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NO. 23182 IN THE INTERMEDIATE COURT OF APPEALS OF THE STATE OF HAWAI#I PETER C. JONES, Plaintiff/Counterclaim Defendant-Appellee/ Cross-Appellant, v. MAUI CLASSIC CHARTERS, INC., a Hawaii corporation, Defendant/CounterclaimantAppellee/Cross-Appellee, CHRISTOPHER F. CARROLL, Defendant-Appellant/Cross-Appellee, SAMUEL DAKIN, Defendant APPEAL FROM THE CIRCUIT COURT OF THE SECOND CIRCUIT (CIVIL NO. 96-0834(3)) (By: MEMORANDUM OPINION Burns, C.J., Lim, and Foley, JJ.)

This action centers around three agreements affecting, among others, a corporation, its current and former presidents, and members of its board of directors. The events leading to

litigation occurred in 1996, when Plaintiff/Counterclaim Defendant-Appellee/Cross-Appellant Peter C. Jones (Jones), the former president of Defendant/Counterclaimant-Appellee/CrossAppellee Maui Classic Charters, Inc. (MCC), a charter boat business operating out of Ma#alaea Harbor on Maui, attempted to sell fifteen shares of his MCC stock to his mother. MCC issued

Jones's stock certificate with a restrictive endorsement that had the purported effect of limiting the valuation of the shares to less than fair market value ("book value"), in accordance with a 1983 stock redemption agreement (the 1983 Stock Agreement) to which Jones was a party. -1-

Jones objected to MCC's reliance on the 1983 Stock Agreement and brought this action for a declaratory judgment that it was no longer valid, against, among other signatories, MCC and Defendant-Appellant/Cross-Appellee Christopher F. Carroll (Carroll), an attorney and a member of MCC's board of directors. In his complaint, Jones included a second claim against MCC alone, alleging that MCC's reliance on the 1983 Stock Agreement violated its express covenant to act in good faith contained in a 1994 agreement among Jones, MCC, another shareholder and two of MCC's directors (the 1994 Addendum); and by "extension" breached a 1993 agreement between Jones and MCC (the 1993 Agreement), entitling him to damages, liquidated damages and attorneys' fees and costs from MCC. In response to Jones's complaint, MCC counterclaimed, alleging that Jones breached release language found in the 1993 Agreement that allegedly barred Jones from thereafter suing MCC, likewise entitling MCC to damages, liquidated damages and attorneys' fees and costs from Jones. Upon cross-motions for summary judgment on the foregoing claims, the circuit court of the second circuit issued orders granting and denying summary judgment on all three claims. It entered judgment as a matter of law in favor of Jones on his first claim for a declaratory judgment and in favor of MCC on both Jones's second claim for breach of contract and MCC's counterclaim. It denied converse motions for summary judgment on

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all three claims.

The court later awarded attorneys' fees and

costs to MCC and denied a request by Carroll, pro se, for attorneys' fees. Following an abortive first appeal of a final judgment entered in the case, the court entered an amended final judgment. Carroll filed a notice of appeal of the amended final judgment. Jones cross-appealed. judgment. On appeal, Carroll contends the court erred in granting summary declaratory judgment to Jones and in denying his crossmotion for summary declaratory judgment. Carroll also contends MCC did not appeal the amended final

the court erred in denying his request for attorneys' fees "based on the 1993 Agreement." In his cross-appeal, Jones essentially

avers that the court should have granted his motions for summary judgment on his second claim against MCC for breach of contract and on MCC's counterclaim. Conversely, Jones argues that the

court erred in granting MCC's motion for summary judgment on his second claim and its counterclaim. Accordingly, Jones contends

the court's award of attorneys' fees and costs to MCC must be vacated. Boiled down, the primary issues on appeal are: (1) Whether the court erred in concluding, as a matter of law, that the 1983 Stock Agreement terminated according to its terms and was not binding on the parties.

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(2) Whether the court erred in concluding, as a matter of law, that MCC did not breach its express covenant of good faith contained in the 1994 Addendum. (3) Whether the court erred in concluding, as a matter of law, that Jones violated the release provision contained in the 1993 Agreement. (4) Whether the court erred in awarding attorneys' fees and costs to MCC. (5) Whether the court erred in denying Carroll's request for attorneys' fees. We agree with the court that Jones was entitled, as a matter of law, to summary declaratory judgment invalidating the 1983 Stock Agreement. Ipso facto, the court was correct in

denying the cross-motion for summary judgment brought by MCC and Carroll. However, we hold that the court erred in granting MCC summary judgment on Jones's breach-of-contract claim and on its counterclaim, as issues of material fact exist which rendered summary judgment inappropriate as to those claims. Accordingly, By the

we vacate the award of attorneys' fees and costs to MCC.

same token, we affirm the court's denial of Jones's cross-motions for summary judgment. Finally, we agree with the court that Carroll is not entitled to attorneys' fees. Accordingly, we (1) affirm the court's April 6, 1998 order that granted summary declaratory judgment to Jones and

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denied the cross-motion for summary judgment brought by MCC and Carroll, (2) vacate the court's November 23, 1998 order that granted summary judgment to MCC on Jones's second claim and on its counterclaim and affirm the November 16, 1998 order that denied Jones's cross-motions for summary judgment, (3) vacate the court's October 21, 1998 order awarding attorney's fees and costs to MCC, (4) affirm the court's December 10, 1998 order denying Carroll's request for attorneys' fees, and (5) remand the case for further proceedings consistent with this opinion.

I.

BACKGROUND.

Jones was a founder and original shareholder of MCC. From 1983 to 1992, he was a director of MCC and its president. In August 1983, MCC, Jones, Carroll, and MCC's other shareholders executed the 1983 Stock Agreement. The 1983 Stock Agreement

provided, in relevant part, as follows:
MAUI CLASSIC CHARTERS, INC. STOCK REDEMPTION AGREEMENT AGREEMENT, made August [1st], 1983, among [Jones], John Scott Nugent, Kenneth Gingerich, [Carroll] and Samuel Dakin (hereinafter called the "Stockholders"), and [MCC], a Hawaii Corporation (hereinafter called the "Corporation")[.] WHEREAS, the Stockholders own all of the capital stock of the Corporation[.] . . . . WHEREAS, the Stockholders and the Corporation believe it to be in the best interests of all parties that the stock of a deceased stockholder be acquired by the Corporation, and

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WHEREAS the Corporation has arranged to provide the funds necessary to acquire the stock of a deceased Stockholder through life insurance policies on the lives of the Stockholders, It is therefore agreed: 1. INSURANCE. The Corporation shall obtain insurance on the life of each Stockholder for $100,000, naming itself as beneficiary of the policies. All policies shall be listed in Schedule A attached hereto, and the policies and any proceeds received thereunder shall be held by the Corporation in trust for the purposes of this Agreement. The Corporation shall have the right to take out additional insurance on the life of any Stockholder whenever, in the opinion of the Corporation, additional insurance may be required to carry out its obligations under this Agreement. The additional policies shall be listed in Schedule A and subject to the terms of the Agreement. The Corporation shall pay all premiums on the insurance policies and shall give proof of payment to the Stockholders within 30 days after the due date of each premium. 2. RIGHTS OF OWNERSHIP. The Corporation shall be the sole owner of the insurance policies and may apply to the payment of premiums any dividends declared and paid on the policies. 3. PURCHASE OF STOCK ON DEATH. Upon the death of any Stockholder, the Corporation shall purchase and the the [sic] estate of the decedent shall sell all the decedent's stock in the Corporation now owned or hereafter acquired by him. The purchase price of the stock shall be its value computed in accordance with the provisions of the following paragraph. 4. PURCHASE PRICE. The purchase price of each share of stock shall be its book value at the end of the month in which the death of the Stockholder occurs. Book value shall include the cash surrender values of life insurance policies taken out by the Corporation pursuant to the Agreement, and the proceeds of policies insuring the life of the deceased Stockholder in excess of their cash surrender values. The determination of book value shall be made by the accountant then servicing the Corporation, and such determination shall be conclusive on all parties. 5. PAYMENT OF PURCHASE PRICE. The purchase price shall be paid in cash to the estate of the decedent within 30 days after the qualification of a legal representative of such estate. 6. INSUFFICIENT SURPLUS. If at the time the Corporation is required to pay the purchase price its

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surplus is insufficient for such purpose, then (a) the entire available surplus shall be used to purchase part of the stock of the deceased Stockholder, and (b) the Corporation and the Stockholders shall promptly take all required action to reduce the capital stock of the Corporation to the extent necessary, or shall take all other action as may be necessary, for the redemption of the unpurchased stock. Payment for the stock so redeemed shall be made at its book value as determined under paragraph 4. 7. DELIVERY OF STOCK. Upon the payment to the estate of the deceased Stockholder of the purchase or redemption price, the legal representative shall assign and deliver the shares of the deceased Stockholder to the Corporation. 8. LIFETIME OPTION TO PURCHASE STOCK. In the event that any Stockholder desires to dispose of his stock during his lifetime, he shall first offer all his stock for sale to the Corporation, and the Corporation shall have the option to purchase all, but not less than all, of his stock. If the Corporation does not purchase all of his stock within 15 days after the receipt of such offer, all of such stock shall be offered to the other Stockholders who shall have the option, among themselves, to purchase all, but not less than all, of such stock. Each of the other Stockholders shall have the right to purchase such portion of the stock offered for sale as the number of shares owned by him at such date shall bear to the total number of shares owned by all the other Stockholders, provided, however, that if any Stockholder does not purchase his full proportionate share of the stock, the unaccepted stock may be purchased by the others proportionately. The purchase price for such shares of stock and the terms of payment shall be the same as fixed by paragraphs 4 and 5, except that the payment shall be made within 30 days after the date of the offer. Simultaneously with the receipt of payment in cash, the selling Stockholder shall take all necessary steps to transfer his shares of stock to the pruchaser [sic]. Any Stockholder whose stock is purchased in accordance with provisions of this paragraph shall cease to be a party to this Agreement, and shall have no further rights hereunder. 9. PURCHASE OF INSURANCE POLICIES ON WITHDRAWAL OF PARTY. In the event that any Stockholder ceases to be a party to the Agreement, pursuant to the provisions of paragraph 8, he shall have the right to purchase from the Corporation the insurance policies on his life listed in Schedule A for a price equal to the cash surrender value of the polices at the date of the offer of sale. The right to purchase shall be exercised and the price paid contemporaneously with

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the payment of the price for the stock purchased from such Stockholder. The Corporation shall deliver the policies to the Stockholder and shall execute any necessary instruments of transfer. In the event any of such policies are not so purchased, they shall be released from the terms of the Agreement. 10. ENDORSEMENT ON STOCK CERTIFICATES. Upon the execution of the Agreement, the certificates of stock subject hereto shall be surrendered to the Corporation and endorsed as follows: "This certificate is transferable only upon compliance with the provision [sic] of an agreement dated August 1, 1983, among Maui Classic Charters, Inc. and its Stockholders, a copy of which is on file in the office of the Secretary of the Corporation." After endorsement the certificates shall be returned to the Stockholders, who shall be entitled to exercise all rights of ownership of such stock, subject to the terms of this Agreement. All stock hereafter issued to the Stockholders shall bear the same endorsement. 11. TERM. This Agreement shall terminate upon the occurrence of any of the following events: (a) Cessation of the Corporation's business. (b) Bankruptcy, receivership, or dissolution of the Corporation. (c) Withdrawal, under the provisions of paragraph 8, of more than one party. (d) Whenever there are only two surviving Stockholders bound by the terms hereof. (e) The termination of the policies on the lives of all of the Stockholders. Upon the termination of the Agreement, each Stockholder shall surrender to the Corporation the certificates for his stock and the Corporation shall issue to him in lieu thereof new certificates for an equal number of shares without the endorsement set forth in paragraph 10. 12. PURCHASE OF INSURANCE POLICIES ON TERMINATION. Each Stockholder shall have the right, within 30 days after termination of the Agreement, to purchase from the Corporation the policies of insurance on his life at a price equal to the cash surrender value of the policies on the date of termination. Upon receipt of the purchase price, the Corporation shall deliver the policies to the respective purchasers and shall execute any necessary instruments of transfer. The insured shall have no further rights in any policies not purchased within the above 30-day period.

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13. BENEFIT. This Agreement shall be binding upon the parties, their heirs, legal representatives, successors, and assigns. Each Stockholder in furtherance therof [sic] shall execute a will directing his executor to perform the Agreement and to execute all documents necessary to effectuate the purposes of this Agreement, but the failure to execute such will shall not affect the rights of any Stockholder or the obligations of any estate, as provided in the Agreement.

In late 1992, Mary Jane Caldwell, Jones's sister, and Charles Caldwell, her husband, acquired a substantial number of MCC shares and became the majority stockholders in the corporation. Shortly thereafter, the board of directors in

effect removed Jones as an officer and director of MCC and elected Charles Caldwell as the new president, effective January 1, 1993. Mary Jane Caldwell had already been installed

as vice-president of MCC at that point. On February 2, 1993, Jones and MCC entered into the 1993 Agreement. In support of his motion for summary judgment on

MCC's counterclaim, Jones declared that "[i]t was the Caldwells' rise to power, and my ouster, that led to the 1993 Agreement." In a deposition, Charles Caldwell described its purpose as follows:
Q. Who drafted this document [(the 1993 Agreement)]? A. Q. A. Q. I think [Carroll] drafted the document. Is that your signature on it? Yeah. What was the purpose of this document?

A. The purpose was to fairly end the relationship of [Jones] and [MCC].

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Q. A.

Which relationship? As a manager of [MCC].

Q. Was it intended to end his relationship with [MCC] as a shareholder? A. No.

Q. So that relationship as contemplated would continue? A. Yeah.

The 1993 Agreement reads, in pertinent part, as follows:
ARTICLE I BACKGROUND 1. WHEREAS JONES has been employed as the Chief Executive Officer and President of [MCC] since the incorporation of [MCC]; and 2. WHEREAS various claims, demands, disputes and differences have arisen between the parties concerning the employment performance of JONES; the business and transactions involving property sold to [MCC] by JONES; violations of the Hawaii corporation code involving the management of [MCC]; violations of the JONES employment contract with [MCC]; financial irregularities existing between the parties; and the monetary claims and counterclaims now existing between the parties; and 3. WHEREAS the parties desire to avoid the time, expense, aggravation, and litigation which is now eminent [sic] between the parties, and to settle all of the legal issues and disputes now existing between them; and . . . . NOW THEREFORE, in consideration of the covenants and mutual promises herein contained, it is hereby agreed as follows: ARTICLE II SPECIFIC PROVISIONS [(Discussing various matters of settlement including, inter alia , disposition of property as between Jones and MCC, transfers of various rights between the parties arising out of the employment relationship,

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and settlement of Jones's rights under his employment contract.)] ARTICLE IV RELEASES 1. In consideration of the terms and conditions hereof and of the mutual covenants of the parties hereto, JONES hereby releases and discharges [MCC], its officers, directors, shareholders, agents, and employees, and each of them, from and against any and all claims, demands, actions, causes of action, liabilities, damages at law and in equity which JONES has or may hereafter have, either now known or not, resulting from or connected with the claims and matters arising out of JONES' employment at [MCC], and all other business dealings, contracts, arrangements, disputes and dealings between JONES and any of the parties mentioned above. 2. In consideration of the terms and conditions hereof and the mutual covenants of the parties hereto, [MCC], its officers, directors, shareholders, agents, and employees hereby release and forever discharge JONES from and against any and all claims, demands, actions, causes of action, liabilities, damages at law and equity which [MCC], its officers, directors, shareholders, agents, or employees have or may hereafter have, whether now known or not, resulting from or connected with JONES' employment, business and personal relationships set forth in the terms of this Agreement and from any liability arising from the January 10, 1993 accident involving the vessel TERAGRAM. 3. This settlement is a compromise of disputed claims. It is not an admission of liability by any party. No party to this Release has made or received a promise, agreement, or a representation to induce this compromise, which is made with full knowledge of the facts and advice of counsel. This settlement agreement shall be a contractual instrument and not a mere recital. It is understood and agreed to by the parties that this instrument is a full and final release between the parties of all claims of every nature and kind whatsoever at law and equity, known or unknown, past, present or future, excepting only those obligations and covenants contained in or resulting from this Agreement. ARTICLE V SURVIVAL OF OBLIGATIONS 1. The parties mutually covenant and agree that the rights and obligations under the terms of this Agreement shall survive and continue and that on default of any obligation by any party, the other

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party may bring an action for specific performance, for damages, or for any other remedy available under applicable law. This Agreement is intended to be a binding contract of full legal force and effect. 2. The parties further agree that any violation of this covenant not to sue, or take [sic] other action as set forth in this Article and this Agreement shall result in the enforceable obligation by the breaching party to pay the aggrieved party a sum equal to amount of the underlying claim, all court costs, and attorneys [sic] fees incurred by the aggrieved party together with the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00) as liquidated damages for breech [(sic)] of contract. . . . . ARTICLE VII GENERAL PROVISIONS . . . . 3. In the event any party hereto shall commence any action or proceeding against the other by reason of any breach or claimed breach in the performance of any of the terms or conditions of this Agreement, or to seek a judicial determination of rights hereunder, the prevailing party in such action or proceeding shall be entitled to reasonable attorney's fees in an amount to be fixed by the trial court. . . .

(Bold typesetting omitted.) Discord arose in July 1993 when Jones wrote a letter to all of MCC's shareholders, encouraging them to form a hui, or investment group, in order to pool their MCC shares for sale as a block. sale. Jones enclosed a proposed agreement for the block stock On August 7, 1993, Jones sent a letter to MCC's board of

directors and shareholders informing them that five shareholders had pooled eighty-nine shares and were planning to sell the block to the highest bidder. The letter also stated, verbatim, "We are

asking $3,000.00 per share and will place any Bona fide offer in a [sic] escrow account where per the Articles and By Laws of the

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corporation you and other non-participating shareholders will have 10 days to exercise your First Right of Refusal." MCC's board of directors responded to the hui's actions by holding a special meeting on December 1, 1993.1 The board

passed a motion that authorized the issuance of an additional fifty capital shares priced at "book value[.]" Further, the

Caldwells took an option to purchase up to twenty-five of the shares. Any remaining shares would be offered first to the

stockholders on a pro rata basis, based on their proportionate shares of the stock outstanding prior to the new issue, then to the stockholders without restriction. Jones sent a December 2, 1993 letter to the board of directors protesting the proposed stock issue. At a December 6, 1993 board of directors meeting,2 Carroll opined that there was no legal problem with the proposed stock issue and that the 1983 Stock Agreement was binding as to its signatories and still in effect. Carroll informed the board

that it needed to change some of the wording of its previous motion authorizing the stock issue, whereupon the board again

Present at the December 1, 1993 MCC board of directors meeting were Charles Caldwell, Mary Jane Caldwell, Thomas Araki, and Lynse Frank, serving as temporary secretary. Present at the December 6, 1993 MCC board of directors meeting were Charles Caldwell, Mary Jane Caldwell, Thomas Araki, [Carroll], Scott Nugent, and Lynse Frank, serving as temporary secretary.
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authorized issuance of the stock.3

The next day, Charles

Caldwell sent a letter to the MCC stockholders informing them of the new stock issue, the price at "book value" ($1,135.98) and the options provisions. Carroll, the attorney retained by MCC to render an opinion as to the legality of the stock issue and the validity of the 1983 Stock Agreement, sent a December 10, 1993 facsimile to MCC expressing his wish to purchase his proportionate share of the stock issue and any remaining shares. Jones sent another letter of protest to Charles Caldwell and MCC's shareholders on December 10, 1993. He claimed

the directors at the meeting acted out of self-interest and in derogation of the rights of the other stockholders in authorizing the stock issue. He also objected to the low sale price. He

expressed his feeling that a change in MCC's board of directors was due. On December 20, 1993, a financial advisor of Samuel Dakin, one of the minority shareholders, sent a letter to Charles Caldwell opposing both the "method and magnitude" of the stock issue. The letter claimed that the option improperly transferred

voting control to the Caldwells and that the valuation of the shares was unacceptable.

Scott Nugent later objected to the minutes of the December 6, 1993 meeting, protesting the stock issue, "its upset price" and the first option to purchase given to the Caldwells.

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On December 21, 1993, Mary Jane Caldwell sent a letter to all MCC shareholders, discussing the 1983 Stock Agreement and enclosing a copy. The letter noted that it was "unfortunate" the

stockholders "were not recently privileged to this information before placing [their] stock for sale under the Aug. 1993 agreement [(the hui's block sale agreement)] with Peter Jones as sales agent." Jones and other hui members then retained counsel, Judith L. Neustadter nka Judith Neustadter Fuqua, who sent a February 7, 1994 letter to Charles Caldwell. that MCC immediately rescind the stock issue. The letter demanded The letter

alleged, inter alia, an impermissible conflict of interest on the part of the board of directors, rendering the transaction voidable by the shareholders; violation of Hawai#i law pertaining to stock options; violation of shareholder preemptive rights; breach of fiduciary duty by the directors; and federal securities fraud. The letter expressed, however, the clients' desire to

settle the claims and not "embark on lengthy and expensive litigation." It also noted that

the Stock Redemption Agreement, made on August 1, 1983, has long been terminated. Pursuant to

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