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Lavides v Weilbacher [1996] FMSC 45; 7 FSM Intrm. 400 (Pon. 1996) (16 February 1996)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Lavides v Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400 (Pon. 1996)

ERROL LAVIDES et al.
Plaintiffs,

vs.

BISMARCK A. WEILBACHER, MICRO CUSTOMIZED CONSTRUCTION CO., SHELDON NETH and FARMER'S HOME ADMINISTRATION,
Defendants.

CIVIL ACTION NO. 1995-029

ORDER

Andon L. Amaraich
Chief Justice

Decided: February 16, 1996

APPEARANCES:

For the Plaintiff:
John Hollinrake, Esq.
Law Offices of R. Barrie Michelsen
P.O. Box 1450
Kolonia, Pohnpei FM 96941

For the Defendants (Weilbacher, MCCC):
Mary Berman, Esq.
P.O. Box 163
Kolonia, Pohnpei FM 96941

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HEADNOTES

Debtors' and Creditors' Rights
Appointment of a receiver is not appropriate when what little evidence that has been presented on the financial strength of the defendant company is long out of date, there is no reliable measure of the value of defendant's current assets and liabilities, no finding of insolvency, and plaintiffs have not demonstrated that the available legal remedy - the reduction of their claims to judgment, followed by a demand for payment, will be insufficient to provide the relief to which they may later prove themselves entitled. Lavides v. Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400, 402-03 (Pon. 1996).

Civil Procedure - Joinder
Compulsory joinder will be denied when the moving party has failed to explain exactly why it is that complete relief cannot be accorded among those already parties without the joinder, why the non-parties' interests would be impaired without joinder, or why failure to join would expose those who are already parties to inconsistent obligations. Lavides v. Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400, 403-04 (Pon. 1996).

Civil Procedure - Sanctions
Sanctions will not be imposed for a motion not well-researched and supported only by the language of what most likely is the wrong rule of civil procedure when it was not a deliberate attempt to harass and increase the cost of litigation. Lavides v. Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400, 404 (Pon. 1996).

Civil Procedure - Pleadings
Pure conjecture is not the appropriate standard for the assertion of an affirmative defense. An affirmative defense may be pled only when to the best of the signer's knowledge, information, and belief formed after reasonable inquiry, the defense is well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law. Lavides v. Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400, 405 (Pon. 1996).

Civil Procedure - Sanctions
Sanctions will be imposed for the assertion of a long list of inapplicable affirmative defenses for which no reasonable inquiry was conducted. Sanctions may be both monetary and non-monetary. Lavides v. Weilbacher, [1996] FMSC 45; 7 FSM Intrm. 400, 406 (Pon. 1996).

* * * *

COURT'S OPINION

ANDON L. AMARAICH, Chief Justice:

BACKGROUND

This case involves a dispute over unpaid back wages. The plaintiffs, a group of nineteen Filipino workers, allege that they were hired and brought to the FSM pursuant to a contract with Defendant Weilbacher and/or Micro Customize Construction ("MCC") to work on construction projects. Under that contract, the defendants were to provide them with reasonable wages, housing and food, as well as repatriation expenses at the end of their contract. Since they arrived in Pohnpei, they allege, they have been working without pay or with partial pay; they have not received adequate housing or food; and they have not received repatriation expenses.[1] Plaintiffs allege that back wages due them, but unpaid, total approximately $48,000.

Defendants Weilbacher and MCC have denied these allegations, and have counterclaimed against the plaintiffs, alleging that plaintiffs misrepresented their job skills prior to being hired; that once here, they performed their jobs in an unworkmanlike manner, causing cost overruns; that they libeled and slandered the defendants; and that they incurred personal debts to the defendants which went unpaid. Defendants also purport to assert libel and slander claims against Evelyn Hermora and the Philippine Government, who are not parties to the action, and assert a breach of contract claim on behalf of Max Mallarme, who is also not a party to the action. See Complaint paras. 17, 20.

There are a number of pending motions in this case: (1) plaintiffs' motion for appointment of a receiver for Defendant Weilbacher and MCC; (2) defendants' motion to join Evelyn Hermora and Max Mallarme as parties; (3) plaintiffs' motion for sanctions in connection with defendants' motion for joinder; (4) plaintiffs' motion to strike defendants' affirmative defenses; and (5) plaintiffs' motion for sanctions in connection with defendants' assertion of affirmative defenses.[2] These motions were all filed in April 1995.

A hearing on all pending motions was originally scheduled for May 30, 1995 at 9:00. However, on that date, then-counsel for plaintiffs, Ron Moroni, informed the Court that he had filed a notice of withdrawal. He asked the Court to continue the hearing until the plaintiffs could obtain substitute representation. The Court granted that request. Plaintiffs secured replacement counsel in mid-November.[3] At a status conference held on January 16, 1996, substitute counsel for the plaintiffs, John Hollinrake, asked the Court to rule on all pending motions. Hearing no opposition from defendants, the Court advised that it would proceed to rule on all motions then before the Court.

DISCUSSION

I. Plaintiffs' Motion for Appointment of Receiver

Plaintiffs have requested that the Court exercise its equitable powers to appoint a receiver to take control of Defendant Weilbacher's and MCC's property, and to see that the claims of defendants' creditors are paid according to their priority. See Pls.' Motion for Appointment of Receiver (Apr. 7, 1995). In support of this motion, plaintiffs cite the Court's treatment of insolvent companies in In re Pacific Islands Distributing Co.[1988] FMSC 31; , 3 FSM Intrm. 575 (Pon. 1988), and In re Mid-Pacific Construction Co.[1988] FMSC 12; , 3 FSM Intrm. 292 (Pon. 1988). Plaintiffs argue that defendants are insolvent and unable to pay their debts as they come due, and that plaintiffs, as unpaid employees, have a strong equitable claim to defendants' assets. Accompanying plaintiffs' motion is an affidavit from plaintiffs' counsel, which states that as of April 4, 1995, MCC owed three businesses approximately $62,000, and owed the plaintiffs approximately $40,000.[4]

On April 24, 1995, defendants filed an opposition to plaintiff's motion for appointment of a receiver, contending that receivership is not warranted because MCC has not been found insolvent, and plaintiffs have not yet reduced their claims to judgments upon which execution may be rendered. They argue that receivership could cause further injury to MCC, in addition to the injury defendants claim they have already sustained from their commercial dealings with the plaintiffs. Moreover, receivership is premature before their counterclaims against the plaintiffs have been adjudicated, because these counterclaims might result in an award of off-setting damages.

The Court finds that appointment of a receiver is not appropriate at this time. Little evidence has been presented on the financial strength of Defendant Weilbacher, or his company, and the evidence that has been submitted is now long out of date. As a result, the Court does not have any reliable measure of the value of defendants' current assets, or the extent of their current liabilities. Without this information, the Court cannot assess whether Defendant Weilbacher and his construction company, MCC, are insolvent. Moreover, although plaintiffs contend that defendants owe them a substantial amount of backpay, that debt is contested and has not been reduced to a judgment. Plaintiffs have not yet demonstrated that the available legal remedy - the reduction of their claims to judgment, followed by a demand for payment, will be insufficient to provide the relief to which they may later prove themselves entitled.

II. Defendants' Motion to Join Parties

Defendants have moved to join two parties to this litigation, Evelyn Hermora and Max Mallarme, pursuant to FSM Civil Rule 19(a). Defendants seek to join Ms. Hermora as a "co-respondent," for the purpose of "helping defend" against defendants' counterclaim for libel and slander, and seek to join Mr. Mallarme as a "party counterclaimant," arguing that he has claims for poor workmanship that arise out of the same transactions and occurrences as those alleged in Defendant Weilbacher's and MCC's counterclaims against the plaintiffs.

FSM Civil Rule 19(a), titled Joinder of Persons Needed for Just Adjudication, addresses compulsory joinder. Rule 19(a) requires that a person over whom the Court has jurisdiction be joined as a party in the action

if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject matter of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the person's claimed interest.

FSM Civ. R. 19(a). Defendants have failed to explain exactly why it is that complete relief cannot be accorded among those already parties without the joinder of Ms. Hermora and Mr. Mallarme. They have also failed to explain why these persons's interests would be impaired without joinder, or why failing to join these two persons as parties would expose those who are already parties to this litigation to inconsistent obligations.

Defendants merely argue that Mr. Mallarme's ability to collect damages may be impaired if MCC's counterclaims exhaust the plaintiffs' resources, see Defs.' Opp'n to Motion to Strike and Opp'n to Motion for Sanctions at 1 (May 8, 1995), and that Ms. Hermora has independently libelled MCC on the plaintiffs' behalf, and "without her joinder, MCC will be unable to obtain any relief at all against Evelyn Hermora for the libel she has committed as the Plaintiffs' agent." Id. at 2. These arguments are unpersuasive. Mr. Mallarme is free to pursue any claim he may have against the plaintiffs' employer and the plaintiffs themselves for poor workmanship, theft and lost income in a separate action.[5] Similarly, defendants are free to pursue their "independent" claim against Ms. Hermora for libel and slander in a separate suit.

The Court finds that complete relief can be afforded among those already parties to this litigation without the requested joinder. Moreover, neither Mr. Mallarme nor Ms. Hermora is so situated that the disposition of this action in their absence will impair their ability to protect their interests or leave any of the current parties subject to the risk of incurring inconsistent obligations. For the foregoing reasons, the Court denies defendants' Rule 19(a) motion to join parties. Pursuant to FSM Civil Rule 12(f), the Court now strikes paragraphs 17 and 20 from defendants' Answer and Counterclaims as immaterial and impertinent, because these paragraphs purport to assert claims on behalf of and against persons who are not parties to this litigation.

III. Plaintiffs' Motion for Sanctions Based on Defendants' Motion for Joinder

Plaintiffs have moved for Rule 11 sanctions, arguing that defendants' motion to join parties is so blatantly without support that sanctions should be imposed either against the defendants or against defendants' counsel. See Pls.' Opp'n to Motion to Join Parties/Motion for Sanctions (Apr. 28, 1995).

It is true that defendants' motion for joinder is not well-researched, or supported by any legal authority other than the language of the rule itself. In fact, defendants' motion most likely relies on the wrong rule of civil procedure. However, the Court finds that defendants' motion evidences a lack of research and a lack of effort, rather than a deliberate attempt to harass the plaintiffs and increase the costs of the litigation, as plaintiffs argue. Accordingly, the Court finds that defendants' motion does not warrant sanctions.

IV. Plaintiffs' Motion to Strike Defendants' Affirmative Defenses

Plaintiffs move this Court to strike the portion of defendants' Answer and Counterclaims which sets forth defendants' affirmative defenses, pursuant to FSM Civil Rule 12(f). Rule 12(f) permits the Court to order stricken from any pleading any insufficient defense or any immaterial or impertinent matter. Plaintiffs direct the Court to paragraph 14 of defendants' pleading, which recites virtually verbatim the language of FSM Civil Rule 8(c).[6] That paragraph reads as follows:

As affirmative defenses, the defendant alleges accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense.

Defs.' Answer and Counterclaims at 1 (Apr. 21, 1995). Plaintiffs contend that it is apparent from a reading of this list of affirmative defenses that defendants made no actual attempt to analyze each of the affirmative defenses asserted, and to determine whether there was any factual or legal basis for including it in this action. They specifically cite, as one egregious example, defendants' assertion of the defense of "discharge in bankruptcy," noting that it is common knowledge that there is no bankruptcy code in the FSM.

It is plain to the Court that counsel for defendants lifted her list of affirmative defenses directly from Rule 8(c), and gave no thought to the applicability of any one of these defenses to the particular facts or issues present in this case. Defendants' Opposition to Motion to Strike and Opposition to Motion for Sanctions does nothing to dispel this impression. Defendants' counsel merely explains that "[a]t this early stage of litigation, it is not possible to predict what affirmative defenses may exist. For this reason, an attorney is wise to err on the side of more, rather than less, advocacy on the client's behalf." Defs.' Opp'n to Motion to Strike and Opp'n to Motion for Sanctions at 2 (May 8, 1995). This is an astonishing response, particularly because FSM Civil Rule 8(e)(2) specifically states that "[a]ll statements shall be made subject to the obligations set forth in Rule 11." Defendants' counsel has been the subject of motions for Rule 11 sanctions on more than one previous occasion, and should, by now, be well aware of the obligations Rule 11 imposes.[7] Counsel for defendants purports to offer explanations for why the defenses of statute of limitations, contributory negligence, assumption of risk, discharge in bankruptcy and license "might" theoretically apply in this case. See Defs.' Opp'n to Motion to Strike at 2-4. Counsel should be well aware that pure conjecture is not the appropriate standard for the assertion of an affirmative defense. The standard under Rule 11 is whether "to the best of the signer's knowledge, information, and belief formed after reasonable inquiry," the defense "is well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law." FSM Civ. R. 11. Plaintiffs' action is expressly founded on a breach of contract claim. See Pls.' Complaint paras. 1, 4 (Mar. 28, 1994). The Court finds that none of the affirmative defenses defendants assert are currently supportable in this breach of contract action, based on the pleadings now on file.

Accordingly, the Court grants plaintiffs' motion to strike defendants' affirmative defenses in their entirety, and paragraph 14 of defendants' Answer and Counterclaims shall be stricken from the record.

V. Plaintiffs' Motion for Sanctions Based on Defendants' Affirmative Defenses

Plaintiffs have asked the Court to sanction defendants or defendants' counsel for forcing plaintiffs to respond to a long list of inapplicable affirmative defenses. Plaintiffs argue that defendants have interposed their affirmative defenses only for the purposes of harassment and delay, in violation of FSM Civil Rule 11. Plaintiffs further argue that these affirmative defenses asserted are not well grounded in fact and warranted by existing law, and do not make a good faith argument for the extension, modification or reversal of existing law, within the meaning of Rule 11.

As noted in part above, Rule 11 states that

the signature of an attorney or trial counselor constitutes a certificate by the signer that the signer has read the pleading, motion or other paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. . . . If adingion, ion, or othe other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who sign, a rented party, or both, an appropriate sanction, whn, which mich may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney's fees.

The Court finds that Ms. Berman, counsel for defendants, has violated Rule 11 by certifying with her signature that defendants' affirmative defenses are well-grounded in fact and warranted by existing law, or a good faith argument for the extension or modification of existing law. It is plain that counsel failed to conduct the reasonable inquiry required by Rule 11 before pleading defendants' affirmative defenses, and for that reason, the Court finds that sanctions are warranted.

An affidavit from plaintiffs' former counsel states that it took him 1.5 hours to research and prepare his motion to strike defendants' affirmative defenses, and suggests that an award of $135.00 ($90.00 per hour) to the plaintiffs as reimbursement for his fees would be a proper sanction. The Court finds that this is a suitable monetary sanction in the circumstances. The Court directs Ms. Berman to pay this sum personally to plaintiffs' current counsel, who shall forward that sum either to plaintiffs or to plaintiffs' former counsel, whichever is appropriate.

However, in the interest of furthering Ms. Berman's legal education, in addition to this monetary sanction, the Court believes that a non-monetary sanction is also warranted. This is not the first time Ms. Berman has been sanctioned by this Court for her pleadings,[8] and with that in mind, the Court now imposes the following additional sanction. The Court directs Ms. Berman to provide to the Court, no later than Friday, March 15, 1996, a one-page single-spaced memorandum on each of the nineteen affirmative defenses she has pled on the defendants' behalf. In each one-page memorandum, she shall set forth: (1) a legal definition of the affirmative defense pled; (2) an illustration of two distinct factual situations (not involving this case) in which that defense would be properly asserted; (3) and an explanation of why that affirmative defense is or is not applicable in this action, based on the pleadings now before the Court. If Ms. Berman's submission is not satisfactory, she will repeat the exercise.

The Court is aware that this is the first case in which the Court finds it necessary to impose this kind of sanction. Nevertheless, the Court believes it to be an appropriate response to counsel's pleading practices. The Court hopes that through this exercise Ms. Berman will gain familiarity with the strictures of Rule 11, and learn to be more judicious in her assertion of affirmative defenses in the future. A copy of this Order and Ms. Berman's March 15, 1996 submission will be retained in the Court's FSM Bar files.

CONCLUSION

For the reasons set forth above, the Court denies plaintiffs' Motion for Appointment of Receiver, denies defendants' Motion to Join Parties, denies plaintiffs' Motion for Sanctions in connection with defendants' Motion to Join Parties, grants plaintiffs' Motion to Strike defendants' affirmative defenses, and grants plaintiffs' Motion for Sanctions with respect to defendants' affirmative defenses. The Court now strikes paragraphs 14, 17 and 20 of defendants' Answer and Counterclaims.

The Court further directs Ms. Berman to personally pay $135.00 to counsel for defendants, and to submit the memoranda required by Section V of this Order to the Court no later than 5:00 p.m. on March 15, 1996.

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^[1] Since the Complaint was filed, seventeen of nineteen Filipino workers have left Pohnpei.

^[2] Plaintiffs have most recently filed a motion to convert this action to a class action. See Motion to Supplement the Pleading to Allege Class Action and Motion to Certify Class Action, pursuant to FSM Civil Rule 15(d) and 23(c) (Jan. 19, 1996). The Court will not address this motion in this Order.

^[3] Following Ron Moroni's withdrawal as counsel for plaintiffs, a period of time elapsed without a filing from either party. The Court scheduled a status conference for October 10, 1995. At that conference, plaintiffs explained that they had still not located counsel, and requested yet another continuance, which the Court granted. At another status conference held on November 7, 1995, John Hollinrake appeared on behalf of the Law Offices of R. Barrie Michelsen, to explain that his firm was in the process of confirming a representation agreement with the plaintiffs which he hoped would be signed shortly.

^[4] See Pls.' Motion for Appointment of Receiver, Aff. in Support of Motion for Appointment of Receiver (Apr. 7, 1995). This affidavit was submitted by plaintiffs' former counsel, Ron Moroni.

^[5] It appears from facts alleged in the Affidavit of Max Mallarme, submitted with defendants' Motion to Join Parties on April 21, 1995, that Mr. Mallarme's claims in any subsequent action would be brought primarily against MCC, the employer of the Filipino workers, for breach of contract.

^[6] FSM Civil Rule 8(c) sets out general rules of pleading for affirmative defenses.

^[7] See, e.g., Damarlane v. United States, [1995] FMSC 50; 7 FSM Intrm. 350, 356-57 (Pon. 1995) (imposing sanctions and requiring Ms. Berman to obtain leave of court before filing additional pleadings); Berman v. Santos, [1995] FMSC 40; 7 FSM Intrm. 231, 241 (Pon. 1995) (finding plaintiff's argument "plainly incorrect," but "not sufficiently frivolous as to warrant sanctions under FSM Civil Rule 11"); Berman v. Kolonia Town, [1993] FMSC 48; 6 FSM Intrm. 242 (Pon. 1993) (request for attorney's fees pursuant to Rule 11 granted), rev'd[1994] FMSC 16; , 6 FSM Intrm. 433 (App. 1994).

^[8] See note 7, above.