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Hawaiian Association of Seventh-Day Adventists v. Wong

Supreme Court of Hawaii

June 28, 2013

HAWAIIAN ASSOCIATION OF SEVENTH-DAY ADVENTISTS A Hawai'i Non-Profit Corporation, Respondent/Plaintiff-Appellant-Cross-Appellee,
v.
STACEY T.J. WONG, As Trustee of the Eric A Knudsen Trust, Petitioner/Defendant-Appellee-Cross-Appellant.

CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (ICA NO. 28592; CIV. NO. 03-1-0026).

Michael D. Tom, Lyle M. Ishida, and David R. Harada-Stone for petitioner.

Michael R. Marsh, James M. Cribley, and Mark G. Valencia for respondent.

RECKTENWALD, C.J., NAKAYAMA, AND MCKENNA, JJ.

OPINION

MCKENNA, J.

I. Introduction

Hawaiian Association of Seventh-Day Adventists, a Hawai'i non-profit corporation ("SDA"), filed suit seeking, among other things, a declaration that its rental of cabins to the public is permissible under its lease agreement with the Eric A. Knudsen Trust ("Lease"). Stacey T.J. Wong, as trustee of the Eric A. Knudsen Trust ("Wong"), counterclaimed for termination of the Lease and other remedies. The circuit court, inter alia, granted summary judgment in favor of Wong on SDA's claim regarding cabin rentals, but granted summary judgment in favor of SDA on Wong's claims for termination and equitable relief. The Intermediate Court of Appeals ("ICA") vacated summary judgment as to the issue of cabin rentals, opining that such use of the Property is permissible under the terms of the Lease, and remanded the case for further proceedings.

We conclude that the ICA correctly vacated the court's judgment in favor of Wong on SDA's claim regarding cabin rentals (Count I of the Complaint), but for the wrong reasons. Contrary to the parties' stipulation and the ICA's conclusion, we hold that Paragraph 16 of the Lease, which delineates permissible uses of the Property, is ambiguous. If, on remand, the fact-finder determines that Paragraph 16 prohibits the use of cabins by the general public, Wong may be entitled to damages for breach of contract and/or disgorgement of profits. The ICA therefore also erred in affirming summary judgment in favor of SDA on Wong's claims for breach of contract and unjust enrichment (Counts II and III of the Counterclaim). We conclude that the ICA correctly vacated the circuit court's order awarding attorneys' fees and costs to Wong; we also, however, vacate the ICA's order awarding costs on appeal to SDA because a prevailing party has yet to be determined. Except for Wong's claim for termination of the Lease (Count I of the Counterclaim), on which the ICA properly affirmed summary judgment, we therefore vacate the ICA's Judgment on Appeal and remand this case for further proceedings consistent with this opinion.

II. Background

A. Factual Background

The subject 200-acre parcel of land ("Property") is part of a 940-acre parcel located in Koloa, Kaua'i, originally owned by the Augustus F. Knudsen Trust and the Eric A. Knudsen Trust (collectively, "the Trusts"). In 1949, the Trusts leased the Property to Valdemar L'Orange Knudsen who, in turn, assigned the lease to Kahili Mountain Park, Inc. ("KMPI"), a company owned by several beneficiaries of the Trusts. KMPI subsequently constructed campgrounds and facilities, including cabins that it rented to the general public as vacation residences. This area became known as Kahili Mountain Park ("the Park") .

Beginning in 1982, KMPI negotiated to sell its capital stock and its leasehold interest in the Park to SDA, which planned to construct a school on part of the Property. SDA closed its acquisition of KMPI's outstanding stock in 1984, at which point the 1949 lease was assigned to SDA, KMPI was dissolved, and a new lease was negotiated with the Trusts.

On December 31, 1984, SDA and the Trusts executed a new sixty-year lease, effective January 1, 1985. Paragraph 16 of the subject Lease delineates allowable uses of the Property as follows:

16. Use of Demised Premises. The demised premises shall be used only for educational, recreation (including vacation residence for members and staff of Lessee's school and church), agricultural, health care and humanitarian uses. No dwellings shall be constructed or used on the demised premises except for faculty, administrative staff, students and employees. If Lessee ceases to use the demised premises for the above purposes, Lessor shall have the right to terminate this Lease.

Paragraph 26 of the Lease is a nonwaiver clause, which gives SDA an thirty-day window to remedy any alleged breach:

26. Nonwaiver. Acceptance of rent by Lessor or its agent shall not be deemed to be a waiver by Lessor of any breach by the Lessee of any term, covenant or condition of this Lease herein contained, nor of Lessor's right to declare and enforce a forfeiture for any such breach, and that the failure of Lessor to insist upon strict performance of any of the terms, covenants or conditions of this Lease, or to exercise any option herein conferred in any one or more instances shall not be construed as a waiver or relinquishment for the future of any such terms, covenants, conditions or options, but the same shall be and remain in full force and effect; PROVIDED, HOWEVER, that before any forfeiture shall be enforced, Lessor shall give written notice to Lessee of the breach constituting the ground of forfeiture, and Lessee shall have thirty (30) days from the date of such notice within which to remedy or cure such breach, and if such breach shall be so cured or remedied, then such breach shall be waived and no forfeiture shall be enforced for such breach ....

SDA's principal objective in leasing the Property was to develop and operate a kindergarten through twelfth-grade school ("School"). After obtaining the necessary permits, SDA developed the Property, opened its new School, and constructed houses for faculty and staff. In addition, SDA continued KMPI's practice of renting cabins to the public, used the rental income to support the School, and constructed additional cabins pursuant to permits previously obtained by KMPI.[1]

Between 1984 and 2000, the Trusts were aware of SDA's continued vacation rentals to the public. There was no communication from the Trusts that these rentals might violate the Lease. By late 2000, however, three major changes occurred: Valdemar L' Orange Knudsen, who had been a strong supporter of the School, died; the Augustus F. Knudsen Trust terminated and the Eric A. Knudsen Trust ("EAK Trust") acquired a hundred-percent fee interest in the Property; and the trustee for EAK Trust changed from First Hawaiian Bank to Wong.

In an April 4, 2001 letter to SDA, Wong asserted that "the Adventists are in material default of the Kahili Adventist School/Mountain Park lease with respect to the Permitted Uses provision." Wong did not explain how SDA had violated the Lease or ask SDA to cease its practice of renting cabins to the public. He warned, however, that he could pursue several legal remedies against SDA including termination of the Lease, eviction from the Property, and a suit for monetary damages and legal fees. Wong stated that he supported SDA's vision of enhancing the property, and he hoped that they could work together to achieve this mission, fulfill the Property's potential, and satisfy the past breach. Using SDA's financial statements from June 1984 to January 2000, Wong calculated that SDA owed $642, 551.33 in unpaid rent, based on a rate of ten percent of gross revenues from SDA's cabin rentals. Wong proposed that SDA prepare a detailed five-year business plan for expanding the Park, enter into a new lease that would permit commercial use of the Property, and pay EAK Trust ten percent of gross non-School related revenues.

SDA retained a consultant to prepare a five-year business plan and evaluate Wong's proposal for expansion; however, it refused to make retroactive payment of percentage rents. Wong rejected SDA's business plan and characterized its failure to tender payment as "evidence of bad faith." In a letter dated March 6, 2002, Wong demanded that SDA cease "all commercial vacation rental operations" and pay "an amount equal to ten percent (10%) of the gross revenues received by [SDA] from the commencement of the commercial vacation rental operations in 1985 until the date such operations cease pursuant to this demand, " plus a ten percent interest rate and general excise tax.

On March 13, 2002, SDA notified Wong that it would cease renting cabins to the public in order to avoid termination of the Lease. SDA maintained, however, that rental of the cabins to the public was a permitted recreational use. It also noted that ceasing rentals would cause significant monetary losses and could result in SDA closing its School. SDA immediately ceased booking reservations for cabins but, pursuant to an agreement with Wong, continued to honor reservations that had been made before March 6, 2002.

B. Circuit Court Proceedings

On March 10, 2003, SDA filed a Complaint in the Circuit Court for the Fifth Circuit ("circuit court"), [2] seeking a declaratory judgment that its operation of the Park, including commercial uses of the Property and rental of cabins to the public as vacation residences, was permitted under the Lease ("Count I of the Complaint"). SDA also alleged that the Lease had been orally amended to permit continued rental of the cabins ("Count II of the Complaint"); that Wong's allegations of breach were barred by waiver and estoppel based on the Trusts' knowledge of these rental activities ("Count III of the Complaint"); and that Wong should be enjoined from threatening to terminate the Lease and interfering with the cabins rentals, since these actions would seriously and irreparably damage SDA ("Count IV" of the Complaint"). In addition, SDA sought damages for Wong's wrongful demand that SDA halt its vacation rentals to the public ("Count VI of the Complaint"). The Complaint did not contain a Count V.

On April 1, 2003, Wong filed an Answer and Counterclaim, seeking termination of the Lease on the ground that SDA had violated its terms by conducting prohibited commercial operations on the Property ("Count I of the Counterclaim"). In addition, Wong claimed an entitlement to damages based on SDA's breach of contract, its failure to comply with the conditions for use, and its refusal to pay rent for its commercial operations ("Count II of the Counterclaim"). He also claimed that SDA had been unjustly enriched by its commercial operations on the Property, and sought disgorgement of the profits therefrom ("Count III of the Counterclaim"). Finally, he alleged that SDA was obligated to defend and indemnify Wong for any loss or damage in connection with the Lease ("Count IV of the Counterclaim").

The parties each filed multiple motions for partial summary judgment.[3] With respect to Count I of the Complaint (cabin rentals), the parties stipulated that the Lease is unambiguous, parol evidence is inappropriate, and the court's interpretation should be limited to the four corners of the agreement.

Wong argued that Paragraph 16 clearly prohibits use of the Property by anyone other than faculty, administrative staff, students, and employees. While maintaining that the Lease is unambiguous, Wong cited letters and committee reports from School representatives in support of his position that Paragraph 16 never contemplated rental of cabins to the public. He also submitted deposition testimony from individuals who had been involved in discussions regarding SDA's use of the Property before the Lease was finalized.

SDA, on the other hand, argued that permissible uses of the Property include educational, agricultural, humanitarian, recreational, or health care, and the Lease does not prohibit use of the Property by the public for any of these permitted purposes. It maintained that the parenthetical reference to "vacation residence" provides an example of recreational use, while the subsequent reference to "dwellings" is a limitation only as to those individuals who could permanently reside on the Property. SDA argued that Wong improperly cited opinion evidence from individuals who were neither involved in drafting the Lease nor qualified to make legal conclusions regarding interpretation of its terms. It contended that, if parol evidence were considered, communications pertaining to the negotiation and execution of the Lease expressly contemplated expansion of the existing cabin rental operations to generate income for the School.

With respect to Count I of the Counterclaim (termination), Wong acknowledged that the law disfavors forfeitures and that the Lease provides SDA thirty days to cure any violation. Relying on Food Pantry v. Waikiki Business Plaza, 58 Haw. 606, 575 P.2d 869 (1978), [4] and Aickin v. Ocean View Investments Co., 84 Hawai'i 447, 935 P.2d 992 (1997), [5] however, he argued that the court should exercise its powers in equity to terminate the Lease as a result of SDA's willful violations. In opposition, SDA contended that termination was inappropriate under paragraph 26 of the Lease where, upon receiving written notice from Wong, SDA timely cured any alleged violation by ceasing its rental of cabins to the public.

With respect to Counts II and III of the Counterclaim (breach of contract and unjust enrichment), Wong argued that SDA violated the Lease by impermissibly renting cabins to the public and he was therefore entitled to a remedy for such breach, either in the form of reimbursement of revenues or disgorgement of profits. SDA argued, inter alia, that relief for an alleged breach was limited to the express terms of the Lease (i.e., notice and opportunity to cure, followed by termination); that a claim for percentage rents assumes the parties would have agreed to such a clause at the time the Lease was signed; that the Lease contained no provision for monetary damages; and that Wong did not suffer any damages from the alleged breach.

After a hearing, the circuit court issued orders granting summary judgment in favor of Wong on Counts I through IV of the Complaint (cabin rentals, oral amendment, estoppel, and injunctive relief), and granting summary judgment in favor of SDA on Count VI of the Complaint (damages)[6] and Counts I through IV of the Counterclaim (termination, breach of contract, unjust enrichment, and indemnification). The court did not elaborate on the grounds for its decision, and SDA filed motions for clarification and reconsideration. At a hearing on these motions, the court explained that it had found no ambiguity in the Lease and, therefore, had not considered parol evidence in making its decision. It then denied both motions.

Wong then filed a motion for costs and attorneys' fees. SDA argued that Wong was not entitled to fees and costs because it had prevailed on two of the four main issues before the court: termination of the Lease and retroactive payment of percentage rents. The circuit court concluded that Wong was entitled to reasonable attorneys' fees and costs because he had prevailed on the disputed main issue in the Complaint (i.e., cabin rentals). It therefore awarded Wong $60, 270.00 in fees and $27, 206.90 in costs.

On May 21, 2007, the court entered its Amended Final Judgment, disposing of all claims against the parties as follows: granting summary judgment in favor of Wong on Counts I through IV of the Complaint (cabin rentals, oral amendment, estoppel, and injunctive relief); granting summary judgment in favor of SDA on Counts I through IV of the Counterclaim (termination, breach of contract, unjust enrichment, and indemnification); dismissing Count VI of the Complaint (damages);[7] awarding reasonable attorneys' fees and costs to Wong; and dismissing all claims and counterclaims not specifically identified therein.

C. The ICA Opinion

SDA appealed the court's judgment granting summary judgment in favor of Wong on Count I of the Complaint (cabin rentals), arguing, among other things, that rental of cabins to the public is a permissible recreational use, and that the Lease does not otherwise prohibit SDA from engaging in commercial activities on the Property.[8]

Wong cross-appealed the court's judgment granting summary judgment in favor of SDA on Counts I, II, and III of the Counterclaim (termination, breach of contract, and unjust enrichment), arguing that he was entitled to terminate the Lease because SDA's rental of cabins to the public was a persistent and willful material breach, and that he was entitled to monetary damages as compensation for SDA's improper use of the Property.

In a Memorandum Opinion dated April 16, 2012, the ICA concluded that the Lease does not prohibit SDA from renting cabins to the public as vacation residences. The ICA opined that "[t]he first sentence of Paragraph 16 does not authorize or exclude use of the Property by [SDA] or any particular class of individuals" and "nothing in the text suggests that [SDA] is prohibited from collecting revenue from the permissible use of the Property." While acknowledging that the second sentence of Paragraph 16 limits the use of "dwellings" to faculty, staff, students and employees of SDA, it concluded that this restriction does not apply to use of the Property for "vacation residence, " which is an expressly permitted recreational use. The ICA concluded, however, that although it was undisputed that at least some of the cabins were being used as vacation residences rather than permanent dwellings, the record contained very little about what the cabins looked like, how they were used, and who used them. Accordingly, the ICA concluded that it could not grant summary judgment in favor of SDA, and remanded the case to the circuit court for further proceedings on this issue.

The ICA affirmed the circuit court's decision as to the remaining counts of the Complaint and Counterclaim. It concluded, inter alia, that termination of the Lease was not warranted because SDA had cured any alleged breach by ceasing cabin rentals to the public within thirty days of receiving written notice from Wong, and that Wong was not entitled to monetary damages because the circuit court had erred in concluding that SDA's cabin rentals were prohibited by the Lease. Finally, the ICA vacated the order awarding attorneys' fees and costs to Wong because, in remanding the case to the circuit court, a prevailing party had yet to be determined.

SDA then filed a motion for attorneys' fees and costs. On June 8, 2012, the ICA issued an order denying SDA's request for attorneys' fees and granting its request for costs in the reduced amount of $16, 377.92. It concluded that SDA was not entitled to attorneys' fees because a prevailing party had yet to be determined, but an award of costs was appropriate because SDA had prevailed on appeal.

D. Questions on Certiorari

Wong raises the following questions on certiorari:

A. Whether the ICA gravely erred in vacating the Circuit Court's grant of summary judgment in favor of Wong on Count I of [SDA's] Complaint seeking a declaratory judgment that "continued operation of 'Kahili Mountain Park' and vacation rental of the ...

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