Batiste v. Sun Kona Finance I, LLC
ORDER ADOPTING IN PART AND MODIFYING IN PART THE PROPOSED FINDINGS AND RECOMMENDED DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT re 34 , 35 - Signed by JUDGE ALAN C. KAY on 1/12/2017. "The Court directs the Clerk to en ter judgment in favor of Defendant." (emt, )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 were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
WILLIAM BATISTE AND VIRGINIA
BATISTE, AS TRUSTEES OF THE
WILLIAM AND VIRGINIA BATISTE
REVOCABLE TRUST DATED JANUARY 23, )
2001; RICHARD L. DVORAK AND
TERESA D. DVORAK, AS TRUSTEES OF
THE RICHARD L. DVORAK LIVING
TRUST, JENNIE ANN FREIMAN,
INDIVIDUALLY AND AS TRUSTEE OF
THE JENNIE ANN FREIMAN PROFIT
SHARING PLAN; STUART H. MENDEL,
INDIVIDUALLY AND AS TRUSTEE OF
THE JENNIE ANN FREIMAN PROFIT
) Civ. No. 15-00397 ACK-KSC
SUN KONA FINANCE I, LLC; JOHN AND )
JANE DOES 1-15; DOE PARTNERSHIPS
1-15; DOE CORPORATIONS 1-15; and
DOE ENTITIES 1-15,
ORDER ADOPTING IN PART AND MODIFYING IN PART THE PROPOSED
FINDINGS AND RECOMMENDED DECISION ON CROSS-MOTIONS FOR
For the reasons set forth below, the Court ADOPTS in
part and MODIFIES in part the Proposed Findings and Recommended
Decision on Cross-Motions for Summary Judgment (“Recommended
Decision”), issued by United States Bankruptcy Judge Robert J.
Faris on November 2, 2016.
ECF No. 34-1.
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FACTS AND PROCEDURAL HISTORY
The Underlying Bankruptcy Proceeding
Plaintiffs William Batiste and Virginia Batiste, as
trustees of the William and Virginia Batiste Revocable Trust
dated January 23, 2001; Richard L. Dvorak and Teresa D. Dvorak,
as trustees of the Richard L. Dvorak Living Trust; Jennie Ann
Freiman, individually and as trustee of the Jennie Ann Freiman
Profit Sharing Plan; and Stuart H. Mendel, individually and as
trustee of the Jennie Ann Freiman Profit Sharing Plan
(collectively, “Plaintiffs” or “Batiste creditors”) and
Defendant Sun Kona Finance I, LLC (“SKFI”) were previously
creditors in the Chapter 11 bankruptcy case In re 1250 Oceanside
Partners, Case No. 13-00353 (Bankr. D. Haw. 2013).
The bankruptcy case arose in relation to a real estate
development called Hokuliʻa (“the Project”) on the Island of
Compl. ¶¶ 8-20, ECF No. 1-1; Recommended Decision at 2-
Lyle Anderson, the company that originally controlled the
Project, borrowed money from the Bank of Scotland to secure
financing for the Project and created 1250 Oceanside Partners
(the “Debtors” or “Oceanside”) to act as the developer of the
Mem. of Decision on Req. for Admin. Expense
(“Administrative Expense Decision”) at 2, ECF No. 5-10; Compl. ¶
Plaintiffs, trustees of various trusts and profit sharing
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plans, purchased lots at Hokuliʻa.
Decision at 2; Compl. ¶ 8.
In 2008, the Bank of Scotland declared default and
SKFI purchased over $600,000,000 in debt from the Bank, along
with the Bank’s security interests in the Project.
Administrative Expense Decision at 2-3; Compl. ¶ 19.
and other lot purchasers filed suit in the Circuit Court of the
Third Circuit of the State of Hawaii against the developers in
connection with the failed Project.
Decision at 3; Compl. ¶ 18.
In 2013, the Debtors commenced Chapter 11 bankruptcy
Administrative Expense Decision at 3; Compl. ¶ 20.
SKFI was a secured creditor and Plaintiffs were unsecured
creditors as a result of the lawsuit they filed in state court
against the Debtors.
Administrative Expense Decision at 3;
Compl. ¶ 21.
The Debtors and SKFI proposed a Third Amended Joint
Consolidated Plan of Reorganization (“Reorganization Plan”) on
November 22, 2013.
See ECF No. 5-7.
Under the plan, the
unsecured creditors, including Plaintiffs, would receive a pro
rata distribution from a fund of $750,000 to satisfy claims of
See Reorganization Plan at 38, 48;
Compl. ¶¶ 25-26.
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Plaintiffs raised several objections during the
confirmation process, which objections included contesting the
amount of the unsecured creditors’ fund.
Decision at 4; Compl. ¶¶ 26-28.
Plaintiffs also initiated
litigation against SKFI in relation to the Reorganization Plan.
Administrative Expense Decision at 4; Compl. ¶¶ 29-30.
Less than thirty minutes prior to the hearing on the
plan confirmation, the parties settled.
Decision at 5; Compl. ¶ 33.
The settlement was memorialized in
writing as the Amended Batiste/Davis/Sun Kona Finance I, LLC
Binding Settlement Term Sheet (the “Settlement Term Sheet”) and
was signed by attorneys representing SKFI, the Debtors,
Plaintiffs, and the Davis Creditors. 1
ECF No. 36-2.
As part of
the Settlement Term Sheet, Plaintiffs agreed to withdraw their
objections to the Reorganization Plan and dismissed adversary
proceedings and claims against the Debtors, SKFI, and related
See Settlement Term Sheet at 1.
SKFI also agreed
to increase the amount of the unsecured creditors’ fund from
$750,000 to $1,550,000.
Additionally, the Settlement Term
Sheet included the following provision, at issue in the instant
The Davis Creditors were another group of creditors that agreed
to withdraw their objections to the plan confirmation pursuant
to the Settlement Term Sheet. See Settlement Term Sheet at 1.
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SKFI and the Davis Creditors will not oppose
an administrative expense claim by the Bays
firm in the amount of $250,000 for making a
substantial contribution to the case.
The “Bays firm,” i.e. Bays Lung Rose & Holma,
represented Plaintiffs in the bankruptcy proceedings and
represents Plaintiffs in the instant case.
As a result of the Settlement Term Sheet, the
Reorganization Plan was confirmed without a contested case
Administrative Expense Decision at 5.
court entered its Confirmation Order on June 2, 2014, which
order incorporated and confirmed the Reorganization Plan.
Confirming Reorganization Plan (“Confirmation Order”) at 2, ECF
The Confirmation Order approved the Settlement Term
Sheet, made it “binding on the parties,” and “incorporated [it]
into the [Reorganization] Plan.”
Id. at 16.
After the bankruptcy court issued its Confirmation
Order, Plaintiffs filed an administrative expense claim for a
portion of their attorneys’ fees and costs.
Expense Decision at 5; see Mot. for Payment of Admin. Expenses
(“Administrative Expense Motion”), ECF No. 36-2.
objected to Plaintiffs’ claim, arguing that the “Batiste
[creditors’] efforts during the course of the bankruptcy case
(i) were directed solely for [the Batiste creditors’] personal
benefit, to the exclusion of the other unsecured creditors, and
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(ii) continued, at great expense to the estate, long after
substantially all of any increased benefit to the other
unsecured creditors had become available.”
Debtor’s [sic] Opp’n
to Administrative Expense Motion (“Debtors’ Opposition”) at 1,
ECF No. 36-2.
Attached to the Opposition was a declaration made
by James A. Wagner, counsel for SKFI, detailing a series of
settlement discussions he had with Bernard Bays, counsel for the
Batiste creditors. 2
See Decl. of James A. Wagner (the “Wagner
Declaration”), ECF No. 36-2.
Mr. Wagner also spoke during the
hearing on the Batiste creditors’ administrative expense claim,
reiterating in part what was outlined in his declaration.
Transcript of Hearing at 14:15-16:15, September 15, 2014, ECF
In its Administrative Expense Decision, issued
October 2, 2014, the bankruptcy court found that Plaintiffs were
entitled to an administrative expense claim of $55,000.
Administrative Expense Decision at 16.
Plaintiffs did not
appeal the decision.
On June 22, 2015, the bankruptcy court issued a Final
Decree, which 1) discharged the Debtors, their representatives,
and their appointed professionals from further duties and
responsibilities; 2) approved the Debtors’ Post-Confirmation
Mr. Wagner passed away on September 2, 2016, and was therefore
unable to provide any testimony regarding the cross-motions for
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Final Reports; 3) directed that all orders and judgments
continue in effect and operation; and 4) closed the case.
Decree at 2, ECF No. 10-2.
District Court Proceedings
On September 1, 2015, Plaintiffs filed a Complaint and
Demand for Jury Trial in the Circuit Court of the First Circuit
of the State of Hawaii.
Count I asserts a claim for breach of
contract, alleging that SKFI breached the Settlement Term Sheet
by opposing Plaintiffs’ request for $250,000 in attorneys’ fees.
Compl. ¶¶ 49-53.
Count II asserts a fraud claim, alleging that
SKFI falsely represented that it would not oppose Plaintiffs’
application for fees “[i]n order to induce the Plaintiff[s] to
dismiss the adversary proceedings filed in the bankruptcy case,
withdraw their objections to the SKF[I] claim against Oceanside
in the bankruptcy proceedings, and withdraw their objections to
the Reorganization Plan.”
Id. at ¶¶ 55-56.
Count III asserts a
claim for punitive damages in relation to SKFI’s conduct.
In support of these claims, Plaintiffs allege that
“Oceanside - which was under the control of SKF[I] - filed an
opposition to Plaintiffs’ application to recover the attorneys’
fees” and that SKFI’s attorney “submitted a declaration in
opposition” to the application for fees and “appeared at the
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hearing [on the application for fees] on behalf of SKF[I], and
argued in opposition to the Plaintiffs’ request.”
Id. ¶¶ 44-47.
SKFI removed the case to this district court on
October 5, 2015.
Notice of Removal, ECF No. 1.
That same day,
SKFI filed a Motion to Refer Case to United States Bankruptcy
ECF No. 5.
Plaintiffs opposed the motion, claiming that
the bankruptcy court lacked jurisdiction.
ECF No. 10.
Magistrate Judge Chang held a hearing on the motion on January
12, 2016, and on January 16, 2016, issued his Findings and
Recommendation to Grant Defendant’s Motion to Refer Case to
United States Bankruptcy Court (“F&R”).
ECF No. 18.
February 26, 2016, over Plaintiffs’ objections, this Court
adopted the F&R, referring the case to the bankruptcy court for
Order Adopting the F&R, ECF No. 24.
On September 9, 2016, Plaintiffs filed a Motion for
Partial Summary Judgment and Memorandum in Support of Motion
(“Plaintiffs’ Motion”), ECF No. 36-1, along with a Separate and
Concise Statement of Facts in Support of Motion, ECF No. 36-2.
Plaintiffs sought summary judgment solely as to Count I of their
Plaintiffs’ Motion at 3.
That same day, Defendant
filed a Motion for Summary Judgment on Plaintiffs’ Complaint and
Memorandum in Support (“Defendant’s Motion”), ECF No. 36-3, as
well as a Separate and Concise Statement in Support of Motion,
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ECF No. 36-4.
Defendant sought summary judgment on Counts I,
II, and III of Plaintiffs’ Complaint.
Defendant’s Motion at 1.
The bankruptcy court held a hearing on the crossmotions for summary judgment on October 13, 2016, and on
November 2, 2016, issued its Recommended Decision, recommending
that this Court grant summary judgment in favor of Defendant on
Recommended Decision at 1-2.
The case was then
transmitted back to the district court on November 16, 2016.
Notice of Transmittal to District Court, ECF No. 34.
filed Objections to the Recommended Decision (“Objections”) on
November 16, 2016, ECF No. 35, and Defendant filed a Response to
Objections (“Response”) on November 30, 2016, ECF No. 37.
The Court finds that this matter is suitable for
decision without a hearing, pursuant to Local Rule 7.2(d).
Standard of Review
The parties agree that interpretation of the
Settlement Term Sheet for purposes of the summary judgment
motions constitutes a “non-core” proceeding. 3
While SKFI agrees that this is a “non-core” proceeding because
it arises under the bankruptcy court’s “related to”
jurisdiction, SKFI states that because this Court determined the
bankruptcy court has ancillary jurisdiction over this matter, it
may enter a final order on that basis. Response at 14-16
(citing Order Adopting the F&R at 28-33). SKFI cites to nonbinding cases that distinguish ancillary jurisdiction from
(continued . . .)
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“related to” jurisdiction, but cites to no authority that
suggests ancillary jurisdiction confers on the bankruptcy court
the authority to enter final judgment. See Response at 15.
A bankruptcy court’s ability to enter a final judgment
rests largely on whether it is defined as a “core” or “non-core”
proceeding, a determination that is made by the bankruptcy judge
pursuant to 28 U.S.C. § 157(b)(3). See Exec. Benefits Ins.
Agency v. Arkison, 134 S.Ct. 2165, 2171-72 (2014). Referencing
this distinction, the Supreme Court recently clarified the
bankruptcy court’s authority to enter a final judgment as
If a matter is core, the statute empowers
the bankruptcy judge to enter final judgment
on the claim, subject to appellate review by
the district court.
If a matter is noncore, and the parties have not consented to
final adjudication by the bankruptcy court,
the bankruptcy judge must propose findings
of fact and conclusions of law.
district court must review the proceeding de
novo and enter final judgment.
Id. at 2172. The Court then went on to note that in an earlier
opinion, Stern v. Marshall, 564 U.S. 462 (2011), it had
“confronted an underlying conflict between [28 U.S.C. § 157] and
the requirements of Article III.” Id. The Court explained that
“Stern made clear that some claims labeled by Congress as ‘core’
may not be adjudicated by a bankruptcy court in the manner
designated by § 157(b).” Id.
The bankruptcy court seemed to briefly consider revisiting
the question whether this case involves a “core” or “non-core”
proceeding, stating that “[t]here is good reason to think that,
if a bankruptcy court approves a settlement agreement and enters
an order in a core proceeding, a subsequent proceeding to
interpret or enforce the agreement and order is also a core
proceeding.” Recommended Decision at 8-9. However, noting that
the Supreme Court’s case law on this point is ambiguous, the
court found it more prudent to issue proposed findings and a
recommended judgment, rather than to enter final judgment. Id.
In a final attempt to convince this Court to afford
deference to the bankruptcy court’s Recommended Decision,
Defendant argues that “even if the Bankruptcy Court does not
have the power to enter a final judgment, SKFI submits the
Bankruptcy Court’s construction of the [Settlement] Term
Sheet . . . should not be ignored given the Bankruptcy Court’s
(continued . . .)
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Decision at 7; Transcript of Hearing, October 13, 2016 at 18:2319:2, ECF No. 36-17; see also Objections at 10.
court may enter final judgment in a “non-core” proceeding only
if all of the parties consent.
28 U.S.C. § 157(c)(2).
SKFI has consented to the bankruptcy court’s entry of a final
order, Plaintiffs have not. Recommended Decision at 7 n.30.
Absent consent, “the bankruptcy judge shall submit
proposed findings of fact and conclusions of law to the district
court, and any final order or judgment shall be entered by the
district judge after considering the bankruptcy judge’s proposed
findings and conclusions and after reviewing de novo those
matters to which any party has timely and specifically
28 U.S.C. § 157(c)(1); In re Moran, Civ. No. 12–
00191 LEK–KSC, 2012 WL 3201901, at *6 (D. Haw. July 31, 2012).
“The district judge may accept, reject, or modify the proposed
findings of fact or conclusions of law, receive further
evidence, or recommit the matter to the bankruptcy judge with
Fed. R. Bankr. P. 9033(d).
ancillary jurisdiction to interpret its own decree. In fact,
the Bankruptcy Court’s construction of the Term Sheet should be
given, at a minimum, the same force and effect or entitled to
the same deference as [a] ‘clarifying order. . . .’” Response
at 16. However, Defendant has failed to put forth any binding
authority that this Court should give special weight to the
bankruptcy court’s findings and recommendation, and accordingly
this Court will review de novo those matters to which the
parties have timely and specifically objected.
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Summary judgment is proper where there is no genuine
issue of material fact and the moving party is entitled to
judgment as a matter of law.
Fed. R. Civ. P. 56(a).
Rule of Civil Procedure (“Rule”) 56(a) mandates summary judgment
“against a party who fails to make a showing sufficient to
establish the existence of an element essential to the party’s
case, and on which that party will bear the burden of proof at
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see
also Broussard v. Univ. of Cal. at Berkeley, 192 F.3d 1252, 1258
(9th Cir. 1999).
“A party seeking summary judgment bears the initial
burden of informing the court of the basis for its motion and of
identifying those portions of the pleadings and discovery
responses that demonstrate the absence of a genuine issue of
Soremekun v. Thrifty Payless, Inc., 509 F.3d
978, 984 (9th Cir. 2007) (citing Celotex, 477 U.S. at 323); see
also Jespersen v. Harrah’s Operating Co., 392 F.3d 1076, 1079
(9th Cir. 2004).
“When the moving party has carried its burden
under Rule 56[(a)] its opponent must do more than simply show
that there is some metaphysical doubt as to the material facts
[and] come forward with specific facts showing that there is a
genuine issue for trial.”
Matsushita Elec. Indus. Co. v. Zenith
Radio, 475 U.S. 574, 586–87 (1986) (citation and internal
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quotation marks omitted); see also Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247–48 (1986) (stating that a party cannot
“rest upon the mere allegations or denials of his pleading” in
opposing summary judgment).
“An issue is ‘genuine’ only if there is a sufficient
evidentiary basis on which a reasonable fact finder could find
for the nonmoving party, and a dispute is ‘material’ only if it
could affect the outcome of the suit under the governing law.”
In re Barboza, 545 F.3d 702, 707 (9th Cir. 2008) (citing
Anderson, 477 U.S. at 248).
When considering the evidence on a
motion for summary judgment, the court must draw all reasonable
inferences on behalf of the nonmoving party.
Indus. Co., 475 U.S. at 587; see also Posey v. Lake Pend Oreille
Sch. Dist. No. 84, 546 F.3d 1121, 1126 (9th Cir. 2008) (stating
that “the evidence of [the nonmovant] is to be believed, and all
justifiable inferences are to be drawn in his favor”).
Breach of Contract
To prevail on a breach of contract claim under Hawaii
law, Plaintiffs must establish “(1) the contract at issue; (2)
the parties to the contract; (3) whether the plaintiff performed
under the contract; (4) the particular provision of the contract
allegedly violated by the defendant; (5) when and how the
defendant allegedly breached the contract; and (6) how the
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plaintiff was injured.”
Barber v. Ohana Military Cmtys., LLC,
Civ. No. 14-00217 HG-KSC, 2014 WL 3529766, at *4 (D. Haw. July
15, 2014) (citing Evergreen Eng’g, Inc. v. Green Energy Team
LLC, 884 F. Supp. 2d 1049, 1059 (D. Haw. 2012)).
agree that the Settlement Term Sheet constituted a valid
Objections at 15; see Response at 2.
parties dispute whether Defendant breached the Settlement Term
Sheet when its attorney submitted a declaration with the
Debtors’ Opposition to Plaintiffs’ administrative expense claim
and later spoke at the hearing regarding the claim and how the
alleged breach injured Plaintiffs.
The contractual provision at
issue states as follows:
SKFI and the Davis Creditors will not oppose
an administrative expense claim by the Bays
firm in the amount of $250,000 for making a
substantial contribution to the case.
Settlement Term Sheet at 1.
Plaintiffs’ principal concern is that Defendant
violated the Settlement Term Sheet when its counsel made
statements in a declaration that he provided to the Debtor and
stated at the Plaintiffs’ administrative expense claim hearing
that he had made a settlement offer to Plaintiffs on November
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11, 2013 in the amount of $1,500,000, 4 and that Plaintiffs had
not made a substantial contribution to the bankruptcy case
subsequent to that offer. 5
One of Plaintiffs’ main contentions is that while it
was the Debtors who filed the Opposition to the administrative
expense claim, it was really SKFI that was behind the effort.
Plaintiffs maintain that SKFI had earlier purchased all of the
Debtors’ debt, allowing “SKFI [to] appoint all officers and
While the Debtors argue that Mr. Wagner offered to increase the
unsecured creditors’ fund to $1,500,000 on November 11, 2013,
Plaintiffs insist that no such offer was ever made. See Reply
in Supp. of Administrative Expense Motion (“Administrative
Expense Reply”) at 6, In re 1250 Oceanside Partners, Case No.
13-00353 (Bankr. D. Haw. Sept. 10, 2014), ECF No. 1192.
However, in an April 2014 email sent from Mr. Bays to Mr.
Wagner, Mr. Bays refers to “doubl[ing] the size of the fund as
you had proposed earlier.” Ex. E to Wagner Declaration, ECF No.
36-6. As noted above, the original Reorganization Plan had
provided for a $750,000 fund to satisfy the claims of unsecured
creditors; this email therefore seems to support Defendant’s
contention that an earlier offer to double the fund to
$1,500,000 was indeed made.
The Bankruptcy Code allows a creditor to recover attorneys’
fees as an administrative expense if that creditor makes “a
substantial contribution in a case under Chapter . . . 11.” 11
U.S.C. § 503(b)(3)(D). In order to recover on a § 503(b)
administrative claim, a claimant must prove two things: “First,
the claimant must be a creditor of the estate. Second, the
creditor must have made a ‘substantial contribution’ to the
bankruptcy plan.” In re Cellular 101, Inc., 377 F.3d 1092, 1096
(9th Cir. 2004). The Ninth Circuit has stated that “the
principal test of substantial contribution is ‘the extent of
benefit to the estate.’” Id. “[S]ervices which substantially
contribute to a case are those which foster and enhance, rather
than retard or interrupt the progress o[f] reorganization.” Id.
at 1097 (quoting In re Consol. Bancshares, Inc., 785 F.2d 1249,
1253 (5th Cir. 1986)).
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directors of the [D]ebtor, which gave SKFI the ability to
orchestrate the opposition to the application.”
Plaintiffs contend that “SKFI utilized its complete
control of the [D]ebtor to instruct the [D]ebtor’s attorney to
join SKFI’s attorney in objecting to the Plaintiff’s claim for
the agreed upon fees.”
Id. at 17.
In fact, Plaintiffs point
out that SKFI – not the Debtors’ estate - was responsible for
paying the claim, which raises a question as to what interest
the Debtors had in opposing the administrative expense claim, as
the only party that would benefit from doing so was SKFI.
Plaintiffs also assert that the Debtors’ Opposition
was based exclusively on the Wagner Declaration, and contend
that “it was clear to everyone that SKFI was opposed to the
[administrative expense claim.]”
Id. at 7.
language in the Wagner Declaration comes across in a
questionable manner, such as Mr. Wagner’s statement that “Mr.
Bays sought SKFI’s agreement to buy his silence with a direct
payoff, to the exclusion of other unsecured creditors.”
Wagner Declaration ¶ 3.
Additionally, Plaintiffs argue that “SKFI’s attorney
was not sworn and called to testify as a witness in the matter,
and made his appearance as an attorney specifically representing
SKFI and for the sole purpose of opposing the award of the
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attorneys’ fees agreed to in the Settlement Agreement.”
Objections at 18.
Their argument is essentially that Mr. Wagner
was representing SKFI’s interests at the hearing, rather than
simply providing factual evidence in support of the Debtors’
Plaintiffs contend that these violations of the
Settlement Agreement injured them because the bankruptcy court
relied entirely on Mr. Wagner’s declaration and arguments in
denying roughly 80% of Plaintiffs’ administrative expense claim.
See id. at 7-8.
For its part, Defendant draws a sharp distinction
between SKFI and the Debtors, which it claims acted
independently of SKFI.
September 15, 2014.
Transcript of Hearing at 12:7-13:20,
Defendant argues that while SKFI may have
agreed not to oppose Plaintiffs’ administrative expense claim,
“nothing in the [Settlement] Term Sheet, or the history of the
negotiations, prohibited the Debtor from filing its Opposition
to Plaintiffs’ motion for administrative expense.”
Rather, Defendant asserts, “the parties specifically agreed
that the Debtor would be able to file an Opposition to
Plaintiffs’ motion for administrative expense.”
points out that an earlier version of the Settlement Term Sheet
included language barring the Debtors from objecting; however,
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this language was ultimately removed from the agreement upon the
advice of the Debtors’ counsel.
Id. at 3-4.
counsel for the Debtors stated at the confirmation hearing in
May 2014 that the Debtors had “not waived any objections [they]
may have to any party’s claims,” and that “those claims are
preserved to the estate.”
Id. at 5 (referencing Transcript of
Hearing at 10:9-14, May 12, 2014, ECF No. 36-2).
Defendant further argues that “subsumed within the
Debtor’s right to file an opposition is the right to marshal
evidence in support of its opposition,” and that to hold
otherwise would conflict with the bankruptcy court’s independent
duty to evaluate whether a substantial contribution has been
Id. at 6, 8.
Defendant contends that the Wagner
Declaration merely served as factual support for the Debtors’
Opposition, and that Mr. Wagner did not make any legal arguments
either in his declaration or during his appearance at the
hearing on the administrative expense claim.
Id. at 11.
The emails sent between Mr. Wagner and Mr. Bays that
were submitted as exhibits to the Wagner Declaration also
support the notion that, to some extent, Mr. Wagner was the best
source for much of the information as to whether Plaintiffs’
counsel had made a substantial contribution to the bankruptcy
See Exs. A-G to Wagner Declaration, ECF No. 36-6.
Indeed, the bankruptcy court stated in its Administrative
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Expense Decision that settlement communications such as the
emails Mr. Wagner provided with his declaration “are the most
important evidence, and may be the only evidence, showing
whether a party made a substantial contribution to the
settlement of a chapter 11 case.”
Decision at 16.
The bankruptcy court found in its Recommended
Decision that Mr. Wagner had not opposed Plaintiffs’
administrative expense claim, but had simply provided evidence
in “support” of the Debtors’ Opposition. 6
at 10 (“SKFI did not oppose the [Administrative Expense Motion];
rather, its counsel provided an evidentiary declaration in
support of the debtor’s objection.”).
Finally, counsel for the Debtors, Simon Klevansky,
provided an affidavit stating that if Mr. Wagner had not agreed
to provide evidence in support of the Debtors’ Opposition, Mr.
Klevansky “could have and would have subpoenaed Mr. Wagner to
testify as to such factual evidence.”
Klevansky ¶ 3, ECF No. 36-13.
See Decl. of Simon
Defendant suggests that this cuts
against the alleged impropriety of SKFI’s attorney providing
Relatedly, Defendant’s counsel argued during the
In finding it was appropriate for Mr. Wagner to submit his
declaration and speak at the hearing on the administrative
expense claim, the bankruptcy court also noted that “[a]ll
citizens have a duty to provide relevant evidence in judicial
proceedings,” and that, as an attorney, Mr. Wagner “owe[d] a
duty of candor to the tribunal.” Recommended Decision at 11.
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hearing before the bankruptcy court on the parties’ crossmotions for summary judgment that when SKFI agreed not to
“oppose” Plaintiffs’ administrative expense claim, it agreed
only that it would not file its own opposition to the claim.
Transcript of Hearing at 19:15-24, October 13, 2016.
counsel argued, because SKFI submitted a factual declaration
rather than an opposition, it did not breach the Settlement Term
Upon review of the extensive administrative expense
claim and summary judgment briefing submitted by the parties to
both this Court and the bankruptcy court, the Court finds that
this case implicates the doctrine of res judicata. 7
of res judicata embraces two doctrines, claim preclusion and
Defendant raised an affirmative defense on the basis of res
judicata, collateral estoppel, claim preclusion, issue
preclusion, and law of the case in its Answer. ECF No. 6, ¶ 17.
Defendant also contended in its Response that “Plaintiffs’
counsel should be collaterally estopped and precluded from relitigating or asserting any arguments relating to contents of
Mr. Wagner’s Declaration.” Response at 18. Defendant’s counsel
raised this point again at the summary judgment hearing before
the bankruptcy court. Transcript of Hearing at 16:6-12, October
13, 2016 (“[W]hat [Plaintiffs are] doing in their state court
case that was removed to federal court is essentially a
collateral attack on the [bankruptcy court’s] prior ruling on
what the appropriate administrative expense claim award was for
their attorneys’ fees.”); id. at 21:7-9 (“And that may be why
we’re back here, trying to defend against what is essentially a
collateral attack on the [bankruptcy court’s] prior
administrative expense claim.”).
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issue preclusion (or collateral estoppel), that bar,
respectively, a subsequent action or the subsequent litigation
of a particular issue because of the adjudication of a prior
Relevant here, “[a] judgment entered in an adversary
proceeding in a bankruptcy case is a valid final judgment for
the purposes of claim and issue preclusion.”
F. App’x 681, 681 (9th Cir. 2011).
In re Eisen, 460
“A bankruptcy court order is
final and thus appealable ‘where it 1) resolves and seriously
affects substantive rights and 2) finally determines the
discrete issue to which it is addressed.’”
In re Lewis, 113
F.3d 1040, 1043 (9th Cir. 1997) (quoting In re Frontier Props.,
Inc., 979 F.2d 1358, 1363 (9th Cir. 1992)).
A bankruptcy court
order that disposes of an administrative expense claim
constitutes a final, appealable order.
See In re United Educ. &
Software, BAP No. CC–05–1067–MaMeP, 2005 WL 6960237, at *2 n.6
(B.A.P. 9th Cir. Oct. 7, 2005) (“An order disallowing
an administrative expense claim is generally a final, appealable
order.”) (citing In re Mouradick, 13 F.3d 326, 326-27 (9th Cir.
1994); In re Cellular 101, Inc., 539 F.3d 1150, 1153 (9th Cir.
2008) (recognizing a party’s right to appeal a bankruptcy court
order granting an administrative expense claim for attorneys’
fees and costs).
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“The preclusive effect of the prior decision of the
bankruptcy court is determined under federal res judicata
McClain, 793 F.2d at 1033.
Under federal law,
collateral estoppel, or issue preclusion, generally requires
that there be “(1) the same issue; (2) actually litigated and
determined; (3) by a valid and final judgment; (4) as to which
the determination is essential to the judgment.”
In re Paine,
283 B.R. 33, 39 (B.A.P. 9th Cir. 2002).
Here, the Court finds that it is unnecessary to
determine whether or not a breach occurred.
Plaintiffs could prevail on the other elements of breach of
contract, Plaintiffs cannot establish how they were injured as
required by the sixth element because the parties have already
litigated before the bankruptcy judge the issue of the
administrative expenses due to Plaintiffs, including whether an
offer to increase the unsecured creditor’s fund was made.
In his October 2014 Administrative Expense Decision,
the bankruptcy judge found that on November 11, 2013, SKFI
offered to increase the unsecured creditors’ fund from $750,000
Administrative Expense Decision at 4.
the court noted, the Batiste creditors rejected this offer and
the litigation continued.
Id. at 4-5.
The bankruptcy court
characterized the period after November 11, 2013 to when the
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court confirmed the Reorganization Plan as the “post-offer
Id. at 10.
The Debtors argued that after the Batiste creditors
rejected SKFI’s offer to double the size of the unsecured
creditors’ fund, litigation continued for an additional five
months before the parties agreed to increase the fund to
$1,550,000 – a mere $50,000 increase from SKFI’s initial offer.
See Debtors’ Opposition at 5-7.
The Debtors argued that this
additional litigation was endured “at great expense to the
estate” and “contributed nothing to advancing the
Id. at 1; Debtors’ Suppl. Opp’n to
Administrative Expense Motion at 8, In re 1250 Oceanside
Partners, Case No. 13-00353 (Bankr. D. Haw. Sept. 11, 2014), ECF
Plaintiffs responded by continuing to detail the
substantial contribution they felt Plaintiffs’ counsel had made
to the case, including his crucial role in settlement
discussions on behalf of the unsecured creditors.
Administrative Expense Reply at 4-5.
They also asserted that
The bankruptcy court also recognized two other relevant time
periods: the “pre-plan period,” which constituted the period
prior to when the first reorganization plan was filed on August
15, 2013; and the “pre-offer period,” the period from the filing
of the first reorganization plan until SKFI offered to increase
the unsecured creditors’ fund to $1,500,000. See Administrative
Expense Decision at 10.
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“Mr. Wagner’s claim that there was another offer outstanding
since November of 2013, is not supported by the record, makes no
sense given the facts of the case, and is simply untrue.”
However, as the bankruptcy court noted in its
Administrative Expense Decision, Plaintiffs “offer[ed] no
evidence to rebut the declarations and exhibits offered by the
debtors . . . leav[ing] [the bankruptcy judge] with nothing to
counter the detailed, corroborated, and persuasive evidence
offered by the debtors.”
Administrative Expense Decision at 16.
The bankruptcy court ultimately found the Debtors’
arguments persuasive and determined that Plaintiffs’ counsel did
not make a substantial contribution to the case after the
November 2013 offer was made and declined to grant counsel any
award for that period.
Id. at 14-16.
For the time period prior
to the November 2013 offer, however, the court determined that
an administrative expense claim of $55,000 was appropriate for
counsel’s contribution to the case.
Id. at 16.
constituted “roughly one-third of the total amount sought for
the pre-plan period” and “roughly 95% of the fees requested for
[the pre-offer] period.”
Id. at 13-14.
Because Plaintiffs failed to appeal the Administrative
Expense Decision, which constituted a final, appealable order,
Plaintiffs are collaterally estopped from relitigating the
aforementioned issues in service of their breach of contract
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To be sure, Plaintiffs allege that their injury in this
case arises from the Debtors’ opposition to the $250,000
administrative expense claim Plaintiffs sought in the bankruptcy
However, resolving how Plaintiffs were injured by the
opposition would require this Court or a jury to determine
whether Plaintiffs’ counsel had made a substantial contribution
to the case, which would also involve the question whether the
November 2013 offer had indeed been made. 9
The bankruptcy court
has already decided these very issues, which were essential to
its conclusion that a $55,000 administrative expense claim was
appropriate, and neither party appealed the court’s order.
time for Plaintiffs to claim injury arising from breach of the
Settlement Agreement has thus passed, and this Court will not
disturb the bankruptcy court’s final order on that issue.
For all of the foregoing reasons, Plaintiffs are
collaterally estopped from bringing their breach of contract
While the bankruptcy court found that Defendant did not
breach the Settlement Term Sheet and recommended that the Court
To be clear, the Court is not here addressing whether
Plaintiffs’ counsel made an earlier settlement offer of
$1,500,000, nor whether Plaintiffs’ counsel thereafter provided
a substantial contribution to the bankruptcy case, nor whether
the bankruptcy court erred in its decision awarding Plaintiffs’
counsel only $55,000. These issues were adjudicated in the
Administrative Expense Decision issued in October 2014, which
order neither party appealed, and therefore Judge Faris’
findings therein are binding upon the parties under the doctrine
of res judicata.
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grant summary judgment in favor of Defendant on that basis, this
Court holds that it is unnecessary to resolve the question
whether Defendant breached the Settlement Term Sheet because
Plaintiffs are barred by res judicata from now claiming they
were injured by the alleged breach.
The Court therefore
MODIFIES the bankruptcy court’s recommendation with respect to
Plaintiffs’ breach of contract claim, and GRANTS summary
judgment in favor of Defendant on Count I on the ground of
Plaintiffs next allege that, “[i]n order to induce
[Plaintiffs] to dismiss the adversary proceedings filed in the
bankruptcy case, withdraw their objections to the SKF[I] claim
against Oceanside in the bankruptcy proceedings, and withdraw
their objections to the Reorganization Plan, SKF[I] made express
and implied representations to the Plaintiffs that it would not
oppose Plaintiff’s [administrative expense claim].”
Under Hawaii law, a plaintiff must establish by clear
and convincing evidence the following elements to prove fraud:
(1) that the defendant made false representations of material
fact, (2) intended to induce plaintiff to act, (3) the
representations were made with knowledge of, or reckless
disregard for, their falsity, and (4) the plaintiff justifiably
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relied upon those false representations to his detriment.
v. Munoz, 853 F.2d 710, 716 (9th Cir. 1988).
Plaintiffs have offered no evidence in support of
their fraud claim, either in their summary judgment briefing or
in their Objections to the Recommended Decision.
Plaintiffs’ counsel admitted at the summary judgment hearing
before the bankruptcy court that Plaintiffs had no evidence to
support their fraud claim.
October 13, 2016.
Transcript of Hearing at 24:2-3,
Instead, Plaintiffs sought a continuance
pursuant to Rule 56(d), in order that they may be afforded an
opportunity to conduct further discovery in support of their
See Pls.’ Mem. in Opp’n to Defendant’s Motion at 15, ECF
No. 36-11; Decl. of Christian D. Chambers ¶¶ 6-9, ECF No. 36-12;
Objections at 21.
Concluding that Plaintiffs “have had an ample
opportunity to uncover evidence of fraud, but . . . offer none,”
the bankruptcy court recommended that the Court deny Plaintiffs’
Rule 56(d) request and grant summary judgment in favor of
Defendant on Count II.
Recommended Decision at 12-13.
To prevail on a Rule 56(d) request, a party must make
“(a) a timely application which (b) specifically identifies (c)
relevant information, (d) where there is some basis for
believing that the information sought actually exists.”
Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co.,
353 F.3d 1125, 1129 (9th Cir. 2004) (citation omitted).
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burden is on the party seeking additional discovery to proffer
sufficient facts to show that the evidence sought exists, and
that it would prevent summary judgment.”
Id. at 1129-30
A district court may “deny further
discovery if the movant has failed diligently to pursue
discovery in the past, or if the movant fails to show how the
information sought would preclude summary judgment.”
1130 (citation omitted).
The Declaration of Christian D. Chambers, which serves
as the Rule 56(d) affidavit, states that “discovery into the
communications between the Defendant and the Debtor must be
completed in order to determine the extent to which the
Defendant encouraged the filing of an opposition to the
Plaintiffs’ request for administrative expenses”; and that
“discovery into any discussions held between Defendant and third
parties during negotiations of the Settlement Agreement must be
conducted to determine whether the Defendant had no intention of
fulfilling its contractual obligations at the time it entered in
the Settlement Agreement.”
Decl. of Christian D. Chambers ¶¶ 7-
The Court finds that Plaintiffs’ Rule 56(d)
application is insufficient, in that it does not provide a
specific and valid “basis for believing that the information
sought actually exists.”
Rather, Plaintiffs’ argument that such
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evidence exists is speculative at best.
Furthermore, the Court
agrees with the bankruptcy court that Plaintiffs had “ample
opportunity” to obtain evidence in support of their fraud claim,
but failed to do so.
Plaintiffs were well aware of their
obligation to file dispositive motions so as to be heard before
the bankruptcy court not later than October 14, 2016 10 – over a
year after Plaintiffs filed their Complaint in state court and
the case was removed to the district court.
Scheduling Order ¶ 2, Batiste, et al. v. Sun Kona Finance I,
LLC, Case No. 16-90014 (Bankr. D. Haw. July 13, 2016), ECF No.
However, Plaintiffs did not file their Rule 56(d)
application until September 29, 2016 – two weeks before the
summary judgment hearing on October 13, 2014.
The Court will
not now award Plaintiffs for their lack of diligence.
On May 13, 2016, the bankruptcy court issued a Recommendation
to District Court to Schedule Jury Trial, in order that the
bankruptcy court could “establish meaningful deadlines for
discovery and pretrial motions.” ECF No. 28. The court further
recommended that “reference of this matter be withdrawn from the
bankruptcy court ninety days prior to the trial date.” Id. On
July 6, 2016, Magistrate Judge Chang issued a Rule 16 Scheduling
Order, setting a jury trial before this Court on February 14,
2017. ECF No. 32. Thus, in a Supplemental Scheduling Order
issued July 13, 2016, the bankruptcy court ordered that
reference of this matter to the bankruptcy court be withdrawn on
November 16, 2016, ninety days prior to trial. The order also
required that dispositive motions “be filed so as to be heard
not later than October 14, 2016.” Suppl. Scheduling Order ¶ 2,
Batiste, et al. v. Sun Kona Finance I, LLC, Case No. 16-90014
(Bankr. D. Haw. July 13, 2016) (emphasis in original), ECF No.
- 29 -
Moreover, as the Court found with respect to Count I,
even assuming Plaintiffs could establish the first three
elements of the fraud claim, they are barred by res judicata
from now claiming they suffered any detriment by justifiably
relying on the alleged false representations.
For the foregoing reasons, the Court ADOPTS the
bankruptcy court’s recommendation as MODIFIED with respect to
Plaintiffs’ fraud claim, and accordingly DENIES Plaintiffs’ Rule
56(d) request and GRANTS summary judgment in favor of Defendant
on Count II.
III. Punitive Damages
Finally, Plaintiffs assert a claim for punitive
damages, claiming that SKFI’s conduct “constitutes willful,
wanton and/or malicious conduct and/or reckless disregard for
the rights of the Plaintiffs under law.”
Compl. ¶¶ 60-63.
preliminary matter, this claim must fail because “punitive
damages are derivative in nature and cannot form an independent
Aoyagi v. Straub Clinic & Hosp., Inc., 140 F. Supp. 3d
1043, 1062 (D. Haw. 2015) (citing Ross v. Stouffer Hotel Co.
(Haw.) Ltd., Inc., 76 Haw. 454, 466 (1994) (“[A] claim for
punitive damages is not an independent tort, but is purely
incidental to a separate cause of action.”)).
Because the Court
has granted summary judgment in favor of Defendant on Counts I
- 30 -
and II, Plaintiffs’ claim for punitive damages fails on this
Furthermore, even assuming Plaintiffs’ punitive
damages claim did not fail as a matter of law, Plaintiffs have
produced no evidence to support such a claim.
Supreme Court has stated that “the fundamental purpose
underlying an award of exemplary or punitive damages is to
punish the wrongdoer and to deter him and others from committing
similar wrongs and offenses in the future.”
Masaki v. Gen.
Motors Corp., 71 Haw. 1, 16 (1989); see also Kunewa v. Joshua,
83 Haw. 65, 73 (1996) (“The purpose of a punitive damages award
in Hawaiʻi is not to compensate the plaintiff, but rather, to
punish the defendant for aggravated or outrageous misconduct and
to deter the defendant and others from similar conduct in the
future.”) (internal quotation marks and citation omitted).
award of punitive damages is appropriate “only when the
defendant has acted egregiously, intentionally, and
deliberately, and with ‘a character of outrage frequently
associated with a crime.’”
Kahale v. ADT Auto. Servs., Inc., 2
F. Supp. 2d 1295, 1302 (D. Haw. 1998) (quoting Masaki, 71 Haw.
To recover punitive damages, Plaintiffs “must prove by
clear and convincing evidence that the defendant has acted
wantonly or oppressively or with such malice as implies a spirit
- 31 -
of mischief or criminal indifference to civil obligations, or
where there has been some wilful [sic] misconduct or that entire
want of care which would raise the presumption of a conscious
indifference to consequences.”
Masaki, 71 Haw. at 16-17.
“[T]he proper measurement of the amount of punitive damages is
the degree of the defendant's malice, oppression, or gross
negligence that forms the basis for liability for punitive
damages and the amount of money required to punish the
Ditto v. McCurdy, 98 Haw. 123, 131 (2002).
facts of this case, Plaintiffs have failed to make any showing
that Defendant acted “wantonly or oppressively or with such
malice as implies a spirit of mischief or criminal
See Masaki, 71 Haw. at 16-17.
For the foregoing reasons, the Court ADOPTS the
bankruptcy court’s recommendation with respect to Plaintiffs’
claim for punitive damages, and GRANTS summary judgment to
Defendant on Count III.
For the foregoing reasons, the Court ADOPTS in part
and MODIFIES in part the bankruptcy court’s Recommended
The Court directs the Clerk to enter judgment in
favor of Defendant.
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IT IS SO ORDERED.
Honolulu, Hawaii, January 12, 2017.
Alan C. Kay
Sr. United States District Judge
Batiste et al. v. Sun Kona Finance I, LLC et al., Civ. No. 15-00397 ACK-KSC,
Order Adopting in Part and Modifying in Part the Proposed Findings and
Recommended Decision on Cross-Motions for Summary Judgment.
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