BENJAMIN PAUL KEKONA and TAMAE M. KEKONA, Petitioners/Plaintiffs-Appellees,
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
[Copyrighted Material Omitted]
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS. (ICA NO. 29036; CIV. NO. 93-3974).
Fred Paul Benco for petitioners.
Peter Van Name Esser for respondent Michael Bornemann, M.D.
RECKTENWALD, C.J., NAKAYAMA, McKENNA AND POLLACK, JJ., AND CIRCUIT JUDGE TRADER, IN PLACE OF ACOBA, J., RECUSED.
[135 Hawai'i 257] OPINION
Since 1993, Dr. Michael Bornemann has claimed lawful ownership of a property that was fraudulently transferred to him 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.
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
[135 Hawai'i 258] 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 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, Kāne'ohe, Hawai'i (the Kāne'ohe property) to Bornemann. 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. 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.
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 Kāne'ohe properties were fraudulently transferred in violation of Hawai'i Revised Statutes (HRS) chapter 651C. The Kekonas also claimed that Abastillas's notarization of the deed that transferred the Kāne'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 Kāne'ohe property appear legitimate. On October 25, 1993, the defendants executed two properly notarized confirmatory quitclaim deeds that specifically acknowledged " a challenge to the validity of notarizations and acknowledgments to [the prior] quitclaim deeds."  Abastillas and Bornemann also allegedly doctored their tax returns and filed amendments to prior tax returns to reflect a legitimate conveyance of the Kāne'ohe property.
Finally, Smith and Abastillas attempted to obscure the fact that although they had been living in the Kāne'ohe property since they transferred it to Bornemann, they had not paid any rent prior to receiving the Kekonas'
[135 Hawai'i 259] 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 " 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. 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 Kāne'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.
The Kekonas did not agree to the remittitur and proceeded to a second trial. 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 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.
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 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
[135 Hawai'i 260] 2007. 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 Kāne'ohe and HPP properties. In regard to the Kāne'ohe property, Bornemann asserted that he had loaned Abastillas in excess of $300,000, and that Abastillas had deeded him the Kāne'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 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 Kāne'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 Kāne'ohe property 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 ...