FSM SUPREME COURT APPELLATE DIVISION

Cite as Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390 (App. 2006)

[14 FSM Intrm. 390]

ROBERT C. ARTHUR, PATRICIA ARTHUR,

BETHWEL HENRY and MARIHNE HENRY,

Appellants,

vs.

FSM DEVELOPMENT BANK,

Appellee.

Civil Action No. 2001-007; APPEAL CASE NO. P6-2004

OPINION

Argued: May 5, 2006

Decided: September 14, 2006

BEFORE:

     Hon. Richard H. Benson, Senior Justice, FSM Supreme Court

     Hon. Keske S. Marar, Specially Assigned Justice, FSM Supreme Court*

     Hon. Aliksa B. Aliksa, Specially Assigned Justice, FSM Supreme Court**

              *Acting Chief Justice, Chuuk State Supreme Court

              **Acting Chief Justice (at time of argument), Kosrae State Court

APPEARANCES:

For the Appellants:   Douglas F. Cushnie, Esq.

                                   P.O. Box 500949

                                   Saipan,   MP   96950

For the Appellee:   Michael J. Sipos, Esq.

                                 P.O. Box 2069

                                 Kolonia, Pohnpei   FM   96941

* * * *

[14 FSM Intrm. 391]

HEAD NOTES

Appellate Review ) Standard of Review ) Civil Cases

    Whether a trial court erred in granting leave to amend a complaint is usually reviewed on an abuse of discretion standard, but when the decision is based on a legal conclusion, the review is de novo. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 394 (App. 2006).

Appellate Review ) Standard of Review ) Civil Cases

    When the trial court decided to grant leave to amend based on its determination that the interests of justice outweighed any prejudice that might accrue to the appellants if the amendment were allowed, this was not a legal conclusion by the trial court, but rather an exercise of its discretion and therefore the trial court’s decision will be reviewed on an abuse of discretion standard. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 394 (App. 2006).

Civil Procedure ) Pleadings ) Amendment

    Rule 15(a) states that leave to amend the complaint "shall be freely given when justice so requires." The purpose of the rule is to provide maximum opportunity for each claim to be decided on the merits rather than on procedural technicalities. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 394 (App. 2006).

Civil Procedure

    When an FSM Rule of Civil Procedure is nearly identical to a U.S. Federal Rule of Civil Procedure and the FSM Supreme Court has not previously construed the FSM Rule, the court may look to the U.S. federal practice for guidance in interpreting the rule. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 394 n.1 (App. 2006).

Civil Procedure ) Pleadings ) Amendment

    In the absence of any apparent or declared reason, such as undue delay, bad faith or dilatory motive on the movant’s part, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the amendment’s allowance, or futility of amendment, leave to amend should, as the rules require, be "freely given." This does not mean that a showing of undue delay, for example, means that a court should deny leave to amend. Prejudice to the opposing party, not the moving party’s diligence, is the crucial factor in determining whether or not to grant leave to amend the complaint. If the court is persuaded that no prejudice will accrue, the amendment should be allowed. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 395 (App. 2006).

Civil Procedure ) Pleadings ) Amendment

    Delay in seeking amendment is alone not sufficient to show bad faith when the movant’s delay in asserting a guaranty claim resulted from its own files being "difficult to locate" and the Federated Development Authority’s destruction or loss of records. While this explanation might not excuse a delay where there was some evidence of a motive to harass or of bad faith, it is sufficient here because no motive for the movant to delay was shown or appears. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 395 (App. 2006).

Civil Procedure ) Pleadings ) Amendment

    It is unlikely that a defendant will be prejudiced where the facts underlying a claim sought to be added are substantially similar to those underlying the original claim. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 395 (App. 2006).

Civil Procedure ) Pleadings ) Amendment

    Prejudice is not shown by a speculative argument concerning a denial of consolidation with

[14 FSM Intrm. 392]

another case when it is unclear how the state’s tort liability to another is a defense to the appellee’s contract claim against the appellants or how that tort liability would offset the appellee’s recovery since not consolidating the cases did not prevent the appellants from introducing into this case any relevant evidence relating to that case. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 395-96 (App. 2006).

Civil Procedure ) Discovery; Civil Procedure ) Pleadings ) Amendment

    When the defendants had eight months after he plaintiff filed its motion to amend to move to reopen discovery; when the parties stipulated to the facts necessary for the trial court to reach a decision on the promissory note and guaranty claims; and when the defendants admitted there was nothing to discover, the defendants cannot have been prejudiced by a lack of opportunity for discovery. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 396 (App. 2006).

Contracts ) Reformation

    The trial court did not err in finding a meeting of minds and no mutual mistake and that the mistake was in reducing the terms to writing when the facts suggest that the lender understood AHPW to liable on the loan and the parties stipulated that AHPW should have signed the promissory note and that the defendants intended to guarantee the loan. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 396 (App. 2006).

Contracts ) Reformation

    Reformation is available where there is an incorrect reduction of a term to a writing. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 397 (App. 2006).

Contracts ) Reformation

    The trial court did not err when it reformed the loan documentation to reflect the parties’ stipulated intent that AHPW be the obligor on the promissory note and that the appellants be guarantors of that obligation. As such, appellants were not guaranteeing their own obligation, they were guaranteeing AHPW’s obligation on the promissory note. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 397 (App. 2006).

Civil Procedure ) Notice

    When a default notice mailed by the to AHPW which had an incorrect box number and salutation but was received by an appellant and the information in the notice (AHPW’s name, the correct loan account number, the original loan amount, the agreed repayment amount, the amount in arrears, the number of days in arrears, and the date of the last payment) was sufficient to put him on notice that AHPW had defaulted on its loan, the trial court correctly found that AHPW had both actual and constructive notice of the default and that the guaranty itself did not require notice to the guarantors, but that they nevertheless had notice of the default in light of their positions as AHPW’s directors. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 397 (App. 2006).

Contracts ) Consideration

    To be enforceable, a guaranty, like other contracts, must be supported by consideration. However, if a guaranty is made as part of a transaction or arrangement which created the guaranteed debt or obligation, it is not essential to a recovery on the promise of guaranty that the promise shall have been supported by a consideration other than that of the principal debt. Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 397 (App. 2006).

* * * *

[14 FSM Intrm. 393]

COURT’S OPINION

RICHARD H. BENSON, Senior Justice:

    The Appellants appeal the judgment issued October 6, 2004 finding them liable on a guaranty and awarding the Appellee $507,496.62, and assign several errors. The Court finds no error and affirms the trial court.

    This is an appeal of an October 6, 2004 judgment which found Appellants liable to Appellee for $507,496.62 on a guaranty. It is undisputed that Appellants intended to make themselves personally liable to guaranty a loan made to their corporation, AHPW, that AHPW received the loan money, and that neither AHPW nor Appellants have repaid that loan money. Nevertheless, Appellants ask the Court to overturn the trial court’s judgment and excuse them from repaying the loan. For the reasons stated below, the Court affirms the trial court’s judgment.

I.   Background

    Appellants comprise the entire board of directors of AHPW, Inc., a corporation formed to process and market black pepper and to manufacture trochus shell buttons. In 1993 AHPW applied for a loan from the Federated Development Authority’s ("FDA") Investment Development Fund. A loan of $620,000 was approved. Under national law, Appellee, FSM Development Bank ("Bank") is charged with administering, documenting, and securing repayment of these loans. 30 F.S.M.C. 303(5). The loan amount was reduced by agreement of all parties to $455,000. Upon request of the borrower, only $408,881.75 was disbursed.

    The loan was documented with a promissory note signed by Appellants in their personal capacities. Appellants also signed a guaranty of the loan. The loan money was disbursed to AHPW.

    AHPW defaulted on the loan. On or about April 30, 1999 the Bank sent a demand letter addressed to AHPW, but having the salutation of "Mr. and Mrs. Inada." The envelope was addressed to AHPW but the postal box number was incorrect.  The demand letter contained the financial information associated with the AHPW loan. Appellant Robert Arthur, the principal officer of AHPW, received the demand letter on or about April 30, 1999.

    On March 12, 2001, the Bank filed suit against Appellants on the promissory note. The case was called for trial on December 17, 2003. On the morning of December 17, 2003, the Bank filed a motion to amend their complaint to conform to the evidence they intended to introduce at trial. The Bank wanted to introduce evidence of the guaranty signed by Appellants and to plead the guaranty as an alternate theory of recovery. Appellants opposed the motion. The parties agreed to stipulate to the facts and to submit briefs on the legal issues. The trial court accepted this and suspended the trial. Over the next eight months the parties submitted a detailed set of stipulated facts and briefed the legal effect of the promissory note and the guaranty, the propriety of reformation as a remedy, whether the court should strike evidence related to the guaranty, whether the court should allow the amendment of the complaint, and whether Appellants would be prejudiced by the amendment.

    On October 6, 2004, the trial court ruled that (1) evidence concerning the guaranty would not be stricken, (2) the writings memorializing the loan to AHPW were reformed to reflect that AHPW was the borrower and principal obligor, (3) the AHPW loan was in default and AHPW received the required notice which allowed the Bank to accelerate the debt, and (4) the guaranty signed by Appellants was valid and enforceable without making AHPW a party to the lawsuit. Judgment was entered against Appellants, jointly and severally, in the amount of $507,496.62 with interest accruing at 9% per year.

[14 FSM Intrm. 394]

II.   Issues

A.  Did the trial court abuse its discretion in granting Appellee’s motion to amend the complaint?

B.  Did the trial court err in not finding a mutual mistake of fact which would make the loan document voidable?

C.  Did the trial court err in finding that Appellants as guarantors were not guaranteeing their own obligation?

D.  Did the trial court err in finding sufficient notice of AHPW’s default to the Appellants as guarantors?

E.  Did the trial court err in finding that the guaranty was supported by consideration and therefore enforceable?

III.   Standard of Review

    Whether a trial court erred in granting leave to amend a complaint, is usually reviewed on an abuse of discretion standard, but when the decision is based on a legal conclusion, the review is de novo. Primo v. Pohnpei Transp. Auth., 9 FSM Intrm. 407, 411 (App. 2000). The trial court decided to grant leave to amend based on its determination that the interests of justice outweighed any prejudice that might accrue to Appellants if the amendment were allowed. This was not a legal conclusion by the trial court, but rather an exercise of its discretion and therefore the trial court’s decision will be reviewed on an abuse of discretion standard.

IV.   Discussion

A.   Did the trial court abuse its discretion in granting Appellee’s motion to amend the complaint?

    Appellants contend that the Bank’s motion for leave to amend its complaint should have been denied based on the Bank’s alleged undue delay, bad faith, dilatory motive, and the resulting prejudice to Appellants.

    In briefs and during oral argument, Appellants repeatedly call the court’s attention to the fact that during approximately three years of litigation they told the Bank that the complaint on the promissory note should be directed at AHPW and not Appellants. The Bank did nothing to pursue Appellants as guarantors until the day of trial when it sought leave amend its complaint under Rule 15(a) to add a cause of action on the guaranty and to request reformation of the promissory note. Appellants argue that 1) this delay is evidence of bad faith and dilatory motive by the Bank, 2) undue delay alone is sufficient grounds to deny the motion, and 3) Appellants were prejudiced.

    Rule 15(a) of the FSM Rules of Civil Procedure states that leave to amend the complaint "shall be freely given when justice so requires." The purpose of the rule "is to provide maximum opportunity for each claim to be decided on the merits rather than on procedural technicalities." 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1471 (2d ed. 1990); see also Foman v. Davis 371 U.S. 178, 182, 83 S. Ct. 227, 230, 9 L. Ed. 2d 222, 225-26 (1962).

[14 FSM Intrm. 395]

In the absence of any apparent or declared reason, such as undue delay, bad faith or dilatory motive on the movant’s part, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the amendment’s allowance, or futility of amendment, leave to amend should, as the rules require, be "freely given." Primo, 9 FSM Intrm. at 413. This does not mean that a showing of undue delay, for example, means that a court should deny leave to amend. Prejudice to the opposing party, not the diligence of the moving party, is the crucial factor in determining whether or not to grant leave to amend the complaint. See Smith v. Costa Lines, Inc., 97 F.R.D. 451, 453 (N.D. Cal. 1983). "[I]f the court is persuaded that no prejudice will accrue, the amendment should be allowed." 6 Wright, Miller & Kane, supra, § 1487; see also Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir. 1980), cert. dismissed, 448 U.S. 911 (delay without resulting prejudice or obvious design to harass the opponent is insufficient to justify a denial of leave to amend).

    Appellants contend that the Bank’s delay in seeking the amendment is alone sufficient to show bad faith. We think it reasonable for the trial court to conclude otherwise. The Bank’s motion to amend the complaint explained that the delay in asserting the guaranty claim resulted from its own files being "difficult to locate" and the Federated Development Authority’s destruction or loss of records. While this explanation might not excuse a delay where there was some evidence of a motive to harass or of bad faith, it is sufficient here. In this case, no motive for the Bank to delay was shown or appears.

    As for prejudice, we start with the premise that is unlikely that a defendant will be prejudiced where the facts underlying a claim sought to be added are substantially similar to those underlying the original claim. See, e.g., Buder v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 644 F.2d 690, 694 (8th Cir. 1981). In Buder, for instance, the trial court was found to have abused its discretion in denying leave to amend the complaint to allege a new cause of action on substantially similar underlying facts, when no significant prejudice resulted from the two and a half year delay between the filing of the complaint and the request for leave to amend. Id.

    In this case, not only were the facts underlying the guaranty claim substantially similar to the promissory note claim, nearly all the facts necessary to make a determination on each were stipulated to by the parties. Additionally, Appellants had eight months of briefing to raise a defense to the guaranty.

    Nevertheless, Appellants claim that they were prejudiced by the amendment. First, that the Bank’s failure to seek the amendment sooner resulted in the denial of a motion to consolidate the case with a then-pending case, Civil Action 1998-053, in which AHPW was suing the FSM and the State of Pohnpei for the destruction of AHPW’s business. On July 5, 2001, the trial court denied the motion to consolidate because the two cases did not involve common questions of law or fact. [FSM Dev. Bank v. Arthur, 10 FSM Intrm. 293 (Pon. 2001).] The trial court in Civil Action 1998-053 has since found in favor of AHPW and against the State of Pohnpei. Appellants allege that facts in that case which showed the Bank’s complicity in the governments’ destruction of the business might have affected recovery against the Bank in this case. There are several problems with this argument. The argument is speculative. Also, it is unclear how the tort liability of the State of Pohnpei to AHPW is a defense to the Bank’s contract claim against Appellants or how that tort liability would offset the Bank’s recovery. Finally, the fact that the trial court did not consolidate this case with AHPW’s case

[14 FSM Intrm. 396]

did not prevent Appellants from introducing into this case any relevant evidence relating to that case. The denial of the motion to consolidate did not prejudice Appellants.

    Second, Appellants argue that they were prejudiced by the lack of opportunity to conduct discovery on the guaranty claim because the claim was first raised by the Bank on the day of trial. There are problems with this argument as well. Appellants had eight months after the Bank filed its motion to amend to file a motion to reopen discovery. Appellants did not do so. Also, the likely reason that Appellants did not do so is that they did not need discovery on the guaranty. At oral argument, Appellants’ attorney admitted as much. When asked whether Appellants attempted to discover information during the eight months of briefing, Appellants’ counsel answered that they did not and asked rhetorically, "Besides, what were we going to discover?" In fact, the parties stipulated to the facts necessary for the trial court to reach a decision on the promissory note and guaranty claims. As there was nothing to discover, Appellants cannot have been prejudiced by a lack of opportunity for discovery.

    As there was no apparent bad faith or dilatory motive on the part of the Bank in failing to amend its complaint earlier and as no prejudice accrued to Appellants from the amendment, the trial court did not abuse its discretion in allowing the Bank to amend its complaint.

B.   Did the trial court err in not finding a mutual mistake of fact which would make the loan documents voidable?

    The Appellant argues that there was a mutual mistake of fact which made the promissory note and the guaranty voidable. They contend that there was no meeting of the minds between Appellants and the Bank as to who would be liable on the promissory note and the guaranty. Appellants state that they understood that AHPW was party to the promissory note and that they would be liable on the guaranty, but that the Bank understood that Appellants were party to the promissory note and would be liable on the guaranty. In support of this contention they point to two facts; 1) that the promissory note lists Appellants individually as the borrowers, and 2) that the Bank sued Appellants individually on the promissory note and did not quickly amend their complaint once the error was brought to the Bank’s attention.

    These facts, however, are not inconsistent with the trial court’s determination that there was a meeting of the minds and that the mistake was merely in reducing the terms to writing. Appellants also ignore the facts that suggest that the Bank understood AHPW to be liable on the promissory note. FDA approved the loan to AHPW. The loan funds were disbursed to AHPW and the Bank sought repayment from AHPW. Indeed, in a brief filed with the trial court on July 23, 2004, the Appellants state, "The entire history of the loan administration shows that FSMDB thought it obligated AHPW, right down to the default notice of April 30, 1999." Defendants’ Opening Brief at 5. Finally, the fact that the parties stipulated that the promissory note should have been signed by AHPW in its corporate capacity and that Appellants intended to guarantee the loan is fatal to Appellants contention that the trial court erred by not finding a mutual mistake of fact.

C.   Did the trial court err in finding that Appellants as guarantors were not guaranteeing their own obligation?

    Appellants’ argument is that before the trial court reformed the promissory note, the Appellants were guarantors of their own obligation on the promissory note. This is just another way of arguing that the reformation was improper.

    The trial court did not err in finding that the naming Appellants as obligors on the promissory

[14 FSM Intrm. 397]

note was a scrivener’s error. Reformation is available where there is an incorrect reduction of a term to a writing. Mills v. Schulba, 213 P.2d 408 (Cal. Dist. Ct. App. 1950); Curry v. Curry, 473 S.E.2d 760 (Ga. 1996); Sams v. Goff, 540 S.E.2d 532 (W. Va. 1999); E. Allan Farnsworth, Contracts § 7.5, at 468 (1982). The trial court reformed the loan documentation to reflect the stipulated intent of the parties: that AHPW be the obligor on the promissory note and that the Appellants be guarantors of that obligation. As such, Appellants were not guaranteeing their own obligation, they were guaranteeing AHPW’s obligation on the promissory note.

D.   Did the trial court err in finding sufficient notice of AHPW’s default to the Appellants as guarantors?

    As explained above, the default notice mailed by the Bank to AHPW had an incorrect box number and salutation. Nevertheless, the notice was received by Appellant Robert Arthur and the information in the notice (AHPW’s name, the correct loan account number, the original loan amount, the agreed repayment amount, the amount in arrears, the number of days in arrears, and the date of the last payment) was sufficient to put him on notice that AHPW had defaulted on its loan.

    The trial court correctly found that AHPW had both actual and constructive notice of the default. The trial court also found that the guaranty itself did not require notice to the guarantors, but that they nevertheless had notice of the default. The court relied on the theory advanced by a Missouri court to find that Appellants had constructive notice. Lemay Bank & Trust Co. v. Harper, 810 S.W.2d 690, 693 (Mo. Ct. App. 1991). In Lemay, the guarantors were the sole directors of the corporation whose obligation they guaranteed. In light of their positions as directors they were found to have constructive notice of the corporation’s default. Moreover, the trial court’s reliance on Lemay is in accord with FSM precedent. See Nahnken of Nett v. Pohnpei, 7 FSM Intrm. 171, 177 n.11 (Pon. 1995) (a party has constructive notice where the facts and circumstances known to him would prompt a reasonable person to acquire knowledge of the fact in question or to infer its existence).

    Appellants contend that the trial court’s reliance on Lemay was misplaced as the guaranty in that case specifically waived notice of default whereas the guaranty in this case did not. The court’s finding in Lemay did not rely on the fact that the guaranty specifically waived notice. Instead, the waiver was an alternate basis for finding the guaranty enforceable without explicit notice to the guarantors.

     Additionally, Appellants have not cited to any authority suggesting that notice to the guarantors was required.

     The trial court did not err in finding sufficient notice of default to the Appellants as guarantors.

E.   Did the trial court err in finding that the guaranty was supported by consideration and therefore enforceable?

    To be enforceable, a guaranty, like other contracts, must be supported by consideration. Good v. Martin, 95 U.S. 90, 93, 24 L. Ed. 341, 342 (1877); 38 Am. Jur. 2d Guaranty § 42, at 1045 (1968). However, if a guaranty is made "as part of a transaction or arrangement which created the guaranteed debt or obligation, it is not essential to a recovery on the promise of guaranty that the promise shall have been supported by a consideration other than that of the principal debt . . . ." 38 Am. Jur. 2d Guaranty § 44, at 1047 (1968); see also Good, 95 U.S. at 93, 24 L. Ed. at 342 (where a guaranty is made at the same time as the note, the guaranty is presumed to have been made for the same consideration as the note). The trial court found that the guaranty was made as part of the same transaction by which AHPW’s debt to the bank was created and that therefore the consideration that supported the promissory note also supported the guaranty.

[14 FSM Intrm. 398]

    Appellants do not dispute that the promissory note and the guaranty were part of the same transaction. Nor do they dispute that there was consideration for the principal transaction. Appellants again contend, however, that the trial court should not have reformed the promissory note and that without reformation Appellants were guaranteeing their own obligation under the promissory note.

    We have already found that the trial court’s reformation of the promissory note was not in error. We now find that the trial court’s determinations that the guaranty was supported by the same consideration as the promissory note and that that consideration was sufficient were not in error.

V.   Conclusion

    For the foregoing reasons, the judgment of the trial court is affirmed in its entirety.

___________________________________

Footnotes:

1.   When an FSM Rule of Civil Procedure is nearly identical to a U.S. Federal Rule of Civil Procedure and the FSM Supreme Court has not previously construed the FSM Rule, the court may look to the U.S. federal practice for guidance in interpreting the rule. Senda v. Mid-Pacific Constr. Co., 6 FSM Intrm. 440, 444 (App. 1994); Jano v. King, 5 FSM Intrm. 326, 329 (App. 1992); Andohn v. FSM, 1 FSM Intrm. 433, 441 (App. 1984).

* * * *