Chen v. Mah

Citation457 P.3d 796
Decision Date30 January 2020
Docket NumberSCWC-16-0000712
Parties Grace CHEN, Respondent/Plaintiff-Appellee, v. Jonathan William MAH, D.D.S.; Jonathan Mah, DDS, Inc., a Hawaii corporation, Petitioners/Defendants-Appellants.
CourtSupreme Court of Hawai'i
I. Introduction

This case concerns a compensation dispute based on an oral agreement between an independent contractor dentist, Dr. Grace Chen ("Chen"), and the dentist who retained her services, Dr. Jonathan Mah ("Mah"), and his corporation, Jonathan Mah, DDS, Inc. ("Corporation") (collectively, "Defendants"). In sum, default and subsequent default judgment as to certain claims were entered against Defendants, and a bench trial was held regarding damages on some remaining claims. Defendants unsuccessfully appealed the Circuit Court of the First Circuit's ("circuit court")1 denial of their motion to set aside entry of default, and their motion for reconsideration and/or for new trial to the Intermediate Court of Appeals ("ICA"). See Chen v. Mah, CAAP-16-0000712, 2019 WL 1198546 (App. Mar. 14, 2019) (SDO).

We hold the circuit court did not abuse its discretion in denying Defendants' Hawai‘i Rules of Civil Procedure ("HRCP") Rule 55(c) motion to set aside entry of default on the grounds they failed to satisfy the second and third prongs of the test governing HRCP Rule 60(b) motions to set aside default judgments. The three prongs are: (1) the nondefaulting party will not be prejudiced by the reopening, (2) the defaulting party has a meritorious defense, and (3) the default was not the result of inexcusable neglect or a wilful act. Although HRCP Rule 55(c), by its plain language, only requires a showing of "good cause" to set aside an entry of default, binding precedent required the circuit court to apply the HRCP Rule 60(b) standard to Defendants' motion. The circuit court also did not err in its other rulings.

Requiring a movant under HRCP Rule 55(c) to satisfy HRCP Rule 60(b) requirements, however, contradicts the plain language of the former rule, which only requires "good cause." Thus, we therefore now hold that HRCP Rule 55(c) motions are governed only by the "good cause" standard explicitly stated in the rule, and that movants seeking to set aside an entry of default pursuant to HRCP Rule 55(c) need not satisfy the three-prong test applicable to HRCP Rule 60(b) motions to set aside default judgments. Our holding is prospective only, however, as trial courts were required to follow precedent requiring parties seeking to set aside an entry of default pursuant to HRCP Rule 55(c) to satisfy the three-prong test for HRCP Rule 60(b) motions. Therefore, by announcing this "new rule," we must avoid unfair prejudice to parties and trial courts that have relied on binding precedent, and our holding applies only to decisions on motions to set aside entries of default after the date of this opinion. See Kahale v. City and Cty. of Honolulu, 104 Hawai‘i 341, 348, 90 P.3d 233, 240 (2004).

Accordingly, we affirm the May 3, 2019 judgment on appeal entered by the ICA pursuant to its March 14, 2019 summary disposition order ("SDO"), which affirmed the circuit court's July 6, 2016 final judgment.

II. Background
A. Procedural and factual background through the July 13, 2013 hearing on Defendants' motion to set aside entry of default

On October 3, 2012, Chen filed a twenty-four page complaint against Defendants in circuit court, which included forty-two detailed preliminary factual allegations. In summary, Chen alleged she and Defendants entered into an oral compensation agreement in November 2008 under which the Corporation agreed to retain her professional services as an independent contractor associate dentist and to compensate her for treating dental patients at its principal place of business according to a formula under which she was entitled to be regularly paid 40% of the gross income produced to the Corporation for her dental work on patients adjusted or reduced by (1) 40% of the gross income not actually collected from her patients or their insurance carriers and (2) 50% of the lab fees incurred by her patients for her treatment of them.

According to the complaint, the Corporation commenced paying Chen a couple of months after she started working in late 2008 based on its collection of income produced from her work, adjusted as reflected above, and regularly provided her with supporting documentation describing in detail all adjustments for uncollected income and patients' lab fees, and this practice continued until November 5, 2011.

The complaint further alleged that several months after beginning work, when Chen asked for a written compensation agreement or a partnership, and repeated this request several times, on each occasion, Mah represented he would have partnership documents prepared and provided to her, but this never happened. Chen alleged that when Mah made these representations, he misled and lied to her as he had no intention of making her a partner as evidenced by him making similar representations to other dental associates and not making them partners, as she later learned.

Chen alleged she continued working based on Mah's representations that he would make her a partner, and in fact, accelerated and increased her work efforts and hours of work as an associate dentist to favorably impress Mah of her abilities and worthiness to be his partner. The complaint alleges that, by July 2011, Chen had increased her work schedule to four days a week while working eight hours per day on weekends and twelve hours per day on Mondays and Tuesdays, and, as a result, Chen produced gross income for the Corporation exceeding $1 million for both calendar years 2010 and 2011, generating substantial income for Defendants consisting of the Corporation's 60% share of her gross income. Chen alleged she relied upon and trusted Defendants to accurately calculate and timely pay her the correct amounts of money owned to her under their compensation agreement.

According to the complaint, after November 5, 2011, Defendants suddenly, and without explanation, stopped providing any calculations and supporting documentation to Chen and her compensation payments became erratic and changed to rounded lump sums. Chen alleged that in 2012, Defendants failed to provide her with a 1099 miscellaneous income form for 2011 despite her repeated requests and failed to pay her any compensation since June 15, 2012. According to the complaint, the Corporation paid Chen $359,874.18 in 2011, and Defendants had underpaid her approximately $200,000 or more in income, but she was unable to determine the amount with certainty without the Corporation's accounting documents. Chen also alleged the Corporation had paid her $92,500 in 2012, but she had been underpaid at least $45,669.76 through her August 23, 2012 resignation by admission of Defendants' accountant Gloria Thompson in her unsupported September 14, 2012 two-page accounting compilation.

The complaint further alleged Mah and his wife had personal federal tax liens filed against them for 2005-2009 for hundreds of thousands of dollars in unpaid income tax, with tax liens still pending against them in 2011, and that upon information and belief, in October 2011, Mah used portions of the monies owed to her to pay these delinquent tax liens. Chen further alleged she had made multiple efforts in 2011 and 2012 to meet and speak with Mah to obtain an accounting and explanation of the above, but Mah repeatedly evaded her or cancelled meetings at the last minute. Chen also alleged she made repeated demands for accounting documents and for payment of the estimated unpaid amounts exceeding $200,000 owed to her, but Defendants failed or refused, raising excuses and attempting to charge exorbitant copying fees, and providing only Gloria Thompson's accounting compilation.

The complaint further alleged that by failing to timely pay her, Defendants had prevented Chen from timely filing her 2011 income taxes and making regular contributions to her own retirement plan, thereby causing her to incur a penalty in an amount to be determined. Chen also alleged that two days after she was coincidentally seated next to Mah on a flight from Hilo to Honolulu on August 8, 2012, and complained to Mah about being owed substantial funds and not being provided accounting records, Mah announced to all associate doctors he was closing his office and hiring an independent CPA to review all doctors' compensation for 2012 in response to Chen's complaint, but despite that, Mah and at least one associate dentist continued to work out of his office, along with staff. Chen also alleged that on August 10, 2012, the Corporation's office manager texted all associate doctors that they were welcome to have their own CPAs review the data. Chen submitted a resignation letter on August 23, 2012, requesting accounting documents and sums owed by August 28, 2012.

Based on these detailed factual allegations, Chen's complaint asserted causes of action in twelve counts: declaratory judgment (Count I), accounting (Count II), breach of contract and of implied covenant of good faith and fair dealing (Count III), conversion (Count IV), fraud (Count V), intentional/negligent misrepresentation (Count VI), intentional infliction of emotional distress (Count VII), unjust enrichment (Count VIII), statutory fraudulent transfer (Count IX), common law fraudulent transfer (Count X), constructive trust/equitable lien (Count XI), and punitive damages (Count XII).

Before the complaint was filed on October 3, 2012, Chen's retained counsel, Dennis King ("King"), sent a demand letter dated September 10, 2012, to Defendants. The letter demanded Defendants immediately pay Chen the delinquent amounts owed to her in the amount of $237,268.92 for past due compensation owed to her, inclusive of attorney's fees of $4,750, and that Defendants deliver to King's office accounting and billing statements, daily production, worksheets, and lab fees for services performed...

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