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Industrial Commercial Electric, Inc. v. McLees (11/12/2004) sp-5843
Industrial Commercial Electric, Inc. v. McLees (11/12/2004) sp-5843
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
INDUSTRIAL COMMERCIAL )
ELECTRIC, INC., an Alaska ) Supreme Court No. S-10447
Corporation, and MICHAEL W. )
HANNAMAN, ) Superior Court No. 3AN-00-10941 CI
)
Appellants, ) O P I N I O N
)
v. ) [No. 5843 - November 12, 2004]
)
RICK L. McLEES, individually, )
RICK L. McLEES d/b/a RICKY )
McLEES ELECTRIC, JANET )
McLEES, McLEES ELECTRIC, LLC, )
and MICHAEL LANDOWSKI, )
)
Appellees. )
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Mark Rindner, Judge.
Appearances: Verne E. Rupright, Rupright &
Foster, LLC, Wasilla, for Appellants. Erling
T. Johansen, Davison & Davison, Inc.,
Anchorage, for Appellees.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
EASTAUGH, Justice.
BRYNER, Chief Justice, with whom CARPENETI,
Justice, joins, dissenting.
I. INTRODUCTION
After Industrial Commercial Electric, Inc. (ICE) and
Michael Hannaman filed suit against a former employee and others,
the superior court dismissed their suit on summary judgment,
holding it was barred by releases they signed before filing suit.
But the validity of the releases raises genuine issues of
material fact, because there are unresolved factual disputes
about whether the employee fraudulently misrepresented facts
and whether ICE and Hannaman were induced to sign the releases in
justifiable reliance on those alleged misrepresentations. We
therefore reverse and remand for further proceedings.
II. FACTS AND PROCEEDINGS
Michael Hannaman is president and majority shareholder
of ICE. In mid-1998 he had a dispute with an ICE employee, Rick
McLees, about McLeess relationship with ICE.1
The employment relationship had begun to erode in the
summer of 1998 when Hannaman suspected that McLees and his wife,
Janet McLees, had taken some of ICEs corporate files without
Hannamans permission. The McLeeses possessed most of ICEs
accounts receivable files, original contract files, and bank
statements. Hannaman contacted Janet McLees and asked the
McLeeses to return the documents. Although Janet McLees admitted
that she and her husband had ICEs files at their home, she did
not comply with Hannamans request. In an attempt to regain
control of his company, Hannaman removed Rick McLees from the
corporate checking account and changed the lock on the corporate
mailbox.
Rick McLees resigned from his positions as an employee,
electrical administrator, and corporate officer of ICE in October
1998.2 Hannaman and Rick and Janet McLees then entered into an
oral agreement, which ended Rick McLeess employment with ICE.
Per the oral agreement, the McLeeses promised to return all of
ICEs bank records and contract and accounts receivable files. In
exchange, Hannaman also agreed to compensate Rick McLees upon
completion of two outstanding projects, which the parties
referred to as the Tesoro projects. The parties agreed that upon
completion of the Tesoro projects, the McLeeses were to return
all property purchased or taken to Fairbanks for the Tesoro
projects and contact [Hannaman] through their attorneys
immediately upon returning to Anchorage . . . at which time
[they] would together divide the contents of the [company] van.
The parties also agreed that the McLees were to return everything
else belonging to [Hannaman] or ICE, Inc. in their possession
and/or control.
In an affidavit he later executed, Hannaman stated that
based on Rick and Janet McLees representations and promises . . .
[he] agreed to settle with the McLees. The parties agreed to
memorialize their oral agreement in a formal settlement agreement
and mutual release.
Per the oral agreement, Hannaman went to the McLeeses
home on October 19, 1998 to inspect the van used to transport
equipment for the Tesoro projects and to collect any tools
belonging to ICE. Although Hannaman recovered some of his tools
from the McLeeses home, Rick McLees refused to let Hannaman
inspect the companys utility trailer or the McLeeses padlocked
storage shed. When Hannaman returned to pick up additional
materials, Rick McLees gave Hannaman additional tools,
representing [that these were] the only materials left over from
the Tesoro projects.
On November 10 Hannaman, ICE, Rick and Janet McLees,
and their attorneys met for the purpose of entering into a twenty-
nine page written final settlement agreement and mutual releases
memorializing their prior oral agreement. The agreement recited
as consideration fulfillment of various undertakings the
signatories were to accomplish. These provisions required Rick
McLees to do certain things, including some in the future (such
as completing work on specific ICE contracts with third persons).
The provisions also required Rick McLees to do certain things by
November 10, including returning all corporate records, mail, job
files, [and] project records for specified projects; furnishing
information to allow ICE to bill for change orders or extra work
on those projects; and returning . . . all other corporate
property. The written agreement contained broadly worded mutual
releases. The agreement also stated that Rick McLees, Hannaman,
and ICE released each other from any potential claims which were
known, or which may be subsequently discovered and which are not
yet known to the parties at this time.
Paragraph 29 of the written agreement provided that
Hannaman, individually and as president of ICE,
acknowledges that Rick L. McLees has
tendered all performances due under this
settlement agreement and mutual release; and
that Michael Hannaman and Industrial
Commercial Electric, Inc. have actually
received full, complete, and satisfactory
performance. . . . [T]o the extent that Rick
L. McLees has not tendered full and
satisfactory performance of all such
obligations, Michael Hannaman and Industrial
Commercial Electric, Inc. hereby waive and
release Rick L. McLees from any further
obligation.
The agreement stated that it represented the parties entire
agreement and superseded any and all prior and contemporaneous
agreements, promises, representations, warranties, contracts and
covenants, oral or written, relating to such subject matter. A
second mutual release released Janet McLees, Hannaman, and ICE
from any present or future claims any party may have had against
the others. ICE also executed a bill of sale to Rick McLees for
the company van, a laptop computer, a utility trailer, and
miscellaneous tools.
Before Hannaman signed the releases for himself and ICE
at the November 10 meeting, Hannamans attorney, Grant Watts,
asked the McLeeses whether they had any corporate property to
return to ICE and whether they had any corporate property
remaining at their home or in their garage or shed. According to
Hannamans February 6, 2001 affidavit, the McLeeses said they did
not have anything else to return except a wire cart and a rug.
Hannamans affidavit stated that Watts then asked the McLeeses
whether they had any other files belonging to ICE in their
possession. According to Hannamans affidavit, the McLeeses
responded that the two boxes they brought with them to the
meeting were the only files they still possessed. Hannamans
affidavit stated that the McLeeses attorney, Paul Crowley, also
asked his clients if they had anything else to return. According
to Hannamans affidavit, the McLeeses responded that they could
not think of anything else. In an affidavit he executed January
9, 2001, Watts attested that, I advised Mr. Crowley (in the
presence of Rick McLees and Janet McLees) that ICE and Mr.
Hannaman were relying upon the representations on the part of
Rick and Janet McLees in regards to signing the [settlement
agreement and mutual releases].
The parties executed the settlement documents,
apparently after these conversations took place. Hannaman later
attested in his affidavit that as of the close of business on
November 10, the McLeeses had not returned all of Hannaman and
ICEs property that they had in their possession, including
contract and change order files for the Sisters Island project.
Rick McLees had only submitted one bill for the Sisters Island
project to Hannaman and ICE. Hannamans affidavit also stated
that the McLeeses also had not returned itemized invoices for
tools that Rick McLees had purchased on ICEs account and did not
disclose or return seven other items of equipment.
ICE and Hannaman, in his individual capacity, filed a
complaint in superior court in October 2000 against (1) Rick
McLees alleging breach of fiduciary duty, breach of contract, and
interference with contractual relationship; (2) Rick McLees and
Janet McLees alleging misrepresentation, fraud, coercion,
interference with prospective economic relationship, and
emotional distress; (3) Michael Landowski, an apprentice
electrician, alleging breach of the duty of good faith and fair
dealing and emotional distress; and (4) Crowley & Hiemer, the law
firm that represented the McLeeses, and lawyers Paul Crowley and
Linda J. Hiemer individually, alleging economic coercion and
emotional distress.
The McLees defendants (Rick McLees, Rick McLees d/b/a
Ricky McLees Electric, Janet McLees, McLees Electric, LLC, and
Michael Landowski) filed counterclaims against Hannaman and ICE
for, among other things, breach of contract, quantum meruit,
interference with contractual relations, tortious business
destruction, business or professional defamation, punitive
damages, and abuse of process.
The McLees defendants moved for summary judgment,
arguing that all of plaintiffs claims were barred by the
settlement agreement and mutual releases. The Crowley defendants
(Paul Crowley, Linda Hiemer, and Crowley & Hiemer, LLC) moved for
summary judgment on Hannaman and ICEs economic coercion claim.
In opposing these motions, Hannaman submitted the previously
discussed affidavits he and Grant Watts executed in 2001, and the
affidavit of Dean Pratt, a former ICE employee.
The superior court granted summary judgment to all
defendants, and dismissed all of ICE and Hannamans claims. The
court held that none of the defendants acted coercively or
fraudulently. The court also held that if the McLeeses had
misrepresented facts, their misrepresentations were not material
to Hannaman and ICEs decision to enter into the settlement
agreement and mutual releases. Finally, the court concluded that
the settlement agreement released all defendants from the claims
brought by ICE and Hannaman. The court observed that [t]hese
agreements are very extensive and this court finds that the
parties intended them to bar any further litigation over the
parties business relationship.
Hannaman and ICE appeal the summary judgment.3
III. DISCUSSION
A. Standard of Review
We review grants of summary judgment de novo and will
uphold a grant of summary judgment when the record shows there
are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law.4 A party opposing
summary judgment need not prove that it will prevail at trial,
but only that there is a triable issue of fact.5 We draw all
reasonable inferences of fact in favor of the non-moving party,
applying our independent judgment to any questions of law and
adopting the rule of law most persuasive in light of precedent,
reason, and policy.6
B. The Settlement Agreement and Mutual Releases Will Not Bar
Hannaman and ICEs Claims if the Agreement and Releases Are
Invalid.
Hannaman argues that the settlement agreement and
mutual releases do not bar his claims against the McLeeses.7 He
argues that the releases, like other contracts, may be avoided if
he entered into them as a result of fraud, misrepresentation, or
duress attributable to the McLeeses. Hannaman contends that
because he is challenging the validity of the releases, the
language and scope of the releases is irrelevant.
The McLeeses argue that all of Hannamans claims are
released by the settlement agreement and mutual releases. The
McLeeses contend that it was the intent of the parties when they
signed the agreement and releases to dispose of all those claims
whether known or unknown and that the parties had washed their
hands of their relationship.8
We have explained that a valid release of all claims
arising under a contract will bar any subsequent claims based on
that contract.9 We have given effect to mutual releases, even
when parties did not specifically list all possible claims.10 The
McLeeses rely on Martech Construction Co. v. Ogden Environmental
Services, Inc., in which we held that the broad language of a
release precluded a subcontractors claim against a contractor for
post-settlement conduct.11 We stated, [t]he broad language used
[in the release] implies that claims not specifically
contemplated are settled.12
Martech, however, dealt with the scope of the release
and not the validity of the contract containing the release. We
have held that settlement agreements and releases, like any other
contracts, are susceptible to attack for mistake, fraud,
misrepresentation, and duress.13 In Old Harbor Native Corp. v.
Afognak Joint Venture, we held that a settlement agreement and
release did not preclude misrepresentation and mutual mistake
claims.14 We distinguished Martech by observing that claims for
fraud, misrepresentation, and mistake challenge the validity and
effectiveness of the release agreement, not its scope the issue
that Martech addresses.15
Likewise, the settlement agreement and mutual releases
in this case would not necessarily bar Hannamans claims against
the McLeeses if the contracts containing the releases are held to
be invalid because Hannaman was induced to enter into them by
fraud, misrepresentation, or duress attributable to the McLeeses.
Although the agreements provide that Hannaman acknowledged that
Rick L. McLees has tendered all performances due under this
Settlement Agreement and that Hannaman release[d] Rick L. McLees
from any further obligation and also released Janet McLees from
all claims and causes of action, Hannamans claims challenge the
manner in which the releases were obtained, not the scope of the
contracts provisions.
C. There Are Genuine Issues of Material Fact About Whether the
McLeeses Fraudulently Induced Hannaman To Enter into the
Settlement Agreement and Mutual Releases.
Hannaman argues that the superior court erred in
granting summary judgment to the McLeeses because he claims that
there are genuine issues of material fact about whether the
McLeeses made fraudulent statements to induce him to sign the
settlement agreement and mutual releases. To support this
assertion, Hannaman refers us to his affidavit and to the
affidavits of Dean Pratt and Grant Watts.
We must first consider whether the affidavits contain
admissible evidence for the purposes of satisfying Alaska Civil
Rule 56(e). The McLeeses argue that the three affidavits are
inadmissible because, they claim, the affidavits contain hearsay
and do not demonstrate competency to testify.16 We reject this
argument. The affiants each described events which they
witnessed. Most of the conversations they described were with
the McLeeses individually or with the McLeeses attorney. The
McLeeses statements to Hannaman, Watts, or Pratt would be
admissible as non-hearsay admissions by party opponents under
Alaska Rule of Evidence 801(d)(2). The McLeeses attorneys
statements would also be nonhearsay under that rule if he spoke
for the McLeeses, or under Alaska Rule of Evidence 801(d)(1) if
he was available to testify to his own prior statements at trial.17
We have recognized that a party induced by a fraudulent
or material misrepresentation to enter into a contract may be
able to avoid the contract.18 Restatement (Second) of Contracts
164 (1981) states that a contract is voidable [i]f a partys
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. This statement is consistent
with what we have said in the past about this ground for avoiding
a contract.19 Per section 164 and our case law, to prove that the
McLeeses fraudulently induced him to enter into the releases,
Hannaman must show that (1) there was a misrepresentation; (2)
the misrepresentation was fraudulent; (3) the misrepresentation
induced Hannaman to enter into the contract; and (4) Hannamans
reliance on the misrepresentation was justified.20 Viewing the
evidence in a light most favorable to Hannaman, there are genuine
issues of material fact about whether the McLeeses made
fraudulent misrepresentations during settlement agreement
discussions and thereby induced Hannaman to release all potential
claims.
Issue of Misrepresentation. Before the parties signed
the settlement agreement and releases on November 10, 1998, the
McLeeses represented to Hannaman and his attorney that they had
returned all of ICEs property, including tools and corporate
files, except for a wire cart and a rug, which they promised to
return. The McLeeses further represented that they did not have
any of ICEs or Hannamans property in their home, garage, or shed.
Hannaman produced evidence, however, permitting an
inference that the McLeeses falsely misrepresented that they had
returned all of ICEs and Hannamans property. The affidavit of
Dean Pratt suggests that the McLeeses may have been harboring
ICEs property as of October 1998. According to Pratts affidavit,
he and Michael Landowski, another crew member on ICEs projects
for Tesoro in Fairbanks, took tools and equipment that were
designated for those jobs to the McLeeses Anchorage home on
October 2, 1998. Pratt stated that at Rick McLeess request,
Pratt and Landowski stash[ed] the tools and equipment at the
McLeeses home. While Pratt was unloading materials, he noticed
that the McLeeses garage and storage shed were filled with
electrical tools and equipment. Pratt attested that Rick McLees
told me the tools and materials we were unloading would not be
needed to complete the Tesoro projects . . . [and that Rick
McLees] didnt want Mike Hannaman to know that he was taking stuff
and hiding it. Pratt further attested that when he, Landowski,
and Rick McLees returned to Fairbanks, McLees told Mike Landowski
and me that he didnt want Mike Hannaman to know that [McLees] had
to reorder materials.
In his own affidavit, Hannaman stated that per the
October 2 oral agreement he went to the McLeeses home to divide
the tools used for one of the Tesoro projects. Although Hannaman
recovered some of ICEs tools from Rick McLees, McLees refused to
let Hannaman inspect the companys utility trailer. When Hannaman
returned to pick up additional materials from the Tesoro
projects, the McLeeses garage door was closed and their storage
shed was padlocked. Rick McLees gave Hannaman a few other tools
and materials, representing [that these were] the only materials
left over from the Tesoro projects.
Although the McLeeses returned some items to Hannaman,
there is a factual dispute over whether they still possessed some
of ICEs property as of November 10, 1998. For instance, Pratt
attested that he unloaded approximately twenty to twenty-five
spools of electrical wire, many of which were full spools, at the
McLeeses home. Hannaman attested in his affidavit that as of
November 1998, the McLeeses had not returned full spools of
electrical wire, among other things.
The McLeeses also maintained at the November 10 meeting
when the parties signed the releases that they had returned all
of ICEs corporate files. Hannaman, however, later attested in
his affidavit that he had not received some of ICEs corporate
documents that the McLeeses had in their possession, including a
contract and change order file for the Sisters Island contract
and itemized invoices for tools that Rick McLees had purchased on
ICEs account. Therefore, drawing all inferences in favor of
Hannaman, there is a genuine issue of material fact about whether
the McLeeses November 10 representation that they had returned
all of ICEs corporate property was false.
Issue of Fraudulent Misrepresentation. Evidence in the
record also permits an inference that the McLeeses alleged
misrepresentation was fraudulent.21 A misrepresentation is
fraudulent if it is consciously false and intended to mislead
another.22 There is evidence permitting an inference that the
McLeeses knew that their representation was false and that they
intended to induce Hannaman into signing the releases. Rick
McLees allegedly personally ordered Pratt and Landowski to store
the tools and equipment from the Tesoro jobs at his home in
October 1998 without Hannamans knowledge. Rick McLeess apparent
awareness that the property did not belong to him is evidenced by
his alleged statement to Pratt that he did not want Hannaman to
know that he was taking equipment and hiding it at his home or
that he was reordering equipment on ICEs account to replace the
tools he had taken. Rick McLeess subsequent refusal to let
Hannaman inspect the companys trailer or the McLeeses garage and
storage shed for any ICE property also permits a reasonable
inference that he may have been knowingly hiding equipment from
Hannaman. There was therefore evidence permitting an inference
that as of November 10, Rick McLees knew that his representation
that he had returned all property to Hannaman was false.
The evidence also permits an inference that the
McLeeses intended Hannaman to enter into the contracts in
reliance on their representations. Because Hannaman had been
trying to recover ICEs property from the McLeeses since
approximately July 1998, the McLeeses were on sufficient notice
that the return of ICEs property was one of Hannamans priorities.
Rick McLeess alleged concealment of ICEs tools at his house in
October also suggests that he intended Hannaman to rely on his
representation that he had returned all of ICEs property.
Issue of Inducement. To avoid the releases, Hannaman
must show that the McLeeses alleged misrepresentations induced
him to enter into the releases.23 Hannaman maintained in his
affidavit that he agreed to settle with the McLeeses in part
because they promised to return his property. When the McLeeses
represented to Hannaman that they had returned all of ICEs
property before Hannaman and ICE signed the releases, Hannamans
attorney told the McLeeses attorney, Paul Crowley, in the
presence of Rick and Janet McLees that ICE and Mr. Hannaman were
relying upon the representations on the part of Rick and Janet
McLees, in regards to signing the [settlement agreement and
mutual releases]. Based on this evidence, we can infer that the
McLeeses representations induced Hannaman to enter into the
releases.
Issue of Justifiable Reliance. Evidence also permits
an inference that Hannaman was justified in relying on the
McLeeses representations. Because Rick McLees refused to let
Hannaman search his garage or shed or the company trailer,
Hannaman was unable to conduct an independent search of the
McLeeses home for ICEs tools and files. There is evidence that
the McLeeses reassured Hannaman in October and again on November
10, in the presence of the parties attorneys, that they had
returned everything belonging to ICE and Hannaman. Before
signing the agreement and releases, Hannaman was unable to
independently confirm the veracity of their representations.
Some courts appear to have held as a matter of law that
releasing parties were not justified in relying on
representations of the released party made at the time of
settlement, at least when the controversy being settled itself
alleged fraud or dishonesty.24 There is authority to the
contrary. For example, in Sims v. Tezak, the Illinois Court of
Appeals, applying Illinois law, held that justifiable reliance is
always a question of fact for the jury, even if the parties who
executed a broad release relied on representations of a party it
had reason to mistrust.25 In support, it quoted a federal case
applying Illinois law:
Illinois law has long held that, where the
representation is made as to a fact actually
or presumptively within the speakers
knowledge, and contains nothing so improbable
as to cause doubt of its truth, the hearer
may rely upon it without investigation, even
though the means of investigation were within
the reach of the injured party and the
parties occupied adversary positions toward
one another. [T]he fraud-feasor will not be
heard to say that he is a person unworthy of
belief, and that plaintiff was negligent in
trusting him, and was cheated through his own
credulity.[26]
We think it better not to hold as a matter of law that
a releasing party is never justified in relying on fact
representations of a released party during settlement of claims
which accused the released party of fraud or dishonesty. Such a
rule would effectively encourage misrepresentations during
settlement negotiations in such cases and would potentially chill
their settlement.
It would also potentially fail to distinguish between
disputes which exclusively involve claims of fraud and
dishonesty, and those in which such claims are ancillary or
alternative or are the product of overheated pleading. Whether
reliance is justified in a given case seems to us more likely to
turn on the course of dealings between the parties before and
during the dispute. And in this case, it is relevant that the
settlement agreement potentially required Rick McLees to do
things following the settlement (such as perform punch-list and
remedial work on several projects, provide as-built drawings and
other things, and provide certain documentation by December 30,
1998). This implies that, notwithstanding claims of fraud or
dishonesty, there was sufficient trust that the parties thought
they could rely on McLeess future performance of these
undertakings.
We conclude that Hannaman is not foreclosed from
proving the element of justifiable reliance.
We therefore conclude that there are genuine issues of
material fact about whether the McLeeses fraudulently
misrepresented facts and thereby induced Hannaman to enter into
the settlement agreement and mutual releases, and about whether
Hannamans reliance was justified. We consequently reverse the
grant of summary judgment.
Hannaman also argues that the superior court erred in
holding that the McLeeses alleged misrepresentations were not
material.27 A misrepresentation is material if it would likely
induce a reasonable person to manifest his assent.28 Because we
have concluded there are genuine triable issues whether the
McLeeses fraudulently induced Hannaman to enter into the
releases, we do not need to decide whether the McLeeses
misrepresentations were material or whether there are genuine
factual disputes about their materiality.
Hannaman alternatively also argues that the release was
the product of economic coercion. We conclude that Hannaman did
not present sufficient evidence to create a genuine issue of
material fact with respect to his economic coercion claim.
IV. CONCLUSION
We REVERSE the order granting summary judgment against
ICE and Hannaman, and remand for further proceedings.
BRYNER, Justice, with whom CARPENETI, Justice, joins, dissenting.
The crux of Hannamans attempt to avoid his settlement
is his assertion that the McLeeses fraudulently misrepresented
their compliance with the settlements requirements and induced
him to sign through their fraud. In rejecting this claim on
summary judgment, the superior court found that the record failed
to support it. I would affirm the superior courts ruling.
As todays opinion acknowledges, Hannamans claim of
fraudulent inducement required him to prove four separate
elements: misrepresentation, fraud (or at least materiality),
inducement, and justified reliance.1 To withstand the McLeeses
motion for summary judgment, then, Hannaman needed to offer at
least some evidence supporting each of these elements. Although
the record in this case might be construed to meet Hannamans
threshold burden as to the first three elements, I fail to see
how it provides any glimmer of hope on the final element:
justified reliance.
The undisputed facts before the superior court
establish that over the summer of 1998 Hannaman became embroiled
in a dispute in which he accused the McLeeses of participating in
an ongoing course of fraudulent conduct by concealing and
converting his corporate assets ICEs records, its equipment, and
its work. The McLeeses adamantly denied any wrongdoing,
repeatedly asserted that they had no significant corporate
property, and consistently refused to cooperate with Hannamans
demands for information. Frustrated by the McLeeses denial and
resistance, Hannaman eventually negotiated an oral agreement to
settle his claims on condition that the McLeeses return whatever
corporate records and property they had in their possession. The
following month, after Hannaman had an opportunity to ensure that
the McLeeses met these conditions, the parties formalized their
arrangement by signing a detailed settlement contract that
mutually released all past and future foreseeable claims. As
part of the written settlement contract, Hannaman expressly
acknowledged that the McLeeses had performed all their
obligations under the agreement. Beyond that, the contract
disavowed Hannamans reliance on representations by the McLeeses
and stated that Hannaman had been given ample time to confirm the
McLeeses compliance. Moreover, the contract sought to avert any
future allegations that the McLeeses had misrepresented their
compliance with the agreement, unequivocally requiring Hannaman
to bear the risk of noncompliance: [T]o the extent that Rick L.
McLees has not tendered full and satisfactory performance of all
such obligations [under the settlement agreement], Michael
Hannaman . . . hereby waive[s] and release[s] Rick L. McLees from
any further obligation.
Hannaman now seeks to avoid the consequences of this
agreement by offering the affidavit of Grant Watts, the attorney
who represented him at the time of the settlement. Watts avers
that just before the settlement was signed, he asked the McLeeses
a series of questions designed to elicit assurances that they had
fully complied with the agreement; then, according to Watts, he
told the McLeeses attorney that ICE and Mr. Hannaman were relying
upon the representations on the part of Rick and Janet McLees in
regards to signing the [agreement]. Hannaman then signed the
settlement contract, whose express terms disclaimed reliance on
any representations by the McLeeses.
Surely a prima facie case of justified reliance
requires something more than this. As a matter of law, the terms
of the parties fully integrated written agreement could not have
been modified by Wattss unilateral and self-serving oral
assertion of Hannamans intent to rely on the McLeeses assurances.
Nor, as a matter of fact, could Wattss nudge-nudge, wink-wink
assertion of intended reliance support a reasonable inference
that Hannamans reliance would be justified given the undisputed
language of the settlement contract particularly its express
disavowal of any reliance on the McLeeses representations.
In fact, it seems hard to imagine any weaker evidence
purporting to show that the McLeeses last-minute assurances
caused Hannaman to be justifiably that is, reasonably misled
into surrendering all future claims against them (including
claims for misrepresentation). For if Hannaman genuinely
believed the allegations he had himself repeatedly leveled
against the McLeeses over their constant assurances of innocence
during the months preceding the settlement, then it seems fair to
wonder how another round of the same assurances moments before
signing the settlement agreement could have reasonably induced
him to settle. Would any reasonably prudent person in Hannamans
shoes have been misled by the McLeeses statements? The obvious
answer is no. It defies common sense to think that a fair-minded
person could infer, on this evidence alone, that Hannamans
reliance was justified.
The basic proposition is simple: Hannaman cannot
wilfully blind himself to the telltale presence of potential
fraud in settling with the McLeeses, and then plausibly blame the
McLeeses for his failure to see it.
Abundant case law joins common sense to support this
conclusion. The Virginia Supreme Court, Eleventh Circuit,
Florida Supreme Court, Second Circuit, and Indiana appellate
courts have all held that justified reliance generally cannot be
found when a party who has settled a dispute over alleged
dishonesty later claims to have been misled by false assurances
of honesty on the part of the allegedly dishonest party.
In Metrocall of Delaware, Inc. v. Continental Cellular
Corp.,2 a group of minority shareholders sued a majority
shareholder, alleging self-dealing, failure to disclose
information, and other fraudulent and dishonest acts. The
litigation settled, with all parties executing a general release.
The minority shareholders later discovered that at the time of
the settlement the majority shareholder did not disclose that it
was in negotiations to sell the company. The minority
shareholders filed a second lawsuit, alleging that the majority
shareholder had fraudulently induced them to settle. But the
Supreme Court of Virginia rejected this claim, holding that the
minority shareholders fraudulent-inducement claim failed because
they could not justifiably have relied on the majority
shareholders representations at the time of settlement.3
Observing that the fraud alleged in the second lawsuit was within
the scope of the broad release contained in the settlement,4 the
court ruled as a matter of law that when negotiating or
attempting to compromise an existing controversy over fraud,
dishonesty, and self-dealing, it is unreasonable to rely on the
representations of the allegedly dishonest party.5
Two federal cases interpreting Florida law have upheld
the same proposition. In Pettinelli v. Danzig,6 the Eleventh
Circuit considered a Florida case in which the plaintiff-
appellants were investors who settled an unlitigated dispute with
a companys officers in which the investors alleged that the
officers had fraudulently induced them to invest. The settlement
agreement included a release of all claims arising out of actions
up to the date of the settlement. The investors later sought to
rescind the settlement as fraudulently induced. But the Eleventh
Circuit ruled that even if the officers had made material
misrepresentations, the investors could not justifiably rely on
them. The court emphasized that one of the investors was an
attorney who should have understood the consequences of the
release and that the investors had not insisted on examining the
companys books before signing the release. The court therefore
affirmed summary judgment for the defendants, holding, just as
the Virginia Supreme Court did in Metrocall, that in settling a
claim of dishonesty or fraud the accusing party may not
justifiably rely on the allegedly fraudulent partys
representations.7
Another Eleventh Circuit decision, Mergens v.
Dreyfoos,8 considered a case in which former minority
shareholders executed a stock repurchase agreement with the
majority; the agreement included a general release clause
applicable to all claims accrued as of the day of the agreement.
The shareholders claimed that they had been told by the company
that it did not contemplate any sales of its assets. The former
shareholders then learned the very next day that the company had
made a very profitable sale of an asset. The former shareholders
sued for fraud. The court noted that before executing the
agreement, the plaintiffs had complained that the defendants were
mismanaging the corporation and wasting its assets, and had
threatened to sue the majority shareholders if they refused to
buy back the minoritys shares. The parties thus had a pre-
existing adversarial relationship before signing the release, and
they signed the release in light of the threatened legal action.
Observing that in these circumstances [a] more untrusting
relationship is difficult to imagine, the court concluded that
reliance by the plaintiffs was unjustified as a matter of law.9
In Bellefonte Re Insurance Co. v. Argonaut Insurance
Co.,10 the Second Circuit, applying New York law, considered an
analogous claim and reached the same conclusion, holding that
Plaintiffs cannot freely, and for consideration, promise not to
sue for failure to disclose material facts and then claim that
the promise was fraudulently induced because material information
was, in fact, not disclosed.11
Indiana follows the same rule. In Prall v. Indiana
National Bank, for example, the Indiana Court of Appeals found a
claim of fraudulent inducement barred in a case arising out of a
previously settled claim of fraud, noting that, even if the
plaintiff had not disclaimed reliance on the defendants
representations in settling the prior claim, reliance on those
representations would not have been justified in an arms-length
settlement negotiated by a represented plaintiff.12
A few scattered cases point in the opposite direction,
resting their rulings on the proposition that the reasonableness
of a plaintiffs reliance always presents a question of fact for
the jury.13 The court today implicitly follows this minority
position, effectively holding that, once the plaintiff produces
some evidence of actual reliance, the issue of justification can
never be decided on summary judgment. Yet we have declined to
follow this categorical view in analogous cases and have
generally recognized that issues of fact such as this may
properly be resolved on summary judgment if the undisputed
evidence would allow a fair-minded person to draw only one
reasonable inference.14
Moreover, the minority view squarely conflicts with the
Restatement. Restatement 164 describes justified reliance as a
factual element that the claimant must prove to avoid a contract
on the ground of inducement by fraud. I see no reason to
conclude that this issue of fact is immune from being decided on
summary judgment when the claimants own evidence of justified
reliance categorically rules out the existence of justification.
Sound policy, too, supports the conclusion that no
reasonable inference of justification can arise under the
circumstances at issue here. Parties accused of fraud would
rarely if ever be encouraged to settle their claims out of court
if they knew that the law routinely allowed accusers to set these
settlements aside merely by advancing conclusory assertions of
unfair inducement by the allegedly fraudulent partys purportedly
fraudulent denials of fraud. It might be argued, of course, that
the minority view reflected in todays opinion advances the
competing goal of protecting the rights of all settling parties
to rely on the good faith of their opponents in settlement
negotiations. Yet this otherwise laudable goal has anomalous
consequences and ultimately proves self-defeating if the
presumption of good faith is applied too rigidly to settlements
involving accusations of bad faith and fraud; for in this unique
setting it inherently tends to operate one-sidedly, and so to
preclude settlements, by exposing accused parties, at their
accusers option, to ever-renewable claims of misrepresentation.
Because it seems to me that Hannaman has failed to produce any
material evidence raising an inference that he justifiably relied
on the McLeeses purportedly fraudulent pre-settlement statements,
I would affirm the superior courts order granting the McLeeses
motion for summary judgment.
_______________________________
1 Our summary of the facts is derived from the materials
submitted in the summary judgment proceedings below. When
reviewing a grant of summary judgment, we draw all reasonable
inferences of fact in favor of the non-moving party. See
Meidinger v. Koniag, Inc., 31 P.3d 77, 82 (Alaska 2001).
2 There may be a factual dispute whether McLees was a
corporate officer when he resigned from ICE in October 1998. His
letter of resignation stated that he was resigning as a corporate
officer if [he was] in fact a corporate officer. The record
indicates that McLees was vice president and secretary in 1997.
No evidence brought to our attention establishes that he held a
corporate office in 1998.
3 Following a settlement discussion required by Alaska
Appellate Rule 221, Hannaman and ICE agreed to dismiss all claims
against Paul Crowley, Linda Hiemer, and Crowley & Hiemer, LLC
under Alaska Appellate Rule 511(a). The Crowley defendants are
therefore no longer parties to this appeal.
4 Old Harbor Native Corp. v. Afognak Joint Venture, 30
P.3d 101, 104 (Alaska 2001).
5 Alaska Rent-A-Car, Inc. v. Ford Motor Co., 526 P.2d
1136, 1139 (Alaska 1974).
6 Meidinger v. Koniag, Inc., 31 P.3d 77, 82 (Alaska
2001).
7 Unless context requires otherwise (such as when we are
referring to Hannaman individually as a witness or participant),
we refer to Hannaman and ICE as Hannaman when we are referring to
them collectively as litigants.
8 The McLeeses argue that the agreement also releases ICE
employee Michael Landowski. Quoting the agreement, the McLeeses
argue that the parties intended the release to inure to the
benefit of and shall be binding on themselves, shareholders,
officers, directors, agents, employees . . . and attorneys.
9 Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline
Serv. Co., 584 P.2d 15, 24 (Alaska 1978).
10 Alyeska Pipeline Serv. Co. v. Shook, 978 P.2d 86, 89
(Alaska 1999) (holding that release between employer and employee
precluded employees claims).
11 852 P.2d 1146 (Alaska 1993).
12 Id. at 1152.
13 See Old Harbor Native Corp., 30 P.3d at 105; Zeilinger
v. Sohio Alaska Petroleum Co., 823 P.2d 653, 657-58 (Alaska
1992).
14 Old Harbor Native Corp., 30 P.3d at 105.
15 Id.
16 See generally Broderick v. Kings Way Assembly of God
Church, 808 P.2d 1211, 1215 (Alaska 1991) (If the parties choose
to submit affidavits [in support or opposition of summary
judgment], they must be based upon personal knowledge, set forth
facts that would be admissible evidence at trial, and
affirmatively show that the affiant is competent to testify to
the matters stated.).
17 See Sopko v. Dowell Schlumberger, 21 P.3d 1265, 1269-70
(Alaska 2001) (holding that workers statements to physician were
admissible in connection with summary judgment motion as
admissions of party opponent).
18 Cousineau v. Walker, 613 P.2d 608, 612 (Alaska 1980)
(citing Restatement (Second) of Contracts 306 cmt. a (Tentative
Draft No. 11, 1976) (holding that material misrepresentation,
either innocent, negligent, or fraudulent, is adequate ground for
avoiding contract).
19 Bering Straits Native Corp. v. Birklid, 739 P.2d 767,
768 (Alaska 1987) (holding that stock purchaser could not avoid
contract on ground of misrepresentation because purchaser had
prior knowledge of misrepresentations and material omissions);
see also Cousineau, 613 P.2d at 612; cf. Johnson v. Curran, 633
P.2d 994, 997 (Alaska 1981) (citing Restatement (Second) of
Contracts 301-15 (Tentative Draft No. 11, 1976) (holding that
nightclub could not avoid contract on basis of fraudulent
misrepresentation because it did not produce evidence that it was
induced to enter into contract because of misrepresentation).
20 Bering Straits, 739 P.2d at 768; see also Restatement
(Second) of Contracts 164 (1981).
21 See Bering Straits, 739 P.2d at 768; Restatement
(Second) of Contracts 164 (1981).
22 Restatement (Second) of Contracts 162 cmt. a (1981);
cf. City of Fairbanks v. Amoco Chem. Co., 952 P.2d 1173, 1176 n.4
(Alaska 1998) (citing Bubbel v. Wien Air Alaska, Inc., 682 P.2d
374, 381 (Alaska 1984) (stating that scienter element of
fraudulent misrepresentation damages claim requires proof that
the maker knew of the untrue character of his or her
representation)).
23 See Bering Straits, 739 P.2d at 768; Restatement
(Second) of Contracts 164 cmt. c (1981) (No legal effect flows
from either a non-fraudulent or a fraudulent misrepresentation
unless it induces action by the recipient, that is, unless he
manifests his assent to the contract in reliance on it.).
24 See, e.g., Metrocall of Delaware, Inc. v. Contl
Cellular Group, 437 S.E.2d 189, 194, 195 (Va. 1993) (reasoning
that it is unreasonable to rely on the representations of the
allegedly dishonest party).
25 Sims v. Tezak, 694 N.E.2d 1015, 1020-21 (Ill. App.
1998).
26 Id. (quoting Pattiz v. Semple, 12 F.2d 276, 278 (E.D.
Ill. 1926)) (internal citations omitted).
27 Even if a misrepresentation is not fraudulent, a
contract may be voided if the misrepresentation was material.
See Cousineau v. Walker, 613 P.2d 608, 612 (Alaska 1980) (holding
that material misrepresentation, either innocent, negligent, or
fraudulent, is adequate ground for avoiding contract); see also
Restatement (Second) of Contracts 164 cmt. b (1981) ([A] non-
fraudulent misrepresentation does not make the contract voidable
unless it is material.); Old Harbor Native Corp. v. Afognak Joint
Venture, 30 P.3d 101, 104 (Alaska 2001); Diagnostic Imaging Ctr.
Assoc. v. H&P, 815 P.2d 865, 866-67 (Alaska 1991) (addressing
claim that non-fraudulent misrepresentations rendered release
invalid).
28 Restatement (Second) of Contracts 162 cmt. c (1981);
see also Cousineau, 613 P.2d at 613 (A material fact is one. . .
.which could reasonably be expected to influence someones
judgment or conduct concerning a transaction.).
1 Restatement (Second) of Contracts 164 (1981).
2 437 S.E.2d 189 (Va. 1993).
3 Id. at 194.
4 Id.
5 Id. at 195.
6 722 F.2d 706 (11th Cir. 1984).
7 Id. at 710; see also Mergens v. Dreyfoos, 166 F.3d 1114
(11th Cir. 1999); Florida Evergreen Foliage v. E.I. DuPont de
Nemours Co., 135 F. Supp. 2d 1271 (S.D. Fla. 2001); Somerset
Pharmaceuticals, Inc. v. Gunster, Yoakley, Valdes-Fauli &
Stewart, 49 F. Supp. 2d 1335 (M.D. Fla. 1999); Hall v. Burger
King Corp., 912 F. Supp. 1509 (S.D. Fla. 1995).
8 166 F.3d 1114 (11th Cir. 1999).
9 Id. at 1118; see also Florida Evergreen Foliage, 135 F.
Supp. 2d at 1289-90; Somerset Pharmaceuticals, Inc., 49 F. Supp.
2d at 1340; Hall, 912 F. Supp. at 1524-25.
10 757 F.2d 523 (2d Cir. 1985).
11 Id. at 526 (citing Bellefonte Re Ins. Co. v. Argonaut
Ins. Co., 586 F. Supp. 241, 244 (S.D.N.Y. 1984)).
12 627 N.E.2d 1374, 1378-79 (Indiana App. 1994); see also
Circle Centre Dev. Co. v. Y/G Indiana, L.P., 762 N.E.2d 176
(Indiana App. 2002). Courts in other states have reached similar
conclusions. See, e.g., Wender & Roberts, Inc. v. Wender, 238
Ga. App. 355, 360 (1999) (claim of reliance in dispute involving
fraud unjustified as a matter of law because, [i]n order for a
genuine issue of material fact to exist as to justifiable
reliance, there must be some evidence that the president and the
company exercised their duty of due diligence to ascertain the
truth of the matter); Davis v. Davis, 422 Pa. Super. 410, 417-18
(1993) (rejecting fraudulent inducement claim as a matter of law
given adversarial nature of the parties relationship and fact
that claimant was represented by counsel).
13 See, e.g., Chase v. Dow Chemical Co., 875 F.2d 278, 283
(11th Cir. 1989); Sims v. Tezak, 694 N.E.2d 1015, 1020-21 (Ill.
App. 1998); see also Matsuura v. E.I. Du Pont De Nemours & Co.,
73 P.3d 687, 701-02 (Hawaii 2003).
14 For instance, in Arctic Tug & Barge, Inc. v. Raleigh,
Schwarz & Powell, 956 P.2d 1199, 1203-04 (Alaska 1998), we
affirmed the summary dismissal of a claim for negligent
misrepresentation when undisputed evidence showed conduct falling
outside the scope of the duty allegedly breached; we observed
that dismissal on summary judgment was proper on this issue
because the undisputed record permitted only one reasonable
inference. Hannamans claim is closely analogous: In Arctic Tug
the plaintiff alleged negligent breach of a duty when no
reasonable inference of the dutys existence arose under the
circumstances alleged by the plaintiff; here, similarly, Hannaman
claims justifiable reliance when no reasonable inference of
justification arises under his asserted facts. See also
Dinsmore-Poff v. Alvord, 972 P.2d 978, 987 (Alaska 1999).
