Mroz v. Hoaloha Na Eha, Inc.

• Decision Date: 22 February 2005
• Docket Number: No. CIV.04-00078 ACK/KSC.,CIV.04-00078 ACK/KSC.
• Parties: Michael MROZ and Susan Mroz Plaintiffs, v. HOALOHA NA EHA, INC.; Na Hoaloha Ilima, LLC; Michael Moore; Timothy Moore; Robert Aguiar; and Kevin Butler, Defendants.
• Court: U.S. District Court — District of Hawaii

360 F.Supp.2d 1122

Michael MROZ and Susan Mroz Plaintiffs, v. HOALOHA NA EHA, INC.; Na Hoaloha Ilima, LLC; Michael Moore; Timothy Moore; Robert Aguiar; and Kevin Butler, Defendants.

No. CIV.04-00078 ACK/KSC.

United States District Court, D. Hawai'i.

February 22, 2005.

Robert Carson Godbey, Jess H. Griffiths, Chad M. Iida, Godbey Griffiths Reiss, Honolulu, HI, Jack R. Naiditch, Paia, HI, for Michael Mroz, Susan Mroz, plaintiffs.

Gary G. Grimmer, John P. Manaut, Carlsmith Ball, John Y. Yamano, Becky T. Chestnut, Wendy F. Hanakahi, McCorriston Miller Mukai, MacKinnon LLP, Paul

Alston, Thomas E. Bush, Alston Hunt Floyd & Ing, Honolulu, HI, for Hoaloha Na Eha, Inc., a Hawaii corporation, Na Hoaloha Ilima, LLC, a Hawaii limited liability company, Michael Moore, Timothy Moore, Robert Aguiar, Kevin Butler, defendants.

ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS HOALOHA NA EHA, LTD. AND NA HOALOHA ILIMA, LLC'S MOTION FOR SUMMARY JUDGMENT

KAY, District Judge.

BACKGROUND

I. Factual History

In March 1987, four friends, Defendants Michael Moore, Timothy Moore, Robert Aguiar, and Kevin Butler ("the friends"), had the opportunity to purchase The Old Lahaina Luau, a luau business in Maui. The friends agreed to form a company called Eha Partners, Inc. ("Eha") to operate the business. The friends sought outside sources of funding to fund the initial operations of the luau business through Eha. Startup funds were gathered from the friends and families of Defendants Michael Moore and Robert Aguiar. Defendant Kevin Butler also approached his brother, Plaintiff Michael Mroz, and sister-in-law, Plaintiff Susan Mroz ("Plaintiffs"), for a contribution to Eha. The Plaintiffs agreed to contribute $5,000 in return for a 10% stock interest in Eha. Plaintiffs' 10% shareholder status in Eha is reflected in Eha's Articles of Incorporation, dated March 17, 1987, as well as a stock certificate in Plaintiffs' names.

The friends decided to purchase Whaler's Pub, Inc. ("Whaler's Pub") a nearby restaurant, owned by George Rotenkolber, that held a liquor license. On November 10, 1987, the friends established Hoaloha Na Eha, Ltd. ("Old Hoaloha") to purchase Whaler's Pub. However, Whaler's Pub was to continue operating as a separate entity. Under the express terms of Old Hoaloha's Articles of Incorporation, each of the friends was to receive 500 shares of voting stock and Rotenkolber was to receive 150,000 shares of non-voting stock. The parties agree that Plaintiffs loaned $40,000 to the friends to assist in the purchase of Whaler's Pub. However, Plaintiffs argue that the $40,000 was in exchange for repayment of the loan and a promise of a 10% ownership interest in Old Hoaloha and a promise of a 10% ownership interest in Whaler's Pub. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 7-8). The Plaintiffs further contend that the friends told them that they could not provide them with stock for their interest in Whaler's Pub, due to their lawyer's advice regarding the liquor license, but assured Plaintiffs that they were 10% owners and the ownership interest would be formalized in due course. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 1-2,7). Defendants¹ dispute this contention and assert that Plaintiffs agreed to loan the $40,000 in exchange for repayment at an interest rate of approximately 10%. (Defs.' Mot. for Summ. J at 8-9). Defendants attached to their Motion for Summary Judgment a copy of a promissory note dated November 11, 1988 indicating this arrangement, signed by Timothy Moore as Secretary of Old Hoaloha. (Ex. I of Defs.' Mot. for Summ.). The Defendants allege that the friends and Plaintiffs expressly agreed that Plaintiffs would not receive any stock interest in Old Hoaloha. (Defs.' Mot. for Summ. J at 9). The Defendants further allege that Plaintiffs agreed to this arrangement because they wanted to avoid any liability resulting from the liquor license and other issues such as necessary paperwork and investigation for out-of-state applicants. (Defs.' Mot. for Summ. J at 9). Plaintiffs argue that the friends always assured Plaintiffs that they were 10% owners of the entire luau business. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 8).

On February 12, 1992, Articles of Merger were filed which merged Eha and Old Hoaloha into Whaler's Pub. The successor entity then changed its name from Whaler's Pub, Inc. to Hoaloha Na Eha, Ltd. ("New Hoaloha" or "Hoaloha Corporation"). Plaintiffs allege that they were never notified of this merger and that the Articles of Merger falsely state that they, as stockholders and directors of Eha, approved of the merger. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 1). However, Defendants contend that prior to Eha's termination by the merger, it was verbally agreed that Plaintiffs' shares in Eha were to be redeemed, cancelled, and cashed out at book value.² (Defs.' Mot. for Summ. J at 7). As a result, Defendants further contend that Plaintiffs had no further stock interest in Eha or in any other successor entity. (Defs.' Mot. for Summ. J at 7). Defendants further allege that because the "book value" of Plaintiffs' shares would have been "insignificant," allegedly about $2,000, Plaintiffs never demanded or pursued any claim to recover the value of the redeemed shares. (Defs.' Mot. for Summ. J at 7). Defendants suggest that payment for the redeemed shares was an issue that simply fell through the cracks because it was not a significant amount. (Defs.' Mot. for Summ. J at 7).

Plaintiffs and Defendants agree that since Eha was a Subchapter S corporation, K-1s were issued to Eha's shareholders. Defendants allege that they stopped issuing K-1s by 1992 and that Defendant Butler assumed responsibility for communicating this to Plaintiffs. (Defs.' Mot. for Summ. J at 7). The Defendants further allege that after Plaintiffs stopped receiving any financial information and K-1s for Eha, they never demanded any stock claim and never took any steps to assert an ownership interest. (Defs.' Mot. for Summ. J at 7). Defendants also contend that Plaintiffs never received any financial information in the successor entity. (Defs.' Mot. for Summ. J at 7). Plaintiffs dispute these allegations and argue that when Plaintiff Michael Mroz did not receive a K-1 in 1993, he contacted Defendant Timothy Moore who simply replied that K-1s were not going to be required anymore. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 10). Plaintiffs allege that the friends ran the business informally and that Plaintiffs relied on their bond of trust with the friends at least through March of 2002 when the minutes for New Hoaloha's Board of Directors' meetings from 1993 to 2001 and the minutes of New Hoaloha's shareholders' meetings in 2002 were fabricated and backdated by the friends.³ (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 11).

Defendants allege that it was not until Plaintiffs' brother Defendant Kevin Butler resigned from the companies and commenced efforts to extract an unreasonable buyout of his minority ownership interest from New Hoaloha that Plaintiffs began to assert a right or entitlement to stock in Old Hoaloha, Whaler's Pub and New Hoaloha. (Defs.' Mot. for Summ. J at 10). Defendants further state that Plaintiffs have never been formally authorized to receive and have never been given any shares of stock in any of the friends' other businesses or companies and that Plaintiffs had actual or constructive notice of this through their brother Defendant Butler. (Defs.' Mot. for Summ. J at 12). Defendants also point out that all relevant ownership interests have been recorded in public records since 1992. (Defs.' Mot. for Summ. J at 12). Defendants allege that Plaintiffs never made a demand for the authorization or delivery of any stock until just before filing this suit in 2004 and that Plaintiffs never pursued any contract claim to authorize and deliver stock in New Hoaloha. (Defs.' Mot. for Summ. J at 12).

The friends together with Troy Yamaguchi decided to expand their business and relocate to a 2.5 acre lot at the Cannery Mall in Lahaina. The friends then converted the old luau site at 505 Front Street into what became known as the Feast at Lele. On December 3, 1997, Na Hoaloha Ilima, LLC was formed to operate the Feast at Lele and to manage the entertainment part of the business. The defendants claim that at no point were Plaintiffs ever promised any interest or shares in Na Hoaloha Ilima, LLC and Plaintiffs never made any capital contribution to the company. (Defs.' Mot. for Summ. J at 14). Plaintiffs allege that the friends never notified them of the formation of Na Hoaloha Ilima but that the friends' interest in Na Hoaloha Ilima was funded with New Hoaloha's assets. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 12).

In August 2002, Plaintiffs allege that there was a significant personal dispute between Defendant Kevin Butler and the friends. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 12). At that time, Defendant Butler asked about Plaintiffs' alleged 10% interest in the luau business and asked the friends to confirm that interest. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 12). The friends, however, allegedly denied that Plaintiffs had an interest in the luau business, Eha, Old Hoaloha, or Whaler's Pub. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 12). Plaintiffs allege that this was the first time that they learned that the friends claimed that Plaintiffs had no interest in the luau business. (Pls.' Mem. in Opp'n to Mot. for Summ. J. at 13).

II. Procedural History

On February 3, 2004, Plaintiffs filed their Complaint in this matter. The Counts alleged are as follows: Count 1 — Breach of Contract Under the First Agreement; Count 2 — Breach of Contract Under the Second Agreement; Count 3 — Fraud; Count 4 — Breach of Fiduciary Duty to Plaintiffs; Count 5 — Unjust Enrichment; Count 6 — Fraudulent Concealment; Count 7 — Civil Conspiracy to Gain Sole Control and Ownership of The Old Lahaina Cafe & Luau and...