Opposition Brief — Ulloa v. Western Systems, Inc.
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Supreme Court, U.S.
FILED
DEC 195 1992
OFFICE OF THE CLERK
No. 92-715
IN THE
UNITED STATES SUPREME COURT
OCTOBER TERM, 1992
RICHARD F. ULLOA and DAVID J. ULLOA,
Petitioners
= a
WESTERN SYSTEMS, INC. and LEE M. HOLMES,
Respondents
On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit
RESPONDENTS' BRIEF IN OPPOSITION
MARK SNYDER HOLMES
Counsel of Record
530 West O'Bnen Drive
Agana, Guam 96910
Telephone: (671) 477-9334
VERNON F. L. CHAR
Char Sakamoto Ishii & Lum
841 Bishop Street, Suite 850
Honolulu, Hawaii 96813
Telephone: (808) 522-5133
Counsel for Respondents
QUESTION PRESENTED FOR REVIEW
Did the district court err in enjoining two Guam suits that
sought to collaterally attack and circumvent the final judgments
resulting from eighteen years of federal litigation, including two trials
and four separate appeals to the Ninth Circuit Court of Appeals?
- iii -
PARTIES
Pursuant to Rule 29.1, Western Systems, Inc. subsidiaries
are all wholly owned. Western Systems, Inc. has no parent.
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ee go cee eck ceases nsecssseses
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& The Present Case Does Not Warrant Review
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Il. The Ninth Circuit's Decision is Consistent
WithThis Court's Opinion in Chick Kam
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A The Exxon v. Chick Kam Choo
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B. General Discussion of Claim and
Issue Preclusion Principles .........
od The Present Case Does Not Conflict
With Chick Kam Choo ...........
Ill. Other Circuit Decisions Cited by the
TABLE OF CONTENTS
Petitioners Do Not Conflict With the Ninth
eh) re
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IV. The Ninth Circuit's Opinion Does Not
Conflict With Other Circuits’ Interpretation
ig Ee 26
| PETE TU CCRT TTT ECE eee Tree ee 29
APPENDIX
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TABLE OF AUTHORITIES
CASES Page
American Town Center v. Hall 83 Assocs.,
a ee Se a BD sb ov oe woe eee cee meaeeenel 25
Brown v. Felsen,
442 U.S. 127, 131, 99 S.Ct. 2205,
eT ee a eel 21
Browning Debenture Holders' Comm. v. DASA Copp.,
454 F.Supp. 88, 101 (S.D.N.Y.), aff'd, 605 F.2d 35
es Es ie bas Dake waa Peewee aes ee eee 27
Browning Debenture Holders' Comm. v. DASA Corp.,
See Fae Be OO CO, FPR) ak vc ccc sens vensses 22, 28
Budinich v. Becton Dickinson & Co.,
486 U.S. 196, 108 S.Ct. 1717,
er EE Gow i hoo 0 a 0040S 0h 2
Camacho v. Civil Serv. Comm.,
ge oy ee + ne en es 27
Chick Kam Choo v. Exxon,
le aes EE Wing 4 soe bd ke a eee 11, 13-14, 16, 21
DeCosme v. Sea Containers, Ltd.,
Se ee Ne a, ude Swe oe ca wee See 23
Farias v. Bexar County Bd. of Trustees,
oe errr rer ere re errr 23
Federated Dep't Stores Inc. v. Moitie,
452 U.S. 394, 401, 101 S.Ct. 2424,
Pee es SED ov ce esate ee enseGawe cede 13
- Vii -
Guam Economic Dev. Auth. v. Ulloa, :
Ge Fae Re GE BED 6 bb dob wwe dae cceellaces 2,8 1
Guam Economic Dev. Auth. v. Ulloa,
O41 FOG Fee Cee CW, PFGE) ccc cect eee ccccsivers 2,8
Hagan v. Lucas,
Be Us ROD vce cern cenccecsnarewewan 22
Hankins v. Finnel,
759 F.Supp. 569, 571 (W.D.Mo. 1991) ................ 21
Hawaii Hous. Auth. v. Midkiff,
467 U.S. 229, 238, 104 S.Ct. 2321,
81 L.Ed.2d 186, 195 (1984) ....... 0... ....... 0.20 eee 26
Hoffman v. Pursue, Ltd.,
420 U.S. 592, 95 S.Ct. 1200,
43 L.BG26 GEE CISTS) 2. ww ccc cer vccceccccvesssece 27
In re G.S.F. Corp.,
936 F.2d 1467 (tat Cir. 1991) 0. cc cece cece ec cees 24
Juidice v. Vail,
430 U.S. 327, 97 S.Ct. 1211,
DE REPENTED gcc cnc eeceeeesecenbiws®awes 27
Julian v. Central Trust Co.,
See TK RE we 8'v cv 6-0 atacekevestd cians 22
Kidder Peabody & Co., Inc. v. Maxus Energy Corp.,
eR ee ee ee rr ee 25
Lamb Enters., Inc. v. Kiroff,
Sa rae ee SO ED. bk 6a bak keh owen be eee 26
LCS Servs., Inc. v. Hamrick, .
925 F.2d 745 (4th Cir. 1991) . 0... eee eee eee eee eens 25
Migra v. Warren City School Dist. Bd. of Educ.,
465 U.S. 75, 77 n.1, 104 S.Ct. 892,
79 L.E4.2d 56 (1984) 0. wc eww weer cece cece ce enccess 14
Mitchum v. Foster,
407 U.S. 225, 236 (1972) ..... cece cere reer erences 23
Mizokami Bros. of Arizona v. Mobay Chem. Corp.,
660 F.2d 712 (8th Cir. 1981) .. 1... eee eee ee eee eee 18-19
Montana v. United States,
440 U.S. 147, 153 (1979) . 2... eee ee ee ete 17
Moore v. Sims,
442 U.S. 415, 423, 99 S.Ct. 2371,
60 L.Ed.2d 994 (1979) 2... cece ec eee er er etre eens 27
Nationwide Mut. Ins. Co. v. Burke,
897 F.2d 734 (Ath Cir. 1990) .. 0... eee ee ee ee eee 25
Nevada v. United States,
463 U.S. 110, 103 S.Ct. 2906,
77 L.Ed.2d 509 (1983) .... cc cece cece cece ee eeene 9,21
Parklane Hosiery Co., Inc. v. Shore,
439 U. S. 322, 326 n.5, 99 S.Ct. 645,
58 L.Ed.2d 552 (1979) ...... eee cree erent eer eenee 17
Parsons v. Chesapeake & Ohio Ry. Co.,
FU kc bck cece vend ade dace Has oa nee 18
Riggs v. Johnson County,
73 (6 Wall.) U.S. 166, 187,
18 L.Ed. 768 (1867) ...... 2. cece cece cree reece eccee 22
Royal Ins. Co. of America v. Quinn-L Capital Corp.,
« i=»
759 F.Supp. 1216, 1237 (N.D.Tex. 1990) .
Samuel C. Ennis & Co., Inc. v. Woodmar Realty Co.,
waa F208 4 (7 Civ. T9796) 2. wees
Staffer v. Bouchard Transp. Co., Inc.,
876 F.26 G38 (2d Cir. 19969) ..........
Thibodeau v. Foremost Ins. Co.,
605 F. Supp. 653 (N.D. Ind. 1985) .....
Toucey v. New York Life Ins. Co.,
ee ee eee
Trainer v. Hernandez,
431 U.S. 434, 444, 97 S.Ct. 1911,
RO
Ulloa v. Guam Economic Dev. Auth.,
580 F.2d 952 (9th Cir. 1978) ..........
Western Systems, Inc. v. Ulloa,
958 F.2d 864 (9th Cir. 1992) ..........
Williams Natural Gas Co. v. Oklahoma City,
890 F.2d 255, 264 (10th Cir. 1989) .....
Younger v. Harris,
401 U.S. 37, 91 S.Ct. 746,
rep) re
Zagano v. Fordham Univ.,——
720 F.Supp. 266, 268 (S.D.N.Y. 1989) ..
&.68°2 62 6. 82 2 28) 9. °C 2: o
STATUTES
ee OD 5 6005 MOWER WOO Rae an EE ed hee Res 3
28 U.S.C. § 2283 (Anti-Injunction Act) ............ >» 35, 9
oR SS rere reer rr re errr rr ree 22
MISCELLANEOUS
17 C. Wright, A. Miller, & E. Cooper,
Civil, Federal Practice and Procedure,
ne Ee os a ag BEADS 28
18 C. Wright & A. Miller,
Civil, Federal Practice and Procedure ,
a ne 20
Restatement (Second) Judgements
Eee aha ip ir ok See oe ae ae een OPE aa 17
DO Od Oo Ua ee eeu esa eee e ae one ew eens 27
DC GeaG toss Fie tee ee Mh ROSS LON akan eee he 16
GU eee ers cha ees SE CEEA LER Rt ewer eee 16-18
2 RAE er ere ho ee ane eer eee wa ee ee 9,20
DS ieee kee beeen have vic eh UA bea kee Oe ee 20
No. 92-715
IN THE
UNITED STATES SUPREME COURT
OCTOBER TERM, 1992
RICHARD F. ULLOA and DAVID J. ULLOA,
Petitioners
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WESTERN SYSTEMS, INC. and LEE M. HOLMES,
Respondents
On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit
RESPONDENTS' BRIEF IN OPPOSITION
OPINIONS BELOW
In this case there have been two trials, an evidentiary
injunction hearing, and six appeals to the Ninth Circuit Court of
Appeals. The previous opinions are as follows:
1. The unpublished February 16, 1977 decision in Ulloa v. Guam
Economic Dev. Auth., United States District Court for the District of
Guam, Civ. No. 24-72, Appendix at 1b.
2. The unpublished November 18, 1977 decision and judgment in
Guam Economic Dev. Auth. v. Ulloa, United States District Court for
the District of Guam, Civ. No. 197-72, Appendix at 28b.
3. The March 21, 1974 memorandum opinion of the Ninth Circuit
Court of Appeals, Civ. No. 72-3159, denying the Ulloas' appeal of
the disqualification of their counsel. 9th Cir. CR. 129.
4. Ulloa v. Guam Economic Dev. Auth., 580 F.2d 952 (9th Cir.
1978), affirming the district court's decision in Civ. No. 24-72,
Appendix at 36b.
5. Guam Economic Dev. Auth. v. Ulloa , 628 F.2d 1356 (9th Cir.
1980), affirming without published decision the district court's
decision in Civ. No. 197-72.
6. Guam Economic Dev. Auth. v. Ulloa, 841 F.2d 990 (9th Cir.
1988), affirming the enforceability of the federal judgments against the
Ulloas. Appendix at 51b.
7. The unpublished May 11, 1990 decision in Guam Economic Dev.
Auth. v. Ulloa, United States District Court for the District of Guam,
Civ. No. 197-72, enjoining the Ulloas from relitigating their claims in
the local Guam court, Petitioners’ Appendix 33a-53a.
§. Western Systems, Inc. v. Ulloa, 958 F.2d 864 (9th Cir. 1992),
consolidated appeals Civ. Nos. 90-15732 and 90-16407, affirming
the injunction against the Ulloas, Petitioners’ Appendix 1a-16a.
JURISDICTION
Respondents agree with the jurisdictional statement of
petitioners. Although the Ninth Circuit remanded the case for further
hearing on the amount of attorneys fees to be awarded as sanctions,
the pendency of a fee dispute does not affect the finality of the
underlying injunction. Budinich v. Becton Dickinson & Co., 486
U.S. 196, 108 S.Ct. 1717, 100 L.Ed.2d 178 (1988).
Sa
STATUTES INVOLVED
"The Supreme Court and all courts established by Act of
Congress may issue all writs necessary or appropriate in aid of their
respective jurisdictions and agreeable to the usages and principles of
law." 28 U.S.C. § 1651.
"A court of the United States may not grant an injunction to
Stay proceedings in a State court except as expressly authorized by Act
of Congress, or where necessary in aid of its jurisdiction, or to protect
or effectuate its judgments."
28 U.S.C. § 2283.
STATEMENT OF FACTS
The petitioners David and Richard Ulloa began this case in the
federal district court of Guam more than twenty years ago. More than
fifteen years ago, following two separate trials, the district court found
them guilty of unclean hands and misrepresentation, and liable for
issuing watered stock to themselves. These findings were affirmed on
appeal by the Ninth Circuit Court of Appeals. The petitioners failed to
pay the federal judgments against them for over twelve years. Finally,
pretending to settle, they agreed to pay the judgments if they received
a $132,000.00 discount. Respondents agreed. One hour after the
settlement was filed in federal court, petitioners filed two new suits
against respondents in the local Guam court based on the same alleged
contracts rights litigated for almost eighteen years in the federal courts.
The district court again found them in bad faith, enjoined the new
cases in the local Guam court, and imposed sanctions. The Ninth
Circuit affirmed the injunction, but vacated the sanctions award to
allow petitioners a further opportunity to challenge the amount. The
petitioners now seek review of this twenty year old case.
The Ulloas are among the original incorporators of Marianas
Communications Systems, Inc. ("MCS"), now known as Wester
Systems, Inc. ("WSI"), one of the respondents. In 1968, they
formed MCS for the purpose of providing cable TV service in the
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territory of Guam. As the district court later found, the Ulloas
misrepresented their capital contributions to MCS:
At the time, the original four shareholders indicated
on the corporate books that the $230,000 worth of
stock that had been subscribed to was paid in full in
exchange for the efforts expended in obtaining the
loan. No cash or property was ever paid for the
23,000 shares issued.
Cruz v. Guam Economic Dev. Auth., D.Guam, Civ. No. 24-72,
February 16, 1977 Opinion at 2, Appendix at 2b. Instead of their
own capital, the Ulloas used the proceeds of a loan guaranteed by a
governmental development agency, the Guam Economic Development
Agency (GEDA). By May 1971 "the company was indisputedly in
grave financial trouble and was insolvent." /d.
To keep the company alive, GEDA agreed to take over MCS
and its debt. On May 21, 1971, the Ulloas and the other shareholders
sold their stock for $1.00 each to GEDA. The former shareholders
retained a "collective" right of first refusal if GEDA resold the stock,
on condition that they pay a minimum purchase price of $421,000, the
outstanding debt of MCS. They falsely warranted to GEDA that the
shares were "lawful." /d. at 4.
GEDA approached respondent Holmes as a prospective buyer
of the company. /d. at 6. On July 14, 1971, Holmes made a proposal
to purchase 70% of MCS stock from GEDA at $2 a share. On July
20, 1971, after extensive negotiations, the Ulloas signed a contract
giving up their right of first refusal, but receiving certain MCS stock
options. These options were subsequently detailed in an "Agreement
For Sale of MCS Stock,” dated August 4, 1971.
In paragraph 1 of the contract Holmes agreed to purchase
70% of MCS stock for $2 a share. In paragraph 2, MCS agreed to
"make available" 15% of its stock to the former shareholders,
including the Ulloas, for $1 a share. In paragraph 3, GEDA agreed to
offer the remaining 15% of MCS stock in equal amounts to 5 persons,
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including David Ulloa, for $4 a share (plus a 10% increase each year)
when the MCS debt to GEDA was "repaid in full." /d. at 6-12.
In July and August, 1971, the Ulloas signed subscription
agreements and promissory notes to purchase their portion of the
reissued MCS stock, but for tactical reasons later decided not to pay
the full amount due. Their stock purchase contracts were cancelled for
nonpayment in 1972. May 11, 1990 Injunction Order, petitioners’
Appendix at 36a-37a.
Thereafter, Holmes invested personally or obtained the
investment of $219,000 in new capital for MCS, "moved himself and
his family to Guam," "devoted his constant labor to MCS," and
"personally guaranteed loans to MCS.” Feb. 16, 1977 Decision at 30-
32, Appendix at 25b. As a result of “large cash liabilities and
considerable time, effort and reputation on the part of Holmes," MCS
"tumed around, reached the breakeven point and was faced with the
prospects of a bright future." /d. at 32.
On February 28, 1972, the Ulloas, and other former
shareholders, filed suit in the Guam federal district court against
GEDA and Holmes seeking shares of MCS stock. Cruz v. Guam
Economic Dev. Auth., Civ. No. 24-72 CR 1, Exh. "G" EOR at 337.
The 1971 contracts were attached to their complaint. They alleged that
Holmes "at ail times acted in bad faith and conspired" with GEDA to
deprive the Ulloas of their shares. The Ulloas sought a constructive
trust, an accounting, and $15 million in damages. May 11, 1990
Order, petitioners’ Appendix at 37a.
On November 28, 1972, GEDA, Holmes and MCS sued the
Ulloas for their breach of warranty in the 1971 contracts, and to
collect the unpaid stock subscriptions owed MCS. Guam Economic
Dev. Auth. v. Ulloa, United States District Court for the Territory of
Guam, Civil No. 197-72. The complaint specifically referred to the
1971 contracts, alleging that the "warranties and representations of
[the Ulloas] as set forth in said contracts...were false and untrue." /d.
at 37a-38a.
«ti
During the discovery phase of these two cases, the district
court found "the Ulloas had the opportunity to inspect all stock
transactions involving MCS between 1971 and 1973." /d. at 38a.
Thus, they "had the opportunity to investigate fully their
rights to stock not purchased by the other former stockholders." /d. at
48a.
The Ulloas' suit, Civ. No. 24-72, went to trial in 1975. The
Ulloas' rights to purchase MCS shares pursuant to the August 4, 1971
agreement were the subject of frequent testimony. 24-72 Tr. at 654-
56, 1141-42, 1151-54, 1235-38. The August 4, 1971 contract was
admitted into evidence as Exh. AA. David Ulloa testified that he was
aware of his rights to purchase MCS stock and, as general manager of
MCS, even pressured other former shareholders to purchase their
shares. 24-72 Tr. at 563-64, 577, 649-54, 796-97, 1230. According
to Ulloa, Holmes made "constant requests" for the former
shareholders to buy their stock. /d. at 1230.
Holmes testified that the Ulloas made downpayments for their
stock, but had failed to pay the balance due. 24-72 Tr. at 1151-57.
The Ulloas' subscription agreements, stock certificates, and
promissory notes were admitted into evidence as Exh. GG. Holmes
testified that the Ulloas’ subscription agreements were cancelled in
1972 for nonpayment. 24-72 Tr. at 1153-54.
On February 16, 1977, the district court issued a 34 page
opinion rejecting all claims made by the Ulloas and finding them guilty
of unclean hands:
Plaintiffs, and each of them, lack clean hands to bring
an equitable action seeking the imposition of a
constructive trust for the stock of MCS acquired by
defendant Holmes, for the reason that the shares of
stock of MCS originally issued were issued contrary
to the provisions of law . . . David Ulloa himself was
a witness to the August 4, 1971 agreement and was
one of the primary beneficiaries of the unlawful
issuance of stock....
Plaintiffs cannot be permitted to come into a
court of equity to attempt to recapture a company
which they claim, as of February, 1972, is worth
$15,000,000 after (1) investing only $30,000 to
$40,000, (2) misrepresenting the value of the
corporation's capital unlawfully as $300,000, (3)
requiring the loan by GEDA of an additional
$270,000 and subsequently another $75,000, and (4)
encouraging outside equity parties under the
reorganization, including Holmes, to invest
approximately $219,000 more. The company was
insolvent and floundering during the period of time
the former stockholders operated it.
After February 1972 when the company was
operational and financially feasible, the plaintiffs then
suddenly decided that they wished to have the stock
and operation of the company retumed to them. To
benefit the very persons who had created the initial
distress condition of the corporation based upon
under-capitalization and the unlawful issuance of
stock would be inequitable. The wrongful acts of
plaintiffs are clearly related to the conduct of the
subject matter of this litigation.
Id. at 30-32, Appendix at 25b (emphasis added).
The Ulloas appealed. The Ninth Circuit affirmed on all
grounds. Ulloa v. Guam Economic Dev. Auth., 580 F.2d 952 (9th
Cir. 1978), Appendix at 35b.
The watered stock case against the Ulloas, Civil No. 197-72,
was tried before a jury in September, 1977. The August 4, 1971
contract was again admitted into evidence, as Exh. 13. The Ulloas'
rights to MCS stock were discussed often during the trial. 197-72 Tr.
355, 380-83, 495, 523, 539-40, 763-64. Following a jury verdict in
the Ulloas' favor, the Court granted a partial judgment
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notwithstanding the verdict, and found the Ulloas liable for watered
stock because "defendants David Ulloa, Richard Ulloa ... failed to pay
any legal consideration for these shares." Memorandum Order, Nov.
18, 1977 at p. 7, Appendix at 31b. On November 18, 1977, a
judgment in the amount of $153,000 was entered against David Ulloa
and $36,000 against Richard Ulloa. /d. The Ulloas appealed. The
decision was affirmed by the Ninth Circuit without published opinion.
Guam Economic Dev. Auth. v. Ulloa, 628 F.2d 1356 (9th Cir.
1980).
The Ulloas failed to pay the federal judgments. On March 27,
1979, the federal court issued an Alias Writ of Execution against
David Ulloa in the amount of $153,000. On April 4, 1979, the federal
court marshal issued a Notice of Levy, levying "any and all” contract
rights of David Ulloa arising from the August 4, 1971 contract. On
April 12, 1979, the United States marshal conducted the sale. David
Ulloa attended and submitted bids through an intermediary. Tr.
4/3/90 at 29. Holmes was the highest bidder and bought the contract
rights. David Ulloa did not object to the levy and sale. May 11, 1990
Order, petitioners’ Appendix at 39a.
The Ulloas refused to pay the remainder of the judgments for
more than 12 years. On August 12, 1986, the federal district court
ruled that WSI could continue to enforce its judgment against the
Ulloas. The Ulloas appealed; the Ninth Circuit affirmed the judgment
was enforceable. Guam Economic Dev. Auth. v. Ulloa, 841 F.2d
990 (9th Cir. 1988). The district court ordered the Ulloas to begin
monthly payments on the judgment. When they failed to appear at
court hearings, an arrest warrant for both Ulloas was issued on
September 8, 1989. May 11, 1990 Order, petitioners’ Appendix at
40a. Statutory post-judgment interest had increased the amount owed
by the Ulloas to approximately $370,000.00. Tr. 4/3/90 at 30.
Finally, the Ulloas offered to settle the judgments against
them, thus ending the federal litigation, if they were given a discount
of $138,000.00. WSI agreed. A satisfaction of judgment was
entered on December 5, 1989. May 11, 1990 Order, petitioners’
Appendix at 40a.
One hour after the satisfaction of judgment was entered, the
Ulloas filed two new lawsuits against WSI and Holmes in the Guam
Superior Court. /d. In Ulloa v. Western Systems, Inc., CV 1223-89,
the Ulloas alleged they were denied rights of first refusal to MCS
shares granted in "paragraphs 2 and 3 of the agreement for sale of
MCS Stock, dated August 4, 1971....". 9th Cir. EOR at 317. The
August 4, 1971 contract is attached as an exhibit to the amended
complaini. The same claim for 1971 MCS shares is expressed as
seven different causes of action, each based on the August 4, 1971
contract. The Ulloas ask the court to "grant 30% of Guam Cable
Television to the plaintiffs and the other original shareholders...." /d.
In the second suit, Ulloa v. Holmes, CV 1224-89, David
Ulloa alleged that the 1971 contracts "remain in effect." 9th Cir. EOR
at 327. He contended that the federal court's levy and sale of his
contract rights "was invalid since the payment for the shares had not
been made pursuant to Guam law" and specifically requested the
Guam court to declare the federal marshall's sale "null and void." /d.
By voiding the sale Ulloa sought to revive his claims under the
contracts for more Western Systems shares.
WSI and Holmes filed a petition for injunction in the same
federal district court of Guam that had heard the Ulloas'’ claims since
1972. The district court held an evidentiary hearing on April 3, 1990.
Testimony and documentary evidence were submitted by WSI and
Holmes without objection. The Ulloas presented no evidence. Tr.
4/3/90.
On May 11, 1990, the court issued a permanent injunction
against the Ulloas. Petitioners’ Appendix 33a-53a. The petitioners
wrongly contend that "the court acknowledged that the Ulloas' stock
and contract claims were not actually raised and litigated in the prior
federal proceeding.” Petition at 5. In fact, using the definition of
Se
-10-
“claim” found in Restatement (Second) Judgments § 24, | the court
held that "the territorial suits filed by the Ulloas concern exactly the
same ‘transaction or series of connected transactions’ involved in
previous federal court litigation: the 1971 corporate reorganization of
Guam Cable TV, and the Ulloas' claims to stock under the August 4th
agreement." /d. at 44a. The court held that the remarkable similarity
between the Ulloas’ discovery requests in the federal and Guam suits
further confirmed that the 1989 "claim" made by the Ulloas in Guam
court to obtain MCS shares was the same as the 1972 "claim" made in
federal court:
The August 4th agreement was a single agreement.
The claims made under paragraph 2 of the agreement
are interwoven with the claims made under paragraph
1. As the Ulloas' discovery requests demonstrate,
the facts and evidence are the same. Judicial
economy and good sense dictate that the same
agreement may not be litigated ad infinitum.
Petitioners’ appendix at 46a.2 “res judicata,” the court held, "does not
permit parties to sue seriatim for different paragraphs of a single
contract.” Jd. at 48a.
1 This definition of "claim" was cited with approval
in Nevada v. United States, 463 U.S. 110, 130 n.12 (1983).
2 The Ulloas contend that the district court should
not "rely on new matters not raised or considered in the prior
federal proceeding to decide on an injunction petition under the
relitigation exception.” Petition at 6. Yet, to determine whether a
single cause of action exists "the test is whether identical evidence
will support the issues involved in both actions.” Thibodeau v.
Foremost Ins. Co., 605 F. Supp. 653 (N.D. Ind. 1985). Whether
the evidence and events at issue in two separate cases are the same
necessarily requires some factual investigation by the district
court. 10
.
Further, David Ulloa's attempt to "void" the federal court's
1979 levy and sale of his rights to MCS stock "is a direct assault" on
the federal court. /d. at 49a. The court concluded the Guam suits "had
no merit whatsoever and were obviously filed for harassment”:
Such blatant disregard for the final judgments of this court
and the Ninth Circuit Court shall not go unsanctioned. The
courtroom is not the place for personal vendettas.
Id. at 52a. The court issued a permanent injunction against further
litigation by the Ulloas of the claims asserted in the Guam cases. /d.
The court later awarded WSI and Holmes $28,117.06 in attorneys
fees and costs. August 28, 1990 Order.
The Ulloas appealed both the injunction order and the amount
of fees awarded, their fifth and sixth appeals to the Ninth Circuit since
they first filed suit in 1972. The Ninth Circuit affirmed "both the
injunction and the award of sanctions,” but remanded "the amount of
the sanction to the district court for reconsideration.” 958 F.2d at
866. Recognizing that exceptions to the Anti-Injunction Act, 28
U.S.C. § 2283, are to be strictly construed, the court nevertheless
upheld the injunction because the issues raised in the Ulloas' Guam
Suits "arose from the same contracts and factual circumstances which
had been litigated in federal court for the past seventeen years." 958
F.2d at 871.
In its opinion the Ninth Circuit held that Chick Kam Choo v.
Exxon, 486 U.S. 140 (1988), did not limit the relitigation exception to
issues actually litigated in a prior federal case:
To read Choo as the other Circuits have, however,
would in essence be to read res judicata entirely out
of section 2283. Any issue which was "actually
litigated" by the parties in a prior proceeding will be
barred by collateral estoppel ("issue preclusion”),
without any need to rely on res judicata ("claim
preclusion"). This result seems to us to be contrary
———————
~B.
to the purposes of section 2283, as stated by the
Supreme Court in Choo. It is also contrary to the
language of Choo, which would bar relitigation of
"claims or issues [that] actually have been decided.”
486 U.S. at 148, 108 S.Ct. at 1690.
958 F.2d at 870 (original emphasis). The court found an injunction
was warranted here based on "the compelling circumstances of this
case":
The problems with limiting the relitigation exception
to collateral estoppel are particularly evident in this
case. This case began twenty years ago. It was
litigated for seventeen years in the United States
District Court for the District of Guam, and was
appealed to this Circuit no less than four times. One
hour after the federal case was settled, the Ulloas
filed suit in Guam territorial court. The issues raised
in that suit arose from the same contracts and factual
circumstances which had been litigated in federal
court for the past seventeen years. The federal court
was far more familiar with the issues presented than
the Guam court could have been. Furthermore, the
preclusion issues facing the Guam court were issues
of federal law. Under the compelling circumstances
of this case, we conclude that the principles
announced in Choo are not disserved by the district
court's injunction. We therefore conclude that the
relitigation exception to Section 2283 allows the
district court to enjoin the Guam litigation on the
ground that it is barred by res judicata.
958 F.2d at 871. The Ulloas' petition for rehearing and suggestion
for rehearing en banc was denied on June 18, 1992. The Ulloas now
seek a writ of certiorari from this Court.
as
ARGUMENT
I. The Present Case Does Not
Warrant Review By This Court
The "compelling circumstances" in the present case make it
inappropriate for review by writ of certiorari. This is not a case of
common application that would give guidance to the lower federal
courts in the interpretation of the Anti-Injunction Act and Chick Kam
Choo v. Exxon Corp., 486 U.S. 140 (1988). The facts here are
egregious: two trials, four appeals, a federal marshal's sale, and
eighteen years of federal litigation ostensibly ended by a "final"
settlement of the outstanding federal judgments, followed one hour
later by new suits attempting to void the marshal's sale and relitigate
the same contracts in the local court.
The petitioners have suffered no injustice. In 1977 the district
court found they "lack clean hands,” and were guilty of
"misrepresenting the value of the corporation's capital unlawfully,”
and "wrongful acts." February 16, 1977 Order at 30-32, appendix at
25b. In 1989, the same court ordered petitioners arrested for failure to
appear at judgment debtor examination hearings. In 1990 the district
court concluded the petitioners had "blatant disregard for the final
judgments of this court and the Ninth Circuit Court" and were
engaged in a "personal vendetta.” May 11, 1990 Order, petitioners’
appendix at 52a. The only injustice in this case has been suffered by
respondents, who have endured more than twenty years of litigation:
We have stressed that the doctrine of res judicata is
not a mere matter of praciice or procedure inherited
from a more technical time iia ours. /t is a rule of
fundamental and substantial jus. -e, a public policy
and a private peace, which will be :ordially regarded
and enforced by the courts.
Federated Dep't Stores Inc. v. Moitie, 452 U.S. 394, 401, 101 S.Ct.
2424, 69 L.Ed.2d 103, 108 (1981) (emphasis added).
iM.
The relitigation exception to the Anti-Injunction Act would be
meaningless if the federal courts were powerless to protect parties
who prevail after eighteen years of federal litigation from further
litigation of the same claims in lccal courts. "It is always to be
understood that Federal tribunals are not moot courts, and that parties
having substantial rights must when brought before those tribunals
present those rights or may lose them." Riverdale Cotton Mills v.
Alabama & Georgia Mfg. Co., 198 U.S. 188, 202 (1905). Despite
some controversy as to the precise scope of injunctions allowable
under the Act, nothing detracts from the common sense conclusion of
the district and circuit courts that this litigation should be over.
Cases similar to the present one are fortunately uncommon.
The petitioners’ bad faith, their petulant refusal to accept the
judgments of the federal courts, their attempt to use the local court to
obtain the stock denied by the federal courts are, as the Ninth Circuit
found, truly "compelling circumstances.” The petitioners’ attempt to
relitigate the 1971 contracts after losing eighteen years of federal
litigation--and pretending to settle--is extraordinary. This case does
not deserve further review.
II. The Ninth Circuit's Decision is Consistent With
This Court's Opinion in Chick Kam Choo y. Exxon
The core of petitioners’ certiorari application is their
contention that the Ninth Circuit's opinion is inconsistent with this
Court's opinion in Chick Kam Choo v. Exxon, 486 U.S. 140 (1988).
In fact, both opinions are harmonious. Petitioners have simply
confused issue preclusion with claim preclusion. 3 Chick Kam Choo
3 Because there is some confusion in the
terminology used by various courts, in this brief we use "claim
preclusion” (often, but not always, called res judicata) and "issue
preclusion” (often called collateral estoppel) as those terms are
used in the Restatement (Second) of Judgments. See discussion
in Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75,
77 n.1, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984).
_ =
was a forum non conveniens case in which there was no final
judgment on the merits in the federal court; the Ulloas' claim for MCS
stock was litigated on the merits to final judgment (and beyond) for
almost eighteen years. Chick Kam Choo was an issue preclusion
case, while the present case is a claim preclusion case. This simple
distinction disposes of the bulk of petitioners’ arguments.
A. The Exxon vy. Chick Kam Choo Decision
In Chick Kam Choo, a federal district court, after determining
that Singapore law governed a foreign seaman's claims, dismissed the
suit on forum non conveniens grounds. The plaintiff then filed an
action in Texas state court. Relying on the relitigation exception to the
Anti-Injunction Act, which allows a district court to enjoin state court
proceedings when an injunction is "necessary in aid of its jurisdiction,
or to protect or effectuate its judgments,” 28 U.S.C. § 2283, the
district court enjoined the plaintiff from litigating the merits of the case
in the Texas court. The Supreme Court reversed.
This Court began its analysis by noting that the Anti-
Injunction Act "is founded in the well recognized concepts of res
judicata and collateral estoppel." 486 U.S. at 147 (emphasis added).
"[A]n essential prerequisite for applying the relitigation exception"
continued the Court, "is that the claims or issues which the federal
injunction insulates from litigation in state proceedings actually have
been decided by the federal court." 486 U.S. at 148 (emphasis
added).
This Court held that the district court's injunction was
overbroad because it precluded the plaintiff from litigating her
Singapore law claims in the Texas state courts. Claim preclusion was
not applicable because "(t]he District Court did not resolve the merits
of [the Singapore law] claim in its 1980 order. Rather, the only issue
decided by the District Court was that petitioner's claims should be
dismissed under the federal forum non conveniens doctrine." 486
U.S. at 148.
eee ai
Issue preclusion, however, was applicable and the district
court's injunction properly precluded further litigation of issues
decided by the federal court. “Because in its 1980 decision the District
Court decided that Singapore law must control petitioner's lawsuit, a
decision that necessarily precludes the application of Texas law, an
injunction preventing relitigation of that issue in state court is within
the scope of the relitigation exception to the Anti-Injunction Act." 486
U.S. at 150.
Petitioners extrapolate from the words "actually have been
decided,” 486 U.S. at 148, the theory that Chick Kam Choo restricted
the relitigation exception of the Anti-Injunction Act to issue preclusion
cases only. Under their theory, a federal court that renders a final
judgment has authority under The Anti-Injunction Act to enjoin
relitigation of issues barred by issue preclusion, but not relitigation of
claims barred by claim preclusion. Nothing in Chick Kam Choo
expressly states this theory, and it contradicts this Court's express
recognition that the relitigation exception to the Anti-Injunction Act "is
founded in the well recognized concepts of res judicata and collateral
estoppel," and allows an injunction of " claims or issues ... decided by
the federal court." Chick Kam Choo , 486 U.S. at 147-48 (emphasis
added).
B. General Discussion of Claim
and Issue Preclusion Principles
The petitioners’ argument confuses the doctrines of claim
preclusion (sometimes called res judicata) and issue preclusion
(sometimes called collateral estoppel). Briefly, the doctrine of claim
preclusion provides that "a valid and final personal judgment rendered
in favor of the defendant bars another action by the plaintiff on the
same claim." Restatement (Second) Judgments § 19. Claim
preclusion does not apply to cases dismissed on grounds of forum
non conveniens, however, such as Chick Kam Choo. This exception
is stated in § 20 of the Restatement (Second) Judgments:
-]7-
(1) A personal judgment for the defendant, although valid
and final, does not bar another action by the plaintiff on the
same claim:
(a) When the judgment is one of
dismissal...for improper venue...
As the Comment to the Restatement (Second) Judgments explains:
Ordinarily, after a judgment is rendered in an action,
the claim is extinguished by the judgment's bar or
merger effect, and therefore it is impossible to
maintain a subsequent action on the claim. But there
are exceptions. For example, when a judgment for
the defendant is based on lack of jurisdiction,
improper venue, Or nonjoinder or misjoinder of
parties, the plaintiff is not precluded from maintaining
another action on the claim.
Restatement (Second) Judgments § 17, Comment c (emphasis
added).
Issue preclusion, on the other hand, precludes relitigation of
issues actually litigated:
When an issue of fact or law is actually ligated and
determined by a valid and final judgment, and the
determination is essential to the judgment, the
determination is conclusive in a subsequent action
between the parties, whether on the same or a
different claim.
Restatement (Second) Judgments § 27. “Under the doctrine of
collateral estoppel...the second action is upon a different cause of
action and the judgment in the prior suit precludes relitigation of issues
actually litigated and necessary to the outcome of the first action.”
Parklane Hosiery Co., Inc. v. Shore, 439 U. S. 322, 326 n.5, 99
=~" =
S.Ct. 645, 58 L.Ed.2d 552 (1979); Montana v. United States , 440
U.S. 147, 153 (1979).
While the rules of claim preclusion do not apply to cases like
Chick Kam Choo dismissed on grounds of forum non conveniens, the
tules of issue preclusion do apply. The Comment to Restatement
(Second) Judgments § 20 makes this clear:
The rules of issue preclusion (see §§ 27, 28) apply to
a valid and final personal judgment for the defendant
even though the judgment is one which, under this
Section [listing exceptions to the general rule of claim
preclusion], does not bar another action on the same
claim.
The Restatement gives the following illustration:
1. A brings an action against B for personal
injuries, and the action is dismissed for improper
venue on the ground that the judicial district in which
suit was brought was not the district of defendant's
residence as required by law. Although A is not
barred from maintaining an action on the claim in
another district, the niles of issue preclusion are
applicable to the determination that venue was
improper in the initial action.
Restatement (Second) Judgments § 20, Illustration 1 at 171.
Thus, in Parsons v. Chesapeake & Ohio Ry. Co., 375 U.S.
71 (1963), this Court held that claim preclusion principles did not
apply to a case dismissed by a state court on grounds of forum non
conveniens. After the state court, located in Chicago, dismissed his
case, the plaintiff brought a similar claim in the federal district court,
also located in Chicago. The defendant argued that claim preclusion
required the federal court to dismiss the federal case as well on forum
non conveniens grounds. This Court held that different factual issues
-19-
were involved in the federal court's decision, and therefore "principles
of res judicata are not applicable....". 375 U.S. at 73.
In Mizokami Bros. of Arizona v. Mobay Chem. Corp. , 660
F.2d 712 (8th Cir. 1981), the plaintiff's suit in the District of Arizona
was dismissed against one defendant on forum non conveniens
grounds. The plaintiff then refiled in the Western District of Missouri.
The Eighth Circuit held that claim preclusion did not apply to the
forum non conveniens dismissal:
In the present case the applicable res judicata principle
is issue preclusion. Because there has been no
judgment on the merits of Mizokami's claim, a
second action is not barred by the rules of claim
preclusion. [citations omitted] The prior forum non
conveniens dismissal precludes relitigation of only
those issues of law and fact actually litigated and
necessary to the [prior court's} decision.
660 F. 2d at 715 (emphasis added). Similarly, in Chick Kam Choo
further litigation of issues actually litigated was barred by issue
preclusion, there was no basis for claim preclusion.
ty The Present Case Does Not
Conflict With Chick Kam Choo
With these principles in mind, the distinction between Chick
Kam Choo, a case dismissed for forum non conveniens reasons, and
the present case, a case litigated to final judgment over eighteen years,
becomes apparent. In Chick Kam Choo, the district court's injunction
was overbroad because the case had been dismissed on forum non
conveniens grounds; thus, issue preclusion applied but not claim
preclusion. The forum non conveniens dismissal in Chick Kam Choo
“preclude{d] relitigation of only those issues of law and fact actually
litigated and necessary to the [court's] decision." Mizokami Bros. of
Arizona v. Mobay Chemical Corp., 660 F.2d 712, 715 (8th Cir.
1981); Restatement (Second) Judgments § 20(1)(a).
- 20 -
The injunction approved by this Court in Chick Kam Choo
went as far as the law of claim and issue preclusion allowed: litigation
of the Singapore law claim was not barred by claim preclusion, but the
choice of Singapore law issue was issue preclusion and could not be
relitigated in the state court. In short, the district court's injunction in
Chick Kam Choo was overbroad because it violated the principles of
claim and issue preclusion; this Court did not hold, as petitioners
Suggest, that the relitigation exception is inapplicable in claim
preclusion cases.
An entirely different situation is presented in the present case.
The merits of the Ulloas' claims for MCS stock under the 1971
contracts were litigated to final judgment. Thus, their claim in the first
Guam case, CV 1223-89, for more MCS stock based on the same
1971 contracts is barred by claim preclusion:
When a valid and final judgment rendered in an action
extinguishes the plaintiff's claim pursuant to the rules of merger or
bar...the claim extinguished includes all rights of the plaintiff to
remedies against the defendant with respect to all or any part of that
transaction, or series of connected transactions, Out of which the
action arose.
Restatement (Second) Judgments, § 24(1) (emphasis added). "All
breaches [of contract} occurring prior to commencement of the first
action constitute part of a single claim or cause of action, even though
each would have been pursued as a separate <laim at the time it arose."
18 C. Wright & A. Miller, Civil, Federal Practice and Procedure §
4409 at 75 (1981).
The claim for MCS stock asserted by the Ulloas in their 1972
federal lawsuit is the same claim for MCS (now WSJ) stock in the first
1989 Guam suit, CV 1223-89, even though in the federal cases they
sought rescission of the 1971 contracts and now they claim breach of
the same contracts:
Having been defeated on the merits in one action, a
plaintiff sometimes attempts another action seeking
- 2] «
the same or approximately the same relief but
adducing a different substantive law premise or
ground. This does not constitute the presentation of a
new Claim when the new premise or ground is related
to the same transaction or series of transactions, and
accordingly the second action should be held barred.
Restatement (Second) Judgments § 25, comment d. at 212. Thus,
claim preclusion prevents a plaintiff from suing first for rescission of a
contract, losing, then suing for breach of the same contract, because
the "claim" is the same. See , Restatement (Second) Judgments, § 25,
comments h, j, k, and illustrations 23, 24, and 25. The final
judgment on the merits "prevents litigation of all grounds for, or
defenses to, recovery that were previously available to the parties,
regardless of whether they were asserted or determined in the prior
proceedings." Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205,
60 L.Ed.2d 767 (1979); Nevada v. United States , 463 U.S. 110, 103
S.Ct. 2906, 77 L.Ed.2d 509 (1983). The federai cases conclusively
decided the Ulloas’ claim for MCS stock under any aspect of the 1971
transactions and any theory or cause of action. Because the Ulloas'
1972 federal lawsuit was decided on the merits, and was not
dismissed for forum non conveniens reasons, the new Guam suit (CV
1223-89) for breach of the 1971 contracts raises "claims" that
"actually have been decided by the federal court," Chick Kam Choo,
486 U.S. at 148, and were properly enjoined.
The second Guam suit, CV 1224-89, in which petitioner
David Ulloa asks the Guam court to declare "null and void" a federal
marshal's sale is a direct attack on the federal court and barred by
claim and issue preclusion. He seeks relitigation in the Guam court of
right to purchase MCS stock under the August 4, 1971 contract--a
right that was sold in the marshal's sale ten years earlier. The April
12, 1979 sale was pursuant to an Alias Writ of Execution signed by
the district court. 9th Cir. EOR at 354. The Writ was addressed from
"THE GOVERNMENT OF THE UNITED STATES OF AMERICA
to the United states Marshal for the District of Guam...."_ It
commanded the marshal to satisfy the federal court's November 18,
1977 judgment by sale of David Ulloa's personal property. /d. The
2%.
sale of David Ulloa's contract rights was thereafter conducted by the
federal marshal and reported back to the federal court. EOR at 354-
360. The sale was conducted under the auspices of the federal
court, by federal officials, as part of Western's enforcement of the
federal court's judgment. Ulloa never objected to or appealed the sale.
May 11, 1990 Order, Petitioners' appendix at 39a.
Fed.R.Civ.Proc. 69(a) authorizes a federal court to conduct
"proceedings supplementary to and in aid of a judgment...and in aid
of execution." Pursuant to Rule 69(a), "a federal court has authority
to enforce its judgment and to conduct proceedings to aid execution of
its judgment through a writ of execution." Hankins v. Finnel, 759
F.Supp. 569, 571 (W.D.Mo. 1991). Alleged errors in the execution
of a federal judgment must be directed to the court that issued the
judgment, or to the appropriate federal appeals court. Riggs v.
Johnson County, 73 (6 Wall.) U.S. 166, 187, 18 L.Ed. 768 (1867).
A federal court may enjoin state court cases threatening title to
property levied and sold by the federal court. Riverdale Cotton Mills
v. Alabama & Georgia Mfg. Co., 198 U.S. 188, 202 (1905); Julian
v. Central Trust Co., 193 U.S. 93 (1904); Hagan v. Lucas, 96 U.S.
400, 402 (1836) ("The first levy, whether it were made under the
federal or state authority, withdraws the property from the reach of the
process of the other"). The Guam court has no power to grant David
Ulloa's request to declare "null and void" the federal marshal's
execution of the federal judgment, just as it has no power to void the
underlying federal judgment itself. Williams Natural Gas Co. v.
Oklahoma City, 890 F.2d 255, 264 (10th Cir. 1989).
To read Chick Kam Choo as the Ulloas suggest would
substantially limit the finality of federal court judgments. Under their
theory, a plaintiff's claim could be dismissed on the merits by a
federal court for statute of limitations, laches, or other procedural
grounds and the plaintiff could file again in state court. This result
would contradict Fed. R. Civ. P. 41(b), which provides that such a
dismissal normally operates as an adjudication upon the merits. See
e.g., Browning Debenture Holders’ Comm. v. DASA Corp., 605
F.2d 35, 39 (2d Cir. 1978) (dismissal of federal case for failure to
- 2.
post a bond was a dismissal on the merits and merited an injunction of
a subsequent state court suit). Claims that should have been litigated
in prior federal proceedings would be barred by claim preclusion if the
plaintiff reasserted the claim in federal court, but would not be barred
if the plaintiff reasserted the same claim in state court. The Ulloas
accuse the respondents of forum shopping, but respondents merely
returned to the same federal court that handled this case since 1972. It
is the Ulloas who are forum shopping, filing suit in Guam court after
losing eighteen years of litigation they started in the federal court.
Congress could have prohibited the federal courts from
enjoining any state court proceedings. It has not. To the contrary,
recognizing that prevailing federal parties deserve protection from
repetitive litigation in the state courts, and the possibility of conflicting
rulings, in 1948 Congress overruled Toucey v. New York Life Ins.
Co., 314 U.S. 118 (1941), and amended the Anti-Injunction Act
expressly to authorize the federal courts to enjoin attacks on final
federal court judgments. Mitchum v. Foster, 407 U.S. 225, 236
(1972); Samuel C. Ennis & Co., Inc. v. Woodmar Realty Co. , 542
F.2d 45 (7th Cir. 1976).
No plaintiff should get two chances at winning. No
defendant should have to defend the same claim in two courts. The
lesson of Chick Kam Choo is that when a case is dismissed for foruni
non conveniens reasons, there is no claim preclusion in either the
federal or the local court. But where a case is decided on the merits in
a federal court, whether or not every theory is addressed in the court's
opinion, the plaintiff's claims are "actually decided” and further
litigation in the local court may be enjoined.
In the present case, the Ulloas have had twenty years in the
federal courts. The district court did not abuse its discretion in
enjoining them. Thus, the holding of the Ninth Circuit in the present
case conforms to the Chick Kam Choo decision.
- 3 -
III. Other Circuit Decisions Cited by the Petitioners
Do Not Conflict With the Ninth Circuit's Opinion
The petitioners cite cases from five other Circuit Courts of
Appeal allegedly in conflict with the Ninth Circuit's opinion. Petition
at 3. Upon close examination, with the lone exception of Farias v.
Bexar County Bd. of Trustees, 925 F.2d 866 (Sth Cir. 1991), these
Cases are distinguishable.
The first case cited by petitioners is DeCosme v. Sea
Containers, Ltd., 874 F.2d 66 (ist Cir. 1989). In DeCosme, a
seaman was killed in a crane accident. The seaman's estate sued in
federal court, and the case was consolidated with another case
involving injured seamen. The workman's compensation insurance
fund was a party to the wrongful death case, but not the injury case.
Both cases were consolidated for trial. A settlement was reached to
dismiss the cases, but did not include the fund as a signatory, nor was
the fund mentioned in the final judgment. The fund's attorney signed
a Satisfaction of judgment under the impression it was for the
wrongful death case only. The fund then sued in local court for
reimbursement of claims paid in the injury case.
The First Circuit held that "there is a legitimate question
whether either res judicata or collateral estoppel would apply” to the
fund's suit to recover reimbursement paid in the injury case. 874
F.2d at 68. The court did not find a "strong and unequivocal showing
of relitigation of the same issue.” /d. The fund did not sign the
settlement, was not mentioned in the final federal court judgment, and
was not even a party to the injury case. The court's reluctance to bar
the fund from litigating its reimbursement rights in the injury case is
understandable. In the present case, the Ulloas were parties to both
federal cases, litigated for eighteen years and lost.
The next case cited by petitioners, Jn re G.S.F. Corp. , 938
F.2d 1467 (ist Cir. 1991) actually agrees closely with the Ninth
Circuit's opinion in the present case. In Jn re G.S.F. Corp., two
parties settled a property dispute pending in the bankruptcy court.
One party then sued two years later in the state court. The First
ee
Circuit held that the bankruptcy court was authorized to enjoin the
state court suit because the federal court settlement encompassed all
claims conceming the property, whether specifically mentioned in the
settlement stipulation or not. 938 F.2d at 1467.
Next, the Ulloas cite Staffer v. Bouchard Transp. Co., Inc. ,
878 F.2d 638 (2d Cir. 1989). In Staffer, an injured seaman recovered
damages against his employer. The employer recovered contribution
for almost the entire amount from a third-party defendant, a doctor.
The seaman then sued the doctor directly in state court. The Second
Circuit refused to enjoin the seaman's state court suit because his
medical malpractice claim had not been litigated in the prior federal
case. The claim decided by the federal court was only the contribution
claim between the employer and the doctor, the seaman was not even a
party to the contribution claim. Again, in the present case the Ulloas
were parties to the federal litigation and their claim conceming the
1971 contracts, no matter what theories they advanced, were litigated
on the merits.
In Kidder Peabody & Co., Inc. v. Maxus Energy Corp. , 925
F.2d 556 (2d Cir. 1991), a federal district court issued a declaratory
judgment that the plaintiff was not liable under federal securities laws,
then declined to exercise jurisdiction over pendent state law claims.
Nevertheless, the court then enjoined the defendant from pursuing any
claim, state or federal, arising from the stock transaction. The Second
Circuit held that "the district court properly enjoined [the defendant)
from relitigating the federal securities claims, 'no matter how
denominated,’ because those issues already had been decided.” 925
F.2d 556. The injunction of state law claims was overbroad,
however, because the district court had no pendent jurisdiction over
such state law claims and its declaratory judgment did not decide
them. /d. In the present case, in contrast, the district court had
jurisdiction over all of the Ulloas’ claims for MCS stock based on the
1971 contracts, and its final judgments were conclusive.
In Nationwide Mut. Ins. Co. v. Burke, 897 F.2d 734 (4th
Cir. 1990), an insurer that had prevailed in a declaratory judgment
action in federal court requested the federal court to enjoin a state court
TT
." S
from enforcing a settlement agreement the insurer had voluntarily
made to settle a case in the state court. Recognizing that the
"relitigation exception applies...when the federal judgment is claim
preclusive," the Fourth Circuit nevertheless held that the federal
court's coverage decision was "irrelevant to the state law issue of
enforceability of the setthement agreement". 897 F.2d at 737-38.
Similarly, in LCS Servs., Inc. v. Hamrick, 925 F.2d 745 (4th Cir.
1991), the Fourth Circuit concluded that a district court's injunction
was overbroad "because no claim or issue pending in the state court
actions has ever been decided by the United States District Court."
925 F.2d at 749. Likewise, in American Town Center v. Hall 83
Assocs., 912 F.2d 104 (6th Cir. 1990), the court refused to require a
district court to issue an injunction when "additional claims" were
made in the state court proceeding. 912 F.2d at 112 n.2. In contrast,
in the Guam suits here the Ulloas seek the same stock based on the
same 1971 contracts at issue in the federal litigation, and hence the
Claim in the Guam suits is the same litigated in the federal court.
Thus, the "conflicting" cases cited by the Ulloas, with one
exception, do not conflict with the Ninth Circuit's decision. These
cases merely hold that a federal court cannot enjoin state court
litigation of a claim or issue that is not barred by claim or issue
preclusion. They do not hold, as petitioners suggest, that only issues
barred by issue preclusion may be enjoined.
IV. The Ninth Circuit's Opinion Does
Not Conflict With Other Circuits’
Interpretation of Younger v. Harris
The Ulloas contend that the Ninth Circuit's opinion conflicts
with Lamb Enters., Inc. v. Kiroff, 549 F.2d 1052 (6th Cir. 1977) and
other cases because it refused to apply the “equitable restraint”
doctrine of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27
L.Ed.2d 669 (1971) in this case. There is, however, no such conflict.
In Lamb Enters. v. Kiroff , the Sixth Circuit specifically declined to
rule on the issue here:
a
-%.
The peculiar posture of this litigation takes the case
out of the class of proceedings traditionally dealt with
under the 'relitigation exception’ to § 2283 .... We do
not reach the question of whether the principles of
Younger-Huffman should be applied in all situations
involving § 2283 and the 'relitigation exception’
thereto.
549 F.2d at 1062.
In its opinion the Ninth Circuit properly found that Younger
v. Harris is inapplicable to the present case. First, " Younger
abstention is required...only when state court proceedings are initiated
before any proceedings of substance on the merits have taken place in
the federal court." Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229,
238, 104 S.Ct. 2321, 81 L.Ed.2d 186, 195 (1984) (emphasis added).
Here, the Ulloas filed their Guam suits after almost eighteen years of
litigation in the federal courts.
Second, the scope of Younger's application outside of
Criminal cases is limited to "civil proceedings in which important state
interests are involved," such as public nuisance statutes "in aid of and
closely related to criminal statutes," Hoffman v. Pursue, Ltd., 420
U.S. 592, 95 S.Ct. 1200, 43 L.Ed.2d 482 (1975), cases involving
"the presence of such other vital concerns as enforcement of contempt
proceedings,” Juidice v. Vail, 430 U.S. 327, 97 S.Ct. 1211, 51
1.Ed.2d 376 (1977), "or the vindication of important state policies
such as safeguarding the fiscal integrity of [public assistance]
programs." Trainer v. Hernandez, 431 U.S. 434, 444, 97 S.Ct.
1911, 52 L.Ed.2d 486 (1977). See, Moore v. Sims, 442 U.S. 415,
423, 99 S.Ct. 2371, 60 L.Ed.2d 994 (1979). Here, the Ulloas' claim
for MCS stock involves no substantial Guam government interests.
The Ulloas claim that "Guam's interest in this case is far
superior to that of the federal court" because their claims rest on
Guam law. Although when the Ulloas first filed suit in 1972 the
district court had expanded jurisdiction over certain non-diversity
cases, the district court is a federal court "created by the laws of the
United States." Camacho yv. Civil Serv. Comm., 666 F.2d 1257,
- 28 -
1261 (9th Cir. 1982) (describing analogous Commonwealth of the
Northern Marianas district court). It is not a Guam court, and its
judgments are not Guam court judgments. Moreover, the preclusive
effect of a judgment of the federal district court or the Ninth Circuit is
governed by federal, not local, law. Toucey v. New York Life Ins.
Co., 314 U.S. 118, 129 n.1 (1941); Restatement (Second) Judgments
§ 18, Comment k, and § 87. It is difficult to see what interest the
government of Guam has in protracting the Ulloas' bad faith litigation.
Nor is the threat of irreparable injury absent in this case. "If
‘the federal litigation has been unusually burdensome or protracted,’
further litigation may cause irreparable harm to the prevailing party,
already denied long-awaited repose." Zagano v. Fordham Univ. , 720
F.Supp. 266, 268 (S.D.N.Y. 1989), quoting in part Browning
Debenture Holders’ Comm. v. DASA Corp., 454 F.Supp. 88, 101
(S.D.N.Y.), aff'd, 605 F.2d 35 (2d Cir. 1978); Royal Ins. Co. of
America v. Quinn-L Capital Corp., 759 F.Supp. 1216, 1237
(N.D.Tex. 1990) ("the irreparable injury facing Royal is the
compromise or nullification of the Court's September 8, 1989
Judgment and the Court's ability to adjudicate the present
controversy"). The option of relying entirely on the Guam court to
uphold the res judicata effect of the federal court judgment does not,
as petitioners suggest, eliminate the threat of irreparable harm. As the
Second Circuit held in a very similar case:
In a case such as this it would be a disservice not only to the
defendants, but also to the state judiciary, to allow the entire
record to be placed in the lap of the New York State courts to
be argued over by lawyers and puzzled over by judges for
years to come. While comity requires respect for the ability of
the state courts to decide the issue of res judicata properly, it
also requires sympathy for their calendar problems and for the
task that would confront them were this litigation to be
imposed upon them.
Browning Debenture Holders’ Comm. v. DASA Corp., 605 F. 2d at
40.
- 29 -
Third, "Younger...do[es] of course allow intervention in
those cases where the district court properly finds that the state
proceeding is motivated by a desire to harass or is conducted in bad
faith." Huffman v. Pursue, Ltd., 420 U.S. at 611; 17 C. Wright, A.
Miller, & E. Cooper, Civil, Federal Practice and Procedure, § 4226 at
552 ("There is no difficulty in justifying an injunction against
relitigation if there is a showing of bad faith, multiplicity of suits, or
other evidence of harassment"). Here, the district court indeed found
that "the suits had no merit whatsoever, and were obviously filed for
harassment." May 11, 1990 Order, Petitioners’ appendix at 52a. The
Ninth Circuit affirmed "the award of sanctions," remanding only for a
rehearing of "the amount of the sanction." 958 F.2d at 866.
Accordingly, for the reasons stated above, the Ninth Circuit's
opinion does not conflict with Younger v. Harris or Lamb Enters.,
Inc. v. Kiroff.
CONCLUSION
The petition for writ of certiorari should be denied.
Respectfully submitted,
pwc Dee Nye Mahal Melene
Mark Snyder Folmes
Counsel of Record for
Respondents Westem Systems, Inc.
and Lee M. Holmes
:
2
:
_
IN THE DISTRICT COURT OF GUAM
TERRITORY OF GUAM
ALBERT THOMAS CRUZ, CEZI
CRUZ, PATRICIA C. CRUZ,
RICHARD G. CRUZ, FRANCES M.
GUNN, LARRY E. GUNN, ROBERT
E. HALSEY, JOHN M. HALSEY,
FRANK V. OKIYAMA, MARIE B.
OKIYAMA, JOHNNY GUEVARA
SABLAN, BARBARA P.
SARMIENTO, HERMAN B.
SARMIENTO, DAVID J.
ULLOA, JUANITA S. ULLOA, and
RICHARD F, ULLOA,
CIVIL CASE NO. 24-72
Plaintiffs,
VS.
GUAM ECONOMIC DEVELOPMENT
AUTHORITY, a public corporation,
and LEE M. HOLMES,
:
Defendants.
ue Ne Ne ae ae ne Ne Nae ee Ne Na Na ee a Ne Sa ee Nae ee Nee ee See”
On February 28, 1972, plaintiffs filed the complaint in this
action to enforce a constructive trust (Count I) and for damages
(Count Il). It was determined at the pretrial conference conducted on
June 9, 1972, that the trial would be limited to Count I, namely the
enforcement of a constructive trust.
Plaintiffs are the former stockholders of Marianas
Communications Systems, Inc., hereinafter referred to as "MCS."
Defendant Guam Economic Development Authority, hereinafter
referred to as "GEDA", is a public corporation and was originally the
guarantor of MCS, subsequently the sole stockholder of MCS, and
is.presently a minority stockholder of MCS. Defendant Lee Holmes in
presently the largest single stockholder of MCS.
-*-
The action was filed by sixteen original shareholders of MCS.
However, over the course of this case, ten (10) of the original
plaintiffs and their claims were dismissed. The remaining plaintiffs are
David J. Ulloa, Richard F. Ulloa, Richard G. Cruz, Robert E.
Halsey, Joan M. Halsey, and Johnny Guevara Sablan.
HISTORY OF MCS
MCS was incorporated in 1968 by David J. Ulloa, Frank V.
Okiyama, Richard G. Cruz, and Richard F. Ulloa and had a purported
capital of $10,000 with 1,000 shares of stock issued at a par value of
$10.00 a share. The purpose of the company was to establish a cable
television system in the Territory of Guam.
In 1969, the four original stockholders conferred with GEDA
personnel with regard to obtaining a loan from GEDA, or a GEDA
guarantee, if the company could secure a bank loan. The amount of
the loan or guarantee requested was $200,000.
Later in 1969, the authorized shares of stock were increased
to 30,000 shares with a purported capital value of $300,000. The
Original four shareholders subscribed to an additional 23,000 shares.
First National City Bank, hereinafter referred to as "FNCB",
approved a $200,000 GEDA-guaranteed loan to MCS in 1970. At the
time, the original four shareholders indicated on the corporate books
that the $230,000 worth of stock that had been subscribed to was paid
in full in exchange for the efforts expended in obtaining the loan. No
cash or property was ever paid for the 23,000 shares issued.
In the middle of 1970, MCS started receiving the money and
by April or may of 1971 the $200,000 from the loan had been spent
and MCS had incurred additional outstanding bills totaling close to
$221,000. At this time, the company was indisputedly in grave
financial trouble and was insolvent. In April of 1971, MCS had
approximately 550 subscribers and thirty-five miles of cable installed.
The company was experiencing technical problems with the quality of
its televisions tapes and was hampered by an insufficient supply of
programs. In order for the company to break even on its operation, it
would be necessary to increase subscribers up to 2,500. In short, as
of April 1971, the company was losing large sums of money per
month on its operation and had no prospects of obtaining further
financing for the desperately needed capital improvements. As a
consequence, buyers were sought for the company. While at least one
company expressed interest in purchasing MCS, and even obtained an
option to purchase, it declined to exercise its option.
. -
As of May 11, 1971, it became obvious that MCS would be
forced to shut down its operation. The consensus of opinion among
the members of the GEDA Board was that the liquidation value of
MCS's assets was negligible.
At a Board of Directors meeting of GEDA on May 11, 1971,
the Board decided it had two alternatives: One, to pay off its obligation
to FNCB of $200,000 and let MCS go bankrupt or Two, to take over
the stock of MCS and further finance its operation at a loss until
GEDA could find somebody else to take over the company. At this
meeting, the GEDA Board voted to take over MCS wholeheartedly
and to provide the amount of money necessary to tum the company
into a successful operation.
FACTS OF THE CASE
On May 21, 1971, Mr. James Halliday, Administrator for
GEDA, entered into two agreements with all of the shareholders of
MCS and their spouses. These agreements were entitled "Stock
Purchase Agreement" and "Agreement". The primary issues in this
litigation involve these two agreements as well as an agreement
ery A July 20, 1971 by most of the original shareholders of MCS
A.
By the terms of the May 21, 1971 agreements, the original
shareholders of MCS sold their shares in MCS to GEDA for the price
of $1.00 per shareholder, regardless of the number of shares owned
by the particular shareholder.
In the agreement, the original shareholders represented to
GEDA that all of the shares issued previously and tumed over to
GEDA were lawful, and that the company was duly Organized and in
good standing under the laws of Guam.
Section 6 of the agreement, entitled Right of First Refusal.
provided that GEDA would not transfer the shares of stock without
first itting the former shareholders an opportunity to repurchase
all of the shares. However, this right to repurchase was conditional in
two respects. First, that the purchase price for the original
shareholders must be equal to the total amount expended by GEDA,
the payment of all debts and liabilities incurred in the operation of the
company and the removal of all guarantees made by GEDA, plus a
reasonable service fee. If the former shareholders failed to exercise
their option to repurchase within 30 days, then GEDA would be free
- 4b -
to "transfer, alienate, or otherwise dispose of such shares without
restriction.” As of May, 1971, the purchase price would equal
approximately $421,000 plus a reasonable service fee. MCS owed
$200,000 to FNCB on a loan for which GEDA was the guarantor,
and MCS also had another $221,000 in accounts payable.
The right to repurchase was conditioned further by the
following clause in Paragraph 6:
"This right of first refusal is not an individual right to
a shareholder to reacquire the shares transferred by that
individual stockholder by this agreement or any other shares.
The right of first refusal is a collective right and all shares
offered for sale by GEDA must be acquired under the same
terms and conditions as set forth in the preceding paragraph."
In addition to the "Stock Purchase Agreement", Halliday and
all the stockholders of MCS and their spouses signed another
document, labeled "Agreement" on May 21, 1971 and annexed the
"Stock Purchase Agreement” to the "Agreement". Paragraph 2 of the
agreement provided:
"Notwithstanding the provisions of Section 6 set forth in the
Stock Purchase Agreement annexed hereto, GEDA further
agrees that it shall not offer for sale any of the shares within
one hundred eighty (180) days from the date of this
agreement."
This supplemental "Agreement" was not shown to, nor
approved by, the GEDA Board.
Admitted into evidence are transcripts of tape recordings made
of meetings of the GEDA Board of Directors held on May 11, May
17, May 28, July 11, July 14, July 20, August 2, August 3, and
September 1, 1971. While the transcripts have some blank spaces,
and it is not possible to identify the people speaking in some instances
due to poor recording quality, the transcripts are by and large an
accurate, record of what transpired at the board meetings.
Also admitted into evidence are the minutes of meetings of the
GEDA Board of Directors held on May 11, July 14, July 20, August
2, August 3, and September 1, 1971 and March 1, 1972.
Subsequent to the May 21, 1971 agreements, GEDA operated
MCS with the assistance of the former employees, namely, David
a ee EEE
- 5b -
Ulloa, Larry Gunn, and Albert Cruz. The company continued to incur
large operational losses of around $15,000 a month, all of which was
absorbed by GEDA. By the middle of July, the GEDA Board did not
believe that GEDA could afford to subsidize the operations of MCS
any longer without possibly causing the bankruptcy of GEDA.
At this point in time, Holmes entered into the picture after
having been asked by James Halliday, then Administrator of GEDA,
if he would be interested in purchasing MCS.
On July 14, 1971, the GEDA Board held a special informal
meeting for the purpose of hearing a proposal from Holmes. Holmes
proposed that GEDA tum 851 of the MCS stock back to the MCS
Treasury, and that 70% of the stock (21,000 shares) be sold to
Holmes for $2.00 a share or $42,000, that 10% of the stock (3,000
shares) be sold to the original shareholders on a pro-rata basis for
$1.00 a share ($1,000) and that 5% of the stock (1,500 shares) be
sold to David Ulloa, Larry Gunn and Albert Cruz, the three officers of
the corporation, who have been and will continue to be active in
management, for $1.00 per share. Note, according to this proposal,
GEDA will hold on to 15% of the stock. Albert Cruz and David Ulloa
were present at this meeting and assisted in the Holmes’ presentation.
It is important to note at this time that David Ulloa was the general
manager of MCS and prior to May 21, 1971 was the majority
stockholder of MCS, owning 15,500 of the 30,000 outstanding
shares.
Holmes' proposal also called for the addition of $100,000
into MCS obtained from more loans, principally an additional $50,000
loan from FNCB and an additional $50,000 loan from GEDA.
The reaction of the GEDA Board was indeed favorable to the
Holmes’ proposal as is apparent from the transcripts of the meeting.
After Holmes left the meeting, Director Ord "This is the best
offer of a way out we've ever had". Director Wharton stated, "It's
probably the only one we're going to get for this company”. Director
Perry stated, "If we don't do something, we'll lose the whole works,
though.”
It was at this point that the GEDA Board of Directors
discovered that Mr. Halliday had signed the supplemental agreement
on May 21, 1971, which prohibited GEDA from offering the shares
for sale for six months. Although the GEDA Board questioned the
validity of the supplemental agreement since it was signed by the
Administrator without knowledge of the board, it was decided that a
- 6b -
round table discussion should be held between the original MCS share-
holders and the GEDA Board in order to obtain the waiver of the
Original shareholders’ right of First Refusal in exchange for the
benefits of the Holmes' proposal.
On May 28, 1971, the GEDA Board of Directors held a
regular GEDA Board meeting. It appears from the transcript of that
meeting that the members of the GEDA Board agreed that they would
become the directors of MCS since MCS was wholly owned by
GEDA. It then appears from the transcript that the GEDA Board
Meeting was adjourned and an MCS Board of Directors meeting was
convened. The Directors of MCS then elected James Halliday,
President, Joe Perez, Vice-President, and Joe Cepeda,
Secretary-Treasurer. Messrs. Halliday, Perez and Cepeda were all
employees of GEDA.
On July 20, 1971, the three members of the MCS Board of
Directors met in a round table meeting with five of the former
stockholders of MCS, David Ulloa, Johnny Sablan, Robert Halsey,
Larry Gunn, and Albert Cruz. David Ulloa was at all times also acting
as a representative for his brother, Richard Ulloa. The three members
of the MCS Board present were Guy Wharton, Roy Benito and
Gerald Perry. All three were also members of the GEDA Board of
Directors. While the minutes of the meeting were labeled as minutes of
the Guam Economic Development Authority, the transcript of the
ne was opened by the Secretary as
ollows:
"Round table meeting between the MCS Board of
Directors and MCS stockholders regarding possible purchase
of MCS stock by Technical Resources, Mr. Lee Holmes,
Jenny Manufacturing, July 20, 10:00 A.M."
The transcript and Minutes of the July 20, 1971 meeting
reflect that the former shareholders of MCS led by David Ulloa
objected to certain parts of the Holmes’ proposal.
Their objections to the proposal were as follows:
1. The former shareholders wanted to buy back 30%
of the stock.
2 . They wanted to buy back the stock for one dollar
per shareholder rather than one dollar per share.
~~ 2
3. They wanted it made a condition to the waiver
ee that Holmes would obtain the necessary loan from
FNCB.
After a long discussion, Holmes, the MCS Board members
and the five former stockholders present finally agreed to the terms of
the July 20, 1971 agreement which was introduced into evidence. In
the agreement, the former shareholders gave up their right of first
refusal on the condition that within a reasonable time a contract would
be executed among GEDA, MCS, and Holmes and that such a
contract would include the following provisions:
"a). Fifteen (15%) percent of the outstanding shares of MCS
shall be made available for sale to the present Stockholders for
the gum of ONE ($1.00) DOLLAR per share, and in such
proportion as is the present stow, ownership of the said
Stockholders.
b). Fifteen (15%) percent of the outstanding shares of MCS
shall be retained by GEDA and shall be made available for
sale, for the sum of FOUR ($4.00) DOLLARS per share, to
the following Stockholders, in equal proportions: DAVID J.
ULLOA, ALBERT THOMAS CRUZ, and LARRY E.
GUNN, JOHNNIE SABLAN, and LEE M. HOLMES, when
the debt owed GEDA by MCS is repaid in full.”
If the contract between Holmes, GEDA, and MCS was not
executed within 60 days from July 20, 1971, then the former
stockholders could cancel the July 20, 1971 agreement with notice by
the stockholders in writing to GEDA and Holmes.
This agreement was signed by Guy Wharton on behalf of
GEDA and by all of the plaintiffs, with the exceptions of Richard
Cruz, Robert Halsey, and Joan Halsey. Lee Holmes signed "agreed"
on the second page of the agreement.
The transcript of this meeting reveals that the former
pores apg Ns sag David Ulloa, wanted to include in the
agreement a ition that Holmes would obtain a loan from FNCB,
with which to make the further capital improvements which would
bring MCS up to the breakeven point. Holmes represented to the
former shareholders_that if GEDA would loan another $50,000 and
the shareholders would contribute $46,500 in equity financing by
purchasing the stock then FNCB would probably match those
amounts with a loan. However, Holmes made the representation that
- 8b -
FNCB's attitude was favorable, but that it would not commit itself to
such an arrangement at this time. Holmes further re that a
commitment from the bank was interrelated to a lot of things, and that
if FNCB would not grant the loan, he would either raise the money
elsewhere or would call off the whole deal. In that event, the waiver
could be cancelled. At this point in the meeting, any discussion of
requiring Holmes to produce a loan from FNCB as a part of the
agreement ceased.
The former shareholders who agreed to the July 20, 1971
agreement represented 26,200 shares of the 30,000 shares outstanding
an of May 21, 1971. The only former shareholders who did not sign
the July 20, 1971 agreement were Richard Cruz and Robert and Joan
Halsey representing 3,800 shares.
The question arose during the meeting as to the legal
consequences if some of the former shareholders did not sign the
agreement. Assistant Attorney General Charlies Troutman was asked
his opinion on the subject, and he replied both at the meeting and on
July 29, 1971 with a written opinion. Troutman took the position that
the former shareholders’ right of refusal under the May 21, 1971
agreements was a collective right and not an individual right.
Troutman's opinion stated in part:
"It is my interpretation of this collective right that the
former shareholders may agree among themselves as to what
method they will use to determine if they, as a group will
the shares or fail to do so. Therefore, the group
may determine that the decision is by a physical majority of
the group, or a majority of shares formerly held, and that if
the group decides to grant a waiver on the right of repurchase,
it may do so with recourse to a majority decision.
"Further, an individual has no right to repurchase
from the group decision. As a result, the
individual's signature on the original agreements, or on any
subsequent agreement or waiver thereof only as one
of a group, rather than as an individual. The effect of the
original signatures is merely that the decision of the group
was unanimous, and any waiver of the 180-day period would
require the signatures to have the same effect, that of members
of a group which may or may not be unanimous.
- Ob -
"Therefore, the group of former stockholders may
decide that as a group they will abrogate the original 180-day
plan, and any dissenting member may complain only against
the group's decision, not against GEDA for acting upon that
decision."
On August 4, 1971, Holmes, GEDA, and MCS executed a
contract called "Agreement for Sale of MCS Stock", the terms of
which required GEDA to sell 26,500 shares of MCS stock to the MCS
Treasury for the sum of $1. Holmes was required to buy 21,000
shares of MCS stock from MCS for the price of $42,000. The
provisions agreed upon in the July 20, 1971 agreement were included
in the August 4, 1971 agreement.
Attached to the August 4, 1971 "Agreement for Sale of MCS
Stock" is Exhibit A, the July 21, 1971 "Stock Purchase Agreement”,
Exhibit B, the May 21, 1971 supplemental "Agreement", and Exhibit
D, the July 20, 1971 “Agreement”. In Section 5 of the August 4, 1971
"Agreement for Sale of MCS Stock", GEDA specifically represents to
Holmes that the July 20, 1971 agreement was made for the purpose of
freeing all of the said shares of MCS stock from the "Right of First
Refusal" held by the former shareholders. GEDA further warranted
the legality of the July 20, 1971 "Agreement" to Holmes.
The August 4, 1971 "Agreement for Sale of MCS Stock" was
signed by Jesus S. L. Guerrero, Chairman of the Board of Directors
of GEDA, James C. Halliday, President of MCS, and Holmes. The
agreement was witnessed by David Ulloa and Joe Perez.
David Ulloa, Richard Ulloa, and Johnny Sablan exercised
their rights to purchase MCS shares under the August 4, 1971
agreement. Defendant's Exhibit GG is a series of letters and
installment notes relating to the shares in question. Johnny Sablan and
David Ulloa both signed installment notes in exchange for their
proportion of MCS shares. While the record does not reflect whether
Richard Ulloa executed installment notes, it does reflect that he paid
for his proportionate number of shares in September 1971. Herman
Sarmiento also purchased his proportionate number of shares on
September 20, 1971.
It is also apparent from the evidence that Richard Cruz
sometime in August of 1971 purchased the right of Robert and Joan
Halsey to purchase any MCS shares. At the time of the August 4,
1971 agreement, Richard Cruz, who at one time was an employee of
MCS, was not an employee of MCS and had not been employed by
- 10b -
MCS for quite some time. It is also apparent that Richard Cruz did not
play a substantial part in the negotiations with GEDA and Holmes
relating to the July 20, 1971 agreement and the August 4, 1971
agreement.
Defendants’ Exhibit CC-1-6 consists of a series of letters and
notes relating to the purchase of MCS stock by Richard Cruz. On
August 10, 1971, Larry Gunn, Secretary of MCS, wrote a letter to
Richard Cruz reminding him that on July 30, 1971, he had indicated
to Lee Holmes and David Ulloa that he intended to purchase his
proportion of MCS shares. Gunn requests Cruz to either purchase his
shares, if necessary on the installment basis, by August 13, 1971 or
indicate his desire to relinquish his right to purchase the shares in
writing.
Cruz replied to Gunn's letter on August 13, 1971 and
informed Gunn that he would let him know of his decision by
September 2, 1971.
On September 9, 1971, Gunn again wrote Cruz and
requested him to notify Gunn within 15 days of the method of
payment he desired to make for his 570 MCS shares. (Cruz was
allowed to purchase his rightful amount of 525 and Halsey's
amount of 45).
On October 5, 1971, Lee Holmes, Chairman of MCS, wrote a
letter to Cruz calling to Cruz's attention that he had not made payment
or offered to make payment for his MCS stock, and, therefore, MCS
had no recourse but to dispose of the stocks.
On October 8, 1971, Richard Cruz signed an installment note
for the purchase of 570 MCS shares to be paid in full not later than
October 13, 1971. On October 13, 1971, Cruz did pay MCS $570.
However, Plaintiffs’ Exhibit 17 is a copy of a memorandum
from Richard Cruz to MCS and is dated October 13, 1971. The
memorandum is signed by Richard Cruz, and receipt of the
memorandum is acknowledged by David Ulloa as President of MCS.
The memorandum states as follows:
"Please be advise that my payment this date of
$570.00, in cash, for MCS shares is not in anyway an
indication of my acceptance of the sales agreement to Lee
Holmes.
- 1lb-
Furthermore, I do not agree with the Holmes-Geda
sales agreement nor did I waive my rights under the May 21,
1971 Agreement."
It is the testimony of Richard Cruz that he purchased the 570
shares under protest of the Holmes-GEDA agreement of August 4,
1971 and specifically did not waive his right under the May 21, 1971
agreement.
It is the testimony of Lee Holmes that subsequent to October
13, 1971, he had a telephone conversation with David Ulloa in which
he specifically asked Ulloa if Cruz had purchased his MCS shares.
According to Holmes, Ulloa informed him that indeed Cruz had paid
for the shares, but Ulloa did not say anything to Holmes about the
conditional nature of the payment or of Cruz's insistence that he was
not waiving his rights under the May 21, 1971 agreement.
Holmes also testified that when he retumed to Guam as
Chairman of MCS, he was unable to locate the memorandum or any
mention of it in the MCS files.
David Ulloa, Richard Ulloa, and Johnny Sablan continued in
the active management of the company along with Holmes after
August 4, 1971.
Soon after August 4, 1971, FNCB turned down Holmes'
request for a loan subject to reconsideration at a later time. By
November 1971, additional funds were provided by Holmes in the
form of preferred shares and warrants raising an additional $118,000.
On December 16, 1971, the Columbia Broadcasting System,
Inc., filed a complaint for Infringement of Copyright and Unfair
Competition in the U. S. District Court, Central District of California,
against MCS and the Ulloas. The suit was resolved by Holmes.
In January of 1972, another $59,000 was provided in equity
capital and by February 28, 1972, ximately 52 miles of cable
was in operation and i y 2,430 subscribers were
connected. In short, MCS's prospects for success were far greater on
February 28, 1972 than on August 4, 1971. As of the date of trial,
MCS was servicing 12,125 subscribers and had installed 270 miles of
cable.
- 12b-
CONCLUSIONS OF LAW
On February 28, 1972, the plaintiffs in this case filed their
complaint.
On November 13, 1972, this court granted defendants’
motion to disqualify counsel for the plaintiffs. That decision was
appealed and was affirmed by the Ninth Circuit Court of Appeals on
March 21, 1974.
On October 22, 1975, six days before trial, counsel for
plaintiffs filed a motion with the court to amend the Second Amended
Pretrial Order and any other necessary pleadings in order to
incorporate the issue of fraud into the case.
Count I of plaintiffs’ complaint alleges that GEDA
breached the May 21, 1971 agreement by failing to first offer the
21,000 MCS shares now held by Holmes to plaintiffs, that
Holmes knew of this failure, that defendants acted in bad faith, and
that the plaintiffs were ready, willing and able to perform the terms of
the said agreements. Therefore, plaintiffs demand that the court
enforce a constructive trust on the shares in question.
Count II of the complaint demanded damages but is not a
subject of this trial.
Plaintiffs contended in their motion to amend that evidence
supported an allegation not made in the complaint, namely, that GEDA
and Holmes fraudulently induced all of the plaintiffs who executed the
July 20, 1971 agreement, by which they waived their right of first
refusal, to sign said agreement based on the promise from GEDA and
Holmes that no contract would be executed transferring MCS shares
from GEDA to Holmes, unless a bank commitment existed to lend
MCS a dollar for each dollar advanced by Holmes, the plaintiffs, and
GEDA. Plaintiffs furthermore contend that between July 20, 1971 and
August 4, 1971, Holmes fraudulently represented to plaintiffs that
FNCB had made a commitment to loan MCS $50,000 when in fact
such representation was untrue.
The court denied plaintiffs’ motion to amend the pleadings on
the ground that the motion was untimely and prejudicial to the
defendants and was not supported by the evidence.
- 13b-
On October 21, 1975, plaintiffs filed a motion for summary
judgment respecting the legal effect of the July 20, 1971 agreement,
and a motion to amend the pleadings to whatever extent was necessary
to hear evidence pertaining to adjudicating the issues concerning the
legality of the July 20, 1971 agreement.
It is plaintiffs’ contention that the July 20, 1971 agreement,
wherein most of the former shareholders waived their right of first
refusal, was an invalid agreement and is void and of no effect since
the agreement was signed by Guy Wharton, as Acting Chairman of its
Board of Directors of GEDA, at a meeting attended by only three (3)
out of the seven (7) directors.
Section 53554 of the Government Code of Guam
provides:
All functions and powers of the Corporation shall be vested in
and be exercised by and under the direction of a Board of
Directors hereinafter referred to as the Board, composed of
seven (7) members, appointed by the Governor of Guam with
the advice and consent of the Guam Legislature. Members of
the Board shall serve for a term of four (4) years. The
Govemor shall appoint a member of the Board to serve as
Section 53558(c) of the Government Code provides that
a majority of the GEDA Board shall constitute a majority for the
transaction of business.
It is plaintiffs’ contention that the GEDA Board, due to the
lack of a quorum, had no authority to act on July 20, 1971.
Consequently, the action it took, i.e., Guy Wharton signed the
agreement, is void and of no effect.
It is undisputed that only three (3) members of the GEDA
Board were present at the meeting on July 20, 1971. However, it is
apparent from the transcript of the meeting that the meeting was a
meeting of the Board of Directors of MCS and not a GEDA Board
meeting. Moreover, the purpose of the meeting was to have a round
table discussion with the former stockholders of MCS. The MCS
Board presented the shareholders with Holmes’ proposal. The former
shareholders presented the Board with a counter-proposal.
Ly see eS
- 14b -
The counter-proposal differed basically from the Holmes'
proposal in the respect that the counter-proposal called for an
immediate pro-rata sale of shares to the former shareholders of 154
and a later sale from GEDA to David Ulloa, Albert Cruz, Larry Gunn,
Johnny Sablan, and Lee Holmes of 15% when the loans from GEDA
to MCS were paid in full.
The transcript reflects a series of negotiations. Finally, Guy
Wharton, Acting Chairman of the GEDA Board, stated that he did not
have the authority to agree to the former shareholders’
counter-proposal since a quorum was not present. However, he stated
that Director Vicente Benavente was on island and had stated to him
that if his vote were needed to contact him. Wharton directed one of
the GEDA employees to find Benavente and obtain his approval of the
agreement. Benavente was contacted and did initial the agreement.
If the July 20, 1971 meeting were to be construed as aGEDA
Board meeting, it is undisputed that a quorum of the GEDA Board
was not on July 20, 1971. Nevertheless, the agreement signed
on July 20 was not a bilateral contract. GEDA was not obligated to do
anything under the terms of the agreement. In essence, the former
shareholders were granting GEDA the option to sell the MCS shares,
subject to the conditions outlined, unhindered by their right of first
refusal. If at the end of sixty (60) days, GEDA had not exercised the
option, then the option would lapse at the command of the former
shareholders. GEDA was not obligated to any course of action by the
July 20, 1971 agreement.
An offer which is to be kept open for a certain time or a
proposal made to be accepted within a specified time, is a continuing
offer. It is the view of some authorities that an option consists of two
elements: One, the offer to perform a certain act, which is an
uncompleted contract until it is accepted; and the other, the agreement
to give the optionee a certain time within which to exercise his option
of accepting. Some authorities even take the view that an option so
long as it remains unaccepted, is a unilateral writing lacking the mutual
elements of a contract, but when accepted by the optionee an
executory contract arises, mutually binding upon the parties. 17
Am.Jur.2d, 370, §32. Crane-Rankin Development Co, v. Duke, 90
P.2d 883 (S.Ct. Okla. 1939).
Conceptually speaking, the July 20th agreement was merely a
continuing offer made by the former shareholders to GEDA. GEDA
accepted the offer on August 4, 1971 by signing a contract with Lee
- 15b-
Holmes within the scope of the option. The act of the GEDA Board
which the former shareholders claim is invalid is not an act committed
on July 20, 1971, for the GEDA Board committed no act on July 20,
1971. The act performed by the GEDA Board on August 4, 1971, i.e.
the execution of the Agreement for Sale of MCS Stock, is the act of
which the plaintiffs complain. Yet, it is undisputed that the execution
of the August 4, 1971 agreement was validly approved by a quorum
of the GEDA Board at a duly held Special Meeting of the Board of
Directors of GEDA on August 3, 1971.
Even if it could be held that the July 20, 1971 agreement was
a contract illegally and invalidly executed by GEDA, the evidence
supports a conclusion that the agreement was duly ratified by the
GEDA Board on August 3, at the time the Board considered and
approved each and every paragraph in the August 4, 1971 agreement.
A Municipal Corporation may ratify and thus make binding an
otherwise invalid contract.
"Generally, a govermmental body may effectively
ratify what it could theretofore have lawfully authorized.
Ratification after the act is said to be as potent as authority
before the act. Irregular and, void acts may be ratified or
confirmed at a subsequent meeting, provided it is a valid or
legal meeting. Thus, where the action in allowing a claim is
invalid because of a lack of a majority vote as required by
law, it may be ratified at a subsequent meeting by resolution
confirming such previous action." 4 McQuillen, Municipal
Corporations (1968 Ed.) § 13.47.
"It is a general rule that whatever acts public officials
may do or authorize to be done in the first instance may
subsequently be adopted or ratified by them with the same
effect as though properly done under previous authority."
McQuillen, Municipal Corporations, Third Ed., § 29.104,
Vol. 10, 420.
In the context of a contract approved at a meeting subject to a
procedural infirmity, 56 Am.Jur.2d, Municipal Corporations § 158,
p. 212. notes:
"Even though all members of the council are not
notified of a special meeting, the proceedings at the meeting,
which are not ultra vires, are validated by a ratification,
understandingly done, at a subsequent regular meeting."
- 16b -
It is undisputed that GEDA had the authority to enter into the
July 20, 1971 agreement and that such action was not an ultra vires
act. Certainly, Section 53553 of the Government Code of Guam
provides GEDA such authority:
The Corporation shall have, and may exercise, the following
general powers in carrying on the activities specified in §
53552 of this Chapter:
(a)
(b)
(c)
(d)
)
(f) To acquire, in any lawful manner, any
property -- real, personal, or mixed, tangible or
intangible, and to hold, maintain, use, and operate the
same; and to sell, lease, encumber or otherwise
dispose of the same, whenever any of the foregoing
transactions are deemed necessary or appropriate to
the conduct of the activities authorized by this
Chapter, and on such terms as may be prescribed by
the Corporation.
(g) To enter into and perform such contracts,
leases, cooperative agreements, or other transactions
with any agency or instrumentality of the United
States, or with any state, territory, or possession, or
any political subdivision thereof, or with any person,
firm, association or corporation, as may be deemed
necessary or appropriate to the conduct of the
activities authorized by this Chapter, and on such
terms as may be prescribed by the Corporation.
(h) To execute all instruments necessary or
appropriate in the exercise of any of its functions.
-17b-
It is not even necessary for a board of a Municipal
Corporation to specifically ratify a previously invalidly performed act.
A ratification can be done by implication. State v. District Court of
Hennepin Co,, 33 Minn. 235, 22 N.W. 625 (1885). In fact,
ratification may be accomplished by some affirmative action by proper
Officers, inaction, mere silence, acquiescence, acceptance of the
contract, or failure of the public corporation to object. See 10
McQuillen, Municipal Corporations, § 29.106.
There can be no doubt that even if the GEDA Board took
some action on July 20, 1971 without the approval of a quorum, it
was within the power of the Board to subsequently ratify that action
and that the Board did properly ratify that act on August 4, 1971. In
5 of the August 4, 1971 agreement, GEDA incorporated the
July 20 agreement as Exhibit "D" and specifically warrants to Holmes
the legality of that agreement.
Plaintiffs have presented public policy arguments as to why
the July 20, 1971 agreement should be found to be invalid. The public
policy arguments have no merit. GEDA obligated itself to do nothing
by the July 20 agreement, and in no way could it or the Government
of Guam or the public be affected detrimentally.
The former shareholders who signed the July 20, 1971
agreement signed the agreement with knowledge of the consequences
and in an above board and open atmosphere, and by so doing waived
their right of first refusal under the May 21, 1971 agreements and
cannot now complain that they were not given the opportunity to
exercise such right. In short, Plaintiffs David Ulloa, Richard Ulloa,
and Johnny Sablan have no right to enforce.
RIGHT OF FIRST REFUSAL
——_IS COLLECTIVE _
Plaintiffs Richard Cruz, Joan Halsey and Robert
Halsey did not, however, agree to or sign the July 20, 1971
agreement.
The depositions of Robert Halsey and Joan Halsey show that
on May 21, 1971, they sold their 300 shares of MCS stock, owned
jointly by them, to GEDA. On August 1, 1971, the Halseys sold their
300 shares of stock to Richard Cruz for $3,000. Although Mr. Halsey
was of the impression that he sold his stock to Cruz, he didn't actually
own any shares on August 1, 1971. What he sold to Cruz were his
a ae ai ie
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rights under the May 21, 1971 agreement. Whatever rights the
Halseys' have in this case and under the contracts in question are
clearly now possessed by Richard Cruz and have been in the
possession of Richard Cruz beginning August 1, 1971.
The question crucial to Cruz's position is, "Did he still
possess a right of first refusal in spite of the fact that the other former
shareholders signed the July 20, 1971 Agreement?"
The last two sentences in Section 6 of the May 21, 1971
Stock Purchase Agreement are most pertinent to this issue:
"Sec. 6. .... This right of first refusal is not an
individual right to a shareholder to reacquire the shares
transferred by that individual stockholder by this agreement or
any other shares. The right of first refusal is a collective right
and all shares offered for sale by GEDA must be acquired
under the same terms and conditions as set forth in the
preceding paragraph."
The term "collective right" is all important to the meaning of
this section. Unfortunately, the Court and the counsel in this action
have found no cases or treatises involving the use of this term or
interpreting this term. The words themselves are ambiguous, and it is
difficult to establish from the section itself what the parties intended
the words to mean.
Agreements containing obscure, imperfect or ambiguous
language are always open to interpretation, and established rules of
interpretation are invoked to determine the meaning. Hudson Canal
Co. v. Pennsylvania Coal Co,, 75 U.S. 276 (1868). The avowed
purpose and primary function of the court is the ascertainment of the
intention of the parties. Williston, Contracts, 3d Ed., § 601, Guam
Code of Civil Procedure, § 1859. Under the law of Guam, a contract
may be explained by reference to the circumstances under which it
was made, and the matter to which it relates. Guam Civil Code, Sec.
1647.
Unfortunately, the GEDA Board did not hold a meeting on
May 21, 1971, and the Stock Purchase Agreement was not executed
during a meeting. However, GEDA made the decision to enter into the
Stock Purchase Agreement at a meeting on May 11, 1971. The
minutes of the meeting and a transcript of the meeting were admitted
into evidence. Also admitted into evidence are minutes of GEDA
Board meetings for the following dates: December 10, 1970, January
- 19b-
14, January 15, January 26, February 2, February 8, and April 16,
1971.
It is obvious from the facts as of May 1971 that MCS was out
of money, was incurring large monthly operating losses, was unable
to raise any additional credit, owed as much as $200,000 in current
accounts payable, and was without any prospective buyers. GEDA
was guarantor of a $200,000 loan made by FNCB to MCS. The loan
was in default and the bank could the note at any time.
It should again be mentioned that GEDA is a public
corporation whose purpose is "to assist in the implementation of an
integrated program for the economic development of Guam.” Section
53552(a), Government Code of Guam. It was intended that GEDA be
a Catalyst in economic development by aiding private enterprise
without unfairly competing with it.
The transcript and minutes of the May 11, 1971 meeting and
the minutes of earlier GEDA Board meetings in 1971 indicate the
overriding concems of the GEDA Board were: One, to make sure that
it didn't lose the $200,000 for which it was liable; and Two, that MCS
continue to operate. It appears from the evidence that throughout
January, February, March, and April of 1971, GEDA paid some of
MCS's accounts payable in order to keep MCS afloat.
As of May 1971, the GEDA Board had only two (2)
alternatives: One, it could allow MCS to go bankrupt and pay FNCB
$200,000; or Two, it could take over the stocks of MCS and keep it
operating until it could find a buyer. Under the first altemative, GEDA
would be sure to lose $200,000 plus whatever additional money MCS
owed GEDA at that time. Under the second alternative, GEDA would
assume all liabilities of MCS, totalling almost $400,000 but stood a
chance of selling the company and getting some of its money back.
Throughout the first five (5) months of 1971, the GEDA
Board recognized the probability that it would have to take over MCS.
The evidence reflects that it was the intention of GEDA to take over
MCS and to sell it back to the former shareholders if they could pay
off all the obligations that GEDA had incurred with relation to MCS.
The intent of the GEDA Board was clearly to offer the company to the
original shareholders as a group. If the original shareholders could
come up with the money to pay off all of MCS's debts, then the
ownership of MCS would revert to the situation that existed prior to
the takeover. The alternatives foreseen by the parties as of May 21,
1971 were either:
iene titan iN i iii,
- 20b -
1. GEDA would sell MCS to the same owners it
purchased it from as a group, or
2. GEDA would sell MCS to some other concem, or
3. GEDA would not be able to sell MCS to anyone
and MCS would go broke.
All of the plaintiffs contend that "collective right", should be
interpreted to mean that no action can be taken with regard to the right
of first refusal, unless all of the former shareholders are in
concurrence. In other words, if everyone wanted to abrogate the right
other than one former shareholder, then the right could not be
abrogated.
The parties were indeed in a serious situation. It was not their
intent to jeopardize the success of their efforts to salvage MCS on the
chance that one of the former shareholders may not agree with the rest
of the former shareholders. The plaintiffs’ contention is unreasonable
in light of the surrounding circumstances. —
Even when viewing Section 6 in light of secondary rules of
contract interpretation, such meaning cannot be given to "collective
right" by the court.
The intention, with which the law is concerned in construing
and giving effect to a contract, is that of the parties at the time of
entering into the contract, regardless of any events occurring
afterward, at least if such subsequent events were not reasonably
within the contemplation of the parties when the contract was made.
17 Am.Jur.2d, Contracts, § 244. While normally the court will not
attempt to continue the intent of the parties to a contract in light of
subsequent events, the incident at hand is an exception to the rule. On
May 21, 1971, the plaintiffs and GEDA executed the Stock Purchase
Agreement. At that point in time, the parties contemplated that
somewhere in the near future the exercise of the collective right of first
refusal would arise. Indeed, that issue did arise at the MCS Board
meeting on July 20, 1971, more than six (6) months before any
dispute arose. The transcript of the July 20, 1971 meeting provides
the court with the unique opportunity to witness what the parties to the
contract themselves construed Section 6 to mean. Courts strongly
incline to give effect to such interpretation.
a
-21b-
But there is a secondary rule (Williston, Cont., §
623) that interpretation may be given to a Contract by the acts
and/or declarations of the parties, done or made while the
agreement is in process of fulfillment, and before any
differences have arisen between them, to which "mutual
i ion" (as Dean Wigmore has called it) courts strongly
and properly incline to give effect. Pressed Stee] Car Co. v.
Union Pacific R. Co,, 297 F. 788, 790 (2nd Cir. 1924).
The transcript indicates that David Ulloa, who had previously
been the majority stockholder in MCS, raised the issue of what would
happen if one of the former shareholders refused to sign the waiver.
At this point, Charles Troutman, legal counsel to GEDA, gave his
opinion that a former shareholder who did not sign the waiver would
be entitled to sue GEDA for damages incurred by GEDA's failure to
wait six (6) months until selling the stock.
Toward the end of the meeting, Mr. Troutman revised his
legal opinion as to the consequences of a former shareholders not
signing the waiver. After having further considered Section 6,
Troutman came to the conclusion that the right of first refusal was a
collective right and that only the group as a whole could repurchase
the shares. Troutman then stated that whatever action the group, i.e. ,
the former stockholders, decided to take would have to be determined
by a majority vote of the former stockholders just as if they were still
stockholders. A dialogue then took place between Troutman and
David Ulloa in which Ulloa expressed his concurrence with this
interpretation. Present were three (3) members of the GEDA Board
and four (4) other former shareholders, Johnny Sabian, Robert
Halsey, Larry Gunn, and Albert Cruz. No one expressed any contrary
interpretation of Section 6 or offered any opposition to the
Troutman-Uiloa interpretation.
Troutman later followed up the matter with a written opinion
elaborating and confirming his oral opinion. A copy of the opinion
was available for the former shareholders to see. The evidence does
not reflect whether or not any of the former shareholders saw the
written opinion. However, it is clear that no objection to this
interpretation of Section 6 was voiced by anyone, up to and including
August 4, 1971.
The May 21, 1971 "Stock Purchase Agreement" was drafted
by Edward Terlaje, counsel for the former MCS shareholders. An
important rule of contract interpretation is that, one who writes the
contract in question can by exactness of expression more easily
- 22b -
prevent mistakes in meaning than can the party who is not responsible
for the choice of words. Therefore, doubts arising from the ambiguity
of language are resolved in favor of the party who was not responsible
for choosing that language. Williston, 3d Ed. § 621.
ACCEPTANCE OF BENEFITS FORESTALLS
COMPLAINT
In any event, the fact that Richard Cruz, who is also owner of
the Halsey's rights, did not sign the July 20, 1971 agreement would
not give him cause to complain even if the right of first refusal was an
individual right rather than a collective right. All of the plaintiffs in
interest, David Ulloa, Richard Ulloa, Johnny Sablan, and Richard
Cruz, subscribed to the shares of stock to which they were entitled
under the July 20, 1971 agreement. Richard Cruz paid for his shares
in full and received his stock certificates.
Section 1589 of the Guam Civil code provides:
"Secti 1589. / : € obligation |
acceptance of benefits. A voluntary acceptance of the benefit
of a transaction is equivalent to a consent to all the obligations
arising from it, so far as the facts are known, or ought to be
known, to the person accepting.”
Richard Cruz accepted the benefit of the July 20, 1971
agreement, but now claims that he is not bound by the obligations of
that agreement. A chain of correspondence between Cruz and Larry
Gunn and Lee Holmes indicates no disagreement on the part of Cruz
with the July 20, and August 4, 1971 contracts. On October 8, Cruz
subscribed to 570 MCS shares and received 570 shares. On October
13, 1971, Cruz paid for those shares. Plaintiffs produced a
memorandum from Cruz to MCS, Inc. dated October 13, 1971 and
acknowledged received by David Ulloa, President of MCS. The effect
of the memorandum as pointed out earlier is that Cruz is not waiving
his right under the May 21, 1971 agreement and does not accept the
sales agreement between GEDA and Holmes. The existence of this
memorandum is somewhat of a mystery to the court, since it was
never found by Holmes, Chairman of MCS, in the MCS files. In any
event, the condition that Cruz placed on his payment of $570 is of no
effect. Cruz already subscribed to his shares and received his shares
on October 8, 1971. At that time, Cruz accepted the benefit of the July
20, 1971 agreement and was bound by the obligation in that
agreement just as if he had signed the agreement.
AO ATE BA marr ark
EQUITABLE CONSIDERATIONS
While the plaintiffs have no right to enforce against the
defendants under the contracts in question, they would be prohibited
from enforcing any such right if any existed by equitable consider-
ations. The plaintiffs have come into this court on the side of equity
asking the court to impress a constructive trust upon MCS in favor of
themselves.
A constructive trust is an involuntary trust. Smith v. Bliss, 44
C.A.2d 171 (1941). Guam Civil Code, §224 provides:
"
etc, One who gains a thing by fraud, accident, mistake, undue
influence, the violation of a trust, or other wrongful act is,
unless he has some other and better right thereto, an
involuntary trustee of the thing gained, for the benefit of the
person who would otherwise have had it.”
Plaintiffs have not pled nor have they presented any evidence
to show the existence of fraud, accident, mistake, undue influence, the
violation of a trust, or any other wrongful act. The plaintiffs have not
alleged that GEDA held a fiduciary duty with relation to them. In fact,
no such relationship could exist since GEDA is a government agency,
and can only be a fiduciary for the general public.
In short, the plaintiffs have not alleged proper grounds for the
relief they seek, let alone shown evidence of any proper ground.
In a court of equity, a frequently stated maxim is, "He who
comes into equity must come with clean hands”.
4 Witkin, Summary of Califomia Law, 7 Ed., Equity, § 7, p. 2791.
Accordingly, where the right upon which the complainant
relies has grown out of a wrong, breach of duty, or a violation of the
law, the court of equity will deny relief. See Baxter v. Deneen, 57 A.
601, (Court of Appeals, Maryland 1903).
Plaintiffs, and each of them, lack clean hands to bring an
equitable action seeking the imposition of a constructive trust for the
stock of MCS acquired by defendant Holmes, for the reason that the
shares of stock of MCS originally issued were issued contrary to the
provisions of law. The original shareholders, plaintiffs in this action,
issued stock to themselves in retum for obtaining a GEDA guaranteed
loan from FNCB. Further, the plaintiffs also received shares of stock
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contrary to law at the time of incorporation. At the time plaintiffs
turned their shares over to GEDA under the May 21, 1971
agreements, they warranted that all of the shares (30,000 shares at par
value of $10.00 per share for a total of $300,000) of MCS were
validly issued and fully paid for. Both the July agreement and the
August agreement incorporated the terms of the May 1971 agreements
and therefor, the representations therein. David Ulloa himself was a
witness to the August 4, 1971 agreement and was one of the primary
beneficiaries of the unlawful issuance of stock.
Section 356, Guam Civil Code, specifically states in pertinent
part:
",...NO Corporation shall issue stock or bonds except
in exchange for actual cash paid to the corporation or for
property actually received by it at a fair valuation equal to the
par value of the stock or bonds so issued..." (Emphasis
added).
From the evidence, it is clear that from 1969 through 1971,
30,000 shares with a cumulative par value of $300,000 was stated on
the books of MCS. In fact, no more than between $30,000 and
$40,000 was paid into the corporation as required by law. By May of
1971, the company was floundering, it was insolvent and there was
on the books approximately $220,000 of current accounts payabie
besides the GEDA guaranteed loan of $200,000 with FNCB. GEDA
was required by the May 21st agreement to come in and take back the
corporation in order to continue the company operations and to try to
prevent the requirement of paying the $200,000 on the FNCB loan at
that time. GEDA was also required to pay the trade creditors in an
amount of approximately $220,000.
If the incorporators had paid in the full $300,000 as set forth
in the corporate records, those funds could have been utilized to pay
off the accounts payable prior to May 21, 1971 and GEDA might well
not have been compelled to come in and salvage the dying operation of
MCS.
It should be noted that prior to the February 28, 1972 filing of
this complaint, but after the Holmes reorganization, GEDA had loaned
an additional $75,000; Holmes had paid in or pledged to pay $42,000,
and, on the strength of Holmes' management, an additional $177,000
of outside equity money was committed to the corporation.
- 25b -
a eee
Plaintiffs cannot be permitted to come into a court of equity to
attempt to recapture a company which they claim, as of February,
1972, is worth $15,000,000, after (1) investing only $30,000 to
$40,000, (2) misrepresenting the value of the corporation's capital
unlawfully as $300,000, (3) requiring the loan by GEDA of an
additional $270,000 and subsequently another $75,000, and (4)
encouraging outside equity parties under the reorganization, including
Holmes, to invest approximately $219,000 more. The company was
insolvent and floundering during the period of time the former
stockholders operated it.
After February 1972 when the company was operational and
financially feasible, the plaintiffs then suddenly decided that they
wished to have the stocks and operation of the company retumed to
them. To benefit the very persons who had created the initial
distressed condition of the corporation based upon undercapitalization
and the unlawful issuance of stock would be inequitable. The
wrongful acts of plaintiffs are clearly related to the conduct of the
subject matter of this litigation.
Furthermore, plaintiffs, other than Cruz, are estopped by the
doctrine of estoppel from asserting any rights; under Section 6 of the
May 21, 1971 agreement since they promised to waive those rights
and knew of the reliance thereon placed by GEDA and Holmes on that
promise, and failed to act to the detriment of GEDA and Holmes.
Section 90, Restatement of Contracts, states:
"Section 90. Promise R he Inducing Defini
ion, A promise which the promisor should
reasonably expect to induce action or forbearance of a definite
and substantial character on the part of the promisee and
which does induce such action or forbearance is binding if
injustice can be avoided only by enforcement of the promise."
GEDA has provided an additional loan of $75,000 to MCS.
Holmes has invested $42,000 of his own money, has moved himself
and his family to Guam, has devoted his constant labor to MCS, and
has personally guaranteed loans to MCS, all in reliance on the validity
of plaintiffs’ July 20, 1971 promise. If plaintiffs, or any of them claim
that the July 20, 1971 agreement was invalid because Cruz and Halsey
did not execute it, or if the plaintiffs feel that the sale of the stock to
Holmes was conditioned upon receiving financing from FNCB prior
to August 4, and said plaintiffs failed to do anything to stop the
transaction on August 4 before there was reliance by the parties and a
Ee
- 26b -
substantial change of position, then said plaintiffs had the obligation to
do so immediately after August 4, 1971. They are now estopped from
asserting any imagined impropriety by having stood by and watched
defendants and others change their position in reliance upon
agreements which were signed and executed by and contained the
promises of plaintiffs.
The maxim "Equity aids the vigilant” is given application in
the doctrine of laches. Those who neglect their rights may be
precluded from obtaining relief in equity. 4 Witkin, Summary of
Califomia Law, 7 Ed., Equity, § 12.
Delay is not a bar to equitable relief unless it works to the
disadvantage or prejudice of other parties. The application of the
doctrine to a case depends almost wholly on the particular facts. 4
Witkin, supra.
. Based on the same facts that applied under the doctrine of
estoppel, the doctrine of laches should be applied: in this case. If the
plaintiffs believed they had been defrauded, then evidence of that
fraud, i.e., the failure of the FNCB loan to come through, or if
plaintiffs believed that the July 20, 1971 agreement was invalid, then
they could have voiced their position in August of 1971 before GEDA
and Holmes incurred large cash liabilities and considerable time, effort
and reputation on the part of Holmes. However, plaintiffs chose to
wait until it was evident that the company had been tumed around,
reached the breakeven point and was faced with the prospects of a
bright-future. It would be unfair to allow the plaintiffs to capitalize on
their delay to the detriment of defendants.
CONCLUSION
Plaintiffs are not entitled to enforce the nonexistent right they
seek to enforce. If such right existed, they would be barred by
equitable considerations.
Plaintiffs’ complaint is dismissed.
Let Judgment issue.
SO ORDERED.
Dated this 16th day of February, 1977.
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Ls/
CRISTOBAL C. DUENAS
JUDGE, DISTRICT COURT OF GUAM
- 28b -
IN THE DISTRICT COURT OF GUAM
Defendants. N.O.V. AND IN THE
ALTERNATIVE FOR
A NEW TRIAL
TERRITORY OF GUAM
GUAM ECONOMIC DEVELOPMENT )
AUTHORITY, ) ]
a public corporation, et al. ) CIVIL CASE NO. 24-72
)
Plaintiffs, ) MEMORANDUM
) ORDER GRANTING
VS. ) INPART AND
) DENYING IN PART
DAVID J. ULLOA, et al., ) PLAINTIFFS' MOTION
) FOR AJUDGMENT
)
)
)
)
The court has viewed the evidence in a light most favorable to
the defendants, because as prevailing parties in a jury trial, they
should enjoy the benefit of every reasonable inference. While a jury's
finding must be afforded great weight az)d ;:aspect, the court has
concluded that the jury's verdict was clearly erroneous and that the
motion for a Judgment N.O.V. must be granted in favor of Marianas
Communications Systems, Inc., (MCS).!
1 The defendants have suggested that the plaintiffs’
motion for a directed verdict was improper because it was made
after the court had already instructed the jury. it is true that Rule
50(a) requires a motion for a directed verdict "at the close of the
evidence offered by an opponent.’ However, as Wright and Miller
States in section 2537 at pages 596-97, even though a motion for a
directed verdict must be made at the close of all evidence, “the
courts take a liberal view of what constitutes a motion for directed
verdict in deciding whether there was a sufficient prerequisite for
the motion for judgivent. The defendants have not offered a case
where a motion for directed verdic made after jury instructions
was held fatal to a motion for Judgment N.O.V., and the court
has likewise been unable to find any such case directly on point. it
- 29b -
Section 331 of the Guam Civil Code clearly gives a
corporation a cuase of action against stockholders who have
not fully paid their subscriptions for capital stock:
"Section 331. Directors may levy. The board of
directors or trustees of any stock corporation formed,
organized, or existing, under this Title may at any time declare
due and payable to the corporation unpaid subscriptions to the
Capital stock and may collect the same with interest accrued
thereon or such percentage of said unpaid subscriptions as it
may deem necessary." [Enacted 1953.]
By virtue of Section 331, MCS would have a valid cause of
action against the defendants unless:
(1) MCS was not a "stock corporation formed, organized, or
existing under this Title..." (i.e. Corporations, General Law).
(2) The board of directors did not "declare due and payable to
the corporation unpaid subscriptions to the capital stock..."
(3) That the defendants did not owe "unpaid subscriptions to
the capital stock..."
As to (1), abundant evidence was offered to show that MCS
was a corporation formed under the laws of Guam. it had filed its
Articles with the Director of Revenue and Taxation, and it had
received a corporate certificate. (See Section 296 of the Guam Civil
Code). As Section 297 of the Guam Civil Code makes clear, a copy of
the Articles of Incorporation, once filed with the Director of Revenue
and Taxation, “shall be received in the courts and all other claces as
is true that a technical reading of this rule would seem to require
the plaintiffs to have made their motion for a directed verdict
immediately after the defendant offered his case, but at least one
case has held that such a motion may be made after closing
arguments. Martin v, Erie Lackawanna Railroad 388 P.2d 802,
804 (6th Cir. 1968). The court rules that plaintiffs’ motion for a
direcid verdict was properly made under Rule 50(a), because any
other result ‘could be to enshrine form over substance." Moran vy.
Raymond Corporaiion, 484 F.2d 1008, 1014 (7th Cir. 1973).
- 30b -
prima facie evidence of the facts therein stated." Finally, no contrary
evidence was Offered to suggest that MCS was not a corporation
formed under the laws of Guam.
With regard to (2), Lee Holmes, the president of MCS, stated
that the board of directors of MCS had declared the stocks in question
“due and payable." This testimony was not contradicted in any way by
the — and the jury could not have had any basis for doubting
this fact.
Finally, there can be no question as to (3), that the defendants
owed unpaid subscriptions to the capital stock. Uncontradicted
testimony and evidence offered by all parties make it very clear that on
April 29, 1968, David Ulloa, Richard Ulloa, Richard Cruz and Frank
Okiyama executed MCS's Articles of Incorporation and signed the
following subscriptions, (Plaintiffs' Exhibit #1):
David Ulloa 510 Shages (@$100/share) $5,100
Richard Ulloa 90 Shares (@$100/share) $900
Richard Cruz 100 Shares (@$100/share) $1,000
Frank okiyama 300 Shares (@$100/share) $3,000.
In addition, on April 12, 1969, these same defendants signed
subscriptions to the following additional amounts, (Plaintiffs'
Exhibit #2):
David Ulloa 14,790 Shares (@$100/share) $147,900
Richard Ulloa 3,510 Shares (@$i00/share) $35,100
Richard Cruz 3,500 Shares (@$100/share) $35,000
Frank Okiyama 1,200 Shares (@$100/share) $12,000.
Also, the testimony is uncontradicted that while Johnny Sablan,
received $45,000 in MCS stock, he only paid $25,000 for such
shares. Also, Mr. and Mrs. Gunn never paid for their subscriptions.
Ne ee ee
consideration for these shares (with the exception of Johnny Sabian).
Section 356 of the Guam Civil Code states that "no ration shall
issue stocks or bones except in exchange for actual paid to the
corporation or for property actually received by it at a fair value..."
The defendants did claim that thev were under the mistaken
impression that the value of their services to the corporation could be a
valid method of exchange; however, it is quite clear that the Guam
Civil Code does not recognize this form of consideration. If, as the
defendants insist, their mistaken reliance on a Califomia corporations
- 31b-
handbook could excuse satisfying the requirements of the Guam Civil
Code, Section 356 could always be circumvented by claiming simple
Ignorance. As responsible businessmen attempting to form
corporation under the laws of Guam, the defendants had a duty to
determine exactly what the law required as to valid consideration for
stocks issued. Any mistaken belief on their part is irrelevant because
the requirements of the Guam Civil Code must control here.
After trial, the defendants introduced a new issue as to
whether there was actually a valid subscription agreement, (thus
perhaps negating the effect of Section 331). However, this factual
issue was never properly before the jury (having never been argued or
raised by a requested jury instruction). Any questions of the
defendants’ intent when they subscribed for the stocks was introduced
by the plaintiffs to relate only to the elements of their cause of action
and these facts never related to a possible defense regarding statutory
liability. There was never any question raised at trial whether or not
the subscriction agreements were valid, and the defendants cannot
raise such an issue at this late date.
Defendants have also relied on Bing Crosby Minute Maid
Corporation v, Eaton, 46 Cal.2d 484, 297 P.2d 5 (1956), for the
proposition that Section 331 of the Guam Civil Code should not be
interpreted to provide for statutory liability for watered stock when
most jurisdictions seem to be content to limit such liability on a
misrepresentation theory.2
As the plaintiffs correctly point out, the case deals with
California statutes which cannot be equated to Guam's statutory
scheme for liability. Unlike Section 1110 of the California
Corporations Code (now repealed; originally Civ. Code §299),
Section 331 of the Guam Civil Code clearly expresses "an intent to
broaden the bdsis of liability of holders of watered stock ... " (297
P.2d 9). Such an intent to provide for liability on a basis in addition to
a misrepresentation theory is also made clear by Section 340 of the
Civil Code which states that:
: See Volume 44 of the California Law Review at
pages 941-95 for the view that Minute Maid was incorrectly
decided and that there actually was statuary liability under the
California Code for watered stock.
- 32b -
Nothing in this Title shall prevent the directors from
collecting, by action in any court of proper jurisdiction, the
amount due on any unpaid subscription, together with accrued
interest and costs and expenses incurred.
Clearly the legislature intended Sections 331 and 340 to
provide corporations with a statutory cause of action in the event that
shareholder failed to pay complete and adequate consideration for
unpaid subscriptions. This court is not sitting in equity and it must
give legal effect to these Provisions of the Guam Civil Code. Since all
the facts necessary to establish liability under Section 331 are
uncontroverted, as a matter of laxer, the defendants are liable to MCS
for "unpaid subscriptions to the capital stock ... with interest accrued
thereon...”
Plaintiffs have also asked for a Judgment N.O.V. on the
grounds that there could have been no factual question as to whether
there was a breach of warranty between the defendants and Lee
Holmes and GEDA, and whether certain other defendants are
automatically liable to the plaintiffs because they were in default.
As the defendants correctly point out, a motion for
a Judgment N.O.V. is generally restricted to the issues which have
been raised on a motion for a directed verdict. See Rule 50, F.R.C.P.
and Wright and Miller, Section 2537. While the plaintiffs argue that |
liberality should be the rule when interpreting whether a motion for a |
Judgment N.O.V. should be granted, they have failed to cite any cases |
contrary to the weight of authority which restricts a party from
asserting a ground not raised in the motion for a directed verdict.
Therefore, the plaintiffg motion for a Judgment N.O.V. on the breach
of warranty cause of action must be denied.
However, as Wright and Miller make clear in Section 2537 (at
page 598), a party's failure to raise certain issues in a motion for
directed verdict does not affect his right to a new trial. See Rule 59,
F.R.C.P.; also Sears y, Pauly, 261 F.2d 304 (1st Cir. 1958). The
jury's finding that there was no breach of warranty by the defendants
is against the clear weight of the evidence. It seems clear that there
was a warranty that the stocks were paid for when in fact only a
fraction of the subscriptions was actually paid. (Plaintiffs' Exhibits
#23 and #13). Since the jury's finding that the defendants were not
liable for breach of warranty is against the clear weight of the
evidence, the plaintiffs’ motion for a new trial is granted.
- 33b -
The plaintiffs have also moved for a judgment N.O.V. against
Frank Okiyama, Marie Okiyama and Pat Cruz, all of whom defaulted
before trial. Since these defendants had defaulted their liability was
already legally determined and the jury only had power io determine
the measure of their liability. Clearly the jury was acting in excess of
its powers in finding that the defaulting defendants were nct actually
liable to plaintiffs and such a finding cannot be given any effect. Since
the question of actual liability had already been determined it was not
before the jury, and counsel for the Plaintiffs had no reason to expect
that the jury would make a finding in this area (except as to the amount
of damages). It would be unfair to require counsel to make a motion
for a directed verdict on an issue which had already been-legally
determined and which the jury had no power to consider.
Furthermore, since the court had found that the other defendants were
liable to the plaintiff corporation under Section 331, the defaulting
defendants must be found similarly liable for the ainount of their
unpaid subscriptions.
Conclusion
Rule 50(c) of F.R.C.P. requires the District Court to rule both
on the motion for Judgment N.O.V. and the motion for a new trial.
The court grants the motion for a Judgment N.O.V. in favor
of MCS on a statutory liability theory because ihere can be no question
that subscriptions were due and payable and that the defendants David
Ulloa, Richard Ulloa, Richard Cruz, and Frank Okiyama failed to pay
any legal consideration for these shares. There also can be no question
that Johnny Sablan failed to pay full valid consideration for the shares
which he received. The court denies a motion in the alternative for a
new trial because it is of the opinion that the facts introduced by the
plaintiff corporation in support of its statutory liability theory are
uncontroverted and it would serve little purpose to present this issua to
a new jury.
The court denies the motion for a Judgment N.O.V. in favor
of Lee Holmes against GEDA based on a breach of warranty theory
because no such ground was raised by the plaintiffs’ motion for
directed verdict. However, the plaintiffs' motion for a new trial is
granted because the jury's finding that there was no breach of
warranty is against the weight of the evidence.
The court grants the motion for Judgment N.O.V. in favor of
the plaintiffs against Frank Okiyama, Marie Okiyama and Pat Cruz.
Since these defendants were in default the jury had no power to
- 34b -
determine anything but the measure of damages and the finding that
the defendants were not liable is clearly erroneous. On a statutory
liability theory, there can be no factual question that these defendants
are liable for the amount due on their unpaid subscriptions. The court
denies the alternative motion for a new trial for the same reasons outlin
above and because these defendants are in default and their liability is
no longer contested.
LET JUDGMENT ISSUE.
SO ORDERED.
Dated this 18th day of November, 1977.
_/s/
CRISTOBAL C. DUENAS
JUDGE, DISTRICT COURT OF GUAM
- 35b -
IN THE DISTRICT COURT OF GUAM
TERRITORY OF GUAM
GUAM ECONOMIC DEVELOPMENT
AUTHORITY, a public
corporation, et al.
CIVIL CASE NO. 197-72
Plaintiffs,
YS.
TUDGMENT (N.O.V,)
DAVID J. ULLOA, et al.,
)
)
)
)
)
)
)
)
)
)
Defendants. )
)
The jury having rendered a verdict in favor of all the named
defendants and Judgment on the Verdict having been entered on
October 5, 1977, the plaintiffs have moved for a Judgment N.O.V. or
in the alternative for a new trial. The Court having heard the
arguments of counsel for the respective parties and being fully advised
in the premises;
IT IS HEREBY ORDERED that the plaintiff MCS recover of
the defendants the following sums, notwithstanding the verdict of the
Jury, together with costs and charges:
David and Juanita Ulloa....$153,000
Richard Ulloa................ $ 36,000
Frank and Marie Okiyama..$ 15,000
Johnny G. Sablan........... $ 20,000.
Dated: November 18, 1977
_ls/
CRISTOBAL C. DUENAS
JUDGE, DISTRICT COURT OF GUAM
- 36b -
David J. ULLOA, Richard F. Ulloa and
Johnny Guevara Sablan,
Plaintiffs- Appellants,
Vv.
GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public
Corporation, and Lee M. Holmes, Defendants-Appellees.
Robert E. HALSEY, Joan M. Halsey and
Richard G. Cruz, Plaintiffs-Appellants,
We
GUAM ECONOMIC DEVELOPMENT AUTHORITY, a Public
Corporation, and Lee M. Holmes, Defendants-Appellees.
Nos. 77-2509, 77-3538.
580 F.2d 952
United States Court of Appeals,
Ninth Circuit.
Aug. 16, 1978.
Former shareholders of Guam corporation brought suit
alleging that, due to the bad faith of defendants, the Guam Economic
Development Authority had failed to first offer to the former
shareholders, as required under certain stock purchase agreements, the
21,000 shares of stock that the GEDA had sold to the individual de-
fendant. The former shareholders requested that the court impose a
constructive trust in their favor. The United States District Court for
the Territory of Guam, Cristobal C. Duenas, J., ruled in favor of
defendants, and six of the former shareholders appealed. The Court of
Appeals, Wong, District Judge, sitting by designation, held that: (1)
the agreement under which the former shareholders purportedly
waived their rights of first refusal was not rendered invalid by reason
of the lack of a quorum of the GEDA board; (2) unanimous consent of
the former shareholders was not required in order to modify certain
earlier stock purchase agreements; (3) the language of the stock
purchase did not overcome the presumption created by he
Guam Civil Code that the right of first refusal possessed by the former
shareholders was joint and not several; (4) under all the
- 37b -
circumstances, the trial court did not abuse discretion in denying the
former shareholders’ motion to amend the pretrial order to include the
issue of fraud; (5) if the former shareholders intended to rely on fraud
as a basis for obtaining a constructive trust, fraud was an element that
had to be affirmatively pleaded and proved, and (6) the district court
did not commit clear error in holding that plaintiffs failed to fulfill the
requirements of a constructive trust.
Affirmed.
1. Corporations §426(12)
General rule with respect to ratification is that ratification of a
contract or other act will be implied if the corporation, represented by
a board of directors who have knowledge of the facts, accepts and
retains the benefits of the contract or act or recognizes the contract as
binding or acquiesces in the contract; ratification may be by
acquiescence.
2. Corporations §137
Despite fact that no quorum of the Guam Economic
Development Authority board was present at meeting when agreement
was reached under which shareholders purportedly waived rights of
first refusal afforded them by a prior stock purchase agreement
between GEDA and the shareholders, where the GEDA board had
power to enter into the second agreement and the conduct of the
GEDA board subsequent to signing the second agreement was
unequivocally sufficient to establish ratification, the agreement was
not invalid because of the lack of a quorum. Government Code Guam
§ 53558(c).
3. Corporations §113
Even when read in conjunction with provision of stock
purchase agreement that the agreement could only be changed by a
writing signed by the party against whom enforcement of change or
waiver was sought, term “collective right" in section of the agreement
prohibiting the Guam Economic Development Authority from
transferring or disposing of certain shares of stock unless the shares
had first been offered for sale to the former stockholders and that the
stockholders’ right of first refusal was a “collective right" did not re-
quire that the agreement could be modified only by unanimous consent
of the former shareholders, some of whom owned but a de minimis
fraction of the outstanding shares; though term "collective right" was
ambiguous, an interpretation requiring unanimity of consent was
unreasonable in light of financial risk to GEDA.
- 38b -
4. Corporations §113
Language of stock purchase agreement whereby the Guam
Economic Development Authority was prohibited from transferring
certain stock unless stock was first offered further stated "This right of
~ first refusal is not an individual right to a shareholder to reacquire the
shares transferred. . . [but] is a collective right” was not sufficient to
overcome presumption created by the Guam Civil Code that the right
of first refusal by the former shareholders was joint and not
several, Civil Guam § 1431.
5. Corporations §137
Where agreement which released the Guam Economic
Development Authority from its promise to afford former shareholders
a right of first refusal with respect to shares purchased the GEDA was
signed by all but three of the 16 former shareholders who had signed
the original agreement containing the right of first refusal, the
signatories to the later agreement thereby discharged the GEDA of its
obligation to the other former shareholders as well.
6. Federal Civil Procedure §1935
In view of fact that appellants completely failed to substantiate
their claim of lack of undue prejudice and of their failure to specifically
identify fraud in any of the pleadings and in view of the three-year
delay in moving to amend a pretrial order and fact that the issue of
fraud was raised for the first time on the eve of trial, district court did
not abuse discretion in denying motion to amend pretrial order so as to
include issue of fraud.
7. Federal Civil Procedure §636
If former shareholders intended to rely on fraud as a basis for
obtaining a constructive trust in some 21,000 shares, shareholders
were required to affirmatively plead and prove fraud with specificity.
Civil Honorable Dick Yin Wong, United States District Judge, District
of Hawaii, sitting by designation.
Code Guam § 1431; Fed.Rules Civ.Proc. Rule 9(b), 28 U.S.C.A.
8. Trusts §110
Evidence in suit wherein former shareholders sought
imposition of a constructive trust in favor of them over some 21,000
shares did not support shareholders’ contention that they were induced
by a fraudulent representation into entering into an agreement whereby
they waived their rights of first refusal under an earlier stock purchase
agreement.
a ee een Oe ee
- 39b -
Robert D. Wyatt (argued), John A. Bohn (argued), Agana,
Guam, for plaintiffs-appellants.
George T. Okamura of Damon, Shigekane, Key & Char,
Honolulu, Hawaii, for David J. Ulloa et al.
J. Bradley Kiemm (argued), of Klemm, Dear & Lawrence,
Agana, Guam, and Vemon F..L. Char (argued), Damon, Shigekane,
Key & Char, Honolulu, Hawaii, for Robert E. Halsey et al.
Appeal from the United States District Court for the Territory
of Guam.
Before CHAMBERS and WALLACE, Circuit Judges, and
WONG, District Judge. .
WONG, District Judge:
Appellants in consolidated Case Nos. 77-2509 and 77-3538
are six of the 16 former shareholders of Marianas Communications
Systems, Inc. ("MCS"), a Guam corporation founded in 1968 for the
purpose of establishing a cable television system for Guam and the
Northem Marianas.! By 1969, the corporation was in need of extra
funds, and the officers and shareholders of MCS sought to obtain the
additional financing from the Guam Economic Development Authority
("GEDA"), an incorporated government agency created for the
purpose of stimulating economic growth in the Territory of Guam.
GEDA ultimately agreed to guarantee a loan in the amount of
$200,000 obtained by MCS from the Guam offices Of the First
National City Bank ("FNCB").
1 The six Appellants are Robert and Jim Halsey,
Richard Cruz, David Ulloa, Richard Ulloa, and Johnny Sablan.
Most of the remaining 10 former shareholders assigned their
interests in the action below and in any MCS stock to D. Ulloa in
September and October of 1974. See C.T. 403-409. By Order
filed April 18, 1975, nine of these remaining 10 shareholders
were dismissed by the trial court for lack of prosecution. In its
Opinion, the district court also found that on August 1. 1971,
Robert and Joan Halsey sold their entire interest in any Mcs
shares to Richard Cruz. See C.T. 693, 406.
- 40b -
Throughout the years 1971 and 1972, MCS continued to
experience severe financial difficulties. After the failure of at least two
attempts by MCS to obtain needed capital from outside corporations,
MCS once again tumed to GEDA. By a Stock Purchase Agreement
dated May 21, 1971, each of the MCS shareholders agreed to sell, for
a nominal consideration, all of the issued MCS stock to GEDA, who
was in tum to assume all of the outstanding obligations of MCS and
- attempt to transform MCS into a viable enterprise. Section 6 of the
Stock Purchase Agreement prohibited GEDA from transferring,
alienating or in any way disposing of any MCS shares unless such
shares were first offered for sale to the original 16 MCS shareholders.
The shareholders’ right of first refusal was set at a purchase price
equal to the total amount of money expended and incurred by GEDA
in the operation of the company.
By a supplemental Agreement also entered into on May 21,
1971, each of the MCS shareholders and GEDA agreed that not-
withstanding Section 6 of the Stock Purchase Agreement, GEDA
would be further prohibited from offering for sale any of the MCS
shares within 180 days of the May 21st Agreement. Both the Stock
Purchase Agreement and supplemental Agreement (hereinafter referred
to as "May 21st agreements") were signed by each of the 16 MCS
shareholders and James Halliday, the GEDA Administrator.2
Less than two months after the May 21st agreements were
entered into, GEDA was approached by Lee Holmes, who, with the
support of David Ulloa, met with the GEDA Board on July 14, 1971
to discuss the possible sale of MCS. In its most basic terms, Holmes
proposed to purchase 21,000 shares (70 percent) of MCS stock for a
total purchase price of $42,000; to have GEDA offer, in varying
amounts, 4,500 shares (15 percent) of MCS stock to the former MCS
shareholders; to have GEDA retain the remaining 4,500 shares (15
percent) until the GEDA loan was paid off, at which time the shares
were to be offered by GEDA to Holmes, D. Ulloa, Sablan, and three
other former MCS shareholders at $4.00 per share; and to have both
GEDA and FNCB increase their respective loans by $50,000 each.
2 A question subsequently arose as to whether
Halliday possessed the authority to bind GEDA to the may 21st
agreements. At a GEDA Board meeting held on August 3, 1971,
the Board unanimously agreed to ratify the May 21st agreements.
See C.T. 59.
- 41b-
Holmes' proposal was favorably greeted by the GEDA
Board, and on July 20,1971, a meeting between Holmes, three of the
seven GEDA Board members, and five of the former MCS
shareholders was held to further discuss the proposal. This meeting
resulted in the drawing up of an Agreement, dated July 20, 1971,
providing for the cancellation of both the former MCS shareholders’
right of first refusal contained in Section 6 of the May 21st Stock
Purchase Agreement and the 180-day prohibition of the sale of MCS
stock contained in paragraph 2 of the May 21st supplemental
Agreement. The July 20th Agreement was conditioned upon the
execution of a contract by Holmes, GEDA, and MCS for the sale of
MCS stock to Holmes, and was signed by Guy Wharton (on behalf of
GEDA), Holmes, and all of the 16 former MCS shareholders except
Richard Cruz and Robert and Joan Halsey.
Further meetings of the GEDA Board were held on August 2
and 3, 1971, and by an Agreement for Sale of MCS Stock dated
August 4, 1971, GEDA agreed to sell 70 percent of the MCS stock to
Holmes on the terms described above, with the exception of the
deletion of any reference to a $50,000 matching loan from FNCB.
This August 4th Agreement was signed by Jesus Guerrero (on behalf
of GEDA), Halliday (on behalf of MCS), Holmes, and witnessed and
signed by D. Ulloa and one J. S. Perez.
Pursuant to the terms of the August 4th Agreement, the shares
of MCS stock prescribed therein were sold by GEDA to Holmes and
the former MCS shareholders. On February 28, 1972, the 16 former
MCS shareholders filed suit, claiming, inter alia, that due to the bad
faith of defendants Holmes and GEDA, the latter had failed to first
offer to them, as required under the May 21st agreements, the 21,000
shares of MCS stock sold to Holmes. The former MCS shareholders
therefore requested that the court impose a constructive trust in favor
of them over the 21,000 shares.
The trial court ruled in favor of Holmes and GEDA, and six
of the former shareholders appealed, raising a number of issues for
this Court's consideration.
[1,2] Appellants first claim that the July 20th Agreement,
under which the former MCS shareholders purportediy waived their
rights of first refusal, is not a binding agreement due to the lack of a
quorum of the GEDA Board. It is clear that the July 20th Agreement
was not properly transacted due to the absence of a Board quorum.
Guam Government Code, § 53558(c). While no Guam case law exists
- 42b -
on this point, it is also clear, however, that the general rule with
respect to ratification is that
“ratification of a contract or other act will be implied if the
corporation, represented by the board of directors, who have
knowledge of the facts, accepts and retains the benefits of the
contract or act, or recognizes it as binding, or acquiesces in it.
They may ratify by acquiescence, and need not act at a
meeting regularly called, but may ratify without any formal
action. 2 Fletcher Cyc. Corp. § 762.
See also Petroleum Anchor ipment, Inc. v. Tyra, 419
S.W.2d 829, 834 (Tex.Sup. Ct.1967) ("Ratification of an
RS ee ee ee
conduct . . .."); See-Tee Mining Corp. v. National Sales, Inc., 76
N.M. 677, 417 P.2d 810, 812 (1966) (“Ratification of the action of a
corporate officer for which there may have been no antecedent
authority may be express or implied [citations omitted), and may be
_ lied by the corporation's acquiescence in or recognition of its
cer’s unauthorized act, or by the corporation's acts ae to
show on acceptance or adoption of the contract {cations cant }");
Monteleone v. Southern California, 26.4 Cal.App.2d 798, 70
Cal.Rptr. 703 (Second Dist.1968); Johnson v. Community
Development Corp., 222 N.W.2d 847 (N.D.Sup.Ct.1974); 19 C.J.S.
Corporations § 1141 (1940).
That the GEDA Board possessed the original authority to
enter into a contract in the nature of the July 20th Agreement cannot be
disputed. Guam Government Code, § 53553.
An examination of the conduct of the GEDA Board
subsequent to the signing of the July 20th Agreement unequivocally
demonstrates Board action sufficient to establish ratification. As the
July 20th Agreement states in paragraph 4 thereof, the Agreement was
conditioned upon the execution of a contract for sale of MCS stock to
Holmes among GEDA, MCS, and Holmes. Holmes in fact
poms anes | submitted Joe contract of sale for GEDA's
nearer reg) ary anna ~ ogee oy referred to the fact that
by the July Agreement, GED. rmer MCS shareholders
aad We dhecioae tak tees ales a ad Seek Seana to One
May 21st agreements. This paragraph was specifically discussed at the
August 2nd and 3rd GEDA Board meetings. The following notation
was entered in the minutes of the August 3rd meeting:
- 43b -
"Section [paragraph] 5 [of Holmes' proposed contract] -- The
Administrator [of GEDA) pointed out that the last part of this
section regarding the abrogation of the former shareholders
had been changed to read . . . ‘GEDA will jointly with
Holmes and MCS defend any claim thereon by any persons or
other entity.' The Board agreed to this."
Therefore, not only did the GEDA Board recognize the
existence of the July 20th Agreement, but it was even willing to go so
far as to agree to defend Holmes and MCS on any claim arising from
the Agreement. Finally, of course, by that Agreement for Sale of MCS
Stock dated August 4, 1971, and agreed upon at the August 2nd and
3rd Board meetings, GEDA agreed to sell 21,000 shares to Holmes,
despite the fact that on the previous day, the Board had specifically
ratified the May 21st agreements containing the former MCS
shareholders’ rights of first refusal. Paragraph 5 of the August 4th
Agreement both recognized the July 20th abrogation of the former
Shareholders’ rights of first refusal and asserted the obligation to
defend noted above. Appellants do not contend that quorum was
lacking at the August 2nd and 3rd meetings, and, as indicated
previously, the August 4th agreement was witnessed and signed by D.
Ulloa. Subsequently, of course, GEDA did in fact sell MCS stock to
Holmes and the former shareholders pursuant to the August 4th
Agreement.
Under these circumstances, for this Court to now hold that the
July 20th Agreement was not ratified by the Board would not only
serve to completely vitiate the clearly expressed intent of the Board
and elevate mere formalism over substance, but would also serve to
permit the former MCS share. holders to evade a contract they freely
and willingly entered into.
[3] Richard Cruz raises the further argument that because he
did not sign the July 20th Agreement, it was not binding upon him.
Section 6 of the May 21st Stock Purchase Agreement provides in
pertinent part that:
"GEDA shall not transfer, alienate or in any way
dispose of any shares of the Company unless such share shall
first have been offered for sale to the Stockholders. . . . This
right of first refusal is not an individual right to a shareholder
to reacquire the shares transferred by that individual
stockholder by this agreement or any other shares. The right
of first refusal is a collective right and all shares offered for
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sale by GEDA must be acquired under the same terms and
conditions as set forth in the preceding paragraph."
Section 7 (entitled "Miscellaneous") of the Agreement states in
subsection (a) that:
"This agreement contains the entire agreement
between the parties and can only be changed by agreement in
writing signed [)y the against whom enforcement of any
change, waiver, modification or discharge is sought."
This Court agrees with the trial court that the term "collective
right," even when read in conjunction with Section 7(a) of the
Agreement, is ambiguous, and we agree with the trial court's
interpretation thereof. As pointed out by the district court, the May
21st agreements were entered into at a time when MCS was in dire
financial straits. GEDA, in assuming control over the corporation,
obviously needed as much flexibility and freedom to operate as possi-
ble. To hold that the May 21st agreements could be modified only by
unanimous consent of the 16 former MCS shareholders (some of
whom owned but a de minimis fraction of the outstanding shares)
would amount to an unreasonable interpretation of the term "collective
right” in light of the risk such an interpretation would impose upon the
future success and viability of the corporation. Moreover, the
“non-unanimity" view was expressed both orally and in writing by
Charlies Troutman, legal counsel to GEDA, and no objectiontosucha -
view was voiced by any of the former MCS shareholders.
eae s [4] Further support of the trial court's interpretation can be
} found in § 1431 of the Guam Civil Code, which section provides in
~_ pertinent part that:
"An obligation imposed upon several persons, or a right
created in favor of several persons, is presumed to I>e joint
and not several. . . . This presumption in the case of a night,
can be overcome only by express words to the contrary."
In interpreting the words "joint right,” § 130(b) of the
Restatement, Contracts, provides that:
".... [A] discharge by a joint obligee of his individual right
operates as a discharge of the joint right of all...
"Tilustration:
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eo A, B and C have a joint right to the delivery
of a horse by D. A discharged D from any duty to himself in
consideration of $50 paid by D to A. This discharges D's duty
to B and C as well as to A. It would be otherwise if with D's
knowledge, A was acting with intent to defraud B and _ ota
See also Forbes v. First Camden National Bank, 25
N.J.Super. 17, 95 A.2d 416, 418-419 (1953) ("[I]t is the general rule
that each of several joint obligees has power to discharge the entire
claim by release, or accord and Satisfaction, or the acceptance of
payment of other performance. Thus, in Ely v. Ely, 70 N.J.L. 31, 56
A. 246 (Sup.Ct. 1903), one joint creditor, acting without the
knowledge or consent of his Co-obligee, accepted from the debtor a
horse and a small sum of money in satisfaction of the debt: and the
court held that the obligation to both creditors was discharged. To a
like effect are Restatement, Contracts, § 130; Williston, Contracts, §
344; and Annotation in 142 A.L.R. 371. Professor Williston, at §
317, finds an implied agency whereby each obligee is empowered to
act for all in relation to the debt.").
[5] The language of the May 21st agreements does not
succeed in overcoming the presumption created by § 1431 of the
Guam Civil Code that the right of first refusal possessed by the former
MCS shareholders was joint, and not several. By releasing GEDA of
its promise to afford the former MCS shareholders first refusal in
consideration for the right to later purchase MCS stock, the sizuatories
to the July 20th Agreement thereby discharged GEDA of its Obligation
to the other former MCS shareholders (i. e., Cruz and the Halseys) as
well. .
Appellants further contend that even if the July 20th
Agreement is deemed to be binding upon all parties concerned,
Holmes and/or GEDA acted fraudulently, in bad faith, and/or
breached their fiduciary duties, and a constructive trust over the
21,000 shares owned by Holmes should therefore be imposed in
favor of them.3 The trial court held that "Plaintiffs have not pled nor
3 Section 2224 of the Guam Civil Code provides
"One who gains a thing by fraud, accident,
mistake, undue influence, the violation of a trust, or other
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have they presented any evidence to show the existence of fraud, acci-
dent, mistake, undue influence, the violation of a trust, or other
wrongful act." (C.T. 701.)
[6] The complaint in this case was filed on February 28,
1972. Trial was ordered set for October 28,1975. On October 20,
1975, GEDA and Holmes filed a Trial Memorandum in which they
stated, inter alia, that since fraud had been neither speci y pleaded
in the complaint as required by Rule 9(b) of the Rules of Civil
Procedure nor included in the pretrial order as an issue for trial, the
plaintiffs should be precluded from trying the issue of fraud. In a
memorandum filed October 22, 1975, the plaintiffs conceded that with
respect to the issue of fraud, they had failed to satisfy the specificity
requirements of Rule 9(b) and include it in the pretrial order. The
plaintiffs therefore moved to amend the pretrial order so as to include
the issue of fraud. This motion was denied by the trial court,
y on the ground that it was “untimely and prejudicial to the
defendants and was not supported by the evidence." (C.T. 687.)
Although Appellants claim in their Opening Brief that "There was no
‘undue prejudice’ t.0 defendant because the discovery proceedings
had made amply clear to defendants the intention of plaintiffs to
introduce such evidence," they are unable to point to anything in the
record to support this contention. Given the complete failure of
Appellants to substantiate their claim of lack of undue prejudice, the
failure to specifically identity fraud in any of the pleadings, the three -
year delay in moving to amend the pretrial order (which order was
filed on October 18, 1972), and the raising of the issue of fraud on the
eve of trial, we cannot say that the trial court abused its discretion in
denying the plaintiffs’ motion.
also contend that the trial court erred in denying
their post-trial motion to amend the pre-trial order to conform to proof.
F.R.Civ.P. 15(b). While it is true that the trial court did state that the
intiffs had failed to plead the existence of fraud, it also found that
the plaintiffs failed to present any evidence to show the existence of
fraud. Under these circumstances, then, the question of whether the
trial court erred in denying the motion to conform to the evidence
collapses into the issue of whether the trial court erred in concluding
wrongful act is, unless he has some other and better right
thereto, an involuntary trustee of the thing gained, for the
benefit of the person who would otherwise have had it."
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that the plaintiffs had failed to prove the elements of a constructive
trust (discussed infra ).
(7) Finally, Appellants argue that fraud was simply a "defense
to Appellees’ defense" and therefore did not fall within the specificity
requirements of Rule 9(b). Whether a "defense to a defense" falls
within Rule 9(b) is a question we need not answer at this time, for it is
clear that the thrust of the plaintiffs' complaint was to seek a
constructive trust over the shares owned by Holmes. As provided by
§ 22
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