GRACE CHEN, Rеspondent/Plaintiff-Appellee, vs. JONATHAN WILLIAM MAH, D.D.S.; JONATHAN MAH, DDS, INC., a Hawaii corporation, Petitioners/Defendants-Appellants.
SCWC-16-0000712
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
JANUARY 30, 2020
FOR PUBLICATION IN WEST‘S HAWAI‘I REPORTS AND PACIFIC REPORTER
McKENNA, POLLACK, AND WILSON, JJ., WITH RECKTENWALD, C.J., CONCURRING AND DISSENTING IN PART AND CONCURRING IN THE JUDGMENT, WITH WHOM NAKAYAMA, J., JOINS
Electronically Filed Supreme Court SCWC-16-0000712 30-JAN-2020 09:19 AM; CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-16-0000712; CIV. NO. 12-1-2495-10)
*** FOR PUBLICATION IN WEST‘S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
OPINION OF
I. Introduction
This case concerns a compensation dispute based on an oral agreement between an independent contractor dentist, Dr. Grace Chen (“Chen“), and the dentist who retained her services, Dr. Jonathan Mah (“Mah“), and his corporation, Jonathan Mah, DDS, Inc. (“Corporation“) (collectively, “Defendants“). In sum, default and subsequent default judgment as to certain claims were entered against Defendants, and a bench trial was held regarding damages on some remaining claims.1 Defendants unsuccessfully appealed the Circuit Court of the First Circuit‘s (“circuit court“) denial of their motion to set aside entry of default, and their motion for reconsideration and/or for new trial to the Intermediate Court of Appeals (“ICA“). See Chen v. Mah, CAAP-16-0000712 (App. Mar. 14, 2019) (SDO).
We hold the circuit court did not abuse its discretion in denying Defendants’ Hawaiʻi Rules of Civil Procedure (“HRCP“)
Requiring a movant under
Accordingly, we affirm the May 3, 2019 judgment on appeal entered by the ICA pursuant to its March 14, 2019 summary disposition order (“SDO“), which affirmed the circuit court‘s July 6, 2016 final judgment.
II. Background
A. Procedural and factual background through the July 13, 2013 hearing on Defendants’ motion to set aside entry of default
On October 3, 2012, Chen filed a twenty-four page complaint against Defendants in circuit court, which included forty-two detailed preliminary factual allegations. In summary, Chen alleged she and Defendants entered into an oral compensation agreement in November 2008 under which the Corporation agreed to retain her professional services as an independent contractor associate dentist and to compensate her for treating dental patients at its principal place of business according to a formula under which she was entitled to be regularly paid 40% of the gross income produced to the Corporation for her dental work on patients adjusted or reduced by (1) 40% of the gross income not actually colleсted from her patients or their insurance
According to the complaint, the Corporation commenced paying Chen a couple of months after she started working in late 2008 based on its collection of income produced from her work, adjusted as reflected above, and regularly provided her with supporting documentation describing in detail all adjustments for uncollected income and patients’ lab fees, and this practice continued until November 5, 2011.
The complaint further alleged that several months after beginning work, when Chen asked for a written compensation agreement or a partnership, and repeated this request several times, on each occasion, Mah represented he would have partnership documents prepared and provided to her, but this never happened. Chen alleged that when Mah made these representations, he misled and lied to her as he had no intention of making her a partner as evidenced by him making similar representations to other dental associates and not making them partners, as she later learned.
Chen alleged she continued working based on Mah‘s representations that he would make her a partner, and in fact, accelerated and increased her work efforts and hours of work as an associate dentist to favorably impress Mah of her abilities and worthiness to be his partner. The complaint alleges that, by July 2011, Chen had increased her work schedule to four days a week while working eight hours per day on weekends and twelve hours per day on Mondays and Tuesdays, and, as a result, Chen produced gross income for the Corporation exceeding $1 million for both calendar years 2010 and 2011, generating substantial income for Defendants consisting of the Corporation‘s 60% share of her gross income. Chen alleged she relied upon and trusted Defendants to accurately calculate and timely pay her the correct amounts of money owned to her under their compensation agreement.
According to the complaint, after November 5, 2011, Defendants suddenly, and without explanation, stopped providing any calculations and supporting documentation to Chen and her compensation payments became erratic and changed to rounded lump sums. Chen alleged that in 2012, Defendants failed to provide her with a 1099 miscellaneous income form for 2011 despite her repeated requests and failed to pay her any compensation since June 15, 2012. According to the complaint, the Corporation paid Chen $359,874.18 in 2011, and Defendants had underpaid her approximately $200,000 or more in income, but she was unable to determine the amount with certainty without the Corporation‘s accounting documents. Chen also alleged the Corporation had paid her $92,500 in 2012, but she had been underpaid at least $45,669.76 through her August 23, 2012 resignation by admission of Defendants’ accountant Gloria Thompson in her unsupported September 14, 2012 two-page accounting compilation.
The complaint further alleged Mah and his wife had personal federal tax liens filed against them for 2005-2009 for hundreds of thousands of dollars in unpaid income tax, with tax liens still pending against them in 2011, and that upon information and belief, in October 2011, Mah used portions of the monies owed to her to pay these delinquent tax liens. Chen further alleged she had made multiple efforts in 2011 and 2012 to meet and speak with Mah to obtain an accounting and explanation of the above, but Mah repeatedly evaded her or cancelled meetings at the last minute. Chen also alleged she made repeated demands for accounting documents and for payment of the estimated unpaid amounts exceeding $200,000 owed to her, but Defendants failed or refused, raising excuses and attempting to charge exorbitant copying fees, and providing only Gloria Thompson‘s accounting compilation.
The complaint further alleged that by failing to timely pay her, Defendants had prevented Chen from timely filing her 2011 income taxes and making regular contributions to her own retirement plan, thereby causing her to incur a penalty in an amount to be determined. Chen also alleged that two days after she was coincidentally seated next to Mah on a flight from Hilo to Honolulu on August 8, 2012 and complained to Mah about being owed substantial funds and not being provided accounting records, Mah announced to all associate doctors he was closing his
Based on these detailed factual allegations, Chen‘s complaint asserted causes of action in twelve counts: declaratory judgment (Count I), accounting (Count II), breach of contract and of implied covenant of good faith and fair dealing (Count III), conversion (Count IV), fraud (Count V), intentional/negligent misrepresentation (Count VI), intentional infliction of emotional distress (Count VII), unjust enrichment (Count VIII), statutory fraudulent transfer (Count IX), common law fraudulent transfer (Count X), constructive trust/equitable lien (Count XI), and punitive damages (Count XII).
Before the complaint was filed on October 3, 2012, Chen‘s retained counsel, Dennis King (“King“), sent a demand letter dated September 10, 2012, to Defendants. The letter demanded Defendants immediately pay Chen the delinquent amounts owed to her in the amount of $237,268.92 for past due compensation owed to her, inclusive of attorney‘s fees of $4,750, and that Defendants deliver to King‘s office accounting and billing statements, daily production, worksheets, and lab fees for services performed by Chen for the period from January 1, 2011 to September 10, 2012. The demand letter stated: “If I do not receive the above payment and these records on or before 5 PM on Saturday, September 15, 2012, I have been instructed to immediately file suit against you and your company to recover these amounts and any other amounts owed to Dr. Chen after obtaining your documents and performing a full accounting of your delinquent payments based on the claims, among others, described below.”
Mah and King had several discussions and communications by e-mail and regular mail between September 11, 2012 and October 3, 2012. During the discussions, King asked Mah if he had an attorney as King preferred to speak to Mah‘s attorney. Mah indicated, however, he did not have an attorney but had spoken to a friend who was an attorney and did not want to incur the high expenses of an attorney. Most of the discussions concerned attempts by Mah and King to informally resolve the matter, by Chen obtaining Mah‘s documents without pursuing litigation.
Specifically, on or about September 11, 2012, Mah called King in response to the demand letter. Mah had informed King that he did not have an attorney representing him in this matter. Also on September 11, 2012, Mah provided the two-page compilation report summary2 purportedly of compensation paid and owed to Chen from 2008 through 2012, but it did not include any information identifying who authored the document, and no backup documentation was provided. In an email dated September 12, 2012, King requested backup documentation and contact information for Mah‘s CPA. King also noted that if Mah altered, changed, or destroyed relevant documents, Chen would have no choice but to assert the spoliation rule against him in any ensuing litigation if the matter could not be resolved before litigation, but that he “look[ed] forward to receiving [Mah‘s] supporting documents and the CPA contact information . . . so that this matter can be resolved before 9/15/12.”
On September 14, 2012, Mah indicated that because he did not have duplicates, and because Chen had allegedly previously removed accounting records without prior authorization in July 2012, Mah was not willing to allow the records to be removed from the dental office for photocopying, but he would permit King and Chen to inspect all accounting data at the dental office, which was consistent with what Mah allowеd all associate doctors to do. Mah indicated, however, any copies made would be done at the dental office by the office manager at one dollar per
Following this exchange, Mah called King on September 15, 17, 24, and 28, and October 2, and 3, 2012.3 Mah indicated he was in the process of attempting to comply and furnish relevant accounting data to King, and King asked Mah why it was taking so long. Mah explained there were voluminous records from 2008 to 2012; King clarified he was only interested in 2012 despite Mah‘s explanation that reviewing only one year, 2012, would not generate an accurate result. King then gave Mah a new deadline.
According to Mah, because of the ever-changing deadlines to comply with requests, together with King‘s assurances of resolving the matter without litigation, Mah felt he was misled and confused into believing there was still time to resolve this matter informally. Further, according to Mah, because King made assurances during their telephone conversations that Mah and Chen would avoid litigation by attempting to resolve this matter informally, and because King was seemingly reasonable, cordial, and professional, Mah, in good faith, trusted King, and was under the impression that King was available to mediate and assist the parties in resolving this matter. In addition, according to Mah, King never recommended to Mah to obtain the assistance or advice of another attorney, or stated that King had a duty of loyalty to Chen to act solely in her best interests at Mah‘s expense.
After their telephone conversation on October 3, 2012, King sent an e-mail to Mah that same day, summarizing the conversation, and stating that “[t]o date you still have not provided the accounting documents initially requested in November[] 2011 by Dr. Chen or by her on numerous occasions thereafter,” that Mah‘s requirement that copies of documents cost one dollar per page was unaffordable and unreasonable, that “we are at an impasse with regard to you producing the accounting documents,” and that “[r]egrettably because of your unwillingness to produce these documents willingly within a reasonable time and to pay [Chen] what she is owed, I have recommended that Dr. Chen pursue this matter through the courts. After you retain counsel, please have your attorney contact me.” According to King, he did not mislead Mah in any way about trying to settle the case without litigation and Mah knew on their last conversation on October 3, 2012 that the matter was going to proceed to court based on King‘s recommendation and that the parties had reached an impasse.
The complaint was served on Defendants in Hilo, Hawaiʻi on October 8, 2012, by serving Mah in both his personal capacity as well as the registered agent for Corporation. Mah was also served with discovery requests on that date. On October 31, 2012, Chen promptly filed a request for entry of default on the complаint, and default was entered against Defendants by the circuit court clerk that same day. Copies of the clerk‘s entry of default were served on Defendants by U.S. mail on November 2, 2012.
There was no further activity in the litigation until May 24, 2013, when Chen filed a motion for default judgment, and a hearing was set for July 9, 2013. The motion requested damages from Defendants on the following counts only: Counts III (breach of contract), IV (conversion), V (fraud by concealment by retaining her compensation without accounting), VI (fraud by misrepresentation of intention to make Chen a partner), VIII (unjust enrichment), and XI (constructive trust/equitable lien).
On June 20, 2013, Defendants, through their attorney, filed a motion to set aside the October 31, 2012 entry of default (“motion to set aside entry of default“), which was set for a hearing on July 18, 2013. Attached to the motion was a declaration by Mah, dated June 18, 2013, alleging, among other things, that Mah only “recently learned” that default against Defendants had been filed on October 31, 2012, that Mah never realized King “was adversely taking action against me
Defendants also filed an ex parte motion to shorten time for hearing their motion to set aside entry of default, asking that the hearing on their motion be set for before the July 9, 2013 hearing date for Chen‘s motion for default judgment. The circuit court denied this ex parte motion on the grounds that there was no showing why the motion to set aside entry of default was not filed earlier to obviate the need to shorten time.
At the July 9, 2013 hearing, however, the circuit court denied Chen‘s first motion for default judgment without prejudice.
On July 10, 2013, Chen filed a memorandum in opposition to Defendants’ motion to set aside entry of default. Attached to the memorandum was a declaration by King dated July 10, 2013, which stated, among other things, that since October 3, 2012, King had not had any discussions or communications with Mah except through the service of court documents.
At the July 18, 2013 hearing on Defendants’ motion to set aside entry of default, the circuit court clarified the standard it would apply:
And the entry of default, setting aside requires the showing of essentially three things, one, there‘s no prejudice to the plaintiff, number two, that the defendant has a meritorious defense andm number three, that the default entered as a result of -- did not enter because of inexcusable neglect.
The circuit court then inquired for which of Chen‘s twelve counts Defendants had meritorious defenses.4 Defense counsel argued Defendants had meritorious defenses for the fraud claims because this was not a fraud, but an accounting case.
The circuit court then inquired what the meritorious defense was for Chen‘s fraud claim in Count V (fraud by concealment by retaining her compensation without accounting). Defense counsel responded that, “[b]asically, the accounting reflects that [Defendants] overpaid Chen.” According to defense counsel, Defendants had nothing to hide, were willing to do the accounting, and let the numbers resolve the case. Defense counsel went on to state that the classification of some of Chen‘s billings were being bounced back by the insurance companies and were not reimbursed because “they were not proper.” According to defense counsel, Chen was expecting Defendants to front generic gross amounts without getting compensation baсk, and the crux of the case was going to be accounting.
The circuit court probed further and asked if Mah ever told Chen that there was an overpayment requiring an adjustment, to which defense counsel responded in the affirmative, citing to Exhibit 9 in Chen‘s memorandum in opposition to Defendants’ motion to set aside entry of default.5 That exhibit
The circuit court then asked the defense, “And where does he talk about an overpayment and then he‘s going to now make an adjustment?” To that inquiry, the following exchange occurred with the circuit court:
MR. KIDANI: In terms of the overpayment, that came up in the audit that was done by the accountant, Thompson.
THE COURT: When was that done?
MR. KIDANI: That was done in 2012 when this whole issue came up, and this was the information that was being given to Mr. King directly from our client. And that audit continued on an ongoing basis through 2012 into 2013. And that was . . . part of the delay of the information that was -- that they were waiting for.
THE COURT: Where in Exhibit 9 . . . does Dr. Mah explain that there was an overpayment and now we have to make an adjustment, therefore, we‘re not going to pay you in the same fashion that we did before?
MR. KIDANI: That wasn‘t in that letter. . . . I think that was what was conveyed by him to all the associates. It wasn‘t in this letter.
THE COURT: Okay, where in his declaration does he talk about the timing of when he told Dr. Chen that there was an overpayment and he is making an adjustment?
MR. KIDANI: . . . [S]tarting with paragraph 14 of his declaration, he indicated in 2011 and ‘12 that he first started learning of the overpayment. And it goes on into 15 -- 14, 15, 16.
THE COURT: Why don‘t you just point me to the paragraph and the language in Dr. Mah‘s declaration attached to your mоtion where he says he informed the plaintiff, Dr. Chen, that there was this overpayment so he‘s making an adjustment.
MR. KIDANI: Okay. Paragraph 216 was when he informed all the doctors of the complaint and his investigation started and that Gloria Thompson was retained at that point to complete the investigation. It was after Gloria Thompson finished that that information was given to Dr. Chen on the overpayment.
Defense counsel clarified that Gloria Thompson, the “independent CPA” hired by Defendants, finished her final report in April 2013 after she got all the 2012 numbers. The circuit court noted, however, that the complaint had been filed in October 2012 and there had been no audit finished before the lawsuit was filed.
In response to defense arguments regarding the fraud claims, Chen‘s counsel argued Mah‘s letter was written generically that the reimbursement program would be changing, but it did not give notice that it was going to change retroactively. Rather, Chen‘s counsel argued Chen had been strung along to continue working with the Corporation, and although she had repeatedly asked for her compensation and accounting, Mah would keep saying it was coming and therefore induced her to keep working, trusting that the accounting would eventually be produced. Chen‘s counsel also argued the second basis for the fraud claim was Mah‘s dangling the prospect of a partnership in front of her while she was being grossly underpaid.
Defense counsel also argued that once the accounting was finished, the numbers would not change that substantially, and would just show whether Chen was entitled to money or not.
Turning to “excusable neglect,” defense counsel noted that prior to the filing of the complaint, Mah had been in discussion with King, and therefore both parties were attempting to resolve the case without litigation. Defense counsel argued that Mah, although a dentist, was like a layperson from the neighbor islands, who “hear[s] things a different way.” Thus, although King had stated to Mah in an October 3, 2012 e-mail that he recommended Chen pursue the matter through the courts, this did not mean there was an impasse.
After hearing the arguments,7 the circuit court ruled Defendants did not meet their burden of proof because it was “unable to find the existence of a meritorious defense as to liability,” and also “unable to find that the default entered as a result of any excusable neglect on the part of the defendants.” Specifically, the circuit court stated:
The court concludes that the defendant did not meet the burden of proof under the Hawaiʻi case law, the BDM case. The court agrees with the defendant that there really is no prejudice8 within the meaning of the BDM case to the plaintiff if default is set aside. However, with respect to meritorious defense as to liability, the court is unable to conclude that the record shows that the defendant has -- or the defendants have meritorious defenses as to liability. The arguments really go to damages which they are not precluded from litigating even if they are in default. The case law permits a defendant in default to continue to litigate the question of damages.
As to excusable neglect, there really is an insufficient basis in the record to support a finding or conclusion that the defendants were excusably negligent in failing to respond to the complaint. It really -- the record only shows that the defendant was avoiding his obligations under the law to respond to the complaint in a timely fashion. Although the plaintiff did not give the defendants much latitude in terms of the 20 days to respond to the complaint, the plaintiff moved very quickly after the 20 days expired to obtain the entry of default. So there was very little opportunity for negotiation on extensions of time or things of that nature, but no overtures were made by the defense to the plaintiff to
request additional time to respond to the complaint. So plaintiff cannot be faulted, although the court does note that the plaintiff[] moved extremely expeditiously giving virtually no time for the defense to have additional extensions of time to respond to the complaint. But that does not prejudice the plaintiff‘s right to pursue the default remedies.
So the court is unable to find the existence of a meritorious defense as to liability, and the court is unable to find that the default entered as a result of any excusable neglect on the part of the defendants. So there is no basis for this court setting aside the entry of default.
But the court does recognize that the record shows the defendants appear to have at least arguments regarding -- and potential defenses regarding damages. So what the court will do is deny the motion to set aside the entry of default. However, in denying the motion, the court will permit the defendant to file an answer setting forth their defenses to the damages claims in this case. The answer must be filed by next Friday, July 26, 2013.
(Emphases added.) The circuit court entered its order denying Defendants’ motion to set aside entry of default on August 8, 2013.
B. Procedural and factual background following the July 13, 2013 hearing on Defendants’ motion to set aside entry of default
Defendants then filed their answer on July 26, 2013. The answer set forth eight defenses centering around the assertion that Chen was not only fully paid, but overpaid by Defendants and the insurance companies because she had misrepresented her work in billing codes. According to Defendants, Chen was therefore not owed any damages; overpayments should have offset any payments and Chen should return overpayments to Defendants; Chen should not be allowed equitable relief because she had unclean hands for overcharging patients; Chen‘s request for damages (presumably for her fraud claim regarding the “dangling” partnership offer) was not related to the oral agreement between Chen and Defendants regarding compensation for her services, and therefore Chen, was not entitled to any claim for damages based on a “pending arrangement” because no consideration was exchanged; and there was a lack of clear and convincing evidence to support Chen‘s claims.
On August 19, 2013, the circuit court set a trial for September 29, 2014. However, prior to that date, Chen filed a second motion for default judgment (“motion for dеfault judgment“) on August 4, 2014. Defendants filed their opposition memorandum on August 19, 2014. A hearing was held on August 27, 2014. The circuit court agreed with Chen that liability was not at issue because Defendants had defaulted and therefore the well-pled allegations of the complaint were required to be taken as true.9 Therefore, the circuit court also agreed to enforce the compensation formula Chen had asserted. Defendants, however, challenged the calculation of damages, and the circuit
court inquired whether it was “required to convene[,] at a minimum[,] a proof hearing if not a trial on damages.”10
Chen responded that she was required to only present “a prima facie case or at least sufficient evidence to pass a motion for directed verdict,” and that she had presented “substantially more evidence than that.”11 Chen had provided a timely expert report by a CPA evidencing her damages. Chen argued Defendants would have to present evidence to refute her evidence, but that an expert report attached to Defendants’ opposition memorandum had not been produced in discovery and should not be able to be relied upon. The one document Defendants had attached to their opposition memorandum that was previously produced was Exhibit I, a report by Gloria Thompson. Chen argued, however, that Gloria Thompson‘s report was based on
Defendants’ purported compensation formula, which differed from the one Chen had pled in her complaint, and which also differed from the formula achieved when
Defendants responded that the compensation formula was based on income produced, i.e., amounts collected, not billed. When the circuit court asked what the proper amounts asserted by Defendants were, Defendants pointed to Exhibits E, F, G, and H, which had been produced as
The circuit court ultimately concluded it could not consider the evidence produced by Defendants in opposition because trial “should not be by ambush.” Instead, the circuit court relied on the well-pleaded facts in the complaint and the evidence submitted by Chen and granted Chen‘s motion for default judgment as to Count III (breach of contract) and Count VIII (unjust enrichment). Damages were ordered in the total amount of $406,392.89; $335,731.68 plus interest was awarded for damages for 2011, and $70,661.21 was awarded for damages for 2012. The circuit court denied the motion for default judgment as to Count IV (conversion), Count V (fraud), Count VI (intentional/negligent misrepresentation), and Count XI (constructive trust/еquitable lien).12
Prior to the bench trial regarding damages on the remaining counts of the complaint, on August 13, 2014, Chen filed a motion to strike previously unidentified witnesses, in which she noted the circuit court had issued a trial setting status conference order dated August 19, 2013, that set forth various trial deadlines, including the submission of expert reports by May 30, 2014 and the final naming of witnesses by July 1, 2014, and that Defendants failed to meet these deadlines with their untimely August 11, 2014 filing. At a hearing held on September 10, 2014, the circuit court denied the motion as to non-expert
testimony, i.e., the court would permit lay witnesses to testify, but granted the motion as to expert testimony as it had previously ordered disclosure by a certain date.
A bench trial on damages only was then held on September 30, 2014 through October 3, 2014 on the following four claims: Count IV (conversion), Count V (fraud), Count VI (intentional/negligent misrepresentation), and Count XI (constructive trust/equitable lien). The remaining unresolved claims, Count I (declaratory judgment), Count II (accounting), Count VII (intentional infliction of emotional distress), Count IX (statutory fraudulent transfer), Count X (common law fraudulent transfer), and Count XII (punitive damages) were dismissed without prejudice and were not the subject of the trial.
At trial, the circuit court received testimony from Chen, Mah, and people who previously worked for Defendants. Parties submitted their post-trial memoranda on November 7, 2014. At a post-trial hearing held on November 10, 2014, the circuit court summarized its decision and tasked Chen with drafting more detailed findings of fact and conclusions of law. In sum, the circuit court denied Count IV (conversion) for Chen‘s failure to present legal authority; denied Count X (constructive trust/equitable lien) for insufficiency of the evidence; found in favor of Chen as to Count V (fraud), and in so doing found Mah to not be a credible witness; and also found in favor of Chen as to Count VI (intentional/negligent misrepresentation). As to the two claims that it found in favor of Chen, Counts V (fraud) and VI (intentional/negligent misrepresentation), the circuit court noted the damages awarded were the
On July 18, 2016, Defendants filed a motion for reconsideration and/or for new trial, in which Defendants asserted five grounds:
A. Defendants have obtained newly discovered evidence regarding claims by more than 50 of Plaintiffs former patients that will be filed with the Regulated Industries Complaints Office of the State of Hawaii Department of Commerce and Consumer Affairs. These claims directly impact the amount of compensation and “damages” allegedly owed to Plaintiff.
B. An accountant has determined that Dr. Chen was overpaid by $161,110.
C. The Court committed clear legal error by finding a fiduciary relationship/duty in the independent contractor context.
D. The Court committed clear legal error by applying the law governing an employer/employee relationship to an independent contractor.
E. The Court committed clear legal error by piercing the corporate veil in violation of Hawaii Supreme Court precedent.
At a September 6, 2016 hearing, the circuit court denied this motion. Although the circuit court expressed concern that offsets to Chen‘s claims for damages may exist based on subsequent remedial measures taken by Defendants to address patient complaints against Chen for poor quality of service, that defense was never pled by Defendants, and even if it had been, Defendants could have brought forth such evidence at trial, but failed to do so. For this reason also, the circuit court declined to re-open the case to receive such evidence. The circuit court also concluded Defendants’ efforts to introduce a report by an accountant, William Andersen, showing Chen was overpaid, did not constitute grounds for a new trial because his testimony had previously been stricken by the circuit court for Defendants’ failure to comply with the circuit court‘s trial setting order. Lastly, the circuit court concluded Defendants’ argument that it had “pierced the corporate veil” when it held Mah liable for the acts of Corporation did not constitute grounds to grant their motion as the complaint was styled against both Mah and the Corporation.
C. Appeal to the ICA
Defendants timely filed a notice of appeal to the ICA, and presented four points on appeal:
[1.] The circuit court violated the public policy favoring resolution of cases on the merits and failed to properly apply the Hawai(‘)i Supreme Court‘s test regarding setting aside an entry of default. The record shows that, although Dr. Mah and the Company did not timely file an Answer to the Complaint, Dr. Mah did engage in months of informal discovery with Appellee‘s counsel, providing documents and information requested by Appellee and her counsel. This process went for approximately seven months before Appellee filed a Motion for Default Judgment.
[2.] The circuit court erred in excluding substantial evidence of liability and/or damages.
[3.] The circuit court erred in denying Dr. Mah and the Company‘s Motion for Reconsideration and/or for New Trial, given newly discovery [sic] evidence of Appellee‘s malpractice, substantial evidence of overpayments to Appellee, the improper creation of new law regarding fiduciary duties, applying employment law to an independent contractor relationship, and improperly piercing the corporate veil.
[4.] The circuit court erred by signing scripted findings of fact and conclusions of law, a practice that has been widely condemned by numerous courts.
The ICA rejected the Defendants’ challenges.
As to the first point on appeal, the ICA cited BDM, Inc. v. Sageco, Inc., 57 Haw. 73, 549 P.2d 1147 (1976), which had set forth a three-prong test to determine whether to set aside an entry of default:
[A] motion to set aside a default entry or a default judgment may and should be granted whenever the court finds (1) that
the nondefaulting party will not be prejudiced by the reopening, (2) that the defaulting party has a meritorious defense, and (3) that the default was not the result of inexcusable neglect or a wilful act.
Chen, SDO at 2 (citing BDM, 57 Haw. at 76, 549 P.2d at 1150). The ICA noted that “[i]f a moving party fails to establish any prong of the test, it is not an abuse of discretion to refuse to set aside the default.” Id. (citing Citicorp Mortg., Inc. v. Bartolome, 94 Hawaiʻi 422, 439, 16 P.3d 827, 844 (App. 2000); Park v. Tanaka, 75 Haw. 271, 281, 859 P.2d 917, 922 (1993); Dillingham Inves. Corp. v. Kunio V. Yokoyama Tr., 8 Haw. App. 226, 236, 797 P.2d 1316, 1321 (1990)).
The ICA concluded the circuit court did not err in denying Defendants’ motion to set aside entry of default. Chen, SDO at 5. As to Defendants’ argument that the circuit court erred when it concluded Defendants lacked a meritorious defense because it focused only on the fraud claim and failed to address the remaining eleven claims, the ICA stated the circuit court had addressed all of the claims:
The Circuit Court did not limit its determination to Mah‘s defenses against the fraud claim but instead stated, in general terms, that “[Defendants‘] arguments really go to damages which they are not precluded from litigating even if they are in default.” While [defense] counsel repeatedly limited his argument to the fraud claims, in its ruling, the Circuit Court did not limit its ruling to just the fraud claim.
Chen, SDO at 3.
The ICA also concluded Defendants’ argument that their failure to answer the complaint was the result of excusable neglect lacked merit. Chen, SDO at 3. The ICA observed that
[t]he Hawai‘i Supreme Court has recognized that circumstances that do not rise to the level of excusable neglect include a defendant‘s failure to answer a properly served complaint without any reason, for an improper reason, or without seeking the approval or extension from the court, as well as circumstances in which there is a lengthy delay between the entry of default and the filing of the motion to set aside the default.
Chen, SDO at 3-4 (citations omitted). The ICA highlighted that Defendants had been made fully aware of the nature of Chen‘s demands and concerns, that an impasse had been reached, and that litigation was imminent. Chen, SDO at 4. Moreover, although Mah may have been surprised as to the filing of the complaint given the various discussions he had with King for weeks, Mah had not cited any reason for failing to respond to the complaint once it had been filed. Id.
As to the second point on appeal, the ICA concluded Defendants failed to present arguments in accordance with
As to the third point on appeal, the ICA concluded the circuit court did not err when it denied Defendants’ motion for
new trial, as the verdict was not against the manifest weight of the evidence. Chen, SDO at 8-9 (citing Richardson v. Sport Shinko (Waikiki Corp.), 76 Hawaiʻi 494, 503, 880 P.2d 169, 178 (1994); Miyamoto v. Lum, 104 Hawaiʻi 1, 11, 84 P.3d 509, 519 (2004)). Although Defendants contended that, at trial, there was substantial evidence demonstrating they overpaid Chen by $161,100, thereby offsetting the damages awarded to Chen, Chen had presented testimonial evidence of the compensation formula agreed upon with Mah, documentary evidence of past compensation and changes to her compensation in November 2011, and other evidence regarding Mah‘s promises to include her in a partnership and
As to the fourth point on appeal, the ICA noted Defendants presented no authority that it was improper or prohibited for a court to adopt findings of fact or conclusions of law drafted by a party, as the circuit court had directed. Chen, SDO at 10. Additionally, to the extent that the circuit court may have erred in entering FOF 34 and COLS FF, GG, ZZ, and AAA, in which the circuit court determined or otherwise implied a fiduciary employer-employee relationship existed between Chen and Mah, the ICA concluded such a relationship did not serve as the basis for the circuit court‘s determination of damages on the fraud and misrepresentation claims. Id. According to the ICA, any such error was therefore harmless and did not warrant relief. Chen, SDO at 10-11 (citing Dupree v. Hiraga, 121 Hawаiʻi 297, 320 n.28, 219 P.3d 1084, 1107 n.28 (2009)). Similarly, Defendants’ argument that the circuit court erroneously pierced the corporate veil was inapposite to the circuit court‘s determination that Mah was liable for fraud and misrepresentation on the basis of his representations to Chen as an agent of Corporation, which exposed him to personal liability. Chen, SDO at 11 (citing Laeroc Waikiki Parkside, LLC v. K.S.K. (Oahu) Ltd. P‘ship, 115 Hawaiʻi 201, 228 n.31, 166 P.3d 961, 988 n.31 (2007)).
Accordingly, the ICA affirmed the circuit court‘s July 6, 2016 final judgment. See id.
D. Application for writ of certiorari
Defendants timely filed their application for a writ of certiorari (“Application“) on June 27, 2019 from the May 3, 2019 judgment on appeal entered by the ICA pursuant to its March 14, 2019 SDO.
Defendants present the following five questions in their Application:
[1.] Did the ICA gravely err in failing to set aside the circuit court‘s entry of default, where (1) the record shows the circuit court failed to analyze all twelve causes of action in the complaint regarding meritorious defenses and the record contains substantial evidence of a meritorious defense to one or more causes of action; and (2) the circuit court failed to consider the lulling of a pro se party into inaction by engaging in months of discovery and communications before and after obtaining an entry of default, then using a long delay to help justify a purported failure to defend the case.
[2.] Did the ICA gravely err in creating new law in Hawai‘i by affirming the circuit court‘s finding of a fiduciary relationship in an independent contractor relationship?
[3.] Did the ICA gravely err in creating new law in Hawaii by permitting the circuit court to apply the law regarding employers and employees to an independent contractor relationship?
[4.] Did the ICA gravely err in allowing the circuit court to pierce the corporate vеil and hold a shareholder liable for the purported acts of a corporation without any allegation or finding of alter ego/piercing the corporate veil?
[5.] Did the ICA gravely err in adopting scripted findings that turned what amounted to an advocate‘s trial brief into findings of [f]act and conclusions of law?
On certiorari, the parties reiterate the arguments they had presented to the ICA.14
III. Standards of Review
A. Motion to set aside an entry of default
“The application of
abrogated on other grounds by Tax Found. of Haw. v. State, 144 Hawaiʻi 175, 439 P.3d 127 (2019).
“The trial court‘s ruling on a motion for reconsideration is reviewed under the abuse of discretion standard.” Kamaka v. Goodsill Anderson Quinn & Stifel, 117 Hawaiʻi 92, 104, 176 P.3d 91, 103 (2008) (citation omitted). Further,
[a]s this court has often stated, “the purpose of a motion for reconsideration is to allow the parties to present new evidence and/or arguments that could not have been presented during the earlier adjudicated motion.” Reconsideration is not a device to relitigate old matters or to raise arguments or evidence that could and should have been brought during the earlier proceeding.
Id. (alteration in original) (citation omitted).
C. Motion for new trial
Both the grant and the denial of a motion for new trial [are] within the trial court‘s discretion, and we will not reverse that decision absent a clear abuse of discretion. An abuse of discretion occurs “where the trial court has clearly exceeded the bounds of reason or disregarded rules or principles of law or practice to the substantial detriment of a party litigant.” It is also within the appellate court‘s discretion to limit the issues of a new trial upon remand.
Costales v. Rosete, 133 Hawaiʻi 453, 465, 331 P.3d 431, 443 (2014) (alteration in original) (citations omitted).
IV. Discussion
A. Counts remaining on appeal
As a preliminary matter, following the dismissal without prejudice of the following claims, the circuit court dismissed them with prejudice in its final judgment, and they are therefore not further discussed in this opinion: Count I (declaratory judgment), Count II (accounting), Count VII (intentional infliction of emotional distress), Count IX (statutory fraudulent transfer), Count X (common law fraudulent transfer), and Count XII (punitive damages). Also not discussed are Count IV (conversion) and Count XI (constructive trust/equitable lien), as the circuit court had ruled against Chen on those claims after the bench trial and she did not appeal. Thus, at issue are Count III (breach of contract) and Count VIII (unjust enrichment), for which the circuit court granted Chen a default judgment with damages in the amount of $406,392.89, and Count V (fraud) and Count VI (intentional/negligent misrepresentation), for which the circuit court awarded the same damages after the bench trial on damages.
B. Whether the circuit court erred in denying Defendants’ HRCP Rule 55(c) motion to set aside entry of default
1. Standard governing HRCP Rule 55(c) motions
The circuit court and the ICA cited to BDM for the proposition that Hawai‘i courts apply the three-prong test applicable to
[A] motion to set aside a default entry or a default judgment may and should be granted whenever the court finds (1) that the nondefaulting party will not be prejudiced by the reopening, (2) that the defaulting party has a meritorious defense, and (3) that the default was not the result of inexcusable neglect or a wilful act.
Although
In BDM, a per curiam opinion, this court stated:
[D]efaults and default judgments are not favored and that any doubt should be resolved in favor of the party seeking relief, so that, in the interests of justice, there can be a full trial on the merits. It should be noted that a motion to set aside a default entry, which may be granted under Rule 55(c) ‘for good cause shown‘, gives the court greater freedom in granting relief than is available on a motion to set aside a default judgment where the requirements of Rule 60(b) must be satisfied. 10 Wright and Miller, Federal Practice and Procedure, Civ. § 2693 at 313 (1973). ‘Despite these differences, the elements advanced in support of a motion under Rule 55(c) will be the same whether relief is sought from a default entry or from a default judgment.’ Wright and Miller supra, Civ. s 2692 at 301.
In general, a motion to set aside a default entry or a default judgment may and should be granted whenever the court finds (1) that the nondefaulting party will not be prejudiced by the reopening, (2) that the defaulting party
has a meritorious defense, and (3) that the default was not the result of inexcusable neglect or a wilful act. 10 Wright and Miller, Federal Practice and Procedure § 2696 (1973). The mere fact that the nondefaulting party will be required to prove his case without the inhibiting effect of
the default upon the defaulting party does not constitute prejudice which should prevent a reopening.
Id. (citations omitted).
Also, in Ala Loop Homeowners, we stated:
Defaults are generally disfavored. See Rearden Family Trust v. Wisenbaker, 101 Hawai‘i 237, 254, 65 P.3d 1029, 1046 (2003) (holding that “defaults and default judgments are not favored and [] any doubt should be resolved in favor of the party seeking relief, so that, in the interests of justice, there can be a full trial on the merits“) (citations omitted). In BDM, Inc. v. Sageco, Inc., 57 Haw. 73, 549 P.2d 1147 (1976), this court held that a party seeking to set aside a default must demonstrate the following three factors:
In general, a motion to set aside a default entry or a default judgment may and should be granted whenever the court finds (1) that the nondefaulting party will not be prejudiced by the reopening, (2) that the defaulting party has a meritorious defense, and (3) that the default was not the result of inexcusable neglect or a wilful act.
123 Hawaiʻi at 423, 235 P.3d at 1135 (alteration in original).
The ICA has held that a defendant moving to set aside an entry of default pursuant to
Despite the language of
2. The circuit court did not abuse its discretion by denying Defendants’ HRCP Rule 55(c) motion to set aside entry of default
As noted above, the circuit court ruled in favor of the Defendants on the first prong regarding prejudice tо Chen, but ruled against the Defendants on the second and third prongs regarding meritorious defenses and excusable neglect. In their first question on certiorari, Defendants allege the ICA erred in failing to set aside the circuit court‘s entry of default because: (1) with respect to the second prong, the record shows the circuit court failed to analyze all twelve causes of action in the complaint regarding meritorious defenses and the record contains substantial evidence of a meritorious defense to one or more causes of action; and (2) with respect to the third prong, the circuit court failed to apply this court‘s stated policy of favoring a trial on the merits and failed to consider the lulling of a pro se party into inaction by engaging in months of discovery and communications before and after obtaining an entry of default, then using a long delay to help justify a purported failure to defend the case.
We address the third prong first because it is dispositive. To prevail, Defendants had the burden of establishing that their default “was not the result of inexcusable neglect or a wilful act.” Under Hawaiʻi law, ignorance of the rules or law cannot be “excusable neglect.” Enos, 80 Hawaiʻi at 353, 910 P.2d at 124 (1996).
Defendants argue this court held that courts are to resolve any doubt in favor of the party seeking relief. See Rearden Family Trust, 101 Hawaiʻi at 254, 65 P.3d at 1046 (“We affirm that defaults and default judgments are not favored and that any doubt should be resolved in favor of the party seeking relief, so that, in the interests of justice, there can be a full trial on the merits.”
Defendants also argue the ICA gravely erred when it affirmed the circuit court‘s denial of their motion to set aside default, as the circuit court failed to consider the “lulling, discovery, and ‘lengthy delay‘” in Chen‘s filing for default judgment. Importantly, Defendants assert that both before and after the complaint was filed, King “engaged in ‘multiple follow-up telephone discussions’ with Dr. Mah,” which had the “effect of lulling Dr. Mah into believing this dispute would be resolved if he simply cooperated with [King].”
The record, however, does not reflect any continued discussions between the parties after the complaint was filed. The citations to the record by defense counsel to support the assertion that Mah and King had “multiple follow-up telephone discussions” following the filing of the complaint do not support the defense‘s position. Rather, the citation is to King‘s declaration regarding the contents of a September 10, 2012 demand letter, which was sent prior to the filing of the complaint on October 3, 2012.
Indeed, as pointed out by Chen and the ICA, the record does not reflect any communications between Mah and King after October 8, 2012, when the complaint was served. See Chen, SDO at 4-5 (“Mah has not cited any reason for failing to respond to the Complaint once it had in fact been filed.” (citation omitted)). Even Mah‘s phone logs do not show any conversations with King following October 3, 2012. In sum, according to the record, upon service of the complaint on October 8, 2012, all non-court related communication between the parties had ceased.
Accordingly, even if there had been some informal discovery and efforts to avoid litigation before October 3, 2012, and even if all doubts were resolved in favor of Defendants regarding Mah‘s misunderstanding of the parties’ alleged impasse, Defendants fail to identify anything in the record to explаin why, after the filing of the complaint, Mah continued to be “lulled” by King into thinking that litigation could be avoided if Mah cooperated with King; there simply was no further communication between them. In other words, although Mah asserts he never realized King was adversely taking action against him while negotiating a resolution, any “negotiations” had ceased as of the filing of the complaint. See Chen, SDO at 5 (“Mah does not assert that there was any effort to continue these discussions after the Complaint was filed, and Mah failed to seek any extensions from the Circuit Court to, for example, obtain more time to resolve the dispute out of court. . . . Mah [did not] file[] the motion to set aside the entry of default [until] after Dr. Chen had filed her First Motion for Default Judgment, nearly nine months following the filing of the Complaint.“).17
The record reflects that during the pre-complaint discussions, King asked Mah if he had an attorney as King preferred to speak to Mah‘s attorney, but Mah indicated “he did not have [an attorney] but had spoken to a friend who was an attorney and did not want to incur the high expenses of an attorney.” Then, despite service of the complaint on October 8, 2012, and prompt notice of the November 2, 2012 entry of default, Mah took no action until being served with Chen‘s May 24, 2013 motion for default judgment. Mah is not an uneducated person lacking resources or access to counsel. Under the circumstances, the circuit court did not abuse its discretion in ruling the Defendants failed to show that their default “was not the result of inexcusable neglect or a wilful act.”
Defendants’ failure to meet this prong is dispositive.18
HRCP Rule 55(c) motion to set aside entry of default is to be evaluated based only on whether there has been a showing of “good cause”
1. Prospective new standard governing HRCP Rule 55(c)
As explained in Section IV.B.1 above,
Our cases have also expressed our policy of disfavoring defaults and default judgments and of resolving any doubt in favor of the party seeking relief, so that, in the interests of justice, there can be a full trial on the merits. BDM, 57 Haw. at 76, 549 P.2d at 1150; Ala Loop Homeowners, 123 Hawaiʻi at 423, 235 P.3d at 1135. And we have specifically noted that a motion to set aside a default entry, which may be granted under
Yet, after this court‘s 1976 per curiam opinion in BDM, our appellate opinions have held that motions to set aside entries of default under
We acknowledge that under federal law, the “good cause” standard governing vacating an entry of default under
The discussions regarding
Good reasons exist to have different standards governing
First, a
Second,
Finally, requiring a party seeking to set aside entry of default to satisfy the three-prong test applicable to
Thus, we therefore now hold that
Our holding is prospective. Trial courts were required to follow ICA holdings requiring parties seeking to set aside an entry of default pursuant to
In Doe v. Doe, 98 Hawaiʻi 144, 44 P.3d 1085 (2002), in the context of a
“Good cause” [] “depends upon the circumstances of the individual case, and a finding of its existence lies largely in the discretion of the officer or court to which [the] decision is committed.” 98 Hawaiʻi at 154, 44 P.3d at 1095 (second alteration in original) (citation omitted).22
Thus, whether “good cause” exists to set aside an entry of default will depend upon the circumstances of the individual case, and whether good cause exists will “lie[] largely in the discretion of the [] court to which [the] discretion is committed.”
It is not possible to provide one definition of “good cause,” as standards governing whether “good cause” exists depend not only upon the circumstances of the individual case, but also upon the specific court rule at issue. This is because in addition to
The rule most analogous to
Thus,
In In re Blaisdell, this court stated, “[o]ur case law informs us that the sanction of dismissal of a complaint with prejudice is one of last resort where lesser sanctions would not serve the interest of justice,” and “an order of dismissal cannot be affirmed absent deliberate delay, contumacious conduct, or actual prejudice.” 125 Hawaiʻi at 49, 252 P.3d at 68 (quoting Shasteen, 79 Hawaiʻi at 107, 899 P.2d at 390). More specifically, we stated that in order for a dismissal with prejudice based on
Shasteen, cited by In re Blaisdell, in turn, also stated that “a dismissal of a complaint is such a severe sanction, that it should be used
Thus, although our opinions did not specifically so state, these rulings provide guidance regarding the “good cause” required to set aside a dismissal under
Accordingly, by analogy, these factors should also be considered in determining whether “good cause” exists under
We reiterate, however, that whether “good cause” exists will depend upon the circumstances of the individual case. And as indicated in 10A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure Civ. § 2693 (4th ed. 2019), appellate courts have demonstrated a marked deference to decisions granting relief against default entries.
V. Conclusion
Based on the reasons explained above, we affirm the ICA‘s May 3, 2019 judgment on appeal, which affirmed the circuit court‘s July 6, 2016 final judgment.
Mark G. Valencia
(Stephanie M. Segovia with him on the briefs), for petitioner
Dennis W. King, for respondent
/s/ Sabrina S. McKenna
/s/ Richard W. Pollack
/s/ Michael D. Wilson
Notes
We are providing this letter to you for inclusion in your records regarding the method of disbursement of compensation checks.
Prior to July 1, 2012, disbursement of compensation checks were based upon estimated production numbers. This meant that the time between the claims being sent out and the actual funds that were collected (including necessary adjustments) could be between a few days for a simple procedure to 90 days or more for more complex procedures.
The growth of the office has resulted in increased expenses, staffing costs, and many more transactions that are processed. As a consequence of this, our accountant has strongly advised us to implement a change from production to a collection method of disbursing compensation checks.
What this means is compensation checks will now be given out once the money has been collected from the insurance companies and patients accordingly.
This change should make a much more streamlined process in the offiсe, as well as reduce the number of man hours needed.
Be assured that this will in no way mean less compensation, but rather change only when payments are disbursed. This change will help keep office expenses steamlined [sic].
On or about August 10, 2012, I sent a written message to all Associate Doctors. My message was as follows: “Based upon a complaint made by Dr. Chen on August 8, concerning improper and inaccurate calculations of doctors [sic] compensation. Dr. Mah has hired an independent CPA to review all doctors [sic] compensation for 2012. Dr. Mah considers the doctors [sic] professional compensation a serious matter, and for that reason effective immediately, the office will be closed to all associate doctors until this matter is resolved. All associate doctors are welcome to have their own CPA review the same data. If you have any questions or concerns please contact Dr. Mah.”
(b) Opening Brief. Within 40 days after the filing of the record on appeal, the appellant shall file an opening brief, containing the following sections in order here indicated:
. . . . .
(7) The argument, containing the contentions of the appellant on the points presented and the reasons therefor, with citations to the authorities, statutes and parts of the record relied on. . . . Points not argued may be deemed waived.
In BDM, this court referred to the “excusable neglect” standard governing
The premise that an official extension of time pursuant to the “excusable neglect” standard would be necessary to allow a circuit court defendant to file an answer to the complaint after expiration of the twenty days provided for by
William H. Danne, Jr., Annotation, What Constitutes “Good Cause” Allowing Federal Court to Relieve Party of his Default Under Rule 55(c) of Federal Rules of Civil Procedure, 29 A.L.R. Fed. 7, § 2[a] (1976), available at https://www.westlaw.com/Document/I512442d1136011da931cf6e6a5b3cd63/View/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0 (citations omitted).[a]lthough the more specific grounds for relief set forth in Rule 60(b) [were] frequently [] regarded as included within the concept of “good cause” for purposes of Rule 55(c), the courts ha[d] generally acknowledged that “good cause” is a broader and more liberal standard than anything found in Rule 60(b), and that, consequently, something less may be required to warrant the opening of an entry of default than would be necessary to set aside a default judgment. (Citation omitted.) Thus, while “excusable neglect” has often been considered a reason for inaction sufficient to satisfy the good cause test, several courts have recognized that relief may be granted under Rule 55(c) even when the neglect giving rise to the default cannot, strictly speaking, be characterized as excusable.