FSM SUPREME COURT TRIAL DIVISION
Cite as In re Engichy ,12 FSM Intrm. 58 (Chk. 2003)
IN RE JOHN ENGICHY, ROSEMARY ENGICHY,
ISLAND IMPORTS, and MERRY SAND MINING,
Judgment-Debtors.
CIVIL ACTION NO. 2003-1001
MEMORANDUM AND ORDERS CONCERNING PRIORITY
Martin G. Yinug
Associate Justice
Decided: August 12, 2003
Amended: August 20, 2003
APPEARANCES:
For the
Judgment-Creditor: Michael J. Sipos, Esq.
(FSM Social Security)
P.O. Box 2069
Kolonia, Pohnpei FM 96941
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-Creditors: Craig D. Reffner, Esq.
(Medabalmis; Albatross;
Law Office of Fredrick L. Ramp
& FSM Telecom)
P.O. Box 1480
Kolonia, Pohnpei FM 96941
For the Judgment-Creditor: Andrea Hillyer, Esq.
(Trans Pacific Export Co.)
P.O. Drawer D
Kolonia, Pohnpei FM 96941
* * * *
Language in 54 F.S.M.C. 135(2) that the amount of wage and salary taxes formed "a lien on the employer's entire assets, having priority over all other claims and liens" meant that this statutory lien
superseded the general rule of first in time, first in right. In re Engichy, 12 FSM Intrm. 58, 64 (Chk. 2003).
All Social Security taxes, including penalties and interest, constitute a lien upon any property of the employer, having priority over all other claims and liens including liens for other taxes. This creates a lien for social security taxes that has priority over even other tax liens, such as the wage and salary tax liens given first priority in Island Hardware and Pacific Islands Distributing. In re Engichy, 12 FSM Intrm. 58, 64 (Chk. 2003).
The social security tax lien arises by operation of law whenever social security taxes become due and are not paid. In re Engichy, 12 FSM Intrm. 58, 64 (Chk. 2003).
One principle of statutory construction is that the specific provision prevails over the more general. In re Engichy, 12 FSM Intrm. 58, 64 (Chk. 2003).
If two statutes conflict, the more recent expression of the legislature's will (that is, the most recently enacted statute) prevails over the earlier to the extent of the conflict. In re Engichy, 12 FSM Intrm. 58, 64 (Chk. 2003).
Under 53 F.S.M.C. 607, Social Security taxes specifically take priority over other tax liens. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
A social security tax lien has priority over a mortgage because section 607 grants social security tax liens priority over all other liens regardless of whether the other liens arose earlier. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
Under the general rule a mortgage first in time has superior right in the absence of the applicability of a statutory provision to the contrary. Section 607 is a statutory provision to the contrary because it grants social security tax liens priority over all other liens regardless of whether the other liens arose earlier. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
Social Security's statutory priority tax lien is consistent with the general rule that acknowledges that the first-in-time priorities are also subject to legislative action that restructures the normal priorities. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
Social Security's tax lien priority is statutory, not equitable. Statutory law, as enacted by Congress, not equitable principles fashioned by the court, applies. The statute, 53 F.S.M.C. 607, expressly gives Social Security a tax lien superior to all other liens. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
Social Security's lofty public purpose is to provide for retirees, their dependents, and their
surviving spouses and dependants. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
A mortgagee's due process rights are not violated by a statute making another lien superior to its mortgage when the statute was enacted prior to the mortgage's execution. In re Engichy, 12 FSM Intrm. 58, 65 (Chk. 2003).
As Congress clearly intended, social security tax liens must be given priority over all other claims and liens and paid first. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
Pleadings, discovery, summary judgment motions, and trial are all prejudgment procedures and are thus inapplicable to an entirely a post-judgment matter. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
When the two issues a party seeks reconsideration of were raised in the other parties' filings and at the scheduled conference (which it declined to attend), the party thus had the opportunity to (and did) respond to other parties' claims, then the party was given the process that was due it. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
Any party recovering a civil judgment for money is entitled to a prompt, immediate issuance of a writ of execution anytime after ten days after the entry of judgment, and a writ of execution, if levied upon, requires immediate payment of the judgment in full. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
An order in aid of judgment only requires future payment according to its terms, which invariably will not be immediate payment in full, and which may later be modified. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
An order in aid of judgment, unlike a writ of execution, may only be obtained after application and notice to the other party and a hearing instead of the prompt issuance possible for a writ of execution. In re Engichy, 12 FSM Intrm. 58, 66 (Chk. 2003).
A judgment-creditor (or its attorney) must evaluate which method (writ of execution or order in aid of judgment) is most likely to best satisfy its judgment unless the judgment-debtor has already foreclosed that choice by applying for an order in aid of judgment. In re Engichy, 12 FSM Intrm. 58, 66-67 (Chk. 2003).
It is fairly clear that a purchaser who has actual knowledge of some adverse claim to the land will take subject to it, even though the certificate of title fails to memorialize it. In re Engichy, 12 FSM Intrm. 58, 67 n.4 (Chk. 2003).
A foreign citizen, is barred from acquiring legal title to land anywhere in the FSM. In re Engichy,
12 FSM Intrm. 58, 68 (Chk. 2003).
By state statute, a mortgage creates a lien on the land, but does not pass title to the mortgagee. In re Engichy, 12 FSM Intrm. 58, 68 (Chk. 2003).
Any land may be mortgaged by its owners, and such a mortgage may be recorded. But a mortgage on unregistered land can only be recorded, not registered because no certificate of title had been issued for it. In re Engichy, 12 FSM Intrm. 58, 68 (Chk. 2003).
On registered land encumbrances such as a mortgage must be endorsed upon the certificate of title. In re Engichy, 12 FSM Intrm. 58, 68 (Chk. 2003).
American common law authorities are applicable in the Federated States of Micronesia, if they are applicable at all, only to "recorded" land – to land that has not been issued a certificate of title. Land with a certificate of title is not part of a land recordation system but is part of a Torrens land registration system. In re Engichy, 12 FSM Intrm. 58, 68 (Chk. 2003).
A Torrens land registration system is a legal concept completely foreign to American common law and the related recording statutes. Common law precedents and procedures do not apply to registered land. Land registration is wholly statutory. In re Engichy, 12 FSM Intrm. 58, 68-69 (Chk. 2003).
The purpose and benefit of the lengthy procedure and notice requirements needed to register land is that a certificate of title, once issued, is conclusive upon all persons who have had notice of the proceedings and all those claiming under them and shall be prima facie evidence of ownership as therein stated against the world. This is unlike a "conventional" recording system, which makes no averments to the public about the state of title to any parcel of land. Instead it merely invites searchers to inspect the copies of the instruments which it contains and to draw their own conclusions as to title. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
The ownership as stated in the certificate of title is conclusive upon all persons who have had notice of the proceedings and all those claiming under them and prima facie evidence against the world. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
No lengthy title searches, which may fail to turn up important claims, need be done on registered land because all transfers and encumbrances of any interest in the land covered by a certificate of title must be noted thereon or therewith except for rights of way over the land, taxes on the land due within the two years prior to the certificate's issuance, and leases or use rights of less than one year. One only needs to consult the Land Commission's original certificate of title, which will show at a glance the ownership of, and the encumbrances on, the property, and the title searcher need then only read and evaluate the documents referred to by the current endorsements. No historical search of the title is ever necessary or relevant. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
The Chuuk Constitution bans taxes on real property. In re Engichy, 12 FSM Intrm. 58, 69 n.6 (Chk. 2003).
An adverse possession claim will never prevail over a validly-issued certificate of title. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
The benefits of land registration all flow from the adherence to the Torrens land registration statutes and people's ability to rely on the certificate of title. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
Generally, a specific statutory provision will control rather than a general statute to the extent that they conflict. In re Engichy, 12 FSM Intrm. 58, 69 (Chk. 2003).
The Chuuk Real Estate Mortgage Law confirms and adopts by reference rather than modifying or repealing the Title 67 provisions applicable to the endorsement of mortgages on certificates of title. In re Engichy, 12 FSM Intrm. 58, 70 (Chk. 2003).
It is the owner's duty in requesting any transfer or upon notice that an involuntary transfer has been effected to submit his owner's duplicate certificate for proper endorsement or cancellation, if it is physically practicable for him to do so and if the owner is unable to physically submit the certificate because it has been lost or destroyed, there is a method whereby he may obtain a new duplicate certificate for submission. In re Engichy, 12 FSM Intrm. 58, 70 (Chk. 2003).
Although preferable, endorsements on certificates of title are not required to be typewritten. Hand printing would suffice. In re Engichy, 12 FSM Intrm. 58, 70 (Chk. 2003).
In some Torrens land registration system jurisdictions, considering that the purpose of land registration acts is to allow confident reliance upon the land registration agency's original certificate of title, the absence of even an obvious encumbrance (or an encumbrance of which there is actual knowledge) from the certificate is fatal because the certificate itself is conclusive. In re Engichy, 12 FSM Intrm. 58, 70-71 (Chk. 2003).
A mortgage endorsed on a certificate of title cannot be given retroactive effect. To do so would destroy the purpose of the land registration system – that the original certificate of title at the Land Commission is conclusive and if there are no endorsements anyone searching the state of the title need look nowhere else for mortgages and for the other encumbrances that, with certain exceptions, are required to be listed there. In re Engichy, 12 FSM Intrm. 58, 71 (Chk. 2003).
A mortgagee will have a secured interest in any future funds that from the sale of the mortgaged land when, although the mortgage was not endorsed on the certificate of title before the case was consolidated with other judgment-creditors', all of the necessary documents for the Land Commission
to endorse the mortgage had been submitted to the Land Commission by then. In re Engichy, 12 FSM Intrm. 58, 71 (Chk. 2003).
The only interest remitted to a judgment-creditor other than that earned before the money was deposited with the court will be whatever amount the court's depository institution has paid on the deposited money. In re Engichy, 12 FSM Intrm. 58, 71 (Chk. 2003).
An order in aid of judgment generally deals not only with funds and assets currently in a judgment-debtor's possession but also with funds that are expected to come into the judgment-debtor's possession in the future. In re Engichy, 12 FSM Intrm. 58, 72 (Chk. 2003).
* * * *
MARTIN G. YINUG, Associate Justice:
This comes before the court on two different judgment-creditors' claim to priority. Judgment-creditor FSM Social Security Administration (Social Security) claims priority over all other creditors through a statutory lien and judgment-creditor Rus Pty Ltd. (Rus) claims priority through a mortgage executed with the judgment-debtors. Other judgment-creditors dispute these priority claims.
By the court's May 22, 2003 order nisi, Social Security's April 29, 2003 judgment against John and Rosemary Engichy d/b/a Island Imports and Merry Sand Mining was, as of June 10, 2003, consolidated with the judgments already consolidated in this matter. Social Security asserts that it holds a lien on the judgment-debtors' assets that has priority over all of the other judgment creditors' claims as its judgment is for unpaid social security taxes.
A. Opposition to Social Security
Judgment-creditors Rao K. Medabalmi and Devi B.B. Medabalmi (the Medabalmis), Albatross Trading Co., Inc., and FSM Telecommunications Corporation, joined by judgment-creditor Trans Pacific Export Co. Ltd., oppose. They ask the court not to recognize Social Security's claim to priority over the judgments originally consolidated in this matter. They contend that its asserted lien should be treated as an equitable lien, the effect of which should be considered on a case-by-case basis. They urge that under the equities present here, where the opposing judgment-creditors were "wholly without knowledge" of Social Security's claimed lien; where Social Security was not involved in the litigation resulting in the court's May 14, 2003 priority order, In re Engichy, 11 FSM Intrm. 520 (Chk. 2003); and where Social Security did not make its claim known or join this litigation until after the priority order was issued, Social Security should not be given any priority. They further contend that Social Security's lien is a disfavored secret lien and that its judgment should not be paid until the last of the original judgment-creditors, Trans Pacific Export Co. Ltd., has been paid in full.
Rus responded to Social Security's claim on August 5, 2003, when it filed an opposition although the court's May 22, 2003 order required any such objection to be filed by June 10, 2003. The court could disregard this filing solely on the ground that it was not timely filed and Rus did not move for an enlargement of time. But the court, in its discretion, will instead address the filing's
substance now rather than being asked to visit it later. Rus contends that its mortgage was a conveyance in payment of a judgment. It further contends that its mortgage will prevail over Social Security because of the principle that first in time has the superior right and Social Security had not attached a lien to the property before it was mortgaged to Rus. For this proposition Rus relies on a treatise which states that this general rule "applies to mortgages, in the absence of the applicability of a statutory provision or agreement to the contrary" and any encumbrance that attaches to the mortgaged property after the mortgage's execution is subject to the mortgage. 55 Am. Jur. 2d Mortgages § 323, at 392 (1971). Rus further contends that as a mortgagee it is a bona fide purchaser for value and as a such Social Security cannot overcome its mortgage. Rus further contends that Social Security cannot find the superior right it claims in the statute it relies upon, and even if it could be found in the statute, then equitable principles estop Social Security from asserting its lien.
B. Social Security's Lien Priority
As already decided in this case, the court will use the priority rules developed in earlier FSM cases as a basis for assigning priorities in this case because these rules were developed through case law that has been in effect in the FSM for well over a dozen years and were affirmed by the appellate division. In re Engichy, 11 FSM Intrm. 520, 527 (Chk. 2003). In Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 108 (Pon. 1987), the court held that wage and salary tax liens under 54 F.S.M.C. 135 had first priority even over other liens which arose earlier in time. This holding was followed in In re Pacific Islands Distributing Co., 3 FSM Intrm. 575, 583-84 (Pon. 1988) and was affirmed in In re Island Hardware, Inc., 5 FSM Intrm. 170, 173 (App. 1991). Under 54 F.S.M.C. 135(2), the amount of wage and salary taxes formed "a lien on the employer's entire assets, having priority over all other claims and liens." This language meant that this statutory lien even superseded the general rule of first in time, first in right. See In re Pacific Islands Distrib. Co., 3 FSM Intrm. at 582 (first-in-time, first-in-right rule applies only to creditors not entitled to statutory lien priority or extraordinary equitable relief); In re Island Hardware, 3 FSM Intrm. 332, 337 (Pon. 1988); Island Hardware, Inc. (II), 3 FSM Intrm. at 108-10.
In contrast, all Social Security taxes, including penalties and interest, constitute "a lien upon any property of the employer, having priority over all other claims and liens including liens for other taxes . . . ." 53 F.S.M.C. 607. By its terms, 53 F.S.M.C. 607 creates a lien for social security taxes that has priority over even other tax liens, such as the wage and salary tax liens given first priority in Island Hardware and Pacific Islands Distributing. This lien arises by operation of law whenever social security taxes become due and are not paid.
Section 607 became law December 29, 1988 (as FSM Public Law No. 5-120, § 4), which was after the trial court had decided those cases involving 54 F.S.M.C. 135(2). The language of 53 F.S.M.C. 607 is similar to but stronger than that of 54 F.S.M.C. 135(2), because it also specifically creates priority over other tax liens. FSM Social Security taxes were not claimed in Island Hardware and Pacific Islands Distributing, but it seems apparent that if 53 F.S.M.C. 607 had been in effect then and if FSM Social Security had made a claim then its lien would have had priority over even the 54 F.S.M.C. 135(2) lien given first priority there. This conclusion is based on two principles of statutory construction ) that the specific provision prevails over the more general, Setik v. FSM, 5 FSM Intrm. 407, 411 (App. 1992); Olter v. National Election Comm'r, 3 FSM Intrm. 123, 129 (App. 1987), and that, if two statutes conflict, the more recent expression of the legislature's will (that is, the most recently enacted statute) prevails over the earlier to the extent of the conflict, see, e.g., Lietz v. Fleming, 264 F.2d 311, 313 (6th Cir. 1959) (both statutes given effect and newer statute repeals older only to the extent of any conflict); American Fed. of Gov't Employees v. Freeman, 510 F. Supp. 596, 602 n.18 (D.D.C. 1981) ("Where there is a conflict between two statutes, 'the latest legislative expression prevails, and the prior law yields to the extent of the conflict.'" (quoting 1A Sutherland
Statutory Construction § 23.09 (4th ed. 1972)); In re Van Der Schuur, 20 F. Supp. 42, 43 (N.D. Cal. 1937) (when two statutes deal with the same subject, the rule is to give effect to both if possible, but if the two conflict in any of their provisions, the latter statute prevails to the extent of the conflict even without a repealing clause). Under 53 F.S.M.C. 607, Social Security taxes specifically take priority over other tax liens, and section 607 is also the more recently enacted statute. Cf. Powers v. Ulichny, 440 A.2d 885, 891 (Conn. 1981) (statute that is both more recent and more specific will control to the extent of any conflict).
Since this is so, even assuming that Rus's mortgage's priority runs from the date it asserts, the social security tax lien has priority over the mortgage. Even relying on the authority cited by Rus that under the general rule a mortgage first in time has superior right "in the absence of the applicability of a statutory provision . . . to the contrary," 55 Am. Jur. 2d Mortgages § 323, at 392 (1971), section 607 is a statutory provision to the contrary. It grants social security tax liens priority over all other liens regardless of whether the other liens arose earlier.1 A mortgage is a lien. See infra pt. II.C.1. Social Security's lien thus prevails over Rus's mortgage.2 This is consistent with the general rule cited by Rus because that general rule acknowledges that "the first-in-time priorities are also subject to legislative action that restructures the normal priorities." 55 Am. Jur. 2d Mortgages § 307, at 54 (rev. ed. 1996). Section 607 restructures the "normal" priorities.
Rus asserts that even if Social Security's lien is superior to its mortgage then equity would estop Social Security from claiming priority because it asserted its rights so long after the other creditors that Rus's due process rights would otherwise be violated. Social Security's priority, however, is statutory, not equitable. Statutory law, as enacted by Congress, not equitable principles fashioned by the court, applies. The statute, 53 F.S.M.C. 607, expressly gives Social Security a tax lien superior to all other liens. Congress could have exempted certain liens such as mortgages. It chose not to.
Considering Social Security's lofty public purpose ) to provide for retirees, their dependents, and their surviving spouses and dependents, 53 F.S.M.C. 602 ) it is apparent that Congress intended to provide Social Security with superior lien rights to effect that purpose. The priority statute itself is a disclosure of the lien. A mortgagee's due process rights are not violated by a statute making another lien superior to its mortgage when, as here, the statute was enacted prior to the mortgage's execution. See generally 42 Am. Jur. 2d Insolvency §§ 5, 6 (rev. ed. 2000); 53 Am. Jur. 2d Mechanics' Liens § 273 (rev. ed. 1996); 55 Am. Jur. 2d Mortgages § 309 (rev. ed. 1996). Thus, even if Rus's mortgage creates a lien from the date it was executed and filed, Social Security's statutory lien right is superior to it and all others. And even if equity could estop Social Security for delay in asserting a claim, the time between the March 6, 2003 consolidation of cases and Social Security's May claim was too short for estoppel to overcome the statutory priority.
The court therefore concludes that, as Congress clearly intended, social security tax liens must be given priority over all other claims and liens and paid first.
Rus asks that the court reconsider its prior ruling that unless its mortgage had been properly registered and endorsed on the certificate of title then its priority would be determined by the date of its writ of execution. In re Engichy, 11 FSM Intrm. at 529-31, 533. If Rus has a perfected mortgage and is thus a secured creditor, then its judgment must be paid in full first so long as the source of funds is from the sale of the mortgaged property. If Rus is not a secured creditor, then the Medabalmis' judgment will be paid before Rus's, but, based on the date of its writ of execution, Rus will still have priority over, and must be paid before, the other judgment-creditors ) Albatross Trading Co., and FSM Telecommunications Corporation, and Trans Pacific Export Co. ) are paid. At issue is thus whether Rus or the Medabalmis should be paid first when the source of the funds is the mortgaged property's sale.
A. Due Process
Rus contends that parts of the May 14th order "came as a surprise" because they were not "the subject of briefs, motions, or a trial" and because the "due process safeguards and traditional remedies of Rule 24 intervention . . . were dispensed with" by the court's May 14th order because "[n]o pleadings closed or framed the issues, no discovery was conducted, no motions for summary judgment" were "exchanged, and no trial was held." Rus Pty. Motion for Reconsideration or Relief from Order at 23 (June 12, 2003).
What Rus overlooks is that pleadings, discovery, summary judgment motions, and trial are all prejudgment procedures. This is entirely a post-judgment matter. Those procedures are thus inapplicable. Furthermore, this is not a Rule 24 intervention by a non-party in a case. This is a Rule 42 consolidation of cases.
The two issues Rus seeks reconsideration of ) whether an order in aid of judgment should be given priority status equal to a writ of execution and whether Rus's mortgage was properly registered and gave Rus priority as a secured creditor or was a secret lien that had no priority ) were raised in the other judgment-creditors' filings and at the scheduled conference (which Rus declined to attend). Rus thus had the opportunity to (and did) respond to other judgment-creditors' claim that the mortgage was not entitled to priority and was a secret lien and that judgment-creditors with orders in aid of judgment should be treated as equivalent to writ of execution holders in these consolidated cases. Rus was given the process that was due it.
B. Precedent
Rus also asserts that the May 14th order "reversed" precedent and erased the distinction between an order in aid of judgment (which it referred to as a payment order) and a writ of execution. It did not. The distinction remains. Any 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 (construing 6 F.S.M.C. 1407), anytime after ten days after the entry of judgment, FSM Civ. R. 62(a), and a writ of execution, if levied upon, requires immediate payment of the judgment in full. On the other hand, an order in aid of judgment only requires future payment according to its terms, which invariably will not be immediate payment in full, and which may later be modified, 6 F.S.M.C. 1411. Furthermore, an order in aid of judgment, unlike a writ of execution, may only be obtained after application and notice to the other party, 6 F.S.M.C. 1409, and a hearing, 6 F.S.M.C. 1410, instead of the prompt issuance possible for a writ of execution. A judgment-creditor (or its attorney) must still
evaluate which method is most likely to best satisfy its judgment unless the judgment-debtor has already foreclosed that choice by applying for an order in aid of judgment, 6 F.S.M.C. 1413(1) (statutory bar on issuance of writ of execution once order in aid of judgment has been applied for).
What the May 14th order did do was determine what priority should be given to an order in aid of judgment when both writs of execution and orders in aid of judgment have failed to achieve their desired results and unsatisfied judgments have had to be consolidated to achieve an orderly payment process. This was, as the May 14th order stated, a matter of first impression, In re Engichy, 11 FSM Intrm. at 527, and thus a gap in precedent which the court had to fill (for the reasons given, id. at 527-28) when confronted with the issue. The court's stated objective was to follow precedent as closely as possible. Id. at 527 ("it is appropriate to use the priority rules developed in those FSM cases as a basis for assigning priorities in this case [since t]hese 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"). Rus's contention that precedent was "reversed" therefore must be, and is, rejected. Precedent was supplemented, not reversed.
Rus does not set forth any authority or argument for reconsidering the priority scheme set in place in the May 14th order other than its unfounded contention the court reversed precedent. Further reconsideration of the priority scheme is therefore denied.
C. Rus's Mortgage
Rus's principal contention for reconsideration of its place in the priority scheme (and the one which the court's May 14th order invited it to make, In re Engichy, 11 FSM Intrm. at 531, 533) is that its mortgage is properly registered and secures its judgment, which therefore holds priority over the Medabalmis', and all other unsecured creditors', judgments. Because of the date of its writ of execution, Rus's judgment currently holds priority over all of the remaining creditors' judgments except the Medabalmis'.
Rus states that it filed its mortgage with the Land Commission on April 18, 2002 and that it was properly recorded in the daily log. It was then placed in the file for Lot No. 61536. Rus contends that the mortgage executed with the then landowner Engichy satisfied all the necessary element for an effective mortgage – consideration, description of the property, obligations, interest, persons liable, delivery, and acceptance. It also contends that the mortgage is valid and that conveyance of the land to buyer Midasy Aisek is subject to the mortgage.
The mortgage's validity and its enforceability against the mortgagor, John Engichy, or against a land buyer3 who took with notice4 of the mortgage, such as Aisek appears to be, was not disputed in this case. What is disputed is whether Rus's mortgage is perfected so as to give Rus the status of a secured creditor who will prevail over all unsecured creditors regardless of whether they had actual notice of the mortgage.
1. Mortgages – Conveyance of Title or Creation of Lien?
Rus contends that it is in a position similar to Dateline where the sale and conveyance of the judgment-debtors' inventory to Dateline was a final transaction transferring title to property. See In re Engichy, 11 FSM Intrm. at 533. For this proposition Rus relies on authority that "[m]ortgages are sometimes regarded as conditional conveyances, vesting in the mortgagee the legal title to the estate conveyed," but that that title can be defeated by the mortgagor's performance according to the mortgage's terms. 54A Am. Jur. 2d Mortgages § 163, at 701 (rev. ed. 1996) (footnotes omitted). Rus omits the rest of that authority which indicates otherwise. It states that "[i]n other jurisdictions, however, the mortgage is regarded as a mere security for the debt. . . . Under this rule, a mortgage does not pass to the mortgagee the title to the property mortgaged . . . ." Id. (footnotes omitted).
Under Chuuk state law, it is this second view that prevails. First, there is the obvious constitutional problem with Rus's view because Rus, as a foreign citizen, is barred from acquiring legal title to land anywhere in the FSM. FSM Const. art. XIII, § 4. Second, a state statute specifically enacts the second rule. "Under the provisions of this Act, [a] mortgage creates a lien on the land, but does not pass title to the mortgagee." Truk S.L. No. 4-91, § 28. Therefore no title did, or could have, passed to Rus as mortgagee. Its analogy to Dateline's position fails.
2. Registered Land and "Recorded" Land
Rus somehow reads the May 14th order as saying that only land with certificates of title may be mortgaged and henceforth creditors would be forced to exercise control over the internal workings of the Land Commission. The May 14th order dealt only with mortgages on registered land because the mortgage in question was for land for which a certificate of title had been issued. It is unquestioned that any land may be mortgaged by its owners, Truk S.L. No. 4-91, § 6, and that such a mortgage may be recorded, id. § 10. But a mortgage on unregistered land can only be recorded, not registered because no certificate of title had been issued for it. The mortgage here is not on "recorded" land. It is on registered land with a certificate of title upon which encumbrances such as a mortgage must be endorsed, 67 TTC 119(1).
Rus relies on various American common law authorities for the proposition that a creditor need only submit his paperwork to the recording authorities to be protected under the recordation statutes. These authorities are applicable in the Federated States of Micronesia, if they are applicable at all, only to "recorded" land ) to land that has not been issued a certificate of title. The mortgaged land in question is not "recorded" land. It has a certificate of title. It is not part of a land recordation system; it is part of a Torrens land registration system. The authorities that Rus cites deal with recordation and "recorded" land (that is, land for which no certificate of title has been issued) are not relevant to the issue at hand.
Rus's contentions and citations of authority exhibit a misunderstanding of the Torrens land registration system.5 It is not a land recordation system. It is a land registration system. The Torrens land registration system had its genesis in South Australia. Roger A. Cunningham, William B. Stoebuck, & Dale A. Whitman, the Law of Property § 11.15, at 828 (1984). Very few places in the United States have Torrens land registration systems and even fewer have important activity under the system. Id. It is a legal concept completely foreign to American common law and the related recording statutes.
Common law precedents and procedures do not apply to registered land. Land registration is wholly statutory.
The purpose and benefit of the lengthy procedure and notice requirements needed to register land, 67 TTC 104-117, is that a certificate of title, once issued, is "conclusive upon all persons who have had notice of the proceedings and all those claiming under them and shall be prima facie evidence of ownership as therein stated against the world," 67 TTC 117(1). This is unlike a "conventional" recording system, to which the American authorities cited by Rus refer, and which "makes no averments to the public about the state of title to any parcel of land. Instead it merely invites searchers to inspect the copies of the instruments which it contains and to draw their own conclusions as to title." Cunningham et al., supra, § 11.15, at 827.
The advantages of the land being registered are usually manifest to the landowner or to a land buyer or a mortgagee. The ownership as stated in the certificate of title is "conclusive upon all persons who have had notice of the proceedings and all those claiming under them" and "prima facie evidence . . . against the world." 67 TTC 117(1). No lengthy title searches, which may fail to turn up important claims, need be done because "[a]ll transfers and encumbrances . . . of any interest in the land covered by [a] certificate of title shall be noted thereon or therewith," 67 TTC 119(1), except for rights of way over the land, taxes on the land6 due within the two years prior to the certificate's issuance, and leases or use rights of less than one year, 67 TTC 117(1). One only needs to consult the original certificate of title kept in the Land Commission. That certificate will show at a glance the ownership of, and the encumbrances on, the property, and the title searcher need then only read and evaluate the documents referred to by the current endorsements. "No historical search of the title is ever necessary or relevant." Cunningham et al., supra, § 11.15, at 829. Furthermore, an adverse possession claim will never prevail over a validly-issued certificate of title. See id. at 830 n.11. Nor, in those places where lenders regularly demand title insurance for all mortgages, is any title insurance needed for registered land. These benefits all flow from the adherence to the Torrens land registration statutes and people's ability to rely on the certificate of title.
The Real Estate Mortgage Law applies to all mortgages on any land in Chuuk, not just registered land (that is, land with a certificate of title). 67 TTC §§ 117, 119 deal specifically with encumbrances (such as a mortgage) on registered land. Generally, a specific statutory provision will control rather than a general statute to the extent that they conflict. Setik, 5 FSM Intrm. at 411; Olter, 3 FSM Intrm. at 129; see also Freeman, 510 F. Supp. at 602 n.19 ("'Where one statute deals with a subject in general terms, and another deals with a part of the same subject in a more detailed way, the two should be harmonized if possible; but if there is any conflict, the latter will prevail, regardless of whether it was passed prior to the general statute.'" (quoting 2A Sutherland Statutory Construction § 51.05 (4th ed. 1972)); Moysey v. Andrus, 481 F. Supp. 850, 860 (D.D.C. 1979) ("'Where one statute is broader than the other, both occupying the same field, the specific controls the general to the extent of the conflict whether enacted before or after the broader statute.'" (quoting 1A Sutherland Statutory Construction § 23.09, at 230 (4th ed. 1972)).
However, the Real Estate Mortgage Law contains a provision that addresses any conflict with other statutes:
In the event of conflict between provisions of this Act and those of any other state law or municipal ordinance . . . the provisions of this Act shall control in so far as
they concern the rights and obligations arising from, the formalities necessary for, and the procedures connected with, mortgages . . . or any aspect thereof . . . .
Truk S.L. No. 4-91, § 2 (as amended by Truk S.L. No. 6-45, § 1). What constitutes "any aspect thereof" must necessarily include what steps a mortgagee must take to provide notice of the mortgage to the world and thus to hold secured creditor status. The Real Estate Mortgage Law further provides that "[a]ll mortgages, amendments, renewals, and extensions or [sic] mortgages shall be acknowledged or proved as provided by this act and recorded with the Clerk of Courts, and/or with the Senior Commissioner or Registrar, as required by Section 11201 of Title 57, and Section 119 of Title 67 of the Trust Territory Code." Truk S.L. No. 4-91, § 10. Section 11201 of Title 57 deals with recording documents pertaining to unregistered ("recorded") land, and Section 119 of Title 67 concerns the recording of encumbrances on registered land by endorsement on the certificate of title. The Real Estate Mortgage Law thus confirms and adopts by reference rather than modifying or repealing the Title 67 provisions applicable to the endorsement of mortgages on certificates of title. The Real Estate Mortgage Law therefore has not repealed by reference the requirement that to be valid against third parties the mortgage must be endorsed on the certificate of title.
Rus also contends that the statute places the burden on the landowner, not the creditor to see to it that the encumbrance is endorsed on the certificate of title. This is so. "It shall be the duty of the owner in requesting any transfer or upon notice that an involuntary transfer has been effected to submit his owner's duplicate certificate for proper endorsement or cancellation, if it is physically practicable for him to do so." 67 TTC 119(1). If the owner is unable to physically submit the certificate because it has been lost or destroyed, there is a method whereby he may obtain a new duplicate certificate for submission. Id. In the usual case, the creditor has little difficulty and great incentive to compel the debtor to do his duty. A mortgage is usually granted to secure a loan. The lender (usually a bank or government agency) upon execution of the mortgage, will require the owner to produce his duplicate certificate of title, which the lender will have some employee or agent deliver to the Land Commission with the mortgage so that the mortgage will be properly registered and endorsed on the original certificate of title held by the Land Commission; and only once that has been done will the (now secured) lender give the borrower/mortgagor the check for the money borrowed. This is not an onerous or difficult process. The lender can even have the duplicate certificate of title returned to it by being named as the owner's authorized representative so as to assure itself that the job was properly done. See 67 TTC 118 ("duplicate certificate shall be . . . delivered to the owner or his or its authorized representative").
Rus lists the documents found in the Land Commission file for Lot No. 61536 in what appears to be the order in which they were submitted. Rus's mortgage is listed as the fourth document with the filing date of April 18, 2002. (It is also listed in the daily log for that date.) The owner's duplicate certificate is the fifth document in the file. It appears that it may have been submitted either with Rus's mortgage or sometime afterward but before the sixth document, a warranty deed to Midasy Aisek, was submitted on December 20, 2002. Yet the Land Commission failed to endorse the mortgage on both the original and the owner's duplicate certificates of title until June 5, 2003, when it did so at Rus's attorney's request. Land Commission personnel testified at deposition that the certificate would have been endorsed with Rus's mortgage if it had not been for certain employee absences and illnesses and for the lack of a working typewriter for some of the time. Although preferable, endorsements on certificates of title are not required to be typewritten. Hand printing would suffice. The court is astounded at the Land Commission's laxity in keeping up to date the endorsements on essential documents that affect Chuukese persons' land rights and liabilities.
Authority from other Torrens land registration system jurisdictions holds that, considering that the purpose of land registration acts is to allow confident reliance upon the land registration agency's
original certificate of title, the absence of even an obvious encumbrance (or an encumbrance of which there is actual knowledge) from the certificate is fatal because the certificate itself is conclusive. See, e.g., Knaefler v. Mack, 680 F.2d 671, 678 (9th Cir. 1982) (Hawaii law); Wells v. Lizama, 396 F.2d 877, 882-83 (9th Cir. 1968) (Guam law); Cunningham et al., supra, § 11.15, at 829 n.6 ("[i]f an encumbrance is erroneously dropped off the certificate by the registrar it ceases to exist"); 66 Am. Jur.2d Registration of Land Titles § 8 (1973) ("[t]he only rights are registered rights").
Although the court is reluctant, in light of the Land Commission's flagrant omission, to deprive Rus of its secured status when everyone else had complied with the statute, the reliability of certificates of title must be upheld. This is because at some point the Land Commission must live up to its responsibilities and people with interests in land must abide by the results if the Land Commission fails in its responsibilities. There must come a time when the public may rely on the Land Commission's original certificate of title without having to conduct further searches. Rus is thus not to be considered a secured creditor. While the mortgage has now been endorsed on the certificate of title, it cannot be given retroactive effect. To do so would destroy the purpose of the land registration system ) that the original certificate of title at the Land Commission is conclusive and if there are no endorsements anyone searching the state of the title need look nowhere else for mortgages and for the other encumbrances that, with certain exceptions, are required to be listed there. 67 TTC 117, 119.
The court will, however, given the equities of the situation, allow it to be given prospective effect against the parties to this consolidated case. That is, the court will not grant Rus priority status for any funds currently in the Receiver's control, but will grant Rus a secured interest in any future funds that come into the Receiver's control from the sale of the mortgaged land. (The last time the Receiver received any funds was before the mortgage was endorsed on June 5, 2003.) This seems proper because although the mortgage was not endorsed on the certificate of title before this case was consolidated, all of the necessary documents for the Land Commission to do so had been submitted to the Land Commission by then. The Land Commission was grossly remiss in performing its duty, but once it did perform its duty, Rus was entitled to the benefits of a mortgagee and preferred creditor insofar as any proceeds from the mortgaged land's sale are concerned. Rus's judgment will thus be paid in full before the remainder of the Medabalmis' if the funds come from the mortgaged land's sale. This prospective application is granted only because all the necessary documents had been submitted to the Land Commission well before this case was consolidated and it was only the Land Commission's lack of diligence that prevented Rus's mortgage from being endorsed before then. This ruling thus should not be read in some future consolidated judgment-debtor case as a license for a judgment-creditor, whose priority has already been set, to try to extract a mortgage from the judgment-debtor in order to improve its position in the priority scheme. It is not.
Accordingly, the Receiver shall remit to Social Security the judgment sum of $48,615.96 plus fees and costs of $425. As $38,010.93 had already been paid into court when Social Security obtained its April 29, 2003 judgment, and $20,000 more was received on May 12, 2003, Social Security is entitled to its statutory interest on only $10,605.03 from April 29 to May 12. This amounts to $41.84. The only other interest remitted shall be whatever amount the court's depository institution has paid on the deposited money. Senda v. Creditors of Mid-Pacific Constr. Co., 7 FSM Intrm. 664, 670-71 (App. 1996). After receipt of these funds, Social Security shall file a Satisfaction of Judgment. Once filed, the court will not, and the parties need not, serve Social Security with any future filings in this proceeding.
Once Social Security is paid, the present remaining funds do not cover the amounts ordered paid (before payments pursuant to the priority orders) as extraordinary equitable relief to purge any possible
contempt. See In re Engichy, 11 FSM Intrm. at 526, 533. Rus has not contested the payments ordered to purge the judgment-debtors of contempt. While the court expected that it might have on deposit by this time sufficient funds to purge the judgment-debtors of any contempt and pay both the Medabalmis and Rus even if Social Security had priority over them and was paid first, this expectation has not been met. The Receiver shall therefore pay the remaining funds towards purging possible contempt on a pro rata basis.
Any funds that come into the Receiver's future control shall be paid out in conformance with the May 14th order as modified herewith. Once future funds have been used to complete the extraordinary equitable relief of purging possible contempt, Rus will have priority if the funds source is from the mortgaged land's sale; otherwise the Medabalmis will have priority.
The court could have declined to reconsider Rus's priority on the ground that the issue is now not yet ripe for decision because the Receiver does not now control sufficient funds to pay out to get to the point where the disputed priority between Rus and the Medabalmis comes into play. But when this issue first came to the fore in the court's May 14th order, In re Engichy, 11 FSM Intrm. at 530-31, the issue was ripe for decision because at that time there were enough funds to pay either the Medabalmis or Rus in full following the priority scheme set out in that order. Even Social Security's later consolidation with this case would not have changed the situation but for the land buyer's unforeseen suspension of his monthly purchase payments.
The court has nevertheless ruled on the priority between Rus and the Medabalmis since those payments may resume at any time in the immediate future and come into the Receiver's control and since those funds are generated by the sale of the mortgaged land. (It is undisputed that the full purchase price has not been paid and that payments will resume at some time.) This order will resolve that outstanding issue so that when those funds do come into the Receiver's control they may be disbursed without much ado. This is in keeping with the nature of an order in aid of judgment. Such an order generally deals not only with funds and assets currently in a judgment-debtor's possession but also with funds that are expected to come into the judgment-debtor's possession in the future. Since funds from the mortgaged land's sale are expected to come into the judgment-debtors' possession in the near future, the question of the priority between Rus and the Medabalmis for those funds is ripe for adjudication.
Accordingly, Social Security's lien has priority over all others and, as detailed above, the Receiver shall pay its judgment from the funds currently in his control. The remaining funds (and any future funds) shall be disbursed as ordered above.
The judgment-debtors and the remaining judgment-creditors are invited to propose courses of action on how any and all property identified in the State Justice Ombudsman's Report #8, filed June 27, 2003, may be used to satisfy the remaining judgments. These proposals shall be filed and served no later than September 5, 2003. Additionally, 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, accounts receivable, and other personal property, whether tangible or intangible, unless the buyer has instead paid the funds directly to the Receiver.
_______________________________Footnotes:
1 Since the Social Security tax lien arises by operation of law whenever social security taxes are due but not paid, and since the judgment-debtors owe social security taxes dating back to over a year before Rus executed its mortgage, even assuming Rus's mortgage was valid against third parties when filed, much of Social Security's lien is earlier in time than Rus's.
2 The court takes no position on whether the same result would obtain if Rus's mortgage were a purchase-money mortgage – a mortgage entered into to finance the purchase of the property. Rus's was not. The Rus mortgage was used to secure a prior debt, not to buy the mortgaged land. The court is aware of the argument that a purchase-money mortgage should supersede other liens on the purchased property because, if the mortgagee had not advanced the purchase money, the debtor would not have acquired the property and therefore it would not be available to satisfy creditors' claims.
3 Nothing in this or prior orders prevents the land buyer himself from paying off the mortgage in order to acquire clear title to the property and thereby extinguishing the judgment-debtors' debt to Rus.
4 "It is fairly clear that a purchaser who has actual knowledge of some adverse claim to the land will take subject to it, even though the certificate [of title] fails to memorialize it." Roger A. Cunningham, William B. Stoebuck, & Dale A. Whitman, The Law of Property § 11.15, at 833 (1984). But see Knaefler v. Mack, 680 F.2d 671, 677-78 (9th Cir. 1982) (under Hawaii law the certificate of title is conclusive even if the buyer had actual knowledge of an unregistered encumbrance).
5 It is perhaps indicative of this that Rus cites Bufton v. Ha, 3 C.R. 776 (N. Mar. I. Tr. Ct. 1989), a case from the Northern Marianas, a place where a Torrens land registration system exists, but the case deals only with the recordation (not the registration) system and "recorded" not registered land.
6 This exception is meaningless in Chuuk because the Chuuk Constitution bans taxes on real property. Chk. Const. art. VIII, § 8.
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