THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as Mid-Pacific Construction Co. v. Semes (II) ,
6 FSM Intrm. 180 (Pohnpei 1993)
MID-PACIFIC CONSTRUCTION CO., INC.,
on Assignment for Benefit of Creditors,
and AMBROS T. SENDA,
HERMAN SEMES and HATLER GALLEN,
HERMAN SEMES and HATLER GALLEN,
Third Party Plaintiffs,
FEDERATED STATES OF MICRONESIA,
Third Party Defendant.
CIVIL ACTION NO. 1992-041
ORDER DENYING MOTION TO DISMISS
Decided: September 7, 1993
For the Plaintiff: Daniel J. Berman, Esq.
Rush, Moore, Craven, Sutton, Morry & Beh
2000 Hawaii Tower
745 Fort Street
Honolulu, Hawaii 96813
For the Defendant : Sungiwo Hadley, Trial Counselor
(Herman Semes) Micronesian Legal Services Corporation
P.O. Box 129
Kolonia, Pohnpei 96941
For the Defendant: John Brackett, Esq.
(Hatler Gallen) P.O. Box 208
Kolonia, Pohnpei 96941
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Remedies ) Election of Remedies
Under the doctrine of election of remedies, a plaintiff cannot pursue two or more remedies which are inconsistent with each other, i.e. the assertion of one remedy directly contradicts or repudiates the other. The test is whether the assertion of one remedy involves the negation or repudiation of the other at a time when full knowledge of the facts would indicate a choice between the forms of redress. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 183 (Pon. 1993).
Remedies ) Election of Remedies
Election of remedies as a bar to plaintiff's action does not apply in a case where plaintiff had no knowledge or reason to know of fraud affecting his choice of action or where his original choice was based unknowingly on false information. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 184 (Pon. 1993).
Civil Procedure ) Res Judicata
The doctrine of merger holds that a plaintiff cannot maintain an action on a claim or part of a claim for which he has already recovered a valid final judgment since the original claim becomes merged in the judgment and thereafter plaintiff's rights are upon the judgment, not the original claim. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 184 & n.2 (Pon. 1993).
Civil Procedure ) Res Judicata and Collateral Estoppel
When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or different claim under the doctrine of collateral estoppel or issue preclusion, but in a judgment entered by confession, consent, or default none of the issues is actually litigated. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 185 & n.3 (Pon. 1993).
Equity ) Laches and Estoppel
The elements of the equitable defense of laches include, at a minimum, inexcusable delay or lack of diligence by the plaintiff in bringing suit, and injury to the defendant from the plaintiff's inaction. For the delay to have been inexcusable, the plaintiff has to have known or had notice of the defendant's conduct giving rise to the cause of action and had an opportunity to bring suit. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 185-86 (Pon. 1993).
Equity ) Laches and Estoppel
The equitable defense of laches is not available to a defendant who has not shown inexcusable delay by the plaintiff in bringing suit and injury to the defendant as a result. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 186 (Pon. 1993).
Transition of Authority
The Corporation, Partnership and Association Regulations incorporated by 37 TTC 52 (1980) remain in effect as FSM national law by virtue of the transition clause of the FSM
Constitution, art. XV, § 1, until they are amended or repealed by Congress. Mid-Pacific Constr. Co. v. Semes (II), 6 FSM Intrm. 180, 187 (Pon. 1993).
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MARTIN YINUG, Associate Justice:
This matter came before me on defendants' Motion to Dismiss or For Judgment on the Pleadings, filed on May 5, 1992. Plaintiffs filed an Opposition Motion on May 14, 1992. A hearing was held on the motion before former Chief Justice Edward King on May 20, 1992. Judge King did not rule on the motion before this case was transferred to me. Having reviewed the motion and opposition and arguments of counsel presented at hearing, I hereby deny the motion.
MEMORANDUM OF DECISION
The plaintiffs in this action are Mid-Pac Construction Company, Incorporated on assignment for benefit of creditors (hereinafter "Mid-Pac") and Ambros Senda, one of the original incorporators and directors of Mid-Pac. The defendants are Hatler Gallen and Herman Semes, also original incorporators and directors of Mid-Pac.
Herman Semes as president, Hatler Gallen as vice-president, and Ambros Senda as secretary/treasurer executed Mid-Pac's articles of incorporation and by-laws on October 14, 1978. On November 14, 1978, Senda and Semes signed a sworn stock affidavit listing the stock subscription and capitalization obligations of all three directors. The affidavit was filed with the Registrar of Corporations of the Trust Territory of the Pacific Islands ("TTPI") on November 20, 1978, and a corporate charter was issued the same day.
Mid-Pac engaged in business as a registered corporation until 1987, when the company became insolvent. Several Mid-Pac creditors were granted writs of execution, which were returned unsatisfied in 1988. Collection actions were subsequently instituted against the three original incorporators, Senda, Semes and Gallen, for outstanding balances on their respective stock subscriptions. Civil Action No. 1988-090, brought by the creditors against Gallen, was reduced to stipulated consent judgment on November 14, 1988.
In early 1989, during the course of discovery in the Mid-Pac creditors' action against Senda, it was revealed that the original stock affidavit signed by Senda and Semes in November 1978 falsely represented that the prerequisites for obtaining a corporate charter and engaging in business had been fulfilled. The complaint in the action against Senda was subsequently amended to include claims of violation of the Corporation, Partnership and Association regulations (hereinafter "C.P.A. Reg.").1 Plaintiffs prevailed on this claim and this Court's Trial Division ruled on December 14,
1990 that Mid-Pac had engaged in business in violation of part 2.7 of the regulations. Mid-Pac v. Senda, 4 FSM Intrm. 376, 384 (Pon. 1990). The Court found Ambros Senda jointly and severally liable to the Mid-Pac creditors in the aggregate amount of $222,073.36. Id. at 386.
New lawsuits were filed in 1991 by one creditor and Ambros Senda against Gallen and Semes in the wake of the Mid-Pac v. Senda decision. These suits were consolidated in April 1992 by order of this Court as the current action, Civil Action No. 1992-041, and includes as intervenors all Mid-Pac creditors.
The Motion to Dismiss or For Judgment on the Pleadings alleges seven grounds of dismissal. One of these, the statute of limitations, has already been denied on summary judgment by order of this Court entered August 31, 1993. Mid-Pacific Constr. Co. v. Semes (I), 6 FSM Intrm. 171 (Pon. 1993). The other six grounds will be discussed below.
Election of Remedies
Defendants invoke a doctrine known as election of remedies as a bar to plaintiffs' complaint. This common law doctrine, originating in Roman times, is often considered a derivation of the estoppel or waiver doctrines. 25 Am. Jur. 2d Election of Remedies § 2 (1966). It is defined as "the adoption of one of two or more coexisting remedies, with the effect of precluding a resort to others." 28 C.J.S. Election of Remedies § 1, at 1057 (1965).
The classic example illustrating application of the doctrine is when a plaintiff has been defrauded in a contract and has a choice of remedies between suing for rescission of the contract or damages for nonperformance. The plaintiff cannot both disaffirm the contract in seeking rescission and affirm the contract by seeking damages. Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 531 (10th Cir. 1962). The two remedies are inconsistent, and pursuit or election of one bars a subsequent action for the other. The test of inconsistency is whether "the assertion of one remedy `involves the negation or repudiation of the other,'" at a time when full knowledge of the facts would indicate a choice between the forms of redress. Bankers Trust Co. v. Pacific Employers Ins. Co., 282 F.2d 106, 110 (9th Cir. 1960) (quoting earlier cases), cert. denied, 368 U.S. 822 (1961).
Gallen argues that when the creditors of Mid-Pac filed Civil Action No. 1988-090 against him, they elected a remedy: namely, collection of the balance of Gallen's unpaid 1978 stock subscription. In filing the present case, the creditors are allegedly pursuing a second remedy inconsistent with the first. The basis of this inconsistency is that in the first action, which resulted in a settlement agreement, the creditors stipulated that Gallen paid in $5,100 toward required starting capital as stated in the 1978 stock affidavit. Now creditors allege that Gallen did not pay the $5,100, in support of their claim that Gallen violated C.P.A. Reg. 2.7 and committed fraud.
On its face, Gallen's argument that the present action is inconsistent with and therefore barred by the earlier collection action accepting contrary facts would seem valid. However, closer analysis of the election of remedies doctrine reveals that a crucial element is missing here: the existence of choice between the two remedies at the time the first action was filed. See 25 Am. Jur. 2d Election of Remedies § 8 (1966). A prerequisite to application of the doctrine is a right to elect; "[t]here must be present such a condition of facts as affords the party a choice of remedies inconsistent in character. If in truth there is only one remedy and not a choice between two or more, the doctrine of election does not apply." Id. § 9.
At the time Mid-Pac creditors sued Gallen and Semes for their unpaid subscription balances, the option of bringing suit on claims involving violation of the C.P.A. regulations was not apparent. This is because the creditors did not know when they instituted the collection actions in 1988 that the stock affidavit was false. It was only during the course of discovery in the collection action against Senda, and after Civil Action No. 1988-090 against Gallen had been settled, that the truth concerning the stock affidavit became known.
A plaintiff is "not chargeable with having made an election when he acted without any knowledge whatever of a fact or facts essential to his exercise of an intelligent choice in the selection of his remedy." 25 Am. Jur. 2d Election of Remedies § 21, at 663 (1966). Specifically, the doctrine does not apply where a plaintiff has no knowledge of the fact of fraud affecting his right of action, or where his original choice or remedy was induced by misrepresentation. See Dickson v. Patterson, 160 U.S. 584, 16 S. Ct. 373, 40 L. Ed. 43 (1896) (holding that plaintiff was not barred by election of remedies in suing to set aside a property conveyance, even though he had already brought action against his co-seller for sale proceeds, when plaintiff discovered that defendant had fraudulently conveyed the property to a third person).
Plaintiffs in this case had no knowledge or reason to know of the violations of C.P.A. regulations by the corporation at the time the original collection actions were begun. No choice of remedies existed. Therefore, election of remedies as a bar does not apply to this action.
Defendants' argument concerning res judicata invokes the concept of merger. This doctrine is an essential component of the general doctrine of res judicata, and can be stated as follows: "When a valid and final personal judgment is rendered in favor of the plaintiff: (1) The plaintiff cannot thereafter maintain an action on the original claim or any part thereof, although he may be able to maintain an action upon the judgment . . . ." Restatement (Second) of Judgments § 18 (1982).2
Gallen asserts that since the plaintiffs pursued and obtained a consent judgment on their claim for the stock subscription balance in 1988, they may not bring the present action for more money against the same defendant since the claims of the present action were somehow merged in the first action. Gallen overlooks the fact that plaintiffs' causes of action in Civil Action No. 1988-090 and Civil Action No. 1992-041 are not the same. The Court takes judicial notice of the fact that the claims in Civil Action No. 1988-090 were simply calls for debts due, the stock subscription balance and a balance on an open purchase account for building materials. The claims in the present complaint are for violation of FSM regulations and fraud.
Defendants do not refer the Court to any other specific prior case with which to compare the claims brought and adjudged. I find, therefore, that the claims in this case have not been merged in any other previous judgment. Defendants' res judicata argument must fail.
Defendants' reliance on collateral estoppel as a bar to plaintiffs' action is misplaced. The doctrine of collateral estoppel, sometimes called issue preclusion, holds that "[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim." Restatement (Second) of Judgments § 27 (1982). The defendants have not identified in their Motion to Dismiss which issue of fact or law in which previous action or actions they believe has been conclusively established such that plaintiffs are estopped from relitigating it.3 The Court does not have a duty to guess what the missing points of a party's argument would be. Collateral estoppel does not apply to this case.
Gallen and Semes assert the equitable defense of laches. The doctrine of laches has no absolute definition and is applied sparingly in the discretion of the court to avoid obvious injustice. The elements of a laches defense include at minimum, (1) inexcusable delay or lack of diligence by
the plaintiff in bringing suit, and (2) injury to the defendant from plaintiff's inaction. Costello v. United States, 365 U.S. 265, 282, 81 S. Ct. 534, 543, 5 L. Ed. 2d 551, 562 (1961). For delay to be inexcusable, the plaintiff has to have known or had notice of defendant's conduct giving rise to plaintiff's cause of action and had an opportunity to bring suit. 27 Am. Jur. 2d Equity § 162 (1966).
Defendants claim that because the creditors neglected to raise their present claims in 1988 in the collection actions, laches should apply to prevent injustice to them. The injustice complained of is the aging and unavailability of evidence necessary to their defense. Most of this evidence dates back to 1978 and concerns circumstances surrounding Mid-Pac's incorporation and initial business activities.
As noted in previous sections, plaintiffs first became aware of the violations of C.P.A. Reg. 2.7 in April of 1989. The violations were confirmed as judicial fact in December 1990 in the Mid-Pac v. Senda decision. Logic holds that the counting of time when plaintiffs could have been expected to file their claims against defendants based on Reg. 2.7 would begin no earlier than 1989. It appears from court records that the first action against Semes and Gallen on these claims was filed in 1991 in Civil Action No. 1991-017, which became incorporated in the present case in 1992. I do not find the span of two years from the time of discovery of the violations and less than one year from the time of the Mid-Pac v. Senda ruling to be inordinate delay or to have worked any additional hardship on defendants. It is difficult to imagine that records from 1978 which were burdensome to locate in 1991 or 1992 were more easily available in 1989. Furthermore, since April 1989 and particularly in light of the Mid-Pac v. Senda decision, Semes and Gallen were on notice that plaintiffs could assert these claims against them.4
Based on these facts and reasons, I do not find inexcusable delay in the filing of the present complaint against Semes and Gallen. The defense of laches is rejected.
Assignment of Claims
Gallen alleges that when Attorney Dan Berman assumed responsibility from Attorney Fred Ramp for the accounts due Mid-Pac's creditors, the only assignable claim against Gallen was the collection of the judgment in Civil Action No. 1988-090. The Court takes judicial notice of the fact that the court assignment to Attorney Berman was for all accounts due creditors from Gallen, Semes, and Senda. The assignment did not limit causes of action. Moreover, the present case is founded on facts that only became apparent in the course of attempting to collect these accounts. Gallen offers no legal argument or authority in support of his claim that Attorney Berman was bound by the litigation choices of Attorney Ramp or the state of facts that existed at the time of the transfer. I find no merit in this argument as a result.
Validity of the Corporate Regulations
Defendants construe dicta in the Mid-Pac v. Senda opinion to the effect that the penalties imposed on incorporators and directors are "extremely harsh" as an indication that the regulations are void and unenforceable. Two grounds for this conclusion are alleged: (1) that the Secretary of Resources and Development failed to exercise the necessary oversight in approving the regulations,
and (2) that the presumed delegation of authority from the Congress to an executive officer in issuing these regulations was overbroad and illegal.
Defendants' first argument is drawn from 36 F.S.M.C. 202. This provision of the Code states:
The Registrar of Corporations, with the approval of the Secretary of the Department of Resources and Development and the President of the Federated States of Micronesia, shall have the power to prescribe such rules and regulations as are deemed advisable to administer and carry into effect the provisions of this chapter.
The defendants, without citing any authority, aver a number of conditions which they believe the Secretary of Resources and Development has a statutory duty to apply. It is obvious the statute does not pose any list of factors the Secretary must consider. Thus defendants' assumptions about what the Secretary should have considered are completely unsupported by law.
More to the point, the C.P.A. regulations in effect at the time of Mid-Pac's incorporation and cited in this action were not promulgated pursuant to 36 F.S.M.C. 202. They were issued in 1974 by the TTPI government and incorporated by 37 TTC 52 (1980). The FSM Code provision, section 202, pertains to new regulations when they are promulgated. Old regulations predating 36 F.S.M.C. 202 continue in effect by virtue of the transition clause of the Constitution, FSM Const. art. XV, § 1, until they are amended or repealed. The C.P.A. regulations were thus made part of FSM national law and in the absence of new regulations remain in effect. Mid-Pac v. Senda, 4 FSM Intrm. at 381.
Each of the defendants' arguments for dismissal of this action is rejected. The motion to dismiss or for judgment on the pleadings is hereby denied.
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No corporation for profit shall upon the incorporation thereof engage in business in the Territory until three-fourths of its authorized capital stock has been subscribed for nor until ten per cent of its authorized capital stock has been paid in by the acquisition of cash or by the acquisition of property of a value equal to ten percent of the authorized capital stock nor until the affidavit or affidavits required by subpart 2.5 of chapter 1 have been filed, provided that in no case shall any corporation for profit upon the incorporation thereof engage in business in the Territory until not less than $1,000 of its authorized capital stock has been paid in by the acquisition of cash or by the acquisition of property of a net value of not less than $1,000. In case of any violation of this section by any corporation, the incorporators and the directors thereof at the time the corporation commences to engage in business shall in their individual and private capacities be jointly and severally liable to the corporation and the stockholders and creditors thereof in the event of its bankruptcy or insolvency or in the event of its dissolution for any loss suffered by the corporation or its stockholders or creditors.
When a plaintiff recovers a valid and final personal judgment, his original claim is extinguished and rights upon the judgment are substituted for it. The plaintiff's original claim is said to be "merged" in the judgment. . . .
After merger of the original claim in a judgment for the plaintiff, the plaintiff may not maintain an action on the original claim in the state that rendered the judgment.
Restatement (Second) of Judgments § 18 cmts. a, b (1982).
3. One possibility is that defendants had in mind the issue of fact in Civil Action 1988-090 concerning Gallen's payment of $5,100 as stated in the stock affidavit. However, collateral estoppel would not apply to the stipulation that Gallen had paid the required amount, because that issue was not litigated. An issue is not actually litigated "if it is the subject of a stipulation between the parties." Restatement (Second) of Judgments § 27 cmt. e (1982). Furthermore, "[i]n the case of a judgment entered by confession, consent, or default, none of the issues is actually litigated." Id. Gallen admits that the judgment against him in Civil Action No. 1988-090 was a consent judgment.