FSM SUPREME COURT APPELLATE DIVISION
Cite as FSM Dev. Bank v. Adams, 14 FSM Intrm. 234 (App. 2006)
FEDERATED STATES OF MICRONESIA CONSOLIDATED
APPEAL CASES
DEVELOPMENT BANK,
Appellant,
vs.
YVETTE ETSCHEIT ADAMS, d/b/a POHNPEI
ACE HARDWARE, and ADAMS BROTHERS
CORPORATION,
Appellees.
NO. P5-2003 and P5-2004
OPINION
Argued: May 5, 2006
Decided: May 30, 2006
BEFORE:
Hon. Dennis K. Yamase, Associate Justice, FSM Supreme Court
Hon. Keske S. Marar, Temporary Justice, FSM Supreme Court*
Hon. Aliksa B. Aliksa, Temporary Justice, FSM Supreme Court**
*Acting Chief Justice, Chuuk State Supreme Court, Weno, Chuuk
**Chief Justice, Kosrae State Court, Tofol, Kosrae
APPEARANCES:
For the Appellant: Michael J. Sipos, Esq.
P.O. Box 2069
Kolonia, Pohnpei FM 96941
For the Appellees: Craig D. Reffner, Esq.
Law Office of Fredrick L. Ramp
P.O. Box 1480
Kolonia, Pohnpei FM 96941
* * * *
Fifteen percent is the usual maximum allowed for attorney's fees in a collection case under FSM Supreme Court caselaw. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 244 n.4 (App. 2006).
A trial court's imposition of discovery sanctions is reviewed on an abuse of discretion standard. Since fashioning remedies and sanctions for a party's failure to comply with discovery requirements is a matter within the trial court's discretion, the appellate court will not disturb them absent a showing that the trial court's action unfairly resulted in substantial hardship and prejudice to a party. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 245-46 (App. 2006).
Rule 11 sanctions are reviewed under an abuse of discretion standard, using an objective standard rather than assessing an attorney's subjective intent. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 246 (App. 2006).
A trial court's abuse of discretion occurs when its decision is clearly unreasonable, arbitrary, or fanciful; or it is based on an erroneous conclusion of law; or the record contains no evidence upon which the court could rationally have based its decision. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 246 (App. 2006).
Whether a financial privilege with respect to non-party borrower records should be recognized; whether a loan agreement's terms created intended third-party beneficiaries; and whether the trial court could award attorney's fees as part of the third-party beneficiary claim are questions of law, which an appellate court reviews de novo. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 246 (App. 2006).
A litigant is permitted to make arguments in the alternative. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 246 (App. 2006).
Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 246 (App. 2006).
The Constitution does not contain a right of privacy or financial or business privilege in bank records emanating from Article IV, Section 5 of the FSM Constitution. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247 (App. 2006).
The Declaration of Rights protects persons from acts of the governments, and those acting under them, established or recognized by the Constitution. The constitutional provision barring the invasion of a person’s privacy only protects persons from governmental intrusion into their affairs, not from intrusions by private persons. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247 (App. 2006).
Congress has the express power to regulate banking, but it has not legislated in the area of bank customer confidentiality. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247 (App. 2006).
Privilege is governed by the principles of the common law as they may be interpreted by the courts of the Federated States of Micronesia in the light of reason and experience, including local custom and tradition. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247 (App. 2006).
The general rule appears to be that there exists no common law privilege with respect to bank customer information, but a court should indulge in a careful balancing of the right of civil litigants to discover relevant facts, on the one hand, with the right of bank customers to maintain reasonable privacy regarding their financial affairs, on the other. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247 (App. 2006).
When, instead of making its own in camera review, the trial court ordered the bank to make the records for the other specified construction projects available to plaintiffs' counsel for a preliminary examination and that plaintiffs' counsel was to keep confidential any information gathered and not reveal it to anyone (even his clients) without a further court order, the trial court did issue a protective order concerning those records and did not abuse its discretion by framing its own protective order that was designed to achieve the same goal as the bank's suggested in camera review – maintaining the records' confidentiality. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 247-48 (App. 2006).
The discovery rules encourage the parties to conduct discovery with a minimum of court involvement or intervention. Sanctions are provided to discourage an abuse or breakdown of the discovery process that would require court involvement. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 248 (App. 2006).
While procedural due process requires governmental decision-making to conform with the concept of what is fair and just, substantive due process, on the other hand, addresses the legislature's rationality. Substantive due process protects individual liberty interests against certain governmental actions regardless of the fairness of the procedure used to implement them. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 248 n.6 (App. 2006).
With substantive due process, the court looks at the rationale or legitimacy of the governmental interest. In subjecting a statute or court rule to the requirement of substantive due process, the court asks: 1) Does the government have power to regulate the subject matter? If the statute or rule is not within the power of the government, such statute or rule will be struck down. 2) If the government has the power to regulate, the court next asks if what the statute or rule proposes to do bears a rational relationship to the implementation of the legislative goal. 3) Finally, where the statute or rule involved arguably infringes upon individuals’ fundamental rights, the court must ask how important is the legislative objective. The court must ask if there is a compelling governmental interest to justify holding the statute or rule valid, even though the statute might limit fundamental rights. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 248 n.6 (App. 2006).
Rule 37(b)(2) sanctions can be imposed only if a party fails to obey an order to provide or permit discovery, including an order made under Rule 37(a) or Rule 35, or if a party fails to obey an order under Rule 26(f). Rule 37(b)(2) sanctions cannot be imposed upon a party for its initial refusal to provide a document when that party had provided that document after the court had ordered it to. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 249 (App. 2006).
An appellate court may affirm the trial court’s decision on a different theory or on different grounds when the record contains adequate and independent support for that basis. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 249 (App. 2006).
The trial court can impose the Rule 37(b)(2) sanctions for the bank's refusal, despite the court-ordered safeguards, to permit inspection of the non-party borrower records which the court had ordered it to allow opposing counsel to inspect. Rule 37(b)(2) sanctions can be appropriate sanctions to impose for that refusal. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 249-50 (App. 2006).
Generally, fourteen days notice must be given before hearing a motion, but that time may be shortened by court order. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 250 (App. 2006).
When a party had at least six days notice that it might be found in contempt and that Rule 37(b)(2)(A) sanctions might be imposed and those six days should have been sufficient and when the party took the opportunity to file various papers concerning the issues raised but did not directly address the prospect of contempt or of Rule 11 or Rule 37(b)(2)(A) sanctions although it was on notice they would be considered at the hearing, thus if the party was not heard on the Rule 37(b) sanctions, it was not because it did not have an opportunity to be heard after it was on notice that Rule 37(b)(2) sanctions would be considered. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 250-51 (App. 2006).
It is ordinarily inappropriate to look beyond the clearly delineated procedure of Rule 37 for the imposition of sanctions in the discovery context. Generally, Rule 37 is the sole source of sanctions for the discovery violations described in that rule. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 251 (App. 2006).
When an FSM court has not previously construed a civil procedure rule that is similar to a U.S. rule, it may look to U.S. sources for guidance in interpreting the FSM rule. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 251 n.7 (App. 2006).
A court cannot award sanctions under Rule 11 for discovery matters subject to Rules 26 to 37, for which Rule 37 sanctions can be imposed. Nor can a court resort to its inherent powers when Rule 37 applies because Rule 37 is the exclusive remedy for failure to comply with a production order. Rule 37 sanctions for the failure to make discovery are the only relief available for failure to make discovery. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 251 (App. 2006).
The only proper remedy for a party's initial refusal to produce a document would be the imposition of attorney's fees because the opposing party had to bring a motion to compel the document's production. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 251 (App. 2006).
Rule 37(b)(2)(A) sanctions could not properly be applied for a party's earlier refusal to produce a document because that document was eventually produced, but could be, and were, properly applied for not permitting the inspection of the designated records as ordered by the court. The limitations on a court's discretion under Rule 37(b) is that the sanction imposed must be just and it must be specifically related to the particular claim which was at issue in the court's order to provide discovery. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
That some lesser sanction should have been considered first and imposed under Rule 37 is frequently the most advisable course of action, but Rule 37 does not require that, especially when the sanctioned party has a history of discovery abuse. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
The most severe Rule 37 sanction must be available not just to penalize those whose conduct warrants it but also to deter those who might be tempted to such conduct in the absence of a deterrent. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
A detailed or comprehensive explanation of the reasons should be included in the trial court order imposing Rule 37(b) sanctions. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
The question before an appellate court is not whether the appellate court would have imposed the sanction the trial court did, but whether the trial court abused it discretion in doing so. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
Civil contempt is a prospective remedial measure designed to encourage, or even coerce, compliance with a lawful court order when the contemnor has been found to have the ability to comply with that order. On the other hand, criminal contempt is retrospective and is punishment for past wrongful conduct. It is not designed to secure compliance with a court order, but instead punishes the intentional violation of a lawful court order. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 252 (App. 2006).
Civil contempt may be employed to coerce compliance with the trial court's orders compelling discovery. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 253 (App. 2006).
Punishment, through criminal contempt, cannot be employed where Rule 37 sanctions may be. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 253 (App. 2006).
When the trial court had abandoned any further attempts at coercion and imposed Rule 37(b)(2) and 37(b)(2)(A) sanctions and, although it is uncertain whether the contempt sanction was actually ever imposed because the trial court let the Rule 37 sanctions "stand" as the contempt sanctions, if the contempt sanctions were, in fact, imposed, they were not civil in nature and must be reversed, and if none were imposed, then, in light of the Rule 37(b)(2) sanctions, the contempt finding must be vacated because no further purpose can be served by their imposition. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 253 (App. 2006).
Rule 37(b)(2) sanctions are not inherently criminal in nature and criminal due process protections do not have to be followed before they can be imposed. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 253 (App. 2006).
Attorney's fees are probably the most common Rule 37 sanction imposed. They are routinely awarded to successful movants seeking to compel discovery unless the court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust. The great operative principle of Rule 37(a)(4) is that the loser pays. The trial court is to make the award against the losing party on the motion unless the court finds that its opposition to, or making of, the motion was substantially justified or that other circumstances make an award of expenses unjust. Thus the rule is mandatory unless one of these conditions for not making an award is found to exist. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 253 (App. 2006).
The trial court may impose fee sanctions on the party, attorney, or trial counselor advising improper conduct or both of them. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
A party's statement that the lawyer should assume responsibility for technical and legal tactical issues and its assertion that it was not involved in the discovery disputes, only its counsel was, is not enough for an appellate court to say the trial court abused its discretion in not applying the attorney's fees sanctions against the party's former attorney himself rather than against the party. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
The question on appeal is not whether it was an abuse of the trial court's discretion to quash a deposition subpoena for a party, but whether the trial court abused its discretion in awarding expenses and attorney's fees as sanctions for quashing the subpoena. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
A mere assertion that a potential deponent lacks knowledge is not a ground for granting a protective order. The party seeking discovery is not required to establish that the person whose deposition it seeks has information about which he or she could testify at trial. Indeed one important purpose of discovery is to ascertain who has such information. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
Age and ill health is often a ground to take a deposition in order to preserve testimony for trial in case the witness is unavailable at that time. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
It would be an extraordinary case where examination of other witnesses would take the place of the examination of a party. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254 (App. 2006).
When a motion for a protective order did not assert that the bank had waived the right to depose a party by going forward with her son's deposition – only that the son was knowledgeable and available and the party was not – the motion's opposition was substantially justified and the trial court abused its discretion when it awarded fees and expenses for bringing the protective order motion. That award will be reversed. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 254-55 (App. 2006).
Deferring ruling on Rule 37 attorney fee requests is not a good idea. The purpose of Rule 37(a)(4)'s cost-shifting is to reduce the burden on the courts by deterring parties from making unjustified motions for discovery and by deterring their opponents from resisting discovery without justification. This deterrence is not as effective if the court defers the sanctions awards. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 255 (App. 2006).
When the trial court awarded attorney's fees against a defendant based on 15% of the judgment against him and a co-defendant was jointly and severally liable for only part of that judgment, if the co-defendant were liable for attorney's fees, its liability would be limited to 15% of the part of the judgment it was liable for. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 256 n.8 (App. 2006).
A contract's intended third-party beneficiary can recover attorney's fees under a contract providing for attorney's fees if it has to sue to enforce its third-party beneficiary rights and prevails. Similarly, a prevailing party can recover attorney's fees from an intended third-party beneficiary litigant if that beneficiary could have recovered attorney’s fees from that party under the contract. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 256 (App. 2006).
When it was the appellees' contract with another that provided for attorney's fees for a
successful litigant and the appellant was not an intended beneficiary of that agreement; when the trial court declined to shift the attorney fee burden to the appellant based on its vexatious conduct, no contract or statute authorized the fees the appellant was awarded. When the trial court, in awarding these attorney's fees after the trial on damages, made no finding that attorney's fees were damages in the contemplation of both parties as the probable result of the breach at the time they made the contract, the fees could not have been awarded as consequential damages. The fee award thus must be reversed. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 256 (App. 2006).
Attorney's fees are awarded to the prevailing party only if authorized by contract or by statute. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 256 (App. 2006).
Consequential damages can only be awarded if the loss was such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract as the probable result of the breach of it. FSM Dev. Bank v. Adams, 14 FSM Intrm. 234, 256 (App. 2006).
* * * *
DENNIS YAMASE, Associate Justice:
This appeal arose from a judgment against the FSM Development Bank and against Joseph Felix d/b/a Island Homes Construction and Island Homes Construction, Inc. ("Felix") for materials that the appellees, Yvette Etscheit Adams d/b/a Pohnpei Ace Hardware and the Adams Brothers Corporation ("the Adamses") supplied to Felix who used the materials to build the Panasang Apartments ("Panasang project), which are owned by Paulus and Lorenza Perman ("Permans"), who financed its construction with a loan from the bank.
The trial court determined the bank's liability on the basis of Civil Rule 37(b), Rule 11, and contempt sanctions; awarded Rule 37(a)(4) attorney's fees as sanctions; determined damages; and added attorney's fees to the damage award. The bank timely appealed. In general, we affirm the Rule 37(a) and (b) sanctions, vacate the Rule 11 and contempt sanctions, and reverse the attorney's fee award as part of damages. Our reasoning follows.
In order to better understand the trial court result and our opinion we outline below the case's relevant history.
The Permans obtained a construction loan from the bank to build the Panasang Apartments. They hired Felix to do the actual work. Felix obtained building supplies from the Adamses for that project and one other (Enipein school) construction project. At some point, Felix stopped paying the Adamses for materials. After a September, 1997 meeting between Paulus Perman, the bank, an Adams representative and a Felix representative, the Adamses resumed supplying Felix material for the Panasang project. The Panasang project was finished, but the Adamses were not paid in full.
On March 24, 2000, the Adamses sued Felix based on Felix's alleged breach of a written credit agreement for materials it bought for the Panasang and the other project. The Adamses also sued the bank based on an oral agreement (which it alleged the bank had made at the September, 1997 meeting)
that the Adamses would continue to supply Felix and the loan disbursements would be made directly to the Adamses to ensure that they would be paid in full. The Adamses further alleged that a written agreement with Felix assigned to it all of Felix's interest in any payments made to Felix by Perman or the bank and that the bank had been served a copy of that agreement (which the bank admitted receiving).
On October 19, 2001, the trial court, granting a motion to compel discovery, ordered the bank to provide the Adamses the requested documents and stated that it would hold a hearing at the time of trial on the question of the attorney fees that the Adamses had incurred in bringing the motion. Adams v. Island Homes Constr., Inc., 10 FSM Intrm. 430, 432 (Pon. 2001). The trial court, in a February 27, 2002 amendment of this order, noted that, although it could determine attorney fee sanctions based on the affected parties’ written submissions, it would leave open until the time of trial the hearing on the question of attorney's fees that the Adamses incurred in bringing their motion to compel. Id.
On October 29, 2001, the bank filed a motion to alter or amend what it called the trial court's October 19, 2001 judgment because it asserted that its loan agreement with the Permans was not relevant and therefore should not be produced in discovery. On November 27, 2001, the trial court noted that its order compelling the production of documents was an interlocutory order and not a final judgment; that the loan agreement was relevant to the Adamses' cause of action against the bank – whether it was more likely than not that the bank would have agreed to pay the Adamses directly; and that continued refusal to comply with the Adamses' discovery requests was potentially sanctionable under Civil Rules 11 and 37 and under 4 F.S.M.C. 119. Adams v. Island Homes Constr., Inc., 10 FSM Intrm. 466 (Pon. 2001). It ordered the loan agreement produced by December 10, 2001, id. at 475, and it was.
On February 21, 2002, the trial court ruled against the bank in a dispute over who should attend depositions as the Pohnpei Ace Hardware representative, concluding that the bank had waived its right to depose Yvette Adams. Adams v. Island Homes Constr., Inc., 10 FSM Intrm. 510, 513-14 (Pon. 2002). The amount of the attorney fee sanctions for successfully defending the bank's discovery motion was left open until trial. Id. at 514. On April 22, 2002, the trial court denied the bank's motion to quash a subpoena duces tecum directed to a bank employee that the bank objected to despite saying the documents had already been produced. Adams v. Island Homes Constr., Inc., 10 FSM Intrm. 611 (Pon. 2002).
On July 26, 2002, the Adamses filed a motion to compel discovery, which sought production of the bank's files for loans to non-party borrowers for nineteen specified construction projects. The bank contended that those records were not relevant because the borrowers were not parties and that it was the bank's practice to maintain confidentiality of records of that sort. On September 9, 2002, the trial court, ruling that the bank's internal confidentiality policy was not dispositive because under Rule 26(b)(1) parties can "obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action," and because the bank did not assert they were privileged, held that the documents sought were probative as to the bank's practice with respect to the bank's direct payment to suppliers in other construction contract settings. Adams v. Island Homes Constr., Inc., 11 FSM Intrm. 130, 131-32 (Pon. 2002). The trial court ordered the bank to
make the records for the other specified construction projects available to plaintiffs' counsel for a preliminary examination at its offices during business hours on Tuesday, Wednesday, and Thursday, September 10-12. Plaintiffs' counsel will keep any information gathered confidential, and will not reveal it to anyone absent further order of court. Based on the preliminary examination, plaintiffs' counsel will advise the court
generally of the categories of documents, if any, he wishes to copy and why and how the information will be used. The court will then issue the appropriate order as to how the documents will be copied and used.
Id. at 132. The trial court also ordered the bank to produce a copy of its "Administrative Manual" and that plaintiffs' counsel must "keep the copies of the Bank's current internal operations manuals confidential, and will not disclose information from the manuals without first advising the court of the use intended. The court will then make the appropriate order." Id. The trial court also vacated its previous orders reserving until trial the time for hearing on sanctions and attorney's fees and ordered that responses to all pending sanctions motions and attorney's fee requests, which had not already been responded to, be made by September 23, 2002 so that the court could enter an order on them. Id.
On September 12, 2002, the bank moved to stay the production of the non-party borrower records until it could file an action in the FSM Supreme Court appellate division and the appellate division could decide it. The bank asserted that the trial court had erred in not recognizing that the bank records sought were privileged. On September 16, 2002, the Adamses moved for sanctions for the bank's noncompliance with the September 9th order. On September 19, 2002, the trial court issued an order to show cause why the bank should not be held in contempt for not fully complying with the September 9th order and a notice setting a hearing for sanctions under Civil Rule 37, which could include an attorney's fee award under Rule 37(a)(4) "and a finding that designated facts shall be taken to be established – i.e., a finding of liability – under FSM Civil Rule 37(b)(2)(A)." Order at 1-2 (Sept. 19, 2002).1
The hearing was held on September 25, 2002. The trial court, stating that it was considering only civil, not criminal, contempt, heard testimony from the bank's president, argument on contempt, and a brief exchange on Rule 37 sanctions in connection with the non-party borrower records. The trial court reserved the right to consider Rule 37 sanctions and attorney's fees further.
On November 12, 2002, the trial court ruled. Adams v. Island Homes Constr., Inc., 11 FSM Intrm. 218 (Pon. 2002). It discussed the case's long history of discovery disputes including the bank's previous refusal to produce the Perman loan agreement which it concluded was done in bad faith. Id. at 223-28. The trial court, relying on Rule 37(a)(4), then awarded attorney’s fees for the Adamses' expenses in bringing the various motions to compel that were granted and the expenses in successfully defending the bank's discovery motions with the exception of the motion to compel production of the non-party borrower records for which the trial court awarded half the expenses sought because the bank had raised a legitimate issue about "whether the court's September 9, 2002, protective order put in place sufficiently stringent safeguards to protect the Bank's customers' undeniable privacy interest in their business records with the Bank." Adams, 11 FSM Intrm. at 229. The trial court also imposed Rule 37(b)(2) sanctions and ordered that the bank would not be allowed to oppose the Adamses' claims, FSM Civ. R. 37(b)(2)(A), and that certain designated facts would be taken as established for purposes of the action, FSM Civ. R. 37(b)(2), so that the bank would no longer be required to produce the non-party borrower records,2 and leaving only the issue of damages for trial. Adams, 11 FSM
Intrm. at 222, 229. The trial court further found the bank in contempt for failure to obey the September 9th order and found that Civil Rule 11 and FSM MRPC Rules 3.3(a)(1) and 1.2 were also violated but declined to impose any further sanctions in light of the Rule 37 sanctions it had already imposed. Adams, 11 FSM Intrm. at 222, 229-30. The trial court also granted the Adamses' motion to amend their complaint to add a third-party beneficiary claim based on the Permans' loan agreement with the bank. Id. at 232-33. On November 19, 2002, the bank filed a notice of appeal from this order.
On March 26, 2003, the trial court fixed the attorney's fees awarded in its November 12, 2002 order at $9,680.07.3 Adams v. Island Homes Constr., Inc., 11 FSM Intrm. 445, 447 (Pon. 2003).
Trial was held on October 27, 2003. On December 1, 2003, the trial court issued its findings of fact and conclusions of law, Adams v. Island Homes Constr., Inc., 12 FSM Intrm. 234 (Pon. 2003), and the clerk entered judgment. The trial court found Felix liable to the Adamses for a total of $131,995.78 plus attorneys fees based on a provision in the written credit agreements. Id. at 237-38. The bank was found liable jointly and severally with Felix (for supplies for the Panasang project, including prejudgment interest per the Adamses credit account agreements) for $69,599.02 plus the plaintiffs' attorney's fees incurred in pursuing their claims against Felix. The bank's liability for that amount of damages was based on the trial court's previous Rule 37(b)(2)(A) sanction, id. at 238, 241, and upon the amended complaint's third-party beneficiary claim based upon paragraph 13 of the Perman loan agreement, id. at 239-40, 241-42. The trial court left open whether the Adamses were entitled to attorney's fees incurred in pursuing its claims against the bank directly. Id. at 243.
On December 11, 2003, both Felix and the bank filed notices of appeal (docketed as P5-2003).
On July 7, 2004, the trial court declined to award any further attorney's fees against the bank based on its vexatious conduct because it had already awarded attorney's fees under Rule 37. Adams v. Island Homes Constr., Inc., 12 FSM Intrm. 541, 543 (Pon. 2004). On September 30, 2004, the trial court awarded the Adamses attorney's fees of $19,799.36 (15%4 of $131,998.72 judgment) jointly and severally against Felix and the bank. Adams v. Island Homes Constr., Inc., 12 FSM Intrm. 644, 647 (Pon. 2004).
On October 5, 2004, the bank, and on October 8, 2004, Felix appealed the September 30, 2004 fee award (docketed as P5-2004). On March 21, 2005, a single appellate justice consolidated the P5-2003 and P5-2004 appeals. On April 28, 2006, the Felix appellants were dismissed as parties because of their failure to file an opening brief. FSM App. R. 27(c).
The bank contends:
1) that the trial court erred in not recognizing a financial privacy privilege with respect to non-party borrower records;
2) that the trial court erred in requiring the production of non-party borrower records without the bank's requested safeguards;
3) that the trial court violated the bank's constitutional rights to procedural and substantive due process by imposing on the bank (what it calls terminating) sanctions under Rule 37(b) for the bank's resistance to producing a document during discovery;
4) that the trial court violated the bank's constitutional rights to procedural and substantive due process by failing to give it adequate notice and opportunity to be heard before imposing those sanctions;
5) that the trial court abused its discretion in imposing those sanctions;
6) that the trial court erred in imposing those sanctions because, in the bank's view, they were of a punitive nature as in criminal contempt proceedings, without the level of due process required for such
proceedings;
7) that the trial court abused its discretion by awarding attorney's fees for discovery disputes;
8) that the trial court erred in applying a third-party beneficiary interpretation to the loan agreement at issue; and
9) that the trial court erred in awarding attorney's fees as part of the third-party beneficiary claim damages.
These nine issues may best be distilled into five: a) whether the trial court should have recognized a bank records "privilege" and conducted its own in camera review of the bank's non-party borrower records [issues #1-2]; b) whether the trial court violated the bank's due process rights or abused its discretion by imposing "terminating sanctions" on the bank [#3-6]; c) whether the trial court abused its discretion in awarding attorney's fees sanctions [#7]; d) whether the trial court erred in determining that the Adamses were intended third-party beneficiaries of the Perman loan agreement [#8]; and e) whether attorney's fees could be awarded as part of the third-party beneficiary damages [#9].
The bank asks us to overturn the lower court's orders imposing sanctions, vacate the judgment and post-judgment attorney's fee award, rule that the non-party borrowers' documents are subject to a privilege against disclosure, and remand for a trial on the Adamses' oral contract and third-party beneficiary claims.
A trial court's imposition of discovery sanctions is reviewed on an abuse of discretion standard. Since fashioning remedies and sanctions for a party's failure to comply with discovery requirements is a matter within the trial court's discretion, we will not disturb them absent a showing that the trial
court's action unfairly resulted in substantial hardship and prejudice to a party. Nakamura v. Bank of Guam (II), 6 FSM Intrm. 345, 349 (App. 1994). Rule 11 sanctions are also reviewed under an abuse of discretion standard, using an objective standard rather than assessing an attorney's subjective intent. In re Sanction of Michelsen, 8 FSM Intrm. 108, 110 (App. 1997). a trial court's abuse of discretion occurs when its decision is clearly unreasonable, arbitrary, or fanciful; or it is based on an erroneous conclusion of law; or the record contains no evidence upon which the court could rationally have based its decision. Jano v. King, 5 FSM Intrm. 326, 330 (App. 1992).
Whether a financial privilege with respect to non-party borrower records should be recognized; whether the loan agreement's terms created intended third-party beneficiaries; and whether the trial court could award attorney's fees as part of the third-party beneficiary claim are questions of law, which we review de novo. Weno v. Stinnett, 9 FSM Intrm. 200, 206 (App. 1999) (trial court motions decided as a matter of law are issues of law and are reviewed de novo); Wolphagen v. Ramp, 9 FSM Intrm. 191, 194 (App. 1999) (contractual interpretation is a question of law to be reviewed de novo on appeal); Nanpei v. Kihara, 7 FSM Intrm. 319, 323-24 (App. 1995) (issues of law are reviewed de novo on appeal).
a. Non-Party Borrower Records
The banks' first assignment of error asserts that the trial court erred in not recognizing a financial privacy right with respect to non-party borrower records. The bank's second assignment of error asserts that the trial court erred in requiring the production of non-party borrower records without the safeguards requested by the bank, which were that the requested documents were to be provided only to the trial judge (or possibly to an attorney hired for that purpose and appointed by the court) and reviewed by the judge (or appointed attorney) in camera, who would then decide which of the documents the bank should provide to the Adamses. These two assignments are contradictory. The second is that the documents could be produced, but only for an in camera inspection by the trial judge who would decide at that point which documents should be provided to the Adamses and under what conditions. The first is that the documents are privileged, which would mean that they should not be produced at all. a litigant, however, is permitted to make arguments in the alternative. At oral argument, the bank stated that these records were discoverable, but that only the trial judge’s in camera inspection would be appropriate.
"Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . . ." FSM Civ. R. 26(b)(1). The bank’s practice in other construction loans was relevant because if, on other loans, they had paid suppliers directly, it made it more likely that the bank had orally agreed to pay the Adamses during the September, 1997 meeting. The trial court did not consider these records privileged. The trial court did, however, recognize that the records were confidential. Thus it considered the records subject to discovery but set up safeguards to protect the records’ confidentiality, which the bank, insisting on the judge's in camera inspection instead, rejected.
1. Financial Records Privilege
The bank asks that we "recognize a right of privacy or financial or business privilege in bank records emanating from Article IV, Section 5 of the FSM Constitution." Appellant's Br. at 33. The bank asserts that under Evidence Rule 501, the judicial branch, not the legislative, should create privileges.
The Constitution does not contain such a privilege. The Declaration of Rights protects persons from acts of the governments, and those acting under them, established or recognized by the Constitution. Pau v. Kansou, 8 FSM Intrm. 524, 526 (Chk. 1998). "[T]he constitutional provision barring the invasion of a person's privacy, FSM Const. art. IV, § 5, only protects persons from governmental intrusion into their affairs, not from intrusions by private persons . . . ." Nethon v. Mobil Oil Micronesia, Inc., 6 FSM Intrm. 451, 455 (Chk. 1994). Here, it was private parties (the Adamses) that sought intrusion into the financial records.
Congress has the express power to regulate banking, FSM Const. art. IX, § 2(g), but it has not legislated in the area of bank customer confidentiality. The trial court recognized that the records were confidential. We will go no further. It would be an extreme measure for the court to create a bank records privilege.
Evidence Rule 501 states that "the privilege . . . shall be governed by the principles of the common law as they may be interpreted by the courts of the Federated States of Micronesia in the light of reason and experience, including local custom and tradition." The bank asks us to create a common law privilege where it has not existed before. The California case that the bank most relies upon (because Article IV, section 5 is worded similar to a California constitutional provision), Valley Bank of Nevada v. Superior Court, 542 P.2d 977, 978 (Cal. 1975), states that "the general rule appears to be that there exists no common law privilege with respect to bank customer information." The Valley Bank court ruled that, in such a situation, a court should "indulge in a careful balancing of the right of civil litigants to discover relevant facts, on the one hand, with the right of bank customers to maintain reasonable privacy regarding their financial affairs, on the other." 542 P.2d at 979.
The trial court's protective order or safeguards is just such a careful balancing of these rights. The Valley Bank court listed certain procedural devices that it thought a court could order to maintain that balance, including deletion of the customer's name, ordering that the information be sealed, to be opened only upon further court order, and holding in camera hearings and further noted that ingenious courts and counsel may develop others. Id. at 980. The trial court here was more cautious than that and did develop another safeguard – it was going to wait until after the Adamses' counsel had made his inspection and report before fashioning an appropriate order, if one was needed (that is, if the Adamses' counsel wanted to make use of any of the records). What further safeguards that order might have included is unknown because the Adamses' counsel was never permitted to make his inspection and report.
2. Requested In Camera Review
The bank asserts that it was an abuse of discretion for the trial court to "circumvent" the in camera option. The bank ignores the trial court's safeguards put in place in its September 9, 2002 order. It ordered the bank to make the records for the other specified construction projects available to plaintiffs' counsel for a preliminary examination and that plaintiffs' counsel was to keep any information gathered confidential, and not reveal it to anyone (even his clients5) without a further court order. Adams, 11 FSM Intrm. at 132. After that, plaintiffs' counsel was to "advise the court generally of the categories of documents, if any, he wishe[d] to copy and why and how the information w[ould] be used." Id. Only then would the trial court make an order concerning the documents the Adamses' counsel might want to use and how, when, and under what circumstances they could be used. At oral
argument, the bank suggested these safeguards were unacceptable because Pohnpei is a small place and once opposing counsel has viewed those documents the information in them will somehow become publicly known. We will not presume that opposing counsel would disregard the trial court's strict order.
It is thus difficult to see why the safeguards imposed by the trial court (in effect, an in camera review by opposing counsel) would be an abuse of discretion while the trial judge's in camera review would not. The trial court issued a protective order concerning those records. The bank was unhappy because that protective order's terms were not the ones they had sought. But the trial court did not abuse its discretion in framing a protective order of its own choosing that was designed to achieve the same goal as the bank's – maintaining the records' confidentiality.
We can sympathize with the trial court and why it might not have been eager to inspect nineteen bank borrower files in camera, necessitating either a special trip from Yap to Pohnpei for that tedious job or consuming time on a Pohnpei trip that could be better spent on other matters. This would be a wasteful use of scarce judicial resources. The discovery rules encourage the parties to conduct discovery with a minimum of involvement or intervention by the court, 8A Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure § 2288, at 655-56(2d ed. 1994), and sanctions are provided to discourage an abuse or breakdown of the discovery process that would require court involvement, id. at 657.
B. Imposition of Sanctions
The bank's third assignment of error asserts that the trial court violated the bank's constitutional rights to procedural and substantive due process by imposing on the bank (what it calls terminating) sanctions for the bank's resistance to producing the loan agreement during discovery. The bank's fourth assignment of error asserts that the trial court violated the bank's constitutional rights to procedural and substantive due process6 by failing to give adequate notice and opportunity to be heard
before imposing those sanctions in its November 12, 2002 order. The bank's fifth assignment of error asserts that the trial court abused its discretion in imposing the "terminating sanctions." The bank's sixth assignment of error asserts that the trial court erred in imposing those sanctions because, in its view, they were of a punitive nature as in criminal contempt proceedings, without the level of due process required for such proceedings.
1. Sanction for Failure to Provide Discovery
The bank refers to the Rule 37(b)(2) sanctions as "terminating sanctions" because the sanctions were that the facts necessary to establish the plaintiffs' third-party beneficiary claim based on the loan agreement were taken to be established and the facts necessary to establish the bank’s liability to the Adamses for the construction materials that they supplied for the Panasang project based on the September 27, 1997 meeting were deemed established. Adams, 11 FSM Intrm. at 229. The bank contends that the trial court imposed the Rule 37(b)(2) sanctions for the bank's initial refusal to produce the loan agreement, but that this imposition was improper since Rule 37(b)(2) sanctions can only be imposed for failure to obey a court order to provide discovery and the bank had earlier provided the loan agreement in December, 2001, after the trial court ordered it to.
The due process violation alleged here is apparently that the trial court imposed a sanction that Rule 37(b)(2) does not allow or for something for which that sanction cannot be imposed. The bank is correct that Rule 37(b)(2) sanctions can be imposed only "[i]f a party . . . fails to obey an order to provide or permit discovery, including an order made under subdivision (a) of this rule or Rule 35, or if a party fails to obey an order under Rule 26(f)." FSM Civ. R. 37(b)(2). The bank is also correct that the Rule 37(b)(2) sanctions could not be imposed upon it for its initial refusal to provide the Perman loan agreement because it had provided that document after the court had ordered it to. The November 12, 2002 trial court decision mentions the bank’s failure to provide the loan agreement while discussing Rule 37 sanctions. Some of this is understandable since Rule 37(a)(4) sanctions – fees and expenses incurred in discovery disputes – were also imposed by that order. At other places, a reader could infer that the Rule 37(b)(2) sanctions were being imposed for the initial refusal to provide the loan agreement. However, as part of the order, the trial court states that no further document production would be required by the bank, Adams, 11 FSM Intrm. at 222, 229, implying that the Rule 37(b)(2) sanctions were being imposed, pursuant to the September 19th order which specifically stated that the Rule 37(b)(2) sanctions would be considered for the bank's non-compliance with the September 9th order – for the bank’s refusal to produce the non-party borrower records despite being ordered to and the trial court framing certain safeguards.
The Adamses contend that the bank was being sanctioned for its numerous discovery abuses, many of which occurred after the Perman loan agreement was produced. They contend that if there is any doubt whether the Rule 37(b)(2) sanctions were proper, the appropriate course would be for the appellate court "to remand the matter to the trial court for it to more fully expound upon exactly which of the Appellant's actions it was sanctioning, as well as exactly what sanction was being imposed." Appellees’ Br. at 34-35.
That will not be necessary. An appellate court may affirm the trial court's decision on a different theory or on different grounds when the record contains adequate and independent support for that basis. Bualuay v. Rano, 11 FSM Intrm. 139, 150 n.3 (App. 2002); Nahnken of Nett v. United States, 7 FSM Intrm. 581, 589 (App. 1996). If the trial court did not (and we think it did) impose the Rule 37(b)(2) sanctions for the bank's refusal to provide, despite the court-ordered safeguards, the non-party borrower records, it could have. The September 25th hearing's purpose was to determine whether to sanction the bank for not allowing inspection of those records, and the November 12, 2002 court order, because of the sanctions it imposed, no longer required the bank to provide those records. The trial
court mentioned in its September 19, 2002 order setting the September 25th hearing that it would consider Rule 37(b)(2) sanctions for the bank's non-compliance with the September 9th order. The bank's refusal to permit inspection of the designated non-party borrower records was thus at least part of the grounds for imposing Rule 37(b)(2) sanctions. We will therefore affirm the trial court's imposition of Rule 37(b)(2) sanctions on that ground – that the bank refused to permit inspection of the non-party borrower records which the court had ordered it to allow the Adamses' counsel to inspect – and that these could be appropriate sanctions to impose for that refusal.
2. Notice and Opportunity to be Heard
The bank's brief recites all of the previous discovery orders that deferred ruling on the Adamses' fee requests until the time of trial. The bank notes that when the trial court's September 9, 2002 order required that responses to all pending motions for sanctions and attorney's fee requests, not already responded to, had to be filed on or before September 23, 2002, after which the trial court would enter an order on those motions and fee requests, nothing more was required of it because it had already responded to all of them. The September 25, 2002 hearing was held concerning the bank's refusal to permit the Adamses' counsel to inspect the designated non-party borrower records. The bank complains that its due process right was violated because, in its view, it was never heard on any of the Rule 11 related issues, which had also been set to be heard at the time of trial. The bank also complains that it did not have a hearing on what it called "terminating sanctions" for failure to produce the loan agreement and that if it had had one, it would have pointed out that it had produced the document in response to the court’s earlier order to.
The bank concedes that it had the opportunity to be heard on the Rule 37(a)(4) fee request sanctions. It disputes whether Rule 11 sanctions were included within the trial court's September 9, 2002 order to respond "to all pending motions for sanctions and attorney's fee requests which have not already been responded to . . . on or before September 23, 2002." Adams, 11 FSM Intrm. at 132. We are unsure why the bank would presume that the term "sanctions" referred only to Rule 37 sanctions and did not also include the Rule 11 sanctions that the trial court had raised in its earlier orders and set for hearing at trial along with the Rule 37 fee requests and why the September 23, 2002 filing deadline did not also apply to them.
The trial court's September 19, 2002 order set a hearing for September 25, 2002 at which time the bank was to show cause why it should not be held in contempt for not fully complying with the court's September 9, 2002 order and it would also consider Rule 37(a)(4) sanctions – attorney's fees – and Rule 37(b)(2)(A) sanctions that designated facts were to be taken to be established. The bank thus had at least six days notice that the bank might be found in contempt and that Rule 37(b)(2)(A) sanctions might be imposed. The trial court’s September 19, 2002 order was a sua sponte motion for contempt and for Rule 37(b)(2)(A) sanctions. Generally, fourteen days notice must be given before hearing a motion, but that time may be shortened by court order. FSM Civ. R. 6(d). Six days should have been sufficient. Also, the bank took the opportunity to file various papers concerning the issues raised. The bank filed a brief on September 25, 2002 and a supplement on September 30, 2002. Neither directly addressed the prospect of contempt or of Rule 11 or Rule 37(b)(2)(A) sanctions although the bank was on notice they would be considered at the September 25, 2002 hearing. The bank did extensively address its claimed privilege in the non-party borrower records, which it felt was good grounds not to comply with the September 9, 2002 order and thus a good defense against any sanction. The bank thus had the opportunity to, but did not directly, address in its filings the proposed Rule 37(b)(2) sanctions. At the hearing, although mentioned in passing and not really argued, the judge indicated that he would be considering the Rule 37 sanctions further. If the bank was not heard on the Rule 37(b) sanctions, it was not because it did not have an opportunity (in its September 25th and 30th filings) to be heard after it was on notice (in the September 19th order and from the bench on
September 25th) that Rule 37(b)(2) sanctions would be considered.
The bank also complains that the Rule 11 sanctions were imposed without adequate notice and that it was unclear whether the contempt was civil or criminal contempt and argues that it was of a punitive, criminal nature. However, the only actual sanctions that the trial court imposed were the Rule 37(a)(4) attorney fee awards, which had been earlier deferred, and the Rule 37(b)(2)(A) sanctions that designated facts were to be taken to be established. No further sanctions were imposed for contempt, Rule 11 violations or asserted violations of the Model Rules of Professional Conduct. The trial court let the Rule 37 sanctions "stand" as sanctions for Rule 11 and contempt. Thus we are unsure whether Rule 11 or contempt sanctions were actually imposed.
But if Rule 11 sanctions were imposed, they should not have been. "[I]t is ordinarily inappropriate to look beyond the clearly delineated procedure of Rule 37 for the imposition of sanctions in the discovery context." 8A Wright, Miller & Marcus, supra, § 2282, at 602-03.7 Generally, "Rule 37 is the sole source of sanctions for the discovery violations described in that rule." Id. at 603. a court cannot award sanctions under Rule 11 for discovery matters subject to Rules 26 to 37, for which Rule 37 sanctions can be imposed. General Motors Corp. v. Johnson Matthey, Inc., 887 F. Supp. 1240, 1246 (E.D. Wis. 1995). Nor can a court resort to its inherent powers when Rule 37 applies because Rule 37 is the exclusive remedy for failure to comply with a production order. Independent Prods. Corp. v. Loew's Inc., 283 F.2d 730, 733 (2d Cir. 1960). Rule 37 sanctions for the failure to make discovery are the only relief available for failure to make discovery. Countryside Cas. Co. v. Orr, 523 F.2d 870, 872 n.3 (8th Cir. 1975); see also Liberty Leather Corp. v. Callum, 653 F.2d 694, 700 (1st Cir. 1981) (cannot amend complaint to add tortious interference with discovery process claim because Rule 37 is exclusive remedy for discovery abuse). When a party has failed to comply with a discovery order, "Rule [37] allows a court all the flexibility it might need in framing an order appropriate to a particular situation." Societe Internationale Pour Participations Industrielles, S.A. v. Rogers, 357 U.S. 197, 208, 78 S. Ct. 1087, 1094, 2 L. Ed. 2d 1255, 1265 (1958).
Therefore, to whatever extent they were imposed, the Rule 11 sanctions are vacated. The Rule 37(b)(2) sanctions are left to stand. The bank had the requisite notice and an opportunity to be heard on the Rule 37(b)(2)(A) sanctions.
3. Were Rule 37(b)(2)(A) Sanctions an Abuse of Discretion?
The bank contends that the trial court's imposition of Rule 37(b)(2) sanctions was an abuse of the trial court's discretion. The bank bases this assignment of error on two contentions: First, that the Rule 37(b)(2) sanctions were improperly applied because they were applied retroactively for the bank's earlier refusal to produce the Perman loan agreement; and second, because the only proper sanction on the bank for the initial refusal to produce Perman loan agreement was to award attorney's fees to the Adamses for prevailing on the motion to compel. The bank further suggests that the trial court is required to implement the least severe sanction that would achieve the desired result.
The bank is correct that the only proper remedy for the bank's initial refusal to produce the Perman loan agreement would be the imposition of attorney's fees. But attorney's fees were imposed because the Adamses had to bring a motion to compel the production of the Perman loan agreement. Adams, 10 FSM Intrm. at 475; Adams, 11 FSM Intrm. at 447-48. The Rule 37(b)(2)(A) sanctions, as
mentioned above, could not properly be applied for the bank's earlier refusal to produce the Perman loan agreement (because that document was eventually produced), but could be, and were, properly applied for not permitting the inspection of the designated non-party borrower records. The limitations on a court's discretion under Rule 37(b) is that the sanction imposed must be just and it must be specifically related to the particular claim which was at issue in the court's order to provide discovery. Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 707, 102 S. Ct. 2099, 2107, 72 L. Ed. 2d 492, 504 (1982). The claim at issue in the September 9, 2002 order was whether the bank had agreed to pay the Adamses, Felix's supplier, directly. Thus the Rule 37(b) sanctions were specifically related to the particular claim. The bank does not contend that it was incapable or unable to comply with the order to permit inspection of the non-party borrower records. The sanction was just. Therefore, imposing Rule 37(b)(2) sanctions was within the trial court's discretion and the trial court did not abuse its discretion by implementing them.
The bank contends that some lesser sanction should have been considered first and imposed under Rule 37 for its refusal to permit inspection of the non-party borrower records. There are frequently times when this is the most advisable course of action, but Rule 37 does not require that, especially when the sanctioned party has a history of discovery abuse. In In re Professional Hockey Antitrust Litigation, 531 F.2d 1188, 1192 (3d Cir. 1976), the appellate court reversed the trial court's dismissal of the case as Rule 37 sanctions in part because the trial court should have considered lesser sanctions first. The U.S. Supreme Court then reversed the appellate court and reinstated the dismissal; it noted the trial court's comprehensive list of discovery violations; and held that the question was not whether the appellate court would have imposed the sanction the trial court did, but whether the trial court abused it discretion in doing so. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642, 96 S. Ct. 2778, 2780, 49 L. Ed. 2d 747, 751 (1976) (per curiam). That court held that the most severe Rule 37 sanction must be available not just to penalize those whose conduct warrants it but also to deter those who might be tempted to such conduct in the absence of a deterrent. Id. at 643, 96 S. Ct. at 2781, 49 L. Ed. 2d at 751. Dismissal in that case was a terminating sanction more severe than the finding of liability in this case. a detailed or comprehensive explanation of the reasons should be included in the trial court order imposing Rule 37(b) sanctions. Id. at 642, 96 S. Ct. at 2780, 49 L. Ed. 2d at 751; Insurance Corp. of Ireland, 456 U.S. at 707, 102 S. Ct. at 2107, 72 L. Ed. 2d at 504.
The question before us is not whether we would impose the sanctions the trial court did, but whether it abused its discretion in doing so. We conclude it did not.
4. Whether Sanctions Were Criminal or Punitive in Nature
The bank contends that none of its discovery misconduct involved behavior justifying an order establishing liability. The bank contends that "only a finding of criminal contempt for refusal to produce the non-party borrower records could have supported a sanction as harsh." Appellant's Br. at 24. The bank then contends that it did not receive the level of due process needed for a criminal contempt finding.
At the September 25, 2002 hearing, the trial court stated that it was considering only civil contempt. Civil contempt is a prospective remedial measure designed to encourage, or even coerce, compliance with a lawful court order when the contemnor has been found to have the ability to comply with that order. On the other hand, criminal contempt is retrospective and is punishment for past wrongful conduct. It is not designed to secure compliance with a court order, but instead punishes the intentional violation of a lawful court order. Rodriguez v. Bank of the FSM, 11 FSM Intrm. 367, 382 & n.23 (App. 2003).
Civil contempt may be employed to coerce compliance with the trial court's orders compelling discovery. See FSM Civ. R. 37(b)(2)(D); see also Lamar Fin. Corp. v. Adams, 918 F.2d 564, 566 (5th Cir. 1990) (daily fine imposed for each day of continued refusal to produce documents); Hodgson v. Mahoney, 460 F.2d 326, 328 (1st Cir. 1972). Punishment, through criminal contempt, cannot be employed where Rule 37 sanctions may be.
The contempt imposed in the November 12, 2002 order may not be civil in nature. It was not designed to coerce compliance with a discovery order – it did not order compliance by a date certain and that if compliance is not forthcoming, impose penalties designed to coerce compliance. The trial court, by that time, had abandoned any further attempts at coercion and imposed Rule 37(b)(2) and 37(b)(2)(A) sanctions to bring the discovery issue to an end. As with the Rule 11 sanctions above, we are unsure whether the contempt sanction was actually ever imposed because the trial court let the Rule 37 sanctions "stand" as the contempt sanctions. Thus, if the contempt sanctions were, in fact, imposed, they were not civil in nature and must be reversed. If none were imposed, then, in light of the Rule 37(b)(2) sanctions, the contempt finding must be vacated because no further purpose can be served by their imposition. Cf. Danning v. Lavine, 572 F.2d 1386, 1389 (9th Cir. 1975) (if default judgment entered against a party for failure to comply with discovery order, contempt order cannot stand because no further purpose to be served by imposing contempt sanctions).
If, by this argument, the bank contends that Rule 37(b)(2) sanctions are inherently criminal in nature and that criminal due process protections must always be followed before they can be imposed, we reject that contention. We have already decided that the trial court's imposition of Civil Rule 37(b)(2) sanctions did not violate due process and were not an abuse of discretion.
5. Summary
In summary, the trial court's imposition of Rule 37(b)(2) sanctions are affirmed on the ground that they were properly imposed for the bank's refusal to permit, under court-ordered safeguards, opposing counsel's inspection of the designated non-party borrower records relevant to this litigation and were not an abuse of discretion. The Rule 11 sanctions, to the extent they were imposed, are vacated because Rule 37 sanctions are generally the exclusive remedy for discovery violations. The contempt finding, to the extent it may have imposed punishment, is reversed; otherwise it is vacated.
C. Attorney's Fee Awards as Discovery Sanctions
The bank's seventh assignment of error asserts that the trial court abused its discretion by awarding attorney's fees for discovery disputes. The bank suggests that it should be liable for attorney's fees for only portions of the Adamses' first motion to compel and that other sanctions should have been levied against its former attorney. The bank also contends that it was clearly erroneous for it not to have been permitted to depose Yvette Adams, the sole proprietor of Pohnpei Ace Hardware, and therefore should not be liable for the attorney fees incurred in getting the trial court to quash a subpoena directed to her.
Attorney's fees are probably the most common Rule 37 sanction imposed. They are routinely awarded to successful movants seeking to compel discovery "unless the court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust." FSM Civ. R. 37(a)(4). "The great operative principle of Rule 37(a)(4) is that the loser pays." 8A Wright, Miller & Marcus, supra, § 2288, at 657-58. The trial court "is to make the award against the losing party on the motion unless the court finds that its opposition to, or making of, the motion was substantially justified or that other circumstances make an award of expenses unjust." Id. at 664. "Thus the rule is mandatory unless one of these conditions for not making an award is found to exist."
Id.
The bank asserts that the attorney's fee sanctions should have been imposed on its former attorney, rather than on it. The trial court may impose fee sanctions on "the party, attorney, or trial counselor advising such conduct or both of them." FSM Civ. R. 37(a)(4). But the bank has not shown that the trial court abused its discretion in imposing the attorney's fee sanctions on the bank instead of solely on its former attorney, who was a salaried bank employee and subject to the bank's instruction and supervision. The bank merely states that the "lawyer should assume responsibility for technical and legal tactical issues." Appellant's Br. at 30. At oral argument, the bank asserted that it was not involved in the discovery disputes, only its counsel was. We, however, would need more before we could say the trial court abused its discretion in not applying the attorney's fees sanctions against the bank's former attorney himself rather than against the bank. Cf. Humphreys Exterminating Co. v. Poulter, 62 F.R.D. 392, 395 (D. Md. 1974) (award of attorney's fees and costs would be made only on party rather than his attorney when it was not clear that discovery was unjustifiably opposed principally at instigation of party's attorney).
The bank also asserts that the trial court should not have awarded attorney's fees for its refusal to produce the non-party borrower records because it had a good-faith reason to disobey that order. The trial court, however, awarded only half of the Adamses' expenses for this refusal. Adams, 11 FSM Intrm. at 229. Because we have affirmed the trial court ruling on the non-party borrower records, we affirm this fee award as well.
The next question is not whether it was an abuse of the trial court's discretion to quash the deposition subpoena for Yvette Adams, but whether the trial court abused its discretion in awarding expenses and attorney's fees as sanctions for quashing the subpoena. When Adams was subpoenaed for a deposition, she moved to quash it on the grounds of her age and ill health, on her lack of knowledge about the Felix transactions or the day-to-day operations of her business, and because her son had appeared, without the bank objecting, when the bank had earlier deposed her business. She offered to let the bank depose her son again because he was running the business. The bank offered to make accommodations for her health and age and hold the deposition in her home if it was convenient. The trial court ruled that the bank had waived its right to insist on deposing her instead of her son and permitted the bank to depose her son. Adams, 10 FSM Intrm. at 513.
The bank was substantially justified in opposing the motion's grounds of lack of knowledge and age and ill health. A mere assertion that a potential deponent lacks knowledge is not a ground for granting a protective order. It is "clear that the party seeking discovery is not required to establish that the person whose deposition it seeks has information about which he or she could testify at trial. Indeed one important purpose of discovery is to ascertain who has such information." 8A Wright, Miller & Marcus, supra, § 2102, at 26. Furthermore, age and ill health is often a ground to take a deposition in order to preserve testimony for trial in case the witness is unavailable at that time. (The bank, however, did not assert that as a reason.) That Yvette Adams is the (lead) named plaintiff is a substantial justification for the opposition. "It would be an extraordinary case where examination of other witnesses would take the place of the examination of a party." Gill v. Stolow, 18 F.R.D. 323, 324 (S.D.N.Y. 1955) (fact that party had complete examination of other witnesses was not ground for barring him from deposing opposing party; right to depose not waived). Since the motion for a protective order did not assert that the bank had waived the right to depose Yvette Adams by going forward with her son's deposition – only that he was knowledgeable and available and Yvette Adams was not – the bank's opposition, in light of the principles cited above, was substantially justified. We therefore conclude that it was an abuse of discretion to have awarded fees and expenses for bringing the protective order motion and reverse that award.
The other attorney fee awards were not an abuse of discretion because the bank has not shown that its opposition to the motions was substantially justified or that other circumstances make an award of expenses unjust. Therefore the $1,166.25 in fees and expenses awarded for bringing the protective order motion is deducted from the $9,680.07 the trial court attorney fee and expense awards and the balance of $8,513.82 in attorney fee sanctions is affirmed.
Part of the problem with this case may have been that when the various discovery motions were decided the trial court deferred ruling on the attorney’s fee requests until trial rather than ruling on the sanction fee requests as they came up, so they just kept accumulating without any deterrent effect. Deferring ruling on Rule 37 attorney fee requests is not a good idea. The purpose of Rule 37(a)(4)'s cost-shifting is "to reduce the burden on the courts by deterring parties from making unjustified motions for discovery and by deterring their opponents from resisting discovery without justification." 8A Wright, Miller & Marcus, supra, – 2288, at 657. This deterrence is not as effective if the court defers the sanctions awards.
D. Third-Party Beneficiary of Loan Agreement
The bank's eighth assignment of error asserts that the trial court erred in applying a third-party beneficiary interpretation to the loan agreement at issue. The Adamses' response is that the trial court's analysis of its third-party beneficiary claims is dictum. They rely on the Rule 37(b)(2) sanction that precluded the bank from opposing at the time of trial "the plaintiffs' third-party beneficiary claim based on" the Perman loan agreement. Adams, 11 FSM Intrm. at 229. The bank acknowledges that if the sanctions are vacated, only then would the court need to decide whether the Perman loan agreement created intended third-party beneficiary rights. Since we affirm the Rule 37(b)(2) sanctions, we will not consider this issue.
E. Attorney's Fees for the Adamses as Third-Party Beneficiary
The bank's last assignment of error asserts that the trial court erred in awarding attorney's fees as part of the third-party beneficiary claim because it improperly concluded that the Adamses would not have incurred those fees if the bank had fulfilled its duty under the loan agreement because then the Adamses would not have had to sue anyone. The bank contends that to determine whether the bank had such a duty would require a trial on the matter of intent, but even then the bank would not be liable because attorney's fees are not awarded for breach of duty.
The trial court's basis for awarding attorney's fees for which Felix and the bank were held jointly and severally liable was that such fees were provided for in the written credit agreement which Felix and the Adamses agreed to and that if the bank had fulfilled its contractual duty to the Adamses no lawsuit would have been needed and no fees incurred. Adams, 12 FSM Intrm. at 543. The bank asserts that these fees are improper because they were awarded on a negligence basis using a tort analysis.
The Adamses' response argues that fees were awarded because there was a provision in the Perman loan agreement that allowed a successful litigant to be awarded fees. We can find no such provision in the Perman loan agreement. If there were one, the Adamses could have been entitled to recovery for attorney's fees.8 a contract's intended third-party beneficiary can recover attorney's fees
under a contract providing for attorney's fees if it has to sue to enforce its third-party beneficiary rights and prevails. See, e.g., In re Vista Med. Investors, Ltd., 98 B.R. 29, 33 (Bankr. S.D. Cal. 1989). Similarly, a prevailing party can recover attorney's fees from an intended third-party beneficiary litigant if that beneficiary could have recovered attorney's fees from that party under the contract. See, e.g., In re Bennett, 298 F.3d 1059, 1071 (9th Cir. 2002).
It is the Adamses' contract with Felix that provides for attorney’s fees for a successful litigant. The bank was not an intended beneficiary of the agreement between Felix and the Adamses. The trial court declined to shift the attorney fee burden to the bank based on its vexatious conduct. Adams, 12 FSM Intrm. at 543. Otherwise attorney's fees are awarded to the prevailing party only if authorized by contract or by statute. Phillip v. Marianas Ins. Co., 12 FSM Intrm. 464, 471 (Pon. 2004); LPP Mortgage Ltd. v. Maras, 12 FSM Intrm. 112, 113 (Chk. 2003). No contract or statute authorizes these fees.
There is one other possible basis for attorney's fees as damages – as consequential damages from the bank's September 1997 oral contract. The trial court sanction, which we affirm, was that the bank would not be allowed to oppose the Adamses' claims, FSM Civ. R. 37(b)(2)(A), and that certain designated facts would be taken as established. As stated above, Rule 37(b)(2) sanctions must be specifically related to the particular claim at issue in the discovery order. The existence and terms of the September 1997 oral contract between the Adamses and the bank was the particular claim at issue.
The trial court concluded that if the bank had fulfilled its contractual duty to the Adamses no fees would have been incurred. The fees were thus a result, or consequence of the bank's breach. Consequential damages can only be awarded if "the loss was `such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract as the probable result of the breach of it.'" E. Allen Farnsworth, Contracts § 12.14, at 874 (1982) (quoting the seminal case of Hadley v. Baxendale, 156 Eng. Rep. 145, 151 (1854)). The trial court, in awarding these attorney's fees after the trial on damages, made no such finding that attorney's fees were damages in the contemplation of both parties as the probable result of the breach at the time they made the contract. Without such a trial court finding, these fees could not have been awarded as consequential damages against the bank. This fee award against the bank is therefore reversed.
There is no, and the court will not create, a bank records privilege. Bank records are confidential and the trial court's protective order was adequate to preserve their confidentiality.
The Rule 11 sanctions are vacated because Rule 37 provides the exclusive remedy for the bank's alleged discovery abuses. The contempt finding is reversed to the extent that it was not civil in nature and is otherwise vacated. The bank had adequate notice and opportunity to be heard on the Rule 37(b)(2) sanctions and the Rule 37(b)(2) discovery sanctions can properly be based on the bank's refusal to permit inspection of the designated non-party borrower records. The Rule 37(b)(2) sanctions cannot be based on the initial refusal to produce the Perman loan agreement since that was eventually produced. Whether the bank had adequate notice for the contempt or for Rule 11 sanctions is irrelevant since those sanctions are vacated or reversed on other grounds.
The Rule 37(a)(4) attorney's fee sanctions are proper and within the court's limited discretion under that rule, with the exception of the attorney fee sanction imposed for trying to depose Yvette Adams. Whether the loan agreement created intended third-party beneficiaries was not decided since the Rule 37(b)(2) sanctions were upheld. The post-judgment attorney's fee award, as applied to the bank, has no basis in law and is reversed.
We accordingly affirm the $69,599.02 judgment against the bank and $8,513.82 in attorney fee sanctions awarded against the bank. This matter is remanded to the trial court which shall conduct such further proceedings as are consistent with this opinion. The parties shall bear their own fees and costs.
_______________________________Footnotes:
1 Also on September 19, 2002, the bank filed a petition for a writ of mandamus in the appellate division challenging the September 9, 2002 trial court order and asking the appellate division to order the trial court to recognize that the bank records were privileged.
2 On March 7, 2003, the bank's September 19, 2002 mandamus petition was denied as moot since the trial court no longer required the production of the non-party borrower records. FSM Dev. Bank v. Yinug, 11 FSM Intrm. 405, 409-10 (App. 2003). On March 24, 2003, a second mandamus petition on the same ground and the added ground that the bank had not been afforded adequate notice and an opportunity to be heard before the November 12, 2002 sanctions were imposed was denied since an adequate remedy at law existed. FSM Dev. Bank v. Yinug, 11 FSM Intrm. 437 (App. 2003).
3 On May 6, 2003, the bank filed a notice of appeal from the portion of the order fixing the attorney fee and expense award. On April 30, 2004, the appellate division dismissed the bank's November 19, 2002 and May 6, 2003 appeals because they were not from a final judgment or order and since they were not otherwise unreviewable and therefore appealable collateral orders. FSM Dev. Bank v. Adams, 12 FSM Intrm. 456, 461-62 (App. 2004).
4 The trial court considered this a collection case. Fifteen percent is the usual maximum allowed in a collection case under FSM Supreme Court caselaw. J.S. Tenorio Enterprises, Inc. v. Sado, 6 FSM Intrm. 430, 432 (Pon. 1994); Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 221 (Pon. 1990).
5 A protective order barring counsel's disclosure of information to his own client is a safeguard other courts have employed. See 8 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure § 2041, at 538 & n.11 (2d ed. 1994).
6 Substantive due process protects individual liberty interests against certain governmental actions regardless of the fairness of the procedure used to implement them. Collins v. City of Harper Heights, 503 U.S. 115, 125, 112 S. Ct. 1061, 1068, 117 L. Ed. 2d 261, 273 (1992).
While procedural due process requires governmental decision-making to conform with the concept of what is fair and just, substantive due process, on the other hand, addresses the rationality of the legislature. With substantive due process, the court basically looks at the rationale or legitimacy of the governmental interest. In subjecting a statute [or court rule] to the requirement of substantive due process, the court asks: (1) Does the government have power to regulate the subject matter? If the statute [or rule] is not within the power of the government, such statute [or rule] will be struck down. . . . (2) If the government has the power to regulate, the court next asks if what the statute [or rule] proposes to do bears a rational relationship to the implementation of the legislative goal. . . . (3) Finally, where the statute [or rule] involved arguably infringes upon individuals’ fundamental rights, the court must ask how important is the legislative objective. . . . The court must ask if there is a compelling governmental interest to justify holding the statute [or rule] valid, even though the statute might limit fundamental rights.
Samuel v. Pryor, 5 FSM Intrm. 91, 100-01 (Pon. 1991) (quoting SCREP No. 23, II J. of Micro. Con. Con. 793, 796). The bank has not identified anything as violative of substantive due process. Its contentions are based on the fairness of the procedures it was subjected to – a procedural due process claim. If the bank's contention is that Rule 37(b) itself violates substantive due process, that contention is unsupported and is rejected.
7 When an FSM court has not previously construed a Civil Procedure Rule that is similar to a U.S. rule, it may look to U.S. sources for guidance in interpreting the FSM rule. Senda v. Mid-Pacific Constr. Co., 6 FSM Intrm. 440, 444 (App. 1994).
8 The trial court awarded the Adamses attorney's fees against Felix of $19,799.36 (15% of $131,998.72 judgment against Felix). Adams, 12 FSM Intrm. at 647. The trial court, however, had held that the bank was jointly and severally liable for only $69,599.02. The rest of the $131,998.72 judgment against Felix was for the Enipein project for which the bank had no liability. If the bank were liable for attorney's fees, its liability would be limited to 15% of $69,599.02 (the debt incurred because the bank did not pay for the Panasang supplies) and thus reduced to $10,439.85.
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