THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as Bank of Hawaii v. Jack,
4 FSM Intrm. 216 (Pohnpei 1990)

[4 FSM Intrm. 216]

BANK OF HAWAII,
Plaintiff,

vs.

TAKEO JACK,
Defendant.

FSM CIV. NO. 1988-081

OPINION

Before Edward C. King
Chief Justice
March 23, 1990

APPEARANCES:
For the Plaintiff:          Mr. Daniel J. Berman
                                     Attorney at Law
                                     P.O. Box 1491
                                     Kolonia, Pohnpei 96941

For the Defendant:     In Pro Per

*    *    *    *

HEADNOTES
Contracts
     Generally, in cases requiring the interpretation or construction of contracts, the national courts would be called on to apply state law.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 218 (Pon. 1990).

Banks and Banking; Contracts; Federalism; Foreign and Interstate Commerce
     Questions regarding the validity of the provisions of promissory notes for personal loans, executed with a national bank operating in each state of the FSM and having in part foreign ownership, are closely connected to the powers of the national legislature to regulate banking, foreign and interstate commerce, and bankruptcy, and to establish usury limits, and they have a distinctly national character.  The FSM Supreme Court therefore will formulate and apply rules of national law in assessing such issues.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 218 (Pon. 1990).Attorney, Trial Counselor and Client - Fees; Banks and Banking.  The FSM Supreme Court will consider an unambiguous provision in a promissory note for the payment of reasonable attorney's fees in debt collection cases as valid in the Federated States of Micronesia.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 219 (Pon. 1990).

[4 FSM Intrm. 217]

Attorney, Trial Counselor and Client - Fees; Banks and Banking; Contracts- Indemnification
     Because agreements in promissory notes for the payment of attorney's fees are essentially indemnity clauses, they will be given effect only to the extent that expenses and losses are actually incurred, as demonstrated by detailed supporting documentation showing the date, the work done, and the amount of time spent on each service for which a claim for compensation is made.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 219 (Pon. 1990).

Attorney, Trial Counselor and Client - Fees; Banks and Banking
     Provisions in promissory notes for the payment of attorney's fees will be enforced only to the extent that the fees demanded are reasonable.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 219 (Pon. 1990).

Attorney, Trial Counselor and Client - Fees; Banks and Banking
     It is necessary for each creditor to establish that attorney's fees to be charged to a debtor pursuant to an agreement in a promissory note are reasonable in relation to the amount of the debt as well as to the services rendered.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 220 (Pon. 1990).

Attorney, Trial Counselor and Client - Fees; Banks and Banking; Contracts
     Where attorney's fees claimed pursuant to a contractual provision are excessive or otherwise unreasonable, it is within the equitable and discretionary power of the court to reduce or even deny the award, despite the contractual provision.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 220 (Pon. 1990).

Attorney, Trial Counselor and Client - Fees; Banks and Banking
     Except in unusual circumstances, the amount awarded pursuant to a stipulation for the payment of attorney's fees in debt collection cases in the FSM will be limited to a reasonable amount not in excess of fifteen percent of the outstanding principal and interest.  Bank of Hawaii v. Jack, 4 FSM Intrm. 216, 221 (Pon. 1990).
  
*    *    *    *
  
COURT'S OPINION
EDWARD C. KING, Chief Justice:
     This matter is before the Court on a postjudgment motion of the plaintiff, Bank of Hawaii, seeking an order requiring the defendant, Takeo Jack, to pay the attorney's fees incurred by the bank in obtaining the judgment.     

[4 FSM Intrm. 218]

     On February 28, 1985 the defendant, Takeo Jack, executed an agreement for a personal loan from the Bank of Hawaii in the amount of $4,388.54 plus fifteen percent interest per annum.  On June 22, 1988 the bank filed a complaint in this Court stating that the defendant had been in default since April, 1987, and alleging the outstanding balance due to be $1747.17 in principal and interest.

     After several pretrial motions and hearings, the matter came to trial on November 6, 1989.  The Court found the defendant indebted to the plaintiff in the amount of $274.15 in interest on the loan, and entered judgment accordingly. The record shows, however, that the defendant made a large payment while the litigation was pending, and that at the time of the complaint, the outstanding amount of the loan was, in fact, $1747.17.

     The bank subsequently requested an award of costs and attorney's fees pursuant to the terms of the loan agreement.  The relevant provision reads: "COLLECTION COSTS.  If we have to hire an attorney to help us collect your loan, you must pay a reasonable attorney fee and any other costs we incur in collecting your loan."

     The attorney's fees which the bank did incur in collecting this loan, and which it now seeks to have the defendant pay, total $1480.80.

II. Legal Analysis.
A.  Applicable law.
     Generally, in cases requiring the interpretation or construction of contracts, the national courts would be called to apply state law.  Semens v. Continental Air Lines, Inc., 2 FSM Intrm. 131, 137 (Pon. 1985).  In this case, however, no statute or court decision of Pohnpei, where the contract was executed, addresses the validity of a stipulation in a promissory note for the payment of attorney's fees as part of the costs of collection.

     In addition, the contract in question here is a promissory note for a personal loan, executed with a national bank operating in each state of the FSM and having, in part, foreign ownership.  Questions regarding the validity of the provisions of such agreements, therefore, are closely connected to the powers of the national legislature to regulate banking, foreign and interstate commerce, and bankruptcy, and to establish usury limits.  FSM Const. art. IX, 2(g), 2(i).  They have a distinctly national character.

     Therefore, the Court feels bound to formulate and apply rules of national law in assessing the issues before it in this matter.

B. Contractual agreements to pay attorney's fees.
     Recently, this Court has noted that it is "especially important... to

[4 FSM Intrm. 219]

scrutinize carefully and strictly construe contractual provisions which relate to the payment of attorney's fees."  Bank of the FSM v. Bartolome, 4 FSM Intrm. 182 (Pon. 1990).  In that case, the Court found that the agreement in question did not require defaulting debtors to pay attorney's fees which the bank incurred in collecting the loan, because of the ambiguity of the relevant contractual provision. Id. at 186.  Thus, the Court did not have to reach the issue of whether more clearly worded provisions calling for the payment of attorney's fees in debt collection cases would be valid.  Id.

     This case directly presents that question.  The language of the loan agreement requiring the defaulting debtor to pay attorney's fees is unambiguous.

     Many courts in the past, and some still now, have refused to enforce such an agreement for a variety of public policy reasons.  Id. at 185 n.5.  See, e.g., Federal Dep. Ins. Corp. v. Timbalier Towing Co., 497 F. Supp. 912, 929 (N.D. Ohio 1980) (in Ohio, "stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void").

     Nevertheless, I am persuaded that a contractual agreement for reasonable attorney's fees does not necessarily constitute a penalty or an excuse for usurious interest, nor does it clearly encourage litigation and oppress the debtor. Indeed, to a certain extent a rule allowing banks to recover the costs of collection against defaulting debtors helps the great majority of borrowers who do not fail to repay their loans.  Barring all recovery of collection costs, including attorney fees, could make it unduly difficult for most borrowers to obtain credit from banks.

     This Court will therefore consider a provision in a promissory note for the payment of reasonable attorney's fees in debt collection cases as valid in the Federated States of Micronesia.  Such a rule, moreover, finds support in a great number of jurisdictions today.  Cf. Annot., 56 A.L.R. Fed. 871 (1982 & Supp. 1988) ("the rule applied by most courts, apart from any statutory authority to the contrary, is that such a contractual provision or stipulation is valid"); Annot., 17 A.L.R. 2d 288, 290-91 (1951 & Supp. 1983).

     Two important qualifications are necessary to the rule, however.  First, because such agreements are essentially indemnity clauses, they will be given effect only to the extent that expenses and losses are actually incurred, as demonstrated by detailed "supporting documentation...showing the date, the work done, and the amount of time spent on each service for which a claim for compensation is made."  Salik v. U Corp., 4 FSM Intrm. 48, 51 (Pon. 1989). Second, the provisions will be enforced only to the extent that the attorney's fees demanded are reasonable.  Bank of the FSM v. Bartolome, 4 FSM Intrm. at 186.

C. Reasonable attorney's fees.
     Plaintiff argues that the fees requested in this case are reasonable, and provides extensive documentation to show a breakdown of the number of

[4 FSM Intrm. 220]

hours spent in collecting this loan.  It is not disputed that these are hours actually spent and costs actually incurred, that the amount of time devoted to each separate item is within reasonable bounds, and that the attorney's rate is acceptable in this forum.  For these reasons, counsel for the plaintiff contends that the overall fee is reasonable as judged by the standards of the FSM Rules of Professional Conduct.  FSM Prof. R. 1.5(a).  Cf. Tolenoa v. Kosrae, 3 FSM Intrm. 167 (App. 1987).

     The Rules of Professional Conduct, however, apply to the fees that an attorney charges his or her own client.  By those measures, the fee that plaintiff's counsel is charging the bank may very well be entirely  reasonable.  Even when, as here, the fee incurred greatly exceeds the amount collected, the bank may consider that it is reasonable in light of the goals and principles, other than a net dollar gain, which the litigation has furthered.

     The reasonableness of a fee passed on to a debtor pursuant to a contractual indemnity provision may be quite different.  In this action, for example, considerable time has been spent on the procedural issue of venue, which is entirely independent of the actual merits of the bank's claim against the debtor. Viewed in light of this case alone, one would wonder whether such effort is reasonable in light of the potential gain involved; yet, it can be of obvious value for the bank as a principle established for future cases.  The individual debtor, however, should not be forced to bear the brunt of the bank's litigation interests and goals which go far beyond the collection of his debt alone.

     For that reason, it is "necessary for each creditor to establish that the attorney's fees to be charged are reasonable in relation to the amount of the debt as well as to the services rendered."  Bank of the FSM v. Bartolome, 4 FSM Intrm. at 186 (emphasis added).  Clearly it would be unreasonable and inequitable for a defendant who in good faith defends a suit to incur attorney's fees which are grossly disproportionate to the amount in controversy.

     The fee requested by the bank here is 85% of the amount of the outstanding debt at the time of default.  It is obviously excessive in relation to the amount of the debt and cannot be upheld.

     Where the claimed fees are excessive or otherwise unreasonable, it is within the equitable and discretionary power of the court to reduce or even deny the award, despite the contractual provision.1  The court must determine,

[4 FSM Intrm. 221]

in those instances, whether it is fair to award a fee at all, and if so what fee would be reasonable.

     Here, the defendant did fail to repay all of his loan.  The litigation was not instituted because of the bank's fault; it was not brought to harass the debtor and it was conducted in good faith.  Therefore, the Court finds it proper to allow some recovery of the attorney's fees incurred in collection.

     Courts have in certain cases allowed fees as high as thirty-three percent of the balance due on a note, while others have denied fees of ten percent or even as low as three percent.2  In a number of jurisdictions, an across-the-board maximum percentage has been established for attorney's fees pursuant to indemnity provisions in promissory notes, ranging from ten percent of the principal and interest due to twenty-five percent.3  A general rule such as this gives some measure of certainty and predictability to creditors and debtors alike.

     Based on these considerations, and taking guidance from the rules of other jurisdictions, the Court finds that a fee of fifteen percent of the amount of the outstanding principal and interest is reasonable in this case.  Except in unusual circumstances, the amount awarded pursuant to a stipulation for the payment of attorney's fees in debt collection cases in the FSM will be limited to a reasonable amount not in excess of fifteen percent of the outstanding principal and interest.

     It should be noted that this limitation applies strictly to the attorney's fees awarded under contractual provisions.  There may be circumstances where the Court will consider it appropriate to award greater fees as an element of costs in litigation because such fees were traceable to unreasonable or vexatious actions of the opposing party.  Salik v. U Corp., 4 FSM Intrm. 48, 49 (Pon. 1989); Semens v. Continental Air Lines, 2 FSM Intrm. 200, 208 (Pon. 1986).  In the case before the Court now, however, it has not been alleged or shown that any of the fees in question result from the defendant's bad faith.

III.  Conclusion.
     The Bank of the FSM is entitled to recover attorney's fees which it incurred in collecting Takeo Jack's loan, to the extent that those costs were actually incurred and do not exceed fifteen percent of the amount due on the loan at the time of default.  In addition to the $274.15 judgment, therefore, the defendant shall pay the plaintiff $262.08 in attorney's fees.

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Footnotes:
 
1. Numerous other courts have taken similar views of the limits of contractual provisions for the payment of attorney's fees, and of the courts' power to modify or ignore the stipulation.  E.g., United States v. Western States Mechanical Contractors, 834 F.2d 1533, 1549 (10th Cir. 1987); Robison v. Katz, 610 P.2d 201, 209 (N.M. 1980); Cable Marine, Inc. v. M/V Trust Me II, 632 F.2d 1344 (5th Cir. 1980); Elson Dev. Co. v. Arizona Sav. & Loan Ass'n, 407 P.2d 930, 934 (Ariz. 1965).  See generally Annot., 17 A.L.R. 2d 288 (1951 & Supp. 1983).
 
2. Buzianis v. Beneficial Homes, Inc., 550 P.2d 174 (Utah 1976) (allowing one-third); Budagher v. Sunnyland Enterprises, Inc., 563 P.2d 1158, 1160 (N.M. 1977) (denying 10%); Elson Dev. Co. v. Arizona Sav. & Loan Ass'n, 407 P.2d 930, 934 (Ariz. 1965) (denying 3%).
 
3.  Missouri Pac. R.R. Co. v. Winburn Tile Mfg. Co., 461 F.2d 984, 989-90 (8th Cir. 1972) (10% maximum under Arkansas rule); Ai v. Frank Huff Agency, Ltd., 607 P.2d 1304 (Haw. 1980) (25% maximum in Hawaii); 17 A.L.R.2d 288 (1983 Supp.) (15% maximum under Georgia law).
                                                                                                                                                                                                                                                                                                           
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