Adkins v. Fischer

152 Hawai‘i 79

520 P.3d 277

Richard K. ADKINS and Brown Eyed Girl, LLC, an Illinois Limited Liability Company, Plaintiffs-Appellants,

v.Gary R. FISCHER; Samantha K. Fischer; Anini Aloha Properties, Inc., a Hawaii corporation, Defendants-Appellees,andJohn Does 1-10; Jane Does 1-10; Doe Partnerships 1-10; Doe Corporations 1-10; and Doe Entities 1-10, Defendants,

and

Gary R. Fischer; Samantha K. Fischer; Anini Aloha Properties, Inc., a Hawaii corporation, Third-Party Plaintiffs-Appellees,

v.Steven Nickens, CBIP, Inc., dba Coldwell Banker Island Properties, Any J. Marvin and Hanalei North Shore Properties, Ltd., Third-Party Defendants-Appellees,andJohn Does 1-10; Jane Does 1-10; Doe Corporations 1-10; and Doe Entities 1-10, Third-Party Defendants

NO. CAAP-18-0000409

Intermediate Court of Appeals of Hawai‘i.

OCTOBER 20, 2022

On the briefs:

Donna E. Richards and Mark R. Zenger, (Richards & Zenger), Lihue, for Plaintiffs-Appellants

David J. Minkin, Jesse J.T. Smith, and Jordan K. Inafuku, (McCorriston Miller Mukai MacKinnon LLP), Honolulu, for Defendants/Third-Party Plaintiffs-Appellees Gary R. Fischer, Samantha K. Fischer, and Anini Aloha Properties, Inc.

GINOZA, C.J., AND WADSWORTH AND NAKASONE, JJ.

OPINION OF THE COURT BY WADSWORTH, J.

This appeal stems from a dispute involving the sale of real property in Hanalei, Hawai‘i (the Property ). In their Complaint, Plaintiffs-Appellants Richard K. Adkins (Adkins ) and Brown Eyed Girl, LLC (BEG ) (collectively, Plaintiffs ) alleged that Defendants/Third-Party Plaintiffs-Appellees Gary R. Fischer and Samantha K. Fischer (the Fischers ) and Defendant/Third-Party Plaintiff-Appellee Anini Aloha Properties, Inc. (Anini Aloha ) (collectively, Defendants ) failed to disclose material facts about the Property when they sold it to Adkins. Adkins then conveyed the Property to BEG, a limited liability company (LLC ) whose sole member was Adkins. After Plaintiffs filed their Complaint, Defendants filed a Third-Party Complaint for indemnification and contribution against Third-Party Defendants-Appellees Steven Nickens (Nickens ), CBIP, Inc., dba Coldwell Banker Island Properties (CBIP ), Amy J. Marvin (Marvin ), and Hanalei North Shore Properties, Ltd. (HNSP ) (collectively, Third-Party Defendants ).

Defendants moved to dismiss Plaintiffs' Complaint on the grounds that: (1) BEG lacked capacity to commence and maintain the lawsuit, because BEG did not have a certificate of authority to transact business in Hawai‘i pursuant to HRS chapter § 428-1008 (2004); and (2) Adkins was not a real party in interest, because after conveying the Property to BEG, Adkins had no interest in the Property. CBIP, Nickens, and HNSP joined the motion. The Circuit Court of the Fifth Circuit (Circuit Court ) agreed with Defendants' arguments and granted the motion to dismiss with prejudice as to Defendants and as to CBIP, Nickens, and HNSP.¹

Plaintiffs appeal from the May 8, 2018 "Final Judgment" (Judgment ), which dismissed Plaintiffs' Complaint with prejudice as to all Defendants and Third-Party Defendants, entered by the Circuit Court pursuant to Hawai‘i Rules of Civil Procedure (HRCP ) Rule 54(b).² Plaintiffs also challenge the Circuit Court's June 19, 2017 "Order Granting (1) Defendants['] ... Motion to Dismiss Under HRCP Rule 17, Filed on September 29, 2016 [(Motion to Dismiss )]; (2) ... CBIP[ and] Nickens' Substantive Joinder in ... Motion to Dismiss ... Filed on October 18, 2016; and (3) [HNSP's] Joinder and Memorandum in Support of ... Motion to Dismiss ... Filed on October 21, 2016" (Dismissal Order ).

On appeal, Plaintiffs contend that the Circuit Court erred in: (1) granting the Motion to Dismiss in violation of HRCP Rule 17(a) ; (2) granting the Motion to Dismiss pursuant to HRS § 428-1008, where BEG obtained a certificate of authority before the Complaint was dismissed; and (3) finding that Adkins was not a real party in interest.

We hold that the Circuit Court did not violate HRCP Rule 17(a) in dismissing BEG's claims against Defendants. HRCP Rule 17(a) allows a real party in interest to ratify the commencement of an action that has not been brought in the name of the party who has the right sought to be enforced. Here, BEG's claims were not dismissed on the basis that it was not a real party in interest; rather, its claims were dismissed because it did not have a certificate of authority when the Complaint was filed, and thus lacked capacity to sue Defendants. In these circumstances, Plaintiffs could not use ratification under HRCP Rule 17(a) to remedy BEG's lack of capacity to sue.

Additionally, we hold that the Circuit Court did not err in dismissing BEG's claims pursuant to HRS § 428-1008(a). We construe that statute to mean that a foreign LLC transacting business in Hawai‘i may not commence or continue an action or proceeding in the state except when the LLC has a certificate of authority. Further, HRS § 428-1008(a) does not provide an exception when a non-compliant foreign LLC obtains a certificate of authority prior to final judgment. Here, it is undisputed that BEG had no certificate of authority when it commenced this lawsuit, Defendants first raised this deficiency in their answer to the Complaint (Answer ), and BEG continued the suit for over three years without obtaining a certificate of authority. Under these circumstances, BEG could not cure its failure to comply with HRS § 428-1008(a) by obtaining a certificate of authority prior to the hearing on the Motion to Dismiss.

We further hold, however, that the Circuit Court erred in concluding that Adkins was not a real party in interest and in dismissing his claims on that basis. Viewed in the light most favorable to Plaintiffs, the facts alleged in the Complaint and the inferences drawn from those facts support a claim that Adkins was fraudulently induced to pay more for the Property than its fair market value and thus suffered damages in an amount to be proved at trial. Adkins therefore asserted a sufficient interest in the action in his own right to make him a real party in interest.

Accordingly, we affirm in part and vacate in part the Judgment and remand the case to the Circuit Court for further proceedings consistent with this opinion.

I. Background

On January 28, 2013, Plaintiffs filed their Complaint. The Complaint alleged the following operative facts, among others:

• In 2006, the Fischers listed the Property for sale, describing it, in part, as having a "main house plus guest house." In January 2007, Adkins entered into a Deposit Receipt Offer and Acceptance Form agreement (DROA ) with the Fischers to purchase the Property. The purchase price was $1.8 million. In the Seller's Real Property Disclosure Statement (Disclosure Statement ), the Fischers failed to disclose that their simultaneous leasing of the two structures on the Property as transient vacation rentals "was illegal," and that the smaller structure "was a Workshop, not a dwelling as defined by the [Comprehensive Zoning Ordinance (CZO )]." In reliance on the Disclosure Statement, Adkins made additional deposits into escrow and obtained a purchase money loan that was deposited into escrow for the purchase of the Property. Escrow for the transaction closed in March 2007.

• Thereafter, Adkins conveyed his "entire[ ] right, title and interest in and to" the Property to BEG. BEG was and is "a duly organized limited liability company under the laws of the State of Illinois, and has its principal place of business in Franklin, Tennessee." Adkins is BEG's "sole and managing member."

• From 2007 through 2010, Adkins and BEG leased both structures on the Property as transient vacation rentals. In 2010, the County of Kaua‘i passed Kaua‘i County Ordinance 904, relating to single family transient vacation rentals. Adkins and BEG applied under the ordinance for a permit to allow both structures to be used as nonconforming use transient vacation rentals. During the permit process, in or about July 2011, Adkins and BEG "learned for the first time ever" that their leasing of the two structures as transient vacation rentals "was illegal and in violation of the CZO" and that the smaller structure "was not a dwelling as defined by the CZO, but was instead a Workshop ...." The designation of the smaller structure as a workshop caused Adkins "to lose the opportunity to obtain a [nonconforming use transient vacation rental] permit" for the structure and "substantially diminished the fair market value" of the Property at the time of the purchase by Adkins and as of the date of the Complaint.

Based on these allegations, the Complaint asserted fourteen claims for relief, denominated as follows:

(1) Civil Conspiracy, alleged against the Fischers and Anini Aloha;

(2) Fraudulent Concealment, alleged against the Fischers and Anini Aloha;

(3) Fraud and/or Negligent Misrepresentation, alleged against the Fischers;

(4) Tortious Interference with Prospective Economic Advantage, alleged against the Fischers and Anini Aloha;

(5) Tortious Interference with Contractual Relationships, alleged against the Fischers and Anini Aloha;

(6) Tortious Interference with Business Relationships, alleged against the Fischers and Anini Aloha;

(7) Intentional Interference with Economic Relations, alleged against the Fischers and Anini Aloha;

(8) Unfair and Deceptive Trade Practices (in violation of HRS Chapter 480), alleged against the Fischers and Anini Aloha;

(9) Beach of Contract, alleged against the Fischers;

(10) Breach of the Covenant of Good Faith and Fair Dealing, alleged against the Fischers; (11) Violation of HRS §§ 508D-1 et seq. , alleged against the Fischers;

(12) Intentional Infliction of Emotional Distress, alleged against the Fischers and Anini Aloha;

(13) Negligent Infliction of Emotional Distress, alleged against the Fischers and Anini Aloha; and

(14) Attorneys' Fees and Costs, alleged against the Fischers and Anini Aloha.

Plaintiffs sought special damages, general damages, punitive damages, treble damages under HRS Chapter 480,...