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Adams v. Adams (04/23/2004) sp-5798
Adams v. Adams (04/23/2004) sp-5798
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
MICHAEL A. ADAMS, )
) Supreme Court No. S-10271
Appellant, )
) Superior Court No.
v. ) 3AN-00-5519 CI
)
DON ADAMS, individually and on ) O P I N I O N
behalf of ALASKA RUBBER & )
SUPPLY, INC., and ADA INVESTMENTS, )
)
Appellees. ) [No. 5798 - April
23, 2004]
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Mark Rindner, Judge.
Appearances: Larry L. Caudle, Anchorage, for
Appellant. Wevley William Shea, Anchorage,
for Appellees.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
MATTHEWS, Justice.
CARPENETI, Justice, with whom EASTAUGH, Justice,
joins, dissenting.
The power to avoid a contract due to misrepresentation
can be lost if a party knowing or having reason to know of the
misrepresentation affirms the contract. But this rule only
applies in cases of non-fraudulent misrepresentations. Where
there is fraud the power of avoidance is only lost if the party
actually knows of the misrepresentation and affirms the contract.
The main question in this case is whether, in the process of
negotiating a lease, changing a right of first refusal to an
option to purchase without notice should be considered a
constructive fraud for purposes of applying this rule. We
conclude that it should because of the strong deceptive tendency
of such conduct.
I. FACTS AND PROCEEDINGS
Michael Adams owns four contiguous lots on the Old
Seward Highway in Anchorage. Adjacent to this property is
property owned and used by Alaska Rubber & Supply, Inc.
Effective October 1, 1996, Michael Adams leased his property to
Alaska Rubber and Alaska Rubber's principal, Don Adams
(collectively referred to in this opinion as Alaska Rubber). The
lease had a three-year term. The focus of this case is a clause
in the lease that is titled "Right of First Refusal," but is
textually an unconditional option running in favor of Alaska
Rubber to purchase the leased property at any time during the
lease term for $300,000.1 The lease also excepts from its
coverage an L-shaped portion of about 3,750 square feet
straddling two lots on which Michael Adams lives in a trailer and
has a quonset hut and storage containers.2 A secondary issue is
whether the option includes the excepted property.
The negotiations leading up to the execution of the
lease began in earnest in July and August of 1996. On August 2,
1996, Michael Adams wrote Don Adams, president of Alaska Rubber,
asking for a decision on leasing the property before the end of
the month. The letter mentions a purchase option. It also
contains language that suggests that Michael Adams's objective
was to sell the property after he found property suitable for a
tax-free trade.3 Enclosed is a copy of a lease I used for one
of my properties. As you know leases are complicated so if you
have one you would feel more comfortable with then prepare it and
I will read it. Lets try for a three year lease at 3000.00 per
month and an opportunity to purchase the property during the
lease period. Chances are that I will find a trade soon and
release you from the lease. Michael Adams enclosed a proposed
lease containing a right-of-first-refusal clause under which the
lessee was granted an option to buy conditioned on the lessor
attempting to sell the property and finding a buyer. In that
event the lessee would have the right to buy on the terms agreed
to between the lessor and the buyer.4 Michael Adams testified
that he brought the letter of August 2, 1996, and the first draft
of the lease to Alaska Rubber and gave them to Alaska Rubber's
general manager, Janeece Higgins, for transmission to Don Adams
who resides in the state of Washington.
Subsequent to the delivery of the August 2, 1996 letter
and the first draft, the parties met and discussed the
prospective transaction. Michael Adams testified that they
reached an agreement and that he instructed his attorney to
prepare a second draft of a lease in accordance with their
agreement. Larry Caudle, Michael Adams's attorney, prepared the
second draft. In it the right of first refusal was changed by
specifying the sale price, $300,000. But the lessee's option was
still only exercisable when "Lessor at his sole discretion elects
to sell the property during the lease term." After Caudle
prepared the second draft, Michael Adams took it to Alaska Rubber
and delivered it to Higgins.
The second draft was transmitted by Higgins to Don
Adams, who sent it to Alaska Rubber's attorney, Herbert Viergutz.
Viergutz then prepared a third draft. The right-of-first-refusal
clause in the third draft is almost identical to that in the
second draft, except that two additional sentences are added at
the end of the clause concerning sharing of the cost of any
environmental phase two report that might be required in the
event that lessee exercises its right of first refusal.5 The
third draft was delivered by Alaska Rubber to Michael Adams.
Michael Adams reviewed it, brought it to Alaska Rubber's office,
and stated that it was acceptable to him. Without then signing
the draft, Michael Adams gave it to Higgins, who sent it to
Washington for Don Adams's review and signature.
Don Adams read the third draft and did not agree with
the right-of-first-refusal clause. In his view the parties had
agreed that Alaska Rubber would have an option to purchase the
property that was not contingent on Michael Adams's decision to
sell. He instructed Viergutz to revise the clause so that Alaska
Rubber's option to purchase would be unconditional. Viergutz
made this change but did not change the caption of the paragraph.
As a result, the paragraph was still titled "Right of First
Refusal."6 Don Adams signed this, the final draft, on behalf of
himself and Alaska Rubber and transmitted it to Higgins. When
the draft arrived at the Alaska Rubber office, Michael Adams came
to the office and signed it without reading it. No one advised
Michael Adams that the third draft had been changed and that the
final draft contained an unconditional option to buy.
Almost three years passed. A month before the lease
was to expire it was extended for an additional two years. This
was accomplished by a letter prepared and signed by Michael Adams
that he delivered to Alaska Rubber on August 30, 1999, and that
Don Adams assented to on September 15, 1999.7 The concerned
parties have agreed to this extension and affixed their
respective signatures. The circumstances leading up to the
lease extension are in dispute.
Michael Adams testified that he prepared the letter
extending the lease because the lease was about to expire and he
wanted to know Alaska Rubber's intentions in advance of the
expiration date. But Higgins testified that the lease was
renewed after a conversation that she had with Michael Adams in
which she told him that Alaska Rubber wanted to purchase the
property. According to Higgins, Michael Adams said that he would
get back to her, and when she did not hear from him, she
telephoned him and again told him that Alaska Rubber wanted to
exercise the option to purchase. She testified that Michael
Adams told her that he did not believe that he had to sell the
property, that she disagreed, and that he told her that he would
look into it and get back to her. The next event of significance
according to Higgins was her receipt of the lease extension from
Michael Adams described above. The trial court accepted
Higgins's description of the events leading up to the lease
extension.
On November 29, 1999, Alaska Rubber sent a certified
letter to Michael Adams exercising its option to purchase the
property. Michael Adams refused to sell. Alaska Rubber brought
the present action seeking specific performance or damages for
breach of the lease agreement. Michael Adams filed a
counterclaim, seeking a declaration that the lease is null and
void because of Alaska Rubber's "fraudulent and deceptive act of
changing a material condition of the lease without [Michael
Adams's] consent or knowledge."
Following a bench trial, the court issued findings of
fact and conclusions of law. The court found that as of October
1996, when Michael Adams signed the original lease, Michael Adams
was justified in believing that the agreement he signed was
identical to the third draft that he reviewed and that Alaska
Rubber did not advise him that the right of first refusal in the
third draft had been converted to an option to purchase. But the
court found that the failure of Alaska Rubber to advise Michael
Adams of the change was not "an attempt to deceive Michael Adams
in any way." As to Higgins, the court found that she "was not
involved in the negotiations other than to act as an intermediary
between the principals." As to Don Adams, the court found that
he "was justified in believing that an option to purchase was
consistent with the prior negotiations between the parties" as
reflected in part in the letter of August 2, 1996, and that both
he and Higgins "were justified in assuming that Michael Adams
would read the final version of the lease before signing it."
With respect to the original lease the court found that
there was a material misunderstanding as to the option agreement
and that no contract was formed. The court wrote:
In Salmine v. Knagin, 645 P.2d 148, 150-
151, the Alaska Supreme Court recognized that
a material misunderstanding among the parties
may prevent the formation of any contract.
This may occur if the parties meant
materially different things and neither knew
or had reason to know of the other's meaning,
of if each knew and had reason to know of the
other's meaning. Id.; See Restatement
(Second) of Contracts 20. I conclude that
this is what occurred when the lease
agreement dated October 1, 1996 was executed.
At that time Don Adams reasonably believed
that the agreement contained an option to
purchase while Michael Adams reasonably
believed that the contract contained a right
of first refusal. Neither party knew or had
reason to know the meaning attached by the
other. When [the lease] originally was
executed there was a material
misunderstanding between the parties and
hence no contract was formed.
The court then turned to the question of the validity
of the lease extension of August 30, 1999. The court found that
the extension was valid and that Michael Adams, by agreeing to
the extension, affirmed the terms of the original lease as
written. The court stated:
Based on my finding that there were
discussions concerning the option to purchase
prior to the execution of the lease extension
(which finding is based in large part on my
finding that Mrs. Higgins is a credible
witness on this issue) I conclude that there
was no longer a misunderstanding between the
parties when the lease extension was
executed. The lease agreement that was
extended clearly indicates that Don Adams has
an option to purchase the property for
$300,000.00. Michael Adams had reason to
know that plaintiffs believed that they had
an option to purchase the property. A review
of the agreement he had signed in 1996 would
have confirmed this. On the other hand, Don
Adams and Mrs. Higgins only knew that Michael
Adams had indicated he would look into
whether or not there was an option to
purchase prior to sending the lease extension
to Mrs. Higgins. Restatement (Second) of
Contracts Section 20 indicates that:
(2) The manifestations of the
parties are operative in accordance
with the meaning attached to them
by one of the parties if:
(a) that party does not know of
any different meaning attached
by the other, and the other
knows the meaning attached by
the first party; or
(b) that party has no reason to
know of any different meaning
attached by the other, and the
other has reason to know the
meaning attached by the first
party.
Id.; see also Salmine, 645 P.2d 151 n.10. I
conclude, therefore, that when the lease
extension was executed in 1999 there was
mutual assent. A valid contract existed at
that time including an unambiguous option to
purchase clause as specified in Paragraph 39
of the original lease agreement. Michael
Adams has breached that agreement by refusing
to sell the property to Don Adams.
The court thus decided that specific performance was
appropriate. Initially the court concluded that the property
excepted from the lease occupied by Michael Adams was not
included in the option to purchase. Michael Adams filed a motion
for reconsideration. One ground for the motion was that the
contemplated decree of specific performance would require Michael
Adams to create an illegal subdivision since the property that
was excepted from the lease was not platted as a separate lot.
The court generally denied Michael Adams's motion for
reconsideration but decided that the excepted property was not
intended to be excepted from the option or right-of-first-refusal
clause. The court stated:
I thus conclude that while the parties
intended to exclude a portion of the property
from the lease, this exclusion was intended
to operate only while the property was leased
and was not intended to affect the sale of
the property. The sale of the property was
intended to be for the entire parcel of
property without exclusion.
The court thereupon ordered Michael Adams to convey the entire
property including the property that was excepted from the lease.
Michael Adams appeals.
II. DISCUSSION
A. Standard of Review
Leases are contracts that are reviewed according to the
principles of contract interpretation.8 Issues of contract
interpretation are reviewed de novo.9 Findings of fact made by a
trial court, including those that "provide a factual basis for
its interpretation of a contract,"10 are reviewed deferentially
under a clearly erroneous standard. A finding of fact is clearly
erroneous when the reviewing court is left with a definite and
firm conviction that the trial court has made a mistake.11
B. Changing the Final Version of the Lease Was a
Constructive Fraud.
Michael Adams argues that Alaska Rubber cannot obtain
specific performance because its conduct, changing the terms of
the final lease without notifying Michael Adams of the change,
was fraudulent as a matter of law. Alaska Rubber counters that
the court's findings that Alaska Rubber did not attempt to
deceive Michael Adams effectively negate his argument that fraud
was involved. For the reasons that follow, we conclude that
Alaska Rubber's conduct with respect to the original lease was a
constructive fraud.
Michael Adams relies on Pierce v. Pierce, a case in
which we strongly disapproved of a party's act of adding an
unagreed-to provision to a document without notice to the other
party.12 Pierce was a divorce case in which the parties
participated in a settlement conference during which they reached
agreement on all issues of child custody, child support, and
property division.13 The subject of which party would receive a
child support tax credit was not discussed during the settlement
conference.14 After the settlement conference, the husband's
counsel was designated to draft a child custody and support order
memorializing the settlement agreement.15 He inserted a provision
in the draft order giving a fifty percent child support credit to
the husband.16 This had not been agreed to in the settlement.17
The draft order was forwarded to the wife's counsel for review
without calling attention to the new term.18 The wife's counsel
reviewed and approved the document, overlooking the newly added
term. The court signed the order as prepared and approved.19
Subsequently the wife discovered the new term and moved for
relief from the order.20 The trial court granted this motion and
issued an amended order deleting the provision that husband's
counsel had added.21 On appeal we affirmed.22 Although this was
not the basis for the superior court's action, we ruled that the
order should have been set aside under Civil Rule 60(b)(3) which
provides relief from judgment for "fraud, . . .
misrepresentation, or other misconduct of an adverse party."23 We
held that the action of husband's counsel of adding the term
without notifying the opposing party was misconduct within the
meaning of Rule 60(b)(3):
Insertion of a new term without informing
[wife] or the court amounts to an attempt to
gain a concession that was not bargained for.
Insertion of the credit . . . was neither an
honest mistake nor a legitimate extension of
negotiations, as the settlement was already
complete when [husband] added the new term.
If [husband] wished to add to the agreement a
new term that had not previously been
negotiated, his counsel had the obligation to
bring the requested change to the attention
of [wife's] attorney. This [husband's]
counsel failed to do. Rule 60(b)(3) gives
the court the authority to remedy such
misconduct by a party or an attorney. In
fact, the court has a duty to rectify such a
wrong to protect the integrity of the
judicial process.[24]
The policy expressed in Pierce condemning the
surreptitious expression of new terms in the process of
negotiations applies here. The conduct in this case is, if
anything, more blameworthy than that in Pierce because the new
language in Pierce was not miscaptioned and it did not contradict
a clause in an earlier draft. Here, the option was inserted in a
paragraph that addressed, according to its caption, a right of
first refusal. Further, the option conflicted with earlier
drafts that the parties had exchanged, including the third draft
that was prepared by Alaska Rubber's counsel.
The trial court's reasons for concluding that Alaska
Rubber was justified in not calling attention to the change to
Michael Adams are insufficient. As noted there are three
reasons. First, Higgins was merely an intermediary; second, Don
Adams believed that an option to purchase was consistent with the
prior negotiations between the parties; and third, Don Adams and
Higgins thought Michael Adams would read the final version before
signing it.25 While Don Adams may have thought that an option to
purchase was consistent with prior negotiations between the
parties, that does not account for the fact that the parties'
recent negotiations had focused on drafts containing a right of
first refusal, not an option, including the most recent draft
that was prepared by Alaska Rubber's counsel. Further, while it
is possible that each of the actors for Alaska Rubber - Don
Adams, Higgins, and Viergutz - might have believed that others
would call attention to the change to Michael Adams, the fact
remains that no one did so. Moreover, it is not a sufficient
excuse for one party to say that it believed that the other party
would review a final document and notice an unannounced change.
Making unannounced changes, as Pierce teaches, is inherently
deceptive and wrongful.
Fraud may be actual or constructive. "Constructive
fraud exists in cases in which conduct, although not actually
fraudulent, ought to be so treated, - that is, in which such
conduct is a constructive . . . fraud, having all the actual
consequences and all the legal effects of actual fraud."26 Stated
otherwise, constructive fraud is a breach of a duty, which while
not intentionally deceptive or actually dishonest, "the law
declares fraudulent because of its tendency to deceive others."27
Alaska Rubber's conduct here was a constructive fraud.
While neither Higgins, nor Don Adams, nor Viergutz, may have
intended to deceive Michael Adams, the failure of Alaska Rubber
to notify Michael Adams of the change had the same effect as an
intentional deception. Viewed corporately, Alaska Rubber "had
the obligation to bring the . . . change to the attention of"
Michael Adams.28 Its breach of this duty was a constructive fraud
because of the powerful tendency to deceive that such conduct
carries with it.
C. The Right To Avoid a Contract that Is Voidable
Because of Fraud Is Lost Only by a Knowing Affirmance.
To use the terms of the Restatement (Second) of
Contracts, Alaska Rubber's act of changing the right-of-first-
refusal clause to an option without changing the caption and
without notifying Michael Adams was a misrepresentation - an
express and implied assertion that the right-of-first-refusal
clause in the third draft was unchanged.29 The misrepresentation
was material30 and for the reasons discussed in the preceding
section of this opinion, we consider it to have all the effects
of actual fraud. But since Michael Adams had a reasonable
opportunity to read the lease before he signed it, his apparent
assent to the lease was effective, and the lease was voidable
rather than void.31
Two illustrations to section 163 of the Restatement
come close to the facts of this case. Illustration 2 states:
A and B reach an understanding that they
will execute a written contract containing
terms on which they have agreed. It is
properly prepared and is read by B, but A
substitutes a writing containing essential
terms that are different from those agreed
upon and thereby induces B to sign it in the
belief that it is the one he has read. B's
apparent manifestation of assent is not
effective.
Illustration 3 states:
A and B reach an understanding that they
will execute a written contract containing
terms on which they have agreed. A prepares
a writing containing essential terms that are
different from those agreed upon and induces
B to sign it by telling him that it contains
the terms agreed upon and that it is not
necessary for him to read it. B's apparent
manifestation of assent is effective if B had
a reasonable opportunity to read the writing.
However, the contract is voidable by B under
the rule stated in 164. . . . In the
alternative, at the request of B, the court
will decree that the writing be reformed to
conform to their understanding under the rule
stated in 166.
The main difference between the two illustrations is that the
recipient of the misrepresentation had a reasonable opportunity
to read the writing in Illustration 3. As Michael Adams had a
reasonable opportunity to read the lease in the final form before
he signed it, Illustration 3 is more analogous to the situation
in the present case. The lease was voidable by Michael Adams,
but not void.
The main question in this case is whether Michael Adams
lost his power of avoidance by extending the lease. The exercise
of the power of avoidance is subject to the limitations expressed
in chapter 16 of the Restatement.32 Section 380(2) deals with the
loss of the power of avoidance by affirmance. It provides that a
party's power of avoidance for misrepresentation is not lost
"until he knows of the misrepresentation if it is fraudulent, or
knows or ought to know of a nonfraudulent misrepresentation
. . . ."33
Michael Adams's extension of the lease was a
manifestation of "a willingness to go on with the contract" and
was thus an "affirmance."34 But the superior court did not find
that Michael Adams actually knew that the original lease
contained an option rather than a right of first refusal, only
that he "had reason to know that [Alaska Rubber] believed that
they had an option to purchase the property. A review of the
agreement that he had signed in 1996 would have confirmed this."
For Michael Adams to lose his power of avoidance, a
finding of actual knowledge of the misrepresentation, rather than
reason to know of it, is necessary. Thus, remand is required.
On remand, the court should make findings as to whether Michael
Adams had actual knowledge that the lease contained an option
when he agreed to extend it.
D. Changing the Property Description Requires
Reformation.
The only property description in the lease excepted
from the lease is a parcel straddling two of the four lots.
Michael Adams lives and stores personal property on this parcel.
Although the court initially concluded that the excepted property
was not included in the option, on reconsideration the court
concluded "that the portion of the property that was excluded
from the lease was not intended by the parties to be excluded
from any eventual sale of the property." The court gave a number
of reasons for this conclusion:
First, the evidence indicates that the
purpose of excluding a portion of the
property from the lease was to allow Michael
Adams the opportunity to remain on the
property temporarily until a sale of the
property finally occurred. The testimony of
the parties establishes that Michael Adams
intended to move off the property when the
property was sold and that Michael Adams was
seeking to dispose of the entire property.
The leasing of the property was intended to
be a temporary measure until the sale of the
property occurred. The appraisals that were
done by the parties at trial all valued the
entire parcel without reference to any
excluded portion. Further, even under
defendant's theory of the case that the
agreement only gave Don Adams a right of
first refusal, this right of first refusal
would have to be exercised on the entire
piece of property. Otherwise, even under
defendant's theory the problem of illegality
and violation of the Municipality's zoning
ordinances would arise. I thus conclude that
while the parties intended to exclude a
portion of the property from the lease, this
exclusion was intended to operate only while
the property was leased and was not intended
to affect the sale of the property. The sale
of the property was intended to be for the
entire parcel of property without exclusion.
By including the excepted property in the option, the
court reformed the only property description in the overall
document.35 Reformation of a contract is available when "the
words of the writing do not correctly express the meaning that
the parties agreed upon."36 In Voss v. Brooks37 we listed the
circumstances under which reformation may be appropriate:
(1) mutual mistake of fact in which the deed,
as written, does not conform to the prior
agreement of the parties; (2) fraud by one
party which causes the other party to be
under a mistaken belief as to the contents of
the deed; (3) duress by one party which
deprives the other party of any true freedom
of choice; (4) unilateral mistake by one
party and fraudulent or inequitable conduct
by the other party, especially where the
latter party knew of the other's mistake and
kept silent; and (5) mistake of law. . . .[38]
A party seeking reformation is required to prove the elements of
reformation by clear and convincing evidence.39
In the present case the only circumstance that might
justify reformation in favor of Alaska Rubber would be a mutual
mistake of fact if the property description set out in the lease
does not conform to the parties' agreement as to what was to be
sold. The court's findings on reconsideration as quoted above
suggest a mutual mistake rationale. But they are not based on a
clear and convincing standard of proof. On remand, if the court
decides that Michael Adams has lost his right to avoid the lease
and that specific performance is appropriate, the court should
explicitly address whether grounds for reformation of the
property description as to the option are present, and if so,
whether the clear and convincing evidence standard has been
satisfied.
III. CONCLUSION
A remand is necessary for additional findings as
described above. The court should hold a supplemental
evidentiary proceeding if it believes that such a proceeding
would be useful or necessary to its decision. For the reasons
stated the judgment of the superior court is VACATED and the case
is REMANDED for further proceedings in accordance with this
opinion.40
CARPENETI, Justice, with whom EASTAUGH, Justice, joins,
dissenting.
Introduction
Michael Adams offered to sell his property to Don Adams
either directly or through a lease with an option to purchase.
The parties, who are unrelated, subsequently signed a lease with
an option to purchase, although Michael Adams, who did not read
the final document, believed it contained a right of first
refusal. Near the end of the lease period, Don Adams gave notice
of his intent to exercise the lease's option to purchase.
Michael Adams insisted that the lease contained a right of first
refusal, not an option to purchase. Told that it contained an
option to purchase, he said that he would read the document. He
subsequently extended the lease with an option to purchase by
drafting and signing an extension and sending it to Don Adams.
Don Adams later notified Michael Adams again that he
intended to exercise his option to purchase. When Michael Adams
again refused to sell, insisting that the lease contained only a
right of first refusal, Don Adams brought a complaint for
specific performance. The superior court granted specific
performance.
The superior court correctly decided the case based on
the court's factual findings. Because those findings are not
clearly erroneous, I respectfully dissent.
Facts
In October 1995 Michael Adams, who owned the property
next to a lot owned by Alaska Rubber, wrote to Don Adams, the
owner of Alaska Rubber, to offer his property for lease or sale.
Michael Adams wrote, "I am writing to ask you if you are
interested in leasing the premises or purchasing it. I am ready
to go either way." He stated, "If you would be interested in
purchasing the building I would like to have until July or sooner
to move off the property." He referred to an earlier
conversation between the two, mentioned that Don Adams had
offered $300,000 for the property but stated that his price was
$320,000, and closed with these admonitions as to his seriousness
in offering the property for sale: "I am ready to dispose of the
property. . . . The property is for sale and I will seriously
consider an offer."
By August 1996 the parties had not reached an
agreement. That month Michael Adams sent another letter to Don
Adams. Noting that he sought a tax free trade, Michael Adams
wrote, "[i]t appears a short term lease with you with a purchase
option would be the way that will benefit me. Perhaps a two year
lease with an option would be suitable." In the same letter
Michael Adams stated, "Let's try for a three year lease at $3,000
per month and an opportunity to purchase the property during the
lease period." Michael Adams then sent a lease form to Don
Adams, but it did not contain an option to purchase. Instead, it
contained a right of first refusal. Under the latter provision,
Don Adams would be able to purchase the property only if Michael
Adams decided to sell.
Don Adams sent the proposed agreement to his attorney,
who changed only one section by adding a provision apportioning
the costs of an environmental investigation (which would be
necessary only in the event of a sale). The draft was sent to
Michael Adams, who approved it and returned it to Don Adams for
his signature. At this point, Don Adams noticed that the draft
did not contain the option to purchase - which he believed the
parties had earlier agreed upon - and he instructed his attorney
to delete the right of first refusal and to insert the option to
purchase. The attorney did so but, as the superior court found,
"for reasons that were not established at trial [the attorney]
failed to change the heading." Neither Don Adams nor anyone else
on his behalf brought this change to the attention of Michael
Adams, who signed the agreement without reading it, believing it
to be the same as the document he had previously sent to Don
Adams. The superior court, after hearing all of the evidence,
concluded that "this was not a deliberate attempt to mislead
Michael Adams." The court based this conclusion on the testimony
of Don Adams, who the court specifically found to be credible.
Almost three years later, as the lease was about to
expire, the office manager for Alaska Rubber, Janeece Higgins,
spoke with Michael Adams at the company picnic. She notified him
that Don Adams was interested in exercising his option to
purchase and therefore needed to initiate the environmental
investigation before winter set in. Michael Adams indicated that
he would get back to her. When he did not do so, she called him
and again stated that Don Adams had decided to exercise the
option to purchase. At this point, as the superior court found:
Michael Adams indicated to her that he did
not think he had to sell the property and
Mrs. Higgins told him she disagreed. She
told Michael Adams that while she did not
have the lease in front of her she was pretty
sure there was wording in the lease that gave
Alaska Rubber & Supply an option to purchase.
According to Mrs. Higgins, Michael Adams
indicated that he would look into it and
would get back to her.
Thereafter, [Alaska Rubber] received a
faxed lease extension from Michael Adams.
The lease extension agreement was drafted and
signed by Michael Adams and subsequently
executed by Don Adams. . . . The lease
extension agreement further indicated that
"all conditions of the original lease shall
apply without changes and shall remain in
full force and effect."
The superior court made several findings that today's
Opinion effectively ignores. The court found that Don Adams's
testimony was "entirely credible." The court found that Don
Adams's testimony was consistent with the initial correspondence
between the parties regarding the sale of the property, and that
it was consistent with the testimony of Janeece Higgins. The
court also found Higgins to be "fully credible." In addition,
the superior court found the testimony of Michael Adams not to be
credible, pointing to a number of factors, including that Michael
Adams's letters uniformly referred to a sale and that negotiation
of a purchase price in the letters is consistent with an option
to purchase and inconsistent with a right of first refusal. In
contrast to these strong findings, the Opinion merely notes that
the superior court found that Don Adams "was justified in
believing that an option to purchase was consistent with the
prior negotiations between the parties," that the trial court
"accepted Higgins's description of the events leading up to the
lease extension," and that both Don Adams and Janeece Higgins
were "justified in assuming that Michael Adams would read the
final version of the lease before signing it."
Next, the superior court unambiguously found that
"there was no longer a misunderstanding between the parties when
the lease extension was executed." While today's Opinion
mentions this finding in a long quotation of the superior court's
decision, the Opinion ignores the finding in its discussion of
whether Michael Adams affirmed the lease when he sent the lease
extension to Don Adams.
But the most critical findings of the superior court,
effectively ignored by today's Opinion in reaching its conclusion
to remand, are the following:
Michael Adams does not recall [the
follow-up telephone conversation in which he
and Higgins "discussed their differing views
concerning whether or not the contract
contained an option to purchase"] and
indicates that he sent the lease extension to
Alaska Rubber & Supply merely because the
contract was to expire in another month. He
denies reading the lease agreement before
sending the lease extension to Mrs. Higgins.
I find Mrs. Higgins['s] testimony on the
events leading to the execution of the lease
extension to be fully credible. Conversely,
I do not find Michael Adams['s] testimony on
this issue to be credible.
(Emphasis added.) In other words, the superior court found (1)
that two conversations took place between Higgins and Michael
Adams in which Higgins stated that the lease contained an option
to purchase (which Michael Adams denied)41 and (2) that Michael
Adams's testimony that he did not read the lease before signing
the lease extension was not credible.
Today's result can be upheld only if Michael Adams had
no obligation to read the lease on two occasions before signing,
first when he signed the original lease under the mistaken belief
that it contained a right of first refusal, and second when he
signed the lease extension after being told twice that it
contained an option to purchase. Because there is no reason to
conclude that the superior court was clearly erroneous in any of
its findings - indeed, I would go so far as to suggest that they
are clearly correct, although that is not the standard of review
to uphold factual findings - and because I cannot agree that a
party may indefinitely refuse to read a document and be saved
from his folly, I dissent from today's Opinion.
Law
I have no quarrel with the proposition that it may
constitute constructive fraud to change a final version of a
lease without informing the other party of the change while
leaving a misleading heading in place. But it is impossible to
accept the propositions that there was not a "knowing affirmance"
of the option to purchase by Michael Adams or that the superior
court did not find a knowing affirmance. A careful review of the
legal standard adopted by the court and the findings made by
Judge Rindner show that there was a knowing affirmance and that
Judge Rindner so found.
The court today adopts the Restatement standard. The
Restatement provides: "The power of a party to avoid a contract
for . . . misrepresentation is lost if after [the party] . . .
knows of the misrepresentation if it is fraudulent, he . . . acts
with respect to anything he has received in a manner inconsistent
with disaffirmance."42 Accordingly, if Michael Adams extended the
lease knowing that it contained an option to purchase, he lost
the power to avoid the lease.
Generally a party acts "knowingly" not only when he or
she possessed actual knowledge of a fact, but also when any
failure to possess actual knowledge was due to the party's
deliberate ignorance or willful blindness in the face of the
information presented to him or her.43 In Louis Vuitton S.A. v.
Lee,44 a trademark case requiring that the defendant's trademark
violation be "knowing," the Seventh Circuit held that "willful
blindness is knowledge enough."45 The court found that the
defendant did not know that he was selling counterfeit designer
goods because the defendant "failed to inquire further because he
was afraid of what the inquiry would yield."46 Thus, the court
found that Louis Vuitton had proved that the defendant had acted
knowingly.47
The equation of willful blindness with actual knowledge
has been found most frequently in criminal prosecutions, an area
where the law has historically been extremely solicitous of the
rights of the defendant. Interpreting the statutory definition
of "knowingly," Alaska courts have held that "one who remains
deliberately ignorant of an illegal activity" is necessarily
"aware of a substantial probability of its existence," and so,
acts "knowingly."48
Federal law is to the same effect. In U.S. v.
Picciandra49 the court held that a jury was properly instructed to
consider the willful blindness of a defendant who claimed a lack
of knowledge as part of his defense, where the facts suggested
that he engaged in a conscious course of deliberate ignorance.50
The Ninth Circuit has similarly held that a defendant's
deliberate ignorance of a fact cannot serve as a shield against
prosecution under statutes requiring actual knowledge. In U.S.
v. Jewell51 the court agreed that " `[t]he rule that willful
blindness is equivalent to knowledge is essential.' "52 The court
cautioned that this rule did not adopt a negligence standard,
whereby knowledge is imputed to a defendant if a reasonable
person would have known of the fact in that situation. Rather,
willful blindness is limited to circumstances where the party's
studied ignorance is a result of not wanting to confirm his or
her suspicion of a fact he or she knows is highly likely to be
true.53 The Ninth Circuit rule is that willful blindness may be
equated to actual knowledge in cases where the facts point to the
defendant's deliberate ignorance, where it can be shown that the
defendant was aware of a high probability of the existence of the
fact in question, and the defendant cannot show that he actually
believed that the fact did not exist.54 The Fifth and Eleventh
Circuits have adopted similar reasoning.55
Examination of the testimony at trial in the present
case and Judge Rindner's findings concerning the evidence leads
inescapably to the conclusion that Michael Adams either actually
knew that the lease contained an option to purchase or was
willfully blind as to the lease's contents.
As to actual knowledge, at trial Michael Adams denied
that he had spoken with Janeece Higgins about Don Adams wanting
to exercise the option to purchase, denied that he had spoken to
her about the environmental investigation, denied that he had
spoken with her about a lease extension, and even denied that he
had read the lease before sending the lease extension. He was
asked, "Prior to sending Don Adams and Janeece Higgins the lease
extension . . . you read the lease agreement, didn't you?" He
responded, "I did not." Judge Rindner found Michael Adams's
testimony concerning the events leading to the lease extension to
be not credible. Although much of Michael's testimony focused on
his conversation with Janeece Higgins, the scope of the finding
that Michael Adams was not credible specifically includes his
testimony at trial that he did not read the lease agreement
before sending out the extension. Judge Rindner's disbelief of
Michael Adams's statement that he did not read the lease before
sending the extension, in conjunction with his acceptance of
Higgins's testimony that she had discussed the matter twice with
Michael Adams,56 is the equivalent of a finding that Michael Adams
had actual knowledge of the lease's terms. Indeed, Judge Rindner
specifically found that "there was no longer a misunderstanding
between the parties when the lease extension was executed."
As to willful blindness, the superior court had
abundant evidence to support its conclusion that, at the least,
Michael Adams kept himself willfully blind of the contents of the
lease. That evidence included that:
C The lease does contain an option to purchase.
No party disputes that.
C Janeece Higgins testified that she told
Michael Adams in person that the lease contained an
option to purchase. The superior court found her to be
credible on this point.
C Michael Adams testified that he did not
remember being told that the lease contained an option
to purchase. The superior court found him not to be
credible on this point.
C Janeece Higgins testified that she called and
reiterated that the lease contained an option to
purchase. The superior court found this testimony to
be credible.
C Michael Adams testified that he did not
recall the telephone call. The superior court found
this testimony not to be credible.
C Michael Adams prepared, signed, and sent to
Don Adams an extension of the lease that provided that
"[a]ll conditions of the original lease shall apply
without changes."
These facts, found by the superior court and not
rejected by today's Opinion as clearly erroneous - nor could they
be - firmly establish that Michael Adams at the least kept
himself deliberately ignorant of the contents of the lease and
was willfully blind to the fact that it contained an option to
purchase.
Conclusion
Michael Adams proposed to sell his property under a
lease with an option to purchase. He twice signed documents to
that effect. Yet the court today remands for a determination, in
effect, of whether he ever read the documents he signed, even
after he promised to check the lease when a dispute arose as to
what it contained. (Indeed, this is not the first time that
Michael Adams has been before this court arguing that he was not
required to do what he had previously agreed to do: sell property
that he had leased with an option to purchase.57) Judge Rindner
properly found that Michael Adams knowingly affirmed the
contract. Judge Rindner was correct, and I would affirm his
decision. Michael Adams should not escape the obligation that he
had originally suggested and twice agreed to. For these reasons,
I respectfully dissent.
_______________________________
1See note 6 infra.
2The premises are described as follows in the lease:
1. Premises: Lessor shall let to
Lessee and Lessee shall rent from the Lessor
that certain property together with all
improvements thereon including an 1,800
square foot building located on the property
together with the real property as described
in Exhibit "A" which is comprised of
approximately Lots 19, 20, and 21 Meredith
Subdivision and Parcel 14, T 13N R3W Sec 32
S1/2NW1/4: SW 1/4 less a portion of land
indicated by a dashline shown in Exhibit A to
be used by the Lessor for his exclusive use
which is comprised of a portion of lot 19
currently utilized by Lessor as his residence
which comprises approximately 50 by 50 feet
located at the Eastern portion of Lot 19 and
a portion of the Northeast corner of Parcel
14, approximately 50 feet by 75 feet where
Lessor is currently storing a quonset hut,
corner containers and a well. It is agreed
that Lessor reserves access to the property
reserved by Lessor as set forth in this
paragraph and that Lessee shall not interfere
with Lessor's ingress and ingress to Lessor's
reserved portion of the property. The 1800
square foot building and land described above
(excluding the portion reserved for Lessor's
use) are referred to throughout this lease as
"Premises."
3In relevant part the August 2, 1996 letter stated:
I would like to make a decision before
the end of the month and it appears I will
have to speak only to you. In the event you
will be involved with the property you will
have it for your use and make any arrangement
with others according to your wishes. I have
been ill and lost a lot of time and I am
trying to put my future in prospective and
get away from real estate. What would
benefit me greatly would be some way I can
reinvest from the sale into a tax free trade.
It appears a short term lease with you with a
purchase option would be the way that will
benefit me. Perhaps a two year lease with an
option would be suitable. The lease payments
would be 3000.00 per month . . . Ken with
unique welding or machine shop would be
willing to pay half of that and my tenant who
occupies the building on the property is also
willing to rent. Of the 3000 per month I
will pay the land taxes which brings your
outlet to 2500 or 2600 per month. If you
exercise an option then in that event I will
furnish you with an environmental phase two
which you asked for. I had some one look
over the premises and he commented that the
property is relatively clean.
4The right-of-first-refusal clause in the first draft read as
follows:
35. Right of First Refusal the Lessor-
owner may place the entire Premises on the
Real Estate Market for sale and if the Lessor-
seller finds a buyer, the Lessee shall then
have the right of refusal to buy at those
terms. In the event the purchaser demands
Phase two environmental assessment the cost
shall be shared equally on a non-refundable
charge to the prospective buyer.
5The right of first refusal in the third draft reads as follows:
39. Right of First Refusal: Lessor
agrees to give Lessee a right of first
refusal to purchase the subject property
during the term of this lease. This right of
first refusal shall not be enforceable unless
Lessor at his sole discretion elects to sell
the property during the lease term. In such
event it is agreed the sale price shall be
$300,000.00 net of any commissions and
closing costs. If Lessee does not agree to
sign an earnest money agreement within 30
days of receiving written notice of Lessor's
desire to sell for $300,000.00 as set forth
herein, Lessor shall be allowed to sell the
property to anyone at market price. In the
event Lessor sells to a third party, Lessor
shall give Lessee 30 days prior written
notice of the date Lessor intends to complete
the sale of the property. Upon closing and
completion of the sale, this lease and
Lessee's rights hereunder shall become null
and void and this lease shall be terminated
except for any liability of Lessee or Lessor
arising from any breach of any provision
herein. The earnest money agreement shall
require $30,000.00 as non-refundable earnest
money and balance of purchase price of
$270,000.00 to be paid within 90 days after
the date set forth in the earnest money
agreement. In the event an environmental
phase two is required at the time of sale,
the cost is to be shared equally by both
parties, the parties being buyer and seller.
In the event the property is not purchased
due to an unfavorable report, each party
shall also share equally in the cost of the
report.
6Clause 39 of the draft that became the lease reads as follows:
39. Right of First Refusal: Lessor
hereby grants to Lessee an option to purchase
the subject property during the term of this
lease. The Lessee, at his sole discretion,
shall have the option to elect to purchase
the property at any time during the lease
term. In such event, it is agreed the sale
price shall be $300,000.00 net of any
commissions and closing costs. Lessee shall
sign an earnest money agreement within 30
days of exercising his option to purchase by
providing written notice of Lessee's desire
to purchase for $300,000.00 as set forth
herein. In the event Lessee fails to
exercise his option to purchase within the
Lease term, or fails to execute the earnest
money agreement as provided herein, Lessor
should be allowed to sell the property to
anyone at market price. In the event Lessee
fails to execute the earnest money agreement
within 30 days of providing written notice of
intent to purchase, Lessor may sell to a
third party, in which event Lessor shall give
Lessee 30 days prior written notice of the
date Lessor intends to complete the sale of
the property. Upon closing and completion of
the sale, this lease and Lessee's rights
hereunder shall become null and void and this
lease shall be terminated except for any
liability of Lessee or Lessor arising from
any breach of any provision herein. The
earnest money agreement shall require
$30,000.00 as non-refundable earnest money
and balance of purchase price of $270,000.00
to be paid within 90 days after the date set
forth in the earnest money agreement. In the
event an environmental phase two is required
at the time of sale, the cost is to be shared
equally by both parties, the parties being
buyer and seller. In the event the property
is not purchased due to an unfavorable
report, each party shall also share equally
in the cost of the report.
7The lease extension provides as follows:
This letter is in reference to that
certain lease agreement with the above
parties dated 1 October 1996, Lease premises
being 5773 Old Seward Highway and further
described in the original lease between the
parties.
Please be advised that your lease has
been extended for an additional two years
ending 1 October 2001. All conditions of the
original lease shall apply without changes
and shall remain in full force and effect.
8Rockstad v. Global Finance & Inv. Co., 41 P.3d 583, 586 (Alaska
2002).
9Id.
10Id.; Alaska R. Civ. P. 52(a).
11Dingeman v. Dingeman, 865 P.2d 94, 96 (Alaska 1993).
12949 P.2d 498, 500 (Alaska 1997).
13Id. at 499.
14Id. at 500.
15Id. at 499.
16Id.
17Id.
18Id.
19Id.
20Id.
21Id. at 499-500.
22Id. at 501.
23Id. at 500.
24Id.
25Supra at page 9.
26In re Arbuckle's Estate, 220 P.2d 950, 954-55 (Cal. 1950).
27Knight v. Day, 36 S.W.3d 300, 303 (Ark. 2001); see also Patel v.
OMH Med. Ctr., Inc., 987 P.2d 1185, 1199 (Okla. 1999).
28Pierce, 949 P.2d at 500.
29Restatement (Second) of Contracts 159 (1981).
30Id. at 162.
31Id. at 163, 164.
32Id. at 164, cmt. a: "Even if the contract is voidable,
exercise of the power of avoidance is subject to the limitations
stated in Chapter 16 on remedies."
33Id. at 380, cmt. b. The black letter statement of 380(2) is
as follows:
The power of a party to avoid a contract
for mistake or misrepresentation is lost if
after he knows or has reason to know of the
mistake or of the misrepresentation if it is
non-fraudulent or knows of the
misrepresentation if it is fraudulent, he
manifests to the other party his intention to
affirm it or acts with respect to anything
that he has received in a manner inconsistent
with disaffirmance.
34Id. at 380, cmt. a.
35The court did so explicitly in the final judgment by deleting
the language in the lease describing the excepted property.
36Arthur L. Corbin, 7 Corbin on Contracts 28.45, at 281 (2002).
37907 P.2d 465 (Alaska 1995).
38Id. at 468.
39Id.
40Michael Adams has made a number of other contentions in
connection with the remedy of specific performance and the
inclusion of the excepted property in the option. We have
reviewed these contentions and find them to be without merit.
41See infra n.16.
42Restatement (Second) of Contracts 380(2).
43See Tal S. Benschar et al., Proving Willfulness in Trademark
Counterfeiting Cases, 27 Colum.-VLA J. L. & Arts 121, 123-25
(2003); Ira P. Robbins, The Ostrich Instruction: Deliberate
Ignorance as a Criminal Mens Rea, 81 J. Crim. L. & Criminology
191, 192 (1990).
44875 F.2d 584 (7th Cir. 1989).
45Id. at 590.
46Id.
47Id.
48Dawson v. State, 894 P.2d 672, 678 (Alaska App. 1995).
49788 F.2d 39 (1st Cir. 1986).
50Id. at 46.
51532 F.2d 697 (9th Cir. 1976).
52Id. at 700 (quoting G. Williams, Criminal Law: The General Part,
57 at 157 (2d ed. 1961)).
53Id. at 700 n.7.
54See U.S. v. Alvarado, 838 F.2d 311, 314 (9th Cir. 1988); U.S. v.
Murrieta-Bejarano, 552 F.2d 1323, 1325 (9th Cir. 1977).
55U.S. v. Batencort, 592 F.2d 916, 918 (5th Cir. 1979); U.S. v.
Aleman, 728 F.2d 492, 494 (11th Cir. 1984).
56Higgins testified that she twice had conversations in which she
stated that the lease contained an option to purchase which Don
Adams wished to exercise, and that Michael Adams expressed
disbelief that the lease contained such an option.
57Adams v. Waddell, 543 P.2d 215 (Alaska 1975).
