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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Alaska Interstate Construction, LLC v. Pacific Diversified Investments, Inc. (2/10/2012) sp-6650
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, email
corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
ALASKA INTERSTATE )
CONSTRUCTION, LLC, PEAK ) Supreme Court Nos. S-13478/13667
ALASKA VENTURES, INC. and )
NABORS ALASKA SERVICES ) Superior Court No. 3AN-05-07921 CI
CORPORATION, )
) O P I N I O N
Appellants/Cross-Appellees, )
) No. 6650 - February 10, 2012
v. )
)
PACIFIC DIVERSIFIED )
INVESTMENTS, INC., JOHN )
ELLSWORTH, Individually, and )
ANCHORAGE AVIATION )
CENTER, LLC, )
)
Appellees/Cross-Appellants. )
)
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage, Sen K. Tan, Judge.
Appearances: Timothy J. Petumenos, Birch Horton Bittner
& Cherot, Anchorage, for Appellants, Cross-Appellees
Alaska Interstate Construction, LLC, Peak Alaska Ventures,
Inc., and Nabors Alaska Services Corporation. Jahna M.
Lindemuth, Dorsey & Whitney LLP, Anchorage, for
Appellant and Cross-Appellee, Peak Alaska Ventures, Inc.
Peter J. Maassen, Ingaldson, Maassen & Fitzgerald, P.C.,
Anchorage, for Appellees and Cross-Appellants, Pacific
Diversified Investments, Inc., John Ellsworth, Individually,
and Anchorage Aviation Center, LLC.
----------------------- Page 2-----------------------
Before: Carpeneti, Chief Justice, Fabe, Christen, and
Stowers, Justices. [Winfree, Justice, not participating]
CHRISTEN, Justice.
I. INTRODUCTION
Alaska Interstate Construction, LLC, is a general contractor involved in the
construction of roads, bridges, and dams; it also supplies support services to the oilfield
sector. In 1995, Alaska Interstate Construction's assets were sold to a joint venture but
it continued to be operated by its founder, John Ellsworth, through a company he owned
called Pacific Diversified Investments, Inc. In 1998, Alaska Interstate Construction
conveyed a 20% ownership interest to Ellsworth and entered into an operating agreement
that provided for Ellsworth's continued management of Alaska Interstate Construction's
operations through Pacific Diversified Investments.
Starting in 1998, Pacific Diversified Investments also leased two aircraft
to Alaska Interstate Construction and provided aircraft support services for them.
Alaska Interstate Construction filed suit against Pacific Diversified
Investments and Ellsworth in 2005, principally alleging fraud, breach of the covenant of
good faith and fair dealing, violation of the Unfair Trade Practices Act, breach of the
parties' operating agreement, and conversion. The jury returned a verdict of $7.3 million
in favor of Alaska Interstate Construction on its Unfair Trade Practices Act claims and
$7.3 million on its claims for common law fraud and breach of fiduciary duty. The
parties filed many post-trial motions.
Though the jury decided that Pacific Diversified Investments and Ellsworth
engaged in conduct that was fraudulent, it decided that they did not materially breach the
parties' operating agreement. Alaska Interstate Construction filed a post-verdict motion
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for judgment notwithstanding the verdict arguing the jury's finding of fraud required the
finding that the operating agreement was materially breached. This motion was denied.
But the superior court did enter judgment notwithstanding the verdict
nullifying the $7.3 million award for violations of the Unfair Trade Practices Act. This
ruling was premised on the superior court's conclusion that the conduct the jury found
to be fraudulent was exempt from the Unfair Trade Practices Act because it dealt with
aviation, an industry regulated by the Federal Aviation Administration.
The superior court awarded attorney's fees and costs to Pacific Diversified
Investments and Ellsworth.
Alaska Interstate Construction appeals; Pacific Diversified Investments and
Ellsworth cross-appeal.
We affirm the superior court's denial of the motion for judgment
notwithstanding the verdict seeking a ruling that the Unfair Trade Practices Act does not
apply to intra-corporate disputes. We affirm the superior court's determination that
Alaska Interstate Construction's aircraft lease claims were not barred by the statute of
limitations. We affirm the superior court's decision to deny Pacific Diversified
Investments access to discovery in support of its abuse of process claim. We also affirm
the superior court's decision to apply the clear and convincing evidence standard of
proof to the quasi-estoppel defense.
We reverse the superior court's judgment notwithstanding the verdict on
Pacific Diversified Investments's argument that Alaska Interstate Construction's claims
were exempt from the Unfair Trade Practices Act. We reverse the superior court's ruling
on material breach and hold that the jury's findings of fraud and wilful misconduct,
under the circumstances of this case, required the finding that Pacific Diversified
Investments materially breached the operating agreement as a matter of law. We reverse
the superior court's order denying the motion for judgment notwithstanding the verdict
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----------------------- Page 4-----------------------
on Pacific Diversified Investments's fraud in the inducement claim, and we vacate the
superior court's determination of prevailing party, award of attorney's fees, and award
of prejudgment interest.
In light of these rulings, Pacific Diversified Investments's claims of
statutory and contractual indemnity are moot.
II. FACTS AND PROCEEDINGS
In 1987 John Ellsworth started Alaska Interstate Construction, LLC (AIC).
AIC is a general contractor involved in the construction of roads, bridges, and dams. It
also supplies other oilfield-related support services. In 1995, Ellsworth sold AIC's assets
to a joint venture consisting of Nabors Alaska Services Corp., a subsidiary of Nabors
Industries, Inc. (Nabors), and Peak Alaska Ventures, Inc. (Peak), a subsidiary of Cook
Inlet Region, Inc. (CIRI). The joint venture retained Ellsworth to manage AIC under a
three-year consulting contract. Ellsworth managed AIC through Pacific Diversified
Investments, Inc. (PDI), a company he owned.1 The management contract between AIC
and PDI contained a non-compete clause naming PDI and Ellsworth in his personal
capacity.
In 1998, with PDI's management contract about to expire, Carl Marrs, then
president of CIRI and Peak, suggested offering Ellsworth an ownership interest in AIC
to keep him engaged in the company. Marrs convinced Ellsworth to convert a
forthcoming bonus into a 20% ownership interest in AIC. He and Ellsworth negotiated
"some of the key business terms" between themselves. Ellsworth also negotiated terms
with Mark Kroloff, an attorney who acted on behalf of CIRI and Peak; Keith Sanders,
1 Throughout this opinion, we use "PDI" to refer to Pacific Diversified
Investments and John Ellsworth, except for instances when it is necessary to distinguish
between them. We also use "AIC" to refer to all cross-appellees collectively, except
where it is necessary to distinguish Peak or Nabors.
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----------------------- Page 5-----------------------
who was then CIRI's general counsel; Charlie Cole, PDI and Ellsworth's lawyer; and
Kathy Ellis, in-house counsel for Nabors. The operating agreement gave Ellsworth an
ownership interest in AIC and responsibility for managing AIC.
The parties' operating agreement included a non-compete clause paralleling
the three-year management agreement the parties had entered into in 1995. By its terms,
the non-compete clause applied to Ellsworth personally and to PDI.
PDI continued to manage AIC from 1998 through April 30, 2005. During
this period, the ownership of AIC was split: Peak owned 40%; Nabors owned 40%; and
PDI owned 20%.
Later, PDI leased two aircraft to AIC and contractually agreed to provide
aircraft support services for them. The first lease was the October 1, 1998 Letter
Agreement. The second was the Sakhalin Jet Lease.2 AIC paid over $20 million to PDI
under these two leases.
In 2005, the other owners of AIC decided to change its management. They
purchased PDI's 20% ownership interest and assumed management responsibility.
AIC filed suit against PDI in May 2005 claiming conversion, breach of the
covenant of good faith and fair dealing, and breach of the parties' operating agreement.
AIC filed an amended complaint in September 2006 adding claims of fraud and
violation of the Unfair Trade Practices Act (UTPA). PDI responded with more than
twenty counter-claims, many of which were dismissed before trial. The relevant counter-
claims on appeal to our court are Ellsworth's claim that he was fraudulently induced to
enter the operating agreement containing the non-compete clause, PDI's claim that AIC
abused the judicial process by reporting its suspicions of fraud to the FBI and the U.S.
2 The lease agreements were made with Anchorage Aviation Center, LLC
(AAC), a wholly-owned subsidiary of PDI through which PDI provided aircraft services.
The parties stipulated that PDI and AAC can be treated as a single entity in this litigation.
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----------------------- Page 6-----------------------
Attorney's Office, and the claim that AIC breached the operating agreement by not
paying the contractual premium price of $12 million for PDI's ownership interest in AIC.
Before trial, PDI conceded over-billing AIC by $1,902,827.
The evidence at trial established that the October 1, 1998 Letter Agreement,
signed by Peak and Nabors, called for PDI to provide aircraft services to AIC at $1,467
per flight hour. In 2002, PDI began charging monthly fees of $100,000 to AIC for the
use of one aircraft, regardless of the time the aircraft was used by AIC. AIC introduced
evidence showing that neither Peak nor Nabors gave prior approval for this change.
AIC's forensics auditor, FTI Consulting, ultimately concluded that the October 1, 1998
Letter Agreement resulted in approximately $6 million in overpayments.
The Sakhalin Jet Lease required AIC to pay $125,000 per month for use of
a jet.3 AIC claimed damages for payments made on this lease in excess of arms-length,
fair market compensation. FTI opined that $9.8 million of the $12.5 million AIC paid
to PDI for services under the Sakhalin Jet Lease were overpayments, based on a rate of
$5,000 per flight hour for 552.5 hours of business use.
In all, FTI's testimony was that approximately $17 million of the payments
made pursuant to the aircraft leases was billed at a rate that exceeded market value, billed
for services not received, or was otherwise fraudulent.4 AIC also presented evidence of
3 While Ellsworth managed AIC, it formed SakhalinMorNefteMontazh
Alaska Projects, LLC (SAP), a wholly-owned subsidiary of AIC, to lease aircraft. The
parties stipulated to treating AIC and SAP as the same entity.
4 FTI determined that there were $17,172,728 in total aircraft related
damages. He made this determination using the following breakdown: PDI gain on sale
of Gulfstream III s/n 466: $936,103; other aircraft-related damages: $474,379; flight
hours invoiced, but not flown: $1,412,139; undocumented use of Westwind II s/n 436:
$60,294; non-reimbursable expenses billed by PDI: $1,571,767. To this, FTI added
non-business or undocumented use of an Astra SP s/n 062 and Astra SPX s/n 121:
(continued...)
-6- 6650
----------------------- Page 7-----------------------
improper or fraudulent credit card charges and charges for expenses unrelated to AIC's
business, and AIC alleged that some of its assets were sold at below market value after
AIC gave notice that it would no longer use PDI to manage its operations.
PDI argued at trial that AIC should be estopped from enforcing the parties'
operating agreement because it was modified by the parties' "words and conduct" and
it would be unconscionable to enforce it. PDI also argued that any misconduct or errors
in billing did not materially breach the operating agreement because the objective of the
operating agreement was to make a profit and AIC was profitable during the period PDI
managed it. PDI argued that its conduct was exempt from the Unfair Trade Practices Act
(UTPA) because the parties were not in competition, because the leases did not meet the
Act's definition of "goods and services," and because the Act does not apply to intra-
corporate disputes. As explained, Ellsworth argued that he was fraudulently induced into
signing the operating agreement containing the non-compete clause. Contrary to the
express language of the non-compete agreement, Marrs and Ellsworth both testified that
they did not intend for it to cover Ellsworth personally.
The jury found that PDI committed unfair and deceptive acts under the
UTPA related to the aircraft leases and that this conduct caused more than $7.3 million
in damages to AIC. The jury awarded the same amount, $7.3 million, on AIC's claims
of fraud by non-disclosure, fraud by affirmative misrepresentation, conversion, breach
of fiduciary duty, and breach of the covenant of good faith and fair dealing relating to
the aircraft leases. The jury also awarded $350,000 for conversion and breach of
fiduciary duty arising from improper credit card billings; approximately $23,000 for
4(...continued)
$1,362,990; billing in excess of $1,467 per hour due to rate change: $916,767; non-
business or undocumented use of Gulfstream III jet s/n 437: $608,805; and AAC-SMAK
Gulfstream III jet lease damages: $9,829,484.
-7- 6650
----------------------- Page 8-----------------------
payments of expenses unrelated to AIC's business, and approximately $85,000 for
breach of fiduciary duty and breach of the covenant of good faith and fair dealing related
to improper sales of assets at below market value after PDI received notice that it was
being removed as manager of AIC. The jury decided that Ellsworth was personally
bound by the non-compete provision in the operating agreement, but it also decided that
he was fraudulently induced into entering into the operating agreement containing the
non-compete provision.
Despite its findings of fraudulent conduct by PDI, the jury decided that PDI
did not materially breach the operating agreement and that Peak and Nabors were not
excused from their contractual obligations.5 The jury awarded PDI $12 million under
two of the operating agreement's provisions. One required payment of a premium price
for PDI's ownership interest in AIC. The other required payment of incentive
compensation for PDI's 2005 management services.
In post-trial motion practice, the superior court ruled that AIC's aircraft-
related claims were exempt from the UTPA. The superior court granted judgment
notwithstanding the jury's verdict (JNOV) to PDI, overturning the jury's verdict on the
UTPA claims and denying AIC's motion for treble damages. The superior court denied
the motion for JNOV that Peak and Nabors filed in which they argued that the jury's
findings of fraud, bad faith, and wilful misconduct established that PDI materially
breached the operating agreement as a matter of law. The superior court upheld the $12
million award in favor of PDI. Later, PDI was determined to be the prevailing party and
awarded attorney's fees and costs.
Both AIC and PDI appeal.
5 The jury also found that PDI's breach of the covenant not to compete was
not a material breach of the operating agreement.
-8- 6650
----------------------- Page 9-----------------------
III. STANDARD OF REVIEW
In reviewing orders granting or denying JNOV motions, we must
"determine whether the evidence, when viewed in the light most favorable to the non-
moving party, is such that reasonable persons could not differ in their judgment of the
facts."6 In addition, "[t]o the extent that a ruling on a motion for [JNOV] involves
questions of law, those questions will be reviewed de novo."7
A superior court's finding that an issue has been tried by consent, or that
it was raised in a motion for directed verdict, is reviewed for abuse of discretion.8
The superior court's determination of when a statute of limitations begins
9 1
to run is a question of fact that we review under the clearly erroneous standard.
Discovery orders are reviewed under the "deferential abuse of discretion
standard."11 We apply our independent judgment to determine whether a challenged jury
instruction states the law correctly.12 Errors in jury instructions are not grounds for
reversal unless the errors are prejudicial.13
6 Richey v. Oen, 824 P.2d 1371, 1374 (Alaska 1992).
7 Sisters of Providence in Wash. v. A.A. Pain Clinic, Inc., 81 P.3d 989, 999
n.10 (Alaska 2003).
8 Tufco, Inc., v. Pac. Envtl. Corp., 113 P.3d 668, 673-74 (Alaska 2005).
9 Solomon v. Interior Hous. Auth., 140 P.3d 882, 883 (Alaska 2006).
10 Williams v. Williams, 129 P.3d 428, 431 (Alaska 2006) (citing John's
Heating Serv. v. Lamb, 46 P.3d 1024, 1033 n. 28 (Alaska 2002)).
11 In re Mendel, 897 P.2d 68, 72 n.7 (Alaska 1995).
12 City of Kodiak v. Samaniego, 83 P.3d 1077, 1082 (Alaska 2004).
13 State v. Carpenter, 171 P.3d 41, 54 (Alaska 2007).
-9- 6650
----------------------- Page 10-----------------------
IV. DISCUSSION
A. The Superior Court Erred By Granting PDI's Motion For JNOV On
The Applicability Of The UTPA To Aircraft Leases.
Alaska's UTPA provides that "[u]nfair methods of competition and unfair
or deceptive acts or practices in the conduct of trade or commerce are declared
unlawful."14 The UTPA broadly prohibits unfair competition and fraudulent conduct
pertaining to the sale of "goods or services" in "consumer transactions."15 In addition
to enforcement by the state attorney general, the UTPA provides a private right of action
by any "person who suffers an ascertainable loss of money or property as a result of
another person's act or practice declared unlawful [under the UTPA]."16 Two elements
must be proven to establish a prima facie case of unfair or deceptive acts or practices:
"(1) that the defendant is engaged in trade or commerce; and (2) that in the conduct of
trade or commerce, an unfair act or practice has occurred."17 The engaged-in-commerce
prong encompasses both consumer and business-to-business transactions.18
Alaska Statute 45.50.481 carves out three exemptions from the UTPA. The
pertinent exemption relating to conduct regulated by other statutory schemes appears in
AS 45.50.481(a)(1):
Nothing in [the UTPA] applies to . . . an act or transaction
regulated under laws administered by the state, by a
14 AS 45.50.471(a).
15 AS 45.50.471(b).
16 AS 45.50.531(a).
17 Odom v. Fairbanks Mem'l Hosp., 999 P.2d 123, 132 (Alaska 2000)
(quoting State v. O'Neill Investigations, Inc., 609 P.2d 520, 534 (Alaska 1980)).
18 W.Star Trucks, Inc. v. Big Iron Equip. Serv., Inc., 101 P.3d 1047, 1048-49
(Alaska 2004).
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regulatory board or commission except as provided by
AS 45.50.471(b)(27) and (30), or officer acting under
statutory authority of the state or of the United States, unless
the law regulating the act or transaction does not prohibit the
practices declared unlawful in AS 45.50.471.
We have said that the UTPA exemption only applies where a "separate and distinct
statutory scheme" regulates acts and practices, and the acts or practices "are therein
prohibited."19
The jury returned a verdict of $7.3 million in favor of AIC on its UTPA
claims, but the superior court vacated that award by granting PDI's motion for JNOV.
On appeal, AIC first argues that PDI should not have been permitted to argue that its
conduct falls under the subsection of the UTPA exempting conduct regulated by other
laws because this argument was raised for the first time after the jury had been
discharged. In response, PDI argues that the superior court did not abuse its discretion
when it ruled that the exemption issue was tried by consent and that AIC was on notice
that "there were many regulations concerning aircraft leasing."
1. PDI's UTPA exemption defense was impermissibly raised for
the first time in its motion for JNOV.
The record shows that PDI's amended answer did not include an affirmative
defense arguing that its conduct was exempt from the UTPA; PDI's answer made no
mention of "exemptions" at all. But the superior court ruled that the exemption issue was
properly raised. The superior court initially determined, "[i]n reviewing the directed
verdict motion in this case, this court finds that the UTPA issues were properly raised,
and the [motion for JNOV] is properly before this court." In an order on motion for
partial reconsideration, the superior court appears to have determined that the UTPA
exemption claims were tried with the express or implied consent of the parties. The
19 O'Neill Investigations, Inc., 609 P.2d at 528.
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----------------------- Page 12-----------------------
order on reconsideration cited Civil Rule 15(b)20 and Rollins v. Liebold.21 In granting
PDI's post-trial motion, the superior court observed, it was "accurate to say that
regarding the UTPA, general arguments were raised, rather than the specific arguments
detailed here . . . [n]onetheless, . . . the issue of the UTPA was raised." The superior
court ultimately decided that AIC had been on notice of PDI's exemption argument,
reasoning: "[i]t was certainly no secret that there were many regulations concerning
aircraft leasing, and it was [AIC] who called an expert in this area."
We recognize that the only aviation expert was the one called by AIC, but
the expert did not address whether the Federal Aviation Administration (FAA)
specifically regulates the conduct at issue in this case. As discussed more fully below,
AIC's expert only expressed an opinion that one of the two aircraft leases violated
regulations promulgated by the FAA. This testimony was offered in the context of
20 Civil Rule 15(b) provides:
When issues not raised by the pleadings are tried by express
or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such
amendment of the pleadings as may be necessary to cause
them to conform to the evidence and to raise these issues may
be made upon motion of any party at any time, even after
judgment; but failure so to amend does not affect the result of
the trial of these issues. If evidence is objected to at the trial
on the ground that it is not within the issues made by the
pleadings, the court may allow the pleadings to be amended
and shall do so freely when the presentation of the merits of
the action will be subserved thereby and the objecting party
fails to satisfy the court that the admission of such evidence
would prejudice the party in maintaining the party's action or
defense upon the merits. The court may grant a continuance
to enable the objecting party to meet such evidence.
21 512 P.2d 937, 940-41 (Alaska 1973).
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expressing the expert's opinion that the second lease was improperly operated under a
part of the FAA regulations that covers air transportation generally rather than the part
of the regulations that covers the transportation of passengers. The expert explained that
operating this way required less paperwork, and allowed PDI's practice of improperly
billing AIC to go undetected for an extended period of time.
We do not accept AIC's argument that the superior court erred by using
AIC's own expert testimony against it, but our review of the record convinces us that
AIC did not ask its expert to address whether the FAA specifically regulates the type of
conduct at issue in this case because AIC was not on notice that PDI would argue that
the exemption applied until after the jury was discharged.22 The record shows that AIC
was prejudiced by this lack of notice.
There is another problem with allowing PDI to advance the UTPA
exemption argument for the first time in a motion for JNOV: the rules do not permit new
arguments in motions for JNOV. Alaska Rule of Civil Procedure 50 provides that "[a]
motion for directed verdict shall state the specific grounds therefor" and if it is
denied,"the court is deemed to have submitted the action to the jury subject to a later
determination of the legal question raised by the motion."23 After a verdict is returned,
a party who has moved for a directed verdict may move for JNOV to have "judgment
entered in accordance with the party's motion for directed verdict."24 We have held that
22 PDI first raised its UTPA exemption defense in its opening memorandum
in support of the defendants' post-verdict joint motion for directed verdict on the
plaintiffs' claim under the UTPA. Despite being titled as a motion for directed verdict,
the superior court treated this post-verdict motion as a motion for JNOV.
23 Alaska R. Civ. P. 50(b).
24 Id.
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the grounds for a JNOV motion must be the same as those raised in a directed verdict
motion.25
At oral argument in the superior court, PDI's position was that the two
aircraft leases did not meet the UTPA's definition of "competition" or "goods and
services" and that there was no consumer relationship between PDI and AIC. On appeal,
PDI characterizes the argument it made in the trial court somewhat differently, arguing
its position was that the UTPA only applies to transactions "in the conduct of trade or
commerce." In our view, the superior court reasonably understood PDI's primary
argument to be that the UTPA applies to consumers, that AIC was not a consumer, and
that the leases are not covered under the UTPA because the UTPA applies only to goods
and services and a lease is neither a good nor a service. The superior court correctly
rejected this argument, citing Western Star Trucks, Inc. v. Big Iron Equipment Services.26
PDI was allowed to bring its motion for JNOV on the issue of the UTPA
exemption because the superior court decided the issue had been raised generally during
the trial and generally at the directed verdict level. In reaching this conclusion, the
superior court cited Sisters of Providence in Washington v. A.A. Pain Clinic, Inc.27 and
Richey v. Oen.28
25 See, e.g., Roderer v. Dash, 233 P.3d 1101, 1108 (Alaska 2010).
26 101 P.3d 1047, 1052 (Alaska 2004) ("the legislative history of the [UTPA]
indicates that while consumer protection was the dominant motive underlying the act, the
act was not intended to be limited to consumer transactions."). Thus, the UTPA applies
to unfair practices in business-to-business transactions as well as business-to-consumer
transactions.
27 81 P.3d 989 (Alaska 2003).
28 824 P.2d 1371, 1374 (Alaska 1992) (general directed verdict motion
insufficient support for subsequent JNOV).
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PDI argues that the superior court correctly construed PDI's pre-verdict,
oral directed verdict motion to encompass the argument it advanced in its post-verdict
JNOV motion. It cites Domke v. Alyeska Pipeline Services Co., Inc.29 and Sisters of
Providence in Washington v. A.A. Pain Clinic, Inc. in support of this argument.30 In our
view, neither case supports PDI's position. Both concern motions for JNOV that
encompassed issues contained within the directed verdict motions that preceded them.
And, as discussed below, both were limited to unique facts.
In Domke v. Alyeska Pipeline, Domke filed a motion for directed verdict
on "liability" for its claim that an Alyeska employee tortiously interfered with its
contractual relationship.31 When the directed verdict motion was orally argued, the
superior court instructed Domke's lawyer to address whether there were material facts
at issue and to focus on whether "Alyeska and [its employee] were justified in their
actions."32 The motion for directed verdict was denied and Domke later moved for
JNOV on the issue of Alyeska's vicarious liability for its employee's actions.33 Alyeska
argued that Domke's failure to move for directed verdict on vicarious liability waived
its ability to seek a JNOV on the issue.34 But our court held that "the limited focus of the
argument invited by the court . . . [made it] unrealistic to view Domke's failure to
29 137 P.3d 295, 300 (Alaska 2006).
30 81 P.3d at 1008 n.63.
31
137 P.3d at 298, 300.
32 Id. at 300.
33 Id.
34 Id.
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expressly mention vicarious liability as a waiver of the point."35 We did not hold that a
directed verdict motion on "liability" was sufficient to preserve the issue of vicarious
liability for JNOV - as argued by PDI - but instead held that the superior court's
express limitation of Domke's oral presentation of his motion for JNOV required that the
motion be read more broadly. "Under the circumstances, [Domke's] general motion for
a directed verdict establishing Alyeska's liability can best be seen as encompassing all
reasonably apparent theories of liability, including the theory that the company was
vicariously liable . . . ."36
In Sisters of Providence, plaintiffs Borello and Chandler sued Providence
claiming various types of anti-competitive conduct.37 Providence unsuccessfully moved
for directed verdict on "all damage claims" and then moved for JNOV on damages
arising from Chandler's efforts to obtain a temporary restraining order requiring
Providence to complete a medical procedure as scheduled, including the fees incurred
in that effort.38 Our court held that the requirement to preserve the damages issue for
JNOV was met by Providence's motion for directed verdict on general damages.39 At
best, Sisters of Providence represents an instance where a more general directed verdict
motion was allowed to serve as the basis for a more specific motion for JNOV
encompassed by the pre-verdict motion. Sisters of Providence did not permit an entirely
35 Id.
36 Id.
37 81 P.3d 989, 995 (Alaska 2003).
38 Id. at 1008 n.63.
39 Id. (citing Metcalf v. Wilbur, Inc., 645 P.2d 163, 170 (Alaska 1982)).
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new theory to be raised in support of a post-verdict motion seeking to set aside the jury's
verdict.
Most recently, in Roderer v. Dash, we reiterated that a motion for JNOV
"may be entered only 'in accordance with [a previously advanced] motion for directed
verdict.' "40 Roderer was a medical malpractice case where the physician's directed
verdict motion argued: (1) plaintiff did not present sufficient evidence to support a
finding of "severe permanent physical impairment"; and (2) plaintiff did not present
evidence to support a finding that there had been malpractice at more than one vertebral
space.41 But the physician's JNOV motion argued that plaintiff did not present sufficient
expert witness testimony on standard of care, breach, or causation.42 We held that
because Roderer's motion for directed verdict did not encompass the issues raised in his
motion for JNOV, the superior court correctly denied it.43
There are sound reasons for the requirement that motions for JNOV must
be preceded by a directed verdict motion on the same issue. A motion for directed
verdict at the close of evidence allows litigants to seek rulings on questions of law and
to resolve factual issues that are not in dispute. The requirement puts the non-moving
party on notice of the moving party's arguments and allows the non-moving party to cure
40 233 P.3d 1101, 1108 (Alaska 2010) (quoting Alaska R. Civ. P. 50(b)).
41 Id.
42 Id.
43 Id. See also Richey v. Oen, 824 P.2d 1371, 1374 (Alaska 1992), an auto
accident case involving a rear-end collision. Plaintiff's motion for directed verdict "on
the issue of negligence of the Defendant driver" was granted. When the jury awarded
no damages, plaintiff moved for JNOV arguing that no reasonable jurors could decide
that she suffered no damages. We held that the JNOV was improper because plaintiff's
directed verdict motion had addressed "negligence," not damages or causation.
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any potential deficiencies of proof so that cases can be decided on their merits.44
Requiring a motion for directed verdict as a prerequisite to a motion for JNOV respects
the jury's fact-finding role.
Here, PDI's oral motion for directed verdict was premised on its argument
that its conduct did not violate the UTPA because AIC and PDI were not in competition,
because the aircraft leases were not contracts for "goods or services," and because there
was no consumer relationship between the parties. But because the motion for directed
verdict made no mention of the Federal Aviation Regulations (FARs) or exemptions to
the UTPA, the motion for JNOV was improper.
2. PDI did not establish that its conduct was exempt from the
UTPA.
PDI also failed to show it was entitled to JNOV on the merits. The superior
court ruled that the UTPA claims were exempt under AS 45.50.481(a)(1) because the
misconduct AIC alleged in relation to its aircraft leases was regulated by other laws.45
44 See, e.g.,McKinnon v. City of Berwyn, 750 F.2d 1383, 1388 (7th Cir. 1984)
("It gives the opposing party a chance to repair - more precisely, to ask the judge for
leave to repair - the deficiencies in his proof before it is too late."); Lowenstein v.
Pepsi-Cola Bottling Co., 536 F.2d 9, 11 (3d Cir. 1976) ("A motion for [JNOV], without
prior notice of alleged deficiencies of proof, comes too late for the possibility of cure
except by way of a complete new trial."). See Fed. R. Civ. P. 50(a)(1) advisory
committee's note (1991 amendments) ("In no event . . . should the court enter judgment
against a party who has not been apprised of the materiality of the dispositive fact and
been afforded an opportunity to present any available evidence bearing on that fact.").
45 AS 45.50.481(a)(1)states:
Nothing in [the UTPA] applies to . . . an act or transaction
regulated under laws administered by the state, by a
regulatory board or commission except as provided by
AS 45.50.471(b)(27) and (30), or officer acting under
statutory authority of the state or of the United States, unless
(continued...)
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But the superior court cited the FAA and the FARs generally. The FAA is primarily
concerned with aviation safety, not redressing claims of fraudulent billing and
conversion.46 The only specific regulation identified by PDI or the superior court was the
truth-in-leasing requirement under FAR Part 91.47 Part 91 does not address the acts or
transactions underlying AIC's UTPA claims - double billing, billing for services not
received, unreasonable and allegedly excessive termination fees, or fraudulent charges
for upgrading an aircraft entirely unrelated to AIC's business. Part 91's truth-in-leasing
provision requires the disclosure of: (1) regulations covering aircraft maintenance; (2)
the person responsible for the operational control of the leased aircraft; and (3) the ability
to obtain the pertinent operational regulations from the FAA.48 PDI did not meet its
burden of showing the UTPA exemption was applicable to AIC's claims because it did
not establish that the FAA specifically regulates the fraudulent conduct AIC alleged in
connection with its aircraft leases.
45(...continued)
the law regulating the act or transaction does not prohibit the
practices declared unlawful in AS 45.50.471.
46 49 U.S.C. § 40101 et seq.; see also Montalvo v. Spirit Airlines, 508 F.3d
464, 468 (9th Cir. 2007) ("The FAA and regulations promulgated pursuant to it establish
complete and thorough safety standards for air travel. . . ."); Abdullah v. Am. Airlines,
Inc., 181 F.3d 363, 367 (3d Cir. 1999) (holding that the FAA and relevant federal
regulations "establish complete and thorough safety standards for interstate and
international air transportation").
47 14 C.F.R. § 91.23 (2011).
48 14 C.F.R. § 91.23(a).
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The UTPA exemption only applies where: (1) "the business . . . is
regulated elsewhere"; and (2) "the unfair acts and practices are therein prohibited."49 In
granting PDI's motion for JNOV, the superior court observed that AIC advanced what
became Jury Instruction 19, which explained to the jury that AIC alleged the "Sakahlin
jet lease is illegal under the Federal Aviation Regulations." This instruction relates to
the testimony of AIC's aviation expert, Delvin Fogg, who testified that PDI operated the
second aircraft lease in violation of the FARs because it should have operated under Part
135 rather than Part 91.
The superior court cited Fogg's testimony that operating under Part 91
rather than Part 135 resulted in $12 million of damages.50 But Fogg testified that
operation under Part 135 increases safety regulation and the volume of paperwork that
must be kept and filed with the FAA because Part 135 governs commuter and on-demand
passenger operations; Part 91 governs aircraft operations generally.51 Fogg opined that
PDI's decision to operate the leased aircraft under Part 91 subjected the lease to a lower
level of scrutiny and allowed PDI's fraudulent billing practices to go undetected for a
longer period. According to Fogg, if PDI had operated the aircraft under Part 135, as he
49 Smallwood v. Cent. Peninsula Gen. Hosp., 151 P.3d 319, 329 (Alaska
2006); State v. O'Neill Investigations, 609 P.2d 520, 528 (Alaska 1980) (UTPA
exemption applies where "separate and distinct statutory scheme" regulates acts and
practices, and the acts and practices "are therein prohibited."). Accord Pepper v. Routh
Crabtree, APC, 219 P.3d 1017, 1023-24 (Alaska 2009); Matanuska Maid, Inc. v. State,
620 P.2d 182, 186 (Alaska 1980).
50 The superior court described Fogg's testimony as establishing a "theme that
there are specific regulations applicable to . . . aircraft transactions." After reviewing the
passages of Fogg's testimony cited by the superior court, it appears these are merely
instances where Fogg discusses FAR Parts 91 or 135.
51 See, e.g., 14 C.F.R. § 135.63 (2010) (Recordkeeping Requirements).
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thought it should have done, the FAA-required paperwork would have resulted in more
questions about the transaction and might have resulted in AIC not agreeing to the lease.
Fogg testified:
Well, if you follow the rules like they're supposed to be
followed, like I would follow and how I recommend to a
client, if you're going to lease an airplane, you need to follow
the provisions under [Part] 91.23, fill out the paperwork
included in your contracts. When that would have got to
Oklahoma City, the [Flight Inspection Safety District Office]
in Anchorage would have been advised, someone would have
come out and asked: What are you using this airplane for?
Well, we're flying freight and billing people for it; but we're
flying people that are not employees of AIC or Sakhalin, and
we're billing for it. I think at that point - if that was the
intention at that point, I think the FAA would have said, well,
you might consider getting a Part 135 certificate, because
we'll violate you if you start flying that way. So what would
have happened in that case, at that point I think a prudent
person would have said, well, maybe we shouldn't do this,
and we might not be sitting here today.
Fogg did not testify that the FARs comprehensively regulate aircraft leases, or that the
FAA specifically prohibits the conduct at issue in this case - he was not asked those
questions. Fogg's testimony was that if PDI had operated the leased aircraft under Part
135 rather than Part 91, AIC may not have entered into the lease or PDI's fraudulent
billing may have been discovered earlier.
In ruling that the UTPA claims were exempt under AS 45.50.481(a)(1), the
superior court also relied on AIC's argument, in response to a pre-verdict motion to
exclude Fogg's testimony, that "violations of FARs committed by Defendants are not
other bad acts, they are the bad acts complained of in this action." But it is important to
place AIC's argument in context. Before trial, PDI moved to exclude Fogg's FAR
testimony under Evidence Rule 404(b) as impermissible evidence of other bad acts.
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AIC's statement that violations of FARs committed by defendants "are the bad acts
complained of" was not an acknowledgment that the aircraft lease may have been
specifically regulated by laws other than UTPA. AIC was arguing that Fogg's FAR
testimony was relevant to refuting PDI's claim that it should be entitled to indemnity for
its defense costs because it was acting as AIC's agent. AIC also argued that Fogg's
testimony was relevant to PDI's claim that AIC abused the judicial process by reporting
its suspicions that PDI violated the FARs and Internal Revenue Code to the FBI and U.S.
Attorney's Office.
PDI also cited the Airline Deregulation Act (ADA) in arguing that its
conduct was exempt from the UTPA. The ADA contains a provision similar to the
UTPA prohibiting "unfair or deceptive practice[s] or an unfair method of competition
. . . [by an] air carrier."52 The superior court rejected this argument because the ADA
only applies to "air carriers." Air carriers must be common carriers or carriers of U.S.
mail to be covered by the ADA.53 No one argued that PDI was a "carrier of U.S. mail"
and to be an interstate common carrier, PDI would have had to have held itself out to the
public as a provider of air transportation services for passengers or property.54 PDI
provided air transport services to AIC, not the general public. It did not establish that it
was a common carrier.
52 49 U.S.C. § 41712(a) (2006).
53 49 U.S.C. § 40102(a)(2) (defining "air carrier" as undertaking "air
transportation"); 49 U.S.C. § 40102(a)(25) (defining "interstate air transportation" as
"the transportation of passengers or property by aircraft as a common carrier for
compensation").
54 United States v. Contract Steel Carriers, 350 U.S. 409, 410 n.1 (1956) ("A
common carrier is one which holds itself out to the general public to engage in the
transportation by motor vehicle of passengers or property.") (internal quotation marks
omitted).
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PDI did not raise its exemption claim until after the jury was discharged.
Even if the argument had been timely raised, PDI did not establish that the FARs
specifically regulate the aircraft-lease-related conduct complained of in this case: double
billing, billing for services not received, unreasonable and excessive termination fees,
and fraudulent charges for upgrading an aircraft completely unrelated to AIC business.
The superior court correctly ruled that the ADA does not apply to the aircraft leases at
issue in this case, but it erred in granting PDI's motion for JNOV on the applicability of
UTPA exemptions.
B. The Superior Court Did Not Err By Denying The Motion For JNOV
That Sought A Ruling That The UTPA Does Not Apply to Intra-
Corporate Disputes.
PDI argues that an alternative basis for affirming the superior court's ruling
is that the UTPA does not apply to intra-corporate disputes. The superior court rejected
this argument. We find no error in the superior court's ruling.
The UTPA is a remedial statute.55 Under the UTPA, a claimant must
establish: "(1) that the defendant is engaged in trade or commerce; and (2) that in the
conduct of trade or commerce, an unfair act or practice has occurred."56 We have
broadly construed the "engaged-in-commerce" prong to encompass purchases of goods
and services in business-to-business commercial transactions as well as in individual
consumer transactions.57
55 State v. O'Neill Investigations, 609 P.2d 520, 528 (Alaska 1980).
56 Odom v. Fairbanks Mem'l Hosp., 999 P.2d 123, 132 (Alaska 2000)
(quoting O'Neill, 609 P.2d at 534).
57 See W. Star Trucks, Inc. v. Big Iron Equip. Serv., Inc., 101 P.3d 1047,
1048-49 (Alaska 2004).
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PDI argues that "[t]ransactions can be either arms-length or fiduciary; they
cannot be both" and "[c]ourts uniformly recognize that arms-length and that fiduciary
relationships are mutually exclusive." PDI argues that because it was acting as a
fiduciary of AIC, it could not have been transacting at arms-length with AIC, and so the
UTPA should not apply to transactions between them. In PDI's view, AIC was incorrect
to allege that the UTPA applied to the parties' aircraft lease-related dealings because "the
UTPA is not designed to be a tool of corporate governance."
PDI cites several cases in support of this position: Stadt v. Fox News
Network LLC,58 Skinner v. Metropolitan Life Insurance Co.,59 OrbusNeich Medical Co.
v. Boston Scientific Corp,60 Szalla v. Locke,61 and Schwenk v. Auburn Sportsplex, LLC.62
In our view, these cases do not support PDI's contention that corporate relationships are
exclusively arms-length or fiduciary. In Stadt v. Fox News Network LLC, Fox News
obtained an exclusive license agreement from Stadt to use a video.63 Stadt alleged that
Fox News continued to air the video and claimed ownership of it after the licensing
agreement with Stadt expired.64 Stadt brought several claims against Fox News,
58 719 F. Supp. 2d 312, 323 (S.D.N.Y. 2010).
59 2010 WL 2175834, at *11 (N.D. Ind. May 27, 2010).
60 694 F. Supp. 2d 106, 116 (D. Mass. 2010).
61 657 N.E.2d 1267, 1268-69 (Mass. 1995).
62 483 F. Supp. 2d 81, 87-88 (D. Mass. 2007).
63 719 F. Supp. 2d at 316.
64 Id.
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including a claim for breach of fiduciary duty.65 The court in that case determined that
"the [c]omplaint alleges insufficient facts to establish that Stadt and Fox had a fiduciary
relationship, as opposed to a typical, arms-length business relationship."66 The case does
not support PDI's assertion that fiduciary and arms-length relationships are mutually
exclusive.
The dispute in Skinner v. Metropolitan Life Insurance Co. arose from a life
insurance contract.67 Skinner "entered into a life insurance policy which provided that
she would no longer need to pay premiums if she became totally disabled."68 But when
Skinner "submitted proof of her total disability, MetLife refused to waive her
premiums."69 Skinner brought claims for breach of contract, bad faith, fraud, and
intentional infliction of emotional distress.70 Skinner addressed the relationship between
an insurer and its insured and observed, "[t]he Indiana Supreme Court has stated that the
contractual relationship between an insurer and an insured is 'at times a traditional
arms-length dealing between two parties, as in the initial purchase of a policy, but is also
at times one of a fiduciary nature,' and sometimes it is an adversarial relationship."71
Skinner stands for the proposition that the relationship between an insurer and its insured
65 Id.
66 Id. at 323.
67 2010 WL 2175834 at *1 (N.D. Ind. May 27, 2010).
68 Id.
69 Id.
70 Id.
71 Id. at *11 (quoting Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 518
(Ind.1993)).
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is, in varying circumstances, arms-length, fiduciary, or adversarial; it does not support
PDI's argument that the relationship between two corporate entities involved in a joint
enterprise cannot be arms-length in some instances, and fiduciary in others.
PDI also relies on OrbusNeich Medical Co. v. Boston Scientific Corp.72
The parties in that case entered into a confidential disclosure agreement while exploring
a joint venture opportunity.73 After the joint venture talks collapsed, Orbus alleged that
Boston Scientific misappropriated stent designs disclosed under the disclosure
agreement.74 The relationship of the parties was relevant to determining under which
legal doctrine the statute of limitations tolled.75 The court observed, "[t]hough the
existence of a fiduciary relationship is typically a factual determination, '[b]usiness
relationships or arms length transactions do not in general rise to the level of a fiduciary
relationship.' "76 The court's conclusion, that one party placing confidence and trust in
the other party does not necessarily transform a business relationship into a fiduciary
relationship, is consistent with the general observation that business or arms-length
relationships do not become fiduciary relationships as a matter of course; it is not a
holding that they can never rise to this level. Orbus does not support the contention that
arms-length and fiduciary relationships are mutually exclusive.
72 694 F. Supp. 2d 106 (D. Mass. 2010).
73 Id. at 110.
74 Id.
75 Id. at 115.
76 Id. at 116 (quoting Savoy v. White, 139 F.R.D. 265, 267 (D. Mass.1991)).
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The disputes in Szalla77 and Schwenk78 arose from attempts to form or
dissolve limited partnerships or corporations; both courts concluded that disputes
concerning the formation or separation of those entities did not constitute "commercial
transactions" within the meaning of the UTPA. In contrast, AIC's largest claim against
PDI arose from AIC's allegation that PDI fraudulently administered two commercial
leases of PDI-owned aircraft. As to the aircraft leases, PDI's relationship with AIC was
that of a vendor providing aircraft and aircraft support services in a commercial
transaction. PDI's status as part owner of AIC does not exempt the actions it took as a
vendor from the purview of the UTPA.
A case that is more analogous to the facts of this one is Sara Lee Corp. v.
Carter, a case from North Carolina.79 An employee of Sara Lee who was authorized to
purchase computer parts and services for Sara Lee set up four separate businesses to
engage "in self-dealing by supplying Sara Lee with computer parts and services at
allegedly excessive cost."80 The court held that although the defendant had a fiduciary
relationship with the company as an employee, "defendant and plaintiff clearly engaged
in buyer-seller relations in a business setting, and thus, . . . defendant's fraudulent actions
[fell] within the . . . statutory prohibition of unfair and deceptive acts."81
77 657 N.E.2d 1267, 1268-69 (Mass. 1995).
78 483 F. Supp. 2d 81, 83, 87 (D. Mass. 2007).
79 519 S.E.2d 308 (N.C. 1999).
80 Id. at 309.
81 Id. at 312.
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During oral argument before our court, PDI argued that the North Carolina
Supreme Court's subsequent decision in White v. Thompson82 represented a departure
from Sara Lee. PDI urged us to read Whiteas an instance where unfair conduct between
partners was held to be outside the scope of North Carolina's UTPA. White concerned
ACE Fabrication and Welding (ACE),83 a company formed by Charles White, Earl Ellis,
and Andrew Thompson to perform specialty construction and fabrication work for
Smithfield Packing Company, Inc.84 ACE hired Thompson's father, Douglas Thompson,
as an accountant.85 White and Ellis later claimed that Andrew Thompson: (1)
misinformed them of ACE's scheduled projects; (2) sent jobs intended for ACE to a
small group he formed outside of the partnership (PAL); (3) conspired with workers at
Smithfield to divert work intended for ACE to PAL; and (4) conspired with his father to
improperly maintain and keep the books for ACE.86
The jury found that Andrew Thompson breached his fiduciary duty to ACE
and the superior court awarded treble damages under the UTPA.87 On appeal, the North
Carolina Supreme Court held that the UTPA did not apply because there was only a
82 691 S.E.2d 676 (N.C. 2010).
83 Id. at 677.
84 Id.
85 Id.
86 Id. at 676-78.
87 Id. at 678.
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breach of a fiduciary duty and Thompson's conduct occurred within ACE's "internal
operations."88
The primary distinction between White and this case is that, in White,
Thompson was funneling business from ACE to a business that he operated for his own
benefit. His breach was failing to meet his fiduciary obligations to ACE by sending
business elsewhere. In contrast, PDI owned two aircraft that it leased to AIC. In relation
to the aircraft leases, AIC and PDI acted as separate entities in arms-length transactions.
The relationship between PDI and AIC fits more closely with the conduct in Sara Lee,
where an employee set up business entities that contracted to provide computer parts and
services for Sara Lee.
In this case, the superior court cited the Connecticut case Spector v.
Konover89 to support its conclusion that the UTPA applies to related-party transactions.
In Spector, the defendant placed funds into an account where they were commingled
with funds from other businesses he ran.90 He withdrew money designated for the
company that Spector and Konover jointly operated and used it to profit his other
enterprises.91 The court held that the UTPA applied to Konover's conduct and affirmed
that "where one's actions go 'well beyond governance of the [partnership], and [place]
him in direct competition with the interests of the [partnership]' " UTPA claims apply.92
In our view, the superior court correctly concluded that PDI's interest in the aircraft
88 Id. at 680.
89 747 A.2d 39 (Conn. App. 2000).
90 Id. at 42-43.
91 Id.
92 Id. at 46 (citing Fink v. Golenbock, 680 A.2d 1243 (Conn. 1996)).
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leases was in direct conflict with AIC's interest, just as Konover's conduct placed his
interest in direct competition with the interests of the partnership.
We find no error in the superior court's denial of PDI's motion for JNOV
on the issue of the applicability of the UTPA to intra-corporate actions. Even where a
party has a fiduciary relationship with a business entity, the UTPA can apply if the
parties also engage in arms-length commercial transactions. The evidence established
that PDI's interaction with AIC constituted a "commercial transaction" within the
meaning of the UTPA.
C. The Superior Court Erred In Not Ruling As A Matter Of Law That
The Jury's Finding of Fraudulent Conduct Was A Material Breach Of
The Operating Agreement Under The Circumstances Of This Case.
The jury found that PDI's fraudulent conduct and breach of the covenant
of good faith and fair dealing resulted in $7.3 million in damages during the 6 1/2 years
it managed AIC. PDI conceded that it inappropriately billed AIC $1,902,827 in charges
but in its closing argument, PDI argued that because AIC made significant profits under
its direction, the operating agreement's central purpose was satisfied. PDI suggested that
AIC's profitability during this period rendered any breach of the operating agreement
immaterial.
The jury's special verdict form reflects its finding that PDI did not
materially breach the operating agreement. The jury awarded PDI the contractual
premium price of $12 million as compensation for PDI's ownership interest in AIC. AIC
moved for JNOV. It argued that the jury's verdict was inconsistent as a matter of law
because the jury could not find that PDI engaged in fraudulent conduct without also
deciding that PDI had materially breached the parties' operating agreement. The
superior court ruled that "the question of whether defendants materially breached the
contract, and thus whether plaintiffs' performance is excused, was appropriately sent to
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the jury as it present[ed] questions of fact." The superior court reasoned that "PDI
continued to manage AIC, to bid for and perform contracts, and continued to earn
money" and that the jury could have properly found that the fraud was immaterial. On
appeal, AIC argues the superior court erred by denying its motion for JNOV. We agree
with AIC.
1. AIC was not required to move for directed verdict.
PDI argues that AIC did not preserve its right to move for a JNOV on the
materiality of its breach because AIC did not file a motion for a directed verdict arguing
that PDI's fraudulent misconduct was a material breach of the operating agreement. As
explained, a motion for directed verdict normally is required to preserve an issue for a
subsequent motion for JNOV. But there is an exception to this rule when the basis for
a JNOV motion is an inconsistency in a jury's verdict that could not have been known
before the case was submitted to the jury. A motion for JNOV to resolve such an
inconsistency is proper.93
This case falls within the exception. It was only after the special verdict
revealed the jury's findings that PDI engaged in fraud and intentional misconduct but did
not materially breach the operating agreement, that it became apparent there might be an
inconsistency in the verdict. Under these circumstances, AIC's motion for JNOV was
properly raised even though it was not preceded by a motion for directed verdict on the
same issue.
93 See, e.g., Pierce v. S. Pac. Transp. Co., 823 F.2d 1366, 1369-70 (9th Cir.
1987) (holding that directed verdict is not prerequisite to JNOV when particular finding
by jury negates the party's liability); Traders & Gen. Ins. Co. v. Mallitz, 315 F.2d 171,
175 (5th Cir. 1963) (holding general rule that "failure to move for a directed verdict
precludes a review as to the sufficiency of the evidence" not applicable where JNOV
motion goes "to the proper judgment to be entered upon the special verdict").
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2. The jury's finding that PDI engaged in fraud by affirmative
misrepresentation and non-disclosure required the conclusion
that PDI materially breached the operating agreement under
the circumstances of this case.
AIC argues that the affirmative misrepresentations and non-disclosures PDI
made in conjunction with the aircraft leases materially breached the operating agreement
as a matter of law. It argues that PDI's material breach excused Peak and Nabors from
the contractual obligation to pay a premium price for PDI's 20% ownership interest in
AIC.94
Our decision in Coffel v. Steward supports AIC's argument.95 Coffel and
Steward "were co-owners of a Piper PA-12 aircraft. The plane was wrecked in
September 1972, . . . when the plane [piloted by Steward] turned over on a remote lake
on the Alaska Peninsula."96 Coffel accepted $3,500 for his interest in the plane because
Steward told Coffel that the aircraft had been "totalled" and "the parties had agreed that
if either party wrecked the aircraft he would pay his co-owner $3,500 for the latter's
interest."97 It was later revealed that Steward had been able to make sufficient repairs to
allow the plane to be flown to Anchorage and restored.98 Coffel brought suit establishing
94 Peak and Nabors do not dispute that PDI is entitled to compensation for its
20% ownership interest in AIC. The only evidence of the fair market value of the
interest valued it at $3,931,200.
95 611 P.2d 543, 546 (Alaska 1980).
96 Id. at 544.
97 Id.
98 Id.
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at trial that the restored value of the plane was $18,000.99 The superior court ruled that
"Steward was guilty of fraud in negotiating his purchase of Coffel's interest."100 And the
superior court concluded that the finding of fraud constituted a material breach of the
parties' agreement.
On appeal, we held "that every contract contains an implied term that the
parties thereto will act honestly toward one another with respect to the subject matter of
the contract."101 We held that there was sufficient evidence to support the "conclusion
that Steward was guilty of fraud in negotiating his purchase of Coffel's one-half
interest"102 and that the superior court's finding of fraud was sufficient support for its
conclusion that "Steward materially breached the contract."103 Finally, we said, "[t]his
breach, in our opinion, was a material breach, sufficient to preclude Steward from
enforcing the remaining terms of the agreement, i.e., the $3,500 buy-out provision."104
Our decision in Coffel is supported by the rule in other jurisdictions that fraud and other
forms of intentional wrongdoing constitute material breaches of contract as a matter of
law.105
99 Id. at 545.
100 Id. at 546.
101 Id. at 546.
102 Id.
103 Id.
104 Id.
105 See, e.g., Christopher Village, LP v. United States, 360 F.3d 1319, 1336
(Fed. Cir. 2004) (holding that company's "conscious effort to defraud" by submitting
false data "constitutes a material breach as a matter of law"); First Interstate Bank of
(continued...)
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At trial, PDI suggested that the purpose of the operating agreement was to
make a profit, and because that purpose was achieved, the jury reasonably decided its
conduct was not a material breach.106 We have not addressed this argument before, but
in Larken, Inc. v. Larken Iowa City LP, the Iowa Supreme Court rejected it.107 The
Iowa court wrote that "[w]hile profitability is a significant purpose of the management
105(...continued)
Idaho v. Small Bus. Admin., 868 F.2d 340, 342-44 (9th Cir. 1989) (upholding summary
judgment ruling that bank's unauthorized disbursements and false statements constituted
material breach of contract relieving the Small Business Administration from
performance of loan guarantee); LJL Transp., Inc. v. Pilot Air Freight Corp., 962 A.2d
639, 652 (Pa. 2000) (affirming summary judgment decision that franchisee's fraud
constituted material breach of contract justifying immediate termination of franchise
agreement despite contrary contract provision because "[s]uch a breach is so
fundamentally destructive, it understandably and inevitably causes the trust which is the
bedrock foundation and veritable lifeblood of the parties' contractual relationship to
essentially evaporate").
PDI cited Wirum & Cash, Architects v. Cash, 837 P.2d 692, 708 (Alaska
1992), to support its contention that a finding of fraud does not necessitate a finding of
material breach. But Wirum dealt solely with breach of fiduciary duty, not fraud. It does
not control the outcome of this case.
106 The superior court appears to have adopted a similar reasoning. In denying
AIC's motion for judgment notwithstanding the verdict, the superior court wrote:
In the context of the amounts of money involved in this case,
over the course of the relationship between the parties, AIC
was worth about $40 million, and AIC made approximately
$39 million for each of the partners. Thus, given the many
components of the Operating Agreement and the continued
performance of the Operating Agreement, the jury could have
found that the breach was not material. Although
Ellsworth/PDI may have taken liberties with AIC money,
PDI continued to manage AIC, to bid for and perform
contracts, and continued to earn money.
107 589 N.W. 2d 700, 701 (Iowa 1999) (en banc).
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agreement, the honesty of the parties is also an integral, although unexpressed,
component of the agreement."108 The court held that the "acts of self-dealing found by
the district court were so serious that they frustrated one of the principal purposes of the
management agreement, which was to manage the hotel in the best interests of the owner
and to be honest and forthright in its dealings."109 The court further explained that self-
dealing is a breach of the implied duty of honesty and fidelity that goes "to the heart of
the contract" and that "no amount of payment for past thefts by [a self-dealing party]
could ever restore the business trust and confidence."110
We find the rationale of the Iowa Supreme Court to be compelling, and it
is directly applicable to the facts of this case. The jury found that PDI's misconduct and
self-dealing constituted fraud by affirmative misrepresentation and fraud by non-
disclosure. Its special verdict form includes findings that PDI violated the UTPA by:
(1) engaging in unfair or deceptive acts in connection with aircraft services; (2) failing
to disclose material information in connection with the aircraft leases; and (3) making
false or misleading representations in connection with aircraft services. The jury also
found that PDI: (1) converted money or property belonging to AIC in connection with
aircraft services; (2) breached its fiduciary duties in connection with aircraft services; and
(3) breached its duty of good faith and fair dealing in connection with aircraft services.
The jury assessed the damages attributable to this conduct at $7,316,157. The reasoning
in Coffel is sound, and it has been echoed by other courts in similar situations.111 We
108 Id.
109 Id. at 704.
110 Id. at 704-05 (internal quotation marks and citations omitted).
111 See Optimal Interiors, LLC v. HON Co., 2011 WL 1207231, at *9 (S.D.
(continued...)
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agree with the Iowa Supreme Court that honesty of the parties to a management
agreement is an integral component of the agreement, and we specifically reject the view
that fraud cannot constitute a material breach just because the defrauded party still makes
a profit.
On appeal, PDI argues that every finding of fraud should not amount to a
material breach. It provides the hypothetical example of a long-time employee stealing
a box of pencils on the last day of work and posed the question whether such an
indiscretion should warrant the termination of the employee's pension benefits. The
extreme example PDI cites is not one we are confronted with; the jury in this case found
multiple acts of fraudulent conduct by PDI extending over a multi-year period that
caused millions of dollars in damages.
On the facts of this case, the jury's finding that PDI committed fraud
compels the conclusion that PDI materially breached the operating agreement as a matter
of law; given the nature of the parties' relationship and the jury's findings regarding
PDI's conduct, reasonable persons could not differ on this question. The superior court
erred by not granting AIC's motion for JNOV on the issue of the materiality of PDI's
breach.112
111(...continued)
Iowa Mar. 14, 2011); Trinity Indus., Inc. v. Greenlease Holding Co., 2010 WL 419420,
at *5 (W.D. Pa. Jan. 29, 2010); Manpower Inc. v. Mason, 377 F. Supp. 2d 672, 679 (E.D.
Wis. 2005); LJL Transp., Inc., 962 A.2d at 644.
112 PDI also argues that the doctrine of invited error bars AIC's argument on
the materiality of PDI's breach. But AIC does not dispute that this issue of materiality
was properly submitted to the jury; it argues that reasonable jurors could not have
concluded the breach was immaterial. The invited error doctrine does not apply.
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D. The Motion For JNOV On Ellsworth's Fraud In The Inducement
Claim Should Have Been Granted.
The parties' operating agreement prohibited "PDI [and] its Affiliates,
including Ellsworth," from engaging in any similar business in Alaska for one year after
PDI was no longer a member of AIC. In an early pre-trial proceeding, the superior court
granted AIC's request for an injunction prohibiting Ellsworth and PDI from competing
with AIC.113 At trial, Marrs and Ellsworth both testified that the parties did not intend
Ellsworth to be bound personally when they negotiated the operating agreement. After
hearing the evidence, the superior court decided the operating agreement was ambiguous
as to whether Ellsworth was personally bound by the non-compete clause, and it sent the
issue to the jury. It observed that some provisions of the operating agreement only
referred to PDI, but that even those parts of the agreement acknowledged Ellsworth's
status as PDI's sole shareholder.
The jury decided that the parties did intend to personally bind Ellsworth to
the operating agreement's non-compete clause. It also found that Ellsworth was
fraudulently induced into signing the agreement. Based on these findings, the superior
court ruled that the preliminary injunction prohibiting Ellsworth from competing with
AIC had been improvidently granted and it ruled that Ellsworth was entitled to the
$500,000 bond posted when the injunction was entered.
AIC filed motions for summary judgment, directed verdict, and JNOV on
PDI's claim of fraud in the inducement. All of these motions were denied by the
superior court. AIC argues on appeal that the superior court erred by allowing the jury
113 Initially, the superior court entered an injunction enforcing the non-compete
agreement against PDI only. AIC petitioned for review and our court directed the
superior court to determine whether Ellsworth could be protected by a bond. The
superior court then required AIC to post a $500,000 bond and it extended the scope of
the injunction so that it applied to Ellsworth personally, as well as PDI.
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to decide whether oral representations inconsistent with the parties' written contract
could support a claim for fraud in the inducement.114
Ellsworth argues that he signed the operating agreement only in his capacity
as president of PDI. He points to the signature line on the operating agreement, which
identifies him as president of PDI, and to the fact that the agreement did not have a
separate signature line for Ellsworth to sign in his individual capacity. Ellsworth also
cites a series of cases from Illinois where courts have considered ambiguities between
the language of agreements purporting to bind persons individually and signatures
indicating that an individual is the agent of a separate entity. Under such circumstances,
courts have found contracts sufficiently ambiguous to allow the presentation of extrinsic
evidence to resolve the ambiguity. But none of these cases dealt with claims that the
signing party was fraudulently induced to enter agreements in a personal capacity.115
Further, the jury in this case did hear the extrinsic evidence concerning the negotiation
and drafting of the operating agreement, and it resolved any ambiguity in AIC's favor.
In Johnson v. Curran we examined the consideration of parol evidence in
a claim that one party was fraudulently induced to enter into a written contract.116
114 PDI argues that AIC waived this argument by failing to raise the
inconsistency in the verdict before the jury was discharged. But we agree with AIC that
this is not an instance where the verdict form itself presents an inconsistency. The
question is whether the evidence supported the jury's finding that Ellsworth was
fraudulently induced into entering the operating agreement containing the non-compete
provision.
115 Zahl v. Krupa, 850 N.E.2d 304 (Ill. App. 2006); Addison State Bank v.
Nat'l Maint. Mgmt., Inc., 529 N.E.2d 30 (Ill. App. 1988); Wottowa Ins. Agency, Inc. v.
Bock, 472 N.E.2d 411 (Ill. 1984); Knightsbridge Realty Partners, Ltd.-75 v. Pace, 427
N.E.2d 815 (Ill. App. 1981).
116 633 P.2d 994, 997 (Alaska 1981).
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Johnson involved a contract between Le Pussycat Lounge and a band called
Jabberwock.117 The parties' written agreement provided that the band would perform at
the nightclub, but the club owner testified that the parties also orally agreed that the show
could be cancelled with two weeks' notice if the band did not draw enough patrons.118
The cancellation provision was not included in the written contract.119 Jabberwock did
not draw the crowd the owner expected and she gave the band notice that the agreement
would be terminated.120 The band sued to recover payment for the two weeks remaining
in its written contract.121 The owner of the nightclub asserted an affirmative defense that
the band orally modified the contract and counterclaimed for false representation and
fraud because the band did not draw a sufficient crowd.122 The district court granted
partial summary judgment in favor of the band "on the basis of the executed written
contract" and entered final judgment pursuant to Civil Rule 54(b).123 The superior court
affirmed the judgment, but on appeal to our court we held that "parol evidence . . . [is]
admissible [in a fraudulent inducement claim] even if the written contract is viewed as
completely integrated."124 We also held that the allegedly inconsistent oral promise was
insufficient to show fraudulent inducement, affirming the district court's order granting
117 Id. at 995.
118 Id.
119 Id.
120 Id.
121 Id.
122 Id.
123 Id.
124 Id. at 997
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summary judgment on that claim.125 We held that a claim for fraudulent inducement can
only succeed if there is a demonstration that the party "misapprehended the content of
the written agreement" or "was induced to sign it by any deception, active or passive."126
Here, Ellsworth asserted misapprehension and deception, but he did not point to any
evidence in the record that supported his assertions.
The jury found that AIC and PDI intended Ellsworth to be bound to the
non-compete provision, and our review of the record convinces us that this finding was
amply supported by the evidence. First we consider the 1998 operating agreement
entered into by Nabors, Peak, and PDI. It included the sale of a 20% ownership interest
in AIC to PDI and an agreement that PDI would manage AIC. The jury heard evidence
establishing that the non-compete provision binding Ellsworth was in all seventeen drafts
of the operating agreement generated during the parties' negotiations. Ellsworth
admitted to reading the draft operating agreement. Second, we consider that all parties
were represented by experienced counsel during the negotiation process, including PDI
and Ellsworth. It is also notable that PDI and Ellsworth negotiated other changes to the
operating agreement's non-compete provision, but not a change that would have
removed Ellsworth from its scope. Finally, we consider that the 1995 agreement
required approval by the boards of directors for Peak/CIRI and for Nabors, and the
boards considered documents that included the non-compete clause.127 Counsel for
Peak/CIRI, Mark Kroloff, and the CEO for Nabors, Gene Isenberg, testified that a
personal non-compete clause for Ellsworth was a key term of the parties' agreement.
125 Id. at 998.
126 Id.
127 The boards of Peak and Nabors voted on formation of the joint venture.
CIRI's board voted to authorize Peak to enter into the joint venture.
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PDI argues that the potential discrepancy in the operating agreement's
signature line may be an indication that Ellsworth was fraudulently induced into signing
the contract. But the case law from Illinois that PDI relies on does not stand for the
proposition PDI advances, and PDI offeres no other arguments to support this claim.
Our own case law requires a showing that Ellsworth "misapprehended the content of the
written agreement" or "was induced to sign it by any deception, active or passive."128
No such showing was made.
The superior court erred by not granting JNOV on PDI's fraud in the
inducement claim.129
E. The Superior Court Did Not Err By Determining That AIC's Aircraft
Lease Claims Were Not Barred By The Statute Of Limitations.
PDI argues that the statute of limitations barred AIC's claims for aircraft
lease payments made more than two years before AIC's tort claims were filed and more
than three years before AIC's contract claims were filed. The superior court ruled that
a three-year statute of limitations period applied because this case primarily involved
claims of breach of fiduciary duty. The exception was AIC's UTPA claims, which are
governed by a two-year statute of limitations. All parties agree that the statute of
limitations defense was a matter for the superior court to decide.
PDI does not appeal the limitation periods determined by the superior court.
Instead, PDI argues that the superior court erred when it decided, as a finding of fact,
when the statute of limitations began running. AIC counters that the statute of
128 Johnson, 633 P.2d at 998.
129 PDI argues that AIC's pre-trial injunction was erroneously entered and that
its damages should not be limited to the amount of the bond posted when the injunction
was granted. But because the evidence did not support the finding that Ellsworth was
fraudulently induced into signing the operating agreement containing the non-compete
clause, we do not need to reach this damages issue.
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limitations was tolled for an extended period of time because PDI's fraudulent conduct
prevented it from discovering PDI's wrongdoing. But in PDI's view, AIC was not
entitled to the benefit of a tolling period because it was utterly unreasonable in failing to
discover PDI's fraudulent activities, and the superior court's ruling to the contrary was
clearly erroneous.130
Evidence was introduced at trial to show that Carl Marrs was responsible
for supervising Ellsworth's management of AIC, but the superior court determined,
"Marrs never actively supervised or scrutinized . . . Ellsworth, but rather allowed him
carte blanche to manage AIC." In late 2004, Ellsworth directed his attorney to look into
breaking PDI's operating agreement with AIC. Also in late 2004, Marrs left CIRI. AIC
and PDI later agreed to use Marrs as a mediator to discuss ending the agreement between
AIC and PDI. AIC purchased PDI's interest in the joint venture on April 30, 2005. Peak
and Nabors took over management of AIC in August of that year and discovered what
they suspected was fraudulent and criminal activity by PDI after PDI was replaced. Peak
and Nabors also discovered that PDI had shredded 6,000 pounds of documents shortly
before leaving AIC; AIC suggested that this hindered its ability to discover and
document its claims. Peak and Nabors reported their suspicion of criminal activity to the
FBI and the United States Attorney's Office shortly after they assumed management
responsibility for AIC.
To counter PDI's statute of limitations argument, AIC presented expert
testimony that it was not possible to detect PDI's fraudulent conduct sooner because
financial statements PDI provided to AIC did not contain specific enough information
130 Palmer v. Borg-Warner Corp., 838 P.2d 1243, 1251 (Alaska 1992) ("[A]
party should be charged with knowledge of . . . fraudulent misrepresentation or
concealment only when it would be utterly unreasonable for the party not to be aware of
the deception.").
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about the use of the aircraft under the two leases. The evidence showed that PDI
provided one-or-two-page invoices listing the hours flown and amount charged. PDI
started charging $100,000 in monthly fees for the use of one jet in 2002, but the invoices
did not provide any details about the passengers or the purpose of flights. AIC's
forensics auditor, Paul Ficca, testified that PDI's fraud was systematic, continuous, and
covered-up assiduously. Ficca identified several instances of fraudulent conduct he
suggested Peak and Nabors could not have discovered because they had not had access
to complete records. These examples include: (1) $1.4 million in charges for hours of
aircraft services when the jet did not fly; (2) charges of $100,000 - $125,000 per month
for aircraft services when PDI did not have a plane available for AIC's use; and (3)
charges of over $700,000 for pilot wages and training that were PDI's responsibility
under the leases.
After considering the evidence, the superior court concurred with the jury's
findings and ruled that there had been "both non-disclosure and active misrepresentation
regarding the aircraft services." The court specifically found that "[t]he information
necessary to evaluate whether there were causes of action did not surface until, at the
earliest, when PDI and Mr. Ellsworth were removed as the Managing Partner of AIC."
Because the superior court found that it was only after taking over AIC's management
that Peak and Nabors had access to the information that revealed their causes of action,
the superior court was not clearly erroneous in determining that the statute of limitations
was tolled on its claims prior to August of 2005.131 AIC filed suit in 2005.
131 Hutton v. Realty Execs., Inc., 14 P.3d 977, 980 (Alaska 2000) ("[T]he
statute of limitations does not begin to run until the plaintiff discovers, or reasonably
should discover, the existence of all the elements of his or her cause of action.") (citing
Greater Area Inc. v. Bookman, 657 P.2d 828, 829 (Alaska 1982)).
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PDI also argues the superior court erred by failing to rule on its summary
judgment motion raising the statute of limitations defense until after trial. But resolution
of this defense required extensive factual testimony and we have recognized that
addressing the substantive merits of a claim at a preliminary evidentiary hearing can
create tension with a party's right to a jury trial.132 Further, though PDI argues that the
court's procedure resulted in an "undifferentiated jury award" that "undoubtedly
included sums for claims that were time barred," our review of the record does not show
that PDI objected to the court's procedure. If PDI wished to secure a differentiated
damages award, it was PDI's burden to make this request at trial.
The superior court did not clearly err by deciding AIC's claims were not
barred by the statute of limitations.
F. The Superior Court Did Not Abuse Its Discretion By Denying PDI
Access To Discovery In Support Of Its Abuse Of Process Claim.
When Peak and Nabors discovered that PDI's conduct may have amounted
to fraud, they reported PDI's actions to the FBI and the United States Attorney's Office.
One of PDI's counterclaims alleged that AIC abused the judicial process by making these
reports. To support its claim for abuse of process, PDI sought discovery of attorney-
client communications between AIC and its counsel under Alaska Evidence Rule
503(d)(1).133 A discovery master appointed by the superior court concluded that PDI
failed to establish a prima facie case that a crime or fraud had been committed when AIC
reported its suspicions to the U.S. Attorney's Office and to the FBI, and he recommended
132 Williams v. Williams, 129 P.3d 428, 431 (Alaska 2006).
133 Communications between attorneys and clients are generally privileged and
not subject to discovery. But Alaska Evidence Rule 503(d)(1) provides an exception to
attorney-client privilege "[i]f the services of the lawyer were sought, obtained or used
to enable or aid anyone to commit or plan to commit what the client knew or reasonably
should have known to be a crime or fraud."
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that the superior court deny discovery of the privileged communication between AIC and
its counsel. The superior court adopted the discovery master's recommendation. At
trial, AIC gave notice that it intended to introduce evidence that PDI may have
committed a federal crime through a fraudulent $1.8 million loan application. PDI
responded by moving to dismiss its abuse of process claim, with prejudice. The superior
court orally granted PDI's motion.
PDI appeals the superior court's order denying it discovery of AIC's
attorney-client privileged communications. It argues this discovery was relevant to its
abuse of process claim and that the attorney-client privilege must give way on the
grounds that AIC perpetrated a fraud or illegal act by reporting its conduct to the United
States Attorney's Office and FBI.
The first reason this portion of PDI's appeal is not meritorious is that this
argument was waived. We have repeatedly held that a party cannot preserve an issue for
appeal if it agrees to the dismissal or settlement of the claim.134 PDI did not preserve its
right to appeal the superior court's discovery ruling.
Even if this argument had been preserved, the superior court did not abuse
its discretion by refusing to permit discovery of AIC's privileged communications. PDI
is correct that there is an exception to the attorney-client privilege that can apply if the
party seeking discovery is able to establish a prima facie case that the communications
at issue involved perpetration of a crime or fraud.135 But Peak and Nabors argued that
they reported what they believed to be criminal activity by PDI, and in order for PDI to
show a prima facie claim of abuse of process, PDI would have had to establish not only
134 Uncle Joe's Inc. v. L.M. Berry & Co., 156 P.3d 1113, 1120-21 (Alaska
2007); Legge v. Greig, 880 P.2d 606, 607-09 (Alaska 1994).
135 Alaska R. Evid. 503(d)(1).
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an ulterior purpose, but also a wilful act in the use of the process "not proper in the
regular conduct of the proceeding."136 PDI does not cite any evidence in the record
supporting its assertion that AIC wrongfully reported evidence of what it believed to be
criminal activity.137 The jury found PDI liable for fraud and conversion, and these
findings were not appealed. On this record, we cannot say that the superior court abused
its discretion by denying PDI access to privileged communications.138
G. The Superior Court's Quasi-Estoppel Instruction Was Not
Erroneous.
Quasi-estoppel was one of the defenses PDI asserted in response to AIC's
claims that it breached the contractual and fiduciary duties it owed AIC pursuant to the
operating agreement and the Alaska Revised Limited Liability Company Act (LLC Act).
PDI argued that the operating agreement was amended by the parties' "words and
conduct,"139 and that it would be unconscionable to enforce it. The superior court found
136 Greywolf v. Carroll, 151 P.3d 1234, 1243-44 (Alaska 2007) (quoting Sands
v. Living World Fellowship, 34 P.3d 955, 961 (Alaska 2001)).
137 There is no evidence that criminal charges were ever pursued against PDI
or Ellsworth.
138 PDI also claims that there should have been an in camera review of the
documents it requested, but as is the case with the order on discovery, the decision
"[w]hether or not to grant in camera review is within the discretion of the judge."
Mogg v. Nat'l Bank of Alaska, 846 P.2d 806, 814 (Alaska 1993) (citing Cent. Constr.
Co. v. Home Indem. Co., 794 P.2d 595, 599 (Alaska 1990)). We find no abuse of
discretion here.
139 Ellsworth testified that shortly after the operating agreement was signed,
Marrs told him to "run the company as if [I] owned it a hundred percent, to make
money," and "[t]hat's the way I operated." When asked whether he considered the
operating agreement to be "out the window," Ellsworth testified that he "thought there
was no reason really to look at the agreement." In a March 2005 letter written shortly
(continued...)
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that PDI did not expect the operating agreement to be enforced and that it would not have
been enforced if Marrs had remained at the helm of CIRI and Peak.
The superior court submitted the quasi-estoppel defense to the jury using
an instruction that PDI challenges on appeal. The instruction asked the jury to decide
whether Peak and Nabors asserted through words or conduct that Ellsworth and PDI
were entitled to receive additional funds beyond arms-length value, whether Peak and
Nabors had full knowledge of all relevant facts when they represented that Ellsworth and
PDI were entitled to receive the additional funds beyond arms-length value, and whether
Peak's and Nabors's prior position was so inconsistent with their current efforts to
recover the funds and damages that it would be unconscionable to allow such
140
recovery.
On appeal, PDI argues that the superior court applied the wrong burden of
proof to the quasi-estoppel defense. It contends that PDI should only have been required
to prove the elements of quasi-estoppel by a preponderance of the evidence rather than
the clear and convincing standard. AIC responds that this equitable defense should have
been decided by the court rather than by the jury,141 but it also argues that the superior
139(...continued)
before he left AIC, Ellsworth reminded Marrs that in their original negotiation Ellsworth
did not intend the non-compete provision to apply to him personally.
140 PDI did not argue that quasi-estoppel would have excused fraud or other
intentional torts. The instruction directed the jury to consider the defense only as to
claims for breach of fiduciary duty and breach of contract.
141 See Dressel v. Weeks, 779 P.2d 324, 329 n.4 (Alaska 1989) ("Thus, in
determining whether the doctrine of quasi-estoppel is applicable to the matter before it,
the trial court should consider whether the party asserting the inconsistent position has
gained an advantage or produced some disadvantage through the first position; whether
the inconsistency was of such significance as to make the present assertion
(continued...)
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court provided the jury with the proper instruction on the burden of proof for this
defense.
Quasi-estoppel " 'appeals to the conscience of the court to prevent injustice'
by precluding a party from taking a position so inconsistent with one [it] has previously
taken that circumstances render assertion of the second position unconscionable."142 PDI
claims "[Peak and Nabors] with full knowledge of the relevant facts, showed through
both words and conduct that they believed [PDI was] entitled to take certain actions and
[to] charge [AIC] for certain costs, and that it was unconscionable for them to later
change their position and allege that the charges are fraudulent." PDI does not claim that
the operating agreement permitted PDI to earn fees in excess of "arms-length value," and
Alaska's LLC Act requires operating agreements and amendments to operating
agreements be in writing.143 It also expressly requires the written consent of all members
to "authorize a manager or member to perform an act on behalf of the company that
contravenes an operating agreement of the company,"144 and it states that self-dealing
transactions by a manager or managing member are void unless approved by an official
141(...continued)
unconscionable; and whether the first assertion was based on full knowledge of the
facts.") (emphasis added) (quoting Jamison v. Consol. Util., Inc., 576 P.2d 97, 102
(Alaska 1978)).
142 Rockstad v. Erikson, 113 P.3d 1215, 1223 (Alaska 2005) (quotingJamison,
576 P.2d at 102.)
143 See AS 10.50.570(g) ("Before filing a certificate of conversion to a limited
liability company with the department, a limited liability company agreement must be
approved in the manner provided for by the document, instrument, agreement, or other
writing governing the internal affairs of the other entity and the conduct of its business,
or by applicable law, as appropriate.").
144 AS 10.50.150(c)(3).
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vote at a meeting of the members after full disclosure.145 Relying on AS 10.50.150(c),
the superior court ruled as a matter of law that the operating agreement could not be
orally modified.146 Despite this ruling, the trial court agreed to instruct the jury on the
quasi-estoppel defense, and PDI was allowed to argue it to the jury.
We agree that equitable claims are typically decided by the court rather than
the jury, but superior courts are free to submit such questions to the jury for advisory
opinions, and that may have been the intent of the superior court here.147 We do not find
error in the superior court's instruction on the burden of proof for this defense. Under
our precedent in Dressel v. Weeks, the proper burden of proof for quasi-estoppel is clear
and convincing evidence.148 This is the standard the superior court used in its jury
instruction and PDI cites no Alaska case in support of the proposition that a
,
"preponderance of the evidence" standard is the correct one for quasi-estoppel.149 150
145 AS 10.50.140(a).
146 The superior court made this ruling in granting AIC's motion for partial
summary judgment regarding oral modification to the AIC operating agreement.
147 See Alaska R. Civ. P. 39(c).
148 779 P.2d 324, 330-31 (Alaska 1989).
149 PDI did cite authority showing that other states use this standard in quasi-
estoppel claims.
150 We also observe that the jury decided that PDI was liable under contract,
tort, and UTPA theories for actions it took in conjunction with the aircraft leases. The
equitable quasi-estoppel defense only applied to the claims for breach of contract and
breach of fiduciary duty. The jury awarded over $7.3 million in damages on AIC's
fraud, conversion, and UTPA claims. Even if we found error in this jury instruction,
AIC would still be entitled to at least $7.3 million in damages for conduct related to the
aircraft leases.
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H. We Vacate The Superior Court's Determination Of Prevailing Party.
Under Alaska Civil Rule 82, "[e]xcept as otherwise provided by law or
agreed to by the parties, the prevailing party in a civil case shall be awarded attorney's
fees."151 "The prevailing party is the one who has successfully prosecuted or defended
against the action, the one who is successful on the 'main issue' of the action and 'in
whose favor the decision or verdict is rendered and the judgment entered.' "152 The
superior court ruled that PDI was the prevailing party and it awarded fees and costs in
its favor. In light of our resolution of the issues presented on appeal, the superior court's
prevailing party determination must be vacated and remanded for reconsideration. The
superior court's award of attorney's fees is also vacated.
I. PDI And Ellsworth's Claim Of Statutory And Contractual Indemnity
Is Moot.
PDI argues that it was error for the superior court to solely award Rule 82
attorney's fees to PDI rather than awarding attorney's fees to both PDI and Ellsworth as
a matter of statutory and contractual indemnity. The superior court noted the LLC Act
contains two provisions relevant to fees incurred by members: (1) a mandatory
indemnification provision under AS 10.50.148(c); and (2) permissive indemnity under
AS 10.50.148(a) and (b). The superior court determined neither statutory nor contractual
indemnity applied to the case.
PDI only sought indemnification "for those litigation expenses that
reflected 'the extent that [it was] successful on the merits' and therefore had a right to
indemnity under AS 10.50.148(c)." On appeal, PDI gauges its success by the "net
151 Alaska R. Civ. P. 82(a).
152 Progressive Corp. v. Peter ex rel. Peter, 195 P.3d 1083, 1092 (Alaska
2008) (quoting Hillman v. Nationwide Mut. Fire Ins. Co., 855 P.2d 1321, 1327 (Alaska
1993)).
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judgment" in its favor. In PDI's view, PDI was successful on two claims: the fraudulent
inducement claim and the claim that PDI's breach was immaterial and did not excuse
Peak and Nabors from paying the contractual premium price of $12 million to purchase
PDI's ownership interest. We reverse the superior court's order denying the motion for
JNOV on PDI's fraud in the inducement claim, and we reverse the superior court's ruling
on material breach, holding that the jury's findings of fraud and wilful misconduct under
the circumstances of this case require the conclusion that PDI materially breached the
operating agreement as a matter of law. PDI's claim of statutory and contractual
indemnity is therefore moot.
J. We Vacate The Award Of Prejudgment Interest.
As explained, PDI conceded before trial that it over-billed AIC by
$1,902,827. The superior court awarded prejudgment interest in favor of AIC on its tort
claims, starting the accrual of prejudgment interest as of February 9, 2000. PDI appeals,
arguing that the court's calculation was erroneous.
Under Alaska law, prejudgment interest must be awarded by the superior
court absent extraordinary circumstances.153 We have held that "[p]rejudgment interest
should be denied 'in only the most unusual case,' such as double recovery."154 For tort
claims (such as fraud) prejudgment interest begins to accrue on the date of the injury.155
153 Farnsworth v. Steiner, 638 P.2d 181, 184 (Alaska 1981); see also Cole v.
Bartels, 4 P.3d 956, 958-59 (Alaska 2000) ("[P]rejudgment interest is awarded as a
matter of course.").
154 State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1158 (Alaska
1989) (quotingAm. Nat'l Watermattress Corp. v. Manville, 642 P.2d 1330, 1343 (Alaska
1982)).
155 K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 725 n.71 (Alaska
2003).
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In K & K Recycling, Inc. v. Alaska Gold Co., our court established that where an ongoing
course of conduct breaches a contract, prejudgment interest may be calculated as of the
beginning of such conduct and the superior court need not calculate interest "from the
date of each impediment."156
AIC asked the superior court to award prejudgment interest beginning
February 9, 2000, the date of the first of a series of invoices that were included in the
$1,902,827 over-billing PDI admitted to before trial.
PDI raises two arguments on appeal. First, PDI argues that the superior
court must be able to determine the actual date AIC's tort claims accrued and that the
failure to make this determination results in either too much or too little prejudgment
interest. Second, PDI argues that the superior court awarded prejudgment interest from
an arbitrarily selected date - February 9, 2000 - and that using that date over-
compensated AIC because some of the wrongful billings were made at significantly later
dates. In particular, PDI observes that the parties had not yet entered into the second
aircraft lease as of the date the superior court began calculating prejudgment interest.
PDI observes that the superior court's "award of prejudgment interest was apparently
based on a 'continuing course of conduct' theory," explained in K & K Recycling.157
We do not reach the merits of PDI's argument on the calculation of
prejudgment interest because on remand a new judgment will be entered. Here, we only
observe that the record does not appear to include a clear explanation of the methodology
used by the superior court to calculate prejudgment interest. On remand, the superior
court should make detailed findings explaining its prejudgment interest calculation so the
litigants can readily understand the court's reasoning.
156 Id. at 725.
157 Id.
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V. CONCLUSION
We AFFIRM the superior court's denial of PDI's motion for JNOV seeking
a ruling that the UTPA does not apply to intra-corporate disputes. We AFFIRM the
superior court's determination that AIC's aircraft lease claims were not barred by the
statute of limitations. We AFFIRM the superior court's decision to deny PDI access to
discovery in support of its abuse of process claim. We also AFFIRM the superior court's
decision to apply the clear and convincing evidence standard of proof to PDI's quasi-
estoppel defense.
We REVERSE the superior court's ruling on the motion for JNOV on the
issue whether PDI's conduct was exempt from the UTPA. We REVERSE the superior
court's ruling on the JNOV addressing material breach and hold that the jury's findings
of fraud and wilful misconduct under the circumstances of this case require the
conclusion that PDI materially breached the operating agreement as a matter of law. We
REVERSE the superior court's order denying the motion for JNOV on PDI's fraud in
the inducement claim, and we VACATE the superior court's determination of prevailing
party, award of attorney's fees, and award of prejudgment interest. PDI's claim for
statutory and contractual immunity is moot.
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