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Wirum & Cash et al v. L. Cash (5/22/92), 837 P 2d 692
<![CDATA[
NOTICE: This opinion is subject to
formal correction before publication in the
Pacific Reporter. Readers are requested to
bring typographical or other formal errors to
the attention of the Clerk of the Appellate
Courts, 303 K Street, Anchorage, Alaska
99501, in order that corrections may be made
prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
WIRUM & CASH, ARCHITECTS, )
C. HAROLD WIRUM, and )
MARY LOU WIRUM, ) Supreme Court No. S-3680,
) S-3691
Appellants/ )
Cross-Appellees, )
)
v. ) Superior Court No.
) 3AN-86-15268 CIVIL
LARRY CASH, ) 3AN-87-00221 CIVIL
)
Appellee/ ) O P I N I O N
Cross-Appellant. )
______________________________) [No. 3842 - May 22, 1992]
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Rene J. Gonzalez, Judge.
Appearances: Sarah J. Tugman, Cathleen
Nelson McLaughlin, Tugman, Clark & Ray,
Anchorage, for Appellants/Cross-Appellees.
Michael E. Kreger, W.D. Bennett, Krissell
Crandall, Perkins, Coie, Anchorage, for
Appellee/Cross-Appellant.
Before: Rabinowitz, Chief Justice,
Compton, and Moore, Justices. [Burke and
Matthews, Justices, not participating.]
RABINOWITZ, Chief Justice.
I. INTRODUCTION
This appeal and cross-appeal arise out of the relative
contractual and fiduciary duties of C. Harold Wirum and Larry
Cash, past partners in the architectural firm of Wirum & Cash,
Architects.
II. FACTS
C. Harold Wirum and Larry Cash executed a written
agreement on or about December 31, 1982, forming the partnership
of Wirum and Cash, Architects (W&C). At that time, Wirum had
been a practicing architect for approximately thirty years; Cash
had been employed by Wirum for six years as an architect at
Harold Wirum & Associates (HWA).
Wirum had a 75% ownership interest in W&C and Cash had
a 25% interest. Cash agreed to pay $250,000 for his interest; he
was to pay this amount from his share of the profits of the
partnership, pursuant to a buy-in agreement. Specifically, 75%
of Cash's 25% share of the profits in excess of his $60,000 per
year draw were to be applied to reduce the buy-in obligation.
The remaining amount was income for Cash. Cash agreed to pay
interest on the unpaid balance of the $250,000 at the prime rate
plus 2%.
Pursuant to the partnership agreement, the initial
working capital of the partnership was $150,000.1 Each partner's
capital account consisted of his initial capital contribution
increased by any additional capital contributions made. The
agreement provided, "[t]o the extent that a partner contributes
more than his percentage of the profits to the capital he shall
be entitled at the end of each year to receive interest computed
monthly upon the excess capital contribution in an amount calcu
lated by using the prime rate of interest plus 2%. . . ."
Wirum was designated managing partner and had
"exclusive authority to manage and control all phases of the
business." As such, Wirum delegated responsibility to his wife,
Mary Lou Wirum. Mary Lou Wirum supervised the business and
accounting functions of W&C. She had done the same at HWA.
On January 6, 1986, Wirum gave Cash notice of his
retirement effective July 1986. Cash was informed by his
attorney that the partnership owed Wirum $1.5 million from the
partnership assets under the retirement provisions of the
partnership agreement. On March 3, 1986, Mary Lou Wirum gave
both Wirum and Cash a memorandum indicating that Cash also had a
negative capital account of approximately $85,000. Cash
understood that this amount had to be paid within sixty days of
Wirum's effective retirement. The memorandum also informed Cash
that he still owed all of the $250,000 against the buy-in, plus
approximately $72,000 in interest. Moreover, it stated that W&C
owed Wirum $210,304 for interest on capital contributions that
Wirum had lent to the firm. Cash also understood that Wirum
would be entitled to 75% of the accounts receivable and work in
progress as of the day of retirement within thirty days of
receipt thereof. Moreover, under Paragraph 27 of the partnership
agreement, Wirum was entitled to receive the credit balance of
his capital account, which was $113,261.25, within sixty days of
retirement.
Cash claims he relied upon the accuracy of the
information provided to him by Mary Lou Wirum in the March 3,
1986 memorandum and concluded it would be a financial hardship,
if not an impossibility, to make the payments demanded.
Therefore, on March 24, 1986, Cash gave notice of his withdrawal
from the partnership, effective May 31, 1986. When asked at
trial why he decided to withdraw, Cash stated,
Because . . . nothing in the partnership
had worked, and the information that I'd been
. . . provided by Harold or Mary Lou
indicated that . . . I had a substantial
negative capital account of about $85,000
that I owed; $250,000 of the principal on the
buy-in, and another $72,000 in interest; that
. . . the firm owed Harold $210,000 in
interest accrued for loans that he had made
to the firm, and . . . in addition to all of
those things, the commitments required by
Harold's retirement was added to it. . . .
[I]t was sort of like a black hole . . . that
had started from the . . . day that I became
a partner until the day that I left. I
continued to work harder and harder and go
further and further into the hole, and this
was the only way that I could see to stop
that. So, I made the decision to withdraw.
Wirum then told Cash that the partnership elected to make Cash's
withdrawal effective March 31, 1986.
The partnership agreement contained a non-competition
clause.2 After Cash left the firm, during the clause's two year
period, he submitted bids and obtained work from the Corps of
Engineers, a client of W&C at the time of withdrawal, for a fee
of $400,000. He also solicited work from the Corps for a project
valued at $5-10 million, although he was not awarded that
contract until after the non-competition clause expired. The
U.S. Postal Service also hired Cash for a fee of $200,000 during
the clause's effect.
On December 11, 1986, Wirum and W&C instituted suit
against Cash, requesting, inter alia, that Cash's accounts be
charged with all paid, as well as accrued but unpaid operating
expenses, but not credited with any accrued but uncollected
accounts receivable for work in progress. Wirum and W&C also
requested judgment of $156,465.84 for money owed to Wirum given
Cash's negative balance in his capital drawing accounts.
Thereafter, Cash filed a lawsuit against Wirum and Mary Lou
Wirum. He alleged, inter alia, breach of contract, breach of
contract for improper maintenance of partnership books, fraud,
negligent misrepresentation, breach of fiduciary duty, breach of
the duty of good faith and fair dealing, that the partnership
agreement should be rescinded given misrepresentations of Wirum's
prior earnings, and that the non-competition clause was void and
unenforceable as a covenant restricting competition.
Subsequently, on March 12, 1987, Wirum also filed for
declaratory judgment and a preliminary injunction relating to the
enforcement of the non-competition clause. A preliminary
injunction was granted enjoining Cash from competing in violation
of the non-competition clause. However, the court did not enjoin
Cash in relation to an initial term of an extant contract with
the U.S. Post Office, nor for the $400,000 contract with the U.S.
Corps of Engineers, because Wirum did not submit qualifications
for either of those contracts and the contracts were to be
completed in approximately three months.
The matters then proceeded to trial without a jury.
Prior to final argument, Cash moved to expunge part of Paragraph
27 of the partnership agreement. The relevant portion states
that a withdrawing partner is liable for "all items of accrued
expense and prepaid expenses." The Wirums opposed the motion as
untimely, and requested that they be allowed to submit further
opposition memoranda if the court was to consider Cash's motion.
Thereafter, the court issued its decision, finding
numerous breaches of fiduciary duty by Wirum.
This court concludes that the evidence
at trial established that Wirum breached his
fiduciary duty to Cash by treating the
partnership as his private entity and not as
a partnership; by his failure to ensure that
the books of W&C were properly and accurately
maintained; by permitting the commingling of
W&C and Wirum personal funds; by permitting
prepayment in 1982 of 1983 expenses without
benefit or justification; by permitting W&C
to pay without Cash's knowledge (a) personal
expenses such as the fees to attorney
McLaughlin and accountant Lind for advice on
the partnership agreement; (b) payment of
accountant fees for personal financial
advice; permitting the manipulation of
expenses and income at year-end 1983 and
1984; by permitting unsupported, excessive
and unreasonable interest to be assessed on
purported "loans"from the Wirums to W&C and
the payment thereof; permitted overpayment of
monies to HWA for accounts receivable;
permitting the underpayment of labor costs
for work done by W&C on Wirum's personal
apartment projects and the non-payment of
overhead costs attributable thereto; by not
devoting full-time and attention to W&C in
1983, 1984, and 1985; by permitting W&C
bookkeepers to devote an excessive amount of
time to the activities of the Wirum personal
business entities; and by permitting the
deposit of W&C funds into a Wirum personal
money market account and not crediting the
interest earned to W&C.
The superior court expunged the disputed portion of Paragraph 27,
finding it an unenforceable penalty clause. In the Wirums'
favor, the superior court concluded that Cash was not entitled to
rescission of the partnership agreement, as he had an adequate
remedy at law; that Cash violated the non-competition clause by
contracting with the U.S. Corps of Engineers for the $400,000
project; and that the covenant not to compete did not violate
public policy.
The superior court also awarded damages to both
parties: Wirum recovered $99,962 and Cash $118,447, netting Cash
$18,485. Wirum's award was composed of $50,000 for the profit
Cash made on the Corps of Engineers contract which violated the
non-competition covenant; $10,112 which was 25% of W&C accounts
payable as of March 31, 1986; and $39,850 which was Cash's
negative balance on his W&C capital account as of March 31, 1986.
Cash's award was composed of $5,000 which was 25% of $20,000 in
payments incorrectly made to Wirum and his personal entity by
W&C; $44,681 which was 25% of the accounts receivable as of March
31, 1986; $21,285 which was 25% of 1986 prepaid liability and
workers' compensation insurance; and $47,481 which was the sum
Cash paid Wirum under the buy-in agreement.
Cash was also awarded $19,779 in prejudgment interest,
$146,400 in Civil Rule 82 attorney's fees and $39,526.28 in Civil
Rule 79 costs. Cash's total judgment was for $205,705.28. Wirum
and his wife, Mary Lou Wirum, were held jointly and severally
liable for this amount. This appeal and cross appeal followed.
Based upon our review of the record and the parties'
arguments, we have concluded (principal holdings only): 1. That
the superior court's findings of fact concerning the following
matters are supported by substantial evidence and are not clearly
erroneous: (a) Wirum's breaches of his fiduciary duties, (b)
loans made by Wirum to Wirum & Cash, (c) pre-payments, year-end
accounting and tax reporting, (d) commingling by Wirum, (e)
misrepresentations by Wirum, (f) damages awarded to Cash (with
the exception of one element of damages which is remanded for
clarification); 2. That the question of the enforceability of
paragraph 27 should be remanded for a determination as to whether
Wirum's breaches excused performance by Cash (in the event the
superior court determines that Cash is not excused the superior
court is to hold a hearing as to whether paragraph 27 constitutes
a penalty clause and is therefore unenforceable); 3. That the
issue of the enforceability of the non-compete clause should be
remanded for determination as to whether Wirum's breaches excused
performance by Cash; and 4. That Mary Lou Wirum is jointly and
severally liable for any damages that are awarded to Cash.
III. THE CONTROLLING FINDINGS OF FACT
(a) Findings Relating to Breaches of Fiduciary Duties
Wirum claims that the superior court's findings
regarding numerous breaches of fiduciary duty by him lack the
requisite evidentiary support. The following relevant findings
were made by the superior court, and on the basis of our review
of the record we conclude that they have adequate evidentiary
support and thus are not clearly erroneous.
1) After the partnership was formed and
unbeknownst to Cash, the fees for Wirums'
attorney . . . in the amount of $20,886.02,
and for his accountant . . . in the amount of
$2,978, for legal and accounting advice that
Wirum received prior to the partnership
agreement being signed by the parties were
paid by Wirum out of the partnership instead
of from personal funds.3
2) At the time of the formation of the
Wirum & Cash partnership, . . . Wirum and
Mary Lou Wirum had very substantial
investments under a number of separate
entities in addition to their interest in
HWA. The Wirums' personal entities were
managed out of the offices of W&C using W&C
personnel and facilities. . . . [B]ookkeepers
for W&C were responsible for the books of up
to 13 different entities of the Wirums. . . .
Mary Lou Wirum represented to Cash that work
performed by the bookkeepers for the Wirum
personal business entities . . . required
only a few hours a week. . . . The time
required . . . was far in excess of a few
hours a week. Bookkeepers Ms. Swartzbacker
and Ms. Ward estimated that 75% of their time
was devoted to Wirum personal matters. Ms.
Barfus estimated that 85% of her time was
spent on Wirum personal matters. Ms. Pitka
estimated that her time was divided
approximately 80% for Wirum entities. . . .
Ms. Posey spent 60% to 70% of her time on the
Wirum entities. Ms. Adams devoted almost her
full time to Wirum personal matters.4
3) Wirum and Mary Lou Wirum managed W&C
as though it was one of their personally-
owned entities. . . . [F]unds of W&C were
commingled with the personal funds or funds
of HWA.
4) Mary Lou Wirum . . . [ordered]
accounting staff that any income received by
W&C which was not immediately needed by W&C
be deposited in an account with Merrill Lynch
owned by Mary Lou and Harold Wirum. The
interest earned on W&C funds in the Merrill
Lynch account was not credited to W&C.5
5) In late December 1982, HWA prepaid
expenses for 1983 totalling
$103,961.34. . . . This prepayment of
expenses created the need for W&C to borrow
money from the Wirums. . . . At the
direction of Mary Lou Wirum, the prepaid
expense cost of $103,961.34 was repaid to the
Wirums by W&C during February and March 1983.
Mary Lou Wirum also assessed W&C interest at
a prime rate plus 2% for the amount of the
prepaid expense.
6) The W&C financial records included
numerous "Due To/Due From" accounts
attributable to the Wirums' personal business
entities and the Wirums' personal activities
. . . . A "Due From"account is like an
accounts receivable account or a loan
account. It means that money is owed by some
entity or person. As a loan, a "due from" as
used by W&C was without interest.6
7) W&C recorded on its books some
monies received on accounts receivable of
HWA. In the course of this process, monies
which should have been credited only to W&C
were in fact credited back to HWA. This
error amounted to approximately $13,561 not
being credited as income to Cash.7
8) Income to HWA for accounts
receivable outstanding as of January 1, 1983
received in 1983 were deposited in W&C bank
accounts; the total amount of $934,532 was
credited to Wirum as contributions to W&C.
These "contributions" were not reasonably
necessary to meet the operating capital needs
of W&C in 1983 and such amounts were . . .
withdrawn by the Wirums and/or their entities
for their personal use. . . .
9) In December, 1983, at Mary Lou
Wirum's direction a $75,000 W&C check was
made payable to M.L. Wirum, Inc. This
payment had nothing to do with W&C, but was
recorded as a "Due From"HWA in the W&C
books.8
10) For tax purposes, Wirum and Mary
Lou Wirum were seeking to shelter as much
income as they could for the year 1983.
Accordingly, they had a vested, personal
interest in manipulating the income and
expenses of W&C to ensure a reported tax
loss. . . . At year end 1984, Mary Lou Wirum
directed that W&C withhold reporting income
received and further directed that income be
reported as received in January 1985. . . .
The effect of the 1984 year-end manipulation
of expenses and income was to materially
distort the income of W&C. This, in turn,
distorted the payment which otherwise would
have been made by Cash under the Buy-In
Agreement and the W&C capital accounts for
Wirum and Cash.9
11) During 1983 and 1984, the Wirums,
as the sole partners in a partnership known
as the 500 Group, built two apartment
projects at Anchorage. . . . Mary Lou Wirum,
as president of M.L. Wirum, Inc. acted as con
struction manager for the apartment
projects. . . . W&C provided the
architectural services for the apartment
projects and Wirum acted as project manager
for W&C for the Apartment Projects. . . .
W&C paid the wages of W&C employees who
performed work on the apartment projects in
1983 and 1984. W&C also paid consultant
bills of approximately $181,436 for work done
on the apartment projects. . . . At year-end
1983, consultant expenses incurred by W&C
were recorded as . . . "Due From HWA
Construction.". . . At year-end 1983, some
labor costs incurred by W&C during 1983 for
work done on the apartment projects were
recorded as . . . "Due from HWA Construc
tion."10 . . . During 1983 and 1984 bills for
third party clients of W&C were reviewed on a
monthly basis at meetings usually attended by
Wirum, Cash and a bookkeeper. . . . The
Wirums' apartment projects were not discussed
at the W&C's monthly billing meetings. . . .
The Wirums did not recognize, charge or pay
any overhead cost attributable to work
performed by W&C on the apartment projects
owned by the Wirums. . . .
By W&C paying the consultant fees
and additional labor costs incurred by W&C
for work done on the apartment projects as
"Due From" entries without any interest
charged to those amounts, the Wirums took
interest free loans from W&C to finance the
architectural costs of the apartment
projects. These interest free loans were
taken throughout 1983 and 1984, and into
1985.
12) The records for W&C understated the
direct labor costs incurred by W&C for work
done on the apartment projects in 1983 and
1984. The records of W&C further failed to
accurately reflect personal expenses of the
Wirums paid by W&C. The adjustment for 1983
is $64,121 and for 1984 is $41,862,
reflecting additional monies owed by Wirums
to W&C. . . . [H]ours worked by W&C
personnel on the apartment projects . . .
were not included in the calculations of W&C
for the purposes of labor costs to be
reimbursed by the Wirums.11
13) Wirum . . . had in 1983 and 1984, a
priority with his apartment projects and as a
result he could not devote his full time
attention to W&C. Wirum devoted a
substantial amount of time to his own
interests in the apartment projects.12
14) On March 12, 1986, Mary Lou Wirum
directed Ms. Niemann to draw a check from W&C
payable to C. Harold Wirum for $210,295.29
for purported interest owed to Wirum for
loans to W&C from 1983 through 1985. Cash
was not informed of this payment while he was
a partner to W&C.13
(b) Findings Relating to Pre-Payments, Year-End
Accounting and Tax Reporting
One of the specific findings of breach which Wirum
challenges is the prepayment of expenses in 1982 and 1983 and the
manipulation of expenses and income at year-end in 1983 and 1984.
Wirum argues that the court erred in making factual findings, in
applying the wrong legal standard, and by improperly shifting the
burden of proof.
First, the evidence does show that in late December
1982, Wirum permitted prepayment of W&C partnership expenses for
1983, totaling $103,961.34. Some of these prepayments went to
the Wirums' entities. The prepayment of these expenses was not
required and did not benefit W&C. In early 1983, Wirum loaned
W&C money to repay these payments. Wirum charged W&C prime plus
2% per annum for the loan. While W&C income was used in 1983 to
repay the loan, interest was allowed to accrue.
Second, Wirum states that Cash knew of the manipulation
of the income and the prepayment of the expenses because Cash had
access to the partnership's tax returns, books, and records. A
partner only overcomes a breach of fiduciary duty if there is a
full and complete disclosure to the other partner and if the
breaching partner secures the other partner's approval and
consent. Skone v. Quanco Farms, 68 Cal. Rptr. 26, 29 (Cal. App.
1968). This includes a full disclosure of the fact that he or
she is dealing on his or her own account and all the facts which
are material to the transaction. Starr v. International Realty,
Ltd., 533 P.2d 165, 168-69 (Or. 1975). Consent must be informed
consent with knowledge of facts necessary to an intelligent
choice. Id. This duty of full disclosure is especially great
when the breaching partner is experienced in business compared to
the non-breaching partner. In re Stanton, 38 B.R. 746, 752
(Bankr. 9th Cir. 1984), appeal dismissed 766 F.2d 1283.
In Application of Lester, 386 N.Y.S.2d 9 (Sup. Ct.
1976), the question arose whether various dissenting partners
ratified an agreement buying out a past partner. Although the
dissenting partners knew of the agreement and were silent, the
court held that only when the self-dealing partner speaks and the
other has a duty to respond can silence be taken as assent. In
order for there to be a ratification or estoppel, the partners
need "detailed knowledge,"so that "by their silence there was
acquiescence, ratification or estoppel." Quoting Trustees of
East Hampton v. Bowman, 32 N.E. 987, 988 (N.Y. 1893), the court
explained,
But before a principal can be held to
have ratified the unauthorized act of an
assumed agent he must have full knowledge of
the facts, so that it can be said that he
intended to ratify the act. If his knowledge
is partial or imperfect, he will not be held
to have ratified the unauthorized act, and
the proof of adequate knowledge of the facts
should be reasonably clear and certain.
Application of Lester, 386 N.Y.S.2d at 514.
In the case at bar, merely presenting the books to Cash
was not sufficient, especially as the information contained in
them was erroneous.14 Moreover, Burke, the expert accountant,
testified that the partnership records were very complex:
[This made] it extremely difficult
to determine the financial position of the
partnership at any point in time; it made it
difficult to identify what was income to the
partnership; it made it difficult to
determine what working capital was actually
needed by the partnership at any point in
time; it made it difficult to determine what
amounts were owed, if any, to either the
Wirum entities or to Wirum & Cash at any
point in time.
In fact, the superior court found,
[b]ecause Wirum as the managing partner
of W&C failed to assure that W&C was run as a
complete and separate entity from the Wirums'
other 13 personal entities, it became neces
sary for accountants for both parties to do a
complex accounting reconstruction of the
financial position of W&C, as well as the
financial status of each partner, by the
application of complex accounting theories,
principles and assumptions.
Here merely presenting the books does not constitute full
disclosure for an informed consent. Lack of a full disclosure
substantiated Cash's testimony that he did not know the interest
Wirum claimed was due until he received the March 3, 1986
memorandum. Moreover, for some improprieties, such as year end
manipulation of expenses, the superior court found that "Mary Lou
represented to Cash that what had been done was what was always
done, was proper, and was approved by their accountants."
The Wirums also argue that the superior court
erroneously shifted the burden of proof and applied the wrong
legal standard in judging these management decisions. They claim
the standard is whether such decisions were made in good faith
for legitimate business reasons. Cash argues that fiduciaries do
not discharge their burden of proof as to the propriety of their
conduct by proving a legitimate business purpose.
Generally, partners are not liable to the partnership
for failure to use ordinary skill and care in the supervision
and management of business because "harm to the partnership is
frequently outweighed by the need to give the partner sufficient
leeway to exercise discretion on behalf of the partnership;"
however, a partner may be charged with losses resulting from
acting in a self-interested manner or in violation of the
agreement. Bromberg & Ribstein on Partnership, 6.07(f), at 6:85-
6. Alaska recognizes the business judgement rule. See Alaska
Plastics, Inc. v. Coppock, 621 P.2d 270, 278 (Alaska 1980); Betz
v. Chena Hot Springs Group, 657 P.2d 831, 835 (Alaska 1982).
In a case that involves both an exercise of the
managing partner's discretion and self-dealing, we adopt the
higher standard to judge that partner's actions. See Bassan v.
Investment Exchange Corp., 524 P.2d 233, 237-38 (Wash. 1974).
The need to exercise discretion does not excuse the managing
partner's fiduciary duties. See Labovitz v. Dolan, 545 N.E.2d
304, 310 (Ill. App. 1989) (Despite a partnership agreement giving
a general partner wide discretion in deciding whether or not to
distribute cash to the limited partners, the general partner
"still owed his limited partners a fiduciary duty which
necessarily encompasses the duty of exercising good faith,
honesty and fairness in his dealings with them and the funds of
the partnership."). Consequently, the allegation of self-dealing
invokes the higher burden and it is allocated to the breaching
partner. Here, given the litany of fiduciary breaches the
superior court found, the superior court did not err in its
conclusion that the actions in question were taken to benefit
Wirum at the expense of the partnership, or Cash. Therefore, we
hold that the allocation of the burden and the standard by which
the superior court evaluated Wirum's behavior was not error.15
(c) Findings Concerning Loans Made From Wirum to Wirum &
Cash
Burke performed a cash flow analysis showing that
Wirum's practices caused an unnecessary need for excess cash.
Burke testified that the interest legitimately owed to Wirum was
$11,228 for his working capital contributions in 1983, $5,450 for
his excess capital contributions in 1983, and $816 in working
capital loans in 1984. Yet, the following amount of interest was
calculated as being owed to Wirum for loans and excess capital
contributions: $44,036.90 in 1983; $50,940.63 in 1984;
$106,325.71 for 1985; and $19,089.51 for January and February
1986. The discrepancy occurred because money received on account
of HWA projects totalling $934,532 was commingled with income of
W&C and credited to Wirum as a "contribution." Therefore,
interest was calculated based on HWA contributions passing
through the W&C accounts, rather than on what was reasonably
necessary to meet W&C's operating needs.16 Burke called these
contributions unnecessary. Based on income actually earned and
received, W&C had no need to carry loans or receive excess
capital contributions from Wirum after February 1984.
Wirum argues that the evidence does not support a
finding that excessive loans were made or that the partnership
could have operated with no cash reserves. Specifically, Wirum
argues the following: that Cash's witness, Burke, was not
qualified as a business expert, but only as an auditor; that Cash
agreed that initial working capital of the partnership would be
$150,000 cash; and that Cash acknowledged he would need operating
capital in the amount of $250,000 and the firm's accounts receiv
able to continue the firm alone.
While Wirum challenges Burke's qualifications, Burke
was a Price Waterhouse Certified Public Accountant. The superior
court accepted Burke as an expert C.P.A., "specifically to
testify in areas of accounting and audit . . . in accounting."
Burke explained that one of the duties of an accountant "is to
advise on good business practices." She provides business
consulting to clients which includes cash flow management.
Burke explained her methodology. Burke performed a
cash flow analysis, examining all accounting records. This
included books of original entry, invoices, memorandums that
refer to or support numbers in books of original entry, and tax
returns. It also included the partnership agreement. She
completed this type of analysis for her other clients as well.
While she admits not having experience in running an
architectural firm, she could see trends within W&C itself that
supported her conclusions. For example, in testifying that funds
received at the end of 1983 were not deposited in a reasonable
time, she explained,
based on an analysis that I performed,
it's clear that the receipts as recorded in
the accounting records are less toward the
end of a calendar year than the typical
amount deposited for other months, and that
there are large deposits made in January.
It's my opinion that these funds did not,
they were not received in the same way they
were recorded in the accounting records. . .
. If you look at the deposits, the income as
recorded in the general ledger on a monthly
basis, you will see a drop in deposits toward
the end of the year and a significant
increase the following January.
The trial involved extensive testimony by the Wirums'
accountants, John Rothenbueler and Ron Lind, as well as the
testimony of Burke on Cash's behalf. The amount of weight to
give to a witnesses' testimony is in the sound discretion of the
trial court. Civil Rule 52(a); Associated Eng'rs & Contractors,
Inc. v. H. & W. Constr. Co., Inc., 438 P.2d 224 (Alaska 1968).
Wirum's witness Rothenbueler admitted that he did not determine
whether the loans were reasonably necessary. He conceded,
however, that "the bookkeepers . . . didn't have a good handle on
what the cash balances were." Burke questioned parts of
Rothenbueler's analysis. Overall, we conclude that the superior
court did not err in heavily crediting Burke's testimony.17
Evidence exists in the record that Wirum never
determined the amount of loans reasonably required to meet W&C's
capital needs. When asked if the money lent was necessary to
meet the operating expenses of W&C, Wirum responded, "that was up
to the bookkeepers. They had the freedom . . . to draw the money
whenever they needed it." When asked if he ever reviewed whether
the bookkeepers borrowed money only when necessary to meet the
partnership's operating expenses, he stated, "I personally never
did. . . ." Yet, neither did Mary Lou Wirum ever direct the
bookkeepers to calculate loans on what was reasonably necessary
for W&C to meet its operating capital needs.18 When the $210,295
check was drawn, representing interest on loans from 1983 through
1985, Wirum did not try to determine if this amount was the
correct amount owed to him. He said, "This check just came in
and was deposited. That's about all I can say. I didn't think
about it at all." The superior court found this interest charge
was substantially and materially erroneous.
(d) Findings Regarding Commingling
The superior court found,
The evidence clearly established that at
significant times, Wirum and Mary Lou Wirum
managed W&C as though it was one of their
personally-owned entities instead of a com
pletely separate partnership entity. As a
result, funds of W&C were commingled with the
personal funds or funds of HWA.
Wirum argues that the records contained all the information
needed for an accounting or an audit to be done. He contends
that if adequate records are kept, the commingling of accounts is
not a breach of contract or of fiduciary duty. In our view this
argument fails.
As Cash argues, the breach was not poor record keeping,
but managing the funds for Wirum's own interest. For example,
the superior court noted that Mary Lou Wirum
order[ed] accounting staff that any
income received by W&C which was not
immediately needed by W&C be deposited in an
account with Merrill Lynch owned by Mary Lou
& Harold Wirum. The interest earned on W&C
funds in the Merrill Lynch account was not
credited to W&C.19
Similarly, when HWA money was commingled with W&C money in 1983,
it was entered as a contribution, for which Wirum received
interest.
This type of commingling constitutes a breach of
fiduciary duty. See Glazer v. Kurman, 120 A.2d 892, 894 (Penn.
1956) ("Defendant kept the books of the company and he alone had
the power to draw checks. He mingled partnership funds and
personal funds in one bank account and, on this one account, drew
checks to pay both partnership obligations and his own personal
obligations. It requires no citation of authority to support the
proposition that defendant's conduct amounted to a breach of the
fiduciary duty which one partner owes to another.").
(e) Findings Relating to Misrepresentation
In its findings of fact relating to misrepresentation
the superior court stated,
Harold and Mary Lou Wirum
represented to Cash during partnership
negotiations that Harold's architectural
practice had averaged a net income of
$500,000 during the five-year period 1978
through 1982. At the time of this
representation, both Harold and Mary Lou
Wirum knew that the net income of $500,000
was derived not only from Harold's
architectural practice but was in fact his
net income from all his entities and
investments.
Based on the Wirums'
representations that the $500,000 per year
was income from Harold's architectural
practice, Cash proceeded with the
negotiations of a "buy in"into the firm.
Wirum argues that this finding caused the superior court to
rescind the buy-in, awarding $47,481 paid in under it. He also
argues that Cash failed to prove the elements necessary to avoid
the buy-in contract on the grounds of fraud or misrepresentation,
as the record did not support the finding that misrepresentations
were made regarding the value of the business, or that Cash's
reliance on any such statements was reasonable. Cash, however,
argues that the trial court did not rescind the buy-in or award
Cash damages on his claim of negligent misrepresentation.
As noted above, the superior court found numerous
breaches of fiduciary duties, and emphasized all of them in its
conclusions of law. Given the purposes of our remand, which is
discussed below, we need not reach this issue since, if on remand
the superior court determines that Wirum's breaches of fiduciary
duties were material, Cash would be excused from further
performance of the buy-in agreement.20
(f) Findings Relating to Damages Awarded Cash
Wirum claims that he cannot tell from where the court
drew its damage figures. Wirum asserts, therefore, that the
damage award cannot be adequately reviewed. Wirum, however, does
not specify any particular error. Nevertheless, we will briefly
review the evidentiary bases for the damage findings.
(i) "$5,000 which is 25% of $20,000 payments
incorrectly made to 500 L Group and to C. Harold
Wirum by W&C"
The $20,000 in payments incorrectly made by W&C to
Wirum's entities was actually composed of $16,000 paid to the 500
L group and $4,000 paid to Wirum personally. Burke found, in
journal entries 634 and 720, that both of these amounts
receivable had been deducted from the books twice. The double
deductions meant,
[a]s detailed on Exhibit GV, we have now
reduced those two accounts twice. We have
reduced it and zeroed it out at the end of
June so that at the end of June, . . . the
general ledger showed that they [entities of
500 L Group and personal] did not owe any
monies to the partnership of Wirum & Cash.
The third journal entry in fact creates an
amount that the partnership owes to those
entities by changing it from a receivable to
a payable.
This amount was then credited to the respective entities. W&C
was therefore due $20,000, 25% of which represented Cash's share.
(ii) "$44,681.00 which is 25% of accounts
receivable as of March 31, 1986."
W&C accounts receivable were $178,723 as of March 31,
1986. This amount was earned while Cash was a partner. W&C
itself provided the document from which this figure was
generated. Cash's award of $10,112 was arrived at by deducting
Cash's share of the questioned payments to consultants from his
25% share of the accounts receivable. The evidence supports this
offset.
(iii) 25% of 1986 prepaid liability and
workers' compen sation insurance . . . Larry
Cash's share of this amount is $21,285"
The superior court stated, "Since W&C existed only for
the first three months of 1986, Larry Cash is entitled to recover
his share of prepaid liability and workers' compensation
insurance, paid for all of 1986." For 1986, professional
liability insurance cost $104,172 and workers' compensation
insurance cost $9,349. Prepaid expenses for the nine months
remaining in 1986 after Cash's withdrawal amounted to $85,140 for
professional liability and workers' compensation insurance.
Twenty-five percent of $85,140 amounts to $21,285.
(iv) "$47,481 which is the sum Cash paid to
Wirum under the terms of the buy-in agreement."
Cash argues he lost this amount when he forfeited his
interest in the partnership due to Wirum's breach of his
fiduciary duties. Yet, the tax returns Cash and Burke cite as
supporting the $47,481 do not indicate that Cash paid this amount
in compliance with the terms of the buy-in agreement. Moreover,
Wirum argues the math is wrong. Upon remand the superior court
is directed to clarify this issue by entering additional findings
of fact and, if necessary, modified conclusions of law.
IV. WAS PARAGRAPH 27 AN UNENFORCEABLE PENALTY CLAUSE?
Upon Cash's notice of withdrawal, Wirum told Cash that
Cash owed $68,915.75 for payables accrued prior to Cash's
withdrawal, pursuant to Paragraph 27.21 On October 7, 1988, after
the parties had rested but before final arguments commenced, Cash
requested that the court find Paragraph 27's clause "all items of
accrued expense and prepaid expenses"to be an unenforceable
penalty clause. Wirum opposed the motion as untimely, and
requested that the court allow him to address the merits with
further memoranda if the court was going to consider it. The
superior court did not respond to the question of timeliness or
allow further briefing. In its findings, it held,
Under the provisions of Paragraph 27 of
the partnership agreement, a withdrawing
partner is charged with all prepaid, as well
as accrued but unpaid operating expenses,
including a proportionate share of normal
fiscal year-end expenses and he is not
entitled to receive "any amount for accounts
receivable or work in progress." These
provisions requiring Cash as the withdrawing
25% partner to pay all prepaid as well as
accrued but unpaid operating expenses,
including a proportionate share of normal
fiscal year-end expenses and the same time
for him not to be entitled to receive any
amount for accounts receivable is clearly an
unenforceable "penalty". These contract
provisions fixing damages in advance of a
partner's withdrawal are intended to penalize
a withdrawing partner [and] do not constitute
an enforceable liquidated damage clause.
Under the facts of this case where the
majority and managing partner of the
partnership breached his fiduciary duty of
good faith and fair dealing owed to a
minority partner, a penalty clause that has
no relation to what actual losses the
partnership suffered by the minority
partner's withdrawal is unenforceable.
The superior court awarded Cash $44,681, constituting 25% of the
accounts receivable as of March 31, 1986, and $21,285,
representing 25% of 1986 prepaid liability and workers'
compensation insurance. Wirum questions the timeliness of Cash's
argument, the lack of an evidentiary hearing, and the absence of
critical findings by the court.
Wirum claims that Cash's motion was untimely; he argues
that the pleadings did not address the concept of "reformation"
or "expunging"a part of the partnership agreement, nor was it
addressed at trial. Cash responds that while he briefed the
legal defense after the close of evidence, the enforceability of
Paragraph 27 was an issue in the pleadings and throughout the
trial because the Wirums sought money damages based on Paragraph
27. We answer these contentions in alternative fashion since we
have concluded that the question of the enforceability of
paragraph 27 should be remanded to the superior court for
additional findings of fact and conclusions of law.
It is a basic principle of contract law that a contract
breach may excuse further performance. On this point, the
superior court failed to make the necessary determinations
whether, under a contract analysis Wirum's breaches of his
fiduciary duties excused Cash's performance of his obligations
under paragraph 27. Thus, on remand the superior court should
enter additional findings and conclusions as to whether Wirum's
various breaches, discussed above, were material breaches of the
parties' contract. Restatement (Second) of Contracts, 237,
comment d; 241 (1981); Howard S. Lease Constr. Co. v. Holly,
725 P.2d 712, 715-16 (Alaska 1986).22
In the event the superior court determines that none of
Wirum's breaches relieved Cash of his obligations under paragraph
27, we hold that the superior court abused its discretion in
refusing to allow Wirum to brief the issue of whether paragraph
27 constituted an unenforceable penalty clause and therefore
should be expunged. Cash did not assert in the pleadings that
paragraph 27 constituted an unenforceable penalty clause.
Furthermore, review of the record persuades us that this issue
was not tried with Wirum's consent. This penalty clause issue
was raised for the first time after Wirum had rested his case.23
In brief, Wirum was never afforded the opportunity to present
countervailing evidence or to argue the matter fully.24
V. THE NON-COMPETE CLAUSE
Cash argues that Wirum is not entitled to enforce the
non-compete clause because Wirum's breaches of fiduciary duties
discharged Cash's further obligations under this clause.
Wirum argues that he breached no duty to Cash, and that
any breaches were not wilful or material. Wirum argues that Cash
voluntarily left the firm because of the amount of money he was
required to pay upon Wirum's retirement and stresses that Cash
received the benefits which he reasonably could have expected
based on the partnership agreement. Wirum also argues that Cash
can be adequately compensated if a breach occurred, and that
Wirum will suffer an unjust and unnecessary forfeiture if Cash is
excused.
Given the remand we discussed above as to the
enforceability of paragraph 27 we think a similar disposition is
called for as to this issue. We therefore remand the question of
the enforceability of the non-compete clause for the purpose of
permitting the superior court to enter additional findings of
fact and conclusions of law as to whether Wirum's breaches were
material and whether such material breaches excused Cash from any
obligations he had under the provisions of the non-compete
clause.
In the event the superior court on remand determines
that Wirum's breaches did not relieve Cash of his obligations
under the non-compete clause we will address the parties'
arguments regarding the superior court's rulings pertaining to
the non-compete clause.
(i) Postal service contract
The superior court found "Cash did not violate the 'non-
competition' clause by entering into a contract with the United
States Postal Service within two (2) years of March 31, 1986,
because Wirum did not submit a bid on the Postal Service
contract." In essence, the superior court approved Judge Joan
Katz's preliminary injunction, refusing to enjoin Cash from
completing the contract for Phase I of the project because Wirum
had not attempted to obtain the contract. Cash, citing Data
Management, Inc. v. Greene, 757 P.2d 62 (Alaska 1988), claims
both Judge Katz and Judge Gonzalez adopted a rule of
reasonableness in their interpretation of the clause. He also
emphasizes that these clauses are disfavored and Wirum had not
submitted a bid. Wirum responds, however, that the superior
court should have looked at whether Cash's contract was with a
W&C or HWA client, and not whether Wirum had placed a bid on that
particular contract.
Based on the language of the partnership agreement, we
conclude that Wirum's argument has merit. Paragraph 16 of the
agreement reads,
No partner shall directly or
indirectly engage in competition with the
business of the partnership as described in
paragraph 5. If any partner withdraws or is
expelled for the partnership he shall not
perform services for a client of the
partnership, past or present, or a client of
Wirum's architectural practice as a sole
practitioner, for a two year period
thereafter without the consent of the other
partners.
A partner may engage in other
enterprises which do not conflict or compete
with the business or interest of the
partnership and a partner need not offer such
business opportunities to the partnership or
the other partners.
(Emphasis added.) The U.S. Postal Service was Cash's client, as
well as a former client of W&C. The U.S. Postal Service contract
provided total fees of $200,000 and was entered into within two
years of leaving the partnership. Judge Katz, ruling for Wirum
on the preliminary injunction, acknowledged "that contacts have
been made which, at least on the face of the noncompete
agreement, violate that agreement, and those more specifically
are the contacts and the contracts with the Postal Service and
Corps of Engineers."
Cash claims that Wirum did not submit a bid on this
project. Yet, this factual issue is irrelevant given the plain
language of the clause.25
(ii) Corps of Engineers Contract26
Cash has a contract to perform architectural services
for a dining facility for the U.S. Corps of Engineers at Fort
Wainwright, valued at $5-10 million. Wirum alleges that Cash
solicited work for this project during the non-compete period.
The Corps of Engineers was Wirum's client for twenty five years,
including at the time Cash withdrew. Wirum claims he submitted
for the Corps job and was "shortlisted"; he believed he had a
good chance of getting it. However, the project was put on hold
and Cash obtained the actual award after the two year non-compete
period expired. Wirum alleges that the trial court erred by not
awarding damages for this breach. The court made no finding as
to whether this action violated the clause.
Cash responds that the Corps contract did not commence
within the two-year term of the non-competition clause, but six
months later. Cash cites Judge Katz's ruling at the preliminary
injunction that the clause would only be construed to prevent
Cash from "competing"where the "effective date of any contract
would fall within the two-year period,"because one needs to
treat such clauses restrictively. See DeCristofaro v. Security
Nat'l Bank, 664 P.2d 167, 169 (Alaska 1983).27
In our view Cash has the more persuasive position.
While the Corps of Engineers first solicited the statement of
qualifications on the project in September 1987, and Cash
submitted a bid in October 1987, Cash was only selected for the
project on January 6, 1988. At the date of trial, August 30,
1988, no negotiations had occurred, no contract was signed, no
work was performed, nor was a proposal predicate to negotiating
the fee for services prepared. Simply, no services had been
"performed,"which is what the partnership agreement prohibited.
While an allegation existed that collusion delayed the
project, Claude Vining, assistant chief of the engineering
division of the Alaska District Corps of Engineers, testified
that it was not an unusual period of time between the
solicitation and selection. He explained that "our user [the
Army] has not authorized us to complete the project." Vining
denied that the Corps and Cash agreed to delay work on the
project. Cash also denies it.
(iii) Contracts with the United States
Cash submitted a statement of qualifications for a U.S.
Army Corps Engineers architectural services contract and was
selected for negotiations. The Corps ultimately awarded him an
indefinite delivery of architectural services contract. He
performed approximately $250,000 in architectural services on the
contract, yet he was unable to identify his profit. The superior
court awarded Wirum $50,000 representing the profit the court
determined that Cash made on this contract. Wirum testified that
he also bid on this contract, although conflicting evidence
existed.
At the preliminary injunction hearing, Judge Katz
allowed Cash to continue to perform the contract to its
completion. Judge Katz found that Wirum had not submitted
qualifications for the contract and Cash's performance under it
was likely to be finished in two or three months. Judge Katz did
not issue a preliminary injunction.
Mr. Cash is in midstream on that job,
and Mr. Wirum did bid on that particular
option -- at least he thinks he probably did.
That one will apparently run out at about the
same time that the noncompete clause itself
expires. I think here, because there is a
potential for serious harm to Mr. Cash's
reputation should he effectively breach his
contract by breaking it off in the middle,
since there's a harm to his employees poten
tially if this contract not be completed, I
am not going to enjoin him from continuing
with the Corps contract for this particular
year.
At trial on the merits, superior court Judge Gonzalez
found that Cash had violated the non-compete clause by
contracting with the Corps to perform architectural services
within two years of March 31, 1986 for "a client for whom HWA
and/or W&C had done work." The superior court found the clause
"not unreasonably restrictive nor is it violative of public
policy."
Cash argues that a restraint on his ability to contract
with the United States, e.g. the Army Corps of Engineers, is
unreasonable because it eliminates "ordinary competition," as
opposed to competition which would be unfair to W&C. Cash
emphasizes that the competitive federal procedures for procuring
architectural services exist.
We reject Cash's argument. Cash places much emphasis
on Data Management, Inc. v. Greene, 757 P.2d 62 (Alaska 1988).
First, Data Management addressed an overbroad covenant not to
compete. Id. at 64. Here, there is no finding that the covenant
is too broad.
Second, the language in Data Management that Cash
emphasizes, the distinction between "whether the covenant seeks
to eliminate competition which would be unfair to the employer or
merely seeks to eliminate ordinary competition," is just one
factor among nine that are listed. Id. at 65. Other factors,
such as "whether the covenant operates as a bar to the employee's
sole means of support," and "the absence or presence of
limitations as to time and space,"indicate that the clause is
reasonable. Id. at 65. This conclusion is reenforced by our
reference to U.C.C. 2-302 which indicates that the clause must
be unconscionable in order to alter the covenant. Data
Management, 757 P.2d at 65.
Even assuming that Cash is correct on the procedures
for obtaining Corps contracts, other courts have refused to place
the public's interest in competitive bidding on public projects
ahead of a partner's obligation not to compete. See Leff v.
Gunter, 658 P.2d 740, 747 (Cal. 1983) (en banc) (partner still
violating continuing duty not to compete with partnership even
though partner withdrew). Moreover, Judge Katz found that "there
is no evidence that enforcement of the covenant not to compete
against Cash is likely to cause significant harm to public
interest."28
(iv) Damages awarded under the non-compete
clause
Finally, Cash argues that the superior court
incorrectly measured Wirum's damages for Cash's breach of the non-
compete clause by Cash's expected profits. Cash claims that
Wirum had to prove some actual damages. Wirum responds that the
trial court did not award damages based on Cash's profit.
Rather, it considered Cash's profit as evidence of Wirum's loss.
Wirum further contends that if the court awarded Wirum Cash's
profit, it is legally supportable.
Cash offers no authority for his argument. Wirum, by
contrast, convincingly argues that a court can consider the
profit of the breaching party. In National Bank of Alaska v.
J.B.L. & K of Alaska, Inc., 546 P.2d 579, 590 (Alaska 1976), we
held, "[t]he measure for breach of a covenant not to compete is
generally not the profits earned by the breaching party asserting
the breach." We cited to Merager v. Turnbull, 99 P.2d 434, 439
(Wash. 1940), which held that the defendant's profit may be
considered in evidence if shown to correspond in whole or in part
to plaintiff's loss for impairment of good will. Other courts
have found that the breaching party's profits can be a reasonable
basis for estimating plaintiff's damages. See North Pac. Lumber
Co. v. Moore, 551 P.2d 431, 435-36 (Or. 1976); Dunn v. Ward, 670
P.2d 59, 61 (Idaho App. 1983).29
VI. WHETHER MARY LOU WIRUM IS JOINTLY AND SEVERALLY LIABLE FOR
DAMAGES ASSESSED AGAINST WIRUM
The superior court found that,
Mary Lou Wirum owed a fiduciary duty to
the partnership of Wirum & Cash and to Larry
Cash because she was entrusted to manage
money belonging to the partnership and to
keep accurate records for the benefit of both
partners and not for the primary benefit of
C. Harold Wirum, her husband and
herself. . . . Mary Lou Wirum breached her
fiduciary duties owed to Larry Cash.
Wirum argues that inadequate findings of fact exist to
show that Mary Lou Wirum had agreed to act on Cash's behalf.
Wirum alternatively argues that assessing liability for damages
assessed against himself and against Mary Lou Wirum, as well, was
error because only Wirum was party to the partnership and buy-in
agreement.
Mary Lou Wirum should be held jointly and severally
liable. The superior court held that "the evidence in this case
proved that Mary Lou Wirum had substantial interwoven interests
with C. Harold Wirum in the acts and transactions involved in
this litigation." This factual finding is not clearly erroneous.
The court lists "[a] few [twenty-six] of the facts which support
[its] conclusion." The superior court found that while Wirum was
managing partner, "in actual practice, at all times during its
existence, Wirum delegated this responsibility to Mary Lou Wirum
who undertook the responsibility for and supervised the business
and accounting functions of the partnership." Mary Lou Wirum
herself said,
For the past 30 years, I have been
intimately involved in the organizational and
financial matters of Wirum & Cash,
Architects, and of C. Harold Wirum as a sole
practitioner, as well as CCWC, Architects,
and Maynard & Wirum, Architects, partnerships
of which C. Harold Wirum was a member. My
involvement with each entity was for the
entire period of that entity's existence.30
Apart from the factual intertwining of actions, several
legal theories support the joint and several award. First, Mary
Lou Wirum assisted Wirum in committing a tort (here breach of
fiduciary duty); she is therefore liable as a joint tortfeasor.
An agent who assists another agent or
the principal to commit a tort is normally
himself liable as a joint tort feasor for the
entire damage. Thus, those who assist in the
wrongful removal of chattels . . . all are
subject to liability together with those for
whom they act, except where their good faith
creates a privilege in them to act.
Restatement (Second) Agency, 343 comment d (1958).31
The superior court's ability to join the parties is
clear.
(1) Principal and agent can be joined in
an action for a wrong resulting from the
tortious conduct of an agent or that of agent
and principal, and a judgment can be rendered
against each.
Restatement (Second) Agency, 217(B) (1958).
However, the Restatement of Torts reaches a slightly
different conclusion:
A person who knowingly assists a
fiduciary in committing a breach of trust is
himself guilty of tortious conduct and is
subject to liability for the harm thereby
caused . . . The measure of his liability,
however, may be different from that of the
fiduciary since he is responsible only for
harm caused or profits that he himself has
made from the transaction, and he is not
necessarily liable for the profits that the
fiduciary has made nor for those that he
should have made.
Restatement (Second) Torts, 874 comment c (1979). However,
given the intertwining of Mary Lou Wirum and Wirum's actions, as
well as their status as partners in other business entities and
as husband and wife, Wirum's gains are indistinguishable from
Mary Lou Wirum's gain.
Given these theories, we find it is unnecessary to
resolve whether Mary Lou Wirum was an agent of Cash as well as
the partnership, since we may affirm a trial court's ruling on
different grounds than those adopted by the trial court.
VII. MISCELLANEOUS CLAIMS OF ERROR
(i) The buy-in agreement
Wirum argues that the superior court erred in refunding
Cash $47,481 that he paid under the buy-in agreement and
simultaneously, crediting Cash with the benefits of 25% ownership
when he withdrew (e.g. $44,681 which was 25% of the accounts
receivable as of March 31, 1986). More particularly, Wirum
contends that the buy-in agreement and the partnership agreement
were one contract, that the evidence did not support that Wirum
knowingly misrepresented past income or that Cash's reliance was
reasonable, and that the court improperly shifted the burden of
proof.
Wirum asserts that the trial court treated the buy-in
agreement and the partnership agreement as two separate
contracts, allowing rescission as to the buy-in agreement and a
damage remedy as to the partnership agreement. He contends that
a damage remedy should have been applied to both. Wirum argues
that he is entitled to have the buy-in agreement enforced and to
receive from Cash the remainder of the $250,000, or to have the
unpaid buy-in sums subtracted from the damage award. Cash does
not deny that the two agreements should be read together as one
contract. Yet, he contends that the court was awarding
restitution for his buy-in contributions in its damage award.
Cash argues that he suffered this loss, and that Wirum derived
this gain, from his breach of fiduciary duties.
Contrary to what Wirum and Cash argue, it seems that
the superior court employed a reliance measure of damages.32
However, as the measure of damages is not specified, upon remand
the superior court shall clarify the precise damage theory it is
applying.
(ii) Costs and attorney's fees
Given our conclusion that a remand for certain aspects
of this case is necessary we find it unnecessary to address
Wirum's attack on the superior court's award to Cash of
attorney's fees and costs. Depending on the superior court's
resolution of the issues remanded it could conceivably make
adjustments to its previous award of attorney's fees and costs.
(iii) New trial and additional errors
In footnote 112 of his brief, Wirum claims this case
should be remanded for a new trial given the overall number of
errors. In that footnote, Wirum lists six alleged errors in
addition to those discussed throughout this opinion. Given the
cursory nature of their presentation, we decline to address them.
Where a point is not given more than a cursory statement in the
argument portion of a brief, the point will not be considered on
appeal. State v. O'Neill Investigations, Inc., 609 P.2d 520, 528
(Alaska 1980); Fairview Development, Inc. v. City of Fairbanks,
475 P.2d 35, 36 (Alaska 1970), cert. denied, 402 U.S. 901 (1971).
Furthermore, we are not persuaded that a new trial, as opposed to
the limited remand called for above, is appropriate.
AFFIRMED in part, REVERSED in part, and REMANDED for
further proceedings consistent with this opinion.
_______________________________
1. At the partnership's inception, Cash's capital
contribution was $16,000 and Wirum's was $48,000, not including
the depreciated cost tax basis of Wirum's furniture, equipment
and books worth $83,671.
2. Paragraph 16 of the agreement read, in part,
If any partner withdraws or is expelled
from the partnership he shall not perform
services for a client of the partnership,
past or present, or a client of Wirum's
architectural practice as a sole
practitioner, for a two year period
thereafter without the consent of the other
partners.
3. Cash claims that as this finding was not challenged in
Wirum's opening brief, it is waived. That Wirum's accountant and
legal fees were paid is supported by the record. The total
appears to be approximately $20,000. W&C did not pay the
equivalent fees for Cash in the formation of the partnership.
4. These diversions of partnership resources are supported
by the record. Wirum contends that these costs were cleared
monthly by offsets through "due-to"and "due-from"accounts.
Wirum contends he understood "overhead"to mean only
"labor burden"or FICA, FUTA, and worker's compensation, and not
rental costs or office expenses. This belies the clear meaning
of the term. Black's Law Dictionary 995 (5th ed. 1979) defines
overhead as "[a]ll administrative or executive costs incident to
the management, supervision, or conduct of the capital outlay, or
business." It goes on to say that overhead includes "office
expenses."
Wirum also contends that he told Cash that the
bookkeepers would work for Wirums' personal projects in exchange
for Mary Lou Wirum's supervisory services. This is not supported
by the agreement; the record indicates Mary Lou Wirum received
free office space for her services, not free bookkeeping
services.
5. The record supports that monies not needed immediately
were transferred to the Wirums' personal account. Interest
earned was not credited to W&C. This finding is not challenged.
Rather, Wirum contends this money was due to him as a result of
HWA receivables flowing through W&C, therefore he practiced good
money management. Wirum cites John Rothenbueler to support his
position, yet Rothenbueler's testimony acknowledges its "a very
complex question" and nowhere states that the money transfers
reflected perfectly the money transferred to the Merrill Lynch
account. He even admitted "you can't tell . . . in hindsight."
Wirum also contends the amounts transferred reduced the interest
W&C owed to Wirum for monies he loaned to the firm. Yet,
Marianne Burke, an expert accountant, showed these transfers
resulted in a loss of $99,185.16 in potential interest to W&C in
1984 through 1986. While Wirum criticizes her analysis, his
attacks go to the damage amount rather than the existence of a
breach. Moreover, Wirum fails to demonstrate how Burke's
conclusion would differ if she considered the factors Wirum
indicated she did not consider.
6. In 1984 alone, if that money had been kept in the part
nership, $35,946 could have been interest earned on excess cash.
7. This is supported by the record. Wirum argues that this
bookkeeping error "when dealing with millions of dollars and
hundreds of transactions, is not a breach of fiduciary duty."
There is no evidence, however, to show that it is a mere
bookkeeping error.
8. M.L. Wirum, Inc. was the construction manager for the
apartment complexes built by a Wirum entity. That company
charged HWA $75,000 for the services in 1983, yet Mary Lou Wirum
caused W&C to pay this expense. HWA was never charged interest
on this payment. Even John Rothenbueler, Wirum's expert, could
not say that this money was repaid.
9. Expenses for 1983 were posted in December 1983 but not
sent out until January 1984. In that year, income received by
W&C was not reported as being received in 1983, but rather as
received in January 1984. This overstated expenses and
understated income for W&C for 1983. In 1984, the same thing
occurred. Expenses were recorded although checks were not mailed
until 1985. Income was under reported, recording it instead in
1985. The distortion of W&C's income negatively affected the
amount credited to Cash under the buy-in and created unnecessary
excess capital contributions and interest charges for Wirum.
Wirum contends that the year end activity affected the
cash income reported to IRS, not the firm's accrual income and
therefore benefited both W&C and Cash. He contends it did not
effect Cash's buy-in obligation. However, there is no record
support given by Wirum.
10. The court found that these billing practices were
continued through mid year 1984. No interest was paid on these
loans.
11. The record supports that W&C employees working on the
apartment projects were paid by W&C. Also W&C records understate
the direct labor costs incurred by the partnership for work on
the apartment projects. Evidence supports the court's conclusion
that Wirum did not reimburse W&C for any overhead costs
attributable to work performed by W&C employees. In 1984, that
amount is estimated at $29,918.
Similarly, third party consultant costs between
$181,436 and $193,000 were paid by W&C. To pay this back, Wirum
made "due from"entries on the accounts; these did not accrue
interest for W&C. These interest free loans were taken
throughout 1983, 1984, and 1985.
Finally, the record supports that the Wirums also owed
W&C for expenses related to personal projects in the amount of
$64,121 in 1983 and $41,862 in 1984.
12. This is supported by the record. An exhibit submitted
by Cash showed Wirum dedicated 21% of his time to personal
projects versus 37% to W&C projects in 1983, 31% to personal
projects and 23% to W&C projects in 1984, 1% to personal projects
and 21% to W&C projects in 1985, and none to personal projects
and 28% to W&C projects in the first quarter of 1986. Again,
Cash emphasizes that as Wirum did not challenge this finding in
his opening brief, his arguments are waived.
However, in his cross-appellee brief, Wirum claims W&C
received credit for all time spent on these projects. Yet,
Rothenbueler's testimony only indicated that he computed W&C
employees' contributions, not the partner's time spent on
personal projects. While Cash might have known of these projects
when he entered the partnership, it is unclear if Cash knew of
the magnitude of time involved or, if his knowledge was relevant
given that the partnership agreement stated, "Each partner shall
devote substantially all of his full time, attention and best
efforts to the interests and affairs of the partnership."
While Wirum says this time included time off for
personal emergencies which Cash authorized, he does not detail
the quantity of time this entailed.
13. While W&C reported a loss of $212,019 in 1983, W&C
reported profits of $252,305 in 1984, $431,091 in 1985 and
$96,018 in the first three months of 1986. W&C had no need to
carry loans or receive excess capital contributions after
February 1984. In fact, under Burke's analysis, W&C should have
had excess cash which would have earned $85,572 by the end of
1985. Yet, interest due to the Wirums for loans and excess
capital contributions totalled $229,064 for the partnership
years, and less than half was attributable to 1983 and 1984, the
time for which the firm may have needed excess capital
contributions.
In March 1986, a check was drawn for interest owed to
Wirum for loans to W&C from 1983 to 1985 in the amount of
$210,295.29. The loans were unnecessary. Rather, the true
interest that was due was $5,466 for the original excess capital
contribution plus $11,228 for working capital loans in 1983. The
interest should have been $816 for working capital loans in 1984.
There should have been no interest due for 1985 or 1986.
Janet Niemann, a CPA and firm bookkeeper, prepared
computations on interest due Wirum for providing operating
capital to the firm for 1983-85. She determined that $210,295
was due Wirum and a check for this amount was paid to Wirum. The
calculations of interest during this period were based on
contributions passing through the accounts of W&C rather than on
what was reasonably necessary to meet the operating capital needs
of W&C. Touche Ross did an accounting for the firm and
determined the correct amount should have been $94,369. Wirum
agrees an error was made and it should be corrected.
14. There is no explicit requirement in Alaska's Uniform
Partnership Act that any books be kept, although it is arguably
implicit in AS 32.05.140 (location and access to partnership
books) and AS 32.05.150 (duty of partners to provide
information). However, once Wirum chose to keep books, they
needed to be adequate. Bromberg and Ribstein on Partnership,
6.05(b), at 6:53. Otherwise, the partnership may be deemed to
have breached the duty to disclose. Rogers v. Stacy, 318 P.2d
1116 (N.M. 1957); Jackson v. Jackson, 98 N.E.2d 169 (Ill. App.
1951). Clear financial records delineate the parties' individual
interests and deter self-dealing and mismanagement by providing a
monitoring mechanism. See Bromberg and Ribstein on Partnership,
6.05(a), at 6:52-3. See also, Frankel, Fiduciary Law, 71 Cal.
L. Rev. 795, 826 (1983).
15. Wirum claims that he acted in good faith. However, a
finding of the absence of good faith is implicit in a finding
that a fiduciary breach occurred. Froemming v. Gate City Federal
Sav. and Loan Ass'n, 822 F.2d 723, 731 (8th Cir. 1987). In
Froemming, the court said,
Good faith in turn depends upon the
knowledge, understanding, and intent of the
partner who is charged with breach of
fiduciary duty, as well as the understanding,
knowledge, and intent of his co-partners. It
also depends upon the circumstances of
whatever action is alleged to be a breach of
duty. Necessarily, the determination of
whether an action is undertaken in good faith
requires the factfinder to weigh the
credibility of the witnesses, gauge nuances
of voice and expression, and sift through
competing and conflicting versions of what
occurred and what state of mind each actor
brought to the occurrence.
Id.
As to the specifics, the superior court found that the
prepayment of expenses did not benefit W&C, but created a need
for the partnership to borrow from the Wirums. Wirum claims that
this was clearly erroneous. The Wirums claim the partnership
would have had to borrow from a bank and no evidence existed that
W&C had the funds to pay the first two months rent and parking
from partnership income. Cash does not specifically respond to
this argument. However, the superior court appears to have
considered Wirum's contention in finding a breach. It
acknowledged that W&C needed additional working capital during
the first few months of its existence, but not after 1984.
The superior court found that the year-end tax
reporting system diminished Cash's ability to pay off his buy-in
obligation. Wirum claims that "it reduced the principal that
Cash had to pay Mr. Wirum on his buy-in." Cash seems to accept
this argument and calls it "false comfort." He claims, rather,
that he may not have withdrawn had the profits been fairly
represented. It is clear, in any event, that the practice
created unnecessary working capital loans and interest charges,
and it caused Cash to owe $45,000 more on his capital accounts
and an additional $48,000 on the buy-in. The finding that Wirum
had a personal interest in manipulating W&C's income was not
clearly erroneous.
As to the capital account, Wirum argues that Cash never
paid his negative balance and that tax deferral procedures catch
up eventually. Cash responds that he never received the benefits
of the partnership and the superior court charged him for his
share of the partnership's capital accounts in its damage award.
While Cash undoubtedly received some benefit from the
partnership, the superior court did award Wirum $39,850 which was
Cash's negative balance of his capital account as of March 31,
1986.
16. The interest owed by W&C to Wirum based on the amount
passing through in 1983 amounted to $52,729.73. A bookkeeper
later computed the correct amount to be $44,037. Another
bookkeeper, however, used the $52,729.73 figure to compute
interest for 1984, 1985, and part of 1986. From 1983 until March
1986, $229,064.52 was calculated as interest accruing on loans
made to W&C by Wirum. Wirum now admits an error was made and
should be corrected.
17. However, Burke admitted she did not perform an audit in
accordance with generally accepted auditing standards on the W&C
financial statements.
18. However, Mary Lou Wirum claims she herself undertook to
determine what loans were reasonably necessary for W&C to meet
its operating capital needs.
19. Testimony of Susan Monsen, an accountant who worked at
W&C, supports that these deposits were made. Testimony from
Margaret Ward, a bookkeeper at W&C, supports that the interest
earned was not returned to W&C.
20. Arguably sufficient evidence exists to support a finding
of misrepresentation. Most significantly, Cash testified that he
believed HWA was making an average of $500,000 per year for the
last five years based on "[r]epresentations that had been made to
me during the partnership negotiations . . . both verbally and in
written documentation." The verbal representations were made by
Wirum and Mary Lou Wirum in 1982. While Wirum contends that this
"self-serving testimony"as to Cash's subjective belief is not
probative, Cash's testimony is corroborated. A letter to a loan
officer signed by Wirum and Cash, and typed by Mary Lou Wirum
stated, "Wirum's last five years earning as a sole practitioner
have averaged $500,000/year. Wirum's experience at start-up of
his sole practice was a negative cash basis profit in Year 1, a
positive (to approximately equal the Year 1 negative) cash basis
profit in Year 2." (Emphasis added.) Also, a letter from Wirum
to a potential partner stated, "Prior to forming the partnership
my earnings had been in the $500,000 annual range. It should be
stressed that for the future partnership to continue to generate
these type earnings (sic) will take an overall-team-management
effort . . . in which case, the monetary benefits are there."
Although these letters were written on March 19, 1985 and October
25, 1984 respectively, after the partnership was formed, they
corroborate Cash's allegations of misrepresentation. Also,
attorney Thomas McLaughlin wrote in December 17, 1982, that the
assumption was earnings from the new partnership would be
$500,000 per year, which could be applied to Cash's buy-in
obligation. This assumption was based on a letter addressed to
McLaughlin and Touche Ross & Co. from Mary Lou Wirum on December
15, 1982. Mary Lou Wirum's letter does contain some ambiguity
because it does not affirmatively state that the $500,000 figure
is only from Wirum's architectural practice:
Instead, in the agreement Larry and
Harold will agree that for purposes of
computing the retirement, death or disability
pay, Wirum's agreed five consecutive full
highest years will be a minimum of
$500,000/year. The retirement, death or
disability pay payment formula to Wirum will
be based upon this figure unless Wirum has
higher earnings following the formation of
the partnership.
21. Paragraph 27 reads:
Payments to Withdrawn or Expelled
Partner. A former partner who has withdrawn
or been expelled from the partnership shall
be entitled to receive the following amounts
and no others, provided the former partner
has complied with all the provisions of this
agreement; (i) The credit balance of his
capital account; (ii) The credit balance of
his drawing account.
The books and records of the
partnership shall be closed at the end of the
month in which the withdrawal or expulsion
occurs. A computation of capital and drawing
accounts shall then be made in the same
manner as at the end of each quarter and so
will reflect as operating expenses all items
of accrued expenses and prepaid expenses.
Accrued expense shall include a reasonable
provision for a proportionate share of normal
fiscal year end expenses.
. . . No other amounts or benefits shall
be payable to a withdrawn or expelled partner
including any amount for accounts receivable
or work in process. Such measures are agreed
upon to compensate the partnership for its
costs and losses arising from the withdrawing
or expulsion of the former partner.
(Emphasis added.)
22. Compare with Obert v. Environmental Research & Devel.
Corp., 771 P.2d 340, 341 (Wash. 1989).
23. Barrett v. Byrnes, 556 P.2d 1254, 1255 (Alaska 1976) (no
implied consent exists when an issue is raised for the first time
after plaintiff has rested his case).
24. Cash additionally argues that the superior court's
findings relating to Wirum's breach of contract and fiduciary
duties constituted a finding of unclean hands and thus "are
complete defenses to Wirum's claims on the non-competition
clause." The doctrine of unclean hands is an equitable remedy.
Here we conclude that the superior court did not abuse its
discretion in failing to apply the doctrine.
25. Cash also emphasizes that Judge Katz reasonably
interpreted the clause. Yet, there is no showing that the
clause here is "unreasonable"given the factors to be considered.
Data Management, 757 P.2d at 65. A predicate to the court
altering an overbroad covenant not to compete to render it
enforceable (based on what restrictions would be reasonable
between the parties) is that the overbroad covenant was drafted
in good faith. Data Management, 757 P.2d at 64.
26. There are two different Corps projects mentioned in the
appeal. One was a project done for $400,000 during the non-
compete period. The court found a violation of the non-compete
clause and awarded Wirum $50,000. This is the subject of Cash's
cross-appeal, infra. The Corps project under discussion here
was a project at Fort Wainwright solicited during the non-compete
period. The superior court made no finding as to whether or not
this violated the non-compete clause.
27. Cash also states that no findings concerning violation
of the non-competition clause were necessary given this language
and because no contract was formed during the relevant period.
The superior court did find that the preliminary injunction was
well founded in law, adopting the original court's reasoning.
28. The superior court found,
Cash violated the "non-competition"
clause by contracting with the Corps of
Engineers to perform architectural services
within two (2) years of March 31, 1986.
Wirum submitted a bid with the Corps of
Engineers and Cash competed with Wirum.
Cash claims Wirum never submitted a bid with the Corps of
Engineers on this project.
Cash's argument lacks merit. First, as Wirum argues,
the evidence conflicted on this point. The trial court's
resolution of this dispute is not clearly erroneous. Preferred
General Agency of Alaska, Inc. v. Raffetto, 391 P.2d 951, 952-53
(Alaska 1964). Second, and not argued by Wirum, the non-compete
clause restrains Cash from doing business with a client of W&C,
regardless of whether Wirum chose to bid on the project. In
fact, in its conclusions of law, the superior court said "Cash
violated the non-competition clause by contracting and performing
work for a client for whom HWA and/or W&C had done work, the U.S.
Corps of Engineers. Wirum is entitled to recover the profit of
$50,000 Cash made on this contract."
29. Cash argues that the facts adduced at trial indicate
that the injunction should not have been issued. Cash claims he
should have received damages for being wrongfully enjoined.
In the event the superior court determines on remand
that Wirum's breaches excused Cash from compliance with the non-
compete clause, the superior court should redetermine this issue.
30. Mary Lou Wirum was head bookkeeper. Her accounting
"caused Cash's withdrawal." The superior court found, "Cash
relied upon the information provided to him by the Wirums and
concluded that it would be a financial hardship if not impossible
to make the payments demanded by the Wirums under the partnership
agreement."
31. Harold Wirum is liable for Mary Lou Wirum's errors.
A person conducting an activity through
servants or other agents is subject to lia
bility for harm resulting from his conduct if
he is negligent or reckless:
. . .
(c) in the supervision of the
activity[.]
Restatement (Second) Agency, 213 (1958). Similarly,
A master or other principal who uninten
tionally authorizes conduct of a servant or
other agent which constitutes a tort to a
third person is subject to liability to such
person.
Restatement (Second) Agency, 215 (1958).
32. Restatement (Second) Contracts, 349 (1979) provides:
Damages Based on Reliance Interest
As an alternative to the measure of
damages stated in 347, the injured party
has a right to damages based on his reliance
interest, including expenditures made in
preparation for performance or in
performance, less any loss that the party in
breach can prove with reasonable certainty
the injured party would have suffered had the
contract been performed.
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