Cumis Insurance Society, Inc. v. CU Pacific Audit Solutions, LLC

Filing 222

ORDER DENYING THIRD-PARTY PLAINTIFF CU PACIFIC AUDIT SOLUTIONS, LLC'S OBJECTIONS TO FINDINGS AND RECOMMENDATIONS [ECF NO. 182 ]; AND ADOPTING THE FINDINGS AND RECOMMENDATION. Signed by JUDGE LESLIE E. KOBAYASHI on 01/15/2016. -- OTS's Motion for Attorneys' Fees and Costs, filed August 6, 2015, is therefore GRANTED IN PART AND DENIED IN PART. The Fee Motion is GRANTED insofar as this Court AWARDS OTS $47,379.75 in attorneys' fees and  6;20.00 in costs, for a total award of $47,399.75. The Fee Motion is DENIED in all other respects. This Court ORDERS CU Pacific to pay the award to OTS according to the terms set forth in the instant Order. (eps) CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications served by first class mail on January 19, 2016

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
)
)
)
)
Plaintiff,
)
)
vs.
)
)
CU PACIFIC AUDIT SOLUTIONS,
)
LLC,
)
)
Defendant/Third)
Party Plaintiff,
)
)
vs.
)
DONA TAKUSHI, JENNY NISHIDA, )
)
NICOLE CHEUNG and OTS
)
EMPLOYEES FEDERAL CREDIT
)
UNION,
)
)
Third-Party
)
Defendants.
_____________________________ )
CUMIS INSURANCE SOCIETY,
INC.,

CIVIL NO. 14-00140 LEK-BMK

ORDER DENYING THIRD-PARTY PLAINTIFF CU PACIFIC AUDIT
SOLUTIONS, LLC’S OBJECTIONS TO FINDINGS AND RECOMMENDATIONS
[ECF NO. 182]; AND ADOPTING THE FINDINGS AND RECOMMENDATION
On November 20, 2015, the magistrate judge filed his
Findings and Recommendation to Grant in Part and Deny in Part
Third Party Defendant OTS Employees Federal Credit Union’s Motion
for Attorneys’ Fees and Costs (“F&R”).

[Dkt. no. 182.]

Defendant/Third-Party Plaintiff CU Pacific Audit Solutions, LLC
(“CU Pacific”) filed its objections to the F&R (“Objections”) on
December 1, 2015.

[Dkt. no. 187.]

Third-Party Defendant OTS

Employees Federal Credit Union (“OTS”) filed its response to
CU Pacific’s Objections (“Response”) on December 16, 2015.

[Dkt.

no. 196.]

The Court has considered this matter without a hearing

pursuant to Rule LR7.2(e) of the Local Rules of Practice of the
United States District Court for the District of Hawai`i (“Local
Rules”).

After careful consideration of the Objections, the

Response, and the relevant legal authority, the Objections are
HEREBY DENIED, and the F&R is HEREBY ADOPTED because there was a
contractual relationship between CU Pacific and OTS, and the
claims brought by CU Pacific against OTS were based on that
contractual relationship.
nature of assumpsit.

Therefore, the litigation was in the

As the prevailing party, OTS is entitled to

an award of attorneys’ fees and costs against CU Pacific after
the entry of final judgment, which has not yet occurred.
BACKGROUND
Plaintiff CUMIS Insurance Society, Inc. (“CUMIS”) filed
its Complaint against CU Pacific on March 20, 2014.
1.]

[Dkt. no.

On May 20, 2014, CU Pacific filed its answer, with a Third

Party Complaint against Third-Party Defendants Dona Takushi,
Jenny Nishida, and Nicole Cheung (collectively “Former
Employees”), and OTS.

[Dkt. no. 14.]

CU Pacific filed its

Amended Third Party Complaint on May 22, 2014, and its Second
Amended Third Party Complaint on January 7, 2015.
60.]

[Dkt. nos. 18,

This Court summarized the relevant allegations in this case

in the November 30, 2014 Order Granting OTS Employees Federal

2

Union Motion to Dismiss (“11/30/14 Order”).

[Dkt. no. 59.1]

According to the Complaint, CUMIS is a
fidelity insurer of credit unions, and it insured
OTS “under the conditions of a fidelity bond which
provided coverage to OTS for losses caused by,
inter alia, employee dishonesty.” The Complaint
alleges that CU Pacific “holds itself out as a
certified public accounting firm[,] . . .
registered with the Hawai`i Board of Accountancy,”
and specializing in credit union audits,
compliance, and accounting services. CU Pacific
served as OTS’s independent external auditor for
the years ending December 31, 2006, through
December 31, 2012.
According to the Complaint, during various
periods between October 2003 and February 2013,
[the Former Employees] allegedly embezzled and
misappropriated funds while employed at OTS.
After discovering the embezzlements on or about
December 6, 2013, OTS: terminated their
employment; reported the embezzlement to law
enforcement; and filed an employee dishonesty bond
claim with CUMIS. CUMIS found that the claim was
meritorious and made a claim payment of
$993,125.58 to compensate OTS for its loss. CUMIS
alleges that, by virtue of this payment, it became
subrogated to OTS’s rights to seek recovery from
the alleged wrongdoers.
The Complaint alleges that OTS is required by
law to have an independent, annual business audit,
performed by a certified public accountant in
compliance with National Credit Union Association
regulations. According to the Complaint,
CU Pacific made several representations to OTS
about what CU Pacific would do: produce audit
reports in compliance with all relevant regulatory
requirements and attestation standards; examine
the internal controls of OTS to make
recommendations for improvements; review employee
accounts, official accounts, and credit card
creation; review and reconcile general ledger
accounts; and reconcile OTS’s credit card loans to

1

The 11/30/14 Order is also available at 2014 WL 6749229.
3

the supporting information provided by OTS’s
credit card processor.
. . . The Amended Third Party Complaint
alleges three claims: 1) CU Pacific is entitled
to recover from OTS based upon indemnity,
contribution, reimbursement and/or equitable
subrogation (“Third-Party Count I”); 2) OTS
breached the Management Representation Letters
that it executed for each of the audits by
CU Pacific (collectively “the Management
Representation Letters”), and OTS’s breach is the
legal cause of both CU Pacific becoming involved
in litigation with CUMIS and CU Pacific suffering
other injuries and damages (“Third-Party
Count II”); and 3) OTS’s negligent failure to
follow CU Pacific’s recommendations in the audit
reports is the legal cause of injuries and/or
damages to OTS and/or CUMIS (“Third-Party
Count III”).
11/30/14 Order, 2014 WL 6749229, at *1-2 (some alterations in
11/30/14 Order) (citations omitted).
In the 11/30/14 Order, this Court found that CUMIS has
conventional subrogation rights as to the amount of the loss
payment and stands in OTS’s shoes as OTS’s subrogee.

In light of

CUMIS’s role as subrogee and CU Pacific’s ability to raise
contribution, indemnity, reimbursement, subrogation and OTS’s
negligence against CUMIS, this Court dismissed Third-Party
Id. at *5-6.

Counts I and III with prejudice.

This Court,

however, concluded that it was unclear whether Third-Party
Count II alleged what should be a breach of contract defense to
CUMIS’s claims or an affirmative claim for relief, such as
misrepresentation.

This Court therefore dismissed Third-Party

Count II without prejudice.

Id. at *6.
4

The Second Amended Third Party Complaint was based upon
the same factual allegations as the Amended Third Party
Complaint.

The Second Amended Third Party Complaint alleged: a

claim for indemnity, contribution, reimbursement and/or equitable
subrogation against the Former Employees (“Amended Third-Party
Count I”); and a misrepresentation claim against OTS (“Amended
Third-Party Count II”).

In the June 30, 2015 Order Granting

Motion to Dismiss Second Amended Third-Party Complaint as to OTS
Employees Federal Credit Union (“6/30/15 Order”), this Court
dismissed Amended Third-Party Count II with prejudice because
CU Pacific could assert OTS’s alleged misrepresentations as a
defense against CUMIS’s claims.

[Dkt. no. 110 at 7-8.2]

CU Pacific’s Amended Third-Party Count I remains against the
Former Employees and is currently set for trial on February 2,
2016.
Pursuant to the 6/30/15 Order, the Clerk’s Office
terminated OTS as a party on July 29, 2015.

On August 6, 2015,

OTS filed its Motion for Attorneys’ Fees and Costs (“Fee
Motion”), seeking $74,130.39 in attorneys’ fees and $690.65 in
costs from CU Pacific.

[Dkt. no. 123.]

In the F&R, the

magistrate judge recommends that this Court grant the Fee Motion
in part and deny in part.

The magistrate judge ruled that all of

CU Pacific’s claims against OTS sounded in the nature of

2

The 6/30/15 Order is also available at 2015 WL 4002240.
5

assumpsit, and, as the prevailing party, OTS is entitled to
attorneys’ fees pursuant to Haw. Rev. Stat. § 607-14.3
17.]

[F&R at

The F&R recommends that this Court award OTS $47,379.75 in

attorneys’ fees, and $20.00 in costs, for a total award of
$47,399.75.

[Id. at 34.]

The sole argument that CU Pacific raises in the
Objections is that the magistrate judge erred in ruling that its
claims against OTS sounded in assumpsit.

3

Section 607-14 states, in pertinent part:
In all the courts, in all actions in the nature of
assumpsit and in all actions on a promissory note
or other contract in writing that provides for an
attorney’s fee, there shall be taxed as attorneys’
fees, to be paid by the losing party and to be
included in the sum for which execution may issue,
a fee that the court determines to be reasonable;
provided that the attorney representing the
prevailing party shall submit to the court an
affidavit stating the amount of time the attorney
spent on the action and the amount of time the
attorney is likely to spend to obtain a final
written judgment, or, if the fee is not based on
an hourly rate, the amount of the agreed upon fee.
The court shall then tax attorneys’ fees, which
the court determines to be reasonable, to be paid
by the losing party; provided that this amount
shall not exceed twenty-five per cent of the
judgment.
. . . .
The above fees provided for by this section shall
be assessed on the amount of the judgment
exclusive of costs and all attorneys’ fees
obtained by the plaintiff, and upon the amount
sued for if the defendant obtains judgment.
6

STANDARD
This Court reviews a magistrate judge’s findings and
recommendations under the following standard:
When a party objects to a magistrate judge’s
findings or recommendations, the district court
must review de novo those portions to which the
objections are made and “may accept, reject, or
modify, in whole or in part, the findings or
recommendations made by the magistrate judge.” 28
U.S.C. § 636(b)(1); see also United States v.
Raddatz, 447 U.S. 667, 673 (1980); United States
v. Reyna–Tapia, 328 F.3d 1114, 1121 (9th Cir.
2003) (en banc) (“[T]he district judge must review
the magistrate judge’s findings and
recommendations de novo if objection is made, but
not otherwise.”).
Under a de novo standard, this Court reviews
“the matter anew, the same as if it had not been
heard before, and as if no decision previously had
been rendered.” Freeman v. DirecTV, Inc., 457
F.3d 1001, 1004 (9th Cir. 2006); United States v.
Silverman, 861 F.2d 571, 576 (9th Cir. 1988). The
district court need not hold a de novo hearing;
however, it is the court’s obligation to arrive at
its own independent conclusion about those
portions of the magistrate judge’s findings or
recommendation to which a party objects. United
States v. Remsing, 874 F.2d 614, 616 (9th Cir.
1989).
Muegge v. Aqua Hotels & Resorts, Inc., Civil 09-00614 LEK-BMK,
2015 WL 4041313, at *2 (D. Hawai`i June 30, 2015) (alteration in
Muegge) (some citations omitted).

Thus, this Court must conduct

a de novo review of the magistrate judge’s ruling that
CU Pacific’s claims against OTS were in the nature of assumpsit.

7

DISCUSSION
I.

CU Pacific’s Objections
Under Hawai`i law,
“Assumpsit . . . allows for the recovery of
damages for the non-performance of a contract,
either express or implied, written or verbal, as
well as quasi contractual obligations.” Leslie v.
Estate of Tavares, 93 Hawai`i 1, 5, 994 P.2d 1047,
1051 (2000) (citation omitted, emphasis added).
“When the recovery of money damages is not the
basis of a claim factually implicating a contract,
the action is not in the nature of assumpsit.”
Id. at 7, 994 P.2d at 1053 (citation and internal
quotation marks omitted).

Kim v. Kam, 128 Hawai`i 366, 369, 289 P.3d 1002, 1005 (Ct. App.
2012) (alteration in original).

The Hawai`i Supreme Court has

recognized that, although “[t]he manner in which [the] plaintiff
has characterized the action may . . . be accorded some weight,”
[t]he character of the action should be determined
from the facts and issues raised in the complaint,
the nature of the entire grievance, and the relief
sought. Where there is doubt as to whether an
action is in assumpsit or in tort, there is a
presumption that the suit is in assumpsit.
Further, a plaintiff’s prayer for attorney fees is
a significant indication that the action is in
assumpsit.
Kahala Royal Corp. v. Goodsill Anderson Quinn & Stifel, 113
Hawai`i 251, 281, 151 P.3d 732, 762 (2007) (citations and
quotation marks omitted).
In the instant case, it is undisputed that there was a
contractual relationship between CU Pacific and OTS.

Further,

the claims that CU Pacific attempted to bring against OTS were
8

clearly related to that contractual relationship.

It is true

that this fact alone does not render the litigation between
CU Pacific and OTS an assumpsit action.

See TSA Int’l Ltd. v.

Shimizu Corp., 92 Hawai`i 243, 264, 990 P.2d 713, 734 (1999).
However, this Court dismissed each of CU Pacific’s claims against
OTS because each purported claim presented an issue or defense
that must be raised against CUMIS, as OTS’s subrogee.

11/30/14

Order, 2014 WL 6749229, at *5-6; 6/30/15 Order, 2015 WL 4002240,
at *3-4.

CUMIS’s claims against CU Pacific include a claim that

CU Pacific breached the Audit Services Agreement between OTS and
CU Pacific.

[Complaint at ¶¶ 42-48.]

Third-Party Count I

alleged that, if CU Pacific was liable for damages to CUMIS,
CU Pacific was entitled to “indemnity, contribution,
reimbursement and/or equitable subrogation” from, inter alia,
OTS.

[Amended Third Party Complaint at ¶ 6.]

Thus, Third-Party

Count I sought to recover damages based on contractual
obligations.
Third-Party Count II alleged that OTS breached the
Management Representation Letters that comprised the Audit
Services Agreement.

[Amended Third Party Complaint at ¶¶ 7-16.]

After CU Pacific amended that claim in response to the 11/30/14
Order, Amended Third-Party Count II was based on allegedly false
representations that OTS made in the Management Representation
Letters.

[Second Amended Third Party Complaint at ¶¶ 7-21.]

9

It

specifically alleged that, “[i]f OTS had not made one or more of
the representations made in the Management Representation
Letters, CU Pacific would have withdrawn from the Supervisory
Committee Audit engagement without issuing an audit report.”
[Id. at ¶ 20.]

In other words, CU Pacific would not have entered

into, or would have terminated, the contractual relationship.
Third-Party Count III alleged that OTS negligently failed to
follow the recommendations that CU Pacific made in the audit
reports which CU Pacific generated pursuant to the Audit Services
Agreement.

[Amended Third Party Complaint at ¶¶ 17-20.]

In

addition, CU Pacific sought an award of attorneys’ fees against
both OTS and the Former Employees.

[Id. at ¶ C; Second Amended

Third Party Complaint at ¶ C.]
Although CU Pacific attempted to characterize these
against OTS as negligence and misrepresentation claims, its
characterization is not dispositive.

See Kahala Royal, 113

Hawai`i at 281, 151 P.3d at 762 (stating that “[t]he manner in
which [the] plaintiff has characterized the action may . . . be
accorded some weight” (emphases added)).

Based upon its review

of the factual allegations, issues raised, and relief sought in
the Amended Third Party Complaint and the Second Amended Third
Party Complaint, this Court CONCLUDES that the “essential
character” of CU Pacific’s claims against OTS was in the nature
of assumpsit.

See Kamalu v. Paren, Inc., 110 Hawai`i 269, 275,
10

132 P.3d 378, 384 (2006) (“Whether assumpsit exists so as to
trigger HRS § 607–14 depends upon the essential character of the
underlying action in the trial court.” (citation and internal
quotation marks omitted)).

Further, this Court CONCLUDES that,

as the prevailing party in the litigation between them, OTS is
entitled to an award of attorneys’ fees against CU Pacific
pursuant to § 607-14.
Insofar as CU Pacific did not object to the F&R on any
other ground, the Objections are DENIED, and the F&R is ADOPTED
as the order of this Court.
II.

Timing of the Award
OTS’s Fee Motion is GRANTED IN PART AND DENIED IN PART.

It is GRANTED insofar as this Court AWARDS OTS $47,379.75 in
attorneys’ fees and $20.00 in costs, for a total award of
$47,399.75.

To the extent that the Fee Motion sought a larger

award, the motion is DENIED.
However, this Court notes that motions for attorneys’
fees are generally filed after the entry of judgment.

See Fed.

R. Civ. P. 54(d)(2)(B)(i)-(ii) (stating that, “[u]nless a statute
or a court order provides otherwise,” a motion for attorneys’
fees must “be filed no later than 14 days after the entry of
judgment” and must “specify the judgment and the statute, rule,
or other grounds entitling the movant to the award” (emphases
added)); Local Rule LR54.3(a), (c) (same).
11

Although the Clerk’s

Office has terminated OTS as a party, there has been no entry of
judgment in this case, and this Court did not give OTS leave to
file the Fee Motion prior to the entry of judgment.
The magistrate judge and this Court have ruled on the
merits of the Objections and the Fee Motion because the only
remaining claim in this case is CU Pacific’s Amended Third-Party
Count I against the Former Employees,4 and the disposition of
that claim will not affect either the dismissal of OTS as a party
or the rulings on the Fee Motion.

However, this Court will not

order the immediate payment of the fee award because, once a
judgment has been entered, CU Pacific will have the opportunity
to appeal this Court’s rulings regarding its claims against OTS
and/or its rulings regarding the Fee Motion.

This Court

therefore ORDERS that CU Pacific is not required to pay the fee
award to OTS until twenty-one days after the entry of a final
judgment in favor of OTS.

Unless CU Pacific files a timely

notice of appeal and obtains an order staying the enforcement of
the award pending appeal, CU Pacific must pay the award to OTS –
through OTS’s counsel – at that time.
CONCLUSION
On the basis of the foregoing, CU Pacific’s objections
to the magistrate judge’s January 11, 2015 Findings and

4

CUMIS and CU Pacific have settled all claims between them
and will submit a stipulation to dismiss. [EO, filed 12/24/15
(dkt. no. 211); EO, filed 12/28/15 (dkt. no. 213).]
12

Recommendation to Grant in Part and Deny in Part Third Party
Defendant OTS Employees Federal Credit Union’s Motion for
Attorneys’ Fees and Costs are HEREBY DENIED, and the magistrate
judge’s F&R is HEREBY ADOPTED.
OTS’s Motion for Attorneys’ Fees and Costs, filed
August 6, 2015, is therefore GRANTED IN PART AND DENIED IN PART.
The Fee Motion is GRANTED insofar as this Court AWARDS OTS
$47,379.75 in attorneys’ fees and $20.00 in costs, for a total
award of $47,399.75.
respects.

The Fee Motion is DENIED in all other

This Court ORDERS CU Pacific to pay the award to OTS

according to the terms set forth in the instant Order.
IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, January 15, 2016.

/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge

CUMIS INSURANCE SOCIETY, INC. VS. CU PACIFIC AUDIT SOLUTIONS,
LLC, ET AL; CIVIL 14-00140 LEK-BMK; ORDER DENYING THIRD-PARTY
PLAINTIFF CU PACIFIC AUDIT SOLUTIONS, LLC’S OBJECTIONS TO
FINDINGS AND RECOMMENDATIONS [ECF NO. 1821]; AND ADOPTING THE
FINDINGS AND RECOMMENDATION

13