229 F.3d 877 (9th Cir. 2000), 99-16295, Kona Enterprises v. Estate of Bishop

Docket Nº:99-16295
Citation:229 F.3d 877
Party Name:KONA ENTERPRISES, INC., individually and derivatively on behalf of Hanford's, Inc. and Nationwide Industries, Inc.; BALANCED VALUE FUND, TACH ONE, on behalf of Montrose Nationwide Limited Partnership; WAYNE M. ROGERS; and JACK M. ERTINO, Plaintiffs-Appellants, v. ESTATE OF BERNICE PAUAHI BISHOP, by and through its trustees, Henry Peters, Myron B. T
Case Date:October 06, 2000
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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229 F.3d 877 (9th Cir. 2000)

KONA ENTERPRISES, INC., individually and derivatively on behalf of Hanford's, Inc. and Nationwide Industries, Inc.; BALANCED VALUE FUND, TACH ONE, on behalf of Montrose Nationwide Limited Partnership; WAYNE M. ROGERS; and JACK M. ERTINO, Plaintiffs-Appellants,



No. 99-16295

United States Court of Appeals, Ninth Circuit

October 6, 2000

Argued and Submitted August 2, 2000

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[Copyrighted Material Omitted]

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Russell S. Walker and Reid W. Lambert, Woodbury & Kesler, P.C., Salt Lake City, Utah, for the plaintiffs-appellants.

David Schulmeister and Kelly G. LaPorte, Cades Schutte Fleming & Wright, Honolulu, Hawaii, for the defendants-appellees.

Appeal from the United States District Court for the District of Hawai'i. David A. Ezra, District Judge, Presiding. D.C. No. CV-94-00858 DAE

Before: Harry Pregerson, Michael Daly Hawkins, and M. Margaret McKeown, Circuit Judges.

PREGERSON, Circuit Judge:

This case involves an award of attorneys' fees to defendants. Plaintiffs Kona Enterprises, Inc. ("Kona"), Tach One, Balanced Value Fund ("BVF"), Wayne M. Rogers ("Rogers"), and Jack Gertino ("Gertino") (collectively "plaintiffs") appeal the district court's order granting defendants'1

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Fed. R. Civ. P. 54(d) motion for attorneys' fees pursuant to Haw. Rev. Stat. § 607-14.2 Plaintiffs challenge the district court's determinations under Hawai'i law that plaintiffs' entire action is "in the nature of assumpsit, " that Rogers, Gertino, Tach One, and BVF are each "losing parties, " and that defendants are "prevailing parties." Plaintiffs also challenge the district court's decision denying their motion for reconsideration by which plaintiffs raised a choice-of-law issue for the first time.

We affirm in part, reverse in part, and remand for further proceedings.


A. Factual Background

In the underlying diversity action, plaintiffs' Second Amended Complaint3 filed on September 7, 1995 (the "Complaint") sought $4 million in damages as well as costs, interest, and attorneys' fees based on five causes of action: (1) breach of fiduciary duty; (2) breach of the covenant of good faith and fair dealing; (3) interference with corporate opportunity and economic advantage; (4) interference with corporate governance; and (5) constructive trust. The factual allegations set forth in the Complaint reveal the following:

Before 1990, defendants -in particular the Estate of Bernice Pauahi Bishop ("Bishop Estate") and its four individual trustees -joined with plaintiffs BVF, Tach One, Rogers, and Gertino in a series of transactions by which they became joint partners and fellow shareholders in various partnership entities that controlled Kona. Several of the investors -including the defendants and plaintiff Rogers -decided to use Kona as a vehicle to gain control of Hanford's Inc., a seasonal decorations company, and Nationwide Industries, Inc., an automobile products manufacturer (collectively the "Companies"). See Kona Enter., Inc. v. Estate of Bishop, 179 F.3d 767, 770 (9th Cir. 1999). By early 1991, Kona had acquired 100% of the stock in the Companies. This stock constituted Kona's only valuable asset.

At the time Kona acquired the Companies' stock, the Companies were obligated to BancBoston on separate commercial loans (collectively the "BancBoston Loans"). Beginning in December 1990, BancBoston communicated its intention to call the loans unless $6.5 million in over-advances made under the BancBoston Loans to the Companies were secured by letters of credit. Thereafter, defendants and Kona entered into a series of transactions and agreements by which the Bishop Estate agreed to provide the letters of credit sought by BancBoston. As consideration for the Bishop Estate's agreement to provide the letters of credit, Kona agreed to pay the Bishop Estate substantial fees, to pledge its stock in the Companies, and to give the Bishop Estate an option to purchase nearly all of Kona's common stock. Once the letters of credit were provided in February 1991, BancBoston agreed to extend the loan repayment

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periods to April 19, 1991, so that defendants, Kona, or the Companies could obtain long-term refinancing to replace the BancBoston Loans. When refinancing was not secured by April 12, 1991, BancBoston agreed to additional extensions on the Nationwide loan to July 5, 1991 and on the Hanford's loan to December 31, 1991 in exchange for further letters of credit from the Bishop Estate.

During this second loan extension period, the plaintiffs obtained a refinancing proposal from Security Pacific Business Credit ("SecPac"). Bishop Estate Trustee and individual defendant Matsuo Takabuki, on behalf of all defendants, told plaintiffs that the Bishop Estate could obtain refinancing on better terms and ordered Kona to reject the SecPac refinancing proposal. No further refinancing efforts were apparently made by anyone. Rather than seeking refinancing as promised, the Bishop Estate purportedly chose to purchase the BancBoston Loans itself in July (Nationwide) and December 1991 (Hanford's).

In February 1992, the Bishop Estate told Kona that it intended to take control of the Companies if the loans were not repaid immediately. Between February and May 1992, the Bishop Estate purportedly took control of Kona's cashflow and interfered with Kona's management and operations. In April 1992, the Bishop Estate demanded that the Companies repay the loans. Between July 1991 and May 1992, the Bishop Estate purportedly contacted trade creditors and suppliers of Nationwide and made highly derogatory comments about Nationwide's financial condition and management, which adversely affected Nationwide's business. 4 According to plaintiffs, the Bishop Estate even rejected a third party's offer to buy Nationwide, an offer that would have resolved much of Kona's debt problems.

In June 1992, the Bishop Estate foreclosed on the stock in the Companies under Kona's stock pledge agreement -taking Kona's only valuable assets and stripping Kona of shareholder status in the Companies. Over the next year, the Bishop Estate formed two new entities -defendants Snap Products, Inc. and Hanford's Creations, Inc. -to whom it assigned the outstanding BancBoston Loans. In September 1993, Snap Products foreclosed on Nationwide's loan, and Hanford's Creations foreclosed on Hanford's loan, taking all assets of the respective companies.

B. Procedural Background

Defendants responded to plaintiffs' Complaint on January 5, 1995, by filing a motion to dismiss for lack of venue or to transfer to a more convenient forum. The district court denied this motion on February 23, 1995. On April 11, 1995, defendants filed a second motion to dismiss, based primarily on plaintiffs' failure to plead their claims derivatively on behalf of the Companies and on plaintiffs Rogers's and Gertino's lack of standing. On June 16, 1995, the district court ruled that plaintiffs' -including Kona's -claims were strictly derivative of the Companies' claims against defendants. The court also dismissed Rogers's and Gertino's claims with prejudice for lack of standing to sue derivatively on behalf of the Companies because they were shareholders in Kona, not the Companies. In addition, because the district court determined that BVF's and Tach One's claims were not individual, but were derivative of Montrose Nationwide Limited Partnership's ("MNLP") claims, the court granted plaintiffs leave to amend their complaint to name MNLP as a plaintiff and to plead all their claims derivatively.

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On September 7, 1995, plaintiffs filed their Second Amended Complaint, to which defendants responded with a third motion to dismiss. Defendants' September 18, 1995 motion to dismiss asserted three grounds for dismissal: (1) the district court lacked subject matter jurisdiction because of incomplete diversity; (2) the district court lacked subject matter jurisdiction because of Kona'a lack of standing to bring a derivative action on behalf of the Companies; and (3) Hawai'i's statute of limitations barred all of plaintiffs' claims. On December 11, 1995, the district court denied plaintiffs' request to drop non-diverse parties -Tach One, BVF, and MNLP -and granted defendants' motion to dismiss for incomplete diversity, without ruling on defendants' other grounds for dismissal.5 Judgment terminating the case was entered on December 20, 1995.

Plaintiffs timely appealed. By memorandum disposition, the Ninth Circuit vacated the judgment, reversed the dismissal, and remanded the case for the district court to determine whether Tach One, BVF, and MNLP were "necessary" and "indispensable" parties. Kona Enter., Inc. v. Estate of Bishop, No. 96-15117, 1997 WL 289418, at *2 (9th Cir. May 29, 1997). On remand, the district court determined that they were "necessary" parties. But instead of ruling on their indispensability, the court concluded that it was in the interests of justice to permit Tach One, BVF, and MNLP to be dismissed with prejudice provided they agreed to waive all claims against defendants. They so agreed. Consequently, Tach One, BVF, and MNLP were dismissed from the action with prejudice on February 11, 1998.

On March 9, 1998, defendants filed their fourth motion to dismiss based on the two grounds not previously addressed by the...

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