FSM SUPREME COURT TRIAL DIVISION

Cite as Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423 (Pon. 2009)

[16 FSM Intrm 423]

INDIVIDUAL ASSURANCE CO., 

PLAINTIFF

vs.

WILLIAM IRIARTE, LILLY-JEAN IRIARTE,EMMY SANTOS, and AMBROS & CO., 

DEFENDANT

CIVIL ACTION NO. 2003-023

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Andon L. Amaraich

Chief Justice

Trial: March 10-13, 16-20, 23, 2009

Decided: May 27, 2009

APPEARANCES:

For the Plaintiff:         Fredrick L. Ramp, Esq.

                                  Kasio Mida, Jr., Esq.

                                  Law Office of Fredrick L. Ramp

                                  P.O. Box 1480

                                  Kolonia, Pohnpei FM 96941
 

For the Defendants:  Mary Berman, Esq.

 (the Iriartes)              P.O. Box 163

                                  Kolonia, Pohnpei FM 96941
 

For the Defendant:    Marstella Jack, Esq.

   (Santos)                  P.O. Box 2210

                                   Kolonia, Pohnpei FM 96941
 

For the Defendant:     Stephen V. Finnen, Esq.

 (Ambros & Co.)         P.O. Box 1450

                                   Kolonia, Pohnpei FM 96941

                                      

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HEADNOTES

Agency

    When a contract expressly provides that a party is responsible to the other party for its employees acts, the party is contractually liable to the other for its employee actions.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 437 (Pon. 2009).

[16 FSM Intrm 424]

Agency

    A principal is liable for the acts of his or her agent when acting under the principal authority within the scope of the agent employment. Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 437 (Pon. 2009).

Contracts – Breach; Insurance

    When an insurance agent contract with the insurer contains language regarding the agent duty to make certain that the premium checks were sent to the insurer, the agent is liable to the insurer for breach of contract when the agent failed to fulfill the contractual obligation to send the premium checks to the insurer office in Kansas City.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 437-38 (Pon. 2009).

Torts – Conversion

    The elements of a conversion cause of action are:  1) the plaintiffs ownership and right to possession of the personal property in question; 2) the defendant unauthorized or wrongful act of dominion over the property that is hostile or inconsistent with the right of the owner; and 3) damages resulting from such action.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438(Pon. 2009).

Torts – Conversion

    Insurance agents took action inconsistent with and hostile to the insurers ownership of premium checks when they cashed, or authorized the cashing of, the checks.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438 (Pon. 2009).

Agency

    Employers are responsible for the actions of their employee under the law of agency, which binds the principal for the acts of the agent. Individual Assurance Co. v. Iriarte , 16 FSM Intrm. 423, 438 (Pon. 2009).

Agency; Torts – Conversion; Torts – Damages; Torts – Respondeat Superior

    An employee is herself jointly and severally liable with her employers for the checks she converted by cashing them while she was their employee because, under the doctrine of respondeat superior, an agent act within the scope of his or her agency is the act of the principal, and the result is that both the principal and the agent are jointly and severally liable to the person injured by the wrongful act.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438 (Pon. 2009).

Common Law

    When prior FSM cases have not addressed a precise point, the court, in such instances, may look to authorities from other jurisdictions in the common law tradition. Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438 n.3 (Pon. 2009).

Agency; Torts

    An agent is not relieved from responsibility for tortious conduct merely because he acted at the request, or even at the command or direction, of the principal.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438 (Pon. 2009).

Agency; Employer – Employee; Torts – Breach of Fiduciary Duty

    An employee or agent is liable to a third person for injuries resulting from the breach of any duty which the employee or agent owes directly to such third person, and is not liable to a third person for injuries resulting from a breach of duty which the employee or agent owes only or solely to his employer.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 438-39 (Pon. 2009).

[16 FSM Intrm 425]

Agency; Torts – Conversion

    Even as an insurance agency’s employee, the employee had a duty not to cash premium checks without first confirming with the insurer that she had the authority to cash the checks.  By failing to do so, the employee intentionally deprived the insurer of its property, and is thus liable for the conversion of the checks that she cashed while she was an the agency’s employee.  The employers and the employee are jointly and severally liable for the checks that the employee cashed during the time that the employers were acting as the insurer’s general agents.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 439 (Pon. 2009).

Evidence – Witnesses

    A court cannot assess the credibility of parties, whose deposition testimony was admitted but who declined to appear at trial, because in order to make this assessment the court must carefully observe the witness’s tone, hesitations, inflections, mannerisms, and general demeanor.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 439 (Pon. 2009).

Torts – Conversion

    "Forgery" is a signature of a person that is made without the person’s consent and without the person otherwise authorizing it. Signing another’s signature with authorization is not forgery.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 440 (Pon. 2009).

Torts – Conversion

    When acheck is made out to a corporate payee; when the corporate payee’s name was endorsed on the reverse side; when the defendant failed to take any steps to determine whether the endorsement was genuine and whether the purported " agent" seeking to cash the checks was authorized by the corporation to do so, the trust placed in the customer was misplaced.  In cashing the checks without first verifying the authority of the one seeking to cash the checks, the defendant cashed the checks at its own peril and by depositing the checks into its bank account and receiving credits for those checks, the defendant exercised dominion and control over the checks and was therefore liable for conversion.  The good faith of the one cashing the check does not enter into the picture.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 440 (Pon. 2009).

Banks and Banking; Torts – Conversion

    It is a corporation’s usual practice to deposit checks payable to it in a bank account  Given this consideration, when a person is asked to cash a check bearing a corporate endorsement he is put on his guard and should verify that the endorsement is authentic, and should take the necessary steps to make certain that the person attempting to cash the check is authorized to do so by the payee corporation. Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 440 (Pon. 2009).

Torts – Conversion

    An actor may be liable for conversion when he has in fact exercised dominion or control and the actor’s intention, good or bad faith, and his knowledge or mistake are immaterial.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441 (Pon. 2009).

Agency; Torts – Breach of Fiduciary Duty

    By definition, the relationship between an agent and principal is a fiduciary one.  Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441 (Pon. 2009).

Agency

    An agent is a fiduciary with respect to the matters within the scope of his agency. The very

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relationship implies that the principal has reposed some trust or confidence in the agent, and the agent or employee is bound to the exercise of the utmost good faith, loyalty, and honesty toward his principal.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441 (Pon. 2009).

Insurance; Torts – Breach of Fiduciary Duty

    Since insurance agents are required to exercise the utmost good faith, loyalty, and honesty toward the insurer during the times that they acted as the insurer’s agents, by cashing the premium checks, and thereby failing to send the checks on to the insurer, they breached this duty.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441 (Pon. 2009).

Contracts – Damages; Torts – Damages – Punitive

    Punitive damages are derivative, in the sense that they derive from and depend on a separate and independent cause of action.  They may be awarded when the acts complained of are wanton, reckless, malicious, and oppressive, but punitive damages are not awardable for breach of contract, since only compensatory damages are allowed in contract cases.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441 (Pon. 2009).

Torrs – Conversion; Torts – Damages – Punitive

    Punitive damages may be recovered for conversion when the defendant’s acts were accompanied by fraud, malice, recklessness, oppressiveness, or willful disregard of the plaintiff’s rights that aggravated the injury or loss inflicted by the defendant.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 441-42 (Pon. 2009).

Torts – Conversion; Torts – Damage – Punitive

    Although conversion by its nature involves wrongful acts that are hostile to an owner’s interest in property, and although the defendants’actions in cashing premium checks were wrongful and showed a disregard of the plaintiff’s property rights, that disregard was not sufficient to impose punitive damages because, when the checks were converted, they were converted in material part in the course of the agents’ efforts to expedite services to the insurer’s policy holders  Nor will the court award punitive damages against the business cashing the checks because, while the business’s actions in cashing the checks was wrongful, its employees relied in good faith on the insurance agents’ representations that they were authorized to cash the checks.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 442 (Pon. 2009).

Torts – Fraud

    The elements of a cause of action for fraudulent misrepresentation are: 1) misrepresentations 2) made to induce action by the plaintiff 3) with reliance by the plaintiffs upon the misrepresentation 4) to their detriment.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 442 (Pon. 2009).

Torts – Fraud

    An assurance that things were "going smooth most of the time" is a type of generalized opinion that is not the sort of specific representation on which a hearer may reasonably rely.  Reliance must be reasonable.  Even when a fiduciary relationship existed between the parties, the parties to such a relationship may certainly communicate at times on a superficial, conventional level where the statements made do not give rise to reasonable reliance that could be the basis for a fraudulent misrepresentation cause of action.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 442-43 (Pon. 2009).

Contracts – Ratification

    Ratification is the approval of an otherwise unauthorized act or transaction.  An implied ratification may take place if one, with full knowledge and understanding of the material facts, exhibits

[16 FSM Intrm 427]

conduct that shows a recognition and adoption of the unauthorized act or transactions.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 443 (Pon. 2009).

Torts – Conversion

    Conversion is the civil equivalent of theft.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 443 (Pon. 2009).

Insurance; Torts – Conversion; Torts – Duty of Care

    An insurer has no duty to its agents to undertake an investigation for the agents’ benefit in order to stop the agents from converting the insurer’s property.  When the insurer’s property was converted by the agents’intentional actions, the agents cannot argue that the insurer should have known that they were converting stealing the insurer’s property, and that since the insurer should have stopped them but did not stop them from doing what they had no right to do, the agents should not have to pay back what they took.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 443 (Pon. 2009).

Contracts – Ratification; Insurance

    The insurer ratified, or approved, the check cashing activities of its agents to the extent that they distributed the money obtained from the checks to policy holders for legitimate insurance purposes, and that the insurer gave credit to its agents for these distributions shows this conclusively.  But the insurer never ratified the agents’ conversion of the funds that were not accounted for, or were not used for insurance purposes since the insurer’s efforts to figure out what had happened, to stop it from happening, to arrive at an accounting for the missing money, and to restore order to its Pohnpei operation, manifest its disapproval of the practice of cashing premium checks initiated and continued by its agents.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 444 (Pon. 2009).

Torts – Comparative Negligence; Torts – Contributory Negligence; Torts – Conversion

    Neither contributory negligence nor comparative negligence is a defense to a conversion action.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 444-45 & n.5 (Pon. 2009).

Torts – Conversion

    A defendant cannot turn the tables on a plaintiff and conclude that the plaintiff was negligent for failing to detect and prevent the conversion earlier than it did.  Such a rule, which the court will not adopt, would serve to blame the tort victim.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 445 (Pon. 2009).

Contracts – Damages – Mitigation of; Torts *#8211; Damages – Mitigation of

    That a plaintiff has a duty to mitigate his damages is clear.  He must take reasonable steps to minimize those damages.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 445 (Pon. 2009).

Torts – Conversion; Torts – Damages – Mitigation of

    A business that was presented, over a period of approximately three-and-a-half years, with checks amounting to over $400,000 that were made payable to a corporate payee, but that cashed the checks at the request of the individual cashing those checks without ever making any efforts to obtain independent confirmation that the individual presenting the check had the corporate payee’s authority to do so, cannot rely on defenses of mitigation of damages or apparent authority or good faith commercial standards since the business had a duty to determine whether the individuals had the authority to cash the checks.  The business cannot be said to have used good faith commercial business standards.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 445 (Pon. 2009).

Statutes of Limitation

    The court will not apply the three year statute of limitations found in the Uniform Commercial

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Code without a showing that this statute of limitations has been enacted into law in this jurisdiction.  The court is at a loss as to what authority would permit it to do this.  It cannot legislate.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 445 (Pon. 2009).

Torts; – Breach of Fiduciary Duty; Torts – Conversion

    A defense that the plaintiff should have made a claim against its errors and omissions policy is without merit even if such a policy existed, because the contract expressly addresses what happens.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 445 (Pon. 2009).

Contracts – Damages; Torts – Breach of Fiduciary Duty; Torts – Damages

    Damages for an insurer’s claim for breach of fiduciary duty are the same as those for its contract claim, since the breach of fiduciary duty claim is also based on the breach of the agency contracts that the insurer had with its agents.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 446 (Pon. 2009).

Agency; Torts – Damages; Torts – Respondeat Superior

    Both principal and agent are jointly and severally liable for the torts that the agent commits in the course and scope of the work performed for the principal.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 446 (Pon. 2009).

Evidence – Burden of Proof; Torts – Conversion; Torts – Damages

    When there is no way of determining what portion of an amount deposited into a bank account was also converted by another defendant and since the plaintiff has the burden of proof, that other defendant will receive the benefit of the doubt created by this question and will not be held liable for the deposited sums.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 447 (Pon. 2009).

Torts – Conversion; Torts – Damages

    One whose property is converted is entitled to recover interest at the legal rate from the time the property is converted.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 448 (Pon. 2009).

Attorney’s Fees – Court-Awarded; Torts – Breach of Fiduciary Duty

    Generally, a party bears its own attorney’s fees, and this rule is the proper foundation upon which the system in the FSM should be built.  An exception to this general rule is that attorney’s fees have been awarded for a breach of fiduciary duty.  Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 449 (Pon. 2009).

Attorney’s Fees – Court-Awarded; Torts – Conversion

    Attorney’s fees will not be awarded to the plaintiff insurer when the conversion arose as part of the insurer’s agents’ efforts to address customer concerns about the time it took for policy holders to receive their checks for loans taken out on their policies or for their policies’ partial or full surrender value when a substantial amount of the cash obtained from the premium checks was distributed to policy holders and when, once the problem was identified, the current agent was cooperative in helping the insurer determine what sums were missing.  Nor will attorney’s fees be awarded against the business that cashed the checks, since it acted in reliance on the insurer’ style='font-size:10.0pt's agents’ representations when its employees cashed the checks. Individual Assurance Co. v. Iriarte, 16 FSM Intrm. 423, 449 (Pon. 2009).

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COURT’S OPINION

ANDON L. AMARAICH, Chief Justice:

    This case involves a dispute between the plaintiff Individual Assurance Co. ("IAC"), an insurance company based in Kansas City, Missouri, in the United States, and their general agents in Pohnpei, the defendants William and Lilly-Jean Iriarte and (later) Emmy Santos.  Beginning in 1999, and continuing until May of 2003, IAC’s agents in Pohnpei received premium checks totaling more than four hundred thousand dollars that were made payable to IAC.  Instead of being forwarded to IAC’s offices in Kansas City as they should have been, many of the checks were cashed in Pohnpei, principally by defendant Emmy Santos who cashed the checks at a store operated by the defendant Ambros & Co.  Some of the money received from cashing the checks was distributed to IAC’s life insurance policy holders in Pohnpei forpurposes approved by IAC.  A substantial part of the cash is unaccounted for. IAC brought this lawsuit to recover the money that is unaccounted for, and for the money that is accounted for, but that IAC determined was not used for an IAC approved purpose.

    Trial began on March 10, 2009, and concluded on March 23, 2009.  Fred Ramp represented IAC.  The defendants William and Lilly-Jean Iriarte were not present at the trial, and did not testify.  However, they were represented at trial by their attorney Mary Berman.  Defendant Emmy Santos appeared and testified extensively at trial, and was represented by Marstella Jack.  Defendant Ambros & Co. was represented by Steve Finnen.

    As set forth herein, the defendants William and Lilly-Jean Iriarte are liable to IAC in the amount of $200,405.82.  Of this amount, $8,300.00 will accrue interest at the statutory rate of nine percent per annum beginning October 29, 1999, until the judgment is paid.  The remaining portion of $192,105.82 ($200,405.82 – $8,300.00) will accrue interest at the statutory rate from May 1, 2001, until paid.

    The defendant Emmy Santos is liable to IAC in the amount of $169,666.19.  Of this amount, $8,300.00 will accrue interest at the statutory rate from October 29, 1999, until paid.  The remaining portion of $161,366.19 ($169,666.19 – $8,300.00) will accrue interest at the statutory rate from May 1, 2001, until paid.  Emmy Santos is liable to IAC for the additional amount of $125,834.49, with interest to accrue at the statutory rate from July 1, 2003, until the judgment is paid.  Thus the total principal amount of the defendant Emmy Santos’s liability is $295,500.68 ($8,300.00 + $161,366.19 + $125,834.49).

    The defendant Ambros and Co. is liable to IAC in the amount of $287,200.68, with interest to accrue until paid at the statutory rate of nine percent per annum from May 1, 2001, on $161,366.19, and from July 1, 2003, on the remaining $125,834.49.

    The defendants’ liability is joint and several to the extent set out below.  IAC’s total recovery is $326,240.31.  No defendant is liable for the entire amount since the defendants are liable for different parts of IAC’s claim.

    No defendant is liable for punitive damages or for IAC’s attorney’s fees.  Pursuant to FSM Civil Rule 54(d), IAC is awarded its costs.

    Based on the evidence presented, and for the reasons set forth below, the court makes the following findings of fact and conclusions of law pursuant to FSM Civil Rule 52(a).

[16 FSM Intrm 430]

I. Findings of Fact

    1.  IAC’s main office is located in Kansas City, Missouri, in the United States, but it sells various types of life insurance policies throughout the Pacific, including the Federated States of Micronesia, the Marshalls, Guam, and Saipan.  In the FSM, its policies are divided into two main categories called Universal Life ("UL") and Group Life.  The disposition of the premiums that IAC’s insureds paid for the UL policies are the subject of this case.

    2.  The defendants William and Lilly-Jean Iriarte1 became IAC’s agents in Pohnpei starting in 1995 when William signed a General Agent Contract.  The contract recites an effective date of January 1, 1995, and further recites that the contract is between IAC and both Lilly and William Iriarte.  William signed the general agency contract on February 28, 1995, for himself and on Lilly’s behalf.  The Iriartes were IAC’s general agents until they moved to Saipan in April of 2001.  At that time, IAC terminated the Iriartes' contract, and the defendant Emmy Santos took over as IAC's Pohnpei agent.

    3.  Section IV of the Iriartes’ general agency contract with IAC provides in part that

    You shall be responsible to Us for the acts of the Agents and Brokers assigned to or appointed by You or Your employees and shall indemnify and hold Us harmless from any and all expenses, cost, causes of action,
    and/or damages resulting from or growing out of any unauthorized act by You or any of them.

Section VIII of the Iriartes’agency contract with IAC provides in part that

   You are not authorized to accept any premium for Us except the first policy premiums, unless We have executed a separate Administrative Agreement with You.  If no such agreement has been executed, receipts for
    premiums must be on the forms furnished for that purpose.  You shall immediately remit to Us, all money received or collected on Our behalf, and such money shall be considered as Our funds held in trust by You.

    4. Beginning in 1997, when she returned to Pohnpei from Guam, Emmy worked as a retail manager for the defendant Ambros & Co. ("Ambros"), a business owned by her stepfather Ambros Senda.  In early 1998 she started working for the Iriartes in their business, known as FSM Insurance Group ("FSMIG"), which offered its own insurance policies, called MicroLife, in addition to IAC policies.

    5. When Emmy became IAC’s general agent, she signed a contract with IAC that was identical to the Iriarte’ contract.  Emmy’s contract was dated May 1, 2001, and signed on May 28, 2001.  Emmy was terminated as IAC’s agent in July of 2003.

    6. Under their identical contracts with IAC, the Iriartes and Emmy were only authorized to handle the first premium received for an insurance policy.  IAC’s agent accepted the premium along with the application form when a new potential insured came into IAC’s office to fill out an application for the UL policy coverage.  IAC did not enter into a separate Administrative Agreement, referred to in the contract, with the Iriartes or Emmy authorizing them to handle any premiums received from an individual insured under a UL policy after the first premium.  Nevertheless, where no Administrative Agreement is entered into, the contract requires that IAC’s agent immediately remit to IAC all money received on IAC’s behalf.

[16 FSM Intrm 431]

    7.  The usual UL insured was an employee of one of four entities on Pohnpei: the Pohnpei state government; the College of Micronesia – FSM; FSM Telecom; or the FSM national government. After the insured enrolled in the UL program, he or she would usually execute an allotment form, and thereby authorize his or her Employer to deduct the amount of the biweekly premium from his or her paycheck.  Each Employer would then take all of the premiums authorized by allotment and combine them into one premium check payable to IAC.

    8. The allotment procedure was also used by employees of the four employers who had FSMIG’s MicroLife policies.  On occasion, an allotment that should have been credited to an FSMIG policy was mistakenly included in an IAC UL premium check from one of the four employers.

    9. When a premium check for any given pay period was ready, the Employer would call IAC’s Pohnpei agent, who would then come and pick up the check.  Each check was accompanied by a list that showed the insured’s name and the amount of the premium deducted for that pay period from the employee’s pay to be credited to the insured’s policy account.  The list of employees and the amounts deducted to pay the premium was known as the payroll register. After IAC’s agent collected the check and payroll register, the agent was supposed to send both to IAC’s Kansas City office along with a transmittal letter.  IAC would then credit each insured’s account with the premium payment.

    10. IAC sent an annual report to each insured that showed the status of the account and the premiums that had been paid.  If an insured’s coverage began in May, then a year later – this was known as the insured’s "monthiversary" – IAC would send the insured a report.  The only mechanism in place at relevant times to alert IAC that its Kansas City office was not receiving premiums was complaints by an insured.

    11.  Typically a premium check cut by the College of Micronesia showed the payee as "IAC Universal Life Insurance."  The premium checks cut by the other three entities provided more information about the payee.  The Pohnpei state government showed the payee on its premium checks as "INDIVIDUAL ASSURANCE CO./ATTN: PREMIUM ACCOUNTING/1600 OAK STREET/KANSAS CITY, MISSOURI 64108."  The FSM Telecom checks showed the payee as "IAC UNIVERSAL LIFE/ATTN: PREMIUM ACCOUNTING/1600 OAK STREET/KANSAS CITY, MISSOURI."  The FSM government checks showed the payee as "INDIVIDUAL ASSURANCE CO" and then showed differing information after that, some showing an address in Hawaii, and others showing different addresses in Kansas City.

    12. Despite the provision in the general agency contract that IAC’s agent was not authorized to handle any premium money beyond the first premium, receipt of premiums by IAC’s agent was the routine practice from 1995 until late 1999.  During this time, the premium checks were picked up from the four employers; forwarded to IAC’s office in Kansas City; and credited to the insureds’ accounts.  However, starting in late 1999 and continuing until May of 2003, the Iriartes and Emmy received premium checks but did not forward many of them on to IAC’s office in Missouri for credit to the insureds’ UL policy accounts.

    13.UL policies are whole life policies.  This means that if the insured individual dies, a death benefit is paid to the named beneficiary or beneficiaries.  But a whole life policy also acts as a savings account.  The premium covers more than the cost of providing the insured with the death benefit.  This extra amount accumulates in the policy over time, and interest is paid on this accumulated value.  After the accumulated value reaches a certain amount, the insured may take a loan against the accumulated value, make a permanent withdrawal of the accumulated value so that his policy will ultimately have a reduced value, or terminate the policy and obtain the surrender value.

    14. The IAC approved method for a policy holder to obtain money from his policy was to come

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into IAC’s agent’s office in Kolonia in Pohnpei and fill out a request for service form.  IAC’s agent would send the form to IAC’s home office in Kansas City for processing.  IAC would review its records, and if there was sufficient accumulated value to support the request for a loan on the policy, or partial or full surrender of the policy value (the parties seemed to refer to these collectively at trial as "cash advances"), IAC would issue a check and send it to the policy holder.  If IAC did not have an address for the policy holder, then IAC would send the check to IAC’s agents office in Pohnpei, and the policy holder would pick up the check there.

    15.  The problem with this procedure from the policy holder’s standpoint was the amount of time it took.  Frequently the policy holder needed money for an emergency reason, such as a funeral.  To expedite this process, IAC’s agent would assist by faxing the request and also checking accumulated value by e-mail, but it could take two or three weeks before the policy holder had his check.  If the request were expedited, the policy holder might receive the check in less than two weeks.

    16.  To address the delay caused by this procedure, IAC’s agents, without informing IAC or obtaining its approval, devised an alternative method for paying cash advances to the UL policy holders.  This alternative way of getting money to the UL policy holders relied for its success on the way that the UL premium checks were collected from the four employers.

    17.  Starting in late 1999, IAC’s agents (first Lilly, and later Emmy) continued to pick up the premium checks, but instead of sending them on to Kansas City, cashed many of the checks (typically in the range of $3000 to $4000 for Pohnpei state government; $2000 to $3000 for the FSM national government; $800 to $900 for COM; and $400 to $500 for FSM Telecom) in Pohnpei.  Some of the currency thus received was distributed to IAC’s insureds, who would come to IAC’s office in Kolonia requesting the money that was available to them under the terms of their policies, while some of the money received through cashing the checks remains unaccounted for.  Most of these checks were cashed by the defendant Emmy Santos, who acted initially at the direction of Lilly Iriarte.

    18. Shortly after she had started working for the Iriartes, Emmy became their office manager, and William and Lilly entrusted Emmy with the day-to-day running of the office.  Emmy and Lilly worked closely together, while William had a full time job elsewhere and would come into the office after business hours.  At some point, Lilly’s mother had a stroke, and Lilly was occupied with looking after her mother.  She came into the office less frequently.  As part of her duties, Emmy began to pay visits to island employers and provide information to employees about the cash value that they had in their policies.  Many people were not aware of this.  She also sold policies as part of her duties for IAC and did well.

    19.  As word spread about the cash value feature of the policies, people started coming into the Iriartes’office in Kolonia to find out how much they could borrow on their policies.  When the policy holders learned about the procedure for obtaining their money, which involved sending the requests to IAC in Kansas City, they did not want to wait.  On one occasion, a customer became belligerent, and the police were called to remove him.

    20.  When Lilly and William had started training Emmy, they told her to expedite the payments to the insured.  Although no one from IAC in Kansas ever told Emmy that the direct payments of cash to the insureds was an IAC approved procedure, Emmy thought that because Lilly and William were the IAC agents, and that because Lilly told her that it was okay, cashing checks to pay cash advances to insured individuals was in fact an acceptable procedure.  Emmy’s cashing of premium checks at Ambros became a routine procedure, and took place from November of 1999 until May of 2003.

AC terminated the Iriartes’ contract, and the defendant Emmy Santos took over as IAC’s Pohnpei agent.

    21. The bulk of the checks were cashed at Ambros Store in Kolonia, which is owned and

[16 FSM Inrm 433]

operated by the defendant Ambros.  All of the stock in Ambros was owned at relevant times by Ambros Senda, who passed away on April 23, 2004, and was the stepfather of Emmy Santos.  Emmy Santos’s mother, Susin Senda, is the second cousin of Lilly.  At relevant times, Ambros Store did a large daily cash business, and it was not unusual for the store to have in excess of $10,000 in cash receipts on a given day.

    22.  The circumstances of the first cashing of an IAC premium check by Ambros were as follows.  Both Lilly and Emmy went to the Ambros Store office sometime in late 1999.  The office is in a separate building behind the store attached to the wholesale part of Ambros’s operation in Kolonia.  Lilly represented that she was IAC’s agent, and that she had full authority to conduct transactions for IAC within the FSM.  Lilly told Carolyn Senda, who was employed at Ambros, that she had a physical office in Pohnpei, and an ad in the phone book.  Lilly claimed that she "was" IAC on Pohnpei and as such was authorized to cash the checks.  Ambros Senda approved the cashing of the first check.  On at least one occasion, Carolyn Senda saw Lilly endorse an IACcheck in Carolyn Senda’s presence.  Emmy also represented to Olivia Senda, who worked at Ambros and Company, that she, Emmy, was authorized to cash the checks.  It was not unusual for Ambros to cash several thousand dollars worth of UL checks made payable to IAC at one time.

    23.  Emmy knew that by cashing the premium checks, the insureds’ policy accounts would not be credited for premium payments.  However, Emmy thought that Lilly and William would do some sort of reconciliation procedure to account for this. Tom Dage, who was the Pacific Region director for IAC, would come to Pohnpei about every three or four months, and would inquire how things were going.  In response to these inquiries, Emmy would tell him that things were "going smooth, most of the time."  Emmy never told him about cashing the checks.

    24.  Even though policy holders received annual statements that did not reflect the premium payments they had actually made, very few evidently lodged any complaints.  One such complaint was from Angelika Saimon, who sent a letter to IAC in October of 2001 complaining about unreported premiums and stating that she had had a phone conversation in 2000 with Emmy about the matter.  A second complaint came from Swingly Jason in November of 2001.  However, IAC did not take steps to address the problem.

    25.  It was not until early May of 2002 that IAC finally realized what was happening.  Sue Moses, an employee of the College of Micronesia and a UL insured, sent a complaint to IAC’s office in Kansas City in which she complained that she was not receiving credits for premiums that were being deducted from her paycheck.  As a result of this complaint, Tom Dage, IAC’s Pacific Region director, investigated what was happening to the premiums.  He pursued this investigation with Emmy, and on May 7, 2002, Emmy told Tom Dage what she had been doing, and that she had been cashing the premium checks at her family’s store.  Tom Dage’s response was "to hold off for awhile until I can figure out what to do."

    26.  The reason IAC did not learn about the missing premiums apart from the customer complaints had to do with the way IAC accounted for the premium checks.  IAC had one general ledger entry on its books for the Pacific Region, which included the FSM, Guam, Saipan, and the Marshalls.  The premium checks coming from the FSM totaled about a hundred and fifty thousand dollars a year.  The amounts from the other areas were much greater, Guam and the CNMI being in the range of two-and-a-half to three million dollars a year.  Because each year for the years in question showed an increase despite the fact that the premiums received from the FSM were decreasing, IAC did not initiate an inquiry.  Furthermore, IAC receives about five to six thousand checks a month from its operations worldwide.  IAC would typically receive seven or eight checks a month from the FSM.

[16 FSM Intrm 434]

    27.  After the cashing the first check, Ambros & Co. continued to cash checks because of Lilly’s and Emmy’s assurances that it was the correct thing to do.  The practice became that Emmy would go to Ambros without Lilly and cash the checks.  While Emmy worked for the Iriartes, she would sign Lilly Iriartes’s signature, with Lilly’s approval.  None of the checks payable to IAC that Ambros cashed were ever returned to Ambros for nonpayment.  None were ever charged to Ambros’s account.  Ambros never received a complaint from IAC about cashing the checks.  Ambros never received a fee or other compensation for cashing the checks.

    28.  Lilly endorsed some of the checks herself; Emmy signed Lilly’s name with Lilly’s permission on some; and Emmy endorsed her own name on some.  Neither Carolyn Senda nor Olivia Senda, who were employed at Ambros and actually cashed the checks, ever received any payment or other consideration for cashing the checks.  Ambros cashed the checks in good faith based on Lilly’s and Emmy’s representations that they were authorized to do so.

    29.  Emmy and IAC had established a relationship of trust.  That relationship continued after Emmy revealed to Tom Dage what had been happening.  When she told Tom Dage what she had been doing, she told him that she had gotten involved in something that had taken a toll on her emotionally and physically, and that she needed to "get something off her chest."  She assisted IAC’s efforts, led by John Diebold, to perform an investigation and audit to learn what had happened to the premium checks, and where the money from the premium checks had gone.  Emmy’s assistance was important to IAC in IAC’s efforts to figure out what had happened, and this was a factor in IAC’s decision to retain Emmy as its agent.  An additional factor was IAC’s ongoing need to have an agent in Pohnpei.  Also figuring in IAC’s decision to keep Emmy on as their agent was the fact that they trusted her.

    30.  Even though Emmy had been told not to cash any more checks, she continued to do so because insureds were still coming into IAC’s office in Pohnpei and asking for cash advances.  IAC learned of this and in October of 2002 instructed all four employers to deposit the premium checks directly into IAC’s account at the Bank of the FSM, an account approved by IAC for its banking transactions.  IAC did not terminate Emmy at that time despite her failure to abide by IAC’s instructions not to cash any more checks.

    31.  Both the FSM national government and FSM Telecom complied with IAC’s directions and deposited all of the checks into IAC’s Bank of the FSM account.  However, Pohnpei state permitted Emmy to pickup the premium checks during the first four months of 2003, while COM permitted the her to pick up one such check in May of 2003.  Emmy continued to cash these checks and give cash payments to policy holders.

    32.  After IAC completed its investigation, an attorney from Guam contacted Lilly about the matter, and indicated that the amount of the missing premiums was about $200,000.  Lilly then sent an e-mail acknowledging responsibility for the missing premiums.  She also gave a promissory note to IAC for $200,989.62.  The instant suit does not seek any recovery based on the promissory note.

    33.  In addition to the checks cashed at Ambros, UL premium checks that should have been remitted to IAC were disposed of in two other ways.

    34.  In October of 1999, after Emmy had been working for Lilly and William for more than a year, Lilly instructed Emmy to take two IAC premium checks totaling $8,300.00 to the Bank of Guam and to use them to purchase a cashier’s check in the amount of $8,293.50 (the remaining $6.50 of the $8,300.00 was for the check issuance fee).  Neither Lilly nor Emmy sent the cashier’s check to IAC’s office in Kansas City.  Instead, a short time after it was purchased, the Bank of Guam repurchased the check at Emmy’s request, and gave the cash to Emmy.

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    35.  Lilly and Emmy also deposited premium checks into an account at the Bank of Guam.  Lilly opened a business account, account number 0209-171075, there.  The deposit account agreement and signature card shows the account as being opened in the name of Individual Assurance Co.; that Lilly Jean Iriarte is the sole owner; and that Lilly J. Iriarte is the authorized signatory on the account.  This agreement does not bear a date.  Approximately eight or nine premium checks were deposited into that account.  Lilly personally deposited between two and four of the checks, while Emmy deposited the rest.

    36.  Throughout the investigation and accounting process Emmy provided documentation, including acknowledgment forms signed by policy holders, of the cash that she had provided to IAC’s insureds.  In many instances, when an insured was given cash, he signed an acknowledgment.  IAC used this documentation to determine how much cash could be accounted for and also to determine how much should be credited to the Iriartes and Emmy.  If there was some accumulated value available in an account that would entitle the policy holder to a loan, or if the policy had surrender value, then IAC gave credit to the Iriartes or Lilly depending on whether the cash had been paid to the insured during the time that the Iriartes were general agents, or whether the cash had been paid while Emmy was the agent.  IAC gave credit for the full amount of cash given to the insured even if the amount available for a loan or as surrender value was less than the amount actually given.  However, if the policy holder was not eligible for a loan or if the policy had no surrender value, then IAC gave no credit to either the Iriartes or Emmy even if the insured had been given cash.  In making these computations, IAC gave the policy holders credit for the premiums that should have been credited to their accounts, but were not received because the agents did not forward the premium checks to Kansas City.

    37.  In addition to not sending the premium checks to Kansas City, the agents did not send the payroll registers that should have accompanied the checks.  The lack of these registers hampered IAC’s efforts to determine the premiums that it should have received for the pay periods for which checks were missing.  In these cases, IAC used a payroll register that it had received for the period closest in time to the period for which a register was missing.  This was possible because during the period late 1999 through May of 2003, the agents had forwarded some payroll registers to Kansas City.

    38.  The premium checks that were either deposited into Lilly’s account or cashed by Ambros were endorsed either by Lilly, by Emmy signing Lilly’s name, or by Emmy herself.  The exception to this was four Pohnpei state checks, and two FSM checks which were never endorsed.  The Iriartes handled these checks while they were IAC’s general agents, and never forwarded the proceeds from these checks to IAC.  The total of these six checks is $17,163.00.2

    39.  Based on the documentation that Emmy provided to IAC about how the cash had been disbursed, IAC determined that $11,654.17 of the checks handled during the Iriartes’ period as agents were used for valid IAC purposes, and gave a credit in that amount.  Similarly, based on the information

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provided by Emmy, IAC gave a credit in the amount of $106,834.00 for the time period in which Emmy was acting as general agent.  Emmy provided documentation for an additional $116,922.95 for which no credit was given because IAC’s criteria for giving credit were not met.  Thus the total credit to be offset against the total amount of UL premium checks that were cashed, deposited, or otherwise handled and not forwarded to IAC’s office in Kansas City is $118,488.17.

    40.  The total amount of IAC premium checks issued by Pohnpei state, COM, FSM Telecom, or the FSM national government that were endorsed and either cashed, deposited or (in the case of two checks) exchanged for a cashier’s check during the period that the Iriartes were general agents was $194,896.99.  The total amount of premium checks cashed while Emmy was acting as general agent was $232,668.49.  Thus the total amount of the endorsed premium checks ($194,896.99 + $232,668.49) plus the six unendorsed checks ($17,163.00) that should have been forwarded to IAC but were not is $444,728.48.  Subtracting the credit of $118,488.17 results in $326,240.31.  This is the total amount of IAC’s loss.

    41.  IAC terminated Emmy as IAC’s general agent on July 1, 2003, because her replacement, David Panuelo, was in place as IAC’s agent in Pohnpei, and because Emmy continued to cash checks.  She continued to cash checks despite IAC’s instructions to her that she was not to cash any further checks, and despite the instructions to the employers that the checks were to be deposited into IAC’s account at the Bank of the FSM.  This lawsuit was subsequently filed in August of 2003.

II.  Conclusions of law

    1.  The defendants William and Lilly-Jean Iriarte and Emmy Santos are liable to IAC in the amount of $200,405.82 for breach of contract under the first cause of action of the complaint.  Of this amount, $8,300.00 will accrue interest at the statutory rate of nine percent per annum beginning October 29, 1999, while the remainder of $192,105.82 will accrue interest beginning May 1, 2001.

    2.  All of the defendants are liable to IAC for conversion under the second cause of action of the complaint.  For the Iriartes, the damages are the same as those for breach of contract.  Emmy Santos is liable for conversion in the amount of $295,500.68.  Of this amount, $8,300.00 will accrue interest at the statutory rate beginning October 29, 1999; $161,366.19 will accrue interest at the statutory rate from May 1, 2001; and the remainder of $125,834.49 will accrue interest at the statutory rate from July 1, 2003.  The defendant Ambros is liable for $287,200.68, with interest from May 1, 2001, on $161,366.19 and from July 1, 2003, on the remaining $125,834.49.

    3.  The Iriartes and Emmy Santos are liable to IAC on the third cause of action of the complaint, which is for breach of fiduciary duty while they were IAC’s agents.  The damages are the same as the damages on the claim for breach of contract.

    4.  The defendants are not liable to IAC on IAC’s fourth cause of action for punitive damages.  This claim is dismissed with prejudice.

    5.  The defendants are not liable to IAC on IAC’s fifth cause of action for fraud.  This claim is dismissed with prejudice.

    6.  The defendants are not liable to IAC for its attorney’s fees.

    7.  All of the defendants’ affirmative defenses are dismissed with prejudice, with the exception that IAC ratified the use of all money received from the cashing of premium checks to the extent, and only to the extent, that IAC gave credit to the Iriartes and Emmy for cash they distributed to UL policy

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holders.

III. Discussion

    This case was tried on the amended complaint filed on May 21, 2004.  The amended complaint contains five causes of action.  The first is for breach of contract against William, Lilly, and Emmy.  The second is for conversion against all defendants.  The third is for breach of fiduciary duty against William, Lilly, and Emmy.  The fourth is for punitive damages against all of the defendants.  The fifth is for fraud against all of the defendants.  IAC also seeks its attorney’s fees.  The court considers in turn each of these claims, the affirmative defenses, and the issues of damages and attorney’s fees. While IAC’s written closing argument and post trial brief addresses only its conversion claim and the defenses thereto, evidence on all of the claims alleged in the amended complaint was presented at trial.  The court will address each claim.

A. Breach of contract

IAC contends that Lilly and William breached their General Agency Contract with IAC when they failed to insure that the UL premium checks received from the four employers were sent to IAC’s office in Kansas City during the time that they were IAC’s general agents.  Emmy signed an identical contract with IAC, and IAC makes the same argument with respect to her.

    Lilly and William entered into their agency agreement with IAC when they signed their General Agent Contract on February 28, 1995.  Lilly did not sign the contract, but William did so on Lilly’s behalf, as is borne out by the fact that Lilly performed her agency functions until Emmy took over as agent in May of 2001.

    Section VIII of the Iriartes’ agency contract with IAC states that "You are not authorized to accept any premium for Us except the first policy premiums, unless We have executed a separate Administrative Agreement."  No such agreement was entered into.  However, the contract goes on to address that very situation.  The contract says that "[i]f no such agreement has been executed, receipts for premiums must be on the forms furnished for that purpose.  You shall immediately remit to Us, all money received or collected on Our behalf, and such money shall be considered as Our funds held in trust by You."  Thus the agency contract required the Iriartes to forward to IAC all "money received or collected on Our [i.e., IAC’s] behalf."  The UL premiums qualified as such money, and as a result, when William and Lilly failed to insure that the UL premiums were forwarded to IAC, they breached their contract with IAC.  Emmy was hired as office manager for William and Lilly’s business, FSM Insurance Group ("FSMIG), and while she was in their employ she cashed the premium checks at Lilly’s direction.  William and Lilly’s contract expressly provides that "You shall be responsible to Us for the acts of. . . Your employees."  Thus William and Lilly are contractually liable for Emmy’s actions.  Additionally, the principal is liable for the acts of his or her agent when acting under the authority of the principal within the scope of the agent’s employment.  Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 315-16 (Pon. 1995).  Lilly expressly directed her employee Emmy to cash the premium checks.  Emmy acted as Lilly’s and FSMIG’s agent when she did so.  Thus, William and Lilly are liable to IAC for breach of their general agent contract with IAC.

    Emmy’s contract with IAC contains language identical to the language contained in the Iriartes’ contract regarding the agent’s duty to make certain that the premium checks were sent to IAC.  When she failed to remit the premium checks to IAC during the period that she was IAC’s agent from May of 2001 to July of 2003, she likewise breached the general agency agreement.

Accordingly, William, Lilly, and Emmy are liable to IAC for breach of contract during their

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respective periods as IAC’s agents when they failed to fulfill their contractual obligation to send the premium checks to IAC’s office in Kansas City

B. Conversion

    IAC seeks damages for the tort of conversion against all of the defendants.  IAC asserts that William, Lilly, and Emmy converted the UL checks by cashing the checks instead of forwarding them to IAC’s office in Kansas City. IAC further contends that Ambros converted the checks when it permitted the cashing of the UL checks at its Kolonia store.

    The elements of a cause of action for conversion are 1) the plaintiffs’ ownership and right to possession of the personal property in question; 2) the defendant’s unauthorized or wrongful act of dominion over the property that is hostile or inconsistent with the right of the owner; and 3) damages resulting from such action.  Rudolph v. Louis Family, Inc., 13 FSM Intrm. 118, 128-29 (Chk. 2005); Bank of Hawaii v. Air Nauru, 7 FSM Intrm. 651, 653 (Chk. 1996); Talley v. Lelu Town Council, 10 FSM Intrm. 226, 235 (Kos. S. Ct. Tr. 2001); Jonas v. Paulino, 9 FSM Intrm. 519, 521 (Kos. S. Ct. Tr. 2000).

    1.The liability of the Iriartes and Emmy

    William, Lilly, and Emmy, when acting as IAC’s agents, took action inconsistent with and hostile to IAC’s ownership of the checks when they cashed, or authorized the cashing of, the checks at Ambros.  While William did not actually engage in cashing checks while he was general agent, his wife Lilly, with whom he was co-agent, approved Emmy’s cashing the checks while Emmy was the employee of William and Lilly’s business enterprise, FSMIG.  Lilly herself went to Ambros on at least one occasion with Emmy to cash a check and also deposited between two and four of the premium checks into the account that she had opened at the Bank of Guam in IAC’s name, and of which she was sole owner.  While the Iriartes argue at pages 15 through 18 of their post trial brief that the Iriartes are not liable for Emmy’s acts because she was actually IAC’s subagent, this contention ignores the extensive testimony that Emmy was the Iriartes’ employee, and that Lilly authorized her actions in cashing the checks.  William and Lilly are responsible for the actions of their employee Emmy under the law of agency, which binds the principal for the acts of the agent.  Bank of the FSM v. O’Sonis, 8 FSM Intrm. 67, 69 (Chk. 1997).

    Emmy is herself jointly and severally liable with William and Lilly for the checks she converted by cashing them while she was their employee.  Under the doctrine of respondeat superior, the act of an agent within the scope of his or her agency is the act of the principal, and the result is that both the principal and the agent are jointly and severally liable to the person injured by the wrongful act.  D.W. v. Radisson Plaza Hotel Rochester, 958 F. Supp. 1368, 1380 (D. Minn. 1997).3 During the time that she was employed by William and Lilly at FSMIG, Emmy was acting as William and Lilly’s agent.  An agent is not relieved from responsibility for tortious conduct "merely because he acted at the request, or even at the command or direction, of the principal."  3 Am Jur 2d Agency § 309 (1986) (footnote omitted).  The fact that Emmy initially acted at the direction of Lilly in cashing checks does not relieve Emmy from responsibility for converting the checks.

    Moreover, "an employee or agent is liable to a third person for injuries resulting from the breach

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    of any duty which the employee or agent owes directly to such third person, and is not liable to a third person for injuries resulting from a breach of duty which the employee or agent owes only or solely to his Employer."  Id. (footnote omitted).  Emmy had a duty to IAC with regard to the premium checks.  The checks were not payable to her, but to IAC. Even as William and Lilly’s employee, Emmy had a duty not to cash the checks without first confirming with IAC that she had the authority to cash the checks.  By failing to do so, Emmy intentionally deprived IAC of its property.  Thus Emmy is liable for the conversion of the checks that she cashed while she was an employee of Lilly and William.

    William, Lilly, and Emmy are jointly and severally liable for the UL checks that Emmy cashed during the time that William and Lilly were acting as IAC’s general agents, and Emmy was their employee.  While IAC urges that the Iriartes’ liability should continue even after they left Pohnpei and Emmy became the general agent, IAC offers no authority for this contention, and the court finds that the Iriartes are no so liable.  Emmy alone is liable for the UL premium checks that she converted by cashing them at Ambros during the time that she was acting as IAC’s agent in Pohnpei.

    Lilly argues in her post trial brief that she never endorsed or cashed any checks, and that she never authorized Emmy to cash any of the checks.  The Iriartes, who now reside in the U.S., declined to appear at trial, claiming financial hardship.  Thus the court cannot assess their credibility, because in order to make this assessment the court must carefully observe the tone, hesitations,inflections, mannerisms, and general demeanor of a witness.  Engichy v. FSM, 1 FSM Intrm. 532, 556 (App. 1984).  However, Carolyn Senda testified at trial that Lilly physically appeared before her, claimed to have the authority to cash the checks, and signed at least one of the checks in her presence.  The court finds this testimony credible, and accepts it.  The court rejects Lilly’s testimony in her deposition, which was admitted into evidence at trial, and which the court has considered, that she never signed any of the many premium checks that she had the opportunity to look at; that she never authorized Emmy to cash even one check; and that she never authorized Emmy to sign her name to any check.  Lilly Iriarte Dep. at 65.4

    According to Lilly’s deposition, Lilly’s involvement with the IAC checks was limited to those checks that were deposited in account number 0209-171075 that Lilly opened at the Bank of Guam with herself as sole owner and sole signatory on the account.  Lilly claimed that her agency contract with IAC allowed her to do this.  Lilly stated that she opened this account because she was receiving IAC checks that mistakenly contained MicroLife allotments that did not belong to IAC.  This is a reference to FSMIG’s MicroLife policy premiums that Lilly testified were on occasion included in the IAC UL premium checks.  According to Lilly, the purpose for depositing the checks was so that FSMIG could take out the MicroLife premiums that were due FSMIG, and then issue a check to IAC for the reduced amount that was rightfully IAC’s.  Lilly claimed that this reduced amount would then be put into a cashier’s check or money order and mailed to IAC. Also according to Lilly, this account was used to give small amounts to IAC customers when they would cancel their policies and request their Employer to terminate their allotments, but there would be a delay, and the customers needed money to buy food to feed their families.  Other than this, Lilly claimed not to know anything about cash being given to individuals.  This deposition testimony of Lilly’s regarding what was purportedly Lilly’s limited role in the handling of the IAC checks is inconsistent with the trial testimony of Emmy, Carolyn Senda, and Olivia Senda.

    Lilly also argues that Emmy forged Lilly’s signature. Emmy signed Lilly’s name many times, but

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    it was with Lilly’s authorization.  "Forgery" is defined as "[a] signature of a person that is made without the person’s consent and without the person otherwise authorizing it." Black’s Law Dictionary 650 (6th ed. 1990).  Emmy testified that Lilly authorized Emmy to sign her signature.  Thus Emmy did not forge Lilly’s signature.

    The Iriartes also urge that there is overwhelming evidence that Emmy engaged in the wholesale forging of checks, and that exhibit P(sub G) proves this.  This exhibit is made up of 91 checks in the range of $13 to $1300 that are made payable to various IAC policy holders and endorsed by the named payees of the checks.  All the exhibit shows is that the policy holders cashed their checks at Ambros.  This is to be expected, since Emmy testified that she told policy holders who received IAC checks that came from outside the FSM that Ambros would cash them.  It is true that the summary sheet that precedes the checks has the notation "Endorse similar to signature card" next to the entries for nine of the checks.  But the most that this might mean is that someone, somewhere may have compared the endorsement signature to the signature card for some account, somewhere, and concluded that the endorsement matched the signature on the signature card.  These notations do not constitute proof that because the notation does not appear next to the entries for the remaining 82 checks, all of those checks have forged endorsements.  To say that the exhibit proves that Emmy engaged in wholesale forgery simply because the checks were endorsed by their payees and cashed at Ambros is pure speculation.

    Any arguments raised by the defendants relative to the conversion claim not specifically addressed are likewise without merit.  Accordingly, the Iriartes and Emmy are liable on IAC’s claim for conversion.

    2. Ambros’s liability

    The checks in question were made payable to IAC and not to either Lilly or Emmy, at whose request Ambros cashed the checks.  Ambros began cashing the checks initially based on Lilly’s representation that as IAC’s general agent, she was authorized to cash the checks.  Lilly is the second cousin of Susin Senda, Ambros Senda’s wife; Emmy is the daughter of Susin Senda and the stepdaughter of the late Ambros Senda.  Ambros and its employees relied in good faith on Lilly’s representation – and later Emmy’s that as IAC’s agents they were authorized to cash the checks.

    A case similar to the one at bar is Sales Promotions Executives Ass’n v. Schlinger & Weiss, Inc., 234 N.Y.S.2d 785, 786 (N.Y. City Civ. Ct. 1962), which involved cashing forty-nine stolen checks made payable to a corporate payee over the period of nine months at the defendant’s store, a supermarket.  The name of the corporate payee was endorsed on the reverse side, and the thief then endorsed his name under the corporation’s endorsement in the presence of the defendant’s officer each time he cashed a check.Id.  The defendant had failed to take any steps to determine whether the endorsement was genuine and whether the purported "agent" seeking to cash the checks was authorized by the corporation to do so.  Id.  In finding the defendant owner of the store liable for conversion, the court noted that it is a corporation’s usual practice to deposit checks payable to it in a bank account.  Id.  Given this consideration, when a person is asked to cash a check bearing a corporate endorsement he is put on his guard.  Id.  He should verify that the endorsement is authentic, and should take the necessary steps to make certain that the person attempting to cash the check is authorized to do so by the payee corporation.  Id.  The good faith of the one cashing the check "does not enter into the picture."  Id.  The court noted that the trust placed in the customer was misplaced and that in cashing the checks without first verifying the authority of the one seeking to cash the checks, the defendant "cashed the checks at its own peril."  Id. at 787.  By depositing the checks into its bank account and receiving credits for those checks, the defendant exercised dominion and control over the checks and was therefore liable for conversion.Id.

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    Ambros acted in good faith when it relied on Lilly’s and Emmy’s representations.  The fact that Lilly and Emmy were family members may well explain why Ambros relied on those representations.  But the fact that the reliance was misplaced does not relieve Ambros of liability.  All of the checks presented for cashing contained IAC’s name and address, which would have enabled Ambros to verify that Lilly and Emmy were authorized to cash the checks, but Ambros took no steps to do so.  When Ambros cashed the checks, it did so "at its own peril."  Id. at 787.  "An actor may be liable [for conversion] where he has in fact exercised dominion or control ... and a defendant’s intention, good or bad faith, and his knowledge or mistake are immaterial."  Peaseley Transfer & Storage Co. v. Smith, 979 P.2d 605, 616 (Idaho 1999).  Although Ambros acted in good faith, it exercised dominion and control over the UL premium checks by cashing them.  In so doing, it converted the checks.

    Accordingly, Ambros is liable to IAC for conversion of the UL premium checks that it cashed.

C. Breach of fiduciary duty

    Thus far in the FSM, a cause of action for breach of fiduciary duty has only been recognized in the area of the relationship between a bank and its depositors, and not in the area of insurance or other context.  Phillip v. Marianas Ins. Co., 12 FSM Intrm. 301, 308 (Pon. 2004).  Phillip dealt with the question whether the relationship between an insured on one hand, and an insurance company and the insurance company’s agent on the other hand, was a fiduciary one.  The facts of Phillip are different from those at bar.  At issue here is the relationship between an insurance company and its agents, and specifically two identical written agency agreements: the one between William and Lilly and IAC, and Emmy and IAC.  By definition, the relationship between an agent and principal is a fiduciary one: "Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." Black’s Law Dictionary 62 (6th ed. 1990) (citing RESTATEMENT (Second) of AGENCY § 1 (1958) (emphasis added). "Fiduciary" as an adjective in turn is defined as "relating to or founded upon a trust or confidence." Black’s Law Dictionary 625 (6th ed. 1990).

    An agent is a fiduciary with respect to the matters within the scope of his agency.  The very relationship implies that the principal has reposed some trust or confidence in the agent, and the agent or employee is bound to the exercise of the utmost good faith, loyalty, and honesty toward his principal.

3 Am. Jur. 2d Agency § 210, at 713 (1986) (footnotes omitted).

    The Iriartes and Emmy were required to exercise the "utmost good faith,loyalty, and honesty" toward IAC during the times that they acted as IAC’s agents. By cashing the checks, and thereby failing to send the checks on to IAC, they breached this duty.

    Accordingly, the Iriartes and Emmy are liable to IAC for breach of fiduciary duty.

D. Punitive damages

    IAC also requests punitive damages against all of the defendants.  Punitive damages are derivative, in the sense that they derive from and depend on a separate and independent cause of action.  Semwen v. Seaward Holdings, Micronesia, 7 FSM Intrm. 111, 113 (Chk. 1995). They may be awarded when the acts complained of are wanton, reckless, malicious, and oppressive.  Primo v. Refalopei, 7 FSM Intrm. 423, 435 (Pon. 1996).  Punitive damages are not awardable for breach of contract, since only compensatory damages are allowed in contract cases. Hartman v. Krum, 14 FSM Intrm. 526, 532 (Chk. 2007).  Punitive damages may be recovered for conversion where the

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defendant’s acts were accompanied by fraud, malice, recklessness, oppressiveness, or willful disregard of the plaintiff’s rights that aggravated the injury or loss inflicted by the defendant.  Bank of Hawaii v. Air Nauru, 7 FSM Intrm. 651, 653 (Chk. 1996).  A bank’s mere failure to respond to an inquiry about funds wrongfully deposited into an account at the bank is not sufficient to sustain an award of punitive damages. Id.

    The conduct in this case does not warrant punitive damage.  While the funds were converted, they were converted in material part in the course of Lilly’s and Emmy’s efforts to expedite services to IAC policy holders.  Although a large amount of the money represented by the checks remains unaccounted for, this fact alone does not mean that unaccounted for amount was converted for the use of William, Lilly, and Emmy. Furthermore, after Emmy told Tom Dage what she had been doing, she was cooperative in providing information to IAC so that IAC could determine, to the extent possible, where the missing premium money had gone.  Conversion by its nature involves wrongful acts that are hostile to an owner’s interest in property. Rudolph, 13 FSM Intrm. at 128-29.  In the case at bar the actions of the Iriartes and Emmy were wrongful and showed a disregard of IAC’s property rights.  However, that disregard was not sufficient to impose punitive damages.  Thus the court will not award punitive damages against either the Iriartes or Emmy.  Nor will the court award punitive damages against Ambros.  While the actions of Ambros in cashing the checks was wrongful, Ambros’s employees relied in good faith on Lilly’s and Emmy’s representations that they were authorized to cash the checks.

    IAC’s claim for punitive damages is accordingly denied.

E. Fraud

    IAC seeks to recover for fraud against all of the defendants.  The elements of a cause of action for fraudulent misrepresentation are: 1) misrepresentations 2) made to induce action by the plaintiff 3) with reliance by the plaintiffs upon the misrepresentation 4) to their detriment. Pohnpei v. Kallis, 6 FSM Intrm. 460, 462 (Pon. 1994).

    IAC cannot prevail against Ambros on the fraud count.  Ambros never made any representation to IAC concerning any aspect of the situation regarding the checks.  The record discloses no evidence that there was any communication between Ambros and IAC during the relevant period.  Had there been, the possibility exists that at that point Ambros would have stopped its practice of cashing IAC checks.

    With respect to the Iriartes and Emmy, Emmy testified that Tom Dage would come to Pohnpei from Guam and periodically meet with the Iriartes and Emmy.  He would inquire about IAC matters generally, and to the extent that the inquiries were answered, Emmy told him that things were "going smooth – most of the time."

    The assurance that things were "going smooth – most of the time" is the only representation that can serve as the basis of a claim by IAC for fraud against Emmy and the Iriartes.  This type of generalized opinion is not the sort of specific representation on which a hearer may reasonably rely.  Reliance must be reasonable.  The representation made was more akin to conventional responses to questions about one’s health or the state of the weather than it was a specific assessment made to a business associate in a professional context where the one asking the questions was eliciting specific information on which he intended to rely.  While a fiduciary relationship existed between IAC and the Iriartes while the Iriartes were IAC’s agents, and between IAC and Emmy while Emmy was IAC’s agent, the parties to such a relationship may certainly communicate at times on a superficial, conventional level where the statements made do not give rise to reasonable reliance.  That was the case here.  Thus, like

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Ambros, the Iriartes and Emmy are not liable to IAC for fraudulent misrepresentation.

F. Affirmative defenses

    The defendants offer two main defenses to IAC’s claims, those of ratification and mitigation of damages.  Generally they contend that IAC should have become aware of the conversion of the checks by the Iriartes and Emmy earlier, and that even after IAC learned from Emmy in May of 2002 what was going on, IAC should have taken more measures than it did to stop the conversion.  They contend that IAC’s lack of more vigorous action in this regard constitutes IAC’s ratification of the conduct.  Similarly, they urge that IAC’s inaction constitutes a failure to mitigate its damages.  They rely on these defenses in asserting that IAC cannot recover from them.

    Ratification is the approval of an otherwise unauthorized act or transaction. Asher v. Kosrae, 8 FSM Intrm. 443, 452 (Kos. S. Ct. Tr. 1998).  An implied ratification may take place if one, with full knowledge and understanding of the material facts, exhibits conduct that shows a recognition and adoption of the unauthorized act or transactions.  Id. at 452-53.

    Ambros asserts that IAC’s reaction to the situation with which they were presented "is almost incomprehensible, unless they were simply accepting the actions of their agent and trying to cover up what had happened."  Id.  Based on the evidence presented, IAC’s conduct was understandable.  Very much a factor in the events as they transpired from May of 2002 when IAC first learned of the cashing of the checks until Emmy was fired in July of 2003 was the fact that IAC trusted Emmy.  When Sue Moses testified about her unsuccessful efforts with Emmy to resolve the question of her missing payments, she described Emmy as "very personable."  Beyond this, the court had the opportunity to observe Emmy’s demeanor during the trial.  She has a manner and demeanor that invites trust.  Even after Emmy told Tom Dage what she had been doing, she continued to be forthcoming, and actively assisted IAC in trying to account for where the missing money went.

    IAC’s conduct was by no means prudent.  IAC should have, and could have, handled the situation better.  IAC should have begun a careful and exhaustive investigation when the very first customer complained.  But whether or not IAC made wise business decisions with regard to the check cashing problem at relevant times is immaterial.  The point that the defendants fail to realize is that IAC had no duty to the defendants, who were effectively stealing from IAC – conversion is the civil equivalent of theft – to undertake such an investigation for the benefit of defendants in order to stop the defendants from converting IAC’s property. IAC’s property was converted by the defendants’ intentional actions.  The defendants cannot argue that because IAC should have known that the defendants were converting – stealing – IAC’s property, IAC should have stopped them, and that because IAC did not stop them from doing what they had no right to do, the defendants should not have to pay back what they took.  Ratification, after all, means approval.  IAC has sued the Iriartes and Emmy for breach of contract, and ratification can certainly be a defense to a breach of contract suit.  But the actions that constitute a breach of the agency contracts in question – failure to remit the premium checks to IAC – are the same as those that constitute the conversion.  The issue is whether IAC ever approved the Iriartes’and Emmy’s use of the cash from the UL premium checks for non-IAC approved purposes so that neither the Iriartes or Emmy have to pay the misused money back.  IAC did no such thing.

    What IAC did – not very successfully as it turned out – was to try to come to terms with and correct a significant problem involving the disappearance of a substantial sum of company money. In other words, IAC was trying to clean up a big mess, one that involved well over $400,000 of IAC money.  While doing so, it was engaging in damage control, and furthermore was trying to do all of this from a distance  hundreds of miles from Pohnpei in the case of Tom Dage in Guam, and thousands

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of miles in the case of Kansas City. The defendants assert that IAC tried to "cover up" what was happening.  It seems plain that after IAC learned what Emmy was doing, it was not eager to have its policy holders find out that its Pohnpei agent was not sending policy holders’ hard-earned premium dollars to Kansas City as she should have so that the policy holder’s accounts could be credited.  Emmy of course was giving an immediate benefit to those seeking cash advances, but in so doing was placing all of the employee policy holders at a disadvantage because their policy accounts were not being credited for the premiums paid.  Sue Moses testified that she terminated her policy once she discovered what had happened.  But even assuming that IAC attempted to keep this from becoming general knowledge among its policy holders – that IAC "covered up" what happened – by no stretch of the imagination does it mean that IAC approved the taking of its money for unapproved purposes in the first place. Any "cover up" did not materially affect any right of the defendants.

    Compounding the situation was that IAC wanted to continue its Pohnpei operation while it was sorting things out.  IAC needed an agent in Pohnpei, and it thought it had one that it could trust in Emmy. After all, it was Emmy herself who told Tom Dage what she had been doing, and why, and that she was very upset by what she had gotten herself involved in.  But IAC’s trust in Emmy was misplaced, because even after being told by Tom Dage to stop cashing premium checks, she continued to obtain premium checks, and continued to cash them.  When IAC discovered this, it directed the employers to deposit the checks directly into its Bank of the FSM account.  Even then, Emmy managed to acquire some of the checks.  She cashed the last check in May of 2003. IAC at last terminated Emmy in July of 2003.

    IAC indeed ratified, or approved, the check cashing activities of both the Iriartes and Emmy to the extent that they distributed the money obtained from the checks to policy holders for legitimate IAC purposes.  That IAC gave credit to the Iriartes and Emmy for these distributions shows this conclusively.  What is equally plain is that IAC never approved the Iriartes’ and Emmy’s conversion of the funds that were not accounted for, or were not used for approved IAC purposes. IAC’s efforts to figure out what had happened, to stop it from happening, to arrive at an accounting for the missing money, and to restore order to its Pohnpei operation manifest its disapproval of the practice of cashing premium checks initiated by Lilly and continued by Emmy.  It seems only too obvious that if IAC had either actively or passively intended to approve the cashing of the checks it 1) would not have told Emmy to stop cashing the checks after she told Tom Dage in May of 2002 what she doing; 2) would not have told the employers to deposit the UL checks directly into its Bank of the FSM account after discovering that Emmy was continuing to cash the checks; and 3) would not have fired Emmy for her continued practice of obtaining and cashing checks even after IAC had told the employers to deposit the UL checks.

    Citing Kosrae Island Credit Union v. Obet, 7 FSM Intrm. 416, 419 n.2 (App. 1996), Ambros urges that where a principal passively allows its agent to appear to a third person to have authority to act on his behalf, apparent authority may be implied on the part of the agent, thus conferring liability for those acts on the principal.  IAC did not become aware that the checks were being cashed until May of 2002, when Emmy told Tom Dage what she was doing, and he told her to stop. Ambros asserts that "it is clear that the inaction of IAC led to the continued ability of its agent to cash these checks."  Post Trial Br. at 6.  The "inaction" to which Ambros refers is a way of saying that IAC was negligent in failing to discover the ongoing tortious conduct – the conversion – earlier, and that IAC should therefore bear the loss.  This argument seeks to circumvent this court’s prior ruling, relying on Opet v. Mobil Oil Micronesia, Inc., 3 FSM Intrm. 159, 166 (App. 1987), that contributory negligence is not

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a defense to a conversion action.5 Ambros had an ongoing, positive duty to ascertain whether Lilly and Emmy were authorized to cash the checks.  When it failed to do so, it interfered with IAC’s ownership interest and thereby converted the checks.  Ambros cannot turn the tables on IAC and conclude that IAC was negligent for failing to detect and prevent the conversion earlier than it did.  Such a rule serves to blame the tort victim.  The court declines to adopt such a rule.

    The defendants also assert that IAC failed to mitigate its damages.  That a plaintiff has a duty to mitigate his damages is clear.  He must take such reasonable steps to minimize those damages. Elymore v. Walter, 9 FSM Intrm. 450, 457 (Pon. 2000).  Of the arguments made by the defendants, Ambros, for example, argues that among the steps that it was necessary for IAC to take to minimize its damages was "to notify the banks or other places where the checks are being cashed so the matter [does not] occur in the future."  Post Trial Br. at 13-14.  The problem with this contention is that Ambros should have, independently of any actions taken or not taken by IAC, confirmed that Lilly and Emmy had the authority to cash the checks.  IAC had no duty to anticipate and attempt to stop Ambros’s tortious conduct.  No matter from what perspective Ambros views the facts of this case, it remains indisputable that Ambros, when presented with checks amounting to over $400,000 over a period of approximately three-and-a-half years that were made payable to a corporate payee, nevertheless cashed the checks at the request of the individual cashing those checks without ever making any efforts to obtain independent confirmation that the individual presenting the check had authority from the corporate payee to do so.  Lilly on at least one occasion and Emmy on numerous occasions were physically present in front of the Ambros employees who handed over large sums of currency to them. IAC’s damages resulted from the unauthorized and intentional acts of Lilly, Emmy, and Ambros. IAC did not fail to mitigate its damages.  This argument is without merit.

    Ambros also relies on the defenses of apparent authority and good faith commercial standards. As just noted, Ambros had a duty to determine whether Emmy and Lilly had the authority to cash the checks.  Thus, Ambros should not have relied on the apparent authority ” which is only the authority that Lilly and Emmy said they had – when Ambros cashed the checks. Nor can it be said that Ambros used good faith commercial business standards.  It tendered cash to Emmy and Lilly on their own mere representations that they had the authority to cash the checks.

    The parties offer various additional affirmative defenses.  For example, the Iriartes assert that the court should apply a three year statute of limitations found in the Uniform Commercial Code to this case.  But without a showing that this statute of limitations has been enacted into law in this jurisdiction, the court is at a loss as to what authority would permit the court to do this. The court cannot legislate.

    Another defense offered by the Iriartes is that IAC should have made a claim against errors and omissions policy because one of its employees, John Diebold, failed to enter into an administrative agreement with the Iriartes that would have permitted the Iriartes to handle the UL checks.  They claim that IAC suffered no damages because of the potential insurance coverage. However, the contract expressly addresses what happens if no administrative agreement is entered into. In that event, the agent was required to "immediately remit to Us[i.e., IAC] all money received or collected on Our behalf."  It is not apparent how failure to enter into any such agreement would serve as a basis for a claim against any errors and omissions policy maintained by IAC, even if such a policy existed.  These two affirmative defenses are without merit.

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    Similarly, the court has considered the remaining effirmative devenses ser out in the parties' post trial briefs. They are without merit.

G. Damages

    IAC is entitled to recover the amount of teh UL checks not accounted for, or for which it did not give credit. No credit was given for payments made to plolicy holders where they policy holder was not eligible for a loan, or where there was no surrender value.

    1. Breach of contract

    IAC's contract claim is against both the Iriartes and Emmy. IAC has prevailed on that claim, and is entitled to recover the sum of $200,405.82 against the Iriartes jointly and severally. This is the amount of checks converted during the time that they were acting as IAC=s agents. This figure represents the checks that were cashed at Ambros, deposited into the account that Lilly opened at the Bank of Guam in the name of IAC, and used to purchase the $8,293.50 cashier=s check ($194,896.99); the six checks totaling $17,163.00 that bear no endorsement but were handled during the Iriarte period; and the $11,654.17 credit that IAC gave the Iriartes ($194,896.99 + $17,163.00 ─ $11,654.17).

    IAC also prevailed on its contract claim against Emmy. IAC is entitled to recover the sum of $125,834.49 on this claim. This represents the amount of the checks that she cashed while she was IAC=s general agent ($232,668.49), minus the credit of $106,834.00 that IAC gave her.

    2. Breach of fiduciary duty

    The damages for IAC=s claim for breach of fiduciary duty are the same as those for the contract claim, since the breach of fiduciary duty claim is also based on the breach of the agency contracts that IAC had with Emmy and the Iriartes.

    3. Conversion

    The Iriartes are liable for conversion in the same amount as their liability on the contract claim, since the acts that they performed while they were IAC=s general agents that constituted a breach of their agency contract also constituted conversion. That amount is $200,405.82.

    Similarly, Emmy is liable for conversion for the amount of the contract damages awarded in IAC=s favor against her, which is $125,834.49. The acts that she performed while she was IAC=s agent in Pohnpei in failing to make certain that the checks were sent to IAC constituted not only a breach of contract, but conversion as well. Emmy is also liable for conversion for the checks that she handled during the time she was the Iriartes= employee, since both principal and agent are jointly and severally liable for the torts that the agent commits in the course and scope of the work performed for the principal. Radisson Plaza, 958 F. Supp. at 1380.

    An issue arises as to the amount of Emmy’s liability for conversion during the Iriarte period.  Of the eight or nine checks that were deposited into account number 0209-171085 that Lilly opened in the name of IAC at the Bank of Guam, Lilly testified in her deposition that she herself deposited between two and four, which means that Emmy would have deposited between four and seven checks.  Thus the exact number of checks, or their respective amounts, that Emmy deposited is not known.  If Emmy had at some point given out the cash ultimately obtained from the checks deposited by Lilly, then she along with Lilly would be liable for conversion.  However, Emmy also testified that Lilly gave out

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cash advances, and if that cash came from the checks Lilly deposited, then Lilly alone converted those check.

    What is known, however, is that the total amount of the checks cashed at Ambros by Emmy alone or together with Lilly is $405,688.85, plaintiff’s exhibit 1D-2, and that the total amount of all checks converted, excluding the checks that have no endorsement at all but were handled during the Iriarte period, is $427,565.48. Plaintiff’s exhibit 1D-1. The difference is $21,876.63 ($427,565.48 – $405,688.85). Of this amount, $8,300 represents the two premium checks that Emmy at Lilly’s direction converted by using them to purchase the $8,293.50 cashier’s check (plus $6.50 issuance fee: $8,293.50 + $6.50 = $8,300) that Emmy then turned around and cashed.  Subtracting the $8,300 from $21,876.63 leaves $13,576.63 for the amount of checks deposited into the IAC Bank of Guam account.  There is no way of determining what portion of this amount was converted by Emmy.  Since IAC as the plaintiff has the burden of proof, Tulensru v. Wakuk, 10 FSM Intrm. 128, 132 (App. 2001), Emmy receives the benefit of the doubt created by this question.  Accordingly, the court will reduce the conversion damages against Emmy for the time she was acting as the Iriartes’ employee by this amount, or $13,576.63, which means this sum will be subtracted from $183,242.82 ($183,242.82 – $13,576.63 = $169,666.19). As set forth in plaintiff’s exhibit 1D-1, the $183,242.82 figure is the amount of all endorsed checks handled during the Iriarte period, minus the $11,654.17 credit given to the Iriartes ($194,896.99 - $11,654.17). Therefore the conversion damages against Emmy for the period that she worked for the Iriartes is $169,666.19.  The total conversion damages against Emmy for both the time she worked for the Iriartes, and for the time that she was IAC’s general agent herself is $295,500.68 ($169,666.19 + $125,834.49).6

    An issue also arises with respect to the conversion damages against Ambros. The total amount of checks cashed at Ambros was $405,688.85.  IAC gave a credit of $11,654.17 to the Iriartes for the checks cashed while they were general agents, and a credit of $106,834.00 to Emmy for the checks cashed while she was IAC’s agent. In its computations set out on plaintiff’s exhibit 1D-1, IAC deducts the credit amount from the total of all converted endorsed checks.  This is appropriate in determining total damages.  However, in determining the amount of conversion damages against Ambros, the starting point is the total of the checks cashed there.  The next question is how to apply the credits.  The possible options are to distribute the credits in some combination to the checks cashed at Ambros ($405,688.85); the six unendorsed checks totaling $17,163.00 that the Iriartes’ handled while they were IAC’s agents; the checks that were deposited into the Bank of Guam account that Lilly opened in IAC’s name ($13,576.63); and the $8,300 that represents the two premium checks that were exchanged for the $8,293.50 cashiers check.  If the credits were applied to the last three items, which total $39,039.63 ($17,163.00 + $13,576.63 + $8,300 = $39,039.63), that would still leave $79,448.54 ($118,488.17 - $39,039.63 = $79,488.54) to be applied to the $405,688.85 amount of checks cashed at Ambros.  But there is nothing in the evidence that precludes the possibility that the total credit of $118,488.17 is properly assignable to the checks cashed at Ambros.  Again, since the IAC has the burden of proof, Ambros is entitled to the benefit of this uncertainty.  IAC did not show precisely to what amounts the credits apply.  Thus, the entire $118,488.17 will be deducted from the $405,688.85, which yields $287,200.68.  This is the total amount of conversion damages awarded against Ambros for the checks that Ambros cashed at its store.

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    With regard to the Iriartes’ liability of $200,405.82, William and Lilly alone are jointly and severally liable for $17,163.00 in unendorsed premium checks that they handled during their time as agents, since there is no showing that either Emmy or Ambros participated in the handling of those checks.  William and Lilly alone are also jointly and severally liable for the $13,576.63 in checks that were deposited into the Bank of Guam account opened by Lilly, since the court cannot determine what portion of those may have been deposited by Emmy.  Emmy is liable jointly and severally with Lilly and William for the $8,300.00 amount that represents the premium checks that she used to purchase the cashier’s check for $8,293.50 (plus the check issuance fee of $6.50) that Emmy then turned around and sold back to the bank for cash.  Subtracting these amounts from the Iriartes’ total liability ($200,405.82 - $17,163.00 - $13,576.63 - $8,300.00 = $200,405.82 - $39,039.63 = $161,366.19) leaves $161,366.19 that represents checks that Emmy cashed at Ambros while she was William and Lilly’s employee, and for which William and Lilly are liable.

    Emmy’s total liability of $295,500.68 includes the $8,300.00 amount for which she is liable jointly and severally with William and Lilly.  Subtracting this from the $295,500.68 ($295,500.68 - $8,300.00 = $287,200.68) leaves $287,200.68 that represents Emmy’s total liability for the checks cashed while she was the Iriartes’ employee and while she herself was IAC’s agent.  Although arrived at by a different calculation, this amount is identical to Ambros’s liability, since both Emmy and Ambros receive the benefit of the $11,654.17 credit that IAC gave to the Iriartes, and the $106,834.00 credit that IAC gave to Emmy.  The Iriartes’ liability of $161,366.19 is joint and several with Emmy’s and Ambros’s liability of $287,200.68 for the checks cashed at Ambros, but in the Iriartes’ case that liability is only to the extent of $161,366.19.  In other words, the maximum amount that IAC can recover from the Iriartes for the checks cashed at Ambros is $161,366.13.

    Regardless of the different components of each defendant’s liability, IAC’s total recovery is $326,240.31, which is the total amount of its loss pursuant to exhibit 1D-2.  Taking into account the two credits, the $326,240.31 amount is composed of the $287,200.68 for the checks cashed at Ambros (assessed in part against the Iriartes and in whole against both Emmy and Ambros); the $17,163.00 for the six unendorsed checks the Iriartes handled while they were IAC’s agents (assessed against Lilly and William alone); the $13,576.63 for the checks deposited into the account Lilly opened at the Bank of Guam (assessed against Lilly and William alone); and $8,300 for the two premium checks that Emmy at Lilly’s direction used to buy the $8,293.50 cashier’s check (assessed jointly and severally against the Iriartes and Emmy).

    One whose property is converted is entitled to recover interest at the legal rate from the time the property is converted.  Bank of Guam v. Nukuto, 6 FSM Intrm. 615, 616 (Chk. 1994).  The present legal rate, or judgment rate, of interest in the FSM is nine percent per annum. The court is presented with the problem of determining how interest should be determined, since the conversions occurred over a period about three and a half years in amounts ranging from several hundred dollars to several thousand.  There was a running balance of converted funds complicated by the fact of the credits.  The evidence does not allow a precise determination of when interest would begin to accrue on the many individual amounts involved.  The exception is the $8,300.00 used to purchase the cashier’s check of $8,293.50 (plus issuance fee of $6.50). The cashier’s check bears a date of October 29, 1999.  Thus interest will begin to run on this amount from that date.

    The evidence provides two dates applicable to the bulk of IAC’s claim.  The Iriartes terminated their agency agreement at the end of April, 2001, and Emmy became general agent as of May 1, 2001.  All of the amounts converted during the Iriartes’ time as agents, with the exception of the cashier’s check, will begin to accrue interest as of that date.  Since Emmy was terminated as IAC’s general agent on July 1, 2003, interest will begin to accrue on the amounts converted during her time as general agent as of that date.  Thus, IAC’s damages against the Iriartes in the amount of $192,105.82

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($200,405.82 – $8,300) will bear interest at the statutory rate of nine percent per annum beginning May 1, 2001.  Of the damages awarded against Emmy, $161,399.19 ($169,666.19 – $8,300.00) will accrue interest at the statutory rate as of May 1, 2001.  The remaining damages of $125,834.49 against Emmy will accrue interest as of July 1, 2003. Similarly with Ambros, interest will accrue on $161,366.19 from May 1, 2001, and from July 1, 2003, on $125,834.49.

    IAC is entitled to no damages on either its claim for attorney’s fees or its claim for punitive damages, since it did not prevail on these claims.

H. Attorney’s fees

    IAC seeks its attorney’s fees in this action.  Generally, a party bears its own attorney’s fees, and this "rule is the proper foundation upon which the system here [in the FSM] should be built."  Semes v. Continental Airlines, Inc. (II), 2 FSM Intrm. 200, 208 (1986).  However, there are exceptions to this general rule.  For example, attorney’s fees have been awarded for a breach of fiduciary duty in the FSM.  Nukuto, 6 FSM Intrm. at 618.  However, in Nukuto, that award was made under a narrowly drawn exception that relied on the specific facts of that case.  Id.  The court in Nukuto first emphasized that it was "not asked to abandon the general presumption against attorney’s fees awards without statutory authority or to make fee awards a standard practice."  Id. at 617.  The defendant had breached her fiduciary duty as a bank employee by converting funds held on deposit by the Bank.  Id. at 618.  The defendant had no claim to the funds, and had no defense. Id.  The trial court concluded that the narrowly drawn exception to the rule that the parties bear their own attorney’s fees would "only apply when a defendant has engaged in wrongdoing, has no colorable title to defense to the sums she has converted, and is wholly to blame." Id.

    Similarly, in the case at bar the court considers the issue of attorney’s fees in the context of the general rule that parties are to bear their own attorney’s fees. The question is whether the facts of this case dictate a departure from that principle.  Unlike Nukuto, which involved simple theft of Bank funds, in this case the conversion arose as part of the efforts of IAC’s agents to address customer concerns about the time it took for policy holders to receive their checks for loans taken out on their policies, or for the partial or full surrender value of their policies. A substantial amount of the cash obtained from the premium checks was distributed to policy holders.  Further, when the problem was identified, Emmy was cooperative in helping IAC determine what sums were missing. Thus attorney’s fees are not appropriate with respect to either the Iriartes or Emmy.  Nor are attorney’s fees awarded against Ambros, since it acted in reliance on Lilly’s and Emmy’s representations when its employees cashed the checks in question.

IV. Conclusion

    The defendants are liable to IAC for the reasons and in the amounts set forth above. The clerk shall enter judgment accordingly.

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Footnotes:

1. Since two of the defendants have the same last name, the court for ease of reference will where appropriate refer to the individual defendants by their first names, i.e., William, Lilly, and Emmy.

2. Exhibit 1D-1, which was admitted into evidence pursuant to the parties' stipulation filed on March 16, 2009, and the order entered on the stipulation on March 17, 2009, sets out a summary of IAC's damages. John Diebold, who is IAC's vice president of finance, testified that in preparing this document he relied on IAC's exhibit 1D-2, which is a listing of all of the checks that were cashed at Ambros. Exhibit 1D, which was also admitted into evidence, and which Diebold testified that he did not prepare, allocates the various amounts in question differently. Exhibit 1D also contains a 59 cent mathematical error. But taking that error into account, both exhibits reach the same conclusion about the total claim: exhibit 1D-1 shows a total claim of $326,240.31, while exhibit 1D shows a total claim of $326,239.72 ($326,240.31 – .59). Diebold testified that exhibit 1D-1, about which he testified in detail, is accurate. The court adopts the figures set out in exhibit 1D-1.

3. Prior FSM cases have not addressed this precise point. In such instances, the court may look to authorities from other jurisdictions in the common law tradition. Rauzi v. FSM, 2 FSM Intrm. 8, 14-15 (Pon. 1985).

4. Lilly did state in her deposition, however, that she talked to Emmy's mother Susin Senda sometime in mid-2001. Susin asked Lilly if Emmy was authorized to cash the checks. Lilly told Susin that if it was in Emmy's contract, it was fine.

5. Subsequent to Opet, comparative negligence was adopted as the rule in Pohnpei. Alfons v. Edwin, 5 FSM Intrm. 238, 242 (Pon. 1991). Thus comparative negligence is not a defense to a conversion action.

6. Emmy asserts that IAC seeks to recover for two checks – number 189071, dated January 16, 2001, and number 189521 dated January 30, 2009, both in the amount of $590 (plaintiff's exhibit 5A-24) – that were allegedly cashed at Ambros, but were actually deposited in IAC's account in Kansas City. However, these checks do not appear on IAC's exhibit 5A (admitted into evidence by stipulation and order of March 16 and 17, 2009, respectively) as being among the checks which IAC is seeking recovery. No credit is given for these two checks.

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