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Air Marshall Islands v Dornier (2) [2002] MHSC 6; 2 MILR 211 (24 December 2002)

2 MILR 211

IN THE SUPREME COURT
REPUBLIC OF THE MARSHALL ISLANDS

S.Ct. CIVIL NO. 02-12

(High Ct. Civil No. 2000-195)

AIR MARSHALL ISLANDS, INC.,
Plaintiff-Appellee,

-v-

DORNIER LUFTFAHRT, GMBH,
Defendant-Appellant.

APPEAL FROM THE HIGH COURT

DECEMBER 24, 2002

FIELDS, C.J.
GOODWIN, A.J. pro tem,¹ and KURREN, A.J. pro tem²

Argued and Submitted November 20, 2002

SUMMARY:

The Supreme Court affirmed the High Court's default judgment over the Defendant-Appellant's objections that the High Court erred when it denied Defendant's motion to compel arbitration, when it entered default despite Defendant's attempts to defend, and when it violated Defendant's right to due process by not granting Defendant an opportunity to brief and argue several motions. The Supreme Court found no error in the High Court's determination that there was no arbitration agreement and that the default not be set aside. Further the Supreme Court found that the High Court's decision not to hold an evidentiary hearing on the 12(b)(1), if error was harmless error. The Supreme Court also affirmed the High Court's decision not to award punitive damages.

DIGEST:

1. ARBITRATION - Agreement to Arbitrate: It is well-settled that arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.

2. ARBITRATION - Agreement to Arbitrate: The existence of an agreement to arbitrate must be determined by the court.

3. CIVIL PROCEDURE - Default Judgments - Grounds to Set Aside: The factors to be considered in determining "good cause" under FRCP 55(c) [MIRCP44] and "excusable neglect" under FRCP 60(b) [MIRCP48(a)] are the same; a court will deny relief if (1) there was culpable conduct by the defaulting party causing the default, (2) the defaulting party had no meritorious defense, or (3) such relief will prejudice the non-defaulting party. A court may deny relief even if only one of the above elements exists.

4. JUDGMENTS - Grounds to Vacate - MIRCP Rule 48(a): The factors to be considered in determining "good cause" under FRCP 55(c) [MIRCP44] and "excusable neglect" under FRCP 60(b) [MIRCP48(a)] are the same; a court will deny relief if (1) there was culpable conduct by the defaulting party causing the default, (2) the defaulting party had no meritorious defense, or (3) such relief will prejudice the non-defaulting party. A court may deny relief even if only one of the above elements exists.

5. CIVIL PROCEDURE - Default Judgments - Grounds to Set Aside: Defendant's failure to answer complaint was culpable when defendant had filed motions to extend their time to answer, indicating an ability to deal with legal requirements.

6. JUDGMENTS - Grounds to Vacate - MIRCP Rule 48(a): Defendant's failure to answer complaint was culpable when defendant had filed motions to extend their time to answer, indicating an ability to deal with legal requirements.

7. CIVIL PROCEDURE - Default Judgments - Grounds to Set Aside: To show the existence of meritorious defense, the defaulting party must make a presentation or proffer of evidence, which, if believed, would permit either the Court or the jury to find for the defaulting party.

8. JUDGMENTS - Grounds a Vacate - RCP Rule 48(a): To show the existence of meritorious defense, the defaulting party must make a presentation or proffer of evidence, which, if believed, would permit either the Court or the jury to find for the defaulting party.

9. CIVIL PROCEDURE - Default Judgments - Grounds to Set Aside: With respect to prejudice to the non-defaulting party, the standard is whether plaintiff's ability to pursue its claim will be hindered.

10. JUDGMENTS - Grounds to Vacate - MIRCP Rule 48(a): With respect to prejudice to the non-defaulting party, the standard is whether plaintiff's ability to pursue its claim will be hindered.

11. CIVIL PROCEDURE - Default Judgments - Entry of Default: No notice or hearing is required for entering default.

12. DAMAGES - Punitive Damages - in General: In the absence of a finding of fraud, the court did not error in not awarding punitive damages.

OPINION BY GOODWIN, A.J.

Fairchild Domier, GmbH³ ("Domier") appeals a default judgment in favor of Air Marshall Islands ("AMI") for approximately $4.2 million. AMI cross-appeals for punitive damages.

Facts and Procedural History

AMI is a Republic of the Marshall Islands ("RMI") corporation and is wholly-owned by the RMI. Domier is a German public corporation in the business of aircraft manufacture.

On February 11, 1999, Tony A. de Brum, RMI Minister of Finance, signed a contract for the purchase of two aircraft manufactured by Dormer (the "Manila Agreement"). Three provisions of the Manila Agreement are relevant to this appeal. The first is Article 3, which requires a pre-delivery payment of 15% of the price of each aircraft to Domier, due on February 25, 1999. Domier agreed to arrange the financing for the remaining 85% of the purchase price. The second is Article 19.10, which provides that the Manila Agreement "shall come into force upon its signature" but conditions "effectiveness" on the occurrence of (1) Domier's receipt of the pre-delivery payment, (2) AMI board approval, issued on or before February 19, 1999, and (3) written approval by the Cabinet of the RMI, issued on or before February 19, 1999. The final paragraph of this Article states:

This Agreement is valid only if accepted and executed by Purchaser, the resolution and approval [of the AMI board and Cabinet] is [sic] issued on or before February 19, 1999 and the pre-delivery payment ... is received on or before February 25, 1999.

Finally, Article 18 provides that any "dispute arising out of or in connection with" the Manila Agreement will be submitted to an arbitration panel of three, in Munich Germany, and will be settled in accordance with the rules of the international Chamber of Commerce.

None of the conditions precedent to effectiveness was satisfied in accordance with the terms of the Manila Agreement. AMI asserts that it informed Dornier in April and May of 1999 that AMI considered the Manila Agreement null and void. Dornier responded that it considered the Manila Agreement "suspended." In any event, the failure to satisfy the agreement's conditions precedent is problematic.

Because AMI continued to be in need of new aircraft, representatives of the two companies met in South Bend, Indiana, on May 18, 1999. There, according to AMI, Domier represented that it would re-market the two aircraft unless AMI made an immediate $500,000 payment. The parties orally agreed that if AMI made a payment of $2.1 million to Dornier by the end of June 1999, Dornier would reserve one aircraft and make delivery "as soon as possible." On June 6, 1999, AMI paid $500,000 to Dornier. AMI paid another $1.6 million to Dornier on October 15, 1999, on the belief that this payment was necessary to obtain financing. Prior to payment, however, AMI secured a letter agreement from Dornier (the "Refund Agreement") stating that "in case of non-availability of ... financing until delivery of the aircraft," the $1.6 million would be refunded to AMI. Interestingly, the Refund Agreement refers to Article 3 of the Manila Agreement. AMI never obtained financing, and Dornier did not refund the $1.6 million despite a demand from AMI.

On September 11, 2000, AMI filed a complaint in the High Court, alleging fraud and duress in connection with the two payments made to Dornier, and negligent misrepresentation in connection with the Refund Agreement. The complaint also alleged wrongful interference by Dornier with an unrelated contract between AMI and a third party (JAS), as well as wrongful interference with prospective economic advantage by blocking a potential sale of a Saab 2000 aircraft by AMI to CityJet.

To this complaint, Dornier filed a 12(b) motion and moved to compel arbitration. On February 9, 2001, AMI moved to stay arbitration on the ground that no agreement to arbitrate was made because (1) the Manila Agreement never became effective since the conditions precedent to effectiveness were not satisfied, (2) the person that signed the Manila Agreement on behalf of AMI did not have authority to bind the company, and (3) in any case, AMI's claims of interference with the unrelated contract are not subject to the arbitration clause. AMI also filed an amended complaint, which clarified the negligent misrepresentation claim, added several new claims (including conversion and unjust enrichment claims with respect to Dornier's retention of the $2.1 million payment), and reasserted the claims of the original complaint. AMI requested return of the $2.1 million, general damages, punitive damages, and costs.

The High Court denied Dornier's motion and granted AMI's motion on February 26, 2001. In its order, the High Court stated that Dornier failed to provide any grounds or legal basis for dismissing AMI's action. The High Court also found that the Manila Agreement was not an enforceable agreement to arbitrate, and ordered Dornier to answer AMI's complaint by March 15, 2001.

On March 15, 2001, Dornier moved for reconsideration of the February 26 order and for expedited discovery on the issue of AMI's agreement to arbitrate, attaching supporting affidavits. The High Court denied the motion on March 20, 2001, finding the affidavits insufficient to support an agreement to arbitrate. On March 21, 2001, Dornier moved for further reconsideration of the February 26 order, expedited discovery, and extension of time to file an answer. The High Court denied the reconsideration motion on April 18, 2001, but granted an extension to answer until May 10, 2001. Dornier also appealed the February 26 and March 20 orders to this Court on March 28, but that interlocutory appeal was dismissed for want of a final judgment. We also denied Dornier's motion to stay the litigation pending that appeal.

On May 10, 2001, Dornier filed another Rule 12(b) motion. Dornier once again challenged the jurisdiction of the High Court, and argued that AMI's complaint either did not plead with sufficient specificity or failed to state a claim. In response, AMI filed a motion for default judgment. The High Court entered Dornier's default on May 18, 2001, on the ground that Dornier had failed to answer AMI's amended complaint. Because damages were unliquidated, the court deferred the calculation of damages pending an evidentiary hearing. Dornier moved to set aside the default on July 2, 2001.

On August 17, 2001, the parties appeared before the High Court. Dornier's motion was denied after argument from each party, and the High Court entered a default judgment. The High Court found that (1) Dornier had failed to answer AMI's complaint in accordance with the RMI Rules of Civil Procedure, (2) the February 11, 1999, instrument was not a valid or binding contract between AMI and Dornier, and (3) AMI was entitled to approximately $4.2 million in damages. The High Court denied any award of punitive damages.

Discussion

1. Denial of Motion to Compel Arbitration

Dornier argues, assuming the existence of a valid arbitration contract, that the High Court erred when it denied its motion to compel arbitration because the arbitration provision of the contract requires that arbitrability issues be decided by an arbitral tribunal. This argument fails because it assumes away the threshold issue: whether an agreement to arbitrate exists.

[1,2] It is well-settled that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers of Am.[1986] USSC 64; , 475 U.S. 643, 648 (1986) (citation and internal quotation marks omitted). Here, because the very existence of the agreement has been challenged by one of the parties, the court may not compel such party to arbitrate. The existence of an agreement to arbitrate must be determined by the court. See Three Valleys Municipal Water Dist. v. E.F. Hutton & Co., Inc., 925 F.2d 1136, 1140-41(9th Cir. 1991).

The High Court found that the Manila Agreement was never entered into by AMI because it was signed only by the Minister of Finance of the RMI, and not by anyone purporting to be an authorized signatory for AMI. The Court found no evidence that Minister de Brum had authority to bind the AMI corporation to the Manila Agreement, other than an affidavit from Minister de Brum himself. The High Court held this evidence to be insufficient, and noted that the conditions precedent relating to board and Cabinet approvals signaled that Minister de Brum did not have signatory authority and the Manila Agreement needed to be ratified. The record contains no evidence of ratification of the Manila Agreement by AMI.

Dornier argues, however, that circumstantial evidence tends to prove the existence of some kind of a contract that included an arbitration agreement. For example, Dornier asks why AMI would transfer $2.1 million to Dornier in exchange for an oral agreement to negotiate a new aircraft purchase agreement in the future. Moreover, Dornier points out that the record contains no objection by AMI to the Refund Agreement's reference to the Manila Agreement. However, the unanswered allegations contained in AMI's complaint, as well as the uncertain status of the Manila Agreement itself, left the High Court in an almost impossible position to find that an agreement to arbitrate had been entered into by the parties. Therefore, the court committed no error when it denied the motion to compel arbitration. Likewise, the High Court also did not err when it denied Dornier's several motions for reconsideration of its February 26 order to stay arbitration.

2. Entries of Default and Default Judgment

Dornier also contends that the High Court erred when it entered a default order despite Dornier's attempts to defend. Rule 55(a) of the Federal Rules of Civil Procedure (FRCP) provides that default is proper where "a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules."

The timing of the parties' filings are crucial for resolution of this issue. AMI filed its original complaint on September 11, 2000. On December 19, 2000, Dornier submitted its first 12(b) motion and motion to compel arbitration. On February 9, 2001, AMI filed a motion to stay arbitration as well as an amended complaint pursuant to FRCP 15(a). Under FRCP 15(a), Dornier had ten days after service of the amended complaint to respond. As of February 26, 2001, the date of the High Court's order denying the 12(b) motion, Dornier had not filed a response to the amended complaint, or any opposition to AMI's motion to stay arbitration.

In its February 26 order, the High Court found Dornier's 12(b) motion defective (as it evidently did not contain "any moving grounds, points, authorities or arguments pertaining to the issues of jurisdiction, venue, or the nominal failure to state a claim"). Rather than treating Dornier's 12(b) motion as mooted by AMI's amended complaint, the High Court exercised its discretion to consider Dornier's 12(b) motion of December 19. In the February 26 order, the High Court denied Dornier's motions and required it to file an answer on or before March 15, 2001.⁴

Dornier never filed an answer, despite several court-ordered extensions of the deadline to do so. Instead, its final defensive filing was another 12(b) motion filed on May 10, 2001. Therefore, we conclude that the High Court did not abuse its discretion in entering Dornier's default for failure to file a substantive answer to defend the Claim.

Dornier next mistakenly asserts that the High Court should have set aside the entry of default under FRCP 60(b) [MIRCP48(a)]. This mistake may have been invited by the High Court's choice of words in the memorandum calling the entry of default a partial "default judgment." In fact, FRCP 55(c) [MIRCP44] allows a trial court to set aside an entry of default for "good cause shown." FRCP 60(b) [MIRCP48(a)] provides relief from a judgment where there is, inter alia, "mistake, inadvertence, surprise, or excusable neglect." FRCP 60(b) [MIRCP48(a)](1).

[3,4] The United States Ninth Circuit has held that the standards for "good cause" under FRCP 55(c) [MIRCP44] and "excusable neglect" under FRCP 60(b) [MIRCP48(a)] are substantially identical. See TCI Group Life Ins. Plan v. Knoebber, [2001] USCA9 302; 244 F.3d 691, 696 (9th Cir. 2001). Other circuits have found that "good cause" under FRCP 55(c) [MIRCP44] is a more lenient standard than "excusable neglect" under FRCP 60(b) [MIRCP48(a)]. See, e.g., Johnson v. Dayton Elec. Mfg. Co., 140 F.3d 781, 783 (8th Cir. 1998); Am. Alliance Ins. Co., Ltd. v. Eagle ins. Co.[1996] USCA2 713; , 92 F.3d 57, 59 (2d Cir. 1996). Despite this difference, the factors to be considered are the same; a court will deny relief if (1) there was culpable conduct by the defaulting party causing the default, (2) the defaulting party had no meritorious defense, or (3) such relief will prejudice the non-defaulting party. TCI Group Life, 244 F.3d at 696. A court may deny relief even if only one of the above elements exists. American Ass'n of Naturopathic Physicians v. Hayhurst, [2000] USCA9 461; 227 F.3d 1104, 1108-09 (9th Cir. 2000).

[5,6] The High Court did not set out its specific findings with respect to good cause. Evidence in the record reveals, however, that Dornier engaged in culpable conduct resulting in its default. There was no reason for Dornier to believe that another 12(b) motion would comply with the High Court's orders to file an answer. Dornier was represented by local counsel and should have known that the High Court's February 26 order unequivocally denied its 12(b) motion and required an answer. Dornier now claims that (1) its first 12(b) motion was rendered moot by the amended complaint, (2) the High Court erroneously considered its motions for reconsideration as 12(b) motions, and (3) it was, therefore, entitled to file the 12(b) motion on May 10, 2001. These assertions are disingenuous. There is no mistaking that the High Court considered the first 12(b) motion in the absence of a new or amended response from Dornier. Moreover, in its March 15 motion for reconsideration, Dornier specifically moves "the Court for an order reconsidering and vacating the Court's February 26, 2001 Order, and dismissing the First Amended Complaint, or in the alternative, staying the litigation pending arbitration [.]" (emphasis added). Dornier again refers to the overruling of its motion to dismiss in its March 21, 2001 motion. In light of its own moving papers, Dornier cannot now insist that the original 12(b) motion was mooted or that it subsequently never moved to dismiss the complaint. Instead of filing an answer, Dornier (1) made successive motions for reconsideration to compel arbitration, (2) requested extensions of time to answer the amended complaint, and (3) admitted that it did not want to jeopardize arbitrability of the Manila Agreement by formally participating in discovery. See, e.g., Benny v. Pipes, [1986] USCA9 1730; 799 F.2d 489, 494 (9th Cir. 1986) (holding that defendants' failure to answer complaint was culpable when defendants had filed motions to extend their time to answer, indicating an ability to deal with legal requirements). Dornier took three months to submit its 12(b)(1) and 12(b)(6) motions, both of which had been denied previously and more than once. Finally, Domier has no answer to AMI's assertion that during the hearing on its motion to set aside the default, Dornier refused to commit to answer the amended complaint.

[7,8] Moreover, Dornier has failed to show that it has any meritorious defense. To show the existence of meritorious defense, the defaulting party must make "a presentation or proffer of evidence, which, if believed, would permit either the Court or the jury to find for the defaulting party." United States v. Maraud, [1982] USCA4 378; 673 F.2d 725, 727 (4th Cir. 1982); see also Enron Oil Corp. v. Diakuhara, [1993] USCA2 1236; 10 F.3d 90, 98 (2d Cir. 1993) (defaulting party must present evidence that, if proven at trial, would constitute a complete defense). Dornier presented to the High Court little to no evidence other than repetitious assertions relating to the existence of the Manila Agreement. Dornier does not point to any meritorious defense in its brief, nor does it argue that it has any meritorious defense before this Court.

[9,10] Finally, with respect to prejudice to the non-defaulting party, "the standard is whether [plaintiffs] ability to pursue his claim will be hindered." TCI Group Life, 244 F.3d at 701 (alteration in original) (citation and internal quotation marks omitted). There is little evidence that AMI would be prejudiced in proving its claim if the default had been set aside, but the delay, with no sign of an answer on the merits, was costly and prejudicial in terms of AMI recovering money paid for goods not delivered, and apparently not in being.

Because Dornier acted culpably and because its final 12(b) motion does not constitute a "meritorious defense," the High Court did not err when it entered the order of default and then proceeded to hear testimony on damages. Its refusal to file an answer and the absence of any meritorious defense are fatal to Dornier's cause under either Rule 55(c) or 60(b).

3. Due Process

Dornier's final claim on appeal is that its due process rights were violated because the High Court did not grant it an opportunity to brief and argue its several motions. A trial court generally is not required to hear oral argument before deciding motions. See Fed. R. Civ. P. 78; Greene v. WCI Holdings Corp.[1998] USCA2 55; , 136 F.3d 313, 315-16 (2d Cir. 1998); Mann v. Conlin, [1994] USCA6 611; 22 F.3d 100, 103 (6th Cir. 1994). Ordinarily, where material factual disputes are raised in a 12(b)(1) motion, a court should hold an evidentiary hearing unless (1) the parties have had a full and fair opportunity to discover and present relevant facts and arguments, or (2) neither party requested an evidentiary hearing. See Valentin v. Hospital Bella Vista, [2001] USCA11 90; 254 F.3d 358, 364 (1st Cir. 2001). The record before this court shows that Dornier did not request an evidentiary hearing until the filing of its final 12(b) motion on May 10, 2001. In light of the fact that Dornier was given more than the requisite number of days after AMI's filings to respond, Dornier also had full and fair opportunity to submit its arguments and papers.

Moreover, any error resulting from the High Court's decision not to hold an evidentiary hearing on the 12(b)(1) motion was harmless, and in any case corrected by the High Court's consideration of Dornier's motions for reconsideration, in the first of which the High Court examined additional evidence Dornier does not point to any harm that resulted from the lack of a formal hearing; it does not indicate that it would have presented previously unavailable evidence or a new legal theory that would have made a difference to the disposition of any of its motions.

[11] Dornier's assertion that it did not have an opportunity to oppose AMI's motion for default judgment also lacks merit. Although the High Court's May 18 order was called "Default Judgment (Partial)," it was effectively an entry of default only. See Enron Oil, 10 F.3d at 97 ("[A] default judgment cannot be entered until the amount of damages has been ascertained"). No notice or hearing is required for entering default. See Hawaii Carpenters' Trust Funds v. Stone, [1986] USCA9 1354; 794 F.2d 508, 512 (9th Cir. 1986). Dornier had an opportunity to appear before the High Court and present its arguments on August 17, 2001, before default judgment was entered. Therefore, the High Court's procedures satisfied due process requirements.

4. Punitive Damages

Section 162 of the Civil Procedure Act of the Marshall Islands reads:

In civil cases where the defendant has been found liable because of fraud, or deceit, or misrepresentation, the court shall add to the judgment, as punitive damages, an amount equal to three (3) times the actual amount of damages found by the trier of facts.

AMI argues that because default judgments are treated as judgments on the merits, it should have been awarded an additional $4.8 million for fraud relating to the $1.6 million payment to Dornier. Dornier argues that the High Court never found liability for fraud or misrepresentation, but instead awarded damages of $1.6 million for breach of contract, a claim that was never pled by AMI and which argument is inconsistent with the High Court's finding that the Manila Agreement was not an enforceable contract.

[12] The default judgment order does not state the factual or legal findings of the High Court with respect to the award of damages. The relevant portions of the transcript indicate that the damages award consisted of the $2.1 million paid by AMI to Dornier and the losses related to the collateral sale of the Saab 2000. The $2.1 million awarded by the High Court could have been supported under a number of well-pled claims that AMI raised in its amended complaint, including unjust enrichment, conversion, or duress. Neither party was able to point to a finding of liability for fraud or misrepresentation in the order or the transcript. While Count III (Fraud) of the amended complaint could have been joined by an answer and proceeded to trial, it was never matured as an issue. Even if AMI might be entitled to punitive damages under § 162, as an abstact proposition, the High Court found as a matter of fact that punitive damaged were not appropriate on the record before the court. We detect no legal error in that finding.

The judgment is affirmed.

_____________

¹Honorable Alfred T. Goodwin, Senior Judge, United States Court of Appeals for the Ninth Circuit, sitting by designation of the Cabinet.

²Honorable Barry M. Kurren, Magistrate Judge, District of Hawaii, sitting by designation of the Cabinet.

³Domier was sued under the name Dornier Luftfahrt, GmbH.

⁴In the Memorandum Opinion accompanying the order, the High Court noted that it deemed waived any "complaints to jurisdiction, venue, or the nominal failure to state a claim" because of the defects is the 12(b) motion. This memorandum sewed confusion, if not error, because complaints to subject matter jurisdiction and failure to state a claim are nonwaiveable. See Van Voorhis v. District of Columbia, 240 F.Supp. 822, 824 (D.C. D.C. 1965) (failure to state a claim); Trustees of the Puritan Church v. United States, 191 F.Supp. 670, 671 (D.C. D.C. 1960) (jurisdiction).