Hawaiian Ass'n of Seventh-Day Adventists v. Wong

• Decision Date: 28 June 2013
• Docket Number: No. SCWC–28592.,SCWC–28592.
• Citation: 130 Hawai'i 36,305 P.3d 452
• Parties: HAWAIIAN ASSOCIATION OF SEVENTH–DAY ADVENTISTS, A Hawai‘i Non–Profit Corporation, Respondent/Plaintiff–Appellant–Cross–Appellee, v. Stacey T.J. WONG, As Trustee of the Eric A Knudsen Trust, Petitioner/Defendant–Appellee–Cross–Appellant.
• Court: Hawaii Supreme Court

130 Hawai'i 36

305 P.3d 452

HAWAIIAN ASSOCIATION OF SEVENTH–DAY ADVENTISTS, A Hawai‘i Non–Profit Corporation, Respondent/Plaintiff–Appellant–Cross–Appellee,

v.Stacey T.J. WONG, As Trustee of the Eric A Knudsen Trust, Petitioner/Defendant–Appellee–Cross–Appellant.

No. SCWC–28592.

Supreme Court of Hawai‘i.

June 28, 2013.

Michael D. Tom, Lyle M. Ishida, and David R. Harada–Stone, Honolulu, for petitioner.

Michael R. Marsh, James M. Cribley, and Mark G. Valencia, Honolulu, for respondent.

RECKTENWALD, C.J., NAKAYAMA, and McKENNA, JJ.; with POLLACK, J., Dissenting Separately, with whom ACOBA, J., joins.

Opinion of the Court by McKENNA, J.

I. Introduction

Hawaiian Association of Seventh–Day Adventists, a Hawai‘i non-profit corporation ("SDA"), filed suit seeking, among other things, a declaration that its rental of cabins to the public is permissible under its lease agreement with the Eric A. Knudsen Trust ("Lease"). Stacey T.J. Wong, as trustee of the Eric A. Knudsen Trust ("Wong"), counterclaimed for termination of the Lease and other remedies. The circuit court, inter alia, granted summary judgment in favor of Wong on SDA's claim regarding cabin rentals, but granted summary judgment in favor of SDA on Wong's claims for termination and equitable relief. The Intermediate Court of Appeals ("ICA") vacated summary judgment as to the issue of cabin rentals, opining that such use of the Property is permissible under the terms of the Lease, and remanded the case for further proceedings.

We conclude that the ICA correctly vacated the court's judgment in favor of Wong on SDA's claim regarding cabin rentals (Count I of the Complaint), but for the wrong reasons. Contrary to the parties' stipulation and the ICA's conclusion, we hold that Paragraph 16 of the Lease, which delineates permissible uses of the Property, is ambiguous. If, on remand, the fact-finder determines that Paragraph 16 prohibits the use of cabins by the general public, Wong may be entitled to damages for breach of contract and/or disgorgement of profits. The ICA therefore also erred in affirming summary judgment in favor of SDA on Wong's claims for breach of contract and unjust enrichment (Counts II and III of the Counterclaim). We conclude that the ICA correctly vacated the circuit court's order awarding attorneys' fees and costs to Wong; we also, however, vacate the ICA's order awarding costs on appeal to SDA because a prevailing party has yet to be determined. Except for Wong's claim for termination of the Lease (Count I of the Counterclaim), on which the ICA properly affirmed summary judgment, we therefore vacate the ICA's Judgment on Appeal and remand this case for further proceedings consistent with this opinion.

II. Background

A. Factual Background

The subject 200–acre parcel of land ("Property") is part of a 940–acre parcel located in Koloa, Kaua‘i, originally owned by the Augustus F. Knudsen Trust and the Eric A. Knudsen Trust (collectively, "the Trusts"). In 1949, the Trusts leased the Property to Valdemar L'Orange Knudsen who, in turn, assigned the lease to Kahili Mountain Park, Inc. ("KMPI"), a company owned by several beneficiaries of the Trusts. KMPI subsequently constructed campgrounds and facilities, including cabins that it rented to the general public as vacation residences. This area became known as Kahili Mountain Park ("the Park").

Beginning in 1982, KMPI negotiated to sell its capital stock and its leasehold interest in the Park to SDA, which planned to construct a school on part of the Property. SDA closed its acquisition of KMPI's outstanding stock in 1984, at which point the 1949 lease was assigned to SDA, KMPI was dissolved, and a new lease was negotiated with the Trusts.

On December 31, 1984, SDA and the Trusts executed a new sixty-year lease, effective January 1, 1985. Paragraph 16 of the subject Lease delineates allowable uses of the Property as follows:

16. Use of Demised Premises. The demised premises shall be used only for educational, recreation (including vacation residence for members and staff of Lessee's school and church), agricultural, health care and humanitarian uses. No dwellings shall be constructed or used on the demised premises except for faculty, administrative staff, students and employees. If Lessee ceases to use the demised premises for the above purposes, Lessor shall have the right to terminate this Lease.

Paragraph 26 of the Lease is a nonwaiver clause, which gives SDA an thirty-day window to remedy any alleged breach:

26. Nonwaiver. Acceptance of rent by Lessor or its agent shall not be deemed to be a waiver by Lessor of any breach by the Lessee of any term, covenant or condition of this Lease herein contained, nor of Lessor's right to declare and enforce a forfeiture for any such breach, and that the failure of Lessor to insist upon strict performance of any of the terms, covenants or conditions of this Lease, or to exercise any option herein conferred in any one or more instances shall not be construed as a waiver or relinquishment for the future of any such terms, covenants, conditions or options, but the same shall be and remain in full force and effect; PROVIDED, HOWEVER, that before any forfeiture shall be enforced, Lessor shall give written notice to Lessee of the breach constituting the ground of forfeiture, and Lessee shall have thirty (30) days from the date of such notice within which to remedy or cure such breach, and if such breach shall be so cured or remedied, then such breach shall be waived and no forfeiture shall be enforced for such breach....

SDA's principal objective in leasing the Property was to develop and operate a kindergarten through twelfth-grade school ("School"). After obtaining the necessary permits, SDA developed the Property, opened its new School, and constructed houses for faculty and staff. In addition, SDA continued KMPI's practice of renting cabins to the public, used the rental income to support the School, and constructed additional cabins pursuant to permits previously obtained by KMPI.¹

Between 1984 and 2000, the Trusts were aware of SDA's continued vacation rentals to the public. There was no communication from the Trusts that these rentals might violate the Lease. By late 2000, however, three major changes occurred: Valdemar L'Orange Knudsen, who had been a strong supporter of the School, died; the Augustus F. Knudsen Trust terminated and the Eric A. Knudsen Trust ("EAK Trust") acquired a hundred-percent fee interest in the Property; and the trustee for EAK Trust changed from First Hawaiian Bank to Wong.

In an April 4, 2001 letter to SDA, Wong asserted that "the Adventists are in material default of the Kahili Adventist School/Mountain Park lease with respect to the Permitted Uses provision." Wong did not explain how SDA had violated the Lease or ask SDA to cease its practice of renting cabins to the public. He warned, however, that he could pursue several legal remedies against SDA including termination of the Lease, eviction from the Property, and a suit for monetary damages and legal fees. Wong stated that he supported SDA's vision of enhancing the property, and he hoped that they could work together to achieve this mission, fulfill the Property's potential, and satisfy the past breach. Using SDA's financial statements from June 1984 to January 2000, Wong calculated that SDA owed $642,551.33 in unpaid rent, based on a rate of ten percent of gross revenues from SDA's cabin rentals. Wong proposed that SDA prepare a detailed five-year business plan for expanding the Park, enter into a new lease that would permit commercial use of the Property, and pay EAK Trust ten percent of gross non-School related revenues.

SDA retained a consultant to prepare a five-year business plan and evaluate Wong's proposal for expansion; however, it refused to make retroactive payment of percentage rents. Wong rejected SDA's business plan and characterized its failure to tender payment as "evidence of bad faith." In a letter dated March 6, 2002, Wong demanded that SDA cease "all commercial vacation rental operations" and pay "an amount equal to ten percent (10%) of the gross revenues received by [SDA] from the commencement of the commercial vacation rental operations in 1985 until the date such operations cease pursuant to this demand," plus a ten percent interest rate and general excise tax.

On March 13, 2002, SDA notified Wong that it would cease renting cabins to the public in order to avoid termination of the Lease. SDA maintained, however, that rental of the cabins to the public was a permitted recreational use. It also noted that ceasing rentals would cause significant monetary losses and could result in SDA closing its School. SDA immediately ceased booking reservations for cabins but, pursuant to an agreement with Wong, continued to honor reservations that had been made before March 6, 2002.

B. Circuit Court Proceedings

On March 10, 2003, SDA filed a Complaint in the Circuit Court for the Fifth Circuit ("circuit court"),² seeking a declaratory judgment that its operation of the Park, including commercial uses of the Property and rental of cabins to the public as vacation residences, was permitted under the Lease ("Count I of the Complaint"). SDA also alleged that the Lease had been orally amended to permit continued rental of the cabins ("Count II of the Complaint"); that Wong's allegations of breach were barred by waiver and estoppel based on the Trusts' knowledge of these rental activities ("Count III of the Complaint"); and that Wong should be enjoined from threatening to terminate the Lease and interfering with the cabins rentals, since these actions would seriously and irreparably damage SDA ("Count IV of the Complaint"). In addition, SDA sought damages for Wong's wrongful demand that SDA halt its vacation rentals to the public ("Count VI of the Complaint"). The Complaint did not contain a Count V.

On April 1, 2003, Wong filed an Answer and Counterclaim, seeking termination of the Lease...