Schmidt v. HSC, Inc.

*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Electronically Filed
Supreme Court
SCWC-XX-XXXXXXX
08-NOV-2019
10:08 AM
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---oOo---
________________________________________________________________
THOMAS FRANK SCHMIDT AND LORINNA JHINCIL SCHMIDT,
Petitioners/Plaintiffs-Appellants/Cross-Appellees,
vs.
HSC, INC., A HAWAIʻI CORPORATION; RICHARD HENDERSON, SR.;
ELEANOR R.J. HENDERSON,
Respondents/Defendants-Appellees/Cross-Appellees/
Cross-Appellants.
________________________________________________________________
SCWC-XX-XXXXXXX
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-XX-XXXXXXX; CIVIL NO. 06-1-228)
NOVEMBER 8, 2019
NAKAYAMA, ACTING C.J., McKENNA, POLLACK, AND WILSON, JJ., AND
CIRCUIT COURT JUDGE KUBO IN PLACE OF RECKTENWALD, C.J., RECUSED
OPINION OF THE COURT BY McKENNA, J.
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
I. Introduction
This case, which concerns $537,000 in excess foreclosure
sale proceeds, returns to this court for the third time.1 The
current iteration of the case arises from a separate action,
Civil No. 06-1-228, filed on April 7, 2006 in the Circuit Court
of the Third Circuit2 (“circuit court”) by Petitioners/
Plaintiffs-Appellants/Cross-Appellees Thomas Frank Schmidt and
Lorinna Jhincil Schmidt (collectively, “Schmidts” or
“Petitioners”) after they obtained a December 21, 2004 final
judgment against Realty Finance, Inc. (“RFI”) for the excess
proceeds, but later learned that those same proceeds were
already transferred, leaving RFI insolvent and essentially
judgment proof. In their Amended Complaint filed on April 24,
2006, the Schmidts raised claims pursuant to Hawaiʻi Revised
Statutes (“HRS”) § 651C-73 alleging RFI fraudulently transferred
the proceeds to the creditors of its parent company,
1
See Schmidt v. HSC, Inc., 131 Hawaiʻi 497, 319 P.3d 416 (2014) (“Schmidt
II”); Realty Finance, Inc. v. Schmidt, No. 23441 (Haw. Mar. 18, 2004) (mem.)
(“Schmidt I”).
2
The Honorable Greg K. Nakamura presided.
3
HRS Chapter 651C governs Hawaiʻi’s Uniform Fraudulent Transfer Act
(“HUFTA”). HRS § 651C-7 provides remedies under HUFTA.
The Schmidts’ Amended Complaint also asserted a claim under HRS § 480-
2, which prohibits “[u]nfair methods of competition and unfair or deceptive
acts or practices in the conduct of any trade or commerce.” This claim is
not discussed further as the circuit court had granted Respondents’ Motion
for Judgment on the Pleadings as to this claim, and it is not the subject of
the present appeal. See Schmidt v. HSC, Inc., Nos. 29454, 29589, at 5 (App.
Aug. 30, 2013) (mem.).
2
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Respondent/Defendant-Appellee/Cross-Appellant HSC, Inc. (“HSC”).
Following a bench trial on July 1 and 2, 2008, the circuit court
concluded the Schmidts did not prove by clear and convincing
evidence RFI actually intended to hinder, delay, or defraud any
creditors of RFI,4 and therefore entered judgment in favor of
Respondents/Defendants-Appellees/Cross-Appellants HSC, Richard
Henderson, Sr. (“Richard”), and Eleanor R.J. Henderson
(“Eleanor”) (collectively, “Respondents”).5
Petitioners appealed unsuccessfully to the Intermediate
Court of Appeals (“ICA”). In deciding the Schmidts’ appeal, the
ICA did not discuss the merits of the Schmidts’ challenge to the
circuit court’s findings and conclusions, but rather concluded
that the Schmidts’ HUFTA claim should have been dismissed as
untimely. See Schmidt, mem. op. at 10.
After accepting certiorari, this court determined that the
ICA’s decision on the statute of limitations provision in HRS §
4
To be clear, the Schmidts’ Amended Complaint cites only to HRS § 651C-
7, which provides remedies to creditors under HUFTA. During closing argument
before the circuit court, the Schmidts clarified that Respondents violated
HRS § 651C-4(a)(1). See Schmidt II, 131 Hawaiʻi at 500, 319 P.3d at 419.
Pursuant to the statute, “[a] transfer made or obligation incurred by a
debtor is fraudulent as to a creditor . . . if the debtor made the transfer
or incurred the obligation . . . [w]ith actual intent to hinder, delay, or
defraud any creditor of the debtor . . . .” HRS § 651C-4(a)(1) (emphasis
added).
5
Richard was HSC’s president; Eleanor was a director of HSC and
Richard’s wife. See Schmidt II, 131 Hawaiʻi at 500, 319 P.3d at 419.
3
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
651C-9(1)6 was wrong as a matter of law because the ICA
“incorrectly held that the statute of limitations r[an] from the
date of the transfer, rather than from the date that Petitioners
discovered the fraudulent nature of the transfer.” Schmidt II,
136 Hawaiʻi at 510, 319 P.3d at 429. This court vacated the
ICA’s Judgment on Appeal and remanded the case to the ICA. See
131 Hawaiʻi at 512, 319 P.3d at 431.
Consequently, the ICA published an opinion that
“address[ed] the merits of the Schmidts’ challenge to [the]
[c]ircuit [c]ourt’s rejection of their fraudulent transfers
claims, irrespective of whether their claims are or may be
barred by the statute of limitations.” Schmidt v. HSC, Inc.,
136 Hawaiʻi 158, 164, 358 P.3d 727, 733 (App. 2015). In sum, the
6
“A cause of action with respect to a fraudulent transfer or obligation
under this chapter is extinguished unless action is brought . . . [u]nder
section 651C-4(a)(1), within four years after the transfer was made . . . or
within one year after the transfer or obligation was or could reasonably have
been discovered by the claimant[.]” HRS § 651C-9(1).
One of the alternative theories presented by the Schmidts as to why
their HUFTA claims were timely, which this court rejected in Schmidt II, was
that the limitations period was extended by six years pursuant to the
doctrine of fraudulent concealment in HRS § 657-20, which they argued applied
to HUFTA by way of HRS § 651C-10 (“Unless displaced by the provisions of this
chapter, the principles of . . . fraud . . . supplement its provisions.”).
See Schmidt II, 131 Hawaiʻi at 510, 319 P.3d at 429. This court noted in
Schmidt II:
Petitioners do not provide any definition of “fraudulent
concealment” and therefore do not explain why the facts of
this case constitute fraudulent concealment under any
controlling legal standard. Petitioners therefore do not
make any discernable argument as to why the doctrine of
fraudulent concealment should apply to the facts of this
case. Thus, we need not decide this issue.
Id.
4
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
ICA concluded the circuit court erred in dismissing the
Schmidts’ claims on the merits, as “the facts established by the
record in this case . . . prove[d] by clear and convincing
evidence that [RFI] actually intended to hinder, delay, or
defraud any creditors of [RFI], as required by HRS § 651C-
4(a)(1).” 131 Hawaiʻi at 179, 358 P.3d at 748. However, because
the circuit court did not issue any findings or legal
conclusions regarding when the Schmidts discovered, or could
reasonably have discovered, the fraudulent nature of the
transfers, the ICA remanded the case to the circuit court. See
136 Hawaiʻi at 180, 358 P.3d at 749.
After remand, on October 19, 2016, the circuit court issued
its Findings of Fact and Conclusions of Law, which concluded the
Schmidts’ claims were time-barred, as the Schmidts could
reasonably have discovered the fraudulent nature of the
transfers on or before February 21, 2005, but did not file a
complaint until April 7, 2006, past the one-year statute of
limitations period for HUFTA claims pursuant to HRS § 651C-9(1).
The circuit court entered Final Judgment on December 6, 2016.
The Schmidts appealed,7 in sum asserting the circuit court
clearly erred in determining when they could reasonably have
7
Respondents also cross-appealed regarding their motion for attorneys’
fees, which is not an issue before this court on certiorari, and therefore is
not discussed further.
5
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
discovered the fraudulent nature of the subject transfers.8 The
ICA rejected the Schmidts’ challenge, concluding the circuit
court did not err in making findings that “aided in its
determination of how and when the fraudulent nature of the
subject transfers could reasonably have been discovered by the
Schmidts, and we are not left with a definite and firm
conviction that, based on all of the evidence, mistakes were
made in these findings.” Schmidt v. HSC, Inc., No. CAAP-16-
0000858, at 3 (App. Nov. 30, 2018) (SDO). Accordingly, the ICA
entered a Judgment on Appeal on January 31, 2019 pursuant to its
SDO affirming the circuit court’s December 6, 2016 Final
Judgment and October 19, 2016 Findings of Fact and Conclusions
of Law. See Schmidt, SDO at 8.
The Schmidts timely filed an Application for Writ of
Certiorari on February 19, 2019 (“Application”), presenting the
same three issues they previously argued before the ICA, all
related to the date the circuit court determined the Schmidts
could reasonably have discovered the fraudulent nature of the
subject transfers:
Whether the [ICA] gravely erred and the magnitude of such
error or inconsistency dictates the need for further appeal
where the ICA affirmed:
8
The Schmidts also raised an additional point of error regarding the
circuit court’s award of costs to Respondents, which is not an issue before
this court on certiorari, and therefore is not discussed further.
6
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
(1) the circuit court’s findings of fact (“FOF”) nos. 5,
13, 19, 21, 22 and 23[;]
(2) the circuit court’s conclusions of law (“COL”) nos.
6, 8, 9 and 10[; and]
(3) the circuit court’s entry of final judgment denying
[Petitioners’] complaint against the [Respondents].
In sum, the Schmidts assert they could not reasonably have
discovered the fraudulent nature of the transfers until the July
26, 2005 deposition of Michael Chagami, the chief financial
officer9 of HSC, during which they learned RFI was insolvent, and
that therefore their HUFTA claim was timely filed within the
one-year statute of limitations period.10
This court accepted the Schmidts’ Application. The ICA
erred in affirming the circuit court’s October 19, 2016 Findings
of Fact and Conclusions of Law and December 6, 2016 Final
Judgment, as the circuit court’s determination that the Schmidts
“could have reasonably known of the Transfers and their
fraudulent nature on or before February 21, 2005” contravenes
this court’s ruling in Schmidt II.
9
Although the record sometimes refers to Michael Chagami as HSC’s
president or treasurer, the circuit court’s Findings of Fact identify him as
the chief financial officer.
10
The Schmidts did not argue to the ICA and do not now argue in their
Application (in contrast to their argument in the alternative in Schmidt II),
see supra note 6, that a six-year extension to the limitations period
prescribed in HRS § 651C-9(1) applies due to any “fraudulent concealment” by
Respondents.
7
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
II. Background
The following section proceeds with a background based on
the uncontested findings of fact (“FOF”) of the circuit court
and cited trial exhibits, followed by a recitation of the
specific FOFs and conclusions of law (“COL”) specifically
challenged by the Schmidts, namely FOFs 5, 13, 19, 21, 22, and
23, and COLs 6, 8, 9, and 10.
A. Factual and Procedural Background
In Realty Finance, Inc. v. Schmidt, Civil No. 97-1235-03,
RFI filed a foreclosure action (the “Foreclosure Case”) in the
Circuit Court of the First Circuit (“trial court”). An
interlocutory decree of foreclosure was entered in favor of RFI
and against the Schmidts. After the Hawaiʻi Supreme Court
remanded the case in Schmidt I for an accounting of the value of
the Schmidts’ mortgage debt in light of third-party payments
that should have been applied, the trial court filed an Order
dated October 12, 2004 stating RFI owed the Schmidts over
$537,000. Later, by Order dated November 24, 2004, the trial
court denied the Schmidts’ motion for prejudgment interest. On
December 21, 2004, the trial court entered a separate “final
judgment” in the Foreclosure Case. Later that same day, both
the Schmidts and Respondents filed Notices of Appeal from the
trial court’s December 21, 2004 “final judgment,” but the
appeals were later deemed untimely as the appealable final order
8
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
in the post-judgment proceeding was the November 24, 2004 Order
denying the Schmidts’ motion for prejudgment interest.
Between December 6, 2004 and March 18, 2005, the Schmidts
made no effort to enforce the final judgment (whether it be the
final order entered on November 24, 2004 or the “superfluous”
December 21, 2004 “final judgment”). Additionally, the Schmidts
did not engage in any formal discovery prior to March 18, 2005.
On March 18, 2005, counsel for the Schmidts met with
counsel for RFI regarding the Foreclosure Case. At this
meeting, the Schmidts’ counsel requested of RFI’s counsel copies
of the following checks (collectively, “Transfers”):
(1) a check dated February 11, 2000, in the amount of
$78,000, payable to Defendant Eleanor Henderson;
(2) a check dated February 15, 2000, in the amount of
$119,393.42, payable to Goodsill, Anderson, Quinn, and Stifel;
(3) a check dated February 11, 2000, in the amount of
$54,399.55, payable to Defendant Richard Henderson;
(4) a check dated March 1, 2000, in the amount of
$165,058.42, payable to Kamehameha Schools -- Bernice Pauahi
Bishop Estate.
The Schmidts’ March 21, 2005 request for production encompassed
a formal request for copies of the Transfers. Thirty days later
on April 20, 2005, the Schmidts’ counsel received the copies of
the Transfers, and RFI’s April 22, 2005 response to the
Schmidts’ request for production stated that the requested
copies of the Transfers had already been produced.
9
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
On June 29, 2005, the Schmidts noticed the deposition of
RFI’s chief financial officer, Michael Chagami, as RFI’s Hawaiʻi
Rules of Civil Procedure (“HRCP”) Rule 30(b)(6)11 designee
relating to RFI’s finances. The deposition was taken on July
26, 2005.
Based on these facts and the following contested FOFs and
COLs, the circuit court concluded the Schmidts’ HUFTA claim was
time-barred.
FOF 5: The Schmidts first noticed the 30(b)(6) deposition
of RFI on August 25, 2004, approximately 5 months after remand.
The Schmidts cancelled on September 3, 2004. No other discovery
was attempted between the March 18, 2004 remand order and October
12, 2004.
. . . .
FOF 13: No stay of the judgment was obtained under HRCP
Rule 62, and the Schmidts therefore could have executed on the
Judgment after ten days of the entry of the Judgment. See HRCP
Rule 62(a) (“[N]o execution shall issue upon a judgment nor shall
proceedings be taken for its enforcement until the expiration of
10 days after its entry[.]”).
. . . .
11
HRCP Rule 30(b)(6) states:
A party may in the party's notice and in a subpoena name as
the deponent a public or private corporation or a
partnership or association or governmental agency and
describe with reasonable particularity the matters on which
examination is requested. In that event, the organization
so named shall designate one or more officers, directors,
or managing agents, or other persons who consent to testify
on its behalf, and may set forth, for each person
designated, the matters on which the person will testify. A
subpoena shall advise a non-party organization of its duty
to make such a designation. The persons so designated shall
testify as to matters known or reasonably available to the
organization. This subdivision (b)(6) does not preclude
taking a deposition by any other procedure authorized in
these rules.
10
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
FOF 19: Between March 21, 2005 and April 20, 2005, thirty
days elapsed prior to the Schmidts receiving the transfer checks.
This indicates that if the Schmidts had commenced proceedings to
enforce the judgment in the Foreclosure Case on December 6, 2004,
then they could have received copies of three or four of the
checks associated with the Transfers on January 6, 2005.
. . . .
FOF 21: However, that deposition could be taken any time
after January 6, 2005, unless doing so was prohibited by a
protective order. The Schmidts did not produce any evidence of a
protective order or of any valid reason why the 30(b)(6)
deposition could have not been taken earlier.
FOF 22: Generally, 45 days is more than enough time to
schedule an oral deposition. Affording the Schmidts up to 45
days to schedule the Rule 30(b)(6) deposition and considering the
2005 calendar, the Rule 30(b)(6) deposition could have reasonably
been taken on or before February 21, 2005.
FOF 23: At minimum, the Schmidts could have reasonably
known of the Transfers and their fraudulent nature on or before
February 21, 2005. To summarize, (1) final judgment was entered
in the Foreclosure Case on November 24, 2004; (2) under HRCP Rule
62, after ten days passed, the Schmidts could have executed on
the judgment on the first business day (December 6, 2004); (3)
the Schmidts actually discovered the Transfer checks on or before
January 6, 2005; (4) because 45 days is generally more than
enough time to notice a deposition, the Schmidts could have taken
the decisive deposition on or before February 21, 2005. Thus,
the Schmidts reasonably could have known of the existence of the
Transfers and their fraudulent nature on or before February 21,
2005.
. . . .
COL 6: Based on the preponderance of the evidence, the
Schmidts could reasonably have discovered the existence of the
Transfers and their fraudulent nature before April 8, 2005.
. . . .
COL 8: However, as set forth in the above findings, had
Plaintiffs commenced proceedings to enforce the judgment in the
Foreclosure Case on December 6, 2004, they could have obtained
copies of the checks associated with the Transfers in January
2005, and could have deposed RFI’s representative in January or
February 2005.
COL 9: Likewise, had Plaintiffs commenced discovery into
RFI’s assets any time after the March 18, 2004 Hawaiʻi Supreme
Court opinion, they would have discovered the fraudulent nature
of the Transfers prior to April 8, 2005.
11
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
COL 10: Thus, the Schmidts could have reasonably
discovered the existence of the Transfers and their fraudulent
nature more than one year prior to filing their lawsuit, and the
Schmidts’ action in this case is time-barred under HRS § 651C-
9(1).
B. Appeal to the ICA
The Schmidts timely filed a Notice of Appeal to the ICA,
and presented, in relevant part, three points of error in their
Opening Brief:
A. The trial court committed reversible error in filing
Findings of Fact (FOF) #s 5, 13, 19, 21, 22 and 23 . . . .
. . . .
B. The trial court committed reversible error in making
Conclusions of Law (COL) 6, 8, 9 and 10 . . . .
. . . .
C. The trial court committed reversible error filing the
December 6, 2016 final judgment . . . .
The ICA rejected the challenges. With respect to the
Schmidts’ challenges to the FOFs, the ICA concluded as follows:
“FOFs 5 and 13 are each supported by the record and not clearly
wrong,” “FOF 19 is [not] inconsistent with FOFs 15–18,” and
“FOFs 19, 21, 22, and 23 are [not] based on speculation and
therefore [not] clearly erroneous.” Schmidt, SDO at 3.
Further, “the [c]ircuit [c]ourt did not err in making findings
that aided in its determination of how and when the fraudulent
nature of the Transfers could reasonably have been discovered by
the Schmidts, and we are not left with a definite and firm
conviction that, based on all of the evidence, mistakes were
made in these findings.” Id.
12
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
With respect to the Schmidts’ challenges to the COLs, the
ICA concluded as follows: the Schmidts failed to cite to the
appellate record in support of their arguments and also failed
to “explain or argue how [such exhibits] are significant with
respect to the [c]ircuit [c]ourt’s FOFs or COLs regarding the
Schmidts’ delayed discovery regarding the fraudulent nature of
the subject transfers and their failure to file their complaint
within the applicable statute of limitations.” Schmidt, SDO at
4. Further, based on Hawaiʻi’s jurisprudence regarding the
“discovery rule” for generic fraud claims -- similar to the
“discovery rule” in Freitag v. McGhie, 947 P.2d 1186 (Wash.
1997), which this court relied on in its analysis in Schmidt II
-- “the statute of limitations begins running when the plaintiff
knew or should have known of the damage,” and that “[w]hen there
has been a belated discovery of the cause of action, the issue
whether the plaintiff exercised reasonable diligence is a
question of fact for the court or jury to decide.” Schmidt, SDO
at 5–6 (citing Thomas v. Kidani, 126 Hawaiʻi 125, 133, 267 P.3d
1230, 1238 (2011)). Accordingly, the circuit court did not err
in the contested COLs because “[t]he circuit court’s finding --
that had the Schmidts conducted a reasonably diligent inquiry in
aid of execution after obtaining judgment in their favor they
reasonably would have discovered the fraudulent nature of the
13
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Transfers over one year before filing of the complaint in this
action -- is not clearly erroneous.” Schmidt, SDO at 6.
C. The Current Appeal
The Schmidts present the same three issues they previously
argued before the ICA, all related to the date the circuit court
determined the Schmidts reasonably could have discovered the
fraudulent nature of the Transfers:
Whether the [ICA] gravely erred and the magnitude of such
error or inconsistency dictates the need for further appeal
where the ICA affirmed:
(1) the circuit court’s findings of fact (“FOF”) nos. 5,
13, 19, 21, 22 and 23[;]
(2) the circuit court’s conclusions of law (“COL”) nos.
6, 8, 9 and 10[; and]
(3) the circuit court’s entry of final judgment denying
[Petitioners’] complaint against the [Respondents].
In sum, the Schmidts assert they could not reasonably have
discovered the fraudulent nature of the Transfers until the July
26, 2005 deposition of HSC’s chief financial officer, Michael
Chagami, as that was the first time they learned of HSC’s
insolvency. Using July 26, 2005 as the date when they could
reasonably have discovered the fraudulent nature of the
Transfers, the Schmidts argue they were well within the one-year
statute of limitations period when they filed their HUFTA claim
on April 7, 2006.
14
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
The Schmidts appear to make the following specific
challenges to the circuit court’s FOFs12 and COLs:
FOF 5:13 The Schmidts assert this finding is incomplete
because the HRCP Rule 30(b)(6) deposition was cancelled “when
this Court’s award of fees and costs on the earlier appeal was
paid by [RFI]’s [lawyers’] trust account, so there was nothing
to discover and at no time did [RFI]’s lawyers ever reveal that
[RFI] was only a corporate shell.”
FOF 13:14 The Schmidts also assert this finding is
incomplete because it is “useless to execute on a judgment when
a case is on appeal,” and both parties had immediately filed
appeals following the December 21, 2004 “final judgment,” and
were unaware that their appeals were untimely until the appeals
were dismissed by the Hawaiʻi Supreme Court on May 9, 2005. The
Schmidts appear to suggest that because the Chagami deposition
occurred on June 29, 2005, not too long after the May 9, 2005
Order, they had been reasonably diligent in their efforts to
12
For ease of reference, each challenged FOF previously quoted supra
pages 10–12, is repeated in a respective footnote, with formatting and
citation omitted.
13
FOF 5: The Schmidts first noticed the 30(b)(6) deposition of RFI on
August 25, 2004, approximately 5 months after remand. The Schmidts cancelled
on September 3, 2004. No other discovery was attempted between the March 18,
2004 remand order and October 12, 2004.
14
FOF 13: No stay of the judgment was obtained under HRCP Rule 62, and
the Schmidts therefore could have executed on the Judgment after ten days of
the entry of the Judgment. See HRCP Rule 62(a) (“[N]o execution shall issue
upon a judgment nor shall proceedings be taken for its enforcement until the
expiration of 10 days after its entry[.]”).
15
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
execute on the Foreclosure Case judgment. The Schmidts also
assert, without explanation, that FOF 13 is inconsistent with
FOFs 10,15 11,16 and 15–18.17 They additionally point out that
they had attempted to execute on the judgment when they filed an
Ex Parte Motion for Issuance of Execution and Garnishment on the
Final Judgment dated August 23, 2005, but on September 1, 2005,
the trial court denied it without prejudice to filing a separate
action against the proper parties.
FOF 19:18 The Schmidts assert this finding is speculation
and that it was “proper to not enforce the appeal judgment out
15
FOF 10: The Schmidts and RFI filed notices of appeal from the December
21, 2004 Judgment.
16
FOF 11: On May 9, 2005, the Hawaiʻi Supreme Court entered its Order
Dismissing Appeal in the Foreclosure Case . . . .
17
FOF 15: On March 18, 2005, the Schmidts’ counsel met with RFI’s
counsel in regard to the Foreclosure Case. At that time, the Schmidts’
counsel requested that RFI’s counsel provide them copies of the checks
associated with the four transfers that are the subject of this Fraudulent
Transfer case.
FOF 16: On March 21, 2005, in the Foreclosure Case, the Schmidts
served RFI their [“]First Request for Production . . . .[”] Included in the
request for production of documents were requests which generally required
the production of checks associated with the fraudulent transfers that are
the subject of this action . . . .
FOF 17: On April 20, 2005, the Schmidts’ counsel received copies of
three or four of the checks associated with the Transfers from RFI’s counsel.
FOF 18: On April 22, 2005, RFI’s counsel signed the [“]Response to
Defendants[’] . . . First Request for Production . . . .[”] . . . RFI
indicated that it had already produced copies of checks relating to the
Transfers to the Schmidts.
18
FOF 19: Between March 21, 2005 and April 20, 2005, thirty days elapsed
prior to the Schmidts receiving the transfer checks. This indicates that if
the Schmidts had commenced proceedings to enforce the judgment in the
Foreclosure Case on December 6, 2004, then they could have received copies of
three or four of the checks associated with the Transfers on January 6, 2005.
16
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
of respect for the appellate process.” They reiterate that the
circuit court erred in using November 24, 2004 to calculate the
date the Schmidts could have executed on the final judgment, as
the “final judgment” did not issue until December 21, 2004, and
so any execution and garnishment “would be premature and also
[the] Schmidts needed to know what assets to execute upon or
garnish.”
FOF 21:19 The Schmidts contend this finding is erroneous
because the deposition could not have taken place because there
were pending appeals before the Hawaiʻi Supreme Court until those
appeals were dismissed on May 9, 2005. They argue that they
therefore “acted reasonably in delaying that until they knew
what assets to execute upon or garnish after the appeal was
dismissed. That process was begun by seeking documentary
evidence in early 2005 proving Schmidt acted reasonably in
delaying attempting collection on the judgment.”
FOF 22:20 The Schmidts assert this finding is based upon an
erroneous analysis and speculation that forty-five days is
sufficient time to schedule a deposition, and without any record
19
FOF 21: However, that deposition could be taken any time after January
6, 2005, unless doing so was prohibited by a protective order. The Schmidts
did not produce any evidence of a protective order or of any valid reason why
the 30(b)(6) deposition could have not been taken earlier.
20
Generally, 45 days is more than enough time to schedule an oral
deposition. Affording the Schmidts up to 45 days to schedule the Rule
30(b)(6) deposition and considering the 2005 calendar, the Rule 30(b)(6)
deposition could have reasonably been taken on or before February 21, 2005.
17
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
evidence supporting this finding. They argue that considering
the amount of time this case spent in the trial and appellate
levels, waiting four months out of respect for the appellate
process was not unreasonable.
FOF 23:21 The Schmidts repeat that the circuit court erred
in stating the final judgment issued on November 24, 2004
instead of December 21, 2004. They argue that FOF 23 is
speculation and contrary to the evidence, and repeat arguments
made with respect to the prior contested FOFs. In sum, the
Schmidts assert they could not have conducted any discovery
prior to December 21, 2004, because such discovery would have
been impermissible prejudgment discovery. The Schmidts
emphasize that the fraudulent nature of the Transfers was not
discovered until the Chagami deposition on July 26, 2005. They
state they were diligent in conducting “early discovery” when
they obtained check copies on April 20, 2005 and learned of the
payees at that time, and they concede that “at the earliest,”
21
FOF 23: At minimum, the Schmidts could have reasonably known of the
Transfers and their fraudulent nature on or before February 21, 2005. To
summarize, (1) final judgment was entered in the Foreclosure Case on November
24, 2004; (2) under HRCP Rule 62, after ten days passed, the Schmidts could
have executed on the judgment on the first business day (December 6, 2004);
(3) the Schmidts actually discovered the Transfer checks on or before January
6, 2005; (4) because 45 days is generally more than enough time to notice a
deposition, the Schmidts could have taken the decisive deposition on or
before February 21, 2005. Thus, the Schmidts reasonably could have known of
the existence of the Transfers and their fraudulent nature on or before
February 21, 2005.
18
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
the statute of limitations period began running on April 20,
2005.
The Schmidts’ challenge to COLs 6, 8, 9, and 10 are
premised on the same arguments they presented with respect to
FOF 23. That is, that they did not discover the fraudulent
nature of the Transfers until July 26, 2005 at the conclusion of
the Chagami deposition. Given the long history of litigation,
and the length of time the case was on appeal, the Schmidts
argue that noticing a deposition in “9-12 months is a reasonable
period of time, not 45 days.” According to the Schmidts, “the
inquiry about whether [they] acted diligently starts on May 9,
2005 when this Court dismissed both appeals in the [Foreclosure]
Case,” and that therefore, their HUFTA claim is not time-barred.
In response, Respondents provide a timeline of events
highlighting how the Schmidts “sat idle, making no effective
effort to inquire into RFI’s financial condition or otherwise
obtain information relating to collection of RFI’s debt.”
However, in addition to explaining the correctness of the ICA’s
decision, Respondents also raise an argument previously raised
to the ICA, which the ICA chose not to address in its SDO: the
Schmidts lost standing to pursue their HUFTA claim because the
underlying judgment awarding them the $537,000 in surplus
foreclosure proceeds “lapsed in 2014 and . . . was vacated . . .
19
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
in July 2016 pursuant to HRS § 657-5.[22]” Respondents argue
that without an outstanding judgment, the Schmidts’ fraudulent
transfer claims are now moot.
The Schmidts timely replied that “Respondents’ cases about
mootness are misleading, useless, and illusory because this is
not a collection on the original judgment but a new statutory
[H]UFTA claim . . . .” They contend “Respondents are trying to
divert the court’s attention from the correct focus . . . .
There is no way that [the] Schmidts could have known of the
fraudulent nature of the transfers by RFI on or before February
21, 2005.”
III. Standard of Review
We review a trial court’s findings of fact under the
clearly erroneous standard. A finding of fact is clearly
erroneous when, despite evidence to support the finding,
the appellate court is left with the definite and firm
conviction in reviewing the entire evidence that a mistake
has been committed. A finding of fact is also clearly
erroneous when the record lacks substantial evidence to
support the finding . . . . Hawaiʻi appellate courts review
conclusions of law de novo, under the right/wrong standard.
Beneficial Hawaii, Inc. v. Kida, 96 Hawaiʻi 289, 305, 30 P.3d
895, 911 (2001) (internal quotation marks, brackets, and
citations omitted); see also Chun v. Bd. of Trs. of the Emps.’
22
HRS § 657-5 states:
Unless an extension is granted, every judgment and decree
of any court of the State shall be presumed to be paid and
discharged at the expiration of ten years after the
judgment or decree was rendered. No action shall be
commenced after the expiration of ten years from the date a
judgment or decree was rendered or extended . . . .
20
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Ret. Sys. of the State of Hawaiʻi, 106 Hawaiʻi 416, 430, 106 P.3d
339, 353 (2005).
IV. Discussion
A. This court does not address the effect of the vacatur of
the Foreclosure Case judgment.
As a preliminary matter, Respondents argue that the
Schmidts lack standing to continue this appeal regarding their
2006 HUFTA claims because the December 21, 2014 Foreclosure Case
judgment became satisfied as a matter of law in 2014.23 As noted
by Respondents, however, the circuit court has not addressed the
issue and the ICA did not address the issue because it ruled in
Respondents’ favor on alternative grounds. In addition, this
court recently clarified that “[i]n Hawaiʻi state courts,
standing is a prudential consideration regarding the proper --
and properly limited -- role of courts in a democratic society
and is not an issue of subject matter jurisdiction, as it is in
federal courts.” Tax Foundation v. State, 144 Hawaiʻi 175, 188,
439 P.3d 127, 140 (2019) (internal quotation marks omitted).
Because (1) the issue is not one of subject matter jurisdiction,
(2) is not an issue adequately briefed on certiorari, (3) has
not been addressed by the circuit court or the ICA, and (4) this
23
In Realty Finance, Inc. v. Schmidt, No. CAAP-XX-XXXXXXX (App. May 14,
2019) (SDO), cert. denied, SCWC-16-536 (Haw. Aug. 14, 2019), the ICA affirmed
the Circuit Court of the First Circuit’s July 7, 2016, vacatur of the
December 21, 2014 Foreclosure Case judgment because the Schmidts failed to
renew it within ten years per HRS § 657-5 (2016). Realty Finance, SDO at 2-
3.
21
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
court is vacating and remanding to the circuit court, this court
declines to address the issue at this time.
B. The Schmidts timely raised their HUFTA claims.
The crux of the Schmidts’ challenge on certiorari is that
the ICA erred in affirming the circuit court’s ruling as to
“when [the] Schmidts discovered or should have discovered . . .
the fraudulent nature of the transfers.”
The ICA’s SDO accurately discusses the current
jurisprudence regarding the “discovery rule” associated with HRS
§ 651C-9 and similar UFTA statutes. See Schmidt, SDO at 5–6.
Namely, this court ruled in Schmidt II that the limitations
period in HRS § 651C-9(1) refers to when “a fraudulent transfer,
and not simply a transfer” “was or could reasonably have been
discovered by the claimant.” Schmidt II, 131 Hawaiʻi at 507, 319
P.3d at 426 (citing HRS § 651C-9(1)) (emphasis in original). In
Schmidt II, this court concluded the interpretations by the
Hawaiʻi federal bankruptcy court and the Washington Supreme Court
regarding relevant UFTA provisions were consistent with the
Hawaiʻi legislature’s purpose behind HUFTA. See Schmidt II, 131
Hawaiʻi at 506–07, 319 P.3d at 425–26 (citing In re Maui Indus.
Loan & Fin. Co., 454 B.R. 133, 137 (Bankr. D. Hawaiʻi 2011);
Freitag, 947 P.2d at 1189). Thus, to be consistent with the
premise that it would be “legally absurd and unjust to interpret
the discovery rule to preclude claims under the UFTA if
22
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
plaintiffs were never aware they held a potential claim,”
Schmidt II, 131 Hawaiʻi at 508, 319 P.3d at 427, “actual
knowledge of the fraud [is] inferred if the aggrieved party,
through the exercise of due diligence, could have discovered
it.” Freitag, 947 P.2d at 1189 (emphasis added).
What was not fully discussed by the ICA, however, is the
rationale behind this court’s holding in Schmidt II. Although
not expressly stated in Schmidt II, that the statute of
limitations begins to run when the fraudulent nature of the
transfer is discovered or reasonably discoverable, as opposed to
when a creditor discovered the transfer, is “more protective of
innocent creditors.” Schmidt II, 131 Hawaiʻi at 506, 319 P.3d at
425 (citation omitted). This means that the date by which the
fraudulent nature of a transfer is discovered or discoverable
should be later than the date by which the transfer alone is
discovered. Indeed, the purpose of HUFTA
would be undermined if the one year period began once plaintiffs
discovered the existence of a transfer, even if they were unaware
of its fraudulent nature. Under that interpretation, plaintiffs
would lose the right to pursue a remedy in court for fraudulently
incurred injuries even though they could not have become aware of
the existence of their claims.
Schmidt II, 131 Hawaiʻi at 508, 319 P.3d at 427.
Cases from other jurisdictions are in accord. Construing
Ohio’s version of the Uniform Fraudulent Transfer Act (“UFTA”),
the Sixth Circuit Court of Appeals stated:
23
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
The Ohio UFTA's overall purpose is to discourage fraud and
provide aggrieved creditors with a means to recover assets
wrongfully placed beyond their reach. Accordingly, to
require a claimant to bring suit within one year of
discovering a transfer, without having discovered facts
that would put the claimant on notice as to the transfer's
fraudulent nature, would be to interpret § 1336.09(A) in a
manner that is directly at odds with the animating purpose
of the UFTA.
In re Fair Finance, 834 F.3d 651, 674 (6th Cir. 2016); see also
Official Comm. of Unsecured Creditors of Great Lakes Quick Lube
LP v. Theisen, 920 N.W.2d 356, 365 (Wis. App. 2018) (“statute of
limitations [begins to run] from the point at which the claimant
discovers or reasonably could have discovered the fraudulent
nature of the transfer”).
The purpose of HUFTA would be further undermined if
creditors are expected to “reasonably discover” the fraudulent
nature of a transfer even before they actually uncover the
existence of the transfer. Yet, that is the upshot of the
circuit court’s October 19, 2016 FOFs and COLs. When considered
in their entirety, it is apparent that the circuit court agreed
with the Schmidts that they discovered the fraudulent nature of
the Transfers at the Chagami deposition on July 26, 2005.
However, by finding that the Schmidts could have “reasonably
discovered” the fraudulent nature of the Transfers by February
21, 2005 -- well in advance of the Chagami deposition and, more
importantly, prior to March 18, 2005, when the Schmidts had
actually discovered the mere existence of the Transfers when
HSC’s counsel produced a February 2000 bank statement to the
24
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Schmidts -- the circuit court necessarily found that the
Schmidts could (and should) have discovered both the existence
and fraudulent nature of the Transfers prior to February 21,
2005. Such a determination contravenes this court’s statutory
interpretation of HRS § 651C-9(1) and discussion of HUFTA’s
purpose in Schmidt II. Accordingly, the circuit court erred as
a matter of law when it determined that the Schmidts could have
reasonably discovered the fraudulent nature of the Transfers by
February 21, 2005, and the ICA erred in affirming the circuit
court in this regard.
Here, the Schmidts did not discover the existence of the
Transfers until March 18, 2005, and discovered the fraudulent
nature of the Transfers shortly thereafter on July 26, 2005.24
The circuit court made no finding that the Schmidts did not act
diligently during this four-month period. Indeed, the record
shows the opposite. On March 21, 2005, prior to the dismissal
of the Foreclosure Case appeals, the Schmidts made a formal
request for production, and on April 20, 2005, the Schmidts
received copies of the checks evidencing the Transfers. Within
about two months, on June 29, 2005, the Schmidts noticed the
deposition of RFI’s chief financial officer, Michael Chagami, as
24
Although the Schmidts concede that “they reasonably discovered the
insider transfers and their fraudulent nature . . . at the earliest on April
20, 2005 when they got copies of the front and back of the four checks
showing the payees,” the circuit court found that the Schmidts discovered the
fraudulent nature of the Transfers on July 26, 2005, and this court does not
disturb that finding.
25
*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
RFI’s HRCP Rule 30(b)(6) designee relating to RFI’s finances,
and the deposition was taken on July 26, 2005. Such steps
undoubtedly demonstrated “reasonable” due diligence.
Based on the foregoing, this court concludes that the
statute of limitations for the Schmidts’ HUFTA claim did not
begin until July 26, 2005, and therefore the Schmidts timely
raised their HUFTA claims.
V. Conclusion
For the foregoing reasons, this court vacates the ICA’s
January 31, 2019 Judgment on Appeal and the circuit court’s
December 6, 2016 Final Judgment and remands this case to the
circuit court for further proceedings consistent with this
opinion.
R. Steven Geshell /s/ Paula A. Nakayama
for petitioner
/s/ Sabrina S. McKenna
Paul Alston
for respondents /s/ Richard W. Pollack
/s/ Michael D. Wilson
/s/ Edward H. Kubo, Jr.
26