Chen v. Mah. ( 2020 )

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Electronically Filed
Supreme Court
SCWC-XX-XXXXXXX
30-JAN-2020
09:19 AM
IN THE SUPREME COURT OF THE STATE OF HAWAII
---o0o---
________________________________________________________________
GRACE CHEN,
Respondent/Plaintiff-Appellee,
vs.
JONATHAN WILLIAM MAH, D.D.S.;
JONATHAN MAH, DDS, INC., a Hawaii corporation,
Petitioners/Defendants-Appellants.
________________________________________________________________
SCWC-XX-XXXXXXX
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-XX-XXXXXXX; CIV. NO. 12-1-2495-10)
JANUARY 30, 2020
McKENNA, POLLACK, AND WILSON, JJ., WITH RECKTENWALD, C.J.,
CONCURRING AND DISSENTING IN PART AND CONCURRING IN THE
JUDGMENT, WITH WHOM NAKAYAMA, J., JOINS
OPINION OF THE COURT BY McKENNA, J.
I. Introduction
This case concerns a compensation dispute based on an oral
agreement between an independent contractor dentist, Dr. Grace
Chen (“Chen”), and the dentist who retained her services, Dr.
Jonathan Mah (“Mah”), and his corporation, Jonathan Mah, DDS,
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Inc. (“Corporation”) (collectively, “Defendants”). In sum,
default and subsequent default judgment as to certain claims
were entered against Defendants, and a bench trial was held
regarding damages on some remaining claims. Defendants
unsuccessfully appealed the Circuit Court of the First Circuit’s
(“circuit court”)1 denial of their motion to set aside entry of
default, and their motion for reconsideration and/or for new
trial to the Intermediate Court of Appeals (“ICA”). See Chen v.
Mah, CAAP-XX-XXXXXXX (App. Mar. 14, 2019) (SDO).
We hold the circuit court did not abuse its discretion in
denying Defendants’ Hawaiʻi Rules of Civil Procedure (“HRCP”)
Rule 55(c) motion to set aside entry of default on the grounds
they failed to satisfy the second and third prongs of the test
governing HRCP Rule 60(b) motions to set aside default
judgments. The three prongs are: (1) the nondefaulting party
will not be prejudiced by the reopening, (2) the defaulting
party has a meritorious defense, and (3) the default was not the
result of inexcusable neglect or a wilful act. Although HRCP
Rule 55(c), by its plain language, only requires a showing of
“good cause” to set aside an entry of default, binding precedent
required the circuit court to apply the HRCP Rule 60(b) standard
to Defendants’ motion. The circuit court also did not err in
its other rulings.
1
The Honorable Gary W.B. Chang presided.
2
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Requiring a movant under HRCP Rule 55(c) to satisfy HRCP
Rule 60(b) requirements, however, contradicts the plain language
of the former rule, which only requires “good cause.” Thus, we
therefore now hold that HRCP Rule 55(c) motions are governed
only by the “good cause” standard explicitly stated in the rule,
and that movants seeking to set aside an entry of default
pursuant to HRCP Rule 55(c) need not satisfy the three-prong
test applicable to HRCP Rule 60(b) motions to set aside default
judgments. Our holding is prospective only, however, as trial
courts were required to follow precedent requiring parties
seeking to set aside an entry of default pursuant to HRCP Rule
55(c) to satisfy the three-prong test for HRCP Rule 60(b)
motions. Therefore, by announcing this “new rule,” we must
avoid unfair prejudice to parties and trial courts that have
relied on binding precedent, and our holding applies only to
decisions on motions to set aside entries of default after the
date of this opinion. See Kahale v. City and Cty. of Honolulu,
104 Hawaiʻi 341, 348, 90 P.3d 233, 240 (2004).
Accordingly, we affirm the May 3, 2019 judgment on appeal
entered by the ICA pursuant to its March 14, 2019 summary
disposition order (“SDO”), which affirmed the circuit court’s
July 6, 2016 final judgment.
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II. Background
A. Procedural and factual background through the July 13, 2013
hearing on Defendants’ motion to set aside entry of default
On October 3, 2012, Chen filed a twenty-four page complaint
against Defendants in circuit court, which included forty-two
detailed preliminary factual allegations. In summary, Chen
alleged she and Defendants entered into an oral compensation
agreement in November 2008 under which the Corporation agreed to
retain her professional services as an independent contractor
associate dentist and to compensate her for treating dental
patients at its principal place of business according to a
formula under which she was entitled to be regularly paid 40% of
the gross income produced to the Corporation for her dental work
on patients adjusted or reduced by (1) 40% of the gross income
not actually collected from her patients or their insurance
carriers and (2) 50% of the lab fees incurred by her patients
for her treatment of them.
According to the complaint, the Corporation commenced
paying Chen a couple of months after she started working in late
2008 based on its collection of income produced from her work,
adjusted as reflected above, and regularly provided her with
supporting documentation describing in detail all adjustments
for uncollected income and patients’ lab fees, and this practice
continued until November 5, 2011.
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The complaint further alleged that several months after
beginning work, when Chen asked for a written compensation
agreement or a partnership, and repeated this request several
times, on each occasion, Mah represented he would have
partnership documents prepared and provided to her, but this
never happened. Chen alleged that when Mah made these
representations, he misled and lied to her as he had no
intention of making her a partner as evidenced by him making
similar representations to other dental associates and not
making them partners, as she later learned.
Chen alleged she continued working based on Mah’s
representations that he would make her a partner, and in fact,
accelerated and increased her work efforts and hours of work as
an associate dentist to favorably impress Mah of her abilities
and worthiness to be his partner. The complaint alleges that,
by July 2011, Chen had increased her work schedule to four days
a week while working eight hours per day on weekends and twelve
hours per day on Mondays and Tuesdays, and, as a result, Chen
produced gross income for the Corporation exceeding $1 million
for both calendar years 2010 and 2011, generating substantial
income for Defendants consisting of the Corporation’s 60% share
of her gross income. Chen alleged she relied upon and trusted
Defendants to accurately calculate and timely pay her the
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correct amounts of money owned to her under their compensation
agreement.
According to the complaint, after November 5, 2011,
Defendants suddenly, and without explanation, stopped providing
any calculations and supporting documentation to Chen and her
compensation payments became erratic and changed to rounded lump
sums. Chen alleged that in 2012, Defendants failed to provide
her with a 1099 miscellaneous income form for 2011 despite her
repeated requests and failed to pay her any compensation since
June 15, 2012. According to the complaint, the Corporation paid
Chen $359,874.18 in 2011, and Defendants had underpaid her
approximately $200,000 or more in income, but she was unable to
determine the amount with certainty without the Corporation’s
accounting documents. Chen also alleged the Corporation had
paid her $92,500 in 2012, but she had been underpaid at least
$45,669.76 through her August 23, 2012 resignation by admission
of Defendants’ accountant Gloria Thompson in her unsupported
September 14, 2012 two-page accounting compilation.
The complaint further alleged Mah and his wife had personal
federal tax liens filed against them for 2005-2009 for hundreds
of thousands of dollars in unpaid income tax, with tax liens
still pending against them in 2011, and that upon information
and belief, in October 2011, Mah used portions of the monies
owed to her to pay these delinquent tax liens. Chen further
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alleged she had made multiple efforts in 2011 and 2012 to meet
and speak with Mah to obtain an accounting and explanation of
the above, but Mah repeatedly evaded her or cancelled meetings
at the last minute. Chen also alleged she made repeated demands
for accounting documents and for payment of the estimated unpaid
amounts exceeding $200,000 owed to her, but Defendants failed or
refused, raising excuses and attempting to charge exorbitant
copying fees, and providing only Gloria Thompson’s accounting
compilation.
The complaint further alleged that by failing to timely pay
her, Defendants had prevented Chen from timely filing her 2011
income taxes and making regular contributions to her own
retirement plan, thereby causing her to incur a penalty in an
amount to be determined. Chen also alleged that two days after
she was coincidentally seated next to Mah on a flight from Hilo
to Honolulu on August 8, 2012 and complained to Mah about being
owed substantial funds and not being provided accounting
records, Mah announced to all associate doctors he was closing
his office and hiring an independent CPA to review all doctors’
compensation for 2012 in response to Chen’s complaint, but
despite that, Mah and at least one associate dentist continued
to work out of his office, along with staff. Chen also alleged
that on August 10, 2012, the Corporation’s office manager texted
all associate doctors that they were welcome to have their own
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CPAs review the data. Chen submitted a resignation letter on
August 23, 2012, requesting accounting documents and sums owed
by August 28, 2012.
Based on these detailed factual allegations, Chen’s
complaint asserted causes of action in twelve counts:
declaratory judgment (Count I), accounting (Count II), breach of
contract and of implied covenant of good faith and fair dealing
(Count III), conversion (Count IV), fraud (Count V),
intentional/negligent misrepresentation (Count VI), intentional
infliction of emotional distress (Count VII), unjust enrichment
(Count VIII), statutory fraudulent transfer (Count IX), common
law fraudulent transfer (Count X), constructive trust/equitable
lien (Count XI), and punitive damages (Count XII).
Before the complaint was filed on October 3, 2012, Chen’s
retained counsel, Dennis King (“King”), sent a demand letter
dated September 10, 2012, to Defendants. The letter demanded
Defendants immediately pay Chen the delinquent amounts owed to
her in the amount of $237,268.92 for past due compensation owed
to her, inclusive of attorney’s fees of $4,750, and that
Defendants deliver to King’s office accounting and billing
statements, daily production, worksheets, and lab fees for
services performed by Chen for the period from January 1, 2011
to September 10, 2012. The demand letter stated: “If I do not
receive the above payment and these records on or before 5 PM on
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Saturday, September 15, 2012, I have been instructed to
immediately file suit against you and your company to recover
these amounts and any other amounts owed to Dr. Chen after
obtaining your documents and performing a full accounting of
your delinquent payments based on the claims, among others,
described below.”
Mah and King had several discussions and communications by
e-mail and regular mail between September 11, 2012 and October
3, 2012. During the discussions, King asked Mah if he had an
attorney as King preferred to speak to Mah’s attorney. Mah
indicated, however, he did not have an attorney but had spoken
to a friend who was an attorney and did not want to incur the
high expenses of an attorney. Most of the discussions concerned
attempts by Mah and King to informally resolve the matter, by
Chen obtaining Mah’s documents without pursuing litigation.
Specifically, on or about September 11, 2012, Mah called
King in response to the demand letter. Mah had informed King
that he did not have an attorney representing him in this
matter. Also on September 11, 2012, Mah provided the two-page
compilation report summary2 purportedly of compensation paid and
owed to Chen from 2008 through 2012, but it did not include any
2
An undated report was attached as “Exhibit C” to Defendants’ memorandum
in opposition to the entry of default judgment, but according to King,
contained different figures than the one provided to King on September 11,
2012.
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information identifying who authored the document, and no backup
documentation was provided. In an email dated September 12,
2012, King requested backup documentation and contact
information for Mah’s CPA. King also noted that if Mah altered,
changed, or destroyed relevant documents, Chen would have no
choice but to assert the spoliation rule against him in any
ensuing litigation if the matter could not be resolved before
litigation, but that he “look[ed] forward to receiving . . .
[Mah’s] supporting documents and the CPA contact information
. . . so that this matter can be resolved before 9/15/12.”
On September 14, 2012, Mah indicated that because he did
not have duplicates, and because Chen had allegedly previously
removed accounting records without prior authorization in July
2012, Mah was not willing to allow the records to be removed
from the dental office for photocopying, but he would permit
King and Chen to inspect all accounting data at the dental
office, which was consistent with what Mah allowed all associate
doctors to do. Mah indicated, however, any copies made would be
done at the dental office by the office manager at one dollar
per page. King responded in an e-mail to Mah that he was not
authorized to pay one dollar per page for 3,000 pages of
documents, that he was only requesting documents for 2011 and
2012, and that he was willing to accept e-mailed or faxed copies
of Mah’s accountant’s summary of monthly totals for collections
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and non-collection adjustments and lab fees for each month from
and after January 1, 2011 to the present for Chen’s billings for
her services.
Following this exchange, Mah called King on September 15,
17, 24, and 28, and October 2, and 3, 2012.3 Mah indicated he
was in the process of attempting to comply and furnish relevant
accounting data to King, and King asked Mah why it was taking so
long. Mah explained there were voluminous records from 2008 to
2012; King clarified he was only interested in 2012 despite
Mah’s explanation that reviewing only one year, 2012, would not
generate an accurate result. King then gave Mah a new deadline.
According to Mah, because of the ever-changing deadlines to
comply with requests, together with King’s assurances of
resolving the matter without litigation, Mah felt he was misled
and confused into believing there was still time to resolve this
matter informally. Further, according to Mah, because King made
assurances during their telephone conversations that Mah and
Chen would avoid litigation by attempting to resolve this matter
informally, and because King was seemingly reasonable, cordial,
and professional, Mah, in good faith, trusted King, and was
under the impression that King was available to mediate and
assist the parties in resolving this matter. In addition,
according to Mah, King never recommended to Mah to obtain the
3
The logs indicate Mah did not contact King after October 3, 2012.
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assistance or advice of another attorney, or stated that King
had a duty of loyalty to Chen to act solely in her best
interests at Mah’s expense.
After their telephone conversation on October 3, 2012, King
sent an e-mail to Mah that same day, summarizing the
conversation, and stating that “[t]o date you still have not
provided the accounting documents initially requested in
November[] 2011 by Dr. Chen or by her on numerous occasions
thereafter,” that Mah’s requirement that copies of documents
cost one dollar per page was unaffordable and unreasonable, that
“we are at an impasse with regard to you producing the
accounting documents,” and that “[r]egrettably because of your
unwillingness to produce these documents willingly within a
reasonable time and to pay [Chen] what she is owed, I have
recommended that Dr. Chen pursue this matter through the courts.
After you retain counsel, please have your attorney contact me.”
According to King, he did not mislead Mah in any way about
trying to settle the case without litigation and Mah knew on
their last conversation on October 3, 2012 that the matter was
going to proceed to court based on King’s recommendation and
that the parties had reached an impasse.
The complaint was served on Defendants in Hilo, Hawaiʻi on
October 8, 2012, by serving Mah in both his personal capacity as
well as the registered agent for Corporation. Mah was also
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served with discovery requests on that date. On October 31,
2012, Chen promptly filed a request for entry of default on the
complaint, and default was entered against Defendants by the
circuit court clerk that same day. Copies of the clerk’s entry
of default were served on Defendants by U.S. mail on November 2,
2012.
There was no further activity in the litigation until May
24, 2013, when Chen filed a motion for default judgment, and a
hearing was set for July 9, 2013. The motion requested damages
from Defendants on the following counts only: Counts III (breach
of contract), IV (conversion), V (fraud by concealment by
retaining her compensation without accounting), VI (fraud by
misrepresentation of intention to make Chen a partner), VIII
(unjust enrichment), and XI (constructive trust/equitable lien).
On June 20, 2013, Defendants, through their attorney, filed
a motion to set aside the October 31, 2012 entry of default
(“motion to set aside entry of default”), which was set for a
hearing on July 18, 2013. Attached to the motion was a
declaration by Mah, dated June 18, 2013, alleging, among other
things, that Mah only “recently learned” that default against
Defendants had been filed on October 31, 2012, that Mah never
realized King “was adversely taking action against me while
negotiating a resolution,” and that Mah was misled by King in
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his representations to try and settle the case without
unnecessary litigation.
Defendants also filed an ex parte motion to shorten time
for hearing their motion to set aside entry of default, asking
that the hearing on their motion be set for before the July 9,
2013 hearing date for Chen’s motion for default judgment. The
circuit court denied this ex parte motion on the grounds that
there was no showing why the motion to set aside entry of
default was not filed earlier to obviate the need to shorten
time.
At the July 9, 2013 hearing, however, the circuit court
denied Chen’s first motion for default judgment without
prejudice.
On July 10, 2013, Chen filed a memorandum in opposition to
Defendants’ motion to set aside entry of default. Attached to
the memorandum was a declaration by King dated July 10, 2013,
which stated, among other things, that since October 3, 2012,
King had not had any discussions or communications with Mah
except through the service of court documents.
At the July 18, 2013 hearing on Defendants’ motion to set
aside entry of default, the circuit court clarified the standard
it would apply:
And the entry of default, setting aside requires the
showing of essentially three things, one, there’s no
prejudice to the plaintiff, number two, that the defendant
has a meritorious defense andm number three, that the
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default entered as a result of -- did not enter because of
inexcusable neglect.
The circuit court then inquired for which of Chen’s twelve
counts Defendants had meritorious defenses.4 Defense counsel
argued Defendants had meritorious defenses for the fraud claims
because this was not a fraud, but an accounting case.
The circuit court then inquired what the meritorious
defense was for Chen’s fraud claim in Count V (fraud by
concealment by retaining her compensation without accounting).
Defense counsel responded that, “[b]asically, the accounting
reflects that [Defendants] overpaid Chen.” According to defense
counsel, Defendants had nothing to hide, were willing to do the
accounting, and let the numbers resolve the case. Defense
counsel went on to state that the classification of some of
Chen’s billings were being bounced back by the insurance
companies and were not reimbursed because “they were not
proper.” According to defense counsel, Chen was expecting
Defendants to front generic gross amounts without getting
4
Defendants did not assert separate defenses as to each of the twelve
counts in their motion to set aside entry of deafult. Rather, they asserted
they “have a meritorious defense” as they “den[ied] any monies owed to
Plaintiff” and “claim[ed] in good faith that Plaintiff was overpaid in
compensation as documented in the accounting that has been made available to
opposing counsel”; Defendants had offered for inspection and copying their
accounting documents and retained an independent accountant to “provide a
summary of the voluminous accounting data.”
Defendants also alleged they were led to believe that if all of the
information was turned over, Chen would not take action. Defendants asserted
they would not have failed to file an answer had King not misled Defendants
into believing legal action would not be taken if the accounting documents
were provided.
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compensation back, and the crux of the case was going to be
accounting.
The circuit court probed further and asked if Mah ever told
Chen that there was an overpayment requiring an adjustment, to
which defense counsel responded in the affirmative, citing to
Exhibit 9 in Chen’s memorandum in opposition to Defendants’
motion to set aside entry of default.5 That exhibit was a letter
informing associates of the Corporation that compensation was
switching from production-based to collections-based. The
5
Exhibit 9 is a June 25, 2012 letter signed by Mah and addressed to the
“associates” of the Corporation. It stated:
We are providing this letter to you for inclusion in
your records regarding the method of disbursement of
compensation checks.
Prior to July 1, 2012, disbursement of compensation
checks were based upon estimated production numbers. This
meant that the time between the claims being sent out and
the actual funds that were collected (including necessary
adjustments) could be between a few days for a simple
procedure to 90 days or more for more complex procedures.
The growth of the office has resulted in increased
expenses, staffing costs, and many more transactions that
are processed. As a consequence of this, our accountant
has strongly advised us to implement a change from
production to a collection method of disbursing
compensation checks.
What this means is compensation checks will now be
given out once the money has been collected from the
insurance companies and patients accordingly.
This change should make a much more streamlined
process in the office, as well as reduce the number of man
hours needed.
Be assured that this will in no way mean less
compensation, but rather change only when payments are
disbursed. This change will help keep office expenses
steamlined [sic].
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circuit court then asked the defense, “And where does he talk
about an overpayment and then he’s going to now make an
adjustment?” To that inquiry, the following exchange occurred
with the circuit court:
MR. KIDANI: In terms of the overpayment, that came up in
the audit that was done by the accountant, Thompson.
THE COURT: When was that done?
MR. KIDANI: That was done in 2012 when this whole issue
came up, and this was the information that was being given
to Mr. King directly from our client. And that audit
continued on an ongoing basis through 2012 into 2013. And
that was –-
. . . .
. . . part of the delay of the information that was -- that
they were waiting for.
THE COURT: Where in Exhibit 9 . . . does Dr. Mah explain
that there was an overpayment and now we have to make an
adjustment, therefore, we’re not going to pay you in the
same fashion that we did before?
MR. KIDANI: That wasn’t in that letter.
. . . .
. . . I think that was what was conveyed by him to all the
associates. It wasn’t in this letter.
THE COURT: Okay, where in his declaration does he talk
about the timing of when he told Dr. Chen that there was an
overpayment and he is making an adjustment?
MR. KIDANI: . . . [S]tarting with paragraph 14 of his
declaration, he indicated in 2011 and ’12 that he first
started learning of the overpayment. And it goes on into
15 -- 14, 15, 16.
THE COURT: Why don’t you just point me to the paragraph
and the language in Dr. Mah’s declaration attached to your
motion where he says he informed the plaintiff, Dr. Chen,
that there was this overpayment so he’s making an
adjustment.
. . . .
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MR. KIDANI: Okay. Paragraph 21[6] was when he informed all
the doctors of the complaint and his investigation started
and that Gloria Thompson was retained at that point to
complete the investigation. It was after Gloria Thompson
finished that that information was given to Dr. Chen on the
overpayment.
Defense counsel clarified that Gloria Thompson, the “independent
CPA” hired by Defendants, finished her final report in April
2013 after she got all the 2012 numbers. The circuit court
noted, however, that the complaint had been filed in October
2012 and there had been no audit finished before the lawsuit was
filed.
In response to defense arguments regarding the fraud
claims, Chen’s counsel argued Mah’s letter was written
generically that the reimbursement program would be changing,
but it did not give notice that it was going to change
retroactively. Rather, Chen’s counsel argued Chen had been
strung along to continue working with the Corporation, and
although she had repeatedly asked for her compensation and
accounting, Mah would keep saying it was coming and therefore
6
Paragraph 21 of Mah’s declaration states:
On or about August 10, 2012, I sent a written message
to all Associate Doctors. My message was as follows:
“Based upon a complaint made by Dr. Chen on August 8,
concerning improper and inaccurate calculations of doctors
[sic] compensation. Dr. Mah has hired an independent CPA
to review all doctors [sic] compensation for 2012. Dr. Mah
considers the doctors [sic] professional compensation a
serious matter, and for that reason effective immediately,
the office will be closed to all associate doctors until
this matter is resolved. All associate doctors are welcome
to have their own CPA review the same data. If you have
any questions or concerns please contact Dr. Mah.”
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induced her to keep working, trusting that the accounting would
eventually be produced. Chen’s counsel also argued the second
basis for the fraud claim was Mah’s dangling the prospect of a
partnership in front of her while she was being grossly
underpaid.
Defense counsel replied that Mah’s testimony would show
that partnership was never offered to Chen. Further, according
to defense counsel, even if that had occurred, it could not
serve as a basis for fraud because there was no clear and
convincing evidence suggesting Mah did anything intentional to
deceive Chen. Additionally, as for the accounting, according to
defense counsel, Chen had access to raw data and so it was not a
situation in which Mah was trying to hide anything. According
to defense counsel, Chen not liking the results of the audit did
not constitute fraud.
Defense counsel also argued that once the accounting was
finished, the numbers would not change that substantially, and
would just show whether Chen was entitled to money or not.
Turning to “excusable neglect,” defense counsel noted that
prior to the filing of the complaint, Mah had been in discussion
with King, and therefore both parties were attempting to resolve
the case without litigation. Defense counsel argued that Mah,
although a dentist, was like a layperson from the neighbor
islands, who “hear[s] things a different way.” Thus, although
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King had stated to Mah in an October 3, 2012 e-mail that he
recommended Chen pursue the matter through the courts, this did
not mean there was an impasse.
After hearing the arguments,7 the circuit court ruled
Defendants did not meet their burden of proof because it was
“unable to find the existence of a meritorious defense as to
liability,” and also “unable to find that the default entered as
a result of any excusable neglect on the part of the
defendants.” Specifically, the circuit court stated:
The court concludes that the defendant did not meet
the burden of proof under the Hawai[ʻ]i case law, the BDM
case. The court agrees with the defendant that there
really is no prejudice[8] within the meaning of the BDM case
to the plaintiff if default is set aside. However, with
respect to meritorious defense as to liability, the court
is unable to conclude that the record shows that the
defendant has -- or the defendants have meritorious
defenses as to liability. The arguments really go to
damages which they are not precluded from litigating even
if they are in default. The case law permits a defendant
in default to continue to litigate the question of damages.
As to excusable neglect, there really is an
insufficient basis in the record to support a finding or
conclusion that the defendants were excusably negligent in
failing to respond to the complaint. It really -- the
record only shows that the defendant was avoiding his
obligations under the law to respond to the complaint in a
timely fashion. Although the plaintiff[] did not give the
defendants much latitude in terms of the 20 days to respond
to the complaint, the plaintiff moved very quickly after
the 20 days expired to obtain the entry of default. So
there was very little opportunity for negotiation on
extensions of time or things of that nature, but no
overtures were made by the defense to the plaintiff to
7
Defense counsel also argued why Chen would not be prejudiced if the
default was set aside. The circuit court agreed. As those arguments are not
at issue, they are not detailed here.
8
Because the circuit court found the first prong, that the nondefaulting
party would not be prejudiced, was satisfied, the arguments regarding this
prong have not been included.
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request additional time to respond to the complaint. So
plaintiff cannot be faulted, although the court does note
that the plaintiff[] moved extremely expeditiously giving
virtually no time for the defense to have additional
extensions of time to respond to the complaint. But that
does not prejudice the plaintiff’s right to pursue the
default remedies.
So the court is unable to find the existence of a
meritorious defense as to liability, and the court is
unable to find that the default entered as a result of any
excusable neglect on the part of the defendants. So there
is no basis for this court setting aside the entry of
default.
But the court does recognize that the record shows
the defendants appear to have at least arguments regarding
-- and potential defenses regarding damages. So what the
court will do is deny the motion to set aside the entry of
default. However, in denying the motion, the court will
permit the defendant to file an answer setting forth their
defenses to the damages claims in this case. The answer
must be filed by next Friday, July 26, 2013.
(Emphases added.) The circuit court entered its order denying
Defendants’ motion to set aside entry of default on August 8,
2013.
B. Procedural and factual background following the July 13,
2013 hearing on Defendants’ motion to set aside entry of
default
Defendants then filed their answer on July 26, 2013. The
answer set forth eight defenses centering around the assertion
that Chen was not only fully paid, but overpaid by Defendants
and the insurance companies because she had misrepresented her
work in billing codes. According to Defendants, Chen was
therefore not owed any damages; overpayments should have offset
any payments and Chen should return overpayments to Defendants;
Chen should not be allowed equitable relief because she had
unclean hands for overcharging patients; Chen’s request for
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damages (presumably for her fraud claim regarding the “dangling”
partnership offer) was not related to the oral agreement between
Chen and Defendants regarding compensation for her services, and
therefore Chen, was not entitled to any claim for damages based
on a “pending arrangement” because no consideration was
exchanged; and there was a lack of clear and convincing evidence
to support Chen’s claims.
On August 19, 2013, the circuit court set a trial for
September 29, 2014. However, prior to that date, Chen filed a
second motion for default judgment (“motion for default
judgment”) on August 4, 2014. Defendants filed their opposition
memorandum on August 19, 2014. A hearing was held on August 27,
2014. The circuit court agreed with Chen that liability was not
at issue because Defendants had defaulted and therefore the
well-pled allegations of the complaint were required to be taken
as true.9 Therefore, the circuit court also agreed to enforce
the compensation formula Chen had asserted. Defendants,
however, challenged the calculation of damages, and the circuit
9
Once a default is established, a defendant cannot contest the factual
allegations of a plaintiff’s claim for relief, but the court considers
whether the unchallenged facts constitute a legitimate cause of action. 10A
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure Civ. §
2688.1 (4th ed. 2019).
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court inquired whether it was “required to convene[,] at a
minimum[,] a proof hearing if not a trial on damages.”10
Chen responded that she was required to only present “a
prima facie case or at least sufficient evidence to pass a
motion for directed verdict,” and that she had presented
“substantially more evidence than that.”11 Chen had provided a
timely expert report by a CPA evidencing her damages. Chen
argued Defendants would have to present evidence to refute her
evidence, but that an expert report attached to Defendants’
opposition memorandum had not been produced in discovery and
should not be able to be relied upon. The one document
Defendants had attached to their opposition memorandum that was
previously produced was Exhibit I, a report by Gloria Thompson.
Chen argued, however, that Gloria Thompson’s report was based on
10
As noted in Dela Cruz v. Quemado, 141 Hawaiʻi 338, 346, 409 P.3d 742,
750 (2018), the ICA in Hupp v. Accessory Distribs. Inc., 1 Haw. App. 174, 616
P.2d 233 (App. 1980) interpreted HRCP Rule 55(b)(2) to provide discretion for
courts to order proof of liability hearings before entering default
judgment. 1 Haw. App. at 179-180, 616 P.2d at 236-37 (“trial courts must be
given leeway in their discretion to require proof of liability in the support
of a default judgment”). Hupp held that in such a hearing, the nondefaulting
party must adduce evidence which would be sufficient at trial to overcome a
motion for directed verdict. 1 Haw. App. at 180, 616 P.2d at 237.
11
Hawaiʻi appellate decisions have, however, consistently held that even
when a defendant cannot contest liability after entry of default, the
defendant may still contest the amount of its liability at proof hearings.
See Occidental Underwriters of Hawaii, Ltd., v. Am. Sec. Bank, 5 Haw. App.
431, 433, 696 P.2d 852, 854 (App. 1985) (“Upon the entry of default,
[defendant] had lost its standing to contest the fact of its liability, but
still had standing to contest the amount of its liability.” (citations
omitted)); Kamaunu v. Kaaea, 99 Hawaiʻi 432, 439, 56 P.3d 734, 741 (App. 2002)
(requiring trial courts to permit parties in default to contest damages at
proof hearings). We affirmed these requirements in Dela Cruz, 141 Hawaiʻi at
347, 409 P.3d at 751.
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Defendants’ purported compensation formula, which differed from
the one Chen had pled in her complaint, and which also differed
from the formula achieved when examining past payments received
by Chen that were not in dispute; moreover, Defendants did not
provide any supporting documents. Accordingly, Chen argued “a
trial would serve no purpose here.”
Defendants responded that the compensation formula was
based on income produced, i.e., amounts collected, not billed.
When the circuit court asked what the proper amounts asserted by
Defendants were, Defendants pointed to Exhibits E, F, G, and H,
which had been produced as Hawaiʻi Rules of Evidence Rule 1006
“summaries” of the over 5,000 pages of financial documents
originally produced to Chen in response to her request for
production. Defendants asserted the summaries were created by
office staff over the course of four to five months under Mah’s
supervision of reconciliations performed by the office. Chen
also challenged the admissibility of the exhibits because they
were newly created documents and she was not given the
opportunity to examine Defendants’ numbers; further, Chen
questioned whether Mah could attest that he made or verified
each of the entries in the exhibits.
The circuit court ultimately concluded it could not
consider the evidence produced by Defendants in opposition
because trial “should not be by ambush.” Instead, the circuit
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court relied on the well-pleaded facts in the complaint and the
evidence submitted by Chen and granted Chen’s motion for default
judgment as to Count III (breach of contract) and Count VIII
(unjust enrichment). Damages were ordered in the total amount
of $406,392.89; $335,731.68 plus interest was awarded for
damages for 2011, and $70,661.21 was awarded for damages for
2012. The circuit court denied the motion for default judgment
as to Count IV (conversion), Count V (fraud), Count VI
(intentional/negligent misrepresentation), and Count XI
(constructive trust/equitable lien).12
Prior to the bench trial regarding damages on the remaining
counts of the complaint, on August 13, 2014, Chen filed a motion
to strike previously unidentified witnesses, in which she noted
the circuit court had issued a trial setting status conference
order dated August 19, 2013, that set forth various trial
deadlines, including the submission of expert reports by May 30,
2014 and the final naming of witnesses by July 1, 2014, and that
Defendants failed to meet these deadlines with their untimely
August 11, 2014 filing. At a hearing held on September 10,
2014, the circuit court denied the motion as to non-expert
12
This court subsequently ruled in Dela Cruz that “[i]n future cases,
when trial courts deny a motion for entry of default judgment, the
appropriate subsequent course of action is to set aside the default, and
allow the case to proceed on the merits.” 141 Hawaiʻi at 347, 409 P.3d at
751. The circuit court had, however, already awarded damages based on the
breach of contract and unjust enrichment counts.
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testimony, i.e., the court would permit lay witnesses to
testify, but granted the motion as to expert testimony as it had
previously ordered disclosure by a certain date.
A bench trial on damages only was then held on September
30, 2014 through October 3, 2014 on the following four claims:
Count IV (conversion), Count V (fraud), Count VI
(intentional/negligent misrepresentation), and Count XI
(constructive trust/equitable lien). The remaining unresolved
claims, Count I (declaratory judgment), Count II (accounting),
Count VII (intentional infliction of emotional distress), Count
IX (statutory fraudulent transfer), Count X (common law
fraudulent transfer), and Count XII (punitive damages) were
dismissed without prejudice and were not the subject of the
trial.
At trial, the circuit court received testimony from Chen,
Mah, and people who previously worked for Defendants. Parties
submitted their post-trial memoranda on November 7, 2014. At a
post-trial hearing held on November 10, 2014, the circuit court
summarized its decision and tasked Chen with drafting more
detailed findings of fact and conclusions of law. In sum, the
circuit court denied Count IV (conversion) for Chen’s failure to
present legal authority; denied Count X (constructive
trust/equitable lien) for insufficiency of the evidence; found
in favor of Chen as to Count V (fraud), and in so doing found
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Mah to not be a credible witness; and also found in favor of
Chen as to Count VI (intentional/negligent misrepresentation).
As to the two claims that it found in favor of Chen, Counts V
(fraud) and VI (intentional/negligent misrepresentation), the
circuit court noted the damages awarded were the same damages
previously awarded to Chen by it by default judgment for Counts
VIII (unjust enrichment) and III (breach of contract).
Accordingly, the circuit court entered judgment in favor of Chen
and against Defendants in the same amounts indicated previously.
On July 6, 2016, the circuit court entered its findings of fact
(“FOF”) and conclusions of law (“COL”) and final judgment.
On July 18, 2016, Defendants filed a motion for
reconsideration and/or for new trial, in which Defendants
asserted five grounds:
A. Defendants have obtained newly discovered evidence
regarding claims by more than 50 of Plaintiffs former
patients that will be filed with the Regulated Industries
Complaints Office of the State of Hawaii Department of
Commerce and Consumer Affairs. These claims directly impact
the amount of compensation and “damages” allegedly owed to
Plaintiff.
B. An accountant has determined that Dr. Chen was
overpaid by $161,110.
C. The Court committed clear legal error by finding a
fiduciary relationship/duty in the independent contractor
context.
D. The Court committed clear legal error by applying the
law governing an employer/employee relationship to an
independent contractor.
E. The Court committed clear legal error by piercing the
corporate veil in violation of Hawaii Supreme Court
precedent.
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At a September 6, 2016 hearing, the circuit court denied
this motion. Although the circuit court expressed concern that
offsets to Chen’s claims for damages may exist based on
subsequent remedial measures taken by Defendants to address
patient complaints against Chen for poor quality of service,
that defense was never pled by Defendants, and even if it had
been, Defendants could have brought forth such evidence at
trial, but failed to do so. For this reason also, the circuit
court declined to re-open the case to receive such evidence.
The circuit court also concluded Defendants’ efforts to
introduce a report by an accountant, William Andersen, showing
Chen was overpaid, did not constitute grounds for a new trial
because his testimony had previously been stricken by the
circuit court for Defendants’ failure to comply with the circuit
court’s trial setting order. Lastly, the circuit court
concluded Defendants’ argument that it had “pierced the
corporate veil” when it held Mah liable for the acts of
Corporation did not constitute grounds to grant their motion as
the complaint was styled against both Mah and the Corporation.
C. Appeal to the ICA
Defendants timely filed a notice of appeal to the ICA, and
presented four points on appeal:
[1.] The circuit court violated the public policy favoring
resolution of cases on the merits and failed to properly
apply the Hawai[ʻ]i Supreme Court’s test regarding setting
aside an entry of default. The record shows that, although
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Dr. Mah and the Company did not timely file an Answer to
the Complaint, Dr. Mah did engage in months of informal
discovery with Appellee’s counsel, providing documents and
information requested by Appellee and her counsel. This
process went for approximately seven months before Appellee
filed a Motion for Default Judgment.
[2.] The circuit court erred in excluding substantial
evidence of liability and/or damages.
[3.] The circuit court erred in denying Dr. Mah and the
Company’s Motion for Reconsideration and/or for New Trial,
given newly discovery [sic] evidence of Appellee’s
malpractice, substantial evidence of overpayments to
Appellee, the improper creation of new law regarding
fiduciary duties, applying employment law to an independent
contractor relationship, and improperly piercing the
corporate veil.
[4.] The circuit court erred by signing scripted findings
of fact and conclusions of law, a practice that has been
widely condemned by numerous courts.
The ICA rejected the Defendants’ challenges.
As to the first point on appeal, the ICA cited BDM, Inc. v.
Sageco, Inc., 57 Haw. 73, 549 P.2d 1147 (1976), which had set
forth a three-prong test to determine whether to set aside an
entry of default:
[A] motion to set aside a default entry or a default
judgment may and should be granted whenever the court finds
(1) that the nondefaulting party will not be prejudiced by
the reopening, (2) that the defaulting party has a
meritorious defense, and (3) that the default was not the
result of inexcusable neglect or a wilful act.
Chen, SDO at 2 (citing BDM, 57 Haw. at 76, 549 P.2d at 1150).
The ICA noted that “[i]f a moving party fails to establish any
prong of the test, it is not an abuse of discretion to refuse to
set aside the default.” Id. (citing Citicorp Mortg., Inc. v.
Bartolome, 94 Hawaiʻi 422, 439, 16 P.3d 827, 844 (App. 2000);
Park v. Tanaka, 75 Haw. 271, 281, 859 P.2d 917, 922 (1993);
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Dillingham Inves. Corp. v. Kunio V. Yokoyama Tr., 8 Haw. App.
226, 236, 797 P.2d 1316, 1321 (1990)).
The ICA concluded the circuit court did not err in denying
Defendants’ motion to set aside entry of default. Chen, SDO at
5. As to Defendants’ argument that the circuit court erred when
it concluded Defendants lacked a meritorious defense because it
focused only on the fraud claim and failed to address the
remaining eleven claims, the ICA stated the circuit court had
addressed all of the claims:
The Circuit Court did not limit its determination to Mah’s
defenses against the fraud claim but instead stated, in
general terms, that “[Defendants’] arguments really go to
damages which they are not precluded from litigating even
if they are in default.” While [defense] counsel . . .
repeatedly limited his argument to the fraud claims, in its
ruling, the Circuit Court did not limit its ruling to just
the fraud claim.
Chen, SDO at 3.
The ICA also concluded Defendants’ argument that their
failure to answer the complaint was the result of excusable
neglect lacked merit. Chen, SDO at 3. The ICA observed that
[t]he Hawaiʻi Supreme Court has recognized that
circumstances that do not rise to the level of excusable
neglect include a defendant’s failure to answer a properly
served complaint without any reason, for an improper
reason, or without seeking the approval or extension from
the court, as well as circumstances in which there is a
lengthy delay between the entry of default and the filing
of the motion to set aside the default.
Chen, SDO at 3–4 (citations omitted). The ICA highlighted that
Defendants had been made fully aware of the nature of Chen’s
demands and concerns, that an impasse had been reached, and that
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litigation was imminent. Chen, SDO at 4. Moreover, although
Mah may have been surprised as to the filing of the complaint
given the various discussions he had with King for weeks, Mah
had not cited any reason for failing to respond to the complaint
once it had been filed. Id.
As to the second point on appeal, the ICA concluded
Defendants failed to present arguments in accordance with Hawaiʻi
Rules of Appellate Procedure (“HRAP”) Rule 28(b)(7) (2016)13 and
therefore waived the argument. Chen, SDO at 6. In any event,
the ICA concluded the argument lacked merit because it was well
within the circuit court’s discretion to strike the testimony of
Defendants’ witnesses for their failure to comply with its
deadline for disclosing witnesses, and Defendants presented no
cogent argument to demonstrate the circuit court abused its
discretion in doing so. Id.
As to the third point on appeal, the ICA concluded the
circuit court did not err when it denied Defendants’ motion for
13
HRAP Rule 28(b)(7) states in relevant part:
(b) Opening Brief. Within 40 days after the filing
of the record on appeal, the appellant shall file an
opening brief, containing the following sections in order
here indicated:
. . . .
(7) The argument, containing the contentions of the
appellant on the points presented and the reasons therefor,
with citations to the authorities, statutes and parts of
the record relied on. . . . Points not argued may be deemed
waived.
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new trial, as the verdict was not against the manifest weight of
the evidence. Chen, SDO at 8–9 (citing Richardson v. Sport
Shinko (Waikiki Corp.), 76 Hawaiʻi 494, 503, 880 P.2d 169, 178
(1994); Miyamoto v. Lum, 104 Hawaiʻi 1, 11, 84 P.3d 509, 519
(2004)). Although Defendants contended that, at trial, there
was substantial evidence demonstrating they overpaid Chen by
$161,100, thereby offsetting the damages awarded to Chen, Chen
had presented testimonial evidence of the compensation formula
agreed upon with Mah, documentary evidence of past compensation
and changes to her compensation in November 2011, and other
evidence regarding Mah’s promises to include her in a
partnership and Chen’s consequent increased production due to
those promises; further, the circuit court had found Mah to not
be credible. Chen, SDO at 9.
As to the fourth point on appeal, the ICA noted Defendants
presented no authority that it was improper or prohibited for a
court to adopt findings of fact or conclusions of law drafted by
a party, as the circuit court had directed. Chen, SDO at 10.
Additionally, to the extent that the circuit court may have
erred in entering FOF 34 and COLs FF, GG, ZZ, and AAA, in which
the circuit court determined or otherwise implied a fiduciary
employer-employee relationship existed between Chen and Mah, the
ICA concluded such a relationship did not serve as the basis for
the circuit court’s determination of damages on the fraud and
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misrepresentation claims. Id. According to the ICA, any such
error was therefore harmless and did not warrant relief. Chen,
SDO at 10-11 (citing Dupree v. Hiraga, 121 Hawaiʻi 297, 320 n.28,
219 P.3d 1084, 1107 n.28 (2009)). Similarly, Defendants’
argument that the circuit court erroneously pierced the
corporate veil was inapposite to the circuit court’s
determination that Mah was liable for fraud and
misrepresentation on the basis of his representations to Chen as
an agent of Corporation, which exposed him to personal
liability. Chen, SDO at 11 (citing Laeroc Waikiki Parkside, LLC
v. K.S.K. (Oahu) Ltd. P’ship, 115 Hawaiʻi 201, 228 n.31, 166 P.3d
961, 988 n.31 (2007)).
Accordingly, the ICA affirmed the circuit court’s July 6,
2016 final judgment. See id.
D. Application for writ of certiorari
Defendants timely filed their application for a writ of
certiorari (“Application”) on June 27, 2019 from the May 3, 2019
judgment on appeal entered by the ICA pursuant to its March 14,
2019 SDO.
Defendants present the following five questions in their
Application:
[1.] Did the ICA gravely err in failing to set aside the
circuit court’s entry of default, where (1) the record
shows the circuit court failed to analyze all twelve causes
of action in the complaint regarding meritorious defenses
and the record contains substantial evidence of a
meritorious defense to one or more causes of action; and
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(2) the circuit court failed to consider the lulling of a
pro se party into inaction by engaging in months of
discovery and communications before and after obtaining an
entry of default, then using a long delay to help justify a
purported failure to defend the case.
[2.] Did the ICA gravely err in creating new law in
Hawai[ʻ]i by affirming the circuit court’s finding of a
fiduciary relationship in an independent contractor
relationship?
[3.] Did the ICA gravely err in creating new law in Hawaii
by permitting the circuit court to apply the law regarding
employers and employees to an independent contractor
relationship?
[4.] Did the ICA gravely err in allowing the circuit court
to pierce the corporate veil and hold a shareholder liable
for the purported acts of a corporation without any
allegation or finding of alter ego/piercing the corporate
veil?
[5.] Did the ICA gravely err in adopting scripted findings
that turned what amounted to an advocate’s trial brief into
findings of [f]act and conclusions of law?
On certiorari, the parties reiterate the arguments they had
presented to the ICA.14
III. Standards of Review
A. Motion to set aside an entry of default
“The application of HRCP Rule 55 . . . is reviewed for
abuse of discretion.” Cty. of Haw. v. Ala Loop Homeowners, 123
Hawaiʻi 391, 404, 235 P.3d 1103, 1116 (2010) (citation omitted),
14
On August 28, 2019, we ordered that the parties submit
supplemental briefs not exceeding ten pages by September 18, 2019, addressing
the following question:
Is a movant filing a motion to set aside entry of default
under Hawaiʻi Rules of Civil Procedure Rule 55(c) required
to show (1) that the non-defaulting party will not be
prejudiced by the reopening, (2) that the defaulting party
has a meritorious defense, and (3) that the default was not
the result of inexcusable neglect or a wilful act?
Consistent with their previous submissions, the parties answered in the
affirmative.
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abrogated on other grounds by Tax Found. of Haw. v. State, 144
Hawaiʻi 175, 439 P.3d 127 (2019).
B. Motion for reconsideration
“The trial court’s ruling on a motion for reconsideration
is reviewed under the abuse of discretion standard.” Kamaka v.
Goodsill Anderson Quinn & Stifel, 117 Hawaiʻi 92, 104, 176 P.3d
91, 103 (2008) (citation omitted). Further,
[a]s this court has often stated, “the purpose of a motion
for reconsideration is to allow the parties to present new
evidence and/or arguments that could not have been
presented during the earlier adjudicated motion.”
Reconsideration is not a device to relitigate old matters
or to raise arguments or evidence that could and should
have been brought during the earlier proceeding.
Id. (alteration in original) (citation omitted).
C. Motion for new trial
Both the grant and the denial of a motion for new trial
[are] within the trial court's discretion, and we will not
reverse that decision absent a clear abuse of discretion.
An abuse of discretion occurs “where the trial court has
clearly exceeded the bounds of reason or disregarded rules
or principles of law or practice to the substantial
detriment of a party litigant.” It is also within the
appellate court's discretion to limit the issues of a new
trial upon remand.
Costales v. Rosete, 133 Hawaiʻi 453, 465, 331 P.3d 431, 443
(2014) (alteration in original) (citations omitted).
IV. Discussion
A. Counts remaining on appeal
As a preliminary matter, following the dismissal without
prejudice of the following claims, the circuit court dismissed
them with prejudice in its final judgment, and they are
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therefore not further discussed in this opinion: Count I
(declaratory judgment), Count II (accounting), Count VII
(intentional infliction of emotional distress), Count IX
(statutory fraudulent transfer), Count X (common law fraudulent
transfer), and Count XII (punitive damages). Also not discussed
are Count IV (conversion) and Count XI (constructive
trust/equitable lien), as the circuit court had ruled against
Chen on those claims after the bench trial and she did not
appeal. Thus, at issue are Count III (breach of contract) and
Count VIII (unjust enrichment), for which the circuit court
granted Chen a default judgment with damages in the amount of
$406,392.89, and Count V (fraud) and Count VI
(intentional/negligent misrepresentation), for which the circuit
court awarded the same damages after the bench trial on damages.
B. Whether the circuit court erred in denying Defendants’ HRCP
Rule 55(c) motion to set aside entry of default
1. Standard governing HRCP Rule 55(c) motions
HRCP Rule 55(c) governs the setting aside of an entry of
default. HRCP Rule 55(c) provides that “[f]or good cause shown
the court may set aside an entry of default and, if a judgment
by default has been entered, may likewise set it aside in
accordance with Rule 60(b).”
The circuit court and the ICA cited to BDM for the
proposition that Hawaiʻi courts apply the three-prong test
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applicable to HRCP Rule 60(b) motions to determine whether to
grant a motion to set aside an entry of default filed pursuant
to HRCP Rule 55(c):
[A] motion to set aside a default entry or a default
judgment may and should be granted whenever the court finds
(1) that the nondefaulting party will not be prejudiced by
the reopening, (2) that the defaulting party has a
meritorious defense, and (3) that the default was not the
result of inexcusable neglect or a wilful act.
Chen, SDO at 2.15
15
In BDM, this court referred to the “excusable neglect” standard
governing HRCP Rule 60(b) motions despite the “good cause” language of HRCP
Rule 55(c) on the premise that the setting aside of a defendant’s default,
alone, would not allow litigation to proceed, and that the circuit court
would also need to grant an extension of time for the defendant to answer the
complaint, else “an anomalous situation in which [defendants] would be forced
to remain in default but [plaintiff] would be foreclosed from obtaining entry
of a default” would result. 57 Haw. at 75, 549 P.2d at 1149. BDM stated
that the “excusable neglect” standard of HRCP Rule 6(b) governing
enlargements of time for performing an act “required or allowed to be done at
or within a specified time” would therefore also have to be considered with
respect to whether an extension of time to answer the complaint should be
considered. 57 Haw. at 75-76, 549 P.2d at 1149.
The premise that an official extension of time pursuant to the
“excusable neglect” standard would be necessary to allow a circuit court
defendant to file an answer to the complaint after expiration of the twenty
days provided for by HRCP Rule 12(a) (2000) was, however, mistaken. If
default has not been requested and entered pursuant to HRCP Rule 55(a), there
is no HRCP rule rendering an answer filed after twenty days of service of
process ineffective. In fact, in our circuit courts, counsel and parties
often provide the courtesy of informally extending time for answering
complaints without court involvement, and simply do not request a formal
entry of default until after the courtesy time has expired. See Guidelines
of Professional Courtesy and Civility for Hawaiʻi Lawyers Section 2(a) (2018)
(“[A] lawyer who manifests professional courtesy and civility [] [a]grees to
reasonable requests for extensions of time or continuances without requiring
motions or other formalities.”). Thus, BDM’s premise for juxtaposing the
“excusable neglect” standard under HRCP Rule 6(b) and HRCP Rule 60(b) to HRCP
Rule 55(c) motions to set aside default judgments was in error. In any
event, BDM further noted that “[i]t is difficult for us to imagine a case in
which ‘good cause’ might be found for setting aside an entry of default and
yet ‘excusable neglect’ for the failure to file the answer, which failure
occasioned the entry of the default, should not also be found.” 57 Haw. at
76, 549 P.2d at 1149.
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Although HRCP Rule 55(c) provides that “[f]or good cause
shown the court may set aside an entry of default and, if a
judgment by default has been entered, may likewise set it aside
in accordance with Rule 60(b)[,]” the parties, the circuit
court, and the ICA all agree Defendants were required to also
meet the three-prong test applicable to motions to set aside
default judgments under HRCP Rule 60(b), which requires a
showing that “(1) the nondefaulting party will not be prejudiced
by the reopening, (2) that the defaulting party has a
meritorious defense, and (3) that the default was not the result
of inexcusable neglect or a wilful act.” BDM, 57 Haw. at 76,
549 P.2d at 1150.
In BDM, a per curiam opinion, this court stated:
[D]efaults and default judgments are not favored and that
any doubt should be resolved in favor of the party seeking
relief, so that, in the interests of justice, there can be
a full trial on the merits. It should be noted that a
motion to set aside a default entry, which may be granted
under Rule 55(c) ‘for good cause shown’, gives the court
greater freedom in granting relief than is available on a
motion to set aside a default judgment where the
requirements of Rule 60(b) must be satisfied. 10 Wright and
Miller, Federal Practice and Procedure, Civ. § 2693 at 313
(1973). ‘Despite these differences, the elements advanced
in support of a motion under Rule 55(c) will be the same
whether relief is sought from a default entry or from a
default judgment.’ Wright and Miller supra, Civ. s 2692 at
301.
In general, a motion to set aside a default entry or
a default judgment may and should be granted whenever the
court finds (1) that the nondefaulting party will not be
prejudiced by the reopening, (2) that the defaulting party
has a meritorious defense, and (3) that the default was not
the result of inexcusable neglect or a wilful act. 10
Wright and Miller, Federal Practice and Procedure § 2696
(1973). The mere fact that the nondefaulting party will be
required to prove his case without the inhibiting effect of
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the default upon the defaulting party does not constitute
prejudice which should prevent a reopening.
Id. (citations omitted).
Also, in Ala Loop Homeowners, we stated:
Defaults are generally disfavored. See Rearden Family Trust
v. Wisenbaker, 101 Hawaiʻi 237, 254, 65 P.3d 1029, 1046
(2003) (holding that “defaults and default judgments are
not favored and [] any doubt should be resolved in favor of
the party seeking relief, so that, in the interests of
justice, there can be a full trial on the merits”)
(citations omitted). In BDM, Inc. v. Sageco, Inc., 57 Haw.
73, 549 P.2d 1147 (1976), this court held that a party
seeking to set aside a default must demonstrate the
following three factors:
In general, a motion to set aside
a default entry or a default judgment may and
should be granted whenever the court finds
(1) that the nondefaulting party will not be
prejudiced by the reopening, (2) that the
defaulting party has a meritorious defense, and
(3) that the default was not the result of
inexcusable neglect or a wilful act.
123 Hawaiʻi at 423, 235 P.3d at 1135 (alteration in original).
The ICA has held that a defendant moving to set aside an
entry of default pursuant to HRCP Rule 55(c) must satisfy the
three-prong test applicable to HRCP Rule 60(b) motions, and has
specifically held that all three prongs must be satisfied for a
trial court to grant a motion to set aside entry of default.
See The Nature Conservancy v. Nakila, 4 Haw. App. 584, 589-91,
671 P.2d 1025, 1030-31 (1983); Manley v. Mac Farms, Inc., 1 Haw.
App. 182, 184-85, 616 P.2d 242, 244 (1980); Hupp, 1 Haw. App. at
177-78, 616 P.2d at 236. In addition, although this court has
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not actually held that HRCP Rule 55(c) movants must satisfy the
three prongs, our cases suggested as much in dicta.16
Despite the language of HRCP Rule 55(c) allowing
entries of default to be set aside based only on a showing
of “good cause,” trial courts, including the circuit court
in this case, were required to follow binding precedent,
which held that parties seeking to set aside an entry of
default pursuant to HRCP Rule 55(c) must satisfy the three-
prong test for HRCP Rule 60(b) motions. Therefore, we
analyze the circuit court and ICA rulings based on the
standard that the circuit court was required to follow at
the time of its ruling, which was that Defendants had the
burden of establishing the following to prevail on their
motion to set aside entry of default: (1) the nondefaulting
party will not be prejudiced by the reopening, (2) the
defaulting party has a meritorious defense, and (3) the
default was not the result of inexcusable neglect or a
wilful act. In addition, the burden was on Defendants to
16
Along this line, if lack of “excusable neglect” is a requisite showing
for a HRCP Rule 55(c) motion, then this clearly contradicts the plain
language of the rule, which only requires “good cause,” a much lower standard
under Hawaiʻi law, which basically only requires a showing of “good cause”
under the circumstances of the situation. In contrast, we have held that
ignorance of the rules or law cannot be “excusable neglect.” See Enos v.
Pac. Transfer & Warehouse, Inc., 80 Hawaiʻi 345, 353, 910 P.2d 116, 124 (1996)
(making it difficult for anyone to meet the lack of “excusable neglect”
requirement of HRCP Rule 60(b) motions). Thus, incorporation of this HRCP
Rule 60(b) requirement into a HRCP Rule 55(c) analysis violates the plain
language of the rule.
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establish that each prong had been satisfied. See In re
RGB, 123 Hawaiʻi 1, 17, 229 P.3d 1066, 1082 (2010).
2. The circuit court did not abuse its discretion by
denying Defendants’ HRCP Rule 55(c) motion to set
aside entry of default
As noted above, the circuit court ruled in favor of the
Defendants on the first prong regarding prejudice to Chen, but
ruled against the Defendants on the second and third prongs
regarding meritorious defenses and excusable neglect. In their
first question on certiorari, Defendants allege the ICA erred in
failing to set aside the circuit court’s entry of default
because: (1) with respect to the second prong, the record shows
the circuit court failed to analyze all twelve causes of action
in the complaint regarding meritorious defenses and the record
contains substantial evidence of a meritorious defense to one or
more causes of action; and (2) with respect to the third prong,
the circuit court failed to apply this court’s stated policy of
favoring a trial on the merits and failed to consider the
lulling of a pro se party into inaction by engaging in months of
discovery and communications before and after obtaining an entry
of default, then using a long delay to help justify a purported
failure to defend the case.
We address the third prong first because it is dispositive.
To prevail, Defendants had the burden of establishing that their
default “was not the result of inexcusable neglect or a wilful
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act.” Under Hawaiʻi law, ignorance of the rules or law cannot be
“excusable neglect.” Enos, 80 Hawaiʻi at 353, 910 P.2d at 124
(1996).
Defendants argue this court held that courts are to resolve
any doubt in favor of the party seeking relief. See Rearden
Family Trust, 101 Hawaiʻi at 254, 65 P.3d at 1046 (“We affirm
that defaults and default judgments are not favored and that any
doubt should be resolved in favor of the party seeking relief,
so that, in the interests of justice, there can be a full trial
on the merits.” (internal quotation marks and citations
omitted)).
Defendants also argue the ICA gravely erred when it
affirmed the circuit court’s denial of their motion to set aside
default, as the circuit court failed to consider the “lulling,
discovery, and ‘lengthy delay’” in Chen’s filing for default
judgment. Importantly, Defendants assert that both before and
after the complaint was filed, King “engaged in ‘multiple
follow-up telephone discussions’ with Dr. Mah,” which had the
“effect of lulling Dr. Mah into believing this dispute would be
resolved if he simply cooperated with [King].”
The record, however, does not reflect any continued
discussions between the parties after the complaint was filed.
The citations to the record by defense counsel to support the
assertion that Mah and King had “multiple follow-up telephone
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discussions” following the filing of the complaint do not
support the defense’s position. Rather, the citation is to
King’s declaration regarding the contents of a September 10,
2012 demand letter, which was sent prior to the filing of the
complaint on October 3, 2012.
Indeed, as pointed out by Chen and the ICA, the record does
not reflect any communications between Mah and King after
October 8, 2012, when the complaint was served. See Chen, SDO
at 4–5 (“Mah has not cited any reason for failing to respond to
the Complaint once it had in fact been filed.” (citation
omitted)). Even Mah’s phone logs do not show any conversations
with King following October 3, 2012. In sum, according to the
record, upon service of the complaint on October 8, 2012, all
non-court related communication between the parties had ceased.
Accordingly, even if there had been some informal discovery
and efforts to avoid litigation before October 3, 2012, and even
if all doubts were resolved in favor of Defendants regarding
Mah’s misunderstanding of the parties’ alleged impasse,
Defendants fail to identify anything in the record to explain
why, after the filing of the complaint, Mah continued to be
“lulled” by King into thinking that litigation could be avoided
if Mah cooperated with King; there simply was no further
communication between them. In other words, although Mah
asserts he never realized King was adversely taking action
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against him while negotiating a resolution, any “negotiations”
had ceased as of the filing of the complaint. See Chen, SDO at
5 (“Mah does not assert that there was any effort to continue
these discussions after the Complaint was filed, and Mah failed
to seek any extensions from the Circuit Court to, for example,
obtain more time to resolve the dispute out of court. . . . Mah
[did not] file[] the motion to set aside the entry of default
[until] after Dr. Chen had filed her First Motion for Default
Judgment, nearly nine months following the filing of the
Complaint.”).17
The record reflects that during the pre-complaint
discussions, King asked Mah if he had an attorney as King
preferred to speak to Mah’s attorney, but Mah indicated “he did
not have [an attorney] but had spoken to a friend who was an
attorney and did not want to incur the high expenses of an
attorney.” Then, despite service of the complaint on October 8,
2012, and prompt notice of the November 2, 2012 entry of
default, Mah took no action until being served with Chen’s May
24, 2013 motion for default judgment. Mah is not an uneducated
person lacking resources or access to counsel. Under the
circumstances, the circuit court did not abuse its discretion in
17
Mah’s declaration dated June 18, 2013, does not supply a different
timeline of events. Additionally, it vaguely states that Mah did not learn
until “recently” of the entry of default, even though he was served with
notice of the entry of default on or about November 2, 2012.
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ruling the Defendants failed to show that their default “was not
the result of inexcusable neglect or a wilful act.”
Defendants’ failure to meet this prong is dispositive.18
C. Prospectively, a HRCP Rule 55(c) motion to set aside entry
of default is to be evaluated based only on whether there
has been a showing of “good cause”
1. Prospective new standard governing HRCP Rule 55(c)
As explained in Section IV.B.1 above, HRCP Rule 55(c),
which governs the setting aside of an entry of default provides
that “[f]or good cause shown the court may set aside an entry of
default and, if a judgment by default has been entered, may
likewise set it aside in accordance with Rule 60(b).” Thus, the
plain language of HRCP Rule 55(c) requires only that a party
18
Defendants’ remaining assertions on certiorari also lack merit. The
circuit court also did not abuse its discretion on the second prong regarding
meritorious defense as the circuit court did not limit the hearing on their
motion to set aside entry of default to a discussion of the fraud claim, as
they assert; rather, the circuit court invited arguments regarding
Defendants’ alleged meritorious defenses as to all counts.
Defendants’ assertion that the circuit court erred in finding Corporation had
a fiduciary duty to provide Chen with documentation to support her
compensation was not clearly erroneous under the circumstances. Lahaina
Fashions, Inc. v. Bank of Haw., 131 Hawaiʻi 437, 456, 319 P.3d 356, 375 (2014)
(discussing situations that can give rise to a fiduciary relationship).
Defendants assert the circuit court precluded evidence of overpayments,
offsets, and/or set-offs, but do not identify what specific evidence was
wrongfully precluded. Defendants do not explain why it was not within the
circuit court’s discretion to strike Defendants’ expert testimony for failure
to comply with the August 19, 2013 order setting various trial deadlines.
Defendants argue improper piercing of the corporate veil when the circuit
court held Mah personally liable, but fail to address the circuit court’s
conclusion that Mah’s liability did not stem from his status as a
shareholder. Even if the circuit court had ruled Mah an alter ego of
Corporation, however, it does not appear this would have constituted error.
See Calipjo v. Purdy, 144 Hawaiʻi 266, 277-78, 439 P.3d 218, 229-30 (2019)
(discussing alter ego factors under Hawaiʻi law). Finally, contrary to
Defendants’ assertion that the circuit court adopted “scripted findings,” the
record shows the circuit court provided a detailed oral ruling and then
ordered King to draft proposed findings of fact and conclusions of law
consistent with its decision.
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show “good cause” to set aside an entry of default and indicates
that the setting aside a default judgment is governed by HRCP
Rule 60(b).
Our cases have also expressed our policy of disfavoring
defaults and default judgments and of resolving any doubt in
favor of the party seeking relief, so that, in the interests of
justice, there can be a full trial on the merits. BDM, 57 Haw.
at 76, 549 P.2d at 1150; Ala Loop Homeowners, 123 Hawaiʻi at 423,
235 P.3d at 1135. And we have specifically noted that a motion
to set aside a default entry, which may be granted under
HRCP Rule 55(c) “for good cause shown,” gives the trial court
greater freedom in granting relief than is available on a motion
to set aside a default judgment where the requirements of
HRCP Rule 60(b) must be satisfied. BDM, 57 Haw. at 76, 549 P.2d
at 1150; Ala Loop Homeowners, 123 Hawaiʻi at 423, 235 P.3d at
1135.
Yet, after this court’s 1976 per curiam opinion in BDM, our
appellate opinions have held that motions to set aside entries
of default under HRCP Rule 55(c) must satisfy the three-prong
test for HRCP Rule 60(b) motions.
We acknowledge that under federal law, the “good cause”
standard governing vacating an entry of default under Federal
Rules of Civil Procedure (“FRCP”) Rule 55(c) is the same
standard that governs vacating a default judgment under FRCP
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Rule 60(b). Franchise Holding II, LLC v. Huntington Rests.
Grp., Inc., 375 F.3d 922, 925 (9th Cir. 2004).19 Yet,
notwithstanding their persuasiveness, interpretations of the
FRCP by federal courts are by no means conclusive with respect
to our interpretation of any rule within the HRCP. Kawamata
Farms, Inc. v. United Agri Prods., 86 Hawaiʻi 214, 256, 948 P.2d
1055, 1097 (1997).
The discussions regarding HRCP Rule 55(c) in this opinion
persuade us to overrule our precedent to the contrary and hold
that HRCP Rule 55(c) motions are governed only by the plain
language “good cause” standard explicitly stated in the rule.
Therefore, movants seeking to set aside an entry of default
pursuant to HRCP Rule 55(c) need no longer satisfy the three-
19
Even in federal courts, however,
[a]lthough the more specific grounds for relief set
forth in Rule 60(b) [were] frequently [] regarded as
included within the concept of “good cause” for purposes of
Rule 55(c), the courts ha[d] generally acknowledged that
“good cause” is a broader and more liberal standard than
anything found in Rule 60(b), and that, consequently,
something less may be required to warrant the opening of an
entry of default than would be necessary to set aside a
default judgment. (Citation omitted.) Thus, while
“excusable neglect” has often been considered a reason for
inaction sufficient to satisfy the good cause test, several
courts have recognized that relief may be granted under
Rule 55(c) even when the neglect giving rise to the default
cannot, strictly speaking, be characterized as excusable.
William H. Danne, Jr., Annotation, What Constitutes “Good Cause”
Allowing Federal Court to Relieve Party of his Default Under Rule 55(c)
of Federal Rules of Civil Procedure, 29 A.L.R. Fed. 7, § 2[a] (1976),
available at
https://www.westlaw.com/Document/I512442d1136011da931cf6e6a5b3cd63/View
/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&R
S=cblt1.0 (citations omitted).
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prong test applicable to HRCP Rule 60(b) motions to set aside
default judgments.
Good reasons exist to have different standards governing
HRCP Rule 55(c) motions to set aside entry of default as
compared to HRCP Rule 60(b) motions to set aside default
judgment.
First, a HRCP Rule 55(c) motion seeks to set aside an entry
of default during a pending litigation in which judgment has yet
to enter. In contrast, a HRCP Rule 60(b) motion to set aside a
default judgment seeks to set aside a judgment on which not only
the parties to the lawsuit, but also other members of the
public, may have relied.
Second, HRCP Rule 60(b) motions require a showing of a lack
of “excusable neglect,” yet HRCP Rule 55(c) motions only require
“good cause,” which is a much lower standard under Hawaiʻi law,
as further discussed below; yet we have held that ignorance of
the rules or law cannot be “excusable neglect.” Enos, 80 Hawaiʻi
at 353, 910 P.2d at 124. Thus, even if a movant seeking to set
aside an entry of default pursuant to HRCP Rule 55(c) can
establish “good cause,” the movant might not be able to meet the
lack of “excusable neglect” requirement for HRCP Rule 60(b)
motions. Thus, incorporation of this HRCP Rule 60(b)
requirement into a HRCP Rule 55(c) analysis violates the plain
language of HRCP Rule 55(c).
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Finally, requiring a party seeking to set aside entry of
default to satisfy the three-prong test applicable to HRCP Rule
60(b) motions is in tension with our expressed policy of
disfavoring defaults and default judgment and of resolving any
doubt in favor of the party seeking relief. In this case,
Defendants inexplicably waited more than seven months after
service of the complaint to move to set aside the entry of
default. Yet, a plaintiff could move for entry of default
twenty-one days after service of a complaint. Even if a
defendant filed a HRCP Rule 55(c) motion to set aside entry of
default the very next day, under our current law, the defendant
would be required to satisfy all three prongs of the HRCP Rule
60(b) test applicable to motions to set aside default judgments.
This seems unfair.20
Thus, we therefore now hold that HRCP Rule 55(c) motions
are governed only by the “good cause” standard explicitly stated
in the rule, and that movants seeking to set aside an entry of
20
The Chief Justice opines that it is sensible to continue considering
the HRCP Rule 60(b) factors to HRCP Rule 55(c) because nearly every federal
circuit, as well as many states, apply them to motions to set aside entry of
default. We note, however, that in the federal courts, there is no
counterpart to HRCP Rule 41(b)(2) (2012) allowing involuntary dismissals to
be set aside for “good cause,” and it appears a plaintiff seeking to
reinstate claims involuntarily dismissed pursuant to FRCP Rule 41(b) must
file a motion under FRCP Rule 60(b). See Link v. Wabash R. Co., 370 U.S.
626, 630, 632 (1962). Thus, our rule is different, and we actually erred by
adopting the HRCP Rule 60(b) standard that contravenes our “good cause” rule.
For all of these reasons, we disagree with the Chief Justice that the BDM
factors are appropriate to consider in determining whether to set aside an
entry of default.
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default pursuant to HRCP Rule 55(c) need not satisfy the three-
prong test applicable to HRCP Rule 60(b) motions to set aside
default judgments.
Our holding is prospective. Trial courts were required to
follow ICA holdings requiring parties seeking to set aside an
entry of default pursuant to HRCP Rule 55(c) to satisfy the
three-prong test for HRCP Rule 60(b) motions. Therefore, by
holding that movants seeking to set aside an entry of default
pursuant to HRCP Rule 55(c) need not satisfy the three-prong
test, we are announcing a “new rule.” In announcing this “new
rule,” we must avoid unfair prejudice to parties and trial
courts who have relied on binding precedent. Therefore, our
holding applies only to decisions on motions to set aside entry
of default under HRCP Rule 55(c) after the date of this
opinion.21 See Kahale, 104 Hawaiʻi at 348, 90 P.3d at 239.
2. What constitutes “good cause”
In Doe v. Doe, 98 Hawaiʻi 144, 44 P.3d 1085 (2002), in the
context of a Hawaiʻi Family Court Rules (“HFCR”) Rule 59(a)
motion for a new trial, we stated:
“Good cause” [] “depends upon the circumstances of the
individual case, and a finding of its existence lies
largely in the discretion of the officer or court to which
[the] decision is committed.”
21
Our holding also applies to the identical language of Rules 55(c) in
the District Court Rules of Civil Procedure as well as the Hawaiʻi Family
Court Rules.
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98 Hawaiʻi at 154, 44 P.3d at 1095 (second alteration in
original) (citation omitted).22 Thus, whether “good cause”
exists to set aside an entry of default will depend upon the
circumstances of the individual case, and whether good cause
exists will “lie[] largely in the discretion of the [] court to
which [the] discretion is committed.”
It is not possible to provide one definition of “good
cause,” as standards governing whether “good cause” exists
depend not only upon the circumstances of the individual case,
but also upon the specific court rule at issue. This is because
in addition to HRCP Rule 55(c) at issue in this case and HFCR
Rule 59(a) referenced above, there are numerous court rules in
which the phrase “good cause” appears.”23 Many of these rules
use the phrase “good cause” in contexts that differ from the
“good cause” required to set aside an entry of default pursuant
22
Doe also referred to a Black’s Law Dictionary entry, stating that
“[t]he term ‘good cause’ has been defined to mean ‘a substantial reason
amounting in law to a legal excuse for failing to perform an act required by
law.’” 98 Hawaiʻi at 154, 44 P.3d at 1095 (quoting Good Cause, Black's Law
Dictionary (6th ed. 1990)). We note that Black’s Law Dictionary, however,
now defines “good cause” as “[a] legally sufficient reason. Good cause is
often the burden placed on a litigant (usu. by court rule or order) to show
why a request should be granted or an action excused.” Good Cause, Black’s
Law Dictionary (11th ed. 2019).
23
See, e.g., HRAP Rule 29(b) (2016) (allowing an appellate court to
further extend time to file a brief only upon “good cause” shown); Rules of
the Circuit Courts of the State of Hawaiʻi (“RCCH”) Rule 7(e) (2007) (allowing
continuance of a trial date only upon a showing of “good cause”); Hawaiʻi
Rules of Penal Procedure (“HRPP”) Rule 5(c)(5) (2014) (allowing a district
court to continue a preliminary hearing after commencement “for good cause”);
HRPP Rule 24(e) (2011) (stating that jurors shall be allowed to take notes
during trial “[e]xcept upon good cause articulated by the court”).
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to HRCP Rule 55(c), and address different policy considerations
dictating stricter or more lenient definitions of “good cause”
or differing approaches on how to determine whether “good cause”
exists depending on the court rule and circumstances at issue.24
The rule most analogous to HRCP Rule 55(c)’s “good cause”
language is HRCP Rule 41(b)(2). HRCP Rule 41(b)(2) provides in
relevant part that an involuntary dismissal entered “[f]or
failure to prosecute or to comply with these rules or any order
of the court” “may be set aside and the action or claim
reinstated by order of the court for good cause shown upon
motion duly filed not later than 10 days from the date of the
order of dismissal.” Just as we have stated “defaults and
24
For example, in the context of HRPP Rule 48(c)(8) (2000), which allows
for periods of time a trial is delayed “for good cause” to be excludable from
the six month period trial must commence, we have stated that “good cause
means ‘a substantial reason that affords legal excuse,’” that a period of
delay must have been “unanticipated and not reasonably foreseeable,” and a
showing of the efforts taken by the government and judiciary to limit delay
is required to establish “good cause.” State v. Abregano, 136 Hawaiʻi 489,
497-99, 363 P.3d 838, 846-48 (2015). Thus, we have required the government
to establish the existence of “good cause” and have required a “substantial
reason” when the finding impacts a defendant’s speedy trial rights under HRPP
Rule 48 in a criminal case. Id. In contrast, in construing a former court
rule allowing this court to extend the time for filing the record on appeal
for “good cause,” we summarily held that “[a]lthough dismissal of an appeal
for late docketing is within the power of this court, mitigating factors in
the instant case, such as the trial judge’s delay in disposing of the motion
to proceed in forma pauperis, justify this court’s grant of an extension of
time and weigh against a dismissal of the appeal.” State v. Kicklighter, 57
Haw. 566, 568, 560 P.2d 1304, 1306 (1977) (citation omitted). Then, in the
context of HRCP Rule 26(c) (2004), which allows a court to enter a protective
order regarding discovery for “good cause,” we have adopted a completely
different approach, balancing an insurer’s need for a person’s health
information against the injury that might result from the disclosure of that
health information outside of the litigation. Brende v. Hara, 113 Hawaiʻi
424, 431, 153 P.3d 1109, 1116 (2007).
Thus, we have taken different approaches to what constitutes “good
cause” depending on the court rule and the circumstances at issue.
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default judgments are not favored and that any doubt should be
resolved in favor of the party seeking relief,” BDM, 57 Haw. at
76, 549 P.2d at 1150, we have also stated that “[i]nvoluntary
dismissals of a complaint with prejudice are not favored, and
should be ordered only in extreme circumstances.” In re
Blaisdell, 125 Hawaiʻi 44, 49, 252 P.3d 63, 68 (2011). Also, in
the context of an appeal of a HRCP Rule 41(b) dismissal and the
denial of a motion for reconsideration of that dismissal, we
also stated that “a corporation should be allowed an opportunity
to secure counsel before permitting an entry of default against
the corporation or, as in this case, dismissing the action,
recognizing a ‘preference for giving parties an opportunity to
litigate claims or defenses on the merits[.]’” Shasteen, Inc.
v. Hilton Hawaiian Village Joint Venture, 79 Hawaiʻi 103, 109,
899 P.2d 386, 392 (1995) (alteration in original) (citation
omitted).
Thus, HRCP Rule 55(c) relates to setting aside an
“involuntary” entry of default against a defendant, while HRCP
Rule 41(b)(2) relates to its counterpart, the setting aside of
an involuntary dismissal of a plaintiff’s claims. Both HRCP
Rules 41(b)(2) and 55(c) require “good cause” to allow the
setting aside and reinstatement of a plaintiff’s claims or a
defendant’s defenses.
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In Ryan v. Palmer, 130 Hawaiʻi 321, 310 P.3d 1022 (App.
2013), the ICA addressed HRCP Rule 41(b)(2) in the context of
reviewing a trial court’s denial of a motion to set aside an
involuntary dismissal for failure to file a pretrial statement
as allowed by RCCH Rule 12(q) (2007). Because the language of
RCCH Rule 12(q) is patterned after HRCP Rule 41(b)(2), the ICA
applied HRCP Rule 41(b)(2) in its review of the RCCH Rule 12(q)
dismissal. See 130 Hawaiʻi at 323, 310 P.3d at 1024. The ICA
did not define what would constitute “good cause” for purposes
of HRCP Rule 41(b)(2), but cited to our case law construing HRCP
Rule 41(b)(2), including In re Blaisdell and Shasteen. Id.25
In In re Blaisdell, this court stated, “[O]ur case law
informs us that the sanction of dismissal of a complaint with
prejudice is one of last resort where lesser sanctions would not
serve the interest of justice,” and “an order of dismissal
cannot be affirmed absent deliberate delay, contumacious
25
The Chief Justice posits that the comparison between HRCP Rules 41(b)
and 55(c) and the application of HRCP Rule 41(b) cases to define HRCP Rule
55(c) are inapt because “the phrase ‘good cause’ is used in the context of
setting aside sua sponte dismissals of plaintiffs’ actions under Rule
41(b)[,]” while “under Rule 55(c), a party must satisfy the good cause
standard to set aside an entry of default that was entered upon the opposing
party’s motion.” HRCP Rule 41(b) does not, however, require “good cause” for
a sua sponte dismissal; rather, it requires “good cause” to set aside a sua
sponte dismissal, which is the same standard for setting aside an entry of
default under HRCP Rule 55(c). In addition, the Chief Justice posits that
because In re Blaisdell and Shasteen were appeals from orders of dismissal,
not from denials of motions to set aside a dismissal for “good cause,” it is
unhelpful to review these cases. The Chief Justice ignores that we address
the “good cause” factors in these cases because they were cited to by Ryan,
which addressed a HRCP Rule 41(b) motion requiring “good cause” to set aside
a dismissal. Ryan, 130 Hawaiʻi at 323, 310 P.3d at 1024.
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conduct, or actual prejudice.” 125 Hawaiʻi at 49, 252 P.3d at 68
(quoting Shasteen, 79 Hawaiʻi at 107, 899 P.2d at 390). More
specifically, we stated that in order for a dismissal with
prejudice based on HRCP Rule 41(b) to not constitute an abuse of
discretion, there must be deliberate delay of the plaintiff
causing actual prejudice or contumacious conduct. 125 Hawaiʻi at
49-50, 252 P.3d at 68-69. We noted that “[a]lthough the law
presumes injury from unreasonable delay, the presumption of
prejudice is rebuttable upon a showing that actual prejudice did
not occur.” 125 Hawaiʻi at 49, 252 P.3d at 68 (citation omitted)
(emphasis added). We also stated, however, that “[b]ecause the
interests of justice are best served by resolving a case on its
merits, absent a clear record of delay or contumacious conduct,
‘the careful exercise of judicial discretion requires that a
[trial] court consider less severe sanctions and explain, where
not obvious, their inadequacy for promoting the interests of
justice.’” Id. (second alteration in original) (quoting
Schilling v. Walworth Cty. Park & Planning Comm’n, 805 F.2d 272,
275 (7th Cir. 1986)).
Shasteen, cited by In re Blaisdell, in turn, also stated
that “a dismissal of a complaint is such a severe sanction, that
it should be used only in extreme circumstances where there is
clear record of delay or contumacious conduct and where lesser
sanctions would not serve the interest of justice.” 79 Hawaiʻi
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at 107, 899 P.2d at 390 (internal quotation marks, brackets,
ellipsis, and footnote omitted) (quoting Lim v. Harvis Contr.,
Inc., 65 Haw. 71, 73, 647 P.2d 290, 292 (1982)).
Thus, although our opinions did not specifically so state,
these rulings provide guidance regarding the “good cause”
required to set aside a dismissal under HRCP Rule 41(b)(2), as
Ryan concerned a HRCP Rule 41(b)(2) motion and relied on In re
Blaisdell and Shasteen. Our cases indicate “good cause” exists
to set aside a dismissal under HRCP Rule 41(b)(2) if there is no
(1) deliberate delay and/or contumacious conduct; or (2) if
deliberate delay or contumacious conduct exist, there is no
actual prejudice that cannot be addressed through lesser
sanctions.
Accordingly, by analogy, these factors should also be
considered in determining whether “good cause” exists under HRCP
Rule 55(c). “Good cause” should exist to set aside an entry of
default if: (1) the defendant did not deliberately fail to plead
or otherwise defend26 or engage in contumacious conduct;27 or
26
We note that “deliberate delay” has been construed to not include time
due to the unavailability of counsel. Shasteen, 79 Hawaiʻi at 108, 899 P.2d
at 391 (“[T]wo of the five continuances were as a result of requests made by
[the plaintiff] corporation. However, the requests were based on reasons
directly related to the unavailability of [the plaintiff] corporation’s
attorney. Moreover, although [the defendant], in advancing its argument with
respect to delay, contends that ‘[the plaintiff] undertook no genuine effort
to find successor counsel [where] [h]aving counsel was critical,’ we review
this contention as it relates to the second factor, contumacious conduct.”)
(Sixth and seventh alterations in original.) Thus, the same analysis should
apply to deadlines missed due to the unavailability of counsel. As in
(continued. . .)
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(b) if the defendant did deliberately fail to plead or otherwise
defend or engage in contumacious conduct, there is no actual
prejudice to the plaintiff28 that cannot be addressed through
lesser sanctions.29
We reiterate, however, that whether “good cause” exists
will depend upon the circumstances of the individual case. And
as indicated in 10A Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure Civ. § 2693 (4th ed. 2019),
appellate courts have demonstrated a marked deference to
decisions granting relief against default entries.
(. . .continued)
Shasteen, any allegation that a defendant caused unavailability of counsel
should be evaluated under the “contumacious conduct” prong.
27
In In re Blaisdell, this court stated that “[w]ithout evidence that
Blaisdell conducted himself in a willfully defiant manner, his actions did
not amount to what this court considers ‘contumacious conduct.’” 125 Hawaiʻi
at 50, 252 P.3d at 69. This court also noted that Black’s Law Dictionary
defined “contumacious conduct” as “[w]illfully stubborn and disobedient
conduct.” Shasteen, 79 Hawaii at 107 n.7, 899 P.2d at 390 n.7 (alteration in
original) (citing Contumacious Conduct, Black’s Law Dictionary (6th ed.
1990)).
28
“The mere fact that the nondefaulting party will be required to
prove his case without the inhibiting effect of the default upon the
defaulting party does not constitute prejudice which should prevent a
reopening.” BDM, 57 Haw. at 76, 549 P.2d at 1150 (citation omitted).
29
A trial court must also state why a lesser sanction is insufficient to
serve the interests of justice. In re Blaisdell, 125 Hawaii at 50-51, 252
P.3d at 69-70. We have previously stated that a trial court can impose some
lesser sanction, such as an award of attorney’s fees caused by the default,
as a condition for setting aside the entry of default. See Dela Cruz, 141
Hawaiʻi at 346, 409 P.3d at 750.
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V. Conclusion
Based on the reasons explained above, we affirm the ICA’s
May 3, 2019 judgment on appeal, which affirmed the circuit
court’s July 6, 2016 final judgment.
Mark G. Valencia /s/ Sabrina S. McKenna
(Stephanie M. Segovia
with him on the briefs), /s/ Richard W. Pollack
for petitioner
/s/ Michael D. Wilson
Dennis W. King,
for respondent
58