Federated States of Micronesia v Ponape Builders Construction Inc [1985] FMSC 10; 2 FSM Intrm. 048 (Pon. 1985) (10 June 1985)

THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48 (Pon. 1985)

[2 FSM Intrm. 48]

FEDERATED STATES OF MICRONESIA,
Plaintiff,

vs.

PONAPE BUILDERS CONSTRUCTION INC. et al.,
Defendants.

CIVIL NO. 1985-017
MEMORANDUM OPINION-
DENIAL OF MOTION FOR PARTIAL SUMMARY JUDGMENT

OPINION
Before Edward C. King
Chief Justice
June, 10, 1985

APPEARANCES:
For the Defendant: Michael J. Berman
Attorney-at-Law
P.O. Box 1491
Kolonia, Pohnpei 96941

For the Plaintiff: Carl V. Ullman
Chief, Division of Litigation
Attorney General's Office
Federated States of Micronesia
Kolonia, Pohnpei 96941

[2 FSM Intrm. 49]

Corporations
Par value and stated value of stock are arbitrarily chosen figures which often bear no relationship to the price paid. These figures may be considerably less than the actual value of the stock and have little significance to creditors or others seeking to determine the financial strength of a corporation in the FSM. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 51 (Pon. 1985).

Corporations
In the Federated States of Micronesia, distribution of dividends in cash or in property may be made only from earned surplus. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

Corporations
The $1,000 original capital requirement specified in part 2.7 of the Corporations, Partnerships and Associations Regulations as a condition for engaging in business is met by bona fide, irrevocable transfers of cash or property, giving the corporation capital, as contrasted to earned surplus, with a net value of not less than S1,000, so long as there is issued and outstanding authorized capital stock representing ownership of the corporation. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

Civil Procedure
Under Rule 56 of the FSM Rules of Civil Procedure, a summary judgment shall be rendered only if the pleadings, depositions, answers, interrogatories, and admissions on files together with the affidavits, if any, show that there is no genuine issue as to the material fact and that the moving party is entitled to a judgment as a matter of law. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

Judgment
A party moving for summary judgment has the burden of clearly establishing the lack of any triable issue of fact. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

Civil Procedure
Rule 56 of the FSM Rule of Civil Procedure is drawn from United States Federal court rules, The court therefore may look to the interpretations of Rule 56 of the Federal Rules of United States Civil Procedures for guidance in seeking the proper interpretations of our Rule. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

Civil Procedure
In considering a motion for summary judgment under Rule 56 of the FSM Rules of Civil Procedure, the facts and inferences to be drawn therefrom, must be viewed by the court in the light most favorable to the party opposing the motion for summary judgment. FSM v. Ponape Builders Constr. Inc., 2 FSM Intrm. 48, 52 (Pon. 1985).

[2 FSM Intrm. 50]

In this tax case brought against Ponape Builders' Construction Inc. and Quirino Mendiola by the national government of the Federated States of Micronesia, the government has moved for a partial summary judgment that Mr. Mendiola, as an incorporator, is personally liable for the debts, including tax liability, of that corporation, which now is insolvent.

I.

The government's claim is based upon the Corporations, Partnerships and Associations Regulations published by the Registrar of Corporations of the Office of the Attorney General of the Trust Territory Government in volume 1, number I of the Territorial Register, dated July 15, 1974. Defendant Mendiola does not dispute that these regulations remain in effect as law of the Federated States of Micronesia pursuant to Article XV, Section 1 of the Constitution of the Federated States of Micronesia.

The government relies upon the following language in part 2.7 of the regulations:

[I]n no case shall any corporation for profit upon the incorporation thereof engage in business ... until not less than $1,000 of its authorized capital stock has been paid in by the acquisition of cash or by the acquisition of property of a net value of not less than $1,000. In case of any violation of this section by any corporation, the incorporators and the directors thereof at the time the corporation commences to engage in business shall in their individual and private capacities be jointly and severally liable to the corporation and the stock holders and creditors thereof in the event of its bankruptcy or insolvency ....

The government contends that the record irrefutably establishes that the corporation engaged in business before "$1,000 of its authorized capital stock had been paid in." In particular, the government points to the affidavit of officers, dated May 15, 1981, signed by Mr. Mendiola as the corporation's president and submitted to the Registrar of Corporations together with the articles of incorporation pursuant to part 2.5 of the regulations. In that May 15, 1981 affidavit the officers represented that the corporation had authorized four shares of $25.00 par value stock, that those had been subscribed for and $25.00 paid in for each, so that the aggregate paid in capital was $100.00.

The defendants repeated in pretrial discovery that the corporation's "total start-up capital" was $100.00 and specifically said that no more than $100.00 of capital was ever invested in the corporation. Defendants' Responses To Plaintiff's First Interrogatories, 3 and 8.

Those statements, taken alone, would seem to leave no doubt that the corporation did violate part 2.7 by engaging in business without first having at least $1,000 of "authorized capital stock ... paid in."

[2 FSM Intrm. 51]

But those admissions do not stand alone. The same responses to interrogatories in which the above statements are made contain another answer saying that the corporation had other assets when it began its corporate existence, including tools, two motor vehicles, and a few construction contracts. Id. 4. Moreover, defendant Mendiola has filed an affidavit contesting the government's motion. The Mendiola affidavit itemizes these other assets now asserted to be part of the corporation's "original capitalization," and contends that their value was considerably in excess of $1,000.

The government maintains that partial summary judgment should be granted under part 2.7 even if the Mendiola affidavit is accepted as true. Emphasizing the words, "$1,000 of ... authorized capital stock ... paid in," the government argues that the part 2.7 $1,000 requirement attaches to the stock itself and requires a showing that specific shares were issued in exchange for the cash or assets which the incorporators hold out as meeting the $1,000 paid in capital requirement. Under that approach the tools, motor vehicles and construction contracts referred to would be of no avail unless reflected by additional capital stock.

Such a reading of part 2.7 would not further the purpose of the starting capital requirement. Defendant Mendiola points out, and the government apparently concedes, that the underlying purpose of part 2.7 is to assure that a minimum of $1,000 is put at risk, potentially available to creditors and others who may have dealings with the corporation. This purpose is served by actual transfer to the corporation of capital, whether cash or property, in the amount of one thousand dollars, regardless of how many shares of stock the corporation has issued.

It must be remembered that issued shares of stock of a corporation represent ownership of the entire business and assets of the corporation. The four shares issued by Ponape Builders' Construction Inc. had a value, and represented capital investment, equal to the net value of the corporation's cash and property before it engaged in business.

The government's interpretation would make the right to engage in business under part 2.7 turn on the par value or stated value of stock, not the actual value of the assets which the issued stock represents. Par value and stated value of stock are arbitrarily chosen figures which often bear no relationship to the price paid and may be considerably less than the actual value of the stock. T. Fillis & H. Kripke, Accounting for Business Lawyers 25 (1971). Those figures have little significance to creditors or others seeking to determine the financial strength of the corporation.

Of course, par value or stated value designations of stock do typically affect corporate financial statements. Many corporations carry par value or stated value amounts as paid in capital, distinguishing capital amounts paid in addition to par or stated value by showing those additional payments for newly issued stock as paid in surplus or capital surplus. This in turn can have a practical effect on creditors in jurisdictions where payments of

[2 FSM Intrm. 52]

dividends may be made from paid in surplus but not from paid in capital. Id. at 356-57.

That is not the case in the Federated States of Micronesia however. Here, distributions of dividends in cash or in property may be made only from earned surplus. Corporations, Partnerships and Associations Regulations part 5.1.

Therefore, an interpretation requiring total par value or stated value of issued capital stock of at least $1,000 merely would add a technical obstacle to efforts to form a corporation, thus perhaps retarding economic development, but doing nothing to protect creditors or other stockholders.

I conclude that the part 2.7 conditions for engaging in business are met by bona fide, irrevocable transfers of cash or property, giving the corporation capital, as contrasted to earned surplus, with a net value of not less than $1,000 before it engages in business. This is sufficient regardless of the par value or stated value of stock issued, so long as there is issued and outstanding authorized capital stock representing ownership of the corporation.

II.

Under Rule 56 of our Rules of Civil Procedure, a summary judgment shall be rendered only "if the pleadings, depositions, answers, interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

In light of this court's interpretation of part 2.7, summary judgment could be granted as to defendant Mendiola's personal liability for corporate debts only if there is no possibility that the corporation had received cash and other capital assets of a net value of $1,000 or more before engaging in business.

The party moving for summary judgment has the burden of clearly establishing the lack of any triable issue of fact. Manahane v. FSM, [1982] FMSC 14; 1 FSM Intrm. 161 (Pon. 1982). Our Rule 56, like many of our civil and criminal procedural rules, is drawn from the rule of the same number in the comparable procedural rules employed in the United States federal court system. We therefore may look to the United States federal courts' interpretations of Rule 56 of the Federal Rules of Civil Procedure for guidance in seeking the proper interpretation of our Rule 56. Cf. Andohn v. FSM, [1984] FMSC 4; 1 FSM Intrm. 433, 441 (App. 1984). Under those interpretations, it is well established that the facts, and inferences to be drawn therefrom, must be viewed by the Court in the light most favorable to the party opposing the motion for summary judgment. See Bishop v. Wood, [1976] USSC 108; 426 U.S. 341, 96 S. Ct. 2074, 48 L. Ed. 2d 684 (1976); United States v. Diebold, Inc., [1979] USCA6 438; 369 U.S. 654, 82 S. Ct. 993, 8 L. Ed. 2d 176 (1962); Bell v. Cameron Meadows Land Co., [1982] USCA9 268; 669 F.2d. 1278 (9th Cir. 1982).

It is obviously difficult to reconcile the various statements of the

[2 FSM Intrm. 53]

defendants concerning the corporation's original capitalization and it could be difficult indeed for the defendants to overcome, the persuasive force of the admissions they already have made. Still, as I review the entire record and view the facts stated in the light most favorable to defendants, I cannot find that the government has clearly established the absence of a genuine issue of fact as to whether the corporation had acquired cash and other property worth $1,000 or more before engaging in business.

The government's motion for partial summary judgment is denied. In light of this conclusion it does not appear necessary to consider the other contentions in defendant Mendiola's opposition to the motion.

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