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HEADNOTES

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COURT'S OPINION

MARTIN G. YINUG, Chief Justice:

On April 8, 2013, the court heard 1) the Motion to Dismiss Complaint and to Vacate Preliminary Injunction, filed on March 1, 2013, by defendants State of Pohnpei, John Ehsa in his capacity as Governor, and the Office of Fisheries and Aquaculture (collectively "state defendants"); 2) Motion to Compel Arbitration, filed on February 25, 2013 by plaintiff Luen Thai Fishing Venture, Ltd. ("Luen Thai"); and 3) Motion to Set Aside Bid Award and Lease; Motion to Defer Decision until Motion to Compel Is Heard, filed on February 25, 2013, by plaintiff Liancheng Overseas Fishery (FSM) Co., Ltd.

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("Liancheng"). The motion to dismiss is denied and the motions to compel and to defer decision are granted. The reasons follow.

I. MOTION TO DISMISS

The state defendants move to dismiss this case for the lack of subject-matter jurisdiction and, because the court lacked jurisdiction, to vacate the preliminary injunction already in place. The state defendant contends that the court has no subject-matter jurisdiction over the lawsuit between Luen Thai and Pohnpei because the lease agreement that Luen Thai seeks to specifically enforce provides that for any legal dispute arising from that agreement, arbitration by the American Arbitration Association in Honolulu, Hawaii or other mutually agreeable venue, is the mandatory and exclusive remedy; because Liancheng failed to exhaust its administrative remedies before filing suit and because there is an absence of diversity of citizenship between the parties. These contentions will be addressed in reverse order.

A. Diversity Jurisdiction

The state defendants' assertion that the court lacks diversity over the case is based on the fact that both plaintiffs are foreign citizens as is one of the defendants § Miju Mulsan Co. This contention is meritless. Complete diversity of citizenship is not a requirement for the FSM Supreme Court to have subject-matter jurisdiction in a diversity case; only minimal diversity is required. Luzama v. Ponape Enterprises Co., 7 FSM Intrm. 40, 48 (App. 1995).

B. Exhaustion of Administrative Remedies

The state defendants contend that the court lacks jurisdiction over Liancheng's claims because Liancheng failed to exhaust its administrative remedies before resorting to litigation. They further contend that when Liancheng did attempt to pursue its administrative remedies that pursuit was untimely so its right to pursue those remedies or to resort to litigation has lapsed. The state defendants contend that under regulations adopted pursuant to 11 Pon. C. § 2-114, Liancheng had seven business days to initiate an administrative appeal once it was notified on January 3, 2013, of the December 20, 2012 bid award to Miju Mulsan Co.

Failure to exhaust administrative remedies is an affirmative defense that ordinarily must be pled or it is deemed waived. E.g., AHPW, Inc. v. FSM, 12 FSM Intrm. 114, 123 (Pon. 2003); see also Mobil Oil Micronesia, Inc. v. Pohnpei Port Auth., 13 FSM Intrm. 223, 228 (Pon. 2005) (burden to plead and prove the defense of failure to exhaust administrative remedies falls upon the defendant); cf. Aunu v. Chuuk, 18 FSM Intrm. 48, 50 (Chk. 2011) (when it appears that the plaintiff may not have exhausted his administrative remedies, the court may, in its discretion, stay the matter to allow the plaintiff to first pursue his administrative remedies and if he remains aggrieved, the court can then lift the stay and allow the litigation to proceed). It was not pled in the state defendants' answer. Nor have the state defendants shown that any statute makes proof of exhaustion of administrative remedies jurisdictional. The state defendants have not shown that there is a statutory requirement that when seeking to lease state government land and facilities certain administrative procedures must be followed within certain time frames before an aggrieved party may resort to court litigation.

The statute and attendant regulations that the state defendants rely upon apply only to Pohnpei state government procurement contracts – bidding for contracts where the vendor bidders are competing to sell goods or services – personal property. In this case, the bidders were not seeking to sell anything to Pohnpei. They were seeking to acquire real estate rights – to lease government land and fish processing facilities (not personal property) from the state government. The state defendants

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have therefore not shown that there are any jurisdictional steps that Liancheng failed to take or any jurisdictional deadlines that Liancheng failed to meet.

Even if it were pled as an affirmative defense, which it was not, this ground would fail. A plaintiff does not have to exhaust one's administrative remedies before filing suit when to do so would be futile. Naka v. Simina, 13 FSM Intrm. 460, 461 (Chk. 2005); Dorval Tankship Pty, Ltd. v. Department of Finance, 8 FSM Intrm. 111, 115 (Chk. 1997); Chuuk v. Secretary of Finance, 7 FSM Intrm. 563, 566 n.4 (Pon. 1996); see also Sipenuk v. FSM Nat'l Election Dir., 15 FSM Intrm. 1, 5 n.2 (App. 2007); Wiliander v. National Election Dir., 13 FSM Intrm. 199, 203 n.2 (App. 2005). There has been ample evidence presented at earlier court hearings that it would be futile for Liancheng to try to pursue administrative remedies.

Accordingly, the court has subject-matter jurisdiction over Liancheng's claims and causes of action.

C. Arbitration Clause

Luen Thai, on January 16, 2013, before this case was filed, sent a letter demanding that its dispute with Pohnpei over the lease agreement be submitted to arbitration. On January 21, 2013, the acting Administrator of the Office of Fisheries and Aquaculture denied this demand in writing. Luen Thai then filed this suit on January 23, 2013. The state defendants, in their February 12, 2013 answer, contested whether Luen Thai's claims were eligible for arbitration.

The state defendants now move to dismiss this case because the lease agreement's arbitration clause makes "mandatory and binding arbitration" the exclusive remedy for "[a]ny legal dispute relating to the lease Agreement" Amended Lease Agreement § 25 (June 6, 2006). This is the same clause that Luen Thai first sought to enforce through its January 16, 2013 demand letter but was rebuffed.

If the state defendants were successful on this ground this case could not be dismissed because the court unquestionably has subject-matter jurisdiction over the claims of Luen Thai's co-plaintiff Liancheng and those claims would remain and proceed through litigation. The court would also have subject-matter jurisdiction over Luen Thai's claims against the state defendants based on diversity of citizenship, FSM Const. art. XI, § 6(b) (FSM Supreme court has jurisdiction over disputes "between a state or a citizen thereof, and a foreign state, citizen, or subject"), except that the parties chose by contractual agreement to resolve any legal disputes in another forum – the American Arbitration Association – and in another venue, Honolulu, if the parties do not mutually agree to a different venue.

In this case, Luen Thai asserts that, since it seeks equitable as well as legal relief, that this case should not be dismissed since the arbitration can address only "legal disputes." Luen Thai contends that equitable relief, such as the preliminary injunction now in place, cannot be awarded in the arbitration since the contract arbitration clause restricts arbitration to "legal disputes." The state defendants respond that under the American Arbitration Association's rules suitable "interim relief" including injunctive relief is available while the arbitration is pending.

The FSM Supreme Court generally encourages parties to voluntarily agree to resolve their disputes through alternative means such as arbitration and will "specifically enforce the parties' contract to arbitrate." E.M. Chen & Assocs. (FSM), Inc. v. Pohnpei Port Auth., 10 FSM Intrm. 400, 409 (Pon. 2001). There are no FSM statutes governing arbitration, therefore only common law arbitration exists here. Id. at 408. Nevertheless, when a contract clearly shows the parties' intent to submit disputes to arbitration, the court will allow and encourage "the parties to freely contract to resolve their disputes in other forums, with the confidence that such agreements will be enforced by the Court." Id. The

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court "will hold them to their agreement and specifically enforce the arbitration provisions in the contract." Id.

In the absence of a statute requiring it, the specific enforcement of the arbitration clause does not mandate that this litigation be dismissed before the arbitration can proceed. Generally, judicial proceedings will instead be stayed pending the arbitration. See 4 AM. JUR. 2D Alternative Dispute Resolution §§ 134-147 (rev. ed. 1995). Because the court has some concerns about whether the American Arbitration Association could, if needed, enforce its "interim relief" in a foreign country (the FSM) against a reductant state sovereign (Pohnpei) and the need for the court to start all over from the beginning if one of the parties were to refuse to participate in the arbitration when the time comes, the court will, instead, stay these proceedings while the parties proceed through arbitration.

In the absence of a statute requiring dismissal and in the interests of judicial economy and of lessening the financial burden on the parties, the best way to specifically enforce the arbitration clause's intent is not to dismiss this case in the hope that a foreign arbitration will proceed smoothly and not require further judicial enforcement. The best way to specifically enforce the arbitration clause is to stay the judicial proceedings and maintain the status quo while the parties go through arbitration. The preliminary injunction will therefore remain in effect and the case will remain open while the arbitration proceeds. Once an arbitration decision is rendered, the court can then enforce that decision as a judgment or final order of this court and take such further steps as may be necessary and appropriate to conclude this litigation. This stay of judicial proceedings while the parties arbitrate is meant solely as an aid to the mandatory and binding arbitration, leaving the parties confident that the result will be quickly and easily enforceable here if needed, with the rest of the case proceeding or being dismissed as need be.

II. MOTION TO COMPEL ARBITRATION

Luen Thai moves that the court specifically enforce the lease agreement's arbitration provision and that the court compel the state defendants to arbitrate its dispute arising from the lease agreement. Luen Thai's motion is unopposed. "[A]n agreement to arbitrate future contractual disputes is specifically enforceable, even if one party attempts to revoke the agreement." E.M. Chen & Assocs., 10 FSM Intrm. at 408. Since the court is denying the state defendants' motion to dismiss the case but will stay further judicial proceedings while the arbitration proceeds, Luen Thai's motion is, in effect, granted by the court's ruling on the motion to dismiss.

Accordingly, Luen Thai's motion to compel arbitration is granted and its case will be stayed while the arbitration proceeds.

III. MOTION TO SET ASIDE BID AWARD AND LEASE; MOTION TO DEFER DECISION

The plaintiffs also move that a decision on Liancheng's motion to set aside the Miju Mulsan bid award be deferred until the arbitration results are known since a favorable outcome for Luen Thai may make it unnecessary for Liancheng to pursue its case. This motion is also unopposed. Good cause, rooted in the principles of judicial economy, exists, so therefore the motion to defer is granted.

IV. ENTRY OF MIJU MULSAN'S DEFAULT

The plaintiffs also ask that Miju Mulsan Co.'s default be entered because it has failed to file an answer in the time permitted by Civil Procedure Rule 12(a) after its motion to dismiss was denied. The plaintiffs' request was not supported by affidavit as required by Rule 55(a) ("When a party against whom a judgment for affirmative relief is sought has failed to plead . . . as provided by these rules and

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that fact is made to appear by affidavit or otherwise, the clerk shall enter that party's default."). "Before entering a default, the clerk must examine the affidavits filed and find that they meet the requirements of Rule 55(a)." 10A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE § 2682, at 19 (3d ed. 1998) (footnote omitted).¹ A request for entry of default must be supported by affidavit because while "[t]he clerk will know when the summons and complaint were served on the defendant [assuming that a return of service was filed], but will not know if the answer was served [on the plaintiff] within the 20-day period provided for in Rule 12." 6 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE ¶ 55.03[1], at 55-14-55-15 (2d ed. 1990). This is because "[p]laintiff's attorney, of course, will know whether he has been served with a copy of a defendant's answer or not." DeTore v. Local No. 245, Jersy City Public Employees Union, 511 F. Supp. 171, 176 (D.N.J. 1981) (affidavit required). "Thus the plaintiff . . . must establish the fact of default by evidence, and this evidence can take the form of an affidavit showing the time and service of the summons and complaint, and averring that an answer . . . was not served within the allowed time." JAMES WM. MOORE ET AL., supra, ¶ 55.03[1], at 55-15. "[T]he practice seems generally to make a request, supported by affidavit, and the burden of preparing an affidavit appears minimal." Id. The plaintiffs did not show by affidavit that they were not served with Miju Mulsan Co.'s answer.

Accordingly, the court will not direct the clerk to enter a default but will direct the clerk not to enter Miju Mulsan Co.'s default until the plaintiffs have supplemented their request by supporting it with an affidavit and the clerk has reviewed the affidavit and is satisfied that it meets Rule 55(a)'s requirements.

V. CONCLUSION

Accordingly, the court orders that, if has not already done so, plaintiff Luen Thai must, within ten days of service of this order, file the necessary papers with the American Arbitration Association to start the arbitration process. The court further orders that Luen Thai and the state defendants shall jointly file on the 25th day of every month a progress report on the status of the arbitration proceedings and shall, once issued, promptly file a copy of the arbitration decision with the court. The court expects, unless given sound reasons not to, that it would then enter the arbitration decision as a final court order and take such further actions, if any, as may be appropriate.

Footnotes:

¹ Although the court must first look to FSM sources of law, FSM Const. art. XI, § 11, when an FSM court has not previously construed an FSM civil procedure rule which is identical or similar to a U.S. counterpart, it may look to U.S. sources for guidance in interpreting the rule. See, e.g., Arthur v. FSM Dev. Bank, 14 FSM Intrm. 390, 394 n.1 (App. 2006).