LAWSUIT—Sanwa Bank Awarded $31 Million in Bizarre Lawsuit

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In a trial wild even by Los Angeles standards, a country club developer from Japan contended that he had sold Westside homes for $3.5 million in cash delivered in cardboard boxes and Samsonite suitcases, and so those properties were no longer his and could not be seized by Sanwa Bank Ltd.

Sanwa came to Los Angeles to pursue the assets of club builder Shigeru Kato, who the bank alleged had misused part of $100 million that Sanwa had lent him in the early 1990s to build the Onjuku Country Club and golf course in Japan.

Kato personally guaranteed the loans, but instead he improperly took part of the loan and purchased a house in Pacific Palisades and beachfront condo in Redondo Beach, Sanwa alleged in a suit it first brought against Kato in 1998.

Sanwa ultimately prevailed after an intense legal battle, and was awarded the two properties last month by Los Angeles Superior Court Judge James Otero.

The Kato-Sanwa dispute illustrates the type of asset fights that occur often in Los Angeles, an international city in which many overseas business people come to set up shop. Obviously, overseas lenders and business associates, when they feel they have been wronged, must come here to pursue assets.

“I am right now involved in another case which is similar, in which money was embezzled from the Far East, and dispersed into various and sundry properties here,” said Linda Dakin-Grimm, a litigation partner with Milbank Tweed Hadley & McCloy who represented Sanwa Bank. She called Los Angeles a mecca for international business people, many of whom acquire assets here.

But in the case of the Japanese developer Kato, he informed the Superior Court that the two residential properties weren’t his anymore, having been bought by a Japanese entity named Victoria Marine, which he said operated a marina in Japan.

The buying of property for cash, even for as much as $3.5 million, is commonplace in Japan, Kato and his associates contended in court proceedings and papers.

Kato’s defense

Despite some outward appearances, Kato is hardly a nefarious character, but rather an unlucky developer who got caught in Japan’s near perma-recession, said John J. Quinn, litigation partner with downtown Los Angeles law firm Riordan & McKinzie, who represented Kato.

“The Japanese economy took a wrong direction for Kato. The (Japanese golf course) ended up being worth less than what he had borrowed to build it,” said Quinn. “It’s a story repeated many times in the real estate industry. There is nothing sinister here.”

Quinn added that “there was nothing I ever saw in the documents that showed that the bank’s money” had been used to buy the properties in Redondo Beach and Pacific Palisades, the latter which overlooks the Riviera Country Club.

Kato had substantial assets of his own, separate from the troubled golf course development, said Quinn.

Quinn noted that, in particular, the Palisades house overlooked a golf course, obviously a pastime that Kato had reason to be interested in.

“Many foreigners like Southern California and buy property here,” said Quinn, denying that Kato was hiding assets.

Sanwa’s lawyers in Los Angeles had a different take on the properties, which they told the court had not been truly sold to Victoria Marine.

“When we checked the address of Victoria Marine in Japan, all that was there was a gravel pit,” said Milbank Tweed’s Dakin-Grimm. “We held up the picture of the gravel pit in court.”

Dakin-Grimm termed Victoria Marine to be a “fictional entity.”

Kato’s lawyer Quinn said, as far as he knew, Victoria Marina was a bona fide outfit.

Testimony denied

Kato produced witnesses who backed up his story about the cash payments, and even tried to present an expert witness who was to testify that large cash payments for property are common in Japan. “But Otero reviewed the expert witnesses credentials, and did not let him testify,” said Dakin-Grimm.

Ultimately, Judge Otero did not accept Kato’s explanation of the residential property sales, and awarded the properties to Sanwa Bank as part of a $31 million final judgment against Kato. The $31 million reflects that portion of the $100 loan that Sanwa claims has been misused, plus accumulated interest.

The case illustrates the frustrations that banks face when attempting to reclaim assets from borrowers who have acquired properties internationally, said Dakin-Grimm.

“You pretty much have to go after them in each jurisdiction in which they bought property. Sanwa is also pursuing Kato in Florida,” said Dakin-Grimm. “This one in Los Angeles was a dog fight.”

It was very difficult to arrange for a time and place to depose Kato, said Dakin-Grimm, noting that was one of the many snags the case presented. Eventually, after time-consuming deposition efforts in Japan proved fruitless, Judge Otero ordered Kato to Los Angeles to face a videotaped deposition, said Dakin-Grimm.

But Quinn presented a different view of Kato and banks.

“Banks have a certain amount of amnesia. They lend and encourage construction in good times, and then go after the developer’s assets when the economy turns south. It’s a story you see all the time,” he said. “When I met Kato, he had suffered a stroke, and was getting hurt by the bad economy. He is getting it from all sides.”

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