FSM SUPREME COURT TRIAL DIVISION
Cite as Seasco Co. v. Ikitsuki, 24 FSM R. 607 (Chk. 2024)
SEASCO COMPANY, LTD.,
Plaintiff,
vs.
IKITSUKI, a vessel registered and now doing
business as NARIK MATAW, presently in the
possession and operation of Congressional Election
District (ED #5), with its hull, keel, engines, gears,
GPS, life jackets, air conditioning and cooling
systems, and furnishings,
In rem Defendant,
FSM DEPARTMENT OF FINANCE, FSM
GOVERNMENT, and CHUUK CONGRESSIONAL
ELECTION DISTRICT FIVE (ED #5),
In Personam Defendants.
CIVIL ACTION NO. 2021-1012
ORDER FINDING ECONOMIC DURESS
Larry Wentworth
Associate Justice
Hearing: October 29, 2024
Decided: November 27, 2024
APPEARANCES:
For the Plaintiff:
Sabino S. Asor, Esq.
213 Raven Way
Dededo, Guam 96929
For the Defendant:
Josef Rold, Esq.
Assistant Attorney General
FSM Department of Justice
P.O. Box PS-105
Palikir, Pohnpei FM 96941
* * * *
Economic duress makes a formed contract voidable. A contract is voidable for economic duress if a party's manifestation of assent is induced by the other party's improper threat that leaves the victim no reasonable alternative. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 610 (Chk. 2024).
The requirements for a showing of duress by threat can be grouped under four headings. First, there must be a threat. Second, the threat must be improper. Third, the threat must induce the victim's manifestation of assent. Fourth, it must be sufficiently grave to justify the victim's assent. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 610-11 (Chk. 2024).
Wrongful acts or threats may be categorized into four principal classes: 1) violence or threats of violence [not economic duress]; 2) imprisonment or threats of imprisonment [also not economic duress]; 3) wrongful seizing or withholding, or threats to wrongfully seize or withhold, goods or lands; 4) other wrongful acts. But, absent a wrongful threat, the driving of a hard bargain is not duress. This is true even if one party benefits from the financial distress of the other. To be wrongful or improper the act or threat does not have to be unlawful. Today, the general rule is that any wrongful act or threat which overcomes the free will of a party constitutes duress. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 611 (Chk. 2024).
One essential element of economic duress that the plaintiff must show is that the other party by wrongful acts or threats, intentionally caused him to involuntarily enter into a particular transaction. Wrongfulness depends on each case's particular facts and may be satisfied where the alleged wrongdoer's conduct is criminal or tortious but an act or threat may also be wrongful if it is wrongful in the moral sense. Thus, the act or threat upon which a claim of coercion is predicated must only be wrongful in a moral sense, not necessarily a legal one. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 611 (Chk. 2024).
Economic duress does not occur simply because a person has been the victim of a wrongful act. That person must also have no choice but to agree to the other party's terms or face serious financial hardship. There is no reasonable alternative to agreeing to the other party's terms when there is no adequate remedy if the threat were to be carried out. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 611 (Chk. 2024).
To prove an economic duress defense against a contract, a party claiming economic duress must show 1) that the other party committed a wrongful or unlawful act or threat; 2) that this wrongful act or threat deprived the victim of its free will, leaving the victim with no reasonable alternative but to agree to the coercing party's terms; 3) that there is a direct causal relationship between the wrongful act or threat and the contract (that is, the wrongful act or threat must have been the primary reason the victim entered into the contract); 4) that the wrongful act or threat had been imminent and the victim had no means of protection or reasonable alternative to avoid it; 5) that the victim had been compelled to make a disproportionate exchange of value as a result of the duress; and 6) that the contract was entered into under the press of financial circumstances, with no other reasonable alternative. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 611 (Chk. 2024).
In many cases, a threat to breach a contract or to withhold payment of an admitted debt constitutes a wrongful act. Implicit in such cases is the additional requirement that the threat to breach the contract or withhold payment be done in bad faith. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 613 (Chk. 2024).
When the circumstances surrounding the refusal to pay (with the overhanging money-laundering prosecution) indicate bad faith, the refusal to pay was a morally wrongful act while the threat of continued prosecution may have been legally wrongful. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 612 (Chk. 2024).
A bad faith threat to withhold a payment may constitute a wrongful act for purposes of the economic
duress doctrine and a reasonably prudent person subject to such an act may have no reasonable alternative but to succumb when the only other alternative is bankruptcy or financial ruin. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 612 (Chk. 2024).
Economic duress does not exist merely because a person has been the victim of a wrongful act; in addition, the victim must have no choice but to agree to the other party's terms or face serious financial hardship. Thus, in order to avoid a contract, a party must also show that he had no reasonable alternative to agreeing to the other party's terms, or, as it is often stated, that he had no adequate remedy if the threat were to be carried out. What constitutes a reasonable alternative is a question of fact, depending on each case's circumstances. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 612 (Chk. 2024).
When one party wrongfully threatens to withhold goods, services, or money from another unless certain demands are met, the remedy's adequacy is to be tested by a practical standard which takes into consideration the exigencies of the situation in which the alleged victim finds himself. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 612 (Chk. 2024).
When an action for breach of contract, did not provide an available legal remedy because it was the action for breach of contract that the defendants' coercion for a settlement agreement aimed to eliminate by dismissal; when the ship was no longer in the plaintiff's possession so the plaintiff did not have the alternative, reasonable or not, of withholding delivery until paid; and when it was a government vessel, on which a maritime lien cannot be asserted or the vessel arrested, there was no reasonable alternative available. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 612 & n.1 (Chk. 2024).
A party seeking to prove economic duress must prove that the defendant committed a wrongful act. More importantly, however, the plaintiff must also show a causal relationship between the bad act and the contract at issue. The defendant's bad act, not something else, must have forced the plaintiff to sign the burdensome contract. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 613 (Chk. 2024).
When the only reasons for the plaintiff's signing (under protest) of a settlement agreement were the defendants' refusal to pay anything for the vessel for over a year and the continued prosecution, it was the defendants' wrongful acts caused the plaintiff to sign the burdensome settlement agreement. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 613 (Chk. 2024).
When the plaintiff had not been paid anything for the vessel (the initial $500,000 pre-purchase payment had been seized and was unavailable) and was in desperate need of a financial infusion and when any further delay may have proved fatal to the plaintiff's business, causing the plaintiff to sign the settlement agreement under duress (and under protest), the wrongful act had been imminent and the plaintiff had no means of protection or reasonable alternative to avoid it. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 613 (Chk. 2024).
The party alleging economic duress must show that he has been the victim of a wrongful or unlawful act or threat, and such act or threat must be one which deprives the victim of his unfettered will. As a direct result of these elements, the party threatened must be compelled to make a disproportionate exchange of values or to give up something for nothing. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 613 (Chk. 2024).
There was a disproportionate exchange of values where the plaintiff was forced to relinquish any claim either to the vessel or to any further payment (thus forfeiting any claim to the earlier $500,000 initial payment seized from the plaintiff during the money-laundering investigation) for an $800,000 payment when the plaintiff had paid substantially more than that to purchase and refit and provision the ship, to provide it with an FSM crew, and to have that crew sail it from the refitting shipyard in Nagasaki, Japan to Chuuk Lagoon to deliver to its current governmental owner. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 615 (Chk. 2024).
The plaintiff signed the settlement agreement under the press of financial circumstances when any further delay may have proved fatal to its business; when its financial predicament was caused by the defendants' refusal to pay anything for the vessel's purchase, refitting, and delivery; and when the defendants' wrongful act of refusing to pay left the plaintiff with no reasonable alternative but to sign the settlement agreement under protest. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 614 (Chk. 2024).
Parties whose agreement was obtained under duress may later ratify the agreement. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 614 (Chk. 2024).
When the court is convinced that the plaintiff has proven its economic duress defense to a settlement agreement, the court will grant the plaintiff's request to void the agreement. Seasco Co. v. Ikitsuki, 24 FSM R. 607, 614 (Chk. 2024).
* * * *
LARRY WENTWORTH, Associate Justice:
On October 29, 2024, the court held an evidentiary hearing on the plaintiff's economic duress defense to the April 13, 2023 settlement agreement under which the plaintiff, Seasco Company Ltd. ("Seasco"), agreed to dismiss this case in return for an $800,000 payment and the dismissal of certain criminal charges (Counts 1-24 in Criminal Case No. 2021-1501 alleging money-laundering) against Seasco and its principal, Pyung Soo Gong. The defendants sought dismissal of this case based on the settlement agreement's terms. Seasco contends that that agreement was obtained through economic duress and is thus voidable.
The court agrees. The basic facts are generally undisputed and are set out in the court's previous Order Denying Motions to Dismiss, for Summary Judgment, and for an Arrest Warrant, Seasco Co. v. Ikitsuki, 24 FSM R. 568 (Chk. 2024), entered on August 23, 2024, and will not be repeated here unless necessary.
As the court noted earlier, "'[e]conomic duress makes a formed contract voidable. A contract is voidable for economic duress if: (1) a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative . . . .'" Seasco Co. v. Ikitsuki, 24 FSM R. 568, 574 (Chk. 2024) (quoting Smith v. Nimea, 18 FSM R. 36, 41-42 (Pon. 2011)). Seasco alleges that the FSM defendants improperly induced its assent to the April 13, 2023 settlement agreement, entitled Contract on the Purchase of Narik Mataw Vessel.
"The requirements for a showing of duress by threat can be grouped under four headings. First, there must be a threat. Second, the threat must be improper. Third, the threat must
induce the victim's manifestation of assent. Fourth, it must be sufficiently grave to justify the victim's assent." E. ALLAN FARNSWORTH, CONTRACTS § 4.16, at 257 (1982).
Wrongful acts or threats "may be categorized into four principal classes. 1. Violence or threats of violence [not economic duress]. 2. Imprisonment or threats of imprisonment [also not economic duress]. 3. Wrongful seizing or withholding, or threats to wrongfully seize or withhold, goods or lands. 4. Other wrongful acts." JOSEPH M. PERILLO, CALAMARI AND PERILLO ON CONTRACTS § 9.3, at 318-19 (5th ed. 2003) (footnote omitted). But, "absent a wrongful threat, the driving of a hard bargain is not duress. This is true even if one party benefits from the financial distress of the other." Id. at 320 (emphasis in original). To be wrongful or improper the act or threat does not have to be unlawful. Id. at 319; FARNSWORTH, supra, § 4.17, at 259.
Ikitsuki, 24 FSM R. at 575 (Chk. 2024) (quoting FSM Telecomm. Cable Corp. v. FSM Telecomm. Corp., 23 FSM R. 667, 685 (Pon. 2022)) (footnote omitted) (alterations in original). "Today the general rule is that any wrongful act or threat which overcomes the free will of a party constitutes duress. This simple statement of law, however, conceals a number of questions, particularly as to the meaning of 'free will' and 'wrongful.'" JOSEPH M. PERILLO, CALAMARI AND PERILLO ON CONTRACTS § 9.2, at 316 (5th ed. 2003) (footnote omitted).
"[O]ne essential element of economic duress is that the plaintiff must show that the other party by wrongful acts or threats, intentionally caused him to involuntarily enter into a particular transaction." Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Serv. Co., 584 P.2d 15, 22, 9 A.L.R.4th 928, 936 (Alaska 1978). "Wrongfulness" depends on each case's particular facts and "may be satisfied where the alleged wrongdoer's conduct is criminal or tortious but an act or threat may also be considered wrongful if it is wrongful in the moral sense." Id. at 22, 9 A.L.R.4th at 935-37. "The act or threat upon which a claim of coercion is predicated must only be wrongful in a moral sense, not necessarily a legal one." Gerber v. First Nat'l Bank, 332 N.E.2d 615, 618, 79 A.L.R.3d 592, 596 (Ill. App. Ct. 1975).
Economic duress does not occur simply "because a person has been the victim of a wrongful act." Totem Marine Tug & Barge, 584 P.2d at 22, 9 A.L.R.4th at 937. That person must also "have no choice but to agree to the other party's terms or face serious financial hardship," and that there is "no reasonable alternative to agreeing to the other party's terms" because there is "no adequate remedy if the threat were to be carried out." Id.
Thus, to prove an economic duress defense against a contract, a party claiming economic duress must show 1) that the other party committed a wrongful or unlawful act or threat; 2) that this wrongful act or threat deprived the victim of its free will, leaving the victim with no reasonable alternative but to agree to the coercing party's terms; 3) that there is a direct causal relationship between the wrongful act or threat and the contract (that is, the wrongful act or threat must have been the primary reason the victim entered into the contract); 4) that the wrongful act or threat had been imminent and the victim had no means of protection or reasonable alternative to avoid it; 5) that the victim had been compelled to make a disproportionate exchange of value as a result of the duress; and 6) that the contract was entered into under the press of financial circumstances, with no other reasonable alternative.
A. Threat or Wrongful Act
There appear to have been two wrongful acts or threats. First, there was the threat of continued prosecution of the 24 money-laundering criminal counts that the FSM national police, after analyzing the records seized with a search warrant, had earlier certified to the FSM Attorney General's Office that they had found no evidence of money-laundering. And the second was the defendants' refusal for over a year to
make any payment for the M/V Ikitsuki even after it was renamed the MS Narik Mataw, and registered as an FSM vessel owned by the Northwest Development Authority, Weno, Chuuk, and delivered to that owner in Chuuk Lagoon. It is undisputed that the contract price for the vessel was $1.3 million.
"In many cases, a threat to breach a contract or to withhold payment of an admitted debt has constituted a wrongful act. Implicit in such cases is the additional requirement that the threat to breach the contract or withhold payment be done in bad faith." Totem Marine Tug & Barge, 584 P.2d at 22, 9 A.L.R.4th at 937 (citations omitted); see generally Wendy Evans Lehmann, Annotation, Refusal to Pay Debt as Economic Duress or Business Compulsion Avoiding Compromise or Release, 9 A.L.R.4th 942, § 5[a], at 955-57 (1981). The circumstances surrounding the refusal to pay (with the overhanging money-laundering prosecution) indicate bad faith. "[A] bad faith threat . . . to withhold a payment may constitute a wrongful act for purposes of the economic duress doctrine, [and] a reasonably prudent person subject to such an act may have no reasonable alternative but to succumb when the only other alternative is bankruptcy or financial ruin." Rich & Whillock, Inc. v. Ashton Dev., Inc., 204 Cal. Rptr. 86, 90 (Cal. Ct. App. 1984).
Thus, while the threat of continued prosecution may have been legally wrongful, the refusal to pay was a morally wrongful act.
B. Deprivation of Free Will
The wrongful act or threat must have deprived the victim of its free will, compelling it to enter into the contract. This means that the victim was left with no reasonable alternative but to agree to the terms imposed by the coercing party. Thus:
Economic duress does not exist, however, merely because a person has been the victim of a wrongful act; in addition, the victim must have no choice but to agree to the other party's terms or face serious financial hardship. Thus, in order to avoid a contract, a party must also show that he had no reasonable alternative to agreeing to the other party's terms, or, as it is often stated, that he had no adequate remedy if the threat were to be carried out. What constitutes a reasonable alternative is a question of fact, depending on the circumstances of each case. An available legal remedy, such as an action for breach of contract, may provide such an alternative. Where one party wrongfully threatens to withhold goods, services or money from another unless certain demands are met, the availability on the market of similar goods and services or of other sources of funds may also provide an alternative to succumbing to the coercing party's demands. Generally, it has been said that "[t]he adequacy of the remedy is to be tested by a practical standard which takes into consideration the exigencies of the situation in which the alleged victim finds himself."
Totem Marine Tug & Barge, 584 P.2d at 22, 9 A.L.R.4th at 937 (citations omitted) (quoting Ross Sys. v. Linden Dari Delite, Inc., 173 A.2d 258, 262 (N.J. 1961)).
In this case, an action for breach of contract, did not provide an available legal remedy because it was this very action for breach of contract that the defendants' coercion aimed to eliminate by dismissal. A civil action was therefore not a reasonable alternative.
And since the ship, now named the MS Narik Mataw, was no longer in Seasco's possession and was an FSM-registered vessel (Registration No. VR0178) in the possession of the development arm, the Northwest Development Authority, of the defendant Congressional Election District (ED #5), Seasco also did not have the alternative, reasonable or not, of withholding delivery until paid.1 Seasco was thus left with
no reasonable alternative. See, e.g., Austin Instrument, Inc. v. Loral Corp., 272 N.E.2d 533, 536 (N.Y. 1971) (contractor's dire need for subcontractor's parts in order for it to meet its government contracts left it with no reasonable alternative but to agree to subcontractor's breach-of-contract demands for price increases for its parts; increased price contract voided for economic duress).
C. Causal Relationship
Seasco must show a direct causal relationship between the defendants' wrongful acts and the April 13, 2023 settlement agreement because
economic duress allows a party to avoid a contract that it has entered if a "wrongful act [of the other party was] sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator's pressure." As that rule suggests, a party seeking to prove economic duress must prove that the defendant committed a wrongful act. More importantly, however, the plaintiff must also show a causal relationship between the bad act and the contract at issue. The defendant's bad act, not something else, must have forced the plaintiff to sign the burdensome contract.
Strickland Tower Maint., Inc. v. AT&T Commc'ns, Inc.,128 F.3d 1422, 1426 (10th Cir. 1997).
In this case, the only reasons for Seasco's signing (under protest) the April 13, 2023 settlement agreement are the withholding of payment and the continued prosecution. The defendants do not suggest that there were other reasons. The defendants' wrongful acts caused Seasco to sign the burdensome April 13, 2023 settlement agreement. That settlement agreement would not exist if it were not for the defendants' refusal to pay anything for over a year.
D. Imminent Threat and Lack of Protection
Seasco also needed to show that the threat or wrongful act had been imminent and that it had no means of protection or reasonable alternative to avoid the threat or wrongful act. Seasco was in just such a situation. It proved that because it had not been paid anything for the vessel (the initial $500,000 pre-purchase payment had been seized by the government as part of its money-laundering investigation and was not available to Seasco), it was in desperate need of a financial infusion. In the months before the settlement agreement, Seasco laid off employees from time to time or issued their paychecks days late. And it lacked the liquidity to pay its suppliers of construction materials and so its gross revenue was in a downward spiral. All of this was because of the defendants' refusal to pay anything for the vessel for well over a year. Since any further delay may have proved fatal to Seasco's business, Seasco signed the April 13, 2023 settlement agreement under duress (and under protest). The agreement was thus potentially voidable. Totem Marine Tug & Barge, 584 P.2d at 23, 9 A.L.R.4th at 938.
E. Disproportionate Exchange of Value
"1. The party alleging economic duress must show that he has been the victim of a wrongful or unlawful act or threat, and
"2. Such act or threat must be one which deprives the victim of his unfettered will.
"As a direct result of these elements, the party threatened must be compelled to make a disproportionate exchange of values or to give up something for nothing. If the payment or exchange is made with the hope of obtaining a gain, there is not duress; it must be made solely for the purpose of protecting the victim's business or property interests. Finally, the party threatened must have no adequate legal remedy."
Wurtz v. Fleischman, 293 N.W.2d 155, 160, 12 A.L.R.4th 1254, 1261 (Wis. 1980) (quoting WILLISTON ON CONTRACTS § 1617, at 704 (3d ed. 1970)).
In this case, there was a disproportionate exchange of values because Seasco was forced to relinquish any claim either to the vessel (now the MS Narik Mataw) or to any further payment (thus forfeiting any claim to the earlier $500,000 initial payment seized from Seasco during the money-laundering investigation) for an $800,000 payment when Seasco had paid substantially more than that to purchase and refit and provision the ship, to provide it with an FSM crew, and to have that crew sail it from the refitting shipyard in Nagasaki, Japan to Chuuk Lagoon to deliver to its current governmental owner. Seasco had no hope of obtaining a gain from the settlement agreement transaction because the transaction was made at a loss and did not contemplate that it would generate any future business.
F. Financial Circumstances
Seasco has also needs to show that it entered into the settlement agreement under the press of financial circumstances. As described above, part II.D., Seasco signed the April 13, 2023 settlement agreement because any further delay may have proved fatal to Seasco's business and Seasco's financial predicament was caused by the defendants' refusal to pay anything for the vessel's purchase, refitting, and delivery. This was shown through witness testimony and affidavits and financial records produced by Seasco and neither challenged nor refuted by the defendants. And as described above, parts II.B. & II.C., no reasonable alternative was available. Therefore, the defendants' wrongful act of refusing to pay, which caused the Seasco's press of financial circumstances, left Seasco with no reasonable alternative but to sign the April 13, 2023 settlement agreement under protest.
G. Summary
Seasco took no action that could possibly be conceived as ratifying the April 13, 2023 settlement agreement. See, e.g., Dorn v. Astra USA, 975 F. Supp. 388, 394 (D. Mass. 1997) (parties may ratify their agreements obtained under duress by remaining silent or acquiescing in the contract for a considerable length of time after having the opportunity to avoid it; repudiation of a contract obtained under duress must be done "within a reasonable amount of time"); Romero v. Bank of the Southwest, 83 P.3d 288, 293 (N.M. Ct. App. 2003) ("Ratification is effective only if (1) all duress is removed; (2) the wronged party has full knowledge of all the material facts entitling him to rescission; and (3) he manifests an intent to ratify the contract, either expressly or by conduct").
The court is therefore convinced that Seasco has proven its economic duress defense. The matter is clear. The court accordingly concludes that the April 13, 2023 settlement agreement between Seasco and the FSM (entitled "Contract on the Purchase of Narik Mataw Vessel") is voidable because the FSM obtained it through economic duress.
The court therefore grants Seasco's request to void the April 13, 2023 agreement. Seasco may proceed with its claims for compensation and the defendants may proceed with their remaining affirmative defenses.
_______________________________Footnotes:
1 Nor, due to the 19 F.S.M.C. 102(9) prohibition of maritime liens on government vessels, could Seasco assert a maritime lien and have the vessel arrested and held until payment was made. See Ikitsuki, 24 FSM R. at 576-77.
* * * *