By Ken Kobayashi
(Honolulu Star Advertiser)
Two years ago, former Gov. George Ariyoshi and others filed a lawsuit seeking as much as $725 million for what they said was an invalid 2002 merger involving the high-technology company Pihana Pacific.
But now Ariyoshi and his fellow plaintiffs, including the University of Hawaii, must pay $3.4 million in fees and costs to the attorneys who represented the companies named in the suit.
Ariyoshi and high-technology entrepreneur Lambert Onuma, both of whom helped raise more than $200 million in investments in Pihana prior to the merger, alleged that they and other shareholders of common stock were "frozen out" when it merged with Equinix, a California-based company.
The suit said they did not receive any money for their stock.
But Circuit Judge Rom Trader granted a request by the civil defendants in May to dismiss the lawsuit and later awarded their attorneys the fees and costs, a staggering amount, legal observers say, for a matter that did not go to trial.
The litigation has raised eyebrows in the legal community with the dismissal of such a complex case and the amount of the fees and costs incurred before either side could mount the even more costly process of deposing witnesses and preparing for other pretrial matters.
It also underscores the price tag and the risks of high-stakes litigation over contract disputes that can allow the winning side to recover attorney fees.
Ariyoshi and the others are appealing the dismissal ruling and the fees and costs award to the Hawaii Supreme Court.
He and Onuma, who held the bulk of the common stock, said in court papers that if they lose the appeal, they will cover the $3.4 million judgment, which would mean UH and other plaintiffs would not have to pay.
Ariyoshi, 84, Hawaii’s governor from 1974 to 1986, and Onuma, who founded Pihana in 1999, both declined to comment because the matter is still pending in court, according to their attorney, John Edmunds.
The suit was filed on behalf of the common stock shareholders in Pihana, a data center company that caused a sensation by raising within two years about $240 million, the largest single venture investment in a Hawaii technological company.
Onuma owned about 4 million shares, or 75 percent of the management common stock, according to the suit. Ariyoshi’s revocable trust owned about 360,000 shares of common stock. The University of Hawaii held 100,000 shares.
UH was given the stock for its help in Hawaii’s first initiative to establish "a neutral network colocation facility" and did not pay for the shares, UH officials said.
Despite its promise and as economic and market conditions worsened, Pihana shut down in 2002 when it merged with Equinix.
In the merger, the common stock shareholders were notified that Pihana’s value had tumbled and they would not receive any compensation.
They were told investor companies that poured in millions of dollars in exchange for Pihana preferred stock would get 22.5 percent of Equinix’s common stock.
But those investors would still end up losing more than 90 percent of their investments, the shareholders were told.
Among the investors were financial firms such as Goldman Sachs, Morgan Stanley and Columbia Capital and their related companies.
Equinix was considered "virtually bankrupt" at the time of the merger but bounced back and grew in value, according to the suit. In 2008, Equinix’s market capitalization was $3.3 billion, the suit said.
Ariyoshi, Onuma, UH and about a dozen other common stock shareholders sued more than 40 companies and individuals, including Equinix and Goldman Sachs and the other major investors.
It alleged that Pihana executives, the board and the investors used the merger to "freeze out" the common stock shareholders and take for themselves the value of the common stock.
The suit asked for damages that may be "all or a substantial portion" of the $725 million, the value of the 22.5 percent of Equinix.
The suit’s claims included breach of contract and fiduciary duty; unjust enrichment; civil conspiracy; fraudulent misrepresentation and concealment; and constructive fraud.
Although the civil defendants deny wrongdoing, the merits of the lawsuit were not litigated because Judge Trader dismissed the case. He essentially found that the suit, filed six years after the merger, came too late under the statute of limitation laws of Delaware, where Pihana was incorporated.
In his appeal, Edmunds argued that the fraud allegations allow more time for filing the lawsuit; Hawaii and not Delaware law applies in the case; and that Trader ignored facts in the complaint and relied on misstatements by the civil defendants.
Even though Trader reduced the attorney fees and cost award from $4.2 million, it was still unreasonable for a case that never went to trial, Edmunds said.
Honolulu lawyer Paul Alston, one of the attorneys for Morgan Stanley, said they will defend Trader’s ruling as well as the award for attorney fees and costs.
"We believe Judge Trader accurately determined that their claims were barred by the Delaware law, which applies to the operations of the company," he said.
Alston said that under a legal doctrine over internal disputes of a company, the law of the state where the corporation was formed is controlling, not where some of the shareholders reside.
It is the only way to establish a rational system of regulations for the company, he said.
"If you have shareholders in 50 states, you’d be subject to 50 different rules regarding when claims could be brought," he said.
Alston said though the fees were substantial, they must be viewed in light of the plaintiffs’ demand for $725 million.
"You can’t defend a case where the claims are that big by taking any chances and not doing less than the best possible job to defeat the claims," he said.
The investor companies named in the suit did not necessarily make any profits, according to lawyers. Alston said Morgan Stanley lost most of its investment because it sold its shares shortly after the merger.
"The Morgan Stanley companies suffered substantial losses in this transaction, and the plaintiffs are wrongly trying to punish them further, which is unjustified," he said.
In court papers, investors’ lawyers said they produced tens of thousands of pages of documents, responded to questions from the plaintiffs, conducted interviews, drafted motions and performed numerous other tasks.
Lyle Hosoda, a Honolulu attorney and one of the lawyers for Columbia Capital, said the large mainland companies wanted their mainland lawyers to work on the defense but that each had to have a local firm working on the case.
"You had a considerable amount of legal fees incurred for a matter that was going on for a couple of years," he said.
Edmunds is also working with mainland lawyers, the prominent Los Angeles firm of Don Howarth and Suzelle Smith, which handled high-profile cases including representing Doris Duke in the legal dispute over her billion-dollar estate.
Edmunds was able earlier this year to persuade the Hawaii Supreme Court, over opposition by the defense, to hear the case, bypassing the Intermediate Court of Appeals.
He argued that the appeal raises issues never addressed here by the courts, one of the exceptions under state law for the high court to directly handle an appeal.
"No reported Hawaii decision exists awarding fees and costs of this magnitude at so early a stage of litigation, for so little legal work accomplished," he said in his brief.
In August, then-Chief Justice Ronald Moon issued an order transferring the case from the appeals court to the Supreme Court.
Trader refused last month to postpone the enforcement of the $3.4 million judgment without the plaintiffs posting a bond to cover that amount should they lose on appeal. Bonding companies charge a fee, usually 10 percent of the judgment, to ensure payment if the award is upheld.
Edmunds said in court papers that if they lose, Ariyoshi and Onuma have agreed to be responsible for the $3.4 million and not seek any reimbursement from other plaintiffs.
Edmunds told Trader they would ask the high court to stay enforcement of the judgment without the plaintiffs posting a bond. The high court will rule later on the request.
The court is not expected to rule on the appeal of the dismissal and fees and costs until sometime next year at the earliest.