United States District Court, D. Hawaii
(1) GRANTING IN PART PLAINTIFF'S MOTION FOR PARTIAL
SUMMARY JUDGMENT, ECF NO. 48; (2) GRANTING PLAINTIFF'S
MOTION TO DISMISS COUNTERCLAIM, ECF NO. 52; AND (3) GRANTING
THIRD-PARTY DEFENDANTS' MOTION TO DISMISS INDIVIDUAL
CAPACITY CLAIMS, ECF NO. 55
Michael Seabright Chief United States District Judge.
court addresses three motions in this suit brought by
Plaintiff United States of America (“Plaintiff”
or “United States”) arising from the alleged
breach of certain promissory notes by Defendant Sandwich
Isles Communications, Inc. (“Sandwich Isles” or
the United States seeks summary judgment on Count One of its
Complaint, arguing that it is undisputed that Sandwich Isles
has breached loan contracts-owing the United States well over
$129 million-by defaulting on loans made to Sandwich Isles by
the Rural Telephone Bank (“RTB”), predecessor to
the Rural Utilities Service (“RUS”), which is an
agency of the U.S. Department of Agriculture
(“USDA”). See ECF No. 48. The United
States also moved for summary judgment on Count Two, seeking
to foreclose immediately on the loans and to sell all
property pledged as collateral, but it is no longer pursuing
such relief at this stage of the proceedings.
the United States-as counterclaim-Defendants the USDA; the
Federal Communications Commission (“FCC”); Ajit
Pai (“Pai”), Lisa Hone (“Hone”),
Sharon Gillett (“Gillett”), and Carol Mattey
(“Mattey”) in their official capacities as
current or former FCC officials; and Kenneth Johnson
(“Johnson”), in his official capacity as head of
the RUS (collectively, the “Official Capacity
Counter-Defendants” or simply the “United
States”)-moves to dismiss the counterclaim brought
against them by Sandwich Isles and “additional
counterclaimants” Iini Patelesio and Kaleo Cullen.
See ECF No. 52.
Pai, Hone, Gillett, Mattey, and Johnson, in their
individual capacities (collectively the
“Individual Capacity Third-Party Defendants”),
separately move to dismiss all third-party claims against
them. See ECF No. 55.
considered the extensive written briefing, and oral arguments
of counsel at the April 29, 2019 hearing, the court rules as
Motion for Partial Summary Judgment, ECF No. 48, is GRANTED
in part. It is granted as to Count One because the record
establishes that Sandwich Isles has breached the promissory
notes at issue and is in default. It is denied without
prejudice as to Count Two because of an existing bankruptcy
stay and, in any event, procedural and substantive
requirements remain before the sale of all collateral can
occur (as conceded by Plaintiff).
United States' Motion to Dismiss Counterclaim of Sandwich
Isles, Patelesio and Cullen, ECF No. 52, is GRANTED with
leave to amend. By August 19, 2019, Sandwich Isles may file
an amended counterclaim-as to Count One of its Counterclaim
only-that attempts to cure the defects identified in this
the Individual Capacity Third-Party Defendants' Motion to
Dismiss, ECF No. 55, is GRANTED with prejudice. The claims
against Pai, Hone, Gillett, Mattey, and Johnson, in their
individual capacities, fail to state viable causes-of-action
under Bivens v. Six Unknown Agents of the Federal Bureau
of Narcotics, 403 U.S. 388 (1971), and any such
amendment would be futile under Ziglar v. Abbasi,
137 S.Ct. 1843, 1857 (2017).
Isles was formed in the mid-1990s to provide
telecommunications services to native Hawaiians on Hawaiian
home lands. ECF No. 26-1 ¶ 29 at PageID #590. See
generally Nelson v. Hawaiian Homes Comm'n, 127 Haw.
185, 187-89, 277 P.3d 279, 281-83 (2012) (explaining basic
history of the Hawaiian Homes Commission Act); Arakaki v.
Lingle, 477 F.3d 1048, 1054-55 (9th Cir. 2007) (also
setting forth history, and explaining that the State of
Hawaii Department of Hawaii Home Lands administers Hawaiian
home lands for the benefit of “native Hawaiians,
” defined by the Hawaiian Homes Commission Act as
“any descendant of not less than one-half part of the
blood of the races inhabiting the Hawaiian Islands previous
to 1778”). Hawaiian home lands are primarily located in
rural or more remote areas, and “[b]ecause of the
remote and noncontiguous nature of the Home Lands, the cost
to provide infrastructure to these areas is very high.”
ECF No. 26-1 ¶ 20 at PageID #587.
to the Complaint, “at times relevant, ” Defendant
Albert S.N. Hee (“Hee”) has been Sandwich
Isles' president and secretary, and one of its directors.
ECF No. 1 ¶ 16 at PageID #5. Hee was president
“until a date in 2013 after August 30, 2013.”
Id. ¶ 19. He remained secretary “until a
date in 2013, ” and a director until July 13, 2015.
Id. ¶¶ 19, 20. Sandwich Isles' current
president and secretary is Defendant Janeen-Ann Olds
(“Olds”), having become president “on a
date in 2013 after August 30, 2013.” Id.
¶¶ 13, 14 at PageID #4, 5.
Isles is a wholly-owned subsidiary of Defendant Waimana
Enterprises, Inc. (“Waimana”), which is a Hawaii
corporation. Id. ¶¶ 33, 107 at PageID #7,
17. Before December 2012, Hee was the sole owner of Waimana.
Id. ¶ 111 at PageID #17. After December 2012,
Hee owned 10% of Waimana, with the other 90% owned by trusts
benefitting Hee's children. Id. ¶ 112 at
PageID #18. The directors of Waimana “at various times
relevant” to this case, have been Hee, his wife, and
their children. Id. ¶ 108 at PageID #17. In
addition to Sandwich Isles, Waimana wholly owns as
subsidiaries Defendants ClearCom, Inc. and Ho'opa'a
Insurance Corp. Id. ¶¶ 113, 114 at PageID
#18. Defendants Paniolo Cable Company, LLC and Pa Makani LLC
are owned indirectly by trusts benefitting Hee's
children. Id. ¶¶ 115, 116.
the Complaint was filed on April 20, 2018, Hee was
incarcerated at a Federal Correctional Institution located in
Terre Haute, Indiana. Id. ¶ 18 at PageID #5. As
set forth in a Judgment entered on January 7, 2016, Hee was
convicted and sentenced to 46 months imprisonment on various
tax-related charges, stemming from a grand jury indictment
first returned on September 17, 2014. See United States
v. Albert S.N. Hee, Crim. No. 14-00826 SOM (D. Haw.)
(ECF Nos. 1, 242). His conviction was affirmed on March
14, 2017. See United States v. Hee, 681
Fed.Appx. 650 (9th Cir. Mar. 14, 2017) (mem.).
evidence at trial established that Hee had characterized
millions of dollars in personal expenses as business expenses
incurred by [Waimana].” Hee v. United
States, 2018 WL 4609932, at *1 (D. Haw. Sept. 25, 2018)
(denying § 2255 petition). Specifically,
Trial evidence established that, between 2002 and 2012, Hee
used Waimana to pay millions of dollars in personal expenses,
including personal massages, college tuition for his
children, living expenses for his children, and credit card
charges such as those for family vacations to France,
Switzerland, Tahiti, Disney World, and the Mauna Lani resort.
Hee also had Waimana pay salaries and benefits to his wife
and children, even while his children were full-time students
doing no work for the company. And although Hee claimed that
he purchased the Santa Clara house as an investment by
Waimana, Hee's son and daughter lived in the house while
attending college and rented out rooms to classmates without
submitting the rent proceeds to Waimana. Waimana wrongfully
deducted the expenses on corporate tax returns, and Hee
failed to report the receipt of any rental income on his
personal tax returns. After an eleven-day trial, the jury
returned a verdict of guilty beyond a reasonable doubt on all
Loans from the RTB and Funding from the FCC's USF
partially finance construction and operation of Sandwich
Isles' telecommunications services on Hawaiian home
lands, Sandwich Isles and the United States entered into a
series of loan agreements and corresponding promissory notes
from September 1997 to April 2001. ECF No. 1 ¶ 57 at
PageID #10. The three loans, totaling over $165 million, were
made by the RTB pursuant to the Rural Electrification Act of
1936, as amended, 7 U.S.C. § 901 et seq. See
Kenneth Kuchno Decl. ¶¶ 5-6, ECF No. 50 at PageID
#939. RTB was an agency of the USDA, but was
dissolved in 2006, and was succeeded by the RUS, which is
also an agency of the USDA. Id. ¶ 19 at PageID
#940. As of January 1, 2013, Sandwich Isles was required to
make monthly installment payments to the RUS of $1, 086,
758.01. Id. ¶ 35 at PageID #942.
Sandwich Isles was receiving subsidies from the FCC as part
of the FCC's Universal Service Fund (“USF”).
Indeed, to qualify for certain loan advances, the RUS
required Sandwich Isles to provide “evidence that [it]
has received approval to participate in the Universal Service
Fund” so that the RUS could “determine that the
revenues derived by [Sandwich Isles] from said Fund, along
with the revenues derived by [Sandwich Isles] from all other
sources, will be sufficient to enable [Sandwich Isles] to
maintain” a certain level of financial health. ECF No.
1-1 ¶ 5 at Page ID #76.
The USF is a funding stream the [FCC] uses to subsidize
telecommunications and information services in rural and
high-cost areas, as well as for schools, libraries, and
low-income households. 47 U.S.C. § 254(b)(3), (h)(1)(B).
The USF receives its funding from businesses in the
telecommunications sector; some businesses are required by
statute to contribute while others must contribute only when
the [FCC] has, in its discretion, required them to do so.
Specifically, the Act mandates contributions from
“[e]very telecommunications carrier that provides
interstate telecommunications services.” Id.
§ 254(d). Moreover, under its permissive contribution
authority, the [FCC] may demand USF contributions from
“[a]ny other provider of interstate telecommunications
. . . if the public interest so requires.” Id.
Vonage Holdings Corp. v. F.C.C., 489 F.3d 1232, 1236
(D.C. Cir. 2007).
addressed later in this Order, the USF was established to
fulfill certain principles, including that:
Consumers in all regions of the Nation, including low-income
consumers and those in rural, insular, and high cost areas,
should have access to telecommunications and information
services, including interexchange services and advanced
telecommunications and information services, that are
reasonably comparable to those services provided in urban
areas and that are available at rates that are reasonably
comparable to rates charged for similar services in urban
47 U.S.C. § 254(b)(3), and that “[t]here should be
specific, predictable and sufficient Federal and State
mechanisms to preserve and advance universal service.”
47 U.S.C. § 254(b)(5).
2005, Sandwich Isles was receiving USF high-cost support in
the amount of $14, 000 per “loop” (or line) per
year. ECF No. 26-1 ¶¶ 52 to 59 at PageID #597 to
601; In re Sandwich Isles Commc'ns, 20 FCC Rcd.
8999, 9006 n.53, 2005 WL 1147760 at **5 n.53 (May 16, 2005).
The 2011 Transformation Order, and 2013 Waiver
2011, “the FCC ‘comprehensively reformed' its
existing regulatory system for telephone service.”
In re FCC 11-161, 753 F.3d 1015, 1035 (10th Cir.
2014). “On February 9, 2011, the FCC issued a Notice of
Proposed Rulemaking (NPRM) ‘proposing to fundamentally
modernize the FCC's Universal Service Fund (USF or Fund)
and intercarrier compensation (ICC) system.'”
Id. at 1035-36 (citation and brackets omitted). As a
result, on November 18, 2011, the FCC issued a comprehensive
975-page Report and Order (the “Transformation
Order”), that, among other matters, reformed the manner
and amount of USF payouts made to rural carriers. See In
re Connect America Fund, 26 FCC Rcd. 17663, 2011 WL
5844975 (Nov. 18, 2011), petitions for review
denied, In re FCC 11-161, 753 F.3d at 1033;
see also In re FCC 11-161, 753 F.3d at 1070
(analyzing changes to USF subsidies).
Transformation Order instituted a $250 per line per month cap
on USF support, effective July 2014. See 47 C.F.R.
§ 54.302(a). This was a significant reduction from the
$14, 000 per line per year that Sandwich Isles had been
receiving. As summarized by the United States, “[t]he
Transformation Order affected . . . all high-cost
USF recipients by establishing, ‘for the first
time,' a ‘budget for the high-cost programs within
USF' to ‘protect consumers and businesses that
ultimately pay for USF through fees on their communications
bills.'” ECF No. 55-1 at PageID #1037 (quoting
Transformation Order, 26 FCC Rcd. 17663, ¶ 18).
recognized that its reforms could impact particular
recipients differently, so the Transformation Order
established a “waiver mechanism under which a carrier
can seek relief from some or all of our reforms if the
carrier can demonstrate that the reduction in existing
high-cost support would put consumers at risk of losing voice
service. . . .” Id. (quoting Transformation
Order ¶¶ 32, 193, 539). See also In re FCC
11-161, 753 F.3d at 1069 (explaining that “the
Order made clear that if ‘any rate-of-return carrier
can effectively demonstrate that it needs additional support
to avoid constitutionally confiscatory rates, the FCC will
consider a waiver request for additional
support.'”) (citing Transformation Order ¶
Isles sought a waiver from the Transformation Order, and its
$250 per line per month cap on USF subsidies, but the FCC
denied its request on May 10, 2013. See In re Connect
America Fund, 28 FCC Rcd. 6553, 2013 WL 1962345 (May 10,
2013). The FCC's denial concluded as follows:
We conclude that Sandwich Isles has failed to show good cause
for a waiver at this time. In particular, Sandwich Isles
seeks a waiver that would allow it to retain a number of
significant and wasteful expenses, totaling many millions of
dollars, including significant payments to a number of
affiliated and closely-related companies. Indeed, Sandwich
Isles' corporate expenses are 623 percent greater than
the average for companies of similar size with the highest
corporate operations expenses. . . . Sandwich Isles may file
a new petition for waiver in the future, once it is able to
restructure its operations in an appropriate manner that
allows it to reduce unreasonable expenses.
2013 WL 1962345, at **1. Sandwich Isles apparently did not
appeal that denial.
a different decision in related proceedings, on December 5,
2016, the FCC issued an administrative Order concluding that
“Sandwich Isles improperly received payments in the
amount of $27, 270, 390 from the federal high-cost support
mechanisms from 2002 to June 2015, ” and finding that
“amount[s] to be determined of the inflated management
fees paid by Sandwich Isles to its parent company Waimana . .
. were excessive.” In re Sandwich Isles
Commc'ns, 31 FCC Rcd. 12999, 2016 WL 7129743 at **1
(Dec. 5, 2016). Among other things, the Order required
Sandwich Isles to repay the $27 million that it improperly
received, and it continued a suspension of further USF
payments to Sandwich Isles that the FCC had implemented on
July 28, 2015. Id. at **10
denied reconsideration of that Order on January 3, 2019.
See In re Sandwich Isles Commc'ns, Inc., 2019 WL
105385 (F.C.C. 18-172 Jan. 3, 2019). And, on May 17, 2019,
the Court of Appeals for the District of Columbia dismissed
as untimely Sandwich Isles' appeal of that
reconsideration Order. See Sandwich Isles Commc'ns,
Inc. v. FCC, 2019 WL 2564087 (D.C. Cir. May 17, 2019).
Sandwich Isles Stops Making Full Payments on the
in an April 25, 2013 letter from Hee to the Secretary of
Agriculture, Sandwich Isles-given the FCC's adoption of
the Transformation Order lowering USF payments (and
apparently while its waiver petition was still
pending)-notified the FCC that Sandwich Isles “is
unable to continue making interest and principal payments on
[its] RUS loans.” ECF No. 48-18 at PageID #892. Rather,
Hee stated that “beginning in May 2013, Sandwich Isles
will be reducing the amount of its debt payment made to RUS
to match the amount the FCC has determined is reasonable and
supportable.” Id. at PageID #894.
10, 2013, the RUS responded to the April 25, 2013
notification by declaring that Sandwich Isles' nonpayment
of the full amounts owing was an “event of default,
” and that the RUS would be “accelerat[ing] the
entire debt on the Loans” if full payment was not made.
ECF No. 48-19 at PageID #895, 896. After apparent
negotiations, by letter dated July 26, 2013, the USDA
rejected a proposed restructuring plan from Sandwich Isles.
ECF No. 48-21 at PageID #905. That letter indicated that, in
order to cure the default, Sandwich Isles was required by
August 26, 2013 to make payment in full of past due amounts.
Id. at PageID #906.
Isles did not make payment in full. Instead, it continued to
make periodic partial payments until February 2018, when it
made its last payment. Specifically, “[f]rom November
2013 through February 2018, [Sandwich Isles] has made
payments on the RUS Loans ranging from approximately 4.6% to
approximately 27.7% of the monthly installment payments that
were due in 2013 prior to RUS's acceleration of the
repayment of the RUS Loans.” ECF No. 110 ¶ 18 at
PageID #1368, 1369.
United States, on behalf of the RUS, filed this suit on April
20, 2018. ECF No. 1. The Complaint contains six substantive
• Count One (breach of contract against Sandwich Isles
for failure to repay the RUS loans);
• Count Two (seeking foreclosure and sale of mortgaged
property, against Sandwich Isles and several other Defendants
who may have had interests in such property);
• Count Three (violations of the Federal Priority
Statute, 31 U.S.C. § 3713, against Hee, Olds, and
Randall Ho “for approving payment of claims of others
before causing the claims of the United States to be
• Count Four (violations of the Federal Debt Collection
Procedures Act, 28 U.S.C. § 3304, against Waimana,
ClearCom, Ho'opa'a Insurance Co., Paniolo, Pa Makani
LLC, Hee, Ho, and Olds, for “transfers made while
[Sandwich Isles] was insolvent”);
• Count Five (violations of the Federal Debt Collection
Procedures Act, against Waimana, ClearCom, Paniolo, Hee, Ho,
and Olds, for “[Sandwich Isles'] transfers or
obligations for which [Sandwich Isles] did not receive
reasonably equivalent value”); and
• Count Six (breach of fiduciary duty, against Hee and
August 3, 2018, Sandwich Isles filed its answer, along with a
counterclaim. ECF No. 26. The counterclaim joins as
“additional Counterclaimants” Patelesio and
Cullen (who were joined, perhaps improperly, pursuant to
Federal Rules of Civil Procedure 13(h) and 20). As discussed
to follow, the counterclaim is made against the United
States, and “additional counterclaim Defendants Kenneth
Johnson, the FCC, Ajit Pai, Lisa Hone, Sharon Gillett,
 and Carol
Mattey.” ECF No. 26-1. The counterclaim (more correctly
characterized as a third-party counterclaim as to the
individuals sued in their personal capacities) is described
and analyzed later, when discussing the motions seeking its
described in the Introduction, the court now faces three
substantive motions-(1) the United States' Motion for
Partial Summary Judgment as to Counts One and Two of its
Complaint, ECF No. 48, (2) the United States' Motion to
Dismiss the counterclaim as to its official-capacity
allegations, ECF No. 52, and (3) the Individual Capacity
Third-Party Defendants' Motion to Dismiss the third-party
counterclaim as to the individual-capacity allegations, ECF
No. 55. The court held a hearing on the motions on April 29,
2019. ECF No. 140.
Motion One-the United States' Motion for Partial Summary
Judgment on Counts One and Two of its Complaint, ECF No.
Standard of Review
judgment is proper where there is no genuine issue of
material fact and the moving party is entitled to judgment as
a matter of law. Fed.R.Civ.P. 56(a). Rule 56(a) mandates
summary judgment “against a party who fails to make a
showing sufficient to establish the existence of an element
essential to the party's case, and on which that party
will bear the burden of proof at trial.” Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also
Broussard v. Univ. of Cal. at Berkeley, 192 F.3d 1252,
1258 (9th Cir. 1999).
party seeking summary judgment bears the initial burden of
informing the court of the basis for its motion and of
identifying those portions of the pleadings and discovery
responses that demonstrate the absence of a genuine issue of
material fact.” Soremekun v. Thrifty Payless,
Inc., 509 F.3d 978, 984 (9th Cir. 2007) (citing
Celotex, 477 U.S. at 323); see also Jespersen v.
Harrah's Operating Co., 392 F.3d 1076, 1079 (9th
Cir. 2004). “When the moving party has carried its
burden under Rule 56[(a)] its opponent must do more than
simply show that there is some metaphysical doubt as to the
material facts [and] come forward with specific facts showing