Case Title: Anthony v. Kualoa Ranch, Inc.

Citation: 736 P.2d 55

Docket Number: 

State: hawaii

Court: Hawaii Supreme Court

Date: 1987-04-23T00:00:00Z

Document:
736 P.2d 55 (1987) James N. ANTHONY and Alberta Pua Anthony, Plaintiffs-Appellees, v. KUALOA RANCH, INC., a Hawaii corporation, and Francis Morgan, Defendants-Appellants. No. 11424. Supreme Court of Hawaii. April 23, 1987. *57 Stanley K.W. Chong (Philip J. Leas with him on briefs; Cades Schutte Fleming & Wright, of counsel), Honolulu, for defendants-appellants. Boyce R. Brown, Jr. (Brown & Johnston, of counsel), Honolulu, for plaintiffs-appellees. Sonia Faust, Deputy Atty. Gen., amicus curiae brief, for State. Before LUM, C.J., and NAKAMURA, PADGETT, HAYASHI and WAKATSUKI, JJ. PADGETT, Justice. This is an appeal from an order staying judgment pending arbitration. We reverse. In 1953, appellants leased lot 55A of the Kaaawa Beach lots for residential purposes to Albert F. Biehl and Josephine H. Biehl at a rental of $75 per annum for a term of 30 years. The present appellees acquired the leasehold through mesne assignments, consented to by the appellants, in 1976. The lease contained the following provisions, inter alia: Appellees, after taking over the lease, erected substantial additions to the residence on the premises. After the expiration of the lease on July 1, 1983, appellees filed suit for specific performance of an alleged agreement to enter into a new lease, and for damages for unfair and deceptive trade practices, and retaliatory acts. As an alternative to their prayer for specific performance of the alleged agreement for a new lease, they prayed that the appellants be ordered to buy from them the residential improvements existing on the premises under the provisions of HRS § 516-70. Appellants counterclaimed for a declaration that the lease had terminated, and for ejectment. The case was tried before a jury which answered 17 special interrogatories. Thereafter, on March 6, 1986, the trial court entered its findings of fact, conclusions of law, and order. In that document, the court rejected appellees' claims for specific performance, and damages for unfair and deceptive trade practices and retaliatory acts; upheld appellants' claims of lease termination and for ejectment; ordered appellees to pay rental at the rate of $212 per month from July 2, 1983 to the time of ejectment; ordered appellants to pay appellees the fair market value of the leasehold improvements as of the date of the expiration of the lease; ordered the parties to mutually agree on the value of such improvements, and failing such agreement, to proceed to appraisal or arbitration of the fair market value of the leasehold *58 improvements pursuant to HRS Chapter 658. The parties did not agree on the value of the leasehold improvements and subsequently on May 5, 1986, the court entered its "Order Staying Judgment Pending Arbitration" from which this appeal is taken. Appellees contend that the May 5 order does not have sufficient finality to make it appealable and, alternatively, that if it does have sufficient finality, the same was true of the March 6 order, and that therefore this appeal is taken too late. Appellants contend that the effective order was not that of March 6 but that of May 5, the stay, and that, under Association of Owners of Kukui Plaza v. Swinerton & Walberg Co., 68 Haw. ___, 705 P.2d 28 (1985), which overruled Pfaeltzer v. Patterson, 49 Haw. 59, 410 P.2d 974 (1966), the latter order is appealable. HRS Chapter 658 applies to agreements, in written contracts, to settle controversies by arbitration, and to agreements, in writing, to submit existing controversies to arbitration. Such was the case in Swinerton, such was the case in Pfaeltzer. Here, however, we are dealing with a statutory requirement of arbitration. HRS § 516-70, when originally enacted as § 43 of Act 307 of the Session Laws of 1967, merely provided: That provision was not different, in substance, from the lease. However, § 19 of Act 184 of the Session Laws of 1975 amended the statute to its present form, so that it now reads: Because the requirement for arbitration was statutory, not contractual, Swinerton is inapposite. We reject appellees' argument that the March 6 order had any finality to it. We read it to be interlocutory only. On the other hand, the May 5 order staying the judgment pending arbitration did have aspects of finality. It appointed an appraiser; it ordered the appraiser to report within 45 days from the date of the order; it provided for a judgment directing the appellants to pay appellees the current fair market value of the improvements determined by the appraiser, less the amounts owed by the appellees to the appellants for damages, etc. within 30 days after the determination; it stayed appellants' right to regain possession of their land by way of a writ of possession until such payment was made; and it provided that if the appellees deposited certain monies with the clerk by May 6, 1986 judgment would be stayed pending arbitration; but that if they did *59 not, judgment would be entered for appellants with a further judgment to be entered for appellees on the conclusion of the arbitration. Appellees' counsel, at oral argument, stated that the fair market value of the leasehold improvements which, under the statute, appellants must pay to the appellees (since appellees chose not to remove their improvements) was between $100,000 and $140,000. If the arbitration had taken place as ordered, and that statement had turned out to be correct, then obviously the appellants would have been required to pay to the appellees, within 105 days from May 6, 1986, a sum near, or perhaps well in excess of, $100,000, before they could regain possession of their property, even though the court had found that the lease had been terminated, and that they were entitled to such possession. Due to the peculiarity of the litigation, and of the order in question, it is unlikely that a similar case will recur. Certainly, had the parties proceeded to arbitration and the court made its decree with respect to the amount to be paid by appellants to appellees for the improvements within the 75 days envisioned by the order, there would be no question but that appellants, faced with the requirement of payment within 30 days after that decree, as required by HRS § 516-70, would have had a right to appeal. See Forgay v. Conrad, 47 U.S. (6 How.) 201, 12 L. Ed. 404 (1848). See also MDG Supply, Inc. v. Diversified Investments, Inc., 51 Haw. 375, 463 P.2d 525 (1969), reh. denied, 51 Haw. 479, 463 P.2d 525 (1969), cert. denied, 400 U.S. 868, 91 S. Ct. 99, 27 L. Ed. 2d 108 (1970). The question then becomes one of whether, given appellees' assertion as to the value of the improvements, we should require the parties to go through the arbitration, and the court below to enter its decree confirming the same, before entertaining this appeal. Since the order in question expressly assumes that, as a result of the arbitration, some net monies will have to be paid by the appellants to the appellees, prior to obtaining the relief of possession, and locks the parties into a position where, so long as the appellants do not pay those monies, they cannot regain possession of their premises, and since, if the lessors do not pay within 30 days of the judgment, they would be subject to criminal penalties under HRS § 516-5, we conclude there is sufficient finality, in fact, in the order, to give us jurisdiction of this appeal. Appellants raise two constitutional objections to the application of the provisions of HRS § 516-70 to this case. They contend first that the statute in question violates Section 10 of Article I of the Constitution of the United States which provides in part: "No State shall ... pass any ... Law impairing the Obligation of Contracts[.]" Secondly, they contend that the compulsory arbitration provisions of HRS § 516-70 violate their right to a jury trial under the Constitutions of the United States and the State of Hawaii. We reach only the first contention. The 30-year lease with which we are here dealing was entered into in September 1953 as of July 1, 1953. It contains an express agreement allowing the lessees, if not in default under the lease, to remove, at their expense, after giving written notice thereof to the lessors, the building or buildings which have been placed on the premises. This provision substantially parallels the statutory provision enacted in 1967 as a part of the leasehold conversion act. In 1975, however, the statutory section in question was changed to its present form. It applies to all residential leases, and not just to those residential leases of lands in tracts, which are subject to condemnation by eminent domain under the other provisions of HRS Chapter 516. Lessors who, before 1975, owned and leased a single lot are just as much bound by HRS § 516-70's provisions as the largest estate. The section in question, by its terms, will compel each lessor, upon termination of a lease, if the lessee elects not to remove the residential leasehold improvements, to pay the lessee the "fair market value" of that lessee's improvements (whatever that may mean in this context). It will, however, have no effect in breaking up the oligopolistic landownership, and the inequality of *60 bargaining power resulting therefrom, which was the objective of the Hawaii leasehold conversion act, and which was the basis for upholding that act as a legitimate exercise of the power of eminent domain under the federal and state constitutions. Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 104 S. Ct. 2321, 81 L. Ed. 2d 186 (1984); Hawaii Housing Authority v. Lyman, 68 Haw. ___, 704 P.2d 888 (1985). The section in question is not an exercise of the State's right to take private property for public use. On the contrary, it is a provision compelling private landowners to pay lessees, solely at lessees' option, for improvements they may not want, may not be able to use, and may not be able to afford. The parties have cited to us four cases of relatively recent vintage, decided by the Supreme Court of the United States, dealing with the contracts clause. They are United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977); Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S. Ct. 2716, 57 L. Ed. 2d 727 (1978); Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983); and Exxon Corp. v. Eagerton, 462 U.S. 176, 103 S. Ct. 2296, 76 L. Ed. 2d 497 (1983). From those cases, it is clear that despite the apparent absolute language of the contracts clause, there are cases where, in the legitimate exercise of a state's police power, statutes which impinge upon existing contractual rights can be validly enacted without contravening the constitutional prohibition. In each of the four cases cited, the Supreme Court first considered, as a threshold requirement, whether the effect of the statute was a substantial impairment of the complaining parties' contractual rights. In the first, second and fourth cases, such an impairment was found to exist. In the third case, it was not. The law of Hawaii in 1953, when the lease was executed, was that a house built upon premises owned by another became a fixture and part of the realty (Ahoi v. Pacheco, 22 Haw. 257 (1914)), and a tenant's right to remove such a house if provided for in the lease, had to be exercised in accordance with the terms of the lease. Akiona v. Kohala Sugar Co., 5 Haw. 359 (1885). The lease in question, when executed, provided exactly what the law of Hawaii, as pronounced by this court, recognized. The lease in question was for a period of 30 years at a rental of $75 per annum. Thus, the lessees paid to the lessors, during the 30-year period of the lease, a total of $2,250 in rent. Now, under the decree of the court below, the lessors are obliged, involuntarily, and at the sole option of the lessees, to pay what appellees estimate as between $100,000 and $140,000, in order to get the leased premises back, even though the lease has expired. To say that this is not a substantial impairment of appellants' contractual rights is absurd. Moreover, if the appellants had known when they entered into the lease, that they would be obliged to purchase the lessees' improvements at the termination of the lease, they may well have bargained for a different rental, a different term, minimum or maximum building expenditures, and may very well have exercised their right of approval of lessees' plans for improvements on the premises, in a very different manner. The statute adds to lessees' rights, by giving them the additional option of receiving, in cash, and within 30 days from the judgment confirming the award, the value of their residential improvements. It correspondingly adds an additional burden to the lessors' obligations by requiring them, involuntarily, and at the option of the lessees, to purchase the improvements for cash within 30 days or face criminal penalties under HRS § 516-5. We have no hesitancy in holding that HRS § 516-70 very substantially impairs appellants' contractual rights. Under the four cases cited, we must then next consider what public policy under the police power was sought to be furthered by HRS § 516-70, and whether it changes the contractual and property rights on reasonable conditions and is of a character appropriate to its public purpose. *61 The policy expressed in Section 1 of Act 184 of the Session Laws of 1975 reads: Nothing in the language just quoted adverts to, or addresses the mandated involuntary buy-out by lessors, at lessees' option, of leasehold improvements on the expiration of a lease already existing at the time of the adoption of the 1975 amendments to HRS § 516-70. The conference committee reports with respect to the act both provide: (Emphasis supplied.) They then go on to address the problem of oligopoly of ownership of land in fee simple. But with respect to the particular section in question, the reports state only: Conf.Comm.Rep. No. 24 on S.B. 1200, 1975 Sen.J. 863 et seq.; Conf.Comm.Rep. No. 27 on S.B. 1200, 1975 Hse.J. 894 et seq. Thus, the question posed is whether, in the exercise of police power, the State can, simply in order to do what it regards as equity, enact a statute which specifically changes an agreed upon, and material provision, in existing leases to the detriment of one party and the advantage of the other. As the Supreme Court stated in Allied Structural Steel Co. v. Spannaus, 438 U.S. at 242, 98 S.Ct. at 2721: (Emphasis in original.) In U.S. Trust Co. v. New Jersey, 431 U.S. at 22, 97 S. Ct. at 1517-18, the Supreme Court stated: In Exxon Corp. v. Eagerton at 462 U.S. 191, 103 S. Ct. at 2306, the Supreme Court, in upholding the statute there under attack, noted: Here we have a statute which has a substantial, material, and, as illustrated by the facts of the present case, even a drastic, and confiscatory effect, on existing contractual obligations, and property rights. The statute, moreover, is limited in effect, to contractual obligations and remedies, as distinguished from one imposing a generally applicable rule of conduct designed to advance broad societal interests. If the expressed desire of the legislature to accomplish equity can justify this substantial and material change in the contractual obligations and remedies in all existing leases, it could also be used to justify changing any of the other material terms of existing lease agreements, such as rent, term of lease, etc. Such changes can be made in emergency situations and for limited periods. See Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934). Here, there was no emergency and no limitation on the duration of the change. This statute, as applied to leases already in effect, purely and simply, is an attempt by the legislature to change contractual remedies and obligations, to the detriment of all lessors and to the benefit of all lessees, without relation to the purposes of the leasehold conversion act; without the limitations as to leaseholds subject thereto contained in the conversion provisions; not in the exercise of the eminent domain power; but simply for the purpose of doing equity, as the legislature saw it. If there is any meaning at all to the contract clause, it prohibits the application of HRS § 516-70 to leases existing at the time of the 1975 amendment. Accordingly, that section, as applied to leases existing at the time of the adoption of the 1975 amendment, is declared unconstitutional. The order appealed from is reversed, and the case is remanded for further proceedings consistent herewith.