Federated States of Micronesia v Falcam [1999] FMSC 1; 9 FSM Intrm. 1 (App. 1999) (7 January 1999)

FEDERATED STATES OF MICRONESIA
SUPREME COURT APPELLATE DIVISION
Cite as Federated States of Micronesia v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1 (App.1999)

[1999] FMSC 1; [9 FSM Intrm. 1]

FEDERATED STATES OF MICRONESIA,
Appellant,

vs.

ALBERT FALCAM,
Appellee.

APPEAL CASE NO. P5-1987

BEFORE:
Hon. Richard H. Benson, Associate Justice, FSM Supreme Court
Hon. Edwel H. Santos, Temporary Justice, FSM Supreme Court*
Hon. Jose S. Dela Cruz, Temporary Justice, FSM Supreme Court**

*Chief Justice, Pohnpei Supreme Court
**Judge, Commonwealth Court of the Northern Mariana Islands

OPINION

Argued: December 12, 1988
Decided: December 13, 1988
Opinion Entered: January 7, 1999

APPEARANCES:
For the Appellant:
Jack Warndof, Esq.
Chief, Division of Litigation
Office of the FSM Attorney General
Kolonia, Pohnpei FM 96941

For the Appellee:
Fredrick L. Ramp, Esq.
Law Offices of Ramp & Michelsen
P.O. Box 1480
Kolonia, Pohnpei FM 96941

* * * *

HEADNOTES

Appeal and Certiorari - Standard of Review; Contracts - Illegality
Whether a trial court correctly used the balancing of factors in weighing enforceability of part of an illegal employment contract, or whether the hiring, being in violation of public policy is unenforceable, is a matter of law, which is reviewed de novo. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 4 (App. 1999).

[9 FSM Intrm. 2]

Contracts - Illegality
The general rule that illegal agreements are void is not without exceptions and restitution ought to be awarded in some situations. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 4 (App. 1999).

Contracts - Illegality; Public Officers and Employees
Because Congress has not explicitly made employment contracts which violate 11 F.S.M.C. 1305 unenforceable, the FSM Supreme Court may properly decide whether a contravention of public policy is grave enough to warrant unenforceabillty. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 4 (App. 1999).

Appeal and Certiorari - Standard of Review; Contracts - Illegality
The standard of review of whether the balancing factors for weighing enforceability of part of an illegal employment contract were weighed properly is whether the trial court abused its discretion. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 4 (App. 1999).

Common Law; Contracts - Illegality; Public Officers and Employees
When there is no national precedent on the issue of the enforcement of an employment contract term which was violative of public policy, and there is no custom or tradition governing the matter, the FSM Supreme Court may look to the common law of the United States. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 5 (App. 1999).

Contracts - Illegality; Public Officers and Employees
Although there was a public interest in denying enforcement because the hiring violated public policy, this is outweighed by the special public interest of the government's failure to provide any hearing or opportunity to be heard concerning its failure to pay the employee or take any steps to terminate the contract, thus constituting a violation of due process rights; the employee's justified expectations of being paid; and the substantial forfeiture would result if enforcement were to be denied. Therefore the trial court did not abuse its discretion in its weighing of the factors on the issue of enforceability. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 5 (App. 1999).

Constitutional Law - Due Process; Public Officers and Employees
An illegally-hired public employee has a constitutionally protected interest in employment because the Secretary of Finance must give notice and an opportunity to be heard after taking the action to withhold his pay, and the government must terminate his employment after it determines his hiring had violated public policy, giving him notice and an opportunity to be heard. Failure to take such steps violated the employee's due process rights. FSM v. Falcam, [1999] FMSC 1; 9 FSM Intrm. 1, 5 (App. 1999).

* * * *

COURT'S OPINION

RICHARD H. BENSON, Associate Justice:

This case arose out of the hiring of the appellee, Albert Falcam (Falcam), as Pohnpei Postmaster by his uncle who was then the Postmaster General. The FSM Secretary of Finance refused to pay Falcam who then brought this action for injunctive and declaratory relief, and damages.

On June 12, 1987, the appellant, Federated States of Micronesia (FSM), was granted partial summary judgment that Falcam was not entitled to retain his position. That decision was not appealed. After trial, the court on September 14, 1987 granted Falcam judgment in the amount of his salary for the period that he had worked. This judgment was appealed.

[9 FSM Intrm. 3]

Issues presented are whether Falcam had a due process right based on his hiring, whether the employment contract which violated public policy was enforceable in any part, and whether the trial court correctly used a balancing process to reach its conclusion. We resolved all issues against the FSM and affirmed the trial court on December 13, 1988. This opinion sets out our reasoning.

I.

Falcam was selected after the FSM used the statutory practice of advertising the Pohnpei Postmaster's position, and establishing a list of eligible applicants. The Postmaster General chose Falcam from this list. Falcam began work on September l, 1986. After protests were made to the hiring, the Attorney General issued his opinion that the decision to hire Falcam violated 11 F.S.M.C. 1305, which makes it a criminal offense for any public official to participate "personally and substantially" in any "matter in which, to his knowledge . .&#1his . . . clo. close relati.e[] 0;.160;. . has a financial inter The" The Secretary of Finance did not make any s payments to Falcam. Neither the government nor the FSM Postal Service (an independent gove governmental agency) took any steps to terminate thloyment of Falcam, who cont continued to work as Pohnpei Postmaster. The court found that Falcam had, after selection and hiring according to the Public Service System Act, an interest that could only be terminated after notice and an opportunity to be heard. The court then concluded that the failure to take any action other than withholding Falcam's pay violated his constitutional right to due process.

On November 6, 1987, Falcam filed this action. In granting the government partial summary judgment, the trial court found that the statutory provision did cover employment contracts, that the Postmaster General is a "public official" who participated "personally and substantially" in the matter and that nephew and uncle are "close relatives." Using the factors in favor of enforcement and against enforcement found in Restatement (Second) of Contracts § 178 (1981), the trial court then weighed the factors reflecting the public policy behind the criminal statute against the interests favoring enforcement. The court concluded that the public policy considerations outweighed Falcam's claim of right to the position. That decision is found in Falcam v. FSM Postal Service, [1987] FMSC 13; 3 FSM Intrm. 112 (Pon. 1987).

While the case was pending the Postmaster General resigned his position because of his election to the FSM Congress. His successor reappointed Falcam. The government never contended the second appointment was improper. For this reason Falcam did not appeal the partial summary judgment against him.

What is on appeal is the government's contention that the trial court erred in granting Falcam his salary for the period from September l, 1986, when he began work, until June 12, 1987 when partial summary judgment was entered.

The trial court used the same factors in reaching its decision in Falcam's favor as it had used when considering whether Falcam was entitled to a permanent position. The court considered in detail whether Falcam had a justified expectation of pay, whether there would be a forfeiture if his pay were denied, and the public interest. In considering the public interest, the trial court recognized a strong public interest in not permitting recovery because the hiring was done in violation of law and was against public policy. The court found in balance, however, that the public interest favored recovery because to do otherwise would be to overlook the government's violation of its citizen's due process rights, and thus sanction the practice.

After weighing these factors, the court concluded that Falcam was entitled to his salary for the period he worked -September 1, 1986 until June 12, 1987, when the court's first decision was issued.

[9 FSM Intrm. 4]

II.

Whether the trial court correctly used the balancing of factors in weighing enforceability, or whether the hiring, being in violation of public policy, is unenforceable is a matter of law. Matters of law we review de novo.

We can find no authority for the appellant's proposition that the contract was, without exception, void and illegal and unenforceable. See, e.g., 17 Am. Jur. 2d Contracts § 216, at 584-85, 587 (1964) ("The general rule is that illegal agreements are void, and the courts will not recognize rights as springing therefrom or enforce such agreements . . .&#" "Thve rule rule is nots not absolute, however, and is not without exceptions."); Dan B. Dobbs, The Law of Remedies § 13.5995 ( ("The rule that denies enforcement of an illegal contract is often easy to underunderstandstand, especially where it is performance itself that is illegal and where the underlying reason for the illegality is a strong one. . . . A number of factors suggest that, contrary to the general rule, restitution ought to be awarded in some situations, however.").

In the cafore ongress has not explicitly made employment contracts which violate the criminal snal statuttatute unenforceable. Thus we may properly "decide whether a contravention of public policy is grave enough to warrant unenforceabillty." E. Allan Farnsworth, Contracts § 5.1, at 328 (1982).

We therefore hold, as a matter of law, that the trial court correctly decided the issue of enforceability of Falcam's employment contract, which has not been made unenforceable by Congress, by weighing the factors for and against enforceability as found in Section 178 of the Restatement.

III.

The standard of review of whether those factors were weighed properly is whether the trial court abused its discretion. A discussion of that question follows.

The government asserts only "that the trial court erred in its assessment of those factors and should have declined to order compensation." There is no further analysis. The government relies only on its view that since the contract is void one cannot receive any benefit from it, apparently believing that this argument outweighs any consideration of any other factors. Section 178 of the Restatement (Second) of Contracts (1981) contains the factors the trial court weighed in making its decision on enforceability.

Section 178 of the Restatement reads as follows:

When a Term is Unenforceable on Grounds of Public Policy

(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.

(2) In weighing the interest in the enforcement of a term, account is taken of

(a) the parties' justified expectations,

(b) any forfeiture that would result if enforcement were denied, and

(c) any special public interest in the enforcement of the particular term.

(3) In weighing a public policy against enforcement of a term, account is taken of

[9 FSM Intrm. 5]

(a) the strength of that policy as manifested by legislation or judicial decisions,

(b) the likelihood that a refusal to enforce the term will further that policy,

(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and

(d) the directness of the connection between that misconduct and the term.

Restatement (Second) of Contracts § 178 (1981). The trialt foun found that there was no national precedent on the issue of the enforcement of an employment contract term which was violative of public policy, and that there was no custom or traditionrning the matter. It therefherefore looked to the common law of the United States. No party takes issue with this approach.

In ruling against Falcam's right to a permanent position (that is, by not enforcing the Postmaster General's decision to hire Falcam) the trial court, in granting partial summary judgment, concluded that public policy weighed far greater in denying enforcement than the interests of Falcam in retaining the position. Falcam v. FSM Postal Service, 3 FSM Intrm. at 122.

In the matter before us - payment of Falcam for the period he did work - the court again weighed the public policy against enforcement of the pay and the factors found in Section 178(2), which would favor payment, and concluded that they "weigh much more heavily." Falcam v. FSM, [1987] FMSC 17; 3 FSM Intrm. 194, 197 (Pon. 1987). The trial court considered Falcam's expectations, found them justified, and detailed the facts which caused this factor to favor Falcam. Id. at 198-201. The court then considered the whether a forfeiture would result if enforcement were to be denied, and found that there would be a substantial forfeiture. The court then detailed the facts which led it to this conclusion in Falcam's favor. Id. at 201-02. The court then considered the third and last factor: "any special public interest in the enforcement of the particular term." As stated earlier, the court found that indeed there was a public interest in denying enforcement because the hiring violated public policy. However, it found this outweighed by the government's failure to provide any hearing or opportunity to be heard concerning its failure to pay Falcam or take any steps to terminate the contract. This failure constituted a violation of Falcam's due process rights, as mentioned earlier. Thus, the public interest that was more important to the trial judge was the curtailing of such conduct by the government.

We have summarized the elements in the factors that the trial court relied upon. Since the FSM failed to argue its contention with any analysis, the summary suffices to show that the trial court did not abuse its discretion in its weighing of the factors on the issue of enforceability.

IV.

The government contends that there is no interest warranting due process protection arising out of a void contract. Again the government rests on such a contention without analyzing the interest. The trial court specified the reasons that Falcam's interest was subject to constitutional protection: that he had been hired pursuant to normal personnel procedures; that he began work and two weeks later was justified in expecting to be paid; and that he received assurances from his supervisors in the postal service that he had the right to continued employment, subject only to the Postmaster General's decision.

Whether Falcam had a constitutionally protected interest in employment is an issue of law. We conclude that the facts of this case are sufficient to establish such an interest, namely, that the Secretary of Finance must give notice and an opportunity to be heard after taking the action to withhold Falcam's pay, and the government must terminate Falcam's employment after it determined his hiring had violated public policy, giving Falcam notice and an opportunity to be heard. Failure to take such steps violated Falcam's due process rights.

[1999] FMSC 22; [9 FSM Intrm. 6]

For the reasons stated we affirmed the trial court's judgment.