Kekona v. Bornemann. , 135 Haw. 254 ( 2015 )

*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
Electronically Filed
Supreme Court
SCWC-29036
24-APR-2015
08:12 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
BENJAMIN PAUL KEKONA and TAMAE M. KEKONA,
Petitioners/Plaintiffs-Appellees,
vs.
MICHAEL BORNEMANN, M.D.,
Respondent/Defendant-Appellant,
and
PAZ FENG ABASTILLAS, also known as PAZ A. RICHTER;
ROBERT A. SMITH, personally; ROBERT A. SMITH, Attorney at Law,
a Law Corporation; STANDARD MANAGEMENT, INC.;
U.S. BANCORP MORTGAGE COMPANY, an Oregon company;
Respondents/Defendants.
SCWC-29036
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(ICA NO. 29036; CIV. NO. 93-3974)
APRIL 24, 2015
RECKTENWALD, C.J., NAKAYAMA, McKENNA AND POLLACK, JJ.,
AND CIRCUIT JUDGE TRADER, IN PLACE OF ACOBA, J., RECUSED
OPINION OF THE COURT BY NAKAYAMA, J.
Since 1993, Dr. Michael Bornemann has claimed lawful
ownership of a property that was fraudulently transferred to him
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
as part of a conspiracy to prevent Benjamin and Tamae Kekona from
collecting on a judgment. Three separate juries have found that
Bornemann’s defense was not credible and that significant
punitive sanctions were necessary. The issue in this case is
whether the Intermediate Court of Appeals (ICA) gravely erred
when it held that a $1,642,857.13 punitive damages award was
grossly excessive and in violation of Bornemann’s Fourteenth
Amendment rights. We hold that Bornemann’s conduct justified the
entirety of the punitive damages award imposed by the third jury.
I. BACKGROUND
A. Factual Background
In the late 1980s, Petitioners/Plaintiffs-Appellees
Benjamin Paul Kekona and Tamae M. Kekona (the Kekonas) sold a
North Shore tour business that they had operated for many years
so that they could retire to a home that they purchased on the
island of Hawai#i. The Kekonas met Defendants Dr. Paz Feng
Abastillas (Abastillas or Paz) and Robert A. Smith (Smith) in
conjunction with the sale of the tour business, and Abastillas
convinced them to serve as passive investors in a business
operating a tram at Hanauma Bay. From the start, Abastillas and
Smith mishandled the tram business, which forced the Kekonas out
of retirement and into day-to-day management of the tram
operations. Nonetheless, Abastillas and Smith filed a lawsuit
(the Hanauma Bay case) against the Kekonas. Following a 1993
2
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
jury trial, the Kekonas prevailed on all of Abastillas and
Smith’s claims. Additionally, the Kekonas obtained a substantial
judgment on various cross claims that was later reduced to
$191,828.27.
The jury rendered its verdict on May 25, 1993. On
May 26, 1993, Abastillas deeded her interest in 1212 Nuuanu
Avenue, Apartment #1809, Honolulu, Hawai#i (the Honolulu Park
Place or HPP property) to Respondent/Defendant-Appellant Dr.
Michael Bornemann (Bornemann). On June 1, 1993, Abastillas and
Smith deeded their primary residence at 47-186 Kamehameha
Highway, Kâne#ohe, Hawai#i (the Kâne#ohe property) to Bornemann.1
Bornemann also signed a blank security agreement on June 1, 1993,
loaning an unspecified sum to Smith. The agreement referenced an
appendix that allegedly listed the collateral for the loan.
However, no appendix was attached.2 Finally, on June 2, 1993,
Bornemann took a security interest in various articles of
Abastillas and Smith’s personal property, allegedly in exchange
for a $19,888 loan.3
1
Two quitclaim deeds were recorded at the Bureau of Conveyances:
(1) a quitclaim deed transferring the interest of Standard Management, Inc.
and Robert A. Smith, Attorney at Law, a Law Corporation in the Kâne ohe
property to Abastillas; and (2) a quitclaim deed transferring Abastillas’
interest in the Kâne ohe property to Bornemann.
2
At trial, the Kekonas alleged that the blank security agreement
was created to protect any residual assets that Abastillas and Smith had
neglected to shield from the Kekonas’ judgment.
3
The loan was recorded at the Bureau of Conveyances on June 2,
1993, and was secured by assorted personal effects including, for example, a
washing machine, a small clock, worn lamp shades, an old toaster, and various
other household goods.
3
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
The Kekonas filed the instant lawsuit against
Abastillas, Smith, and their related companies on October 13,
1993. Bornemann was named as a co-defendant. The Kekonas
alleged, among other things, that the HPP and Kâne#ohe properties
were fraudulently transferred in violation of Hawai#i Revised
Statutes (HRS) chapter 651C.4 The Kekonas also claimed that
Abastillas’s notarization of the deed that transferred the
Kâne#ohe property from Smith’s law corporation to herself
constituted an illegal notarization because a notary cannot
lawfully notarize a transfer to which she is the beneficiary.
Upon receipt of the lawsuit, Bornemann, Abastillas, and
Smith took several steps to make the conveyance of the Kâne#ohe
property appear legitimate. On October 25, 1993, the defendants
executed two properly notarized confirmatory quitclaim deeds that
4
HRS § 651C-4(a) (1985) provided then as it does now:
(a) A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor’s claim
arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or
incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any
creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
(A) Was engaged or was about to engage in a business
or a transaction for which the remaining assets of the
debtor were unreasonably small in relation to the
business or transaction; or
(B) Intended to incur, or believed or reasonably
should have believed that the debtor would incur,
debts beyond the debtor’s ability to pay as they
became due.
4
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
specifically acknowledged “a challenge to the validity of
notarizations and acknowledgments to [the prior] quitclaim
deeds.”5 Abastillas and Bornemann also allegedly doctored their
tax returns and filed amendments to prior tax returns to reflect
a legitimate conveyance of the Kâne#ohe property.
Finally, Smith and Abastillas attempted to obscure the
fact that although they had been living in the Kâne#ohe property
since they transferred it to Bornemann, they had not paid any
rent prior to receiving the Kekonas’ complaint. On October 18,
1993, Smith sent Bornemann a check to cover back rent from June
and July of 1993. The amount of the monthly rent was the same
amount as the monthly mortgage payment, and thus, functioned as a
“pass-through” payment. Smith sent Bornemann a second rent check
on November 14, 1993.
Six months later, Smith sent Bornemann a letter
acknowledging that he and Abastillas owed eight months of back
rent. Because Smith claimed to be insolvent, he “assigned” to
Bornemann his ownership interest in a timeshare with Vacation
Internationale, Ltd. and his rights to one week at a Colorado
resort. Smith represented that the value of the two vacation
timeshares was $12,000. However, it appears that Bornemann had
already acquired those interests on June 7, 1993, when he
delivered a $12,000 check that was made payable to Smith and
5
Both confirmatory quitclaim deeds were recorded in the Bureau of
Conveyances on October 27, 1993.
5
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
“VI”. The Kekonas alleged that “VI” was an acronym for Vacation
Internationale, Ltd.
B. Procedural History
The first jury trial was held in the Circuit Court of
the First Circuit (circuit court) in May of 1999.6 At the close
of trial, the jury returned a verdict in favor of the Kekonas.
The jury found, among other things, that Abastillas, Smith, and
their associated companies had transferred the HPP and the
Kâne#ohe properties with the actual intent of delaying or
defrauding the Kekonas, and that Bornemann had not received the
properties in good faith or for reasonably equivalent value.
The jury awarded a panoply of general and special damages, and
imposed $250,000 in punitive damages against each of the
defendants. Following post-trial motions, the circuit court
found that the punitive damages award against Bornemann was
excessive and ordered a new trial unless the Kekonas consented to
reduce the punitive award to $75,000.7
The Kekonas did not agree to the remittitur and
proceeded to a second trial.8 Following retrial, the second jury
imposed a $594,000 punitive award against Bornemann. Bornemann
filed a motion for new trial and/or to eliminate or reduce
punitive damages, which the court denied. The court entered a
6
The Honorable Rhonda A. Nishimura presided.
7
The circuit court did not reduce the punitive damages awarded
against any of the other defendants.
8
The Honorable Victoria S. Marks presided.
6
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
final judgment that included the $594,000 punitive damages award
on February 26, 2001. Bornemann timely appealed to the ICA.
Before the ICA, Bornemann raised six arguments, three
of which relate to the instant appeal. He first argued that
punitive damages should not be available in fraudulent conveyance
cases. Bornemann also argued that even if punitive damages were
available, the circuit court should have reduced the punitive
damages award because it was grossly excessive. Finally,
Bornemann argued that the circuit court erred when it instructed
the jury that fraudulent transfers could be proven by a
preponderance of the evidence rather than by clear and convincing
evidence. On June 8, 2006, the ICA affirmed the circuit court’s
judgment in part, including the punitive damages award.9
On appeal to this court, Bornemann argued that the ICA
erred by affirming the $594,000 award of punitive damages against
him and by failing to require the circuit court to instruct the
jury that fraudulent transfers must be proven by clear and
convincing evidence. We held that although punitive damages
could be imposed to punish fraudulent transfers, the proper
evidentiary standard for determining whether a fraudulent
transfer took place was proof by clear and convincing evidence.
Kekona v. Abastillas, 113 Hawai#i 174, 179, 182, 150 P.3d 823,
828, 831 (2006). Accordingly, we remanded the case to the
9
Benjamin Kekona died while the first appeal to the ICA was
pending.
7
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
circuit court for a new trial under the clear and convincing
evidence standard. We did not address whether the punitive
damages award was grossly excessive.
C. The Third Trial and Subsequent Appeal to the ICA
The third trial began in late December of 2007.10
On the first day of trial, the Kekonas called Bornemann as a
witness to establish the circumstances surrounding the various
deeds that he had signed to acquire the Kâne#ohe and HPP
properties. In regard to the Kâne#ohe property, Bornemann
asserted that he had loaned Abastillas in excess of $300,000, and
that Abastillas had deeded him the Kâne#ohe property when it
became clear that she would be unable to pay all of her
creditors. In regard to the HPP property, a rental condominium,
Bornemann asserted that he had paid part of the down payment on
the property and that he had also paid off a substantial portion
of the mortgage, a fact that was supported by exhibits he
introduced into evidence. Bornemann asserted that all of these
transactions began well before the Kekonas won their judgment
against Abastillas and Smith, and that he had no knowledge of
that judgment at the time of the challenged transactions.
To rebut Bornemann’s assertions, counsel for the
Kekonas called various witnesses to establish that Bornemann’s
loans to the Kekonas were concocted post-hoc as part of a
10
The Honorable Victoria S. Marks presided.
8
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
conspiracy to shelter assets from the Kekonas’ judgment. Tax
expert John Candon (Candon) explained that real estate
depreciation allowances provide rental property owners
substantial income tax deductions and that the IRS requires
individuals to take such deductions. Candon opined that
Bornemann’s federal tax returns did not reflect ownership of
either the Kâne#ohe property or HPP property prior to the
Kekonas’ 1993 judgment. The Kekonas also introduced evidence
that Bornemann attempted to cover up his role in the conspiracy
by filing a sham lawsuit against Abastillas and Smith in
September of 2000. Counsel for the Kekonas noted that this
lawsuit was later dismissed for failure to prosecute.
Finally, counsel for the Kekonas impeached Bornemann’s
credibility through extensive adverse examination. For example,
Bornemann testified that he loaned Abastillas tens of thousands
of dollars but that he had no idea what the money was going to be
used for, whether Abastillas had provided promissory notes,
whether he had charged interest, or whether Abastillas had repaid
those loans. Bornemann testified that Abastillas called him and
asked for $126,000 one week before the original jury returned its
verdict but that he couldn’t recall what she planned to use the
money for or if he had even asked. Bornemann testified that when
he discovered that Abastillas had lost her lawsuit with the
Kekonas, he accepted a hasty transfer of the Kâne#ohe property
9
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
without escrow, title investigation, or inquiry into the legal
significance of a quitclaim deed, simply because he trusted
Abastillas. Most strikingly, Bornemann admitted that after he
received and reviewed the Kekonas’ fraudulent transfer lawsuit,
he re-executed confirmatory deeds to the property without
consulting an attorney to determine the legality of his continued
actions. The Kekonas used these examples to establish a primary
theme, that Bornemann’s claimed ignorance reflected “a serious
problem with accepting responsibility for his actions.”
With respect to punitive damages, counsel for the
Kekonas asked Mrs. Kekona what justified her request for a
$2,000,000 award. She explained: “One million for me and one
million for my husband. . . . [W]e need to have Dr. Bornemann
punished. We need to have that so that he does not ever again
. . . conspire to withhold property and prevent people from
collecting on their judgments and, uh, causing people so much
agony.” Counsel continued:
Q: Mrs. Kekona, are there any monetary reasons why you’re
asking for one million for Ben and one million for you?
A: The mon – yes, there is. For this case alone, which is
not including this instant case, we owe in lawyers fees
$600,000 plus 20 percent . . . of whatever judgment we win,
if any.
Mrs. Kekona also testified about the impact that years
of litigation and the inability to recover on the original
judgment had on her and on her husband:
Q: Mrs. Kekona, did you ever get to retire to Hilo in –-
A: We went back and forth to Hilo, but, uh, we lost our
10
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
home.
Q: How did you lose your homes?
. . . .
A: We lost our home, first the one on Volcano was $79,000,
and then our dream retirement home in Hilo we lost. Uh, it
was a three bedroom, one and a half acre home, and we were
planning to retire there. But we had to use that to pay Mr.
Eggers.
Q: So you had to use --
A: And not only that. We spent so many of our retirement
years –- instead of enjoying our retirement we were spending
it in court in litigation and all these problems.
Q: Did you eventually have to move back, yourself, back to
Honolulu?
A: Yes. After my husband passed away . . . .
Bornemann’s counsel cross-examined Mrs. Kekona
regarding attorney’s fees as follows:
Q: I’d like to talk to you a minute about the attorney’s
fees. Okay?
A: Yes.
Q: Do you [have] any bills, lawyer’s fees?
A: We certainly do.
Q: Where are they?
A: Where are they?
Q: Yes.
A: I don’t have them with me, but we have it at home.
Q: Hmm. And do you have any checks or any other indications
of payments you’ve made?
A: Yes, we do.
Q: Where is that?
A: We paid that every month.
Q: Where are they?
A: At home.
. . . .
11
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
Q: The hundred thousand dollars that you said you’ve
actually paid, is there any of that amount that you can
identify as money that was expended for attorney’s fees just
against Dr. Bornemann.
A: No, I don’t think so.
In closing argument to the jury, the Kekonas requested
compensation “for a 14 year journey through the Court system.”
Counsel stressed the length of the conspiracy and Bornemann’s
unwillingness to take responsibility for his own actions as
factors supporting a $2,000,000 punitive damages request:
How long does this conspiracy to defraud go on? It goes on
until 1999, when Dr. Bornemann, who that year had adjusted
gross income of . . . 279,000 dollars, allows the [Kâne#ohe]
property to go in foreclosure. . . . Why? Because Smith and
Abastillas were still living there. Were they paying rent?
And if so, then Dr. Bornemann was keeping it.
If they were not paying rent, why do we not see any letters
going to the tenants saying hey, you’re not paying the rent.
I can’t make my mortgage payments. The scam continued in
[1999]. And remember, he said that well, his attorney told
him to do it. Dr. Bornemann has a serious problem with
accepting responsibility for his actions. And that’s a
graphic example.
And we come to the year 2000. Dr. Bornemann sues Abastillas
and Smith. Why, this was a shocker. He says all kinds of
stink things about him in that lawsuit. And he admits that
that attorney told him well, this is to separate you out
from Paz and Smith because oh, they’ve caused you a lot of
problems. At the same time, Miss Abastillas is still going
up to his house.
Does that sound like a bona fide lawsuit? Or does it sound
like a setup, a fraud, a shibai, something to mislead other
people? And what happens to that lawsuit after it’s filed.
It’s dismissed for failure to prosecute. And Dr. Bornemann
again says that’s my attorney’s fault.
Counsel also focused on the Kekonas’ financial
vulnerability and on their advanced age in support of a
substantial punitive award. He stated:
Mr. Kekona dies nine years into this case. He couldn’t see
it through the end. Paz and Smith lived in that property
for years and years following the filing of this lawsuit.
Do you remember for probably for the most part they lived
12
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
rent free.
. . . .
You know, you get a judgment after four years of litigation.
It’s so exhaustive that the attorney decides to take a
sabbatical. How exhausting must that have been? Bill
Eggers, the attorney, took a sabbatical after it was over.
So the Kekonas wanted to collect a mere 191,000. They had
to give their attorney two homes on the Big Island in
payment of his fees. So they weren’t even getting back
everything they lost. When they went to collect, they found
interference of the first order. It was put there by Mr.
Smith, Miss Abastillas, with their get-along, go-along
accomplice, Dr. Bornemann.
Counsel also noted that Bornemann’s net worth exceeded
$2.25 million dollars. Counsel explained that Bornemann
attempted to take advantage of the Kekonas’ vulnerability by
engaging in a war of attrition: “I think it’s because of his
money. But he didn’t care. He could defeat this by use of his
money and resources.” Counsel concluded by discussing what he
described as Bornemann’s misuse of the judicial system:
I want to talk about respect for the law, respect for legal
procedures. I have always felt this case is slightly
misnomered in that it should be called interference with
court procedures.
. . . .
There is no respect for the legal processes shown in this
case. He didn’t respect it when he received the lawsuit.
He went right ahead and signed more deeds. He didn’t
respect it years later when his attorney filed . . . a
shibai lawsuit against Paz and Smith. . . .
I think this jury should keep in mind that as well educated
as Dr. Bornemann is, everybody in America should have
respect for the law. And I think that’s the point that this
jury must make in this case. Unfortunately, the way we do
it here is money. And that is why Mrs. Kekona personally
and on behalf of her husband’s estate respectfully asks for
the damages that we talked about earlier.
At the close of trial, the jury found by clear and
convincing evidence that the transfer of the Kâne#ohe property
13
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
was fraudulent. However, the jury found that the Kekonas failed
to establish by clear and convincing evidence that the transfer
of the HPP property was fraudulent. The jury awarded the Kekonas
$253,000 in special damages to compensate for the interest that
had accrued on the Kekonas’ initial $191,000 judgment.11 The
jury also imposed $1,642,857.13 in punitive damages. Bornemann
filed a post-trial motion to amend judgment on the grounds that
the punitive damages award was grossly excessive and that
attorney’s fees should have been apportioned. The circuit court
denied Bornemann’s motion and entered final judgment.
Bornemann timely appealed to the ICA on February 28,
2008. On appeal, Bornemann argued that the punitive damages
award was grossly excessive and in violation of his rights under
the Fourteenth Amendment. Bornemann also argued that the
$253,000 special damages award constituted double recovery. The
ICA agreed, concluding that a punitive award of $250,000 was
sufficient to punish Bornemann. Accordingly, the ICA vacated the
punitive damages award and ordered the circuit court to provide
the Kekonas with the option to remit $1,392,857.10 in punitive
damages or proceed to a fourth jury trial. The ICA also vacated
the $253,000 special damages award.
The Kekonas timely filed an application for writ of
certiorari requesting this court’s review of the punitive damages
11
HRS § 478-3 (1986) provides: “Interest at the rate of ten per cent
a year, and no more, shall be allowed on any judgment recovered before any
court in the State, in any civil suit.”
14
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
award.
II. STANDARDS OF REVIEW
Two levels of review are applicable when a punitive
damages award is challenged as excessive. The first inquiry
proceeds under state law, and the second, if raised, is governed
by federal due process standards. See Cooper Indus., Inc. v.
Leatherman Tool Co., 532 U.S. 424, 450 (2001), (Ginsburg, J.,
dissenting) (explaining that Supreme Court precedent now
“requires lower courts to distinguish between ordinary common-law
excessiveness and constitutional excessiveness.”).
A. Excessiveness Under State Law
“Award or denial of punitive damages is within the
sound discretion of the trier of fact. The trier of fact’s
decision to grant or deny punitive damages will be reversed only
for a clear abuse of discretion.” Amfac, Inc. v. Waikiki
Beachcomber Inv. Co., 74 Haw. 85, 138, 839 P.2d 10, 36-37 (1992)
(internal citations omitted). “The proper measurement of
punitive damages should be ‘[t]he degree of malice, oppression,
or gross negligence which forms the basis for the award and the
amount of money required to punish the defendant.’” Kang v.
Harrington, 59 Haw. 652, 663, 578 P.2d 285, 293 (1978) (quoting
Howell v. Associated Hotels, 40 Haw. Terr. 492, 501 (1954)).
“[T]he inquiry on review is limited to whether, ‘upon the
evidence adduced, reasonable men [and women] could have come to
15
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
the same conclusion as the jury, or the trial court in a jury-
waived case.’” Romero v. Hariri, 80 Haw. App. 450, 458, 911 P.2d
85, 93 (1996) (quoting Lima v. Tomasa, 42 Haw. 478, 483 (1958)).
B. Federal Due Process Review
An award of punitive damages implicates rights that are
guaranteed by the Due Process Clause of the Fourteenth Amendment
to the United States Constitution. See BMW of N. Am., Inc. v.
Gore, 517 U.S. 559, 562 (1996) (“The Due Process Clause of its
own force . . . prohibits the States from imposing ‘grossly
excessive’ punishments on tortfeasors.”). “[T]he question
whether a punitive damages award is constitutionally excessive
calls for the application of a constitutional standard to the
facts of a particular case, and in this context de novo review of
that question is appropriate.” Cooper Indus., 532 U.S. at 435(quoting United States v. Bajakajian, 524 U.S. 321, 336-37
(1983)).
III. DISCUSSION
A. State Law Principles
A punitive damages award is an extraordinary remedy and
is only imposed when “the defendant’s wrongdoing has been
intentional and deliberate, and has the character of outrage
frequently associated with crime.” Masaki v. Gen. Motors Corp.,
71 Haw. 1, 6, 780 P.2d 566, 570 (1989) (internal quotation marks
and citation omitted). The fundamental purpose of punitive
16
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
damages is to “punish[] the defendant for aggravated misconduct
and [to] deter[] the defendant and others from engaging in like
conduct in the future.” Id. at 12, 780 P.2d at 573; see also,
Kang, 59 Haw. at 660, 578 P.2d at 291; Howell, 40 Haw. Terr. at
499. “In such circumstances, utilizing the civil law to shape
social behavior is both logical and desirable.” Id. at 9, 780
P.2d at 571 (internal quotation marks and citation omitted).
Because punitive sanctions are quasi-criminal in
nature, Hawai#i imposes special safeguards to ensure that a
defendant is neither unfairly stigmatized nor arbitrarily
deprived of his or her property. See Masaki, 71 Haw. at 6, 780
P.2d at 570. Accordingly, this court has imposed a clear and
convincing standard of proof, the highest civil standard of
proof, for all punitive damage claims. Id. at 16, 708 P.2d at
575.
The plaintiff must prove by clear and convincing evidence
that the defendant has acted wantonly or oppressively or
with such malice as implies a spirit of mischief or criminal
indifference to civil obligations, or where there has been
some willful misconduct or that entire want of care which
would raise the presumption of indifference to consequences.
Id. at 16-17, 780 P.2d at 575. The clear and convincing evidence
standard requires “that degree of proof which will produce in the
mind of the trier of fact a firm belief or conviction as to the
allegations sought to be established, and requires the existence
of a fact be highly probable.” Id. at 15, 780 P.2d at 574. That
17
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
standard was applied in this case.12
Once a punitive damages award has been rendered, the
magnitude of the award is subject to review at the trial court
level as well as appellate review. On appeal, we analyze whether
the damages awarded by the jury were “‘palpably not supported by
the evidence, or so excessive and outrageous when considered with
the circumstances of the case as to demonstrate that the jury in
12
Jury instructions serve as an additional safeguard with respect to
the magnitude of a punitive award. In this case, the court instructed the
jury as follows:
The proper measure of punitive damages is 1, the degree of
intentional, willful, wanton, oppressive, or malicious
conduct; 2, the amount of money required to punish the
defendant, considering his financial condition, without
considering the value of either Honolulu Park Place or the
Kaneohe property; and 3, the reasonable and necessary
expense of litigation, including attorney’s fees, expert
witness fees, and the inconvenience and time involved in
preparing for trial.
Although this instruction properly stated the law, more explicit jury
instructions would provide an additional procedural safeguard. For example,
Illinois Pattern Civil Jury Instruction 35.00 (2007) provides:
In arriving at your decision as to the amount of punitive
damages, you should consider the following three questions.
The first question is the most important to determine the
amount of punitive damages:
1. How reprehensible was [(defendant’s name)] conduct?
On this subject, you should consider the following:
a) The facts and circumstances of defendant’s conduct;
b) The [financial] vulnerability of the plaintiff;
c) The duration of the misconduct;
d) The frequency of defendant’s misconduct;
e) Whether the harm was physical as opposed to
economic;
f) Whether defendant tried to conceal the misconduct;
g) [other]
2. What actual and potential harm did defendant’s conduct
cause to the plaintiff in this case?
3. What amount of money is necessary to punish defendant and
discourage defendant and others from future wrongful conduct
[in light of defendant’s financial condition]?
18
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
assessing damages acted against rules of law or suffered their
passions or prejudices to mislead them.’” Kang, 59 Haw. at 663,
578 P.2d at 292 (quoting Vasconcellos v. Juarez, 37 Haw. Terr.
364, 366 (1946)).
B. The Punitive Award in This Case
With the twin interests of punishment and deterrence in
mind, and considering the Kekonas’ substantial attorney’s fees
and the presence of several aggravating factors, we conclude that
the evidence presented to the third jury adequately substantiated
the $1,642,857.13 punitive damages award that the jury rendered.
1. Attorney’s Fees
As a starting point, the punitive award contains a
sizable component that corresponds to the Kekonas’ two decades of
attorney’s fees. See Lee v. Aiu, 85 Hawai#i 19, 936 P.2d 655(1997) (uncompensated attorney’s fees may comprise a portion of a
punitive damages award). In Lee, this court adopted “the
majority view that a jury should be allowed to consider a
plaintiff’s attorney fees in determining the amount of a punitive
damages award.” 85 Hawai#i at 34, 936 P.2d at 670 (citing
Masaki, 71 Haw. at 8 n.2, 780 P.2d at 572 n.2; Kunewa v. Joshua,
83 Hawai#i 65, 77, 924 P.2d 559, 571 (App. 1996)). There are two
limitations: First, “[w]hen considering attorney’s fees in
calculating the amount of the punitive damage award, the fee
amount must be ‘reasonable and necessary.’” Id. at 35, 936 P.2d
19*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
at 671 (citation omitted). Second, “[a]ttorneys’ fees cannot be
awarded in addition to exemplary damages; rather, they must
constitute the whole of the punitive damage award or be accounted
for as a portion of the total punitive damage award.” Id.; see
also Romero, 80 Hawai#i at 458-59, 911 P.2d at 93-94.
In this case, the Kekonas presented sufficient evidence
for the jury to conclude that they had accrued $600,000 in
attorney’s fees and expenses over fourteen years of litigation.
Their attorney’s fees reasonably corresponded to the extensive
discovery required to expose the fraudulent transfer, three jury
trials, the cost of hiring expert witnesses, voluminous pre-trial
and post-trial motions, and several appeals to the ICA and to
this court. Although Bornemann attempted to impeach Mrs. Kekona
because she did not introduce written documentation of the
attorney’s fees she incurred, the testimony of a single witness,
if found credible by the jury, constitutes sufficient evidence to
support a finding. See In re Doe, 95 Hawai#i 183, 196-97, 20
P.3d 616, 629-30 (2001). Here, Mrs. Kekona’s testimony regarding
the attorney’s fees she had incurred as a result of Bornemann’s
conduct was sufficient to sustain $600,000 of the punitive award.
Bornemann argues that the Kekonas have grossly
exaggerated their fees and costs. First, he argues that the fees
incurred were not solely incurred against him, and that large
portions corresponded to litigation against other defendants.
However, it is well settled that “where the wrongful act of a
20
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
defendant causes a plaintiff to engage in litigation with a third
party in order to protect his or her rights or interests,
attorney’s fees incurred in litigating with that third party may
be chargeable against the wrongdoer as an element of the
plaintiff’s damages.” Lee, 85 Hawai#i at 33, 936 P.2d at 669.
Second, Bornemann argues that some of the attorney’s
fees corresponded to the original jury trial in the Hanauma Bay
case. At trial, Bornemann could have cross-examined Mrs. Kekona
on that point, but he did not. “[I]f a party does not raise an
argument at trial, that argument will be deemed to have been
waived on appeal.” State v. Moses, 102 Hawai#i 449, 456, 77 P.3d
940, 947 (2003).
Third, Bornemann cites the ICA’s 2006 Memorandum
Opinion as evidence that only $200,000 in fees had been incurred
over the course of the first two trials. Bornemann argues that
the additional $400,000 claimed by Mrs. Kekona “defies logic or
belief.” Again, this point could have been raised in cross-
examination to impeach Mrs. Kekona’s testimony, but was not.13
In sum, $600,000 of the $1,642,857.13 punitive award is
justified as compensation for attorney’s fees and costs.
2. The Remainder of the Punitive Award
The remaining question is whether Bornemann’s conduct
justified a $1,042,857.13 punitive award, which is roughly four
13
Neither Bornemann’s second nor his third argument were raised in
his post-trial motion to amend the verdict.
21
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
times as large as the $253,000 compensatory award in this case.14
Based on the presence of several aggravating factors, we conclude
that it does.
a. Fraudulent Transfers
Fraudulent transfers are a common method of shielding
assets from creditors and other individuals with legitimate
claims to property.15 There is a considerable incentive to
defraud because fraudulent transfers are easy to promulgate but
difficult to prove: a fraudulent debtor boasts an apparently
valid deed while the defrauded creditor must confront the reality
that “the intent to hinder, delay, or defraud creditors is seldom
susceptible of direct proof.” Uniform Fraudulent Transfer Act,
Prefatory Note at 4 (1984). Further, HRS § 651C-8 (Supp. 1985)
limits a defrauded creditor’s actual damages to “the value of the
asset transferred . . . or the amount necessary to satisfy the
creditor’s claim, whichever is less.”16 In other words, at worst
the fraudulent debtor is forced to pay what he or she already
14
Although the ICA vacated the $253,000 special damages award, the
$253,000 figure still serves as a fair estimation of the statutory interest
damages that accrued as of the date of the third jury’s verdict.
15 Fraudulent transfers have been prevalent throughout the entirety
of the American judicial tradition. In 1918, the first uniform act codified
the “better” decisions of several states that had applied England’s Statute of
13 Elizabeth. The act was updated in 1984 and subsequently adopted by Hawai#i
and 42 other states. See Uniform Fraudulent Transfer Act, Prefatory Note at 4
(1984).
16 The availability of punitive damages is not constrained by HRS §
651C-8 because the UFTA contains a savings clause that provides: “Unless
displaced by the provisions of this chapter, the principles of law and equity
. . . supplement its provisions.” HRS § 651C-10.
22
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
owed. Without the possibility of significant punitive damages,
it would be difficult to deter this conduct.
We conclude that a fraudulent transfer promulgated with
the intent required to impose punitive damages justifies a
punitive award at a 2:1 ratio to the actual damages suffered by
the plaintiff.17 This amount is supported by comparison to “the
civil or criminal penalties that could be imposed for comparable
misconduct.” BMW, 517 U.S. at 583. The Hawai#i legislature has
declared that treble damages (i.e. a 2:1 ratio) are an
appropriate sanction for unfair, deceptive, or fraudulent acts
committed in the course of commerce. See HRS § 480-13(b)(1)
(Supp. 2005) (punishing deceptive practices with the greater of
“threefold damages” or “$1,000” in addition to “reasonable
attorney’s fees” and the “costs of suit”).
In this case, Bornemann’s decision to sign confirmatory
quitclaim deeds immediately after he was served as a defendant in
the Kekonas’ fraudulent transfer lawsuit illustrates an
intentional decision to hinder the Kekonas’ attempt to collect a
legitimate debt. See BMW, 517 U.S. at 576 (“[I]nfliction of
economic injury, especially when done intentionally through
affirmative acts of misconduct or when the target is financially
vulnerable, can warrant a substantial penalty.” (internal
citation omitted)). The third jury was justified in imposing
17
This results in an award of treble damages once the compensatory
and punitive awards are combined.
23
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
$506,000 in punitive damages against Bornemann based solely on
his decision to participate in a fraudulent transfer “with such
malice as implies a spirit of mischief or criminal indifference
to civil obligations.” Masaki, 71 Haw. at 16-17, 780 P.2d at
575.
b. Aggravating Factors
The Hawai#i legislature has repeatedly declined to cap
punitive damages at treble damages. See Denise E. Antolini,
Punitive Damages in Rhetoric and Reality: An Integrated Empirical
Analysis of Punitive Damages Judgments in Hawai#i, 1985-2001, 20
J.L. & Pol’y 143, 189-207 (Spring 2004) (explaining that the
Hawai#i legislature declined to enact proposed bills that would
have capped punitive damages at either twice or three times the
compensatory award in 1991, 1993, 1996, 1997, 1998, 1999, and
2001). Accordingly, higher ratios of damages may be imposed to
punish and deter aggravated misconduct. In this case, the
remaining $536,857.13 of the punitive damages award is supported
by the presence of several aggravating factors.
First, Bornemann engaged in a pattern of repeated
conduct with knowledge that his actions would cause substantial
civil harm to the Kekonas. See BMW, 517 U.S. at 576 (“[E]vidence
that a defendant has repeatedly engaged in prohibited conduct
while knowing or suspecting that it was unlawful would provide
relevant support for an argument that strong medicine is required
24
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
to cure the defendant’s disrespect for the law.”). Evidence at
trial suggested that in addition to executing multiple fraudulent
deeds to the Kâne#ohe property, Bornemann took a mortgage on a
substantial portion of Abastillas and Smith’s personal property,
signed a blank promissory note, filed fraudulent tax returns,
accepted “pass-through” rent payments, filed a “sham” lawsuit,
and attempted to drain the Kâne#ohe property of equity by
allowing it to fall into foreclosure, all so that the Kekonas
would be unable to collect on their original judgment. Indeed,
the majority of these actions occurred after Bornemann had
received and read the Kekonas’ fraudulent transfer lawsuit.
Second, Bornemann harmed an elderly and financially
vulnerable couple. See BMW, 517 U.S. at 576, 588 (characterizing
conduct that targets elderly or financially vulnerable
individuals as “the most serious”); Campbell v. State Farm Mut.
Auto. Ins. Co., 98 P.3d 409, 418 (Utah 2004) (holding that
financial misconduct by an insurer that targeted a financially
and emotionally vulnerable family warranted punitive damages at a
9:1 ratio) cert denied, 543 U.S. 874 (2004); cf. HRS § 480-
13(b)(1) (providing a damages enhancement for elderly plaintiffs
victimized by deceptive practices); HRS § 480-13.5 (providing
additional civil penalties of up to $10,000 per deceptive act
against an elder). Bornemann’s misconduct occurred in the
immediate wake of intense litigation wherein the Kekonas incurred
25
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
substantial litigation fees and costs. The evidence suggests
that the defendants saw the Kekonas’ unique vulnerability and
sought to exploit it. Because of Bornemann’s participation in
the fraudulent transfer of the Kâne#ohe property, the elderly
Kekonas could not collect on their judgment and had to sign over
their three-bedroom retirement home on the island of Hawai#i to
their original attorney. Mr. Kekona died during the pendency of
litigation without collecting anything on the original judgment
and with his retirement plans greatly disrupted. The Kekonas
were forced to consign years of their retirement to full-scale
litigation in order to recover amounts that they were
legitimately owed.
Considered in its entirety, the record supports the
punitive damages awarded by the third jury. Six hundred thousand
dollars of the award is justified as compensation for the
Kekonas’ attorney’s fees and costs. Five hundred and six
thousand dollars of the award is justified as a means to deter
and punish Bornemann’s intentional participation in a fraudulent
transfer. The remainder is justified as a means to punish
aggravated misconduct that included targeting an elderly and
financially vulnerable couple, and engaging in repeated unlawful
conduct with knowledge of the civil harm that conduct created.
In sum, we are left with the firm belief that $1,642,857.13
reflects “[t]he degree of malice, oppression, or gross negligence
26
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
which forms the basis for the award and the amount of money
required to punish the defendant.” Kang, 59 Haw. at 663, 578
P.2d at 293 (citation and quotation marks omitted).
C. The Punitive Damages Award Survives Federal Due Process
Review
Although “States possess discretion over the imposition
of punitive damages, it is well established that there are
procedural and substantive constitutional limitations on these
awards.” State Farm, 538 U.S. at 416. “The Due Process Clause
of the Fourteenth Amendment prohibits a State from imposing a
‘grossly excessive’ punishment on a tortfeasor.” BMW, 517 U.S.
at 562. “Elementary notions of fairness enshrined in our
constitutional jurisprudence dictate that a person receive fair
notice not only of the conduct that will subject him [or her] to
punishment, but also of the severity of the penalty that a State
may impose.” Id. at 574. “To the extent an award is grossly
excessive, it furthers no legitimate purpose and constitutes an
arbitrary deprivation of property.” State Farm, 538 U.S. at 417.
Federal due process review is de novo, Cooper Indus.,
532 U.S. at 435, and is based on three guideposts: (1) the degree
of reprehensibility of the defendant’s conduct; (2) the ratio of
the punitive damages award to the harm suffered by the plaintiff;
and (3) a comparison to the civil penalties authorized or imposed
in comparable cases. See BMW, 517 U.S. at 575. Given that these
guideposts were considered at length in our state law analysis,
27
*** FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER ***
and mindful of the de novo standard required by the Supreme
Court, we conclude that the punitive damages awarded by the third
jury did not violate Bornemann’s federal due process rights.
IV. CONCLUSION
For the foregoing reasons, we vacate the ICA’s
September 16, 2013 Judgment on Appeal to the extent that it
vacated the punitive damages award against Bornemann and remand
to the circuit court for further proceedings consistent with this
opinion.
Fred Paul Benco /s/ Mark E. Recktenwald
for petitioners
/s/ Paula A. Nakayama
Peter Van Name Esser
for respondent /s/ Sabrina S. McKenna
Michael Bornemann, M.D.
/s/ Richard W. Pollack
/s/ Rom A. Trader
28