VERN T. WEISS, father and next friend of )
CARL WEISS, on behalf of himself and all )
others similarly situated; and MARY C. )
NANUWAK and BILLY R. CROSS, on behalf )
of themselves and all others similarly )
situated, )
)
Appellants, )
)
STATE OF ALASKA, ANITA BOSEL,FRANCES )
DOULIN, SHARON GOODWIN, and GABRIEL ) Supreme Court No. S-6845
MAYOC, and ALASKA ADDITION )
REHABILITATION SERVICES, ) Superior Court No.
) 4FA-82-2208 CIV
Appellees. )
______________________________________________)
David T. Walker (7510101) James B. Gottstein (7811100)
LAW OFFICES OF Bruce A. Moore (8611124)
DAVID T. WALKER LAW OFFICES OF
417 Harris Street JAMES B. GOTTSTEIN
Juneau, Alaska 99801 406 G Street, Suite 206
(907) 586-3537 Anchorage, Alaska 99501
(907) 274-7686
Attorneys for Appellants Vern T. Weiss, Mary C. Nanuwak, and Billy R. Cross
TABLE OF CONTENTS
Brief of Appellants
Appellants Vern T. Weiss, father and next friend of Carl Weiss on behalf of himself and all others similarly situated, and Mary C. Nanuwak and Billy R. Cross, on behalf of themselves and all others similarly situated, timely appealed January 13, 1995 from the Superior Court's December 13, 1994 final order. This Court has direct appellate jurisdiction. Appellate Rule 202(a); AS 22.05.010.
Other orders and decisions of the Superior Court appealed herein include: Order, June 19, 1986 (Exc. 61); Memorandum Decision and Order (Beneficiaries), April 27, 1988 (Exc. 74); Memorandum Decision and Order Re: Preliminary Approval of Proposed Settlement (Ch. 66), December 30, 1993 (Exc. 271); Scheduling and Case Management Order, May 23, 1994 (Exc. 437); Order (modification to case management order), May 31, 1994 (Exc. 455); Order (extension to challenges to HB201), June 8, 1994 (Exc. 469-A); Order Re: Motion for Filing Declaratory Judgment, June 17, 1994 (Exc. 483); Memorandum Decision and Order Re: Preliminary Approval of HB 201 Proposed Settlement Agreement, July 29, 1994 (Exc. 666); Order Modifying Class Definition, August 2, 1994 (Exc. 725); Management Order For Final Approval Hearing, August 11, 1994 (Exc. 726-A); Order Re: Suggestion of Death Motion to Substitute Party, September 7, 1994 (Exc. 727); Order Re: Proposed Text of Display Advertisement, September 23, 1994 (Exc.742); and, Memorandum Decision and Order Granting Final Approval to the HB 201 Settlement, December 6, 1994 (Exc. 831) Order of Dismissal..
VERN T. WEISS, father and next friend of Carl Weiss, a minor child, on behalf of themselves and all others similarly situated; MARY C. NANUWAK and BILLY R. CROSS on behalf of themselves and all others similarly situated, STATE OF ALASKA, ANITA BOSEL, FRANCES DOULIN, SHARON GOODWIN,GABRIEL MAYOC, H.L., M.K., ALASKA ADDICTION REHABILITATION SERVICES, USIBELLI COAL MINE, IDEMITSU ALASKA, INC., ALASKA CENTER FOR THE ENVIRONMENT, SIERRA CLUB, MARATHON OIL COMPANY, JOHN R. MORRIS,
1. Did the trial court err by granting approval to the HB 201 Settlement?
2. Did the trial court err by finding the HB 201 Settlement Fair, Reasonable and Adequate?
3. Did the trial court err in its evaluation of the class's claims?
4. Did the trial court err by failing to properly consider the impact of the plaintiffs' mismanagement claims?
5. Did the trial court err in its evaluation of the class's risk with respect to recovery of land granted under the Alaska Mental Health Enabling Act?
6. Did the trial court err in its evaluation of the value of the original trust grant?
7. Did the trial court err by over valuing the HB 201 Settlement?
8. Did the trial court err in approving a settlement that can not achieve the goals of Congress in enacting the Alaska Mental Health Enabling Act's trust grant?
9. Did the trial court err by approving a settlement that does not require the Trust to be used first for the necessary expenses of the mental health program of Alaska?
10. Did the trial court err by failing to properly scrutinize the conduct of the settlement negotiations?
11. Did the trial court err in concluding that there was no collusion in the negotiation of the HB 201 settlement?
12. Did the trial court err by failing to find that the HB 201 Settlement is the result of adequate representation?
13. Did the trial court err by approving an unenforceable agreement?
14. Did the trial court err by approving a settlement with an illegal management Regime?
15. Should the trial court have declared HB 201 Invalid in its entirety?
16. Should the trial court have declared the Directed Results Provisions of HB 201 Invalid? [ A subsidiary of this question is: should the trial court have denied the stay of Appellants' motion for a declaratory judgment. There are subsidiary questions to many of the other listed Issues. Mindful of both the desirability of limiting appellate briefs to essential material and this court's requirement that specifications of error must apprise the court in what respect each questioned action was error ( See , e.g. , Freightways Terminal Company v. Industrial & Commercial Construction, Inc. , 381 P.2d 977 at 982 (Alaska 1963) ), Appellants have not included the 27 page Points on Appeal filed in this matter but do incorporate it by reference to apprise the court and Appellees in what respect each questioned action was error. ]
17. Did the trial court err by denying preliminary approval to the Chapter 66 Settlement?
18. Did the trial court err by holding that the mentally retarded and mentally defective are members of the class?
19. Did the trial court err by holding the State can add beneficiaries to the Trust?
20. Did the trial court err by limiting the claims that the Mental Health Intervenors can make in this action?
21. Should the trial court have allowed the substitution of Billy R. Cross?
22. Did the trial court err by excluding the testimony of Dr. George Rogers regarding damages for the class's mismanagement claims?
23. Did the trial court err by not limiting comments to members of the class?
24. Should the trial court have provided enough information in the Notice for Class Members to form an informed opinion?
25. Did the court err by denying Appellants their due process rights?
26. Did the trial court err by failing to properly discharge its fiduciary duty to the class?
In 1956, the Federal government created the Alaska Mental Health Trust with a munificent 1 million acre selection endowment and the superbly simple and beneficial commandment to provide income for Alaska's mental health program through the generations. The Territory's trustee obligation was solemnly accepted upon Statehood.
Between its creation and 1966, first the Territorial and then the early State governments used the endowment's selection rights to choose what was then and with the decline of Prudhoe Bay quite probably remains today the most valuable 1 million acre portfolio of surface and subsurface lands in Alaska. However, there is no serious dispute that the State as trustee never attempted to place the Trust lands in productive capacity or otherwise manage them for the benefit of Alaska's mental health program.
The Trust lands were de facto treated as part of the State's general grant lands and disposed of as dictated from time to time by general government imperatives, political interests across the ideological spectrum and private concerns. The lands were placed into park and other non-use and restricted-use categories, transferred or made available to local government or other administrative uses, used in land swaps, leased under general government regimens, and on occasion even transferred to private parties, among other dispositions or non-use. This indifference to or predation on Trust lands culminated in the Legislature's 1978 attempted abolition of the Trust and formal transfer of the lands to general grant land status.
However, on complaint of Vern Weiss as representative of the beneficiary class to first the Fairbanks Superior Court and then on subsequent appeal, the indifference and predation were ended. Cognizant of the State's solemn obligation as trustee and Federal precedent, this court in State v. Weiss , 706 P.2d 681 (Alaska 1984), invalidated the 1978 legislation and remanded the proceeding under direction that the superior court reconstitute the Trust corpus to presumably thereafter be managed in faithful compliance with the original commandment.
This appeal brings up for review the actions and decisions of the Fairbanks superior court in approving on remand a settlement reached in 1994 between the State and representatives of two at best minor components of the beneficiary class over the strenuous objections of appellants Weiss and Nanuwak et al representing the major components of the beneficiary class and the originators of this litigation. The approval was issued in a "rush to judgment" environment that failed to allow adequate time for properly structured judicial resolution of legal issues or development and presentation of relevant evidence. The superior court's December 6, 1994, Decision itself excluded proffered relevant evidence, improperly considered or weighed evidence that was received, failed to sufficiently explain determinations that were made, and ignored, misinterpreted or misapplied relevant constitutional, statutory and judicial case law.
The immediate result of these failures was a grossly inadequate valuation by the superior court of the original Trust lands and of the plaintiffs' positive litigation prospects in the event the settlement was rejected. The further immediate result was a gross overvaluation of the value of the settlement, including the cash and lands placed in the Trust, the virtues of the management regimen placed over the Trust, the litigation threats to the Trust, and the significance and validity of various promises made to the beneficiary class accompanying the settlement.
The end result was approval of a settlement that produces a reconstituted Trust corpus at a fraction of its original value, to be managed under a dysfunctional management structure and supplemented by illusory and unlawful promises with, most sadly, invitations to yet further predations. The casualties are the intent of the Federal government in creating the Trust, and the welfare of present and unborn generations of Alaskans who stood to benefit so greatly from the Trust's munificent endowment and singular purpose.
It is forever the burden of the Alaska State government under both State and Federal Constitutions to demonstrate that its activities with respect to the Trust are always in keeping with the Trust's best interests. The State cannot sustain that burden under this settlement's end result. Accordingly, this Court should, under applicable law, reject the settlement and restore and fulfill its own vision in Weiss.
In 1956, Congress granted the then Territory of Alaska the right to select one million acres of land "as a public trust" to be used "first for the necessary expenses of the mental health program of Alaska.". § 202(e), Alaska Mental Health Enabling Act (Enabling Act), Pub.L. No. 84-830, 70 Stat. 709 (1956). The Trust is to be managed under basic private trust law principles. State v. Weiss, 706 P.2d 681 at 683, n.3 (Alaska 1985). The land selected for the Trust was the best land available in the State. (Tr. XXI-681-702, 733-770; Tr. XX-525; Tr. XXIV 328-9, 333-9); (Exc. 838, 670, 98). However, the Trust was never managed properly. (Tr. XXI-844; Tr. XXI-727), (Exc. 705). [ The State's hostility to managing the Trust in the beneficiaries' interests continued throughout the course of the litigation. As late as 1994, the State was held in contempt for a deliberate violation of the July 9, 1990 preliminary injunction. (R.19998-20019).] At the same time, due to the extreme demand for the Trust's holdings for a variety of uses, [ § 1(a)(6), Ch. 48 SLA 1987 ; (Tr. XXI-681-702).] the 1978 legislature enacted legislation to abolish the Trust. Chs. 181 & 182 SLA 1978. Much of these lands were then snapped up by the State and third parties. (§ 1(a)(6), Ch. 48 SLA 1987; (Exc. 894).
Litigation was commenced to protect the Trust in 1982. (Exc. 24-26). On cross motions for summary judgment the Superior Court ruled that the 1978 legislation breached the Trust, but held that invalidation of the 1978 redesignation legislation was not the proper remedy. (R.6173-6176). [ A lis pendens was filed on the original trust grant, but the Superior Court granted a motion to expunge it based on its decision that invalidation of the redesignation legislation was not a proper remedy. (R.6500).] Original counsel for the class plaintiffs and the State then stipulated to take a Civil Rule 54(b) appeal. In this stipulation original counsel for the class agreed to a set-off against the corpus of the Trust for expenditures on the mental health program in an unspecified amount. (Exc. 37). At the June 10, 1985 oral argument for Weiss, original counsel for the plaintiffs explained this stipulation as follows:
I might point out, Mr. Justice Matthews, that we have stipulated that all sums that were actually spent in -- for mental health programs would serve as a credit against whatever money would have been available through the de facto condemnation of these lands. So -- and for all I know, the lands might not have been worth as much as the appropriations. So we have provided for that eventuality. Frankly, I think that it's arguable under the law of private trusts that we wouldn't have to give the credit but I think it's fair, and that's the reason we made the stipulation.
(emphasis added). [ The "set-off" was incorporated in this court's Weiss Opinion as part of its remand guidance without discussion (706 P.2d at 384).] (Tr. II-33).
Due to concerns that the original class counsel was inadequately representing the class, Appellant Nanuwak and others (Mental Health Intervenors) represented by James B. Gottstein (Gottstein), moved to intervene in the litigation. [ "Mental Health Intervenors" is used to describe the group represented by Appellants Nanuwak and others in this litigation due to the later development where separate sets of plaintiffs intervened to demand a piece of the expected Mental Health Trust funding pie. They are the parties that are normally considered to be served by a "mental health program." The Mental Health Intervenors were actually the original sponsor of this litigation, but had to move to intervene when original counsel for the class refused to follow their direction. (R.179-182[in S-794]).] (R.175 [in appeal S-794]). The Superior Court denied this motion to intervene, but on appeal, following the Weiss remand, this court, without determining the propriety of the denial, allowed intervention as to "future proceedings." (Exc. 55,61). [ However, the Superior Court later entered an order limiting the claims that the Mental Health Intervenors could make to those "directly involving reconstitution of the Trust ordered by the Alaska Supreme Court in Weiss ." (Exc. 61).]
When original class counsel announced his bid for governor, he withdrew from this case and William Council was substituted. (R.6474). Mr. Council withdrew in a matter of months and David Walker was substituted as counsel for the original named plaintiffs, the other Appellant here. He remains their counsel and has acted as lead counsel since that time. (R.6870).
Following this court's remand, Weiss, supra, 706 P.2d at 684, the parties negotiated legislation establishing the Interim Mental Health Trust Commission (Trust Commission) to (a) approve transactions involving Trust Land, [ § 2(d), Ch. 132 SLA 1986 .] and (b) make a recommendation to resolve the litigation. [ § 4, Ch. 132 SLA 1986 .] Following extensive meetings between all parties, including the Legislature, Ch. 48 SLA 1987 (Chapter 48) was enacted as a settlement of this action.
Chapter 48 provided that (a) the original Trust grant's land be valued as of September 7, 1987, [ § 4, Ch. 48 SLA 1987 .] (b) the Trust be reconstituted to consist of land in Legislatively Designated Areas (LDAs) such as state parks, refuges, etc., [ § 4, Ch. 48 SLA 1987 .] (c) the State pay 8% of the value annually [ The value was to be re-determined at least every five years. (§ 2, Ch. 48 SLA 1987 ).] to the Trust as rent on this land, [ § 2, Ch. 48 SLA 1987 .] (d) the Alaska Mental Health Board, created thereunder, determine the necessary expenses of Alaska's mental health program, [ § 6, Ch. 48 SLA 1987 .] and (e) the income to the Trust (the rent) be spent first on the necessary expenses of the mental health program. [ § 3, Ch. 48 SLA 1987 .] Until the reconstitution was completed the State was to pay 5% of its total General Fund revenues as a proxy for the 8% rent. [ § 11, Ch. 48 SLA 1987 .] Chapter 48 directed that the valuation be performed under procedures approved by the Trust Commission. [ § 4, Ch. 48 SLA 1987 . The original (1986) Commission consisted of five members, some of whom were appointed by the Governor from lists submitted by the original plaintiffs, the Mental Health Intervenors, and the Governor's Mental Health Advisory Council (§ 1(b), Ch. 132 SLA 1986 ). However, the members of the Chapter 48 Commission (1987), were specifically appointed by the Legislature to, inter alia , approve the valuation procedures. Chapter 48 , §7.] The 5% of General Fund interim payments amounted to approximately $114.8 million per year, (R.8911), while the mental health program had previously been receiving approximately $30 million per year (not counting funding for the mentally retarded and mentally defective and chronic alcoholics with psychosis). (R.9077).
Following enactment of Chapter 48, representatives of the mentally retarded and mentally defective (MR/MD Intervenors), represented by Jeffrey L. Jessee and chronic alcoholics with psychosis (CAWP Intervenors), represented by Philip R. Volland, moved to intervene in the lawsuit to share in the 5% funding provided in Chapter 48. (R.7189; R.6763). Appellants did not dispute the beneficiary status of chronic alcoholics with psychosis, but there was a dispute over the status of the MR/MD Intervenors. [ Counsel for MR/MD had been notified in 1984 that his clients' interests might be involved (R.6907), but they did not intervene until passage of Chapter 48 with its funding commitment to the mental health program (R.6763-64).] (R. 6901-6964, 7400-7427, 7432-7472). In April of 1988, the Superior Court ruled that both groups as well as the elderly senile suffering from major mental illness were beneficiaries of the Trust. (Exc. 90).
After two years of intense work, in December of 1989, the Trust Commission issued its final report establishing the approved procedures, resulting in a valuation of the original Trust grant of approximately $2.243 Billion. (Exc. 116,117). However, in early 1990, the State declared that it would not implement Chapter 48, citing the negative impact on the State's over-all budget. (Exc. 142). At that point, the Commission, which had been approving transactions on Trust Lands over the objections of Appellants, [ Tr. XXI-705, (R.23807) ] passed a resolution prohibiting any further transactions. (R. 9045). The State defied this directive despite the clear language of § 2(d), Ch. 132 SLA 1986, (Exc. 184A-N), requiring Commission approval for any conveyances of Trust land.
As an alternative to the Chapter 48 settlement, Chapter 210 SLA 1990 was enacted (Chapter 210), providing that instead of 8% of the value of Trust land, the rent to be paid would be 6% of General Fund revenues. (§ 2, Ch. 210 SLA 1990). Appellants' counsel advocated serious consideration of Chapter 210 as a settlement amid substantial opposition among certain of the beneficiary groups. (Exc. 526-27). Counsel for the MR/MD Intervenors was adamantly opposed to Chapter 210 as a settlement. (Exc.526). Counsel for the CAWP Intervenors was not opposed to the fiscal settlement but was concerned about whether his clients would receive enough of the money. (Exc. 527). In addition, the Alaska Alliance for the Mentally Ill, an organization composed mainly of the parents of mentally ill persons, was violently opposed to taking anything less than the 8% of 2.243 Billion annual payments of $178 million annually expected to go up. (Exc.526; Exc.281). Due to the opposition to the settlement within the class, Chapter 210 was never presented as a settlement, although the State argued that its passage could constitute resolution of the litigation. (Exc. 192).
Because of the impasse and because the State was proceeding to make even further conveyances of Trust property in defiance of the express directions of the Trust Commission, the Superior Court entered a preliminary injunction against any further transactions on Trust Land without approval by the court. (Exc.199).
The second settlement, enacted as Chapter 66 SLA 1991 (Chapter 66), was negotiated at the end of the 1991 legislative session and presented to the court in the April 6, 1992 Settlement Agreement. (Exc.207-270). The Chapter 66 Settlement provided for full reconstitution of the Trust without application of any set-off. In order to accomplish this, the Trust was to retain much of its original holdings, (§ 54, Ch. 66 SLA 1991), and for Trust Land not returned to the reconstituted trust, the Trust would receive land of equal value and as comparable as practicable. (§ 55 Ch. 66 SLA 1991). Plaintiffs were allowed to nominate any land owned by the State as replacement land, (Exc.229), with disputes to be resolved by this court under original jurisdiction, possibly acting through a special master. (§ 55(h) Ch. 66 SLA 1991, § 57(c) Ch. 66 SLA 1991). The Trust was to be managed by a Mental Health Trust Authority with full management authority and which was obligated to manage the trust solely in the interest of the Trust's beneficiaries. (§ 10, Ch. 66 SLA 1991). The Chapter 66 Settlement resulted in a 100% plaintiffs' recovery (no set off was applied) and proper Trust management.
Counsel for the original plaintiffs (Walker), the Mental Health Intervenors (Gottstein) and the MR/MD Intervenors (Jessee) participated in the negotiation of Chapter 66 and signed the April 6, 1992, Settlement Agreement. (Exc. 269). The Chapter 66 Settlement Agreement was also signed by the Governor, the Attorney General and the Commissioner of DNR. [ The HB 201 Settlement Agreement, on the other hand, was signed by an Assistant Attorney General on behalf of the State.] (Exc.269). Counsel for the CAWP Intervenors (Volland) failed to participate in either. (Exc. 326).
Opposition to the Chapter 66 Settlement arose on three main fronts. First, development interests objected to the prospect of so much desirable land being managed in a way that would require users or purchasers to pay fair market value for the land. (Exc. 542). Second, environmental interests objected to that much land, including land granted to the Trust under the Enabling Act, being managed solely on behalf of the Trust. (R. 168). The third opposition front arose among some beneficiaries who objected to a settlement that did not guarantee adequate mental health program funding. (Exc. 541). This opposition to the Chapter 66 Settlement manifested in legal and political challenges. (Exc. 283; 369; 371).
After participating in briefing and other activities in favor of the Chapter 66 Settlement, including forcing certain changes to weaken the arguments in favor of the Chapter 66 Settlement, (Exc.530), and in the middle of the evidentiary hearing on preliminary approval of the Chapter 66 Settlement, counsel for the MR/MD Intervenors (Jessee) switched sides and actively supported the legal and political defeat of the Chapter 66 Settlement. (R. 2640). [ In justifying this switch, Jessee charged in pleadings and an affidavit that Counsel for the Mental Health Intervenors had made a secret agreement with the coal interests (R.2879-2883), but this was immediately demonstrated to be palpably untrue. (R.13054-13171) .] Counsel for Appellants advised counsel for the CAWP and MR/MD Intervenors that it was a mistake and disadvantageous to the class for them to work to defeat a settlement under which the class was to receive land of tremendous value sought by settlement opponents without a settlement they deemed better already in hand (i.e. losing much of the class's negotiation leverage). (Exc.542; Exc. 553). They failed to heed this advice. (Exc. 542).
Ultimately, the Superior Court denied preliminary approval of the Chapter 66 Settlement because (a) for the relatively short time it would take to implement the settlement, the existence of certain very important conditions subsequent allowed either party to terminate the settlement and return the parties to their original position, and (b) the court's ruling (then on appeal) that the Hypothecated Lands List had not been validly promulgated, created concerns for enforceability. (Exc. 391). At the same time, the court recognized these problems were rather easily corrected and invited the parties to resubmit the Chapter 66 Settlement after doing so. (Exc. 392).
However, following the court's decision, a new Commissioner of Natural Resources and Attorney General were appointed. The State repudiated the Chapter 66 Settlement, (Tr. XIV-334), and tried to negotiate a settlement more favorable to the State that would also appease the development and environmental interests. (Exc. 393; Exc. 519).
After joining in the demise of the Chapter 66 Settlement, the CAWP and MR/MD Intervenors then entered into the negotiations that resulted in the HB 201 Settlement. (R. 19539). Appellants were fully involved in the sense that they kept providing input. However, it became clear that the CAWP and MR/MD Intervenors were willing to agree to a settlement on far less favorable terms to the beneficiaries than Appellants. As a result, the State pursued a settlement with the CAWP and MR/MD Intervenors. (Exc.561).
In order to obtain the agreement with the development and environmental interests, it became the negotiating convention to allow any party to the negotiations to prevent any particular parcel or category of parcels from going into the HB 201 Trust. (Exc. 953-4; 520-1;. 575; Tr.XXIV-338). The most visible single example of this is that most of the Trust's original coal lands, (the Usibelli Coal Mine and the Beluga Coal Fields), which were included in all previously discussed Trust reconstitutions, were taken out of the HB 201 Trust because the coal lessees now objected to their inclusion. (Exc. 925). In a similar fashion, any lands to which the Environmental Intervenors maintained an objection were not included. (Tr. XXI-844).
3. . . . The principal concern of the public interest intervenors in these negotiations was to protect the public interest in state lands for environmental and recreational purposes. . . . I communicated about these proposals with my eight client groups, who in turn had to consult members, state and federal agencies, and other contacts with local knowledge about the various parcels proposed for conveyance to the trust.
* * *
6. In the end, this effort was completely successful . . . it [the HB 201 Settlement Trust] does not include any parcels where there was substantial public opposition.
* * *
8. I believe that through the combination of DNR's public notice and comment process, the public interest intervenors' participation in the negotiations, and the legislative process, thousands of Alaskans had their voices heard and their concerns answered with respect to the public lands in this settlement. I attended nearly all of the legislative hearings on this settlement, and I do not recall any members of the public testifying in opposition to the inclusion of any particular parcels of land after negotiation of the final list.
(Exc. 520-22).
Finding out that with the change in Attorney General and Commissioner of Natural Resources, the State was then not going to agree to anywhere near a full value reconstitution of the Trust, the CAWP and MR/MD Intervenors initially focused on three things. First was a substantial cash deposit into the Trust to be used for "special" or "discretionary" funding. Second was a commitment by the State to a minimum level of funding for the Mental Health Program. The third was the power of the Mental Health Trust Authority to spend the Trust's income absolutely free from any legislative (or executive branch) control at all. This latter point was referred to as the "Endowment Concept." (Exc. 556, 557).
The entire approach was grounded upon the concept that the relatively small amount of income that an inferior, reconstituted HB 201 settlement Trust could earn would be acceptable because the State would commit to funding an adequate mental health program. The small amount of HB 201 settlement Trust income could then be used for "discretionary" or "special" programs that would not normally be funded by the State's mental health program. (Exc. 550-51; 394). Appellants considered this approach, but were concerned about (a) the enforceability of any funding commitment, (b) the constitutionality of the Endowment Concept, and (c) the fact that Trust funding of "discretionary" and "special" programs would be a violation of the Enabling Act to the extent that the Trust was not being used "first for the necessary expenses of the mental health program." (Exc. 553; 557-558).
Appellants' concerns were borne out. The settlement does not provide a commitment to fund the mental health program at any particular level, the Endowment Concept's constitutionality is gravely doubtful, (Exc. 682; R. 23753), and the problem of ensuring that the benefits from the HB 201 Settlement Trust accrue to the beneficiaries specified by Congress remains. (R.23760).
As part of the negotiation process, the Attorney General's Office authored legislation which purports to unilaterally end the litigation and dissolve the Trust unless the beneficiaries of the Trust agreed to the State's terms (Directed Results Provisions). [ These provisions are referred to as the "Directed Results Provisions" because they purport to direct the courts how to decide the case.] HB 201 actually is two alternative pieces of legislation. One alternative takes effect if the HB 201 Settlement is approved and sustained on appeal (the "incentive provisions") and the other takes effect if it doesn't (the "Directed Results Provisions"). This is attempted through a complicated set of conditional repealers and revivers. [ § 37, Ch. 5 First Special Session Laws of Alaska (FSSLA) 1994 , § 38, Ch. 5 FSSLA 1994 , § 39, Ch. 5 FSSLA 1994 , § 48, Ch. 5 FSSLA 1994 , § 49, Ch. 5 FSSLA 1994 , § 2, Ch. 1 Second Special Session Laws of Alaska (SSSLA) 1994 , § 3, Ch. 1 SSSLA 1994 , § 8, Ch. 1 SSSLA 1994 , § 9, Ch. 1 SSSLA 1994 , § 10, Ch. 1 SSSLA 1994 , § 11, Ch. 1 SSSLA 1994 , § 12, Ch. 1 SSSLA 1994 , § 13, Ch. 1 SSSLA 1994 , § 14, Ch. 1 SSSLA 1994 , § 15, Ch. 1 SSSLA 1994 .]
The above stated goals of HB 201 are then accomplished through the following means. Section 41(a)(1) [ § 40(a)(1), Ch. 5 FSSLA 1994 , as amended by § 4, Ch. 1 SSSLA 1994 . These are the same lands that no one objected to going into the Trust.] "confirms and ratifies" the "conversion" of Mental Health Trust Land to general grant land in 1978 that this court ruled invalid in Weiss, supra, except for the land placed into the Trust listed under §40(a)(1). The terms of the bill also purport to now convert the Trust land to general grant land in case the ratification of the 1978 conversion fails. [ § 41(a)(2), Ch. 5 FSSLA 1994 .] Section 42 [ § 42, Ch. 5 FSSLA 1994 .] purports to legislate that the amount of the set-off mentioned in Weiss amounts to $1.3 Billion. Section 40(c) provides that if the $1.3 Billion is not enough to eliminate the State's liability for taking the Trust's corpus, the other land put into the Trust under the HB 201 Settlement and "the other compensation made by this Act" and all future appropriations for the mental health program will be used. [ § 40(c), Ch. 5 FSSLA 1994 .] Section 44(a) [ § 44(a) Ch. 5 FSSLA 1994 . ] provides that if there is additional liability for taking the Trust's corpus, $100 million per year is to be deposited into the Mental Health Trust Income and Proceeds Account established by the Directed Results Provisions of HB 201 to pay for this liability, [ § 10, Ch. 5 FSSLA 1994 .] and then immediately withdrawn from the trust account; the deposit alone accomplishing payment for that part of the State's liability. [ § 44(b), Ch. 5 FSSLA 1994 .]
With respect to the revenue that the land placed in the HB 201 Settlement Trust might generate (corpus as well as income), [ See § 10, Ch. 5 FSSLA 1994 .] Section 11 provides that it is all to be spent every year (including corpus): first on the mental health program [ § 11(a), Ch. 5 FSSLA 1994 .] and then anything not spent on the mental health program automatically taken out of the Trust and transferred to the General Fund. [ § 11(b), Ch. 5 FSSLA 1994 .] Section 44 (a) provides that if there is any liability after all of the previously described legislated set-off amounts, the State will transfer up to $100 million per year into the Mental Health Trust Income and Proceeds Account to satisfy this liability and then immediately turn around and appropriate all of it in the same year; first to what it is already spending on the mental health program [ § 44(a), Ch. 5 FSSLA 1994 .] and then to the General Fund. [ § 44(b), Ch. 5 FSSLA 1994 .]
The findings and purposes of HB 201 explicitly state that the Directed Results Provisions are being passed to validate the State's past breaches of Trust and to threaten to cut mental health funding [ "(13) because of the criticism and hostility directed against the . . . trust's beneficiaries, failure [to pass the Directed Results Provisions] . . . will make it increasingly difficult for the beneficiaries . . . to obtain appropriations . . . to fund the mental health program." § 1(a)(13), Ch. 5 FSSLA 1994.] if the beneficiaries do not agree to the terms of the alternative Settlement Provisions (also called the "incentive provisions"). [ §§ 1(8)-(14) and 2 (b)(1)-(5), Ch. 5 FSSLA 1994 .] The minutes of the April 30, 1994, House Finance Committee reflect the Attorney General's Office's advice on this topic:
Representative Brown asked why the Trust is only preserved in perpetuity if the incentive provisions take effect. Mr. Koester explained that the state does not see any reason to include the incentive package if there is no early dismissal.
(Exc. 409).
In mid-April, the CAWP and MR/MD Intervenors became concerned that Appellants would be successful in preventing passage of their agreement and met with counsel for Appellants seeking to come to an arrangement that would prevent such opposition. (Exc. 584) On April 15, 1994, all four counsel for the beneficiaries agreed on a number of "bottom lines" for continued negotiation. (Exc. 584). This was reflected in a letter dated April 19, 1994. (Exc. 401-408). This agreement provided that the CAWP and MR/MD Intervenors would not agree to a settlement that did not meet the conditions of the April 19th letter. (Exc. 404).
The consideration given by Appellants for this agreement was that counsel for Appellants agreed they would not attempt to defeat passage of the legislation. (Exc. 585). Except for the inclusion of the Ft. Knox property (because the lessee of Ft. Knox agreed to it), none of counsel for the CAWP and MR/MD Intervenors' agreements of April 15, 1994 were kept by them. (Exc. 586). However, by that time, passage of the legislation became assured, (Exc. 586), and legislation was passed on May 16, 1994. [ (Exc. 410-434) is a copy of HB 201 as it existed on April 27, 1994, with Appellants' marginal notations. There are a few of the provisions that were subsequently changed, but Appellants respectfully suggest that a review of this "Annotated HB 201" will be helpful in understanding the Appellants' analysis of the intricacies of this complicated legislation.]
There then ensued a flurry of negotiations over a settlement agreement which was due on June 10th. (R.19256-19260). Appellants, at Counsel for CAWP Intervenors' request, (Exc. 442), submitted comments and suggestions as to the form of the settlement agreement, including what changes it would take for Appellants to withdraw their objections to the HB 201 Settlement. (Exc. 442-454; Exc. 457-469; Exc. 471-474; Exc. 479-480). [ The date on the first page of the Exhibit is incorrect. The date on the following pages reflects the correct date of June 9, 1994.] The HB 201 Settlement Agreement was signed on June 10, 1994 without the bulk of the suggestions being implemented. (Exc. 485-501). [ This version of the HB 201 Settlement Agreement has been annotated with Appellants' comments on the form of settlement agreement and, as with the Annotated HB 201, Appellants believe it will aid the court. As a result of Appellants' efforts, a few of the identified problems were addressed in the Second Special Session.]
The HB 201 Settlement contains the following features. The Trust is to be conveyed by quitclaim deed approximately 550,000 acres of fee simple land, 341,000 acres of subsurface only estate and 104,000 acres of hydrocarbon interest only land. (Exc.855). No land to which an objection was maintained by any person or special interest groups was included. The land is to be managed under the rules applicable to general state land except to the extent that the Enabling Act "imposes" different management. [ § 17, Ch. 5 FSSLA 1994 .] DNR is to manage the land through a special unit reporting to the Commissioner of Natural Resources. [ § 22, Ch. 5 FSSLA 1994 .] Costs for this management are to be borne by the Trust. [ § 16, Ch. 5 FSSLA 1994.] DNR is to manage the land pursuant to a mandated contract with the Mental Health Trust Authority. [ § 9(a)(4), Ch. 5 FSSLA 1994 , (Exc. 513).]
Under the HB 201 Settlement, the Trust receives a $200 million cash deposit to corpus. [ § 1(a), Ch. 6 FSSLA 1994 , as amended by § 1(a), Ch. 2 SSSLA 1994 .] The cash corpus is to be managed by the Alaska Permanent Fund Corporation under a mandated contract with the Trust Authority. [ § 9(a)(5), Ch. 5 FSSLA 1994 .] Under the HB 201 Settlement Agreement (but not the legislation) , [ Instead under § 16, Ch. 5 FSSLA 1994. it provides that the Trust's income "shall be administered" by the Trust Authority."] the Trust Authority is given the right to spend the income generated by the Trust free of any legislative power of appropriation. (Exc. 496). The Legislature refused to pass a letter of intent in the Second Special Session that would have made clear that it agreed and intended to support and follow the HB 201 Settlement Agreement in this regard. (Exc.741-A, Exc. 864). [ The Superior Court's decision here incorrectly recites Appellants submitted the Letter of Intent. Actually it was Representative Brown. (Tr.XXI-854).] The constitutionality of this provision is in grave doubt. (Exc.682).
HB 201 changes the requirement in Chapter 66, that in discharging its duties the Trust Authority must act solely in the best interests of the beneficiaries, to a fiduciary obligation to ensure that the assets of the Trust are managed consistent with the requirements of the Enabling Act, [ § 8(b)(1), Ch. 5 FSSLA 1994 and § 9(a)(1), Ch. 5 FSSLA 1994 .] but at the same time takes away its power to do so, most importantly, by giving land management authority [ § 9(a)(4)(A), Ch. 5 FSSLA 1994 , § 17(b), Ch. 5 FSSLA 1994 .] including promulgation of regulations to DNR and requiring that general state land management policies apply if possible. [ § 17(c), Ch. 5 FSSLA 1994.] Counsel for the State has stated that he doesn't know who the Trustee is under the HB 201 Settlement. (Exc. 606).
The Trust Authority is to consider budget recommendations by four beneficiary groups [ § AS 47.30.036(3), as enacted by § 26, Ch. 66 SLA 1991 and amended by §26 Ch. 5 FSSLA 1994, and further amended by § 110, Ch. 21 SLA 1995 .] and make recommendations to the governor and the public [ The 1995 amendment deleted the requirement that the report also be made to the Legislature. § 110, Ch. 21 SLA 1995 .] regarding spending on the mental health program, including general fund spending. [ § 27, Ch. 5 FSSLA 1994 .] HB 201 then requires the governor to submit to the legislature a separate appropriations bill for the mental health program. [ § 4, Ch. 5 FSSLA 1994 .] The legislature is required to pass appropriations in a separate appropriations bill. [ § 7, Ch. 5 FSSLA 1994 .] If the bill submitted by the governor or passed by the legislature differs from the Trust Authority's recommendations for appropriations from the General Fund, a report must accompany the bill explaining the reasons for the difference. [ § 5, Ch. 5 FSSLA 1994 , § 7, Ch. 5 FSSLA 1994 .]
The State has specifically reserved the right to unilaterally change any or all of these provisions. (Exc. 485; Tr. XVI-565). The remedy for such a unilateral change, if there is one at all, is a muddle. [ Appendix B hereto is a compilation of provisions relating to enforceability of the HB 201 Settlement Agreement. Since the court concluded that the HB 201 Settlement Agreement was modified by the oral and written representations of counsel for the State and because apparently the Superior Court's decisions are intended to at least in part be incorporated into the settlement, only through such a compilation can the provisions related to enforceability be reviewed.]
As initially enacted on May 16, 1994, HB 201 provided that if the HB 201 Settlement was not finally approved by December 15, 1994, including all potential appeals being concluded, the settlement aspects of the legislation were automatically repealed and the Directed Results Provisions would take effect. [ § 37, Ch. 5 FSSLA 1994 . The Governor was given the right to extend this deadline for up to 45 days. § 47, Ch. 5 FSSLA 1994 . This extension was later repealed by § 13, Ch. 1 SSSLA 1994 when HB 201 was amended to make the Directed Results Provisions go into effect if the Superior Court's approval was not granted by December 15, 1994, or is reversed on appeal. ] Over Appellants' objections, [ See , Section II.L., below.] the Superior Court set an accelerated schedule so that it could approve the proposed settlement within the legislatively mandated time period. (Exc. 437).
For a proposed class action settlement to be properly approved it must be fair, reasonable and adequate. In order to be fair reasonable and adequate, the proposed settlement must compare favorably with the prospects of litigation. A proposed class action settlement must also be legal and the result of adequate legal representation, as that term is specifically defined in class action litigation. The HB 201 Settlement falls far short of being fair, reasonable and adequate, it is illegal in at least two respects and it is the result of inadequate representation. The HB 201 Settlement is a bad deal (for the beneficiaries), is based on a flawed premise (that a set-off allows a dollar for dollar diminution of the Trust for mental health expenditures by the State) and, if approved, will result in a judgment that will not bind absent class members.
There is no question but that the HB 201 Settlement Trust compares unfavorably with the original Trust. It is conceded that no land which any interest group maintained an objection to being in the Trust was included in the HB 201 Settlement. With rare exceptions, the HB 201 Settlement lands are more remote and will take much longer to produce income than the Trust's original holdings. The $200 million cash payment does not come close to making up the difference. The HB 201 Settlement is legally unenforceable, and amazingly, the State has specifically reserved the right to unilaterally change the terms of the settlement. The rule of undivided loyalty to the Trust is violated and management of the Trust has been explicitly made subject to political pressure.
The Superior Court found the HB 201 Settlement fair, reasonable and adequate only by concluding that the set-off mentioned in Weiss, supra, 706 P.2d at 684, could completely offset the loss to the Trust resulting from the State's breaches and mismanagement of the Trust. However, in concluding the setoff substantially risks the loss of $1.3 Billion worth of Trust corpus, the Superior Court failed to consider that even if the setoff applied as postulated, it could only begin to diminish the corpus if it exceeded the damages, (i.e., lost income) resulting from the 30 plus years of admitted mismanagement of Trust lands.
In its decision, the court failed to adequately explain its findings of facts and conclusions of law. Finally, in acceding to the State's demand for an unreasonably truncated consideration process, the Superior Court not only deprived Appellants of their due process rights to an adequate time to prepare and an adequate time for the court to consider the complex issues involved, but abdicated its fiduciary role as class guardian. Primary among the issues left behind and unconsidered by the accelerated schedule imposed by the legislature was the Plaintiffs' $2.75+ Billion claim against the State for lost income resulting from the State's mismanagement.
After the Superior Court's 1983 Summary Judgment Decision, original class counsel agreed to a set-off for State expenditures on the mental health program against the amount the State would owe for removing all the land from the Trust. (Exc. 37). In appellate argument before this court, counsel's position was that although under trust law a set-off was not required, he had agreed to one because he thought it was fair. (Tr. II-33). Agreeing to such a set-off was inadequate representation. [ As a former legislator who voted for the 1978 legislation ruled invalid by this Court in Weiss (Exc. 23), and who ran for Governor of Alaska following the stipulation, there is a question as to whether he was actively representing the interests of the class. ]
Adequate representation is the constitutional underpinning required to bind absent class members in class action judgments. Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22 (1940); In re: General Motors Corporation Engine Interchange Litigation, 594 F.2d 1106, 1121 (7th Cir. 1979). In Ferguson v. Alaska, 816 P.2d. 134, 138 (Alaska 1991), this court, in finding a class member was not bound by an approved class action settlement agreement, stated:
'It is well settled that the constitutional requirements of due process and full faith and credit mandate that absent class members are not bound by a judgment in a class action unless the class representative provided adequate and fair representation.' [citation omitted].
* * *
The question of adequate representation can best be resolved by determining whether the interests of those who would attack the judgment were vigorously pursued and protected in the class action by qualified counsel. [citation omitted].
See also, Gonzalez v. Cassidy, 474 F.2d 67, 75 (5th Cir. 1973). The stipulation respecting the set-off was inadequate representation in the class action context as a matter of law.
The stipulation to the set-off was also unauthorized. Any compromise of the class's claims is subject to notice and court approval under Civil Rule 23 (e). This failure to obtain approval of a waiver or relinquishment of a major claim of the class in and of itself voids the operation of the set-off.
Despite this court's holding in Weiss that the set-off envisioned by the parties violated the trustee's duty to preserve the corpus, (Weiss, supra, 706 P.2d at 683), the State continues to stand on its agreement with original counsel and maintains that every dollar spent on the mental health program "purchased" a dollar's worth of Mental Health Trust Land -- that every dollar spent on the mental health program reduces the corpus of the Trust by a dollar. They claim the set-off amounts to agreeing to a diminution of the Trust's value by $1.3 Billion, which diminution has been sanctioned by this court, and grows every day.
Appellants maintain that this court in Weiss rejected this view of the set-off [ During another part of the oral argument Justice Compton expressed concern over prior counsel's view that the State could dissipate the corpus by appropriating general fund money in support of the mental health program. (Tr.II-26-28). This court was exercising its fiduciary duty to the class when it refused to accept that the State could dissipate the corpus of the Trust in this way.] as a violation of the trustee's duty to preserve the corpus, [ Weiss , supra , 706 P.2d at 683.] leaving for later determination to what extent the set-off might apply, if at all, to lands that were conveyed to Third parties. Weiss, supra, 706 P.2d 684, n.4. [ See Section II.C.(2) below.]
In Weiss, neither this court, nor the Superior Court below, were presented with, nor did they consider, the class's damages due to the failure to make the Trust's holdings productive (mismanagement damages claims). Before any set-off can be applied to reduce the corpus of the Trust, even if it is allowed, it must first be applied against the income that the Trust would have earned had the Trust been managed properly. [ Because of the unauthorized stipulation, neither have the Superior Court nor this court ever had occasion to consider the sound reasons for disallowing a set off against corpus in any event.]
The Superior Court's conclusion that the set-off allows the State to reduce the value of the Trust's corpus by its expenditures without consideration of the mismanagement damages claim was erroneous. Because this conclusion permeates the Superior court's judgment, affirmance of the HB 201 Settlement approval will not be binding on the class. To avoid this result, this court should reverse approval of the HB 201 Settlement. See e.g., In Re: GM Engine Interchange, supra, 594 F.2d at 1121.
In reviewing constitutional questions and questions of law this court exercises its independent judgment. In the Matter of Mendel, 897 P.2d 68, at 72, n.7 (Alaska 1995). In reviewing questions of statutory construction this court exercises its independent judgment. Huf v. Arctic Alaska Drilling Company, Inc., 890 P.2d 579, n.1 (Alaska 1995). In reviewing questions as to whether the trial court weighed appropriate factors, this court exercises its independent judgment. Mendel, supra, 897 P.2d at 72, n.7. In reviewing interpretation of terms of a contract (here, the HB 201 Settlement Agreement), this court exercises its independent judgment. Jackson v. Barbero, 776 P.2d 786, 788 (Alaska 1989). In reviewing the interpretation of a contract against a given factual background this court conducts a de novo review without deference to the trial court. Donnybrook Bldg. Supply v. Interior City, 798 P.2d 1263, 1267 (Alaska 1990). In reviewing the application of legal effect to facts, this court conducts a de novo examination. DNR v. Arctic Slope Regional Corporation, 834 P.2d 134, n.8 (Alaska 1992). In reviewing trial court factual determinations this court examines whether the finding is clearly erroneous, Donnybrook, supra, 798 P.2d at 1267, but in doing so will reverse the trial court if the reviewing court has "a definite and firm conviction that a mistake has been made." Id., at 1266. In addition, factual determinations will be reversed or remanded unless supported by sufficiently detailed and explicit explanation of their bases to give an appellate court a clear understanding of the ground on which the trial court reached its decision." Nass v. Seaton, 904 P.2d 412, 418, n.13 (Alaska 1995).
Appellants have not found any case(s) in which this court has discussed the standard of review specifically for approval of a class action settlement. As applied in other jurisdictions, in reviewing approval of a class action settlement, the reviewing court determines if the court abused its discretion. GM Pick-Up Fuel Tank Products Liability Litigation, 55 F.3d 768, at 782 (3rd Cir. 1995). Under GM Pick-Up Fuel Tank, in exercising the court's discretion, the trial court must show it has explored comprehensively all relevant factors. Id., at 805; see also, GM Engine Interchange, supra, 594 F.2d at 1132, n.44 (trial court has a duty to assess, if not decide, the issues of law which weigh heavily in the settlement approval calculus and to consider the most probative evidence bearing on those issues).
The most important factor in determining whether a class action settlement is fair, reasonable and adequate involves a comparison between the prospects of the class litigating its rights and the proposed settlement. GM Engine Interchange, supra, 594 F.2d at n 44. A nine-part test is used in reviewing whether an approved class action settlement is fair, reasonable and adequate.
(1) the complexity and duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining a class action;
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement in light of the best recovery; and
(9) the range of reasonableness of the settlement in light of the attendant risks of litigation.
GM Pick-Up Fuel Tank, supra, 55 F.3d at 785.
Factors (3) the risks of establishing liability, (6) the risks of maintaining a class action, and (7) the ability of the defendants to withstand a greater judgment, without question, all weigh in favor of requiring a more favorable settlement as opposed to accepting one that is not so favorable to the class. The other factors will be discussed below.
In addition to the general standard of review applicable to review of class action settlement approval, the following applies to this particular subsection. In reviewing questions regarding the exclusion of evidence this court determines if the trial court abused its discretion. Agostinho v. Fairbanks Clinic Partnership, 821 P.2d 714, 716, n.2 (Alaska 1991). An abuse of discretion will be found where the trial court failed to consider appropriate factors, such as the danger of undue prejudice. Lewis v. Lewis, 469 P.2d 689, 696 (Alaska 1970). Discretion may only be exercised within the permissible range of discretion. Hughes v. Bobich, 875 P.2d 749, 752 (Alaska 1994). An abuse of discretion will be found where the trial court failed to follow appropriate procedures. Agostinho, supra, 821 P2d at 77. It is an abuse of discretion to exclude evidence if there was a mitigating measure that could have been taken. Lewis, supra, 469 P.2d at 696. [ Lewis also states it is an abuse of discretion to exclude evidence if the reason is clearly untenable or unreasonable.]
It is undisputed that the State mismanaged the Trust from its inception through the Superior Court's final approval of the HB 201 Settlement. "DNR has generally managed the lands as if there was no mental health lands trust and as if DNR had no fiduciary obligations to the beneficiaries of the trust." (Exc. 705). The State has admitted this. (Tr. XVIII-151). Restatement (Third) of Trusts, [ In 1992, the ALI issued the Restatement of Trusts, 3d., "Prudent Investor Rule" to specifically address the prudent investor rule and changed the formulation of certain of the sections in the Restatement of Trusts, 2d. Section 205 was one of the sections that was changed.] § 205 provides in pertinent part:
A trustee who commits a breach of trust is:
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(b) chargeable with the amount required to restore the values of the trust estate and trust distributions to what they would have been if the trust had been properly administered.
In addition, the trustee is subject to such liability as necessary to prevent the trustee from benefiting personally from the breach of trust.
The Superior Court's reaction to appellants mismanagement damages claim was:
Weiss and [Nanuwak] maintain that the plaintiff's claim for lost opportunity damages due to the State's mismanagement of the trust would more than nullify the setoff for state expenditures. There has been no discovery done on this issue. There has been no attempt to litigate the issue. This claim has largely been relegated to an occasional whisper from the back of the courtroom; this claim has never played a central role in anyone's analysis of the case until the hearing on final approval.
(Exc. 912-913 emphasis added).
In evaluating a proposed class action settlement, the case must be sufficiently developed through discovery and legal analysis to allow the court an informed judgment as to how the proposed settlement compares to the prospects of litigation. Williams v.Vukovitch, 720 F.2d 909 (6th Cir. 1983); Saylor v. Lindsey, 456 F.2d 896, (2nd Cir. 1972); GM Pick-Up Fuel Tank, supra, 55 F.3d at 806, 814 (lack of appropriate discovery is a "red flag;" trial court "erred by not assuring that adequate discovery had been taken"). To the extent that the Superior Court properly concluded it didn't have the information necessary to evaluate the mismanagement damages claims, it had no discretion to approve the HB 201 Settlement. Id.
One of the reasons that the Superior Court did not have certain information on mismanagement damages is because it excluded it. The Superior Court refused to accept testimony from Dr. Rogers regarding the impact of the State's management of the Trust on its production of income with respect to surface values because it was arguably not set forth with sufficient particularity in Appellants' witness list. (Tr. XXI-724). [ "You asked for an opinion as to lost income opportunity costs. I sustained [an objection to] that. That will not come in."] Moreover, there was no surprise in connection with the management issue because Appellants had raised mismanagement damages in its pleadings. (R.23722-23780). It was an abuse of discretion to exclude this evidence, particularly in light of the court's fiduciary duty to the class to determine whether the settlement was fair, reasonable and adequate.
This is particularly so, since the impact of the State's mismanagement on the class's claims was critical to an evaluation of the HB 201 Settlement. Indeed, the impact of the exclusion was the litigation-ending sanction of approving a settlement based on the Superior Court's mechanistic determination that there was no evidence on mismanagement damages because it had been excluded. [ As will be discussed below there was other unrebutted evidence of mismanagement damages that the Superior Court failed to address.]
Appellants submit that in excluding the evidence, the Superior court failed to consider the importance of the testimony, the prejudice to the Appellants and the class -- for whom the court is a fiduciary -- in excluding it, the lack of prejudice to the State, or the court's ability to fashion an appropriate remedy, such as rebuttal testimony. Aghostinho, supra, 821 P.2d at 717; Lewis, supra, 469 P.2d 696; Hughes, supra, 875 P.2d at 752.
Dr. Rogers' expertise and ability with respect to the economic value of land is unparalleled. [ Dr. Rogers' received his Bachelor of Art degree in Economics in 1942 from the University of California at Berkeley , his Master's in Economics from the University of California at Berkeley , an M.P.A., from Harvard University in Economics and Public Administration in 1948, and his Ph.D., from Harvard in 1950 in Political Economy. (Tr. XX- 597-9). ] During Dr. Rogers' career he was Territorial Economist for Governor Gruening, (Tr. XX-612), the highest ranking United States Department of the Interior Official in Alaska as Chair of the Alaska Field Commission, (Tr. XX-616), in charge of planning and coordination for the United States Department of Interior United States Geological Survey (USGS) (Tr. XX-617), the first Chairman of the Alaska Permanent Fund Corporation, (Tr. XX-621), appointed as a Special Master by this court for election re-apportionment, (Tr. XX-622), personally knew the people selecting Mental Health Trust Lands and discussed it at the time they were making the selections, (Tr. XX-625-6), became intimately familiar with the entire Mental Health Trust Land Grant as a result of his work as the Chairman of the Interim Mental Health Trust Commission, (Tr. XX-628), and had worked in the field of valuing undiscovered minerals since 1961. (Tr. XXI-677).
After the Superior Court ruled that Dr. Rogers could not refer to a map when describing the location of Mental Health Trust Lands, (Tr. XXI-679), Dr. Rogers testified from memory as to the location and surface development pattern of virtually the entire Mental Health Trust Land Grant. (Tr. XXI-681-684; 687-697).
In his Offer of Proof, Dr. Rogers took his personal knowledge of the location of Mental Health Trust Lands and the development patterns of Mental Health Trust Lands and surrounding lands, [ The Superior Court sustained an objection to Dr. Rogers' use of an air photo of Parcel No. SM-1481 to demonstrate one of the patterns where all the non park lands around Mental Health Trust Lands had been developed. (Tr. XXX-728-731, Exc. 96-A). This was error.] and estimated the rate at which they would have been developed if properly managed and the amount of money they would have earned. (Exc. 823-830). Dr. Rogers used what he considered a mid-range estimate of the amount of land that would have been developed, (Exc. 826), and a conservative estimate of the per acre value, (Exc. 827), to arrive at his estimate of these mismanagement damages with respect to surface use alone of $739 million. (Exc. 830).
The $739 million estimate for mismanagement damages for surface uses does not include any income from the Trust's mineral, gravel and timber portfolio, (Exc. 829), all of which were among the best in the State. Dr. Rogers' Offer of Proof also does not include the additional value that would have accrued to the Trust as the result of development. (Exc. 828). As is discussed below, [ See Section II.F.(i), infra.] there was also an estimate of the mismanagement damages associated with the failure to manage the Trust's very valuable mineral holdings. [ As is developed below, these mineral lands were not developed because mining companies do not spend the kind of money it takes to bring a mine into production where there is any question about their right to mine the deposits and the failure of the State to implement trust management made such right very questionable. ] The conservative estimate of the amount the Trust's mineral holdings should have earned is $2.08 Billion. [ See , n.101, infra.] The Superior Court ignored this evidence in evaluating the mismanagement damages claims and in reaching its decision not to give the class's mismanagement claims any weight when evaluating the proposed settlement. [ Appellants submit that the Superior Court's failure to do so, nor even mention Dr. Rogers' testimony indicates that the Superior Court did not make a fair and impartial determination.] (Exc. 912-913).
The failure to comprehensively evaluate the class's damages claims for mismanagement damages mandates reversal of the Superior Court's approval of the HB 201 Settlement. GM Pick-Up Fuel Tank, supra, 55 F.3d at 805. (Failure to "show it has explored comprehensively all relevant factors"). The Superior Court was under an obligation to quantify the class's damage claims for mismanagement, because without doing so it could not properly assess the prospects of litigation. GM Engine Interchange, supra, 594 F.2d at 1132, n.44. ("The trial court should have made a more precise estimate of probable compensatory damages").
The Superior Court's finding that mismanagement damages will be difficult to prove and won't be sufficient to eliminate the setoff is also clearly erroneous. [ Factor 5 in GM Pick-Up Fuel Tank , supra , 55 F.2d at 785.] (Exc. 912-913). The strong likelihood is, as asserted by Appellants, that the Trust's earning capacity exceeded the amount spent on the mental health program and thus consideration of lost earnings would not only eliminate any arguably appropriate set-off, but it would also result in a substantial money judgment against the State. Appellants have demonstrated that these damages are at least $2.75 Billion. There is no contrary evidence. That the class is due some damages for mismanagement can not be questioned.
The only cases considered by the Superior Court in its final approval decision regarding what land might be recovered by the Trust were Weiss and University of Alaska, 624 P.2d 807 (Alaska 1981). (Exc.906-911). The Superior Court's conclusions regarding the beneficiaries' claims are contrary to both that authority and the authority it failed to address.
Mental Health Trust Lands are to be treated the same as the various School Trust Lands. Weiss, supra, 706 P.2d at 683, n.3. Management of the Trust is subject to basic private trust law principles. Id. Basic private trust law principles hold that third parties are entitled to retain trust land conveyed in breach of trust only if they are bona fide purchasers, i.e., purchasers for value without notice of the breach of trust. See e.g. Restatement (Second) of Trusts, §§ 286, 288, 289, 291 and 297 for some of the basic applicable principles regarding the quality of title held by third parties who have been granted interests in trust property in breach of trust.
In the federal school trust land cases it is uniformly held that no one can be a bona fide purchaser because everyone is under constructive notice. See, e.g., State v. Alaska Land Title Ass'n., 667 P.2d 714, 725 (Alaska 1983). In a series of cases from the State of Nebraska, thousands of leases for trust lands were invalidated and the land returned unencumbered to the Nebraska school land trust because they were issued in breach of trust. See, e.g., Propst v. Nebraska Bd. of Educational Lands, 55 N.W.2d 653 (Nebraska 1953); State v. Cooley, 56 N.W.2d 129 (Nebraska 1952); and State ex rel Ebke v. Board of Educational Lands and Funds, 47 N.W.2d 520 (Nebraska 1951). There the violation was that the leases were automatically offered for renewal to existing lessees based upon an appraisal. The courts found the lease renewal scheme a breach of trust because appraisals did not guarantee the highest return to the trust.
For the same reason, an Arizona mineral leasing scheme that provided for a fixed 5% royalty was ruled a breach of trust and leases issued thereunder invalidated in Kadish v. Arizona State Land Dept., 747 P.2d 1183 (Arizona 1987), aff'd in Asarco, Inc., v. Kadish, 490 U.S. 605, 104 L.Ed. 2d 696, 109 S.Ct. 2037 (1989). See also, Gladden Farms, Inc., v. State, 633 P.2d 325 (Arizona 1981) (purchase of school trust land by state without compliance with Enabling Act invalid); Arizona State Land Dept. v. Superior Court, 633 P.2d 330 (Arizona 1981) (purchase of school trust land by municipality without compliance with Enabling Act void); and City of Sierra Vista v. Babbitt, 633 P.2d 333 (Arizona 1981) ("sales" of school trust land to state or municipal agencies without public auction void).
The enactment of the Directed Results Provisions of HB 201, given such weight by the Superior Court, (Exc. 196), does not change the calculus. As set forth above, the various state supreme courts, including this one, and the United States Supreme Court, uniformly invalidate statutes that do not adhere to a state's obligation as trustee of undivided loyalty to the trusts' beneficiaries. [ Weiss , itself, of course, is just such a case. ] See also, County of Skamania v. State, 685 P.2d 576, 580-3 (Wash. 1984) ("when the state enacts laws governing trust assets, its actions will be tested by fiduciary principles"). [See also , Plateau Min. v. Utah Div. of State Lands , 802 P.2d 720, 729 (Utah 1990) (duty not to act in the interest of third parties at the expense of the beneficiaries).] The duty of loyalty commands that "the state as trustee may not use trust assets to pursue other state goals." Id. at 582; see also Restatement (Third) of Trusts, § 170. The State legislature cannot change the nature of the federal trust or the trustee's duties imposed under it. Kadish, supra, 747 P.2d at 1185.
The Superior Court recognized that these principles apply to the Mental Health Trust in earlier decisions:
It is true that Section 202(e) of the Alaska Mental Health Enabling Act gave the Alaska Legislature the power to sell, lease, mortgage, exchange, or otherwise dispose of the mental health lands. However, as the Supreme Court has clearly held in this case, it must do so in light of its fiduciary responsibilities to the trust. One of those responsibilities is to preserve the corpus of the trust. [citation omitted] It is similarly clear that it is the duty of the state in administering this trust to administer solely in the interest of the beneficiaries.
(Exc. 196; see also, Exc. 96). National Parks and Conservation Association v. Board of State Lands, 869 P.2d 909 (Utah 1993), is a recent case that reviews the case law on the applicability of the duty of undivided loyalty with respect to these trust land grants and concludes that such duty is inviolate. Because HB 201 was enacted by the State for reasons antithetical to the best interests of the beneficiaries it is an improper exercise of trustee power. Appellants submit that Weiss, supra, 706 P.2d at 681, itself stands for the proposition that legislation concerning the Mental Health Trust that is enacted for an improper purpose is invalid.
Moreover, the HB 201 Directed Results provisions are an impermissible encroachment on the judiciary's exclusive constitutional authority to resolve legal cases. The legislature cannot pass laws which direct a court to make specific factual findings or legal rulings. United States v. Klein, 80 U.S. 128, 145-7 (1871); Seattle Audubon Soc. v. Robertson, 914 F.2d 1311, 1314-5 (9th Cir. 1990); [ Rev'd on other grounds, 503 U.S. 429, 112 S.Ct. 1407, 118 L.Ed.2d 73 (1992).] In re Washington Public Power Supply System Securities Litigation, 673 F.Supp 411, 415 (W.D.Wash. 1987).
Statutes drafted for an improper purpose or with an improper intent are invalid. This can be the case with statutes enacted to direct a judicial result in a specific action, as well as with legislative acts that are intentionally discriminatory, or seek to advance private rights under the guise of public interest. WPPSSS Litigation, supra, 673 F.Supp. at 416. ("Improper legislative motive has been held repeatedly by the United States Supreme Court to be a valid basis for finding a statute to be constitutionally infirm"); see also, Fleming v. City of Tacoma, 502 P.2d 327, 330 (Wash. 1972); [ Overruled in part on different grounds in Rayner v. City of Leavenworth , 821 P.2d 1204 (Wash. 1992) (noting legislative amendment of appearance of fairness doctrine).] Krahmer v. McClafferty, 288 A.2d 678, 682 (Del. 1972); Trujillo v. City of Los Angeles, 81 Cal.Rptr. 146, 149 (App. 1969); Teacher Bldg. Co. v. City of Las Vegas, 232 P.2d 119, 123 (Nev. 1951). HB 201, and particularly its Directed Results Provisions, was enacted for an improper purpose in hostility to the Trust beneficiaries and is invalid.
Appellants filed a motion to have HB 201 declared invalid prior to any approval of the HB 201 Settlement. (R. 19860-19861). The parties to the settlement opposed and the Superior Court stayed briefing and consideration until such time as the HB 201 Settlement might fail. (Exc. 483-484). This left the Damocles sword of the HB 201 Directed Results Provisions hanging over the settlement and encourages the Legislature to breach the HB 201 Settlement. It was an abuse of discretion for the Superior Court to stay this motion. The trial court has a duty to the class and this court to assess, if not decide, the issues of law which weigh heavily in the settlement approval calculus and to consider the most probative evidence bearing on those issues. GM Engine Interchange, supra ,594 F.2d 1132, n.44. Deciding this critical issue was essential to protecting the class and properly evaluating the fairness of the HB 201 Settlement.
This court should correct the error by declaring HB 201 invalid in its entirety. [ Additional analysis can be found at Appellants' Memorandum in Support of Motion for Declaratory Judgment with Respect to HB 201. (R. 19862) Included therein is an analysis of why specific provisions of HB 201 are invalid. Appellants hereby respectfully draw the court's attention to such analysis for additional detail.]
In concluding the HB 201 Settlement compared favorably with the prospects of litigation, the Superior Court concluded that the plaintiffs' risk of not being able to recover land subject to conveyances to third party purchasers was very high. (Exc. 909, 911). The Superior Court found that the value of third party purchaser land as estimated by the Appellants was $154.6 million. (Exc. 911). The Superior Court concluded that the bona fide purchaser rule would probably apply, but then held that these third parties would probably be considered bona fide purchasers because they did not have actual knowledge of trust and/or its breach. (Exc. 908). The cases on school trust lands uniformly hold that there are no bona fide purchasers in these circumstances. The Nebraska cases listed above, Ebke, Propst, and Cooley are illustrative. In invalidating all of the leases issued pursuant to a statute that was held to be in violation of Nebraska's fiduciary duty, the court in Propst said: "Anyone dealing with the school lands must do so with knowledge of and subject to the trust obligation of the state." Propst, supra, 55 N.W.2d at 657. See, e.g., Alaska Land Title Ass'n, supra, 667 P.2d at 725 (public land orders impart constructive notice, denying bfp status). There is a long-standing per se rule that conveyances of these federal trust lands in breach of trust are void, regardless of the actual state of knowledge of the conveyees. In Murphy v. State, 181 P.2d 336 (Arizona 1947), a mortgagee with no notice of the breach of trust who gave value for a mortgage on school land was held not to have a valid mortgage as against the trust.
In earlier proceedings, the Superior Court rejected the State's contention that land subject to land sale contracts had been "sold" within the meaning of Weiss, supra, holding:
The State's motion is overly simplistic. It asks the court adopt its definition of "sold" simply because it says that's what it is. The State ignores the fact that the Supreme Court did not at that time determine issues regarding b.f.p.'s and conveyancees. The court is certainly open to a realistic motion complete with authority other than the mandate.
(Exc. 206). In holding that the Beneficiaries were at great risk with respect to the Trust's valuable land conveyed to third parties, the Superior Court failed to address the cases directly on point from other jurisdictions holding otherwise. The failure to explain this reversal in analysis is arbitrary and capricious raising a question about whether the Superior Court's Decision was the result of a fair and impartial consideration of the material before it.
In any event, the rule is that the Trust can recover land from conveyees who acquired their interest in the land in a breach of trust regardless of the state of their actual knowledge. The Superior Court failed to address the authorities cited by appellant and is incorrect in concluding the Trust's risk on this issue is very high.
The Superior Court's entire analysis that the beneficiaries' risk with respect to recovery of pre-1978 disposals was very high was as follows:
The court concludes that the litigation risk associated with the pre-redesignation legislation disposals is very high. Nothing in Weiss would require that they be included in the reconstituted trust. To mandate their return, the plaintiffs would have to prove a breach of trust or other invalidity other than the enactment of the redesignation legislation. It is not likely that the plaintiffs could do so, in light of the power of the legislature to sell the trust lands and the court's decision in University of Alaska.
(Exc. 907). The Superior Court found that the value of the pre-1978 lands as estimated by the Appellants was $237.5 million. (Exc.911).
First, the apparent finding of fact that it would be unlikely that the plaintiffs could prove a breach of trust with respect to these lands is contrary to the admissions of the State, (Tr. XVIII-151), other unrebutted evidence, (Tr. XXI-727), and other findings of the Superior Court itself. (Exc.705). There is no dispute but that these lands were disposed of in breach of Trust. As acknowledged in Weiss, supra, 706 P.2d at 682, the State didn't even have a separate account for the lands or proceeds before 1978. [ Thus, the court was clearly erroneous with respect to factor 4 of GM Pick-Up Fuel Tank , supra , 55 F.3d at 785.] That Weiss itself did not address the issue of the validity of pre-1978 dispositions in breach of Trust is certainly no reason to conclude that the result would be different than the authority cited above mandates. Similarly, University of Alaska, supra, 624 P.2d at 816, relied upon by the Superior Court, without analysis, certainly does not allow the State as trustee to breach the Trust with impunity. It holds just the opposite -- the State has to pay for land it removes from the Trust.
Fundamentally, the Superior Court's HB 201 settlement approval analysis ignores the tenet that a trustee is obligated to deal with the Trust solely in the best interests of the beneficiaries. Restatement (Third) of Trusts, § 170. The pre-1978 dispositions are valid only if they were undertaken by the State solely in the interests of the beneficiaries. Since the State did not even consider the trust status of these lands when it made the dispositions, it can not meet this standard. The Superior Court failed to explain why its analysis of the HB 201 Settlement is at such variance with its previous decisions or with fundamental trust law. This is arbitrary and capricious.
This court has had a long standing and uniform requirement that in making findings of fact and conclusions of law, the trial court must make clear how it actually arrived at its conclusions. Urban Dev.Co.v.Dekreon, 526 P.2d 325 (Alaska 1974). The Superior Court failed in this regard.
Contrary to the Superior Court's finding, the plaintiffs' prospects with respect to recovery of pre-1978 dispositions is quite good. The plaintiffs' claims are compelling in the context of recovering the property itself. And, as previously noted, one doesn't even reach the issue of diminution of the Trust's corpus through a setoff until the value of the land deemed lost to the Trust exceeds the plaintiffs' damages for mismanagement. As previously discussed this is upwards from $2.75 Billion. The Superior Court's analysis is based on the assumption that the setoff will ultimately remain viable -- a prospect in serious question.
The Superior Court concluded that under University of Alaska, supra, 624 P.2d at 807, the beneficiaries risk associated with recovering Legislatively Designated Areas (LDAs) such as State Parks, refuges etc., was high. This was the Superior Court's entire analysis with respect to this specific issue involving $300 million worth of land. (Exc. 909, 911).
However, Weiss, supra, 706 P.2d at 684, specifically held that University of Alaska did not apply. Moreover, the holding in University of Alaska was that the Trust had to be made whole. In this case, the Superior Court accepted the State's argument that under University of Alaska a vast amount of the Trust's land can be placed into State parks without any compensation to the Trust. Appellants respectfully submit that "sold" as used in Weiss, does not apply to land still held by the State.
The Superior Court's analysis here, as elsewhere, did not address the cases much closer to the point in other jurisdictions discussed above. For example, Gladden Farms, supra, 633 P.2d at 329, specifically held that the State of Arizona could not "purchase" Arizona school trust lands without strict compliance with the requirements of the trust instruments - in that case their Enabling Act and state constitution. Under all applicable authority, the State must pay for any Trust land it takes for its own purposes. Lassen v. Arizona, 385 U.S. 458, 87 S.Ct. 492, 17 L.Ed. 2d 515 (U.S. 1967).
The Superior Court found that the plaintiffs' litigation risk with respect to land transferred to State agencies without compensation as high. (Exc. 909). The Superior Court found that the value of State agency land as estimated by the Appellants was $15 million. (Exc. 911). The cases previously cited and analysis presented do not support this conclusion.
The Superior Court found that the plaintiffs' risk on recovering lands conveyed to municipalities was medium. The Superior Court found that the value of the municipal lands as estimated by the Appellants was $188 million. (Exc.911). The reasoning given was that the State would argue that these lands had been sold (even though the municipalities paid no money) and that "many of the lands have been sold" to third parties. (Exc. 909). The Superior Court's conclusion is not supported by the authority. In City of Sierra Vista, supra, 633 P.2d 333, the Arizona Supreme Court invalidated a sale to a municipality where the city had paid for the land. Here, the municipalities were given the land and can not even begin to claim bona fide purchaser status. The court's finding about "many" third party purchasers from municipalities also amounts to double counting because the value of these lands was also included in its "Third Party Purchaser" category.
In sum, the Superior Court's analysis that the Trust was at medium to very high risk of losing almost $900 Million worth the Trust's corpus was erroneous. Based on this erroneous conclusion the Superior Court ruled that the HB 201 Settlement compared favorably with the prospects of litigation. The approval of the HB 201 Settlement must be reversed for this reason.
In reviewing interpretation of terms of a contract (here, the HB 201 Settlement Agreement), this court exercises its independent judgment. Jackson, supra, 776 P.2d at 788. In reviewing the interpretation of a contract against a given factual background this court conducts a de novo review without deference to the trial court. Donnybrook, supra, 798 P.2d at 1267. In reviewing the application of legal effect to facts, this court conducts a de novo examination. Arctic Slope Regional Corporation, supra, 834 P.2d at 134, n.8. The general class action settlement approval standards of review set forth above also apply here.
5. Modification and Future Enforcement. By this agreement, the parties stipulate to a mutual dismissal of all claims and defenses, and acknowledge that the trust is reconstituted in accordance with State v. Weiss, 706 P.2d 681 (Alaska 1985). The provisions of Sections 2 through 9, 12 through 40(a) and (b), 41, 43, 46, 47, 49, 50 and 51 of HB 201 and Sections 1 and 2 of HB 371 constitute material terms upon which the plaintiffs have agreed to a dismissal and acknowledged that the trust is reconstituted. If the Legislature materially alters or repeals any of those provisions, the plaintiffs' sole remedy, is a new action, alleging that the mental health trust has not been adequately reconstituted and to seek such relief as may be appropriate in light of the plaintiffs' claims.
(Exc. 499). The following section of the HB 201 Settlement Agreement at subsection (c) [ § (VI.6.(c)) of the HB 201 Settlement Agreement. (Exc. 499).] , provides that the class's claims are dismissed with prejudice.
Appellants objected to these settlement agreement terms because (1) the mere enactment of HB 201 constituted the consideration for settlement (i.e., they were not incorporated as part of the settlement), (2) the terms of the settlement could not be specifically enforced, and (3) nothing prevents the State from unilaterally changing the legislation and thereby the terms of the settlement. The State explicitly agreed that Appellants' concerns were correct declaring that the State:
was not agreeing and would not agree to anything that restricted the right of the legislature to amend or repeal the Trust Authority (including its right to spend money without further appropriation) and the program elements of the settlement. . . . [T]he Plaintiffs should evaluate the proposed settlement solely on the basis of the land and money that was going into the Trust because that was all that the State was agreeing to as part of the settlement.
(Exc. 485; Exc. 607-608), (Tr.XVI-565). The State later admitted that it even has the power to take away all of the money under this agreement (and impliedly the land too). (Tr. XVI-701). The State is not bound to follow the HB 201 Settlement Agreement; i.e., the HB 201 Settlement is not specifically enforceable. The Legislature has the right to change any aspect of the settlement and if it does so, the plaintiffs' only remedy is to bring "a new action, alleging that the mental health trust has not been adequately reconstituted and to seek such relief as may be appropriate in light of the plaintiffs' claims." What in the world this all means was the subject of considerable controversy, with the result completely unclear. [ See Appendix B for a compilation of the oral and written representations that the Superior Court found to have modified the written Settlement Agreement with respect to enforceability.]
In granting preliminary approval to the proposed settlement, the Superior Court acknowledged that the HB 201 Settlement Agreement was not specifically enforceable -- that the State had the right to unilaterally change any and all of its terms. (Exc. 698). The only remedy that the plaintiffs have in the event of a material breach [ There is no remedy whatsoever for breaches that might not be found to be "material."] is to seek relief under Civil Rule 60(b)(6). [ At page 124 of its Final Approval Decision, n 107, the Superior Court misread the Settlement Agreement to provide that the State had agreed in art. VI,§7, (Exc. 501), that it would not oppose such a Civil Rule 60(b) motion. What the State actually agreed to in this section is not to oppose such a motion in the sole event that settlement approval was reversed on appeal. ] (Exc. 956; Exc. 973-974). The State says (naturally) that it can then assert any defenses it might have. (Tr.XXVI-723). Appellants truly cannot apprehend how the Superior Court could have approved a class action settlement leaving the class at such great risk. This approval was far outside any range of permissible discretion of the Superior Court. See, e.g., Hughes, supra, 875 P.2d at 752.
A Civil Rule 60(b) motion is not an appropriate enforcement vehicle. Finality of judgment considerations makes obtaining Civil Rule 60(b) relief available only in the most extraordinary of circumstances. O'Link v. O'Link, 632 P.2d 225, 229 (Alaska 1981). The grounds for obtaining Civil Rule 60(b) relief are very limited. Id. "Civil Rule 60 is not a substitute for a party failing to file a timely appeal; nor does it allow relitigation of issues that have been resolved by the judgment." [ Subdivisions 1-3 of Civil Rule 60(b) have a one year limitation and the trial courts are without jurisdiction to enlarge them. O'Link , supra , 632 P.2d at 229. O'Link also holds that Clause (6) is mutually exclusive of (1) through (5). Thus, any of the grounds contained in Clauses (1) - (3) must be made within one year. So all the Legislature would have to do to defeat 60(b)(1) through (3) claims is wait a year to amend HB 201 without risk of any repercussions at all.] Morris v. Morris, 908 P.2d 425, 428 (Alaska 1995), Burrell v. Burrell, 696 P.2d 157, 163 (Alaska 1984);). In O'Link, supra, 632 P.2d at 229, this Court cited the following portion of §2864 of Wright & Miller, Federal Practice and Procedure at 213-14 (1973) with approval as follows:
In general, relief is given under clause (6) in cases in which the judgment was obtained by the improper conduct of the party in whose favor it was rendered or the judgment resulted from the excusable default of the party against whom it was directed under circumstances going beyond the earlier clauses of the rule. . . .
. . . The broad power granted by clause (6) is not for the purpose of relieving a party from free, calculated, and deliberate choices he has made. A party remains under a duty to take legal steps to protect his own interests.
Rule 60(b) is simply an inappropriate enforcement mechanism. The HB 201 Settlement Agreement should be subject to specific performance. That the State refused to agree to be bound by its Settlement Agreement is a matter of grave concern in itself. If it truly intended to be committed to the settlement it would have agreed to be bound to it. "Typically, class action settlements are reached by the parties, who draft a consent decree which is submitted to the trial judge for approval." Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157, 1172 (5th Cir. 1978). Here the State refused to be bound by a consent decree or otherwise subject to specific performance of its supposed agreement. Such an arrangement should not be countenanced.
In place of enforceable terms, the court relied on the good intentions of the State and its memory of this case to keep it from exercising its right to abrogate the settlement's terms. (Exc. 698; Exc. 831-972). This situation is identical to that confronting the court in Morales v. Turman, 569 F. Supp. 332 (1983). That case involved a class action brought to remedy the State's failure to meet minimum standards in youth correctional facilities. After twelve years of litigation and appeals, the parties presented the court with a settlement full of promise of future good faith conduct by the state defendants. The Morales court reviewed the settlement agreement and commented:
Although such a structure seems a logical and plausible approach to settlement of an injunctive institutional reform suit, close legalistic inspection of the Agreement reveals that the actual powers of the Committee of Consultants are quite limited, and the success of the settlement depends entirely upon the good faith cooperation of the defendants.
. . .
No reason to doubt the present good faith of the current personnel of the [state defendant] TYC, or their counsel, or plaintiffs' counsel is apparent. However, legal instruments are executed precisely because good faith and social mores are often insufficient to insure promises are kept, and to make certain that the precise contours of given promises are fully understood by the promisors and the promisees. The trust accorded the current state defendants on the basis of their present good faith must be tempered, nonetheless, by the recognition that personnel will inevitably change, and that, just over a decade ago, many of the individuals who then comprised the officialdom of TYC, and at least one of the attorneys who represents them, unregenerately and callously endeavored to preserve and perpetuate debased, execrable institutions in which juveniles were tortured and terrorized. Further, few or none of the asserted reforms regarding conditions of confinement affecting the class were placed in operation before the orders of this court.
Id., at 334 (emphasis added; citation omitted). Accordingly, the court required several steps to be taken prior to granting approval, including allowing a court appointed investigator to verify conditions and requiring the parties to stipulate to enforcement clauses. Id. at 338-9. For similar reasons as those voiced by the court in Morales, this court should not approve this class action settlement because it does not contain unequivocal and unambiguous provisions that will ensure compliance by the State with the terms of the settlement. The State's unrelenting hostility to the Trust also does not auger well for future, voluntary compliance.
It was outside the range of permissible exercise of discretion to approve the HB 201 Settlement Agreement because of the problems with enforcement by the beneficiaries. As set forth above, the Superior Court also considered the wrong factors, failed to adequately explain its findings and conclusions, misinterpreted the HB 201 Settlement Agreement, and erred in the application of legal effect to facts.
In reviewing interpretation of terms of a contract (here, the HB 201 Settlement Agreement), this court exercises its independent judgment. Jackson, supra, 776 P.2d at 788. In reviewing the interpretation of a contract against a given factual background this court conducts a de novo review without deference to the trial court. Donnybrook, supra, 798 P.2d at 1267. The other more general standard of review for class action settlement approval set forth above also apply.
The cases are unanimous that these federally created land trusts must be managed solely in the best interests of the beneficiaries. National Parks and Conservation Association v. Board of State Lands, 869 P.2d 909, 917-20 (Utah 1993), surveys the law on this. Here, the Superior Court approved a settlement that violates this principle. Thus, the settlement is illegal and approval should be reversed. Williams v. Vukovich, 720 F.2d 909, 920 (6th Cir. 1983).
Section 17 of HB 201, in part, provides:
(b) Subject to (a) of this section,[ [ Subsection (a) provides, "(a) Mental health trust land shall be managed consistent with the trust principles imposed on the state by the Alaska Mental Health Enabling Act , P.L. 84-830, 70 Stat. 709 (1956)." (emphasis added).] ] the department
(1) shall manage mental health trust land under those provisions of law applicable to other state land;
(2) may exchange other state land for mental health trust land under the
procedures set out in AS 38.50; and
(3) may correct errors or omissions in the legal descriptions of mental health trust land.
(c) The commissioner shall adopt regulations under AS 44.62 (Administrative Procedure Act) to implement this section. The regulations adopted under this subsection must, at a minimum, address
(1) maintenance of the trust land base;
(2) management for the benefit of the trust;
(3) management for long-term sustained yield of products from the land; and
(4) management for multiple use of trust land.
There are at least two illegal elements of this statutory scheme. The first is the stricture that state law applicable to other (non-trust) land is the management standard for Trust lands, except to the extent the Enabling Act imposes other requirements. This violates the duty of undivided loyalty. The second is the mandate for multiple use management for Trust lands. While the State drafted the statute to make it appear that the Enabling Act's requirements are the primary criterion, upon analysis it becomes clear that normal State land management goals are to be followed except to the extent that the State is forced to manage it under trust principles. [ The use of the word "imposes" is illuminating in that it reveals the State's continuing resistance to implementing management on behalf of the beneficiaries and spotlights the State's intention to do only the minimum required.] Since it is so clear that the Trust property should not be managed as all other state property, but instead managed "solely in the best interest of the beneficiaries," the legislation is illegal for providing a different standard. See, e.g., Kadish, supra, 747 P.2d at 1185. Indeed, consideration of anything other than the best interests of the beneficiaries is prohibited under the trust grant. In National Parks and Conservation Association, supra, 869 P.2d at 917-20, the question was the extent to which non-trust interests could be accommodated in the management of school trust lands. In rejecting the use of school trust lands for scenic, aesthetic or recreational values the court below said:
[T]he value of school lands cannot be used to further other legitimate governmental objectives.
In short, trust beneficiaries do not include the general public or other governmental institutions, and the trust is not to be administered for the general welfare of the state.
Id., at 918.
In its HB 201 preliminary approval decision, the Superior Court said:
The statute and agreement are intentionally vague on the issue of the required management standard. In order to assure the support of the environmental resource industry interest groups, language acceptable to all was adopted. The battle, if there is to be one, was reserved for the regulatory process. It is important that the class understand that it may require more litigation to ensure that regulations actually comply with the Enabling Act. Of course, it is possible that DNR will adopt regulations that satisfy the Act. It is also possible that all interest groups can be accommodated in the regulatory process.
(Exc. 704; emphasis added). But this very litigation was over the State's failure to comply with the Enabling Act's management standard. Of what conceivable benefit is a settlement that for all practical purposes requires the beneficiaries to win this in litigation again, after having much of the Trust's value removed, and faced with a settlement agreement in which they apparently agreed to the lesser standard?
HB 201 was specifically drafted so that no changes from the current non-trust management regime would occur. "Approval of HB 201 in the Alaska Senate was widely understood to have been conditional on assurance that there would be no divergence from the current management and regulatory arrangement." (Exc. 646; see, also Tr. XV-457-462). During the negotiations various management standards that Appellants felt complied with the Enabling Act's requirements, but that addressed the concerns of the environmental and development interests were discussed. (Exc.573; 578; 395). Finally, a proposal that went as far as Appellants believed was permissible was presented. (Exc. 582; 622; 397).
However, the environmental and development interests refused to agree. (Tr. XIII-157-160). While there may have been oral representations to the Superior Court that the Trust would be managed solely in the best interests of the Beneficiaries, the unrebutted testimony is that there was contrary intent. [ (Tr. XV-457; Exc. 646, n.18).] This is confirmed by the language itself. The State could have agreed to the standard of undivided loyalty to the beneficiaries -- the standard required by the Enabling Act, by basic trust law principles and by this court in Weiss - but it didn't. Thus, there can be no doubt that the interested parties do not intend and never intended to manage the HB 201 Settlement Trust solely in the best interests of the beneficiaries. This is a violation of the Enabling Act and is a sufficient basis in itself to invalidate the settlement.
Even if it is held that a technical interpretation of the HB 201 management scheme satisfies the Enabling Act's requirements because it ultimately requires that the management be in accord with the requirements imposed by the Enabling Act, the unrebutted testimony is that meeting this standard will not be met in actual operation. (Tr. XXI-799) (The HB 201 Management scheme "a disaster waiting to happen."); [ To appreciate the incredible depth of Dr. Rogers expertise on this issue, Dr. Rogers' 60 years of work in economics, resource economics, land management, and studies of the impact of statutory directives on land management must be reviewed. (Tr. XX-XXI-599-711). ] (Tr. XXV-424; 544). Appellants respectfully submit that actual compliance with the Act is required, and that the HB 201 management scheme does not comport with this standard.
In evaluating the HB 201 Settlement, the Superior Court was required to compare the value of the Trust's original holdings with the value of the HB 201 Settlement. The Superior Court made a number of serious errors in doing so. As is acknowledged, the original trust grant was of the best million acres available from 1956 to 1966.
Approximately half the mental health trust lands were urban and sub-urban lands, selected because their values would appreciate at a high rate in response to community growth. Timber lands were selected with the view that they would become the core of the State's forest system (which they are) and hydrocarbon and mineral lands were selected from the major active mining areas of the State.
(Exc. 104). See also, testimony of Dr. George Rogers, who testified from extensive personal knowledge as to the quality of the land in the original trust grant. (Tr. XXI- 681-684, 687-697, 697)
In analyzing the surface value of the original trust grant for purposes of comparing it to cash, however, the court said that the time required to sell surface value original trust lands (called "absorption") reduced the value to as much as one-tenth to one-fifth of their stated value. (Exc. 899). In doing this, the Superior Court ignored the unanimous testimony that the lands with significant surface value had already been absorbed (put to use). (Tr. XXI-742, 762-3; XX-521-2, 528). The expert witness retained by the CAWP and MR/MD Intervenors agreed that these lands had already been absorbed.
Well, as it was originally presented to me, this was a hypothetical liquidation of the portfolio in the future, and it might have a very long absorption period. And as I thought about it more, it occurred to me that the NRTL portfolio is designated as non-returnable lands because somebody else has an interest in it today, third party purchasers or someone else. So it seemed to me that trying to forecast the liquidation of that portfolio in the future might be a real fiction today. Appraisers can do lots of fictional work but I didn't think it would contribute to this proceeding. The information I have available tells me that the state acquired this property, the State alienated title to it, conveyed it to others for consideration, and that was all done before now and probably done before a few years ago. So I don't know when the parcels were actually liquidated, but that's where we fell on the conclusion that an absorption period of 25 years would seem to be excessive. They've already been liquidated.
(Tr.XX-527-8). Mr. Karabelnikoff also testified that these lands were absorbed from the late 1960's through perhaps 1980 and that they were absorbed in a ten year period from the time they were made available. (Tr. XX-521-2).
There is actually a Legislative Finding that the bulk of this particular land has already been absorbed:
(b) because of the highly desirable location and character of much of the land selected by the state under the Act, for example, in and around major population centers, suitable for parks and game refuges, and other uses, . . . [including municipal conveyances] the Tenth Alaska State Legislature enacted ch. 181 and 182, SLA 1978, which, among other things redesignated all mental health lands as general grant lands.
(§ 1(a)(6), Ch. 48 SLA 1987). The Superior Court's absorption finding for the original trust grant apparently comes from a theoretical study by a State employee who admitted that she was not familiar with the land involved, based her study only on the general area of the land, (like the Mat-Su Valley), and didn't take into consideration that this land had already been disposed of. (Tr. XIX-268-79). [ In GM Pick-Up Fuel Tank , supra , 55 F.3d at 807-8, the Third Circuit rejected the trial court's reliance on expert testimony that was not nearly as unreliable as the State's witness on this issue.] Indeed, the Superior Court itself found:
The trust lands which are not being returned are generally lands where the State conveyed an interest to someone else." . . . These lands were among the most desirable for immediate sale when the legislature reclassified trust lands as general grant lands. The court considers these valuation numbers to be fairly reliable and the reduction in value to be close to a real dollar loss.
(Exc. 894).
That the Superior Court ignored the knowledgeable witnesses, apparently relied upon a discredited one in finding an absorption problem that would reduce the value of the original trust grant's surface value holdings to one tenth to one-fifth of the value the State agreed to when comparing it to cash, and ignored its own finding that the loss of this land was a real dollar loss is very troubling. Even where the finding is not so manifestly against the weight of the evidence, the Superior Court is under the obligation to explain the reasoning behind its findings "which are adequate to accord rational appellate review:"
A trial court's findings must be sufficiently detailed and explicit to give an appellate court a clear understanding of the ground on which the trial court reached its decision.
Nass, supra, 904 P.2d at 418, n.13, citing Adrian v. Adrian, 838 P.2d 808 (Alaska 1992), citing Sloan v. Jefferson, 758 P.2d 81, 86 (Alaska 1988). The Superior Court did not meet this standard.
The Superior Court made similar errors with respect to its analysis of the value of the original Trust grant's mineral endowment. After reciting the criticisms of the mineral valuation, the Superior Court said merely that they, "made sense to the court." (Exc. 921). No analysis. No discussion of the contrary evidence. [ All of the criticisms were rebutted. ] This does not comport with the court's obligation to explain its findings. Nass, supra.
The court listed the criticism that Dr. Metz disregarded the costs for smelting, refining, and treatment, (Exc. 919), but failed to mention that this was rebutted through expert testimony that these costs would be more than offset by the presence of additional recoverable minerals. (Tr. XXII-11, 39-40, 45-6, 72-3, 114). The Superior Court failed to identify if this was a criticism that "made sense to the court" or why the rebuttal was unpersuasive. This does not comport with Nass, supra.
Similarly, the court noted the criticism of Dr. Metz's opinion that the probabilities of discovery that were used did not accurately reflect the probability of different types of mineralization occurring on the same parcel, (Exc. 919,921), but did not address the rebuttal. [ During the final approval hearing the Court was clearly unsure about this issue because it asked another of the experts retained by the Proponents, Bruce Bouley, if he had an opinion on the subject (Tr. XX-585). He wasn't able to provide one.] (Tr. XXII-56; XXIII-230). The Superior Court failed to identify if this was a criticism that "made sense to the court" or why the rebuttal was unpersuasive or what it considered the relative monetary impact of this criticism was. Or anything else. This does not comport with Nass, supra.
The Superior Court also noted Robert Cameron's criticism that the probabilities of discovery used were inappropriate, (Exc. 921), failed to address the rebuttal (Tr. XXVI-713-15), and failed to address the fact that the Proponents' own expert testified that Dr. Metz was correct in his use of statistics and probabilities. [ It was apparently because of this admission that Mr. Cameron was called in "rebuttal" to contradict his co-worker's testimony. Appellants objected to this "sandbagging" as putting part of the direct case in as rebuttal but the court allowed it (Tr. XXVI-687-9), even after Appellants' objection that Counsel for the CAWP Intervenors had refused to allow Mr. Cameron's deposition after discovery had closed but prior to his surprise testimony. (Tr. XXVI-696). This is in stark contrast to the Superior Court's suspension of proceedings to allow the additional deposition of Mr. Erickson (until 11:30 p. m. when he was to be back in the dock at 8:30 the next morning) because he had not produced every book he had read on a particular topic in response to a deposition subpoena. (Tr. XXIII-292). Both of these rulings are an abuse of discretion.] (Tr. XX-471). This does not comport with Nass, supra.
The Superior Court noted the criticism of Dr. Metz's use of a 10% discount rate, (Exc.919,921), but failed to address the rebuttal (Tr. XXII-29-33),and doubts cast on the criticism that were revealed in cross examination. [ For example, Mr. Guarnera testified that he always included inflation in the discount rate, which for the valuation methodology used was inappropriate because of the assumption (agreed to be a good one (Tr. XIX-424)), that inflation was not a factor. The Superior Court also failed to address the rebuttal point that a mining company's "hurdle rate" is not the proper discount rate to be used. (Tr. XXII-29-30). ] (Tr. XX-485-498). This does not comport with Nass, supra.
The criticism of the valuation methodology with the largest impact is that of timing. The point is that it will take X number of years to bring the posited minerals into production and that the valuation should be reduced to reflect that. [ One point never addressed by the Superior Court was that discounting real (inflation adjusted) income because it would not be generated until some time in the future was improper in the context of this case because it discriminates against future beneficiaries. In other words, a million dollars (in inflation adjusted dollars) received for beneficiaries in twenty years is just as valuable to the beneficiaries of the Trust then as a million dollars is to the current beneficiaries now. To say that this million dollars should be considered to be worth only $150,000 for settlement purposes discriminates against these future beneficiaries. See , (Exc. 633).] However, it was admitted that the State as trustee not only completely mismanaged the land, but put much of the valuable mineral lands in Parks, etc., where mineral exploration and development was prohibited. Moreover, it was admitted by the Proponents' own expert witnesses that (a) there was a cloud on title to Trust Lands arising from the State's failure to implement proper trust procedures, (Tr. XX-558), and (b) mining companies would not invest in exploration of lands where there was any cloud on title. (Tr. XIV-298; XX-569-70).
In United States v. Silver Queen Mining Co., 285 F.2d 506, 509, n.5 (10th Cir. 1960), the Tenth Circuit held that no advantage should accrue to the government in a condemnation case because of the difficulty in proving mineral value occasioned where the government had held possession of the land for 18 years. The reasoning applies with much greater force here, where a breaching trustee has illegally appropriated trust property to its own benefit and prevented mineral exploration.
Dr. Metz's valuation, (Tr. XXII-41), was quite conservative in this regard (as it was in others) in that he assumed a delay of 26 years from the end of the selections. The Proponents' own witnesses admitted that the timing issue cuts both ways for valuation purposes in that there is also a commensurate increase in value if the posited minerals should already have been in production as of 1992. (Tr. XIX-415; XX-479). Specifically, Mr. Guarnera admitted that if the time period started ten years prior to that assumed by Dr. Metz, that the value of the mineral estate would more than double and that the increase is "geometric" as one goes back in time. (Tr. XIX-415). Mr. Houseman admitted that if one used the discount rate utilized by Dr. Metz that the value increases by 2.6 times for each ten year period, (Tr. XX-479), and that if one used the discount rate he insisted was appropriate (20%), the factor is 6.2 times. (Tr. XX-484).
The Superior Court also failed to note the various conservative assumptions or "safety factors" that Dr. Metz and Colin Dixon incorporated into their analysis to ensure that the mineral valuation did not overstate the value. See, e.g., (Exc. 111).
The Metz/Dixon methodology did not include industrial minerals [ Other than aggregate.] because when the state compiled the mineral potential it completely ignored these economically important minerals. (Exc.744-810). Dr. Metz testified that the impact of this would be to increase the mineral value by a factor of 2. (Tr. XXII-124). The Proponents' own expert admitted that inclusion of industrial minerals would increase the value. (Tr. XIX-417; 245). Adjusting for this factor results in a valuation of the Trust's original mineral endowment of $2.6 Billion.
The Metz/Dixon methodology valued the royalty interest rather than the total property value. The Proponents' own expert admitted that in these types of situations (when buying the property) the appropriate measure is, in fact, the total property interest and that doing so results in a value that is a multiple of the royalty interest valued by Metz/Dixon. (Tr. XIX-418). Dr. Metz concurred that normally the total property interest is valued in this type of situation, (Tr. XXI-878-79), that if the total property value had been valued, the increase would be from 2 to 6 times, with 4 times being an average. (Tr. XXII-116). The Superior Court specifically queried Dr. Metz about this and that the result of using this normal approach would result in a mineral valuation of $5.2 Billion (adjusting for only this one "safety factor" or conservative assumption). (Tr. XXIII-223-4). That the Superior Court failed to even address this in its valuation findings is troubling, and does not comport with Nass, supra. All of the experts testified that the total property interest would normally be valued, yet the Superior Court ignored this testimony. On top of the adjustment for adding in industrial minerals the value for this adjustment increases to $10.4 Billion.
Certain metallic minerals were also ignored by the State when it conducted the Trust's mineral endowment study. (Tr. XXI-889). Dr. Metz testified that adjusting for this would increase the value by 10%. (Tr. XXII-114). This brings the mineral endowment valuation to $11.4 Billion.
The following table shows the impact of backing out the safety factors or conservative assumptions employed by Metz/Dixon that were quantified.
In spite of the unrebutted testimony on the conservative assumptions that went into the $1.3-$1.5 Billion mineral valuation, the Superior Court found that the Appellants' valuation of $1.3 Billion for the value of the Trust original mineral holdings as of April 1992 significantly overstated the value of the Trust's mineral endowment [ (Exc. 916).] and therefore it was confident the $1.9 or $2.2 Billion valuations of the Trust presented by the Appellants were not reliable for purposes of evaluating the settlement. [ (Exc. 922).] The Superior Court also concluded that it did not consider the loss in mineral value to be a real dollar loss. [ (Exc. 895).] At a minimum, the Superior Court failed to make findings of fact in this regard "which are adequate to accord rational appellate review" as required under Nass, supra, and the other decisions of this court and its settlement approval decision should be reversed on this basis alone. [ The Superior Court's finding that the Appellants' most optimistic value was $1.9 Billion is clearly erroneous. This might seem like a minor point, but it is really fairly significant. In spite of all the evidence to the contrary, the Superior Court considered the maximum posited value of the original Trust grant at $1.9 Billion. It used this supposedly maximum value in evaluating the HB 201 settlement. Using the true maximum value in the $30 Billion range was essential to properly evaluate the HB 201 settlement, particularly the relative importance of the $200 million cash deposit. As noted previously, GM Pick-Up Fuel Tank , supra ., 55 F.3d at 785, factor 8, requires the trial court to comprehensively consider the range of reasonableness of the settlement in light of the best recovery . Here, the Superior Court never considered the factor and made a clearly erroneous conclusion as to the amount in any event. This mandates reversal under GM Pick-Up Fuel Tank , Id .] The Superior Court's findings and conclusions on this issue are also clearly erroneous.
In making this erroneous finding, the Superior Court also ignored that the value of the Trust's original mineral holdings were officially determined to be $1.5 Billion as of September 1987 under § 4, Ch. 48 SLA 1987 by the Trust Commission. (Exc. 116, 117). The Superior Court never even discussed this official determination of the Trust's mineral endowment value. Instead, the Superior Court refused to allow Dr. Rogers, the Chairman of the Trust Commission, to testify as to his experience in valuing undiscovered minerals. [ This was error.] (Tr. XXI 820) The Trust Commission, which spent years working on the values found that this value represented "a mid-range value, not a high value." (Exc. 181). Unlike the Superior Court, the Trust Commission [ Both public members of the Trust Commission were well qualified to value mineral endowments. (Exc. 100). ] carefully considered both sides of the argument and gave detailed reasoning for its decision. [ (Exc. 97-137).] For example, unlike the Superior Court, the Trust Commission considered the "safety factors" employed by the Metz/Dixon methodology [ (Exc. 111)] and considered other "reality checks," on the figures, including that the State had used $2 Billion as a proxy figure for the value of the Trust. [ (Exc. 132, 137)]
One of the reality checks that the Superior Court ignored was that in 1990 the State agreed to pay 6% of the State's entire annual General Fund receipts to "rent" the Trust's land. (§ 2, Ch. 210 SLA 1990). This amounted to annual revenue in the neighborhood of $130 million. The rent on the $2.24 Billion valuation was $178 million. Thus, even while strenuously objecting to the $2.24 Billion valuation under Chapter 48, the State offered to settle fairly close to this value. Simply put, a valuation of $2 Billion on the most desirable million acres available in 1956, which included "the most promising [mineral lands] in the State," [ (Exc 131).] is a mid-range value and was the lowest the Superior Court should have used for evaluating the HB 201 Settlement for factor 9 of the test outlined in GM Pick-Up Fuel Tank, supra, 55 F.3d at 785.
In addition to grossly undervaluing the original Trust grant, the Superior Court substantially over-valued the HB 201 Settlement. The Superior Court identified five primary benefits in the HB 201 Settlement:
1. The Trust will be reconstituted with some of its original land and some replacement land.
2. The Trust Authority is created with responsibility for protecting trust assets and planning and promoting the mental health program.
3. The mental health program is given advantages in the budgeting process.
4. $200 million in cash.
5. Creation of DNR's Special Unit to manage the Trust's land.
(Exc. 891).
The first benefit of the HB 201 Settlement identified by the Superior Court was that some of the original trust land and some replacement land is included in the Trust. While, the Superior Court acknowledged that only lands that no one maintained an objection to were included in the reconstituted Trust, (Exc. 953, 954), it failed to consider the economic consequences of this conclusion. Thus, the portfolio of land included in the Trust was in the main land that no one had found a use for, [ There are some exceptions where the interest holders did not object to their inclusion in the HB 201 Settlement.] whether original trust land [ This contrasts with the original trust land taken out of the Trust under the HB 201 Settlement. As discussed previously, in all cases , land was removed from the Trust under HB 201 precisely because it had already found a use.] or substitute land. The Superior Court found:
Without question, the reconstituted trust is not as valuable as the original mental health trust. . . . Neither side places particularly large values on the substitute lands.
(Exc. 893). In these circumstances, there is a very real absorption factor for the land that survived everyone's veto rights. [ The State's witness admitted that Substitute Lands are generally inferior to the original Trust lands that were removed from the Trust in HB 201 (Tr. XIX-269). Al Olson, Appellants' witness testified that most Substitute Lands wouldn't have a very good market. (Tr. XIX-311).] Using the State's witness's figures, the posited surface values should therefore be reduced by a minimum of one fifth to one tenth of the stated value. [ "Minimum" is used because the State's witness considered only the original Trust grant lands which were generally better situated than the substitute lands. ]
Another error the Superior Court made was failing to recognize that the HB 201 Management regime reduced the value of the land. Thus, the surface value for the HB 201 Settlement should have been discounted by the court by $114 million, metallic minerals by $328 million, coal by $7.5 million, and timber by $3 million for a total of $453 million for the economic impact of the HB 201 management scheme. (Exc. 664-665). The Superior Court concluded that these discounts developed to account for the economic effect of the HB 201 management regime should also apply to the Original Trust Grant if they applied at all. This was error.
The Erickson discounts compared the impact on the value of the Trust's holdings from having it managed "solely in the interests of the beneficiaries" as required under the Enabling Act to management under the HB 201 regime. (Tr. XV-415; Exc. 640-47). Mr. Erickson carefully evaluated the two different management regimes and calculated the diminution in value attributable to the changes that were made to accommodate the environmental and developmental interests. (Tr. XV-415; Exc. 640-47. The discounts Mr. Erickson developed fully took into account the language in HB 201 providing that management under general state law was "subject to the requirements imposed on the State by the Enabling Act." (Tr. XV-415). Mr. Erickson's testimony as to the actual economic impact of this management regime (apart from the court's legal analysis in its preliminary approval decision) is unrebutted.
The Superior Court also should have recognized the additional discounts calculated by Mr. Erickson for differences in title, survey and split estate/access. (Exc. 664-665). In addition, insofar as can be determined, the Superior Court failed to consider that most of the posited value for the mineral estate only lands in the Haines Area was subject to federal mining claims and would never be conveyed to the State for inclusion in the Trust. Mr. Bouley, one of the Proponents' expert witnesses, testified from personal knowledge that the lands considered most valuable for minerals in the area were subject to federal mining claims which were unlikely to be relinquished by the holders. (Tr. XX-571-2). This analysis was confirmed by Dr. Metz, Ms. Hayes and by Commissioner Noah. (Tr.XXVI-711-2; Tr.XXIV-369; Tr.XIV-354). The Superior Court's analysis of the value assumes that the Trust was going to receive the mineral values on these lands when all the testimony was that it was very unlikely.
The Superior Court found the creation of the Trust Authority to be a "substantial benefit" in evaluating the HB 201 Settlement. (Exc.895). This substantial benefit arises, according to the Superior Court, because the Trust Authority will have primary authority for overseeing the integrated comprehensive mental health program for Alaska, the HB 201 Settlement Agreement by itself authorizes and requires the Trust Authority spend the Trust's money without legislative approval, and because the Trust Authority "will be the trustee" of the Trust." The Superior Court concluded:
It is the court's judgment that even if the reconstituted trust never earns enough money to support the mental health program, the Trust Authority and the program changes made in the statutes should provide real improvements in the lives of the beneficiaries. For this reason, the court considers the Trust Authority with all its powers and its advocacy position to be a fundamental and significant part of this settlement.
(Exc.896).
First, the creation of a Trust Authority to do that which the State is already obligated to do does not justify stripping hundreds of millions to billions of dollars of assets from the Trust. Second, of course, it is admitted that none of this is enforceable and any or all of the Trust Authority's assumed powers can be taken away.
Third, it would appear that the Legislature does not agree that it intended to grant the Trust Authority the right to spend the money free from legislative appropriation. HB 201 only provides that the Trust Authority may "administer" the Trust fund. AS 37.14.039(a) added by § 16 of HB 201 (§ 16, Ch. 5 FSSLA 1994). Only the HB 201 Settlement Agreement has this provision, it appears nowhere in statute. [ Art. V, §4.] A Letter of Intent evidencing the legislature's support and agreement for the settlement provision authorizing the Trust Authority to spend Trust money without legislative involvement was drafted by the Attorney General's Office for consideration by the Finance Committee, but it was voted down. (Tr. XXI-855). The Superior Court said, without explanation, that it did not believe the Legislature's refusal to adopt the letter of intent can be interpreted as an expression of contrary legislative intent. (Exc. 864). However, less than three months later, Legislative Counsel for the Legislature, wrote "I am hard pressed to understand the contention that use of all or part of the balance of the mental health trust income account established in AS 37.14.041(a) is not subject to prior legislative appropriation." [ Appendix C. ]
The Superior Court acknowledged that the legislation only provided that the Trust Authority may "administer" the account, [ See , (Exc. 681,682).] and that "it is not known whether this is permissible under the Alaska Constitution." [ (Exc.682).] The Superior Court then went on to say that only if the provision authorizing the Trust Authority to spend Trust money without legislative involvement appeared unconstitutional as a legal certainty should the proposed settlement be rejected. [ (Exc.682).] Thus did the Superior Court just close its eyes to the potential that this critically important element of whether the settlement is either not included in the legislation and hence illegal, or if included within the meaning of "administer," is unconstitutional. This is an abdication of the Superior Court's fiduciary obligation to protect the interests of a class in a a class action settlement and its fiduciary duty to the beneficiaries of a trust. See Williams v. Vukovich, 720 F.2d 909, 923 (6th Cir. 1983).
Other aspects of the Trust Authority's nominal power are illusory. The land is to be managed by DNR and if the Trust Authority disputes DNR actions, DNR gets the final say. [ § 17(c), Ch. 5 FSSLA 1994 , (Exc. 513).] Similarly, the Superior Court's reliance on the Trust Authority's mandate to "ensure" that the Trust's assets are managed consistent with the Enabling act and to "ensure an integrated comprehensive mental health program," [ (Exc. 713).] is misplaced because the Trust Authority does not have the power to make it so.
The Superior Court concluded that "the third benefit from the settlement lies in the budgeting advantages found in the legislation. These are basically that the Governor and Legislature are supposed to treat mental health program expenditures differently and issue a report when they don't appropriate general fund money as recommended by the Trust Authority. [ § 5, Ch. 5 FSSLA 1994 , § 7, Ch. 5 FSSLA 1994 .] (Exc. 896, 897). However, not only are these provisions completely unenforceable, they are not at all concrete. [ Last year, the very first year after the passage of HB 201, the Legislature changed § 26, Ch. 5 FSSLA 1994 , to eliminate the provision that the Trust Authority make its report to the Legislature on general fund spending to meet the necessary expenses of the mental health program. Now the Trust Authority merely notifies the Legislature when the report is available. § 110, Ch. 21 SLA 1995 . In other words, the Legislature is telling the Trust Authority, "if we want your report, we will ask for it."] Besides being unenforceable, how much are these supposed benefits worth? It was incumbent upon the Superior Court to quantify these supposed benefits because without doing so, it could not properly evaluate the settlement.
As a benefit, the Superior Court found the $200 million cash infusion "extremely significant." (Exc. 897). Certainly $200 million is a lot of money. However, it must be put in perspective. First, after inflation it can be expected to generate only $5 million annually. [ This is based on the realistic average real return of this type of fund. (Exc. 647). The State asserted that it could be expected to earn 5.85% after inflation. (R. 19320-21). This return is extremely unlikely to be sustained over time. (Exc. 647) However, even at this unrealistic rate, the $200 million would earn only $11.7 million.] (Exc. 897). The mental health program budget is in the $85-$145 million per year range (depending on if one uses the Alaska Mental Health Board's view of proper Trust expenditures (based on the Superior Court's holding that the mentally retarded and mentally defective are members of the class) or the Legislature's expanded view) (Tr. VIII-67-8), so this amount of income is not particularly significant. In emphasizing the importance of the $200 million deposit the Superior Court made clearly erroneous findings and conclusions with respect to comparing the $200 million deposit with the Trust's land portfolio:
This cash infusion is extremely significant. First, it ensures that there will be some income for the support of the Trust Authority and whatever programs it decides to fund. Second, it is real money in hand today. In this way it is unlike other values that are attached to the trust assets. For example, $200 million of mineral value may never produce $1 of income for the trust, because the mineral values are based on probabilities of discovery derived from extremely limited geophysical, geochemical, and geological data with no actual drilling. The results of comparing the $200 million is the equivalent of the net present value of an annual royalty stream of $254 million paid with a 10 year start-up delay and a 20% discount rate over the 20 year average life of a mine. It would take $6.3 billion in metallic mineral production each year from these lands to generate that royalty stream. [footnote omitted]. The $200 million is also more valuable than $200 million value in surface estate lands. To compare those two values one must apply an absorption rate and a discount rate to the surface value. Doing so could reduce the surface values to as much as one-tenth to one-fifth of their stated value, thus $200 million surface value in lands may be the equivalent of $20 - 40 million cash in hand.
(Exc. 897, 898).
The statement "$200 million of mineral value may never produce $1" of income represents a fundamental misunderstanding of the valuation process. A $200 million fair market value means that the asset would fetch $200 million today in the market place. As set forth above the realistic real rate of return on the $200 million deposit is 2.5% or $5 million per year. The Superior Court, contrary to all of the relevant evidence concluded that the bulk of the original Trust portfolio's values would not be productively employed. As shown above, however, the Trust's earning capacity is far above the $5 million per year or even $11.7 million if one uses the State's posited real rate of return.
The Superior Court's conclusions about why the $200 million deposit overshadows the over $1 billion in lost land value is very far off the mark. The glaring failure of the Superior Court's analysis is shown by its virtually incomprehensible determination that it takes $6.3 billion in annual mineral production from Trust lands to equal the value of the $200 million. A 4% Net Smelter Return (NSR) [ Net Smelter Return is essentially the gross value paid by the smelter.] royalty on $6.3 Billion is $254 million per year! [ $6.3 Billion times 4%.] The amount of mineral production required to earn $5 million in income at a 4% Net Smelter Return and assuming the maximum percentage is applied to principle is $172 million, not $6.3 Billion. [ A 4% NSR on $172 million results in a total royalty of $6.9 million of which $1.9 is applied to principal.] Appellaants submit that in its mechanistic calculations the Superior Court didn't see the forest for the trees.
The Usibelli coal leases, which are contained in the original Trust grant, but that were excluded from the HB 201 Settlement alone are currently earning $1 million under the current non-trust lease terms it has under current state law. (Tr. XIV-296) Other examples of the Trust grant's extreme productivity abound and is most demonstrated by the fact that so much of it has been snapped up by third parties and the State itself. The Original Trust Grant included the very best mineral prospects that were known in the late 1950's and early 1960's and the most likely to contain bonanzas.
The over-blown emphasis as to the importance of the $200 million with the clearly erroneous findings as to the earning capacity of the Trust's land grant is one of the fundamental underpinnings of the Superior Court's erroneous conclusion that the HB 201 Settlement is fair, reasonable and adequate.
The fifth benefit of the HB 201 Settlement identified by the Superior Court is the creation of the special unit in DNR to manage the HB 201 Trust Lands. (Exc. 891; 899, 900). In relying on this as a benefit the Superior Court said:
First, the land managers in the special unit will have a smaller amount of land per person to manage than those in DNR. This should allow managers to be proactive managers instead of passive managers. Second, the special unit members can be trained in the special rules applicable to trust management and will have to apply only those rules and those laws applicable to other state lands which do not conflict with trust management under the Enabling Act. Third, the individuals in the special unit may develop a sense of pride in their special charge.(Exc. 900). These are not very concrete benefits. In addition, there is no evidence that there will be fewer acres of land per person managing the HB 201 Trust land than DNR personnel managing other State land.
The Superior Court also found that the "involvement of the environmental and resource industry interest groups in the negotiation process should assist the trust's development of its lands for income purposes. [ At page 123, in justifying the approval, the Superior Court says that the "proponents of the settlement hope the early involvement of environmental groups will enable the trust to develop most trust lands without interference from environmental interests. (emphasis added).] (Exc.900; emphasis added). There is no support nor explanation for this conclusion. There is no reason to believe that the industry and environmental interest groups will cease their advocacy with respect to these lands. In fact, the unrebutted testimony is that was why the HB 201 management regime was fashioned as it was. The Superior Court's conclusion here is arbitrary and not supported by the evidence.
In addition to overvaluing those elements of the HB 201 Settlement the Superior Court found to be benefits, it failed to address several negative elements not otherwise addressed here. One of these is that the Trust is subject to all of the risk if the conveyances of the subsurface estate to substitute land is a violation of the § 6(i) of the Alaska Statehood Act. This was a major contention of the Environmental Intervenors in their appeal of the Superior Court's Decision, which appeal has been administratively closed, but subject to reopening pending outcome of this appeal.
Another is that DNR has not agreed to be responsible for hazardous substance contamination of Trust land under its management of Trust land under the HB 201 management scheme. Art 4, §4(c), p. 9 HB 201 Settlement Agreement. (Exc. 493).
In its April 27, 1988 Memorandum Decision and Order, the Superior Court ruled that the mentally retarded and mentally defective are beneficiaries of the Mental Health Lands Trust. (Exc. 90).
The House passed version of the Enabling Act included the mentally retarded and mentally deficient by including them in the definition of "mentally ill." (Exc.2-3). However, the Senate disagreed that they should be included. Senator Jackson, the lead sponsor of the bill in the Senate discussed the issue of including the mentally retarded and defective under the Enabling Act on March 5, 1956, as follows:
Senator JACKSON. I want to say, Congressman O'Brien, that that provision bothers me quite a bit. I think that the committee certainly is going to have to hear from the Department on the meaning of the words "mentally retarded." There are a lot of people who are mentally retarded that should not be under the provision of this bill.
(Exc. 6).
On April 16, 1956, Roswell Perkins, Assistant Secretary of Health Education and Welfare wrote to Committee Chairman Goldwater, requesting amendments to the Senate Committee mark-up to include the mentally retarded and mentally deficient. (Exc. 7-22). Specifically, the Department of Health Education and Welfare requested that the phrase "mental health program of Alaska" be followed by "including (but not by way of limitation) the outpatient and inpatient care and treatment of the mentally ill, and of the mentally defective and mentally retarded, of Alaska." [ (Exc. 9-22).] After a considerable amount of back and forth on the issue, including several attempts by the Executive Branch to include the mentally retarded and mentally defective, (R. 6917-6921), the Senate passed the current form of the Enabling Act without the language specifically requested by the Executive Branch to include the mentally retarded and mentally deficient. Thus, the Senate specifically rejected the language required to include the mentally retarded and mentally defective which was ultimately concurred in by the House.
The necessity of preserving intact the beneficiaries identified by Congress in these federally created land trusts is inviolate. It is the duty of the courts to ensure that none of the assets of these trusts be used for any parties or for any purposes not strictly in accordance with Congress's trust instrument. See, e.g., Ervien v. United States, 251 U.S. 41, 40 S.Ct. 75, 64 L.Ed. 128 (U.S. 1919). Allowing any party to receive the benefits of the trust in addition to those specified by Congress is absolutely impermissible. That is the underpinning for the teaching of the cases discussed above about the inviolate duty of undivided loyalty to the trust and the prohibition of using these federal land trusts' assets for other purposes.
In United States v. New Mexico, 536 F.2d 1324 (10th Cir. 1976), the question arose whether a federal trust land grant for "a miners' hospital" could be used for miners cared for in other hospitals due to the reorganization of New Mexico's Hospitals and Institutions Department. The Tenth Circuit agreed that the answer was no, saying:
While the underlying motivation for the trust may have been a desire on the part of Congress generally to provide for the healthy care of miners, the specific purpose of the trust was the establishment and maintenance of a "miners' hospital."
Id., at 1327. The Tenth Circuit also cited the following language from Lassen, supra, 87 S.Ct. at 588:
The Enabling Act unequivocally demands both that the trust receive the full value of any lands transferred from it and that any funds received be employed only for the purposes for which the land was given.
Thus, the determination of the beneficiaries of the Trust is a critical one. Since this appeal arises out of a final judgment dismissing the action, this issue must be addressed now.
The Superior Court's conclusion that the mentally retarded and mentally defective are included as beneficiaries of the Trust is error and should be reversed.
In its Beneficiary Decision and Order Modifying Class Action, the Superior Court ruled that the Legislature has the power to add beneficiaries to the Trust in addition to those specified by Congress and that such added people are members of the class. (Exc. 17; Exc. 725-726). This is beyond the power of the Trustee and is error. It is a violation of the duty of undivided loyalty to the beneficiaries identified in the Trust grant by Congress because adding beneficiaries dilutes their interest. See, e. g., U. S. v. New Mexico, supra, 536 F.2d 1324. This is error and should be reversed.
It was suggested by then counsel for the MR/MD Intervenors, Jeff Jessee, that when the State under-funds the mental health program that the Mental Health Trust Authority refuse to fill any gap with Trust funds to force the State to maintain its funding and thus avoid supplanting general funds with Trust funds. This was perceived as the only way to prevent the Trust from merely "supplanting" General Fund funding of the mental health program. This "Supplanting Problem" as it was called, recognizes that if the Trust has $2 million in income to spend on the mental health program, the State decreases the funding of Alaska Psychiatric Hospital by $2 million and the Trust fills the gap, the Trust has accomplished nothing. Mr. Jessee, the proponent of this approach, is now the Executive Director of the Mental Health Trust Authority. Appellants believe this approach violates the Enabling Act's requirement of using the Trust "first for the necessary expenses of the mental health program" because the beneficiaries of the Trust (those needing in-patient psychiatric services at API) are being left out in the cold while the Trust's income is spent on "discretionary" or "special" programs. See, (Exc.589). In fact, the Commissioner of the Department of Health and Social Services testified that the number of beds at API was reduced from well over a hundred to 72 due, in part, because of funding cuts. (Tr. XVIII-92).
In reviewing the application of legal effect to facts, this court conducts a de novo examination. Arctic Slope Regional Corporation, supra, 834 P.2d at 140, n. 8. In reviewing trial court factual determinations this court examines whether the finding is clearly erroneous, [ Donnybrook , supra , at 1267. ] but in doing so will reverse the trial court if the reviewing court has "a definite and firm conviction that a mistake has been made." [ Donnybrook , supra , at 1266.] Factual determinations will be reversed or remanded unless supported by sufficiently detailed and explicit explanation of their bases to give an appellate court a clear understanding of the ground on which the trial court reached its decision." Nass, supra, 904 P.2d at 418, n.13. In reviewing questions as to whether the trial court weighed appropriate factors, this court exercises its independent judgment. Mendel, supra, 897 P.2d at 72, n.7.
A proposed settlement must be the result of adequate representation to be approved. Malchman v. Davis, 706 F.2d 426, 433 (2nd Cir. 1983). At the preliminary approval stage where the question is whether the proposed settlement is "within the range of possible approval," one of the factors courts normally look at is whether the proposed settlement was the result of collusion. The Superior Court found that there was no collusion, (Exc. 722), but never made any specific finding that the class was adequately represented by class counsel agreeing to the HB 201 proposed settlement. Appellants submit that the Superior Court erred. There was collusion and representation was inadequate. Moreover, the failure to find that the class was adequately represented during the settlement negotiation is grounds for reversal:
This court has several times commented on the trial court's continuing duty to undertake a stringent examination of the adequacy of representation by the named class representatives and their counsel at all stages of the litigation. [citations omitted] . . . The trial court's duty is heightened by its responsibility to review the fairness of any compromise of the class action.21
____________________________
21"Before approving a settlement, therefore, the judge must assure himself that the class has been adequately represented during the settlement talks, a conclusion which will not follow automatically from a finding of adequacy for litigation purposes." [citation omitted].
GM Engine Interchange, supra, 594 F.2d at 1124. Rather than "stringently examine" the adequacy of representation, the Superior Court failed to examine it at all. [ All the Superior Court found was that Counsel for the CAWP and MR/MD Intervenors "had sufficient experience and access to knowledgeable staff to represent the class adequately." (Exc. 947). This is far different than a finding of adequate representation, particularly in light of the fact that they ignored the advice of such staff. ]
There is a great deal of evidence that collusion in the negotiation of the HB 201 Settlement took place. Counsel for the CAWP and MR/MD Intervenors caused the State to withdraw from the Chapter 66 Settlement Agreement by being willing to support a settlement that was much more favorable to the State. They supported passage of legislation that provided for the dismantling of the Trust (the "Directed Results Provisions") if their negotiated settlement is not approved by the courts. (Exc. 591). They negotiated a settlement and a schedule that would not allow judicial determination of whether the Mental Health Trust Authority's key right to spend the Trust's income free of legislative appropriation was constitutional. [ Whether asserting that HB 201 itself allows this when it does not have any such provision may be collusion or inadequate representation or something else.] They assured the mental health community that they would only accept a settlement that contained certain elements to gain their support and then negotiated a settlement that did not contain those elements. (Exc. 556; Exc. 563,564).
Counsel for the CAWP and MR/MD Intervenors entered into a formal agreement with Appellants' counsel about absolute bottom line requirements for a settlement when they thought they needed such agreement and then agreed to a settlement that achieved virtually none of these in violation of their agreement. (Exc.584). This is even worse than the exclusion situation that caused the court in GM Engine Interchange to reverse settlement approval. [ Under these circumstances, the Proponents had the burden of proving the fairness of the proposed settlement by clear and convincing evidence. Id ., at n. 30. The Superior Court concluded a preponderance of the evidence standard was all that was necessary because it concluded there was nothing untoward in the negotiations at all. This was clearly erroneous.] There, such a factor "weighed heavily against approval of the settlement." GM Engine Interchange, supra, 594 F.2d at 1126.
The Superior Court's entire findings regarding collusion are found at p 30 and 57 of its preliminary approval decision. (Exc. 695; Exc. 722).
The court disagrees and finds that the agreement is not the product of collusion. The court finds that the attorneys had legitimate disagreements over the interpretation of their April agreements. The court finds that counsel for Bosel and H.L. negotiated in good faith with the interests of the class in mind. Moreover, counsel for Weiss and AMHA were free to negotiate directly with the State throughout the process. There can be disagreement about the result, but the process was fair and non-collusive.
* * *
5. Collusion. Weiss and AMHA imply that counsel for H.L. and Bosel negotiated a settlement favorable to the State in order to encourage the State to withdraw from the Chapter 66 settlement, which H. L. and Bosel opposed. Weiss Opp. To Prelim. Appr., at 11. Weiss and AMHA contend that H.L. and Bosel negotiated outside the parameters of what they had agreed the settlement should contain. Despite Weiss and AMHA's claims to the contrary, the court concludes there was no collusion during the negotiations.
As is evident, the Superior Court did not address the vast bulk of the evidence of collusion; instead merely saying it disagreed with the contention of collusion. This does not comport with the requirements of Nass, supra, 904 P.2d 412. It also fails to comport with the requirement of GM Pick-Up Fuel Tank, supra, 55 F.3d at 805, and GM Engine Interchange, supra, 594 F.2d at 1126.
The one piece of evidence the Superior Court did mention was the April 15th agreement, of which the court found that "the attorneys had legitimate disagreements over the interpretation of their April agreements." This finding is clearly erroneous. The April 15, 1994, agreement is memorialized in a letter dated April 19, 1994. (Exc. 401-408). In this agreement Counsel for the CAWP and MR/MD Intervenors agreed:
1. That the Healy (Usibelli) and Beluga coal lease lands, land at Anderson Bay outside of Valdez, and specific original trust land that was under some State agency authority, but was not being used by the agency would be included in the land package.
2. That the language for the "Endowment Concept" of the Trust Authority having power to spend the Trust's income without any legislative involvement would be absolutely clear to the satisfaction of all counsel and would be tested and have to be favorably decided prior to approval of the settlement.
3. That the State would agree to a certain minimum level of funding of the Mental Health Program from its own revenues. Specifically, that if they deviated from the Mental Health Trust Authority's funding recommendations that the Legislature and Governor had to make specific findings that the needs of the beneficiaries were being met.
4. That the Mental Health Trust Authority would have control of policy and personnel sufficient to ensure that appropriate management occur. It was specifically agreed that the Trust Authority would have ultimate management power.
5. Not to pursue a settlement that did not achieve these elements.
The language was specifically agreed to in advance by Counsel for the CAWP Intervenors. [ See (Exc. 617-621).] The Superior Court's finding that "the attorneys had legitimate disagreements over the interpretation of their April agreements" is unexplained and clearly erroneous. The agreement was written. The terms are known. It was breached. The Superior Court did not even attempt to describe what interpretation of the agreement Counsel for the CAWP and MR/MD might have had that comported with their subsequent action. There is no such interpretation. [ In addition to being collusive, this court should not countenance such behavior. As indicated previously, unauthorized negotiations caused the court in GM Engine Interchange , supra , to reverse approval of a class action settlement.] The Superior Court failed to comprehensively explore this relevant factor. GM Pick-Up Fuel Tank, supra, 55 F.3d at 805.
Inadequate representation is demonstrated by a number of actions. [ The elements of collusion set forth above will not be discussed separately here, other than to say they all also constitute inadequate representation.] Counsel for the CAWP and MR/MD Intervenors negotiated an agreement that is unenforceable. They negotiated an agreement whose key provision (the power of the Trust Authority to spend Trust income free of the legislative power of appropriation) is constitutionally infirm. They sought (and obtained) the loss of the very valuable Chapter 66 settlement that included so much value to the Trust that it was opposed by the Environmental and Resource Development Communities without having something else in hand to replace it.
Counsel for the CAWP Intervenors, concluded that there would be no monetary compensation to the Trust from the litigation [ (Tr. XIII-106).] but admitted neither he nor counsel for MR/MD Intervenors had conducted any discovery with respect to the Beneficiary's mismanagement claims and had no idea what such damages might be:
I am not suggesting by that that those claims haven't been made and that they don't exist and that they might real. It's just that there's been no discovery to establish their size, the extent, the legitimacy of them . . .
(Tr. XXVI-751).
In addition, they said that they didn't think pursuing the Beneficiaries' legal rights would achieve anything for the Beneficiaries. [ Recall that they did not move to intervene until it appeared there would be $100 million+ annually to spend on the mental health program. In fact, counsel for MR/MD was specifically notified of the potential of his clients' interests being affected by the litigation in 1984 (R.178-184 [in S 794]), but waited until there appeared to be a large income stream before "discovering" that his clients might be members of the class.] (Exc. 551). Counsel for the CAWP Intervenors told the Superior Court that the settlement should be approved because it was in the public's interest -- not the interests of the beneficiaries, whose interests should have been Counsel's sole concern. (Exc.931). Counsel for the MR/MD Intervenors said that the Trust Authority does not have to give priority in funding to the beneficiaries of the Trust created by Congress even if they are being inadequately funded by the legislature. [ (R.21169-21180).] Whose interests were really being represented in advocating for the HB 201 Settlement? It would not appear to be the class's. The Beneficiaries of the Trust were not adequately represented by the proponents of the HB 201 Settlement. [ There are other instances of inadequate representation. They are set forth in (R.20935-20847; 20717-20744) . For example, Counsel for CAWP Intervenors' original counter proposal to the State was some $40 million less in total value than the State's original offer. (Exc. 559). Another example is that Counsel for the CAWP Intervenors' draft of the settlement agreement offered to the other side eight days before it was due to be filed "was not intended to be complete, but to just get issues on the table" and that omissions from the draft of issues presented to him just days before in writing "were not deliberate." (Exc. 627). An example of the latter was the failure of Counsel for the CAWP Intervenors to even ask the State for sufficient rights to access the mineral estate only areas to be placed in the Trust under HB 201 without having to pay for such right which had been specifically drawn to his attention. (Exc. 626). See Parker v. Alaska Power Authority , (Alaska Slip Opinion No. 4331 - March 29, 1996) . The form of the agreed upon legislation itself (HB 201) and the June 10, 1996, settlement agreement themselves demonstrate inadequate representation. Counsel for the MR/MD Intervenors chose to have the State's attorney who believed it was unconstitutional draft the critical endowment language. Another example is that the HB 201 Settlement leaves the Beneficiaries completely at risk that all of the mineral estate substitute land conveyed to the Trust is a violation of § 6(i) of the Alaska Statehood Act, Pub.L. No. 85-508, 72 Stat. 339 and subject to forfeit. ]
Civil Rule 23(e) requires that notice of any proposed settlement be sent to the members of the class so that they may have an opportunity to object. The form of notice of the proposed settlement sent in this case (Notice) is attached as Appendix A to the Superior Court's Final Approval Decision. (Exc. 969-972). The Notice was defective because it failed to apprise the Beneficiaries of important considerations, because it was sent to every residence in the State, and because non-class members were allowed - even encouraged -- to comment on the proposed settlement.
In its Preliminary Approval decision, the Superior Court held that there were a number of issues the beneficiaries would have to carefully consider in weighing the HB 201 Settlement. The fact that the State was permitted to unilaterally change the terms of the settlement with questionable remedies, was something that the Superior Court said had "risks . . . which should be analyzed by the class." (Exc. 698). As recognized by the Superior Court in its preliminary approval decision, but inexplicably omitted from the Notice, understanding this risk is critical in evaluating the proposed settlement. This is particularly true in light of the State's history of attempting to dismantle the Trust and reneging on two previously enacted settlements. [ The Superior Court also should have included this history in the Background section of the Notice.] The Notice is silent on the State's unilateral right to alter the settlement.
In its Preliminary Approval Decision, the Superior Court cautioned, "The class should be aware that [The Endowment Concept] may not withstand a constitutional challenge should one be raised. It is a risk to be evaluated by the class." (Exc. 713). The Notice makes no mention of this. In fact it suggests otherwise -- that the Trust Authority gets to spend the money without question. As recognized by the Superior Court, understanding this risk was critical to form an informed opinion.
The Superior Court cautioned "it is important for the class to understand that it may require more litigation to ensure that [land management] regulations actually comply with the Enabling Act." (Exc.704,705). No mention of this is made in the Notice. The Superior Court cautioned, "It is important that the class considers the importance of cash to them," (Exc.720), yet no mention of this is made in the Notice.
In addition to the failure to include in the Notice those factors the Superior Court found the class should consider, the Notice was deficient in other areas as well. The Notice does not describe the value of the original Trust and the value of the HB 201 Settlement Trust. [ This is particularly misleading because the Notice describes the HB 201 Settlement as containing 930,000 acres as compared with 1,000,000 original acres without any kind of disclosure that only land that no one else wanted is included in the HB 201 Settlement Trust.] It is not possible to make an informed decision without these values, or at least a description of the range of values.
The Notice states: "the Trust Authority will spend the money in the income account 'to ensure an integrated comprehensive mental health program' for Alaska" and "the State's mental health program will still be funded by state money which is not part of the trust." This would cause a member of the class to reasonably - but incorrectly - believe the settlement commits the State and Trust Authority to providing an adequate mental health program. This problem is exacerbated by the fact that the Beneficiaries were told throughout the negotiation process that just such a commitment was to be included in the settlement.
The statement that the Trust Authority will "oversee the management of the trust land" is misleading because the Trust Authority only has to be consulted, while "oversee" would normally be interpreted as having decision making authority.
The purpose of Rule 23(e) notice is to "protect the nonparty members of the class from unjust or unfair settlements affecting their rights when the class representatives become fainthearted before the action is adjudicated. . . ." [ Appellants suggest that is precisely what happened here. ] 7B Wright & Miller, § 1797, at p. 340. Payne v. Travenol Labs, Inc., 673 F.2d 798, 839, (5th Cir 1982), reh'g denied, 683 F.2d 417 , cert. denied, 459 U.S. 1038 (1982). The notice must "[disclose] sufficient information for individual class members to make informed choices about . . . accepting or objecting to the settlement." In re: Corrugated Container Antitrust Litigation, 643 F.2d 195, 223 (5th Cir. 1981) (emphasis added); see also In re: Federal Skywalk Cases, 97 F.R.D. 365, 366 (W.D. Mo. 1982) ("due process requires that Class members be provided with 'enough information to make an informed choice'") (emphasis in original).
The Superior Court acknowledged that "the written comments indicated that few people obtained information beyond the notice." (Exc. 935). The Superior Court also said that "most class comments reflect a lack of understanding of the legal issues underlying the lawsuit." (Exc. 934). Thus, those commenting, did so without sufficient knowledge to make informed comments. Under the authority cited above, the Notice was defective because it failed to apprise the class of critical information necessary to make an informed choice. Proper notice is one of the constitutional underpinnings of the ability of class actions settlements to bind absent class members. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974).
The Notice was also defective because it was sent to every residence in Alaska, non class members were invited to [ For example, the display advertisement notice approved by the Superior Court and run in virtually all of the newspapers in the state specifically stated "any Alaskan resident may comment." (Exc. 742).] (and did) comment, [ (Exc. 930).] and class membership was not verified when considering comments. [ The Superior Court attempted to classify the comments as being "associated" with the class, but there was absolutely no procedure for verifying class membership. ] The Superior Court found that confusion as to class member status reigned. [ (Exc. 929, 930) .] Thus, the Superior Court could not even determine the true extent of class opposition to the HB 201 settlement. This was error.
Allowing non-class members to comment was also error. cf. Gould v. Alleco, Inc., 883 F.2d 281 (4th Cir. 1989). Sixty percent of the total comments were considered to have come from non class members. (Exc. 929). The Superior Court said that it did not give the same weight to third parties who had questionable title to land because of the litigation and were therefore directly adverse to the class. [ (Exc. 930). The Superior Court also said that it weighted comments from the general public differently than those attributed to the class. (Exc. 931)] Accepting the comments at all, let alone giving any weight to the comments of these parties in determining whether the HB 201 Settlement was fair, reasonable and adequate to the class is clearly erroneous.
In reviewing claims of denial of due process this court exercises its independent judgment. Carvalho v. Carvalho, 838 P.2d 259, 261, n.4 (Alaska 1992).
HB 201 was passed May 16, 1994 and included a provision that the Superior Court had to finally approve the settlement and all appeals concluded by December 15, 1994, or the settlement would be repealed and the Directed Results Provisions would go into effect. [ § 37, Ch. 5 FSSLA 1994 . The legislatively mandated time for the judicial decision was changed from all appeals being concluded by December 15, 1994, to a final order approving the HB 201 Settlement and dismissing the case in the Second Special Session. § 2, Ch. 1, SSSLA 1994] Appellants objected to this schedule as preventing them from a meaningful opportunity to prepare for and present their opposition, [ (R. 22713).] but the Superior Court set a schedule to comply with the legislatively directed schedule of judicial consideration, saying: "In order for the class to receive major benefits of this attempted settlement, it is essential that the court and parties move expeditiously." [ Appellants also suggested that the Superior Court make the optional executive extension of the December 15th deadline by 45 days a condition of moving forward with settlement approval consideration. (R.18843) The Superior Court failed to even do this. (Exc. 437-441). ] (Exc. 437). The Schedule from passage of HB 201 to final approval of the HB 201 Settlement on May 16, 1994, was as follows: [ (Exc. 437-441). ]
May 16th Passage of HB 201
May 18th Hearing on schedule
May 25th Scheduling and Case Management Order mailed
June 7th Legal challenges to HB 201 due
June 10th Motions for preliminary approval and settlement agreement
due
June 21st Opposition to legal challenges to HB 201 due
June 27th Reply re: legal challenges to HB 201 due
July 1st Opposition to preliminary approval due
July 8th Reply re: preliminary approval due
July 13th Motions re: Notice, including proposed text due
July 19th - 22nd Evidentiary hearing on preliminary approval
July 20th Opposition to Notice motion due (During the Preliminary Approval Hearing.)
July 25th Reply re: Notice
July 29th Decision granting preliminary approval
August 5th Decision on Notice
September 9th Second Special Session called
September 15th Expert witness reports due
Witness lists due
September 21st Appellants submit counter proposal legislation
September 21st --
September 28th Second Special Session
October 11th Final approval briefs due
October 14th Exhibits due
October 18th Final approval response briefs due
October 19th Close of Discovery
October 20th Final witness lists due
October 24th --
November 4th Final Approval Hearing
November 15th Final Approval Decision (Original Schedule)
December 9th Final Approval Decision (actual date issued)
December 14th Judgment dismissing action
It is apparent that this schedule did not allow Appellants an adequate time to conduct discovery and prepare and present their opposition case. Nor did it allow for sufficient time for the Superior Court to carefully consider the evidence and legal arguments made to it and make a deliberative decision.
The Superior Court denied Appellants' request for an additional three months to conduct discovery and prepare for the final approval hearing. (R.23140). The Superior Court denied Appellants request to continue the hearing date by three weeks to allow for more discovery and preparation time and enlarge the hearing time from eight days (not counting comment) to fifteen days to allow for additional time to present Appellants' evidence, following the 30 day deadline extension enacted in the Second Special Session of 1994. (R. 23139-23144; Exc. 23157-58). The Superior Court denied Appellants' motion for a one week extension of time to file their opposition to the proposed form of Notice which was due during the hearing on preliminary approval. (Tr. XIII-4). The Superior Court denied Appellants' request that they be allowed to file their witness list one week after the Proponents in order to have a chance to review the Proponents' lists before being required to serve their opposition witness list. (R 22716).
Due process demands that Appellants be given a meaningful opportunity to be heard and a hearing appropriate to the nature of the case. Carvalho, supra, 838 P.2d at 263; Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 313 (1949), quoted with approval in Aguchak v. Montgomery Ward Co., Inc., 520 P.2d 1352 (Alaska 1974); Frontier Saloon, Inc., v. CAWP Beverage Control Board, 524 P.2d 657, 661 (Alaska 1974); see also, GM Engine Interchange, supra, 594 F.2d at 1123 ("expediency cannot justify the disregard of the individual rights of even a fraction of the class").
This court has also recognized the due process implications of forcing a litigant to proceed without having an adequate opportunity to prepare. In Channel Flying, Inc., v. Berhnhardt, 451 P.2d 570, 572-3 (Alaska 1969), this court held it was an abuse of discretion not to grant a continuance where the opposing party presented new material shortly before the scheduled hearing, and stated:
The point that must be recognized is that there can be subtleties to late filings which the judge cannot detect unless he is intimately familiar with all facets of the case as it has developed to that stage of the proceedings, which he ordinarily is not. For example, it is easy to inject a point or two in late filed matter which can subsequently become crucial and which, if not properly met, can result in a serious disadvantage to the other side.
The amendments to HB 201 were passed less than a month from the date set for the beginning of the final approval hearing. This presented Appellants with a "moving target" to address. They were entitled to a reasonable time to meet the challenge of the changes. They were not granted that opportunity.
Appellants submit they were also entitled to an appropriate deliberative decision from the Superior Court. (R. 23755). Appellants were denied their due process rights and suffered prejudice thereby. [ The schedule did not allow Appellants time to depose most of the Proponents' witnesses. It resulted in pre-filed testimony of one of Appellants' witnesses being stricken because the affiant was out of the State during the hearing, and the court denied a continuance to allow the witness to be subject to cross-examination. (Tr. XV-497-8). It resulted in the inability to arrange for expert testimony entirely because of scheduling problems . (Tr. XXV-449). It resulted in a lack of time to adequately prepare for presentation of evidence. It resulted in the exclusion of certain mismanagement damages.]
One of the roles of the judiciary is to interpose its deliberative process between illegal action by the legislature and the citizens of this State. By acceding to the Legislature's demand to decide the case by December 15th, the Superior Court failed in this constitutional role and Appellants were denied their due process rights.
The Superior Court recognized that it had a fiduciary duty to act as guardian of the interests of the class, [ (Exc. 932). ] but failed to discharge that duty. As part of its fiduciary duty to the class, the Superior Court must "independently and objectively analyze the evidence and circumstances before it." GM Pick-Up Fuel Tank, supra, 55 F.3d at 785
Fundamentally, the Superior Court failed to understand both the legal standard that the State, as trustee, owes to the beneficiaries and the Superior Court's own fiduciary duty to the beneficiaries, both as beneficiaries and as class members in a class action. The State, as trustee, is under the highest duty of fidelity and loyalty. There is no question but that the State has acted with outright hostility to the Trust, including passing legislation twice to dissolve the Trust. HB 201 is such legislation. Its Directed Results provisions were enacted as extortion to force the beneficiaries to accept a bad deal and the court to approve one. Instead of shielding the beneficiaries from this overt extortion, the court allowed itself to be stampeded by the overweening behavior of the State.
In considering the "evidence and circumstances before it," GM Pick-Up Fuel Tank, supra, at 785, the court should have taken into account the State's pattern of overt hostility toward the Trust in connection with evaluating the HB 201 Trust Authority management scheme and the likely harm to the class resulting from the State's continued failure to acknowledge that the Trust must be managed solely in the interests of the beneficiaries. Moerover, in complying with the fiduciary role as guardian of the Trust, the court should not have excluded highly relevant evidence on past mismanagement issues as a result of an alleged lack of notice to the State that such losses were at issue in the final hearing.
The Superior Court concluded that the amount of time it would take to litigate the Beneficiaries' claims was a reason to approve the settlement. (Exc. 901). But this is not a proper reason. [ The Superior Court justified this factor on the basis of the delay in making the land productive during the litigation. (Exc. 902). However, (a) the State will be liable for the mismanagement damages attributable thereto and the land in the Trust is so admittedly poor for producing revenue that it is not a legitimate reason to approve the HB 201 Settlement.] Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157, 1223 (5th Cir. 1978), cert. denied, 439 U.S. 1115, 59 L.Ed.2d 74 (1979).
In reviewing a trial court's decision on whether to substitute a party this court determines whether the court has abused its discretion. State v. 18,013 Square Feet, 621 P.2d 887, 889 (Alaska 1981). On May 11, 1994, John Martin, one of the class representatives for the Mental Health Plaintiffs was senselessly and tragically shot to death as he walked home from a restaurant. Thereafter a motion was filed to substitute Billy R. Cross for John Martin. (R. 22682-22683). The Superior Court denied this motion without explanation. (Exc. 727-728). Substitution in these circumstances should be freely granted. The Superior Court erred in denying this motion.
The Superior Court denied preliminary approval to the Chapter 66 settlement because it "permitted any party to terminate the settlement agreement even after final approval and dismissal of this case." (Exc. 677). While specifically indicating that all of these problems could easily be corrected, the Superior Court denied preliminary approval. In considering the HB 201 Proposed Settlement, the Superior Court granted preliminary approval in spite of finding several serious problems with enforceability. (Exc. 700).
Unlike the enforceability flaws in the HB 201 settlement which allow the State to terminate the HB 201 settlement unilaterally at any time in the future (but without any clear remedy), the provisions of the Chapter 66 Settlement Agreement that allowed for termination were limited to the relatively short period of time until the Trust was fully reconstituted at 100% of its original value as agreed by the parties or found by this court. The termination provisions in the Chapter 66 Settlement Agreement were included to ensure that the parties (especially the Beneficiaries) received the benefit of their bargain. It turns the Court's duty to ensure that a proposed class action settlement is fair, reasonable and adequate on its head to disapprove the Chapter 66 Settlement that protected the class in this way and approve the HB 201 Settlement that leaves the class in grave danger of losing everything.
The Superior Court erred in denying preliminary approval to the Chapter 66 Settlement. The inconsistent standards used by the Superior Court in the two preliminary approval proceedings are arbitrary and capricious and demonstrate further the court's error in approving the HB 201 Settlement.
For the foregoing reasons, Appellants respectfully request:
1. The Court Reverse and/or Remand the Superior Court's approval of the HB 201 Settlement;
2. The Court declare HB 201 invalid.
3. The Court Reverse the Superior Court's ruling that the mentally retarded and mentally defective are beneficiaries of the Trust.
4. The Court reverse the Superior Court's April 27, 1988, Decision holding the State can add to the beneficiaries specified by Congress.
5. The Court reverse the Superior Court's June 19, 1986, Order limiting the claims that the Mental Health Intervenors can make.
6. The Court reverse the Superior Court's December 30, 1993, Order denying preliminary approval of the Proposed Settlement Agreement signed April 6, 1992, and amended June 22, 1992.
7. The Court issue such other remedial orders as it deems appropriate in light of the circumstances inhering in this appeal.
Respectfully submitted this 30th day of April, 1996, at Anchorage, Alaska.
LAW OFFICES OF DAVID T. WALKER.
Attorney for Appellants
VERN T. WEISS, et al.
By:
David T. Walker, Esq.
LAW OFFICES OF JAMES B. GOTTSTEIN
Attorney for Appellants
Mary C. Nanuwak, et al.
By:
James B. Gottstein, Esq.
By:
Bruce A. Moore, Esq.
Appellants dedicate this Brief to the memory of Nissel A. (Mike) Rose, who passed away on January 8, 1996. Among many other things, Mike Rose was a tireless advocate for those suffering from mental illness. As a member of the Alaska and Anchorage Alliances for the Mentally Ill, Mike was involved in this litigation from its inception until the time of his passing. In addition to his work within the mental health community with respect to legislation and negotiations, Mike Rose participated formally by filing an amicus brief on behalf of the Alaska Alliance for the Mentally Ill (R. 7400), wrote very cogent comments on the HB 201 Settlement and testified with respect to the HB 201 Settlement. (Exc. 811).