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Kealoha v. Machado

Supreme Court of Hawai‘i

December 3, 2013

SAMUEL L. KEALOHA, JR., VIRGIL E. DAY, JOSIAH L. HOOHULI, and PATRICK L. KAHAWAIOLAA, Petitioners/Plaintiffs-Appellants,
v.
COLETTE Y. PI'IPI'I MACHADO, individually and in her official capacity as Chairperson and Trustee of the Office of Hawaiian Affairs; S. HAUNANI APOLIONA, ROWENA AKANA; DONALD CATALUNA; BOYD P. MOSSMAN; OSWALD STENDER; PETER APO; ROBERT K. LINDSEY, JR.; and JOHN D. WAIHE'E IV, individually and in their official capacity as Trustees of the Office of Hawaiian Affairs; and DANTE CARPENTER and WALTER HEEN, individually, Respondents/Defendants-Appellees.

APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CAAP-11-0001103; CIV. NO. 11-1-0575-03) DECEMBER 3, 2013

Walter R. Schoettle, for petitioners

Robert G. Klein, and Lisa W. Cataldo for respondents

RECKTENWALD, C.J., NAKAYAMA, ACOBA, AND McKENNA, JJ., AND CIRCUIT JUDGE KIM, IN PLACE OF POLLACK, J., RECUSED

OPINION

RECKTENWALD, C.J.

Samuel L. Kealoha, Jr., Virgil E. Day, Josiah L. Hoohuli, and Patrick L. Kahawaiolaa (collectively, Plaintiffs), brought this suit against Office of Hawaiian Affairs (OHA) trustees, [1] alleging that the OHA trustees improperly expended trust funds on Hawaiians, as opposed to native Hawaiians as defined by the Hawaiian Homes Commission Act (HHCA).[2] Plaintiffs argued that these expenditures violated the OHA trustees' duty to expend trust funds "in the sole interest" of native Hawaiians, as required under Hawai'i Revised Statutes (HRS) § 10-3(1), §§ 4 and 5(f) of the Hawai'i Admission Act, and article XII, sections 4, 5, and 6 of the Hawai'i Constitution.

The OHA trustees filed a Motion to Dismiss the complaint, arguing that the Plaintiffs' claims were barred under principles of res judicata and collateral estoppel by the U.S. District Court's decision and judgment in Day v. Apoliona (Day II), No. 05-00649, 2008 WL 2511198, *7-14 (D. Haw. June 20, 2008) and the Ninth Circuit Court of Appeals' opinion and judgment in that case, 616 F.3d 918, 924-28 (9th Cir. 2010), both of which held that the challenged expenditures were proper under federal law. The OHA trustees also argued that even if res judicata and collateral estoppel did not bar Plaintiffs' claims, they failed on the merits for the same reasons as the claims set forth in Day II.

The circuit court dismissed the complaint, finding that it failed to state a claim upon which relief could be granted pursuant to Hawai'i Rules of Civil Procedure (HRCP) Rule 12(b)(6). The Plaintiffs then filed a motion for leave to file an amended complaint "to correct the deficiencies identified by the court[.]" The circuit court denied the motion. Plaintiffs appeal from the circuit court's December 6, 2011 final judgment in favor of the OHA trustees.[3]

On appeal to this court, Plaintiffs raise the following points of error:

(1) Whether the [circuit court] erred in dismissing the complaint for failure to state a claim?
(2) Whether dismissal is appropriate on grounds of res judicata or collateral estoppel?

In deciding a motion to dismiss for failure to state a claim, courts must interpret the complaint in the light most favorable to the plaintiff, and should dismiss only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his or her claim that would entitle him or her to relief." County of Kaua'i v. Baptiste, 115 Hawai'i 15, 24, 165 P.3d 916, 925 (2007) (citation omitted). Applying that test here, we hold that the circuit court did not err in dismissing Plaintiffs' complaint.[4] We also hold that the circuit court did not abuse its discretion in denying Plaintiffs' motion for leave to file an amended complaint. Accordingly, we affirm the circuit court's December 6, 2011 judgment.

I. Background

A. Public trust funds

The Hawai'i Admission Act (Admission Act), Pub. L. No. 86-3, 73 Stat. 4 (1959), reprinted in 1 HRS 135 (2009), made Hawai'i a state of the Union. As a condition of admission, "the State of Hawai'i agreed to hold certain lands granted to the State by the United States in a public land trust, " subject to the trust provisions set forth in § 5(f) of the Admission Act. Corboy v. Louie, 128 Hawai'i 89, 92, 283 P.3d 695, 698 (2011) (citing Office of Hawaiian Affairs v. State, 96 Hawai'i 388, 390, 31 P.3d 901, 903 (2001); Admission Act § 5). Section 5(f) requires the State to hold those lands and the profits from them for one of five enumerated purposes: (1) "the support of the public schools and other public educational institutions"; (2) "the betterment of the conditions of native Hawaiians, as defined in the [HHCA], as amended"; (3) "the development of farm and home ownership on as widespread a basis as possible"; (4) "the making of public improvements"; and (5) "the provision of lands for public use."[5]

Before 1978, the State directed the proceeds and income of the trust lands "by and large to the Department of Education[, ]" making public education the primary beneficiary of the trust. Office of Hawaiian Affairs v. Yamasaki, 69 Haw. 154, 161-62, 737 P.2d 446, 450-51 (1987) (quoting Office of the Legislative Auditor, Final Report on the Public Land Trust 14 (1986)). However, the 1978 Constitutional Convention proposed -and Hawai'i voters adopted - constitutional amendments that expressly and fundamentally changed the State's objectives with regard to the § 5(f) public land trust.[6] Id. Article XII, section 4 specified that the public land trust, except for Hawaiian Home Lands, is to be held "as a public trust for native Hawaiians and the general public." Article XII, section 5 established the Office of Hawaiian Affairs (OHA), and directed that it "hold title to all the real and personal property now or hereafter set aside or conveyed to it which shall be held in trust for native Hawaiians and Hawaiians." Article XII, section 6 described the power of the OHA board of trustees and noted that the "income and proceeds from that pro rata portion of the [public land trust] for native Hawaiians" was included among the property that OHA was to hold and manage in trust "for native Hawaiians and Hawaiians." In describing its vision for OHA to be independent from all other branches of government, the Constitutional Convention's Committee on Hawaiian Affairs expressed a desire to stop the "commingling of funds intended for native Hawaiians of one-half blood with other moneys in the state treasury." Stand. Comm. Rep. No. 59, in 1 Proceedings of the Constitutional Convention of Hawai'i of 1978, at 645. The framers also believed it important that Hawaiians have "the right to determine the priorities which will effectuate the betterment of their condition and welfare by granting to the board of trustees powers to 'formulate policy relating to affairs of native Hawaiians.'"[7] Stand. Comm. Rep. No. 59, in 1978 Proceedings, at 645.

To execute these constitutional provisions, the 1979 legislature enacted Act 196, codified in HRS chapter 10. See 1979 Haw. Sess. Laws Act 196, at 398-408; HRS ch. 10. Act 196, inter alia, created "an office of Hawaiian affairs constituted as a body corporate which shall be a separate entity independent of the executive branch, " and set forth the powers and duties of the OHA board. 1979 Haw. Sess. Laws Act 196, § 2, at 400. HRS § 10-3[8] sets forth OHA's purposes, including:

(1) The betterment of conditions of native Hawaiians.[9] A pro rata portion of all funds derived from the public land trust shall be funded in an amount to be determined by the legislature for this purpose, and shall be held and used solely as a public trust for the betterment of the conditions of native Hawaiians. . . .
(2) The betterment of conditions of Hawaiians;[10]
(3) Serving as the principal public agency in this State responsible for the performance, development, and coordination of programs and activities relating to native Hawaiians and Hawaiians[.]

HRS § 10-3 (emphasis added).

Among the powers and duties the legislature granted to the OHA board of trustees is the power to "[m]anage, invest, and administer the proceeds from the sale or other disposition of lands, natural resources, minerals, and income derived from whatever sources for native Hawaiians and Hawaiians, including all income and proceeds from that pro rata portion of the trust referred to in section 10-3[.]" HRS § 10-5(1) (2009). In 1980, the legislature set the pro rata share at "[t]wenty per cent of all funds derived from the public land trust [.] "[11] 1980 Haw. Sess. Laws Act 273, § 1 at 525, codified at HRS § 10-13.5 (2009).

B. Federal court action

On March 10, 2006, Plaintiffs, [12] identifying themselves as native Hawaiians as defined in Section 201(a) of the HHCA, filed an amended complaint in the United States District Court for the District of Hawai'i (U.S. District Court) against current and former OHA trustees, alleging that the OHA trustees misspent funds derived from the trust established by § 5(f) of the Admission Act by expending those funds without regard to blood quantum. Specifically, Plaintiffs contended that the OHA trustees breached their "legal duty" to expend trust funds solely for the betterment of the conditions of native Hawaiians by spending those trust funds to lobby for the Akaka Bill, [13] and to support the Native Hawaiian Legal Corporation (NHLC), [14] Na Pua No'eau Education Program (Na Pua No'eau), [15] and Alu Like.[16]Plaintiffs alleged that the OHA trustees' expenditures violated the Admission Act, enforceable in federal court by 42 U.S.C. § 1983, the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution, and Hawai'i common law and HRS § 10-16(c).[17] On August 10, 2006, the U.S. District Court dismissed the action, holding that the Plaintiffs may not enforce public trust duties in the Admission Act under § 1983. Day I, 451 F.Supp.2d at 1136. The U.S. District Court also dismissed the Plaintiffs' Equal Protection claim and declined to exercise supplemental jurisdiction over the remaining state law claims. Id.

Plaintiffs appealed to the Ninth Circuit Court of Appeals, contesting only the dismissal of the § 1983 claim for violation of the Admission Act. Day v. Apoliona, 496 F.3d 1027, 1030 (9th Cir. 2007). The Ninth Circuit reversed the U.S. District Court's dismissal of the case and remanded, holding that "each Native Hawaiian plaintiff, as a beneficiary of the trust created by § 5(f), has an individual right to have the trust terms complied with, and therefore can sue under § 1983 for violation of that right." Id. at 1039. The Ninth Circuit left "to the district court to interpret those § 5 (f) purposes to determine in the first instance not only whether [Plaintiffs'] allegations are true, but also whether the described expenditures in fact violate § 5(f)." Id. The Ninth Circuit emphasized that it was expressing no view concerning the merits of Plaintiffs' expenditure challenges. Id. at 1040 n.14.

On remand, the U.S. District Court granted the OHA trustees summary judgment, concluding that OHA's expenditures of the trust funds to support the Akaka Bill, NHLC, Na Pua No'eau, and Alu Like are consistent with the Admission Act. Day II, 2008 WL 2511198, at *1, *14. Specifically, the U.S. District Court stated that the Plaintiffs conceded that the OHA trustees had broad discretion in determining whether a particular expenditure betters the conditions of native Hawaiians. Id. at *7. The court then viewed each of the challenged expenditures under trust principles. Id. at *8-13. The court first rejected the Plaintiffs' contention that the OHA trustees abused their discretion in supporting the Akaka Bill, and found that "[e]ven if the Akaka Bill is intended to benefit Hawaiians in general, the OHA trustees would not be unreasonable or arbitrary in viewing the Akaka Bill as also benefitting native Hawaiians." Id. at *7-8. Specifically, the court noted that "[n]umerous" legal challenges had been brought against Hawaiian-only and native Hawaiian-only programs, alleging Equal Protection violations. Id. at *8. The court further noted that "[a]lthough most race-based preferences are subject to ''strict scrutiny, ' preferences given to American Indian tribes are reviewed under the ''rational basis' standard." Id. (citing Morton v. Mancari, 417 U.S. 535 (1974)). Given the foregoing legal framework, "passage of the Akaka Bill might ultimately affect whether programs benefitting only Hawaiians and native Hawaiians are reviewed under the ''strict scrutiny' standard as involving racial preferences, or under a ''rational basis' standard as involving a political preference." Id. Thus, the court reasoned, the trustees' expenditures in support of the Akaka Bill were proper:

It cannot be said that the OHA trustees are abusing their discretion in supporting legislation that could affect challenges to programs favoring Hawaiians and native Hawaiians. The OHA trustees are reasonably exercising their fiduciary judgment when they expend trust funds in support of the Akaka Bill. That action is consistent with the public trust requirement that trust funds be used for the betterment of the conditions of native Hawaiians, even if the funds simultaneously better the conditions of Hawaiians.

Id.

The court next examined OHA's contract with the NHLC, and noted that under the contract, NHLC was to render legal services and provide legal representation to clients in substantive areas which shall include but shall not be limited to:

(a) Assertion and defense of quiet title actions;
(b) Protection, defense and assertion of ahupua'a and kuleana tenant rights, including rights of access and rights to water;
(c) Land title assistance, including review of title and genealogy;
(d) Preservation and perpetuation of traditional and customary practices;
(e) Protection of culturally significant places, including burial sites and material culture; and
(f) Preservation of Native Hawaiian Land Trust entitlements.

Id. at *10-11.

The court found that OHA's contract with the NHLC "arguably betters the conditions of native Hawaiians because it helps to preserve and perpetuate their traditional and customary practices, protect culturally significant areas, and help them assert their legal rights regarding land and water in court." Id. at 11. The court also found that OHA's contract with the NHLC "also can be said" to support other public trust purposes, such as aiding farm and home ownership, making public improvements, and providing for lands for public use. Id.

The court next determined that OHA's use of trust funds to support Na Pua No'eau constituted a proper exercise of the OHA trustees' fiduciary judgment. Id. at *12. The court noted that according to its contract with OHA, the University of Hawai'i at Hilo, through its Na Pua No'eau program, was to "provide for educational enrichment programs" that were "designed to optimize learning for Hawaiian students" and "develop a stronger interest in learning, connect learning and education to one's Hawaiian identity, and explore possible educational, career and academic goals." Id. (quotation marks omitted). In light of these purposes, the court found that OHA's support of Na Pua No'eau "arguably betters the conditions of native Hawaiians in ensuring that learning is connected to students' Hawaiian identity." Id. The court also found that the support of Na Pua No'eau was consistent with the § 5(f) trust purpose of supporting public schools and other public educational institutions. Id.

Finally, the court held that the OHA trustees "exercised their reasonable discretion and fiduciary judgment" in supporting Alu Like. Id. at *13. The court described Alu Like as "a nonprofit organization that strives to help Hawaiians and native Hawaiians achieve social and economic self-sufficiency through the provision of early childhood education and child care, elderly services, employment preparation and training, library and genealogy services, specialized services for at-risk youth, and information and referral services." Id. at *12. The court concluded that "Alu Like's programs better the conditions of native Hawaiians and support public education, " and that the OHA trustees "did not abuse their considerable discretion in determining that one of the ways they were going to better the conditions of native Hawaiians was by providing support to a service organization with the mission of helping Hawaiians and native Hawaiians achieve social and economic self-sufficiency." Id. at *13.

The U.S. District Court noted that it did not examine whether the OHA trustees' expenditures violated state law:

[F]or purposes of the § 1983 claim asserted in Count I, this court examines only whether the OHA trustees violated a federal right or statute, in this case, the Admission Act. Whether the OHA trustees are violating state law by using public trust funds to support the Akaka Bill, the Native Hawaiian Legal Corporation, the Na Pua No'eau Education Program, and Alu Like is not before this court.

Id. at *5.

The Plaintiffs appealed the U.S. District Court's grant of summary judgment. Day II, 616 F.3d at 921. The Ninth Circuit affirmed the district court's order. Id. First, the Ninth Circuit rejected Plaintiffs' argument that federal law requires the OHA trustees to spend OHA's twenty percent share of the § 5(f) trust only "for the betterment of the conditions of native Hawaiians." Id. at 921, 924. The Ninth Circuit stated that the OHA trustees have not breached their federal trust obligations so long as the expenditures meet any of the five purposes enumerated in § 5(f). Id. at 925. Second, the Ninth Circuit rejected Plaintiffs' alternative argument that, "even if OHA trustees may spend for any of the § 5(f) trust purposes, they breached the trust under federal law because each of the challenged projects was not restricted to one or more of the enumerated purposes." Id. Relying on the common law of trusts, the Ninth Circuit noted that "a trustee's 'power is discretionary except to the extent its exercise is directed by the terms of the trust or compelled by the trustee's fiduciary duties.'" Id. at 926 (quoting Restatement (Third) of Trusts § 87 cmt. a). The Ninth Circuit found that because § 5(f) set forth broad purposes and "does not direct specific expenditures, " the OHA trustees "have discretion (i.e., are to use fiduciary judgment) to determine whether a particular use of trust funds serves one or more of the trust purposes." Id. (citation, quotation marks, and brackets omitted). The Ninth Circuit also articulated the following trust principles:

"When a trustee has discretion with respect to the exercise of a power, its exercise is subject to supervision by a court only to prevent abuse of discretion." In the context of the narrow federal inquiry into whether an expenditure is a use for a trust purpose, an abuse of discretion occurs when a trustee "has acted ...

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