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Casey v. Semco Energy, Inc. (06/11/2004) sp-5813
Casey v. Semco Energy, Inc. (06/11/2004) sp-5813
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
TIMOTHY J. CASEY and )
DAVID L. SINCLAIR, )
) Supreme Court No. S-10830
Appellants, )
) Superior Court No.
v. ) 3AN-00-12077 CI
)
SEMCO ENERGY, INC., ) O P I N I O N
)
Appellee. ) [No. 5813 - June 11,
2004]
_______________________________ )
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, John Reese, Judge.
Appearances: Bruce E. Gagnon and Jerome H.
Juday, Atkinson, Conway & Gagnon, Anchorage,
for Appellants. John C. McCarron and Dani
Crosby, Ashburn & Mason, P.C., Anchorage, for
Appellee.
Before: Fabe, Chief Justice, Bryner, and
Carpeneti, Justices. [Matthews and Eastaugh,
Justices, not participating.]
CARPENETI, Justice.
I. INTRODUCTION
Timothy Casey and David Sinclair appeal the superior
courts decision that Semco Energy, Inc. did not breach the
covenant of good faith and fair dealing when its counsel decided
that their inclusion in an early retirement program would
jeopardize the programs tax-exempt status under federal law.
They argue that the superior court should have construed their
severance contracts to provide them other benefits of the early
retirement program that were not affected by federal law.
Because the superior court properly interpreted the contract, and
because the covenant of good faith and fair dealing does not add
duties to a contract, we affirm.
II. FACTS AND PROCEEDINGS
A. Facts
In November 1999 Appellee Semco Energy, Inc. (Semco)
purchased ENSTAR Natural Gas Company. The next month Semco
terminated ENSTAR managers Timothy J. Casey and David L.
Sinclair effective at the end of the year, despite its
assurances, given during the negotiations for the sale, that it
intended to retain ENSTARs management. A condition of the sale
was that the top management sign severance agreements, which they
did in October 1999, providing for lump-sum severance payments
and several months of health insurance coverage in the event of
involuntary termination or voluntary termination following a
significant change in duties. Two other managers, Richard Barnes
and Thomas Waldock, left ENSTAR voluntarily in early December
1999 after their salaries were reduced.
The four departing managers later decided that the
severance agreements were inadequate, and Barnes and Waldock
began negotiating for additional benefits on their collective
behalf. On December 15, 1999 the parties raised the possibility
that Semco would offer an early retirement program or plan (ERP),
perhaps adding three or five years of age and service to an
employees existing benefit level, to encourage other ENSTAR
employees to leave. Semco President Carl Porter said that if the
ERP was offered he would make it happen for the four departing
managers. A draft agreement to this effect dated December 16,
1999 provided that [i]f SEMCO implements an Early Retirement
Program on or before [date], Employee will be considered as
having retired for purposes of that Early Retirement Plan. SEMCO
makes no commitment to Employee that it will implement such a
Plan. Waldock, an attorney, consulted an advisor who specialized
in benefit plans who warned that applying any new ERP
retroactively only to certain highly-compensated employees would
probably disqualify the plan from tax-exempt eligibility under
section 1051 of the Employee Retirement Income Security Act
(ERISA).1 Waldock passed this concern along to Bud Madigan, an
attorney and one of Semcos primary negotiators on the issue.
Negotiations followed, and on January 14, 2000 the four
managers signed settlement agreements under which they dropped
all outstanding claims against Semco in exchange for large lump-
sum severance payments, inclusion in the ENSTAR retiree medical
program, and inclusion in the possible future ERP if the ERISA
risk could be avoided. Specifically, paragraph II(D) of the
settlement agreements provided:
If Semco implements an Early Retirement Plan
for the employees of the ENSTAR Natural Gas
Division on or before June 30, 2001, Employee
will, subject to the following provisions of
this paragraph, be considered as having
retired for purposes of that Early Retirement
Plan. Employee will not be so considered if,
in SEMCOs sole judgment exercised in good
faith, based upon an opinion of SEMCOs
counsel, the inclusion of the Employee in
such an Early Retirement Plan would result in
a risk that the ENSTAR Natural Gas Retirement
Plan For Salaried Employees would no longer
be a Qualified Plan under Section 401 of the
Internal Revenue Code. SEMCO makes no
commitment to Employee that it will implement
such an Early Retirement Plan.
(Emphasis added.) At the time that this paragraph was drafted,
Waldock warned all the managers in an e-mail that we will be
included UNLESS in SEMCOs sole judgment our inclusion would
jeopardize the ERISA qualification of the Plan. SEMCO will not
offer any cash payment in lieu thereof. You can bet that SEMCO
will be VERY conservative when it assesses the risk of Plan
disqualification.
In July 2000 Semco adopted an ERP consisting of a
severance payment equal to nine months pay, a twenty percent
discount on co-payments for medical visits, and a pension plan
enhanced by five years of age and five years of service. But
Semco did not include the four managers in the plan. Semco
submitted the question of ERISA disqualification to its actuary,
Ray Shapiro, and its counsel, Larry Gagnon, both of whom issued
opinions stating that allowing the managers to participate would
jeopardize the tax status of the plan under ERISA. Waldock
called Madigan in late August 2000 to ask whether the managers
would be eligible for just the severance pay and health insurance
aspects of the ERP, since these benefits would not disqualify the
pension program. Waldock asked whether the opinion had been
issued on the assumption that the ERP would be offered only to
the four managers in question, or whether it would still be
discriminatory if offered to all otherwise eligible employees who
had retired in the period prior to the ERP being officially
offered. Madigan responded that he had only instructed his
advisors to investigate the possibility of discrimination if the
four managers were included. Madigan then asked Gagnon to
research how many otherwise eligible employees had retired or
left ENSTAR during the relevant period. Gagnon discovered that
no such employees had left during the relevant period, and wrote
another opinion in late September 2000 stating that even if the
discrimination testing had taken all relevant employees into
account, there would still have been the risk of disqualification
of the ERPs ERISA status.
B. Proceedings
Casey and Sinclair filed suit in November 2000,
alleging breach of contract, violation of the covenant of good
faith and fair dealing, and misrepresentation. Trial was held on
January 7-9, 2002 before Superior Court Judge John Reese. At
trial, Casey and Sinclair presented the testimony of an expert,
Norman Milks. Milks testified that Casey and Sinclairs inclusion
in the ERP could indeed have created a risk of disqualification
of the ERPs ERISA status, but that Semco could have provided
Casey and Sinclair with the ERP benefits or their equivalent by
creating a benefit plan that applied to any employee who retired
at about the same time as the managers, by simply making lump-sum
payments to Casey and Sinclair that were equivalent to the
pension benefits, or by creating a top hat plan in which Casey
and Sinclair would have received periodic cash payments
equivalent to those under the ERP pension. Milks also testified
that Semco could have provided Casey and Sinclair with just the
severance pay and medical co-payment aspects of the ERP without
any risk to its ERISA status. Milks also testifed that Semco
could have eliminated the risk of ERISA disqualification by
obtaining an opinion letter to that effect from the IRS.
The superior court denied all of Casey and Sinclairs
claims. The court held that the settlement agreement only
required Semco to obtain a good faith opinion from its counsel
about whether inclusion of Casey and Sinclair in the ERP might
jeopardize its ERISA status, that Semco had met this condition
when Gagnon issued his opinion in good faith, and that any of
Porters statements that well take care of it were unclear and
unenforceable in light of the settlement agreements integration
clauses. Casey and Sinclair appeal.
III. STANDARD OF REVIEW
We apply our independent judgment to questions of law,2
including contract interpretation,3 adopting the rule of law most
persuasive in light of precedent, reason, and policy.4 We review
a trial courts factual findings for clear error, which is found
when we are left with a definite and firm conviction based on the
entire record that a mistake has been made.5 Whether there has
been a breach of the covenant of good faith and fair dealing is a
question of fact, and is therefore reviewed only for clear error.6
It is the function of the superior court, rather than this court,
to weigh conflicting evidence and assess the credibility of
witnesses.7
IV. DISCUSSION
Casey and Sinclair challenge the superior courts
factual findings, its application of the covenant of good faith
and fair dealing to the agreement, and its refusal to fill the
gap by granting them two of the three benefits of the early
retirement program. We reject each of these challenges.
A. The Parties Did Not Intend the Settlement Agreements To
Require Semco To Exhaust All Means of Including Casey
and Sinclair in the Early Retirement Plan.
The goal of contractual interpretation is to give
effect to the reasonable expectation of the parties.8 We
consider disputed language in its context in the contract as a
whole and look to the purposes of the contract, the circumstances
surrounding its formation, and the case law on similar
contractual provisions.9 The parol evidence rule provides that
an integrated contract (one that is intended to describe the
entire agreement) cannot be varied through the introduction of
evidence about prior negotiations or agreements.10 However,
extrinsic evidence is always admissible on the question of the
meaning of the words of the contract itself.11 If the parties
disagree about the interpretation of a provision, we inquire into
what the parties knew or had reason to know of each others
position;12 a party prevails when he or she did not know or have
reason to know that the other side interpreted the provision
differently, but the other party did know or have reason to know
of the disagreement.13 When a phrase in a contract is understood
differently by the parties and is sufficiently ambiguous to
support both meanings, no contract exists.14
Casey and Sinclair contend that the true meaning of
paragraph II(D) was that Semco [could] avoid giving Casey and
Sinclair the early retirement benefits only if there was a risk
of ERISA disqualification that Semco could not avoid by
reasonable means. They argue that their interpretation is
consistent with the purpose of the settlement agreements, which
was to give them more benefits than they had obtained in the
severance agreements. They also argue that their interpretation
is consistent with Porters statements that he would make it
happen for them and Madigans statements that he expected that
Semco would find a way to put them in the plan if [it] could. In
effect, they argue that the superior court should have weighed
the testimonial evidence more heavily in their favor. We reject
that argument.
It is the role of the trial court, not the appellate
court, to evaluate the credibility of the witnesses and to weigh
the evidence.15 Although Sinclair testified that his
understanding of good faith was that Semco would have to make
serious efforts to include him in the early retirement plan, he
also suggested that his expectation that he would be included was
based more on Carl Porters statements, which he received second-
hand, than on the words of the settlement agreement. In
contrast, Madigan testified that the disputed language had been
drafted at the last moment and that his intent was to put them in
the plan if we could do it without a risk to qualification, not
to research alternative ways to approximate benefits similar to
those in the plan if the risk of disqualification was determined
to exist. The court found Madigans testimony to be credible and
convincing. There was ample evidence to support the superior
courts decision to accept Semcos rather than Casey and Sinclairs
version of the facts.
Casey and Sinclair argue that the superior courts
interpretation of the contract constitutes legal error because it
violates the rule that contracts should be interpreted so as to
give effect to all their provisions and to find all provisions
meaningful to the extent that this is possible.16 They point out
that a certain amount of ERISA risk had already been identified
by the time that the final version of paragraph II(D) was drafted
indeed, this risk was the very reason why the paragraph was
redrafted and that conditioning their inclusion in the plan on a
risk assessment by Semcos counsel would be a redundant exercise,
the outcome of which was almost certain. Thus, they claim, it is
more reasonable to interpret paragraph II(D) as requiring Semco
to find a way to include them. Semco argues that requiring it to
find a way to include Casey and Sinclair by any reasonable means
renders part of the text of paragraph II(D) meaningless.17 The
central mystery of Casey and Sinclairs case is why they would
agree to such a narrowly drawn provision, especially in light of
their representatives warnings that SEMCO will not offer any cash
payment in lieu of the plan and [y]ou can bet that SEMCO will be
VERY conservative when it assesses the risk of Plan
disqualification.
Nonetheless, parties are free to make arrangements that
seem unreasonable to others.18 The intent of the parties is the
primary issue, and their intent can be drawn from extrinsic
evidence, especially their express attempts to comply with the
contract as they understood it.19 Based on the superior courts
factual findings regarding the parties intent in drafting the
contractual language, and upon our reading of that language, we
hold that paragraph II(D) required only that Semco obtain its
counsels good faith opinion regarding ERISA disqualification.
B. The Covenant of Good Faith and Fair Dealing Did Not
Require Semco To Find a Way To Include Casey and
Sinclair in the Early Retirement Plan.
Casey and Sinclair argue that because the covenant of
good faith and fair dealing requires a party to take reasonable
steps to ensure the occurrence of a condition precedent to a
contract, Semco had to take reasonable steps to include them in
the ERP. Because the covenant of good faith and fair dealing
cannot add terms to a contract or prohibit what a contract
explicitly permits, we reject Casey and Sinclairs claim that
Semco breached the covenant of good faith and fair dealing.
The covenant of good faith and fair dealing is implied
in all contracts in Alaska.20 [W]here a party has promised to
attempt to satisfy a condition, the attempt must be made in good
faith.21 A party must act in subjective good faith, meaning that
it cannot act to deprive the other party of the explicit benefits
of the contract, and in objective good faith, which consists of
acting in a manner that a reasonable person would regard as fair.22
Where a duty of one party is subject to the occurrence of a
condition, the additional duty of good faith and fair dealing
. . . may require . . . refraining from conduct that will prevent
or hinder the occurrence of that condition or . . . taking
affirmative steps to cause its occurrence.23 But the purpose of
the covenant is to effectuate the reasonable expectations of the
parties, not add to them,24 and cannot be interpreted to prohibit
what is expressly permitted.25
Casey and Sinclair rely on the doctrine that a party
cannot be excused from contractual performance by the
nonoccurrence of a condition over which that party has control.
The Restatement (Second) of Contracts section 245 provides that
[w]here a partys breach by non-performance contributes materially
to the non-occurrence of a condition of one of his duties, the
non-occurrence is excused.26 The classic case of a breach of the
covenant of good faith and fair dealing regarding contractual
conditions occurs when an obligation is conditioned on a partys
ability to obtain financing or insurance, but the party fails to
make reasonable efforts to obtain such financing or insurance.27
Where a condition is within the sole control of a single party,
most authorities require that party to take reasonable steps to
obtain the occurrence of the condition.28 The superior court
found that Semco and its agents acted in good faith, both
subjectively and objectively, in fulfilling Semcos contractual
obligations to Casey and Sinclair. It also found Casey and
Sinclairs argument that Semco could have included them in a
separate retirement plan to be irrelevant because neither the
express language of the Settlement Agreements nor the implied
good faith and fair dealing covenant require[s] Semco to provide
more than the parties bargained for.
Casey and Sinclair argue that taking reasonable steps
to obtain the occurrence of the condition required Semco to
consider[] ways to extend the benefits of the plan to them. They
argue that the superior court misunderstood the application of
the covenant of good faith and fair dealing to their case,
because the superior court read the settlement agreements as
requiring Semco only to submit the question of whether Casey and
Sinclairs inclusion would create a risk of ERISA disqualification
to counsel, and as requiring Semcos counsel to consider the
question in accordance with the law and without being arbitrary.
The superior court was correct in its interpretation of
paragraph II(D) of the settlement agreements. The covenant of
good faith and fair dealing is implied in every contract in order
to effectuate the reasonable expectations of the parties to the
agreement, not to alter those expectations.29 The covenant of
good faith and fair dealing will not create a duty where one does
not exist.30 The doctrine does not provide courts with carte
blanche to rewrite contracts31 and cannot be interpreted to permit
what is expressly prohibited by the contract.32 While the text of
paragraph II(D) promises Casey and Sinclair that they could be
included in the ERP, it specifically disclaims any responsibility
for Semco to adopt an ERP, and further conditions their inclusion
on Semcos counsel not finding any potential risk to the ERPs
ERISA qualification. The language is so carefully hedged that
Semco has very little responsibility at all; it must merely adopt
a plan and submit it to counsel for an opinion. Moreover, the
paragraph defines implement[ing] an Early Retirement Plan as
amend[ing] the ENSTAR Natural Gas Retirement Plan for Salaried
Employees . . . to provide enhanced benefits (such as increased
years of service) which function as incentives to employees to
accelerate termination of employment to a date preceding July 1,
2001. It would considerably increase Semcos duties to require it
to put forth all reasonable efforts to structure the plan so that
these four employees may be included, or to put forth all
reasonable efforts to provide benefits to these employees that
are similar to but outside of the structure of the plan. Since
Casey and Sinclair do not allege that Semco and its counsel
reached their conclusion about ERISA disqualification in bad
faith indeed, their own expert agreed that such a risk existed
we uphold the superior courts conclusion that there was no breach
of the covenant of good faith and fair dealing.
Casey and Sinclair also argue that Semco breached the
covenant of good faith and fair dealing by refusing to grant them
the severance pay and medical benefit components of the ERP
solely because they were ineligible for the pension aspect of the
ERP. They argue that this violated the covenant as defined in
Restatement section 205, which states that a breach of the
covenant includes abuse of power to specify terms.33 While Semco
could have provided those benefits, it was not required to do so
under the settlement agreement. Therefore we affirm the holding
of the superior court that Semco did not breach the implied
covenant of good faith and fair dealing.
C. The Superior Court Did Not Err in Declining To Fill the
Gap in the Agreements by Requiring Semco To Give Casey
and Sinclair Two of the Three Components of the Early
Retirement Plan.
Finally, Casey and Sinclair argue that because the
ERISA risk foreseen in paragraph II(D) affected only one of the
three components of the ERP the enhanced pension benefit adding
five years of age and five years of service, but not the
additional twenty percent of medical visit co-payments to be paid
by the company or the nine months transitional pay in a lump sum
the parties had left a gap in the contract. Casey and Sinclair
argue that the superior court should have filled this gap by
implying a new term granting them the two remaining benefits of
the ERP. Semco responds that filling the gap in this manner
would be inappropriate because Semco never would have agreed to
the terms proposed by Casey and Sinclair.
A court may supply an essential term that has been
omitted from an otherwise sufficiently defined contract.34
Because the parties cannot plan for all contingencies that might
arise, a court may fill in gaps to ensure fairness where the
reasonable expectations of the parties are clear.35 But based on
the integration clauses in the settlement agreements and the
superior courts findings regarding the parties intent, we
conclude that there were no contractual gaps to fill.
The threshold inquiry in determining whether this case
is an appropriate one for gap-filling is whether, in fact, there
is an essential term or circumstance for which the parties failed
to plan. Casey and Sinclair argue that their settlement
agreements were skeletal ones in which the possibility of only
one aspect of the plan causing a risk to ERISA qualification was
never discussed or planned for, primarily since the content of
the future Semco ERP amendment was unknown at the time. But our
reading of the contractual language and the superior courts
factual finding regarding the intent of the parties lead us to
conclude that Semco was required under the contract only to
obtain a good faith legal opinion from its counsel as to whether
inclusion of Casey and Sinclair in the ERP would risk
disqualification under ERISA. The settlement agreements were
fully integrated: Both contain integration clauses that state,
[t]his is the entire Agreement between Employee and SEMCO. SEMCO
has made no promises to Employee other than those in this
agreement. We therefore reject Casey and Sinclairs argument
that the superior court should have read new terms into the
agreement in order to fill contractual gaps because we find that
there were no gaps to fill.
V. CONCLUSION
Because the superior court did not err in its
interpretation of the severance agreements, we AFFIRM.
_______________________________
1 29 U.S.C.A. 1051(2) (West 2003) (providing that tax
exemption of employee pension plan under Employee Retirement
Security Act shall not apply to a plan which is unfunded and is
maintained by an employer primarily for the purpose of providing
deferred compensation for a select group of management or highly
compensated employees).
2 McCormick v. Reliance Ins. Co., 46 P.3d 1009, 1012
(Alaska 2002).
3 Old Harbor Native Corp. v. Afognak Joint Venture, 30
P.3d 101, 104 (Alaska 2001).
4 Vezey v. Green, 35 P.3d 14, 20 (Alaska 2001) (quoting
Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979)).
5 Id. (internal citations omitted).
6 Luedtke v. Nabors Alaska Drilling, Inc., 834 P.2d 1220,
1223 (Alaska 1992). If the case presents only undisputed facts,
then the covenant of good faith and fair dealing can be reviewed
de novo. Id.
7 Krossa v. All Alaskan Seafoods, Inc., 37 P.3d 411, 415
(Alaska 2001).
8 Exxon Corp. v. State, 40 P.3d 786, 793 (Alaska 2001).
9 Zuelsdorf v. Univ. of Alaska, Fairbanks, 794 P.2d 932,
934 (Alaska 1990).
10 Alaska Diversified Contractors, Inc. v. Lower Kuskokwim
Sch. Dist., 778 P.2d 581, 583 (Alaska 1989).
11 Id. at 584 (citing Restatement (Second) of Contracts
214 cmt. b (1981)).
12 Id. at 584 n.3 (quoting Restatement (Second) of
Contracts 214 cmt. b).
13 Restatement (Second) of Contracts 201(2).
14 Krossa v. All Alaskan Seafoods, Inc., 37 P.3d 411, 416
(Alaska 2001).
15 Id.
16 See, e.g., Grant v. Anchorage Police Dept, 20 P.3d 553,
556 (Alaska 2001); Peterson v. Wirum, 625 P.2d 866, 872 n.11
(Alaska 1981).
17 See Grant, 20 P.3d at 556.
18 Restatement (Second) of Contracts 203 cmt. c.
19 Sprucewood Inv. Corp. v. Alaska Hous. Fin. Corp., 33
P.3d 1156, 1162 (Alaska 2001).
20 Ellingstad v. State, Dept of Natural Res., 979 P.2d
1000, 1009 (Alaska 1999).
21 Gordon v. Foster, Garner & Williams, 785 P.2d 1196,
1199 (Alaska 1990).
22 Ramsey v. City of Sand Point, 936 P.2d 126, 133 (Alaska
1997).
23 Gordon, 785 P.2d at 1199 n.6 (quoting Restatement
(Second) of Contracts 245 cmt. a).
24 Era Aviation, Inc. v. Seekins, 973 P.2d 1137, 1141
(Alaska 1999).
25 Ramsey, 936 P.2d at 133.
26 Quoted in Gordon, 785 P.2d at 1199 n.6, and Klondike
Ind. Corp. v. Gibson, 741 P.2d 1161, 1167 (Alaska 1987).
27 E.g., Cauff, Lippman & Co. v. Apogee Fin. Group, Inc.,
807 F. Supp. 1007, 1022-24 (S.D.N.Y. 1992) (finding breach of
covenant of good faith and fair dealing where party refused to
proceed with certain meetings and finance agreements so as to
obtain financing for contract); Gordon, 785 P.2d at 1199-1200 &
n.8 (remanding to find whether intent of parties required party
to attempt to obtain insurance, or actually required insurance
itself).
28 Dayan v. McDonalds Corp., 466 N.E.2d 958, 972 (Ill.
App. 1984); John Edward Murray, Jr., Murray on Contracts 111(B),
at 622-23 (3d ed. 1990).
29 Ramsey, 936 P.2d at 133 (internal citation omitted).
30 Lorenz v. CSX Corp. 736 F. Supp 650, 656 (W.D. Pa.
1990).
31 Id.
32 Ramsey, 936 P.2d at 133.
33 Restatement (Second) of Contracts 205 cmt. d (1981).
34 Id. at 204.
35 Magill v. Nelbro Packing Co., 43 P.3d 140, 142 (Alaska
2001).
