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Sourdough Development Services, Inc. v. Riley (02/20/2004) sp-5781
Sourdough Development Services, Inc. v. Riley (02/20/2004) sp-5781
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
SOURDOUGH DEVELOPMENT )
SERVICES, INC., d/b/a BIG GAME ) Supreme Court No. S-10801
ALASKA, G. MICHAEL MILLER, )
and DOUG DRUM, ) Superior Court No. 3AN-98-3556 CI
)
Appellants, ) O P I N I O N
)
v. ) [No. 5781 - February 20, 2004]
)
JAMES W. RILEY, MICHAEL J. )
SCHACHLE, and J. MICHAEL )
SCHACHLE, )
)
Appellees. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Sen K. Tan, Judge.
Appearances: Barton M. Tiernan, The Law
Offices of Barton M. Tiernan, Anchorage, for
Appellants. Michael A. Grisham, Patton Boggs
LLP, Anchorage, for Appellees.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
Parties to a lawsuit disputed control of a closely held
corporation. When parties alleged corporate mismanagement and
requested dissolution, the trial court appointed a receiver to
manage the corporation. After the court conducted a bench trial
and resolved one issue, the shareholders and the corporation
entered into a settlement agreement. The parties who prevailed
at trial argue here that the superior court erred by declining to
assess the receivership expenses against the other shareholders
as a litigation cost under Alaska Civil Rule 79. We conclude
that this dispute is resolved by the settlement agreement. The
controlling passage of the agreement is section 9, which required
the corporation to pay these expenses, rather than section 8,
which generally permitted parties to seek litigation costs under
Rule 79. We therefore affirm.
II. FACTS AND PROCEEDINGS
This case arises out of a series of disputes between
two groups of shareholders of Sourdough Development Services,
Inc., d/b/a Big Game Alaska (Sourdough), a closely held
corporation operating a wildlife park in Portage. The underlying
substantive issues material to the deterioration of the business
relationship are disputed by the parties but are not relevant to
the issues in this appeal.
The underlying legal dispute involved the effect of two
agreements. A 1992 agreement between family shareholders James
W. Riley, J. Michael Schachle, Michael J. Schachle, and G.
Michael Miller established the number of shares issued to each
shareholder, and designated each of the four shareholders a
director of the corporation.
In 1993 G. Michael Miller and James W. Riley,
respectively president and secretary of Sourdough, on behalf of
Sourdough entered into a partnership agreement with Doug Drum.
Per the 1993 partnership agreement, Drum sold $50,000 in personal
property to Sourdough in return for ten percent stock ownership
in Sourdough.
Disputes arose between the shareholders regarding
Sourdough's management. Sourdough, acting through Miller in his
capacity as president, filed a complaint in 1998 against Riley,
alleging breach of fiduciary duty, misappropriation of funds, and
conversion. Riley, Michael J. Schachle, and J. Michael Schachle,
acting individually and derivatively on behalf of Sourdough,
asserted claims against third-party defendants Miller and Drum.
The Riley-Schachle answer and third-party complaint requested the
dismissal of Sourdough's complaint against Riley, sought an order
rescinding the 1993 partnership agreement with Drum, and
requested a declaration that Sourdough's board of directors
consist only of Riley, Miller, and the Schachles. The third-
party complaint alternatively requested that the corporation be
involuntarily dissolved, and that the court appoint a receiver
for the corporation pending resolution of the request for
involuntary dissolution.
Hoping to avoid a formal receivership, Miller, acting
for Sourdough, entered into a limited financial receivership
agreement with CPA Eileen Zaiser in July 1998. In September 1998
Superior Court Judge Sen K. Tan formally appointed Zaiser
receiver, granting her authority "to . . . manage the business
and affairs" of Sourdough pending the hearing and determination
of the dissolution complaint. The court observed that "unless a
receiver . . . is appointed, the interests of the corporation and
its shareholders will suffer."
After conducting a two-day bench trial addressing one
of the claims, the superior court ruled in favor of Sourdough,
Miller, and Drum; the court found that the 1992 shareholder
agreement was unenforceable because there was no mutual assent by
all shareholders. The court reserved the remaining claims in the
lawsuit. The remaining claims were to be tried in September
1999.
In June 1999 Sourdough (acting through the court-
appointed receiver), Riley, Miller, Drum, and the Schachles
agreed to settle the remaining claims. The parties agreed to
dismiss all pending claims and to release each party from "any
and all claims . . . that arise out of or relate to any of the
matters asserted in . . . any actual or proposed pleadings
submitted in the Lawsuit, or any matters that could have been
asserted in the Lawsuit, or any actions taken pursuant to and in
furtherance of [the] Agreement." Section 8 of the settlement
agreement allowed the parties to seek attorney's fees under
Alaska Civil Rule 82 and costs under Alaska Civil Rule 79.1
The settlement agreement also gave Miller and Drum the
option of having Sourdough buy the shares owned by Riley and the
Schachles, following a valuation of the business. If Miller and
Drum did not timely exercise their buy-out option, the settlement
agreement gave Riley and the Schachles the option of having
Sourdough purchase the shares owned by Miller and Drum. If
neither group of shareholders timely exercised its buy-out
option, the settlement agreement required the superior court to
involuntarily dissolve the corporation.
The settlement agreement also provided that the
receiver would continue to manage Sourdough's business and
affairs until a buy-out or dissolution. Section 9 of the
settlement agreement provided that the receiver "shall retain
sufficient funds of the corporation to pay all expenses of the
receivership and the Receiver shall then transfer all other
assets, books and records of the corporation to the persons who
are assuming responsibility for the corporation." The superior
court approved the settlement agreement in September 1999.
Per the settlement agreement, Miller and Drum tendered
money to purchase the shares of Riley and the Schachles. In May
2001, after the receiver conducted a final accounting, Judge Tan
approved the final accounting, authorized payment of the
receiver's final fees from corporate funds, and discharged the
receiver.
In December 2000 plaintiff Sourdough and third-party
defendants Miller and Drum filed a motion asking the court to
enter a final judgment in their favor on their theory that they
prevailed on the only issue the superior court had ruled on - the
unenforceability of the 1992 shareholder agreement. Arguing that
they were the prevailing parties, they also moved for an award of
attorney's fees and costs.
The superior court issued an "Order of Final Judgment"
in 2002; the order ended the litigation per the parties'
settlement agreement, dismissed all claims with prejudice, and
stated that Miller, Drum, and Sourdough were the prevailing
parties in the first part of the dispute. The order also stated
that "[a]lthough it is not possible to infer at this stage who
would have prevailed on what issues at the second trial, this
court finds that whether there was an enforceable agreement was
clearly one primary issue in the case. On that issue, plaintiffs
prevailed."
After hearing oral argument, the superior court
issued an order addressing attorney's fees and costs; it held
that although Miller and Drum had prevailed on one issue at
trial, the court could not find that only one party prevailed in
the ensuing settlement. The court therefore awarded Miller and
Drum attorney's fees of $9,504, fifteen percent of the attorney's
fees they had incurred through the end of trial, and awarded no
attorney's fees to Miller and Drum for "phase two" of the case,
after trial.
Miller and Drum's attorney submitted a cost bill for
Rule 79 costs totaling $163,553.57. Citing Rule 79(f)(15), the
cost bill included the receiver's fees and the fees charged by
her attorney as "other costs allowed by statute." Those fees and
expenses apparently totaled more than $120,000 as of February
2002. The superior court held that all receivership expenses
were to be paid by Sourdough, and should not be taxable to either
party. The court found that Miller and Drum were only entitled
to Rule 79 costs incurred through the end of the trial. After
referring the cost bill to the clerk of court for a cost hearing,
the superior court awarded Miller and Drum $5,524.59 in costs.
The attorney's fees and cost awards were reduced to final
judgment, and have been satisfied.
Miller, Drum, and Sourdough appeal the superior court's
order regarding attorney's fees and costs. For the purposes of
this appeal, we refer to the appellants collectively as
"Sourdough." Although the order from which Sourdough appeals
also includes a ruling on attorney's fees, Sourdough only
challenges the superior court's failure to require Riley and the
Schachles to bear the receivership fees and expenses as
litigation costs taxable under Rule 79.
III. DISCUSSION
1. Standard of Review
1. Normally we review a trial court's Rule 79 award of
litigation costs for an abuse of discretion; demonstrating an
abuse of discretion requires a showing that the award "was
arbitrary, capricious, manifestly unreasonable, or improperly
motivated."2 The dispositive issue here, however, is whether the
settlement agreement permits receivership expenses to be awarded
as Rule 79 costs. This issue turns on contract interpretation.
We apply our independent judgment to matters of contract
interpretation.3
2. The Settlement Agreement Bars Sourdough's Claim that
Receivership Expenses Should Be Paid by Riley and the Schachles
as Litigation Costs Taxable Under Rule 79.
Sourdough advances multiple reasons to support its
contention that the superior court erred by failing to order
Riley and the Schachles to bear the receivership expenses as
litigation costs under Rule 79. Most, if not all, of its reasons
implicate the merits of the parties' disputes and the propriety
of ordering a receivership. Thus, Sourdough argues that Riley
and the Schachles should pay the receivership expenses as Rule 79
litigation costs because they were the proponents of the
receivership and the receivership was improper and improvident.
It likewise argues that the receivership was compelled by Riley
and the Schachles' claim that the 1992 shareholder agreement was
enforceable. It argues that because that claim was based on what
it calls "unsubstantiated [and] embellished allegations" and
because the superior court ruled in Sourdough's favor by holding
that the 1992 shareholder agreement was unenforceable, the
receivership was improper.
Sourdough similarly claims that the receivership was
intended to sequester Sourdough's assets, that the receivership
conferred no benefit on Sourdough, and that the receivership was
improperly continued. Sourdough further argues that Riley and
the Schachles acted with improper motives, and that they
"wrongfully necessitated" the receivership.
In support of its claim of error, Sourdough cites cases
from other jurisdictions in which courts taxed the receiver's
expenses to the party responsible for the receivership when the
appointment of the receiver was held to be erroneous, or when the
party compelled the receivership based on unsubstantiated claims.
Sourdough also argues that Rule 79 allows parties to recover
receivership expenses as litigation costs.
As Riley and the Schachles correctly assert, these
potential grounds for relief are precluded by the settlement
agreement. That agreement ended the litigation and disposed of
all claims arising from the lawsuit, "any matters that could have
been asserted in the Lawsuit," and "any actions taken pursuant to
and in furtherance of [the] Agreement." The grounds Sourdough
raises for awarding these costs would have required the superior
court to dive back into the merits of the parties' disputes, some
of which raised potentially complex and vigorously contested
factual issues. That course would have forced the parties to
litigate the merits of many of the substantive issues that they
were attempting to resolve by entering into the settlement
agreement. When the parties entered into the settlement
agreement they intended to end the litigation, not prolong it.
The timing of the agreement, on the eve of the second trial,
suggests that the parties intended a universal settlement of all
remaining disputes, many of which revolved around Sourdough's
attempts to terminate or modify the receivership. Consequently,
the principal arguments Sourdough advances for finding error are
completely unavailing and are barred by the settlement agreement.
If Sourdough wanted to litigate these issues, it should not have
entered into the settlement agreement.
Although its appellate briefs are largely devoted to
elaborating on the arguments discussed and rejected above,
Sourdough's opening brief also seems to argue that the superior
court should have awarded the receivership expenses against Riley
and the Schachles simply because they were litigation costs
recoverable under Rule 79. Sourdough's opening brief completely
fails to address the real question inherent in such an argument:
whether section 9 of the settlement agreement has the effect of
precluding a Rule 79 award of the receivership expenses against
Riley and the Schachles. Riley and the Schachles discuss that
question in their appellees' brief and Sourdough's reply brief
contains a short response. Sourdough there argues that the
parties did not truly "agree" that the corporation would bear the
costs of the receivership because section 9 came from a provision
included in the superior court's order appointing the receiver.
That order provided that the receiver should provide notice
before "transferring corporate funds . . . to pay for her
receivership fees." Sourdough therefore asserts in its reply
brief that the settlement agreement only specifies that the
receiver would be paid by the corporation because the parties
could not, and did not, modify the court order. It also contends
that "there is no probative evidence of any agreements that the
Corporation pay any litigation costs and in fact the same was
specifically reserved for a post-litigation cost application in
the Settlement Agreement Stipulation filed with the [c]ourt."
Section 8 of the settlement agreement provides in part:
Attorneys' Fees and Costs. Any party may
file with the Superior Court a motion seeking
an award of attorneys' fees under Rule 82 and
an award of costs under Rule 79. Nothing in
this Agreement is intended to foreclose an
award of Rule 82 attorneys' fees or Rule 79
costs. In deciding any motion for Rule 82
attorneys' fees and any motion for Rule 79
costs, the Superior Court may consider, as it
deems appropriate, the results achieved
through the Lawsuit as well as the outcome
provided for in this Agreement.
Section 9 of the settlement agreement provides:
Receivership. If Sourdough buys the
shares Riley, Schachle Sr. and Schachle Jr.
own as is provided in Section 2 above, or if
Sourdough buys the shares Miller and Drum own
as is provided in Section 3 above, the
receivership shall automatically terminate
without further order of the Superior Court
upon the closing of the purchase transaction.
The Receiver shall retain sufficient funds of
the corporation to pay all expenses of the
receivership and the Receiver shall then
transfer all other assets, books and records
of the corporation to the persons who are
assuming responsibility for the corporation.
The Receiver shall file a final report and
accounting with the Superior Court, and upon
the approval of the final report and
accounting, the Superior Court shall enter an
appropriate final judgment terminating the
Lawsuit. If neither of the stock purchases
contemplated by Section 2 [or] Section 3
occur[s], the receivership shall continue
until it is terminated by order of the
Superior Court.
(Emphasis added.)
The controlling question is which section controls. Is
it section 9 - which deals with the receivership expenses - or is
it section 8 - which reserves to the parties an opportunity to
seek Rule 82 attorney's fees and Rule 79 litigation costs?
A settlement agreement that fulfills basic contract
principles is binding on the parties to the agreement.4
Sourdough claims that it only agreed to include section 9 because
of the presence of a similar provision in a court order. But
this is not a valid reason for either misinterpreting the section
or excusing Sourdough from the effect of the provision.
Sourdough does not attack the validity of the settlement
agreement or section 9; it does not claim that the settlement
agreement is unenforceable or is invalid or that duress,
coercion, or fraud caused Sourdough to enter into the agreement.
The settlement agreement's inclusion of a provision consistent
with a provision in the superior court's order appointing the
receiver does not nullify Sourdough's (and Miller and Drum's)
assent to the settlement agreement. Nor does it excuse Sourdough
from abiding by the terms of a valid settlement agreement.
When interpreting a contract, such as the settlement
agreement in this case, it is our duty to give effect to the
intentions of the parties.5 To determine their intentions, we
look to the words of the contract and any extrinsic evidence
regarding the parties' intentions when they entered into the
contract.6
We read section 9 to be the more specific provision
with regard to receivership expenses.7 Section 9 specifies that
upon termination, the receiver "shall retain sufficient funds of
the corporation to pay all expenses of the receivership and the
Receiver shall then transfer all other assets, books and records
of the corporation to the persons who are assuming responsibility
for the corporation." Section 8 provides that the parties may
seek litigation costs under Rule 79, but says nothing about
receivership expenses. We therefore read the general reservation
in section 8 to be the less specific provision with respect to
receivership expenses. Section 9 clearly enough allocates those
expenses to the corporation, one of the parties in the lawsuit,
and one of the signatories to the settlement agreement.
Sourdough has not convinced us that section 8, rather
than section 9, governs the receivership expenses. Sourdough has
not referred us to any extrinsic evidence that would compel or
support a different interpretation of sections 8 and 9. The
settlement agreement stipulation, contrary to Sourdough's
contention on appeal, provides no assistance in interpreting the
terms of the agreement.8 That an earlier order is similar to
section 9 does not convince us, as Sourdough contends, that the
parties intended to allow the superior court to award the
receivership expenses against some of the parties as a litigation
cost. To the contrary, it would be remarkable to think that
parties entering into a settlement agreement on the eve of trial
would mutually agree that the court could award the very large
receivership expenses against individual shareholders. Given the
buy-out scheme underlying the settlement agreement, the
presumption that the receivership benefitted the corporation, and
the parties' knowledge of the expense of the receivership, we see
no basis for thinking that the parties intended to treat these
expenses as an awardable Rule 79 cost. That is especially so if
resolution of the cost application would have required the
superior court to resolve the merits of claims which the parties
thought they were settling on the eve of trial.
We therefore hold that the settlement agreement bars
Sourdough's claim of error. Our holding precludes Sourdough's
argument that because the receivership was improper and
improvident, Riley and the Schachles should bear the receivership
expenses. This holding makes it unnecessary for us to decide
generally whether receivership expenses are recoverable as
allowable costs under Rule 79.9
IV. CONCLUSION
We therefore AFFIRM the superior court's order
declining to tax the receivership expenses as Rule 79 litigation
costs.
_______________________________
1 Rule 79(a) entitles "the prevailing party" to recover
certain litigation costs "necessarily incurred in the action."
Rule 82 generally allows the prevailing party to recover partial
attorney's fees.
2 Fernandes v. Portwine, 56 P.3d 1, 4-5 (Alaska 2002);
Kellis v. Crites, 20 P.3d 1112, 1113 (Alaska 2001).
3 Holderness v. State Farm Fire & Cas. Co., 24 P.3d 1235,
1237-38 (Alaska 2001).
4 Dickerson v. Williams, 956 P.2d 458, 463 (Alaska 1998).
5 Exxon Corp. v. State, 40 P.3d 786, 793 (Alaska 2001).
6 Sprucewood Inv. Corp. v. Alaska Hous. Fin. Corp., 33
P.3d 1156, 1162 (Alaska 2001).
7 As a matter of contract construction, "specific terms
and exact terms are given greater weight than general language."
5 Margaret N. Kniffin, Corbin on Contracts 24.23, at 253 (1998)
(quoting Restatement (Second) of Contracts 203(c) (1981)); see
also McGary v. Westlake Investors, 661 P.2d 971, 974 (Wash. 1983)
(en banc) (stating that specific language of lease addendum must
prevail over general terms of lease provision).
8 The relevant words of the stipulation ("the parties may
move for costs") are no more specific than section 8 of the
settlement agreement.
9 Our reliance on the settlement agreement also makes it
unnecessary to decide what effect AS 10.06.643(c) might have on
this appeal. That statute provides that the compensation of a
receiver appointed to manage the affairs of a corporation
undergoing dissolution "shall be paid out of the assets of the
corporation and unless otherwise agreed shall be fixed by the
court."
