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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Kazan v. Dough Boys, Inc. (2/20/2009) sp-6338
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
| NICHOLAS KAZAN, | ) |
| ) Supreme Court No. S- 12830 | |
| Petitioner, | ) |
| ) Superior Court No. 3AN-06-12160 CI | |
| v. | ) |
| ) O P I N I O N | |
| DOUGH BOYS, INC., | ) |
| ) No. 6338 February 20, 2009 | |
| Respondent. | ) |
| ) | |
Petition for Hearing from the Superior Court
of the State of Alaska, Third Judicial
District, Anchorage, Michael R. Spaan, Judge,
on appeal from the District Court, Anchorage,
John R. Lohff, Judge.
Appearances: Brewster H. Jamieson and Joshua
M. Kindred, Lane Powell LLC, Anchorage, for
Petitioner. Roy Longacre, Longacre Law
Offices, Ltd., Anchorage, for Respondent.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, and Winfree, Justices. [Carpeneti,
Justice, not participating.]
FABE, Chief Justice.
I. INTRODUCTION
This appeal arises from a claim based on the filing of
a financing statement with an overly broad description of the
property subject to a lien under Revised Article 9 of the Uniform
Commercial Code. A single overarching question is presented: Is
it error as a matter of law to rescind a settlement agreement
with respect to one party and not the other? In the proceedings
below, the trial court awarded Dough Boys, Inc. $60,000 in
damages after holding that Nicholas Kazan used his overbroad
financing statement to leverage a $60,000 settlement payment as
part of the sale of a business owned by Dough Boys. The superior
court affirmed and we granted Kazans petition for hearing.
Because we conclude that it was error to not enforce the parties
settlement agreement in its entirety and that Dough Boys was not
harmed by Kazans overbroad financing statement, we reverse the
$60,000 award to Dough Boys.
II. FACTS AND PROCEEDINGS
A. Facts
In 2002 Nicholas Kazan sold two business, Europa Bakery
and Caf Europa, to Dough Boys, Inc. in two separate transactions.
When Dough Boys purchased Caf Europa in the second transaction,
it gave Kazan a promissory note for part of the purchase price.
The parties also entered into a security agreement that secured
the promissory note and all amounts Dough Boys might owe Kazan in
the future under the parties sale agreement for Caf Europa. Both
the Caf Europa sale agreement and the security agreement
authorized Kazan to file a financing statement covering the
assets of Caf Europa. Dough Boys paid the $125,000 balance on
the note in full and on time at the end of 2002.
It is undisputed, and the trial court found, that the
financing statements description of Dough Boys property subject
to Kazans lien was overly broad because it covered all of Dough
Boys property.1 The parties sale agreement for Caf Europa
authorized Kazan to execute and record . . . an initial financing
statement covering equipment, inventory, fixtures, accounts
receivable, general intangibles and proceeds thereof arising from
any business operation owned by [Dough Boys] and operated under
the name of Caf Europa. Similarly, the parties security
agreement, which authorized Kazan to file a financing statement,
limited the collateral to the assets of Caf Europa. The
financing statement filed by Kazan, however, did not limit the
property to that of Caf Europa but instead covered Dough Boys
equipment[,] inventory, fixtures, accounts receivable, general
intangibles, trademarks, customer lists, booked orders,
attachments and accessions, leasehold interest, products and
proceeds.
In 2005 Dough Boys sold both Europa Bakery and Caf
Europa to Sagaya Corporation, again in two separate transactions.
Sagaya and Dough Boys signed a purchase agreement for Europa
Bakery in January 2005, and a month later, they signed a purchase
agreement for Caf Europa.
Before the purchase agreement for Caf Europa was
signed, an attorney representing Dough Boys sent a letter
requesting that Kazan amend the financing statement to cover only
assets of Caf Europa.2 Kazan responded in a letter that [u]ntil
my extended claims against the Dough Boys are resolved, I am not
inclined to release my security interest in the assets of Dough
Boys, Inc.
Sagayas owner, Paul Reid, testified that the lien . . .
was inhibiting [Dough Boys and Sagaya] from closing on the
purchase of [Europa Bakery and Caf Europa]. Reid also noted that
he acted as a closer on the deal by go[ing] back and forth to
both [Dough Boys and Kazan]. These negotiations led to related
agreements.
Dough Boys signed a sale agreement for Caf Europa with
Sagaya. That sale agreement provided that Sagaya would pay Kazan
$60,000 in return for certain releases of claims by Kazan:
At the Closing, [Sagaya] shall pay in cash or
in cash over a scheduled term to Nicholas
Kazan, who has a claim against [Dough Boys]
and who holds a security interest in certain
assets of the Caf, the sum of $60,000.
[Sagaya] will obtain a release or releases
from Kazan . . . for the benefit of [Dough
Boys] and [Sagaya] and the assets of the Caf.
Kazan executed and delivered to Sagaya a settlement and release
agreement under which Kazan discharged all of his claims against
Dough Boys. Kazan also entered into a mutual release of all
claims with Sagaya under which both discharged their present and
future claims against each other. Although Kazans settlement and
release agreement in favor of Dough Boys did not mention the
$60,000 payment and was not executed by Dough Boys, Reid
testified that the sale agreement between Sagaya and Dough Boys
expressed the understanding that Kazan would receive $60,000 in
consideration for the settlement and release agreement in favor
of Dough Boys.
B. Proceedings
In March 2005 Gheorghe Cozac filed a small claims
action against Dough Boys for payment for work he performed for
Europa Bakery and Caf Europa when Kazan was the owner. In its
answer to Cozacs complaint, Dough Boys filed a third-party
complaint against Kazan, seeking damages arising from Dough Boys
purchase of Caf Europa from Kazan and from its agreement to
manage Kazans coffee shop. Dough Boys further alleged that Kazan
breached the covenant of good faith and fair dealing by treating
Dough Boys unfairly and breached their settlement and release
agreement by failing to indemnify Dough Boys for Cozacs claims.
In response, Kazan brought counterclaims against Dough Boys
concerning money owed by Kazan to the IRS and other creditors,
the management of Kazans coffee shop by Dough Boys, and Dough
Boys alleged breach of its indemnity agreement with Kazan.
In the district courts summary judgment order, Judge
John R. Lohff dismissed Kazans counterclaims and release[d] any
lien against Europa Bakery Wholesale assets,3 leaving appropriate
damages to be determined [at trial]. The trial court found that
good cause existed for granting Dough Boys motion, but it did not
discuss the grounds for its decision. In Dough Boys motion for
summary judgment, it argued that Kazans counterclaims should be
dismissed because Kazan released all his claims against Dough
Boys in his settlement and release agreement with Dough Boys.
Dough Boys also argued that Kazan refused to correct his
overbroad financing statement and that Kazan held the financing
statement hostage to extract $60,000 from its sale of Caf Europa.
At a two-day bench trial in May 2006, Dough Boys sought
damages for the $60,000 paid to Kazan when Sagaya bought Caf
Europa. Dough Boys did not pursue any of the other claims
alleged in its third-party complaint against Kazan. Kazan
represented himself at trial.
In its decision, the trial judge denied Cozacs claim
against Dough Boys, finding that it was not supported by
sufficient evidence. It also awarded Dough Boys $60,000, plus
interest, costs, and fees, against Kazan on the basis that Dough
Boys was damaged by Kazans demand for the payment required to
obtain the release of the lien. The trial court reasoned:
If Kazan had not filed an overly broad
description of the property subject to the
UCC lien, he would not have been paid the
$60,000. This court is left with the firm
conviction that Kazan had no basis for the
$60,000 payment. The claims Kazan had or
thought he had over the nonpayment of the
employee withholding tax to [the] IRS, and
the dispute over the management of the Made
in the Shade Coffee shop did not entitle
Kazan to the lien he had filed against the
Dough Boys property. He should have released
the UCC lien when requested to do so by Dough
Boys.[4]
In its written findings of fact and conclusions of law, the trial
court also concluded that Kazan had used his lien to leverage the
$60,000 payment at Dough Boys expense. The district court found
that Kazans claims arose from his difficulty with the IRS over an
unpaid employee withholding from the last quarter that he owned
Caf Europa and from another agreement between the parties, where
Kazan hired Dough Boys to manage a coffee shop owned by Kazan.
The trial court attributed the breakdown of the parties
management agreement to Kazans failure to disclose numerous
unpaid bills to Dough Boys when it began managing the coffee
shop. According to the district court, [t]hese disputes remained
unresolved until Dough Boys sold Europa Bakery and Caf Europa in
2005.
Kazan appealed the district courts damages award to
Superior Court Judge Michael R. Spaan, who affirmed, reasoning
that the trial court did not err in concluding that the parties
settlement and release agreement prevented Kazan from bringing
his claims against Dough Boys, that Kazans lien was overbroad,
and that Kazan extracted the $60,000 payment from Sagaya because
of his overbroad lien. We granted Kazans petition for hearing.
III. STANDARD OF REVIEW
We review questions of law and the trial courts
application of the law to facts de novo,5 adopting the rule of
law that is most persuasive in light of precedent, reason, and
policy.6 We review factual findings under the clearly erroneous
standard7 and in the light most favorable to Dough Boys, the
prevailing party below.8 A finding of fact is clearly erroneous
if it leaves the court with a definite and firm conviction on the
entire record that a mistake has been made.9
IV. DISCUSSION
A. The Trial Courts Failure To Enforce the Parties
Settlement Agreement in Its Entirety Was Error.
Kazan argues that the district court erroneously
enforced only one-half of the parties settlement agreement under
which Kazan released his lien and his disputed claims against
Dough Boys10 in exchange for $60,000 to be paid by Sagaya when it
purchased Caf Europa from Dough Boys. According to Kazan, the
trial court enforced the agreement against him by dismissing his
claims against Dough Boys based on the release he had executed as
part of the settlement. But the trial court set aside the
settlement agreement as it bound Dough Boys by awarding it the
$60,000 that Kazan received under the settlement. In other
words, Kazan argues that the trial court effectively rescinded
the part of the parties agreement benefiting Kazan but not the
portion benefiting Dough Boys. We agree.
The settlement agreement between Kazan and Dough Boys
is a binding contract because Kazan released claims that were
disputed in good faith in exchange for the $60,000 payment. In
Wyatt v. Wyatt, we recognized that a settlement agreement forms a
binding contract when the agreement satisfies the four elements
of contract formation: an offer encompassing all essential terms,
unequivocal acceptance by the offeree, consideration, and an
intent to be bound.11 Even though we generally do not examine the
adequacy of the consideration agreed upon by the contracting
parties and instead leave the bargaining to them,12 we have noted
that one form of adequate consideration is the release of a claim
that is disputed in good faith.13 And the record supports Kazans
contention that his claims were disputed in good faith, despite
the trial courts holding that Kazans claims had no basis.
In his response to Dough Boys request that Kazan amend
and narrow the description of property in his financing
statement, Kazan noted that he had a number of unresolved claims
against the Dough Boys, Inc., and that until these claims were
resolved, he was not inclined to release [his] security interest
in the assets of Dough Boys, Inc. Under the terms of the parties
security agreement, Kazans lien secured Dough Boys $125,000
promissory note to Kazan for a portion of the sale price of Caf
Europa as well as [a]ll amounts [Dough Boys] may in the future
owe to [Kazan] pursuant to the [Caf Europa] Purchase and Sale
Agreement, any promissory note, and any extension or renewal
thereof, whether agreed to now or in the future, or which [Kazan]
may otherwise pay, advance, or loan to [Dough Boys] . . . .
Todd Harris, a principal of Dough Boys, testified that
Dough Boys paid the $125,000 balance on the note on time and in
full on December 30, 2002. Dough Boys contends that Kazans lien
was no longer valid after this payment was made. But Dough Boys
fails to acknowledge that the lien also secured any amounts that
Dough Boys owed to Kazan under its contractual obligations in the
parties Caf Europa sales agreement. These obligations included
Dough Boys assumption of all of Kazans liabilities for Caf Europa
as of July 1, 2002, as well as Dough Boys completion of
accounting work to close the books of Kazan doing business as
Europa Bakery and Caf Europa in 2001 and 2002. Kazan also
alleged that Dough Boys failed to protect and indemnify him from
claims of the IRS and other creditors of Caf Europa as agreed
upon under the parties sale agreement for Caf Europa. But the
parties never had an opportunity to flesh out the merits of
Kazans claims because the trial court dismissed all of Kazans
claims against Dough Boys in its summary judgment order.
Although the district court did not discuss the grounds for its
decision, Dough Boys argument in favor of summary judgment was
based on Kazans release, which was signed as part of his
settlement with Dough Boys.
Given that the parties had a binding settlement
agreement, the trial courts conclusions of law were legally
erroneous. In light of the district courts summary judgment
order dismissing all of Kazans claims against Dough Boys based on
the settlement and Kazans release agreement, it was legal error
to award Dough Boys $60,000 in damages. During the trial, Kazan
repeatedly referred to the claims against Dough Boys that he had
released in exchange for $60,000. But Kazan was precluded from
presenting any evidence about those claims because the trial
court had ruled that the release Kazan gave in connection with
the settlement barred him from doing so. Yet the trial court
awarded Dough Boys the $60,000 that Kazan received in
consideration for releasing his disputed claims against Dough
Boys.
A number of policy reasons support enforcement of
settlement agreements. Citing the basic tenet that competent
parties are free to make contracts and that they should be bound
by their agreement, we have observed that [a]s a matter of
judicial policy the court should maintain and enforce contracts,
rather than enable parties to escape from the obligations they
have chosen to incur.14 Accordingly, we leave the negotiating to
the parties and do not ordinarily question the adequacy of the
consideration that they exchanged for their promises.15 Policy
also favors enforcing settlements and stipulations between
parties.16 We encourage and favor settlements between parties
because they reduce demand for judicial resources.17
Nonetheless, we have recognize[d] that freedom of
contract is a qualified and not an absolute right, and cannot be
applied on a strict, doctrinal basis. An established principle
is that a court will not permit itself to be used as an
instrument of inequity and injustice.18 In particular, we have
quoted Justice Frankfurters discussion of the fundamental
principle of law that the courts will not enforce a bargain where
one party has unconscionably taken advantage of the necessities
and distress of the other.19
The trial court found that Kazan used his lien . . . to
leverage a payment of $60,000 from Dough Boys as a part of the
sale of Caf Europa and Europa Bakery [to Sagaya]. According to
Sagayas owner, the lien . . . was inhibiting [Dough Boys and
Sagaya] from closing on the purchase of [Europa Bakery and Caf
Europa]. But we have recognized that economic necessity very
often the primary motivation for compromise is not enough, by
itself, to void an otherwise valid release. 20 And Dough Boys
never raised, argued, or presented evidence of any unconscionable
activity, nor did it allege fraud or economic duress. In the
absence of evidence that the settlement agreement between Kazan
and Dough Boys was unconscionable or of any other basis for
invalidating the settlement, the parties settlement agreement
should have been enforced in its entirety by the trial court.21
B. The Overbroad Financing Statement Did Not Cause Dough
Boys To Suffer Any Damages.
Aside from seeking a refund of its payments under the
settlement agreement, Dough Boys does not allege that it suffered
any additional damages as a result of Kazans overbroad financing
statement. Dough Boys notes that [t]he financing statement filed
by Kazan improperly covered all assets of Dough Boys, not just
the Europa Caf assets. But Kazan does not dispute that the
financing statement was overbroad. Instead, Kazan argues that
Dough Boys was not harmed by the overbroad financing statement.
And Dough Boys failed to present any evidence that the overbroad
financing statement caused it harm, perhaps because the financing
statements overly broad description of Dough Boys property
subject to Kazans lien did not affect the extent of Kazans
security interest in Dough Boys property.
Kazans lien on Dough Boys property was limited to its
Caf Europa assets because a financing statement cannot enlarge
the property covered by the security agreement. As other courts
have explained, the purpose of filing a financing statement is to
give notice to third parties that the filing party may have a
security interest in the named debtors property.22 The extent of
a partys security interest in anothers property is determined by
the description of the collateral in the security agreement
between them.23 If there is a conflict between the language used
in the security agreement and the financing statement to describe
the property covered by the security interest, the security
agreement generally prevails because the security agreement, not
the financing statement, defines the extent of the secured partys
interest.24 A financing statement cannot enlarge the property
covered by the security agreement, but it may restrict the
property covered by the security agreement.25
The security agreement between Kazan and Dough Boys
granted Kazan a security interest in all of Dough Boys Caf Europa
assets and authorized Kazan to file a financing statement that
covered those assets. As a result, Kazan had a security interest
in Dough Boys Caf Europa assets. When Kazan filed a financing
statement that covered all of Dough Boys assets, his security
interest in Dough Boys property did not expand. Kazan merely
filed an overbroad financing statement, and Dough Boys had the
statutory right to request that it be corrected.26 After Dough
Boys asked Kazan to amend the financing statement, the parties
negotiated a settlement agreement under which Kazan released all
of his claims against Dough Boys, including his lien on Dough
Boys Caf Europa assets, which rendered the issue of the overbroad
financing statement moot.27 Because Dough Boys failed to prove
any damages arising out of the overbroad financing statement
aside from its role in motivating Dough Boys to settle its claims
with Kazan, it was error to award damages to Dough Boys.
V. CONCLUSION
Because the parties settlement agreement is a binding
contract and there is no justification for rescinding it, and
because Dough Boys did not suffer any damages from Kazans
overbroad financing statement, we REVERSE the $60,000 damage
award to Dough Boys.
_______________________________
1 The parties and courts below at times refer to Kazans
overbroad lien, but this phrase is misleading. Kazan filed a
financing statement containing an overly broad description of the
collateral covered by his security interest in Dough Boys
property. This did not create an overbroad lien. A lien is [a]
legal right or interest that a creditor has in anothers property,
lasting usu[ally] until a debt or duty that it secures is
satisfied, and generally the creditor does not take possession of
the property on which the lien has been obtained. Blacks Law
Dictionary 941 (8th ed. 2004). As other courts have noted,
including an overbroad description of collateral covered by a
security interest in a financing statement does not enlarge the
scope of a creditors security interest, or lien, in the debtors
property. E.g., In re Amex-Protein Dev. Corp., 504 F.2d 1056,
1061 (9th Cir. 1974). Thus, the more accurate description is
overbroad financing statement, which we use throughout this
decision unless specifically referring to the arguments or
reasoning of the parties or the courts below.
2 Although the letter requested that Kazan amend the
collateral description in the security agreement, it appears that
the letter intended to refer to the financing statement because
the letter said that the description in the financing statement,
and not the security agreement, was too broad.
3 Kazan, however, never had a lien on any of Dough Boys
Europa Bakery assets. The parties security agreement, which
authorized Kazan to file a financing statement, limited Kazans
security interest in Dough Boys assets to all assets of Caf
Europa. As other courts have explained, even though Kazan filed
a financing statement that described the property covered by his
security interest as all of Dough Boys assets, the financing
statement did not expand the property covered by his security
agreement to all of Dough Boys assets. See, e.g., Amex-Protein,
504 F.2d at 1061 (explaining that a financing statement cannot
enlarge the property covered by the security agreement). Kazans
security interest was in Dough Boys Caf Europa assets only. See
79 C.J.S. Secured Transactions 99 (2008) (noting that the
security agreement defines the extent of the security interest).
4 Contrary to the trial courts assertion that Kazan
should have released the lien when asked to do so, Dough Boys did
not ask Kazan to release his lien. Dough Boys asked Kazan to
amend his financing statements description of the collateral
covered by his lien.
5 Maddox v. Hardy, 187 P.3d 486, 491 (Alaska 2008).
6 Odom v. Odom, 141 P.3d 324, 330 (Alaska 2006) (quoting
Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979)).
7 Id.
8 See N. Pac. Processors, Inc. v. City & Borough of
Yakutat, 113 P.3d 575, 579 (Alaska 2005) (In reviewing factual
findings, we view the evidence in the light most favorable to the
prevailing party below. (internal quotation marks omitted)).
9 Id. (internal quotation marks omitted).
10 Dough Boys appears to describe this release as
unilateral to argue that the release did not reciprocally state
that Dough Boys released all its claims against Kazan, which
would support the trial courts finding that the release barred
Kazan from bringing his claims against Dough Boys while the
release did not bar Dough Boys from bringing its claims against
Kazan. Kazan, however, does not argue that the release bars
Dough Boys from bringing its claim against Kazan concerning Dough
Boys alleged harm from Kazans overbroad lien; Kazan argues that
if the trial court enforces the parties settlement agreement, it
cannot both bar Kazan from bringing his disputed claims and award
Dough Boys the consideration it gave for the release.
11 65 P.3d 825, 828 (Alaska 2003) (quoting Davis v.
Dykman, 938 P.2d 1002, 1006 (Alaska 1997)).
12 Reeves v. Alyeska Pipeline Serv. Co., 926 P.2d 1130,
1142 (Alaska 1996).
13 See Air Van Lines, Inc. v. Buster, 673 P.2d 774, 777
(Alaska 1983) (citing Restatement (Second) of Contracts 74, at
281 (1981)) (In our view the requirement of adequate
consideration is satisfied if Keystone disputed AVLs claim for
overtime in good faith.).
14 Inman v. Clyde Hall Drilling Co., 369 P.2d 498, 500
(Alaska 1962).
15 Reeves, 926 P.2d at 1142.
16 See DeSalvo v. Bryant, 42 P.3d 525, 528 (Alaska 2002)
(Generally, sound judicial policy indicates that private
settlements and stipulations between the parties are to be
favored and should not be lightly set aside. (internal quotation
marks and alteration omitted)).
17 See Interior Credit Bureau, Inc. v. Bussing, 559 P.2d
104, 106 (Alaska 1977) (Stipulations and settlements are favored
in law because they simplify, shorten and settle litigation
without taking up valuable court resources.); see also Worland v.
Worland, 193 P.3d 735, 740 (Alaska 2008).
18 Inman, 369 P.2d at 500 (footnotes omitted).
19 Id. (quoting United States v. Bethlethem Steel Corp.,
315 U.S. 289, 327-28 (1942) (Frankfurter, J., dissenting)).
20 Hawken Nw., Inc. v. State, Dept of Admin., 76 P.3d 371,
380 (Alaska 2003) (quoting Zeilinger v. SOHIO Alaska Petroleum
Co., 823 P.2d 653, 658 (Alaska 1992)).
21 The failure to enforce the settlement agreement in its
entirety had the effect of rescinding half of the agreement. We
have explained that rescission is an equitable remedy used by
courts to unmake a contract induced by mistake, fraud, or duress.
Watega v. Watega, 143 P.3d 658, 666 (Alaska 2006). When a court
rescinds a contract, it restores to the extent possible the
parties to the positions they were in before they entered into
the contract. Id. The remedy of rescission is not applicable to
this case. Dough Boys neither argued or presented evidence
supporting a claim of economic duress. Nor did Dough Boys claim
that it was induced to enter into the settlement agreement by
mistake or fraud. Moreover, the parties cannot be put back into
the position they were in before they entered into the settlement
agreement. Kazan could pay Dough Boys $60,000 and his claims
against Dough Boys could be reinstated, but his security interest
in Dough Boys Caf Europa cannot be reinstated because Dough Boys
no longer owns Caf Europa.
22 See, e.g., In re Northview Corp.,130 B.R. 543, 547
(B.A.P. 9th Cir. 1991) (quoting In re Softalk Publg Co., Inc.,
856 F.2d 1328, 1330 (9th Cir. 1988)).
23 In re Bakersfield Westar Ambulance, Inc., 123 F.3d
1243, 1248 (9th Cir. 1997).
24 79 C.J.S. Secured Transactions 99 (2008).
25 E.g., In re Amex-Protein Dev. Corp., 504 F.2d 1056,
1061 (9th Cir. 1974).
26 See generally AS 45.29.210, .625(g) (providing the
types of requests that debtors may make of secured parties and
the remedy if the secured parties fail to comply with the
requests).
27 Because the financing statements overbreadth is no
longer an issue, we decline to discuss Kazans argument that the
statutory procedures provide the exclusive remedy for an
overbroad financing statement.
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