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Gushi Brothers Co v Hawaiian Flour Mills [1991] MHSC 9; 1 MILR (Rev) 239 (28 June 1991)

1 MILR (Rev.) 239

IN THE SUPREME COURT
REPUBLIC OF THE MARSHALL ISLANDS

S.Ct. CIVIL NO. 89-09

(High Ct. Civil No. 1989-414)

GUSHI BROTHERS COMPANY,
Petitioner-Appellee,

-v-

HAWAIIAN FLOUR MILLS, et al.,
Respondents-Appellants.

APPEAL FROM THE HIGH COURT

JUNE 28, 1991

ASHFORD, C.J.
PHILIPPO, A.J., and RUTLEDGE, A.J. (sitting by designation)

SUMMARY:

A creditor who had not been properly served with process was not bound by the High Court's injunction against actions to collect sums owing by a debtor even though the creditor took part in the debtor's receivership proceeding.

DIGEST:

1. APPEARANCE – Distinction Between General and Special Abolished: The provision of Rule 12(b) of the Marshall Islands Rules of Civil Procedure, that defenses or objections are not waived by joinder with other defenses or objections, abolished the distinction between general and special appearances.

2. JURISDICTION – Challenges: It is unnecessary for a defendant to abstain from asserting other defenses while at the same time attacking jurisdiction over his person.

3. JURISDICTION – Same – Waiver of Objection: If it is clear that the objection has been preserved, neither going to trial after a challenge to jurisdiction has been overruled nor going to trial after it has been upheld, but proper service has not yet been effected, constitutes a waiver of the objection.

OPINION OF THE COURT BY ASHFORD, C.J.

Gushi Brothers Company (the "Company"), a sole proprietorship, filed a complaint in the High Court praying that the Court appoint the son of the proprietor as receiver for the Company, enjoin creditors' execution on assets of the Company, approve a payment schedule to retire the Company's debts and grant other relief as appropriate. The complaint did not name any defendants nor list the creditors of the Company, but it did identify, by case number and parties, four lawsuits in the Marshall Islands and one in Hawaii brought against the Company by "vendors and suppliers." In two of those lawsuits, Appellant Hawaiian Flour Mills was named as plaintiff. While the captions on the complaint and summons identified the Company, the summons was not directed to any identified persons or firms. "Service" was made by certified mail on Appellant and other creditors.

Appellant and three other creditors, all represented by the same attorney ("creditors' counsel"), filed substantially similar answers, including affirmative defenses, and prayed for dismissal of the complaint. The affirmative defenses asserted, among other grounds, that the Court lacked jurisdiction over the creditors "by reason of insufficient process and service of process." Another creditor moved to dismiss on essentially the same grounds pleaded as affirmative defenses by creditors' counsel. Following a hearing on the motion to dismiss, at which creditors' counsel also urged dismissal based upon the affirmative defenses and other grounds asserted in the answers, and consideration of written memoranda filed by counsel, the High Court declined to dismiss the complaint. However, the High Court did agree that there had not been proper service of process on the respondents and ordered petitioner to "re-serve process strictly in accordance with the relevant Rules of Civil Procedure." See Order on Motion To Dismiss Complaint, filed October 30, 1989. Rule 4 of the Marshall Islands Rules of Civil Procedure requires process to be served by the police, or someone specially appointed by the court, and requires personal service upon the defendant or someone as agent for him. See, also, 29 MIRC Ch. 1, §§ 2 and 4. Those Rules contain no provision for service by certified mail or other substituted service. Rule 63 states that if there is no procedure specified with respect to any matter, the court may proceed in a manner which will promote justice, consistent with law and the Rules. 29 MIRC Ch. 1, §§ 8 and 9 provide for substituted service in certain cases under the direction and control of the court. The record does not contain any return of service on Appellant showing compliance with the High Court's October 30 Order.

Ten days after entry of the Order on the Motion To Dismiss, the High Court conducted a hearing on the merits of the complaint. At that hearing, creditors' counsel appeared for the four creditors on whose behalf he had previously filed answers and, also, "for the purposes of this hearing only” for the creditor who had filed the Motion to Dismiss. Creditors' counsel did not note his appearance as a special rather than a general appearance, nor did he again raise the matter of insufficiency of process and service of process. The court heard the testimony of two witnesses and, the following day, entered its order on the complaint. The order placed the Company in receivership under the jurisdiction of the court, appointed the owner's son as receiver and general manager of the Company, gave him instructions concerning the filing of financial statements and review of Company assets, approved a payment schedule to retire past-due accounts and stayed all proceedings for collection of sums owed by the Company to its creditors.

Appellant Hawaiian Flour Mills was the only one of the several clients of creditors' counsel to appeal. Various grounds of error were alleged, including reassertion of the claim that the High Court did not acquire jurisdiction over Appellant because of insufficiency of process and service of process. Because that claim is well taken, we need not deal with the other grounds urged for reversal.

[1,2] The first question we must deal with is whether the failure of creditors' counsel to appear specially only, until resolution of the claim that the High Court had acquired no jurisdiction over Appellant was resolved, effected a waiver of the jurisdictional defect. We rule that it did not. Rule 12(b) of the Marshall Islands Rules of Civil Procedure states in pertinent part that "(n)o defense or objection is waived by being joined with one or more other defenses or objections in a responsive pleading or motion." The exact same language appears in Rule 12(b) of the United States Federal Rules of Civil Procedure, on which the Marshall Islands Rules are based. The quoted provision has been held to abolish the distinction between general and special appearances, making it unnecessary for a defendant to abstain from asserting other defenses while at the same time attacking jurisdiction over his person. Investors Royalty Co. v. Market Trend Survey, [1953] USCA10 112; 206 F.2d 108 (1953), cert. den. 346 U.S. 909, 98 L.Ed. 406, reh. den. 346 U.S. 940, 98 L.Ed. 427 (1954).

[3] The next question is whether going to trial on the merits constituted a waiver by Appellant of its objection to the Court's lack of jurisdiction over it. It has been held that going to trial does not waive the objection, when a motion to set aside service of process has been denied, so long as defendant makes it clear that the objection is preserved. Hassler v. Shaw[1926] USSC 115; , 271 U.S. 195, 70 L.Ed. 900 (1926). Cf. Cline v. Kaplan, [1944] USSC 126; 323 U.S. 97, 89 L.Ed. 97 (1944). See, also, annotation at 62 A.L.R.2d 937, 941 asserting that a "substantial majority of courts" have held that answering or going to trial on the merits, after an objection to in personam jurisdiction has been overruled, does not waive the objection.

The record does not reveal whether any of counsel or the Chief Justice of the High Court knew that service on Appellant had not been effected, prior to trial, as ordered. In any event, if going to trial after a jurisdictional challenge has been denied is not a waiver, it would be anomalous to hold that going to trial when the challenge has been upheld and proper service has been ordered effects a waiver of the objection to jurisdiction. We rule that it did not. Neither, in the circumstances, was it necessary for creditors' counsel to reiterate the jurisdictional challenge, already upheld, at the opening of the trial.

The cause is remanded to the High Court with instructions to vacate paragraph 4 of its Order of November 10, 1989, enjoining further collection proceedings against the Company, insofar as that Order purports to bind Appellant.

DISSENTING OPINION BY RUTLEDGE, A.J.

I.

This appeal stems from receivership proceedings in the High Court instituted by a financially troubled company. As a statutory scheme to protect beleaguered businesses has yet to be developed in this young Republic, the court was asked to use its equitable powers to enjoin the company's creditors, appoint a receiver and approve a repayment schedule. Unfortunately, the gnarled handling of the procedural aspects of this action by court and counsel convoluted that process and has now diverted the majority's straightforward consideration of the merits on this appeal. I dissent.

II.

Following the filing of the complaint initiating these receivership proceedings, petitioner Gushi Brothers (the Company) improperly tried to effect service of process on its creditors by mail. Several creditors acquiesced to this action. Counsel for Appellant Hawaiian Flour Mills, however, who also represented three other creditors, filed Answers opposing the action and asserted as an affirmative defense lack of personal jurisdiction by reason of insufficient process and service of process. Another creditor, National Telecommunication Authority (NTA), rather than filing an Answer, moved to dismiss under Rule 12(b) of the Marshall Islands Rules of Civil Procedure, also citing inadequate service of process.

A hearing on NTA's motion was held on October 14, 1989, with only the attorney representing Appellant and NTA's counsel in attendance. The Company's lawyer did not attend but filed a written brief in opposition. Following oral argument by NTA, Appellant's counsel "agreed" with NTA's position.

On October 30, 1989, the High Court issued its written Order On Motion To Dismiss Complaint. In its discussion of the grounds for this motion, the court referred to service of process only as it related to NTA. Without mentioning any other creditors by name, the court then concluded that there had been no proper service of process on the "respondents" and ordered petitioner to re-serve "strictly in accordance with the relevant rules of Civil Procedure." Considering counsel for the Company was not present at the hearing, it is not too surprising that only NTA was re-served by the Company. What is surprising is that NTA was re-served on November 14, 1989, five days after the hearing on the merits, although NTA had previously filed its Answer on November 1, 1989. Except for NTA, neither Appellant nor any other creditor was ever re-served.

Despite issuing its order to re-serve process on October 30, 1989, the court waited only 10 days before conducting its final hearing on the merits, on November 9, 1989. At that hearing, only the Company's lawyer and the attorney for Appellant were present. Appellant's attorney also represented NTA "for purposes of this hearing only." Evidence was presented and witnesses were examined, with counsel for Appellant having the opportunity to cross examine and fully participate in the proceedings. At no time did he ever indicate that service had not yet been effectuated or object to the proceedings in any way. Following the hearing, the court enjoined the company's creditors, appointed a receiver and approved a repayment schedule. Of all the creditors, Appellant alone appealed, claiming, among other errors, that service of process was never made.

III.

There can be no question that the service of process by mail on Appellant was improper. Unless the court specifically orders otherwise, Rule 4 of the Marshall Islands Rules of Civil Procedure requires personal service upon the defendant or his agent by the police or some other person specially appointed by the Court.

The purpose of service of process is to notify a party of the claim against him so that he may properly prepare and be given the opportunity to respond, be heard and defend. 62B Am Jur 2d, Process § 3 (1990). Due process under the Constitution of the Marshall Islands would also require reasonable notice of a lawsuit and the opportunity to defend. Constitution, Article II, § 4.

It is clear, however, that objection to service of process may be waived. The defense of insufficiency of service of process is waived, for instance, if not included in the first responsive pleading or motion. Rule 12(h)(1), MIRCivP. It is also waived, pursuant to statute and court rule, if a party voluntarily appears. 27 MIRC Ch. 2, § 64(1); Rule 4(d), MIRCivP.

Appellant validly preserved its objection to sufficiency of service of process by including it as an affirmative defense in its Answer. The High Court, in ruling on this issue by its order of October 30, 1989, upheld Appellant's objection and ordered re-service on "respondents" according to the Rules of Civil Procedure. The effect of this decision was to agree with Appellant that the rules had been violated as they relate to service and that strict compliance with the rules was necessary. The court ordered the Company to do nothing more than what it was already required to do under the rules. Following this ruling, then, Appellant stood in the same shoes as a party who had not been served. Proper service of process was necessary unless waived by Appellant.

After issuing its order requiring re-service, the High Court curiously went forward with its trial hearing 10 days later. Appellant was prepared for the trial, participated in it, cross examined witnesses and made arguments to the court. Never once did Appellant object to the proceedings by stating it still had not been served. Never once did Appellant complain that it was not properly before the court. Its behavior and participation was inconsistent with Appellant's claim that the court did not have personal jurisdiction over it due to insufficient service. See, 5 Am Jur 2d, Appearance § 5 (1962). This voluntary appearance, without objection, to substantively and actively try the case on the merits, acts as a waiver to defects and irregularities in the service of process and gave the trial court personal jurisdiction over Appellant. 27 MIRC Ch. 2, § 64(1); Rule 4, MIRCivP.

Going to trial after an adverse ruling on a sufficiency of service challenge does not effect a waiver, it is true; it is preserved for appeal. That Appellant here won its jurisdictional challenge, however, merely put it in a position of one who was not served; it did not forever relieve Appellant from its duty to re-assert its objection in the event process was not re-served. The fact that the trial took place only 10 days after re-service was ordered was a peculiar eventuality. Had the trial taken place 10 months later without re-service, could the Appellant have fully participated and not waived its objection? I think not.

By allowing Appellant to go to trial on the merits and fully litigate the issues without effecting a waiver creates an anomaly. It puts the Appellant in a position where it cannot lose: either it wins at the trial level or it wins its appeal. Waiver must apply to prevent two bites at the apple and to promote judicial economy.

It has been said that this is not only decided law, but good sense. A court having jurisdiction of the subject matter would be open to serious charges if it permitted a party to try a cause on its merits without in any way raising a question as to the party's being rightfully before it, and then allowed the party, after a decision adverse to him, to question the service of process.

5 Am Jur 2d, Appearance § 7 (1962) (footnote omitted).

I would hold that Appellant waived its objection to sufficiency of service of process and address this appeal on its merits.

Determined on briefs submitted by:

Dennis J. Reeder, Esq., attorney for Respondent-Appellant

Douglas F. Cushnie, Esq., attorney for Petitioner-Appellee.