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DENNIS K. YAMASE, Associate Justice:
On December 17, 2003, the plaintiff, the FSM Development Bank, filed a motion to amend the complaint to conform the pleadings to the evidence it intended to introduce and to permit it to introduce as evidence a guaranty signed by the defendants and to allow the bank to plead the guaranty as an alternate theory of recovery. The motion was argued at the scheduled pretrial conference that afternoon. At the start of trial on December 18, 2003, the court granted the bank’s motion with the proviso that the parties could submit further briefing on the nature of the document and granted leave for the defendants to file a motion to strike all evidence in relation to the document identified as the defendants’ personal guaranty, Ex. 5.
The court heard the testimony of Bethwel Henry, Marihne Henry, Robert C. Arthur, and Ana Mendiola. The parties then proposed to the court that they would stipulate in writing to the facts necessary for the court to make its decision and submit briefing on various legal issues. The court accepted this proposal, suspended trial, and memorialized the parties’ agreement as a written order of the court entered on December 19, 2003.
The parties filed their written stipulation of facts on January 28, 2004. Additional written submissions before the court are: Brief of FSM Development Bank, filed July 15, 2004; the defendants’ Motion to Strike Evidence/Memorandum and Memorandum in Support of Motion to Strike, filed July 23, 2004; Defendants’ Opening Brief, filed July 23, 2004; the bank’s Opposition to Motion to Strike Evidence; Response to Defendants’ Opening Brief, filed July 26, 2004; and Defendants’ Response Brief, filed August 17, 2004. The case was at that point considered submitted for decision.
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The parties deem to be true and stipulated to the following facts as undisputed:
1. In August 1993, a loan was approved by the Federated Development Authority ("FDA") to AHPW, Inc. ("AHPW") from the Pohnpei state-earmarked subaccount of the Investment Development Fund ("IDF"). The IDF is in part governed by Title 30, Section 201 et seq., of the FSM Code and consists wholly of funds granted to the Federated States of Micronesia from the United States for certain lending.
2. FSMDB is charged with administering and documenting the IDF loans such as that to AHPW.
3. At all times relevant, Tom Delanoy and Norman Clow, expatriate employees of FSMDB and both United States citizens, were tasked with administering and documenting the AHPW loan.
4. The AHPW loan was approved in the principal amount of $620,000 but was reduced to $455,000 by agreement of all concerned. FSMDB actually disbursed $408,881.25 of this loan, while the remainder of $46,118.75 was not requested resulting in a reduction of the loan by such $46,118.75 amount. As of December 17, 2003, there remains a principal amount owed on the loan of $370,324.04, with accrued interest of $119,400.11, and accrued penalty of $2,908.78 for a total of $492,632.93.
5. AHPW is an FSM corporation. At all times relevant, defendants Robert C. Arthur, Patricia Arthur, Bethwel Henry and Marihne Henry ("Defendants") comprised the entire board of directors of AHPW. The shareholders at all times relevant were Patricia Arthur, majority shareholder, and Marihne Henry, minority shareholder. Ms. Henry paid nothing for her shares (i.e., she contributed no cash, labor or other thing of value) while Patricia Arthur contributed $7,000 in cash; subsequently Patricia Arthur converted $120,000 of loans to AHPW into equity for a total capital contribution for Mrs. Arthur of $127,000. AHPW has had no income or significant assets since 1998 and has no income or significant assets today1. Robert Arthur was the principal officer of AHPW at all times relevant.
6. The loan to AHPW was documented in the form of a promissory note in favor of FSMDB as IDF administrator dated December 10, 1993 in the principal amount of $455,000 signed by defendants Robert C. Arthur, Patricia Arthur, Bethwel Henry and Marihne Henry in their personal capacities on December 10, 1993. See, Plaintiff’s Exhibit 1. The promissory note should have been made by AHPW in its corporate capacity in the form of the promissory note of Plaintiff’s Exhibit 1 but was not. Defendants Robert C. Arthur, Patricia Arthur, Bethwel Henry and Marihne Henry each also signed a guaranty (Plaintiff’s Exhibit 5) at the same time they each signed the promissory note on December 10, 1993. Defendants Robert C. Arthur, Patricia Arthur, Bethwel Henry and Marihne Henry each intended to guarantee the subject IDF loan to AHPW. Defendants Robert C. Arthur, Patricia Arthur, Bethwel Henry and Marihne Henry each did not read the Guaranty
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(Plaintiff’s Exhibit 5) before each such person signed it nor did any of them consult counsel or other advisor notwithstanding having had opportunity to do so.
7. The last payment of any kind made on the subject loan was made on July 1, 1999. A demand letter was sent by FSMDB addressed to AHPW on April 30, 1999 prior to filing the instant suit. See, Plaintiff’s Exhibit 4. The demand letter dated April 30, 1999 was received by Robert Arthur and Patricia Arthur on or about April 30, 1999. The addressees of the letter, "Mr. & Mrs. Inada," are not known to have any business relationship with Robert C. Arthur or AHPW. The financial information contained in the demand letter was correct on the date received by Robert Arthur and Patricia Arthur.
8. If called upon to testify, Patricia Arthur and Bethwel Henry, if asked the same questions as Mr. Arthur, would provide substantially the same responses under oath as those testified to by Mr. Arthur.
Stipulation of Facts at 2-4 (Jan. 28, 2004).
The defendants move to strike the guaranty, Ex. 5, and all evidence related to it. They contend that the bank’s motion to amend the pleadings to allow introduction of the guaranty should not have been granted. They contend that under Civil Procedure Rule 15(b), the motion should have been denied because the issues were not "tried by express or implied consent of the parties," as required by Rule 15(b) since the defendants made a continuing objection throughout the December 18, 2003 trial to the introduction of the guaranty and to any testimony related to it.
The defendants are correct that the bank’s motion could not have been granted under Rule 15(b). By its terms, Rule 15(b) applies after evidence has been introduced, either at "an evidentiary hearing held in connection with a pretrial motion, in the course of trial, after the close of testimony, after the return of the verdict or entry of judgment, and on rehearing or on remand following an appeal." 6A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1494, at 51-52 (2d ed. 1990)2 (footnotes omitted). The bank’s motion was brought, and granted, before the trial or an evidentiary hearing was held. A motion to amend the pleadings made before any evidentiary proceeding falls under Rule 15(a).
Under Rule 15(a), a court should generally exercise its discretion liberally to allow amended pleadings when justice so requires. Primo v. Pohnpei Transp. Auth., 9 FSM Intrm. 407, 413 (App. 2000); Tom v. Pohnpei Utilities Corp., 9 FSM Intrm. 82, 87 (App. 1999). In the absence of any apparent or declared reason, such as undue delay, bad faith or dilatory motive on the movant’s part, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the amendment’s allowance, or futility of amendment, leave to amend should, as the rules require, be "freely given." Primo, 9 FSM Intrm. at 413. Rule 15’s purpose "is to provide maximum opportunity for each claim to be decided on the merits rather than on procedural
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technicalities." 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1471, at 505-06 (2d ed. 1990).
The defendants now assert they may have been prejudiced by the amendment because AHPW may have defenses against the promissory note. AHPW is not a party to this action, and the bank has not sought to add it as a party defendant. On more than one occasion the defendants stated on the written record that they would move to make AHPW a third party defendant at some future point, but they never did so. The defendants have never specified the defenses they believe that AHPW may have other than a reference in earlier filings to the bank’s alleged failure to provide technical assistance being a cause of AHPW’s non-payment and a defense. The court has rejected that defense to non-payment on other occasions. See FSM Dev. Bank v. Ifraim, 10 FSM Intrm. 342, 345 (Chk. 2001); FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 76 (Pon. 2001). But more importantly, the defendants, under the terms of the guaranty, waive any right to the borrower’s [AHPW’s] defenses. Guaranty para. 5 (Dec. 10, 1993) ("Guarantor waives any defense arising by reason of any disability or other defenses of Borrowers or by reason of the cessation from any cause whatsoever of Borrowers."). Thus, no undue prejudice to the defendants appears.
Furthermore, even if the motion were brought under Rule 15(b) and had been made after trial, the court could still have permitted the amendment of the pleadings despite the defendants’ objection at trial to the guaranty’s admission.
If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice the party in maintaining the party’s action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.
FSM Civ. R. 15(b). The defendants, although objecting before (and during) trial to any evidence concerning the guaranty, did not seek a continuance to meet that evidence. Moreover, because of the eight months between the amendment and the final submission of the case for decision, the defendants had ample opportunity to cure any prejudice.
The court, having determined that justice required amendment of the pleadings and that the presentation of the action’s merits would be subserved thereby, the motion to strike is accordingly denied.
The defendants also maintain that the guaranty is ineffective because the loan it was meant to guarantee is void and unenforceable, and even if the loan is not void, no court action can be taken to enforce the loan because AHPW was never properly notified that its loan was in default. The defendants raise two alternative contentions concerning the loan documentation. First, they contend that since, by (in their view) mutual mistake, both the loan agreement and the promissory note obligate the defendants personally instead of obligating AHPW, they are entitled to rescission of the loan contract, and, as a result, there is nothing to guarantee. Second, they contend that the guaranty is unenforceable because no one can guarantee their own obligation) a guaranty guarantees the obligation of another.
The defendants contend that the loan documents are all void and unenforceable due to mutual mistake since the bank made mistakes in preparing the loan documentation and the defendants did not
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notice the mistakes, and that since these mistakes were mutual, the loan agreement and the promissory note should be rescinded or voided as there was "no meeting of the minds." The bank urges that the court should reform the contract (evidenced by the loan documentation) for mistake.
The defendants correctly note that in the case of mutual mistake the adversely affected party may rescind or avoid the contract. E. Allan Farnsworth, Contracts § 9.3, at 662 (1982). However, this is not a case of mutual mistake. "A mutual mistake occurs when both parties are under substantially the same erroneous belief as to the facts." Id. at 653. In a mutual mistake case, "[t]he party adversely affected must show that: (1) the mistake goes to a basic assumption on which the contract was made; (2) the mistake has a material effect on the agreed exchange of performances; and (3) the mistake is not one of which he bears the risk." Id. at 654 (citing Restatement (Second) of Contracts § 152). The mistake here did not go to a basic assumption upon which the contract (loan) was made. The mistake had no effect on the agreed exchange of performances) the loan terms offered by the bank and accepted and agreed to by the borrower were not a result of the "mistake." Furthermore, both parties were not under substantially the same erroneous belief as to the facts that were the basis of the agreement. There was no mutual "erroneous belief" about the facts which were the basis for the loan and its terms. The only mistake made was in reducing certain terms of the final agreement to writing.
Because of this mistake, the bank asks that the court reform the loan agreement and the promissory note. But "[c]ontracts are not reformed for mistake, writings are. The distinction is crucial. . . . [C]ourts have been tenacious in refusing to remake a bargain entered into because of mistake. They will, however, rewrite a writing which does not express the bargain." John D. Calamari & Joseph M. Perillo, the Law of Contracts § 9-31, at 392 (3d ed. 1987). "The classic case for reformation is a scrivener’s or typist’s error. Reformation is available in the case of the omission of a term agreed on, the inclusion of a term not agreed on, or the incorrect reduction of a term to writing." Farnsworth, supra, § 7.5, at 468. "At the simplest level it is the mechanism for the correction of typographical and other similar inadvertent errors in reducing an agreement to writing." Calamari & Perillo, supra, § 9-31, at 392.
In this case, there was an incorrect reduction of a term to writing. The defendants were named as the borrowers and promisors respectively when they should have been named (if named at all) as the board of directors of the borrower and promisor, AHPW, Inc.
The variance between the original agreement and the writing may take any one of an infinity of conceivable forms. . . . Often, the mistake is as to the legal effect of the writing; the parties’ agreement called for a particular legal result. The writing, if enforced, produces a different result. Reformation is available.
Id. § 9-34, at 395. In this case, the mistake concerned the legal effect of the writing. The agreement was that AHPW, Inc. was the borrower and would be the principal liable on the promissory note. The written loan agreement and promissory note, if enforced as written, would make the defendants personally and primarily liable with no liability for AHPW. The defendants ask for rescission) that the promissory note (and presumably the loan agreement) be declared void and unenforceable.
"Where, because of mistake, a writing fails to accurately state the agreement of the parties, reformation is the exclusive remedy. [But i]f the writing is inaccurate because of fraud, the alternative remedies of reformation and rescission are available." Calamari & Perillo, supra, § 9-35, at 395-96 (emphasis added). No allegation of fraud has been made in this case. Rescission is thus not an available remedy. However, "[r]eformation will not be granted if its effect would be to curtail the rights of a bona fide purchaser for value or others who have relied upon the writing." Id. § 9-36, at 396-97.
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But, there is no bona fide purchaser for value present here (although since promissory notes are readily negotiable there easily could have been one).
The loan agreement and promissory note that were the writings that memorialized the agreement are therefore reformed to accurately reflect the agreement of the parties to it. Contrary to the defendants’ assertion that the court is being asked to create an obligation where none currently exists, the court, by reforming the writings, is not creating an obligation on AHPW’s part. The court is merely reforming the writings to reflect an obligation that already exists.
The defendants correctly note that one cannot guarantee one’s own obligation. "In a broad sense a guarantor or surety is one who promises to answer for the debt or default of another." United States v. Frisk, 675 F.2d 1079, 1082 n.6 (9th Cir. 1982). The defendants contend that they cannot be liable on the guaranty because the guaranty secures the promissory note on which they are named as the promisors. But this argument can only prevail if the defendants are also the primary obligors on the FDA loan. They are not, and never were. AHPW is, and was at all times, the borrower and promisor even though certain writings (the December 10, 1993 loan agreement and promissory note) failed to properly reflect that. Those writings have been reformed. This contention is without merit.
The defendants also contend that they cannot be held liable on the guaranty because AHPW was never properly notified that its obligation was in default and because there was no independent consideration for their guaranty. They further make a general argument that this suit is improper because AHPW is not a party to the action.
The promissory note required that the borrower be given written notice of its default in order for the bank to accelerate all amounts due and payable under the note. The basis for the defendants’ contention that AHPW was never properly notified of its default is that the notice received by Robert Arthur and Patricia Arthur on or about April 30, 1999 was inaccurately addressed. It was titled "First Default Notice" and addressed to: "AHPW, Inc., P.O. Box 339, Kolonia, Pohnpei State, Federated States of Micronesia 96941." The salutation read: "Dear Mr. & Mrs. Inada:". The post office box number was incorrect and Mr. & Mrs. Inada, the people greeted in the salutation, never had any business relationship with Robert C. Arthur or AHPW. It is undisputed that the rest of the information in the default notice was correct on that date. That information included the borrower’s name (AHPW), the loan account number, the original loan amount, the agreed repayment amount, the amount in arrears, the number of days in arrears, and the last date on which a payment had been made.
This is sufficient notice of default to the borrower) AHPW. It is actual notice since all information in the document is correct except the P.O. box number and the greeting and because it was actually promptly received by AHPW’s officers. And, even if those flaws were not in strict compliance with the written notice requirement, the accuracy of the rest of the document would constitute constructive notice. A party has constructive notice when from all the facts and circumstances known to him at the relevant time, he has such information as would prompt a person exercising a reasonable care to acquire knowledge of the fact in question or to infer its existence. Nahnken of Nett v. Pohnpei, 7 FSM Intrm. 171, 177 n.11 (Pon. 1995).
AHPW thus received the required notice of default which permitted the bank to accelerate AHPW’s debt as per the note’s terms. The guaranty itself does not require a notice of default to the guarantors. Also, the relationship between the debtor, AHPW, and the guarantors is such that the guarantors may be charged with notice of the debtor’s (AHPW’s) situation without a formal notice of default. See, e.g., Lemay Bank & Trust Co. v. Harper, 810 S.W.2d 690, 693 (Mo. Ct. App. 1991)
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(when guarantor was one of the debtor’s corporate officers, notice of default was unnecessary to apprise guarantor of debtor’s situation; guaranty also states guarantors waive notice of default)
The defendants contend that the guaranty is void because there was no independent consideration for the contract of guaranty. "Like other contracts, contracts of guaranty must be supported by consideration, and a guaranty will not be enforced unless the promise is supported by consideration." 38 Am. Jur. 2d Guaranty § 40, at 902 (rev. ed. 1999). However, "[i]f the promise of the guarantor is shown to have been given as part of a transaction or arrangement which created the guaranteed debt or obligation, the promise is supported by the same consideration which supports the principal transaction." Id. § 42. The guaranty here was given as a part of the same transaction by which AHPW’s debt to the bank was created. No independent consideration was necessary. The guaranty was supported by the same consideration that supported the transaction between AHPW and the bank.
The defendants also contend that the suit is improper because AHPW has never been a party to this action. The guaranty at issue here, if it is a guaranty, is a guaranty of payment. A debtor is not an indispensable party under Rule 19 in an action to enforce a guaranty of payment. See, e.g., Boulevard Bank v. Philips Med. Sys. Int’l B.V., 15 F.3d 1419, 1422-23 (7th Cir. 1994); L&L Oil Co. v. Hugh Mac Towing Corp., 859 F. Supp. 1002, 1005 (E.D. La. 1994); see also 38 Am. Jur. 2d Guaranty § 113, at 966 (rev. ed. 1999). Generally, a lender holding a guaranty of payment can sue a guarantor directly, without naming the borrower. See also 38 C.J.S. Guaranty § 6, at 1138 (1943) ("A guarantor, being bound by a separate contract, must . . . be sued separately.")
Furthermore, under the terms of the "guaranty" signed by the defendants, the "[g]uarantor[s] waive any right to require Bank to (a) proceed against the Borrower; (b) proceed against or exhaust any security held from the Borrower; or (c) pursue any other remedy in Bank’s power whatsoever." Guaranty para. 5. The defendants’ contention that the bank could not proceed against them without also proceeding against AHPW is without merit.
Lastly, the court is uncertain whether the document called a guaranty is just that. It may be a suretyship. Guaranties and suretyships bear many similarities. 38 Am. Jur. 2d Guaranty § 11, at 880 (rev. ed. 1999). "A guaranty creates a secondary obligation under which the guarantor promises to be responsible for the debt of another. The guarantor is only secondarily liable, and then only on proof of the default by the principal debtor." Id. § 2, at 873 (footnote omitted). "[A] suretyship differs from a guarantee in that a surety’s obligation to the creditor is primary and unconditional whereas a guarantor’s obligation is secondary and conditioned on the principal’s default." Frisk, 675 F.2d at 1082 n.6. According to one authority:
The main distinction between a contract of surety and one of guaranty has been expressed by stating that a surety is primarily and jointly liable with the principal debtor, while a guarantor’s liability is collateral and secondary and is fixed only by the inability of the principal debtor to discharge the primary obligation.
38 Am. Jur. 2d Guaranty § 12, at 881 (rev. ed. 1999). The guaranty signed by the defendants unequivocally provides that "[t]he undersigned Guarantor[s] hereby unconditionally guarantee and promise to pay to FSM Development Bank, on demand, any and all indebtedness of AHPW, Inc., hereinafter called ‘Borrower’, to the Federated States of Micronesia Development Bank, hereinafter called ‘Bank’." Guaranty para. 1. There is no provision in the guaranty conditioning the defendants’ liability on AHPW’s default or its inability to discharge the obligation. Liability is conditioned "on demand." The only indication that it might be a guaranty instead of a surety is the statement: "The obligations hereunder are independent of the obligations of the borrowers." Guaranty para. 3.
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However, based on the facts in this case, the court does not need to determine whether this instrument is a guaranty or a surety. If it is a guaranty, the prerequisite that the principal borrower is in default has been met, and, for the reasons discussed above, the bank may proceed on the guaranty. If it is a suretyship, then the bank can proceed directly against the defendants as joint obligors.
Accordingly, the evidence concerning the guaranty will not be stricken; the writings memorializing the loan to AHPW are reformed to reflect that AHPW is the borrower and principal obligor; the AHPW loan was in default and AHPW received the required notice of this allowing the bank to accelerate the debt; and the guaranty signed by the defendants is valid and may be enforced in this action without making AHPW a party. As Robert Arthur stated under oath at trial, the defendants expected that, because of the guaranty they signed, they could at sometime become personally liable for the AHPW loan. That time has come. Let judgment be entered accordingly.
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