FT - Kekona v. Abastillas (6/8/2006)

[Riser Adkisson LLP]

Kekona v. Abastillas,
2006 WL 1562086 (Hawai'i App. 06/08/2006)

(Under Rule 35(c) of the Hawai'i Rules of Appellate Procedure, a memorandum opinion or
unpublished dispositional order shall not be cited in any other action or proceeding except
when the opinion or unpublished dispositional order establishes the law of the pending case,
res judicata or collateral estoppel, or in a criminal action or proceeding involving the
same respondent.)

Intermediate Court of Appeals of Hawai‘i.

Benjamin Paul KEKONA, and Tamae M. Kekona, Plaintiffs-Appellees and Cross-Appellants

v.

Paz Feng ABASTILLAS, also known as Paz A. Richter, Robert A. Smith, personally, Robert A. Smith,
Attorney at Law, a Law Corporation, Standard Management, Inc., Western Surety Company, and
Michael Bornemann, Defendants-Appellants and Cross-Appellees,

and

U.S. Bancorp Mortgage Company, an Oregon Company, John Does 1-10, Doe Corporations 1-10, and Doe
Entities 2-10, Defendants.

No. 24051.

June 8, 2006.

Appeal from the Circuit Court of the First Circuit (Civil No. 93-3974).

Robert A. Smith, on the briefs, for Defendants-Appellants and Cross-Appellees, Paz F. Abastillas,
Robert A. Smith, Attorney at Law, A Law Corporation, Standard Management, Inc., and Western
Surety Company.

Peter Van Name Esser and Edward J. Bubee, on the briefs, for Defendant-Appellant and Cross-
Appellee, Michael Bornemann.

Fred Paul Benco, on the briefs, for Plaintiffs-Appellees and Cross Appellants.

BURNS, C.J., WATANABE and LIM, JJ.


MEMORANDUM OPINION

*1 The Defendants-Appellants and Cross-Appellees (Defendants) in this case are the following: (a)
Paz Feng Abastillas (Abastillas), (b) Standard Management, Inc., (SMI), which is a corporation
wholly owned by Abastillas, (c) attorney Robert A. Smith (Smith), who is the employer and live-in-
boyfriend of Abastillas, (d) Robert A. Smith, Attorney at Law, A Law Corporation (RASCORP), which
is Smith's wholly-owned law corporation, (e) Dr. Michael Bornemann (Dr. Bornemann), who is a
friend and client of Abastillas, Smith, and RASCORP, and (f) Western Surety Company (WSC), which
is the company that issued notary bonds on behalf of Abastillas and Smith.

The Defendants appeal from the Amended Revised Final Judgment entered on February 26, 2001 in
favor of the Plaintiffs-Appellees and Cross-Appellants Benjamin Paul Kekona and Tamae M. Kekona
(the Kekonas or Plaintiffs). The Kekonas cross-appeal. We affirm in part and reverse in part.

BACKGROUND

In 1989, SMI filed First Circuit Court Civil No. 89-3517 against the Kekonas for breach of a
partnership agreement pertaining to the operation of a tram concession at Hanauma Bay in
Honolulu, Hawai‘i. The Kekonas counterclaimed and filed a third-party complaint against
Abastillas, Smith, and SMI. The jury awarded the Kekonas $152,500 against SMI for breach of
contract; FN1 $281,250 against Abastillas for fraud; FN2 and $270,000 against Smith for
malpractice.FN3 In a Memorandum Opinion entered in appeal No. 18388 on November 25, 1997, this
court reviewed the circuit court's September 2, 1994 Revised Final Judgment as to All Claims and
All Parties entered in Civil No. 89-3517 and vacated all but the $152,500 judgment against SMI
and $25,000 of the judgment against Abastillas.

FN1. $22,000 special damages, $100,000 general damages, and $30,000 attorney fees.

FN2. $200,000 general damages, $25,000 punitive damages, and $56,250 attorney fees.

FN3. $270,000 general damages.

In their Motion for Reassignment or Recusal filed in the instant appeal, Smith and Abastillas
report that

[o]n remand, [Smith] made a Rule 68 offer of $6,000, which the Kekonas accepted. On the day of
trial of their damages against Abastillas, the Kekonas settled with Abastillas for $3,000. The
Kekonas now have a judgment for $6,000 against [Smith] and $25,000 (punitive damages) against
Abastillas.

It appears that (1) Abastillas paid the $3,000 and (2) the Kekonas also had an $8,128.27 judgment
for costs against Abastillas and SMI. In other words, at the time of trial in the instant case,
the combined total of the principal due from various parties was $191,628.27 ($152,500 plus
$25,000, plus $6,000, plus $8,128.27).

While the above was occurring, the factual basis for the instant appeal commenced when, on June
1, 1993, eleven days after the May 21, 1993 jury verdict in Civil No. 89-3517, two improved real
estate properties were transferred to Dr. Bornemann. The first property was the residence of
Smith and Abastillas at 47-186 Kamehameha Highway in Kaneohe, Hawai‘i (Kaneohe property). This
Kaneohe property was owned by SMI and RASCORP. On June 1, 1993, (1) SMI and RASCORP recorded a
transfer of the Kaneohe property to Abastillas, and (2) Abastillas recorded a transfer of the
Kaneohe property to Dr. Bornemann. In the documents, Smith had notarized the signatures of
Abastillas, and Abastillas had notarized the signatures of Smith.

*2 The second property was Apartment # 1809 in the Honolulu Park Place Condominium, 1212 Nuuanu
Avenue, Honolulu, Hawai‘i (HPP property). This HPP property was owned by Abastillas and she
transferred it to Dr. Bornemann.

On October 13, 1993, the Kekonas commenced the instant case by filing a complaint alleging that
the transfers of the Kaneohe property and the HPP property were an unlawful attempt by the
judgment debtors to avoid the claims assertable by the Kekonas as judgment creditors. Count I
alleged fraudulent transfers, Count II alleged violations of Hawaii's Racketeer Influenced and
Corrupt Organizations (RICO) law, Hawai‘i Revised Statutes (HRS) Chapter 842 (Supp.2005), Count
III alleged a conspiracy to fraudulently transfer, and Count IV alleged notary misconduct. Counts
I, II, and III were filed against Abastillas, Smith, SMI, and Dr. Bornemann.FN4 Count IV was
filed against Abastillas and Smith. WSC was later added as a Doe Defendant to Count IV because
WSC had issued the statutorily required $1,000 notary bonds on behalf of Abastillas and Smith. On
September 26, 1995, the court denied the July 18, 1995 motion by Abastillas, Smith, and WSC for
summary judgment on Count IV. On April 19, 1999, the court granted the February 25, 1999 motion
by Abastillas and Smith for a dismissal of Count II. The jury trial commenced on May 10, 1999.
Judge Rhonda Nishimura presided.

FN4. Mortgagee U.S. Bancorp Mortgage, Co. was also named as a defendant, but the claims against
it were later voluntarily dismissed.

On May 20, 1999, after both parties rested, the court denied a motion by the Kekonas seeking a
directed verdict that the deeds were void because of the defective notarizations. After counsel
for the Kekonas presented his closing argument to the jury, the court granted a motion by the
Defendants to dismiss the mental and emotional distress claims asserted by the Kekonas. On May
20, 1999, the court instructed the jury, in relevant part, as follows:

Plaintiffs are required to prove that Defendants fraudulently conveyed property by a
preponderance of the evidence.

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the
creditor's claim arose before or after the transfer was made, if the debtor made the transfer or
incurred the obligation with the actual intent to hinder, delay, or defraud any creditor of the
debtor.

In determining actual intent, consideration may be given to one, some or all of the following:

····

(2) The debtor had retained possession or control of the property transferred after the transfer.

(3) The transfer or obligation was concealed.

(4) Before the transfer was made or obligation was incurred, the debtor was sued or threatened
with suit:

(5) The transfer was of substantially all the debtor's assets;

····

(8) The value of the consideration received by the debtor was reasonably equivalent to the value
of the asset transferred or the amount of the obligation incurred.

(10) The transfer had occurred shortly before or shortly after a substantial debt was
incurred;····

*3 ····

A transfer without consideration by one who is indebted is presumptively fraudulent, regardless
of the actual intent of the transferor.

····

Knowledge that a transaction will operate to the detriment of creditors is sufficient for actual
intent.

If the conveyance is made under such circumstances that the result must necessarily be to hinder
and delay creditors, it will be presumed that this was the intent of the transferor in making it.

Fraudulent intent can be found on the basis of circumstantial evidence, direct proof will rarely
be available.

A conveyance of real estate by one who is debtor or potential debtor to another, to be held
wholly or in part in trust by the other person for the debtor, is a fraud on the creditor or
potential creditor whether so intended or not.

A fraudulent conveyance occurs where an owner or co-owner of property conveys that property to a
third person in order to deprive a creditor or potential creditor of the property out of which
that creditor or potential creditor may recover.

····

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the
creditor's claim arose before or after the transfer was made or the obligation was incurred, if
the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and the debtor was engaged or was about to
engage in a business or a transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction.

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the
creditor's claim arose before or after the transfer was made or the obligation was incurred, if
the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and the debtor intended to incur, or believed
or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability
to pay as they became due.

····

Any transfer whereby the transferee gives less than “reasonably equivalent value” in exchange for
the transfer from the debtor and has the effect of reducing the debtor's assets by a certain sum
may be avoided. The transferee's intent need not be shown if there is less than reasonably
equivalent value.

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim
arose before the transfer was made or the obligation was incurred if the debtor made the transfer
or incurred the obligation without receiving a reasonably equivalent value in exchange for the
transfer or obligation and the debtor was insolvent at that time or the debtor becomes insolvent
as a result of the transfer or obligation.

····

A person taking a transfer in good faith and for a reasonably equivalent value is entitled to
protection to the extent of the value given the debtor for the transfer.

*4 ····

Even if the Kekonas prove an actual intent to hinder, delay, or defraud the Kekonas, if Defendant
Bornemann took the property in good faith and for a reasonably equivalent value, then the
transfer and/or transfers are not voidable.

If you find that no fraudulent conveyance exists, a conspiracy cannot exist as it cannot stand
alone as a single claim. In other words, membership or participation in a conspiracy to commit a
wrongful act is by itself not a basis for liability. Conspirators have no liability unless a
wrongful act is committed by one or more of the conspirators in furtherance of the conspiracy
causing another party to sustain injury, damage, loss or harm.

The existence of a civil conspiracy must be established by clear, cogent and convincing evidence.

A conspiracy to commit fraudulent transfers is a combination of two or more persons or entities
who, pursuant to an agreement, tacit or implicit, delay, hinder or defraud a creditor of one or
more of the persons or entities.

····

A conspiracy to commit fraudulent transfers is a combination of two or more persons or entities
who, pursuant to an agreement, tacit or implicit, delay, hinder or defraud a creditor of one or
more of the persons or entities.

····

Proof of a slight connection to a conspiracy is sufficient to support such accountability.

A party damaged by a conspiracy to fraudulently transfer property so as to prevent the party from
collecting on a debt or a judgment may sue for damages.

····

One who has a beneficial interest in a document, no matter how small or nominal his interest
therein, cannot act as a notary public relative to that document.

For the official misconduct of a notary public, the notary shall be liable to the party injured
thereby for all the damages sustained.

····

You are not permitted to award a party speculative damages, which means compensation for future
loss or harm which, although possible, is conjectural or not reasonably probable.

Compensation must be reasonable. You may award only such damages as will fairly and reasonably
compensate the plaintiffs for the damages which you find from a preponderance of all the evidence
in the case which have been sustained as legal cause of the occurrence.

If you find the Defendants or some of them are liable to the Plaintiffs for any of the claims
they have made, then Plaintiffs will be entitled to an award of damages, and it is your
responsibility to set the amount of those damages.

You must determine the amounts of special damages to which the Plaintiffs are entitled.

To determine the amount of special damages to which Plaintiffs are entitled you should consider
the following:

1. The loss of monies and other value by the Plaintiffs; and,

2. Any other actual losses suffered by the Plaintiffs.

Special damages are those elements of damages which fix the amount precisely or permit you to
determine the amount with reasonable certainty from the evidence.

*5 Interest lost by Plaintiffs may be recovered as an item of damages. Interest on judgments
represents delay damages.

In Hawaii, interest at the rate of ten percent a year, and no more, shall be allowed on any
judgment recovered before any Court in the State.

Under Hawaii law in order to recover punitive damages plaintiffs must prove by clear and
convincing evidence that a particular defendant has acted wantonly or oppressively or with such
malice as implies a spirit of mischief or criminal indifference in civil obligations or that
there has been such an entire want of care which would raise the presumption of a conscious
indifferences [sic] to consequences.

Punitive damages are not awarded for mere inadvertence, mistake or errors of judgment by that
person.

Punitive damages may be awarded even if Plaintiff(s) suffered only nominal special or general
damages.

Punitive damages are those damages awarded to punish a wrongdoer.

When the court asked if there were any objections to the special verdict form, the following was
stated:

MR. SMITH: Just a matter of putting on the record the double recovery positions which are
apparent in several parts of the form. And it's my understanding Your Honor has taken the
position that there's not to be any number of double recovery so if the jury starts ordering the
same figures in multiple places, the court will cure that problem.

THE COURT: And we will address that at the appropriate time.

The special verdict form advised the jury that the Kaneohe property was subject to a valid
$174,000 mortgage to U.S. Bancorp. On May 21, 1999, by a special verdict, the jury decided Counts
I, III, and IV in favor of the Kekonas. It answered the following questions as follows:

Question no. 1. “Do you find by a preponderance of the evidence that [Abastillas, RASCORP, or
SMI] transferred the Kaneohe property with the actual intent of hindering, delaying or defrauding
the [Kekonas].” The jury's answer was yes.

Question no. 2. “Please identify the Defendants who transferred the Kaneohe property with the
actual intent of hindering, delaying or defrauding the [Kekonas].” The jury identified
Abastillas, RASCORP, and SMI.

Question no. 6. “Do you find by a preponderance of the evidence that Dr. Bornemann took the
Kaneohe property in good faith and for reasonably equivalent value?” The jury's answer was no.

Question no. 9. “What, if any, is the amount of the damages that should be awarded to the
Plaintiffs for the fraudulent transfer of the Kaneohe property?” The jury's answer was $29,064
special damages and $17,436 general damages against Abastillas; $6,000 special damages and $3,600
general damages against RASCORP; and $156,564 special damages and $93,936 general damages against
SMI.

Question no. 10. “Do you find by clear and convincing evidence that two or more Defendants
conspired to harm the [Kekonas] by fraudulently transferring the Kaneohe property?” The jury's
answer was yes.

*6 Question no. 11. “Please identify the Defendants who were involved in the conspiracy as to the
Kaneohe property.” The jury identified Abastillas, Smith, RASCORP, Dr. Bornemann, and SMI.

Question no. 12. “What, if any, is the amount of the damages that should be awarded to the
Plaintiffs from the conspiracy as to the Kaneohe property?” The jury's answer was $100,000.

Question no. 13. “Do you find by a preponderance of the evidence that [Abastillas] transferred
the HPP apartment property with the actual intent of hindering, delaying or defrauding the
[Kekonas]?” The jury's answer was yes.

Question no. 17. “Do you find by a preponderance of the evidence that Dr. Bornemann took the HPP
apartment in good faith and for reasonably equivalent value?” The jury's answer was no.

Question no. 19. “What, if any, is the amount of the damages that should be awarded to the
Plaintiffs against Paz F. Abastillas for the fraudulent transfer of the HPP apartment?” The
jury's answer was $15,128 special damages and $9,076 general damages.

Question no. 20. “Do you find by clear and convincing evidence that two or more Defendants
conspired to harm the [Kekonas] by fraudulently transferring the HPP apartment?” The jury's
answer was yes.

Question no. 21. “Please identify the Defendants who were involved in the conspiracy as to the
HPP apartment.” The jury identified Abastillas, Smith, and Dr. Bornemann.

Question no. 22. “What, if any, is the amount of the damages that should be awarded to the
Plaintiffs from the conspiracy as to the HPP apartment?” The jury's answer was $100,000.

Question no. 23. “Do you find by a preponderance of the evidence that [Abastillas or Smith]
engaged in official misconduct relating to the acknowledgment of deeds to the Kaneohe property or
the HPP apartment?” The jury's answer was yes.

Question no. 24. “What, if any, is the amount of the damages that should be awarded to the
Plaintiffs arising from the notary misconduct?” The jury's answer was $95,500 special damages and
$57,300 general damages against Abastillas and the same against Smith.

Question no. 25. “Do you find by clear and convincing evidence that punitive damages should be
awarded to the [Kekonas] against any of these Defendants?” The jury's answer was yes. The jury
then decided that each of the following should pay $250,000 punitive damages: Abastillas, Smith,
RASCORP, SMI, and Dr. Bornemann.

Pursuant to the jury's special verdict, a judgment was entered on July 12, 1999, ordering the
following Defendants to pay the following special and general damages relating to the following
items:

Item

Kaneohe

HPP

Notary

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

Abastillas

$29,064

$15,128

$95,500

$17,436

$ 9,076

$57,300

Smith

$95,500

$ 57,300

SMI

$156,564

$ 93,936

RASCORP

$6,000

$3,600


Pursuant to the jury's special verdict, the July 12, 1999 judgment also (1) imposed a joint and
several $100,000 liability against Abastillas, Smith, RASCORP, SMI, and Dr. Bornemann for their
conspiracy to fraudulently transfer the Kaneohe property; (2) imposed a joint and several
$100,000 liability against Abastillas, Smith, and Dr. Bornemann for their conspiracy to
fraudulently transfer the HPP property; (3) ordered Abastillas, Smith, RASCORP, SMI, and Dr.
Bornemann each to pay $250,000 punitive damages; and (4) voided the deeds involved in the
transfer of the Kaneohe property and the HPP property to Dr. Bornemann.

*7 In response to Dr. Bornemann's July 22, 1999 Motion for New Trial And/Or to Eliminate Verdict
for Conspiracy Damages And/Or to Eliminate Punitive Damages, the court entered an October 6, 1999
order stating, in relevant part:

3. The ··· Court finds that the punitive damages assessed against [Dr. Bornemann] in the amount
of $250,000 was excessive and hereby reduces the amount of punitive damages to $75,000.

4. There shall be a new trial solely on the question of punitive damages awarded to [the Kekonas]
against [Dr. Bornemann] unless, within seven (7) calendar days after service of a copy of this
Order on [the Kekonas'] attorney, [the Kekonas] file with the clerk for the court a written
consent to reduce the verdict to $75,000.00 for punitive damages awarded to [the Kekonas] against
[Dr. Bornemann].

Subsequently, at a jury trial with Judge Victoria Marks presiding, the court instructed the jury,
in relevant part:

The proper measure of punitive damages is (1) the degree of intentional, willful, wanton,
oppressive, malicious or grossly negligent conduct that formed the basis for the prior award of
damages against [Dr. Bornemann], and (2) the amount of money required to punish [Dr. Bornemann],
considering his financial condition. In determining the degree of [Dr. Bornemann's] coduct, you
must analyze his state of mind at the time he committed the conduct which formed the basis for
the prior award of damages against [Dr. Bornemann]. Any punitive damages you award must be
reasonable.

The following factors should be considered by you: (a) whether there is a reasonable relationship
between the punitive damages award and the harm likely to result from [Dr. Bornemann's] conduct
as well as the harm that actually has occurred to the Kekonas; (b) the degree of reprehensibility
of [Dr. Bornemann's] conduct, the duration of that conduct, [Dr. Bornemann's] awareness, any
concealment, and the existence and frequency of similar past conduct; (c) the profitability to
[Dr. Bornemann] of his wrongful conduct and the desirability of removing that profit and of
having [Dr. Bornemann] also sustain a loss; (d) the financial position of [Dr. Bornemann]; and
(e) all the costs of litigation.

On November 2, 2000, the jury decided that Dr. Bornemann should pay $594,000 in punitive damages.

On November 30, 2000, the court entered a Revised Final Judgment combining both jury verdicts,
adding a $1,000 judgment against WSC, and assessing $7,424.39 costs jointly and severally against
Abastillas, Smith, RASCORP, SMI, and Dr. Bornemann.

On February 26, 2001, after sundry post-judgment motions were filed, heard, and decided, Judge
Marks entered an Amended Revised Final Judgment that increased the judgment against WSC to $2,000
and assessed $1,235.53 additional costs against Dr. Bornemann.FN5

FN5. The Amended Revised Final Judgment entered on February 26, 2001 awarded the following to the
Kekonas:

1. Against Defendant PAZ FEND ABASTILLAS, also known as Paz A. Richter:

a. Count I (fraudulent transfer of the Kaneohe property):

$29,064 (Special Damages)

$17,436 (General Damages)

b. Count I (fraudulent transfer of # 1809 Honolulu Park Place):

$15,128 (Special Damages)

$9,076 (General Damages)

c. Count IV (illegal notary)

$95,500 (Special Damages)

$57,300 (General Damages)

d. Punitive Damages:

$250,000

2. Against Defendant Robert A. Smith, personally:

a. Count IV (illegal notary)

$95,500 (Special Damages)

$57,300 (General Damages)

b. Punitive Damages:

$250,000

3. Against Defendant Robert A. Smith, Attorney At Law, A Law Corporation:

a. Count I (fraudulent transfer of the Kaneohe property):

$6,000 (Special Damages)

$3,600 (General Damages)

b. Punitive Damages:

$250,000

4. Against Defendant Standard Management, Inc.:

a. Count I (fraudulent transfer of the Kaneohe property):

$156,564 (Special Damages)

$ 93,936 (General Damage)

b. Punitive Damages:

$250,000

5. Against Defendant Michael Bornemann:

a. Punitive Damages:

$594,000

6. Count III (conspiracy to commit fraudulent conveyances):

a. Related to the Kaneohe property:

Against Defendants Paz Feng Abastillas; Robert A. Smith, personally; Robert A. Smith, Attorney At
Law, A Law Corporation; Standard Management, Inc.; and Michael Bornemann, jointly and severally:

$100,000

b. Related to # 1809, Honolulu Park Place:

Against Defendants Paz Feng Abastillas; Robert A. Smith, personally; and Michael Bornmann,
jointly and severally:

$100,000

7. Against Defendant Western Surety Company:

$2,000

8. Costs of suit:

Against Defendants Paz Feng Abastillas; Robert A. Smith, personally; Robert A. Smith, Attorney at
Law, A Law Corporation; Standard Management, Inc.; and Michael Bornemann, jointly and severally:

$7,424.39

Against Defendant Michael Bornemann, individually:

$1,235.53

These appeals and cross-appeal were assigned to this court on May 20, 2002.

POINTS ON APPEAL AND CROSS-APPEAL

1. Abastillas, SMI, Smith, RASCORP, and Dr. Bornemann contend that the circuit court reversibly
erred by instructing the jury that fraudulent transfers could be proven by a preponderance of the
evidence. They contend that clear and convincing evidence should have been required.

*8 2. Abastillas, SMI, Smith, RASCORP, and Dr. Bornemann contend that the circuit court
reversibly erred (a) in holding that the common law “preferential transfer” rule was abrogated by
HRS 651C-8 (1993), and (b) in not instructing the jury to consider the common law “preferential
transfer” rule as a defense.

3. Notwithstanding their agreement to this instruction, Abastillas, SMI, Smith, and RASCORP
contend that the circuit court reversibly erred when it instructed the jury that “proof of slight
connection to conspiracy is sufficient to support such accountability[.]”

4. Abastillas, SMI, Smith, and RASCORP contend that the circuit court reversibly erred when it
failed to grant their motions for summary judgment, directed verdict, or new trial on Count IV,
the Kekonas' illegal notary claim. WSC contends that the circuit court reversibly erred in
denying partial summary judgment, directed verdict, or JNOV on Count IV.

5. Notwithstanding their agreement at trial to these instructions, Abastillas, SMI, Smith,
RASCORP, and Dr. Bornemann contend that the circuit court erred by giving the conspiracy
instructions because “the vast majority of cases [from other jurisdictions] ··· have refused to
allow conspiracy actions for fraudulent transfer[; when] there is no tort, there can be no
conspiracy[.]”

6. Abastillas, SMI, Smith, RASCORP, and Dr. Bornemann contend that the circuit court reversibly
erred in refusing, post-judgment pursuant to a Hawaii Rules of Civil Procedure Rule 60(b) motion,
(a) to reduce the Kekonas' judgment to the statutory limits specified in HRS § 651C-7, and (b) to
vacate the general, conspiracy, and punitive damages awarded.

7. The Kekonas contend that “[t]he trial court erred and abused its discretion in awarding the
Kekonas only $2,000 in damages against [WSC], where the special, general and punitive damages
caused by the wrongful notarizations of Smith and Abastillas exceeded $1,000,000.”

8. Dr. Bornemann contends that the circuit court reversibly erred by forcing Dr. Bornemann,
during the second jury trial, “to present his entire defense during his cross-examination in the
plaintiff's case.”

DISCUSSION

1.

[1] Abastillas, SMI, Smith, RASCORP, and Dr. Bornemann contend that the court reversibly erred
when it instructed the jury that fraudulent transfers could be proven by a preponderance of the
evidence. They contend that clear and convincing evidence was required. We disagree.

The following parts of Hawai‘i's Uniform Fraudulent Transfer Act (1993) FN6 are relevant:

FN6. In 1985, the Hawai‘i Legislature enacted the Uniform Fraudulent Transfer Act (UFTA) into law
as Hawaii Revised Statutes (HRS) Chapter 651C. The Judiciary Committee explained the purpose and
content of the UFTA:

The purpose of this bill is to enact the Uniform Fraudulent Transfer Act, which would promote
national uniformity in determining and proving fraudulent transfer cases.

Your Committee heard favorable testimony on the bill from the Hawaii Commission for Promulgation
of Uniform Legislation. The Uniform Act was brought about to remedy the varying standards used in
different states to prove fraud. Since the intent to hinder, delay or defraud creditors is seldom
susceptible of direct proof, courts have relied on badges, or indicia, of fraud and assigned
different weights to them, from jurisdiction to jurisdiction.

Presently, there is no Hawaii statutory law which directly addresses the problem of fraudulent
transfers. Case law has provided guidance. The leading case in this area is Achiles v. Cajiles,
39 Haw. 493 (1952). The Court there indicated eight badges, or indicia of fraud. The Uniform Act
would increase the number of indices and categorize these into two divisions. One category would
only pertain to present creditors. The other category would pertain to both present and future
creditors. The Uniform Act also seeks to minimize or eliminate the diversity of standards from
different jurisdictions by providing that the proof of certain fact combinations would
conclusively establish fraud. In absence of evidence of the existence of such facts, proof of a
transfer would depend on evidence of actual intent.

The Uniform Act is necessary to conform with the new Bankruptcy Act of 1978 and the Uniform
Commercial Code.Your

Committee on Judiciary is in accord with the intent and purpose of S.B. 1404 and recommends that
it pass Second Reading and be placed on the calender for Third Reading.

Sen. Stand. Comm. Rep. No. 372, in 1985 Senate Journal, at 1051.

§ 651C-4 Transfers fraudulent as to present and future creditors. (a) A transfer made or
obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the obligation was incurred, if the debtor made
the transfer or incurred the obligation:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or

(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation,
and the debtor:

*9 (A) Was engaged or was about to engage in a business or a transaction for which the remaining
assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) Intended to incur, or believed or reasonably should have believed that the debtor would
incur, debts beyond the debtor's ability to pay as they became due.

(b) In determining actual intent under subsection (a)(1), consideration may be given, among other
factors, to whether:

(1) The transfer or obligation was to an insider;

(2) The debtor had retained possession or control of the property transferred after the transfer;

(3) The transfer or obligation was disclosed or concealed;

(4) Before the transfer was made or obligation was incurred, the debtor was sued or threatened
with suit;

(5) The transfer was of substantially all the debtor's assets;

(6) The debtor had absconded;

(7) The debtor had removed or concealed assets;

(8) The value of the consideration received by the debtor was reasonably equivalent to the value
of the asset transferred or the amount of the obligation incurred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the
obligation was incurred;

(10) The transfer had occurred shortly before or shortly after a substantial debt was incurred;
and

(11) The debtor had transferred the essential assets of the business to a lienor who had
transferred the assets to an insider of the debtor.

Transfers fraudulent as to present creditors. (a) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the
obligation was incurred if the debtor made the transfer or incurred the obligation without
receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor
was insolvent at that time or the debtor becomes insolvent as a result of the transfer or
obligation.

(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the
transfer was made if the transfer was made to an insider for other than a present, reasonably
equivalent value, the debtor was insolvent at that time, and the insider had reasonable cause to
believe that the debtor was insolvent.

····

[§ 651C-8] Defenses, liability, and protection of transferee. (a) A transfer or obligation is not
voidable under section 651C-4(a)(1) against a person who took in good faith and for a reasonably
equivalent value or against any subsequent transferee or obligee.

(b) Except as otherwise provided in this section, to the extent a transfer is voidable in an
action by a creditor under section 651C-7(a)(1), the creditor may recover judgment for the value
of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy
the creditor's claim, whichever is less. The judgment may be entered against:

(1) The first transferee of the asset or the person for whose benefit the transfer was made; or

*10 (2) Any subsequent transferee other than a good-faith transferee who took for value or from
any subsequent transferee.

(c) If the judgment under subsection (b) is based upon the value of the asset transferred, the
judgment must be for an amount equal to the value of the asset at the time of the transfer,
subject to adjustment as the equities may require.

(d) Notwithstanding voidability of a transfer or an obligation under this chapter, a good-faith
transferee or obligee is entitled, to the extent of the value given the debtor for the transfer
or obligation, to:

(1) A lien on or a right to retain any interest in the asset transferred;

(2) Enforcement of any obligation incurred; or

(3) A reduction in the amount of the liability on the judgment.

(e) A transfer is not voidable under section 651C-4(a)(2) or section 651C-5 if the transfer
results from:

(1) Termination of a lease upon default by the debtor when the termination is pursuant to the
lease and applicable law; or

(2) Enforcement of a security interest in compliance with Article 9 of the Uniform Commercial
Code.

(f) A transfer is not voidable under section 651C-5(b):

(1) To the extent the insider gave new value to or for the benefit of the debtor after the
transfer was made unless the new value was secured by a valid lien;

(2) If made in the ordinary course of business or financial affairs of the debtor and the
insider; or

(3) If made pursuant to a good-faith effort to rehabilitate the debtor and the transfer secured
present value given for that purpose as well as an antecedent debt of the debtor.

····

Supplement of provisions. Unless displaced by the provisions of this chapter, the principles of
law and equity, including the law merchant and the law relating to principal and agent, estoppel,
laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or
invalidating cause, supplement its provisions.

Black's Law Dictionary (5th ed.) explains the difference between “actual” and “constructive”
fraud:

Fraud is either actual or constructive. Actual fraud consists in deceit, artifice, trick, design,
some direct and active operative of the mind; it includes cases of intentional and successful
employment of any cunning, deception, or artifice used to circumvent or cheat another. It is
something said, done, or omitted by a person with the design of perpetrating what he knows to be
a cheat or deception. Constructive fraud consists in any act of commission or omission contrary
to legal or equitable duty, trust, or confidence justly reposed, which is contrary to good
conscience and operates to the injury of another. Or, as otherwise defined, it is an act,
statement or omission which operates as a virtual fraud on an individual, or which, if generally
permitted, would be prejudicial to the public welfare, and yet may have been unconnected with any
selfish or evil design[.]

*11 HRS §§ 651C-4(a)(2) and 651C-5 are the “constructive fraud” part of the UFTA. In many states,
no distinction is made between the HRS § 651C-4(a)(1) “actual intent” part of the UFTA and the
HRS §§ 651C-4(a)(2) and 651C-5 “constructive fraud” part of the UFTA and the clear and convincing
evidence burden of proof is imposed for both parts.FN7

FN7. Eli's, Inc. v. Lemen, 256 Neb. 515, 591 N.W.2d 543, 555 (Neb.1999); Ralfs v. Mowry, 586
N.W.2d 369, 373 (Ia.1998); McCain Foods, USA Inc. v. Central Processors, Inc., 275 Kan. 1, 61
P.3d 68 (2002); Bueneman v. Zykan, 52 S.W.3d 49 (Mo.App.2001); Heimbinder v. Berkovitz, 175
Misc.2d, 808, 670 N.Y.S.2d 301 (N.Y.Sup.Ct.1998); Abood v. Nemer, 128 Ohio App.3d 151, 713 N.E.2d
1151 (1998); Sedwick v. Gwinn, 73 Wash.App. 879, 873 P.2d 528, 533 (Wash.App.1994).

In Washington, the following distinction is made:

Under Washington's UFTA, the actual intent to defraud must be demonstrated by “clear and
satisfactory proof”. Clearwater v. Skyline Const. Co. Inc., 67 Wash.App. 305, 321, 835 P.2d 257
(1992), review denied, 121 Wash.2d 1005, 848 P.2d 1263 (1993). In contrast, constructive fraud
must be shown by “substantial evidence”. Clearwater, at 321, 67 Wash.App. 305, 835 P.2d 257.

Sedwick v. Gwinn, 73 Wash.App. 879, 873 P.2d 528, 531 (Wash.App.1994).

Other states impose a “more probable than not” burden of proof for both parts. FN8

FN8. Preferred Funding, Inc. v. Jackson, 185 Or.App. 693, 61 P.3d 939 (Jan. 8, 2003); Whitehouse
v. Six Corp., 40 Cal.App.4th 527, 48 Cal.Rptr.2d 600, 603-4 (2d Dist.1995).

We conclude that the “more probable than not” burden of proof is applicable to the “constructive
fraud” part of Hawai‘i's UFTA. We now must decide the burden of proof applicable to the HRS §
651C-4(a)(1) “actual intent” part of Hawai‘i's UFTA. In this case, the court decided, in relevant
part:

THE COURT: The court notes that with the enactment of the UFTA in the mid-1980s there has been no
Hawaii case law that sets forth the particular standard of proof for actual fraud. Therefore the
court already adopted [ In Re Ayala ] in the Ninth Circuit as the closest parallel or analogy
which gives some instruction for the standard of proof for an actual fraudulent transfer.

The Ayala case cited is a 1989 bankruptcy case reported in 107 B.R. 271. The Bankruptcy Code, 11
U.S.C.A. § 727(a)(2)(B), permits a creditor to prove that discharge should be denied by proving
the debtor transferred property after the filing of the petition with the intent to hinder,
delay, or defraud the creditor. The Bankruptcy Court concluded that the degree of the creditor's
burden of proof was the preponderance of the evidence degree rather than the clear and convincing
evidence degree.

In Standard Management, Inc. v. Kekona, 98 Hawai‘i 95, 43 P.3d 232 (App.2001), this court
recognized that actual fraud has different varieties. FN9

FN9. The following discussion in Standard Management, Inc. v. Kekona, 98 Hawai‘i 95, 99, 43 P.3d
232, 236 (App.2001), describes a type of fraud that is more than garden variety fraud:

Furthermore, where fraud is alleged as grounds for an IAE [Independent Action in Equity], the
plaintiff must show that the perjury relied upon as the basis for fraud is more than garden-
variety fraud. Geo. P. Reintjes Co., Inc. v. Riley Stoker Corp., 71 F.3d 44, 48 (1st Cir.1995)
(“there is also little doubt that fraud cognizable to maintain an untimely independent attack
[under Federal Rules of Civil Procedure Rule 60(b) ] (FN2) upon a valid and final judgment has
long been regarded as requiring more than common law fraud”) (citations omitted). The actuating
fraud must be such that “it prevented [the movant] from presenting his case[.]” Id. (citation
omitted).

Standard Management, Inc. v. Kekona, 98 Hawai‘i 95, 43 P.3d 232 (App.2001).

The following are the elements of “garden variety actual fraud”:

To support a finding of fraud, it must be shown that “the representations were made and that they
were false, ··· (and) that they were made by the defendant with knowledge that they were false,
(or without knowledge whether they were true or false) and in contemplation of the plaintiff's
relying upon them and also that the plaintiff did rely upon them.” Hong Kim v. Hapai, 12 Haw.
185, 188 (1899).

Kang v. Harrington, 59 Haw. 652, 656, 587 P.2d 285, 789 (1978). The burden of proving garden
variety actual fraud is the clear and convincing evidence burden. See Shoppe v. Gucci America,
Inc., 94 Hawai‘i 368, 386, 14 P.3d 1049, 1067 (2000); Dobison v. Bank of Hawaii, 60 Haw. 225,
226, 587 P.2d 1234, 1235 (1978).

*12 The following considerations lead us to conclude that the burden of proving an HRS § 651C-4(a)
(1) fraudulent transfer is the preponderance of the evidence burden rather than the clear and
convincing evidence burden:

A. The fraudulent transfer described in HRS § 651C-4(a)(1) may involve much less than garden
variety actual fraud. The UFTA permits a creditor to prove that a fraudulent transfer occurred by
proving that the debtor transferred the property with any one of the following three intents: (a)
to hinder; (b) to delay; or (c) to defraud. In other words, a gift made to a third party with an
intent to hinder or delay payment to the creditor is a fraudulent transfer. This is much less
than garden variety actual fraud.

B. HRS § 651C-4(b) contains a non-exclusive list of objective factors that may be considered
when “determining actual intent under subsection (a)(1) [.]” The fact that these historically
have been labeled as “badges of fraud” does not change the fact that they are more accurately
called badges of an intent (a) to hinder; (b) to delay; or (c) to defraud.

C. This appeal does not challenge the following jury instructions:

A transfer without consideration by one who is indebted is presumptively fraudulent, regardless
of the actual intent of the transferor.

····

Knowledge that a transaction will operate to the detriment of creditors is sufficient for actual
intent.

If the conveyance is made under such circumstances that the result must necessarily be to hinder
and delay creditors, it will be presumed that this was the intent of the transferor in making it.

Fraudulent intent can be found on the basis of circumstantial evidence, direct proof will rarely
be available.

A conveyance of real estate by one who is debtor or potential debtor to another, to be held
wholly or in part in trust by the other person for the debtor, is a fraud on the creditor or
potential creditor whether so intended or not.

A fraudulent conveyance occurs where an owner or co-owner of property conveys that property to a
third person in order to deprive a creditor or potential creditor of the property out of which
that creditor or potential creditor may recover.

2.

[2] Abastillas, SMI, Smith, RASCORP, and Dr. Bornemann contend that the trial court reversibly
erred in (a) holding that the common law “preferential transfer” rule was abrogated by HRS § 651C-
8, and (b) not instructing the jury to consider the common law “preferential transfer” rule as a
defense. We disagree.

In 1935, the Hawa‘i Supreme Court explained the “preferential transfer” doctrine as follows:

[I]t is not fraudulent for a debtor in failing circumstances to prefer one or more of his bona
fide creditors to the exclusion of other creditors, he having a legal right, although insolvent
or in failing circumstances, to prefer one or more of his creditors by giving security for and
limited to the amount of his valid debt notwithstanding that the claims of other creditors will
thereby be delayed or defeated; that such a preference although it may exhaust or reduce the
assets of the debtor so as to leave other creditors unpaid and without the means of collecting
their claims does not of itself hinder, delay or defraud creditors within the meaning of a
fraudulent conveyance to deprive them of any legal rights.

*13 In re Application of Sec. Inv. Co., 33 Haw. 364, 369 (1935).

Some state courts have continued to recognize “preferential transfers” even after their state
legislatures adopted the UFTA. For example, Dr. Bornemann cites Wyzard v. Gollar, 23 Cal.App.4th
1183, 28 Cal.Rptr.2d 608 (1994). In Wyzard, after an attorney's client realized that a sizable
judgment would be rendered against him in a lawsuit, he executed a promissory note to the
attorney for the attorney fees that he owed in connection with the case, the note being secured
with the client's only substantial assets, interests in real property. After obtaining a judgment
in the lawsuit, the plaintiff filed an action against the attorney, challenging the security
interests conveyed to him by his client as a fraudulent transfer of assets. The trial court
granted the attorney's motion for summary judgment. In affirming the trial court, the California
Court of Appeal gave the following lengthy, but informative, discussion of the UFTA's
predecessor, the Uniform Fraudulent Conveyance Act (UFCA), and the “preferential transfer”
defense:

Mr. Wyzard's [the creditor] argument to the trial court, and to this court, is that the deeds of
trust to Mr. Goller [the debtor's lawyer] were made “with actual intent to hinder, delay, or
defraud” Mr. Wyzard as a creditor of Mr. Manning. Mr. Wyzard invokes Civil Code section
3439.04: “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor,
whether the creditor's claim arose before or after the transfer was made or the obligation was
incurred, if the debtor made the transfer or incurred the obligation as follows: (a) With actual
intent to hinder, delay, or defraud any creditor of the debtor.”

Before proceeding with a discussion of this provision, we note the statute to which it would be
opposed according to appellant's argument. Civil Code section 3432, enacted as part of the 1872
Field Codes, provides that “A debtor may pay one creditor in preference to another, or may give
to one creditor security for the payment of his demand in preference to another.” Even before
enactment of the Field Codes, it had been recognized that a failing or insolvent debtor could
prefer one creditor over another. (See Randall v. Buffington (1858) 10 Cal. 491, 494 [“it is
difficult to perceive how the payment of a debt which [is] justly owed, and which was past due,
can be tortured into an act to hinder, delay, and defraud creditors”]; Wheaton v. Neville (1861)
19 Cal. 41, 46.) Subsequent cases continued the judicial refusal to set aside a preferential
transfer solely because it worked a preference. (See McGee v. Allen (1936) 7 Cal.2d 468, 474, 60
P.2d 1026; Bradley v. Butchart (1933) 217 Cal. 731, 20 P.2d 693.) If the transfer was for fair
consideration and not fraudulent, the only basis to set it aside was through bankruptcy, which
now reaches transfers made within 90 days of the adjudication. (11 U.S.C. § 547(b)(4)(A); see
McGee v. Allen, supra, 7 Cal.2d at p. 474, 60 P.2d 1026.)

*14 The general rule permitting a debtor to prefer one creditor or group of creditors over others
has long been subject to exceptions in cases of fraud. The subject was dealt with by the National
Conference of Commissioners on Uniform State Laws which, in 1918, proposed what became the
Uniform Fraudulent Conveyance Act (the Uniform Act). By 1984, the Uniform Act had been adopted in
25 jurisdictions. (See 7A West's U.Laws Ann. (1984) Bus. & Fin. Laws, comrs. note, p. 639.)
California was one of them; it adopted the uniform law in 1939. (Stats.1939, ch. 329, § 9, p.
1669.) Civil Code section 3439.07, which was taken directly from section 7 of the Uniform Act,
declared conveyances made to hinder, delay or defraud present or future creditors to be
fraudulent.

As a result of major changes in the Bankruptcy Act and the Uniform Commercial Code, and in
recognition of other changes in the law, the Commissioners undertook a study and revision of the
Act in 1978. The result was the 1984 version, which, like its predecessor, has been widely
adopted. (7A West's U.Laws Ann., op. cit. supra, Bus. & Fin. Laws, comrs. note, p. 639.) The
California version was enacted in 1986, and was in effect when the conveyances at issue in this
case were made. (See Stats.1986, ch. 383, § 2.) (The law has been retitled; it is now the Uniform
Fraudulent Transfer Act; see Civ.Code, § 3439.)

Civil Code section 3439.04 combines the substance of several separate provisions of the former
Act. (See Reddy v. Gonzalez (1992) 8 Cal.App.4th 118, 123, 10 Cal.Rptr.2d 55.) We have quoted the
language pertinent to this case, which appears in subdivision (a). The redrafted provision is
substantially the same as Civil Code section 3439.07 of the former Act. Civil Code section
3439.12 of the new Act provides in part that provisions of the new law, insofar as they are
substantially the same as provisions of the former statute, “shall be construed as restatements
and continuations, and not as new enactments.”

We therefore turn to the principal issue on this appeal: whether a preferential transfer, if made
for proper consideration (“value” under the new law; see Civ.Code § 3439.03), but with
recognition that the transfer will effectively prevent another creditor from collecting on his
debt, is one made with “actual intent to hinder, delay, or defraud” that creditor.

As we have discussed, California cases predating the Act rejected the claim that debtor's
preference of some creditors over others is improper as to those who are not preferred. Later
cases reached the same result on the basis of Civil Code section 3432, without discussion of the
Act. (See U.S. Fid. & Guar. Co. v. Postel (1944) 64 Cal.App.2d 567, 572, 149 P.2d 183[“[t]he
statutory right of a debtor to prefer one creditor to another is based upon the principle that in
the absence of fraud the owner of property may do with it as he pleases ···, nor does the fact
that such preference hinders or delays other creditors in the collection of their claims render
it void, nor the fact that the preferred creditor had knowledge that such consequences would
follow the preference”]; United States v. Eleven Certain Parcels of Land (S.D.Cal.1942) 45
F.Supp. 289 [preference of one creditor over another proper under California law even if
insolvency results] .)

*15 This has been the rule for over 400 years, since the Statute of Elizabeth in 1571. (13 Eliz.,
ch. 5 (1571); see 1 G. Glenn, Fraudulent Conveyances and Preferences (rev. ed.1940) §§ 58, 289,
pp. 79, 488.) Cases decided under the law of jurisdictions that adopted the Uniform Act reached
the same result under section 7 of the uniform law. (See Irving Trust Co. v. Kaminsky
(D.N.Y.1937) 19 F.Supp. 816.)

The Irving Trust Co. decision, a leading case, pointed out that a transfer made in good faith to
secure an antecedent debt is declared to be for fair consideration, and does not amount to an act
to “hinder, delay or defraud” an unpreferred creditor. (19 F.Supp. at p. 818.)

The New Jersey Supreme Court summarized the rule in the following terms: “We start with the
proposition that a preference as such is not a fraudulent conveyance. True, a creditor who
collects from an insolvent debtor fares better than other claimants. Yet if the transfer were set
aside in favor of another creditor, there would be but a substitution of one preference for
another. For that reason a preference cannot be undone by a competing creditor whether the
preference was obtained through judicial process or by a transfer from the debtor, and the
Uniform Fraudulent Conveyance Act did not alter that proposition.” ( Smith v. Whitman (1963) 39
N.J. 397 [189 A.2d 15, 18]; see also Marroquin v. Barrial (1959) 174 Cal.App.2d 540, 543 [345
P.2d 30]; In re Olson (D., Minn.1984) 45 B.R. 501, 505; Peoples-Pittsburgh T. Co. v. Holy Family
P. Nat. C. Ch. (1941) [341 Pa. 390] 19 A.2d 360, 361; American Cas. Co. of Reading Pa. v. Line
Materials Indus. (10th Cir.1964) 332 F.2d 393, 396; Manello v. Bornstine (1954) 44 Wash.2d 769
[270 P.2d 1059]; Boston Trading Group, Inc. v. Burnazos (1st Cir.1987) 835 F.2d 1504, 1508
[hypothetical debtor who owes $10,000 to A and $20,000 to B, but has only $8,000, which he uses
to satisfy his debt to A, does not make “fraudulent conveyance” under the Uniform Act because
payment satisfies a debt owed to legitimate creditor; “B must find a remedy in bankruptcy, or in
some other, law”].)

We conclude that the transfer to Mr. Goller, in payment for his legal services, while a
preference, is not for that reason a transfer made to “hinder, delay or defraud” Mr. Wyzard.

Wyzard v. Gollar, 23 Cal.App.4th at 1188-91, 28 Cal.Rptr.2d at 610-12. FN10

FN10. We disagree with the holding in Wyzard v. Gollar. We would have concluded that the
following questions were genuine issues of material fact: (1) did the debtor make the transfer
with actual intent to hinder, delay, or defraud the creditor and, if so, (2) did the transferee
take in good faith and for a reasonably equivalent value?

Abastillas, Smith, RASCORP, SMI, and Dr. Bornemann proposed the following jury instructions:

A preferential transfer occurs when a debtor transfers property of equivalent value to a pre-
existing, bona fide creditor in return for the discharge of a legitimate antecedent (old) debt.
In other words, a preferential transfer occurs when the creditor is an “old” creditor, and the
transfer discharges an old (and real) debt. A preferential transfer is not illegal under the law.
In other words a preferential transfer is not an unlawful fraudulent transfer. A preferential
transfer is valid and lawful.

*16 Such a transfer is called a “preferential” transfer because the law allows a debtor to choose
which of two or more creditors he or she wishes to pay. The debtor thus has a legal right
to “prefer” that creditor over another.

Let me give you an illustration. Mary owes Alice $10,000, and Mary also owes Ted $10,000. Mary's
debts thus total $20,000. Mary has only $10,000 in cash and owns nothing else. She can give her
entire $10,000 to Ted, to “discharge” or pay her debt to him, even though Alice gets nothing, if
it is Ted, and not Alice, that she prefers to pay.

····

If the transfer in question was preferential, and not fraudulent, then the actual intent of the
debtor is irrelevant. That is, even if the debtor had an actual intent to hinder, dely, and
defeat another creditor, it does not matter: you cannot find the transfer fraudulent, no matter
what the debtor's intent, if the transfer was preferential.

By the same token, if the transfer in question was preferential, and not fraudulent, the badges
of fraud are likewise irrelevant because the badges are circumstantial evidence of actual intent
to hinder, delay, and defeat, and actual intent to hinder, delay, and defeat is irrelevant, as I
have just explained.

Dr. Bornemann proposed the following jury instruction: “In the absence of fraud, and even though
insolvent, debtors Abastillas and SMI may pay Defendant Bornemann in preference to the Kekonas,
or may give to Defendant Bornemann security for the payment of his demand in preference to the
Kekonas.”

Abastillas and Smith contend “that the preferential transfer rule applies even if the transferee
knows that (1) there is an unpaid creditor (even a judgment creditor); (2) the debtor is giving a
preference; (3) the debtor is insolvent; (4) and the debtor actually intends to defeat the other
creditor (has a fraudulent intention).” We disagree and conclude that Hawaii's UFTA replaced the
preferential transfer rule.FN11

FN11. There are material differences between the conclusions stated in parts “3” and “4” of this
opinion and the following opinion interpreting and applying Hawai‘i law:

The common law of fraudulent conveyances, from the Statute of Elizabeth (13 Eliz. Chap. 5 (1570))
is part of the common law of Hawaii. Achiles v. Cajigal, 39 Haw. 493 (1952). The common law rule
on fraudulent conveyances was that any conveyance made with the intent to hinder, delay, or
defraud creditors is void, unless the recipient of the property both acts in good faith and gives
value for the property. Achiles, 39 Haw. at 496.

····

Direct evidence of whether a person intended to hinder, delay, or defraud his creditors is
difficult to obtain. For that reason, the common law of Hawaii recognized certain “badges of
fraud” or indicators of fraud, the presence of which indicate that a fraudulent conveyance has
occurred. Achiles, 39 Haw. at 497; Sylvester v. Sylvester, 723 P.2d 1253, 1257 (Alaska 1986)
(although no Hawaii court has examined the common law badges of fraudulent conveyance since
territorial days, there is no reason to believe that Hawaii will not recognize the badges).
Utilization of the badges of fraud is favorable to the creditor because by simply showing the
existence of badges of fraud, a creditor's burden is satisfied. Plaintiffs urge the Court to find
a fraudulent conveyance upon a showing of the badges alone.

····

This Court finds that the common law of Hawaii makes a distinction in analysis between pre-
existing creditors-those creditors whose claims predated the questioned conveyance ( Achiles )
and subsequent creditors-creditors who became creditors subsequent to the questioned conveyance (
Middleditch ). Although a pre-existing creditor need only show badges of fraud to establish an
inference of fraud, a subsequent creditor must show fraud in fact or actual intent to defraud. 37
Am.Jur.2d, Fraudulent Conveyances, §§ 139, 143 (1968); Lippi v. City Bank, 955 F.2d 599, 607 (9th
Cir.1992) (citing Metzger v. Lalakea, 32 Haw. 706 (1933), for Hawaii common law of fraudulent
conveyances and subsequent creditors); Metzger, 32 Haw. at 720 (subsequent creditor may set aside
a conveyance only when debtor conveyed with intent to defraud creditors, the transfer was secret,
or the debtor transferred with the intention of entering a new and hazardous business, the risk
of which would be placed upon subsequent creditors); Middleditch, 19 Haw. 413-14 (husband's
purchase of residence in wife's name cannot be attacked by subsequent creditors absent a finding
of actual intent to defraud, even though intended for the very purpose of keeping property secure
from subsequent claims against husband).

Sherry v. Ross, 846 F.Supp. 1424, at 1428-29 (D.Haw.1994) (omitted).

HRS § 651C-4 specifies as follows:

§ 651C-4 Transfers fraudulent as to present and future creditors. (a) A transfer made or
obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the obligation was incurred, if the debtor made
the transfer or incurred the obligation:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor;

HRS § 651C-8 specifies as follows:

[§ 651C-8] Defenses, liability, and protection of transferee. (a) A transfer or obligation is not
voidable under section 651C-4(a)(1) against a person who took in good faith and for a reasonably
equivalent value or against any subsequent transferee or obligee.

HRS § 651C-4(a)(1) specifies what is a fraudulent transfer. HRS § 651C-8(a) specifies what HRS §
651C-4(a)(1) fraudulent transfers are not voidable. HRS § 651C-8(a) protects creditor transferees
and buyer transferees. It does not protect debtor-transferors. HRS § 651C-8(a) does not specify
that a transfer in violation of HRS § 651C-4(a)(1) is not a violation of HRS § 651C-4(a)(1) if it
is to “a person who took in good faith and for a reasonably equivalent value[.]” In other words,
a transfer that is a fraudulent transfer pursuant to HRS § 651C-4(a)(1) continues to be a
fraudulent transfer notwithstanding the fact that the transfer is not voidable because the HRS §
651C-8 defense is validly asserted by the creditor transferee or buyer transferee.

3.

*17 [3] Smith and Abastillas contend that the circuit court plainly erred by instructing the jury
that “[p]roof of slight connection to conspiracy is sufficient to support such accountability.”
FN12 In this case, we disagree.

FN12. The following is the precedent cited for this instruction:

United States v. Inafuku, 938 F.2d 972 (9th Cir., Haw.1991) (The principles of conspiracy allow a
defendant to be punished for becoming a party to an agreement to facilitate the commission of
substantive offenses, regardless of whether that defendant is also to be punished for those
substantive offenses themselves. Under these principles, at the point of entering into an
agreement, a conspirator becomes accountable for all conduct of the conspiracy, and proof of a
slight connection to the conspiracy is sufficient to support such accountability. When one agrees
to be a member of a conspiracy, one agrees to all acts that have been or will be committed by the
conspiracy, and, by virtue of that agreement, is responsible for such acts regardless of one's
role in their commission.

United States v. Batimana, 623 F.2d 1366, 1370 (9th Cir., cert. denied, 449 U.S. 1038, 101 S.Ct.
617, 66 L.Ed.2d 500 (1980) (The test for admissibility of out-of-court statements of a co-
conspirator is whether there is sufficient, substantial evidence apart from the statements which
establishes a prima facie case of the conspiracy and the defendant's slight connection to the
conspiracy.)

United States v. Weiner, 578 F.2d 757 (9th Cir.Haw.1978) (In this case the disputed statements
were clearly made during and in furtherance of the conspiracy. The only question is whether there
was sufficient independent evidence of a conspiracy and the defendants' connection to it. The
quantum of independent proof necessary for the application of the coconspirator hearsay exception
is sufficient, substantial evidence to establish a prima facie case that the conspiracy existed
and that the defendant was a part of it. Once the existence of a conspiracy has been established,
independent evidence is necessary to show prima facie the defendant's connection with the
conspiracy, even if the connection is slight.)

The Hawai‘i Rules of Appellate Procedure Rule 28(b) (2005) 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 the order here indicated:

····

(4) A concise statement of the points of error set forth in separately numbered paragraphs. Each
point shall state: (i) the alleged error committed by the court or agency; (ii) where in the
record the alleged error occurred; and (iii) where in the record the alleged error was objected
to or the manner in which the alleged error