Creditors of Mid-Pac Construction Co Inc v Senda [1993] FMSC 27; 6 FSM Intrm. 140 (Pon. 1993) (28 July 1993)

[1993] FMSC 27; 6 FSM Intrm. 140 (Pon. 1993)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION

CIVIL ACTION NO. 1988-099

CREDITORS OF MID-PAC CONSTRUCTION CO., INC.,
Plaintiffs,

vs.

AMBROS SENDA,
Defendant.
___________________________________

ORDER

Andon L. Amaraich
Associate Justice

Hearing: June 11, 1993
Decided: July 28, 1993

APPEARANCES:

For the Plaintiff: Daniel J. Berman, Esq.

Rush, Moore, Craven, Sutton, Morry & Beh
2000 Hawaii Tower
745 Fort Street
Honolulu, HI 96813-3862

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

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HEADNOTES

Debtors' and Creditors' Rights
Where a debtor/account receivable to an insolvent corporation is liable to the corporation's creditors the debtor has no standing to vindicate the rights of any of the creditors against other creditors. Creditors of Mid-Pac Constr. Co. v. Senda, [1993] FMSC 27; 6 FSM Intrm. 140, 142 (Pon. 1993).

Attorney, Trial Counselor and Client - Fees; Debtors' and Creditors' Rights
Where a debtor/account receivable to an insolvent corporation is liable to the corporation's creditors the debtor cannot challenge the arrangement for attorney's fees made between the creditors, counsel, and the court for collection of the insolvent corporation's accounts receivable. Creditors of Mid-Pac Constr. Co. v. Senda, [1993] FMSC 27; 6 FSM Intrm. 140, 142 (Pon. 1993).

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COURT'S OPINION

ANDON L. AMARAICH, Associate Justice:

Defendant moves for an order determining which judgments shall be paid and the net judgment to be paid to each creditor, and for an order vacating 1993 disbursements to plaintiffs' counsel. For reasons expressed below, the motions are denied.

MEMORANDUM

This action arose when, in 1987, Mid-Pac Construction Co. became insolvent, and this Court issued writs of execution which were returned unsatisfied to the company's creditors. See In re Mid-Pacific Constr. Co.[1988] FMSC 12; , 3 FSM Intrm. 292 (Pon. 1988). The Court then distributed the accounts receivable for collection on behalf of Mid-Pac's creditors, and ordered plaintiffs' counsel in the present case to collect the defendant's allegedly unpaid stock subscription. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 158 (Pon. 1989). Plaintiffs' counsel demanded payment on August 17, 1988 and received no answer from the defendant. Counsel then instituted this action for collection of the unpaid subscription. Later, the complaint was amended to assert that Mid-Pac had violated the Corporations, Partnerships, and Associations Regulations of the Trust Territory, and that the defendant, as an incorporator and director of Mid-Pac, was jointly and severally liable to the creditors of Mid-Pac for the aggregate amount of the judgments against Mid-Pac, or $222,073.36. In Mid-Pac Constr. Co. v. Senda, [1990] FMSC 23; 4 FSM Intrm. 376 (Pon. 1990), this Court found that Mid-Pac Construction Co. had engaged in business in violation of the C.P.A. Regulations, which were ruled still in effect at the time, and that the defendant was jointly and severally liable for the full amount. Id. at 386.

Payment of the judgment by the defendant has been a protracted, tortuous affair, requiring numerous motions, hearings, and post-judgment rulings and orders by this Court. This is largely due to the defendant's reticence in paying the judgment and in complying with this Court's order of May 27, 1992 requiring defendant to make payments of $20,000.00 every sixty days. Fortunately, as of March 10, 1993, defendant has paid the principal amount due.

However, defendant now moves this Court for a determination of which judgments are to be collected and for an order vacating plaintiffs' counsel's attorney's fees. The motion is based on the position that certain creditors have waived their judgment and that other creditors are currently off-island and presumably out of contact with counsel. Therefore, the Court should determine whether or not the judgments should be deemed collected and whether or not other creditors should move up in order. Defendant also argues that the total judgment amount should be reduced by the amount waived by certain creditors. Finally, defendant requests a determination of how attorney's fees are to be paid and by which party.

On September 15, 1988, the Court appointed the firm of Moon, O'Connor, Tam, and Yuen as counsel for the specific purpose of collecting judgments obtained against Mid-Pac Construction Co. Current counsel was associated with that firm and has remained the assigned counsel, even after having left the firm.¹ That order, which was issued before this action was instituted, disposes of all the defendant's arguments.

First, the Court assigned the collection of the judgments to counsel. That the attorneys which litigated the merits of the cases against Mid-Pac are not involved in the collection of the judgment is irrelevant to the defendant who lacks standing to question the nature of the arrangement between the creditors, counsel, and this Court. Counsel Daniel Berman is the counsel of record regarding the collection of judgments in this matter. The September 15, 1988 order is clear that "[s]uch collection authority includes the authority to initiate litigation against the debtors of Mid-Pac." The creditors may come forward individually if they object to the arrangement, but defendant may not seek to reduce his judgment by pretending to vindicate the rights of the creditors.

Second, defendant's argument that the judgment should be reduced by any amount waived by certain creditors has little relevance to the collection of the judgments. There is a prioritized list of creditors. The creditors do not take all at once or pro rata, in which case a waiver would affect all the remaining creditors. Rather, the first creditor in line takes as much as he is owed, then the second takes as much as he is owed out of what is left, and so on, such that the last creditor in line is less likely to receive payment when insufficient funds exist to satisfy all judgments. Therefore, once the entire amount is collected, only then will the issue of waiver become relevant, because, once a creditor waives his judgment, those creditors behind him move up in line and have a better chance of collecting. Those higher in line are not affected. Since the entire amount due has yet to be collected, defendant's argument of judgment waiver by certain creditors is premature.

Furthermore, the issue again is one between the creditors and assigned counsel who "has the discretion to abandon or dismiss the [collection] because in [his] judgment the amount in controversy is not sufficient to warrant the effort involved in collection or because in its judgment the collection would be futile." Order of September 15, 1988. It is within the counsel's discretion whether or not to seek any modification in the collection or amount or to continue to seeking collection at all. Clearly, the issues of distribution and order of payment do not concern the defendant who has been found liable for a specific amount and who has no standing to assert the rights of the creditors.

Finally, the issue of counsel's fees is also resolved by the September 15, 1988 order: counsel is to be paid $25 per hour plus expenses relating to communications, depositions, etc. "In addition to the hourly fee plus expenses, [counsel] shall be paid ¼ of the gross of all sums collected pursuant to this order." It is clear that the ¼ fee comes from the "gross amount" or the amount received before subtracting expenses and fees. The order also states that "[f]unds currently on deposit with the Court for the payment of creditors of Mid-Pac shall not be disbursed until the Court is satisfied that the funds actually generated by collections are sufficient to compensate for the hourly fees and expenses pursuant to this order." Therefore, the hourly fee and expenses are also to be taken from the judgment amount collected on behalf of the creditors. The arrangement is one between the creditors, counsel, and the Court. Defendant's responsibility is to pay the judgments due, including statutory interest and all Court-ordered costs. He has no standing to raise issues concerning the distribution of the judgments or the payment of counsel's fees.

For the foregoing reasons, the defendant's motions for an order determining which judgments shall be paid and for an order vacating counsel's 1993 attorney's fees are denied.

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