United States District Court, D. Hawaii
ORDER DENYING THIRD-PARTY PLAINTIFF CU PACIFIC AUDIT SOLUTIONS, LLC'S OBJECTIONS TO FINDINGS AND RECOMMENDATIONS [ECF NO. 182]; AND ADOPTING THE FINDINGS AND RECOMMENDATION
LESLIE E. KOBAYASHI, District Judge.
On November 20, 2015, the magistrate judge filed his Findings and Recommendation to Grant in Part and Deny in Part Third Party Defendant OTS Employees Federal Credit Union's Motion for Attorneys' Fees and Costs ("F&R"). [Dkt. no. 182.] Defendant/Third-Party Plaintiff CU Pacific Audit Solutions, LLC ("CU Pacific") filed its objections to the F&R ("Objections") on December 1, 2015. [Dkt. no. 187.] Third-Party Defendant OTS Employees Federal Credit Union ("OTS") filed its response to CU Pacific's Objections ("Response") on December 16, 2015. [Dkt. no. 196.] The Court has considered this matter without a hearing pursuant to Rule LR7.2(e) of the Local Rules of Practice of the United States District Court for the District of Hawaii ("Local Rules"). After careful consideration of the Objections, the Response, and the relevant legal authority, the Objections are HEREBY DENIED, and the F&R is HEREBY ADOPTED because there was a contractual relationship between CU Pacific and OTS, and the claims brought by CU Pacific against OTS were based on that contractual relationship. Therefore, the litigation was in the nature of assumpsit. As the prevailing party, OTS is entitled to an award of attorneys' fees and costs against CU Pacific after the entry of final judgment, which has not yet occurred.
Plaintiff CUMIS Insurance Society, Inc. ("CUMIS") filed its Complaint against CU Pacific on March 20, 2014. [Dkt. no. 1.] On May 20, 2014, CU Pacific filed its answer, with a Third Party Complaint against Third-Party Defendants Dona Takushi, Jenny Nishida, and Nicole Cheung (collectively "Former Employees"), and OTS. [Dkt. no. 14.] CU Pacific filed its Amended Third Party Complaint on May 22, 2014, and its Second Amended Third Party Complaint on January 7, 2015. [Dkt. nos. 18, 60.] This Court summarized the relevant allegations in this case in the November 30, 2014 Order Granting OTS Employees Federal Union Motion to Dismiss ("11/30/14 Order"). [Dkt. no. 59.
According to the Complaint, CUMIS is a fidelity insurer of credit unions, and it insured OTS "under the conditions of a fidelity bond which provided coverage to OTS for losses caused by, inter alia, employee dishonesty." The Complaint alleges that CU Pacific "holds itself out as a certified public accounting firm[, ]... registered with the Hawaii Board of Accountancy, " and specializing in credit union audits, compliance, and accounting services. CU Pacific served as OTS's independent external auditor for the years ending December 31, 2006, through December 31, 2012.
According to the Complaint, during various periods between October 2003 and February 2013, [the Former Employees] allegedly embezzled and misappropriated funds while employed at OTS. After discovering the embezzlements on or about December 6, 2013, OTS: terminated their employment; reported the embezzlement to law enforcement; and filed an employee dishonesty bond claim with CUMIS. CUMIS found that the claim was meritorious and made a claim payment of $993, 125.58 to compensate OTS for its loss. CUMIS alleges that, by virtue of this payment, it became subrogated to OTS's rights to seek recovery from the alleged wrongdoers.
The Complaint alleges that OTS is required by law to have an independent, annual business audit, performed by a certified public accountant in compliance with National Credit Union Association regulations. According to the Complaint, CU Pacific made several representations to OTS about what CU Pacific would do: produce audit reports in compliance with all relevant regulatory requirements and attestation standards; examine the internal controls of OTS to make recommendations for improvements; review employee accounts, official accounts, and credit card creation; review and reconcile general ledger accounts; and reconcile OTS's credit card loans to the supporting information provided by OTS's credit card processor.
... The Amended Third Party Complaint alleges three claims: 1) CU Pacific is entitled to recover from OTS based upon indemnity, contribution, reimbursement and/or equitable subrogation ("Third-Party Count I"); 2) OTS breached the Management Representation Letters that it executed for each of the audits by CU Pacific (collectively "the Management Representation Letters"), and OTS's breach is the legal cause of both CU Pacific becoming involved in litigation with CUMIS and CU Pacific suffering other injuries and damages ("Third-Party Count II"); and 3) OTS's negligent failure to follow CU Pacific's recommendations in the audit reports is the legal cause of injuries and/or damages to OTS and/or CUMIS ("Third-Party Count III").
11/30/14 Order, 2014 WL 6749229, at *1-2 (some alterations in 11/30/14 Order) (citations omitted).
In the 11/30/14 Order, this Court found that CUMIS has conventional subrogation rights as to the amount of the loss payment and stands in OTS's shoes as OTS's subrogee. In light of CUMIS's role as subrogee and CU Pacific's ability to raise contribution, indemnity, reimbursement, subrogation and OTS's negligence against CUMIS, this Court dismissed Third-Party Counts I and III with prejudice. Id. at *5-6. This Court, however, concluded that it was unclear whether Third-Party Count II alleged what should be a breach of contract defense to CUMIS's claims or an affirmative claim for relief, such as misrepresentation. This Court therefore dismissed Third-Party Count II without prejudice. Id. at *6.
The Second Amended Third Party Complaint was based upon the same factual allegations as the Amended Third Party Complaint. The Second Amended Third Party Complaint alleged: a claim for indemnity, contribution, reimbursement and/or equitable subrogation against the Former Employees ("Amended Third-Party Count I"); and a misrepresentation claim against OTS ("Amended Third-Party Count II"). In the June 30, 2015 Order Granting Motion to Dismiss Second Amended Third-Party Complaint as to OTS Employees Federal Credit Union ("6/30/15 Order"), this Court dismissed Amended Third-Party Count II with prejudice because CU Pacific could assert OTS's alleged misrepresentations as a defense against CUMIS's claims. [Dkt. no. 110 at 7-8. CU Pacific's Amended Third-Party Count I remains against the Former Employees and is currently set for trial on February 2, 2016.
Pursuant to the 6/30/15 Order, the Clerk's Office terminated OTS as a party on July 29, 2015. On August 6, 2015, OTS filed its Motion for Attorneys' Fees and Costs ("Fee Motion"), seeking $74, 130.39 in attorneys' fees and $690.65 in costs from CU Pacific. [Dkt. no. 123.] In the F&R, the magistrate judge recommends that this Court grant the Fee Motion in part and deny in part. The magistrate judge ruled that all of CU Pacific's claims against OTS sounded in the nature of assumpsit, and, as the prevailing party, OTS is entitled to attorneys' fees pursuant to Haw. Rev. Stat. § 607-14. [F&R at 17.] The F&R recommends that this Court award OTS $47, 379.75 in attorneys' fees, and $20.00 in costs, for a total award of $47, 399.75. [Id. at 34.]
The sole argument that CU Pacific raises in the Objections is that the magistrate judge erred in ruling that its claims ...