THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as Black Micro Corp. v. Santos ,
7 FSM Intrm. 311 (Pon. 1995)

[7 FSM Intrm. 311]     

BLACK MICRO CORPORATION,
Plaintiff,

vs.

OSAIA SANTOS d/b/a P&S CONSTRUCTION,
Defendant.

CIVIL ACTION NO. 1993-073

ORDER
 
Andon L. Amaraich
Chief Justice

Decided:  October 30, 1995

APPEARANCES:
For the Plaintiff:          Fredrick L. Ramp, Esq.
                                     P.O. Box 1480
                                     Kolonia, Pohnpei FM 96941

For the Defendant:     pro se

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HEADNOTES
Civil Procedure ) Summary Judgment
     If the adverse party does not respond to a motion for summary judgment with affidavits or other competent evidence, summary judgment, if appropriate, shall be entered against the adverse party. Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 314 (Pon. 1995).

Common Law; Contracts
     Common law decisions of the United States are an appropriate source of guidance for the FSM Supreme Court for contract issues unresolved by statutes, decisions of the constitutional courts here, or custom and tradition within the Federated States of Micronesia, but review of decisions of courts of the United States or other jurisdictions, must proceed against the background of pertinent aspects of Micronesian society and culture.  Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 314 (Pon. 1995).

Contracts ) Assignment, Delegation and Novation
     Liabilities arising from a contract are not assignable without the consent of the creditor, and the mere assumption of the debt by a third party is not sufficient to establish a novation of the original contract unless there is a clear assent by the creditor to the substitution of a new obligor.  Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 314-15 (Pon. 1995).

[7 FSM Intrm. 312]

Contracts ) Assignment, Delegation and Novation
     When a person is liable for a business's debts because he is the sole proprietor of a business, the sale of the business to another who has agreed to assume the business's liabilities will not relieve him of liability if the creditor has not agreed to the assignment.  Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 315 (Pon. 1995).

Agency
     The principal is bound by, and liable for, the acts which his agent does with or within the actual or apparent authority from the principal, and within the scope of the agent's employment.  Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 315-16 (Pon. 1995).

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COURT'S OPINION
ANDON L. AMARAICH, Chief Justice:
     This matter is before the Court on plaintiff's motion for summary judgment.  Having reviewed the pleadings of the parties, the Court finds that there are no material issues of fact remaining in this action and plaintiff is entitled to judgment as a matter of law.

Facts
     This action is a debt collection case, brought by a supplier of construction materials, Black Micro Corporation, against the recipient of these materials, P&S Construction.  On January 11, 1993, Black Micro Corporation sent P&S Construction an invoice for a supply of ready-mix concrete, and for the rental of a Grove crane, concrete bucket and electric vibrator.  The invoice was for a total amount of $6,161.87, and was addressed to P&S Construction, to the attention of Mr. Peregrino.  On August 25, 1993, plaintiff filed its Complaint, alleging that it had made repeated demands on defendant for payment of the amount due, but that defendant has refused to pay.  See Complaint para. 6.
 
     On August 27, 1993, Mr. Santos wrote a letter to counsel for plaintiff.  In that letter, Mr. Santos denied that he was affiliated in any way with P&S Construction, and suggested that "the appropriate person to contact was the actual owner or manager, Mr. Diosdado Peregrino."  Defendant filed this letter with the Court.  The Court treated defendant's August 27, 1993 letter as defendant's Answer.  See Court order (Mar. 16, 1993).

     On June 18, 1994, plaintiff served its first set of interrogatories, request for admissions, and request for production on the defendant.  With that discovery request, plaintiff provided defendant with three exhibits:  an equipment lease signed by Diosdado Peregrino on behalf of P&S Construction on January 9, 1993; a copy of an equipment rental report signed by Diosdado Peregrino on behalf of P&S Construction dated January 9, 1993; and a Memorandum of Understanding ("MOU") dated June 28, 1993 between Diosdado Peregrino, Operations Manager of P&S Construction, and defendant, Osaia Santos, sole proprietor of P&S Construction. Defendant did not respond to plaintiff's discovery request.

     On June 30, 1995, plaintiff moved for summary judgment.  This motion was supported by an affidavit from the Administrative Assistant at Black Micro Corporation's Pohnpei office, Philip Soto, stating that as of January 11, 1993, Black Micro Corporation was owed $6,161.87 by P&S Construction, and had never consented to assignment of that debt.  Aff. Soto para. 5.  Mr. Soto attached a copy of the invoice issued to P&S Construction on January 11, 1993, which is addressed to

[7 FSM Intrm. 313]

P&S Construction, and contains Mr. Peregrino's signature on a "received by" line. Plaintiff's motion for summary judgment was further supported by an affidavit from plaintiff's counsel, attaching defendant's August 27, 1993 letter and the June 28, 1993 MOU.  See plaintiff's Motion for Summary Judgment (June 30, 1995).

     The MOU supplied to the Court by both parties states virtually in its entirety as follows:

WHEREAS, P&S Construction Company is solely owned by Mr. Osaia Santos, a FSM citizen, and operated by Mr. Diosdado P. Peregrino as Operation Manager;

WHEREAS, it has been mutually agreed upon by Mr. Osaia Santos and Mr. Diosdado Peregrino that Mr. Santos relinquishes ownership and control of the Company to a new in-coming Proprietor;

NOW WHEREFORE, because of the facts enumerated above and the mutual understanding and covenants between the Proprietor and the Operation Manager, the following conditions and requirements have been agreed upon:

1.     THAT, all existing responsibilities and liabilities on contracts and account whether government or private be assumed by the new Proprietor through the person of the Operation Manager as his duly authorized representative;

2.     THAT, all personal debts and accountabilities as of the date of the signing of this document be assumed and accounted for by the new Proprietor;

3.     THAT, the new proprietor will retain the services of Mr. Diosdado Peregrino as Operation Manager;

4.     THAT, the blue Toyota 4WD pick-up with plate no. 2815, be turned over to the ownership of the out-going proprietor, Mr. Osaia Santos;

5.     THAT, upon execution of the Memorandum of Understanding, Mr. Osaia Santos, the out-going proprietor, relinquishes all claims and controls of the company, and promises never to interfere in its future business operations.

     On July 20, 1995, defendant wrote again to counsel for plaintiff, this time in response to plaintiff's motion for summary judgment.  Defendant referred plaintiff to the June 28, 1993 MOU, in support of his argument that he has "no direct control and involvement with the operation of the P&S Construction" and no responsibility for any company liabilities.  Mr. Santos further contends that he has no personal knowledge about the debt at issue, and therefore cannot be held liable.

     On September 27, 1995, plaintiff supplemented its motion for summary judgment with an affidavit stating that P&S Construction was at all times pertinent to the action a sole proprietorship, and that according to an inquiry made with the FSM Registrar of Corporations, P&S Construction had never been incorporated.  See Aff. Frederick L. Ramp, paras. 2, 3.  Mr. Santos did not file any opposing evidence within the time allowed him by the Court's September 5, 1995 request for additional briefing.1

Discussion
 
[7 FSM Intrm. 314]

     The simple issue in this action is whether Black Micro Corporation can recover the debt incurred by P&S Construction in January 1993 against the defendant.  The debt was incurred prior to the signing of the MOU, which transferred the liabilities of P&S Construction under Mr. Santos' ownership to the incoming proprietor.

     Mr. Santos claims that because he is no longer affiliated with the company, he is not liable for the debt.  He further claims that because he was not personally a signatory to a construction supply contract with Black Micro, he cannot be held liable. Plaintiff, on the other hand, claims that because it never consented to the assignment of P&S Construction's debt, Mr. Santos is liable in the first instance for payment of the obligation, despite the transfer of Mr. Santos' sole proprietorship to a new proprietor.

     Under FSM Civil Rule 56(e), when a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon mere allegations or denials in its pleading, but must in response, through affidavits or other competent summary judgment evidence, set forth specific facts showing there is a genuine issue for trial.  If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

     As set out above, plaintiff has presented the Court with affidavits stating that the defendant was the sole proprietor of P&S Construction at the time the debt was incurred, that P&S Construction was never incorporated, and that Micro Black Corporation did not consent to assignment of P&S Construction's debt to a new proprietor.  Defendant has presented no evidence that P&S Construction did not incur the debt at issue, or that Black Micro Corporation in fact consented to P&S Construction's assignment of that debt to a new proprietor.

     This Court has held that common law decisions of the United States are an appropriate source of guidance for the FSM Supreme Court for contract issues unresolved by statutes, decisions of the constitutional courts here, or custom and tradition within the Federated States of Micronesia.  FSM v. Ocean Pearl, 3 FSM Intrm. 87, 90-91 (Pon. 1987); Semens v. Continental Air Lines, Inc. (I), 2 FSM Intrm. 131, 139-42 (Pon. 1985).  Because the issue of the assignment of contractual liabilities raised in this case appears not to have been previously addressed, the Court will look to U.S. law for guidance.  As always, this Court's "[r]eview of decisions of courts of the United States, and any other jurisdictions, must proceed against the background of `pertinent aspects of Micronesian society and culture.'" Semens (I), 2 FSM Intrm. at 142.

[7 FSM Intrm. 315]
 
     It is well established in the United States that liabilities arising from a contract are not assignable without the consent of the creditor.2  See Pink v. Busch, 691 P.2d 456, 460-61 (Nev. 1984) (court held that to find an inferred novation where creditor was simply aware of the execution of new guarantees by third parties, and did not accept any payments under those personal guarantees, would be "tantamount to forcing new debtors on the creditor"); Jacobsen v. Stern, 605 P.2d 198, 201 (Nev. 1979) (a creditor must assent to the substitution of a new obligor for there to be a valid novation);  Allen Steel Supply Co. v. Bradley, 402 P.2d 394, 398 (Idaho 1965) ("[t]he relationship of debtor and creditor having once been established . . . a new debtor cannot be substituted without the agreement of both parties"); 58 Am. Jur. 2d Novation 29, at 632 (1989) ("the mere assumption of the debt by a third party is not sufficient to establish a novation of the original contract unless there is also shown an intention to release the first obligor and to extinguish his liability; otherwise the assumption of the debt by the third party will be presumed to be merely additional security"); id. 47 ("a novation does not affect the rights of a separate creditor of the debtor who was not a party to the negotiation or agreements culminating in the alleged novation").3

     This Court finds that the U.S. common law rule regarding the assignment of debts is appropriate for application in the FSM and in this case.  Accordingly, the Court will now apply this rule to the facts of this case.

      It is plain that before the date of the MOU, P&S Construction's debts were the personal responsibilities of Mr. Santos, as sole proprietor of the business.  See, e.g., Allen Steel Supply Co., 402 P.2d at 397 (where steel supplier sued officer of an unincorporated company to recover a balance due for steel sold to officer on behalf of company, plaintiff properly sued defendant in his personal capacity).  On June 28, 1993, Mr. Santos signed an MOU which contemplated the transfer of Mr. Santos's company to a new proprietor.  Under the terms of defendant's MOU, the new proprietor, through Mr. Peregrino, "agreed to assume all existing responsibilities and liabilities on contracts."  To the extent the Black Micro Corporation invoice sent to defendant in January 1993 had not been paid at the time the MOU was signed in June 1993, it unquestionably represented an existing liability which the new proprietor agreed to assume.  However, the new proprietor's agreement to be responsible for existing liabilities does not affect Black Micro Corporation's ability to bring a cause of action against Mr. Santos.  Because Black Micro Corporation never consented to Mr. Santos' assignment of its debt to a new proprietor, that debt remained Mr. Santos' responsibility after the date of the MOU.  Accordingly, this Court finds Mr. Santos liable to Black Micro Construction for the amount charged.

     Mr. Santos additionally claims that because he was not personally a signatory to a construction supply contract with Black Micro, he is not liable for payment on that contract.  See July 20, 1995 letter.  This argument is not sustainable.  Mr. Peregrino acted as an agent of P&S Construction when he contracted with Black Micro on P&S Construction's behalf.  "It is a fundamental rule underlying the structure of agency law that the principal is bound by, and liable for, the acts which his agent does

[7 FSM Intrm. 316]

with or within the actual or apparent authority from the principal, and within the scope of the agent's employment . . . ."  3 Am. Jur. 2d Agency 270, at 771 (1986). Defendant has not denied that Mr. Peregrino was Operations Manager at the time the contract with Black Micro Corporation was signed, and has presented no competent summary judgment evidence which would place in question Mr. Peregrino's ability to act as an agent of P&S Construction.

     FSM Civil Rule 56 requires the Court to enter summary judgment "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."  FSM Civ. R. 56(c).  If there is no genuine issue of material fact and the moving party is entitled to summary judgment as a matter of law, summary judgment must be granted.  Kihara Real Estate, Inc. v. Estate of Nanpei, 6 FSM Intrm. 48, 52 (Pon. 1993) (citing FSM Dev. Bank v. Rodriguez Corp., 2 FSM Intrm. 128, 130 (Pon. 1985); Wainit v. Truk (II), 2 FSM Intrm. 86, 87 (Truk 1985)).  The burden of showing a lack of triable issues of fact belongs to the moving party.  FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).  In determining whether triable issues of fact exist, the Court must view the facts presented and the inferences therefrom in the light most favorable to the party against whom summary judgment is sought.  Bank of Guam v. Island Hardware, Inc., 2 FSM Intrm. 281, 284 (Pon. 1986).  After reviewing the facts in the light most favorable to the defendant, the Court finds that there are no material issues of fact remaining, and that plaintiff is entitled to judgment as a matter of law.

     Accordingly, the Court hereby grants plaintiff's motion for summary judgment, and finds defendant liable to plaintiff in the amount of $6,161.87, plus post-judgment interest at the statutory rate.

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Footnotes:
 
1.  On September 14, 1995, the Court received a faxed letter from the defendant, Osaia Santos, residing in Fiji.  This letter asked for "sufficient time" to respond to the Court's request for additional briefing.  The Court's request for additional briefing was directed to the plaintiff, and was limited to "proof of the legal status of P&S Construction at the time the expenses for the materials and equipment in controversy were incurred in January 1993, and the time the Memorandum of Understanding at issue was signed by Osaia Santos and Diosdado Peregrino on June 28, 1995." Defendant was given an additional ten days following plaintiff's filing to respond to that submission.  Plaintiff's one-page supplemental briefing was filed with the Court on September 27, 1995, and served by mail on defendant in Fiji on the same day. The Court believes that defendant has had ample time to frame a response to plaintiff's filing, given the narrowness of the issue, and denies defendant's request for any further enlargement of time to respond.

2.  Cf. Derek Roebuck et al., Pacific Contract Law 443 (1987) (liabilities arising from a contract are not assignable; generally, only a party to a contract may be sued on it, and a party to a contract cannot assign his liability without the other party's consent).

3.  The term "novation" is defined in Black's Law Dictionary 959-60 (5th ed. 1979) as:

[s]ubstitution of a new contract, debt, or obligation for an existing one, between the same or different parties.  The substitution by mutual agreement of one debtor for another or of one creditor for another, whereby the old debt is extinguished.  The requests of a novation are a previous valid obligation, an agreement of all parties to a new contract, the extinguishment of the old obligation, and the validity of a new one.