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United States v. Sandwich Isles Communications, Inc.

United States District Court, D. Hawaii

July 22, 2019

UNITED STATES OF AMERICA, Plaintiff,
v.
SANDWICH ISLES COMMUNICATIONS, INC., ET AL., Defendants. AND RELATED COUNTERCLAIMS AND THIRD-PARTY CLAIMS.

         ORDER (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

          J. Michael Seabright Chief United States District Judge.

         I. INTRODUCTION

         The 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 “SIC”).

         First, 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.[1] 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.

         Second, 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.

         Third, 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.

         Having considered the extensive written briefing, and oral arguments of counsel at the April 29, 2019 hearing, the court rules as follows:

         Plaintiff's 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).

         The 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 Order.

         Finally, 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).

         II. BACKGROUND

         A. Factual Background

         1. Sandwich Isles

         Sandwich 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.

         According 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.

         Sandwich 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.

         When 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).[2] His conviction was affirmed on March 14, 2017. See United States v. Hee, 681 Fed.Appx. 650 (9th Cir. Mar. 14, 2017) (mem.).

         “The 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 counts.

Id.

         2. Loans from the RTB and Funding from the FCC's USF Program

         To 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.[3] 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.

         Meanwhile, 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).

         As 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 areas.

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).

         In 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).

         3. The 2011 Transformation Order, and 2013 Waiver Denial

         In 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).

         The 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).

         The FCC 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 ¶ 294).

         Sandwich 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.

         And in 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

         The FCC 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).

         4. Sandwich Isles Stops Making Full Payments on the Loans

         Meanwhile, 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.

         On May 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.

         Sandwich 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.

         B. Procedural Background

         The United States, on behalf of the RUS, filed this suit on April 20, 2018. ECF No. 1. The Complaint contains six substantive counts:

• 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);[4]
• 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 paid”);
• 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 Olds).

         On 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, [5] 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 dismissal.

         As 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.

         III. DISCUSSION

         A. Motion One-the United States' Motion for Partial Summary Judgment on Counts One and Two of its Complaint, ECF No. 48

         1. Standard of Review

         Summary 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).

         “A 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 ...


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