Cowan v. Pauoa Bay Props. LLC

• Decision Date: 27 January 2023
• Docket Number: CAAP-17-0000714
• Parties: David COWAN and Nathalie Cowan; Umang P. Gupta and Ruth M. Gupta, as Trustees of the Umang and Ruth Gupta Trust under Trust Agreement dated January 18, 2000; and Pauoa Beach 8 LLC, a Hawaii Limited Liability Company, Plaintiffs-Appellants, and Roaring Lion, LLC, a Montana Limited Liability Company; Roger A. Greenwald and Jennifer A. Hurwitz, Plaintiffs-Appellees, v. PAUOA BAY PROPERTIES LLC, a Delaware Limited Liability Company; White Sand Beach Limited Partnership, a Delaware Limited Partnership; Exclusive Resorts PBL1, LLC, a Delaware Limited Liability Company; Pauoa Beach Realty LLC, a Hawaii Limited Liability Company; Exclusive Resorts PBL3, LLC, a Delaware Limited Liability Company; John Does 1-50, Defendants-Appellees
• Court: Hawaii Court of Appeals

152 Hawai‘i 162

523 P.3d 1076 (Table)

David COWAN and Nathalie Cowan; Umang P. Gupta and Ruth M. Gupta, as Trustees of the Umang and Ruth Gupta Trust under Trust Agreement dated January 18, 2000; and Pauoa Beach 8 LLC, a Hawaii Limited Liability Company, Plaintiffs-Appellants,

and

Roaring Lion, LLC, a Montana Limited Liability Company; Roger A. Greenwald and Jennifer A. Hurwitz, Plaintiffs-Appellees,

v.PAUOA BAY PROPERTIES LLC, a Delaware Limited Liability Company; White Sand Beach Limited Partnership, a Delaware Limited Partnership; Exclusive Resorts PBL1, LLC, a Delaware Limited Liability Company; Pauoa Beach Realty LLC, a Hawaii Limited Liability Company; Exclusive Resorts PBL3, LLC, a Delaware Limited Liability Company; John Does 1-50, Defendants-Appellees

NO. CAAP-17-0000714

Intermediate Court of Appeals of Hawai‘i.

January 27, 2023

MEMORANDUM OPINION

Plaintiffs/Counterclaim-Defendants/Appellants/Cross-Appellees David Cowan and Nathalie Cowan, Umang P. Gupta and Ruth M. Gupta, as Trustees of the Umang and Ruth Gupta Trust Under Trust Agreement dated January 18, 2000, and Pauoa Beach 8 LLC (Plaintiffs ) appeal from the June 9, 2017 Final Judgment on Remand (Remand Judgment ) entered by the Circuit Court of the Third Circuit (Circuit Court ).¹ Defendant/Counterclaimant /Crossclaimant/Crossclaim-Defendant/Appellee/Cross-Appellant Exclusive Resorts PBL1, LLC (PBL1 ) cross-appeals from the Remand Judgment. Both sides challenge the Circuit Court's Findings of Fact and Conclusions of Law (FOFs & COLs ) entered on March 28, 2017. Plaintiffs also challenge the Circuit Court's Order Denying Plaintiffs' [Motion for Attorneys' Fees] (Order Denying Attorneys' Fees ) entered on September 15, 2017.

The Circuit Court previously entered judgment after granting summary judgment in favor of PBL1, finding that PBL1's development and use of certain property for a "luxury destination club" did not violate applicable restrictive covenants. On appeal from the earlier judgment, the Intermediate Court of Appeals (ICA ) remanded the case to the Circuit Court having concluded that summary judgment should not have been entered because there was a genuine issue of material fact as to whether PBL1's rental activities rise to the level of a commercial use.² No party sought certiorari review of this court's decision in PBL1 I. After remand and a seven day bench-trial, the Circuit Court entered the Remand Judgment. This second appeal followed.

I. BACKGROUND FACTS

The dispute concerns the Pauoa Beach subdivision within the Mauna Lani Resort (Resort ) master development³ in the County of Hawai‘i. The Resort includes hotels, residences, retail operations, recreational areas, golf courses, and other uses and services. All lots in the Pauoa Beach subdivision are subject to both the Mauna Lani Resort Association Declaration of Covenants and Restrictions (Resort Declaration ) and the Pauoa Beach Declaration of Covenants, Conditions, Restrictions, and Easements (Pauoa Beach Declaration ) (collectively, Project Documents ).

Pauoa Beach consists of two subdivisions with residential lots: a subdivision of oceanfront lots (Makai Subdivision ) and a subdivision of non-oceanfront lots (Mauka Subdivision ). Plaintiffs own lots in the Makai Subdivision of Pauoa Beach. In December 2003, non-party Exclusive Resorts, LLC (ER ) — PBL1 and Exclusive Resorts PBL3's (PBL3 )⁴ parent company — purchased lots in the Mauka Subdivision. The lots were consolidated and renamed Lot B, and ER received approval from the Mauna Lani Resort Design Committee to build eight condominium units in the form of four duplexes on Lot B. ER assigned its purchase agreement for Lot B to a non-party subsidiary. Upon completion of construction of the residences at the Pauoa Beach lots, PBL1 and PBL3 (collectively, Defendants ) intended to make the residences available to members of a luxury destination club, the details of which are discussed further below. During the litigation of the summary judgment proceedings subject to the previous appeal, construction of the four duplexes on Lot B was underway, and there was no evidence regarding actual use of Lot B. However, the record indicated that destination club members who stayed elsewhere in the Resort received some access to Pauoa Beach facilities.

The Resort Declaration governs the permitted uses in all subdivisions within the Resort, including Pauoa Beach, and states that all properties within the Resort are subject to certain restrictive covenants running with the land. Article V lists the restrictive covenants and contains a section providing general restrictions on land use. Section 1(a)(14) states:

(14) Except in the case of Commercial Lots, no gainful occupation, profession or trade shall be maintained on any Lot or in any structure on any Lot without the prior approval of the [Resort] Board, except that this provision shall in no way limit or restrict Declarant or Declarant's Nominees in their activities prior to the sale, leasing or other development of Lots within the Mauna Lani Resort nor prevent Owners from renting their houses, apartment units or Condominium Units.

(Emphasis added).

The Pauoa Beach Declaration states: "Developers intend to develop the Property for residential use comprised of Lots and the Association Property and, at the election of Developers, one or more Condominium Projects, and to sell or otherwise convey the Lots, Units and Association Property." The Pauoa Beach Declaration provides that if it contains a provision more restrictive than that in the Resort Declaration, the more restrictive provision controls. The Pauoa Beach Declaration contains the following use restrictions:

§ 15.4.1 Residential Use . All Lots and Units shall be used only for residential use (whether transient or permanent) and incidental activities and in compliance with the Resort Declaration and applicable law (including zoning ordinances and building codes). As provided in the Resort Declaration, no gainful occupation, profession or trade shall be maintained on any Lot or Condominium Common Elements or within any Unit without the prior approval of the Board of Directors of the Resort Association[.]

§ 15.4.13 Timeshare Prohibited . No timeshare use or ownership plan to which Chapter 514–E, [HRS] would be applicable shall be permitted with respect to all or any portion of the Property.

(Emphasis added).

Litigation ensued regarding, inter alia , whether Defendants' development and the operation of a luxury destination club violated the Project Documents' restrictive covenants, which allow only residential use. In the earlier phase of the litigation, the Circuit Court granted partial summary judgment and concluded that Defendants' project did not violate the Project Documents' restrictive covenants in that (1) the use did not violate the covenants regarding residential use in Pauoa Beach, and (2) the project did not constitute a "time share plan." That judgment was appealed to this court in PBL1 I.

In PBL1 I, the ICA affirmed the Circuit Court's decision that the project did not constitute a time share plan. PBL1 I, 2013 WL 1759002 at *6-*11. Regarding the residential use covenants, this court reviewed the Project Documents' restrictive covenants and held that

because the Project Documents contemplate only two types of lot use, and because the prohibition of "gainful occupation, profession or trade" is the only use restriction unique to residential lots, any use rising to the level of maintaining a "gainful occupation, profession or trade" constitutes a commercial use and cannot be deemed "residential" within the meaning of the Project Documents.

Id. at *5.

We explained that to determine whether a use violates the restrictive covenants, the nature and character of the owner's use must be considered. Id. at *6. We noted that to determine whether rental activities exceed the scope of "residential use," other jurisdictions have found relevant "whether the owner provided services or conducted transactions on-site." Id. We further explained that

[t]he nature and extent of such services (such as any increase in noise, traffic, or pollution; the hours of operation; and whether outside employees would be working on-site) are also relevant to whether Defendants' use constitute "incidental activities," which are permitted under the "residential use" provisions.

Id.

We concluded that the Circuit Court erred in granting summary judgment and we stated:

[I]t is undisputed in this case that Defendants intended to provide a number of services and amenities to its renters. Because construction of Defendants' Pauoa Beach units was ongoing during the summary judgment proceedings, however, there is little in the record before us that we can use to accurately determine the impact of Defendants' intended use of its Lot B units. At oral argument, Defendants' counsel did not know whether Defendants' services and amenities would be provided at the units or off-site, and it is unclear from the record the extent to which such activities would result in increased noise, traffic, or usage of the subdivision's common facilities.

Based on the foregoing, we conclude that although the Project Documents expressly allow "transient" rentals, the Project Documents on the whole establish the parties' intent to limit the scale and scope of the unit owners' rental activity. We further conclude that whether Defendants' intended use rises to the level of maintaining a "gainful occupation, profession or trade" remains a genuine issue of material fact. The circuit court erred in granting partial summary judgment on the issue of whether Defendants' use violated any of the Project Documents' restrictions related to residential use.

Id. ⁵ (emphasis added).

After remand, the Circuit Court conducted a bench trial at which evidence regarding PBL1's actual use of the Lot B units was presented. On September 20, 2016, the Circuit Court entered a Decision and Order (Order ). The Circuit Court determined, inter...