Thursday, December 25, 2008

Hawai'i Adopts the Pretext Defense to Condemnation Proceedings

County of Hawai'i v. C&J Coupe Family Ltd. Partnership (HSC December 24, 2008)

Background. A large housing development by Oceanside was planned for Kona District. Between the housing area and the main highway running through Kona sits the Coupe family land. Oceanside and the County entered into a development agreement, which required Oceanside to build a by-pass to the highway. If Oceanside could not purchase the land needed for the bypass, the mayor was authorized to condemn the necessary properties. Discretion in choosing the necessary lands, however, remained with Oceanside and the bypass was under the supervision of Oceanside. After the Coupes refused to sell, Oceanside requested the County to condemn the property for the building of a road. The Council adopted a resolution finding it necessary to exercise eminent domain and the County filed a condemnation proceeding for 2.9 acres of Coupe land. As that prepared for trial, the County brought a second action seeking condemnation of 3.348 acres of Coupe land. The Coupes filed a motion to dismiss or, in the alternative, consolidate. The circuit court consolidated the actions and both went to trial. The circuit court, after a bench trial, concluded that the first condemnation was invalid, but the second one was for a public purpose and allowed it to proceed. The Coupes then filed a motion for fees and costs under the first condemnation proceeding, but it was never ruled upon and, thus, deemed denied.

The "Denied" Motion for Fees. Whenever a property is "not finally taken for public use, a defendant who would have been entitled to compensation or damages had the property been finally taken, shall be entitled, in such proceedings, to recover from the plaintiff" damages, including fees and costs. HRS § 101-27. The HSC agreed with the Coupes that even though the County prevailed on the second condemnation, it did not win the first one. This was a separate action and, thus, the Coupes were entitled to statutory damages because the property was not "finally taken for public use." And so the HSC held that the Coupes are entitled to damages. But because the motion was never ruled upon within 90 days, it was deemed denied. HRAP Rule 4(a)(3). This default denial, therefore, created an insufficient record for the HSC to determine the scope of damages and remanded the case.

The Pretext Defense. The Coupes argued that the resolution by the County was an unconstitutional taking because although it may have stated a public purpose, it was actually a pretext for the transfer of lands to Oceanside. "Private property shall not be taken or damaged for public use without just compensation." Haw. Const. Art. I § 20. The term "public use" means that it must be for "public purposes." Hawai'i Housing Authority v. Lyman, 68 Haw. 55, 68, 704 P.2d 888, 896 (1986). When the government articulates a public purpose for the condemnation, courts afford great weight to the government and will presume it to be correct. Hawai'i Housing Authority v. Ajimine, 39 Haw. 543, 549 (Terr. 1952). But according to the HSC, this deference is not unlimited. The courts will review the decision to see if it is "manifestly wrong." Id.

Based on that, the HSC held that once the government demostrated a legitimate public use for the exercise of emninent domain, a landower can challenge the stated public use on the grounds that it is a mere pretext for something "clearly and palpably of a private character." Id. This burden appears to be a heavy one. The courts still give great weight to the government's public purpose. The HSC also pointed out that the transfer of the condemned property to another private entity "may be a relevant factor in consideration of the pretext defense."

But what about Kelo? The HSC pointed out that affording the pretext defense to the condemnation proceedings is consistent with the Fifth Amendment's takings clause and the recent United States Supreme Court case, Kelo v. City of New London, Conn., 545 U.S. 469 (2005). The HSC explained that the Kelo court did not condone the transfer of property "for the sole reason that [the new landowner] will put the property to a more productive use and thus pay more taxes." Id. at 486-87. The HSC also pointed out that the Kelo court also indicated that the government may not take property "under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit." Id. at 477-78.

The HSC ultimately held that the public purpose here appeared to comport with the public use requirement under the state and federal constitutions. After all, condemnation for a road may be a "classic" case. And the transfer of condemned property to a private entity is not in itself an invalid taking. Thus, there was a prima facie showing of a legitimate public purpose. However, the HSC held that the circuit court did not allow the Coupes to demonstrate that the purpose was "clearly and palpably of a private character" so it remanded the matter back to the Big Island.

Other Issues. The HSC also held that the first condemnation proceeding did not deprive the circuit court of subject matter of the second proceeding mainly because the proceedings were not identical. They involved different parts of the Coupes property. In other words, the doctrine of abatement did not apply here. See Shelton Eng'g Contractors, Ltd. v. Hawaiian Pac. Indus., Inc., 51 Haw. 242, 249, 456 P.2d 222, 226 (1969).

Chief Justice Moon's Dissent and Concurrence. Chief Justice Moon agreed with the majority on all points, but the constitutional question. Justice Levinson joined him. According to Chief Justice Moon, the U.S. Supreme Court, in Kelo, made it clear that "a taking should be upheld as consistent with the Public Use Clause . . . as long as it is rationally related to a conceivable public purpose." Kelo, 545 U.S. at 490 (Kennedy., J., concurring.). Chief Justice Moon believed that the the rational basis test--"which includes deference to the government's statement of public purpose--remains the appropriate test for determining the constitutionality of a 'public use' under the federal constitution." But even for Chief Justice Moon, the deference afforded to the government is not absolute. He explained that "deference to the government's public purpose determination may be overcome only if the party challenging the taking makes a 'clear showing' that the government's stated public purpose is 'irrational.'" Chief Justice Moon also believed that under the Hawai'i Constitution's takings clause, the HSC has consistently applied the rational-basis test in determining the stated public use. See Kau v. City and County of Honolulu, 104 Hawai'i 468, 478, 92 P.3d 477, 487 (2004). Even under the Hawai'i Constitution, the deference is not absolute. Chief Justice Moon explained that the burden is on the party "challenging the legislative judgment to convince the court that the legislative facts on which the legislation is apparently based could not reasonably be conceived to be true[.]" HFDC v. Castle, 79 Hawai'i 64, 86, 898 P.2d 576, 598 (1995).

Under these formulations of the rational basis test, Chief Justice Moon believed the stated purpose--a bypass road to connect up with the highway--was for a legitimate public use. And this was enough for the Chief Justice. He was careful not to foreclose the possibility of a pretext defense in some cases, but the record did not warrant that this was such a case.

So what Happens now? It appears that the HSC has adopted a defense to condemnation proceedings. Under the Fifth Amendment takings clause there were two things checks on the seizure of private property by the government: (1) the taking is for a public purpose; and (2) the landowner is "justly compensated." The U.S. Supreme Court has, for some time now, adopted a deferential stance toward the first limitation. But everyone on the HSC--including the Chief Justice and Justice Levinson--believes that that deference is not unlimited. When the stated public use is a mere pretext for something impermissible--such as the condemnation for sole private benefit--the landowner should be permitted to make his or her case before the court. The dispute in the HSC appeared to be over the case itself. Chief Justice Moon and Justice Levinson found ample evidence in the record that the circuit court considered the pretext argument and defense, but disagreed. The bare majority, however, disagreed and remanded.

Has the HSC moved into uncharted waters with this pretext defense? The U.S. Supreme Court has not exactly adopted this defense just yet. Perhaps this is the case in which it may do so. The case has raised another question: which constitutional affords the pretext defense? Has the HSC looked to the federal cases in support of its interpretation of the Hawai'i Constitution? If so, then as a matter of state constitutional law, there is a pretext defense. But if the HSC distinguished Kelo and allowed the pretext defense to go through because the Fifth Amendment was not offended, then it cuts closer to an interpretation of the federal constitution, which makes it a candidate for resolution in Washington.

Monday, December 22, 2008

HSC Reassesses what Constitutes a tax.

Hawai'i Insurance Council v. Lingle (HSC December 18, 2008)

Background. The Department of Commerce and Consumer Affairs is an executive agency of the State of Hawai'i. It has an insurance division that is run by the Insurance Commissioner. In 1999 the DCCA was no longer funded by the Legislature's General Fund. Instead it was funded by private persons and entities that were regulated by the DCCA or received DCCA services. Those funds for the insurance division went into a special fund--the Insurance Regulation Fund. Funds were based on assessments made by the Insurance Commissioner and paid for the carrying out of operations by the insurance division and some of the overhead of the DCCA. The money never went to the General Fund. In 2002, the Legislature merged the special fund with another fund. The Legislature determined that there was an outstanding $4 million and directed the transfer of that money to the General Fund. The Governor by line-item veto struck it down to $2 million. The same thing happened in 2003. In all, $3.5 million was transferred to the General Fund. The Hawai'i Insurers Council sued to enjoin those transfers on the grounds that it was an unconstitutional tax. The ICA held that they were indeed unconstitutional taxes. The State appealed.

So is the Exaction a tax? The Hawai'i Constitution prohibits the executive branch from imposing taxes. Haw. Const. Art. VIII § 3. "[T]he tax can be imposed only by the legislative power." McCandless v. Campbell, 20 Haw. 411, 420 (Terr. 1920). But not all exactions are taxes. The Legislature can delegate the power to charge fees. State v. Medeiros, 89 Hawai'i 361, 366, 973 P.2d 736, 741 (1999). The distinction, therefore, hinges on whether the exaction by the executive agency was a fee or a tax. The HSC noted that a taxes are "burdens or charges imposed by legislative authority on persons or property to raise money for public purposes, or, more briefly, an imposition for the supply of the public treasury." McCandless, 20 Haw. at 420. A fee, on the other hand, was not as easy to define.

The Tried and True Service/User fee. The HSC identified two kinds of fees: the service or user fee and the regulatory fee. A service/user fee is determined by a three-prong test: (1) it is applied to the direct benefit for a particular service; (2) it was directly allocated to defraying the costs of providing that service; and (3) it was reasonably proportionate to the benefit. Medeiros, 89 Hawai'i at 367, 973 P.2d at 742. The HSC agreed with the State that this was not a service/user fee, but its analysis did not end there.

. . . And Introducing the Regulatory fee. A regulatory fee is not a tax either. A regulatory fee, according to the HSC, is a charge authorized by the police of power of promoting the public safety, health, and welfare. The HSC had never before adopted a test to determine whether the charge is a regulatory fee and here it adopted the analysis from San Juan Cellular Telephone Co. v. Pub. Service Com'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992). Under San Juan Cellular, a charge is a regulatory fee (and not a tax) when (1) a regulatory agency assesses the charge; (2) the agency places the monies into a special fund; and (3) the money is not for general purposes, but rather to "defray the expenses generated in specialized investigations and studies, for the hiring of professional and expert services and the acquisition of the equipment needed for the operations provided by law for the payor." Id. at 686.

And so the HSC applied the San Juan Cellular test here. The assessments by the Insurance Commissioner met the first two prongs easily. As for the third prong, the HSC pointed out that the monies cannot be used for a general purpose, but that it could be used to pay for the "regulation or benefit of the parties upon whom the assessment is imposed." Bidart Bros. v. California Apple Com'n, 73 F.3d 925, 931 (9th Cir. 1996). The assessments that went to pay for the overhead costs of the DCCA, according to the HSC, fit the test just fine and it was not an unconstitutional tax.

A Taxing Flow-Chart. This case presents the perfect opportunity to make one of those flow-charts from law school. The first question is whether there is any governmental entity other than the legislature exacting money. If so, then arises the question of whether the charge is a tax or a fee. Before this case, the ICA was confronted with the same question and applied the only test it saw as available: the Medeiros test. Now, however, there is an intermediate step: we need to determine what kind of fee the charge could be. If a regulatory fee, then the San Juan Cellular test applies. If a service/user fee, then the Medeiros approach controls. But how do we determine whether the fee is a regulatory one or a service/user fee? The HSC never really addressed that question. It simply declares that this particular assessment collected by the insurance commissioner was a regulatory fee because the payor did not have a direct benefit.

But if that is the distinction between the regulatory fee and the service/user fee, then what is the distinction between the regulatory fee and the tax? Justice Breyer, who wrote San Juan Cellular when he was Chief Judge of the First Circuit noted that the test is not a three-prong test in the truest sense. The First Circuit wrote that the test is to determine whether the charge is "close to the 'fee' end of the spectrum" rather than the "tax" end. San Juan Cellular, 967 F.2d at 686. So perhaps instead of asking what kind of fee, it is better to ask whether the fee passes muster under Medeiros (even if the HSC never applied it here). If so, then it is a service/user fee. If not, then we may be on that regulatory-fee-to-tax spectrum, which calls for the San Juan Cellular analysis. In the law school flow-chart, both tests apply.

Separation of Powers: the Bigger Problem? The HSC applied the San Juan Cellular test and held that the charges were not unconstitutional taxes. The court then examined whether the Legislature's bills directing the transfer of funds out of the DCCA accounts into the General Fund was a violation of separation of powers. The Hawai'i Constitution "is one in which the sovereign power is divided and allocated among three co-equal branches." Biscoe v. Tanaka, 76 Hawai'i 380, 383, 878 P.2d 719, 722 (1994). A department cannot "exercise powers not so constitutionally granted, which from their essential nature, do not fall within its division on governmental functions, unless such powers are properly incidental to the performance by it of its own appropriate functions." Id. Here, according to the HSC, the legislation directing the transfer of the money to the General Fund was an "impermissible blurring of the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes." Thus, the $3.5 million was an unconstitutional attempt by the Legislature to convert the fees to taxes by transferring it to the General Fund. The remedy ordered by the HSC was to invalidate the transfer bills and have the money returned to the DCCA's special fund.

Other Issues. The HSC agreed with the ICA that it had subject-matter jurisdiction to hear the issue and that the assessments by the Insurance Commissioner did not violate Equal Protection provisions.

Wednesday, December 17, 2008

HSC Weighs in on when Hawaii ends its Business day.

Tataii v. Cronin (HSC December 16, 2008)

Background. Tataii ran as a Republican against Neil Abercrombie in the 2008 election. Tataii lost and filed a complaint in the HSC challenging the election pursuant to HRS §§ 11-172 and 174.5 on November 24, 2008 at 4:32 p.m.--twenty days after the election. Abercrombie filed a motion to dismiss the complaint on the grounds that it failed to state a claim upon which relief could be granted and that the filing of the complaint was untimely.

A Directory "shall" and a Mandatory "shall." A complaint alleging an election challenge "shall be filed not later than 4:30 p.m. on the twentieth day following the . . . election." HRS § 11-174.5(a). When it comes to a specific time provision in a statute is generally, "mandatory and not merely directory." Coon v. City and County of Honolulu, 98 Hawai'i 233, 255, 47 P.3d 348, 370 (2002). However, while the word "shall" is generally mandatory, it may be given a directory (or not-so-mandatory) meaning. Id. at 256, 47 P.3d at 371. In determining whether a statute is mandatory or directory, "the intent of the legislature must be ascertained." State v. Himuro, 70 Haw. 103, 105, 761 P.2d 1148, 1149 (1988). Legislative intent can be gleaned from "a consideration of the entire act, its nature, its object, and the consequences that would result from construing it one way or the other." Id. However, "the primary duty in interpreting statutes is to ascertain and give effect to the intention of the legislature, which, in the absence of a clearly contrary expression is conclusively obtained by the language of the statute itself." Id.

Tataii's complaint was filed on the twentieth day after the general election at 4:32 p.m. Abercrombie argued the complaint was untimely. The HSC, however, disagreed. The deadline in HRS § 11-174.5(a), according to the HSC, is actually divided into two parts: the day and the time. The twenty-day deadline is mandatory because it is clear and unambiguous. However, the 4:30 p.m. deadline is "tantamount to 'the close of business'" and interpreting that portion to extend to the end of the mandatory-twentieth business day would not distort the legislative intent to keep these complaints to the twenty-day deadline. Thus, Tataii's complaint was timely.

So Hawai'i's Business ends at 4:30 p.m.? This statute is not the only one with a clear time provision. The HRS has several deadlines that end at a specific time on a specific day. Does this suggest that they too are directory? Probably not. A deadline at high noon is certainly not "tantamount to the close of business" and, would thus appear to be a mandatory cutoff point. So where does this notion that 4:30 in the afternoon signifies the end of the workday? Although the HSC did not discuss it, this could be one of those only-in-Hawai'i sort of things. Where else but Hawai'i does the business day wind down at 4:30 p.m.? Certainly the Dolly Parton song "Working Nine to Five" doesn't really apply here. Then again, working 7:45 to 4:45 is a lot harder to put into a country music song.

The Other Matter (the Merits). As for the merits of the complaint, the HSC agreed with Abercrombie that the complaint did not state a claim for relief. An election challenge "shall set forth any cause or causes . . . that could cause a difference in the election results." HRS § 11-172. The complaint challenging the results of an election fails to state a claim unless "the plaintiffs demonstrate errors that would change the outcome of the election[.]" Akaka v. Yoshina, 84 Hawai'i 383, 387, 935 P.2d 98, 102 (1997). Tataii's complaint alleged that because Abercrombie refused to debate him he lost the election. The HSC concluded that Tataii did not show that Abercrombie was required to debate. The refusal to debate was, therefore, not an "error, mistake, or irregularity that would change the results of the election" and did fail to state a claim for relief in the HSC.

Thursday, December 11, 2008

Sanctioning Attorney's Fees/Costs Requires Bad Faith

Kaina v. Gellman (ICA December 11, 2008)

Background. Kaina's son was injured in a motorcycle accident in East Maui. He was treated by Dr. Gellman at the Hana Community Health Center, of which Vasconcellos was the executive director. The day after Dr. Gellman's treatment, Kaina's son died. Kaina sued Dr. Gellman, Vasconcellos, and the Health Center for negligence and the negligent hiring of Dr. Gellman. Although they did not raise it in a motion, the defendants brought up the issue of a bifurcated trial in a reply memorandum regarding their motion for summary judgment. Ten days before trial, the circuit court, Judge August, bifurcated Kaina's claims over Kaina's objection. Judge August, upon Kaina's request, recused himself and the case was transferred to Judge Joseph Cardoza. After the recusal, Judge August issued the orders pertaining to the summary judgment and the bifurcation.

Before Judge Cardoza, Kaina filed a motion to consolidate back into a single trial. Judge Cardoza characterized the motion as a request for reconsideration of Judge August's order and denied the motion. Kaina tried to get an interlocutory appeal, but the Hawai'i Supreme Court denied the request. Kaina then brought a "Renewed Motion for Consolidation." The circuit court denied the motion and awarded attorney's fees and costs of $6,805.37 to the defendants, as requested. Kaina appealed.

Abuse of Discretion Doesn't Necessarily mean Deference. The decision to sanction is reviewed for an abuse of discretion. Gap v. Puna Geothermal Venture, 106 Hawai'i 325, 331, 104 P.3d 912, 918 (2004). An abuse of discretion arises when the lower court "bases its ruling on an erroneous view of the law or a clearly erroneous assessment of the evidence." Id. It also arises when the lower court "clearly exceeded the bounds of reason or disregarded rules or principles of law or practice to the substantial detriment of a party litigant." AOAO of Kai Nui Court v. City and County of Honolulu, 118 Hawai'i 119, 121, 185 P.3d 867, 869 (App. 2008). The ICA stated two formulations for an abuse of discretion. Both of these formulations do not require the appellate court to defer to the decision below. How exactly is review for an "erroneous view of the law" or the disregard of "rules or principles of law" different from a decision reviewed de novo? That remains to be seen.

Rule 11 Sanctions: for Lawyers only. The ICA characterized the award of attorney's fees and costs as "sanctions" against Kaina. The ICA first examined whether the sanctions by the circuit court were permitted under Hawai'i Rules of Civil Procedure (HRCP) Rule 11. HRCP Rule 11(b) states that by signing a pleading or other paper filed before the court, the paper is not frivolous, not made for improper purposes, and is supported by some kind of evidence. Violations of Rule 11(b) may result in sanctions from the court, which specifically includes "reasonable attorneys' fees and other expenses." HRCP Rule 11(c). Rule 11 sanctions are initiated either (1) by separate motion filed by a party, or (2) by the court upon an order directing the party to show cause why it had not violated subsection(b). Neither circumstance arose here. Furthermore, Rule 11 sanctions "may be imposed only upon the person who signed the pleading, motion, or other paper." The sanctions here, however, went against the party, and not the party's attorney. Thus, the sanctions imposed against Kaina could not have been pursuant to HRCP Rule 11.

The Inherent Power of the Court to Sanction Requires Finding of bad Faith for Attorneys and Their Clients. HRCP Rule 11 is not the only way to get sanctioned. Hawai'i courts have the "inherent power . . . to control the litigation process before them and curb abuses and promote fair process including, for example, the power to impose sanctions for abusive litigation practices." Bank of Hawai'i v. Kunimoto, 91 Hawai'i 372, 387,984 P.2d 1198, 1213 (1999). This inherent power is codified (but not superseded by) in HRS § 603-21.9(6). Kukui Nuts of Haw., Inc. v. R. Baird & Co., Inc., 6 Haw.App. 431, 436, 726 P.2d 268, 272 (1986). But before imposing sanctions against the attorney pursuant to this inherent power, the court must first find that the attorney acted in bad faith. Bank of Hawai'i, 91 Hawai'i at 389, 984 P.2d at 1215; Enos v. Pac. Transfer & Warehouse, Inc., 79 Hawai'i 452, 458, 903 P.2d 1273, 1279 (1995) ("a particularized showing of bad faith is required to justify the use of the court's inherent power").

The ICA held that the same bad-faith finding is required for sanctions against the represented party. Moreover, the court's order must inform the party of "the authority pursuant to which he or she is to be sanctioned." Here, the ICA held that the circuit court made no finding that Kaina acted in bad faith. Moreover, according to the ICA, the renewed motion for consolidation did not exhibit any evidence of bad faith on the part of Kaina or her attorney. The award of attorneys' fees was not the correction of abusive litigation, but rather the mere shifting of the burden of attorneys' fees and costs to Kaina.

So can a Sanction EVER be an Award of fees/costs? This is not a case of an award of attorneys' fees and costs. This is all about sanctions. The ICA limited this appeal to a single issue: "whether the circuit court erred when [it] sanctioned Appellant Kaina by ordering [her] to pay Appellees' attorneys' fees and costs[.]" Here, the ICA concluded it was error and reversed. But does this mean that a court cannot award fees/costs to one party by sanctioning another? Not necessarily. After all, HRCP Rule 11(c) expressly provides for such a possibility. Furthermore, the court could also impose a sanction equal to the attorneys' fees and costs pursuant to its inherent power as long as it finds some "particularized showing of bad faith" and informs the party of its inherent authority.