C. Brewer & Co. v. Hawaii Insurance Guaranty Ass'n

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

IN THE INTERMEDIATE COURT OF APPEALS

oF THE sTATE oF HAwAr1
---o0@-~-

C. BREWER AND COMPANY, LIMITED, a HaWaii COrpOratiOD,

Plaintiff~Appellee,
v.
HAWAII INSURANCE GUARANTY ASSOCIATION, a statutorily
created non-profit unincorporated legal entity,

Defendant-Appellant

NO. 29342

APPEAL FRoM THE cIRcUIT coURT oF THE FIRsT cIRCUIT
(cIvIL No. 05-1~0543) ».

APRIL 28, 2010
NAKAMURA, C.J., FOLEY AND FUJISE, JJ.

OPINION OF THE COURT BY FOLEY, J.

Defendant-Appellant Hawaii Insurance Guaranty

Association (HIGA) appeals from the Stipulated Final Judgment

filed on August 20,

Circuit1 (circuit court).
judgment in favor of Plaintiff-Appellee C. BreWer and Company,
and awarded C. Brewer damages in the amount

2008 in the Circuit Court of the First
The circuit court entered final

Limited (C. Brewer)
of $l06,l50.ll. The Stipulated Final Judgment incorporated by
reference the circuit court's "Order Granting Plaintiff's Motion

for Partial Summary Judgment Filed May l0, 2006 on Stipulated

Facts Filed December 4, 2006" (Order Granting MPSJ) filed on
December 28, 2006, and "Rule 54(b) Judgment" filed on January ll,

2007.
On appeal, HIGA contends the circuit court erred in

granting C. Brewer's May lO, 2006 Motion for Partial Summary

Judgment (MPSJ) and disputes the portion of the Rule 54(b)

1 The Honorable Victoria S. Marks presided.

:CYB"'H$

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

Judgment stating that C. Brewer "is entitled to recover under
[Hawaii Revised Statutes (HRS)] § 43l:l6~l01 et seq., the amount
of covered claims that would have been paid by the insolvent
excess workers['] compensation insurer had it not become
insolvent." HIGA further contends C. Brewer is not entitled to
recover under the Hawaii Insurance Guaranty Association Act (the
Act), codified by HRS § 43l:16-101 et seq., because C. Brewer's
"net worth" on December 3l, 2002 exceeded the $25 million
statutory threshold for recovery. HIGA argues that "net worth,F
according to HRS § 43l:l6-105 (2005 Repl.), should be calculated
according to a "common sense," dictionary, and "universally
accepted" definition (hereinafter, "the common sense approach"),
and according to "the common sense approach," C. Brewer's net
worth exceeded the threshold. HIGA's arguments are premised on
the notion that generally accepted accounting principles (GAAP)2

and "the common sense approach" are incompatible and that "net

2 In Bolt v. Merrimack Pharmaceuticals, Inc , 503 F.3d 9l3, 917 n.6
(9th Cir. 2007) (citations omitted), the United States Court of Appeals for
the Ninth Circuit stated the following regarding GAAP:

GAAP is not found in a single source. Instead, in the United
States, GAAP consists of a hodgepodge of accounting sources, which
find their respective places in the hierarchical structure
established by the American Institute of Certified Public
Accountants ("AICPA"). There are five categories in the GAAP
hierarchy. Officially established accounting principles, referred
to as Category (a) authority, are the highest level and include
the Financial Accounting Standards Board ("FASB") Statements of
Financial Accounting Standards and Interpretations, Accounting
Principles Board ("APB") Opinions, and AICPA Accounting Research
Bulletins. . . . Category (b) authority, the next highest level,
consists of FASB Technical Bulletins and, if cleared by FASB,
AICPA Industry Audit and Accounting Guides and AICPA Statements of
Position. The third level of authority, Category (c), consists of
AICPA Accounting Standards Executive Committee Practice Bulletins
that have been cleared by FASB and consensus positions of the FASB
Emerging Issue Task Force. Category (d), the fourth level of
authority, consists of AICPA accounting interpretations and
implementation guides published by the FASB staff, and practices
that are widely recognized and prevalent either generally or in
the industry. In the absence of established accounting
principles, auditors may consider accounting literature in the
fifth and final level of authority, which includes FASB Statements
of Financial Accounting Concepts; APB Statements; AICPA Issues
Papers; International Accounting Standards of the International
Accounting Standards Committee ("IASC"); Governmental Accounting
Standards Board ("GASB") Statements, Interpretations, and
Technical Bulletins; pronouncements of other professional
associations or regulatory agencies; AICPA Technical Practice
Aids; and accounting textbooks, handbooks, and articles.

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FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

worth" under HRS § 431:l6-105 may not be calculated according to
GAAP.

We disagree with HIGA that "net worth" according to HRS
§ 43l:l6~l05 may not be calculated according to GAAP and affirm
the Stipulated Final Judgment.

I.

The Hawai‘i legislature created HIGA to provide claims
coverage to certain insureds if their insurers become insolvent
and claims covered under existing policies arise. Villagonza v.
Hawaii lns. Guar. ASS'n, 70 HaW. 406, 408, 772 P.2d ll93, ll95
(l989); see also HRS § 43l:l6-108 (2005 Repl.) (describing HIGA's
powers and duties). HIGA defrays the cost of covering the claims
through assessments levied on its members. Villagonza, 70 Haw.
at 409-l0, 772 P.2d at ll95. However, HIGA is authorized to pay
only "covered claims," HRS § 43l:16~l02 (2005 Repl.), which are
defined by HRS § 43l:l6~l05:

"Covered claim":

(l) Means an unpaid claim, including one for unearned
premiums, submitted by a claimant, that arises out of
and is within the coverage and is subject to the
applicable limits of an insurance policy to which this
part applies issued by an insurer, if the insurer
becomes an insolvent insurer after July l, 2000, and

(2) Shall not include:

(D) Any first party claims by an insured whose nep
worth exceeds $25,000,000 on December 31 of the
year prior to the year in which the insurer
becomes an insolvent insurer; provided that an
insured's net worth on that date shall be deemed
to include the aggregate net worth of the
insured and all of its subsidiaries as
calculated on a consolidated basis[.]

(Emphasis added.)

In the instant case, the following facts are
undisputed. C. Brewer bought excess workers' compensation
insurance coverage from The Home Insurance Company (Home). On
June l3, 2003, the New Hampshire Superior Court declared Home
insolvent. By December 3l, 2004, C. Brewer had paid out roughly
$322,000 in excess workers' compensation claims, which would have

been covered under the Home policy. C. Brewer consequently

FOR ID’UBLICATI()N IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

turned to HIGA for reimbursement. To prove its "net worth" as of
December 3l, 2002, C. Brewer submitted Combined Financial
Statements for fiscal years ending June 30, 2002 and 2003 to
HIGA. Although these statements indicated that C. Brewer's total
equity interest on December 3l, 2002 was $l5,954,000, HIGA
treated a $l16 million debt that Buyco (C. Brewer's parent
company) owed C. Brewer as an asset and concluded that

C: Brewer's "net worth" exceeded $25 million. On September 28,
2004, HIGA denied C. Brewer's claim.

On March 3l, 2005, C. Brewer filed a complaint against
HIGA in circuit court, alleging that HIGA was statutorily
obligated to reimburse C. Brewer for the losses it suffered
because of Home's insolvency. In its April 22, 2005 answer, HIGA
stated that it was without knowledge or information sufficient to
form a belief as to the allegation, except as to its rights,
duties, and obligations as defined in HRS Chapter 431, Article
l6.

C. Brewer filed its MPSJ, and HIGA filed a memorandum
in opposition. In support of its MPSJ, C. Brewer presented
expert opinion that C. Brewer's "net worth" was calculated
according to GAAP. In support of its opposition memorandum, HIGA
presented expert testimony that C. Brewer's "net worth" should be
calculated according to other principles.

_ On December 4, 2006, the parties filed Stipulated
Facts, which included the following: (l) at all relevant times,
C. Brewer was a wholly owned subsidiary of Buyco; (2) Buyco
approved a plan to liquidate and dissolve; (3) as part of this
plan, C. Brewer made distributions to Buyco totaling $ll6
million; (4) Buyco would not be able to pay back these
distributions; (5) the fair market value of C. Brewer's assets as
of December 3l, 2002 exceeded $25 million; (6) C. Brewer's
audited financial statements and related total equity interest
computations were prepared in accordance with GAAP; and (7)

C. Brewer's auditor's position was that GAAP required that
C. Brewer determine its total equity interest by offsetting the

$ll6 million due from Buyco.

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

At a hearing on the MPSJ on December 22, 2006, the
circuit court orally held that GAAP should be used to determine
net worth pursuant to HRS § 413:16~105, stating that GAAP is
"really the only uniform set of accounting principles that
apply." The circuit court filed the Order Granting MPSJ and
entered the Rule 54(b) Judgment. HIGA appealed. This court
dismissed the appeal because the circuit court had failed to file
an appealable judgment. On August 20, 2008, the circuit court
filed the Stipulated Final Judgment, from which HIGA timely
appealed.

II.
A. Summary Judgment
The Hawafi Supreme Court has stated that an appellate

jcourt

reviews the circuit court‘s grant of summary judgment de
novo. Price v. AIG HawaiH Ins. Co., 107 Hawafi 106, 110,
111 P.3d 1, 5 (2005). Summary judgment is appropriate "if
the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a
matter of law." [Hawafi Rules of Civil Procedure] Rule
56(c).

Gillan v. Gov't Emplovees Ins. Co., 119 Hawafi 109, 114, 194
P.3d i07i, 1076 (2008).

B. Conclusions of Law

[The appellate] court reviews the trial court's COLs
de novo. A COL is not binding upon an appellate court and
is freely reviewable for its correctness. Moreover, a COL
that is supported by the trial court's FOFs and that
reflects an application of the correct rule of law will not
be overturned.

Bhakta v. County of Maui, 109 Hawafi 198, 208, 124 P.3d 943, 953
(2005) (internal quotation marks, citations, and brackets in

original omitted).
C. Statutory Interpretation

Questions of statutory interpretation are questions of
law to be reviewed de novo under the right/wrong standard.

Our statutory construction is guided by the following
well established principles:

[When construing a statute,] our foremost obligation
is to ascertain and give effect to the intention of
the legislature, which is to be obtained primarily
from the language contained in the statute itself,
And we must read statutory language in the context of

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F()R PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

the entire statute and construe it in a manner
consistent with its purpose.

When there is doubt, doubleness of meaning, or
indistinctiveness or uncertainty of an expression used
in a statute, an ambiguity exists.

In construing an ambiguous statute, the meaning
of the ambiguous words may be sought by examining the
context, with which the ambiguous words, phrases, and
sentences may be compared, in order to ascertain their
true meaning. Moreover, the courts may resort to
extrinsic aids in determining legislative intent. One
avenue is the use of legislative history as an
interpretive tool.

[The appellate] court may also consider the
reason and spirit of the law, and the cause which
induced the legislature to enact it to discover its
tnwrQmMng

Lingle v. HawaiYi Gov't Emplovees Ass’n, AFSCME, Local 152, AFL~
QlQ, 107 HaWai‘i l78, l83, 111 P.3d 587, 592 (2005) (internal
quotation marks, brackets in original, and ellipses omitted)
(quoting Guth v. Freeland, 96 Hawafi 147, 149-50, 28 P.3d 982,
984~35 (2001>). °
III.

A. "Net worth" under HRS § 431:16~105 may be

calculated according to GAAP.

HIGA and C. Brewer fundamentally disagree on the
meaning and method of valuing "net worth." C. Brewer argues that
"net worth" under HRS § 431:16~105 refers to a company's
shareholder's equity and is "book" or "balance sheet" net worth,
as indicated on an entity's financial statements prepared in
accordance with GAAP. C. Brewer agrees with HlGA that under
GAAP, "net worth" means recorded assets minus recorded
liabilities; however, C. Brewer argues that its assets,
calculated according to GAAP, do not include the $116 million due
from Buyco.

HIGA argues the following: according to the plain
language of HRS § 431:16~105, the term "net worth" should be
calculated according to "the common sense approach"; according to
that approach, C. Brewer's assets should be valued at fair market
value (FMV) and the $116 million owed to C. Brewer by Buyco

should be characterized as an asset; and taking into account the

F()R PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

moneys owed by Buyco and/or the FMV of C. Brewer's assets,

C. Brewer's "net worth" exceeded the $25 million threshold.
Alternatively, HIGA claims that according to "the common sense
approach," C. Brewer’s assets and liabilities at the relevant
time, as reported by C. Brewer on combined balance sheets
(attached to MPSJ as Exhibit "C"), may be calculated to arrive at
C. Brewer's net worth and according to the balance sheets,

C. Brewer's "total liabilities" of $75 million subtracted from
the company's reported "net earnings" of $109 million results in
a net worth amount exceeding $25 million. HIGA does not
significantly dispute that calculated according to GAAP,

C. Brewer's net worth at the relevant time was within the
threshold set forth in HRS § 410:16-105; rather, HIGA argues that
"net worth" under HRS § 431:16~105 may not be calculated
according to GAAP.

Our review is limited to a single issue: whether the
"net worth" of a company, such as C. Brewer, may be determined
according to GAAP for the purposes of determining whether the
company's claim is "covered" under HRS § 431:16-105. If the
answer to this question is yes, the circuit court did not err in
issuing the Stipulated Final Judgment.

We look to the plain language of the Act to discern the
intended meaning and method of valuing "net worth." §e§ Lingle,
107 HawaFi at 183, 111 P.3d 592. The Act does not define "net
worth," except to state that "an insured's net worth on that date
[December 31 of the year prior to the year in which the insurer
becomes insolvent] shall be deemed to include the aggregate net
worth of the insured and all of its subsidiaries as calculated on
a consolidated basis." HRS § 431:16-105(2)(D). when a term in a
statute is undefined, we also look to dictionaries to determine
the term's ordinary meaning. Estate of Roxas v. Marcos, 121
Hawafi 59, 66, 214 P.3d 598, 605 (2009). Black's Law Dictionary
1639 (8th ed; 2004) defines "net worth" as “fa] measure of one's
wealth, [usually] calculated as the excess of total assets over
total liabilities.“ Additionally, we interpret terms in a

statute with reference to the statute's policy and purpose.

FOF{PUBLJCAHTCHTHV\VESl“Sl{A\VAYIPUHW)RTS¢ANI)PA(HF1ClEPORHHHR

Lingle, 107 HawaFi at 1S3, 111 P.3d 592. HRS § 431:16~l02
expressly indicates that the purpose of the Act is "to avoid
excessive delay in payment and, to the extent provided in this
part, to minimize financial loss to claimants or policyholders
because of the insolvency of an insurer." These interpretative
tools provide us with little guidance in addressing the issue in
this case,

HawaiYi courts have not addressed this issue; hence, we
look to case law in other jurisdictions for assistance. §§§L
e.q , Sierra Club v. Dep't of Transp. of State of Hawafi, 120
Hawai‘i 181, 200~03, 202 P.:sd 1226, 1245-43 (2009) where Hawai‘i
Supreme Court considered case law in other jurisdictions to
interpret constitutional provision because there were no cases on
point in this jurisdiction); Countv of Hawafi v. C & J Coupe
FamilV Ltd. P'Ship, ll9 Hawafi 352, 369, 198 P.3d 6l5, 632

(2008) (stating that a survey of opinions from other

jurisdictions was useful where no Hawafi case addressed whether
abatement was a question of subject matter jurisdiction).
Although the act at issue in Sanders v. Jackson, 209

F.3d 998 (7th Cir. 2000), is dissimilar to the Act in this case,
Sanders provides guidance in construing "net worth." Sanders
concerned the meaning of the term under the portion of the Fair
Debt Collection Practices Act (FDCPA) limiting recovery of class
action damages to part of a debt collector's "net worth." ;d; at
999. The FDCPA does not define "net worth." ld; at 1000. The
United States Court of Appeals for the Seventh Circuit held that
"net worth" referred to the debt collector's "book" or "balance
sheet" net worth, ld; at 1000~01. In so holding, the Seventhp
Circuit noted that federal courts have similarly interpreted
parallel "net worth" provisions in many federal statutes,

including the Equal Access to Justice Act (EAJA):

One of these . . . types of statutes is the [EAJA],
which permits parties that prevail against the government to
obtain the costs of litigation, but only if the individual's
"net worth does not exceed $2,000,000." 5 U.S.C.

§ 504(b)(1)(B). In Continental Web Press Inc. v. N L.R.B.,
we examined the term "net worth" in the context of this EAJA
provision. 767 F.2d 321, 323 (7th Cir. 19S5). There the

NLRB [National Labor Relations Board] argued that in
calculating net worth, Continental's assets should be valued
at cost rather than cost minus depreciation. We held that

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FfH{PUBLHQATHJNIN\NESTWSHANVAFIREPCHTTSADH)PACIFHjREPCHTER

the proper valuation entails a depreciation of assets
because that is the procedure prescribed by [GAAP].

Congress did not define the statutory term
"net worth." lt seems a fair guess that if it
had thought about the question, it would have
wanted the courts to refer to [GAAP]. What
other guideline could there be? Congress would
not have wanted us to create a whole new set of
accounting principles just for use in cases
under the [EAJA].

;d; This holding is consistent with our prior holding in
Te1egraph Savings and Loan Association v. Schilling that
GAAP should also be used to determine a bank's net worth as
that term is defined by federal banking statutes. 703 F.2d
1019, 1027-28 (7th Cir. 1983). Not surprisingly, when the
Ninth Circuit was asked to define net worth for purposes of
the EAJA,/it also held that GAAP should govern. American
Pac. Concrete Pipe Co., Inc. v. N.L.R.B., 788 F.2d 586, 591
(9th Cir. 1986) (adopting this reasoning and holding of
Continental Web Press).

Implicit in these holdings is the conclusion that the
statutory term net worth means book net worth or balance
sheet net worth, because GAAP has meaning only in the
context of financial statement reporting -- GAAP dictate the
standards for reporting and disclosing information on an
entity's financial statements. While those cases involved
different statutes, we believe their reasoning applies
equally to the FDCPA. Accordingly, because there is no
indication in the FDCPA that the term net worth should be
used in anything but its normal sense, we also look to book
net worth or balance sheet net worth as reported
consistently with GAAP.

209 F.3d at 1001 (footnote omitted). We find the reasoning in

Sanders persuasive.

In the instant case, in light of the foregoing and the
HawaiH_legislature's silence on the meaning and means of valuing
"net worth" under HRS § 431:16-105, we hold that "net worth" may
be "book" or "balance sheet" net worth as governed by GAAP. This
interpretation furthers the explicit purpose of the Act -- "to
avoid excessive delay in payment and . . . to minimize financial
loss to claimants or policyholders because of the insolvency of
an insurer" -- because it provides a uniform system for
efficiently determining eligibility under the Act. HRS § 431:16-
lO2.

In so holding, we note that GAAP comports with the
definition of "net worth" set forth in Black's Law Dictionarv and
HIGA has created a false dilemma by distinguishing between the
two. See, e.q , Broaddus v. U.S. Armv Corps of Eng'rs, 380 F.3d
162, 166-67 (4th Cir. 2004) (holding that unambiguous meaning of

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"net worth" under [EAJA] is total assets less total liabilities
according to GAAP); Sanders, 209 F.3d at 999-1002 (holding that
plain meaning of "net worth" under FDCPA is total assets less
total liabilities according to GAAP, which is balance~sheet or
book net worth). The main disagreement between the parties in
this case concerns not whether "net worth" is assets minus
liabilities, but the "assets" part of that equation, i.e., what
value to assign a company's assets and whether an amount of money
owed to a company should be considered an asset.

We also note that numerous other HRS statutes call for

financial accounting according to GAAP. See, e.g., HRS §§ 489D-6
(2008 Repl.) (providing that a person licensed under Chapter

489D, "Money Transmitters Act," shall have a certain net worth,
calculated according to GAAP); 412:3-108 (2004 Repl.) ("Every
Hawaii financial institution shall follow [GAAP], except as
otherwise prescribed by the appropriate federal regulatory
agency); 40-2 (2009 Repl.) (stating that the University of
Hawari and Hawafi Department of Education may install accounting
systems that conform with GAAP); 103D-314 (1993) (providing that
except with respect to firm fixed-price contracts, no contract by
a proposed contractor with the government shall be used unless it
has been determined that "[t]he proposed contractor's accounting
system is adequate to allocate costs in accordance with [GAAP]");
302B~1 (2007 Repl.) (partly defining the "organizational
viability" of a charter school as “operates in accordance with
[GAAP]"); 323F-22 (Supp. 2009) (stating that the Hawaii Health
Systems Corporation "shall engage a certified public accountant
to conduct an annual audit of its financial affairs, books, and
records in accordance with [GAAP]"); 412:3-112 (2004 Repl.) &
412:1-109 (2004 Repl.) (providing that trust companies shall file
written reports with the commissioner of financial institutions
containing audited financial statements prepared in accordance
with GAAP); 449-15 (1993) & 449-1 (1993) (stating that an escrow
depository must submit to the commissioner of financial
institutions its annual financial statements, prepared in
accordance with GAAP); 466-5 (Supp. 2009) & 466~4 (1993 & Supp.

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2009) (providing that the state board of public accountancy may
license and grant the designation of "certified public
accountant" to any person who has completed "one thousand five
hundred chargeable hours in the performance of audits involving
the application of [GAAP] and auditing standards earned while in
public accounting practice"). _

Last, we note that H1GA has not provided any persuasive
authority for the notion that GAAP may not be used to calculate
"net worth" under HRS § 413:16~105, and we find none.

Accordingly, we hold that the "net worth" of a company,
such as C. Brewer, may be valued according to GAAP for the
purposes of determining whether the company's claim is "covered"
under HRS § 431:16-105. The circuit court did not err by issuing
the Stipulated Final Judgment in favor of C. Brewer.

B. Remaining points

HIGA's remaining points of error are premised on the
notion that "net worth" may not be calculated according to GAAP,'
under HRS § 431:16~105. Because we have already held that the
converse is true, we need not address these points.

IV.
The Stipulated Final Judgment filed August 20, 2008 in

the Circuit Court of the First Circuit is affirmed.

On the briefs:

kevin P.H. Sumida %

(Sumida & Tsuchiyama)
for Defendant-Appellant.

GarY G. Grimmer <:é2£W;£j§ZQ2
(Carlsmith Ball LLP)
for Plaintiff-Appellee.
»1'
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