FSM SUPREME COURT TRIAL DIVISION
Cite as Jayko Intl, Inc. v. VCS Constr. & Supplies
10 FSM Intrm. 475 ( Pon. 2001)
 
[ 10 FSM Intrm. 475]
 
JAYKO INTERNATIONAL, INC.,
Plaintiff,
 
vs.
 
VCS CONSTRUCTION & SUPPLIES,
Defendant.
 
CIVIL ACTION NO. 2001-030
 
ORDER AND MEMORANDUM
 
Martin Yinug
Associate Justice
 
Decided: November 30, 2001
 
APPEARANCES:
 
For the Plaintiff:                       Salomon Saimon, Esq.
                                                  Stephen V. Finnen, Esq.
                                                  Law Offices of Saimon & Associates
                                                  P.O. Box 1480
                                                  Kolonia, Pohnpei FM 96941
 
For the Defendant:                 Joseph S. Phillip, Esq.
                                                 P.O. Box 464
                                                 Kolonia, Pohnpei FM 96941
 
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[10 FSM Intrm. 476]
 
HEADNOTES
 
Civil Procedure ) Summary Judgment
     When an opposing party fails to respond to a motion for summary judgment, the court must still determine that there is a good basis both in law and in fact for the granting of the motion. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 476 (Pon. 2001).
 
Civil Procedure ) Summary Judgment
     When a plaintiff seeks summary judgment on the question of liability, the plaintiff must initiate the inquiry even as to affirmative defenses. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 476 (Pon. 2001).
 
Commerce; Usury
     In commercial credit transactions, no person may directly or indirectly receive or charge interest which exceeds an annual percentage rate of twenty-four percent. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 477 (Pon. 2001).
 
Debtors' and Creditors' Rights
     A promissory note is a term of art. There is a division of authority as to whether a document containing no express promise to pay constitutes a promissory note, but a writing that does not include such promise-to-pay language, but which is signed by the party to be charged is enforceable on its face as an acknowledgment of a debt. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 477 (Pon. 2001).
 
Debtors' and Creditors' Rights
     The general rule is that payments are applied to interest first, and then to principal. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 477 (Pon. 2001).
 
Debtors' and Creditors' Rights
     Unpaid interest and principal, consolidated into a new principal sum for purposes of a new loan is not a violation of a statute that prohibits interest compounding, since interest compounding results where interest is automatically compounded, and not where interest has become due, has not been paid, and becomes the subject of a new loan agreement. Jayko Int'l, Inc. v. VCS Constr. & Supplies, 10 FSM Intrm. 475, 478 (Pon. 2001).
 
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COURT'S OPINION

MARTIN YINUG, Associate Justice:

     The defendant VCS Construction & Supplies ("VCS") did not respond to the summary judgment motion filed by Jayko International, Inc., ("Jayko") on July 30, 2001. However, where an opposing party fails to respond to a motion for summary judgment, the court must still determine that there is a good basis both in law and in fact for the granting of the motion. Kyowa Shipping Co. v. Wade, 7 FSM Intrm. 93, 95 (Pon. 1995). Further, "when the plaintiff seeks summary judgment on the question of liability, the plaintiff must initiate the inquiry even as to affirmative defenses." FSM Dev. Bank v. Rodriquez Corp., 2 FSM Intrm. 128, 130 (Pon. 1985). After reviewing the complaint and the motion for summary judgment, the court requested by an order issued on October 16, 2001, additional briefing from Jayko on VCS's second affirmative defense in which it contends that "[t]he claim of interest is a 'roll over' of interest on interest grossly excessive in contravention of the FSM usury law." Answer

[10 FSM Intrm. 477]

at 7 (July 10, 2001). Section 204 of Title 34 of the FSM Code provides that "[i]n commercial credit transactions, no person may directly or indirectly receive or charge interest which exceeds an annual percentage rate of twenty-four percent."

     On October 29, 2001, Jayko moved for an enlargement of time to file the response to the October 16, 2001, order. The response was due on October 26, 2001; it was filed on October 29, 2001. Good cause appearing, the motion for enlargement is granted.

     When it filed the response to the October 16, 2001, order, Jayko also filed a motion to amend the complaint, which seeks to correct typographical errors, and also states that the interest calculation in the complaint is erroneous because of an ambiguity in the promissory note. According to the motion to amend, a correct calculation of interest removes any question of a usury violation. On November 8, 2001, VCS filed a response to the motion to amend the complaint in which it also offers comment on the October 16, 2001, order, and also admits owing the principal amount of $42,216.92, which appears to be for construction supplies purchased on an open account basis, but contests the interest of $16,464.60, which is sought in the original complaint. On November 12, 2001, Jayko filed a reply.

     Jayko attached as exhibit "A" to both the original and amended complaint a document dated January 12, 2001, and signed by Jose San Nicolas on behalf of VCS Construction. Jayko contends that this document is a promissory note. A promissory note is a term of art. There is a division of authority as to whether a document containing no express promise to pay constitutes a promissory note. 11 Am. Jur. 2d Bills and Notes 140 (1963). Exhibit "A" does not include such promise-to-pay language, but as a writing signed by the party to be charged is enforceable on its face as an acknowledgment of a debt. Thus the court need not determine whether the document, which the court will refer to as the debt acknowledgment, is a promissory note. VCS does not challenge the document as evidence of the debt.

     In the original complaint Jayko was seeking the sum of $58,681.52, due as of January 1, 2001, plus prejudgment interest at the rate of 15 percent (consistent with the debt acknowledgment, interest is 18 percent ) this is the typographical error which occurs more than once in the complaint and is changed to 18% by the amended complaint) on that amount from January 1, 2001, until entry of judgment. The $58,681.52 figure is comprised of principal of $42,216.92 and interest of $16,464.92. The $16,464.92 represents 26 months of interest at 18 percent on the principal sum of $42,216.92. As noted, section 204 of Title 34 of the FSM Code limits interest to 24 percent per year in commercial transactions. By the court's calculation, 24 percent of the principal sum of $42,216.92 is $10,132.06, which is the maximum amount that the principal could generate on an annual basis. But if the interest of $16,464.92 is added to the principal amount of $42,216.92, a total of $58,681.92 results, 18 percent of which is $10,562.74, or $439.68 more on an annual basis than the principal sum of $42,216.92 could lawfully generate under 34 F.S.M.C. 204. Under this analysis, $10,562.74 is 25.02 percent of $42,216.92, or 1.02 percent more than the 24 percent limit provided for in 34 F.S.M.C. 204. The excess of $439.68, although nearly a de minimis amount in percentage terms, would at least arguably arise from compounding, or charging "interest on interest." This raised in the court's mind whether this was an indirect way of charging interest in excess of 24% in violation of 34 F.S.M.C. 204.

     The listing of purchases provided in the first part of the debt acknowledgment shows that VCS made its first purchase in June of 1998, and by October of 1998 owed Jayko $121,012.42 on outstanding invoices. Seven payments made from October of 1998 through September of 2000 reduced that amount to the $42,216.92 principal amount that Jayko now seeks. Jayko points out in its response that the $16,464.60 in interest is not on the declining balance over the 26 months in question, but is on the final balance. Jayko correctly notes the general rule that payments are applied to interest first, and then to principal. Senda v. Creditors of Mid-Pacific Constr. Co., 7 FSM Intrm. 664,

[10 FSM Intrm. 478]

670 (App. 1996). If Jayko had followed this practice, then by Jayko's calculation, the $76,795.50 in payments over the relevant period would have been credited $54,111.83 to principal and $24,683.67 to interest (at 18 percent), which would leave an outstanding balance of $66,900.59 in principal, and $11,086.73 in interest. Under this method of calculation, VCS would have owed $77,987.32 ($66,900.59 in principal and $11,086.73) as of January 1, 2001, versus the $58,681.51 ($42,216.92 in principal and $16,464.60 in interest) which Jayko is seeking. Thus Jayko contends that it provided VCS a substantial discount. According to VCS it will stand by the lesser claim amount. The court also notes that applying the same analysis to the foregoing that the court just applied to the $42,216.92 principal/$16,464.92 interest figures does not lead to a similar usury concern: 24% of $66,900.59 is $16,056.14, while 18% of $77,987.32 is substantially less than that, or $14,037.72.

     Jayko's claimed ambiguity in the debt acknowledgment goes to how prejudgment interest should be calculated. The relevant portion of the debt acknowledgment sets out the following:

                            Outstanding balance $                       42,216.92
                                        26 month's interest:               16,464.60
                                            As of 01-01-016     58,681.52
 
                           Interest at 1-1/2% per month will be added to above until
                           fully paid

In the original complaint, prejudgment interest was computed using the $58,681.52 figure, whereas Jayko now states that the appropriate way to calculate prejudgment interest from January 1, 2001, onward is to use the outstanding balance figure of $42,216.92. Jayko contends that this would avoid any usury concerns. The amended complaint reflects this way of calculating the prejudgment interest.

     The court grants the motion to amend the complaint. The amended complaint does not raise usury concerns, and thus renders the usury issue moot. At the same time, the court would be disinclined to find that a usury violation existed under the original complaint. Viewed without reference to the amended complaint, the debt acknowledgment is a consolidation into one figure, $58,681.52, of outstanding principal and interest. This consolidated amount was to be the subject of the payment plan set out in the rest of the debt acknowledgment. Beginning immediately after the portion set out above, the debt acknowledgment continues to the end as follows:

     Effective 2-20-01, payment of $7,500.00 will be
    made monthly (every 30 days of 10th of each month)
    until account is paid in full. If a payment is
    not paid in time, the entire balance is due immediately.
    All legal expenses will be paid by VCS Construction
    in the event that this account goes to collection.
    01-12-01                                              /s/
    Date                                                    Jose San Nicolas
                                                                VCS Construction
 
Thus, the consolidated $58,681.52 figure was the point of reference from which the payment plan of $7,500 monthly payments was to operate prospectively. Unpaid interest and principal, consolidated into a new principal sum for purposes of a new loan is not a violation of a statute that prohibits interest compounding, since interest compounding results where interest is automatically compounded, and not where interest has become due, has not been paid, and becomes the subject of a new loan agreement. C.L. Feinstock, Annotation, What is "Compound Interest" Within Meaning of Statutes Prohibiting the

[10 FSM Intrm. 479]

Charging of Such Interest , 10 A.L.R.3d 6, at 433 (1966) (citing Beneficial Finance Co. (Maine) v.

Fusco, 203 A.2d 457, 460-61, 462, 10 A.L.R.3d 410, 417, 419 (Me. 1964). The facts of Fusco were that the borrower had entered into a new loan agreement for more than the sum necessary to pay off the outstanding principal and interest, giving the borrower cash in hand. Fusco, 203 A.2d at 461, 10 A.L.R.3d at 418. Fusco is sufficiently analogous to the case at bar that the court is satisfied that the original complaint did not present a usury violation under 34 F.S.M.C. 204.

     The court has granted the motion to amend the complaint. The amended complaint is attached to the motion to amend, which was served on VCS's counsel. The court deems the amended complaint filed and served. VCS shall file its answer on or before December 10, 2001. Jayko then may renew its motion for summary judgment in accordance with the amended complaint.

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