FSM 3 Intrm. 575-586

Under circumstances where there is no bankruptcy legislation or comprehensive system for establishing and recognizing liens in the FSM, the court acts essentially as a court of equity when deciding insolvency cases. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 581 (Pon. 1988).

In an insolvency proceeding, holders of writs of execution should be paid on the basis of a first-in-time, first-in-right rule according to the dates of the individual parties' writs, subject to the rights of the creditors entitled to superior treatment by virtue of statutory lien priority or extraordinary equitable relief. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 582 (Pon. 1988).

In an insolvency proceeding, judgment creditors with judgments issued on or before the consolidation of the case but without writs of execution as of that time are prioritized on a pro-rata basis, after satisfaction of claims of lienholders, those with special equitable claims and holders of writs of execution. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 582 (Pon. 1988).

In an insolvency proceeding, claimants without liens and not entitled to special equitable treatment, who comply with a court order or with the instructions of a court appointed receiver, trustee or other custodian to substantiate their claims against the debtor's estate after the proceedings have been consolidated, shall receive payment on a prorata basis with other creditors in the same class. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 582 (Pon. 1988).

Creditor with judgments more than 10 days old are entitled to writs of executions upon request. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 584 (Pon. 1988).

Where the government is entitled to a lien on the debtor's assets as of the date it gave notice of its claim for those taxes the lien also becomes effective as of that date. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 585 (Pon. 1988).

The final class of creditors entitled to distribution in an insolvency proceeding shall consist of all the debtors remaining creditors who either reduced their claims to judgment after the consolidation date or who substantiate their claims according to the receiver's instructions. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 587 (Pon. 1988).

This consolidated case presents yet another instance of a hopelessly insolvent corporation, Pacific Islands Distributing Company, Inc. (the "debtor"), with numerous unsatisfied creditors. As in In re Island Hardware, 3 FSM Intrm. 332, 336 (Pon. 1988), the Court must determine the priorities of the creditors' claims and set out procedures for the distribution of the debtor's remaining assets. This case was consolidated on September 7, 1987, and a receiver was appointed by this Court on October 6, 1987. To date his efforts to liquidate the debtor's assets have yielded upwards of $150,000 available for disbursement to the creditors. No additional funds are expected to augment that amount.

The Court notes at the outset that this case, like the previous insolvency cases, must be decided without the benefit of any bankruptcy legislation or any comprehensive system for establishing and recognizing liens in the Federated States of Micronesia. Under these circumstances the Court acts essentially as a court of equity when we decide insolvency cases, applying established general principles, but shaping particular decisions to the facts of each case. In re Mid-Pacific Construction Co., 3 FSM Intrm. 292, 296 (Pon. 1988).

The Mid Pacific and Island Hardware cases were administered directly by the Court. There was no single event prior to issuance of the Court's opinion which formed a logical basis for identifying classes by reference to the timing of events which occurred during the administration of the case.

Compared to Mid-Pac and Island Hardware, the posture of this case is more similar to that of a traditional collective bankruptcy liquidation because the claims against the debtor were consolidated at an earlier stage than in either of the earlier cases. Moreover, in this case a receiver has been appointed to reduce the debtor's assets to cash and to administer the substantiation of claims against the debtor's estate. Therefore, the case

presents issues, and offers opportunities to re-establish standards for priorities, somewhat different than those raised in the earlier cases. Since it is probable that more cases of this particular type will arise in the future, the Court thinks that some articulation of principles to guide the classification and prioritization of claims in such cases is called for.

In the Mid-Pac case, the Court noted that a judgment creditor's effort to obtain a writ of execution must be treated as a significant event in determining the highest priority class of claims. Mid-Pac, 3 FSM Intrm. at 305. Therefore, in that case, judgment creditors holding writs of execution were grouped together for the purpose of establishing the priority of the creditors' claims. Id.

In Mid-Pac, the Court observed that in order "to reduce the risk of precipitous and unnecessary business failure through writs of execution" it had declined to grant writs of execution on an automatic basis. Instead, judgment creditors seeking writs were required first to show that they had "seriously explored" the possibility of satisfying the judgment through other "means." Id.

Upon review, it now appears that the execution statute, 6 F.S.M.C. 1407, does not contemplate such a condition, but instead requires issuance of the writ upon request:

Every court, at the request of the party recovering any civil judgment in that court for payment of money, shall issue a writ of execution against the [non-exempt] personal property of the party against whom the judgment has been rendered . . .

6 F.S.M.C. 1407. This right to obtain prompt issuance of a writ of execution is subject to the limitation that "no execution shall issue upon a judgment until the expiration of 10 days after the entry [of that judgment]." FSM Civ. R. 62(a).

The statutory right of a judgment creditor to obtain immediate issuance of a writ of execution implies as well a legislative intent that holders of writs be paid on the basis of a first-in-time, first-in-right rule according to the dates of the individual parties' writs. The Court therefore shall apply such a rule, but may in the future stay the enforcement of such writs in order to achieve the goals referred to in Mid-Pac.

For the purposes of this discussion, the theoretical class of creditors holding writs of execution issued on or before an insolvency-triggered consolidation of the cases against a debtor shall be called the "first priority" class, even though there will be distinctions within the class depending upon when the respective class members' writs were issued, and even though it is entirely possible in any given case that such a class, or some of its members, will not actually be awarded first priority among all creditors. The "first priority" class will only be first among those creditors not entitled to statutory lien priority or extraordinary equitable relief.

The presumed second priority class of claimants in consolidated insolvency cases will, on a pro rata basis, include all judgment creditors with judgments issued on or before the consolidation of the case, but without writs of execution as of that time. Mid-Pac, 3 FSM Intrm. at 307.

The third basic class will consist of all claimants without liens and not entitled to special equitable treatment, but who comply with a court order or with the instructions of a court appointed receiver, trustee, or other custodian, to substantiate their claims against the debtor's estate after the proceedings have been consolidated. Payments to this class also will be pro-rated.

The simple principles set out above are meant to guide the classification and prioritization of all claims not entitled to statutory lien priority or extraordinary equitable relief.1 As such, the first two presumptive classes identified may in any particular case have to be subdivided. For example, and as shall be the case in this action, it is possible that a statutory lien effective as of the time adequate notice was given by the lienholder might divide a class in two, creating a class of claims superior to, and a class inferior to the statutory lien.

In addition to guiding the prioritization of claims, these principles also provide an incentive to parties actively litigating disputed claims with the debtor at the time the insolvency case is consolidated to settle those disputes quickly. This is because even if those parties were eventually to reduce their claims to judgment, they still would not be granted priority status over all other parties who simply substantiated their claims pursuant to the Court's or the receiver's instructions. In this way the consolidated case can proceed quickly, and the debtor's liquidated assets can be disbursed as soon as possible. Of course it will be necessary for the Court to adjudicate some disputes, but that task will be required only for litigation involving disputes over substantial claims where there is no hope of settlement.

The FSM national government was awarded a judgment on November 23, 1987, for wage and salary taxes. Pursuant to 54 F.S.M.C. 135(2), that judgment constitutes a lien against all of the debtor's assets and is entitled to first priority. Bank of Guam v. Island Hardware Inc. (II), 3 FSM Intrm. 105, 109-10

This case was consolidated on September 7, 1987. Mid-Pacific Construction Company, Inc. ("Midpac") obtained a writ of execution on May 4, 1987. Tyeb Import Export, Ltd. ("Tyeb") was awarded its judgment against the debtor and moved for a writ of execution on August 17, 1987. That writ was not issued until October 1, 1987, nearly a month after the consolidation date. However, had the writ been issued promptly, Tyeb would have held it prior to the consolidation. Since the Court has now recognized that creditors with judgments more than ten days old are entitled to writs of execution upon request, equity demands that Tyeb's writ of execution be recognized as if it had been issued sometime at the end of August, 1988.

Bob Gokal and Sons (Hong Kong) Ltd. ("Gokal") was awarded its judgment on August 29, 1987. Like Tyeb, Gokal also moved immediately for a writ of execution. However, the 10 day waiting period required by rule 62(a) had not run for Gokal's writ prior to the consolidation of this case.

In future cases, notice should be given to interested parties prior to consolidation of a debtor's cases. If that had been done in this case, and if Gokal had been aware of the new policy announced here concerning issuance of writs of execution, Gokal would have had the opportunity to request a deferral of the consolidation of this case until the ten day period had expired.

Once again, since this is the first time the Court is applying this method of determining priorities, equity demands that Gokal's writ of execution be recognized as if it had been issued one day prior to the consolidation. This result is further compelled by the fact that Gokal has diligently and emphatically moved to protect its priority position throughout this prolonged case. Even before consolidation, Gokal worked together with Midpac and Tyeb to arrange an execution sale of the debtor's assets pursuant to the latter parties' writs of execution.

Midpac, Tyeb, and Gokal therefore presumptively make up the second priority class of creditors, and their claims presumptively should be paid, after the first priority claim of the national government is paid in full, based on a first-in-time, first-in-right rule according to the dates of their respective writs. However, for the reasons set out immediately below, Gokal cannot be included in the second priority class.

On September 4, 1987, the government filed its claim for the wage and salary taxes awarded first priority above. At the same time it asserted a claim for gross revenue taxes. Judgment for the gross revenue taxes was

awarded on November 23, 1987. Pursuant to 54 F.S.M.C. 153, the government is entitled to a lien on the debtor's assets as of the date it gave notice of its claim for those taxes. Bank of Guam v. Island Hardware (II), 3 FSM Intrm. at 109. The record reveals no notice prior to the government's filing of its complaint on September 4, 1987. Therefore, the Court holds that the government's lien is effective as of that date. In re Island Hardware, 3 FSM Intrm. at 342.

The government's lien establishes its position ahead of Gokal, who was not yet eligible for a writ of execution as of September 4, 1987. Thus the presumed class of second priority creditors in this case must be divided; Mid-Pac and Tyeb shall together be ahead of the national government, Gokal shall be behind them all. Gokal shall stand alone as the sole member of a fourth priority class, and shall be paid only after the national government's claim for gross revenue taxes is paid in full.

As mentioned above, this case was consolidated on September 7, 1987. That same day a final judgment was entered against the debtor in favor of Talent International Export Party, Ltd. ("Talent"). No creditors other than those discussed above reduced their claims to final judgment on or before the day this case was consolidated. Therefore, Talent alone is entitled to fifth priority in the disbursement of the debtor's assets.

The sixth and last priority shall consist of all of the debtor's remaining creditors who either reduced their claims to judgment after the consolidation date or who substantiated their claims according to the receiver's instructions.2

Based on the above discussion a final judgment and disbursement order shall issue recognizing the rights of Pidco's creditors to have their claims paid from the debtor's funds in this Court's trust account as follows:

Sixth Priority: All other creditors who reduced their claims to final judgment after the case was consolidated, or who substantiated their claims with the court-appointed receiver.

The final order will also set out a procedure for the receiver to make his final report on the amount of funds available for disbursement and the specific amounts in which claims shall be recognized.

No claims of any class shall be paid until the claims of all creditors in superior classes have been paid in full. If the debtor's funds are inadequate to pay the claims of any class in full, then the claims of that class shall be paid on a pro rata basis until the debtor's funds are exhausted. An exception shall be that the claims of the second priority class shall in any event be paid on a first-in-time, first-in-right basis according to the dates of the respective class members' writs of execution.

Finally, creditors whose claims are not recognized in the receiver's final report shall not be entitled to have those claims paid from the debtor's funds in the Court's trust account. In effect then, since this opinion contemplates that all of those funds will be disbursed, the receiver's final report will cut off all potential future claims against the debtor. This is obvious because such claims would in all practicality be impossible to collect.

1. For example, extraordinary equitable relief might be granted to the debtor's unpaid wage-earners. See In re Mid-Pacific Constr. Co., 3 FSM Intrm. at 299-301; In re Island Hardware, 3 FSM Intrm. at 341 (appeal pending on other issues).

2. The only litigation still pending that concerns a disputed claim against the debtor's estate is that of Sharma Wholesaler ("Sharma"). The debtor admits that it owes money to Sharma, but the parties are at odds over the precise amount. If the parties cannot settle their dispute before the second week of January, 1989, an expedited hearing date shall be set and the Court shall decide the issue. There is no reason, however, why this minor dispute should hold up payment to the superior creditors. The final judgment and disbursement order shall reflect this sentiment.