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Supreme Court of Palau |
IN THE SUPREME COURT OF THE REPUBLIC OF PALAU
TRIAL DIVISION
CIVIL ACTION NO. 07-064
ROSALINDA ONGALIBANG, et al.,
Plaintiffs,
vs.
PALAU ADMINISTRATION CREDIT
UNION, et al.,
Defendants
DECISION
On February 13, 2007, Plaintiffs Rosalinda Ongalibang, Elena Tellei, Peter Napoleon, Angeles Takashi,[1] Clarinda Alexander, Olympia E. Remengesau[2] and Laurinda Mariur filed their first complaint against Defendants Palau Administration Credit Union (APACU@), Leo Ruluked, John Kebou, Rosemary Mersai, Yorang Miner, Emil Remarui, Kokich Ingas, Alonzo Tellei and John Doe I and II,[3] in their official capacities as officers and members of the Credit Committee of PACU and in their individual capacities. Defendants answered on April 13, 2007. They conceded that Plaintiffs held shares or money in PACU, but denied any liability.
On September 11, 2007, the Court entered a partial judgment and order under ROP R. Civ. P. 54(b), pursuant to a stipulation signed by all parties. Defendants conceded liability in their official capacity. They agreed to re-pay Plaintiffs the principal along with 6% pre-judgment interest, 9% post-judgment interest and attorney fees.[4] The only issue remaining was whether Defendants should be held liable in their individual capacity.
The Court set a trial date, which was continued when Defendants= counsel indicated that he could not represent all of the Defendants, some Officers and others Directors and Credit Committee members, if this matter were to go to trial on individual liability. The Court vacated the trial date, and the Credit Committee members (Miner, Ingas, Remarui and Tellei) hired separate counsel.
On February 24, 2010, the Credit Committee Defendants moved to amend their answer to include the affirmative defense of statute of limitations and laches. The Credit Committee Defendants argued that they are all retired government employees; since retirement they have not participated in PACU activities; some of them retired over six years before this suit; and their memories have deteriorated due to age and illness. The Court addressed the Credit Committee Defendants= motion prior to the commencement of trial. It granted the motion to amend, but required the Credit Committee Defendants to shoulder Plaintiffs= counsel=s additional costs for researching and responding to this issue at this late date, and allowed Plaintiffs= counsel additional time at the close of trial to brief the issue if he deemed it necessary. Ultimately, Plaintiffs= counsel determined that additional briefing was not necessary, so counsel required neither additional time nor costs.
This matter proceeded to trial on February 26, March 1-4, and March 8-11, with closings March 18, 2010. On March 31, 2010, the Court issued an order requesting oral argument on the issue of whether this matter should have been brought as a derivative suit under ROP R.Civ.P. 23.1. After hearing from the parties on April 7, 2010, the Court issued two orders on April 9, 2010, first, granting Plaintiffs= oral motion to amend his complaint to comply with ROP R.Civ.P.23.1, and second, granting Defendants= oral motion to dismiss for statute of limitations and/or laches, as to Defendant Tellei and denying it as to Defendants Remarui, Ingas and Miner.
On May 14, 2010, the same Plaintiffs filed an amended verified shareholder derivative complaint (Aamended complaint@), suing all of the same Defendants except for Tellei. In the amended complaint, Plaintiffs alleged that Defendants owe them the principal of their lost shares in addition to 6% pre-judgment interest and 9 % post-judgment interest. In the second cause of action, Plaintiffs alleged that PACU officers Kebou, Mersai and Ruluked breached their fiduciary duties to PACU and Plaintiffs. The third cause of action focuses on Miner, Ingas and Remarui, alleging that they, as PACU Credit Committee and Board members, breached their fiduciary duty to PACU and Plaintiffs. The fourth cause of action is for an accounting. As remedies, Plaintiffs sought an accounting, a declaration that Defendants breached their fiduciary duties to PACU, punitive and exemplary damages, and a return of PACU shareholders= principal (shares), along with 6 % pre-judgment interest and 9 % post-judgment interest and attorney fees and court costs.
On June 24 and 28, 2010, the Credit Committee Defendants (Miner, Remarui, and Ingas) and the Officer Defendants (Ruluked, Kebou and Mersai) answered. Thereafter, the parties requested a hearing to introduce a limited amount of additional factual testimony. After several continuances, the Court held the evidentiary hearing and supplemental closing arguments on November 1, 2010.
The Court must resolve four issues. First, whether Plaintiffs properly represent the PACU shareholders in a derivative suit. Second, whether the individual Defendants had a fiduciary duty to PACU and Plaintiffs. Third, whether they breached that fiduciary duty in their actions or inactions leading up to the demise of PACU. And, fourth, whether that breach rose to the level required for them to be individually liable. As required under ROP R.Civ.P. 52, the Court will first set out its findings of fact, then apply those facts to the law, and ultimately issue a judgment, as mandated by ROP R.Civ.P. 58.
Plaintiff Takashi was a member of PACU from the early 1980's through its demise in 2003. Takashi remembers attending annual meetings through 1999 or 2000. She attended every meeting for which she received notice. At these meetings, Defendant PACU Treasurer Kebou presented on PACU=s financial condition, and said nothing which caused her concern. He mentioned bad loans, but did not indicate the amount owed. He did not talk about losses or gains; he just talked about the current financial statement. Kebou mentioned PACU=s time certificate deposit (TCD) at Bank of Hawaii. She never asked to review PACU=s records because AJohnny would explain it and I believed him.@ Takashi never saw the Articles of Incorporation or Bylaws. She retired from government service in 2004. Prior to that date, on February 5, 2003, she wrote a letter to Kebou, asking to withdraw her shares from PACU. She received $1,000 in November, 2003, but otherwise received no response to her letter and no repayment of her shares. PACU still owes her $9,644.67.[5] She approached Kebou to ask about her money, but he told her that PACU was broke. She asked him about the TCD, and he told her that he had told the Board not to touch the TCD, but they did not listen and now the TCD was gone.
Like Takashi, Plaintiff Napoleon was a PACU member from the early 1980's until PACU stopped operating in 2004. He also tried to get his shares out by letter to Kebou in February 2003, but his attempts were equally unsuccessful. He too was paid $1,000 in November 2003, but is still owed $5,625. He tried to speak with Defendants Kebou, Ruluked, Mersai and Miner about when he could expect the rest of his money. They either answered that they were no longer members of PACU and sent him to someone else, or told him that he would need to wait to get his money back because PACU currently had no money. Napoleon did not attend many meetings because of his job as a police officer, but he remembered one meeting where the management reassured its members that PACU had a $100,000 TCD.
Laurinda Mariur was a PACU member from 1984[6] through April, 2003. She remembers a meeting in 1995 or 1996 where the Board discussed money in a TCD. She does not remember the specific amount but remembers that it sounded big, so she left the meeting confident in PACU=s financial stability. She never heard discussion of PACU=s liabilities at these meetings. She wrote a letter to PACU dated April 22, 2003, asking to withdraw her shares and stopped making allotments in May 2003. She wanted her PACU money because her son was graduating from high school and needed money to attend college in Hawaii. She received no response to her letter. She called the PACU office several times, and spoke to the bookkeeper Benita Mesubed, who told her that she (Mariur) was on the list of members seeking share withdrawals and referred her to PACU Secretary Mersai. When she spoke to Mersai, Mersai told Mariur that PACU was having cash flow problems, and it was impossible to withdraw her shares at that time. Mariur received no notice from PACU that it was closing.
Olympia Morei was a PACU member from 1986 through December 2003. During that time, she only attended one annual meeting. At that meeting, the Board informed the members that their money was insured by a TCD, and assured the members that there was enough money in the TCD to cover the members. Morei stopped her allotments in December 2003 because she heard that there was no more money in PACU. In December 2004, the amount of her loan ($776.50) was automatically deducted from her shares ($7,395), leaving a balance of $6,525.32. She called Mesubed several times to ask when she could come and withdraw her shares, but she received no answer. Although she stopped her allotments in December 2003, she did not write her withdrawal letter until January 2007. She received no response to her letter.
Rosalinda Ongalibang and Clarinda Alexander were PACU members from 1993 through 2004. On March 11 and 21, 2004, Alexander and Ongalibang separately wrote letters to PACU President Ruluked asking to withdraw their shares. By the time PACU closed its doors, Ongalibang had amassed $9,799.15[7] and Alexander had $9,799.33. They received no response to their letters. In an attempt to recoup her money, Ongalibang approached Ruluked. Ruluked told her that PACU had no money, but that many people owed PACU money. He added that Ongalibang should see Kebou. Ongalibang followed up with Kebou, who sent her back to other Board members. Ongalibang called the collections attorney to determine the status of collections. She was told that they were endeavoring to collect on the outstanding debts. She offered to help with collections if the attorney would give her the list of debtors, but no one gave her the list.
Elena Tellei was a PACU member from 1986 through PACU=s demise. She attended one or two meetings during that time. At those meetings, she was shown a financial statement on the projector, and was informed of a $100,000 TCD, but was not told of any bad debts. She tried to withdraw her shares in August 2002 by writing a letter to Kebou, but was told she could not withdraw her money. Like Takashi and Napoleon, she received $1,000 in November 2003, along with a letter from Ruluked explaining that A[d]ue to the withdrawal of more members and delinquent loans, we were not able to collect enough money for the full refund of your shares. In fact, we were only able to collect about a fifth (1/5) of the amount of full refunds.@ Ruluked blamed PACU=s inability to repay shares on delinquent loans, and promised to repay the remaining shares Aas soon as we collect the money.@ When Tellei went to collect her $1,000 from Mesubed, Mesubed told Tellei that some members right before Tellei in the queue had been paid in full. Tellei later approached Kebou to discuss the situation, but Kebou told her that Mersai had the PACU books. Tellei called Mersai several times only to learn that PACU had no money, but was trying to collect on outstanding debts. Tellei still maintains $5,861.36 in PACU shares.
All plaintiffs testified that getting a PACU loan was easy. They filled out a form, and got signatures of the Credit Committee members. Not one of them testified to being turned down for a loan. They received loans beyond their shares and, if they were repaying their loans, they could take out additional loans from PACU before repaying their original loans. Several Plaintiffs also testified that they received no notice from PACU concerning financial difficulties, closure or liquidation.
In 1968, PACU was incorporated. The original incorporators included Leo Ruluked. By 1970, Defendant Ruluked was elected President. He held that position until PACU ceased operations in 2004.[8] By the 1990's, the other members of the Board of Directors were Johnny Kebou as Treasurer, Rosemary Mersai as Secretary,[9] Emil Remarui, Yorang Miner and Kokich Ingas as Credit Committee members, and Alonzo Tellei as a Board member. Kebou, Remarui, Miner, Ingas and Tellei all allegedly left PACU before its demise in 2003-04.
Johnny Kebou testified that he stepped down as Treasurer in December 2002 for medical reasons. Nevertheless, no one replaced him, and he continued to oversee PACU=s books at the President=s request. In fact, he was the one who ultimately ferreted out Benita Mesubed=s check fraud, and reported it to the Board. After Mesubed was fired in January or February of 2004, Kebou took PACU=s ledgers and journals into his possession. Thereafter, he recorded member allotments, balanced the books, and oversaw PACU=s Bank of Hawaii checking account up through the trial.
Emil Remarui retired in 1999. At that time, he transferred all of his shares to pay for his outstanding loan with PACU, leaving him with no shares in PACU by May of 1999, or so he believed. Even though he intended to repay his loan in full upon retirement, he maintained a loan with a principal of $231.70 up until the eve of trial. Once notified of the remaining debt after reviewing Plaintiffs= Exhibit 28, he repaid the principal to Kebou, as PACU Treasurer, the next day. Remarui told no one on the Board that he was retiring from government service and the Board. Even after his purported retirement from the Board, he attended all Board meetings for which he received notice. Further, in 2002, Remarui signed a complaint as a representative of PACU in a small claims suit to recover an unpaid loan from Maxie Taima.
Yorang Miner replaced Yoich Kohama in 1994, and retired from government service in October 2002. She believed that she was no longer on the Board when she retired. Nevertheless, her shares remained in PACU until its demise; Board members believed she was still on the Board; and no testimony was elicited that she ever informed anyone on the Board that she was quitting.
Kokich Ingas retired from government service in September of 1994. He testified that he believed he was no longer on the Board as of that date, but he never informed anyone that he was leaving the Board. Further, other Board members testified that Ingas continued to act as a Credit Committee member, signing loans and appearing at Board meetings long after 1994.[10]
All of the Defendants testified. They appeared to be well-educated, capable individuals. Defendant Ruluked worked his way through the Ministry of Education and rose to the level of Principal of Palau High School. Defendant Kebou graduated from the University of Guam with a degree in Business Administration, a few credits short of an Accounting Degree, and now works for the Workforce Investment Act Office. Defendant Mersai has a Degree in Economics from Japan, and retired from Palau High School in 1999. By the time Defendant Remarui retired, after 37 years of service, he was overseeing all of the elementary schools in Palau. He was chairman of the Parole Board, on the Palau Community College and Palau Public Lands Authorities boards of directors, and a shareholder and board member of WCTC for eight years. Defendant Miner graduated from the University of Hawaii with a Bachelors of Arts, and taught at Palau High School for approximately 30 years. There is little information about Defendants Ingas= background, only that he worked for the government for a long time.[11]
From its inception to its demise, Leo Ruluked saw PACU as a vehicle for making loans to its members. According to Ruluked, there were no banks or other financial institutions in Palau when PACU was first incorporated, so Palauans had nowhere to turn if they needed a loan. PACU provided that loan opportunity if the applicant was a permanent employee of the federal government, and maintained shares in PACU. Ruluked=s vision was shared by others. Despite PACU=s mission statement in the Articles of Incorporation and Bylaws, which extolled PACU as a vehicle for accumulating savings and making loans, all of the testifying Board members indicated that the focus was on the loans. All monies received by PACU[12] were turned around and paid back out as loans or payments towards individual=s share withdrawals. Mersai testified that 99% of PACU=s members obtained at least one loan from PACU.
The 1970's through the 1990's saw few changes for PACU. Board meetings occurred every two to three months. At those meetings, Board members would typically discuss PACU=s financial standing (to include year-end discussions concerning dividends and patronage fees), loans, and uncollected debts.
The Board would periodically change the maximum amount that a member could borrow, from $200 in the 1970's up to a $10,000 ceiling in the 1980's, and back down to $5,000 by the late 1990's. When considering whether to raise or lower the maximum loan amount, the Board would consider the amount of money coming into PACU=s checking account through member share allotments and repayments on loans, and the amount of money sought by applicants. More money coming in and fewer applicants meant an increase in the loan maximum. Conversely, less money coming in and more applicants required lowering the loan maximum.
The Board delegated all authority for authorizing loans to the Credit Committee, and gave every indication that the Committee should be in the business of approving loans. From the 1980's through 2003, the process for obtaining a loan was as follows: The applicant sought a loan application from PACU employee, Benita Mesubed. Mesubed filled out the application based on PACU data and information, which the applicant provided. Once completed, the applicant would take the application to two Credit Committee members for their signatures.[13] The applicant would return the application to Mesubed after obtaining at least two signatures,[14] and the application would be placed in the queue of loan applicants.
There were few requirements to gain a loan from PACU: the applicant had to be a permanent government employee, a member of PACU with shares, and able to list collateral or a co-signor if the applicant=s shares did not cover the loan. Loans were made far beyond the member=s shares. In fact, if the member had at least $500 in PACU shares and proper collateral, he or she could receive the loan maximum. The Credit Committee not once investigated the collateral. For example, if the applicant listed a house, no one confirmed that the applicant actually owned the house, double-checked the listed value of the house, or investigated to determine whether there were other outstanding liens on the house. Similarly, if the applicant listed a co-maker, the co-maker=s finances were not investigated. PACU trusted the bona fides of the applicant and his or her co-maker. Remarui testified that if all blanks were properly filled out, he would approve the application. He did not look behind the application. According to Remarui, who was Chairman of the Credit Committee for almost twenty years, although he deferred some applicants, he not once denied a loan. The same was true of Miner, a Credit Committee member as of 1994. Despite the admonition in the application itself,[15] the Credit Committee did not meet to consider the application. Each Credit Committee Member separately signed the application after a cursory review.
Collecting delinquent loans was also delegated by the PACU Board. This time to Treasurer Johnny Kebou.[16] If a member was behind on loan payments, either Kebou or Mesubed would call and remind the member that he or she had a loan outstanding with PACU. Mersai testified that government employees would join PACU, take out a loan and then stop their allotments, making loan repayment difficult. If payments stopped for over a year, then Kebou would turn over the name and the amount owed to PACU=s collections attorney.
Kebou would report on the bleak state of collections on delinquent loans to the Board, but the Board rarely commented on the issue of collection, except to suggest that Kebou talk to the collections attorney and ask him to step up his efforts. Occasionally, the Board would suggest that Kebou fire the attorney to hire a new one. The Board volunteered no other options.
PACU=s collection efforts, at least as of the mid->90s through 2003/04 were dismal. For example, out of a list of 26 debtors turned over to the collections attorney in around 1995, only one approached the Treasurer to repay his loan. In that case, the parties reached an agreement and the debtor satisfied the debt by repaying only the principal and PACU agreed to forego its right to interest. The other 25 loans remain uncollected.
Ruluked testified to a similar practice for all recent retirees. If the retiree agreed to pay off the principal of the loan in one lump sum, then he or she would not need to pay any of the interest.
There was little testimony of notice to the debtors, or any actual collection efforts. Although the defaulted members were not foreign to the Board B in fact, one of the debtors was Board member Alonzo Tellei, another was Board member Remarui; a third was President Ruluked; and a fourth, Secretary MersaiB the Court heard no testimony of anyone on the Board approaching an individual debtor. Further, the Court repeatedly heard from PACU debtors, e.g., Emil Remarui, Benita Mesubed, and Tellei=s daughter, Lucia, that they did not even know they owed money to PACU. Besides the three small claims cases filed in 2000 and 2002, a letter from Mersai to debtor Amador Ngirkelau dated September 15, 1992, and two letters from a collections attorney, one to debtor Moses Sam and one to debtor William Tabelual, the Court heard no testimony and saw no documents, which evidenced an attempt to recover on PACU=s outstanding loans to the 47 debtors, as listed in Exhibits 28, 29 and 30.[17]
Once the bad debt was turned over to the collections attorney, the Board abdicated all responsibility. The testimony at trial reflects Defendants= belief that debt collection was someone else=s problem Bthe directors saw it as the Treasurer=s problem, and the Treasurer saw it as the collections attorney=s problem, and no one saw it as PACU=s problem. Once the debts were turned over to the collections attorney, Defendants believed nothing else needed to be done. Even though the Board concluded that the attorney was not doing enough to collect on the debts, they never took it upon themselves to approach the debtor, write him or her a note, or threaten to fine the debtor or move against the collateral or the co-signor.
Conversely, these overdue debts were never listed as Abad debts@ in the Annual Report filings with the Attorney General, or in Financial Reports to the Board or to the members. Kebou conceded that Abad debts@ meant debts that were no longer collectible, either because the debtor had died or because the debt was beyond the statue of limitations. Nevertheless, despite the availability of an entry for Abad debts and donations,@ and then Abad debts written off@ in the annual reports from 1996 through 2002, PACU entered nothing or A0@ even when the debts were beyond the statute of limitations and no longer collectible. Mersai testified that they decided not to list debts in the Abad debts@ column because if they listed them as Abad debts,@ they would, in essence, be conceding defeat and admitting that they would no longer seek repayment from those debtors. This argument only works if the Board was actively seeking to collect the loans.
Since loans were paramount, PACU operated with little reserves. In fact, up until 1987, PACU operated with no reserves. All of the money which came in from loan payments and allotments was loaned right back out. In 1987, the Palauan government was furloughed for lack of funds. Many PACU shareholders found themselves short on cash, and turned to PACU. PACU had previously set aside a reserve and used that reserve to issue $50 to each member to help them through the furlough. Once the furlough ended, government employees returned to work and resumed their allotments to PACU. As a response to the 1987 furlough scare, Treasurer Kebou suggested that they create a special reserve for such emergency situations. The Board agreed and froze all disbursements for three months to build up a $200,000 reserve. The Board put that $200,000 into a Bank of Hawaii TCD. See Exh. 114 (March 12, 1998 record of a $200,000 TCD at Bank of Hawaii). Thereafter, the TCD generated quarterly interest, which was reported as income, placed in the general checking account and used for loans and share withdrawals.
The PACU Board set up one other reserve. On March 12, 1998, CUNA Insurance informed PACU that they would no longer insure PACU. Previously, CUNA had insured PACU against deceased members who left shares and/or outstanding loans. CUNA would cover repayment of the shares to the decedent=s heirs or pay the decedent=s PACU loan. When CUNA discontinued its insurance, Kebou again suggested starting a reserve to handle the situations which CUNA previously handled. In May, 1998, PACU set aside $2,000 in a reserve to replace CUNA.
Besides these two reserves, PACU maintained no other rainy day funds. They did not consider setting aside funds on an annual basis. Kebou knew there was supposed to be a general reserve, but there was no such reserve when he became Treasurer, so he never set one up.
PACU took out loans. Kebou testified that during his tenure as Treasurer, PACU took out loans from the Bank of Hawaii at the commercial rate.[18] PACU then folded the loaned money into its checking account to provide more loans to its members. From 1987 to 2001, PACU took out between five and seven loans from Bank of Hawaii. By 1998/1999, PACU could only get a loan for $95,000 from Bank of Hawaii, so PACU took out a loan for that amount in 1999/2000, and a second loan a couple of months later for $20,000. PACU used that money for loans and repayment of shares to withdrawing members. The money PACU was collecting was not enough to cover these additional loans and share withdrawals. According to Kebou, the Board (which consisted of Ruluked, Mersai, Ingas, Tellei, Remarui, Miner and Kebou) met and authorized these Bank of Hawaii loans. None of these loans were reflected in the Annual Reports, and no witness mentioned these loans in their discussions of the reports at the members= annual meetings.
In 1998, PACU broke the $200,000 TCD to pay $50,000 towards share withdrawals and loans, and returned the rest to a $150,000 TCD. In 2000 or 2001, the Board decided to pay off the Bank of Hawaii loans by breaking the $150,000 TCD.[19] $73,000 went to pay off the two short-term Bank of Hawaii loans; $51,000 went into the CUNA special reserve (which was transferred soon thereafter to the general checking account for share withdrawals and loans); and the rest went to the general checking account for share withdrawals and loans, leaving PACU with no reserves by 2001.
Annually, in December, the Board would consider its finances and set the percentage for dividends and patronage refunds to its members. They would announce these percentages at the annual general members= meetings, which also occurred in December. PACU gave out dividends and patronage refunds every year of its existence up to 2001. Also discussed at the annual general membership meetings was PACU=s financial status. After 1987, when Kebou became Treasurer, he would make a presentation on the projector at the study hall of the Palau High School. Although membership soared to over 300 members, never more than 30 members came to the annual meetings. Not only was there no discussion of the Bank of Hawaii loans, but there was no discussion of Benita Mesubed=s repeated theft or the Service Retirement Bill (both to be discussed at greater length in Section II.D) and little discussion of bad loans. It appears that the PACU Board shared no bad news with its members. Even Board member Remarui testified that the Board raised no financial red flags at the annual meetings he attended. No written financial reports were issued at the annual meetings. That said, Defendants rightly point out that no written financial reports were ever requested.
The financial reports submitted at trial were those for 1992 through 2002, along with the Annual Reports, which Kebou filled out and filed with the Attorney General=s Office through 2001.[20]
The Board was not paid, but all officers conceded that, from time to time, they awarded themselves an honorarium of $100 to $250 if there was money Aleft over@ after covering expenses, and paying out dividends and patronage refunds. Honorariums issued three or four times from 1968 through 2003.
Certain Board members took out loans. Remarui took out a loan but repaid it at the inception of this case. Former Board member Alonzo Tellei=s loan has not been repaid. Although Ruluked also has a loan listed as outstanding, he testified that he has since repaid it by taking out a loan with Bank of Hawaii. Finally, Mersai testified that she had an outstanding loan of over $12,000 when she retired from government employment in 1999. She asked Kebou not to turn her loan over to the collections attorney and promised to pay it. Mersai took out a separate loan to repay PACU in June 2003. At the time her loan remained unpaid, Mersai asked to take out $300 of her shares for an emergency. Ruluked approved her request and she was able to withdraw $300, despite her large outstanding loan. She did not know of anyone else who received this treatment, but she rationalized that she was working at Palau High School at the time, so it would have been easy to find her if she was not repaying her loan.
Plaintiffs blame PACU=s insolvency on Defendants= inability to collect on outstanding debts. Kebou testified that by 1999/2000, PACU was owed $153,837.83 in outstanding debts. As discussed above, the PACU Board did try to collect, but its efforts were minimal and unavailing. Plaintiffs argue that the Board did not try hard enough.
According to Kebou, PACU only brought one list to its collections attorney, and that was in 1994 or 1995. PACU=s next list of delinquent debtors was given to the PACU Directors= current counsel at the inception of this case in 2007. Despite the ongoing problems with individuals failing to repay their debts, PACU provided no list to its collections counsel for 12 or 13 years. Defendants respond that PACU carried unpaid debts almost as long as it had been in operation, but it remained solvent. Neither side proffered evidence of PACU=s debt load prior to 1994/>95, and Kebou testified that he did not list debts under the bad debts category of annual reserves, so the Court has no way of comparing the amount of debt over time. Based on this record, the Court cannot conclude that the bad debts alone caused PACU=s insolvency, but the Court can, and will, find that the bad debts were a contributing factor to PACU=s insolvency.
Defendants blame PACU=s insolvency on a mandatory retirement bill, which required that government employees retire after 30 years= service. Defendants allege that they were blind-sided by this bill which took effect in 1998 or 1999,[21] causing droves of members to retire, cease their allotments and withdraw their shares. The Annual Reports support Defendants= contention and reflect a drop in membership from 236 in 1998, to 170 in 1999, to 138 by 2000.
The Court has taken judicial notice of the Service Retirement Bill referenced by the parties. The legislative history of the mandatory retirement law in the Palau National Code belie Defendants= assertion that they were blind-sided and therefore unable to prepare for an increased number of retired members. The requirement that a government employee retire after thirty years of service first appeared in RPPL 4-40 ' 41. That law was passed on November 24, 1995, and signed on November 29, 1995, to be effective on June 1, 1996. RPPL 4-40 ' 41. Before the new provision took effect, however, the legure amended the provision to extend the effective date of t of the mandatory retirement to July 1, 1999. RPPL 4-49 ' 1 (passed o 10 agned on Mayn May 17, 1996). Thus, PACU was on notice aice as of late 1995 that its members would be forced to retire after thirtrs of service, but the law did not take effect for almost four years later. Nonetheless, ths, they did little over those four years to prepare for this looming drop in membership.
Remarui testified to a meeting where Ruluked spoke to the Board of the damaging effect of the Service Retirement Bill. Ruluked foresaw that funding would become tight when a large chunk of their membership retired, stopped their allotments, and demanded their shares. Ruluked told the Board that the bill became effective in July 1999. Ruluked foresaw a problem, alerted the Board, and no one did a thing about it. When Remarui was asked what the Board did to counter the Service Retirement Bill Bdid they save money? Boost reserves? Halt payment of dividends or loans for a period of time?B Remarui answered that he had no recollection of the Board discussing any of these options.
With such advance notice, PACU could have planned for the negative impact the law would have on the credit union. Knowing that mandatory retirement was looming, the Board could have set aside a special reserve, just as they had after the furlough, and saved money for the inevitable demand for share withdrawals. They could have earmarked the $200,000 TCD solely for withdrawals. They could have held a general meeting, informed the shareholders of this potential problem, and solicited solutions. The Board could have made a concerted effort to recruit new members at the time that it was still solvent. As a final option, the Board could even have taken the necessary steps towards liquidation, thereby ensuring a fair division of assets. Instead, they did nothing.
A third contributing factor was the rampant theft of Benita Mesubed. Although not the only cause of PACU=s demise, it undoubtedly assisted. Benita Mesubed was employed by PACU as a bookkeeper in March of 1980. At that time, her Aauntie@ Bernarda Kitalong was Treasurer of PACU. She had been helping Kitalong with PACU=s books ever since she graduated from high school in 1978. In the mid-1980's the Board determined that there were unexplained shortages of funds. They determined that Mesubed had been stealing money from PACU. In fact, she had stolen over $10,000 by the time the Board became aware of her misdeeds. Instead of reporting her to the police or to PACU members, the Board decided to stay mum and maintain her employment, so she could repay PACU through allotment, just like any other PACU debtor. The Board asked the Treasurer to hide all blank PACU checks from Mesubed, and generally keep an eye on her.
Benita Mesubed still owed over $13,000, however, when she stole again. This time, Kebou had recently stepped down as Treasurer, so there was no one in the office to watch Mesubed. From August 2003 to January 2004 Mesubed stole over $8,000 in the form of 47 forged checks. In early 2004, Mersai and Ruluked were alerted to a problem when several businesses informed them that PACU checks had bounced. They asked Kebou to investigate. He found the 47 forged checks and called a Board meeting to report his findings. The Board was informed of the fraud and merely fired Mesubed, instead of demanding a return of the money and reporting the theft to the police or to the members.[22] Mesubed testified that when she left, Kebou told her she owed no money to PACU. Further, she testified that since her departure from PACU, no one representing PACU has contacted her to collect on her alleged loans, even though she has been gainfully employed by Palau Royal Resort for almost five years by the time she testified at trial. At least that portion of her testimony is supported by the record, which reflects no attempts, verbal or written, to collect on Mesubed=s alleged loans.
PACU stopped operations when the money ran out in 2003. They used the final allotments to pay their operating costs. PACU informed no one that they were stopping operations. They did not undergo the liquidation process detailed in the Articles of Incorporation. The Board looked for a lawyer to help them with liquidation but it was impossible to find a lawyer who would agree to a discounted rate. At trial, Ruluked testified that they had recently discussed liquidating PACU.
The parties agree that PACU has no assets today.
PACU was governed by both Articles of Incorporation and Bylaws. Although the incorporators may have assisted, Trust Territory representatives drafted these legal documents. These documents appear to track Palau=s credit union regulations.
The relevant sections of the Articles of Incorporation are as follows:
- Section (6): AThis credit union . . . shall have powerB
e. to make loans with maturities not exceeding 3 years to its members for provident and productive purposes upon such terms and conditions as the credit committee . . . may approve
. . . no loans to a director or member of the credit . . . committee shall exceed the amount of his shareholdings and deposits in the credit union, plus the total unencumbered and unpledged shareholdings and deposits in the credit union of any member pledged as security for the obligation of such director or committee member . . .;
i. to borrow, from any source, in an aggregate amount not exceeding 50 percentum of its paid-in and unimpaired capital[23] and surplus;[24] . . .
k. to levy against the shares and dividends, or deposits, of any member to the extent of any loans made to him or any other obligations due the credit union from him;
l. to annually, and after the provision for required reserves, declare a dividend to be paid from the remaining net earnings;[25]
m. to pay an interest refund to members of record at the close of business December 31 in proportion to the interest paid by them during that year;
n. to make loans exclusively to members in an amount not exceeding $200 or 10% of the credit union=s paid-in and unimpaired capital and surplus, whichever is greater. All loans in excess of $100 shall be adequately secured. The assignment of a member=s shares and deposits, or the endorsement of his note, shall be deemed security; . . .
r. to exercise such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated . . . .@
- Section (9) AAll entrance fees and fines provided by the Bylaws and 20 percentum of the net earnings each year, before the declaration of any dividends, shall be set aside as a regular reserve against losses on bad loans and any other losses. In addition to such regular reserve, special reserves to protect the interests of members shall be established when required (1 ) by regulation, or (2) by the High Commissioner, or (3) when authorized by the board of directors . . . .@
- Section (12) AThe business affairs of this credit union shall be managed, as specified in the Bylaws, by a board of directors of not less than 5 directors, and a credit committee of not less than 3 members . . . and by an audit committee of 3 members, to be appointed by the board . . . . No member of the board or of either committee shall, as such, be compensated except that the Treasurer may be compensated to the extent authorized by the board of directors.@
- Section (13) sets the annual accounting period Ato end each December 31@ and requires an annual members= meeting.
- Section (14) allows the credit union to Ago into voluntary liquidation@ after a vote from the members, or a directive from the High Commissioner. Under Section (14), PACU=s accounts must be frozen at the time the Board decides to seek liquidation, including discontinuing loans. Further, the board Ashall be responsible for conserving the assets, for expediting the liquidation and for equitably distributing the assets to members.@ Finally, Section (14) sets out the order of payments in liquidation.
- Section (16) lists the officers of PACU at the time of incorporation in 1968, including Defendant Leo Ruluked as President.
- Section (17) explains that the details of PACU=s management are to be set out in the Bylaws.
The Articles of Incorporation are signed by Leo Ruluked, amongst others, and AWhite@ appears to be a signatory as the District Cooperative Officer for the Trust Territory.
The relevant sections of the Bylaws are as follows:
- Article I. Section 2. AThe purposes of this credit union are to promote thrift among its members by affording them an opportunity to accumulate their savings; and to create for the members a source of credit for provident or productive purposes at reasonable rates of interest.@
- Article III. Section 5. AMoney paid in on shares, or installments of shares, may be withdrawn on any day when payment on shares may be made; but the board shall have the right, at any time, to require members to give not more than 60 days [sic] notice in writing of intention to withdraw the whole or any part of the amounts so paid in by them . . . .@ The Bylaws further explain that a member can only withdraw those shares which are left after deducting any outstanding PACU loans.
- Article VII, Section 5, sets out the powers of the Board. AThe board shall have the general direction and control of the affairs of the credit union. In addition to duties customarily performed by boards of directors, the board shall -- . . .
(b) . . . require any officer or employee having custody of or handling funds of this credit union to give bond with good and sufficient surety in an amount and character to be determined by the board . . . .
(c) Declare and authorize the payment of annual dividends on shares of members.
(d) Fix the interest rate to be paid on members= deposits.
(e) Authorize an interest refund to members of record at the close of business on December 31 in proportion to the interest paid by each member during theat year. . . .
- Article VII, Section 5(f) allows the Board to employ and fire employees, and set their salaries. Section 5(h) gives the Board the power to make loans, and set interest rates, maturity dates and loan maximums. Section (i) puts the Board in charge of PACU=s investments; Section (k) authorizes borrowing; and Section (l) requires that the Board A[d]eligently [sic] supervise the collection of loans to members and authorize the charge-off of uncollectible loans.@
- The job descriptions of the President, Secretary and Treasurer can be found in Article VIII. Specifically, the President Ashall preside at all meetings of the members and at all meetings of the board . . .; countersign all notes . . ., checks, drafts, and other orders for disbursement of its funds . . .; [and] shall also perform all such other duties as customarily appertain to the office of the president . . . .@ Art. VIII, ' 3. The Treasurer Ashall be the general manager of this credit union under the control and direction of the board.@ Art. VIII, ' 5. The Treasurer is Ato maintain full and complete records of all assets and liabilities of this credit union;@ draft a monthly financial statement Ashowing the condition of this credit union as of the end of the month@ to show the Board at its monthly meeting and post in a public place for the members= review. Finally, the Secretary was to prepare and maintain complete records of PACU=s board and member meetings, and provide notice of meetings.
- Article IX discussed the Credit Committee. The Committee was to pick a chairman and secretary; the secretary was to maintain a list of all approved loans; and the Committee was to meet no less than once a month. Art. IX, '' 3, 4. As for loan criteria, the Credit Committee was to Ainquire carefully into the character and financial condition of each applicant for a loan and his sureties, if any, to ascertain their ability to repay fully and promptly the obligations incurred by them and to determine whether the loan sought is for a provident and productive purpose and will be of a probable benefit to the borrower.@ Id., ' 5. The application was to be considered at a meeting and would only be made if approved by a majority of the committee during the meeting. Id. ' 6. Finally, the Committee was to determine Athe security, if any, which shall be required for each loan, and its adequacy, and the terms upon which it shall be repaid.@ Id. ' 7. When funds were not available, the Committee was to prioritize smaller loans. Id.
- Article X defined the Audit Committee in great detail, including requirements for quarterly auditing of PACU=s finances, and meetings Ato consider any significant violations of the articles of incorporation, and regulations or the Bylaws . . ., . . . any practice of this credit union which the committee deems to be unsafe or unauthorized . . . .@ Art. X, '' 3, 5.
- Article XII, entitled ALoans to Members,@ requires that loans be made only for Aprovident and productive purposes.@ It further discusses interest rates (no higher than 12%), the restrictions on loans to directors or members of the credit committee,[26] the restrictions on loans to general members,[27] and fines of 20% of the amount of interest due on the loan for delinquent loans.
- Article XIII set out the reserves. First, A[a]ll entrance fees, transfer fees, fines, and 20 percent of the net earnings each year shall be set aside as a regular reserve: provided, however, that when the regular reserve thus established shall equal 10 percent of the total amount of members shareholdings, no further transfer of net earnings to such regular reserve shall be required except as may be needed to maintain this 10 percent ratio. . . . The regular reserve shall be used only for losses on loans to members . . . .@ Art. XIII, ' 1. The Bylaws also envisioned special reserves, established by the Board or the High Commissioner, as necessary. Art. XIII, ' 2.
- Article XIV discussed dividends and patronage refunds, while Article XV covered bank deposits, and limited loans to specific entities, including union members. Article XVI covered member expulsion and withdrawal. Notably, Section 1 reads: AAll amounts paid in on shares by . . . withdrawing members, prior to their . . . withdrawal, shall be paid to them in order of their withdrawal . . ., but only as funds become available and after deducting therefrom any amounts due from such members of this credit union.@
- Article XIX, entitled AGeneral,@ sets out several general tenets including: A[a]ll power, authority, duties and functions of the members, directors, officers, and employees of this credit union, pursuant to the provisions of these Bylaws, shall be exercised in strict conformity with the provision of the articles of incorporation, applicable regulations, and the Bylaws of this credit union.@ Art. XIX, ' 1.
- Article XX sets out the requirements for amending the Bylaws and Articles of Incorporation.
Like the Articles of Incorporation, the Bylaws were signed by Leo Ruluked, and a person whose last name appears to be AWhite@ signed as District Cooperative Officer, as representative of the Trust Territory.
As a general principal, a corporate officer or director owes a fiduciary duty to the corporation,[28] not its individual shareholders, and the corporation therefore is Athe proper party to sue for wrongs to itself through mismanagement of its affairs, official misconduct, or waste of its assets by its directors or officers.@ 19 Am.Jur. 2d Corporations '' 1462, 1583. Therefore, the generll rule is that shareholders cannot sue on their own behalf for a director=s or officer=s violation of a fiduciary duty, because duty is owed to the corporation, and any breach causes injury to the shareholders as a whoa whole. Id.; see also id. ' 1937.
Based osethese general principles of corporate liability, there are three categories of actions byorate shareholders: (1) stockholders= derivative actions, brought by one or more stockholdeholders to remedy or prevent a wrong against the corporation; (2) direct actions, which are brought by one or a few shareholders to remedy or prevent a direct wrong to the plaintiffs; and (3) representative or class actions, which arise if the parties who have a direct claim against a corporation are too numerous to be joined in a direct action. 19 Am.Jur. 2d Corporations ' 1934.
In a derivativvative action, Athe corporation is the real party in interest, and any recovery goes to the corporation, rather than to the shareholder who brihe action.@ 19 Am.Jur. 2d Corporations ' 1944. 944. Deriv suits are are typically a corporation=s last resort because it is preferable for the corporation to deal with its own harms and to avoid micro-management from shareholders; courts do not favrivative lawsuits. Id. ' 1945. Such lawsuits are important, however, as Aa device to protect shareholders against abuses by the corporation, its officers, and directors and is a vehicle to insure corporate accountability.@ Id.
Tstinction betweentweentween a derivative and a direct claim turns on the existence of a direct or special injury to the particulareholder alleging the wrongdoing. 19 Am.Jur. 2d Corporations ' 1935. If the inhe injury ci incidental to or an indirect result of a direct injury to the corporation, it should be a derivative action (e.g., loss of share value because of mismanagemeId. If the injury to the shareholder is separate ande and distinct from the injury suffered by the corporation or arises from a special duty from the director to the shareholder, it is a direct claim. Id.
One common claim against a director or officer is a breach of fiduciary duty. Typically, such a claim is enforceable solely through a derivative action. 19 Am.Jur. 2d Corporations ' 1956. Similarly, claims for an injury to corporate property or funds, including diversion or dissipation of corporate assets, waste of corporate assets, or removal of corporate property from the corporation, or directorismanagement or self-dealingaling Amay be pursued as derivative actions, not as direct actions.@ Id. ' 1958. Althoughea brof a fida fiduciary duty may give rise to a direct action by a shareholder, such a case involves a breach of a duty specialhat idual shareholder, rather than the mere duty of an officer or director to the corp corporatioration and its shareholder. Id.<1956
In thIn this case, Plaintiffs allege breaches of a fiduciary duty owed to PACU as a whole, not to individual ms. They allege negligence, waste of assets, improper lending practices, and other conduct fuct falling within the general managerial duties of the officers and directors. None of the members has alleged a direct, individual claim, i.e., that the directors owed them an individual duty separate and distinct from the duties they owed to all PACU members. Although most Plaintiffs testified to conversations with certain Board members about when they could withdraw their shares, those conversations did not create individual liability. When the board members/Defendants answered their questions, those answers did not rise to fraud. The board members simply admitted that PACU was broke and Plaintiffs would get paid as soon as PACU had money. Accordingly, the Court found that this case must be brought as a derivative action. See April 9, 2010 Order.
The distinction between a direct and derivative claim is not a mere technicality. Whereas a party obviously has a right to sue for
injury caused by an officer=s or director=s breach of duty owed directly to them, a shareholder has no vested or property right to
bring a derivative action on behalf of a corporation. 19 Am.Jur. 2d Corporations ' 1959. Derivaactions B and tand their accompanying procedural requirements B are purposely structured to limit the power of individual
shareholders to control corporate litin, an procedures for filing them gives managers the chhe chance ance to address the issue first
and discourages frivolous suits or those for purely personal, rather than corporate, benefit. Id. ' 1962. Thus, a shareholder cust comply with the prerequisites to filing such an action, and failure to do so Adeprives the shareholder
of standing and justifies dismissal of the comp for re to state a claim upon which relief may be gran granted.@ted.@ Id. ' 1959.
To brin bring a claim as a derivative action, Plaintiffs must comply with the requirements of ROP R.Civ.P. 23.1. The first component
of a derivative acti thatshareholder must exhaust all remedies within the the corpocorporation before filing, including a demand
of the directors and officers to file suit on the corporation=s behalf. 19 Am.Jur. 2d Corporations ' 1960.ee al> ROP> ROP R.Civ..Civ.P. 23.1(2). The demand requirement is a matter of standing and is a condition precedent to the
action. Id. ' 1961.
Circumstances which excuse the demand requirement include: if a majority of the board is interested in the transaction or subject of the complaint; if the board failed to inform themselves to a degree reasonably necessary about the transaction or subject of the complaint; if the board failed to exercise their business judgment in the transaction or subject of the complaint; or if a majority of the board are so personally or directly conflicted that they cannot reasonably be expected to respond to a demand. 19 Am.Jur. 2d Corporations ' 1969. Furtre, A[a]s a genergeneral rule, demand on the directors is futile and may be excused if the directors themselves have permitted or participated in the wrongdoing complained of in the derivativeon.@ Id. ' 1970;1970.
Based on d on the circumstances in this case, Defendants are the subjects of the complaint as they are implicated in the alleged wrongdoings. At best, they failed to inform themselves to a degree reasonably necessary and failed to exercise proper business judgment. At worst, they were fully informed and chose not to act. The Court can therefore comfortably excuse Plaintiffs from making their demands of the Board. According to Plaintiffs= amended complaint, Defendants as PACU directors and officers were complicit in the alleged misconduct, and PACU was unquestionably insolvent when Defendants were sued. Plaintiffs could not have reasonably believed that any demand would be accepted and acted upon and Defendants would have sued themselves. The demand requirement is therefore waived in this case.
Plaintiffs also meet the other requirements of ROP Rule 23.1. First, Plaintiffs were shareholders Aat the time of the transaction of which the plaintiff complains.@ The problematic transactions span from the 1980's (including Benita Mesubed=s first embezzlement and the failure to collect on outstanding debts) through January, 2004 (including Benita Mesubed=s second embezzlement and PACU=s insolvency). Although Plaintiffs Ongalibang and Alexander joined PACU in 1993, the rest (Takashi, Napoleon, Mariur, Tellei and Morei) were all members from the early to mid-1980's through PACU=s demise.
Second, Plaintiffs must be members and shareholders at the time they brought suit. Defendants argue that as soon as Plaintiffs wrote letters demanding repayment of their shares and stopped their allotments,[29] Plaintiffs were no longer members. Under Defendants= logic, since none of the Plaintiffs were making allotments in February 2007 when the complaint was first filed, they cannot meet the requirement. Following this logic, no one can sue PACU because no one was allotting money to PACU by February 2007. That cannot be right. According to the Bylaws, a member who withdraws all of his or her shares Athereby ceases to be a member.@ Conversely, anyone with shares remaining in the credit union, remains a member. All Plaintiffs had shares remaining in PACU in February 2007 through today, and they therefore have standing to sue as members of PACU. Cf., Wright, Miller & Kane, Federal Practice & Procedure: Civil 2d ' 1826 (1986) (plaintiff must have a Afinancial stake@ in the corporation to maintain derivative action) (AWright ' ___@).
Third, the action cannot be meant to confer jurisdiction on this Court. This language is a hold-over from its United States counterpart, which has little or no application in Palau. Cf. Wright ' 1830 (this clause is meant to address A[t]he problem of contrived federal jurisdiction@). Further, Plaintiffs rightly point out that all parties already conceded that the Court has jurisdiction over this case in their pleadings.
Fourth, Plaintiffs must Afairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation.@ When determining the adequacy of representation, courts Aconsider whether plaintiff=s interests are antagonistic to those he is seeking to represent.@ Wright ' 1833. The burden is on Defendants to show that Aa serious conflict exists.@ Id. Plaintiffs have represented the interests of the shareholders throughout this lengthy litigation, and inform the Court that they will divide up any recovery from this litigation in an equitable manner. Defendants have made no creditable claim otherwise.
A[T]hree broad duties may be said to stem from the fiduciary status of corporate officers and directors, and they include the duty of care or prudence, the duty of loyalty and the duty of good faith .... Further, liability for violation of the fiduciary duty may be found even in the absence of bad faith, or dishonesty....@ 18B Am.Jur.2d Corporations ' 1460. AThe directors of a corporation are bound to use due care and to be diligent in respect of the management and administration of the affairs of the corporation, and in the use or preservation of its property and assets, and for the breach of neglect of duty in this regard they are liable for losses or injuries proximately resulting.@ Id. ' 1489. Conversely, A[w]here [the directors] have exercised reasonable care and diligence and good faith, they are not liable for losses resulting to the corporation from mere errors of judgment on their part.@ Id. As PACU=s directors and officer, there is no doubt but that Defendants owed duties of care, prudence, loyalty and good faith to PACU and its shareholders. AThe fact that the directors receive[d] no [or, in this case, little] compensation [did] not relieve them from the duty of exercising due care.@ Id. ' 1465.
The Court exhaustively quoted and cited the Articles of Incorporation and Bylaws to highlight all of the ways that PACU=s Board of Directors neglected to abide by either of these documents, to the detriment of PACU shareholders. The Bylaws required that the directors and officers act in Astrict conformity@ with the Articles, credit union regulations and Bylaws.[30] Importantly, PACU was to serve not just as a lender institution, but also as a means Ato promote thrift among its members by affording them an opportunity to accumulate their savings.@ That prong was never pursued, much less prioritized.
From the mundane to the critical, PACU=s Articles of Incorporation and Bylaws were routinely ignored:
(1) According to both Articles and Bylaws, PACU=s business affairs were to be managed by the Board, not just the Treasurer. Although the Board could delegate tasks to the Treasurer, it could not abdicate all responsibility to the Treasurer. Further, the Board was to diligently supervise loan collections, and authorize the charge-off of bad debts. This was not done.
(2) The Treasurer was to draft monthly financial reports and post those reports Ashowing the condition of this credit union at the end of this month@ in a public place for members= review. This was not done.
(3) As a means of ensuring PACU=s sound financial standing, the Board was to appoint an audit committee Ato consider any significant violations of the articles of incorporation, and regulations of the Bylaws ...@ and ferret out any other Apractice[s] of this credit union which the committee deems to be unsafe or unauthorized ....@ The audit committee was to issue quarterly reports to highlight any potential financial problems or weaknesses. Although Kebou and Ruluked concede that they were aware of the requirement, the Board never appointed an audit committee.
(4) The Articles also require that loan maturity dates not exceed three years. PACU made four-year loans.
(5) According to the Articles, all loans to directors could not exceed their, and their co-signor=s, shares in PACU. All of the directors who testified about their loans (e.g., Ruluked, Mersai, Remarui) indicated that they had taken out loans beyond their shares, and no one justified the size of their loan by pointing to the shares of their co-signors.
(6) Similarly, loans to members were limited by the number of shares that the member had in the credit union. The applicant could not withdraw more than she or he had in PACU shares. That requirement was routinely ignored. Ruluked and Kebou testified that they knew of the requirement, but the Board issued a directive waiving it. There is no written proof of that directive. Ruluked testified that the directive was oral so, at best, it might be reflected in the minutes, which were destroyed. Neither the Bylaws nor the Articles were amended to reflect that directive. In practice, if the applicant had $500 in shares and some form of collateral or co-signor, he or she could receive the loan maximum.
(7) Conversely, PACU was not to take out a loan greater than 50% of its paid-in and unimpaired capital and surplus. Kebou never discussed PACU=s paid-in and unimpaired capital and surplus when testifying about the PACU loans from Bank of Hawaii. In fact, he testified that he never calculated unimpaired income, and never compared the loans to unimpaired income. It does not appear that Kebou, much less the Board, considered these factors when seeking a loan from Bank of Hawaii. The Court got the distinct impression that the only limiting factor for PACU loans was how much Bank of Hawaii was willing to loan them.
(8) The Board could levy against members= dividends to collect on outstanding loans. Further, the Board could fine a debtor up to 20% of the interest owed on the debt. The Court heard no testimony that the Board took any of these actions in its attempts to collect from delinquent debtors.
(9) Although PACU was limited to loans of $200 or 10 % of the credit unions= paid-in and unimpaired capital, none of the Directors testified to any such calculations when determining loan maximums. Again, Kebou testified that he never calculated unimpaired income. On the contrary, Ruluked testified that they would increase the loan maximum when there was more money and less demand, and conversely decrease it when the money was down and demand was up.
(10) No Board members were to be compensated. There is no exception for honorariums.
(11) According to the Bylaws, Credit Committee members were to serve for two years, and meet Ano less than once a month@ to consider each loan application. The Credit Committee members only met with the rest of the Board and held no separate meetings; they never met separately to discuss individual loans.
(12) The Credit Committee was to Ainquire carefully into the character and financial condition of each applicant ... and his sureties, if any, to ascertain their ability to repay fully and promptly the obligations incurred by them ....@ A cursory review of an application without any confirmation or background check does not qualify as a careful inquiry into the character and financial condition of the applicant. Further, the Credit Committee was to investigate whether the loan was Asought ... for provident and productive purpose.@ No one testified to the Credit Committee investigating the underlying purpose of the loan.
(13) Most critically, before the declaration of dividends, the Board was to set aside 20% of its annual net earnings, along with all entrance fees and fines, into a regular reserve, which was to be used Aagainst bad loans and any other losses.@ The Bylaws qualified this requirement by explaining that when the reserve equaled 10% of the total amount of shareholdings, no further transfers to the reserve were required, as long the Board maintained that 10% threshold. Again, that was not done here. Ruluked testified that Mr. Francis White, an official charged with oversight of credit unions during the Trust Territory times, told him (Ruluked) to ignore this requirement and place all monies collected back into the revolving account to be loaned out again.[31] The Court has a hard time accepting that the same person who had a hand in drafting the Bylaws and Articles told Ruluked to ignore them. Even accepting this testimony as true, White also advised Ruluked to amend those Bylaws and Articles which did not apply to PACU. Ruluked could have moved to amend the Bylaws and Articles to forego the general reserve after receiving this advice from White. Ruluked did not do so.[32] Thus, like all of the other requirements listed in this section, the 20% general reserve requirement remained on the books over thirty years, and the Board just ignored it.
(14) There was a method to legally and properly unwind PACU. The Board could have taken the necessary steps to place PACU into liquidation. The Board could then have frozen all assets, including setting a moratorium, conserving the assets, and distributing those assets equitably.[33] The Board did not take advantage of that option. Instead, they just watched as the PACU ship slowly sank. They informed no one of PACU=s devolution into insolvency. They took no steps to stop, or even slow, the sinking. Lucky members received repayment on all of their shares, while the rest received little or nothing.
(15) Benita Mesubed=s repeated unreported repeated theft from PACU presents a prominent example of gross negligence. AIn determining whether directors properly supervised the officers and employees of the corporation, the courts have considered several factors as almost invariably establishing negligence of directors for which they will be held liable if such negligence was the proximate cause of the loss. One of these is the failure on the part of the directors to heed warnings of mismanagement . . . by employees and to take action appropriate to the situation.@ 18B Am.Jur.2d Corporations ' 1494. Benita Mesubed=s repeated theft from PACU was undoubtedly a proximate cause of PACU=s demise. Although Defendants were on notice, or should have been on notice, of her fraudulent behavior in the >80s, they let the fox back into the hen house. Even if the Court were to accept that it was not gross negligence to maintain Mesubed=s employment after uncovering her original theft of over $10,000, it was gross negligence to allow Mesubed unfettered access to PACU=s checks after Kebou left the PACU office. These directors knew, or should have strongly suspected, that Mesubed would steal again. Further, once they figured out that Mesubed was again stealing from PACU, instead of alerting the authorities and seeking repayment of her mounting debts, the directors just fired her, without any demand for repayment. The Board never initiated any collections proceedings against Mesubed, nor did they report her to the police. Liability must attach to such negligence.
In addition to a complete failure to abide by the Bylaws and Articles of Incorporation, Defendants knew or should have known of the looming problems of the 30-year-retirement requirement and the mountain of debts. Contrary to some of the witnesses= testimony, PACU was on notice for years that a large chunk of its members would soon be retiring. Likewise, Defendants knew, or should have known, of the mounting unpaid debts. Instead of facing these problems, they ignored them.
In fact, the stipulation, and subsequent order issued in September 2007, appears to acknowledge fiduciary duties to Plaintiffs, and a breach of those duties. Defendants, as PACU Board members, understood their fiduciary duties to the Plaintiffs, as PACU members, because Defendants agreed to a judgment against PACU and each of them as Board members of PACU. The only issue remaining is whether Defendants are personally liable for these breaches.
These repeated breaches of fiduciary duty rise to the level of gross negligence and require a finding of personal liability. In their defense, the Credit Committee Defendants BMiner, Remarui and IngasB argue that they were never fully informed of these problems, while the Officer Defendants BMersai, Kebou and RulukedB contend that they did their best in a difficult situation. Neither of these defenses are adequate to address the repeated abdication of their duties to Plaintiffs. Directors are protected by the business-judgment rule, which creates an evidentiary presumption that, Ain making business decisions . . . corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation=s best interest.@ 18B Am.Jur.2d Corporations ' 1470. Stated another way, Athe business-judgment rule operates as a shield to protect directors and officers from liability for unprofitable or harmful corporate transactions when they were made in good faith, with due care, and within the directors= or officers= authority.@ Id. Although Defendants never specifically invoked the business-judgment rule, they argued a variation on the theme, that Defendants were doing the best job that they could given the business environment at the time.
Plaintiffs bear the burden of rebutting the business-judgment rule. 18B Am.Jur.2d Corporations ' 1470. To overcome the presumption, Plaintiffs must show fraud, gross negligence or bad faith. Id. ' 1472. A[A]bsent fraud, bad faith, gross overreaching, or abuse of discretion, a director=s exercise of business judgment will be respected by the courts, no matter how poor that judgment is.@ Id. ' 1476. In other words, the party challenging the director=s business decision must Aestablish that no informed business person would have rationally made that decision.@ Id. ' 1474.
However, directors Acannot invoke the business-judgment rule when they have either abdicated their functions or, absent a conscious decision, failed to act.@ 18B Am.Jur.2d Corporations ' 1472, Caution. Directors have a duty to be informed. Id. ' 1472 (ATo invoke the protection of the business-judgment rule, directors have a duty to inform themselves, prior to making a business decision, and, having become so informed, must act with requisite care in the discharge of their duties.@) See also id. ' 1475. ADirectors are chargeable with knowledge of the financial condition of the corporation . . . . [and] what is going on about them in the conduct of the business of the corporation.@ Id. ' 1496. They have a duty to consult their corporate books and records, maintain familiarity with the financial status of the corporation through Aa regular review of financial statements.@ Id. ' 1497. If directors fail to remain informed of material[34] information reasonably available at the time of their decision, they cannot invoke the business-judgment rule. Id. ' 1475. Uninformed decisions are Ainherently unreasonable,@ and Acan result in a finding of gross negligence.@ Id.
Here, some of the directors failed to keep themselves properly informed. Defendant Yorang Miner=s answer to questions concerning PACU=s financing and Benita Mesubed=s fraud at trial were a string of AI don=t know.@ She conceded that she would listen to Kebou=s presentation and other talks at the meetings, but once the meeting was over, she would forget what had been said. She stated that once she determined she would be retiring, she no longer paid attention to discussions at board meetings. Ingas also sought to distance himself from PACU=s financial activity. At trial, he did not know the answers to many questions concerning PACU=s financial well-being.[35] He saw his sole job on the Board as processing loans, not worrying about PACU=s finances. Given their abdication of responsibility, these Defendants cannot rely on the business judgment rule, and must be found grossly negligent.
For those directors who were informed (Mersai, Kebou, Ruluked), the presumption of the business judgment rule is overcome by their inaction, which rose to the level of gross negligence. Although it is impossible to give the exact measure of care or negligence required, Ait is generally agreed that the directors . . . are bound to exercise ordinary care and diligence, but no more.@ 18B Am.Jur.2d Corporations ' 1466.[36] Directors are not liable to the corporation or its shareholders for Aslight omissions from which a loss which results to the corporation could not reasonably have been expected. However, directors are liable for losses or injury resulting from their gross negligence.@ Id. ' 1466. Some courts have increased the duty of care owed to a financial institution because banks are Aquasi-governmental agencies@ and Aone of the principal purposes is to hold and safekeep the money of their depositors.@ 18B Am.Jur.2d Corporations ' 1492. There is some disagreement as to whether the standard is ordinary negligence or gross negligence. Id. ' 1491. Since the Court holds that the directors were grossly negligent in this case, it need not resolve which standard this jurisdiction should adopt. The business judgment rule cannot shelter Defendants from gross negligence, even if such negligence was in honesty and good faith. See id. ' 1495 (AThe honesty and good faith of corporate directors, without more, is no excuse.@). The sixteen reasons listed above rise beyond Aslight omissions@ to the level of gross negligence.[37]
Finally, directors are presumed to know the law of the country of incorporation. 18B Am.Jur.2d Corporations ' 1498. The Alaw of the country@ is the credit union regulations, issued by the Attorney General=s Office under 12 P.N.C. ' 122. Much of the language in PACU=s Articles of Incorporation and Bylaws mirrors the language in the regulations from the definitions to the requirements for reserves, giving and getting loans, an audit committee, and board compensation.
Amongst other regulations, the credit regulations in Palau at the relevant time required:
(1) not only a reserve fund (Regulation 3.8), but also a special reserve for delinquent loans (Regulation 3.9), Awhich shall be equal to the excess of the sum of ten percent of the unpaid balances of loans delinquent more than two months and less than six months, plus twenty-five percent of the unpaid balances of loans delinquent from six months to less than twelve months, and plus eighty percent of the unpaid balances of loans delinquent twelve months or more over the balance in the reserve fund@;
(2) the Board to consider delinquent loans when ascertaining the value of the assets of the credit union in its calculations of annual dividends[38] (Regulation 3.10);
(3) an annual audit of its books by Aa qualified accountant or bookkeeper, who shall not be directors, officers, or employees@ (Regulation 6.1); and
(4) that A[e]very individual acting as officers or employees of a credit union, and handling funds or securities amounting to $1,000 or more, in any one year, shall be covered by an adequate bond as determined by the board of directors, and at the expense of the association@ (Regulation 6.2).
Further, the Regulations provided a lengthy discussion of voluntary dissolution (Regulations 4.1-4.8). PACU B through its Board B met none of these regulatory requirements, and failed to follow the mandate for dissolution.
Under the law, all of the directors Bno matter their level of knowledge or involvementB are liable. See 18B Am.Jur.2d Corporations ' 1465. (AWhere the duty of knowing facts exists, ignorance due to negligence of duty on the part of the director creates the same liability as actual knowledge and a failure to act thereon.@).
Further, all of the directors are equally liable, no matter their positions or roles. AThere is no distinction in the degree of fiduciary obligation that may be recognized based upon the degree of corporate involvement of an officer or director; it is the nature of the position, itself, and not the nature of the specific responsibilities that may be assumed, that gives rise to the obligation . . . . [E]ven an inactive officer or director owes a fiduciary duty of good faith and due care to the corporation.@ 18B Am.Jur.2d Corporations ' 1464.
Finally, all of the directors are jointly and severally liable. Although ordinarily directors are not typically liable for the Awrongful acts of their co-directors,@ see 18B Am.Jur.2d Corporations ' 1487, Awhere two or more corporate officers join or participate in a wrongful act, they are, as a general rule, jointly and severally liable,@ id. at 1488. Here, Defendants jointly repeatedly failed to act.
In a derivative action, Athe corporation is the real party in interest, and any recovery goes to the corporation, rather than to the shareholder who brings the action.@ 19 Am.Jur. 2d Corporations ' 1944. testified that all dall debts were repaid prior to PACU=s complete insolvency, so only the shareholders remain unpaid. See i> ' 1945 (A[A]ny damages ... recovered [in a derivative action] will be available for for the payment of debts of the corporation and, if any surplus remains, for distribution to the stockholders in proportion to the number of shares held by each.@) Therefore, all of the Defendants are jointly and severally liable to PACU for the losses suffered by the PACU members.
Accordingly, the Court orders an accounting by PACU of the PACU shares remaining for each member by December 6, 2010.[39] Plaintiffs will have until December 20, 2010, to object to the accounting. Once the remaining amount of shares for each member is determined, all Defendants will be jointly and severally liable for that amount, along with 9% post-judgment and 6% pre-judgment interest.
Plaintiffs sought 6% pre-judgment interest based on language in the Bylaws which caps interest on members= deposits at 6%. See Bylaws, Art. XIV,' 3. Defendants counter that Article XIV, Section 3 of the Bylaws was not meant for this situation. The Court agrees with Defendants, leaving open the issue of how much pre-judgment interest should be awarded in this case.
Post-judgment interest is set high (9%) to motivate the losing party to pay off the judgment as quickly as possible. See 44B Am.Jur. 2d Interest ' 40 (AThe purpose of post-judgment interest is not to punish the defendant, but to encourage prompt payment and to compensate the plaintiff for another=s useis or her money.@). Pre-judgment interest, on the other hand, Ais the compensation allowed owed by law as additional damages for lost use of money due as damages during the lapse of time between the accrual of the claim and the date of the judgment.@ Id. ' 39. Because the amount o-jure-judgment interest has no effect on whether the losing party pays promptly, the Court will set pre-judgment interest at 6% based on the parties= partial settlement, filed on September 10, 2007, and judicially blessed on September 11, 2007. Pursuant to that stipulation and order, Defendants were to pay Plaintiffs at a rate of 6% pre-judgment interest. The Court sees no reason to change that amount now.[40]
In calculating pre-judgment interest, A[i]f the breach consists of a failure to pay a definite sum of money ..., interest is recoverable from the time of performance on the amount due ....@ Kobayashi v. Kamiishi, 13 ROP 72, 77 (2006). The Bylaws grant an additional 60 days= grace period before PACU is required to repay the member after receipt of her or his demand. See Bylaws Art. II, ' 5. Therefore, 6% pre-judgment interest will be calculated as of 60 days from the date of each Plaintiff=s demand letter. For example, Angeles Takashi wrote her demand letter to Treasurer Kebou on February 5, 2003. 60 days from February 5, 2003 is April 6, 2003. For Plaintiff Takashi, pre-judgment interest of 6% should be calculated from April 6, 2003 to the date of judgment.
Further, Defendants are liable for reasonable litigation expenses, to include Plaintiffs= attorney fees and court costs. See Wright ' 1841 (courts typically reimburse plaintiffs in derivative actions for their litigation expenses). See also Supplemental Stipulation, filed September 11, 2007, and Order, filed September 11, 2007 (agreeing to and granting court costs and attorney fees in this case). Plaintiffs= counsel will submit his reasonable litigation expenses to the Court and counsel by December 6, 2010. Defendants will have until December 20, 2010, to object to any of Plaintiffs= listed expenses. Once the Court adopts Plaintiffs= expenses as reasonable, 9% post-judgment interest will also begin to accrue against those expenses.
Finally, Plaintiffs seek punitive damages. For punitive damages to attach, corporate directors must Amake a profit from transactions with the corporation in violation of their fiduciary duties . . . .@ 18B Am.Jur.2d Corporations ' 1501. While it is true that none of the Defendants, besides Miner ($3,500.48) and Mersai ($417.02) lost money in PACU, Plaintiffs have not shown that the directors actually gained any significant profit[41] in violation of their fiduciary duties. Further, Athe award of punitive damages rests entirely in the discretion of the trier of fact, who must determine whether the defendant was motivated by malice, whether the defendant=s conduct was sufficiently willful or wanton to justify the imposition of punitive damages, or whether there was such reckless disregard of the rights of others as to warrant an award.@ Nebre v. Uludong, 15 ROP 15, 31 (2008) (quoting 22 Am.Jur. 2d Damages ' 780 (2003)). Defendants= actions were ill-considered and, at worst, incompetent, but they were not sufficiently malicious, willful or wanton to warrant punitive damages.
So Ordered.
November 23, 2010
______________________
Alexandra F. Foster
Associate Justice
[1] Plaintiff AAngeles Takashi@ is sometimes referred to as AAngeles Takasi.@
[2] At trial, Plaintiff Olympia Remengesau testified as Olympia Morei.
[3] Plaintiffs never named John Doe I and II. Claims against John Doe I and II are dismissed.
[4] Because the specifics of this agreement were at issue in the supplementary closing argument on November 1, 2010, the Court will quote the relevant section: APursuant to ROP Rules of Procedure, Rule 54(b), Plaintiffs shall have judgment in the principal amount of $54,796.89 plus 6% pre-judgment interest, 9% post-judgment interest, $182.90 of court costs, $1,950.00 of attorney fees, as of September 10, 2007 and further interests, costs and attorneys fees thereafter@ against all named Defendants. See Supplemental Stipulation for Attorney=s and Court Costs at 1 (filed Sep. 11, 2007).
[5] The parties stipulated that PACU paid Plaintiffs $2,515.82 as part of the settlement in 2007. That money was divided by the seven Plaintiffs and paid out as $359.40 each. Plaintiffs concede that they received that money, but it appears that money was not subtracted from the amounts to which each Plaintiff testified.
[6] When she testified on November 1, 2010, she stated that she became a PACU member in 1986.
[7] Unlike the other Plaintiffs, the numbers in Ongalibang=s passbook do not match the numbers in her ledger. Her ledger stops at $9.799.15 on 12/26/03, while her passbook goes up to $10,328.15 by May 2004. Ongalibang testified that, as of late 2003, she maintained her passbook, whereas the ledger remained in the PACU office. For reasons which will be discussed further below, Mesubed, the person maintaining the ledgers, was fired in January 2004, but Kebou testified that he updated the ledgers after Mesubed=s termination.
[8] Ruluked retired in 1995, but testified at trial that he still considers himself President of PACU.
[9] Mersai retired in 1999, and no longer maintained shares in PACU as of that time, but she remained as PACU=s Secretary until its demise.
[10] One way of checking who attended which meetings would be to check the minutes. As Secretary, Mersai took minutes of the Board=s
attendance and discussions. Unfortunately, those minutes were destroyed after 2004, when Mersai=s shed, where she housed copies
of the minutes after PACU was no longer operational, was flattened by a storm.
[11] In its original complaint, Plaintiffs sued Alonzo Tellei=s. The Court granted Tellei=s motion to dismiss in its April 9, 2010 order.
Plaintiffs did not sue Tellei in their amended complaint, and conceded at the November 1, 2010 hearing that Tellei was no longer
a Defendant in this case.
[12] PACU calculated its income from interest on loans to members and its interest-bearing accounts. PACU=s 1985 annual report reflected income of $123,423.21, and expenses of $26,196.45. Income hovered at a little over $100,000 (while expenses rose to around $40,000) through the >80's and into the early >90's, with a peak income of $154,887.46 in 1986. In the 1997 annual report, income had dropped under $100,000. It continued to spiral downwards thereafter. By the 2002 annual report, income had dwindled to $11,144.47.
[13] In at least one instance, someone else handled the loan application for the applicant. Plaintiff Elena Tellei testified that she never personally met with members of the Credit Committee. Instead, she had her staff gain the required signatures to obtain PACU loans.
[14] Miner testified that three signatures were required unless the Chairman of the Credit Committee signed, in which case only two signatures were necessary. The other witnesses who had served on the Credit Committee testified that only two signatures were necessary.
[15] Under the signature lines for the Credit Committee members, the application reads: AAll committee members shown as present in the minutes of the meeting at which this application was approved must sign above.@
[16] Kebou testified that he believed the Credit Committee was charged with debt collection. Ruluked testified that collections was directed by Kebou and the Credit Committee. All members of the Credit Committee denied any knowledge of the requirement that they assist on loan collections. It is unrefuted that Kebou or Mesubed called the delinquent debtor; Kebou was the contact person with the collections attorney; and Kebou was the one who reported to the Board on uncollected debts. Given this testimony, the Court finds that Kebou had been charged with collecting delinquent loans, but he could have sought help from the Credit Committee members or even other members of the Board.
[17] Although there may have been attempts at collection which did not make it into the PACU files and are therefore not reflected in the exhibits, none of those efforts were presented at trial.
[18] The testimony about loan amounts and commercial rates is confusing. Kebou first testified that PACU took out loans of $200,000 at a commercial rate of 9%. He later testified that the largest loan from Bank of Hawaii was $150,000, taken out in 1987 at the commercial rate of 6 to 8%. Either way, the loans were substantial and the commercial rate was less than the 12% interest rate required for PACU loans to its members.
[19] The Court=s notes also reflect that Kebou testified to breaking a $100,000 TCD. It does not appear that there was a $100,000 TCD. The only logical conclusions are that Kebou misspoke or the Court=s notes are inaccurate, and PACU broke its $150,000 Bnot $100,000B TCD.
[20] 2002 was the last year PACU filed an annual report. Kebou testified that he did not fill out the annual report for 2002, which was filed in July 2003. Indeed, unlike the other annual reports, this one has Benita Mesubed=s signature. Mesubed testified that she signed at Kebou=s or the Asecretary=s@ request, and filed it with the Attorney General=s office. Mesubed said that she did not fill out the report. Kebou or the Asecretary@ did it. Presumably, Mesubed is referring to Mersai when she says the Asecretary,@ since Kebou and Mesubed were the only two PACU employees, and Kebou had no secretary at PACU. That issue was not clarified at trial.
[21] Ruluked and Kebou testified that the offending bill passed in 1998. Mersai testified that it actually started in 1997, but PACU did not feel its effects until 1998. Remarui testified that the law passed in 1997, but there was a grace period through 1998 or 1999. Remarui added that they thought the President would veto the bill.
[22] Mesubed testified that she sought, and received, PACU loans just like everyone else. She filled out an application, provided the required information, had it approved by Credit Committee members then turned in her application to Kebou, who discussed it with the Board. Her testimony is, at best, unconvincing and, at worst, perjury. First, none of the Credit Committee members signed off on a loan to Mesubed. Second, none of the Board members have any memory of mention of a loan to Mesubed. Third, Ruluked and Mersai both testified that their signatures on the checks to Mesubed were forged. Finally, the Aloans,@ in quick succession (issuing every few days) and in small amounts (from $32 to $700), are unlike any other loan on record in this case. Other PACU loans are for at least hundreds, if not thousands, of dollars, and such loans issue, at most, once every few years.
[23] A>Paid-in and unimpaired capital= as of a given date shall mean the balance of the shares account as of such date, less any losses that may have been incurred for which there is no reserve or which have not been charged against undivided earnings.@ Bylaws, Art. XVIII Definitions (c).
[24] A>Surplus= as of a given date shall mean the balance of the undivided earnings account on such date, after all losses have been provided for and net earnings or net losses have been added thereto or duducted [sic] therefrom, as the case may be. Reserves shall not be considered as a part of surplus. The purpose of this definition is solely for determining the maximum amount which this credit union may lend to another credit union, to any member, or borrow from any source.@ Bylaws, Art. XVIII Definitions (d).
[25] A>Net earnings= for a given period shall mean the balance remaining after deducting from the gross income of this credit union actually received during such period all expenses paid or payable during such period, and any losses sustained therein (as determined by the board) for which no specific reserve has been set aside.@ Bylaws, Art. XVIII Definitions (b).
[26] Each Director/Credit Committee member was not to receive a loan Ain excess of the amount of his shareholdings in this credit union plus the total unencumbered and unpledged shareholdings in this credit union of any member pledged as security for such loan.@
[27] The last sentence of Section 3 reads: ANo loan shall be made to a member . . . in excess of the amount of his shareholdings in this credit union.@ Section 6 reads: ANo loan shall be made to any member in excess of the limitations imposed by the articles of incorporation.@ Section 6(n) of the Articles of Incorporation limits a member loan to A$200 or 10% of the credit union=s paid-in and unimpaired capital and surplus, whichever is greater.@ These parameters are not necessarily inconsistent. PACU should have been limited by both sections in its loans to members.
[28] In its order of April 9, 2010, the Court held that PACU should be treated as a corporation for purposes of this case. See Order at 2-3. No one seems to contest that PACU should be treated as a corporation. PACU maintains a board and officers, adopted articles of incorporation, and filed annual reports with the Attorney General=s Office. In short, it acted like a corporation, and the Court will treat it as such.
[29] Takashi retired in 2004 and wrote her demand letters on February 5, 2003. It is unclear when Napoleon stopped making allotments, but he too wrote his demand letter in February 2003. Mariur wrote her demand letter on April 22, 2003, and stopped her allotments in May of the same year. Morei stopped her allotments in December 2003, and wrote her letter in January 2007. Ongalibang and Alexander wrote demand letters in March 2004, but Ongalibang continued allotments until May 2004, and Alexander until April 2004. Tellei wrote her demand letter in August 2002, and stopped her allotments at the same time.
[30] Both the Articles of Incorporation and the Bylaws could have been amended, but they were not. The original documents from 1968 remained binding on the officers and directors through 2004.
[31] White, who appears to have been a signatory to PACU=s Bylaws and Articles of Incorporation left Palau in the late 1960's or early 1970's.
[32] Amendment of either document required an affirmative vote by two-thirds of the Board and written approval from the High Commissioner, or his replacement in post-Trust Territory times.
[33] Instead it appears that some members received a return of all of their shares, where others received $1,000 and the rest received nothing. This division of assets was completely arbitrary. Ruluked wrote a letter in November, 2003, disbursing $1,000 to approximately 20 members. How those members were selected to receive $1,000 while others received nothing is a mystery.
[34] AMaterial@ is defined as Arelevant and of a magnitude to be important to directors in carrying out their fiduciary duty of care in decisionmaking.@ 18B Am.Jur.2d Corporations ' 1475, Practice Guide.
[35] Admittedly, these events occurred six or seven years ago, and some level of forgetfulness is warranted. In this case, however, Miner and Ingas appear to have gone out of their way to remain ill-informed, contending that their role was solely one of cursory loan reviewer.
[36] AOrdinary care@ is defined as Aa degree of care which prudent persons, prompted by self-interest, would exercise in the management of their own affairs.@ 18B Am.Jur.2d Corporations ' 1467. Stated another way, Aa director is under an obligation to discharge his or her duties in good faith, with the care an ordinarily prudent person in like position would exercise, and in a manner the director reasonably believes to be in the best interest of the corporation.@ Id.
[37] Remarui=s case is a hybrid. Although not as well informed as the Directors, he did come to meetings when summoned and paid attention. He remembers discussions concerning PACU=s dismal financial status in the late 1990's. Remarui is liable both because sometimes he did not inform himself sufficiently (e.g., reporting bad debt, lack of reserves, never read Bnor even requestedB a copy of the Articles of Incorporation or Bylaws even though he knew they existed), and sometimes because, although sufficiently informed, he did nothing to address PACU=s problems (e.g., insufficient collateral for loans, Service Retirement bill).
[38] AIn ascertaining the value of the assets of the credit unions, a loan delinquent for more than two but less than six months shall be valued at ninety percent of the unpaid balances; a loan delinquent for more than six but less than twelve months shall be valued at seventy-five percent of the unpaid balance; and a loan delinquent for twelve months or more shall be treated as of no value.@
[39] The amended complaint seeks Aa full, complete and accurate accounting for all PACU transactions.@ Such a demand is over broad. What really matters at this juncture is the amount owed to PACU=s members.
[40] The Court understands that it is not bound by the September 2007 order; it is only using the order as a guideline -in the absence of any suggestions from Defendants- to set pre-judgment interest.
[41] Although not in accordance with the Bylaws or Articles of Incorporation, the honorariums are de minimis and do not rise to the amount of self-dealing which would justify an award of punitive damages.
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