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Electronically Filed
Intermediate Court of Appeals
CAAP-XX-XXXXXXX
29-APR-2021
07:58 AM
Dkt. 53 MO
NO. CAAP-XX-XXXXXXX
IN THE INTERMEDIATE COURT OF APPEALS
OF THE STATE OF HAWAI#I
NORMAN INOUE, AND ALL OTHERS SIMILARLY SITUATED,
Plaintiffs-Appellants,
v.
HARBOR LEGAL GROUP AND LAW OFFICES OF G. ANTHONY YUTHAS,
Defendants-Appellees
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CIVIL NO. 19-1-0495)
MEMORANDUM OPINION
(By: Ginoza, Chief Judge, Wadsworth and Nakasone, JJ.)
Plaintiff-Appellant Norman Inoue (Inoue) appeals from
an "Order Granting Defendant Harbor Legal Group, LLC's Motion to
Compel Arbitration or in the Alternative Dismiss the Complaint,"
(Order Compelling Arbitration) filed on August 8, 2019, in the
Circuit Court of the First Circuit (Circuit Court).1
On appeal, Inoue contends the Circuit Court erred by
granting a motion to compel arbitration filed by Defendant-
Appellee Harbor Legal Group, LLC, also known as The Law Offices
of G. Anthony Yuthas (HLG). Inoue asserts the Circuit Court
improperly severed the arbitration clause from the contract at
issue, rather than applying the plain language of Hawaii Revised
1
The Honorable Jeffrey P. Crabtree presided.
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Statutes (HRS) § 446-2 (2013 Repl.) which Inoue contends dictates
that the entire contract is void and unenforceable, including the
arbitration clause.
Based on precedent by the United States Supreme Court
and the Hawai#i Supreme Court, we conclude the Circuit Court
correctly issued the Order Compelling Arbitration and therefore
we affirm.
I. Background
Inoue initiated this lawsuit by filing a "Class Action
Complaint" (Complaint) alleging that, pursuant to HRS § 446-2,
for-profit debt adjusting is illegal in Hawai#i and that HLG is a
for-profit debt adjuster conducting business in Hawai#i. The
Complaint alleges Inoue hired HLG in October 2015 as a debt
adjuster to help him manage his debts, he entered into an
agreement with HLG, he paid various fees to HLG and deposited a
certain amount with HLG each month to adjust and pay his debts,
but that subsequently HLG's services were unsuccessful and Inoue
was sued by his creditors. The Complaint further contends that
HLG is a law office in Colorado and is not licensed in Hawai#i.
The Complaint asserts that HLG violated HRS chapter 446 and HRS
§ 480-2 (2008 Repl.).
HLG brought a motion to compel arbitration, which the
Circuit Court granted by issuing the Order Compelling
Arbitration, stating in part:
The Court finds that the parties entered into a broad and
valid agreement to arbitrate any dispute which arose between
them relating to Defendant's services. The Court also finds
that the subject matter of this dispute is arbitrable, and
Plaintiff must pursue his claims, if at all, in arbitration.
Therefore, the instant case is hereby stayed pursuant to
Haw. Rev. Stat. § 658A-7(g).
Inoue contends the Circuit Court erred in compelling
arbitration because debt adjusting services were outlawed in
Hawai#i under HRS § 446-2 and "[t]he entire contract, including
the arbitration clause within it, is void and unenforceable
pursuant to [HRS § 446-2]." The statute provides:
§ 446-2 Debt adjusting prohibited; penalty;
contracts void. Any person who acts or offers to act
as a debt adjuster in this State shall be fined not
more than $500 or imprisoned not more than six months,
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or both. Any contract for debt adjusting entered into
with a person engaged in the business for a profit
shall be void and unenforceable and the debtor may
recover from the debt adjuster all sums or things
deposited with the debt adjuster and not disbursed to
the debtor's creditors.
Inoue's challenge to the arbitration provision is thus based on
his challenge to the agreement as a whole.2
In response, HLG counters that Inoue entered into a
Letter of Engagement (the Agreement) with HLG which contains a
valid arbitration provision and the dispute falls squarely within
the scope of the arbitration provision. HLG asserts that Inoue's
argument -- that the entire Agreement, including the arbitration
provision, is void under HRS § 446-2 –- runs afoul of controlling
decisions by the United States Supreme Court and Hawaii Supreme
Court. HLG first points to Gabriel v. Island Pacific Academy,
Inc., 140 Hawai#i 325, 400 P.3d 526 (2017), under which a court
determines the validity and enforceability of an arbitration
agreement based on three elements: (1) it must be in writing; (2)
it must be unambiguous as to the intent to submit the dispute to
arbitration; and (3) there must be bilateral consideration. Id.
at 334, 400 P.3d at 535 (quoting Douglass v. Pflueger Hawaii,
Inc., 110 Hawai#i 520, 531, 135 P.3d 129, 140 (2006) (quotation
marks omitted)). HLG asserts these elements were satisfied. HLG
further contends that, as a matter of substantive federal
arbitration law that also applies in state courts, an arbitration
provision is severable from the remainder of the contract, citing
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006),
Southland Corp. v. Keating, 465 U.S. 1 (1984), Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and Siopes v.
Kaiser Found. Heath Plan, Inc., 130 Hawai#i 437, 457 n.28, 312
P.3d 869, 889 n.28 (2013).
2
Inoue also cites to Narayan v. Ritz-Carlton Dev. Co., Inc., 140
Hawai#i 343, 400 P.3d 544 (2017), and argues that arbitration agreements, like
other contracts, can be invalidated by generally applicable contract defenses
such as fraud, duress or unconscionability. However, Inoue did not raise such
contract defenses to the arbitration provision in the Circuit Court, thus this
argument is waived.
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II. Standard of Review
The standard for appellate review of a motion to compel
arbitration is the same as a motion for summary judgment. Koolau
Radiology, Inc. v. Queen's Med. Ctr., 73 Haw. 433, 439-40, 834
P.2d 1294, 1298 (1992). The appellate court reviews "the circuit
court's grant or denial of summary judgment de novo." Querubin
v. Thronas, 107 Hawai#i 48, 56, 109 P.3d 689, 697 (2005) (quoting
Hawai#i Community Federal Credit Union v. Keka, 94 Hawai#i 213,
221, 11 P.3d 1, 9 (2000)). The de novo review is "based upon the
same evidentiary materials as were before [the trial court] in
determination of the motion." Koolau Radiology, 73 Haw. at 440,
834 P.2d at 1298 (internal quotation marks and citation omitted).
III. Discussion
"When presented with a motion to compel arbitration,
the court is limited to answering two questions: 1) whether an
arbitration agreement exists between the parties; and 2) if so,
whether the subject matter of the dispute is arbitrable under
such agreement." Brown v. KFC Nat'l Mgmt. Co., 82 Hawai#i 226,
238, 921 P.2d 146, 158 (1996) (brackets and citation omitted).
Given Inoue's arguments on appeal –- that the entire Agreement is
void and severance of the arbitration provision is not
appropriate -- our focus is on the first question, whether an
arbitration agreement exists between the parties.
There is no dispute that the Gabriel elements are met:
the arbitration provision is in writing, there is an unambiguous
intent to submit the dispute to arbitration, and there is
bilateral consideration. The arbitration clause in the Agreement
states, in part:
In the event of any controversy, claim or dispute between
the Parties arising out of or relating to this agreement or
the breach, termination, enforcement, performance,
interpretation or validity thereof, including any
determination of the scope or applicability of this
agreement to arbitrate, shall be determined by arbitration
in the county in which the Client [sic], in accordance with
the laws of the state of the Client's residence.
The crux of this appeal is whether Inoue's contention
that HRS § 446-2 voids the entire Agreement as illegal, also
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voids the arbitration provision. Because Inoue's argument is not
a specific challenge to the validity of the arbitration
provision, we agree with HLG that under the prevailing case law
the arbitration clause should be severed.
In Buckeye, the plaintiffs entered deferred-payment
transactions with the defendant Buckeye Check Cashing, Inc., in
which plaintiffs received cash in exchange for a personal check
in the amount of the cash plus a finance charge. For each
transaction there was an agreement that contained an arbitration
provision. The plaintiffs filed a class action lawsuit in
Florida state court "alleging that Buckeye charged usurious
interest rates and that the Agreement violated various Florida
lending and consumer-protection laws, rendering it criminal on
its face." 546 U.S. at 443. Buckeye sought to compel
arbitration. The trial court denied the motion to compel
arbitration, the Florida court of appeal reversed, the Florida
Supreme Court reversed the appellate court, and the case was
accepted for review by the U.S. Supreme Court. Id.
The U.S. Supreme Court stated the issue before it as
follows: "We decide whether a court or an arbitrator should
consider the claim that a contract containing an arbitration
provision is void for illegality." Id. at 442. The court first
noted the application of the Federal Arbitration Act (FAA),3
stating:
To overcome judicial resistance to arbitration, Congress
enacted the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16.
Section 2 embodies the national policy favoring arbitration
and places arbitration agreements on equal footing with all
other contracts:
"A written provision in ... a contract ... to
settle by arbitration a controversy thereafter
arising out of such contract ... or an agreement
in writing to submit to arbitration an existing
3
The FAA applies to written arbitration provisions in "any maritime
transaction or a contract evidencing a transaction involving commerce[.]" 9
U.S.C. § 2 (1976). Thus, it "rests on the authority of Congress to enact
substantive rules under the Commerce Clause[,]" and the substantive rules of
the FAA apply in state and federal courts. Southland Corp., 465 U.S. at 11,
12. No party questions that the FAA applies in this case.
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controversy arising out of such a contract ...
shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in
equity for the revocation of any contract."
Id. at 443-44.
The court then explained:
Challenges to the validity of arbitration agreements "upon
such grounds as exist at law or in equity for the revocation
of any contract" can be divided into two types. One type
challenges specifically the validity of the agreement to
arbitrate. See, e.g., Southland Corp. v. Keating, 465 U.S.
1, 4–5, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (challenging the
agreement to arbitrate as void under California law insofar
as it purported to cover claims brought under the state
Franchise Investment Law). The other challenges the contract
as a whole, either on a ground that directly affects the
entire agreement (e.g., the agreement was fraudulently
induced), or on the ground that the illegality of one of the
contract's provisions renders the whole contract invalid.
Respondents' claim is of this second type. The crux of the
complaint is that the contract as a whole (including its
arbitration provision) is rendered invalid by the usurious
finance charge.
In Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S.
395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), we addressed the
question of who—court or arbitrator—decides these two types
of challenges. The issue in the case was "whether a claim of
fraud in the inducement of the entire contract is to be
resolved by the federal court, or whether the matter is to
be referred to the arbitrators." Id., at 402, 87 S.Ct. 1801.
Guided by § 4 of the FAA, we held that "if the claim is
fraud in the inducement of the arbitration clause itself—an
issue which goes to the making of the agreement to
arbitrate—the federal court may proceed to adjudicate it.
But the statutory language does not permit the federal court
to consider claims of fraud in the inducement of the
contract generally." Id., at 403–404, 87 S.Ct. 1801
(internal quotation marks and footnote omitted). We rejected
the view that the question of "severability" was one of
state law, so that if state law held the arbitration
provision not to be severable a challenge to the contract as
a whole would be decided by the court. See id., at 400,
402–403, 87 S.Ct. 1801.
Subsequently, in Southland Corp., we held that the FAA
"create[d] a body of federal substantive law," which was
"applicable in state and federal courts." 465 U.S., at 12,
104 S.Ct. 852 (internal quotation marks omitted). We
rejected the view that state law could bar enforcement of
§ 2, even in the context of state-law claims brought in
state court. See id., at 10–14, 104 S.Ct. 852; see also
Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270–273,
115 S.Ct. 834, 130 L.Ed.2d 753 (1995).
. . .
Prima Paint and Southland answer the question presented here
by establishing three propositions. First, as a matter of
substantive federal arbitration law, an arbitration
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provision is severable from the remainder of the contract.
Second, unless the challenge is to the arbitration clause
itself, the issue of the contract's validity is considered
by the arbitrator in the first instance. Third, this
arbitration law applies in state as well as federal courts.
The parties have not requested, and we do not undertake,
reconsideration of those holdings. Applying them to this
case, we conclude that because respondents challenge the
Agreement, but not specifically its arbitration provisions,
those provisions are enforceable apart from the remainder of
the contract. The challenge should therefore be considered
by an arbitrator, not a court.
Id. at 444-46 (emphases added) (footnotes omitted).
In Lee v. Heftel, 81 Hawai#i 1, 911 P.2d 721 (1996),
the appellants challenged a trial court's order compelling
arbitration, asserting that fraud in the inducement was grounds
to revoke the subject real estate contract such that the
contract's arbitration clause was not enforceable. Id. at 2, 911
P.2d at 722. The Hawai#i Supreme Court analyzed Prima Paint and
other federal case law and held that, "where no claim is made
that fraud was directed to the arbitration clause itself, a broad
arbitration clause will be held to encompass arbitration of the
claim that the contract itself was induced by fraud." Id. at 4,
911 P.2d at 724 (quoting Prima Paint, 388 U.S. at 404).
Further, although not directly addressing the issue
raised in this appeal, the Hawai#i Supreme Court in Siopes
recognized that an arbitration provision is severable from the
rest of a contract, including as recognized in Buckeye. In
Siopes, the Hawai#i Supreme Court stated:
In Brown, this court recognized that "[f]or almost forty
years, arbitration agreements have been regarded, as a
matter of federal law, as severable and distinct from the
underlying agreement." 82 Hawai#i at 245, 921 P.2d at 165.
The court held that generally, "an arbitration agreement is
severable from the writing in which it is embedded." Id. at
246, 921 P.2d at 166. See Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d
1038 (2006) ("as a matter of substantive federal arbitration
law, an arbitration provision is severable from the
remainder of the contract"); Richard A. Lord, 21 Williston
on Contracts 245 (4th ed. 2001) ("Ordinarily, an arbitration
clause will be treated as a separate contract, and severable
from the main body of the contract. Thus, whenever possible,
an arbitration clause will be held severable ....")
(footnote omitted).
130 Hawai#i at 457 n.28, 312 P.3d 889 n.28.
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Given the prevailing case authority discussed above, it
was appropriate for the Circuit Court to sever the arbitration
provision from the rest of the Agreement and to enforce the
agreement to arbitrate. Therefore, the Circuit Court was correct
in granting HLG's motion to compel arbitration.
IV. Conclusion
Based on the above, we affirm the "Order Granting
Defendant Harbor Legal Group, LLC's Motion to Compel Arbitration
or in the Alternative Dismiss the Complaint," entered by the
Circuit Court of the First Circuit on August 8, 2019.
DATED: Honolulu, Hawai#i, April 29, 2021.
On the briefs: /s/ Lisa M. Ginoza
Chief Judge
Justin A. Brackett,
for Plaintiff-Appellant /s/ Clyde J. Wadsworth
Associate Judge
Matthew T. Evans,
Joanna C. Zeigler, /s/ Karen T. Nakasone
(Damon Key Leong Kupchak Associate Judge
Hastert)
and
Timothy D. Elliott,
(Rathje Woodward, LLC)
for Defendant-Appellee
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