ALAN C. KAY, Senior District Judge.
For the reasons discussed below, the Court imposes monetary sanctions in the amount of $25,000 jointly and severally against Defendant Kristin Kimo Henry ("Defendant Henry") and Defendant Aloha Ocean Excursions, LLC ("Defendant AOE"), subject to potential substantial enhancement as discussed more fully herein.
For purposes of this Order, the Court will not recount this case's lengthy procedural history beginning in 2013. The Court only discusses those facts and events of specific relevance to the issue that this Order addresses.
On August 15, 2019, the Court issued a Minute Order (the "08/15/2019 Order"), ECF No. 601, concerning the commercial use permit and the matter of whether to sanction Defendant Henry and Defendant AOE. The Court stated the following:
08/15/2019 Order at 1. Defendant AOE and Plaintiff Barnes filed briefs on the sanctions matter on August 20, 2019. ECF Nos. 603 and 604. The Court held a hearing on the sanctions matter on August 22, 2019. ECF No. 606.
Based upon the authorities hereinafter discussed, the Court imposes sanctions against Defendant Henry and Defendant AOE for the reasons that follow.
A review of the various events concerning the permit is necessary in order to properly understand the Court's decision to sanction Defendant Henry and Defendant AOE.
Plaintiff Barnes was injured in July 2012 when the vessel Tehani, on which he was working as a seaman, exploded as it was being lowered into the water at the Honokohau Harbor in Kailua-Kona, Hawai`i. Plaintiff Barnes filed this lawsuit on January 1, 2013, which includes a maritime lien claim for failure to pay Plaintiff Barnes maintenance and cure. This Court has ruled that Plaintiff Barnes is entitled to recover for maintenance and cure from Defendant Sea Hawaii Rafting, LLC ("Defendant SHR") as the owner of the Tehani. At the time of the accident, Defendant SHR operated the vessel Tehani under a commercial use permit issued by the Division of Boating and Ocean Recreation ("DOBOR") as part of a maritime tourist business. The permit was issued to Defendant SHR, and the Tehani was (and still is) the vessel named on the permit. Defendant Henry is the sole member of Sea Hawaii Rafting, LLC and Aloha Ocean Excursions, LLC. The parties have always agreed that the commercial use permit significantly affects the value of the vessel.
The commercial use permit entitles the permittee to launch the vessel named on the permit from the ramp at Honokohau Harbor. Currently, 51 such permits exist; however, the number of permits is limited to 35 and there is a permit waitlist with six individuals or entities on it. Transcript of February 28, 2019 Hearing ("Tr."), ECF No. 539, at 8:8, 9:1-6 (testimony of William Wynhoff, Deputy Attorney General and General Counsel for the State of Hawai`i's Department of Land and Natural Resources ("DLNR")). This means that 16 individuals or entities must give up their permits before an individual or entity on the waitlist will be issued a permit. Tr. at 9:7-12.
On November 3, 2014, Defendant Henry filed a voluntary chapter 13 bankruptcy petition.
In a Minute Order dated July 17, 2015, the Court noted that Defendant Henry represented to this Court that Defendant SHR owned the Tehani; yet in the Chapter 13 Case, Defendant Henry represented that he himself owned the Tehani. ECF No. 158 at 2. After the Court noted the inconsistency in Defendant Henry's representations, Defendant SHR amended its bankruptcy schedules on August 4, 2015 to reflect the fact that it owned the Tehani (although Defendant SHR did not disclose that it owned the commercial use permit). Chapter 7 Case, Dkt. No. 24.
Defendant Henry formed Aloha Ocean Excursions, LLC on August 11, 2015.
Shortly after the bankruptcy court approved the lease arrangement, the Chapter 7 Trustee agreed to sell the vessel and its trailer to Defendant AOE for $35,000. On March 29, 2016, the Chapter 7 Trustee filed a motion requesting the bankruptcy court's approval of the proposed sale. Chapter 7 Case, Dkt. No. 151. On May 9, 2016, the bankruptcy court issued an order granting the Chapter 7 Trustee's motion, and the Tehani was thus sold to Defendant AOE. Chapter 7 Case, Dkt. No. 185. The sale of the vessel did not include the commercial use permit, which at the time of the sale was still in the name of Defendant SHR and property of Defendant SHR's Bankruptcy Estate.
On December 16, 2016, Defendant Henry wrote a letter to Bill Taylor, the Harbor Master of Honokohau Harbor, which stated in its entirety: "I would like to request a change in name from Sea Hawaii Rafting, LLC to Aloha Ocean Excursions, LLC. There have been no changes in ownership or officers or any other changes. Thank you for your consideration."
In 2018, the Court held a trial on Plaintiff Barnes's maintenance and cure claim, and on October 6, 2018, issued Amended Findings of Fact and Conclusions of Law and entered judgment against the Tehani in rem and Defendant SHR in personam in the amount of $279,406.12 plus $206,281.00 in attorney's fees and $27,124.44 in costs for a total judgment of $512,811.56.
On December 6, 2018, the bankruptcy court issued an order in which it approved the Chapter 7 Trustee's Notice of Proposed Abandonment of the Tehani's commercial use permit. Chapter 7 Case, Dkt. No. 355. It is unclear when the Chapter 7 Trustee became aware of the commercial use permit's existence. "Abandonment" in the bankruptcy context "is the formal relinquishment of the property at issue from the bankruptcy estate. Upon abandonment, the debtor's interest in the property is restored
On May 22, 2019, Judge Kobayashi issued an order voiding the bankruptcy court's sale of the Tehani to Defendant AOE.
Accordingly, Defendant SHR now owns the Tehani, and the Tehani is the vessel named on the permit. However, Defendant Henry and Defendant AOE, by the December 16, 2016 letter, wrongfully caused the permit to be reissued in the name of Defendant AOE. With this background in mind, the Court turns to the matter of sanctions.
The Court finds it appropriate to impose monetary sanctions on Defendant Henry and Defendant AOE, first because they deliberately, recklessly, and wrongfully caused the permit to be transferred to Defendant AOE, and second because Defendant Henry and Defendant AOE's conduct has potentially jeopardized the validity of the permit and put the permit at a risk of cancellation. At the same time, Defendant Henry and Defendant AOE have deprived Defendant SHR of an extremely valuable asset, and have therefore substantially limited Plaintiff Barnes's potential recovery of his maritime lien and judgment against Defendant SHR and the vessel Tehani.
Defendant Henry put the permit at a risk of cancellation when he moved the bankruptcy court to approve the sale of the vessel. Hawai`i Administrative Rules § 13-231-62(b)(2) provides several scenarios where a permit "shall automatically expire[] ... [i]f the vessel ... operated under the commercial use permit ... [is] sold or otherwise transferred and not replaced" according to another provision of the Hawai`i Administrative Rules. Haw. Admin. R. § 13-231-62(b)(2)(B). Apparently, the bankruptcy court and the Chapter 7 Trustee were unaware of the permit's existence at the time the Chapter 7 Trustee and Defendant AOE agreed on the terms of the sale, and when the bankruptcy court subsequently approved the sale.
Therefore, the Court finds that Defendant Henry and Defendant AOE acted deliberately, recklessly, and wrongfully by causing the vessel to be sold and putting the validity of the permit at risk.
Defendant Henry also put the permit at risk when he wrote the December 16, 2016 letter to Mr. Taylor requesting a change in name from Sea Hawaii Rafting, LLC to Aloha Ocean Excursions, LLC. Although Mr. Taylor and/or DOBOR agreed to the request, Mr. Wynhoff confirmed that "there's an issue" when asked whether he had any reason to believe that the existing permit held by Defendant AOE was valid or invalid. Tr. at 15:9-12. Mr. Wynhoff also testified, having read the letter into the record, "it's my belief having looked at it, that this letter is not accurate." Tr. at 14:9-10. Mr. Wynhoff explained that the letter is inaccurate because "Sea Hawaii Rafting, LLC was a corporation.... And then Aloha Ocean Excursions, LLC was a brand new different corporation. Both of which were controlled by Mr. Henry as far as I can tell, but the statement in here that it's just a name change does not appear to me to be accurate[.]" Tr. at 14:13-18. Mr. Wynhoff's testimony unequivocally confirms that Defendant Henry's actions put the validity of the permit at risk.
Moreover, the bankruptcy court has ruled that Defendant Henry's conduct violated the automatic stay.
Accordingly, the Court finds that Defendant Henry and Defendant AOE acted deliberately, recklessly, and wrongfully because they again put the permit at a risk of cancellation by causing it to be improperly transferred from Defendant SHR to Defendant AOE on the basis of a misrepresentation.
Defendant Henry and Defendant AOE's wrongful transfer of the permit also significantly harmed the interests of Plaintiff Barnes. Defendant Henry and Defendant AOE benefitted from the use of the permit for a period of approximately two years after the permit was improperly transferred from Defendant SHR to Defendant AOE. Moreover, this improper maneuver by Defendant Henry (the sole member of Defendant SHR) has furthered Defendant Henry's efforts to avoid paying maintenance and cure to Plaintiff Barnes (to date, Defendant Henry has paid less than $2,000 in maintenance to Plaintiff Barnes and has been credited $10,000 which was rent paid for the period Defendant AOE leased the Tehani from the Chapter 7 Trustee). Plaintiff Barnes, who now has a substantial judgment of $512,811.56 against Defendant SHR and maritime lien on the Tehani, has been is severely limited in enforcing that judgment and maritime lien against solely the Tehani—because the permit, which should be one of Defendant SHR's only two valuable assets (the second being the Tehani), is improperly in the name of Defendant AOE; and without the permit the Tehani cannot operate and be productive and thus is of minimal value.
Moreover, at the time the improper transfer occurred, Plaintiff Barnes had a maritime lien on the Tehani for the payment of maintenance and cure, and there was a question at the time whether Plaintiff Barnes's maritime lien extended to the permit. Although the Court has since determined that the permit is not an appurtenance of the vessel, and therefore Plaintiff Barnes's maritime lien does not extend to the permit, title to the Tehani has reverted to Defendant SHR, and the Tehani is the vessel named on the permit.
Therefore, the Court finds that the transfer of the permit was deliberate, reckless, and wrongful, and that it was done for an improper purpose because it potentially substantially limits Plaintiff Barnes's recovery of his maritime lien and judgment against Defendant SHR and the vessel Tehani.
Based upon the foregoing, the Court finds it appropriate to impose monetary sanctions against Defendant Henry and Defendant AOE. Defendant Henry and Defendant AOE acted deliberately, recklessly, and wrongfully by putting the permit at a risk of cancellation on at least two occasions—first by asking the bankruptcy court to sell the vessel without the permit; and second by causing the permit to be reissued in the name of Defendant AOE on the basis of a misrepresentation. Defendant Henry and Defendant AOE also acted wrongfully because the improper transfer of the permit has potentially significantly limited Plaintiff Barnes's recovery of his maritime lien and judgment against Defendant SHR and the vessel Tehani.
Accordingly, the Court will impose monetary sanctions against Defendant Henry and Defendant AOE because these defendants have acted deliberately, recklessly, wrongfully, and with an improper purpose, and the Court finds that this conduct "was tantamount to bad faith and therefore sanctionable" under the Court's inherent power to issue sanctions.
Under the facts of this case, the Court concludes that the permit is improperly in the name of Defendant AOE and justice requires that the permit should be reissued in the name of Defendant SHR; however, any such determination regarding the reissuance of the permit is properly left to DOBOR.
"Three primary sources of authority enable courts to sanction parties or their lawyers for improper conduct: (1) Federal Rule of Civil Procedure 11, which applies to signed writings filed with the court, (2) 28 U.S.C. § 1927, which is aimed at penalizing conduct that unreasonably and vexatiously multiplies the proceedings, and (3) the court's inherent power."
The Court is imposing sanctions against Defendant Henry and Defendant AOE based upon the Court's inherent power to sanction.
In the Ninth Circuit, Courts have inherent power to levy sanctions for "willful disobedience of a court order ... or when the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons...."
Courts have the "inherent authority to impose sanctions for bad faith, which includes a broad range of improper conduct."
The Court is mindful that its inherent power to sanction must be exercised with "restraint and discretion."
The Court hereby imposes monetary sanctions jointly and severally against Defendant Henry and Defendant AOE in the amount of $25,000, which shall be payable to Plaintiff Barnes. The Clerk of Court is directed to disburse the $18,000 plus interest currently held in the registry of the Court to Plaintiff Barnes as partial payment of the sanction.
The Court directs Defendant AOE and Defendant Henry to take appropriate steps to effectuate the successful transfer of the commercial use permit back to Defendant SHR. Defendant AOE and Defendant Henry are required to pay any fine or transfer fee assessed in the course of transferring the permit back to Defendant SHR. The Court further rules that the $25,000 sanction shall be subject to significant enhancement should the permit not be reissued to Defendant SHR. This Order modifies and supersedes the Court's 07/17/2019 Order.
IT IS SO ORDERED.
