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Supreme Court of the Federated States of Micronesia |
FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Adams v. Island Homes Constr., Inc.[2002] FMSC 38; , 11 FSM Intrm. 218 (Pon. 2002)
[2002] FMSC 38; [11 FSM Intrm. 218]
YVETTE ETSCHEIT ADAMS, d/b/a POHNPEI
ACE HARDWARE, and ADAMS BROTHERS
CORPORATION,
Plaintiffs,
vs.
ISLAND HOMES CONSTRUCTION, INC., FSM
DEVELOPMENT BANK, and PAULUS PERMAN,
Defendants.
CIVIL ACTION NO. 2000-012
ORDER AND MEMORANDUM
Martin Yinug
Associate Justice
Hearing: September 25, 2002
Decided: November 12, 2002
APPEARANCES:
For the Plaintiff:
Fredrick L. Ramp, Esq. (motion to amend)
Craig D. Reffner, Esq. (sanctions motion)
Law Office of Fredrick L. Ramp
P.O. Box 1480
Kolonia, Pohnpei FM 96941
For the Defendant (Island Homes):
Salomon Saimon, Esq.
Law Offices of Saimon & Associates
P.O. Box 1450
Kolonia, Pohnpei FM 96941
For the Defendant (FSM Dev. Bank):
James Woodruff, Esq.
Legal Counsel
P.O. Box M
Kolonia, Pohnpei FM 96941
* * * *
HEADNOTES
Civil Procedure - Discovery
There is a real, substantial dichotomy between a privilege and a privacy interest, because if matter is privileged, it is not discoverable
under Civil Procedure Rule 26(b)(1), which expressly provides that parties may obtain discovery regarding any matter, not privileged,
which is relevant to the subject matter involved in the pending action. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 227
(Pon. 2002).
Civil Procedure - Discovery; Evidence - Privileges
There is no banker-client (i.e., customer) privilege, and no analytical reason to raise an understandably confidential commercial
situation of principal-agent or customer-banker to a privilege. A privacy or confidentiality interest must be balanced against a
litigant's interest in obtaining relevant and probative information even if the privacy interest implicated is that of non-parties.
Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 227 (Pon. 2002).
Civil Procedure - Sanctions
When a motion to compel discovery is either granted or denied, the court must, after opportunity for hearing, award to the prevailing
party its reasonable expenses incurred, including attorney or trial counselor fees, unless the court finds that the non-prevailing
party's position was substantially justified or that other circumstances make an award of expenses unjust. The opportunity for hearing
is complied with by considering written submissions from the affected parties. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 228 (Pon. 2002).
Contracts - Third Party Beneficiary
A third person can, in his own name and claiming his own right, enforce a promise made to benefit him regardless of the fact that
he is a stranger to the contract and the consideration. The determining factor in a third party beneficiary claim is the parties'
intent, which is a question of the construction of the contract as determined by the contract's terms as a whole. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 228 (Pon. 2002).
Civil Procedure - Discovery
A party may not refuse to produce relevant discovery materials in order to prevent information damaging to it from coming to light.
Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Civil Procedure - Sanctions
In addition to the sanction of fees and expenses provided for in Rule 37(a)(4), Rule 37(b)(2)(A) provides that the court may enter
an order refusing to allow the disobedient party to oppose designated claims or defenses. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Civil Procedure - Sanctions
The court may order as a sanction that the matters regarding which an order compelling discovery was made or any other designated
facts will be taken to be established for purposes of the action in accordance with the claim of the party obtaining the order. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Civil Procedure - Sanctions
When a party's refusal to produce a document in discovery was sufficiently egregious that the facts necessary to establish the party's
liability to the plaintiffs are deemed established, the only issue remaining for trial will be that of damages. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Civil Procedure - Sanctions
When a court has imposed Rule 37 discovery sanctions and finds that Rule 11 has also been violated, it may make the sanctions imposed
under Rule 37 also stand as those imposed under Rule 11. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Civil Procedure - Sanctions; Contempt
The court may impose no further sanctions when a party is in contempt for its failure to abide by a court order because it knew of
the order, had the ability to comply with the order, and decided not to comply, but Rule 37 sanctions have already been imposed.
Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 229 (Pon. 2002).
Attorney, Trial Counselor and Client - Attorney Discipline and Sanctions
The Model Rules of Professional Conduct are applicable to practitioners before the FSM Supreme Court. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Attorney, Trial Counselor and Client - Attorney Discipline and Sanctions
A lawyer must not knowingly make a false statement of material fact or law to a tribunal. Legal argument based on a knowingly false
representation of law constitutes dishonesty toward the tribunal. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Attorney, Trial Counselor and Client - Attorney Discipline and Sanctions
Model Rule 1.2 prohibits a lawyer from perpetrating a fraud upon the court. If a party's attorney pursues a spurious lack of relevancy
claim on the party's behalf with the specific intent to prevent the disclosure of evidence damaging to the party, then Rule 1.2 is
implicated. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Civil Procedure - Discovery
Personal conflicts between counsel do not excuse the failure to produce a document. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Civil Procedure - Pleadings
Rule 8(a) provides that a pleading shall assert a short and plain statement of the claim showing that the pleader is entitled to relief.
Under this rule, the claimant need not set forth any legal theory justifying the relief sought on the facts alleged, but the rule
does require sufficient factual averments to show that the claimant may be entitled to some relief. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Civil Procedure - Pleadings
The plaintiffs' factual averments and the claims resting on them are dispositive, not the legal theories assigned to the claims. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230 (Pon. 2002).
Civil Procedure - Pleadings
After a pleading has been responded to, leave shall be freely given to amend a pleading when justice so requires. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 230-31 (Pon. 2002).
Contracts - Implied Contracts; Equity; Remedies - Quantum Meruit
Quantum meruit is an equitable doctrine, based on the concept that no one who benefits by the labor and materials of another should
be unjustly enriched thereby; under those circumstances, the law implies a promise to pay a reasonable amount for the labor and materials
furnished, even absent a specific contract therefor. The doctrine of unjust enrichment has been recognized in the FSM. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 232 (Pon. 2002).
Civil Procedure - Pleadings
When at a late stage in the litigation, the plaintiffs can only allege on no more concrete basis than mere information and belief
that an unseen contract may make non-parties liable for unpaid-for building
materials, it is insufficient at this point to state an unjust enrichment or third-party beneficiary claim, and the motion to add these non-parties and claims will be denied. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 232 (Pon. 2002).
Civil Procedure - Pleadings; Contracts - Implied Contracts; Remedies - Quantum Meruit
A motion to amend a complaint to add an unjust enrichment claim will be denied when it is based upon a defendant's failure to abide
by the alleged agreements' terms because these are express agreements, and unjust enrichment is a theory applicable to implied contracts.
Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 232 (Pon. 2002).
Civil Procedure - Pleadings
When the loan agreement was produced in discovery seven months before the motion to amend was filed, but the motion was brought within
the time permitted for filing pretrial motions; when the opponent bank was also responsible for considerable delays through its own
resistance to discovery; and when the bank cannot claim surprise, since the loan agreement is its own document, a motion to amend
the complaint to add a third-party beneficiary claim against the bank based on the loan agreement will be granted. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 232 (Pon. 2002).
Civil Procedure - Pleadings; Statutes of Limitation
When the applicable statute of limitations is six years and the construction agreement between the Permans and Felix is dated January
10, 1997 and other operative events occurred in September and October 1997, a July 23, 2002 motion to amend the complaint to add
Felix and claims against him is not time barred. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 233 (Pon. 2002).
Civil Procedure - Pleadings; Federalism - Abstention and Certification
A strong presumption exists under FSM law for deferring land matters to local land authorities, along with federalism principles and
concerns for judicial harmony. The FSM Supreme Court can certify such questions of state law to the state courts. But when, if the
equitable or mechanic's lien claims had been presented in the original complaint, the court could then have certified the questions
to the state court to determine whether such liens exist under state law and when the original complaint's factual allegations support
such claims, there was no reason why that claim could not have been made then with discovery on-going while the state court considered
the question. But when, considering the circumstances, it has become too late to bring this claim, a motion to amend the complaint
to add a declaratory judgment claim that the plaintiffs have such a lien will be denied. Adams v. Island Homes Constr., Inc., [2002] FMSC 38; 11 FSM Intrm. 218, 233 (Pon. 2002).
* * * *
COURT'S OPINION
MARTIN YINUG, Associate Justice:
This order and memorandum addresses various pending discovery matters, as well as the plaintiffs' motion to amend the complaint filed on July 23, 2002.
As explained further below in the memorandum, IT IS ORDERED as follows:
A. Discovery issues
1. The clerk is directed to transmit a copy of this order to Chief Justice Andon L. Amaraich,
Associate Justice Dennis K. Yamase, and Designated Justice Keske Marar.
2. As to the plaintiffs' July 30, 2001, motion to compel, the renewed motion filed on September 10, 2001, and the supplement filed on September 26, 2001, the plaintiffs are granted their attorney's fees and expenses. They will submit an affidavit supporting these fees and any other expenses within ten days of the date of this order.
3. Because of its refusal to provide the loan document between the defendant Paulus Perman ("Perman") and the defendant FSM Development Bank ("the Bank"), and pursuant to FSM Rule of Civil Procedure 37(b)(2)(B), the Bank will not be permitted at the time of trial to oppose the plaintiffs' third-party beneficiary claim based on that document. Further, pursuant to Rule 37(b)(2)(A), the facts necessary to establish the liability of the Bank to the plaintiffs for the construction materials that they supplied for the Panasang project based on the third-party beneficiary claim and the September 23, 1997, agreement are deemed established. As to the Bank, the only issue on which to proceed at trial will be that of damages. No further document production by the Bank is required. Also, no further discovery in this case will occur. As provided by this court's order of April 22, 2002, discovery closed on July 1, 2002. [Adams v. Island Homes Constr., Inc., [2002] FMSC 13; 10 FSM Intrm. 611, 614 (Pon. 2002).]
4. The Bank's resistance, by its responses filed on August 28, 2001; September 14, 2001; and September 28, 2001, to the plaintiffs' July 30, 2001, motion to compel and associated filings, violated Rule 11 of the FSM Rules of Civil Procedure, at least as to the Bank's claim that the Perman loan document was not relevant. The sanctions imposed under Rule 37 will also stand as those imposed under Rule 11.
5. Plaintiffs are awarded their attorney fees and expenses in moving to quash the subpoena of plaintiff Yvette Etscheit Adams d/b/a Pohnpei Ace Hardware. They will submit the appropriate affidavit within ten days of this order.
6. Plaintiffs are awarded half of their attorney's fees and expenses under Rule 37(a)(4) in bringing their motion to compel filed on July 26, 2002, as well as half of the fees and expenses incurred in the course of the order to show cause proceedings related to this issue. The court also finds a partial Rule 11 violation with respect to the Bank's filings related to these matters. The Rule 37(a)(4) sanctions will also stand as the Rule 11 sanctions. The plaintiffs will submit a fee affidavit within ten days of this order.
7. The court finds the Bank to be in contempt for its failure to abide by this court's September 9, 2002, order. In light of the sanctions imposed under Rule 37 of the FSM Rules of Civil Procedure in this order, no further sanctions are imposed for contempt.
8. All other pending motions for fees and sanctions are denied.
9. By this order and memorandum, and as set out further below, this matter is referred under Rule 4(b) of the Disciplinary Rules of Procedure to the Chief Justice for such further disciplinary proceedings as he may deem appropriate as to the Bank's counsel, James Woodruff ("Woodruff"), relative to his conduct in resisting discovery of the Perman loan document.
B. The plaintiffs' motion to amend the complaint
1. The motion to amend the complaint to add the state of Pohnpei ("Pohnpei") and the FSM as defendants is denied.
2. The motion to add an unjust enrichment claim against the Bank is denied.
3. The motion to add a third-party beneficiary claim against the Bank based on the Perman loan agreement is granted.
4. The motion to add additional claims against the Bank and Perman based on the October 8, 1997, assignment agreement alleged in the original complaint is denied.
5. The motion to add a third-party beneficiary claim against Joe Felix ("Felix") d/b/a Island Homes Construction and Island Homes Construction, Inc. ("Island Homes") is granted.
6. The motion to add Felix as a party defendant on all claims permitted against his alleged successor in interest, the defendant Island Homes, is also granted.
7. The motion to add Lorenza Perman as a party, and to add the third-party beneficiary claims against the Permans based on the construction contract between them and Island Homes is granted.
8. The motion to amend the complaint to add a claim for declaratory judgment to determine that plaintiffs have an equitable or mechanic's lien against either the Panasang apartment building or the Enipein school is denied.
9. The motion to amend the complaint as to any other claims not specifically addressed above are also denied.
10. Within ten days the plaintiffs will file their amended complaint in accordance with this order.
Lastly, the Bank's motion to stay in part the order of September 9, 2002, is denied as moot as a result of the sanctions imposed under this order.
MEMORANDUM
I. Discovery matters
A. Background
As to the Bank, this case, which has been rife with discovery disputes, has its origins in a construction loan agreement between it and Perman for the construction of an apartment building. Island Homes was the contractor on the project. The complaint alleges that when Island Homes did not pay the plaintiffs for materials that they supplied and that were used in the project, the parties reached an oral agreement at a meeting held on September 23, 1997, in which the Bank agreed to use loan proceeds to bring Island Homes account with the plaintiffs current, and to also pay plaintiffs directly for future materials if the plaintiffs would continue to supply construction materials to Island Homes on an open account basis. This allegedly did not occur.
The first discovery dispute arose when the plaintiffs' filed their July 30, 2001, motion to compel documents which included those relating to the loan that the Bank had made to Perman for the apartment building, and included the loan document. This motion took on its own litigation life. It was renewed on September 10, 2001, with an additional supplement filed on September 26, 2001. The Bank filed responses on August 28, 2001; September 14, 2001; and September 28, 2001. At page 2 of the September 28 response the Bank described the plaintiffs' discovery requests for relevant documents as the "the endless stream of discovery drivel emanating from plaintiffs' quarter." The Bank
contended that the discovery requests were meant to harass, and that since the Bank had "denied the existence of any such agreement [to pay the plaintiffs directly for the materials] . .&. the broad swath of docu documents requested is beyond the reasonable scope of discovery in this proceeding and is not likely to lead to the discovery of admissible evidence." Response of FSM Bank to Pls.' Request for for Production of Documents at 2 (May 28, 2001). The court found that the Bank could not frame the issues by denying the allegations of the complaint. Documents relating to the Perman loan, proceeds of which the Bank had allegedly agreed to pay the plaintiffs directly, were plainly relevant and by order of October 19, 2001, this court ordered production. [Adams v. Island Homes Constr., Inc., [2002] FMSC 9; 10 FSM Intrm. 430, 432 (Pon. 2001).]
On October 29, 2001, the Bank filed its motion to alter or amend judgment directed to the court's October 19, 2001, order in which it stated that "[i]nformation that is not relevant is not discoverable even if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Motion [] at 3 (Oct. 29, 2001). In ruling on that motion by order of November 27, 2001, the court explained in some detail why the loan documents were relevant. Adams v. Island Homes Constr., Inc., [2001] FMSC 40; 10 FSM Intrm. 466, 472-73 (Pon. 2001).
Paragraph 13 of the subsequently disclosed loan agreement between Perman and Island Homes provides that "[u]nless otherwise provided, loan release shall be on drawdown basis, supported by invoice, subject to verification and evaluation of assets to be acquired/constructed and submission of evidence that all labor and materials have been paid for." Thus by its terms, the original loan agreement provided that the Bank would not release the loan proceeds for the Panasang project until it had ascertained that the material suppliers, in this case the plaintiffs, had been paid. This document is also the basis on which the plaintiffs have moved to amend the complaint to add a third party beneficiary claim and which is addressed in part II. below. In granting the motion to compel the loan documents the court also noted that it would reserve the issue of fees and sanctions sought by the plaintiffs until the time of trial.
The next discovery dispute occurred when on January 8, 2002, the Bank noticed the deposition of plaintiff Yvette Adams d/b/a Ace Hardware, and on the next day filed a motion to exclude certain individuals as representative parties from attending certain depositions. More than a year and a half earlier, the Bank had by its prior counsel served a notice of deposition directed to Pohnpei Ace Hardware. Mrs. Adams's son, Richie Adams, appeared at the time of the deposition and testified as Pohnpei Ace Hardware's representative without any objection from the Bank. The court by order of February 20, 2002, found that the Bank had waived any objection to accepting Richie Adams as the representative of Pohnpei Ace Hardware, Mrs. Adam's sole proprietorship, and that the Bank could not re-depose Ace Hardware's representative. [Adams v. Island Homes Constr., Inc., [2002] FMSC 7; 10 FSM Intrm. 510, 513 (Pon. 2001).] Also on the basis of waiver, that order denied the Bank's motion to exclude Richie Adams as the representative of Pohnpei Ace Hardware from other depositions on the basis that having accepted Richie Adams as Ace Hardware's representative for one purpose in the litigation, it had accepted him for all litigation purposes. [Id. at 514.]
The next discovery dispute occurred when on March 6, 2002, the Bank filed a motion to compel against the plaintiffs. That motion, with attachments, amounts to something on the order of 150 pages. The motion, inter alia, requested that the plaintiffs be compelled to produce certain documents generated by an entity known as Abcor Engineering and Construction, a non-party to this case. It attached over a hundred pages of documents that already in its possession, copies of which it had not received from the plaintiff. The Bank urged that this was evidence that the plaintiffs had been withholding discovery. Although this motion was subsequently withdrawn, the court noted "[w]ithout citing any applicable law, or using the words "alter ego," the Bank [had] attempted to discover document generated by an entity known as ABCOR . . . from the plaintiff Adams Brothers Corporation
. . . on an alter ego theory." Adams v. Island Homes Constr., Inc., [2002] FMSC 13; 10 FSM Intrm. 611, 614 (Pon. 2002). The court further noted that the alter ego question was one collateral to the main issues in the case, and that in any event the Bank had a plain remedy for obtaining ABCOR documents by subpoenaing any such documents directly from ABCOR.
The next discovery dispute occurred on April 4, 2002, when the Bank moved to quash a subpoena directed to it by the plaintiffs on the basis that it should have been served with a notice to produce instead of a subpoena. Based in material part on the Bank's prior conduct in wrongly resisting discovery in this case, the court by its April 22, 2002 order, denied the Bank's technical objection. The plaintiffs could have obtained the same result sought by the subpoena through a notice to produce. [Adams, 10 FSM Intrm. at 613.]
The next discovery dispute was a disagreement over who would represent the Bank for purposes of depositions. That dispute was resolved by order of May 14, 2002.
The next, and latest, discovery dispute has to do with the Bank's refusal to permit the inspection of 19 of its loan files having to do with other construction projects. By a motion to compel filed on July 26, 2002, which with supporting exhibits amounts to approximately one ream of paper, the plaintiffs also sought the disclosure of other Bank documents, including various in-house procedure manuals. The discovery of the other construction loan files was relevant for purposes of determining whether it has been, or is, the Bank's business policy to pay suppliers directly in construction loan settings, since it was alleged that the Bank had agreed to pay the plaintiff suppliers directly in this case. The Bank opposed disclosure, and the court ordered that discovery be had subject to a protective order. Under that order, the files were to be reviewed by counsel, who was ordered not to disclose the results of his document review until he had come to court and advised the court of the result of his review of the documents. The Bank refused to comply with this order, and the court set the matter for an order to show cause why the Bank should not be held in contempt.
At the hearing on the order to show cause, held telephonically on September 25, 2002, with the court present in Yap and counsel in Pohnpei, the Bank urged the court to adopt a business records privilege that would protect the business relationship between the bank and its customers. The Bank claimed that this argument had been made in the response to the motion to compel that he had filed on August 5, 2002, on behalf of the Bank. The Bank's counsel stated the following at the hearing:
When the Bank received this order, the September 9th order of the court, we were actually very surprised by it. And I guess some other things that surprised us its that is the court says two things in here that are not accurate. One of those things is that the Bank, the court contends that the Bank cited no authority as to why the nonparty borrower records ought to be confidential when we did in fact cite two cases from the U.S. that deal with that issue. The other thing that the court said that doesn't match the filings made by the Bank is that the court says that the Bank never urged any kind of a privilege for the business and financial privacy of these records. In fact the Bank urged the privilege both in its objection to the discovery and in its response to the motion to compel. So, I guess after we got through the first two pages of the order, they frankly didn't match, the arguments that were attributed to the Bank did not match the arguments that we had made in our papers with the court.
Tape of September 25, 2002, hearing at counters 918-959.
This court's order of September 9, 2002, does not say, as the Bank contends, that "the Bank cited no authority as to why the nonparty borrower records ought to be confidential." The September
9, 2002, order states that "[c]iting no authority, the Bank contends that the records sought are not relevant because they involve non-parties as the borrowers." [Adams v. Island Homes Constr., Inc., [2002] FMSC 29; 11 FSM Intrm. 130, 131 (Pon. 2002).] The Bank cites no authority for its contention that the non-party documents are not relevant. These records are relevant, because they would tend to show whether the Bank does, or does not, have a policy of paying suppliers directly in construction contract settings.
Also, the Bank states that "the court says that the Bank never urged any kind of a privilege for the business and financial privacy of these records. In fact the Bank urged the privilege both in its objection to the discovery and in its response to the motion to compel." The Bank recites in its discovery responses a "privilege" as its basis for noncompliance with those discovery requests. However, as far as the Bank's August 5, 2002, response to the motion to compel is concerned, and to which the court's September 9, 2002, order is directed, there appears to be a single instance of the word "privilege" or its variants - "privileged" occurs on page 9 of the Bank's response - in the course of the response's twelve pages. The court read the Bank's August 5, 2002, response as making a privacy or confidentiality argument, and indeed said as much in its order: "[w]hile the Bank contends that these records are confidential, it does not assert that this information is privileged." Adams v. Island Homes Constr., Inc., 11 FSM Intrm. at 131. The two cited authorities in the August 5, 2002, response that presumably support a privilege argument are In re Financial Corp. of America, 119 B.R. 728 (Bkrtcy. C.D. Cal. 1990) and Edwards v. Gordon & Co., 94 F.R.D. 584 (D.D.C. 1982). Just as this court's order of September 9, 2002, acknowledged the privacy interest of the Bank's customers' records by imposing limitations on the disclosure of those records, both of these cases acknowledge a privacy interest in business records. But neither case recognizes the existence of a privilege, and in both cases the court ordered the disclosure of third party customer documents under terms less stringent than those imposed by this court's September 9, 2002, order. In In re Financial Corp. of America, where various entities had withheld certain records containing customer financial information in the face of Chapter 7 trustee's request for that information, the court noted as follows:
Although the disclosure to the Chapter 7 Trustee is not prohibited by the authorities discussed above [i.e., the United States Right to Privacy Act (12 U.S.C. §§ 3401-3422); 18 U.S.C. § 1906, which provides establishes penalties for unauthorized disclosure of bank examination reports; and state law], the FDIC, New West, and ASB have a legitimate interest in preventing the general disclosure of customer financial information. Verrazzano Towers, 7 B.R. at 648; see also 12 C.F.R. § 310. It is appropriate therefore, to require a protective order permitting disclosure of relevant documents containing customer financial information to the Chapter 7 Trustee, but limiting the scope of production to avoid the general disclosure of such information.
119 B.R. at 736 (footnote omitted). Similarly, in Edwards, the court noted that
since it appears that some of the compelled discovery will involve confidential information concerning account records of option and securities customers of Gordon & Company, in addition to the records pertaining to the plaintiff, and will invade their business and financial privacy, the Magistrate sua sponte imposed the following protective order restrictions. Documents produced and other information shall be for use only in this case and shall not otherwise be disclosed. Counsel for the plaintiff may use the information obtained in discussions with his client, in further discovery, in dispositive or other motions, and at the trial of this case, should that occur. Any documents filed with the court containing the financial and business records of Gordon & Co.'s option and securities customers not parties to this litigation, or containing information obtained from such records, shall be filed under seal, subject to further order of the Magistrate or a
judge of the court. Once the case has been finally concluded, any copies of document produced and any memoranda or other writings of their contents shall either be returned to the defendant or destroyed under procedures sufficient to assure the defendant that the contents thereof will remain confidential and private.
Edwards, 94 F.R.D. at 584-85. The protective order issued in this case permitted only an initial inspection by counsel of the third party records. Counsel was ordered to keep the results of that review in confidence, and was obliged to come back to court and advise the court of the result of that inspection before any copying or other disclosure of any other kind would be permitted. Indeed, if it would have proven to be the case that the Bank had not made direct payments to suppliers, no further disclosure would have occurred.
Also at the telephonic hearing, the court asked the Bank's counsel whether he could "produce three more cases from any jurisdiction in which the court recognized a business records privilege." Tape of September 25, 2002, hearing at counters 1097-1102. Counsel's response was "sure, absolutely your honor." Id. at counter 1105-1106. On September 30, 2002, the Bank submitted three cases. One of the these cases states that "the general rule appears to be that there exists no common law privilege with respect to bank customer information." Valley Bank of Nevada v. Superior Court, 542 P.2d 977, 978 (Cal. 1975). Nor do the other two cases support a claim of privilege - both speak in terms of a privacy interest. In Winfield v. Division of Pari-Mutuel Wagering, Department of Business, 477 So. 2d 544 (Fla. 1985), the court acknowledged "an individual's legitimate expectation of privacy in financial institution records"; held that "the state's interest in conducting effective investigations in the pari-mutuel industry is a compelling state interest;" and determined that the subpoenaing of all of a citizen's bank records without notice did not constitute an abuse of legislature's power. Id. at 548. In Corbetta v. Albertson's, Inc., 975 P. 2d 718, 720 (Cal. 1999), the court acknowledged the "right to privacy, alternatively referred to as the ‘right to confidentiality.'" Article IV, Section 5 of the FSM Constitution states that "[t]he right of the people to be secure in their persons, houses, papers, and other possessions against unreasonable . . . inv of py mayy may not beot be violated." There can be no question that such a privacy interest exists in the FSM.
Along with the three cases submitted on September 30, 2002, the Bankd a ssupplement in whin which thch the Bank then stated that "the FSMDB is not particular whether the right of confidentiality it seeks is called ‘privilege' or ‘privacy.'" After all the needlessly turbulent water that has gone under the discovery bridge in this case, revisionist equivocation of this sort will not suffice. This position is at variance with the Bank's insistence at the hearing that it was urging a privilege, and the court will hold the Bank to that insistence for purposes of determining the law as it relates to Rule 37 and Rule 11 sanctions, especially in light of the fact that the Bank took exception to the court's characterization of the Bank's position in its September 9, 2002 order as urging a privacy or confidentiality interest. There is a real, substantial dichotomy between a privilege and a privacy interest, because if matter is privileged, it is not discoverable under the FSM Rule of Civil Procedure 26(b)(1), which expressly provides in pertinent part that "[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action" (emphasis added). As the court in Rosenblatt v. Northwest Airlines, Inc., 54 F.R.D. 21, 22, 23, (S.D.N.Y. 1971) noted, "there is no banker-client [i.e., customer] privilege," and "[w]e see no analytical reason to raise an understandably confidential commercial situation of principal-agent or customer-banker to a privilege." On the other hand, a privacy or confidentiality interest must be balanced against a litigant's interest in obtaining relevant and probative information even if - as in the case at bar, In re Financial Corp. of America, and Edwards - the privacy interest implicated is that of non-parties to the litigation.
B. Sanctions
The court indicated in its September 9, 2002, order that it would rule on all pending discovery fees and sanctions motions, which the court had previously deferred until the time of trial. That order also gave the Bank until September 23, 2002, to respond to all of the pending sanctions motions. The Bank filed its response on September 25, 2002. On September 23, 2002, the plaintiffs filed their supplement to requests for attorney's fees and sanctions, in which they request their attorney's fees and expenses associated with, by their count, five different discovery issues that have arisen in this case.
Rule 37(a)(4) of the FSM Rules of Civil Procedure provides in pertinent part that if a motion to compel is granted,
the court shall, after opportunity for hearing, require the moving party, the party or deponent whose conduct necessitated the motion or the party, attorney, or trial counselor advising such conduct or both of them to pay to the moving party the reasonable expenses incurred in obtaining the order, including attorney or trial counselor fees, unless the court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust.
Similarly, where a motion to compel is denied,
the court shall, after opportunity for hearing, require the moving party, the attorney or the trial counselor advising the motion or all of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorney or trial counselor fees, unless the court finds that the making of the motion was substantially justified or that other circumstances make an award of expenses unjust.
FSM Civ. R. 37(a)(4). The opportunity for hearing is complied with by considering written submissions from the affected parties. 7
JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 37.23[5] (3d ed. 1999).
As to the plaintiffs' July 30, 2001, motion to compel, the renewed motion filed on September 10, 2001, supplement filed on September 26, 2001, which were directed in material part to the Perman loan documents, the plaintiffs are granted their attorney's fees and expenses. The Perman loan agreement was attached as an exhibit to the plaintiffs' opposition to the Bank's motion for summary judgment filed on July 16, 2002, and as previously noted, paragraph 13 is as follows: "Unless otherwise provided, loan release shall be on drawdown basis, supported by invoice, subject to verification and evaluation of assets to be acquired/constructed and submission of evidence that all labor and materials have been paid for." Under the terms of this agreement, signed by the Bank, the Bank had a duty as between itself and Perman to insure that the materials supplied by the plaintiffs had been paid for as a precondition to releasing the loan funds. However, a third person can also, in his own name and claiming his own right, enforce a promise made to benefit him regardless of the fact that he is a stranger to the contract and the consideration. Mailo v. Penta Ocean Inc., [1997] FMSC 28; 8 FSM Intrm. 139, 141 (Chk. 1997). The determining factor in a third party beneficiary claim is the intent of the parties, which is a question of the construction of the contract as determined by the contract's terms as a whole. Id. Based on the language from the loan document set out above, the plaintiff's have moved to amend the complaint to add a third party beneficiary claim as discussed below.
The Bank's loan agreement is its own document, and as such the Bank is to be credited with the knowledge that that document contained the foregoing provision. It apparently employs house counsel
to advise it on such questions. Not only is the loan agreement relevant, but the foregoing provision, to the extent that it states a prima facie case for a third party beneficiary claim, is potentially dispositive of the plaintiffs' claim to be paid for the materials the plaintiffs supplied. This court should not have to say that a party may not refuse to produce relevant discovery materials in order to prevent information damaging to it from coming to light. On the record before it, the court must conclude that the refusal to produce the clearly relevant loan agreement containing a provisions damaging to it was done in bad faith.
In addition to the sanction of fees and expenses provided for in Rule 37(a)(4), subparagraph (b)(2)(A) of Rule 37 of the FSM Rules of Civil Procedure provides that the court may enter an order "refusing to allow the disobedient party to . .oppose designated claimclaims or defenses." Because of its refusal to provide the loan document, the Bank will not be permitted at the time of trial to oppose taintiffs' third-party beneficiary claim based on that documdocument. Further, Rule 37(b)(2) provides that the court may enter an "order that the matters regarding which the order [compelling discovery] was made or any other designated facts shall be taken to be established for purposes of the action in accordance with the claim of the party obtaining the order." The facts necessary to establish the plaintiffs' third-party beneficiary claim based on the loan agreement are taken to be established. Moreover, the Bank's refusal to produce the loan document was sufficiently egregious that the facts necessary to establish the liability of the Bank to the plaintiffs for the construction materials that they supplied for the Panasang project based on the September 27, 1997, meeting are deemed established. As to the Bank, the only issue remaining for trial will be that of damages. Consequently, no further document production by the Bank is required.
The court also finds that the Bank's resistance, by its responses on August 28, 2001; September 14, 2001; and September 28, 2001, to plaintiffs' July 30, 2001, motion to compel and associated filings, violated Rule 11 of the FSM Rules of Civil Procedure, at least as to the Bank's claim that the Perman loan document was not relevant. The sanctions imposed under Rule 37 will also stand as those imposed under Rule 11.
The court also awards the plaintiffs their attorney fees and expenses in moving to quash the subpoena of plaintiff Yvette Etscheit Adams.
The Bank has presented one legitimate discovery issue in this case to date, which is whether the court's September 9, 2002, protective order put in place sufficiently stringent safeguards to protect the Bank's customers' undeniable privacy interest in their business records with the Bank. However, in presenting that issue, the Bank urged a business records privilege which, looking to the black letter of the case which the Bank itself submitted, does not exist. Valley Bank of Nevada, 542 P.2d at 978 ("[T]he general rule appears to be that there exists no common law privilege with respect to bank customer information."). Accordingly, the plaintiffs are awarded half of their attorney's fees and expenses under Rule 37(a)(4) in bringing their motion to compel filed on July 26, 2002, as well as half of the fees and expenses incurred in the course of the order to show cause proceedings related to this issue. The court further finds that the Bank's position on the business records privilege, as opposed to a privacy interest, to be sufficiently wide of the mark with regard to established law in this area as to constitute a Rule 11 violation. The Rule 37(a)(4) sanctions will also stand as the Rule 11 sanctions.
The court finds the Bank to be in contempt for its failure to abide by this court's September 9, 2002, order. The Bank knew of the September 9, 2002, order, had the ability to comply with the order, and decided not to comply. The court finds that that order sufficiently safeguarded the Bank's customers' privacy interest in their records with the Bank. However, in light of the ruling on the Rule 37 sanctions, no further sanctions are imposed. The fact that the Bank has filed a petition for writ of mandamus to cause this court to recognize the "right of business and financial privacy and privilege,"
Petition for Writ of Mandamus at 3 (Sept. 19, 2002) (App. No. P5-2002), played no part in this court's decision in either imposing sanctions against the Bank under Rule 37 or in finding the Bank in contempt.
All other pending motions for fees and sanctions are denied.
The court also notes that the Model Rules of Professional Conduct ("the Model Rules") are made applicable to practitioners before this court pursuant to FSM Supreme Court General Court Order 1983-2. Model Rule 3.3(a)(1) provides that "[a] lawyer shall not knowingly make a false statement of material fact or law to a tribunal." The comment to Rule 3.3, entitled "Misleading Legal Argument" states that "[l]egal argument based on a knowingly false representation of law constitutes dishonesty toward the tribunal." The Bank's claim that the Perman loan document was not relevant was sufficiently counter to clear law as to implicate this rule. The language of the paragraph 13 of the loan agreement is not only relevant, but is potentially dispositive of the plaintiffs' claim against the Bank to be paid for the construction materials that they supplied. Further, Rule 1.2 of the Model Rules prohibits a lawyer from perpetrating a fraud upon the court. If the Bank's attorney Woodruff pursued the spurious lack of relevancy claim on the Bank's behalf with the specific intent to prevent the disclosure of evidence damaging to the Bank, then Rule 1.2 is also implicated. By this order and memorandum, this matter is referred under Rule 4(b) of the Disciplinary Rules of Procedure to the Chief Justice for such further disciplinary proceedings as he may deem appropriate as to Woodruff.
Lastly, at the September 25, 2002, order to show cause hearing, Woodruff stated as follow: "It seems as if this case has gotten to where, where it's become a personality contest between me and Mr. Reffner, and has really strayed very far from the facts and issues of the case." Tape at counters 90-94. If this is to say that the untoward discovery proceedings in this case have served as a forum for giving vent to personal animosity between counsel, then the court must expressly disapprove such conduct. Whatever else may be the case, personal conflicts between counsel do not excuse the Bank's failure to produce the Perman loan document.
II. The motion to amend the complaint
The plaintiffs moved on July 23, 2002, to amend their complaint. They contend that the amended complaint is based on information obtained through discovery. The discovery cutoff as provided in this court's order of April 22, 2002, was July 1, 2002. The motion was filed within the prescribed period for filing pretrial motions.
The amended complaint differs from the original complaint in that it sets out the legal theory under which each count is allegedly brought. For example, the first count (of the four contained in the amended complaint) bears the subtitles "breach of contract" and "quantum meruit/restitution," while the second count is titled "third party beneficiary contract" and "restitution/ quantum meruit." Rule 8(a) of the FSM Rules of Civil Procedure provides that a pleading shall assert "a short and plain statement of the claim showing that the pleader is entitled to relief." Under this rule, the claimant need not "set forth any legal theory justifying the relief sought on the facts alleged, but [the rule] does require sufficient factual averments to show that the claimant may be entitled to some relief." 2 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 8.03[3] d. 1999) (footnote note omitted). In Newman v. Silver, [1983] USCA2 749; 713 F.2d 14, 15 n.1 (2d Cir. 1983), appellant urged that the district court "tried the case on a quantum meruit basis although quantum meruit was not mentioned in the complaint." In response to this contention, the court noted that the appellant "misconceives that nature of federal pleading which is by statement of claim, not by legal theories." The point that bears making here is that for purposes of a motion to amend the complaint, it is the plaintiffs' factual averments and the claims resting on them that are dispositive, not the legal theories assigned to the claims. Further, Rule 15(a) of the FSM Rules of Civil Procedure provides generally that after a pleading has been responded to,
"leave shall be freely given [to amend a pleading] when justice so requires."
The dispute in the case at bar has to do with two construction projects, an apartment building in the Panasang Heights area of Pohnpei ("the Panasang project"), and the Enipein elementary school project ("the Enipein project"). Both the complaint and the amended complaint allege that the defendant Island Homes did not pay the plaintiffs for construction materials purchased from them on an open account basis and used in both projects. Both complaints allege that an agreement was reached at a September 1997 meeting under the terms of which the plaintiffs and defendants agreed that in order to complete the projects, the plaintiffs would continue to supply materials, and that the Bank would disburse loan proceeds directly to the plaintiffs. Both complaints also allege an October 8, 1997, agreement under the terms of which Island Homes assigned to the plaintiffs any payment due Island Homes from either Perman or from the Bank for the Panasang project. Based on these factual averments, the original complaint - as opposed to the amended complaint - seeks recovery against Island Homes for the materials it supplied in both projects. As to the Bank and Perman, the original complaint seeks recovery against them for the value of the materials they supplied in the Panasang project.
The amended complaint seeks to add both parties and claims. As to parties, plaintiffs seek to add Joe Felix d/b/a Island Homes Construction as a defendant on the claims brought against the defendant Island Homes on the basis that discovery has disclosed that Felix did not incorporate Island Homes Construction, Inc., until March of 1998, or six months or so after the last operative events occurred. Plaintiffs allege that Island Homes Construction, Inc., is Felix's successor in interest. Plaintiffs also seek to add Lorenza Perman, who is Paulus Perman's wife, as a party on the loan agreement between the Permans and the Bank. They move to add the FSM and Pohnpei as parties on the basis that they are apparent joint owners of the Enipein project. On information and belief, they allege that the construction contract between the FSM and Joe Felix d/b/a Island Homes Construction provides for no payments to Joe Felix or Island Homes absent proof provided to the FSM that all construction materials had been paid for. Plaintiffs allege they are third-party beneficiaries of this alleged agreement, and further allege that they have repeatedly sought copies of this document through discovery, but that it has not been provided. The plaintiffs also make a claim against the FSM and Pohnpei based on the legal theory of quantum meruit because the FSM and Pohnpei are unjustly enriched by now owning a school that is constructed with unpaid-for materials. Finally, in the amended complaint they seek a declaratory judgment that they are holders of equitable and mechanic's liens against both projects.
Plaintiffs also seek to add new claims to existing parties, including at least the following. As to the Bank and the Permans, the plaintiffs seek to add a claim against them on the basis of the Panasang project construction loan agreement, discussed in part I. above, between the Permans and the Bank. The plaintiffs allege that they are the third party beneficiaries of the agreement. They also move to add a claim against Joe Felix d/b/a Island Homes Construction and Island Homes Construction, Inc., based on a provision in the construction contract between Perman and Island Homes that allegedly provides the no payments would be due to Felix from Perman until Felix delivered lien releases to Perman. Plaintiffs allege that they are third-party beneficiaries of this agreement. The plaintiffs are also seeking to recover against Perman, Felix, Island Homes, and the Bank under the October 8, 1997, alleged assignment based on conversion and quantum meruit.
In sum, in the amended complaint, the plaintiffs seek to recover against all defendants for the value of the construction materials supplied for the Panasang project. As to the Enipein project, they seek recovery against Joe Felix d/b/a Island Homes and Island Homes Construction, Inc., as well as Pohnpei and the FSM. In addition, as just noted, are the equitable and mechanic's lien claims on both the Panasang apartment building and the Enipein school.
A. The claims against Pohnpei and the FSM
Quantum meruit is "an equitable doctrine, based on the concept that no one who benefits by the labor and materials of another should be unjustly enriched thereby; under those circumstances, the law implies a promise to pay a reasonable amount for the labor and materials furnished, even absent a specific contract therefor." BLACK'S LAW DICTIONARY 1243 (6th ed. 1990). The doctrine of unjust enrichment has been recognized in the FSM. Etscheit v. Adams, [1994] FMSC 6; 6 FSM Intrm. 365, 392 (Pon. 1994). As to the Pohnpei and FSM government claims, plaintiffs allege that these two government entities have been unjustly enriched because they now jointly own a building built by Island Homes that contains as yet unpaid-for building materials. Those materials were alleged to have been purchased from the plaintiffs by Island Homes, and not by either the FSM or Pohnpei directly. So long as Pohnpei and the FSM have paid, or are paying under financing arrangements, the full amount that they owed respectively for the construction of the school, then they paid for, or are paying for, what they got. The fact that the money they paid may not have ended up in the hands of the entities supplying the materials does not mean that either Pohnpei or the FSM has been unjustly enriched. At best, the amended complaint alleges that on "information and belief" the construction contract between FSM, Pohnpei, and Island Homes provides that "the Defendant Federated States of Micronesia may be held liable for claims for unpaid materials." First Amended Complaint at 26. As noted, the plaintiffs allege in their motion that they had been unable to obtain a copy of the contract through repeated discovery requests. But the record of the case does not show that in the course of the many discovery disputes with which this case has been fraught, the plaintiffs brought this to the court's attention. By now, the plaintiffs should be in a position to allege this contract on a more concrete basis than mere information and belief. The court finds that the allegations that the Enipein school contains unpaid-for building materials are insufficient at this point in this case to state an unjust enrichment or third-party beneficiary claim. The motion to add these parties and these claims is denied.
Nor does the court see how the allegations in the amended complaint states an unjust enrichment claim against the Bank. The essential allegations of the amended complaint relate to the Bank's failure to abide by the terms of the alleged September 23, 1997, agreement under which the Bank allegedly agreed to pay the plaintiffs directly; the alleged October 8, 2002, assignment agreement; or paragraph 13 of the loan agreement between the Perman and the Bank. These are express agreements, and unjust enrichment is a theory applicable to implied contracts. Etscheit v. Adams, 6 FSM Intrm. at 368. The motion to amend the complaint to add an unjust enrichment claim against the Bank is denied.
B. Other additional claims and additional parties
The amended complaint makes a third party beneficiary claim as to the Bank based on the construction loan agreement that the Permans entered into with the Bank. The Bank urges that it is too late in this litigation for the plaintiffs to assert this new claim. The Bank maintains that the loan document was produced to the plaintiffs in December of 2001, seven months before the motion to amend was filed, and that the motion to amend should therefore have been filed earlier. The motion was brought within the time permitted for filing pretrial motions. The Bank also has been responsible for considerable delays in this case through its own resistance to discovery. Nor can the Bank claim surprise, since it is the Bank's own document. Thus, the plaintiffs' motion to amend the complaint to add a third-party beneficiary claim against the Bank based on the loan agreement is granted.
The additional claims against the Bank and Perman based on the October 8, 1997, assignment agreement alleged in the original complaint are denied. The court can discern no reason why these claims could not have been made when the October 8, 1997, agreement was first alleged.
The third-party beneficiary claim against Joe Felix d/b/a Island Homes Construction, and Island
Homes Construction, Inc., is allowed on the basis that the construction contract between Island Homes and the Permans on which this claim is based was disclosed in the course of discovery. Island Homes contends that adding Felix as a party is time barred. However, the applicable statute of limitations in this case is six years pursuant to 6 F.S.M.C. 805. The construction agreement between the Permans and Felix is dated January 10, 1997, and other operative events occurred in September and October of that year. The motion to amend the complaint was filed on July 23, 2002. The claims as to Felix are not time barred. The motion to add Felix as a party defendant on all claims permitted against his alleged successor in interest, the defendant Island Homes Construction, Inc., is also granted.
Defendant Paulus Perman, who is Lorenza Perman's husband, has not filed any objection to the motion to amend the complaint to add the plaintiffs' third-party beneficiary claim based on the construction contract between the Permans and Island Homes. Nor has Lorenza Perman herself responded. The motion to add Lorenza Perman as a party, and to add the third-party beneficiary claims against the Permans based on the construction contract is granted.
The equitable and mechanic's lien claims remain. Plaintiffs contend that they are entitled to have these liens declared as to both the Panasang apartments and the Enipein school. However, they cite no FSM or Pohnpei state authority for the declaration of these liens, which affect an interest in land. A strong presumption exists under FSM law for deferring land matters to local land authorities. Kapas v. Church of Latter Day Saints,, 6 FSM Intrm. 56, 60 (App. 1993). Article XI, Section 8 of the FSM Constitution, along with federalism principles and concerns for judicial harmony, bestow power on the FSM Supreme Court to certify questions of state law to the state courts. Edwards v. Pohnpei, [1988] FMSC 6; 3 FSM Intrm. 350, 361 (Pon. 1988). If the lien claims had been presented in the original complaint, then court could have certified these lien questions to the Pohnpei Supreme Court to make the determination whether, as a matter of law, such liens exist under Pohnpei state law. The factual allegations at paragraphs 10-17 of the original complaint support such claims, and the court can see no reason why that claim should not have been made at that time. If it had, then discovery in this case could have been on-going while the Pohnpei Supreme Court was considering this question. Considering the circumstances of this case as a whole, it is too late to bring this claim now. The motion to amend the complaint to add a claim for declaratory judgment to determine that plaintiffs have an equitable or mechanic's lien against either the Panasang apartment building or the Enipein school is denied.
The motion to amend the complaint as to any other claims not specifically addressed above are denied. Within ten days from the date of this order, the plaintiffs will file an amended complaint in accordance with this order and memorandum.
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