FSM 10 Intrm. 067-078

Summary judgment will be entered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of any material fact and that the moving party is entitled to judgment as a matter of law. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 72 (Pon. 2001).

A party to a contract cannot relieve himself of the obligations which a contract imposed upon him merely by assigning the contract to a third person. Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 74 (Pon. 2001).

Liabilities arising from a contract are not assignable without the consent of the creditor, and a third party's mere assumption of the debt is not sufficient to establish a novation of the original contract unless there is a clear assent by the creditor to the substitution of a new obligor. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 74 (Pon. 2001).

When a bank agreed to allow another to take on the obligations under a promissory note, but did not agree to allow the borrowers to be free from liability on that note once they had assigned their rights, and when the language of the assignment agreement and promissory note indicates that the parties (assignors and assignee) intended that the assignors would remain liable on the promissory note, the assignors remain liable, and if the assignors are in default on the note, the bank is entitled to summary judgment against the assignors based on their breach of the duty to pay as required. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 74 (Pon. 2001).

The determining factor as to a third party beneficiary's rights is the intention of the parties who actually made the contract. The question whether a contract was intended for a third person's benefit is generally regarded as one of construction of the contract. The parties' intention in this respect is determined by the contract's terms as a whole, construed in the light of the circumstances under which it was made and with the apparent purpose that the parties are trying to accomplish. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 75 (Pon. 2001).

When a contract's parties did not enter into that agreement primarily to benefit another, they were seeking to benefit themselves, and when their purpose was not to give the bank the benefit of their bargain, the bank is not the agreement's intended beneficiary and has no right to enforce that agreement. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 75 (Pon. 2001).

30 F.S.M.C. 104 does not require the FSM Development Bank to provide technical assistance to persons the bank loans money to, but simply permits it to provide such assistance. The bank has no duty to provide technical assistance. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 76 (Pon. 2001).

An agreement and promissory note that does not set out the exact amount of payments needed to make a debt current, would not make performance of that agreement impossible when the party assuming the payments could easily have calculated the amount of the payments he would have to make to bring the loan current. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 76 (Pon. 2001).

The statute, 30 F.S.M.C. 104, does not impose a duty upon the FSM Development Bank to provide technical assistance to debtors to whom it has already made a loan, nor to assignees of those debtors. Nor does it give rise to a private cause of action. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 76-77 (Pon. 2001).

When the undisputed facts show that a party clearly entered into a legally binding agreement whereby he agreed and promised to make payments to the bank in exchange for purchasing a taxi service and when he breached it by failing to make the required payments, the court will grant summary judgment to the taxi service seller. The fact that the taxi service was losing money does not excuse the buyer from his responsibility. Nor does the fact that it might have been a bad investment. FSM Dev. Bank v. Mudong, 10 FSM Intrm. 67, 78 (Pon. 2001).

On May 18, 1998, plaintiff FSM Development Bank filed its complaint against Welfred Mudong a.k.a. Welpret Mudong and Meriuter Mudong. In count I, the complaint alleges that on August 25, 1993, defendants made and delivered to plaintiff a promissory note (the "Promissory Note") for the principal amount of $37,000, with interest at 9% per annum, with such principal and interest to be paid in equal monthly installments of $1,176, and with the entire note to be paid in full by December 10, 1997. The complaint further alleges that defendants have failed to make the monthly payments, and pursuant to the terms of the note, plaintiff accelerated the debt. Plaintiff alleges that as of the time of filing of the complaint, defendants owed plaintiff $30,676 plus accrued interest from January 29, 1998. Further, the terms of the note contain a provision that in the event of collection, defendants shall be liable to plaintiff for costs including attorney's fees.

In count II, plaintiff alleges that as security for the payment of the promissory note, defendants executed and delivered two mortgages to plaintiff on certain real property described in the mortgages. Since defendants have defaulted on their loan to plaintiff, plaintiff is entitled to foreclose on the mortgages and have the money from the foreclosure sale applied to the mortgage debt.

In count III, plaintiff alleges that in addition to the mortgage on the real property, as security for the payment of the promissory note, defendants also executed and delivered a chattel mortgage to plaintiff on two Mazda 15 seat buses (which were to be used by the Mudongs to operate their taxi service). As defendants are in default on their obligation to plaintiff, plaintiff is entitled to judicial foreclosure of the chattel mortgage and to have the money from the foreclosure sale applied to the debt.

On June 17, 1998, defendants Welfred and Meriuter Mudong ("the Mudongs") filed their answer to plaintiff's complaint. They plead one affirmative defense, that of contribution, claiming that defendant Welfred Mudong ("Mudong") and Benskin Etse entered into an "Agreement and Promissory Note," whereby Mudong assigned his entire financial obligation with plaintiff to Benskin Etse. The Mudongs claim that Benskin Etse agreed and promised to pay back the loan in accordance with the terms and conditions set forth in the Promissory Note. The Mudongs claim Benskin Etse breached the terms of the Agreement and Promissory Note by failing to make the payments as required by that agreement.

On July 2, 1998, the Mudongs filed a third party complaint against Benskin Etse. The Mudongs (now defendants and third party plaintiffs) allege that on March 27, 1996, (third party defendant) Etse entered into an agreement with Welfred Mudong entitled the "Agreement and Promissory Note" whereby Welfred Mudong assigned his entire financial obligation with plaintiff to Benskin Etse. The Mudongs allege Etse accepted full and entire financial responsibility for the Promissory Note when he entered into the Agreement and Promissory Note. The Mudongs allege that Etse agreed to accelerate loan payments on the arrearages in the amount of $13,065 to make the loan current by August 1996, agreed to maintain the account on current status at all times, and agreed to make the monthly payments of $1,176. The Mudongs allege Etse failed to keep the account current, and plaintiff has elected to accelerate the debt. The Mudongs claim that Etse is liable for the entire debt on the Promissory Note and all related expenses.

On August 14, 1998, Etse filed an answer to the third party complaint of the Mudongs. Etse pleaded what he called an "affirmative defense" and alleges that the plaintiff (FSM Development Bank) had a duty to provide technical assistance to Etse but failed to provide such technical assistance thereby precluding itself from claiming against the Mudongs or Etse. Etse further claims that plaintiff failed to advise the Mudongs or Etse of the "prudence" of entering an agreement to assign the taxi service [from the Mudongs to Etse], when the service was in arrears of about $13,000, and failed to provide Etse with an analysis on the potential of the taxi services and the practicality of making the loan current in five months thus rendering the agreement impractical and unfair and excuses Etse from liability "for unconscionability." Etse further claims he is liable only to the extent of the income he has earned from operation of the taxi service.

Contained in Etse's answer to the third party complaint is a section entitled "counterclaims against plaintiff" (this would properly be called a "cross claim," not a "counterclaim," and will be referred to from this point forward as a cross claim). In his cross claim, Etse alleges that the above described actions by plaintiff constitute a breach of duty under 30 F.S.M.C. 104(2)(c). [30 F.S.M.C. 104 authorizes the FSM Development Bank to "engage in all banking functions that will assist the economic advancement of the Federated States of Micronesia."] Etse further alleges these same actions rendered the agreement unconscionable and against public policy. Etse also alleges that the conduct of plaintiff in approving and accepting an agreement which it knew or should have known was unconscionable and would put Etse in a financial bind is unfair and deceptive in violation of 34 F.S.M.C. 103(13), thereby entitling Etse to seek actual and punitive damages.

On August 21, 1998, plaintiff answered the counterclaim of Etse and also filed a cross claim against him. Plaintiff alleges that it is a third party beneficiary of the Agreement and Promissory Note entered into by Mudong and Etse. Plaintiff further alleges that Etse breached the Agreement and Promissory Note by failing to bring the Mudongs' loan account with plaintiff current within 6 months and by further failing to make any of the required monthly payments. Plaintiff alleges that as a third party beneficiary, it has the right to enforce the Agreement and Promissory Note and is therefore entitled to judgment against Etse for breach of the Agreement and Promissory Note.

Under Rule 56(c) of the FSM Rules of Civil Procedure, judgment shall be entered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of any material fact and that the moving party is entitled to judgment as a matter of law. In interpreting this rule, the Court, in considering a motion for summary judgment, must view the facts and inferences in a light that is most favorable to the party opposing the motion. See Federated Shipping Co. v. Ponape Transfer & Storage, 4 FSM Intrm. 3, 16 (Pon. 1989). This Court will now examine each of the pending motions for summary judgment.

On October 8, 1998, plaintiff filed its motion for summary judgment against the Mudongs. Plaintiff seeks a finding that (1) defendants have defaulted on their obligation under the promissory note and are liable for the full amount due and owing; (2) plaintiff is entitled to foreclosure of the mortgaged real property in accordance with the terms of the mortgage and [Pohnpei] State statutes; and (3) plaintiff is entitled to foreclosure of the mortgaged property [the two Mazda buses] in accordance with the terms of the chattel mortgage.

As to count I, the Mudong's default under the promissory note, plaintiff submits the affidavit of Kedise Robert, an accountant for plaintiff who is responsible for monitoring collections on plaintiff's loan accounts. Robert swore that the Mudongs were in default and that the amount owed [at the time the motion was filed] was $24,134.85 in principal, $7,056.24 in interest, and $241.35 as late charges.

As to count II of its motion for summary judgment, plaintiff argues that the Mudongs executed and delivered a mortgage to plaintiff on certain described real properties. Plaintiff attaches a copy of the mortgage to its motion. The mortgage states that it was intended to secure payment of the promissory note and that the terms of the promissory note were incorporated into the mortgage. The Mudongs' failure to make all required monthly payments on the promissory note constituted a default under the mortgage.

(5) Sale of the Mortgaged Property. When the Mortgagor after being directed to do so, as provided in sub-section (4) of this section, fails to pay the principal and interest and cost and attorney's fees incident thereto to the extend permitted under this Law, at the time directed in the order, the court shall order the property (or so much as there may be necessary) to be sold . . . . [A]ny sale of property under a judgment of foreclosure shall be made by some person appointed by the court for that purpose and must be made at a public place to be designated by the court, upon notice and in the manner provided by Law governing sales under execution with such additional requirements including, but not limited to, the extension of the term of notice, and requirement of Publication or announcement in local newspaper, radio, or television, as may be prescribed by the court, to attempt to assure a reasonable return from the sale.

Plaintiff asks the Court to issue a judgment for all amounts due and to require defendant to pay such amount to the Court within three months as required by the above statute. If the Mudongs fail to do that, plaintiff claims it file an additional motion requesting the property be sold in accordance with the mortgage statute.

On count III of its motion for summary judgment, plaintiff argues that defendants executed and delivered a chattel mortgage (a copy of which is attached to its motion) on two Mazda 15 seat buses which were used to run the taxi service. The chattel mortgage states on its face that it secures payment of the principal and interest on the promissory note. Nonpayment of any amount payable on the promissory note constitutes a default of the chattel mortgage. Plaintiff argues the Mudongs are in default of their obligations under the promissory note and chattel mortgage having failed to make the required monthly payments.

Plaintiff claims 33 F.S.M.C. 933 authorizes a judicial foreclosure of a chattel mortgage. Plaintiff requests that the court order the Mudongs and Etse to immediately turn over possession of the buses and allow it to be sold in the manner described by 33 F.S.M.C. 930.

On November 14, 1998, the Mudongs filed their opposition to plaintiff's motion for summary judgment. The Mudongs only argument in opposition is that third party defendant Etse is liable for the entire amount owed on the promissory note because the Mudongs and Etse entered into the Agreement and Promissory Note on March 26, 1997 whereby defendant Welfred Mudong assigned his entire financial obligation with plaintiff to third party defendant Etse. The Mudongs argue that thus a genuine dispute exists as to whether defendants are liable for any amount owed to plaintiff on the promissory note.

It is a well established rule that a party to a contract cannot relieve himself of the obligations which a contract imposed upon him merely by assigning the contract to a third person. 6 Am. Jur. 2d Assignment § 110 (1963). Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor. Restatement (Second) of Contracts § 318(3) (1981).

Liabilities arising from a contract are not assignable without the consent of the creditor, and the mere assumption of the debt by a third party is not sufficient to establish a novation of the original contract unless there is a clear assent by the creditor to the substitution of a new obligor. Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 314-15 (Pon. 1995). When a person is liable for a business' debts because he is the sole proprietor of a business, the sale of the business to another who has agreed to assume the business' liabilities will not relieve him of liability if the creditor has not agreed to the assignment. Id. at 315.

In this case, there has been an assignment of the contract from the Mudongs to Etse, established by the Agreement and Promissory Note signed by both Welfred Mudong and Etse. Whether the Mudongs are still liable on the promissory note to plaintiff depends on whether plaintiff has clearly assented to the assignment. The Agreement and Promissory Note signed by Mudong and Etse states that:

. . . The terms and conditions of the original documents executed in connection with [the] loan, which forms the basis of the indebtedness herein, not inconsistent with the terms and conditions hereof shall remain in full force and effect for all practical purposes.

Interestingly, the Agreement and Promissory Note is witnessed by a representative of plaintiff bank, but plaintiff is not a party to the agreement. Although it is not discussed, it appears that the language of the Agreement and Promissory Note was drafted by plaintiff. In fact, the Mudongs and Etse signed the agreement in plaintiff's offices. This Court is convinced that, although plaintiff may have agreed to allow Etse to take on the obligations under the promissory note, it did not agree to allow the Mudongs to be free from liability on that note once they assigned their rights to Etse. The language of the Agreement and Promissory note indicates that the parties (the Mudongs and Etse) intended that the Mudongs would remain liable on the Promissory Note. Since the parties intended that the Mudongs remain liable on the Promissory Note, the Mudongs are still liable to plaintiff on that note. And since the Mudongs are in default on the Promissory Note, plaintiff is entitled to summary judgment against the Mudongs based on their breach of the duty to pay as required by the Promissory Note. The Court will grant plaintiff's motion for summary judgment against the Mudongs.

On March 11, 1999, plaintiff filed a motion for summary judgment on its cross claim against third party defendant Etse. Plaintiff seeks to enforce plaintiffs rights as a third party beneficiary under the Agreement and Promissory Note signed by the Mudongs and Benskin Etse. Plaintiff argues that since Etse failed to fulfill his obligations under the Agreement and Promissory Note, Etse is liable to plaintiff since plaintiff, as a third party beneficiary of that contract, suffered damages when Etse breached the agreement.

On April 5, 1999, Etse filed his opposition to plaintiff's motion for summary judgment on its cross-claim against him. Etse argues that although he testified at his deposition that he understood the Agreement and Promissory Note when he signed it, it was impossible for him to discharge his obligations under that agreement. Etse further claims that the plaintiff did not inquire into Etse's financial ability to discharge his obligation under the terms of the Agreement and Promissory Note. Etse argues that the Agreement and Promissory Note was invalid as it was impossible for him to discharge or perform.

Etse further argues that under 30 F.S.M.C. 104(2)(c), plaintiff had a duty to provide technical assistance and services for projects of economic development and failed to render such assistance. Etse claims plaintiff engaged in unfair and deceptive practices in violation of 34 F.S.M.C. 103(13). Etse urges the Court to find that he is not liable to plaintiff for breach of the Agreement and Promissory Note.

Plaintiff moves for summary judgment on Etse's failure to fulfill his obligation to Mudongs. Since plaintiff is not a party to the Agreement and Promissory Note, it is suing as a third party beneficiary of that contract. It is a general principal of the law of contracts that a third party beneficiary can only recover if he is an intended beneficiary of the contract; he may not recover if he is only an incidental beneficiary of that contract. The FSM Supreme Court has held:

The question whether a contract was intended for the benefit of a third person is generally regarded as one of construction of the contract. The parties' intention in this respect is determined by the terms of the contract as a whole, construed in the light of the circumstances under which it was made and with the apparent purpose that the parties are trying to accomplish.

In applying the above test, the Court believes that plaintiff FSM Development Bank is not an intended beneficiary of the Assignment and Promissory Note. The Mudongs and Etse did not enter into that agreement primarily to benefit plaintiff. They entered into the agreement seeking to benefit themselves. Their purpose was not to give the bank the benefit of their bargain. Therefore, plaintiff is not an intended beneficiary of the Assignment and Promissory Note and has no right to enforce that

On April 13, 1999, Etse moved for partial summary judgment on his cross claim plaintiff Etse incorporated the memorandum in opposition he submitted in opposition to plaintiff's motion for summary judgment against him, and submits that there are no genuine issues of material facts on these claims since plaintiff "admitted" that it did not at any time provide technical assistance to him. (He fails to show how plaintiff admitted that it failed to do this.) Etse also argues that since the Agreement and Promissory Note did not clearly set out the exact amount of monthly payments to make the debt current, performance by Etse was impossible.

This Court is of the opinion that 30 F.S.M.C. 104 does not require plaintiff to provide technical assistance to persons the bank loans money to, but simply permits plaintiff to provide such assistance. Therefore, plaintiff was under no duty to provide technical assistance to Etse (see discussion below). Etse's claim that the bank had a duty to provide him with technical support is without legal support and this Court will deny Etse's motion for summary judgment on this claim.

Also, even though the Agreement and Promissory Note did not set out the exact amount of payments needed to make the debt current, this would not make performance by Etse impossible. Etse could easily have calculated the amount of the payments he would have to make to bring the loan current. Etse's claim that performance of the Agreement and Promissory Note was impossible is simply not supported by the facts and this Court will deny Etse's motion for summary judgment on this claim as well.

Plaintiff argues this statutory language only refers to pre-loan analysis; it does not require plaintiff to engage in post-loan assistance to assist a debtor who cannot make payments on the loan. Plaintiff further argues that 30 F.S.M.C. 104 does not give rise to a private cause of action.

This Court agrees with plaintiff's arguments. Etse's claim that plaintiff had a duty to provide him with technical assistance is not legally supported. The statute above does not impose a duty upon plaintiff to provide technical assistance to debtors to whom it has already made a loan, nor to assignees of those debtors. Nor does 30 F.S.M.C. 104 give rise to a private cause of action. Thus, this Court will grant plaintiff's motion for summary judgment on this claim, and Etse will be barred from claiming that the plaintiff had a duty to provide technical assistance to Etse.

Etse claims that plaintiff's approval and acceptance of the Agreement and Promissory Note was an unfair and deceptive trade practices act pursuant to 34 F.S.M.C. 103. However, as plaintiff correctly points out, this statute is part of the Consumer Protection Act. Section 106(1) of the Consumer Protection Act provides that "[a]ny person who purchases or leases good or services primarily for personal, family, or household purposes and thereby suffers any retainable loss of money or property . . . as a result . . . of a method, act, practice declared unlawful by section 103 of this chapter, may bring an action under the rules of civil procedure . . . ."

This Court believes that this was a commercial transaction, not one primarily for personal, family, or household purposes. Etse may not bring a cause of action under this section since Title 34 of the FSM Code only provides for consumer protection. Therefore, this Court will grant plaintiff's motion for summary judgment on this claim. Etse will be barred from arguing that plaintiff's approval and acceptance of the Agreement and Promissory Note was an unfair and deceptive trade practice prohibited by 34 F.S.M.C. 103.

Plaintiff argues that issues of fact are only material if their resolution could affect the outcome of the case. The presence of factual issues will not bar summary judgment if they are not material to the controlling legal issue of the case, and thus have no dispositive significance.

This Court agrees with plaintiff's argument. Etse's claims are not supported. Thus, this Court will deny Etse's motion for summary judgment against plaintiff and will grant plaintiff's cross motion for summary judgment on Etse' cross claim.

On April 14, 1999, the Mudongs filed a motion for summary judgment on their third party complaint against third party defendant Etse. The Mudongs argue that the following facts are undisputed: Welfred Mudong and Etse entered into the Agreement and Promissory Note; Mudong assigned his entire financial obligation with plaintiff to Etse in exchange for Etse's ownership, control and operation of the taxi service; Etse agreed to maintain the account on current status at all times and make monthly payments of $1,176.00; Etse agreed to accelerate loan payment on the amount of arrearages in the amount of $13,065.36 to have the loan account on current status within five months; and Etse never made any payments to plaintiff.

The Mudongs claim the above undisputed facts establish a breach of contract on the part of Etse. In the Agreement and Promissory Note, Etse agreed to make regularly payments to satisfy the outstanding balance. Etse, never making any payments, breached the Agreement and Promissory Note, and is therefore liable to the Mudongs for damages resulting from that breach.

On April 26, 1999, Etse filed his opposition to the Mudongs' motion for summary judgment on the third party complaint. Etse incorporated his memorandum in opposition to plaintiff's motion for summary judgment, and also filed a memorandum in opposition to the Mudongs' motion for summary judgment.

Etse's argument appears to be that the Agreement and Promissory Note was unconscionable as the Mudongs had already defaulted on their obligation to plaintiff and Etse was simply trying to help them out. Etse further argues that the agreement is without consideration because the taxi business had no assets. Etse also argues that performance of the Agreement and Promissory Note was impossible on its face and is therefore void. Etse lastly argues that since the Agreement and Promissory Note did not extinguish the Mudongs' liability to plaintiff on the promissory note, the assignment was merely additional security and Etse is not liable to the Mudongs.

All of Etse's arguments are without merit. They establish a failure of understanding of the law of contracts. The Mudongs and Etse entered into a legally binding agreement whereby Etse agreed and promised to make payments to plaintiff in exchange for purchasing the Mudong's taxi service. The fact that the taxi service was losing money does not excuse Etse from his responsibility. Nor does the fact that it might have been a bad investment. Whatever Etse's motivations for entering into the Agreement and Promissory Note were, the undisputed facts show that he clearly entered into the agreement and breached it by failing to make the required payments. This Court will grant the Mudongs' motion for summary judgment against Etse on the Mudongs' third party complaint.

(1) Plaintiff's motion for summary judgment against the Mudongs is granted. The Mudongs are ordered to pay all sums due within three months from the date of this Order. The Court further orders the Mudongs to relinquish possession of the chattel property (the two Mazda buses) to plaintiff within thirty (30) days of the date of this Order.