Pangelinan v Camacho [2008] GUSC 4; 2008 Guam 4 (4 March 2008)

	Home \| Databases \| WorldLII \| Search \| Feedback Supreme Court of Guam

FELIX P. CAMACHO, Governor; ALICIA G. LIMTIACO, Attorney General;
LAWRENCE P. PEREZ, Director of the Department of Public Works;
ANTHONY C. BLAZ, Acting Administrator of the Guam Economic Development and Commerce Authority;
TEREZO R. MORTERA, Director of Land Management;
Y’ASELA A. PEREIRA, Treasurer of Guam;
GOVERNMENT OF GUAM
Defendants-Appellees,

Appeal from the Superior Court of Guam
Argued and submitted on May 15, 2007
Hagåtña, Guam

Appearing for Intervening Defendant-Appellee:
Arthur B. Clark, Esq.
Calvo & Clark, LLP
655 South Marine Corps Dr. Suite 202
Tamuning, Guam 96911

Appearing for Plaintiffs-Appellants:
Michael F. Phillips, Esq.
Phillips & Bordallo, P.C.
410 West O’Brien Dr., Suite 102
Hagåtña, Guam 96910

BEFORE: RICHARD H. BENSON, Presiding Justice Pro Tempore; JOHN A. MANGLONA, Justice Pro Tempore; J. BRADLEY KLEMM, Justice Pro Tempore[1].

[1] In Pangelinan v. Gutierrez, 2004 Guam 16, we amended our earlier decision in the case from Pangelinan v. Gutierrez, 2003 Guam 13, and remanded the case to the Superior Court. On remand, the Superior Court granted summary judgment for Intervening Defendant-Appellee Guam Resource Recovery Partners ("GRRP"), finding that an illegal contract provision was severable from the remainder of the contract. On appeal from the Superior Court’s grant of summary judgment, we, for the following reasons, reverse and remand this matter for further proceedings consistent with this opinion.

[2] We have discussed fully the procedural and factual background of this case in Pangelinan v. Gutierrez, 2003 Guam 13 ¶¶ 2-10 ("Pangelinan I"), and Pangelinan v. Gutierrez, 2004 Guam 16 ¶ 1 ("Pangelinan II"), and need not recite it completely here. This case involves a series of agreements between the Government of Guam and various parties regarding the building of a facility on Guam that would convert solid waste into electrical power. In Pangelinan I, we held that the entire Solid Waste Construction and Service Agreement entered into between GRRP and the Government of Guam in 1996 ("1996 Agreement") was null and void because it violated 48 U.S.C. § 1423j and 5 GCA § 22401.[2] Pangelinan I, 2003 Guam 13 ¶ 27. In Pangelinan II, we affirmed our holding in Pangelinan I that section 4.04 of the 1996 Agreement violated 48 U.S.C. § 1423j and 5 GCA § 22401 but amended our earlier decision and remanded the case for a determination on whether or not section 4.04 was severable from the 1996 Agreement. Pangelinan II, 2004 Guam 16 ¶ 1. On remand we instructed the lower court to apply a two-part analysis for severability that tests, one, whether the illegal provision is the central purpose of the agreement and, two, whether the illegal provision is integral to the agreement.[3] Id. ¶ 18.

[3] Applying the Pangelinan II test, the Superior Court determined that section 4.04 was not the central purpose of the 1996 Agreement and that section 4.04 was not integral to the 1996 Agreement.[4] The court therefore held that section 4.04 of the 1996 Agreement was severable from the 1996 Agreement and granted GRRP’s motion for summary judgment. Severing section 4.04, the Superior Court "declare[d] the remaining portions of the 1996 Agreement to be valid and enforceable."[5] Appellants’ Excerpts of Record ("ER"), tab 4 (Judgment at 1). Pangelinan timely filed his appeal of the Superior Court’s summary judgment for GRRP.

[4] Prior to discussing the merits of this case, we must discuss an issue raised sua sponte by the court – plaintiffs’ taxpayer standing to sue. We raised the issue of Pangelinan’s taxpayer standing to sue due to the possibility of contradictory interpretations of what establishes standing under 5 GCA § 7103.[6] Contradictory interpretations of 5 GCA § 7103 are possible, because the statute permits a taxpayer to seek injunctive relief for expenditures without authorization "and to obtain a personal judgment." 5 GCA § 7103 (2005) (emphasis added).[7] Section 7103 could be read in the conjunctive and not disjunctive sense, allowing injunctive relief only when accompanied by personal judgments.[8] The parties provided supplemental briefs regarding the issue of standing under 5 GCA § 7103. We decline at this time to address the issue of standing under 5 GCA § 7103, however, because Pangelinan has a valid source of standing under the common law taxpayer standing recognized by Santos v. Calvo, Civ. No. 80-0223A, 1982 WL 30790 (D. Guam App. Div. Aug. 11, 1982).

[5] In Santos v. Calvo, the Appellate Division of the District Court of Guam determined that a party had general common law taxpayer standing to sue to enjoin spending by a public official. Id. at *2. The court stated that, "we adopt the majority rule and hold that Santos had [taxpayer] standing to bring an injunctive action against a public official of Guam." Id. We do not divert from precedents set by the Appellate Division of the District Court of Guam unless reason supports deviation, In re Camacho, 2006 Guam 5 ¶ 51 n.10, and we see no reason to divert from the precedent set in Santos v. Calvo.[9] We hold that Pangelinan has common law taxpayer standing in this case. With standing established, we now turn to the merits of the case.

[6] This court has jurisdiction to review a final judgment of the Superior Court. 7 GCA §§ 3107 and 3108(a) (2005). We review the grant of summary judgment by a Superior Court de novo. Guam Hous. & Urban Renewal Auth. v. Pac. Superior Enters. Corp., 2004 Guam 22 ¶ 14. Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Guam R. Civ. P. Rule 56(c). "In rendering a decision on a motion for summary judgment, the court must draw inferences and view the evidence in a light most favorable to the non-moving party." Bank of Guam v. Flores, 2004 Guam 25 ¶ 7. "We review issues of contract interpretation de novo." Pac. Superior Enters. Corp., 2004 Guam 22 ¶ 29.

[7] One of the main purposes for the remand in Pangelinan II was to give the Superior Court an opportunity to determine if section 4.04 of the 1996 Agreement was severable from the Agreement. Pangelinan II, 2004 Guam 16 ¶ 18. This court’s severability instructions in Pangelinan II were pivotal, because the Pangelinan II court affirmed that section 4.04 of the 1996 Agreement violated 48 U.S.C. § 1423j and 5 GCA § 22401, id. ¶ 1, and determined that the entire 1996 Agreement would be invalid if section 4.04 was not capable of severance. Id. ¶ 18. The severability test from Pangelinan II outlines a two-part analysis that tests: (1) whether the illegal provision was the central purpose of the 1996 Agreement; and (2) whether the illegal provision is integral to the 1996 Agreement. Id.[10]

[8] The Superior Court determined under the first part of our Pangelinan II analysis that section 4.04 of the 1996 Agreement is not the central purpose of the 1996 Agreement. Due to our determination regarding the second part of the Pangelinan II severability analysis, we need not analyze the Superior Court’s central purpose ruling.[11]

[9] Regarding the second part, we disagree with the Superior Court’s determination that section 4.04 is not integral to the 1996 Agreement. Because section 4.04 is an essential part of the agreed exchange and, looking at the language of the 1996 Agreement, GRRP would not have entered into the 1996 Agreement without this provision, it is integral and not severable. We arrive at our severability determination by looking at the law underpinning the second part of our Pangelinan II severability analysis and then applying this law to section 4.04 and the 1996 Agreement.

[10] The second part of our severability analysis from Pangelinan II involves determining "whether section 4.04 is integral to the contract." Pangelinan II, 2004 Guam 16 ¶ 18. "Should the court find that section 4.04 is an integral part of the contract, and therefore the illegal provision cannot be severed, the trial court must find that the contract in its entirety is invalid." Id. The term "integral" in the Pangelinan II analysis originated from John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 87 (Tex. App. 1996). Pangelinan II, 2004 Guam 16 ¶¶ 17-18. John R. Ray & Sons did not explicitly define "integral," but the case provided a test for severability when the court stated:

Where each covenant is such an indispensable part of what both parties intended that the contract would not have been made without the covenant, they are mutual conditions and dependent, in the absence of clear indications to the contrary. The relevant inquiry is whether or not the parties would have entered into the agreement absent the unenforceable part.

[11] Furthermore, in Pangelinan II we cited with approval to Panasonic Co. v. Zinn, 903 F.2d 1039, 1041 (5th Cir. 1990), where that court stated, ‘"In determining whether a particular provision is severable, the issue is whether the parties would have entered into the agreement absent the illegal parts."’ Pangelinan II, 2004 Guam 16 ¶ 16 (quoting Panasonic Co., 903 F.2d at 1041 (internal quotation marks and brackets omitted)). Inquiring whether the parties would have entered into the agreement absent the unenforceable or illegal part is a sound method of determining whether a provision is integral and comports with prudent policy regarding contracts.

[12] The policy behind a court examining whether or not the parties would have entered into the agreement absent the illegal or unenforceable part when making a severability determination was cogently explained by the Alaska Supreme Court in Zerbetz v. Alaska Energy Center, 708 P.2d 1270, 1282-83 (Alaska 1985). The court in Zerbetz stated:

In general, courts try to give effect to agreements the parties have made, not to agreements the parties have not made but that the courts think would have been just. If parts of an agreement violate public policy, the "agreement" which remains after those parts have been excised may or may not seem to "result in some inequality." Even if it does not, it is still not the agreement the parties made. If a provision that the court must excise is an "essential part of the agreed exchange," the court cannot be sure that in that provision's absence the parties would have agreed at all. In that case the court should not enforce what remains of the agreement.

[13] We adopt the analysis from Panasonic, Zerbetz, and John R. Ray & Sons as the measure of whether a provision is integral under the second part of our severability test from Pangelinan II. In order to determine whether or not section 4.04 of the 1996 Agreement is integral and, therefore, not severable, we must analyze whether the parties would have entered into the agreement absent the unenforceable or illegal part. If the unenforceable or illegal part is an essential part of the agreed exchange, then it is integral and not severable.

[14] We conclude that section 4.04 is an essential part of the agreed exchange and that GRRP would not have entered into the 1996 Agreement without the illegal and unenforceable part. We come to this conclusion by looking solely at the terms of the 1996 Agreement.[12] Section 4.04(c) of the 1996 Agreement would provide GRRP with millions of dollars in payments. The section states:

If such failure [to satisfy any Conditions Precedent set forth in sections 4.02 or 4.03] is the result of Government Fault, then (i) this Agreement shall terminate, (ii) the Government shall pay on or prior to the Termination Date to the Company its Phase I Development Costs, its Phase II Development Costs incurred through the Termination Date of this Agreement and the Defeasance Cost, if any, and the License Defeasance Cost, and (iii) the Company shall have no other claim against the Government arising from or relating to this Agreement.

Appellants’ SER, tab 1 (Pls.’ Mem. in Supp. of Summ. J., Ex. A (1996 Agreement at 70)) (hereinafter "1996 Agreement").

[15] The fact that GRRP would gain substantially under section 4.04(c) is not obvious, because the section is not a standalone provision. It is tied to many other sections of the 1996 Agreement, and one must look elsewhere in the 1996 Agreement to provide meaning to terms used in section 4.04(c). "Phase I Development Costs" are defined by the 1996 Agreement as "[o]ne million five hundred thousand dollars ($1,500,000), in respect of development services by the Company before January 1, 1993. Phase I Development Costs shall not be subject to Cost Substantiation." 1996 Agreement at 43 (emphasis added). "Phase II Development Costs" are defined as:

One million three hundred thousand dollars ($1,300,000), which shall be paid to the Company in respect of costs and expenses of the Company for the period from and after January 1, 1993, in connection with the development of the Facility; provided, however, that the Phase II Development Costs shall be subject to adjustment (i) if, within ninety (90) days following the Contract Date, the Government has not delivered to the Company either evidence of Legislative Approval or an unqualified opinion of nationally recognized bond counsel for the Government to the effect that no Legislative Approval is required for the execution, delivery and performance by the Government of its obligations hereunder, or (ii) as provided in Sections 7.06, 7.07 and 7.08. Phase II Development Costs shall not be subject to Cost Substantiation and, unless otherwise agreed by the parties, shall not be subject to increase or reduction based upon actual costs incurred by the Company.

[16] GRRP would also receive "Defeasance Cost" and "License Defeasance Cost" through section 4.04(c). "Defeasance Cost" is defined to mean:

[A]s of any calculation date, an amount sufficient to defease and discharge all outstanding Bonds in accordance with their terms, together with all related costs of defeasance and repayment, after giving effect to the release of any reserve funds or insurance proceeds which are made available for such purpose under the Indenture in connection with such defeasance, plus an amount equal to all outstanding Equity and all return thereon provided for under this Agreement accrued but unpaid as of such calculation date.

1996 Agreement at 15-16. "License Defeasance Cost" means "as of any calculation date (a) if such calculation date is prior to the Acceptance Date, the product of Three hundred thousand dollars ($300,000) times the number of years (including any partial year) prior to the year 2013, or (b) if such calculation date is on or after the Acceptance Date, the Fair Facility Value less the Defeasance Cost." 1996 Agreement at 35.

[17] Thus, GRRP stands to gain millions of dollars from section 4.04 regardless of whether they perform any work or incur any cost. Due to this substantial gain afforded by section 4.04, it is an essential part of the agreed exchange and integral to the entire contract. Furthermore, the importance placed on section 4.04 by the parties is made clear by the fact that section 4.04 is specifically referred to in other provisions of the 1996 Agreement. Section 6.02 and section 6.04 allow GRRP to exercise its rights under section 4.04 if the parties cannot agree on a revised facility price or GEDA or another political subdivision of the Government of Guam fails to agree to issue bonds despite being able to issue the bonds. 1996 Agreement at 96, 98. Because the parties would not have entered into the 1996 Agreement without section 4.04, the presence of a severability clause in section 19.15 of the 1996 Agreement does not save the Agreement in this case. "‘[W]hen the severed portion is integral to the entire contract, a severability clause, standing alone, cannot save the contract.’" Pangelinan II, 2004 Guam 16 ¶ 17 (quoting John R. Ray & Sons, 923 S.W.2d at 87).

[18] GRRP’s arguments that section 4.04 is not integral are unavailing. GRRP argues that section 4.04 of the 1996 Agreement is not integral and is severable, because section 4.04 is a collateral damages provision. However, GRRP’s argument is unpersuasive. GRRP cited two cases to support its proposition that courts have generally held that damages provisions of a contract are not essential or integral and are, therefore, severable: Tata Consultancy Services v. Systems International, Inc., 31 F.3d 416 (6th Cir. 1994), and

Supreme Court of Guam

Pangelinan v Camacho [2008] GUSC 4; 2008 Guam 4 (4 March 2008)