Fong v. Oh
| Decision Date | 30 November 2007 |
| Docket Number | No. 27635.,27635. |
| Citation | 116 Haw. 187,172 P.3d 499 |
| Parties | Connie Y. FONG, Respondent/Plaintiff/Counterclaim Defendant-Appellee v. Semin OH and Myung Hui Oh, Petitioners/Defendants/Counterclaimants/Cross-Claimants-Appellants and Celia Olaes Batle, Defendant/Cross-Claim Defendant and Cliff Enterprises, Inc.; David Jon Tamura; Anne Ju Tamura; Renato Vito Batle; Michael Tamura; and Does 1-100, Defendants and Semin Oh and Myung Hui Oh, Petitioners/Third-Party Plaintiffs-Appellants v. Keith M. Kiuchi, Respondent/Third-Party Defendant-Appellee. |
| Court | Hawaii Supreme Court |
Thomas T. Watts (of Kemper & Watts), Honolulu, for petitioners/defendants/counterclaimants/cross-claimants/third-party plaintiffs-appellants, Semin Oh and Myung Hui Oh.
David J. Gierlach, Honolulu, for respondent/plaintiff/counterclaim defendant-appellee, Connie Y. Fong.
Keith K. Hiraoka (of Roeca, Louie & Hiraoka), Honolulu, for respondent/third-party defendant-appellee, Keith M. Kiuchi.
Patricia J. Moy, on the brief, Honolulu, for amicus curiae State of Hawai`i Commissioner of Securities.
Petitioners Semin Oh and Myung Hui Oh seek review of the Intermediate Court of Appeals' (ICA) November 16, 2006 judgment affirming the November 2, 2005 judgment of the circuit court of the first circuit.1 We accepted the Ohs' application for a writ of certiorari and oral argument was held on August 15, 2007.
The Ohs assert that the ICA gravely erred in vacating in part and affirming in part the circuit court's judgment in favor of Respondent/Plaintiff/Counterclaim Defendant-Appellee Connie Fong and Respondent/Third-Party Defendant-Appellee Keith Kiuchi. With respect to Fong, the Ohs assert that the ICA mistakenly held that the anti-fraud provisions of Hawai`i Revised Statutes (HRS) chapter 485, known as the Uniform Securities Act, do not apply to transactions in which "a party sells all, as opposed to only a portion, of the stock of a corporation." With respect to Kiuchi, the Ohs assert that the ICA was mistaken in its ruling that an escrow agent's duty of disclosure is limited to agreements or instructions imposing such a duty, and that there was no evidence of any such agreement or instructions in this case. Because we do not believe the ICA's conclusion with respect to Kiuchi was in error, we focus on the Ohs' HRS § 485-25 claim.
Based on the following, we vacate the ICA's judgment in part and remand to the circuit court on the Ohs' counterclaim with respect to HRS § 485-25, and affirm the judgement of the ICA in all other respects.
Although the initial transactions and lawsuits involved six parties,2 the present appeal concerns four individuals: Mr. and Mrs. Oh, Fong, and Kiuchi.
Cliff Enterprises, Inc. (CEI) was incorporated on May 15, 2000 by Clifton Yamamoto, at Fong's direction.3 Yamamoto subsequently transferred all of the shares of stock of CEI to Michael Tamura, who paid part of the purchase price with a promissory note in favor of Fong. Ownership subsequently passed to Batle in October 2000. Pursuant to an agreement between Tamura, Fong, and Batle, a promissory note designating Fong as the payee of a sum of $280,000 in monthly payments of $8,000 was signed in October 2000 by CEI (Batle signing as President), Batle, Ann Tamura, and David Tamura. The note was secured by mortgages on two condominiums owned by Ann and David Tamura, as well as a mortgage on Batle's house.
Under Batle's ownership and operation, she sold cigarettes to retail customers at discount prices, allegedly because she was not paying the requisite Hawaii excise tax of five cents for each cigarette sold required by HRS § 245-3.4 Batle testified that she purchased cigarettes from the mainland via a wholesale company she owned, and would resell them at the store. This "gray market" or illegal sales practice continued until December 2000, after which she did not make further purchases from her mainland company but continued to sell the remaining inventory.5
Batle was arrested on April 3, 2001 for selling cigarettes without the required stamps. Ten months later, on January 31, 2002, she was formally charged with selling cigarettes without stamps, with one count against her individually and one count against her as corporate representative of CEI. Batle reached a plea agreement with the state, in which she would plead no contest, agree to a five year term of probation, and pay a $10,000 fine, in return for a dismissal of the charge against CEI.
Subsequent to her arrest in April 2001, Batle sought to sell her interest in CEI and no longer work at the store. At this point, Myung Oh contacted Fong regarding purchase of the store.6 At this time, CEI had the following assets: (1) a commercial lease for premises located at 152 North Pauahi Street in Honolulu; (2) a liquor license, issued by the Honolulu Liquor Commission, which allowed the sale of packaged liquor at the store; and (3) the food and liquor inventory located at the store. Fong offered to sell the business to Mrs. Oh for $228,000, the amount that was still owed to her on the promissory note signed by Batle.
While negotiating the sale, Mrs. Oh asked Fong about the monthly income of the store. Fong referred Mrs. Oh to Harry Lee, the accountant employed by CEI, whom Mrs. Oh knew from prior business dealings. Mrs. Oh spoke with Mr. Lee, who confirmed the income of the store for the previous three months. Fong knew that Batle sold cigarettes from the store and that she had a wholesale cigarette business as well. Fong also knew that Batle had been arrested for selling cigarettes without the requisite stamps.
On May 25, 2001, Mrs. Oh signed a Stock Purchase Agreement, in which she agreed to purchase 100% of the stock of CEI for herself and her husband Semin as the sole shareholders. Although Batle was the seller of the stock, payment would not be made directly to Batle. Under the agreement, Mrs. Oh agreed to pay $30,000 immediately as a non-refundable deposit and $50,000 at the time of closing, which funds were to be made to the Client's Trust Account of Kiuchi & Nakamato and disbursed according to a separate agreement between Batle and Fong. As part of the agreement, Mrs. Oh also signed a promissory note in favor of Fong in the amount of $148,000, payable at the rate of $5,000 per month. The Stock Purchase Agreement also provided for additional compensation for the food and liquor inventory in existence at closing of the stock transfer, the amount of which was negotiated after the closing. Under the agreement, Batle assumed responsibility for all of CEI's liabilities incurred during her ownership of the corporation, except for those specifically disclosed.
On the date of closing for the stock sale, May 30, 2001, Fong and the Ohs also signed a document entitled "Disclosure Re: Stock Purchase Agreement." Among the disclosures in this document were: (1) a statement acknowledging that Fong makes no representations or warranties regarding the condition of assets of CEI, which were to be accepted "as is," and that the Ohs agreed to indemnify Fong for any claims arising out of the condition of the assets; (2) a disclosure that CEI had recently received a citation from the Honolulu Liquor Commission for selling liquor to a minor, for which Batle was deemed to be responsible, accompanied by an agreement to indemnify and hold Fong harmless for any claims arising out of the violation; and (3) an acknowledgment that Fong has not made any warranties regarding the success or failure of the business, accompanied by an agreement to indemnify and hold Fong harmless for any liability arising out of the success or failure of the business.
Kiuchi acted as Fong's attorney in the sale of Batle's stock in CEI to the Ohs. Kiuchi's role as Fong's attorney was disclosed to the Ohs both orally and in writing in the Stock Purchase Agreement:
The parties acknowledge that the law firm of Kiuchi & Nakamoto represents Connie Yon Fong and has previously represented the Seller and the Seller's corporation. In this transaction, however, the law firm of Kiuchi & Nakamoto represents only Connie Yon Fong and its only other duty will be to act as escrow and to draft documents. Seller and Buyer both acknowledge that they have the right to retain separate counsel to represent them and that the law firm of Kiuchi & Nakamoto does not represent them in this transaction.
While the Stock Purchase Agreement provided that certain payments be received by Kiuchi "as escrow," the undisputed evidence is that Kiuchi received no money to hold in escrow as payments were made and received by the parties directly. Kiuchi's role was limited to drafting the transaction documents and facilitating their execution and exchange. Kiuchi testified in his deposition as to his understanding of the meaning of "escrow":
Escrow in a transaction such as this normally would be that escrow drafts the documents. Escrow may or may not handle the money. But it is not escrow as we know it with a real estate transaction.
Whenever I have referred to escrow, it's simply to draft documents. It's to act really to make sure that all documents are signed, that the parties have signed them.
In some cases, it may or may not involve handling money. In this case, because of certain circumstances, it did not involve us handling money.
The Ohs did not give any instructions to Kiuchi in connection with the manner in which the documents should be drafted or the money exchanged.
After Batle's arrest for illegal cigarette sales, Kiuchi contacted Deputy Attorney General Earl Hoke on Batle's behalf — at the request of both Fong and Batle — apparently seeking information regarding whether Batle would be charged with a crime. Kiuchi's conversations...
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