Loyalty Development Company, LTD. v. Ching

NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER

Electronically Filed
Intermediate Court of Appeals
CAAP-XX-XXXXXXX
17-MAY-2024
08:19 AM
Dkt. 108 SO

NO. CAAP-XX-XXXXXXX

IN THE INTERMEDIATE COURT OF APPEALS

OF THE STATE OF HAWAI#I

LOYALTY DEVELOPMENT COMPANY, LTD., Plaintiff-Appellee,
v.
WALLACE S.J. CHING, individually and in his capacity
as a Director of Loyalty Development Company, Ltd.,
Defendant-Appellant
and
JOHN DOES 1-5; JANE DOES 1-5; DOE PARTNERSHIPS 1-5; DOE
CORPORATIONS 1-5; and DOE ENTITES 1-5, Defendants

APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CASE NO. 1CC161001580)

SUMMARY DISPOSITION ORDER
(By: Hiraoka, Presiding Judge, Wadsworth and McCullen, JJ.)

Wallace S.J. Ching appeals from the Final Judgment
entered by the Circuit Court of the First Circuit on April 24,
2019.1 He challenges the "Findings of Fact, Conclusions of Law
and Order Denying Defendant Wallace S.J. Ching's Individually and
in His Capacity as a Director of Loyalty Development Company
Ltd., Motion for Attorneys' Fees and Costs Incurred in Obtaining
Indemnification" entered on February 25, 2019. We affirm the
Final Judgment, but for reasons other than those articulated in

1
The Honorable Dean E. Ochiai presided.
NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER

the Order. We affirm conclusion of law E. in the Order,2 but
vacate the findings of fact, conclusions of law, and mixed
findings and conclusions that are inconsistent with or contrary
to the discussion below.3
Loyalty Development Company, Ltd. filed a lawsuit (the
DJ Action) against Ching on August 16, 2016. The complaint
alleged a controversy between Loyalty and Ching, who was one of
Loyalty's directors, about whether the Conflict Clause in
Loyalty's Articles of Association was valid. Loyalty sought
declarations that: (1) the Conflict Clause was valid and
enforceable; (2) Ching was estopped from arguing that the
Conflict Clause or any corporate action implicating it was
invalid; and (3) laches barred Ching from challenging the
enforceability of the Conflict Clause or any corporate action
implicating it.
Ching moved to dismiss the DJ Action. He argued that
"this lawsuit should be dismissed because it does not present an
actual case or controversy . . . . Here, [Loyalty] alleges only a
difference of opinion among directors. As a result, [Loyalty]'s
complaint calls for an impermissible advisory opinion and should
be dismissed for failure to state a claim." An order dismissing
the DJ Action "without prejudice" was entered on December 16,
2016.4 Loyalty has not appealed the dismissal.
Ching then asked Loyalty to pay the attorneys fees and
costs he incurred to defend against the DJ Action, under the
indemnification provision of Loyalty's Articles. Loyalty

2
The Order concluded:
E. WChing [sic] is entitled to no additional
recovery of legal fees and costs over the $177,755.43 that
he already has accepted and therefore no recovery pursuant
to WChing's Motion [for] Attorneys' Fees and Costs incurred
in seeking his indemnity.
3
We do so because of the potential for future litigation between
the parties in which attempts to assert claim preclusion (res judicata) or
issue preclusion (collateral estoppel) could be made.
4
The Honorable Edwin C. Nacino presided.

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retained Counsel to opine on Ching's request, a procedure
prescribed by Loyalty's Articles. On February 23, 2018, Loyalty
tendered $177,755.43 to Ching based on Counsel's opinion.
On December 19, 2018, Ching moved for an award of the
attorneys fees and costs he incurred to obtain indemnification
(fees on fees). The circuit court made findings and conclusions
and entered an order denying Ching's motion on February 25, 2019.
The Final Judgment was entered on April 24, 2019. This appeal
followed.
Ordinarily, a "trial court's grant or denial of
attorneys' fees and costs is reviewed under the abuse of
discretion standard." Kamaka v. Goodsill Anderson Quinn &
Stifel, 117 Hawai#i 92, 105, 176 P.3d 91, 104 (2008) (quoting
Kahala Royal Corp. v. Goodsill Anderson Quinn & Stifel, 113
Hawai#i 251, 266, 151 P.3d 732, 747 (2007) (citation omitted)).
But in this case Ching contends that he was entitled to fees on
fees under: (1) Hawaii Revised Statutes (HRS) §§ 414-243, -245;
and (2) article V, paragraph 7 of Loyalty's Articles.
We construe a statute de novo. Barker v. Young, 153
Hawai#i 144, 148, 528 P.3d 217, 221 (2023). We start with the
statute's language. "[I]mplicit in the task of statutory
construction is our foremost obligation to ascertain and give
effect to the intention of the legislature, which is to be
obtained primarily from the language contained in the statute
itself." Id. We may refer to "extrinsic aids in determining
legislative intent, such as legislative history, or the reason
and spirit of the law." Id. (citation omitted).
We also review interpretation of the Articles de novo,
because "a corporate charter is a contract[,]" Casumpang v. ILWU,
Local 142, 94 Hawai#i 330, 344, 13 P.3d 1235, 1249 (2000)
(citations omitted), and we interpret a contract de novo. Title
Guar. Escrow Servs., Inc. v. Wailea Resort Co., 146 Hawai#i 34,
46, 456 P.3d 107, 119 (2019). Absent an ambiguity, contract
terms are interpreted according to their plain, ordinary, and
accepted sense in common speech. Id. (citation omitted).

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(1) HRS § 414-243 (2004) provides:

A corporation shall indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of
any proceeding to which the director was a party because the
director was a director of the corporation against
reasonable expenses incurred by the director in connection
with the proceeding.

Loyalty argues that Ching was not wholly successful on
the merits or otherwise. Ching argues he was. We need not
decide this issue. Loyalty paid Ching what Counsel opined to be
the reasonable expenses Ching incurred to defend against the DJ
action. Ching's motion for fees on fees stated, "the issue of
the amount owed to Mr. Ching in connection with his attempts to
settle and ultimately dismiss the LDC Lawsuit has been resolved
and is not at issue here." Ching's opening brief acknowledges he
"has already been indemnified for the expenses incurred in the
[DJ Action]." The only issue presented by this appeal is whether
Ching is entitled to recover fees on fees.
HRS § 414-243 does not speak to fees on fees. HRS
Chapter 414 is based on the American Bar Association's Model
Business Corporations Act (Model Act). See Conf. Comm. Rep.
No. 15, in 2000 House Journal, at 850-51. The conference
committee reported:

The purpose of this bill is to modernize the Hawaii
Business Corporation Act by replacing chapter 415, Hawaii
Revised Statutes, with the 1984 amendments to the Model
Business Corporation Act (Model Act). The bill includes
technical, nonsubstantive amendments to the newly adopted
law for clarity and uniformity with Hawaii's laws, as well
as to allow cross-referencing between Hawaii's law and the
Model Act.

The official comments to the Model Act are instructive.
HRS § 414-243 is materially identical to § 8.52 of the Model Act.
The Official Comment to Model Act § 8.52 states, in part:

Section 8.52 creates a right of indemnification in
favor of the director who meets its requirements.
Enforcement of this right by judicial proceeding is
specifically contemplated by section 8.54(a)(1).
Section 8.54(b) gives the director a right to recover

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expenses incurred in enforcing the director's right to
indemnification under section 8.52.

Model Act § 8.54 is materially identical to HRS § 414-
245 (2004), which provides:

(a) A director who is a party to a proceeding
because the director is a director may apply for
indemnification . . . to the court conducting the proceeding
or to another court of competent jurisdiction. After
receipt of an application and after giving any notice it
considers necessary, the court shall:

(1) Order indemnification if the court determines
that the director is entitled to mandatory
indemnification under section 414-243[.]

. . . .
(b) If the court determines that the director is
entitled to indemnification under subsection (a)(1) . . . it
shall also order the corporation to pay the director's
reasonable expenses incurred in connection with obtaining
court-ordered indemnification or advance for expenses.

(Emphasis added.)
Hawai#i follows the common law rule that parties must
pay their own attorneys fees unless recovery from another party
is "authorized by statute, rule of court, agreement, stipulation,
or precedent." Fought & Co. v. Steel Eng'g & Erection, Inc., 87
Hawai#i 37, 51, 951 P.2d 487, 501 (1998). Statutes in derogation
of common law must be strictly construed. Gold Coast
Neighborhood Ass'n v. State, 140 Hawai#i 437, 457, 403 P.3d 214,
234 (2017). HRS § 414-245(b) doesn't apply here. Loyalty
followed the procedure in article V, paragraph 8 of its Articles,
retained Counsel to review Ching's claim, and paid Ching what
Counsel opined were the reasonable fees and costs Ching incurred
to defend against the DJ Action. No court ordered Loyalty to
indemnify Ching. HRS § 414-245(b) does not apply because the
fees and costs sought by Ching were not incurred to obtain court-
ordered indemnification.

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(2) Article V, paragraph 7 of Loyalty's Articles
provides, in relevant part:

The corporation shall indemnify each person who was or is a
party . . . to any . . . action or suit . . . by reason of
the fact that he is or was a director . . . of the
corporation, . . . against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit[.]

We interpret these terms according to their plain,
ordinary, and accepted sense in common speech. Title Guar.
Escrow Servs., 146 Hawai#i at 46, 456 P.3d at 119. They entitle
Ching to indemnification for attorneys fees and costs "actually
and reasonably incurred by him in connection with the defense or
settlement of" the DJ Action. Ching has already been indemnified
for these expenses. Article V, paragraph 7 does not address or
allow recovery of fees on fees.
Ching relies on Stifel Fin. Corp. v. Cochran, 809 A.2d
555 (Del. 2002). Cochran was an officer and director of a Stifel
subsidiary. Stifel terminated him in the midst of a federal
investigation. He was later convicted of securities fraud, but a
federal appeals court held he had violated no law. He then sued
Stifel in state court for indemnification against attorneys fees
and costs he incurred to defend the criminal case, and for fees
on fees. The trial court dismissed the latter claim. Cochran
appealed. The Delaware Supreme Court applied a Delaware statute
(8 Del.C. § 145) and held that Cochran was entitled to fees on
fees. Delaware has not adopted the Model Act. Stifel is
inapposite. Ching cites no other authority supporting his claim
for fees on fees.5

5
After briefing was completed, the Hawai#i Supreme Court held that
fees on fees were recoverable under the private attorney general doctrine.
Pub. Access Trails Haw. v. Haleakala Ranch Co., 153 Hawai#i 1, 29, 526 P.3d
526, 554 (2023). The private attorney general doctrine doesn't apply in this
case.

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For these reasons, the April 24, 2019 "Final Judgment"
is affirmed. Conclusion of law E. in the February 25, 2019
"Findings of Fact, Conclusions of Law and Order Denying Defendant
Wallace S.J. Ching's Individually and in His Capacity as a
Director of Loyalty Development Company Ltd., Motion for
Attorneys' Fees and Costs Incurred in Obtaining Indemnification"
is affirmed, but all findings of fact, conclusions of law, and
mixed findings and conclusions that are inconsistent with or
contrary to this summary disposition order are vacated.
DATED: Honolulu, Hawai#i, May 17, 2024.

On the briefs:
/s/ Keith K. Hiraoka
Ward Jones, Presiding Judge
Edmund K. Saffery,
Deirdre Marie-Iha, /s/ Clyde J. Wadsworth
Lauren K. Chun, Associate Judge
for Defendant-Appellant.
/s/ Sonja M.P. McCullen
Bert T. Kobayashi, Jr., Associate Judge
Jonathan S. Moore,
Caycie K. Gusman Wong,
for Plaintiff-Appellee.

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