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In re Maui Industrial Loan & Finance Co., Inc.

United States District Court, D. Hawaii

February 20, 2015

In re MAUI INDUSTRIAL LOAN & FINANCE CO., INC., Debtor.
v.
DENNIS I. HINAHARA; MYRA S. HINAHARA, Defendants DANE S. FIELD, Plaintiff,

Page 1176

For Maui Industrial Loan & Finance Company, Inc., Debtor in Chapter 7 USBC Hawaii Bankruptcy Case 10-00235, In Re: James A. Wagner, LEAD ATTORNEY, Wagner Choi & Verbrugge, Honolulu, HI.

For Dane S. Field, Bankruptcy Trustee and Plaintiff in Adversary Proceeding No. 12-90009, Plaintiff: Bradley R. Tamm, Lissa D. Shults, LEAD ATTORNEYS, Shults & Tamm, ALC, Honolulu, HI.

For Dennis I. Hinahara, Defendant in Adversary Proceeding No. 12-90009. Myra S. Hinahara, Defendant in Adversary Proceeding No. 12-90009, Defendants: Dana R. Lyons, Ryan M. Hamaguchi, Ted N. Pettit, LEAD ATTORNEYS, Case Lombardi & Pettit, Honolulu, HI.

Page 1177

ORDER (1) RULING ON QUESTION OF LAW REGARDING THE " FRAUD ON THE PARTNERSHIP" EXCEPTION, AND (2) REQUESTING COMMENT ON FORM OF QUESTION TO BE CERTIFIED TO THE HAWAII SUPREME COURT

J. Michael Seabright, United States District Judge.

I. INTRODUCTION

This Order rules on a threshold issue of law in this adversary bankruptcy proceeding arising out of a Ponzi scheme perpetrated by Lloyd Kimura (" Kimura" ).[1] Plaintiff bankruptcy trustee Dane S. Field (" Trustee" ), seeks to avoid nearly a million dollars of fraudulent transfers made to Defendants Dennis and Myra Hinahara (the " Hinaharas" ) by Debtor Maui Industrial Loan and Finance Company, Inc., which sometimes did business as Maui Finance Company (" MFC" ) in connection with Kimura's Ponzi scheme. Currently before the court are Objections under 28 U.S.C. § 157(c)(1) to a July 11, 2014 Proposed Findings of Fact and Conclusions of Law (" PFOF/PCOL" ) of the United States Bankruptcy Court for the District of Hawaii that, among other matters, found that the Hinaharas took most of the transfers in good faith.[2]

Page 1178

At issue in this Order is specific language -- emphasized below -- in the Uniform Partnership Act (" UPA" ) § 12 (previously adopted in Hawaii Revised Statutes (" HRS" ) § 425-112 (1972)), and the Revised Uniform Partnership Act (" RUPA" ) § 102(f) (adopted in HRS § 425-102(f) (2000)). Specifically, UPA § 12 provides:

Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.

( Emphasis added.) Likewise, RUPA § 102(f) provides:

A partner's knowledge, notice, or receipt of a notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.

( Emphasis added.) The court received supplemental briefing from the parties on the meaning and potential applicability of the emphasized " fraud on the partnership" exception to imputation of a partner's knowledge in both UPA § 12 and RUPA § 102(f).[3] See Doc. Nos. 13, 16 & 17. Based on the following, the court concludes that the " fraud on the partnership" exception does not apply.

Given that conclusion, the court squarely faces the question whether Kimura's knowledge of his Ponzi scheme is imputed by law to the Hinaharas, who were partners with Kimura in certain real estate transactions. The answer turns on a question of Hawaii law which the court intends to certify to the Hawaii Supreme Court under Hawaii Rule of Appellate Procedure (" HRAP" ) 13(a). Accordingly, the court requests comment from both parties as to the form of the question, as explained to follow.

II. BACKGROUND

A. Kimura's Ponzi Scheme[4]

Kimura was a certified public accountant on Maui who, beginning in 1985, was the principal owner and the person in control of MFC. PFOF/PCOL at 3, ¶ 3. MFC was licensed under Hawaii law as a " nondepository financial services loan company," engaged in the business of making loans. Id. ¶ 2. Although Hawaii law forbids nondepository financial services loan companies from accepting deposits from the public, MFC ignored this prohibition and accepted millions of dollars of deposits from dozens of depositors. Id.

Beginning in the late 1980s, Kimura began to operate a Ponzi scheme. Id. ¶ 7.

Page 1179

He induced individuals (many of them his accounting clients) to invest money with him or MFC, often representing that MFC was a bank or savings and loan business that made loans at high interest rates secured by collateral and that investors would receive interest at rates usually ranging from eight to twelve percent. Id. Contrary to his promises, he usually did not use the investors' funds to make loans, but instead used them to finance his personal businesses and investments, to maintain his personal lifestyle, and (in order to maintain the perceived legitimacy of his business) to pay earlier investors their promised principal and interest. Id. He also generated false monthly statements and tax returns to convince investors that he was using their funds as promised. Id. In order to generate some of the cash needed to keep the Ponzi scheme afloat, he fraudulently obtained bank loans and looted his accounting firm's retirement plan accounts. Id.

The Hinaharas are husband and wife and residents of Maui. Id. ¶ 4. They met Kimura in the early 1980s. Id. ¶ 5. Over the course of their relationship, the Hinaharas engaged in a number of business ventures with Kimura. For example, the Hinaharas made a number of monetary transfers to MFC from 1990 through June 2007, which Mr. Hinahara thought of as " deposits" in a savings account, and on which MFC regularly paid the interest due (although on some occasions the payments were a few days late). Id. ¶ ¶ 9, 12.

Beginning in 1988, Kimura and his wife and the Hinaharas also jointly purchased interests in numerous parcels of real estate. Id. ¶ 14. Some of the properties were acquired by Kimura and Mr. Hinahara; some investments included one or both of their wives; and some included other unrelated people. Id. Each of these joint investments in real estate was a partnership, an association of two or more persons to carry on as co-owners a business for profit. Id. ¶ 15.[5]

Most of the joint investments and companies created by the Hinaharas and the Kimuras were successful and profitable. Id. ΒΆ 17. With the agreement of the other investors and/or partners, Kimura managed the day-to-day affairs of these ventures and companies, which included keeping the books, collecting rents and other income, paying expenses, and arranging for routine upkeep of the properties. Kimura also deposited income ...


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