| Alaska Supreme Court Opinions made Available byTouch N' Go Systems and Bright Solutions |
|
|
|
| Alaska Supreme Court Opinions made Available byTouch N' Go Systems and Bright Solutions |
|
|
|
|
You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Asinuk Corporation v. Lower Yukon School District (07/31/2009) sp-6393
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
| ASKINUK CORPORATION, | ) |
| ) Supreme Court No. S- 12786 | |
| Appellant, | ) |
| ) Superior Court No. 4BE-05-309 CI | |
| v. | ) |
| ) O P I N I O N | |
| LOWER YUKON SCHOOL | ) |
| DISTRICT, | ) No. 6393 - July 31, 2009 |
| ) | |
| Appellee. | ) |
| ) | |
Appeal from the Superior Court of the State
of Alaska, Third Judicial District, Bethel,
Leonard R. Devaney III, Judge.
Appearances: A. Lee Petersen, Petersen
Professional Corp., Willow, for Appellant.
Raymond E. Goad, Jr., and Saul R. Friedman,
Jermain Dunnagan & Owens, P.C., Anchorage,
for Appellee.
Before: Matthews, Eastaugh, Carpeneti, and
Winfree, Justices. [Fabe, Chief Justice, not
participating.]
EASTAUGH, Justice.
MATTHEWS, Justice, dissenting.
I. INTRODUCTION
After the Lower Yukon School District leased twenty
acres from Askinuk Corporation on which to build a school in
Scammon Bay, Askinuk sued the school district to reform or
invalidate the lease. The lease specified a lease rate of one
dollar per year, subject to renegotiation after ten years. It
also provided that if the parties could not reach mutual
agreement upon renegotiation, the original payment rate would
remain in effect until agreement could be reached. Askinuk
claimed that it never assented to the leases payment and
renegotiation provisions; that the lease lacked consideration;
and that George Smith, who signed the lease for Askinuk and was
chair of Askinuks board, had a conflict of interest that
invalidated the lease. The superior court rejected these
contentions and entered summary judgment for the school district.
Because we conclude that the lease was valid and enforceable, we
affirm.
I. FACTS AND PROCEEDINGS
A. Factual History
The Lower Yukon School District provides public
education in the region that includes the village of Scammon Bay.
Askinuk Corporation is the Scammon Bay native village corporation
created by the Alaska Native Claims Settlement Act. In October
2003 the school district proposed leasing from Askinuk twenty
acres on which to build and operate a new public school in
Scammon Bay. The school districts proposed lease had a term of
fifty-five years, with options for two ten-year renewals.
Section III of the proposed lease addressed the duration of the
lease; Section IV addressed the payment rate. The proposed lease
called for the school district to pay Askinuk one dollar per
year.
Askinuks attorney reviewed the proposed lease and in
October 2003 sent Askinuks board of directors a letter commenting
on the school districts proposal. The letter cautioned the board
that approving a payment of one dollar per year could be regarded
as breaching the directors fiduciary duty to the shareholders.
The letter added that because some members of [Askinuks] Board
[were] also members of the school board . . . an obvious conflict
of interest existed. George Smith was then the chair of Askinuks
board and the vice-chair of the school districts board. Timothy
Kaganak was the school districts treasurer and was also on
Askinuks board. The lawyers October 2003 letter also stated that
the conflict of interest could be avoided if a reasonable rental
rate were agreed upon or if the corporations shareholders
approved the lease:
If the school district were offering to
pay a fair rental on this property,
adjustable to changes of circumstances every
five or ten years, there may not be a
conflict of interest. But when the school
district is asking for a gift of the use [of]
some of the corporations most valuable land
for 75 years, the issue becomes very
difficult, especially when the corporation is
struggling to pay its bills. One appropriate
way to deal with a transaction of this sort
would be to call a special meeting of the
shareholders and let them vote on it. If the
shareholders approve, it is their
responsibility, not the responsibility of the
Directors.
In response, Askinuks board asked its attorney to draft
a lease addressing his concerns. He revised the proposed lease
by changing, among other things, the payment rate. He proposed a
rate of $400 dollars per month for the first ten years, after
which the rate would be adjusted to conform to changes in the
cost of living index.
In November 2003 Askinuks three board members who had
no conflict of interest and one member of Askinuks land committee
met to discuss the proposed terms. The attendees decided that,
to encourage the school district to build a school in Scammon
Bay, the corporation would charge only $400 per month.
School district representatives met with Askinuks board
on March 4, 2004 to discuss Askinuks proposed changes. George
Smith, chair of Askinuks board and vice-chair of the school
districts board, did not attend. Smith stated in an email to
Askinuks lawyer that he completely stayed away from the meeting
not wanting to taint the proceedings with a possible conflict of
interest. Of the five Askinuk representatives present, three
later submitted affidavits giving nearly identical accounts of
what happened at the meeting. Their affidavits stated that there
was discussion of the school districts proposed one dollar per
year payment rate subject to renegotiation after ten years
after a representative of the school board stated that the school
district could not pay more than that. The affidavits stated
that nothing was said during the meeting about what would happen
if the parties could not agree on a new rental rate after ten
years and that, at the end of the meeting, the language of the
leases payment term was still to be revised.
Karen Goodwin, the school districts business manager,
also attended the March negotiation meeting and had a different
understanding of what had happened. According to her, both sides
left the meeting with a revised draft of the lease that not only
provided for a dollar per year rate subject to renegotiation in
ten years, but also provided that rent would continue at that
rate should no contrary agreement be reached during
renegotiation.
On the afternoon of March 4, 2004, Smith emailed
Goodwin, stating, I made short work of the lease agreement with
the changes. The email indicated that an electronic file
entitled lease.doc was attached. Later that same day, Smith sent
an email to Askinuks attorney indicating that he was attaching a
copy of the lease with a revised payment term for the attorneys
review.
In the final draft of the lease agreement, the sections
relating to duration and payment stated in relevant part:
Section III
Term
The lease term shall be for fifty-five
(55) years, commencing on the first day of
October 2003, and shall terminate on the last
day of October 2058, or upon such date as the
premises are no longer used for purposes
authorized under Section II above. The
Lessee is entitled to two (2) ten (10) year
renewals of the Lease under the same terms
and conditions.
Section IV
Payment
In consideration of the mutual promises
contained herein, Lessee shall pay to Lessor
the sum of $1.00 a year, for the first ten
(10) years of the Lease, after which the
Lessor and Lessee shall renegotiate SECTION
IV PAYMENT.
However, in the event both parties
cannot reach mutual agreement on this section
the sum of $1.00 per year payment shall be
the amount that will remain in effect until
such an agreement can be reached.
If during the term of the Lease taxes
are assessed on the leased property, the
Lessee may use its exempt status to have the
taxes abated, but if abatement of taxes on
the leased land is not allowed, the rental
will be adjusted to provide adequate
additional funds to pay the taxes on the
land.
Apparently after reviewing this language, Askinuks
lawyer responded to Smith in a March 4 email and
cautioned Smith that its effect would be to giv[e] the
property away for 75 years, unless the school district
volunteer[ed] to pay rent. Smith said he would pass on
the lawyers insights to the members that participated.
Smith did forward a copy of the lawyers email to
Goodwin, telling her not to sweat over it unless we
cant decide on what font to use on the language. But
there is no evidence Smith sent any of the lawyers
cautionary advice to Askinuks representatives. In a
March 5 email to Smith, Askinuks lawyer described the
wording of the payment term as being inept and stated
that Askinuk had given away the store without
consulting its attorney.
Askinuks board decided at the regular board meeting on
March 12 to submit the lease to Askinuks shareholders for
approval at the annual meeting in April. When the subject of the
lease came up for discussion at the annual meeting in April,
Timothy Kaganak told the shareholders that if they did not
approve an annual rental rate of one dollar, the school district
would put the new school somewhere else. Although George Smith
presided over the meeting, he did not express any opinion about
the proposed lease. The shareholders discussed the benefits and
consequences of leasing land to the school district for one
dollar per year. Some shareholders stated that they favored the
proposed rate because they wanted a school for their children and
the high-wage job opportunities the project would bring to the
community. Some shareholders expressed a desire to get a better
rate to help out the cash poor corporation.
During the discussion, Anthony Ulak, a member of
Askinuks land committee, made a motion to lease the land to the
school district for one dollar a year, subject to renegotiation
after ten years. Thirty-nine shareholders voted in favor of
Ulaks motion; ten shareholders voted against. Ulak later stated
in an affidavit that the text of the proposed lease was not read
to the shareholders before the vote and that he did not see a
copy of the lease during the meeting. He also stated in his
affidavit that [n]othing was said about what would happen if the
parties could not agree on the rent after 10 years and that was
not included in [his] motion.
After the meeting Smith notified the school district
that Askinuks shareholders had approved the lease. Askinuks
lawyer had previously advised Smith that, so long as he did not
participate in the approval process, his school board membership
did not preclude him from signing the lease, as signing was
solely a ministerial act. In late April 2004 Smith signed the
lease for Askinuk; Superintendent Robert Robertson signed the
lease for the school district.
B. Procedural History
In August 2005 Askinuk filed a superior court complaint
seeking to invalidate or reform the lease. The school district
moved for partial summary judgment. Askinuk cross-moved for
partial summary judgment, arguing that the court should find that
the lease signed on April 27, 2004 should be reformed to become a
legal and valid contract.
In an amended complaint Askinuk asserted that: (1)
internal corporate mistakes make the lease invalid; (2) the
school district exerted undue influence on Askinuks shareholders;
(3) the lease results in an unconstitutional taking; and (4) the
lease violates equal protection principles. The amended
complaint did not alter Askinuks request for relief. The
superior court denied summary judgment to Askinuk on each cause
of action of the amended complaint, granted summary judgment to
the school district on each cause of action, ordered the case
dismissed, and entered final judgment for the school district.
In May 2007 Askinuk asked the superior court to alter
or amend the judgment. The superior court denied this motion.
Askinuk appeals.
III. DISCUSSION
A. Standard of Review
Askinuk argues that the superior court erroneously
granted summary judgment to the school district. Askinuk
advances multiple theories for reversal. Its most persuasive
arguments concern contract formation and contract voidability.
We review grants of summary judgment de novo on questions of
contract formation.1 We will affirm a grant of summary judgment
if the evidence in the record presents no genuine issue of
material fact and the moving party is entitled to judgment as a
matter of law.2 On questions of law, we exercise our independent
judgment.3 We adopt the rule of law that is most persuasive in
light of precedent, reason, and policy.4
B. The Superior Court Correctly Held that a Valid Lease
Was Formed.
Askinuk argues that a valid lease was never formed
because: (1) George Smith lacked authority to bind the
corporation, (2) neither the corporations board nor its
shareholders assented to the lease, and (3) the lease was
unsupported by sufficient bargained-for consideration.
1. Authority to act
Askinuk argues that the lease is void because Smith
acted without authority to bind the corporation. We focus here
on whether Smith had apparent authority to sign the lease for
Askinuk.5
Apparent authority to do an act is created as to a
third person when a principals conduct, reasonably interpreted,
causes the third person to believe that the principal consents to
have the act done on his behalf by the person purporting to act
for him.6 Three considerations are pertinent in evaluating
apparent authority: (1) the manifestations of the principal to
the third party; (2) the third partys reliance on the principals
manifestations; and (3) the reasonableness of the third partys
interpretation of the principals manifestations and the
reasonableness of the third partys reliance.7
There is no real dispute here about the first two
elements. The closer question is whether it was reasonable for
the school district to rely on Smiths apparent authority to sign
the lease. In the official commentary to AS 10.06.020-.025 of
the Alaska Corporations Code, legislative counsel recognized that
a third partys belief in the real authority of a corporate agent
must go beyond the white heart and empty head standard of
subjective good faith.8 Nonetheless, we have held that a third
party need not investigate the extent of an agents authority or
deal only at its peril.9 It is undisputed here that Smith
informed the school district that Askinuks shareholders had
approved the lease. There is also no evidence that any Askinuk
representative said anything to the school district before Smith
and Superintendent Robertson signed the lease that would have led
the school district to think either that the shareholders had not
approved the proposed lease or that they were uninformed of the
material provisions of the lease when they voted. It is also
undisputed that Askinuk held Smith out as the chair of its board
of directors. There is consequently no genuine material factual
dispute as to this issue it was reasonable for the school
district to believe that Askinuk had authorized Smith to sign the
lease on its behalf. We accordingly conclude that Smith had
apparent authority to sign the lease and bind Askinuk.
2. Mutual assent
Askinuk argues that the lease is nonetheless void
because Askinuk never assented to all of its terms, most
particularly the provision in Section IV stating that the annual
payment rate would remain one dollar if the parties could not
agree on a different amount after renegotiation. Askinuk argues
that because neither its board of directors nor its shareholders
ever approved this provision in Section IV, the corporation never
assented to its terms. Although the shareholders approved a
rental rate of one dollar per year, subject to renegotiation
after ten years, Askinuk argues that the lease was not made
available to the shareholders and that the motion voted on made
no mention of Section IV or its terms. Askinuk implicitly argues
that the shareholders did not know and could not have known that
the rental rate would remain at one dollar per year if a
different rate could not be agreed upon after renegotiation.
Askinuk contends that the formation of a contract
requires both an offer that includes all essential terms and an
unequivocal acceptance of the same terms by the offeree. Askinuk
assumes that the provision that the rental rate would remain the
same absent contrary agreement was an essential term.
It is unnecessary to consider here whether this
provision was an essential term. Because we conclude that the
superior court was correct in holding that AS 10.06.020 prevents
Askinuk from prevailing on this argument, it is irrelevant
whether the shareholders, when they voted at the annual meeting,
were ignorant of specific lease terms even if those terms were
essential. Alaska Statute 10.06.020 prevents a corporation from
avoiding its contractual liability in certain circumstances,
stating that
[a] limitation upon the powers of the
shareholders, officers, or directors, or the
manner or exercise of their powers, contained
in or implied by the articles of
incorporation, bylaws, or action of the
board, or by AS 10.06.605 - 10.06.678 or
10.06.705 - 10.06.788 or by a shareholders
agreement may not be asserted as between the
corporation or a shareholder and a third
person . . . .
The official commentary to section .020 states that it was
intended to apply in situations in which actual authority is
lacking.10 The commentary explains that if apparent authority to
enter a contract is present, the third party acquires the full
liability of the betrayed corporate principal upon the executory
terms of the unauthorized agreement.11 We concluded above that
George Smith had apparent authority to enter into the contract on
behalf of Askinuk.12 Alaska Statute 10.06.020 therefore precludes
Askinuk from avoiding its contract on the basis that the
directors arguably failed to observe internal requirements for
corporate action by neglecting to inform the shareholders of the
disputed provision before they voted.13
Askinuk argues that AS 10.06.020 does not bar its
mutual assent argument because the lease was not signed by two
Askinuk corporate officers, as Askinuk contends AS 10.06.483(d)
requires.14 Alaska Statute 10.06.483(d) restricts a corporations
ability to contest the validity of a contract signed by two
specified officers:
Subject to the provisions of AS 10.06.020, a
note, mortgage, evidence of indebtedness,
contract, conveyance, or other instrument in
writing, and an assignment or endorsement of
these, executed or entered into between the
corporation and another person, if signed by
two individuals, one of whom is the chairman
of the board, the president, or a
vice-president and the other of whom is the
secretary, an assistant secretary, the
treasurer, or an assistant treasurer of the
corporation, is not invalidated as to the
corporation by a lack of authority of the
signing officers in the absence of actual
knowledge on the part of the other person
that the signing officers had no authority to
execute the instrument.[15]
The school district argues that Askinuk failed to preserve its
argument as to the application of subsection .483(d). As a
general rule, we will not consider arguments first raised on
appeal.16 Because Askinuk did not raise its subsection .483(d)
argument in the superior court, it has not been preserved.
In any event, we are unpersuaded by Askinuks
contention. It is not likely the legislature intended subsection
.483(d) to limit the application of section .020. Instead, the
legislative history shows that subsection .483(d) was intended to
eliminate the possibility of the corporation successfully
contesting liability,17 by providing a strategy by which a third
party can preclude a corporate principals denial of the authority
of an officer as agent.18 Subsection .483(d) does not impose a
two-signature requirement for all corporate contracts; rather it
ensures greater security for third parties who contract with
corporations when the two-signature standard has been met. When
the two-signature standard has been satisfied, subsection .483(d)
prevents a corporation from avoiding contractual liability unless
the third party had actual knowledge that authority to bind the
corporation was lacking.19
The superior court therefore did not err in granting
summary judgment to the school district on the issue of mutual
assent.
3. Consideration
Askinuk also argues that the lease lacks bargained-for
consideration because [t]here is no evidence that Askinuk ever
bargained for the peppercorn o[f] legal detriment of $1.00 per
year; they bargained for just compensation. It similarly argues
that the school districts promise to renegotiate the lease is
illusory and cannot be consideration because the leases
renegotiation provision does not provide a definite and specific
rental rate and because the renegotiation provision is not easily
enforceable.
The superior court determined that the renegotiation
provision is not illusory and that the lease is supported by
adequate consideration.20
We have held that [t]o constitute consideration, a
performance or a return promise must be bargained for . . . . A
performance or return promise is bargained for if it is sought by
the promisor in exchange for his promise and is given by the
promisee in exchange for that promise.21 Here Askinuk promised to
lease land to the school district and the school district
promised to pay one dollar per year to lease the land solely for
public school purposes; the lease implicitly contemplated
construction and operation of a new school in the village. This
exchange provided sufficient bargained-for consideration, apart
from the payment rate.
Moreover, Askinuks argument that the renegotiation
provision is illusory and cannot constitute consideration is
unpersuasive. Illusory promises are those that by their terms
make performance entirely optional with the promisor.22 The
renegotiation provision requires the parties to renegotiate the
payment term in ten years and provides that in the event both
parties cannot reach mutual agreement on [the payment term] the
sum of $1.00 per year payment shall . . . remain in effect until
such an agreement can be reached. Because the covenant of good
faith and fair dealing is implied in all contracts in Alaska,23
this provision is not illusory. The covenant prevents each party
from doing anything that will injure the right of the other to
receive the benefits of the agreement.24 Askinuk can therefore
rely on the school districts express promise to renegotiate the
rate and its implied promise to renegotiate in good faith. The
superior court did not err in granting summary judgment to the
school district on this issue.
C. The Superior Court Correctly Held that the Lease Was
Enforceable. Askinuk alternatively argues that the lease
is unconscionable and is therefore not enforceable. It also
argues that the lease does not accurately reflect the parties
true mutual intention.
1. Unconscionability
Quoting the Restatement (Second) of Contracts, section
208, comment b,25 Askinuk first argues that the lease is
unconscionable because it reflects a bargain that no man in his
senses and not under delusion would make on the one hand, and as
no honest and fair man would accept on the other. Askinuk
contends that there was a vast disparity of bargaining power
between Askinuk and the school district in terms of their
available resources and the experience and educational background
of their representatives. The fact that it was represented by
counsel is immaterial, Askinuk argues, because its attorney was
not present at the critical meetings at which the lease was
discussed, notably the annual shareholders meeting. Askinuk
implicitly argues that its shareholders were coerced to approve
the one-dollar-per-year rental rate because of Kaganaks threats
that there would be no new school otherwise.
We have relied on the Restatement approach in the past
when applying the doctrine of unconscionability.26 The
Restatement does not provide a concise definition of what makes a
contract or term unconscionable and instead states that [t]he
determination that a contract or term is or is not unconscionable
is made in the light of its setting, purpose and effect.27
Although inadequacy of consideration does not of itself
invalidate a bargain, the Restatement provides that a gross
disparity in the values exchanged may be an important factor in a
determination that a contract is unconscionable.28 A contract or
a contractual term is not unconscionable merely because the
parties to it are unequal in bargaining position, nor even
because the inequality results in an allocation of risks to the
weaker party.29 But we have also held that unconscionability may
exist if the circumstances indicate a vast disparity of
bargaining power coupled with terms unreasonably favorable to the
stronger party.30
The superior court held that the lease in this case was
not unconscionable. It concluded that, because Askinuk was
represented by counsel and was experienced in the art of
negotiation, no disparity of bargaining power was present. The
court explicitly noted that the school district had leased land
for public school purposes from four other entities on terms that
were similar to those in Askinuks lease.31 Each of those other
four leases had a term of fifty-five years (with the additional
option of two ten-year renewals) and a rental rate of one dollar
per year. None of the leases contained a provision that the
rental rate was subject to renegotiation after ten years. The
superior court concluded that the fact that Askinuk was able to
negotiate a renegotiation provision demonstrated that there was
no disparity of bargaining power between it and the school
district.
Askinuk has not demonstrated that the superior courts
conclusion was erroneous. We are unconvinced that there was a
disparity of bargaining power even though Askinuks attorney was
not present when the lease was discussed and eventually approved
by the shareholders. Askinuk and its shareholders had access to
legal advice throughout the negotiation process and could have
availed themselves of their attorneys advice at any time.32 We
are also unpersuaded by Askinuks contention that the shareholder
vote was coerced or that the lease is so one-sided on its face as
to render it unconscionable. The shareholders had a meaningful
choice whether or not to enter into the lease and could have
refused. While the payment rate is no doubt minimal, the
evidence suggests that the shareholders ultimate decision was not
motivated by how much the district was to pay annually. Before
voting to approve an annual rental rate of one dollar, some of
the shareholders discussed how they wanted not only a new school
for their children but the high-wage job opportunities the lease
would bring into the community. We accordingly cannot conclude
that the lease or any one term within it is unconscionable in
light of its setting, purpose, and effect.
Askinuk also argues that the lease is unconscionable
because George Smith sat on the boards of both the school
district and Askinuk and allegedly drafted the offending in the
event that both parties cannot reach mutual agreement language in
the amended Section IV.
Transactions between entities with interlocking
directorates may be voidable in certain situations if the common
directors participate in the decision to enter into the
transaction.33 But the mere fact that the directorates of two
contracting entities overlap does not make any transaction
between them voidable if the shareholders, not the board of
directors, voted to approve the transaction. Even assuming Smith
drafted the language to which Askinuk now objects, the lease in
its final form was available to the shareholders before they
voted to approve it. Askinuk has not alleged that Smith or
anyone else would not have provided the actual lease had the
shareholders wanted to see it.
We accordingly hold that the superior court did not err
in concluding that the lease was not unconscionable.
2. Mistake
Askinuk argues that the lease does not accurately
reflect the true mutual intention of the parties, and that
reformation is consequently appropriate. The superior court held
that reformation was not an appropriate remedy.
The equitable remedy of reformation is available only
in certain well-defined circumstances.34 These circumstances
include situations involving mistake of fact, fraud, or mutual
mistake, or situations in which a party executes a written
instrument knowing the intention of the other party as to the
terms to be embodied therein, and knowing that the writing does
not accurately express that intention.35 A party seeking
reformation must prove the elements of reformation by clear and
convincing evidence.36 Askinuk seems to base its reformation
argument on a theory of unilateral mistake.
The Restatement (Second) of Contracts provides that a
mistake of one party may in certain situations make a contract
voidable, but only if that party did not bear the risk of the
mistake.37 According to section 154 of the Restatement (Second)
of Contracts, a party bears the risk of a mistake if he is aware,
at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates
but treats his limited knowledge as sufficient.38 This is
sometimes referred to as conscious ignorance.39 Askinuks
shareholders bore the risk of mistake when they voted to
authorize the lease without asking that the lease be made
available to them for closer review.
Askinuk contends that it reasonably expected that it
would receive just compensation for its land and that the lease
in its final form does not accurately express that intention.
Askinuk seems also to contend that the school district executed
the lease knowing that it did not accurately reflect Askinuks
intent. It argues the school district knew all along that it
should pay just compensation as evidenced by the fact that the
school district had sometime before October 2003 budgeted
$120,000 for land. Askinuk accordingly requests that we reform
Section IV to make the amount of consideration specific and
definite, legal and just. We decline Askinuks request. We
conclude that Askinuk has not demonstrated there was a genuine
question of material fact about whether the school district knew
that the Askinuk shareholders had authorized the lease under a
mistaken apprehension.
Nor is this a case in which it would be unconscionable
to enforce any mistake on Askinuks part. Askinuks shareholders
knowingly agreed to accept the one-dollar-per-year rate after
discussing the advantages and disadvantages of doing so. We have
already concluded that this rate and the holdover-rate provision
in Section IV were not unjust in light of the anticipated
benefits a new school and high-wage job opportunities for the
community Askinuk would gain from the lease and in light of the
school districts duty to renegotiate the rate in good faith. We
conclude that the superior court did not err in denying Askinuks
reformation request.
IV. CONCLUSION
We therefore AFFIRM the superior court judgment.
MATTHEWS, Justice, dissenting.
In reviewing a judgment that is based on the grant of a
motion for summary judgment, the appellate court is required to
take that view of the facts, including reasonable inferences
drawn from the facts, that is most favorable to the losing
party.1 In discussing the facts related below I adopt this
perspective.
Askinuk Corporation was willing to lease the twenty-
acre parcel to the school district for a dollar a year for the
first ten years of the lease term in order to ensure that the new
school was built. But after the initial ten-year term Askinuk
wanted fair compensation for the use of its land. Askinuks
shareholders thought that providing for renegotiation of the rent
after ten years would ensure fair compensation. But the
shareholders were not alerted to the fall-back clause in the
revised lease that provided that if the parties could not agree
on the amount of the rent when the time for renegotiation came,
the rent would still be one dollar per year.
The fall-back clause is of great importance. Without
it, one could assume that if the parties could not agree on an
amount for the new rent a court would set the rent for them based
on a standard that would recognize Askinuks desire for fair
compensation after the initial ten-year period.2 But with the
fall-back clause in place the renegotiation clause means very
little. The district will always be able to claim in good faith
that it is strapped for funds and that it must therefore decline
to pay more than nominal rent. This predictable posture will
satisfy the districts obligation of good faith and fair dealing.
The upshot will be that Askinuk will have made a gift of land for
seventy-five years when in actuality it only intended a ten-year
gift.
I believe that the lease with the fall-back clause
falls readily within the definition of unconscionability quoted
in todays opinion.3 No lessor desiring fair compensation after
an initial ten-year term would sensibly agree to the fall-back
clause and no lessee knowing what the lessor thought it was
achieving by the clause could fairly and honestly accept it.
Further, no comfort can be taken from the fact that Askinuk was
represented by counsel. It is true that Petersen, the attorney
for Askinuk, correctly advised Smith that the fall-back clause
has the effect of giving the property away for 75 years, unless
the school district volunteers to pay rent. But though Smith,
who was both the chairman of the board of Askinuk and the vice-
chairman of the school districts board, dismissively4 forwarded
this opinion to the school district, there is no evidence that he
communicated it to Askinuks other board members or to Askinuks
shareholders. Thus, the fact that Askinuk was represented by
counsel, in fact by counsel who gave excellent advice, does
nothing to cure the unconscionability in this case because
counsels opinion concerning the illusory nature of the
renegotiation clause was communicated only to Smith, and through
Smith to the school district, but not to the disinterested
representatives of Askinuk.
Smiths failure to communicate Petersens opinion to the
board is of critical importance. Petersen had advised the
Askinuk board in October of 2003 that the proposed lease was a
seventy-five-year give-away. The board took this advice
seriously and sought a lease under which the rental rate would be
$400 per month for the first five years. At the end of the first
five years, the rent would be adjusted for cost-of-living
changes, and this process would be repeated at each five-year
anniversary. At the March 4, 2004 meeting, the school district
representatives told the board that it could not afford more than
one dollar per year. At that point, in order to resolve their
impasse, the parties discussed the possibility of renegotiating
the rent after ten years. They tentatively agreed to this
approach. The board members appear to have thought that even
though they had not completely eliminated the give-away character
of the lease, they had reduced its duration from an unacceptable
seventy-five years to an acceptable ten years. Petersens opinion
that the fall-back clause made the renegotiation clause illusory
would have disabused them of this belief, but Smith withheld this
information from them.
I also do not agree that the transaction is insulated
from the need for judicial scrutiny on unconscionability grounds
by the fact that the shareholders at the annual meeting of
April 20, 2004, agreed to a motion to lease the proposed land
site . . . for [$]1.00 a year but negotiable after 10 years. A
shareholder resolution may remove the taint that would otherwise
attach to a transaction where directors have a conflict of
interest, but the general rule is that such a cure can occur only
when the shareholders are fully informed.5 The Model Business
Corporation Act requires a conflicted director to disclose those
facts known to him that a director free of such conflicting
interest would reasonably believe to be material in deciding
whether to proceed with the transaction.6 Applying this same
standard to disclosures to ratifying shareholders, the standard
would not be satisfied in this case. There is no evidence that
the shareholders were advised either of the existence of the fall-
back clause or of their attorneys opinion that it meant that the
renegotiation right would be meaningless.
In conclusion, I believe that the lease is
unconscionable under the facts of this case when they are
considered in the light most favorable to Askinuk. The
unconscionability can in no sense be said to have been purged by
the approval of the lease by Askinuks board or by its
shareholders. Neither the board nor the shareholders knew of the
fall-back clause or that it made the renegotiation clause
illusory because the dual director, Smith, kept that knowledge
from them. I would therefore reverse the judgment of the
superior court and remand this case for trial.
_______________________________
1 Copper River Sch. Dist. v. Traw, 9 P.3d 280, 283
(Alaska 2000) (citing Davis v. Dykman, 938 P.2d 1002, 1006
(Alaska 1997)).
2 Id. at 283.
3 Id. (citing Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska
1979)).
4 Id.
5 Given the outcome of the apparent authority issue, we
do not need to decide whether Smith had actual authority to sign
the lease with the disputed default payment term. An agent acts
with actual authority if, at the time of taking action that has
legal consequences for the principal, the agent reasonably
believes, in accordance with the principals manifestations to the
agent, that the principal wishes the agent so to act.
Restatement (Third) of Agency 2.01 (2006). There is
insufficient evidence in the record to conclude at the summary
judgment stage that Smith reasonably believed the shareholders
had authorized the lease in its final form prior to his signing.
6 Anderson v. PPCT Mgmt. Sys., Inc., 145 P.3d 503, 509
(Alaska 2006) (quoting City of Delta Junction v. Mack Trucks,
Inc., 670 P.2d 1128, 1130 (Alaska 1983)).
7 Id. at 509 (citing Cummins, Inc. v. Nelson, 115 P.3d
536, 542 (Alaska 2005)).
8 Commentary on the Alaska Corporations Code, Senate-
House Joint Journal Supp. No. 9 at 17, 1987 House-Senate Joint
Journal. Legislative counsel was likely referring to the pure
heart and empty head standard of good faith applied by courts in
other contexts. See Alaska Fed. Sav. & Loan Assn of Juneau v.
Bernhardt, 794 P.2d 579, 583 (Alaska 1990) (quoting Schwarzer,
Sanctions Under the New Federal Rule 11- A Closer Look, 104
F.R.D. 181, 187 (1985) (There is no [longer] room for a pure
heart, empty head defense under Rule 11.)).
9 Sea Lion Corp. v. Air Logistics of Alaska, Inc., 787
P.2d 109, 117 n.3 (Alaska 1990) (holding corporation liable on
contract despite agents lack of authority to bind the corporation
because board of directors ratified contract).
10 Commentary on the Alaska Corporations Code, Senate-
House Joint Journal Supp. No. 9 at 16, 1987 House-Senate Joint
Journal.
11 Id.
12 See Part III.B.1.
13 Askinuk also argues that Smith failed to abide by a
provision in the corporations bylaws that required contracts to
be signed by two officers. This argument is also foreclosed by
AS 10.06.020.
14 Askinuk makes a similar argument with respect to AS
10.06.015. That section governs situations in which a claim of
ultra vires may affect the rights of third parties who have dealt
with a corporate entity. Commentary on the Alaska Corporations
Code, Senate-House Joint Journal Supp. No. 9 at 14, 1987 House-
Senate Joint Journal. A transaction is ultra vires when it is
beyond the powers of the corporation as those powers are
conferred by law and the terms of the articles of incorporation.
Id. Because there was no showing that Askinuk was prohibited by
law or its articles from leasing its land, or from doing so on
the disputed terms, the transaction at issue here was not ultra
vires. AS 10.06.015 is accordingly irrelevant.
15 AS 10.06.483(d) (emphasis added).
16 Hoffman Constr. Co. of Alaska v. U.S. Fabrication &
Erection, Inc., 32 P.3d 346, 355 (Alaska 2001) (citing Frost v.
Ayojiak, 957 P.2d 1353, 1355-56 (Alaska 1998)).
17 Commentary on the Alaska Corporations Code, Senate-
House Joint Journal Supp. No. 9 at 19, 1987 House-Senate Joint
Journal.
18 Id. at 113 (emphasis added).
19 AS 10.06.483(d).
20 The superior court addressed Askinuks illusory promise
argument as follows:
Askinuk claims that the renegotiation clause
of the lease renders the contract illusory.
The phrase illusory promise means words in a
promisory form that promise nothing. An
illusory promise is not a promise at all and
cannot act as consideration; therefore no
contract is formed. Cordry v. Vanderbilt
Mortgage & Finance, Inc., 445 F.3d 1106, 1110
(8th Cir. 2006), quoting Corbin on Contracts
5.28 (rev. ed. 1995). A good example of an
illusory promise is a contract that says I
will pay five dollars for the bike unless I
choose not to. Alaska courts have found that
satisfaction clauses, which appear to give
one side of a contract the incentive to act
in bad faith, are not illusory because the
courts read them to require the exercise of
honest judgment and good faith. Kennedy
Associates, Inc. v. Fischer, 667 P.2d 174,
180 (Alaska 1983).
Askinuk argues that Section IV of the lease
creates an illusory promise with this clause:
However, in the event both parties cannot
reach mutual agreement on this section the
sum of $1.00 per year payment shall be the
amount that will remain in effect until such
an agreement can be reached. This clause
does not make the promise to renegotiate
illusory even though it does put the District
in a much stronger negotiating position.
Like in Kennedy Associates, a promise to
renegotiate assumes that the renegotiation
will happen in good faith even though the
District is given much more power in the
negotiation through the Section IV clause.
The District still must renegotiate after 10
years and, by the covenant of good faith and
fair dealing, it must enter those
negotiations in good faith. Section IV of
the lease provides a promise the District
will renegotiate and it is required by law to
renegotiate in good faith. As a matter of
law, this is not an empty promise. There is
no issue of material fact as to illusory
promise. The court grants the District
summary judgment on the illusory promise
claim. This implicitly denies Askinuks
summary judgment claim.
21 Reust v. Alaska Petroleum Contractors, Inc., 127 P.3d
807, 811 n.4 (Alaska 2005) (quoting Restatement (Second) of
Contracts 71 (1981)).
22 Restatement (Second) of Contracts 77 cmt. a (1981).
23 Casey v. Semco Energy Inc., 92 P.3d 379, 384 (Alaska
2004) (citing Ellingstad v. State, Dept of Natural Res., 979 P.2d
1000, 1009 (Alaska 1999)).
24 Ellingstad, 979 P.2d at 1009 (citing Guin v. Ha, 591
P.2d 1281, 1291 (Alaska 1979)).
25 Restatement (Second) of Contracts 208 cmt. b (1981).
26 Helstrom v. North Slope Borough, 797 P.2d 1192, 1199
(Alaska 1990) (citing Vockner v. Erickson, 712 P.2d 379, 381-83
(Alaska 1986)).
27 Restatement (Second) of Contracts 208 cmt. a (1981).
28 Id. at cmt. c.
29 Vockner, 712 P.2d at 382 (quoting Restatement (Second)
of Contracts 208 cmt. d (1981)).
30 OK Lumber Co. v. Alaska R.R. Corp., 123 P.3d 1076, 1081
n.17 (Alaska 2005) (quoting Municipality of Anchorage v. Locker,
723 P.2d 1261, 1265-66 (Alaska 1986)).
31 The four entities were Pilot Station, Inc., Sea Lion
Corporation, the City of Kotlik, and Swan Lake Corporation.
32 The dissent similarly argues that no comfort can be
taken from the fact that Askinuk was represented by counsel
because the cautionary legal advice the attorney gave was
communicated only to Smith and not to the shareholders or other
board members. (Slip Op. at 25) But three of the disinterested
board members and one member of the land committee were aware of
Askinuks attorneys negative opinions regarding the original
proposed lease agreement. The minutes from a joint meeting of
Askinuks board of directors and its land committee indicate that
the participants had read the letter Askinuks attorney sent the
board in October 2003. The letter explained that the lease as it
was then written contemplated that Askinuk would give away some
of its principal asset for what was effectively seventy-five
years. That the board may not have been apprised of later
correspondence which largely reiterated these observations is of
little significance, in our view.
33 AS 10.06.478(c) governs the voidability of interlocking-
directorate transactions approved by an entitys board of
directors. According to subsection .478(c), such transactions
will not be void or voidable solely because a common director was
present when the board authorized the transaction if: (1) the
board votes in good faith to authorize the transaction after
having been informed of all material facts, or (2) the
shareholders approve the transaction in good faith. AS
10.06.478(c) provides:
A contract or other transaction between a
corporation and a corporation or association
of which one or more directors of the
corporation are directors is neither void nor
voidable because the director or directors
are present at the meeting of the board that
authorizes, approves, or ratifies the
contract or transaction, if the material
facts of the transaction and the directors
other directorship are fully disclosed or
known to the board and the board authorizes,
approves, or ratifies the contract or
transaction in good faith by a sufficient
vote without counting the vote of the common
director or directors or the contract or
transaction is approved by the shareholders
in good faith.
AS 10.06.478(c) implies that transactions between entities with
interlocking directorates may be void or voidable if they were
approved by board action, a common director was present when the
board approved the transaction, and neither of the two
safeguarding conditions were met.
34 Ahwinona v. State, 922 P.2d 884, 887 n.3 (Alaska 1996)
(stating contract reformation is the proper remedy where it is
alleged that the instrument does not conform to the actual
intentions of the parties (quoting D.M. v. D.A., 885 P.2d 94, 96
(Alaska 1994))).
35 Id. at 887 n.3 (quoting Lathrop Co. v. Lampert, 583
P.2d 789, 790 (Alaska 1978)); see Restatement (Second) of
Contracts 155 cmt. a (1981) ([R]eformation is available when the
parties, having reached an agreement and having then attempted to
reduce it to writing, fail to express it correctly in the
writing.); see also Firemans Fund Mortgage Corp. v. Allstate Ins.
Co., 838 P.2d 790, 797 (Alaska 1992) (Traditionally, reformation
is a tool courts use to correct what are essentially errors in
the drafting of a contract so as to conform the written agreement
to the clear intention of the parties. (citing Oaksmith v.
Brusich, 774 P.2d 191, 197 (Alaska 1989))).
36 Adams v. Adams, 89 P.3d 743, 752 (Alaska 2004) (citing
Voss v. Brooks, 907 P.2d 465, 468 (Alaska 1995)).
37 Restatement (Second) of Contracts 153 (1981) provides
that:
Where a mistake of one party at the time a
contract was made as to a basic assumption on
which he made the contract has a material
effect on the agreed exchange of performances
that is adverse to him, the contract is
voidable by him if he does not bear the risk
of the mistake under the rule stated in 154,
and
(a) the effect of the mistake is such
that enforcement of the contract would be
unconscionable, or
(b) the other party had reason to know
of the mistake or his fault caused the
mistake.
38 Id. 154.
39 Wasser & Winters Co. v. Ritchie Bros. Auctioneers
(Am.), Inc., 185 P.3d 73, 79 (Alaska 2008).
1 Beegan v. State, Dept of Transp. & Pub. Facilities, 195
P.3d 134, 138 (Alaska 2008) (explaining that when reviewing a
grant of summary judgment, [a]ll reasonable inferences are drawn
in favor of the nonmovant).
2 Cf. City of Kenai v. Ferguson, 732 P.2d 184, 186-88
(Alaska 1987) (lease which called for rent to be renegotiated
every five years was enforceable as court could declare the
missing rental term in order to effect the reasonable expectation
of the parties).
3 Slip Op. at 17.
4 When Smith emailed Goodwin, the school districts
business manager, a copy of Petersens seventy-five-year give-away
memo, Smith stated: I wouldnt sweat over it unless we cant
decide on what font to use on the language. It is also
noteworthy that Petersen was not in Scammon Bay during the
formation of the lease. Rather his office is in Willow, some 500
miles away, and there is no indication that he communicated with
any representative of Askinuk other than Smith during the time in
question.
5 Edward Brodsky & M. Patricia Adamski, Law of Corporate
Officers and Directors: Rights, Duties, and Liabilities 3.7, at
3-14 (2003) (For shareholder approval to have any effect, it must
be given after full disclosure . . . .); id. at 3-16 ([The]
entire atmosphere is freshened and a new set of rules invoked
where formal approval has been given by a majority of
independent, fully informed stockholders. (quoting Gottlieb v.
Heyden Chemical Corp., 91 A.2d 57, 59 (Del. 1952)) (internal
quotation marks omitted)).
6 Model Business Corp. Act Ann. 8.60(7) (4th ed. 2008);
see id. at 8.61(b), 8.63(a).
 |
| Case Law Statutes, Regs & Rules Constitutions Miscellaneous |
|
