In re WPMK Corp.
| Citation | 59 BR 991 |
| Decision Date | 19 March 1986 |
| Docket Number | Adv. No. 84-0016.,Bankruptcy No. 81-00424,81-00724 |
| Parties | In re WPMK CORPORATION, Debtor. In re PARADISE PALMS VACATION CLUB, Debtor. Thomas E. HAYES, Trustee in Reorganization for WPMK Corporation, and Ralph S. Aoki, Trustee in Reorganization for Paradise Palms Vacation Club, Plaintiffs, v. James Raymond QUINCY, et al., Defendants. |
| Court | U.S. District Court — District of Hawaii |
Paul Alston, Shelby Anne Floyd, Jeffrey P. Crabtree, Paul, Johnson & Alston, Honolulu, Hawaii, for plaintiffs.
David A. Nakashima, Albert E. Peacock, Rush Moore Craven Kim & Stricklin, Honolulu, Hawaii, for Michel P. Stern.
Jamie A. Chuck, John C. Bryant, Jr., Torkildson Katz Jossem Fonseca & Moore, Honolulu, Hawaii, for Harold Sasaki and Sasaki & Vyas, CPA.
Dennis E.W. O'Connor, Wesley H.H. Ching, Chunmay Chang, Hoddick Reinwald O'Connor & Marrack, Honolulu, Hawaii, for Diamond & Sylvester, Josef Diamond, John N. Sylvester, Simon Wampold, Albert O. Prince, Richard M. Foreman, Craig S. Sternberg, Edwin J. Snook, John T. Petrie, William J. Cruzen, F. Douglas Ruud, John W. Hempelmann, and O.J. (Buz) Humphrey, III.
James M. Thomas, Diamond & Sylvester, Seattle, Wash., for Diamond & Sylvester.
ORDER GRANTING DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF PUNITIVE DAMAGES
This case is an adversarial proceeding in bankruptcy court arising out of the operation and management of WPMK Corporation, a timeshare developer, and Paradise Palms Vacation Club (PPVC), its non-profit membership arm. Both corporations are now in bankruptcy. The plaintiffs, trustees for the combined estates, are suing assorted officers, directors, and other corporate agents for various alleged breaches of their fiduciary duties to the corporations.
In its second amended complaint, the plaintiffs allege that defendant, attorney Michel Stern, in performing legal services for WPMK and PPVC, acted for his own personal gain, failed to exercise the judgment, care and loyalty required of the attorney-client relationship, and otherwise breached his duties to the now-bankrupt corporations. The plaintiffs further assert that defendant Stern was a partner in and agent of the law firm of Diamond & Sylvester (D & S) and that all the acts at issue were undertaken in that capacity.
This order addresses the issue whether the plaintiffs can hold D & S vicariously liable for any punitive damages incurred for the alleged misconduct of its partner, defendant Stern, in representing the now-bankrupt corporations.
Defendants D & S, joined by Stern, have brought a motion for partial summary judgment under Fed.R.Civ.P. 56 on the issue of punitive damages. At the outset, plaintiffs question the form of the motion. Defendants do not rely on any material outside of the pleadings, and thus, plaintiffs assert that the motion should be treated as one under Fed.R.Civ.P. 12(b)(6).1 This court agrees.
Although the motion may be denominated one for summary judgment, if it rests on the pleadings alone, and the court does not look to additional materials, the motion is the functional equivalent of a motion to dismiss for failure to state a claim on which relief may be granted. Wright, Miller & Kane, Federal Practice and Procedure: Civil § 2713, at 593-94 (2d ed. 1983). Accordingly, in determining whether the complaint is sufficient to state a legal claim on the issue of punitive damages, this court accepts all material facts in the pleadings as true and reviews the complaint liberally and in the light most favorable to the plaintiffs.
In order to determine the applicable substantive law on punitive damages, this court must first address the choice of law rules governing this issue. Defendants argue that a bankruptcy court may freely choose its choice of law rules in an adversarial proceeding and that this court should apply a "fundamental factors" test, but that either this conflicts approach or Hawaii's conflicts law mandates the application of Washington substantive law on punitive damages. The plaintiffs counter that the "fundamental fairness" test, the Hawaii conflicts rules, and the Washington choice of law rules all point to the application of Hawaii substantive law.
Although the choice of law rules of the forum state govern under a diversity action, the courts are split on which conflicts rule applies in bankruptcy. See, e.g., Fox v. Peck Iron & Metal Co., 25 B.R. 674, 684-85 (Bankr.S.D.Cal.1982). Some courts do apply the choice of law rules of the forum state, in this case Hawaii. E.g., In re Bagley, 6 B.R. 387, 389 (N.D.Ga.1980). However, some courts hold that bankruptcy courts may make an independent determination of this issue, with the court selecting the choice of law rule that would be the fairest under the circumstances of the case. E.g., 4 Collier on Bankruptcy ¶ 544.02, at 544-10 (15th ed.1985); Wallace Lincoln-Mercury Co. v. Gentry, 469 F.2d 396, 400 n. 1 (5th Cir.1972). See also In re Holiday Airlines Corp., 620 F.2d 731, 733-34 (9th Cir.), cert. denied, 449 U.S. 900, 101 S.Ct. 269, 66 L.Ed.2d 130 (1980). It is unnecessary for this court to enter the fray on this issue, however, since under any of the potentially applicable conflicts rules, on balance, the Hawaii substantive law would govern.
Defendants argue that this court, sitting in bankruptcy, is not bound by traditional diversity rules but should make its own independent judgment on conflicts law. Defendants urge this court in applying a federal choice of rules test, however, to avoid the use of "mechanical tests," such as the "most significant relationship" test or the "governmental interest" analysis. Instead, this court should base its choice of law on what the "fundamental factors" are in this case. Under this analysis, defendants ask this court to perform its time-honored task of considering and balancing all the "fundamental factors."
Defendants cite the following factors as relevant to their assertion that the substantive law of Washington should apply: (1) D & S was formed as a partnership under Washington law; (2) there are no allegations that D & S or any of its partners, except Stern, committed any alleged wrongful acts; (3) D & S is being held liable only vicariously through the acts of Stern; and (4) no one in Hawaii would really benefit from the award of punitive damages since most of the creditors are not Hawaii residents.
Plaintiffs argue, on the other hand, that the court should consider the facts that (1) the fraudulent scheme involved property in Hawaii; (2) most of the timeshare purchasers were present in Hawaii when they made their purchase; (3) Stern was involved in many activities that had a significant impact here in Hawaii; (4) Hawaii has a strong interest in litigation involving property within its borders; and (5) Hawaii has a strong interest in protecting its citizens and its visitors from unfair business practices and frauds.
The factors cited by the plaintiffs persuade this court that Hawaii substantive law should govern. This court finds it particularly relevant that the property involved in the transactions is located in Hawaii. Further, as the plaintiffs have recognized, Hawaii has considerable interest in protecting its citizens as well as tourists who come to the state from the type of fraudulent transactions that are alleged here.
This application of Hawaii law is further supported by Fox v. Peck Iron & Metal Co., 25 B.R. 674 (Bankr.S.D.Cal.1982). Fox involved real property in California that was part of an alleged fraudulent sale/leaseback transaction. The court noted that Virginia had more "contacts" since it is the jurisdiction where the defendant conducted business, most of the negotiations took place, and the documents were executed. 25 B.R. at 684. On the other hand, some of the negotiations took place in California, and the property was in California. The bankruptcy court, applying the federal choice of law approach and exercising its independent judgment found itself confronted with conflicting principles. With respect to the debt obligation, the place of payment, here Virginia, normally governs conflicts questions, but conflicts of law issues involving property interests are normally determined by the law of the situs of the property. Faced with this issue, the court held that it would defer to the situs of the property and apply the law of California. Id. at 685. Alternatively, the court held that under the conflicts rules of California, which employ a "governmental interest" approach, California law would also apply, since it has a strong interest in litigation over realty within its borders and has a strong policy of protecting even commercial or corporate borrowers. Id. at 687.
Some bankruptcy courts would apply the conflicts law of the forum state. Hawaii's conflicts test, which was laid out in Peters v. Peters, 63 Hawaii 653, 634 P.2d 586 (1981), espouses "an assessment of the interests and policy factors involved with a purpose of arriving at a desirable result in each situation." 634 P.2d at 593. The Peters court stressed, among other factors, the effect its decision would have on the citizens of Hawaii, in general.2
In Jenkins v. Whittaker Corp., 545 F.Supp. 1117 (D.Hawaii 1982), Peters was applied to determine that Hawaii substantive law should govern in a diversity wrongful death case arising from the death of a serviceman. The court reasoned that applying Hawaii law would simplify judicial proceedings and significantly further predictability since so many servicemen here are legal residents of other states, and that "perhaps most importantly, Hawaii has a distinct interest in having its laws applied in cases such as this in order to give its citizens the level of protection the state deems appropriate." 545 F.Supp. at 1118.
The Hawaii choice of law rule...
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