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Of Counsel: LAW OFFICE OF ARNOLD THIELENS PHILLIPS II Attorneys at Law ARNOLD THIELENS PHILLIPS II #6640 1188 Bishop Street, Ste. 1404 Honolulu, Hawaii 96813 Telephone/Facsimile: (888) 467-0555 Mobile (808) 781-1414 ATP@atphillips.com Attorney for Plaintiffs Timothy J. Fitzgerald and Gordon P.A. Smith IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII TIMOTHY J. FITZGERALD, ) individually, and GORDON P. A. ) SMITH, individually, ) ) ) Plaintiffs, ) ) vs. ) ) PACIFIC SOURCE, INC. a ) Washington Corporation and MARK ) MASON, individually and as President ) of Pacific Source, Inc. and DOES 1 ) ) through 20 inclusive, ) ) Defendants. _______________________________ ) CIVIL NO.: 11-00111 DAE/KSC

FIRST AMENDED COMPLAINT; DECLARATION OF ARNOLD T. PHILLIPS, II; EXHIBITS 1 35; CERTIFICATE OF SERVICE

FIRST AMENDED COMPLAINT COMES NOW Plaintiffs TIMOTHY J. FITZGERALD (Fitzgerald) and GORDON P. A. SMITH (Smith), by and through their attorney, Arnold T.
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Phillips, brings the following First Amended Complaint against Defendants Pacific Source, Inc. and Mark Mason (Mason) (collectively PSI), and DOES 1 through 20 inclusive, avers and alleges as follows: I. 1. INTRODUCTION This is an action for fraud, breach of contract and unfair and deceptive

practice brought by two homeowners who relied upon PSI who was a surety to supply materials for their home construction projects. JURISDICTION AND VENUE 2. This Court has subject matter jurisdiction under 28 U.S.C. 1332

diversity of citizenship between the parties and the amount in controversy exceeds $75,000.00. This is a civil action seeking monetary damages for fraud, intentional and/or negligent misrepresentation, breach of contract and deceptive business practices pursuant to HRS 480. II. 3. THE PARTIES Fitzgerald and Smith are and were at all times relevant herein over

the age of eighteen and residents of the County of Maui, State of Hawaii. They are individual consumers. 4. GORDON P. A. SMITH is the owner of real property located at 3076

Alaneo Place, Wailuku, HI 96793 (hereinafter Alaneo). 5. TIMOTHY J. FITZGERALD is the owner of the real property
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located at 2276 W. Vineyard Street, Wailuku, HI 96793 (hereinafter Vineyard). 6. PACIFIC SOURCE, INC. (PSI) is a Washington State corporation,

with its principal place of business in Snohomish, Washington. 7. MARK MASON, was President of Pacific Source, Inc., and a

resident of the state of Washington. 8. DOES Defendants 1-50, inclusive, are various individuals,

partnerships, associations, corporations, and other entities participating with or on behalf of the Defendants as described adverse to Plaintiffs interests. Plaintiffs will make a good faith effort to determine the true names and identities of these parties. Plaintiffs reserve the right to amend this Complaint to add such parties as their true identities and capacities are ascertained through discovery or otherwise. FACTUAL ALLEGATIONS 9. PSI was in the business of providing construction materials with

performance, completion bonds to homeowners and their contractors for residential construction projects. 10. In performing as a bonded supplier PSI planned with the homeowner

and contractor for each project, budgeting for various materials needs and estimating needed funds to be applied to specific phases of the construction and furnishing bonding statements reporting progress as the project is underway. 11. Fitzgerald and Smith each had bonding agreements with the PSI for
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the construction of their respective residences and understood the purpose of the bond was to protect their construction loan funds from misuse and mismanagement. FITZGERALD - VINEYARD 12. On August 27, 2007, Fitzgerald entered into a construction contract

with his contractor Thomas Martin. The construction contract was for labor only and Fitzgerald agreed to supply all the necessary materials (Exhibit 1). Aloha Package Homes (APH) was a coordinator for the construction project management. 13. On December 17, 2007, Fitzgerald, along with his contractor, entered

into a Uniform Performance Bond Agreement of Contract and Agreement Bond (Bond) provided and executed by PSI. The purpose of the bond was to make payments for the construction of his residence located at 2276 W. Vineyard Street, Wailuku, Hawaii (Vineyard). The project was to cost $392,599.00 (Exhibit 2). 14. On December 17, 2007, Plaintiff Fitzgerald entered into a

construction to mortgage contract with American Savings Bank (ASB) (Exhibit 3). 15. Fitzgeralds construction loan in the amount of $392,599.00 was

funded by the ASB loan. All construction draws were funded directly to the PSI bonding account from the bonded account at ASB.
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16.

The first construction draw of the bonded Vineyard construction loan

in the amount of $104,824 was requested by PSI and approved by ASB on January 2, 2008 (Exhibit 4). account at ASB to PSI. 17. Fitzgerald began ordering lumber materials from PSI on January 4, $104,824 was transferred from the Fitzgerald bonded

2008 (Exhibit 5). 18. On January 30, 2008, Fitzgerald submitted a Request for Payment

(RFP) to PSI for $39,168.00 to pay for Vineyard construction project framing materials and windows in the amount of $34,763.00 that PSI had supplied and for the funds to pay the roofing vendor in the amount of $4,405.00 (Exhibit 6). 19. On January 31, 2008, PSI emailed Fitzgerald a second RFP which

contained a $47,058.19 payment request. The categories and amount on this PSI RFP version were different. The PSI RFP had different Phase Numbers and totaled $47,058.19. PSI inquired of Fitzgerald if he wanted to change any of the phase numbers (Exhibit 7). 20. The Phase names were omitted from PSIs proposed RFP version.

The phase numbers that PSI intended to take funds from, per this proposed RFP, were lumber (05-29) and cabinets (06-37). However, because PSI was not supplying Fitzgeralds cabinets the PSI RFP was refused by Fitzgerald (Exhibit 8). This email mentioned a $35,000 framing draw for PSI on a previous draw
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request. 21. On January 31, 2008, PSI emailed Fitzgerald a copy of a $35,000.00

check from the ASB bond account identified as #302050 made payable to Pacific Source. On the memo portion of the check it listed four invoices numbers. Also, attached was the PSI Vineyard 1/31/2008 bonding statement indicating a withdrawal of Fitzgeralds funds in the amount of $38,500.00 under lumber phase (05-29)[Page 1 line 7 of Bonding Statement] (Exhibit 9, 5-pages). 22. In an email from PSI to Fitzgerald through APH on February 6, 2008,

PSI refused to process Fitzgeralds RFP (refer to Exh. 6) stating as the reason the past due balance on your account (Exhibit 10, 2 pages). There was no past due balance on Fitzgeralds account but referred to other unrelated APH accounts with PSI. This email included an APH aging statement which showed PSI was adding Fitzgeralds Vineyard invoices in the APH aging statement beginning with invoice 146801, dated 1/18/08 in the amount of $19,820.78 allowing a $7,762.59 credit leaving a balanced owed of $12,058.19 [Exhibit 10 page 2 fifth line from the bottom]. The $7,762.59 credit amount refers to invoice 146801 PARTIAL is listed in the memo portion of the Exhibit 9 check #302050 as a remittance advice. 23. PSI comingled the accounting entries for Fitzgeralds Vineyard

construction which was a personal consumer residence with other unrelated

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invoices on the APH aging statement. 24. On February 8, 2008, PSI emailed Fitzgerald through APH stating

[P]lease see the attached check copy and updated bonding statement with an attachment of a Pacific Source check #302087 in an amount of $39,168.00 that matched Plaintiffs first RFP (refer to Exh. 6); however, the invoices identified on the check were unrelated to Vineyard (Exhibit 11, 4 pages) [unrelated invoices are highlighted on page 3 of the exhibit]. 25. The entries on check #302087 are all noted as the same invoice date

of 2/7/08, marked as same Job Number: MARTPARS and had identical entries under the Remarks: column MARTIN / PARSONS. However, these invoices were for other customers. The customer job names were changed so that the payments would appear to be related to Fitzgeralds Vineyard construction job and qualify for payment from funds in the Fitzgerald bonding account with ASB. 26. On the check that PSI used to collect Fitzgerald bonded funds the

true customers and dates for the invoices shown are as follows: a.) Invoice #144086 was dated 11/9/07 and belonged to APH customer

Aguera and was for lumber (attached hereto as Exhibit 11a); b.) Invoice #144087 was dated 11/9/07 and belonged to APH customer

Aguera and was for siding (attached hereto and included in Exhibit 11a);

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c.)

Invoice #145314 was dated 12/07/07 and belonged to APH customer

Blackstad and was for lumber and cabinets (attached hereto and included in Exhibit 11b); d.) Invoice #137787A was dated 7/13/07 and belonged to APH customer

Altinbay and was for laminate flooring (attached hereto and included in Exhibit 11c); e.) Invoice #145029 was dated 11/30/07 and belonged to APH customer

Aguera and was for miscellaneous items (attached hereto and included in Exhibit 11d); None of these invoices were for the Fitzgeralds Vineyard construction. 27. PSIs February 8, 2008 Bonding Statement (refer to Exh. 11)

shows that Vineyard bond funds had been drawn to pay $46,730.00 of labor, plus $77,668.00 of materials that consisted of lumber, siding, windows trusses, and roof shingle. However, PSI was only entitled to funds for the construction phases in which they supplied the materials on Plaintiff Fitzgeralds job. 28. Fitzgerald had contracted to pay other vendors for the roof shingle
1

and the trusses.

PSI provided bonding statements claiming money paid for

products and services that they had not supplied and which they knew had been supplied by other vendors for the Vineyard project.

had contracted with other suppliers to provide drywall, insulation, cabinets, flooring, appliances, in addition to roofing and trusses.
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29.

On the PSI February 8, 2008 bonding statement for Fitzgerald, PSI

withdrew payments for various products and services including some materials they had supplied. For an item identified as siding, Sec. 5 05-32, PSI claimed payment in the amount of $10,136.00 from the Vineyard account (attached hereto as Exhibit 12). 30. However, PSI claimed payment in the February 8, 2008 bonding

statement for the siding invoice #148328 dated February 22, 2008 in the amount of $10,382.07 and again, two (2) years later on an APH statement dated 2/2/10 [line 1] (attached hereto as Exhibit 13). 31. On the Defendants February 8, 2008, PSI claimed entitlement from

Fitzgerald and the Vineyard account for payment for products and services for an item identified as trusses - Sec. 5 05-30 - in the amount of $10,800.00. 32. However, although PSI claimed entitlement to payment for products

and services from the Fitzgerald bonded funds for trusses, in fact, the trusses were contracted to an independent vendor, Truss Systems Hawaii, Inc., and the payment was advanced by Fitzgerald in the amount of $13,590.97 to be paid for by APH check on August 7, 2008 (Exhibit 14). 33. On the PSIs February 8, 2008 bonding statement PSI claimed

entitlement to funds from Fitzgeralds bond account claiming their payment for roofing shingle -Sec. 8 08-49 -in the amount of $4,405.00.
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34.

However, PSI was aware that this was misrepresentation, not a

legitimate entitlement and that, in fact, the roofing shingle component was contracted to an independent vendor, RSI Roofing & Building Supply, and the payment was made by Fitzgerald in the amount of $4,527.48. (Exhibit 15). 35. These bonding statements were provided to Fitzgerald as part of the

reporting on the progress of his home construction project by PSI. It was the record keeping for demand for payment and an indication that bonded funds were used to pay for the product or service. Mismanaged payments for this product or service would deplete the bonded construction account and expend funds needed for the completion of the project. 36. On February 28, 2008, PSI was notified that they were

misappropriating bonded funds (Exhibit 16). 37. After notification of the commingling of the funds and the misuse of

Fitzgeralds bonded funds PSI refused to correctly pay proper invoices and, although, on April 18, 2008, PSIs president Mark Mason emailed Fitzgerald I will be redirecting the $74,168 back to the Bond Account by the end of the day (Exhibit 17) he did not correct the misuse and continued to deplete the bond account so that Fitzgerald would have to pay for any shortfall in the bond account if he wanted his home finished. 38. Fitzgeralds design and expenditures for building his home were
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professionally prepared with architectural and design experts, planned in detail, budgeted for, reviewed, negotiated, agreed to and specifically defined in the Bonding Statement (refer to Exh. 9). There were more than enough funds budgeted to cover the materials that the PSI agreed to supply. PSI agreed, as part of their contractual obligation, to pay invoices as instructed by Fitzgerald. 39. Fitzgeralds construction draws that were directly deposited into the

Pacific Source bonding bank account by American Savings Bank (Exhibit 18, Bank Draws) were paid as follows: Draw # Draw #1 Draw #2 Draw #3 Draw #4 Draw #5 Draw #6 Date 1/2/2008 1/30/2008 4/16/2008 6/18/2008 8/6/2008 10/27/2008 Description Materials Foundation Complete Framing Complete Elec. & Plumb Complete Partial before Final Final** fn.2 Amount $ 104,824 $ 60,984 $ 104,824 $ 60,984 $ 30,000 $ 30,983

40.

On April 24, 2008, PSI emailed Fitzgerald notifying him that

payments of the PSI Vineyard material invoices were being processed (Exhibit 19). 41. On November 3, 2008, Fitzgerald requested an accounting of

expenditures. PSI provided a spreadsheet of disbursements on November 4, 2008

Final Draw was not provided by the Plaintiff and is obviously different from the five previous draw requests.
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The

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(Exhibit 20). The spreadsheet indicated that PSI had voided the two withdrawals taken on 1/31/08 (302050) for $35,000 and 2/8/08 (302087) for $39,168 on April 21, 2008, as indicated in the email from Mason (refer to Exh. 17); however there was a check #302266 in the amount of $74,168.00 written on April 22, 2008, without any explanation. This money taken from the bonded account and paid to PSI. 42. Although PSI acknowledged that it had taken funds improperly from

Fitzgerald and agreed to repay the moneys and showed in the recordkeeping that it voided the disputed amounts as it had communicated to Fitzgerald it would do. The next day it removed, appropriated and paid itself from the bonded Fitzgerald funds check #302266 in the amount of $74,168.00 which was the total of the two admitted improper payments taken by PSI and promised to be returned. 43. The bonded funds improperly withdrawn by PSI caused Fitzgerald to

have to pay from his own funds to complete his house. A summary of the funds taken improperly by PSI from a cost breakout/reconciliation using the categories of the bonding statement, the PSI invoices (Exhibit 21) show, in summary form, as follows: from the $392,599.00 deposited into the PSI bond account on behalf of Fitzgerald, labor was paid ($234,561.00), PSI material invoices totaled $83,252.00 which left a balance of $58,204.00 undisbursed. 44. The total of the funds advanced by Fitzgerald required to complete
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the construction of this home and dates those payments were advanced are as follows: RME drywall and insulation RSI roofing materials Trusses Appliances Laminate flooring Tax Contingency price differences TOTAL 45. $ 17,529.00; $ 4,405.00; $ 10,800.00; $ 7,213.00; $ 7,924.00; $ 6,322.00; $ 4,011.00. $ 58,204.00

On November 4, 2008, PSI closed out the bonding account and

emailed Fitzgerald a copy of check #302923 written to PSI dated October 31, 2008 (Exhibit 22). 46. When compared with the February 8, 2008, bonding statement (refer

to Exhibit 11) and the November 4, 2008, excel spreadsheet (refer to Exhibit. 20), PSI had claimed early payment for these Vineyard material invoices bought from Pacific Source. Check #302923 indicates that: invoices #147834 dated 2/08/08 ($1,865.69) was for lumber (Exhibit 22 page 2, line 1); #148086 dated 2/15/08 ($10,402.00) was for windows (Exhibit 22 page 2, line 2) ; #148328 ($3,030.17) was for siding;(Exhibit 22 page 2 line 3); #146719B dated 1/18/08
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($613.22) was for framing hardware (Exhibit 22 page 2, line 4); #146799A dated 1/18/08 ($24,096.28) was for lumber (Exhibit 22 page 2, line 5); #146800B dated 1/18/08 ($2,527.91) was for lumber (Exhibit 22 page2, line 6); #146801A dated 1/18/08 ($19,820.78) was for lumber (Exhibit 22 page 2, line 7). 47. Further, invoices 146800B and 146801 (PARTIAL) appeared in

check #302050 memo (refer to Exh. 9) as having been paid on January 31, 2008. 48. On a November 4, 2008, APH aging statement Fitzgeralds Vineyard

invoices, including invoice #148328, again were shown as unpaid with interest charged. 49. Further, seven (7) Vineyard invoices totaling $23,045.81 and eight

(8) finance charges totaling $9,408.14 appear on this APH aging statement (attached hereto as Exhibit 23). The Vineyard invoices placed by PSI on the APH aging statement3 as of 11/4/08 were: DATE 2/2/08 2/29/08 2/29/08 3/14/08 3/28/08 3/31/08 4/11/08
3

JOB NAME MM0220/VINEYA MM02227/VINEYA FINANCE CHG ADMIN FEE/PAR MM0326/VINEYA FINANCE CHG MM0326/VINEYA

INVOICE 148328 148699

AMOUNT $ 7,351.90 $ 3,582.87 $ 936.95

149197 149843

$ 2,443.75 $ 6,153.99 $ 982.83

150441

$ 2,630.59

FitzgeraldhassignedanindemnityagreementforAPHdebt.

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4/11/08 4/25/08 4/30/08 5/30/08 6/30/08 7/31/08 8/29/08 9/28/08 TOTAL

LAF/ALOHA PKG UNLOAD/146799 FINANCE CHG FINANCE CHG FINANCE CHG FINANCE CHG FINANCE CHG FINANCE CHG

150519 151181

$ $

382.70 500.01

$ 1,080.75 $ 1,219.32 $ 1,313.78 $ 1,358.73 $ 1,217.66 $ 1,298.12 $ 32,453.95

Exhibit 23 contained the Vineyard invoices that should have been paid with the Fitzgerald bonding funds when they came due earlier in the year between January and April of 2008: INVOICE DATE INVOICE NO. DESCRIPTION 2/22/08 2/29/08 3/14/08 3/28/08 4/11/08 4/11/08 1/18/08 TOTAL unpaid 148328 148699 149187 149843 150441 150519 146799 Siding Doors Admin Plumb Doors Typar Hse. Wrap Lumber AMOUNT OWED $ 7351.90 $ 3582.87 $ 2443.75 $ 6153.99 $ 2630.59 $ 328.70 $ 500.01 $22,991.81

Vineyard as of 11/4/08

50.

On February 18, 2009, when Fitzgerald pressed for a full accounting

PSI required as a condition of disclosure of the financial information that Fitzgerald indemnify APH accounts (Exhibit 24).

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51.

On February 12, 2010, Fitzgerald received an accounting of the

actual disbursements in a Check Register Detail History Report from PSI it still indicated that all these invoices were related to the Vineyard construction project (Exhibit 25). Regarding on page 2 of Exhibit 25 the Check Register Detail History Report, check number 302266 [line 1], logged under Job: MARTPARS, Fitzgerald investigated the invoices using an APH statement dated February 7, 2008 (Exhibit 26) and found the following invoices to belong to unrelated jobs; without consent, notification to the lender or Fitzgeralds knowledge, and contradictory to the previous communications by the PSI, Fitzgerald bonding funds were diverted to pay these unrelated invoices by PSI check #302226 dated April 22, 2008 in the amount of $74,168.00. 52. Check #302226 was never disclosed to Fitzgerald. The check paid

not for the Fitzgerald project, but for project products and services on unrelated PSI invoices for parties named Hashimoto, Aguera, and Blackstad (Exhibit 27). Check Register Detail History Report, page 2 Check #302266 dated 04/22/08 PACISOUR PACIFIC SOURCE INC. ACTUAL JOB HASHIMOTO MORREIRA AGUERA
4

Hare, Bediamol, Altinbay,

INVOICE NO. 144710 144712 145029

JOB CHG TO AMOUNT MARTPARS 8,804.28 MARTPARS 6,737.34 MARTPARS 154.60

INV. DATE 04/22/08 04/22/08 04/22/08

Refer to details 27. and Exhibit 11a for Aguera invoice details on 144086 and 144087.
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HARE BEDIAMOL ALTINBAY AGUERA* AGUERA* AGUERA BLACKSTAD 53.

145515 145635 137787B 144086A 144087A 145029A 145314A

MARTPARS MARTPARS MARTPARS MARTPARS MARTPARS MARTPARS MARTPARS

17,662.88 1,290.77 863.19 11,963.40 4,379.83 504.73 21,806.98

04/22/08 04/22/08 04/22/08 04/22/08 04/22/08 04/22/08 04/22/08

PSIs bonding statement identified the specific material costs to be

supplied by Fitzgerald, in addition to the materials PSI was to supply. However, based on the Check Register Detail and Exhibits 14, 15 and 25 Fitzgeralds bonded funds never paid for his specified construction costs as set out below:
PHASE Appliance 04-24 Frame 05-30 Cabinets 06-38 Roof 08-49 Drywall 09-55 Drywall 09-56 Floor 12-73 Misc 13-83 Pacific Source TOTAL DESCRIPTION Appliances Trusses Cabinets Shingles Material Insulation Hardwd flooring Hawaii GET Invoice Totals ESTIMATE $ 7,213.00 $ 10,800.00 $ 17,920.00 $ 4,405.00 $ 10,000.00 $ 7,529.00 $ 7,924.00 $ 6,322.00 $ 85,925.00 PAID Not received Not received $16,582.50 Not received Not received Not received Not received Not received $83,252.00 actual BALANCE OWED $ 7,213.00 $ 10,800.00 $ 1,338.00 $ 4,405.00 $ 10,000.00 $ 7,529.00 $ 7,924.00 $ 6,322.00 $ 2,673.00 $ 58,204.00

54.

At the end of the construction according to the plans, budget and

agreements regarding the project Fitzgerald should have received an amount from the bond fund which would be any overage of the loan over the project costs. Fitzgerald expected to be reimbursed for any advancement of his personal funds to
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the complete the Vineyard project. However, PSI notified him on February 9, 2010, that the Pacific Source purchases for Vineyard exceeded your budget. (Exhibit 28). 55. PSI contracted to perform surety responsibilities for Fitzgerald and

American Savings Bank and Fitzgerald reasonably relied upon PSI to perform these duties and responsibilities. 56. PSI diverted the $58,204.00 as budgeted for the Vineyard job and

they rerouted $23,045.81 of Vineyard invoices to the APH aging statement. PSI diverted $81,249.81 of Fitzgerald bonded funds to unrelated accounts and then added $9,408.14 of unauthorized finance charges. 57. As a result of the actions of PSI Fitzgerald had to advance funds in

order to complete the construction of Vineyard which depleted his savings funds for finishing work, landscaping and loan payments. 58. Having to advance the funds for Vineyard depleted Fitzgeralds

operating funds and he had to file for protection under Chapter XIII, incurring costs expenses and loss of reputation and standing in the community. SMITH - ALANEO 59. On January 25, 2010, Smith entered into a construction contract with

Lehua Management Services after outlining the specific costs of labor and identifying the budget for construction materials (Exhibit 29).
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60.

On February 2, 2010, Smith entered into a Uniform Performance

Bond, Assignment of Contract and Agreement Bond with his contractor provided and executed by PSI for the construction of a residence located at 3076 Alaneo Place, Wailuku, HI 96793 (Exhibit 30). 61. Smith relied on PSI representations and believed that his construction

funds were protected from loss or fraud because PSI was acting as surety for the construction project. 62. 63. Smith was a consumer, building his own residence. The construction loan was funded by Territorial Savings Bank

(TSB), who had recommended the Defendants, and the first construction draw of the bonded Alaneo construction loan in the amount of $180,600 was funded directly to PSIs bonding account on or about February 22, 2010 (Exhibit 31). 64. 65. Smiths contractor began ordering materials directly from the PSI. During the planning of this project APH had provided the contractor,

Smith and PSI with a complete breakout of expenditures on the job based on estimates for materials. In the project budget there was a budget component which project management, material contingency field changes, as well as overages due to price reductions or actual invoicing as opposed to estimate additional expense. If these funds were not necessary they would revert to the homeowner. 66. For Smith these budgeted amounts were $27,869.00 shown as
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ALOHA PACKAGE HOMES component in the project budget. (Exhibit 32). 67. 68. 69. with APH. 70. APH withdrew from the project and Smith proceeded with his The Smith bonded funds were limited to use on his project. PSI was aware of the involvement of APH and the Smith budget. Because of the separate issues PSI refused to work on this project

contractor and PSI. 71. PSI by agreement, stated intention and commercial practice intended

that Smith and the bank rely upon the representation that the payments made and the bonding statement withdrawals were applied to the Alaneo construction project. 72. In the PSI Alaneo bonding statement dated March 9, 2010 (Exhibit

33) PSI made the claim for $30,537.83 of bonded project funds and filed a charge indicating that as of that date PSI had paid $30,537.83 of the construction materials from the APH Material Package out of first draw. This was a false statement. It was a material misrepresentation. 73. APH was no longer supplying Smiths services or product and the

funds extracted were not applied to the Smith construction project. 74. PSI knew the line item identification; Sec. 06, 06-40, [Exhibit 33 line

17] was false. That APH had no association with the project and that PSI had
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required APHs removal from the project prior to the date PSI made this representation. 75. This statement was made to convey notice that $30,537.83 was paid

to APH for expenses of the construction of Smiths home. 76. On February 26, 2010, shortly after receiving the first draw from the

lender, PSI emailed APH and stated, We are applying the funds due APH from the Smith job, $25,774.00, as an offset against your account to Pacific Source (Exhibit 34). 77. On April 6, 2010, PSI used Smiths funds to pay off Vineyard

invoices that had wrongfully been added to the APH aging statement (Exhibit 35). Refer to Exh. 23 to compare invoice/job name information. INVOICE DATE INVOICE NO. DESCRIPTION 2/22/08 2/29/08 2/08 3/14/08 3/28/08 3/08 4/11/08 4/11/08 04/25/08 04/25/08 TOTAL 150441 150519 151070 151070 4/6/10 149187 149843 148328 148699 Siding/VINEYARD Doors/VINEYARD Fin. Chg. /VINEYARD Admin/VINEYARD Plumb/VINEYARD Fin. Chg. /VINEYARD Doors/VINEYARD Typar Hse. Wrap/VINE MM0423/BUNZEL MM0423/BUNZEL Admitted Conversion AMOUNT OWED $ 5,091.01 $ 3,582.87 $ 936.95 $ 2,443.75 $ 6,153.99 $ 982.83 $ 2,630.59 $ 328.70 $ 3,569.31 $ 1,091.00 $26,811.00

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78.

PSI knew or should have known that these Vineyard invoices had

been paid by Fitzgeralds lender, American Savings Bank, two (2) years earlier. 79. Smith had to advance his own funds to complete his construction and

landscaping and had more expense to complete his home and lot as set out here: Description APH DRYWALL ROOFING FINAL TRUSS TOTAL (estimate) Est. Budget $ 27,869.00 $ 8,873.00 $ 8,201.00 $ 10,920.00 Actual Amt. $ 27,869.00 $ 6,873.22 $ 6,024.57 $ 9,527.66 Bal. Due $ 27,869.00 $ 1,999.78 $ 2,176.43 $ 1,392.34 $ 33,437.55

FIRST CAUSE OF ACTION FRAUD (Against all Defendants) 80. The allegations contained in the preceding paragraphs of this

Complaint are incorporated herein by reference. 81. PSI engaged in acts, practices and a course of business that operated

as a fraud or deceit upon the Plaintiffs in connections with their bonded construction projects and the disbursements of bond funds during the relevant periods. 82. The financial records and communications from PSI regarding the

Fitzgerald and Smith project bond statements, checks, invoices and other accounting documents including the invoices to be paid from the bonded accounts
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contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading as set forth above and in detail in paragraphs 25, 26, 28, 30, 31, 33, 42, 47, 49, 72, 74 and 76. The facts misstated and omitted would have been material to a reasonable person reviewing the bond statements and accounting documents. 83. These misrepresentations were made with the intention that they be

relied upon and to defraud Fitzgerald and Smith. 84. Fitzgerald and Smith were in a relationship with PSI where they

reasonably relied on the representations made to them by PSI about the invoices and payments on their projects. 85. As a direct and proximate cause of the misrepresentations of PSI

Fitzgerald and Smith were damaged. SECOND CAUSE OF ACTION BREACH OF CONTRACT (Against all Defendants) 86. The allegations contained in the preceding paragraphs of this

Complaint are incorporated herein by reference. 87. PSI breached their obligations under the Fitzgerald and Smith

Uniform Performance Bonds, Assignments of Contract and Agreement Bonds by negligently, willfully and recklessly mismanaging the outlay of payments. 88. PSI negligently, willfully and recklessly mismanaging the outlay of
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payments for the Fitzgerald and Smith projects disbursing payments relating to the Fitzgerald and Smith construction projects to improper, unauthorized debts and invoices and when they knew such disbursement were being made to the detriment of Fitzgerald and Smith. 89. As a direct, proximate and foreseeable result of the PSI breaches of

contract Fitzgerald and Smith have been damaged and are entitled to recover from PSI general, special, incidental and consequential damages, including but not limited to attorneys' fees and costs, in such amounts as shall be proven at trial. THIRD CAUSE OF ACTION VIOLATION OF HRS CHAPTER 480 (Against all Defendants) 90. The allegations contained in the preceding paragraphs of this

Complaint are incorporated herein by reference. 91. The actions of the PSI, as more fully set forth above, constitute unfair

or deceptive acts or practices under Hawaii Revised Statutes Chapter 480. 92. The actions of PSI show a pattern and practice of accounting and

billing practices which are unfair and deceptive acts and practices. 93. As a direct, proximate and foreseeable result of the PSIs unfair acts

and/or practices, Fitzgerald and Smith have suffered substantial losses and been injured. 94. Plaintiffs are entitled to an award of damages as appropriate under
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Hawaii Revised Statutes Section 480-13(b). PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, pray for relief and judgment, as follows: A. Awarding Plaintiffs damages in an amount which may be proven at

trial with interest thereon; B. Awarding Plaintiffs prejudgment and post-judgment interest, as well

as its reasonable attorney fees and other costs; C. Awarding Plaintiffs triple damages and/or punitive damages as may

be available to them for such acts herein; D. Awarding such equitable. Legal or other relief as the Court may deem

just and proper.

Dated: Honolulu, Hawaii January 19, 2012 Respectfully submitted, /s/ ARNOLD THIELENS PHILLIPS II ARNOLD THIELENS PHILLIPS II Attorney for Plaintiffs

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