FSM SUPREME COURT TRIAL DIVISION
Cite as In re Engichy,11 FSM Intrm. 520 (Chk. 2003)
IN RE JUDGMENTS AGAINST JOHN ENGICHY,
ISLAND IMPORTS, and ROSEMARY ENGICHY,
Judgment-Debtors.
CIVIL ACTION NO. 2003-1001
MEMORANDUM AND ORDER IN AID OF JUDGMENTS
Martin G. Yinug
Associate Justice
Conference: April 9, 2003
Decided: May 14, 2003
APPEARANCES:
For the
Judgment-Creditor: Michael J. Sipos, Esq.
(Dateline)
P.O. Box 2069
Kolonia, Pohnpei FM 96941
For the Judgment-Creditors: Craig D. Reffner, Esq.
(Medabalmi; Albatross;
Law Office of Fredrick L. Ramp
& FSM Telecom)
P.O. Box 1480
Kolonia, Pohnpei FM 96941
For the Judgment-Creditor: Stephen V. Finnen, Esq. (filings)
(Trans Pacific Export Co.)
Law Offices Of Saimon & Associates
P.O. Box 1450
Kolonia, Pohnpei FM 96941
J. Bradley Klemm, Esq. (conference)
Klemm, Blair, Sterling & Johnson
1008 Pacific News Building
238 Archbishop F.C. Flores St.
Hagatna, Guam 96910
For the Judgment-Creditor: Daniel J. Berman, Esq.
(Rus Pty, Ltd.)
Berman O'Connor Mann & Shklov
111 Chalan Santo Papa, Suite 503
Hagatna, Guam 96910
For the Judgment-Debtors: Wesley Simina, Esq.
P.O. Box 94
Weno, Chuuk FM 96942
* * * *
Previous insolvency cases involved juridical persons, either corporations or cooperatives, which after they were declared insolvent and the creditors paid to the extent they could be, were dissolved. Once a corporation's or a cooperative's assets are all paid out and the corporation or cooperative is dissolved, unpaid creditors are generally without further recourse to collect any unpaid sums. In re Engichy, 11 FSM Intrm. 520, 525 (Chk. 2003).
In the FSM, judgments, by statute, remain valid and enforceable for twenty years from date of entry. In re Engichy, 11 FSM Intrm. 520, 525 (Chk. 2003).
While the court may determine (and has in the absence of statute) the priority of its judgments as to a debtor, the court is reluctant to assume that it may order the discharge of a judgment against a debtor when, by statute, the judgment is to remain valid and enforceable for twenty years. In re Engichy, 11 FSM Intrm. 520, 525 (Chk. 2003).
The Constitution assigns Congress the authority to enact bankruptcy laws and thus to determine when a judgment against an insolvent person should be discharged without either full payment or the parties' agreement. In re Engichy, 11 FSM Intrm. 520, 525-26 (Chk. 2003).
Even if the court can declare natural persons insolvent in the manner it can and has declared corporations and cooperatives insolvent, the court does not have the authority to "discharge" a natural person judgment-debtor's debts short of full satisfaction of the judgment. In re Engichy, 11 FSM Intrm. 520, 526 (Chk. 2003).
There is no impediment to appointing a receiver in the absence of an insolvency declaration, especially when it is the judgment-debtors who ask that one be appointed. In re Engichy, 11 FSM Intrm. 520, 526 (Chk. 2003).
In order to purge any possible contempt buy the judgment-debtors, the court may order the receiver to pay out of funds on deposit with the court the arrearages accrued on orders in aid of judgment before the judgments were consolidated. In re Engichy, 11 FSM Intrm. 520, 526 (Chk. 2003).
A major purpose for granting consolidation of judgments is to establish the payment priority for the consolidated judgments and to implement an orderly payment plan involving one, instead of multiple, orders in aid of judgments. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
Among judgment creditors, those with a writ of execution have priority over those who do not. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
One reason writ-holders are granted a higher priority is that the judgment creditor who has taken the effort and exhibited the diligence to move to the status of execution creditor deserves to be treated differently on that basis. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
A judgment-creditor's right to the issuance of a writ of execution is provided for by statute, as is the right to obtain an order in aid of judgment. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
By statute, a party recovering a civil judgment for money is entitled to a prompt, immediate issuance of a writ of execution. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
The court's procedural rules stay a writ of execution's issuance until ten days after entry of judgment. The purpose behind this automatic ten-day stay is to permit a judgment-debtor to determine what course of action to follow. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003).
Although the FSM Supreme Court must first look to sources of law rather than begin with a review of cases decided by other courts, when the court has not previously construed an FSM civil procedure rule which is identical or similar to a U.S. rule, the court may look to U.S. sources for guidance in interpreting the rule. In re Engichy, 11 FSM Intrm. 520, 527-28 n.1 (Chk. 2003).
Because of the automatic ten-day stay on the issuance of a writ of execution, a money judgment, upon entry of judgment, is final for the purposes of appeal, even though it is not yet final for the purposes of execution. In re Engichy, 11 FSM Intrm. 520, 528 (Chk. 2003).
An FSM judgment-debtor can, if he so chooses, prevent the issuance of a writ of execution because any party, either the judgment-creditor or the judgment-debtor may apply for an order in aid of judgment and once a party has applied for an order in aid of judgment, the judgment-creditor is statutorily barred from obtaining a writ of execution except as part of an order in aid of judgment or by special order of the court for cause shown. In re Engichy, 11 FSM Intrm. 520, 528 (Chk. 2003).
A judgment-creditor who has obtained an order in aid of judgment should be accorded the same status as a judgment creditor who has obtained a writ of execution because both methods of enforcing a money judgment are provided for by statute and both methods show that the judgment creditor has taken the effort and exhibited diligence greater than that of a mere judgment-creditor. In re Engichy, 11 FSM Intrm. 520, 528 (Chk. 2003).
A judgment-creditor's statutory right 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 each party's writ. In re Engichy, 11 FSM Intrm. 520, 528 (Chk. 2003).
Judgment-creditors with execution creditor status are to be paid on the basis of a first-in-time, first-in-right rule according to the dates of the individual parties' writs. The pro rata payment basis is the rule for unsecured judgment-creditors who do not hold execution creditor status or a statutory lien priority. Because holders of orders in aid of judgment are accorded the status of execution creditors, those judgment-creditors will be paid in order according to the date of either their first writ of execution or their first order in aid of judgment. In re Engichy, 11 FSM Intrm. 520, 528-29 (Chk. 2003).
A buyer would usually expect to buy land without a mortgage or, if the land carries a mortgage, that a part of his purchase price will be used to pay off the mortgage so that he receives title free and clear of any mortgage. (Alternatively, a buyer might reduce his offer by the mortgage's outstanding balance and then pay off the mortgage himself.). In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
If a creditor's judgment is secured by a mortgage, it would have priority over the other unsecured judgment-creditors for the proceeds from the sale of the mortgaged property. In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
Generally, a secured interest will not be given priority status when there is no recording statute, thus making it a secret lien. In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
If a judgment-creditor were to attempt to execute against a piece of land for which there was a certificate of title and that certificate showed an outstanding mortgage on the land, or if there was no certificate of title for the land but a mortgage had been duly and properly recorded at the Land Commission so that anyone searching the records there should necessarily find it, then that would be a security interest that was not a secret lien and therefore valid against third parties. In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
Certificates of title are required to show all interests in the land except for rights of way, taxes due, and lease or use rights of less than one year. Therefore a mortgage can and must be shown on the certificate of title to be perfected and thus effective against third parties. If the property has not been issued a certificate of title, then the mortgage must be properly recorded in the chain of title so that someone searching the Land Commission files would expect to find it. In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
A perfected security interest in land (the mortgage either shown on the certificate of title, or if no certificate, properly recorded) would have priority over any unsecured judgment-creditors, even those with writs of execution, should the mortgaged property be sold to satisfy the landowners' debts. In re Engichy, 11 FSM Intrm. 520, 530 (Chk. 2003).
The proper way to record a mortgage under the Torrens land registration system in use in Chuuk is for the mortgage and the landowner's [duplicate] certificate of title to be submitted to the Land Commission at the same time. The mortgage document is then recorded; the mortgage is endorsed on the certificate of title permanently on file at the Land Commission; and then a (new) duplicate certificate
of title, showing the endorsement of the newly-recorded mortgage, is given (or returned) to the landowner. If this is done, then the security interest is perfected and the mortgage is valid and enforceable against all the world and has priority over all other claims to the proceeds from the sale of the mortgaged property. If all these steps are not done, then the security interest is not perfected and the mortgage does not carry priority over and is not effective against parties without notice of it – it is a disfavored secret lien. In re Engichy, 11 FSM Intrm. 520, 531 (Chk. 2003).
A party must comply strictly with the Torrens land registration system's procedures in order to claim its benefits. In re Engichy, 11 FSM Intrm. 520, 531 (Chk. 2003).
Failure to perfect a security interest does not affect the mortgage's validity and enforceability between the parties to it. In re Engichy, 11 FSM Intrm. 520, 531 (Chk. 2003).
Any judgment-creditor with a writ of execution may elect not to use it, and try some other method to satisfy its judgment. In re Engichy, 11 FSM Intrm. 520, 532 (Chk. 2003).
An execution sale does not require judicial confirmation or allow claims of other creditors. In re Engichy, 11 FSM Intrm. 520, 532 (Chk. 2003).
An execution creditor who has levied on its writ may, with the debtors' consent, postpone the execution sale. In re Engichy, 11 FSM Intrm. 520, 532 (Chk. 2003).
Assuming that the transfer of title to property by the judgment-debtors to a judgment-creditor was not a sham transaction with the judgment-debtors retaining ownership of it and the judgment-creditor merely selling it for them, but was a bona fide transfer of title, it was within the judgment-creditor's rights to take property instead of cash as payment on its judgment. In re Engichy, 11 FSM Intrm. 520, 533 (Chk. 2003).
When a judgment-creditor decides to take title to property as full payment for the outstanding judgment in lieu of a cash payment for the remainder of the judgment, the judgment is satisfied at that point, not at some later time when the judgment-creditor has managed to sell the property for cash. A judgment-creditor accepting title to property in lieu of cash as full satisfaction of its judgment takes the risk that its later sale of the property could amount to less (or the chance it could be more) than amount due on the judgment or that the sale might fall through. In re Engichy, 11 FSM Intrm. 520, 533 (Chk. 2003).
In calculating the amounts due on judgments, the 9% statutory interest ceases to accrue at the point the judgment-debtor pays the money credited to the principal into court and after that time the only interest a judgment-creditor is entitled to is that paid by the court's depository institution on the deposited money. In re Engichy, 11 FSM Intrm. 520, 534 (Chk. 2003).
Any post-judgment charges for attorney's fees and costs – any attorney's fees and costs beyond
those awarded in the judgments themselves – must first be determined as reasonable and awarded by the court before the judgment-creditors are entitled to these amounts. In re Engichy, 11 FSM Intrm. 520, 534 (Chk. 2003).
* * * *
MARTIN G. YINUG, Associate Justice:
On April 9, 2003, this came before the court on the judgment-debtors' motion to appoint a receiver, three judgment-creditors' motions for orders to show cause why the judgment-debtors should not be held in contempt for failure to obey orders in aid of judgment; various judgment-creditors' claims against sums collected, or allegedly collected, by other judgment-creditors; and the general question of what payment priority each of the consolidated judgments is to be given. Appearing at the conference were counsel for all judgment-creditors with the exception of counsel for Dateline Exports, Inc. and counsel for Rus Pty Ltd. who declined to appear personally.
The judgment-debtors asked that they be declared insolvent and that a receiver be appointed. The parties present disagreed over the issue of insolvency. Additionally, the judgment-creditors were opposed to any action, and it was presumed that an insolvency declaration would be such an action, that would require the addition of any other creditors or potential creditors to this proceeding.
Previous insolvency cases involved juridical persons, either corporations or cooperatives, which after they were declared insolvent and the creditors paid to the extent they could be, were dissolved. See, e.g., In re Kolonia Consumers Coop. Ass'n, 9 FSM Intrm. 297, 300 (Pon. 2000); cf. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 586 (Pon. 1988) (receiver's final report to cut off all potential future claims). Once a corporation's or a cooperative's assets are all paid out and the corporation or cooperative is dissolved, unpaid creditors are generally without further recourse to collect any unpaid sums.
The judgment-debtors in this case are natural persons, John Engichy and Rosemary Engichy. Island Imports, the other judgment-debtor, is a d/b/a of the two Engichys, and thus, in effect, a partnership. It is not a corporation. Natural persons cannot be "dissolved," as insolvent corporations or cooperatives are.
In the FSM, judgments, by statute, remain valid and enforceable for twenty years from date of entry. Walter v. Chuuk, 10 FSM Intrm. 312, 315 (Chk. 2001) (citing 6 F.S.M.C. 801). By declaring the judgment-debtors insolvent and paying out only the judgment-debtors' present assets, and then ruling that any remaining judgments or future claims were uncollectible and discharged, see In re Pacific Islands Distrib. Co., 3 FSM Intrm. at 586 (receiver's final report to cut off all potential future claims), the court would, in effect, be overriding or amending a Congressionally-enacted statute concerning the validity and enforceability of judgments. The court does not have the power to amend (or ignore) a statute. While the court may determine (and has in the absence of statute) the priority of its judgments as to a debtor, the court is reluctant to assume that it may order the discharge of a judgment against a debtor when, by statute, the judgment is to remain valid and enforceable for twenty years. Judicial discharge of debts short of full satisfaction is the province of bankruptcy laws. The Constitution assigns Congress the authority to enact bankruptcy laws, FSM Const. art. IX, § 2(g), and thus to determine when a judgment against an insolvent person should be discharged without either full
payment or the parties' agreement. Congress has not yet legislated on the subject. The court is thus bound by the statutory requirement that unsatisfied judgments remain valid and enforceable for at least twenty years.
The court therefore doubts whether it can declare natural persons insolvent, at least in the manner it can and has declared corporations and cooperatives insolvent. Even if it can make such a declaration, the court does not have the authority to "discharge" a natural person judgment-debtor's debts short of full satisfaction of the judgment. In previously-reported consolidated insolvency cases, the judgment-debtors were all "hopelessly insolvent corporation[s]." In re Pacific Islands Distrib. Co., 3 FSM Intrm. at 581. Here, they are natural persons. Therefore, the court can discern no purpose in declaring the judgment-debtors insolvent other than inviting intervention by everyone with a claim against these judgment-debtors, whether it has been reduced to judgment or not. This the court declines to do. Furthermore, the parties oppose adding more claimants.
Another possible purpose would be to require the appointment of a receiver. However, the court sees no impediment to appointing a receiver in the absence of an insolvency declaration, especially when it is the judgment-debtors who ask that one be appointed. All counsel present at the conference agreed on the desirability of a receiver and agreed on the State Justice Ombudsman's appointment as receiver if he was willing to serve. The Ombudsman having assented, the court hereby appoints State Justice Ombudsman Harry Narruhn as Receiver for the purpose of facilitating the satisfaction of the judgments in this case.
Before these judgments were consolidated, there were pending three motions for orders to show cause why the judgment-debtors should not be held in contempt for failure to obey three different orders in aid of judgment. Counsel for those judgment-creditors (Rao K. Medabalmi and Devi B.B. Medabalmi in Civil Action No. 2000-1032, Albatross Trading Co., Inc. in Civil Action No. 2001-1022, and FSM Telecommunications Corp. in Civil Action No. 2002-1001) suggested handling these pending motions by paying the judgment-creditors the arrearages accrued on these orders in aid before these judgments were consolidated. Payment would come out of funds the judgment-debtors have already deposited with the court.
No party present opposed this suggestion. It seems equitable to protect the judgment-debtors from liability for contempt when they had the ability to comply with the order but choose not to do so, in part because of the multitude of orders demanding their attention. Also, there are now funds on deposit with the court more than sufficient to cover the arrearages. The court therefore, as a matter of extraordinary equitable relief, adopts this sensible suggestion to dispose of these motions with one modification.
The court will therefore order that the Receiver shall pay the following sums to the following judgment-creditors: $15,000 to Rao K. Medabalmi and Devi B.B. Medabalmi; $1,423.03 to Albatross Trading Co.; $2,100 to FSM Telecommunications Corporation. The funds to pay Albatross Trading Co. shall come from the bank account originally opened for its benefit by an order in aid of judgment in Civil Action No. 2001-1022, and when those funds are paid out, that account shall be closed. The judgment-debtors are hereby purged of any possible contempt as to the relevant orders in aid of judgment.
On March 6, 2003, the court granted the judgment-debtors' motion to consolidate six judgments
against them. The court granted the motion, in part, because the numerous and potentially conflicting orders in aid of judgment (and modifications of those orders) made it difficult for the judgment-debtors to try to satisfy their judgment-creditors in an orderly fashion. A major purpose for granting consolidation was to establish the payment priority for the consolidated judgments and to implement an orderly payment plan involving one, instead of multiple, orders in aid of judgments.
Although this is not a corporate or cooperative insolvency to be followed by a corporate or cooperative dissolution, it is appropriate to use the priority rules developed in those FSM cases as a basis for assigning priorities in this case. These priority rules were developed through case law that has been in effect in the FSM for well over a dozen years and these rules were affirmed by the appellate division. See In re Island Hardware, Inc., 5 FSM Intrm. 170, 173-74 (App. 1991). The business and legal communities in the FSM should therefore have some familiarity with them.
A. Priority among Judgment-Creditors
Among judgment creditors, those with a writ of execution have priority over those who do not. In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 582-84 (Pon. 1988), approved by In re Island Hardware, Inc., 5 FSM Intrm. 170, 173 (App. 1991); see also In re Mid-Pacific Constr. Co., 3 FSM Intrm. 292, 305-07 (Pon. 1988).
Various judgment-creditors contend that a judgment-creditor who has obtained an order in aid of judgment ought to be accorded the same priority status as that of a judgment-creditor with a writ of execution. This appears to be an issue of first impression – this claim has not been raised before. These judgment-creditors contend that while they could have obtained writs of execution, they did not because they choose to try to work with the judgment-debtors to satisfy their judgments without the drastic remedy of writs which might force the judgment-debtors out of business. They contend that they should not be penalized for trying to allow the judgment-debtors to maintain a viable business that could continue to pay them (and other creditors). They further contend that the reasoning behind awarding a higher priority status to writ holders likewise applies to those with orders in aid of judgment.
One reason writ-holders were granted a higher priority was that "the judgment creditor who has taken the effort and exhibited the diligence to move to the status of execution creditor may deserve to be treated differently on that basis." In re Mid-Pacific Constr. Co., 3 FSM Intrm. at 305. They contend that a judgment-creditor who has obtained an order in aid of judgment has shown equal effort and diligence and thus deserves to be treated equally. The court sympathizes with this rationale.
Furthermore, there is another reason why the treatment should be equal. A judgment-creditor's right to the issuance of a writ of execution is provided for by statute, 6 F.S.M.C. 1407, as is the right to obtain an order in aid of judgment, 6 F.S.M.C. 1409. By statute, a party recovering a civil judgment for money is entitled to a prompt, immediate issuance of a writ of execution. In re Pacific Islands Distrib. Co., 3 FSM Intrm. at 582 (citing 6 F.S.M.C. 1407). The court's procedural rules, however, stay the writ's issuance until ten days after entry of judgment. "[N]o execution shall issue upon a judgment nor proceedings be taken for its enforcement until the expiration of 10 days after its entry." FSM Civ. R. 62(a). The purpose behind this automatic ten-day stay is to permit a judgment-debtor "to determine what course of action to follow." 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2902, at 492 (2d ed. 1995). If a judgment-debtor wants to
attack the judgment in the trial court by a motion for a new trial or to alter or amend the judgment (both of which must be made within ten days of entry of judgment, FSM Civ. R. 59(a)) or similar post-trial motion, "he can make that motion and apply for a further stay pending disposition of the motion as provided in Rule 62(b)." Wright, Miller & Kane, supra, § 2902, at 492. If the judgment-debtor prefers to appeal, he can file a notice of appeal and seek a stay pending appeal as provided in Rule 62(d) and in Appellate Rule 8(a) and 8(b). Id. Thus, upon entry of judgment, a money judgment is final for the purposes of appeal, even though it is not yet final for the purposes of execution. See Heikkila v. Barber, 164 F. Supp. 587, 591 (N.D. Cal. 1958).
Another course of action an FSM judgment-debtor can follow, if he so chooses, is to prevent the issuance of a writ of execution. Any party, either the judgment-creditor or the judgment-debtor (although invariably it is the judgment-creditor) may apply for an order in aid of judgment. 6 F.S.M.C. 1409; see also Walter, 10 FSM Intrm. at 316-17 (judgment-debtor applied for and was granted hearing for an order in aid of judgment). Once a party has applied for an order in aid of judgment, the judgment-creditor is statutorily barred from obtaining a writ of execution except as part of an order in aid of judgment "or by special order of the court for cause shown." 6 F.S.M.C. 1413(1). A judgment-debtor can therefore apply for an order in aid of judgment during the ten-day automatic stay after entry of judgment and, by operation of law, prevent the issuance of a writ of execution, thereby preventing a judgment-creditor from obtaining execution status.
The court therefore concludes that a judgment-creditor who has obtained an order in aid of judgment should be accorded the same status as a judgment creditor who has obtained a writ of execution. Both methods of enforcing a money judgment are provided for by statute. Both methods show (in the usual case) that the judgment creditor has taken the effort and exhibited diligence greater than that of a mere judgment-creditor.
The appellate division held that a judgment-creditor's statutory right 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 each party's writ. In re Island Hardware, Inc., 5 FSM Intrm. 170, 173 (App. 1991). See also Western Sales Trading Co. v. Ponape Federation of Coop. Ass'ns, 6 FSM Intrm. 592, 593 (Pon. 1994) (individual writ-holders are to be paid on the basis of first-in-time, first-in-right rule according to the dates of their writs because among execution creditors the claims of those whose writs are dated earliest have priority over those whose writs are dated later); In re Pacific Islands Distrib. Co., 3 FSM Intrm. 575, 582 (Pon. 1988) (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 creditors entitled to superior treatment by virtue of statutory lien priority or extraordinary equitable relief). Under this priority rule, the judgment-creditor with the oldest writ of execution or order in aid of judgment will have its judgment paid in full before the next senior judgment-creditor is paid anything, and so on until the last judgment-creditor with a writ or order in aid has been paid or all of the judgment-debtors' resources have been exhausted.
Some judgment-creditors propose a priority scheme that would have most of the judgment-creditors paid on a pro rata basis. The rule, as affirmed by the appellate division in In re Island Hardware, Inc., 5 FSM Intrm. 170, 173 (App. 1991), is that judgment-creditors with execution creditor
status are to "be paid on the basis of a first-in-time, first-in-right rule according to the dates of the individual parties' writs." The pro rata basis is the rule for unsecured judgment-creditors who do not hold execution creditor status or a statutory lien priority. In re Pacific Islands Distrib. Co., 3 FSM Intrm. at 582-83. Since, by this order, holders of orders in aid of judgment are accorded the status of execution creditors, the judgment-creditors in this consolidated case will be paid in order according to the date of either their first writ of execution or their first order in aid of judgment.
The following are the six consolidated judgments and their relevant dates:
Civil Action No. 1999-1020, Dateline Exports, Inc. v. John Engichy and Island Imports ("Dateline")
date judgment entered ............................................. June 5, 2000
date first order in aid of judgment entered ...............August 10, 2000
date writ of execution issued ..................................January 28, 2003
date writ of execution levied upon ...........................February 1, 2003
Civil Action No. 2000-1032, Rao K. Medabalmi and Devi B.B. Medabalmi v. Island Imports Co., John Engichy and
Rosemary Engichy ("Medabalmi")
date judgment entered .............................................November 22, 2001
date first order in aid of judgment entered ................November 22, 2001
Civil Action No. 2001-1018, Trans Pacific Export Co., LLC v. John Engichy and Island Imports ("Trans Pacific")
date judgment entered ..............................................October 22, 2001
date a writ of execution first issued .............................December 23, 2002
Civil Action No. 2001-1022, Albatross Trading Co., Inc. v. John Engichy and Rosemary Engichy d/b/a Island Imports
("Albatross")
date judgment entered ...............................................March 15, 2002
date first order in aid of judgment entered ....................May 16, 2002
Civil Action No. 2002-1001, FSM Telecommunications Corporation v. John Engichy ("Telecom")
date judgment entered .....................................April 9 (amended May 7), 2002
date first order in aid of judgment entered ..........................August 21, 2002
Civil Action No. 2002-1002, Rus Pty Ltd. v. John Engichy and Rose Engichy d/b/a Island Imports ("Rus")
date judgment entered ..................................................February 19, 2002
date a writ of execution first issued ..................................March 15, 2002
date mortgage granted ........................................................April 18, 2002
date mortgage filed ...........................................................April 18, 2002
From this chronology the following order is apparent: that the Dateline judgment should be paid first (Aug. 10, 2000 order in aid); the Medabalmi judgment paid second (Nov. 22, 2001 order in aid); the Rus judgment paid third (Mar. 15, 2002 writ); the Albatross judgment paid fourth (May 16, 2002 order in aid); the Telecom judgment paid fifth (Aug. 21, 2002 order in aid); and the Trans Pacific judgment
paid sixth (Dec. 23, 2002 writ).
The court's analysis, however, does not end here. Two more issues were raised that must be considered. First, the priority rules discussed above are for unsecured judgment-creditors and Rus asserts that it is a secured judgment-creditor. Second, Medabalmi, Albatross, and Telecom, with the oral concurrence of Trans Pacific, contend that because of certain alleged bad acts or unclean hands on the part of Dateline and Rus, those two should lose any priority they have over the others.
B. Rus's Secured Judgment-Creditor Status
Rus contends that it is a fully secured judgment-creditor as it holds a mortgage covering the amount of its judgment on the judgment-debtors' land upon which Island Imports is located. This mortgage is particularly important because it is the sale of this land that has generated most (and will generate more) of the funds currently deposited with the court. A buyer would usually expect to buy land without a mortgage or, if the land carries a mortgage, that a part of his purchase price will be used to pay off the mortgage so that he receives title free and clear of any mortgage. (Alternatively, a buyer might reduce his offer by the mortgage's outstanding balance and then pay off the mortgage himself.)
If Rus's judgment is secured by this mortgage, it would have priority over the other five, unsecured judgment-creditors for the proceeds from the sale of the mortgaged property. Generally, a secured interest will not be given priority status when there is no recording statute, thus making it a secret lien. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, 7 FSM Intrm. 659, 664 (Pon. 1996). However, there is a recording statute for land, and Rus asserts that its mortgage is properly recorded.
If a judgment-creditor . . . were to attempt to execute against a piece of land for which there was a certificate of title and that certificate showed an outstanding mortgage on the land, or if there was no certificate of title for the land but a mortgage had been duly and properly recorded at the Land Commission so that anyone searching the records there should necessarily find it, then that would be a security interest that was not a secret lien and therefore valid against third parties.
UNK Wholesale, Inc. v. Robinson, 11 FSM Intrm. 361, 365 (Chk. 2003) (footnote omitted). Certificates of title are required to show all interests in the land except for rights of way, taxes due, and lease or use rights of less than one year. 67 TTC 117(1). Therefore a mortgage can and must be shown on the certificate of title to be perfected and thus effective against third parties. UNK Wholesale, 11 FSM Intrm. at 365 n.2. If the property has not been issued a certificate of title, then the mortgage must be properly recorded in the chain of title so that someone searching the Land Commission files would expect to find it. Such a perfected security interest (either shown on the certificate of title, or if no certificate, properly recorded) would have priority over any unsecured judgment-creditors, even those with writs of execution, should the mortgaged property be sold (as here) to satisfy the landowners' debts.
Rus asserts that its mortgage is properly recorded. Rus asserts that its mortgage on Lot No. 61536 was registered with the Chuuk Land Commission as Document No. 5657 and that the mortgage was entered on the reverse of the certificate of title. Rus has provided the court with a copy of Document 5657, but not with a copy of the certificate of title showing the mortgage. Document 5657 was filed on April 18, 2002, but when (and if) the mortgage was endorsed on the certificate of title is uncertain.
The counsel for Medabalmi, Albatross, and Telecom contends that the mortgage was not properly recorded and is therefore a secret lien which does not carry any priority against third parties
without notice. In support of this contention, he provides a copy of a certificate of title for Lot No. 61536 (dated Dec. 21, 1998) which does not show Rus's (or any other) mortgage.
The proper way to record a mortgage under the Torrens land registration system in use in Chuuk is for the mortgage and the landowner's [duplicate] certificate of title to be submitted to the Land Commission at the same time. 67 TTC 119(1). The mortgage document is then recorded; the mortgage is endorsed on the certificate of title permanently on file at the Land Commission, see 67 TTC 118; and then a (new) duplicate certificate of title, showing the endorsement of the newly-recorded mortgage, is given (or returned) to the landowner. 67 TTC 119(1). If this is done, then the security interest is perfected and the mortgage is valid and enforceable against all the world and has priority over all other claims to the proceeds from the sale of the mortgaged property. See 67 TTC 117(1). If all these steps are not done, then the security interest is not perfected and the mortgage does not carry priority over and is not effective against parties without notice of it – it is a disfavored secret lien. A party must comply strictly with the Torrens land registration system's procedures in order to claim its benefits.
It is undisputed that the mortgage was filed with the Chuuk Land Commission. It appears, however, that the landowner's duplicate certificate of title may not have been submitted to the Land Commission for the Rus mortgage to be endorsed on the Land Commission's original certificate of title and the endorsed duplicate certificate of title returned to the landowner. If so, Rus's mortgage is not a perfected security interest and will not be effective against third parties without notice of it and Rus will not have priority over all the others to the proceeds from the sale of Lot No. 61536. Failure to perfect a security interest does not, of course, affect the mortgage's validity and enforceability between the parties to it.
Therefore, Rus shall have until May 30, 2003, to provide the court with a copy of a certificate of title for Lot No. 61536, issued before this case was consolidated on March 6, 2003, on which its mortgage has been endorsed. Rus may file and serve this copy by fax, with the originals mailed the same day. If such a copy is provided, the court will deem Rus a secured creditor who has perfected its security interest and thus has priority over all others to the proceeds from the sale of Lot No. 61536. If no such certificate of title is provided, then Rus will be relegated to a priority status based on other factors as discussed herein.
C. Alleged Bad Acts or Unclean Hands
The other four judgment-creditors contend that Rus and Dateline should be deprived of any priority they might have over them due to their alleged bad acts or unclean hands. They contend that Rus and Dateline should disgorge or return the funds they have collected as the result of these bad acts so the court can redistribute them among the more deserving judgment-creditors.
1. Rus Pty Ltd.
They contend that Rus acted improperly in trying to collect its judgment by obtaining a promissory note from the judgment-debtors for the amount of its judgment and attempting to secure the promissory note with a mortgage. They assert that Rus could not use its writ of execution to obtain a mortgage on the judgment-debtor's land. They also assert that Rus should have held an execution sale of the judgment-debtors' property and if it had, Rus could not have sold the land because it was exempt from execution.
The court, however, does not see Rus's diligence in trying to secure satisfaction of its judgment in the same light. It would appear that once having obtained a writ of execution, Rus elected not to
use it, and decided to pursue another avenue to obtain payment. This was within Rus's rights. Any judgment-creditor with a writ of execution may elect not to use it, and try some other method to satisfy its judgment. It is irrelevant whether the land was exempt from execution – Rus did not levy execution on the land. Furthermore, if Rus has not perfected its mortgage (see discussion above) then obtaining the mortgage has not even changed the other judgment-creditors' positions to their detriment. The court can find no actions by Rus that would warrant affecting its priority or Rus's disgorgement of funds it has received.
2. Dateline
The other four judgment-creditors also contend that Dateline's actions warrant its loss of priority and disgorgement of funds. On January 28, 2003, Dateline obtained a writ of execution, and on February 1, 2003, started to levy on the writ. On February 3, 2002, the court ordered all writs of execution directed to the judgment-debtors stayed. On February 4, 2003, the court lifted the stay of only Dateline's writ because, unknown to the court, execution had been in process when the stay order was issued. The February 4th order also provided that the proceeds from the execution sale were to be paid into court and all other judgment-creditors invited to claim any funds they thought they were entitled to. Dateline then postponed the execution sale, received some money from the judgment-creditors, and made arrangements to sell the store inventory over time. No money was paid into court. It is these actions that four judgment-creditors consider improper and grounds for the court to order the funds Dateline received be disgorged and that Dateline lose whatever priority it had.
Dateline contends that by requiring payment of the funds into court and allowing the other judgment-creditors to make any claims against the funds before the court confirmed the sale improperly converted an execution sale into a judicial sale. Dateline further contends that it took title to the store inventory, that it is therefore selling its own property, and that when the sale is complete, there will be neither a deficiency or an excess, and it will file a satisfaction of judgment. It further contends that its actions are permitted by law and were not in violation of any court order, and therefore cannot be the basis for the relief that the four other judgment-creditors request.
Dateline is correct that an execution sale does not require judicial confirmation or allow claims of other creditors. But what Dateline fails to acknowledge is that the court put Dateline in a privileged position when it lifted the stay on only its writ of execution and not on the others. The unusual conditions were imposed so that if it were improper for the court to lift the stay for just Dateline and another was prejudiced thereby then those conditions might protect it. As it were, Dateline decided to take another course. Dateline, with the debtors' consent, was certainly within its rights to postpone the execution sale. 6 F.S.M.C. 1408(5). Dateline does not appear to have violated any court order or statute in receiving cash payments from sources other than the sale of property levied on. Nor does Dateline appear to have violated any statute or any court order that applied to it when it accepted title to property in lieu of cash as payment for its judgment even though it had found a tentative buyer for that property. Assuming that the inventory's transfer of title to Dateline was not a sham transaction with the judgment-debtors retaining ownership of the inventory and Dateline merely selling it for them (the court has no reason to doubt Dateline's and the judgment-debtors' assertion that it was a bona fide transfer of title), it was within Dateline's rights to take property instead of cash as payment and is not grounds to alter Dateline's priority status. Furthermore, Dateline's counsel is to be commended for finding a buyer for the inventory that would pay a price higher than the distress sale prices an execution sale would probably have realized thus making his client whole. This benefitted both the judgment-debtors and the other judgment-creditors by leaving more assets available to satisfy the other judgments. Dateline's actions are therefore not grounds to order it to disgorge funds that, because of its priority status, would most likely be paid right back to it.
Dateline states that it will file a satisfaction of judgment when it has finished selling the inventory. The judgment-debtors assert that when Dateline took title to the inventory that Dateline's judgment against them was satisfied. The court agrees. When a judgment-creditor decides to take title to property as full payment for the outstanding judgment in lieu of a cash payment for the remainder of the judgment, the judgment is satisfied at that point, not at some later time when the judgment-creditor has managed to sell the property for cash. Only if the alleged title transfer were a sham transaction or a fraudulent transfer would the judgment not be satisfied until the property was sold and the money collected. The other four judgment-creditors' arguments would then have great weight. A judgment-creditor accepting title to property in lieu of cash as full satisfaction of its judgment takes the risk that its later sale of the property could amount to less (or the chance it could be more) than amount due on the judgment or that the sale might fall through. Dateline took that risk.
The court therefore concludes that Dateline's actions are not grounds to reduce its priority status or for disgorgement of the funds it has received. The court further concludes that the Dateline judgment has been satisfied. The court therefore will not, and the parties need not, serve Dateline with any future filings in this proceeding.
All writs of execution and previously entered orders in aid of judgment are hereby stayed or vacated. Based on the foregoing reasoning, they are replaced by the following order in aid of all the judgments:
1. State Justice Ombudsman Harry Narruhn is hereby appointed as Receiver for the judgment-debtors.
2. The judgment-debtors shall promptly remit to the Receiver any and all funds received from the sale of any of their assets, including, but not limited to, land, vehicles, vessels, and other personal property, whether tangible or intangible, unless the buyer has instead paid the funds directly to the Receiver.
3. As a matter of extraordinary equitable relief, the Receiver shall pay to Albatross Trading Co. the sum of $1,423.03 from the bank account originally opened for its benefit by an order in aid of judgment in Civil Action No. 2001-1022, and when those funds are paid out, that account shall be closed; and, from the other funds deposited with the court, the Receiver shall pay $15,000 to Rao K. Medabalmi and Devi B.B. Medabalmi and $2,100 to FSM Telecommunications Corporation.
4. From the funds deposited with the court on April 6, 2003, the Receiver shall set aside $15,355.26 plus the interest that sum has accrued to date, and place it into a separate account. If, no later than May 30, 2003, Rus Pty Ltd. files a copy of a certificate of title for Lot No. 61536, issued before March 6, 2003, on which its mortgage has been endorsed, the court will order these funds remitted to Rus Pty Ltd. Filing and service may be by fax, with the originals mailed the same day. If no such certificate of title is provided, then these funds will be paid to the next judgment-creditor in line.
5. Dateline Exports, Inc.'s judgment having already been satisfied, no funds will be disbursed to it.
6. The remaining funds shall be disbursed to Rao K. Medabalmi and Devi B.B. Medabalmi until their judgment has been satisfied.
7. Then, unless the Rus Pty Ltd. judgment has been satisfied before then, the Receiver shall remit to Rus Pty Ltd. any funds deposited with the court until its judgment is satisfied.
8. Once the Rus Pty Ltd. judgment has been satisfied then the funds deposited with the court will be applied to the Albatross Trading Co. judgment until that judgment is satisfied.
9. Once the Albatross Trading Co. judgment has been satisfied then the funds deposited with the court will be applied to the FSM Telecommunications Corporation judgment until that judgment is satisfied.
10. Once the FSM Telecommunications Corporation judgment has been satisfied then the funds deposited with the court will be applied to the Trans Pacific Export Co. judgment until that judgment is satisfied.
11. Once the Trans Pacific Export Co. judgment has been satisfied then any excess funds still deposited with the court will be returned to the judgment-debtors.
12. The Receiver shall prepare, file and serve monthly reports showing all money received, all money paid out, and to whom paid, and the date of each transaction. Such reports shall be served on the judgment-debtors and all remaining unsatisfied judgment-creditors.
13. Medabalmis' counsel shall file and serve, no later than May 30, 2003, an accounting showing the Medabalmi judgment, payments thereon, and the balance due on April 6, 2003, the date the funds currently on deposit with the court were received. This accounting may be filed and served by fax, with the originals mailed the same day.
14. The Receiver shall investigate and compile a report showing all assets owned by the judgment-debtors and their sources of income. The list of assets shall include, but not be limited to, land, vehicles, vessels, equipment, goods, receivables, shares in any company (such as UMDA, Bank of the FSM, or any other company), bank accounts, and any other movable personal property. The list of assets listed shall include all assets, whether located in Chuuk or elsewhere. This report shall be filed and served on the judgment-debtors and all remaining unsatisfied judgment-creditors no later than June 16, 2003. From time to time, the Receiver may update or supplement this report as the situation warrants.
15. Counsel are reminded that in their calculations of amounts due on their clients' judgments that the 9% statutory interest ceases to accrue at the point the judgment-debtor pays the money credited to the principal into court and that after that time the only interest a judgment-creditor is entitled to is that paid by the court's depository institution on the deposited money. Senda v. Creditors of Mid-Pacific Constr. Co., 7 FSM Intrm. 664, 670-71 (App. 1996).
16. Counsel are also reminded that any post-judgment charges for their attorney's fees and costs (that is, any attorney's fees and costs beyond those awarded in the judgments themselves) that they might claim must first be determined as reasonable and awarded by the court before the judgment-creditors are entitled to collect from the judgment-debtors or be paid by the Receiver for these amounts.
_______________________________Footnotes:
1 Although the court must first look to FSM sources of law rahter than begin with a review of cases decided by other courts, FSM Cont. art. XI,§ 11("In rdering a decision, a court shall consult and apply sources of the Federated States of Micronesia."): Alaphonso V. FSM, 1 FSM Intrm. 209,214 (App. 1982),{page 528} when the court has not previouysly construed an FSM civil procedure rule which is identical or similar to a U.S. rule, the court may look to U.S. sources for guidance int interpreting the rule, see, e.g., Bualuay v. Rano, 11 Intrm. 139, 146 n.1 (App. 2002); Primo v. Pohnpei Transp. Auth., 9 FSM Intrm.407, 413 n.3 (App. 2000); Tom v. Pohnpei Utilities Corp., 9 FSM Intrm. 82, 87 n.2(App. 1999); Senda v. Mid-Pacific Constr. Co., 6 FSM Intrm.440, 444(App. 1994)
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