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Johnson v. Olympic Liquidating Trust (1/30/98), 953 P 2d 494
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.
THE SUPREME COURT OF THE STATE OF ALASKA
JAMES JOHNSON, EDYE RISENER, )
and AL RISENER, ) Supreme Court Nos. S-7378/7408
Appellants and ) Superior Court No.
Cross-Appellees, ) 3AN-94-639 CI
OLYMPIC LIQUIDATING TRUST, ) O P I N I O N
Appellee and )
Cross-Appellant. ) [No. 4939 - January 30, 1998]
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Peter Michalski, Judge.
Appearances: Victor C. Krumm, Law Office of
Victor C. Krumm, P.A., Sarasota, Florida, for Appellants/Cross-
Appellees. Cabot Christianson, Gary A. Spraker, Bundy &
Christianson, Anchorage, for Appellee/Cross-Appellant.
Before: Compton, Chief Justice, Matthews,
Eastaugh, Fabe, and Bryner, Justices.
James Johnson, Edye Risener and Al Risener appeal the
superior court's grant of summary judgment holding them liable on
a non-negotiable promissory note. They contend that the note was
procured by fraud and is avoidable. Assuming that part of the note
is touched by fraud, we conclude that they may not avoid the
portion of the note representing valid debt. We affirm the
superior court as to the grant of summary judgment. We reverse the
superior court's award of attorney's fees to the Olympic
Liquidating Trust, and remand for further proceedings.
II. FACTS AND PROCEEDINGS
The Olympic Liquidating Trust (Trust) was created by the
United States Bankruptcy Court in the wake of the bankruptcy of
Anchorage businessman Peter Zamarello and two of his corporations.
Pursuant to the order creating the Trust, property of one of the
bankrupt corporations, Olympic, Inc., was placed in the Trust for
purposes of liquidation. The proceeds were to be distributed to
the Trust's beneficiaries, Olympic, Inc.'s creditors. Among the
property placed in the Trust was a lawsuit denominated Olympic,
Inc. v. James Johnson; Edye Risener and Al Risener, 3AN-94-639
Civil. Under the terms of the debtor's reorganization plan, the
Trust was entitled to receive the lesser of $200,000 or 50% of the
proceeds of the lawsuit.
The underlying lawsuit arose out of business dealings
between Peter Zamarello on the one hand and James Johnson and Edye
Risener and Al Risener on the other. Johnson and the Riseners were
the principals of a corporation called "40, Inc." The main
business of 40, Inc. was the operation of two Anchorage bowling
alleys, East 40 Bowl and South 40 Bowl. 40, Inc. leased these
bowling alleys from Olympic, Inc. Zamarello was, at least at one
time, a principal of Olympic, Inc.
On October 21, 1985, Johnson and the Riseners signed a
promissory note in the amount of $500,000 in favor of Olympic, Inc.
(the 1985 note). This $500,000 represented amounts owed by Johnson
and the Riseners for bowling equipment, improvements to the leased
premises, and a liquor license. They defaulted on the note and
fell behind on the payments due under the bowling alley leases.
To remedy this problem, a second promissory note was
negotiated at a meeting where Zamarello, Johnson and the Riseners
were present. This second note, in the amount of $1,049,000, was
signed on August 20, 1986, in favor of Eastgate, Inc., another
corporation with which Zamarello was involved (the 1986 note). The
amount of the note was made up of an accumulation of smaller debts.
These debts included the $500,000 still owing on the 1985 note;
$253,655 in back rent; and $289,000 in construction costs that
Zamarello claimed to have paid on behalf of Johnson and the
Riseners to a company called Strand, Inc. Johnson and the Riseners
contend that they, at all times during the meeting, disputed the
actual amount of their indebtedness to Zamarello or his
corporations and that they signed the second note only after a
lengthy argument with Zamarello. Pursuant to the signing of the
1986 note, the 1985 note was marked "cancelled 8/20/86"and
Meanwhile, in preparation for the impending bankruptcy,
Zamarello had been transferring all of Olympic, Inc.'s assets to
Eastgate, Inc. On August 21, 1986, the day after the 1986 note was
signed, Olympic, Inc. filed for Chapter 11 bankruptcy protection.
The bankruptcy court ordered Eastgate, Inc. to return all of the
Olympic, Inc. assets that had been transferred to it. This order
included "[a]ll net rents, profits and proceeds received by
Eastgate, Inc. . . . ."
Johnson and the Riseners never made a payment on the 1986
note. On January 4, 1988, Olympic, Inc. filed suit against Johnson
and the Riseners for the $1,049,000 owed on the 1986 note. This
lawsuit became, in part, the property of the Olympic Liquidating
Trust. Johnson and the Riseners were later able to settle with
Olympic, Inc. for $10,000. The Trust learned of the impending
settlement and began to seek a method of intervening in the
litigation. Ultimately, Johnson and the Riseners stipulated that
the Trust would be allowed to bring suit on its own to enforce its
interest in the note, provided that they be allowed to raise any
defenses they had against Olympic, Inc. against the Trust.
The Trust brought that suit on January 19, 1994. The
complaint alleged only that Johnson and the Riseners were liable to
the Trust on the 1986 note. On February 8, 1995, the Trust moved
for summary judgment on the ground that there were no material
facts in dispute and Johnson and the Riseners were liable to the
Trust to the $200,000 limit as a matter of law.
Johnson and the Riseners, in their answer and opposition
to the Trust's motion, defended on the grounds that there were
material facts in dispute as to whether the 1986 note was voidable
due to fraud and whether there was consideration for the note.
They also argued that there were issues of fact as to one, or more,
defective assignments of the note, and that Zamarello lacked the
authority to bind Eastgate or Olympic, Inc. at the time the note
The superior court found, as a matter of law, that
Johnson and the Riseners were liable to the Trust at least to the
extent of its maximum allowable recovery. The court reasoned that,
even if the fraud issue could be proven and the 1986 note avoided,
Johnson and the Riseners would then be liable in the amount of
$500,000 on the 1985 note. Accordingly, the superior court granted
summary judgment on the $500,000 1985 note. The Trust was awarded
its $200,000 maximum recovery, $16,500 in attorney's fees,
$106,284.60 in prejudgment interest, and $1,450.33 in costs.
Johnson and the Riseners appeal, contending that the
superior court erred in entering summary judgment in favor of the
Trust. They also appeal the award of prejudgment interest. The
Trust cross-appeals the amount of the attorney's fees award.
III. STANDARD OF REVIEW
A superior court's grant of summary judgment must be
affirmed if the evidence in the record fails to disclose a genuine
issue of material fact and the moving party is entitled to judgment
as a matter of law. Public Safety Employees Ass'n, Local 92 v.
State, 895 P.2d 980, 984 (Alaska 1995). This inquiry is conducted
without deference to the ruling of the superior court. Martech
Constr. Co. v. Ogden Envtl. Serv., Inc., 852 P.2d 1146, 1149
(Alaska 1993). All reasonable factual inferences must be drawn in
favor of the party opposing summary judgment. Id.
The time when prejudgment interest begins to accrue is a
question of law which we review using our independent judgment.
Tookalook Sales and Serv. v. McGahan, 846 P.2d 127, 129 (Alaska
1993). Interpretation of an attorney's fees clause in a contract
is also a question of law. We use our independent judgment in
making such an interpretation. A & G Constr. Co. v. Reid Bros.
Logging Co., 547 P.2d 1207, 1212-13 (Alaska 1976).
A. Did the Superior Court Err in Granting Summary Judgment
in Favor of the Trust?
1. Fraud in the inducement regarding the 1986 note
Johnson and the Riseners first argue that it was improper
for the superior court to grant summary judgment on the 1985 note,
when that note was not specifically put at issue by the parties'
pleadings or the Trust's motion for summary judgment. They have
framed this argument as one claiming a denial of due process of law
under the Alaska Constitution. It is true that the 1985 note was
not specifically raised in the pleadings or in the Trust's motion
for summary judgment. However, we find the superior court's grant
of summary judgment proper as an application of the doctrines
relating to the avoidability of contracts. Namely, when a clearly
delineated and severable part of a contract is avoidable due to
fraud, it is only that part which may be avoided.
Johnson and the Riseners rightly contend that a contract
induced by fraud is avoidable at the election of the defrauded
party. They base their claim of fraud on their allegations that
Zamarello demanded that they sign the 1986 note and
[w]hen they protested and said that they did
not owe anybody that amount of money, Zamarello presented them with
a list of alleged debts that were owed. The first item on that
list was for $289,000, which Zamarello claimed had been paid to
Strand, Inc. for tenant improvements made to one of the 40, Inc.
bowling alleys . . . . The representation was completely false.
Nonetheless, Johnson and the Riseners signed the 1986 note.
Apparently, they were later sued by Strand, Inc. for $289,000.
The Restatement (Second) of Contracts sec. 164(1) (1981)
If a party's manifestation of assent is
induced by either a fraudulent or a material misrepresentation by
the other party upon which the recipient is justified in relying,
the contract is voidable by the recipient.
Assuming that the parties' conduct falls within this section, this
does not give rise to a disputed issue of material fact. As the
Trust points out, "[o]nly disputed issues of material fact preclude
entry of summary judgment. Alaska R. Civ. P. 56. A fact is
material only if it may effect [sic] the outcome of the case. See
Beck v. Haines Terminal & Highway Co., 843 P.2d 1229, 1231 (Alaska
1992)." (Emphasis in original.)
When a contract is comprised of several distinct parts or
performances, a right of avoidance as to one part or performance
does not give rise to a right of avoidance as to the entire
contract. Conley v. Texas Co., 289 S.W. 169, 172 (Tex. App. 1926)
("[W]here a contract is composed of several distinct and divisible
parts, one of the parties cannot rescind as to such severable part
. . . in respect to which no breach has occurred."); see also B.F.
Sturtevant Co. v. Le Mars Gas Co., 176 N.W. 338, 341 (Iowa 1920)
(holding a contract to be divisible although contained in one
instrument); Wooten v. Walters, 14 S.E. 734, 736 (N.C. 1892) ("When
. . . the plaintiff avoided the contract . . . as to the land . . .
he did not avoid the contract as to the stock of goods. The
contract was severable, and, as to the goods, was valid and
remained of force and continued to have effect."). A contract is
severable for purposes of the above rule when it is of such a
nature that it is clear that the formation of the contract itself
was not dependent on all of its parts together, but rather that it
could just as well have been entered into as several different
agreements. See Conley, 289 S.W. at 172; Butler v. Prentiss, 52
N.E. 652, 656 (N.Y. 1899) (holding contract entire when plaintiff
would not have assented to one part unless he assented to all).
Here, Johnson and the Riseners contend only that $289,000
of the amount owed under the note was touched by fraud. It is
clear that a $500,000 portion of the 1986 note, represented by the
1985 note, and $253,655 for back rent were valid debts. Therefore,
Johnson and the Riseners have no right to avoid the note at least
to the extent of these sums. There is no issue of material fact as
to their liability in this amount. The Trust is, therefore,
entitled to judgment as a matter of law.
Johnson and the Riseners further argue that disputed
material facts exist as to their entitlement to certain set-offs
which would reduce their liability to below the $200,000 mark.
Specifically, they allege a $170,000 set-off for "assorted
indebtedness owed by Olympic"and a $10,000 set-off for the amount
paid to Olympic, Inc. in the original settlement of the lawsuit.
This, again, fails to raise an issue of fact that would preclude
summary judgment. Even were the set-offs allowed against the valid
debts, the net amount owed by Johnson and the Riseners would still
total more than double the $200,000 limit. [Fn. 1] In their brief,
Johnson and the Riseners claim that "[these sums are] not intended
to be exhaustive of the set-off claims. A party opposing summary
judgment need not produce all of the evidence it may have at its
disposal but need show only that issues of fact are in existence."
Be this as it may, a party must bring forth enough evidence to show
that a disputed fact is material to the outcome of the lawsuit.
Johnson and the Riseners have failed to do this. [Fn. 2]
Given that the Trust is limited to a recovery of the
lesser of $200,000 or 50% of litigation proceeds, Johnson and the
Riseners have failed to show that any issue of material fact exists
as to whether they would be liable for at least twice the $200,000
2. Lack of one or more valid assignments
Johnson and the Riseners next argue that there existed a
material issue of fact as to whether Olympic, Inc., and the Trust
standing in its shoes, had the ability to enforce the 1986 note, as
there was no evidence of a valid assignment of the note from
Eastgate, Inc., in the favor of which the note was made, to
Olympic, Inc. This argument fails as well.
As persuasively put by the Trust, this contention "does
not properly account for the Order Avoiding Transfers of Property
dated January 21, 1987, entered in the Olympic bankruptcy
proceedings." That order "unwound"all of Zamarello's transfers of
Olympic, Inc.'s property to Eastgate, Inc. The court ordered that
"[a]ll net rents, profits and proceeds received by Eastgate, Inc.,
. . . shall be immediately turned over to [Olympic, Inc.]." This
encompasses the transfer represented by the 1986 note and effected
a valid transfer of that note from Eastgate, Inc. to Olympic, Inc.
Finally, Johnson and the Riseners attempt to raise an
issue of material fact regarding Zamarello's authority to enter
into an agreement on behalf of Eastgate, Inc. or Olympic, Inc. with
regard to the 1986 note. This argument is also rejected. Whatever
Zamarello's status on the relevant dates as an agent of either or
both Olympic, Inc. and Eastgate, Inc., a principal may affirm the
unauthorized conduct of another through conduct "manifesting that
he consents to be a party to the transaction, or by conduct
justifiable only if there is a ratification." Restatement (Second)
of Agency sec. 93(1) (1958). Bringing suit on an obligation which
entered into by a person without authority is one example of
conduct evincing ratification. Id. at sec. 97; cf. Sea Lion Corp.
Air Logistics of Alaska, Inc., 787 P.2d 109, 116-19 (Alaska 1990)
(ratification by implied acquiescence). When Olympic, Inc. brought
suit on the 1986 note, the question as to whether Zamarello had
authority to bind it to that obligation was closed. Thus, the
Trust was entitled to judgment as a matter of law on this issue.
The superior court's grant of summary judgment awarding
the Trust $200,000 is affirmed.
B. Did the Trial Court Err in Granting the Trust Prejudgment
The superior court awarded the Trust $106,284.60 in
prejudgment interest. It arrived at this amount by applying the 9%
interest rate of the 1986 note to the $200,000 award from the date
the Trust was created, December 1, 1989, to the date judgment was
entered, October 26, 1996. [Fn. 3] Johnson and the Riseners
contend both that the Trust is not entitled to prejudgment interest
and that, if it is entitled to prejudgment interest, the superior
court miscalculated the amount owed.
We reject the argument as to the Trust's right to receive
prejudgment interest on its award. Johnson and the Riseners point
to Article VI, paragraph 6.9, of the reorganization plan of
Olympic, Inc. as a limit on the Trust's right to collect interest
on the judgment. That provision reads:
Distribution Upon Allowance. At such
time as a Disputed Claim or Disputed Interest becomes an Allowed
Claim or an Allowed Interest, the distributions reserved for such
Allowed Claim or Allowed Interest (without any interest thereon)
shall be withdrawn from the Contested Fund and distributed to the
[Trust] as [its] interests may appear, and thereafter to the holder
of such Allowed Claim or Allowed Interest.
We first note that Johnson and the Riseners failed to raise this
provision of the reorganization plan in the court below. We need
not address the issue on appeal. Gates v. City of Tenakee Springs,
822 P.2d 455, 460 (Alaska 1991). Even were we to review the issue,
it is clear that it is meritless. The quoted provision is aimed at
the satisfaction of creditors' claims against the bankruptcy
estate. It has no bearing on the Trust's ability to recover here.
Johnson and the Riseners next argue that prejudgment
interest should only have been awarded from the date the Trust
filed its lawsuit, rather than from the date the Trust came into
being. Alaska Statute 09.30.070(b) provides:
Except when the court finds that the
parties have agreed otherwise, prejudgment interest accrues from
the day process is served on the defendant or the day the defendant
received written notification that an injury has occurred and that
a claim may be brought against the defendant for that injury,
whichever is earlier. The written notification must be of a nature
that would lead a prudent person to believe that a claim will be
made against the person receiving the notification, for personal
injury, death, or damage to property. [Fn. 4]
Johnson and the Riseners contend that prejudgment
interest should only accrue from the date that they were served
with process in this case -- a date after the Trust was created.
This argument fails. Johnson and the Riseners had already been
served with process in the underlying suit brought by Olympic,
Inc., and were well into litigation, when the Trust came into
existence. The service of process in the Olympic, Inc. case served
to give the notice required by AS 09.30.070(b). We affirm the
superior court's award of prejudgment interest.
C. Did the Trial Court Err in Awarding Attorney's Fees at
the Civil Rule 82 Rate?
The Trust cross-appeals on the ground that the superior
court erred in awarding it attorney's fees at the Civil Rule 82
rate. [Fn. 5] The trial court awarded the Trust $16,500 in
attorney's fees. The Trust's actual fees were approximately
$31,789.50. The Trust contends that it is entitled to reasonable
actual attorney's fees under the provisions of the 1986 note. The
1986 note reads:
In case this note is placed in the hands
of an attorney for collection or in the event suit is instituted to
collect this note or any portion thereof, the undersigned promises
to pay, in addition to the costs and disbursements provided by
statute, such additional sums as the court may adjudge reasonable
for attorney fees to be allowed in said suit or action.
Under Alaska law, an attorney's fees provision in a contract
controls an award of attorney's fees. Jackson v. Barbero, 776 P.2d
786, 788 (Alaska 1989) (noting that the plain meaning of a contract
provision prevails over any limitation otherwise imposed by Civil
Rule 82). It appears that the trial judge applied the Civil Rule
82 formula to the award at issue here. We remand this issue and
direct the superior court to determine a reasonable award of
attorney's fees under the contract provision.
We AFFIRM the superior court's grant of summary judgment
in favor of the Trust to the extent of its $200,000 limitation on
recovery. We also AFFIRM the award of prejudgment interest. We
REVERSE the award of attorney's fees to the Trust and REMAND for
proceedings consistent with the above.
Edye Risener estimated that the group's true indebtedness to
Zamarello's corporations was approximately $600,000. Assuming off-
sets of $180,000, the resulting judgment based on their admission
would still exceed $400,000.
Johnson and the Riseners also claim a set-off in the amount of
$289,000 for the "Strand debt." As discussed above, if this court
assumes that part of the 1986 note was procured by fraud and is
avoidable, the Strand debt is avoided with it. Johnson and the
Riseners cannot both have the portion of the note representing the
debt avoided and also claim a set-off for the amount of that debt.
It charged Johnson and the Riseners $49.32 per day in interest
for 2,155 days.
Both parties assume that AS 09.30.070 is the controlling
statute. We note that this question is an open one. It may be
that AS 09.30.070(b) only applies to cases involving "personal
injury, death, or damage to property." See Hofmann v. von Wirth,
907 P.2d 454, 455 n.2 (Alaska 1995); Tookalook Sales and Serv. v.
McGahan, 846 P.2d 127, 129 (Alaska 1993). We need not dispose of
the issue to resolve the case before us.
The trial court did not explicitly refer to Civil Rule 82 in
making its $16,500 award of attorney's fees. However, this is the
amount that is arrived at if the Rule 82 formula is applied.