Opinion ID: 1195492
Heading Depth: 1
Heading Rank: 9

Heading: The defense of attempted fraud in the proof of the claim.

Text: The present action is brought pursuant to the consent of the State and the grant of jurisdiction contained in Chapter 661, HRS, and is subject to the provisions of HRS § 661-7: Claim forfeited by fraud. Any person who corruptly practices or attempts to practice any fraud against the State in the proof, statement, establishment, or allowance of any claim, or any part of any claim against the State, shall ipso facto forfeit the same to the State; and the court, in such cases, shall find specifically that fraud was practiced or attempted to be practiced, and thereupon give judgment that such claim is forfeited to the State, and that the claimant is forever barred from prosecuting the same. This section is modelled upon the federal statute, 28 U.S.C. § 2514, which in similar language has the effect of withdrawing the consent of the United States to be sued upon any contract or transaction in connection with which the claimant has corruptly practiced or attempted to practice fraud. Globe Indemnity Co. v. United States, 84 Ct. Cl. 587 (1937). A defense under HRS § 661-7 is an affirmative defense, which must be pleaded. Rule 8(c), H.R.C.P. The State sought to amend its answer to add this previously unpleaded defense by oral motion made after all the evidence in chief had been presented by both the Contractor and the State. It is apparent that counsel and the trial court understood the motion as made under Rule 15(b), H.R.C.P., which permits amendment of a pleading at any time to conform the answer to the evidence. However, by the express provisions of the rule, such an amendment may be made only when an issue not raised by the pleading has been tried by express or implied consent of the parties or when evidence is objected to at the trial upon the ground that it is not within the issues made by the pleadings. Where the issue has been tried by consent of the parties an amendment of the pleadings is unnecessary and merely formal, the same being treated as if it had been raised in the pleadings whether or not the pleadings are amended. 6 Wright & Miller, Federal Practice and Procedure, Civil § 1493 (1971). On this appeal, the State argues that the evidence established a complete defense under HRS § 661-7 and that the judgment for the Contractor should be reversed notwithstanding denial of the State's motion to amend its answer. Since the issue was before the trial court, and consequently before us, only if it was tried by the express or implied consent of the parties, our first inquiry must be into that question. The evidence upon which the State relies was presented in response to a report filed with the trial court by counsel for the State, in which it was charged that one of the attorneys for the Contractor, an attorney not admitted to practice in Hawaii but appearing in association with local counsel, had either participated in or had knowledge of the removal from Hawaii of the State's former inspector of this project, who was at the time a prospective witness for the State. A hearing was held by the trial court on the report, in which testimony was given with respect to the circumstances of the departure of the project inspector and in which an alleged conversation was described in which the attorney had been overheard saying that the inspector was the only person with first hand knowledge of what went on at the construction site and we've shipped him out ... we are not going to help them find him. Following this hearing, which did not result in any action by the trial court on the record, the attorney withdrew from the case and the Contractor was represented for the remainder of the trial by local counsel. The project inspector was located by the State and returned to Hawaii to testify for the State. The State was awarded judgment for its expenses incurred in locating him, in the sum of $1,451.06. The trial court found, in support of this item of the judgment, that officers of the Contractor had obtained mainland employment for the inspector with the object of preventing him from testifying for the State, and had purchased airplane tickets for him and his wife. The State bases its defense under HRS § 661-7 upon this finding and the related findings of the trial court, which were not challenged by the Contractor on its appeal. The State's possible defense under HRS § 661-7 was not brought to the attention of the court or the Contractor until near the end of the trial and after the hearing on the report of the alleged misconduct of the Contractor's counsel. All of the evidence relevant to this issue came before the court during that hearing. Whatever issues were then being tried, we believe it is clear that the State's defense under HRS § 661-7 was not one of them. This issue having never been tried by express or implied consent of the parties, Rule 15(b) furnished no support for the State's motion to amend its answer and the issue was not before the trial court. The validity of the defense which the State seeks to assert under HRS § 661-7 is not directly before us on this appeal. However, the fact that the State was not entitled to amend its answer to conform to the evidence does not dispose of its motion, if the amendment of its answer should have been allowed under Rule 15(a), H.R.C.P., which permits a party to amend its pleading by leave of court and requires that leave shall be freely given when justice so requires. Here the question is whether an issue not yet tried should be permitted to be raised at the end of a lengthy trial. We have said that the grant or denial of leave to amend under Rule 15(a) is within the discretion of the trial court. Bishop Trust Co., Ltd. v. Kamokila Development Corp., 57 Haw. 330, 555 P.2d 1193 (1976). In the cited case we sustained the denial of a motion to amend an answer to plead affirmative defenses, where it appeared that there had been undue delay which had prejudiced the plaintiff, and we referred to the following statement of the general standard employed under Rule 15(a) by the federal courts: In the absence of any apparent or declared reason  such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.  the leave sought should, as the rules requires, be freely given. ( Foman v. Davis, 371 U.S. 178, at 182, 83 S.Ct. 227, at 230). The motion in the present case should be judged by this standard. The fact that the motion was made after the evidence in chief of both parties had been presented weighs against the motion. However, the alleged defense was predicated on conduct of the Contractor during the course of the trial and the evidence had already been developed, although on another issue. None of the usual reasons for denial of a motion to amend were present except the possible futility of the amendment. How far the trial court ordinarily should inquire into the substantive merits of a claim or defense on a motion to amend under Rule 15(a) is open to debate. 6 Wright & Miller, Federal Practice and Procedure: Civil § 1487 (1971). However, the circumstances in which the motion was presented in the present case made it apparent that the real issue before the court was the sufficiency of the evidence upon which the State proposed to rely. The remarks of the trial judge at the hearing on the motion to amend indicated that the motion was denied upon his opinion that the evidence presented at the hearing on the misconduct report was insufficient to sustain an allegation of fraud or attempt to practice fraud in the proof of the claim and that the amendment would be futile. We conclude that we should consider as before us on this appeal the question whether such evidence, if presented in a trial of the issue and viewed in the light most favorable to the State, would prima facie establish the defense. This question has been briefed and argued, in substance, on this appeal. The terms used in HRS § 661-7 are not defined in the statute. Neither are they defined with specificity in our decisions. We have quoted the following in a case where the issue was the commission of constructive fraud: Fraud in its generic sense, especially as the word is used in courts of equity, comprises all acts, omissions and concealments involving a breach of legal or equitable duty and resulting in damage to another. Fraud has also been defined as any cunning or artifice used to cheat or deceive another. However, the wisdom of an exact legal definition of fraud has been questioned, and it has been stated that fraud is better left undefined, and some courts have said that the common law not only fails to define fraud but perhaps asserts as a principle that there shall be no definition. Further it is frequently stated that owing to the multiform character of fraud and the great variety of attendant circumstances no definition which is all inclusive can be framed, but each case must be determined on its particular facts. (26 C.J., § 1, p. 1059, as quoted in Daly v. Showers [Appellate Court of Indiana, En Banc., May 4, 1973] 104 Ind. App. 480, 8 N.E. [2d] 139, 142.) ( Von Holt v. Izumo Taisha Kyo Mission, 42 Haw. 671, at 722) To establish its defense, the State must show that the acts of the Contractor in inducing the project inspector to leave Hawaii with the purpose of making his testimony unavailable to the State constituted an attempt corruptly to practice fraud in the proof of the claim, within the meaning of HRS § 661-7. There can be no question that such conduct on the part of the Contractor, if established, would have taken place in the proof, statement, establishment or allowance of the claim, since it would have been in the context of a trial conducted for the purpose of proving the claim. Whether such conduct should be characterized as an attempt to practice fraud can best be considered in the light of the doctrine under which equitable relief is granted against a judgment obtained by fraud. The rule has been stated: A United States court sitting in equity may vacate and set aside a judgment for fraud which was extrinsic or collateral to the matter tried but not for fraud which was in issue in the former suit. United States v. Throckmorton, 98 U.S. 61, 25 L.Ed. 93. The line of distinction between the two is sometimes indistinct and difficult to draw; dialectic niceties have sometimes been used in an effort to blueprint it; and tenuous differences have occasionally been sketched. Broadly stated, fraud practiced by a successful litigant which prevents his unsuccessful adversary from fully exhibiting his case, such as wrongfully preventing him or his material witnesses from attending the trial, inducing his attorney to professional delinquency or infidelity in connection with the case, or some other similar act, unmixed with fault or negligence on the part of the losing party, constitutes extrinsic or collateral fraud; and the introduction of perjured testimony or forged documents, or other cognate matter, which is actually considered in the judgment constitutes intrinsic fraud. ( Brady v. Beams, 132 F.2d 985 at 986-987 (10th Cir.1943). Similarly, in Godfrey v. Godfrey, 30 Cal. App.2d 370, 86 P.2d 357, 362 (1939), extrinsic fraud is said to include acts preventing the presence at the trial of material witnesses. To the same effect is Britton v. Gannon, 285 P.2d 407 (Okl. 1955) and Annot.: Secreting witness or other conduct preventing summoning or appearance of witness as ground for relief from judgment, 131 A.L.R. 1519 (1941). Of course, the question whether the conduct under examination here constituted extrinsic or intrinsic fraud would be material only to the State's right to relief from the judgment in a proceeding brought for that purpose. The State need not establish that the fraud was extrinsic to establish its defense under HRS § 661-7. Thus intrinsic fraud, consisting of alteration of books of account which had the effect of presenting perjured testimony, has been held to require forfeiture of the claim under 28 U.S.C. § 2514, the federal statute upon which HRS § 661-7 is modeled. Blume v. United States, 81 Ct. Cl. 210 (1934), cert. den., 297 U.S. 722, 56 S.Ct. 667, 80 L.Ed. 1006, rehearing den., 298 U.S. 691, 56 S.Ct. 746, 80 L.Ed. 1409. The secreting of a witness was regarded as equivalent to the giving of perjured testimony, and as intrinsic fraud, in Stephens v. Lampron, 308 Mass. 50, 30 N.E.2d 838 (1941). The State urges that the record shows a violation by the Contractor of HRS § 661-7, and that we should hold that the trial court erred in refusing to declare a forfeiture of the Contractor's claims, thus obviating the need for a remand of this case for further proceedings. Even if we were to leave aside the procedural considerations to which we have referred, this course would not be open to us. The defense of fraud under the statute must be supported by clear and convincing evidence. Law v. United States, 195 Ct. Cl. 370, 440 (1971). Questions of credibility and the weight of the evidence are necessarily vital considerations in the ultimate determination of the effect of HRS § 661-7 upon the Contractor's claims. The findings of fact touching upon this issue are not sufficiently definitive to enable us to determine whether the applicable standard of proof has been met. The trial judge who heard this case has retired. Accordingly, a further trial of this issue is required. We do no more here than to conclude that the motion of the State to amend its answer was accompanied by a showing that sufficient evidence was available to prima facie establish the defense and that denial of the motion in the circumstances of the case constituted an abuse of judicial discretion. The judgment in favor of the Contractor must be reversed to permit this defense to be raised by the State. Upon remand of the case, the State's motion to amend its answer should be granted.