In re Genesys Data Technologies, Inc.

• Decision Date: 05 March 2001
• Docket Number: No. 23220.,23220.
• Citation: 18 P.3d 895,95 Haw. 33
• Parties: In re GENESYS DATA TECHNOLOGIES, INCORPORATED, Debtor. John Meindl, Genesys Data Technologies, Incorporated, Plaintiffs-Appellants, v. Genesys Pacific Technologies, Incorporated, Defendant-Appellee.
• Court: Hawaii Supreme Court

18 P.3d 895

95 Haw. 33

In re GENESYS DATA TECHNOLOGIES, INCORPORATED, Debtor.

John Meindl, Genesys Data Technologies, Incorporated, Plaintiffs-Appellants, v. Genesys Pacific Technologies, Incorporated, Defendant-Appellee.

No. 23220.

Supreme Court of Hawai`i.

March 5, 2001.

Dale A. Cooter and Donna S. Mangold (of Cooter, Mangold, Tompert & Wayson, P.L.L.C., Washington, DC), pro hac vice; and G. Richard Morry and Cheryl A. Nakamura (of Rush Moore Craven Sutton Morry & Beh), on the briefs, for plaintiffs-appellants.

Michael W. Skojec and Thomas C. Dame (of Gallagher, Evelius & Jones LLP, Baltimore, Md.), pro hac vice; and Robert G. Klein (of McCorriston Miho Miller Mukai) on the briefs, for defendant-appellee.

MOON, C.J., LEVINSON, NAKAYAMA, RAMIL, and ACOBA, JJ.

Opinion of the Court by MOON, C.J.

This case arises out of involuntary bankruptcy proceedings in Maryland instituted by creditor Genesys Pacific Technologies, Inc. (Pacific) against debtor Genesys Data Technologies, Inc. (Data) based upon a default judgment in the amount of $1,262,067.24 in favor of Pacific and against Data in an underlying action for breach of contract and tortious interference with contractual relationship in the state circuit court of Hawaii. The United States Bankruptcy Court for the District of Maryland disallowed a portion of Pacific's claim. On appeal from the bankruptcy court, the United States District Court for the District of Maryland reversed the decision of the bankruptcy court and allowed Pacific's entire claim. Thereafter, on appeal from the district court, the United States Court of Appeals for the Fourth Circuit concluded that, unless the default judgment was void under Hawai`i Rules of Civil Procedure (HRCP) Rule 54(c) (1990), principles of res judicata precluded the bankruptcy court from disturbing the Hawai`i judgment. In re Genesys Data Technologies, Inc., 204 F.3d 124, 129 (4th Cir.2000). Data maintains that the default judgment is void because the judgment awarded damages beyond those prayed for in the complaint, in violation of HRCP Rule 54(c) (1990), which provides as follows:

Demand for Judgment. A judgment by default shall not be different in kind from or exceed in amount that prayed for in the demand for judgment. Except as to a party against whom a judgment is entered by default, every final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in his pleadings.

(Bold emphasis in original.) (Underscored emphasis added.)

Finding no Hawaii law to guide its determination whether the judgment was void, the United States Court of Appeals for the Fourth Circuit certified the following question to this court:

Under Rule 54(c) of the Hawaii Rules of Civil Procedure, is Pacific's default judgment for $1,262,067.24 void when Data received notice of Pacific's complaint requesting "[g]eneral, special, treble, and punitive damages in an amount to be determined at trial" before the entry of any default, and Data received notice of the specific amount requested and itemization of damages claimed after the entry of the default but before the entry of judgment?

In re Genesys, 204 F.3d at 133. We accepted certification¹ and now answer the question in the negative.

I. BACKGROUND

In April 1991, Pacific filed suit against Data in the First Circuit Court of Hawaii on a variety of claims related to a contract between Data, a seller of optical disk-based imaging systems, and Pacific, its franchisee. The first amended complaint, filed in October 1992, requested damages for breach of contract, breach of the covenant of good faith and fair dealing, interference with contractual relationship, and alleged violations of Hawaii Revised Statutes (HRS) chapter 482E (1985), entitled, "Franchise Investment Law." In support of its breach of contract claim, Pacific did not expressly request damages for lost profits. However, Pacific alleged that, "[a]s a result of [Data's] material breach, [Pacific] has lost all of its marketing leads and its ability to operate as a viable entity. In addition, [Data's] actions have saddled [Pacific] with a valueless laser optical system." Further, in support of its claim of interference with contractual relationship, Pacific requested "punitive damages in an amount sufficient to punish or to set an example" and "to deter the reckless conduct of [Data.]" The complaint did not request damages in any specific amount but prayed for judgment awarding:

A. General, special, treble and punitive damages in an amount to be determined at trial[;]

B. Attorneys' fees, costs of suit and both pre-judgment and post-judgment interest; and

C. Such other and further relief as the Court deems just and proper.

Data initially defended the action, filing an answer and engaging in discovery. However, Data closed its business operations in Maryland in 1992 when its secured lender foreclosed on all of its assets. In October 1992, the circuit court granted a motion filed by the law firm representing Data to withdraw as counsel and, thereafter, Data ceased defending the action. In December 1992, Pacific moved for entry of default by the clerk of court pursuant to HRCP Rule 55(a) (1990)² and sent a notice of the motion to Data's Maryland office. Subsequent to a hearing, at which Data did not appear, the circuit court granted the motion, and the clerk entered default against Data on February 19, 1993. Pacific then moved for default judgment against Data pursuant to HRCP Rule 55(b) (1990)³ in the amount of $1,262,067.24 and again sent Data the notice of the motion and supporting documents to its Maryland office. The supporting documents included the affidavits of its attorney and of its president, Neil Alper, who itemized the damages to include $252,067.24 in total incidental losses, $750,000 in lost profits over five years, and $250,000 in punitive damages. Pacific also sought $10,000 in attorneys' fees. Data did not respond to the motion. On April 22, 1993, following a hearing that Data did not attend, the circuit court entered a default judgment in favor of Pacific in the requested amounts. The circuit court then sent a notice of entry of the default judgment to Data on April 26, 1993. Data did not file any post-judgment motions, take an appeal, or in any other manner contest the entry of default or default judgment in the state courts of Hawaii.

In 1994, Pacific filed the Hawaii judgment in the Circuit Court of Baltimore County, Maryland against Data to facilitate recovery on the judgment. When Data refused to honor Pacific's default judgment, Pacific initiated bankruptcy proceedings against Data and filed a claim in those proceedings based on the judgment. Data and its principal, John Meindl, objected to Pacific's assertion of the claim, contending that the Hawaii judgment was based on no real debt, was procured by fraud, and was void.

The bankruptcy court found that Alper's affidavit, filed in support of the default judgment, contained some fraudulent material representations involving an office lease and, thus, disallowed that portion of the claim. However, the bankruptcy court allowed the remainder of the claim as well as pre-petition interest and additional attorney's fees. On appeal from the bankruptcy court, the federal district court allowed Pacific's entire claim, concluding that the full faith and credit clause in article IV, section 1 of the United States Constitution prevented the bankruptcy court from disturbing the Hawaii judgment in any way.

Reviewing the district court's decision, the United States Court of Appeals for the Fourth Circuit clarified that, although the full faith and credit clause of the United States Constitution requires states to accord full faith and credit to the judgment of other states, a federal statute, 28 U.S.C. § 1738 (1994), directs federal courts to afford state court judgments full faith and credit. In re Genesys, 204 F.3d at 127. Section 1738 provides that "judicial proceedings . . . shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken." 28 U.S.C. § 1738. The United States Supreme Court has expressly held that the full faith and credit statute "directs a federal court to refer to the preclusion law of the State in which judgment was rendered." Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) (cited in In re Genesys, 204 F.3d at 127). Thus, the Fourth Circuit concluded that, if a Hawai`i court would grant the default judgment preclusive effect, then the bankruptcy court must grant the judgment the same effect. In re Genesys, 204 F.3d at 129.

Data argued that a Hawaii court would not give the judgment preclusive effect because it was based on no real debt, was procured by fraud, and was void under HRCP Rule 54(c). First, the Fourth Circuit rejected the contention that the default judgment would not be afforded preclusive effect under Hawai`i law because it was based on no real debt, holding that the default judgment in Pacific's favor "adjudicated" Pacific's allegations that Data breached its contractual and statutory obligations. Id. at 129-30. The Fourth Circuit further held that, under Hawai`i law, Data was time-barred from seeking to vacate the judgment based on fraud under HRCP Rule 60(b)(3) (2000).⁴ Id. at 131, 132. However, the Fourth Circuit, finding no Hawai`i precedent to guide its determination whether the default judgment was void under HRCP Rule 54(c), certified the question to this court. In re Genesys, 204 F.3d at 132-33.

II. DISCUSSION

Data contends that the default judgment entered by the Hawai`i circuit court in the amount of $1,262,067.24 is void because it violates the requirements of HRCP Rule 54(c). Data argues that, because Pacific's...