,000 a month.

[00:23:49] Speaker 03:
And that is after Mr. Sadegi put in upwards of $2 million to keep this business going.

[00:24:02] Speaker 03:
I don't think there's any dispute that in a hypothetical chapter seven liquidation, there's not going to be any proceeds of sale or enough, as bankruptcy lawyers call it, enough water to reach the general unsecured creditors.

[00:24:21] Speaker 03:
This is really an appeal that should be and can be

[00:24:29] Speaker 03:
or a decision that can be affirmed just by looking at the values of the two leases.

[00:24:37] Speaker 03:
Because if the panel agrees the leases are not worth

[00:24:42] Speaker 03:
two and a half million and agrees with us that it's more likely that it's worth up to or at most 500,000, then all these other issues are frankly irrelevant.

[00:24:55] Speaker 03:
The cattle sale costs, the advance of the freight because the delta between the debtor's position and appellant's position on the value of

[00:25:11] Speaker 03:
the cattle at liquidation is less than a million.

[00:25:14] Speaker 03:
It's about 950,000.

[00:25:16] Speaker 03:
Even if the panel agreed with Mr. Genski's analysis of the liquidation value of the cattle, which we believe is completely off the mark, they fall short of that $2.2 million.

[00:25:33] Speaker 03:
Unless the panel judges have any questions, I have nothing for them.

[00:25:39] Speaker 02:
Any questions?

[00:25:40] Speaker 02:
Thank you.

[00:25:41] Speaker 03:
Thank you.

[00:25:52] Speaker 05:
Your honors, there's this suggestion that showed up in the proposed plan in the proposed liquidation analysis that the leases might be worth between $250,000 and $500,000.

[00:26:05] Speaker 05:
We had a trial on that issue and the debtor didn't present a shred of competent evidence with respect to valuation or lack of valuation of those leases.

[00:26:18] Speaker 05:
And what should have been expected of the debtor would be some kind of evaluation, perhaps an expert witness, a real estate broker, an appraiser, someone in the industry who could make

[00:26:30] Speaker 05:
an informed decision on behalf of the debtor as to the value or lack thereof of these leases.

[00:26:36] Speaker 05:
And this record is devoid of any of that.

[00:26:39] Speaker 05:
As defending parties, we presented what we had.

[00:26:43] Speaker 05:
But again, the defending party does not have the prima facie burden of proof on this kind of an issue.

[00:26:53] Speaker 05:
We don't believe that the plaintiff met its prima facie burden

[00:26:57] Speaker 05:
The evidence at the end of the day was inconclusive, and we believe that the Chapter 11 plan should have been rejected.

[00:27:06] Speaker 05:
For the reasons set forth in the brief and the reasons I've argued today, we would request that Judge Farris's decision be vacated and the matter remanded.

[00:27:17] Speaker 02:
All right.

[00:27:17] Speaker 02:
Thank you.

[00:27:18] Speaker 05:
Thank you.

[00:27:20] Speaker 02:
The matter will be submitted.

[00:27:21] Speaker 02:
Thank you.