Bank of Hawaii v Kolonia Consumer Cooperative Association [1996] FMSC 17; 7 FSM Intrm. 659 (Pon. 1996) (20 December 1996)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite case as Bank of Hawaii v Kolonia Consumer Cooperative Association,
[1996] FMSC 17; 7 FSM Intrm. 659 (Pon. 1996)

BANK OF HAWAII,
Plaintiff,

vs.

KOLONIA CONSUMER COOPERATIVE ASSOCIATION,
Defendant.

______________________________________________________

CIVIL ACTION NO. 1995-126

MEMORANDUM OF DECISION

Martin Yinug
Associate Justice

Decided: December 20, 1996

APPEARANCES:

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

For the Defendant:
Charles Greenfield, Esq.
Micronesian Legal Services Corporation
P.O. Box 129
Kolonia, Pohnpei FM 96941

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HEADNOTES

Attachment and Execution
The right to prejudgment seizure must exist by the law of the state in which the action is pending. In the absence of state law, no remedy is available under Rule 64. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 662 (Pon. 1996).

Attachment and Execution
Under Pohnpei law a court may issue writs of attachment, for special cause shown, supported by a statement under oath. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 662 (Pon. 1996).

Attachment and Execution
Attachment is an extraordinary, prejudgment remedy, which is purely ancillary to the main suit, has nothing to do with the merits, and is a summary, anticipatory method of impounding defendant's assets to facilitate collection of the judgment against him, if and when one is obtained. Attachment did not exist at common law, and is created by statute. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 662 (Pon. 1996).

Attachment and Execution; Statutes - Construction
Statutes authorizing attachment must be construed strictly. In general, attachment is available only in certain kinds of actions and then only upon a showing of special grounds. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 662 (Pon. 1996).

Attachment and Execution
Under Pohnpei law attachment appears to be available in any suit for collection of money, but not available in judgments affecting land, and the statute requires only that "special cause" be shown for the issuance of a writ of attachment. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 662 (Pon. 1996).

Evidence - Hearsay
Hearsay within hearsay is inadmissible. Hearsay otherwise admissible may be excluded where it consists primarily of reiteration of a statement made by some other unidentified person. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 663 (Pon. 1996).

Attachment and Execution
The existence of a sale of some of a debtor's assets is not special cause sufficient to grant a request for attachment. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 663 (Pon. 1996).

Debtors' and Creditors' Rights - Secured Transactions
In the absence of a statute authorizing the recording of security interests, security agreements should be authenticated by a controller, accountant, bookkeeper, or other employee with firsthand, personal knowledge of the secured party's books and records. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 663 (Pon. 1996).

Debtors' and Creditors' Rights - Secured Transactions
A secured interest will not be given priority status when there is no recording statute, thus making it a secret lien, and where there is no transfer of dominion to the lender, and the lender appears to claim a floating interest. Bank of Hawaii v. Kolonia Consumer Coop. Ass'n, [1996] FMSC 17; 7 FSM Intrm. 659, 664 (Pon. 1996).

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COURT'S OPINION

MARTIN G. YINUG, Associate Justice:

By Order dated May 7, 1996, the plaintiff's Motion for Prejudgment Seizure of Assets and to Recognize Priority of Security Interest was denied. This Memorandum of Decision explains the reasoning in denying the Motion.

Background

The plaintiff, Bank of Hawaii ("the Bank"), filed a one-count Complaint on October 23, 1995, against the Kolonia Consumer Cooperative Association ("KCCA"), alleging breach of a loan agreement. KCCA filed two Answers, the first of which was withdrawn when Delson Ehmes withdrew as counsel of record for KCCA. The Bank filed an answer to KCCA's counterclaims.

The Bank filed a motion seeking pre-judgment seizure of KCCA's assets and for an order recognizing that the Bank has priority over other creditors of KCCA. The Bank and KCCA allegedly executed a Security Agreement/Chattel Mortgage ("the 1995 Security Agreement") on June 28, 1995 to secure a loan, and to secure all other amounts KCCA owed the Bank. The same parties allegedly executed a previous Security Agreement ("the 1992 Security Agreement") on December 1, 1992. The Bank claims that it recorded the 1992 Security Agreement by filing it at the Pohnpei Supreme Court. By these agreements, the Bank claims that it has a security interest in virtually every piece of property that KCCA owns or will own during the life of the agreements.

The Bank claims that KCCA is on the verge of insolvency as there are several collection cases pending against it. The Bank claims that enforcement of judgments by unsecured creditors threatens its ability as a secured creditor to collect against the property of KCCA. Thus, the Bank seeks to seize the assets of KCCA by attachment before judgment. The Bank also requests an order recognizing the priority of its security interest.

KCCA argues that the Bank has not shown the special cause necessary to obtain a writ of attachment. KCCA also asserts that issuing a writ of attachment will cause KCCA to close operations before an adjudication is reached on the merits. KCCA claims that the Bank may not assert priority over other creditors because its security interest, if any, is unenforceable as non-possessory, floating, and probably unknown.

Law and Analysis

A. Prejudgment Attachment

The Bank moved pursuant to FSM Rule of Civil Procedure 64, which governs prejudgment seizure in the FSM Supreme Court. By Rule 64's terms, the right to prejudgment seizure must exist by the law of the State in which the action is pending. In the absence of State law, no remedy is available under Rule 64. 7 James W. Moore et al., Moore's Federal Practice 64-13. The Pohnpei Jury Acty Act § 11-5 allows at to issue wrie writs of attachment, for special cause shown, supported by a statement under oath. Pon. S.L. 3L-99-95, § 11.

Attnt isxtrisxtraordinary, pre, prejudgment remedy. "Attachment is purelpurely ancillary to the main suit, has nothing to do with the merits, and summary, anticipatory method of impounding defendant's asse assets to facilitate collection of the judgment against him, if and when one be obtained." Lubrication Eng'rs, Inc. v. Parkinson, 341 S.W.2d 876, 878 (Mo. Ct. App. 1961) (emphasis in original).^[1] Attachment did not exist at common law, and is created by statute. 6 Am. Jur. 2d Attachment and Garnishment § 7 (1963). Sta authorizing aing attachment must be construed strictly. Id.

In general, attachment is available only in certain kinds of actions and then only upon a showing of special gro Id. § 40.0;40. Sincs is an actionction on a single claim for debt on a contract, the prejudgment remedy of attachment may be available. Id. § 41. Attachment is limitedenn general to cases involving certain extenuating circumstances. For instance, in the District of Columbia, attachment may be invoked only in one of the following circumstances: (1) defendant nonresident or a foreign cign corporation; (2) defendant has been absent from the jurisdiction for at least six months; (3) defendant evades service of process; (4) defendant has removed or is about to remove some or all of its property from the jurisdiction so as to defeat claims against it; (5) has assigned or secreted its property, or is about to, in fraud of creditors; (6) fraudulently contracted the debt. D.C. Code Ann. § 16-501 (198p>

A plaA plaintiff seeking attachment generally must post a bond conditioned to pay costs and damages if the writ is sued out wrongfully. 6 Am. Jur. 2d Attachment and GarnishmentSee, e.g., Cal. Civ. Proc. Code § 484.05.

The Pohnpei npei statute contains few of these basic, procedural safeguards. No bond is required, much less one double the value of property to be seized. No particular form of application is required, so as to notify the defendant of rights and procedures. Attachment appears to be available in any suit for collection of money. Cf. Pon. S.L. 3L-99-95, § 11-2 (not avle in judgmentsments affecting land). As to conditions for the issuance of a writ of attachment, the Pohnpei statute requires only that "special cause" be shown. Pon. S.L. 3L-99-95, § 11- The Court thus has very very serious concerns about the efficacy of the Pohnpei statute. Absent a Pohnpei Supreme Court decision construing this portion of theute, however, this Court will not rule, but only comment onnt on the potential procedural shortcomings of construing the statute to allow an extraordinary prejudgment remedy. See Carey v. Sugar, [1976] USSC 44; 425 U.S. 73, 78-79[1976] USSC 44; , 96 S. Ct. 1208, 1210-11, 47 L. Ed. 2d 587, 591 (1976).

B. No Special Cause Shown

The special cause asserted by the Bank is dissipation of assets, and alleges a number of examples. The Bank alleges that in order to satisfy another judgment, KCCA sold equipment - i.e., a longbed truck and a forklift - it needs to carry on its normal business. In support of this allegation, the Bank submits an affidavit of counsel which recounts statements made by Delson Ehmes in his capacity as Chairman of the Board of Directors. Such an admission by a party opponent is not hearsay. FSM Evid. R. 801(d)(2). But Mr. Ehmes was not in a position to perceive the sale of equipment since he was off Pohnpei at the time. He thus lacked personal knowledge. FSM Evid. R. 602. Furthermore, KCCA's acting General Manager contradicted the conclusion by stating that after the sale, KCCA still had another longbed truck and forklift.

The second example of dissipation of assets alleged by the Bank is a supposed sale, wherein KCCA sold every item for an arbitrary, nominal price. The Bank's evidence in this regard is suspect. It submits an affidavit by an employee of the Bank's counsel, that he spoke with another employee, unidentified, regarding the price of a single piece of merchandise. Hearsay within hearsay is inadmissible. FSM Evid. R. 805. Even if the Court were to consider the affidavit, "[h]earsay otherwise admissible may be excluded where it consists primarily of reiteration of a statement made by some other unidentified person." FSM v. Yue Yuan Yu No. 708[1995] FMSC 48; , 7 FSM Intrm. 300, 304 (Kos. 1995).

The Court does consider that portion of the Affidavit of Salomon Saimon that consists of his own observations. But those observations are discounted by the affidavit of KCCA's acting General Manager confirming a sale, but denying that all items are sold for the nominal, arbitrary price cited by Mr. Saimon. Likewise, there was no evidentiary foundation for Mr. Saimon's comparison shopping at another, unidentified, large retailer. The existence of a sale is not "special cause" sufficient to grant the Bank's request for attachment.

The Bank also asserts that KCCA is currently favoring certain, unsecured creditors by confessing judgments and defaulting. This Court has been assigned to handle most, if not all litigation pending against KCCA in the FSM Supreme Court. As in any litigation, strategies were followed and mistakes were made. But this Court sees nothing in the pattern of cases involving KCCA that would serve to support the Bank's supposition.

The Bank has also failed to prove that it holds a secured interest in any property of KCCA. The Bank attached the two security agreements to its motion, but made no attempt to authenticate these documents. FSM Evid. R. 901. In the absence of a statute authorizing the recording of security interests, these notes should have been authenticated by a controller, accountant, bookkeeper, or other Bank employee with firsthand, personal knowledge of the Bank's books and records. See Richmond Wholesale Meat Co v. Kolonia Consumer Coop. Ass'n (III), [1996] FMSC 55; 7 FSM Intrm. 453, 455 (Pon. 1996). Again, special cause was not proved.

C. Priority of Interests

The Bank also requests a declaration that its rights are superior to every other creditor of KCCA. Such a claim is beyond the scope of its Complaint, which is on a single count for indebtedness. If the Court were to consider the Bank's unauthenticated exhibits offered as proof of a secured interest, several serious difficulties would remain.

First is the alleged recording of the 1992 Agreement. The filing of documents demonstrating secured interests is not authorized or required by Pohnpei statute. Indeed, the Uniform Commercial Code has been enacted nowhere in the FSM. In general, such claims of interest are filed with the secretary of state, not with the State Supreme Court. A later coming creditor of KCCA could check with the secretary of state and be unaware that the Bank claimed a "recorded" security interest. Even if a creditor were to check with the Pohnpei Supreme Court, it would be extremely difficult to locate the filing. The 1992 Security Agreement was not submitted as part of any pending litigation and was not served on any person. Indeed, except as part of pending litigation, it is unclear by what authority the Bank could file any document at the Pohnpei Supreme Court. A search by the State Justice Ombudsman indicated no record of the filing in a log or docket book. The effectiveness of the so-called "recording" is doubtful.

Finally, the FSM Supreme Court has addressed banks' claims of security interests. In In re Island Hardware[1988] FMSC 14; , 3 FSM Intrm. 332, 345 (Pon. 1988), aff'd[1991] FMSC 23; , 5 FSM Intrm. 170, 174 (App. 1991), the court denied the Bank of Guam's claim of priority status. Without a recording statute, any lien becomes by nature secret. Likewise, the terms of the note reveal no transfer of dominion to the lender, and appear to claim a floating interest. Under common law principles, such interest could not be recognized. Id.

Conclusion

For these reasons the Court denied the Bank's motion.

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^[1] The Court is aware of no published FSM decision addressing attachment. As such, it is appropriate to consult foreign sources of law. See Nahnken of Nett v. Pohnpei, [1996] FMSC 3; 7 FSM Intrm. 485, 489 n.3 (App. 1996).