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North Pacific Processors v. Sitka Sound Seafoods (4/15/2005) sp-5885
North Pacific Processors v. Sitka Sound Seafoods (4/15/2005) sp-5885
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
NORTH PACIFIC PROCESSORS, )
INC., d/b/a SITKA SOUND ) Supreme Court Nos. S-11072/11091
SEAFOODS, and JOHN SEVIER, )
) Superior Court No. 1JU-02-924 CI
Appellants/Cross-Appellees, )
) O P I N I O N
v. )
) [No. 5885 - April 15, 2005]
CITY AND BOROUGH OF )
YAKUTAT, Alaska, a Municipal )
Corporation, )
)
Appellee/Cross-Appellant. )
)
Appeal from the Superior Court of the State of Alaska, First
Judicial District, Juneau, Larry R. Weeks, Judge.
Appearances: Anthony M. Sholty, Faulkner Banfield, P.C.,
Juneau, for Appellants/Cross-Appellees. Sara E. Heideman,
Hedland, Brennan, Heideman & Cooke, Anchorage, for
Appellee/Cross-Appellant.
Before: Bryner, Chief Justice, Matthews, Eastaugh, and Fabe,
Justices. [Carpeneti, Justice, not participating.]
EASTAUGH, Justice.
I. INTRODUCTION
The City and Borough of Yakutat leased a fish-processing plant and cold storage
to North Pacific Processors, Inc. (NPPI) and its predecessor, Sitka Sound Seafoods, Inc., for
many years. This appeal concerns disputes about Yakutat?s contractual ?first option to
purchase? items installed on the leased property by the lessees, and the appropriate purchase
price. We hold that the superior court did not clearly err in finding after trial that the disputed
items are ?structural improvements or additions? within the meaning of the leases, and are
therefore subject to the lessor?s option to purchase. We reverse and remand, however, for
further consideration of the appropriate purchase price for some items, because it was error to
rely on an internal NPPI accelerated depreciation schedule to set the purchase price for those
items.
II. FACTS AND PROCEEDINGS
Since 1976 the City of Yakutat (later the City and Borough of Yakutat) has
leased to a series of lessees property consisting of a seafood processing plant, a machine shop,
two docks, and two icehouses. The plant was a fully functioning seafood processing plant when
Yakutat acquired it. Yakutat began leasing the property to Sitka Sound Seafoods, Inc. in 1986.
Directly pertinent here are the 1986 and 1988 leases between Yakutat and Sitka Sound; also
potentially germane are the 1992 lease between Yakutat and Sitka Sound and the 1997 lease
between Yakutat and Sitka Sound?s successor, NPPI. NPPI succeeded to Sitka Sound?s
interests in 1996.
Sitka Sound expanded the processing plant?s freezing capacity in 1987 and
improved the refrigeration and electrical systems. Yakutat agreed to pay more than $277,000
for this work. The Sitka Sound letter asking Yakutat for permission to undertake the project
stated that it would ?have a 20 year life expectancy.? Sitka Sound also upgraded the
refrigeration system at the ?little dock? icehouse in 1988, and the letter it sent Yakutat
proposing this upgrade likewise stated that this project would ?have a useful life of 20 years.?
The 1986 and 1988 Yakutat-Sitka Sound leases were in effect in 1987 and 1988,
when the items in dispute in this appeal either were installed or were allegedly purchased by
Sitka Sound from the previous lessee. Per lease section 12, titled ?Improvements,? the lessor
under both leases had the ?first option to purchase? any ?structural improvements and
additions? made to the premises by the lessee ?at cost based upon straight line depreciation.?
Neither lease defined the term ?structural improvements and additions.? Both stated that the
lessee was to return the property to Yakutat in the same condition in which the lessee had
received it. We discuss the lease language in more detail below.
The other two leases, the 1992 lease between Yakutat and Sitka Sound, and the
1997 lease between Yakutat and NPPI, are also potentially germane. Neither of these leases
directly applies here, because the disputed items were installed before these two leases took
effect. They nevertheless provide guidance in interpreting the two applicable leases.
In 2002 NPPI notified Yakutat that NPPI would not renew the lease then in
effect. It then sent Yakutat an extensive list of assets it stated Sitka Sound owned and
informed Yakutat by letter that the listed items were available for sale to Yakutat; NPPI valued
the items collectively at about $1,500,000. The letter asked Yakutat which items it wished to
purchase. During discussions, however, NPPI informed Yakutat that the listed items were for
purchase on a package basis, and that if Yakutat did not buy all of them, NPPI would remove
them from the plant.
Yakutat sought injunctive and declaratory relief to prevent NPPI from removing
some eighty items on NPPI?s sale list. The superior court granted Yakutat a preliminary
injunction and then held a trial to determine which items, if any, NPPI was entitled to remove
subject to Yakutat?s option to purchase. After considering extrinsic evidence the court decided
that Yakutat had ?the right to purchase structural improvements and additions . . . at a straight
line depreciation price over a term agreed upon.? This price was twenty-five percent of the
original cost of the projects at the main processing plant and the little dock. The court also
decided that Yakutat could purchase certain other disputed items at ?their straight line
depreciated value, in accordance with the schedule set out in Exhibit BP,? an NPPI internal
depreciation expense report. The court entered findings of fact and conclusions of law and a
final judgment.
NPPI?s appeal concerns only some of the items installed in 1987 and 1988.
There are five compressors in the main building on the leased property. One of these is a
Vilter compressor; there is no dispute that Yakutat owns the Vilter compressor. The main
building also contains two Mycom compressors. NPPI alleges that Sitka Sound bought those
two compressors from the previous lessee; it also alleges that Sitka Sound installed a third
Mycom compressor and a Sullaire compressor in the main building. The parties dispute
whether Yakutat has the right to purchase the three Mycom compressors and the Sullaire
compressor.
There is also a dispute about three Vilter compressors at the little dock. The
other disputed items are condensers, ammonia receivers, blast freezer coils, and refrigeration
valves. NPPI claims that it owns all these items and has the right to remove them; Yakutat
claims that it has the right to purchase the items and disputes whether NPPI has a right to
remove them.
NPPI appeals. Yakutat cross-appeals, contending that the superior court erred by
failing to award it full attorney?s fees.
After the superior court issued its decision, Yakutat exercised its option to
purchase certain items for about $174,000, and also purchased other items from NPPI, for
about $124,000 more. NPPI, concerned that the bill of sale might affect its appeal, wrote
Yakutat to make it clear that the bill of sale would not prejudice NPPI?s appeal. Yakutat agreed
?that if NPPI appeals, [Yakutat] will not use the executed Bill of Sale as independent grounds
to argue that NPPI is not entitled to relief on appeal.? The sale was then consummated and
NPPI deposited Yakutat?s checks. Yakutat has asked us to dismiss NPPI?s appeal; Yakutat
invokes the acceptance of benefits doctrine and alternatively argues mootness because the
judgment was not stayed.
III. DISCUSSION
A. Standard of Review
?[L]eases are contracts and should be interpreted according to contract
principles.? We use our independent judgment when reviewing the trial court?s interpretation
of a contract. To the extent a trial court?s findings are based on extrinsic evidence, we apply
the clearly erroneous standard. We also review questions of fact under the clearly erroneous
standard. A finding of fact is clearly erroneous if it leaves the court with a ?definite and firm
conviction on the entire record that a mistake has been made.? In reviewing factual findings,
we view ?the evidence in the light most favorable to the prevailing party below.?
B. The Court Did Not Clearly Err in Finding that Yakutat Had the First Option
To Purchase the Disputed Items.
The 1986 and 1988 leases gave Yakutat a ?first option to purchase? ?[a]ny
structural improvements and additions? made to the premises during the term of the leases.
The superior court held that the disputed items were structural improvements or additions and
concluded that the leases consequently gave Yakutat the right to purchase the items from NPPI
at cost, based upon straight line depreciation. NPPI contends that the court erred in ruling
that Yakutat had an option to purchase these items.
This dispute revolves around the meaning of the term ?structural improvement
and additions? in the 1986 and 1988 leases.
Determining the meaning of a term in an agreement involves a two-stage
analysis. The first stage requires looking to ?both the language of the lease and extrinsic
evidence to determine if the wording of the lease is ambiguous.? Disagreement between the
parties regarding the interpretation of a contract term does not necessarily create ambiguity.
?An ambiguity exists only where the disputed terms are reasonably subject to differing
interpretation after viewing the contract as a whole and the extrinsic evidence surrounding the
disputed terms.? If the language is ambiguous, the second stage calls for considering extrinsic
evidence to attempt to resolve the ambiguity, but ?[i]f the lease is clear and unambiguous, we
construe it solely according to its written terms.?
1. The pertinent lease terms are ambiguous.
We first determine from the lease language and extrinsic evidence whether the
phrase ?structural improvements and additions? is ambiguous.
NPPI contends that the leases distinguished between structural improvements
and additions on the one hand, and machinery, equipment, and facilities, in whatever manner
affixed to the real property, on the other; it claims that only the former items were subject to
Yakutat?s option to purchase. NPPI argues that the compressors, condensers, ammonia
receivers, blast freezer coils, and refrigeration valves are attached by metal piping, electrical
cables, or wires and are ?readily removable.? It argues that the leases ?did not define structural
improvement beyond discussing what they are not?; NPPI therefore refers us to this law
dictionary definition of ?structural alteration?: ?such an alteration of a building as changes the
physical structure so materially as to create a different building.?
NPPI asserts that Yakutat and Sitka Sound agreed that Sitka Sound could
remove the equipment it installed as long as it restored the premises to their condition before
the equipment was installed. It contends that NPPI planned to leave a working refrigeration
system that ?would be a better composition than what [Yakutat] had before [the lessee installed
the equipment].? NPPI argues that courts have recognized that it would be inequitable ?for a
lessee to make extensive structural repairs that would revert to the benefit of the lessor.? It
claims the option to purchase avoids inequities.
Yakutat responds that NPPI?s interpretation of the leases would give Yakutat the
option of purchasing only items that are physically nonremovable ? items that if removed
would cause the building to collapse or be changed into a different building. It asserts that
these items are not removable under any theory, and in case of repossession Yakutat would
acquire them without exercising any option. Yakutat argues that NPPI?s theory would
therefore make the option to purchase language superfluous, contrary to rules of contract
construction.
Yakutat argues that Interior Energy Corp. v. Alaska Statebank supports its position,
because that opinion states that tenants may remove items they installed ?so long as the
landlord and tenant have not agreed otherwise.? It contends that here the parties testified
that they had agreed otherwise, establishing an intention that the refrigeration components be
subject to Yakutat?s option to purchase.
a. The leases? words support NPPI?s reading.
In determining whether ambiguity exists, we first turn to the lease language.
Yakutat and Sitka Sound entered into the first relevant agreement, entitled ?License
Agreement,? in 1986. This ?1986 lease? was to end December 31, 1988. It applies to the
renovations of the processing plant?s freezing capacity, because Sitka Sound undertook those
renovations in 1987. It appears that Sitka Sound purchased the other disputed items at the
processing plant from the previous lessee in 1987, making these items subject to this lease.
Section 12 of this agreement stated in full:
Licensee may from time to time, and at its own expense,
make or construct such additions to or improvements or
alterations in and about the licensed premises and its
appurtenances, whether structural or otherwise, and install such
machinery, equipment and facilities as it may consider proper or
advisable in connection with the use and operation of the
premises, except that no structural alteration to any part of the
licensed premises may be carried out without the prior written
consent of the City. Licensee shall have the right at the
termination of this license to remove any such machinery,
equipment, and facilities belonging to it; provided, however, that
after such removal Licensee shall, at its sole expense, restore the
licensed premises to their condition prior to the installation of
such machinery, equipment and facilities.
Any structural improvements and additions made to the
licensed premises by Licensee during the term of this license shall
be preceded by mutual agreement of the expected useful life of
the particular improvement or addition which shall under no
circumstances exceed twenty (20) years, and shall stipulate that
City has first option to purchase the said improvement or
addition at cost based upon straight line depreciation over the
remaining agreed-upon useful life of the improvement or
addition.
All property belonging to Licensee placed upon the
licensed premises, whether such property consists of furniture,
machinery, equipment, appliances, fixtures or otherwise, and
whether property is fixed to the real property by means of piping,
wiring, bolts or otherwise, shall belong solely to Licensee and
remain so subject to the right of removal herein provided but in
the event of removal, the premises shall be restored to their
original condition by Licensee.
(Emphasis added.) Section 13 stated, in part: ?Licensee shall return the licensed premises to
City in the same condition in which received (or, if altered by Licensee, the licensed premises
shall be returned in such altered condition), reasonable wear and tear, and use thereof . . .
excepted.?
Sitka Sound and Yakutat entered into a successor lease in January 1988; this
?1988 lease? was in effect through December 31, 1992. It applies to the upgrades at the little
dock icehouse, because Sitka Sound appears to have carried out that upgrade in 1988. This
lease contained sections virtually identical to the sections quoted above with only one material
difference: the first paragraph of section 12 of the 1988 lease stated:
Lessee shall not make or construct any additions to or
improvements or alterations in and about the leased premises and
its appurtenances, whether structural or otherwise, or install
machinery, equipment and facilities without the prior written
consent of Lessor. . . . [A]ll such work shall be at the expense of
Lessee. Subject to Section 33 [Option to Renew], Lessee shall
have the right at the termination of this lease to remove any such
machinery, equipment and facilities belonging to it; provided,
however, that after such removal Lessee shall, at its sole expense,
restore the leased premises to their condition prior to the
installation of such machinery, equipment and facilities.
The rest of section 12 was identical in substance to section 12 of the 1986 lease.
In 1992 Sitka Sound and Yakutat entered into a new lease; its provisions were
identical to those of the 1988 lease. Mayor Larry Powell signed the 1992 lease for Yakutat;
Harold Thompson, who then owned Sitka Sound, signed for Sitka Sound. None of the
disputed items appears to have been installed during the term of this lease; it is therefore not
directly applicable.
In 1997 NPPI and Yakutat entered into a new lease; its section 12 differed from
the corresponding sections in the prior leases. It stated:
Lessee may, in its sole discretion, make alterations,
additions or improvements to the leased premises at Lessee?s
expense . . . .
All property belonging to Lessee placed upon the leased
premises, whether such property consists of furniture, machinery,
equipment, appliances, or otherwise, and whether such property
is fixed to the real property by means of piping, wiring, bolts or
otherwise (hereinafter collectively referred to as ?trade fixtures?)
shall belong solely to Lessee, and, at the expiration or sooner
termination of this lease or any renewal or extension thereof,
Lessee shall have the right to remove such trade fixtures,
provided, however, that after such removal Lessee shall, at its sole
expense, restore the leased premises to its condition prior to the
installation of such trade fixtures. If at such expiration or
termination of this lease or any renewal or extension thereof,
Lessee elects to sell its trade fixtures, or any portion thereof,
Lessee shall, in such event, give the City a right of first refusal to
purchase the trade fixtures or portion thereof which Lessee elects
to sell at a price equal to the fair market value of such trade
fixtures, f.o.b. Yakutat.
Section 13 of the 1997 lease was identical to the corresponding sections in the prior three
leases. The 1997 lease thus gave Yakutat a ?right of first refusal? with respect to ?trade
fixtures,? while the previous three leases gave Yakutat an option to purchase ?structural
improvements and additions.? It is undisputed that section 12 of the 1997 lease applies only
to improvements or additions made after it became effective, and that none of the disputed
items falls into this category. Therefore, the right of first refusal the 1997 lease gave Yakutat
with regard to trade fixtures does not apply to the disputed items. But it is useful to examine
the 1997 lease because it sheds light on what the parties meant by ?trade fixtures,? as opposed
to ?structural improvements and additions.?
As a starting point we recognize that the Restatement (Second) of Property ?
12.2(4) states that ?[e]xcept to the extent the parties to a lease validly agree otherwise, the
tenant is entitled to remove permissible annexations he has made to the leased property . . . if
the leased property can be and is restored to its former condition after the removal.? In
Interior Energy, we stated the traditional principle that a tenant may remove trade fixtures if (1)
it installed or affixed them to the premises; (2) it did not intend to donate them to the
landlord; and (3) the property may be returned to its former condition. With regard to the
second factor, we stated that ?[i]n the absence of an agreement to the contrary, courts presume
that the tenant did not intend to donate the affixed items to the landlord.?
The parties agreed that Yakutat had the first option to purchase ?structural
improvements and additions.? We therefore must decide what that phrase means and what
items it includes. We have found no case discussing an identical phrase. Cases discussing
related phrases provide some guidance.
A New York court has defined a ?structural change? as
one that affects ?a vital and substantial portion of the premises, as
would change its characteristic appearance; the fundamental
purpose of the erection; or the uses contemplated, or a change of
such a nature as would affect the very realty itself, extraordinary in
scope and effect, or unusual in expenditure.?[ ]
Courts have held the following to be ?structural? changes or improvements: (1)
new electrical outlets and wiring, new pipes, and fire-retardant walls; (2) a block wall; (3)
new doors, a canopy extension, and a brick fascia; (4) an altered sewer system; (5) fire-proof
walls; (6) fire-proof paneling, elevator doors, and handrails; (7) fire escapes and fire-proof
partitions; (8) flooring changes; (9) improved beams, columns, connections, and shear
walls; (10) a storage shed, new door openings, and a concrete pad to support storage tanks;
(11) a new floor and surface flooring; and (12) central heat and hot water.
The court in Shell Oil Co. v. Capparelli defined ?trade fixtures? as property the
tenant installed ?at his own expense, during the term of the lease, to carry on the business for
which the realty was leased.? It held that oil storage tanks installed in the ground and covered
with concrete were trade fixtures.
In Consiglio v. Carey a Massachusetts court had to determine who owned a walk-in
freezer, a compressor that supplied the cold air to the freezer, two air conditioners, a
dishwasher, and a bar. Consiglio, the tenant, had purchased the dishwasher from a prior
tenant, who had installed it, and Consiglio had installed the other items. These were all large
items, and some required that the building be modified before they could be installed. The
court stated that the right to remove an item depended on the effect on the property of
installing and removing the item; an item could be removed if its removal (1) caused no
material injury to the estate and (2) would not make the item lose its character or value as
personal chattel. The court held that the tenant could remove all of the ?trade fixtures,?
which included all of the items except the dishwasher, because the fixtures satisfied the two
conditions above; it remanded as to the dishwasher.
These cases distinguish between structural improvements and trade fixtures
based on the item?s relationship to the realty. Structural improvements are more closely
connected to the building itself than are trade fixtures; structural improvements have little use
when not incorporated into a building. Trade fixtures, on the other hand, while sheltered by a
building, do have theoretical use outside it. While many, if not all, of the structural
improvements listed in these decisions would be considered ?trade fixtures? as Shell Oil defined
that term, structural improvements bear a closer tie to the building than do fixtures.
Yakutat?s 1986, 1988, and 1992 leases distinguish between ?structural
improvements and additions? and ?machinery, equipment, and facilities?; the 1997 lease refers
to the latter as ?trade fixtures.? The items in dispute here do not fall squarely within the
?structural change? definition set out above, because they did not change the structure?s
characteristic appearance or fundamental purpose. The structure remains a large building
designed to house machinery, and it continues to be available for any purpose for which it
could have been used before Sitka Sound installed the items. The disputed items do fall within
the definition of ?trade fixtures? stated above. Sitka Sound installed them at its own expense,
during the term of the leases, to carry on its fish processing business. Nevertheless, the fact
these items are ?trade fixtures? is not determinative, because many items deemed in the cited
cases to be structural changes fall under the definition of ?trade fixtures,? and are not
?structural changes.? Therefore, in addition to this definitional factor, we also consider the
similarity between the disputed items and the examples from the cited cases.
The items in dispute here fall closer to the cited examples of trade fixtures than
to the examples of structural improvements. Yakutat?s argument that NPPI?s interpretation of
?structural improvements? would render the option language superfluous is appealing, but not
entirely convincing. One could imagine the tenant removing the kinds of items listed in the
structural improvement cases cited above, for example, handrails, fire-escapes, doors, or even
electrical wiring. These items would be virtually useless without a building in which to put
them, but the tenant could nevertheless remove them and install them in a new building.
Thus, NPPI could also have attempted to remove items that are indisputably structural
improvements or additions and install them in another fish processing plant. That is what it
argues it has the right to do, and what it threatened to do before litigation commenced.
Therefore, we cannot say that the option language is rendered superfluous.
The leases? language, as illuminated by case law, consequently tends to support
NPPI?s argument that the disputed items are not structural improvements or additions, and are
therefore not subject to the option to purchase.
b. Extrinsic evidence supports Yakutat?s position.
We next turn to extrinsic evidence to determine whether ?structural
improvements and additions? is ambiguous. The extrinsic evidence on which the superior
court relied to ascertain the parties? intentions largely consisted of the trial testimony of Powell,
Yakutat?s mayor, and the deposition testimony of Thompson, Sitka Sound?s former owner.
Powell testified that it was Yakutat?s intention under the option to purchase
section to have the right to purchase and maintain ?major integral? parts, including the
refrigeration and electrical systems. He testified that he and Thompson agreed that individual
components of an overall plant system, including compressors, were subject to Yakutat?s option
to purchase and would not be removed at the end of the lease.
Thompson testified that Sitka Sound did not intend to remove essential
components. He also stated that Sitka Sound was entitled under this provision to remove only
freestanding, portable items that were not integral parts of the overall system. He testified that
Sitka Sound intended refrigeration improvements and components, including compressors,
condensers, receivers and the like, to be subject to Yakutat?s option to purchase, along with
other items integral to the overall plant system.
NPPI argues that Thompson?s testimony, given fifteen years after he wrote the
letters about the equipment Sitka Sound installed, should not be seen as interpreting the lease;
rather, it asserts, he merely assumed that Sitka Sound would not want to remove the
equipment if the lease terminated. It argues that his description of the lease provisions
concerning the removal of machinery also shows his misunderstanding of the lease. NPPI
asserts that he testified that the clause was limited to freestanding items, but that the lease
language contradicts his testimony. NPPI similarly argues that Powell testified that equipment
could not be removed if it is an integral part of the system, but it points out that the lease does
not differentiate between items that are integral and those that are not. NPPI argues that
Thompson did not originally negotiate the clause concerning structural improvements, because
that clause is from a lease predating Sitka Sound?s tenure as lessee.
NPPI?s arguments regarding Thompson?s testimony are not implausible. But the
superior court also relied on Powell?s testimony, stating that it ?specifically [found] the hearing
testimony of Larry Powell regarding the intent of the parties as to the lease language to be
credible.? ?The trial court?s findings regarding the credibility of witnesses and weighing of the
evidence may be reversed only if clearly erroneous? Having reviewed Powell?s testimony, we
cannot say that the superior court clearly erred in assessing his credibility. Moreover,
Thompson?s testimony corroborated Powell?s position. The testimony of both witnesses
supported Yakutat?s position. We therefore conclude that this extrinsic evidence supports the
superior court?s conclusion that the disputed items are structural improvements or additions.
Based on the leases? language and the extrinsic evidence, we conclude that the
parties? conflicting interpretations of ?structural improvements and additions? are both
reasonable; ambiguity therefore exists.
2. Extrinsic evidence resolves the ambiguity.
The second stage of the analysis requires courts to examine the extrinsic evidence
to help determine the parties? intent and reasonable expectations. The parties? conduct after
entering into the contract is probative of intent. Conduct is a better indicator of intent than
is testimony.
The following extrinsic evidence helps resolve the ambiguity of ?structural
improvements and additions?: (1) the correspondence between Sitka Sound and Yakutat
discussing the expected useful lives of items, (2) the potential economic consequences if the
disputed items are removed, and (3) the parties? investment in the plant.
NPPI argues that from 1978 to 2002 the parties to the various leases invoked the
option to purchase only twice: (1) in a 1987 letter regarding refrigeration work, and (2) in a
letter Yakutat received in January 1988 discussing the electrical upgrade at the little dock. It
claims that these were the only two instances in which the parties sought a ?mutual agreement
of the expected useful life? of a structural improvement; this means that there could not have
been any other structural improvements to which the parties believed the option to purchase
applied, or the parties would have agreed on their useful lives as well. It also argues that the
letters discussing the useful lives are ambiguous. With regard to the first instance, it argues that
the twenty-year ?life expectancy may refer to the refrigeration work done to install the
equipment, not to the equipment itself.? With regard to the second instance, the project the
letter referred to ?might be the electrical service upgrade, and not the purchase of the ammonia
compressor, which is equipment.?
Yakutat points out that in 1987 and 1988 Sitka Sound and Yakutat upgraded
the electrical and refrigeration systems at both the main plant and the little dock, and
constructed and installed compressors, condensers, receivers, and blast freezers. It argues that
in connection with these projects the parties referred to Yakutat?s option to purchase, a
contract term of major significance to Yakutat, because it protected Yakutat?s investment in the
projects.
The two letters describing the proposed projects are ambiguous. They could be
referring just to the electrical upgrades that accommodate the new equipment or they could be
referring to the equipment itself when they discuss the projects? useful lives of twenty years.
The letter about the 1987 refrigeration work from Sitka Sound to Yakutat states:
the only practical way for us to correct the electrical deficiencies
will be to consolidate the present two engine rooms. This will
require extensive refrigeration work as well. . . .
. . . .
We also ask permission to perform the refrigeration work
necessary for the consolidation of the engine rooms and for the
improvements as outlined in the August 4, 1987 letter from
Wade & Wyatt Refrigeration Company (attachment G). As
mentioned previously, this portion of the project would be at the
expense of Sitka Sound and is thought to have a 20 year life
expectancy.
This letter also discusses proposed ?208 and 440 volt systems.? The letter from Sitka Sound to
Yakutat about the little dock project states:
In general terms the project consists of upgrading the electrical
service in order to accommodate the addition of an ammonia
compressor in order that the ice making and holding equipment
is functioning at [its] optimum level. This project would be at the
expense of Sitka Sound Seafoods and is thought to have a useful
life of 20 years.
Neither letter unambiguously states what items are expected to have a life expectancy of twenty
years. Read as a whole, however, they imply that the electrical work, and not the equipment,
was expected to have a useful life of twenty years; this is especially true as to the letter regarding
the little dock project. The leases required the parties to discuss useful life before undertaking
structural improvements or additions. The parties did not do so except on these two occasions.
Similarly, there is no evidence that Sitka Sound asked for permission to make structural
improvements, as the leases required, on other occasions. That it did not do so is some
evidence that the contracting parties thought that the 1987 refrigeration work and the little
dock project were the only structural improvements Sitka Sound made. Yet this evidence is not
conclusive.
There was evidence that the cost of removing and shipping the items that Sitka
Sound alleged that it owned and restoring the facility to its original condition, as sections
twelve and thirteen required, could exceed the revenue from selling the items, resulting in
economic waste. Parties to a contract generally intend not to incur economic waste, and in this
case this intent is preserved and waste is avoided if the disputed items are not removed or the
contract is interpreted as treating the disputed items as structural improvements.
We also consider the amount the parties invested in the facility. NPPI asserts
that it and its predecessor invested more than $5 million in the plant. NPPI argues that the
superior court impermissibly rewrote the lease to protect Yakutat from the bargain that Yakutat
made with NPPI and its predecessor. It contends that Yakutat did not need the superior
court?s protection, because Yakutat received ample return on its investment in the plant from
the royalties and rents it received, and from the plant?s importance to the local economy.
Yakutat contends that during the terms of Sitka Sound?s and NPPI?s leases
Yakutat spent $2.1 million on capital projects and major repairs at the facility. It argues that
this expenditure is consistent with its view of the parties? mutual intent, because Yakutat would
not have spent this money if it had believed it would have received a stripped facility ?wholly
incapable of performing its core function and purpose ? refrigeration.? Yakutat contends that
the $5 million NPPI claims the lessees invested in the plant includes hundreds of thousands of
dollars for which Yakutat reimbursed the lessees, as well as amounts spent on items NPPI
legitimately removed from the plant.
Alaska case law does not permit a court ?to rewrite a contract for the purpose of
accomplishing that which, in the court?s opinion, might appear proper? or to ? ?create
substantive rights under the guise of doing equity,? ? except in limited circumstances, none of
which is alleged to exist here. Contracts ?must be enforced strictly according to their terms.?
The extrinsic evidence concerning the total amounts invested does not permit us
to rewrite the lease, but it can be probative of intent. We hold that evidence that both parties
made substantial investments in the plant supports a conclusion they each intended to retain
the items in which they invested.
The extrinsic evidence consequently does not definitively reveal what the parties?
intentions were. Yet the parties? conduct and the testimony discussed above reasonably permit
an inference that they intended that Yakutat would be able to purchase the disputed items
when the lease terminated. Because we apply the clearly erroneous standard when reviewing a
trial court?s factual findings based on extrinsic evidence, we cannot say that the superior court
erred in finding that (1) Powell and Thompson ?agree as to the intent of the parties regarding
Yakutat?s right to purchase such improvements and additions at the facility,? (2) ?removal
would result in economic waste,? and (3) the ?expenditures by Yakutat would not have been
necessary if Yakutat was to receive the facility back from Sitka Sound Seafoods in the condition
in which it existed in 1986.? We therefore uphold the superior court?s conclusion that Yakutat
had the option to purchase the disputed items.
Our decision should not be read as disapproving the principles expressed in
Interior Energy and the Restatement (Second) of Property ? 12.2(4). We simply hold that the
evidence, although disputed, was sufficient to render the findings not clearly erroneous. These
findings had the effect of establishing that the parties agreed to terms that rendered
inapplicable the common law principles reflected in Interior Energy and Restatement ? 12.2(4).
C. NPPI?s Current Understanding of Yakutat?s Option To Purchase Is
Irrelevant.
NPPI argues that the superior court erred in finding that NPPI was ?fully aware?
that a clause giving Yakutat an option to purchase structural improvements included the
option to purchase equipment such as compressors and condensers. NPPI refers us to the
testimony of an NPPI vice president who testified about his understanding of ?trade fixtures.?
But, as Yakutat contends, the witness was not a participant in the Sitka Sound
transactions that preceded NPPI?s 1996 purchase of Sitka Sound. We agree with Yakutat that
what is relevant is the parties? intentions when they entered into the leases, not the subjective
belief of NPPI personnel during litigation years later. A contract is enforceable in accordance
with the meaning the parties attach to a contract term at the time they enter into the
contract. NPPI?s current understanding of the lease is irrelevant.
D. NPPI?s Internal Depreciation Expense Report Should Not Be Used To Set
Option Prices.
NPPI argues that the superior court erred in relying on Exhibit BP to determine
option prices for some items. Exhibit BP is an NPPI internal ?Depreciation Expense Report?
dated December 31, 2001. It lists numerous items; for each item, it lists the acquired value,
the depreciation method, the estimated life, and the depreciation. The superior court held
that, except for the 1987-88 upgrades at the main processing plant and the 1987-88 electrical
upgrade at the little dock, ?Yakutat has the right to purchase the . . . items . . . at their straight
line depreciated value, in accordance with the schedule set out in Exhibit BP.? The court
found that Exhibit BP was the applicable depreciation schedule for these remaining items.
NPPI correctly contends that the trial testimony established that, except for the
twenty-year estimates for the 1987 refrigeration project and the little dock project, the parties
did not, contrary to the leases, agree on items? expected useful life. NPPI argues that the court
should have given effect to the parties? reasonable expectations, and that the parties expected a
depreciation schedule that would reflect each item?s expected useful life. It asserts that, absent
other agreement, the court should have adopted a twenty-year schedule to set the option prices,
because that schedule is related to expected useful life, and because most, if not all, of the items
subject to the option to purchase will have a useful life exceeding twenty years. NPPI contends
that James Kudwa, a senior vice president of NPPI and a certified public accountant, testified
that Exhibit BP was not designed to set a price at which NPPI would sell a particular asset and
that he was unaware of any company that uses an internal depreciation report in that way. It
argues that according to Thompson?s testimony, a twenty-year schedule applies, absent
agreement to a different expected life. NPPI argues that no testimony supports the proposition
that the schedule?s depreciation periods were intended to set the assets? useful lives.
Yakutat argues that Exhibit BP is not a tax schedule, that it ?establishes a life
term for each asset,? and that it contains NPPI?s own realistic evidence of these items? useful
lives. Yakutat argues that granting a twenty-year life to every item, as NPPI proposes,
contradicts the evidence presented. It asserts that Powell testified that the parties did not
intend that all items would have a useful life of twenty years, and that he and Thompson
agreed that Sitka Sound?s depreciation terms would determine Yakutat?s option price. Yakutat
contends that Thompson?s testimony does not indicate that all items subject to an option to
purchase would be subject to a twenty-year useful life. It also argues that no trial evidence
supported NPPI?s contention that most, if not all, of the items would have useful lives
exceeding twenty years; it contends that Powell?s testimony instead contradicts NPPI?s
contention.
Per the leases, the parties were to agree about the useful life of a structural
improvement before it was made. With the two exceptions discussed in Part III.B.2, the parties
did not agree on any improvement?s useful life.
We are unpersuaded by NPPI?s argument that the court was required to apply a
twenty-year useful life to these items. The leases state that the expected useful life ?shall under
no circumstances exceed twenty (20) years,? not that it shall be twenty years unless agreed
otherwise. The evidence did not compel the trial court to find a twenty-year useful life.
We nonetheless agree with NPPI that it was error to use Exhibit BP to determine
option prices for the remaining items. Kudwa testified that the depreciation report was not
meant to represent true value or the price at which items could be sold, and Yakutat produced
no evidence justifying a finding that this internal company report reflected true values.
(Indeed, Yakutat itself attacked the exhibit?s accuracy, demonstrating at trial, for example, that
it listed an improvement for which Yakutat had paid $277,000.) Powell testified on cross-
examination by NPPI that there was a ?general understanding? in his discussions with
Thompson ?that . . . more or less whatever depreciation schedule they were going to use would
be how they would finally consider whether or not it had been fully depreciated out or not at
the end of the term.? But there was no evidence that Exhibit BP was prepared for a purpose
even incidentally related to valuing improvements to set a fair price if Yakutat exercised its
option to purchase.
Using the exhibit to establish price had the effect of attributing a value of ?zero?
to valuable refrigeration equipment based on a five-year internal depreciation schedule
unsupported by evidence that the items actually had a useful life of only five years. As NPPI
contends, this potentially results in Yakutat receiving for free items allegedly worth as much as
$732,419. Absent evidence that Exhibit BP was the sort of schedule about which Powell and
Thompson had a ?general understanding,? or that it accurately reflected the expected useful
life for the listed items, it was error to rely on it to set the option prices.
Even viewing the evidence in the light most favorable to the prevailing party, it
was clear error to find that Exhibit BP determined the value of the disputed items. We
therefore reverse the finding and conclusion that relied on Exhibit BP and remand for further
proceedings to determine the value of these items.
E. The Superior Court Did Not Err in Denying Yakutat Full Attorney?s Fees.
Yakutat argues on cross-appeal that the superior court erred in failing to grant its
request for an award of full attorney?s fees, $90,490.50. The court awarded Yakutat $81,000,
?finding this amount reasonable.? Yakutat relies on this language in the 1988, 1992, and 1997
leases:
If Lessee or City shall bring any action for any relief against the
other, declaratory or otherwise, arising out of this lease, including
but not limited to any suit by City for the recovery of possession
of the premises, the losing party shall pay the successful party a
reasonable sum for attorneys? fees in such suit . . . .
It asks that we interpret such provisions to call for an award of full, reasonable attorney?s fees.
It argues that the superior court did not find that Yakutat?s fees were unreasonable, but
instead erroneously averaged the parties? fees. It contends that the court erred because it did
not explain why it was ruling that the actual fees were unreasonable. It only compared the two
sides? fees, a method this court disapproved of in Gamble v. Northshore Partnership.
Because we reverse and remand for valuation of some of the disputed items, we
recognize the possibility that a new award may replace or supplement the original award. But
because the attorney?s fees issue may recur, we address it here.
We agree with NPPI that a trial court has discretion to determine whether the
incurred fees are reasonable in situations such as this. Interpreting an attorney?s fees clause in
a contract presents a question of law, to which we apply our independent judgment. The
provision in the contract controls, and a provision that calls for reasonable attorney?s fees
means full and reasonable attorney?s fees. In determining what is reasonable the court may
consider ? ?the reasonableness of the total time expended on the case, the hourly rate charged
and any of the other components of a reasonable fee. . . . If the court finds that the full
amount requested is unreasonable and awards a lesser sum, it must state its reasons on the
record.? ? A large discrepancy between the fees incurred by each side may be evidence of
unreasonableness, but it is not conclusive. We will uphold the trial court?s determination
regarding attorney?s fees unless the trial court abused its discretion.
Before issuing its order, the superior court stated that it would compare the fees
incurred by each side, and it presumably based its award on this comparison. The court might
have more clearly explained its reasons for the award. But the method of calculation is
sufficiently clear for meaningful appellate review, and the record supports the implicit finding
that the full amount sought was unreasonable. NPPI, which incurred fees that were more than
twenty percent lower than Yakutat?s, pointed out to the superior court that two or even three
lawyers for Yakutat attended depositions. The superior court?s methodology was not
erroneous.
F. NPPI?s Appeal Is Not Foreclosed by the Acceptance of Benefits
Doctrine and Is Not Moot.
Yakutat argues that NPPI?s appeal should be dismissed under the acceptance of
benefits doctrine because it asserts that NPPI, having accepted Yakutat?s check for
$174,385.88, is foreclosed from appealing the judgment.
We have not previously considered the acceptance of benefits doctrine. Under
the traditional acceptance of benefits doctrine, a party that voluntarily and with knowledge of
the material facts accepted the benefits of a judgment was barred from appealing the
judgment. This strict approach, however, is generally no longer applied. For example, in
Hawaiian Paradise Park Corp. v. Friendly Broadcasting Co., the United States Court of Appeals for
the Ninth Circuit stated that for the doctrine to apply, there must also be an intent ?to finally
compromise and settle a disputed claim.?
We decline to dismiss NPPI?s appeal on the acceptance of benefits theory. NPPI
specifically informed Yakutat that it was reserving its right to appeal when the parties were
discussing the form of the bill of sale.
Yakutat also argues that NPPI?s appeal should be dismissed as moot. Yakutat
argues that because it invested large amounts of money and labor in repairing and maintaining
the disputed items, we could not grant NPPI effective relief even if NPPI were to prevail.
We refrain from deciding cases if ? ?the facts have rendered the legal issues
moot.? ? But Yakutat fails to establish that a remedy would be impossible were NPPI to
prevail. Had we reversed the superior court?s opinion with regard to whether Yakutat had an
option to purchase the disputed items, we or the superior court could have fashioned a remedy
that would have considered Yakutat?s expenses in improving the plant.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM as to the decision that Yakutat had the
right to purchase the disputed items, but REVERSE to the extent the superior court held that
the depreciation schedule and values in Exhibit BP apply to any of the disputed items. We
REMAND for valuation of those items.
Rockstad v. Global Fin. & Inv. Co., 41 P.3d 583, 586 (Alaska 2002).
Interior Reg?l Hous. Auth. v. James, 989 P.2d 145, 148 n.12 (Alaska 1999).
Fairbanks N. Star Borough v. Tundra Tours, Inc., 719 P.2d 1020, 1024-25
(Alaska 1986).
Dunn v. Dunn, 952 P.2d 268, 270 (Alaska 1998).
Id. (quoting R.F. v. S.S., 928 P.2d 1194, 1196 n.2 (Alaska 1996)).
Klosterman v. Hickel Inv. Co., 821 P.2d 118, 122 (Alaska 1991).
Wessells v. State, Dep?t of Highways, 562 P.2d 1042, 1046 (Alaska 1977).
Id.
Id.; see also Rockstad v. Global Fin. & Inv. Co., 41 P.3d 583, 586 (Alaska
2002).
Wessells, 562 P.2d at 1046.
Id.
Rockstad, 41 P.3d at 586; see also Wessells, 562 P.2d at 1046; Nat?l Bank of
Alaska v. J. B. L. & K. of Alaska, Inc., 546 P.2d 579, 582-83 (Alaska 1976).
BALLENTINE?S LAW DICTIONARY 1225 (3d ed. 1969).
Polk v. Armstrong, 540 P.2d 96, 98 (Nev. 1975).
Interior Energy Corp. v. Alaska Statebank, 771 P.2d 1352, 1356 (Alaska 1989).
RESTATEMENT (SECOND) OF PROPERTY ? 12.2(4) (1977).
Interior Energy, 771 P.2d at 1355-56.
Id. at 1356.
Riverside Research Inst. v. KMGA, Inc., 489 N.Y.S.2d 220, 223 (App. Div.
1985) (quoting Wall Nut Prods., Inc. v. Radar Cent. Corp., 244 N.Y.S.2d 827, 829 (App.
Div. 1963)).
Margold Residence Corp. v. Younger, 142 N.Y.S.2d 46, 47-48 (App. Div. 1955).
Polk v. Armstrong, 540 P.2d 96, 98 (Nev. 1975).
Two Guys from Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 482 N.Y.S.2d 465, 466
(N.Y. 1984).
Bush Terminal Assocs. v. Federated Dep?t Stores, Inc., 424 N.Y.S.2d 28, 30 (App. Div.
1980).
Buckley v. Liggett, 218 A.2d 515, 516 (D.C. App. 1966).
Ingalls v. Roger Smith Hotels Corp., 118 A.2d 463, 465 n.1, 466-67 (Conn. 1955).
Sullivan v. New York United Realty Co., 293 N.Y.S. 957, 960 (App. Div. 1937).
Hill v. Employers? Liab. Assurance Corp., 188 A. 277, 279 (Conn. 1936).
Palo Alto Town & Country Vill., Inc. v. Deutsche Lufthansa AG, 2002 WL
1363868, *2 (N.D. Cal. June 17, 2002).
Kaydon Acquisition Corp. V v. America Cent. Indus., Inc., 179 F. Supp. 2d
1022, 1029, 1038-39 (N.D. Iowa 2001).
630 McKinley Square Corp. v. Great Atl. & Pac. Tea Co., 285 N.Y.S.2d 130,
133 (Civ. 1967).
Brown v. Denner, 218 N.Y.S.2d 834, 841 (Mun. 1961).
Shell Oil Co. v. Capparelli, 648 F. Supp. 1052, 1055 (S.D.N.Y. 1986); see
also Interior Energy, 771 P.2d at 1355.
Shell Oil Co., 648 F. Supp at 1055-56.
Consiglio v. Carey, 421 N.E.2d 1257, 1258 (Mass. App. 1981).
Id. at 1259.
Id.
Id.
Id. at 1258, 1260.
See supra note 32 and accompanying text.
Rausch v. Devine, 80 P.3d 733, 737 (Alaska 2003).
See Wessells v. State, Dep?t of Highways, 562 P.2d 1042, 1048 (Alaska 1977).
State v. Arbuckle, 941 P.2d 181, 186 n.5 (Alaska 1997).
Sprucewood Inv. Corp. v. Alaska Hous. Fin. Corp., 33 P.3d 1156, 1162
(Alaska 2001).
See Lathrop Co. v. Lampert, 583 P.2d 789, 790 (Alaska 1978) (holding that
superior court did not possess either equity powers or independent legal authority to condition
tenant?s relief from forfeiture upon its renegotiating lease rental clause).
Id.
Id. (quoting Stein v. Simpson, 230 P.2d 816, 819 (Cal. 1951) (en banc)).
Id.
Arbuckle, 941 P.2d at 186 n.5.
Fairbanks N. Star Borough v. Tundra Tours, Inc., 719 P.2d 1020, 1025
(Alaska 1986).
See Sprucewood, 33 P.3d at 1162 (stating that to determine parties?
intentions, court considers their intentions at time they sign contract); Peterson v. Wirum,
625 P.2d 866, 870 (Alaska 1981) (holding that opinions expressed during litigation
regarding parties? intent ?do not establish an issue of fact regarding the parties? reasonable
expectations at the time they entered into the contract?).
Sprucewood, 33 P.3d at 1162-63.
Peterson, 625 P.2d at 870.
See Klosterman v. Hickel Inv. Co., 821 P.2d 118, 122 (Alaska 1991).
See Dunn v. Dunn, 952 P.2d 268, 270 (Alaska 1998).
See Johnson v. Olympic Liquidating Trust, 953 P.2d 494, 500 (Alaska 1998) (stating
that attorney?s fees provision in contract controls amount of award); Jackson v. Barbero, 776
P.2d 786, 787-88 (Alaska 1989) (same).
Gamble v. Northshore P?ship, 28 P.3d 286, 289-90 (Alaska 2001).
See id. at 290.
See A & G Constr. Co. v. Reid Bros. Logging Co., 547 P.2d 1207, 1212-13
(Alaska 1976).
Johnson, 953 P.2d at 500; see also Jackson, 776 P.2d at 788.
Gamble, 28 P.3d at 288.
Jackson, 776 P.2d at 788 (quoting Hunsicker v. Thompson, 717 P.2d 358,
360 (Alaska 1986)).
Gamble, 28 P.3d at 289.
Id. at 290.
Benson K. Friedman, An Intent-Based Approach to the Acceptance of Benefits
Doctrine in the Federal Courts, 92 MICH. L. REV. 742, 742-43 (1993).
20 JAMES WM. MOORE ET AL., MOORE?S FEDERAL PRACTICE 303.10[2][f] (3d
ed. 2003).
Hawaiian Paradise Park Corp. v. Friendly Broadcasting Co., 414 F.2d 750, 752 (9th
Cir. 1969); see also United States v. Hougham, 364 U.S. 310, 312 (1960) (holding that ?where a
judgment is appealed on the ground that the damages are inadequate, acceptance of payment
of the amount of the unsatisfactory judgment does not, standing alone, amount to an accord
and satisfaction of the entire claim?). But see, e.g., Huguley v. John Wright & Assocs., Inc., 644 So.
2d 911, 913 (Ala. 1994) (?When an appellant is shown to have accepted the benefits of a
judgment or order, the appeal will be dismissed.?).
Haynes v. Charney, 693 P.2d 831, 834 (Alaska 1985) (quoting Doe v. State, 487
P.2d 47, 53 (Alaska 1971)).
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