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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Alaska Interstate Construction, LLC v. Pacific Diversified Investments, Inc. (2/10/2012) sp-6650

Alaska Interstate Construction, LLC v. Pacific Diversified Investments, Inc. (2/10/2012) sp-6650

        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, email 
        corrections@appellate.courts.state.ak.us. 

                THE SUPREME COURT OF THE STATE OF ALASKA 

ALASKA INTERSTATE                                ) 
CONSTRUCTION, LLC, PEAK                          )   Supreme Court Nos. S-13478/13667 
ALASKA VENTURES, INC. and                        ) 
NABORS ALASKA SERVICES                           )   Superior Court No. 3AN-05-07921 CI 
CORPORATION,                                     ) 
                                                 )   O P I N I O N 
        Appellants/Cross-Appellees,              ) 
                                                 )   No. 6650 - February 10, 2012 
        v.                                       ) 
                                                 ) 
PACIFIC DIVERSIFIED                              ) 
INVESTMENTS, INC., JOHN                          ) 
ELLSWORTH, Individually, and                     ) 
ANCHORAGE AVIATION                               ) 
CENTER, LLC,                                     ) 
                                                 ) 
        Appellees/Cross-Appellants.              ) 
                                                 ) 

               Appeal from the Superior Court of the State of Alaska, Third 
               Judicial District, Anchorage, Sen K. Tan, Judge. 

               Appearances:      Timothy J. Petumenos, Birch Horton Bittner 
               &    Cherot,    Anchorage,     for  Appellants,    Cross-Appellees 
               Alaska Interstate Construction, LLC, Peak Alaska Ventures, 
               Inc.,   and   Nabors   Alaska   Services   Corporation.   Jahna   M. 
               Lindemuth,       Dorsey    &   Whitney     LLP,    Anchorage,     for 
               Appellant and Cross-Appellee, Peak Alaska Ventures, Inc. 
               Peter   J.   Maassen,   Ingaldson,   Maassen   &   Fitzgerald,   P.C., 
               Anchorage,      for  Appellees    and   Cross-Appellants,     Pacific 
               Diversified Investments, Inc., John Ellsworth, Individually, 
               and Anchorage Aviation Center, LLC. 

----------------------- Page 2-----------------------

               Before:    Carpeneti,     Chief  Justice,  Fabe,   Christen,   and 
               Stowers, Justices.   [Winfree, Justice, not participating] 

               CHRISTEN, Justice. 

I.     INTRODUCTION 

               Alaska Interstate Construction, LLC, is a general contractor involved in the 

construction of roads, bridges, and dams; it also supplies support services to the oilfield 

sector.  In 1995, Alaska Interstate Construction's assets were sold to a joint venture but 

it continued to be operated by its founder, John Ellsworth, through a company he owned 

called Pacific Diversified Investments, Inc.       In 1998, Alaska Interstate Construction 

conveyed a 20% ownership interest to Ellsworth and entered into an operating agreement 

that provided for Ellsworth's continued management of Alaska Interstate Construction's 

operations through Pacific Diversified Investments. 

               Starting in 1998, Pacific Diversified Investments also leased two aircraft 

to Alaska Interstate Construction and provided aircraft support services for them. 

               Alaska    Interstate  Construction    filed  suit  against  Pacific  Diversified 

Investments and Ellsworth in 2005, principally alleging fraud, breach of the covenant of 

good faith and fair dealing, violation of the Unfair Trade Practices Act, breach of the 

parties' operating agreement, and conversion. The jury returned a verdict of $7.3 million 

in favor of Alaska Interstate Construction on its Unfair Trade Practices Act claims and 

$7.3 million on its claims for common law fraud and breach of fiduciary duty.  The 

parties filed many post-trial motions. 

               Though the jury decided that Pacific Diversified Investments and Ellsworth 

engaged in conduct that was fraudulent, it decided that they did not materially breach the 

parties' operating agreement. Alaska Interstate Construction filed a post-verdict motion 

                                              -2-                                         6650
 

----------------------- Page 3-----------------------

for judgment notwithstanding the verdict arguing the jury's finding of fraud required the 

finding that the operating agreement was materially breached.   This motion was denied. 

                But   the   superior   court   did   enter   judgment   notwithstanding   the   verdict 

nullifying the $7.3 million award for violations of the Unfair Trade Practices Act.  This 

ruling was premised on the   superior court's conclusion that the conduct the jury found 

to be fraudulent was exempt from the Unfair Trade Practices Act because it dealt with 

aviation, an industry regulated by the Federal Aviation Administration. 

                The superior court awarded attorney's fees and costs to Pacific Diversified 

Investments and Ellsworth. 

                Alaska Interstate Construction appeals; Pacific Diversified Investments and 

Ellsworth cross-appeal. 

                We     affirm    the  superior    court's   denial   of  the   motion    for   judgment 

notwithstanding the verdict seeking a ruling that the Unfair Trade Practices Act does not 

apply   to   intra-corporate disputes.       We affirm the superior court's determination   that 

Alaska Interstate Construction's aircraft lease claims were not barred by the statute of 

limitations.     We     affirm   the  superior    court's   decision   to  deny    Pacific   Diversified 

Investments access to discovery in support of its abuse of process claim.   We also affirm 

the superior court's decision to apply the clear and convincing evidence standard of 

proof to the quasi-estoppel defense. 

                We reverse the superior court's judgment notwithstanding the verdict on 

Pacific Diversified Investments's argument that Alaska Interstate Construction's claims 

were exempt from the Unfair Trade Practices Act. We reverse the superior court's ruling 

on material breach and hold that the jury's findings of fraud and wilful misconduct, 

under   the   circumstances   of   this   case,   required   the   finding   that   Pacific   Diversified 

Investments materially breached the operating agreement as a matter of law. We reverse 

the superior court's order denying the motion for judgment notwithstanding the verdict 

                                                   -3-                                             6650
 

----------------------- Page 4-----------------------

on Pacific Diversified Investments's fraud in the inducement claim, and we vacate the 

superior court's determination of prevailing party, award of attorney's fees, and award 

of prejudgment interest. 

                In   light  of  these  rulings,   Pacific   Diversified   Investments's     claims    of 

statutory and contractual indemnity are moot. 

II.     FACTS AND PROCEEDINGS 

                In 1987 John Ellsworth started Alaska Interstate Construction, LLC (AIC). 

AIC is a general contractor involved in the construction of roads, bridges, and dams.  It 

also supplies other oilfield-related support services. In 1995, Ellsworth sold AIC's assets 

to a joint venture consisting of Nabors Alaska Services Corp., a subsidiary of Nabors 

Industries, Inc. (Nabors), and Peak Alaska Ventures, Inc. (Peak), a subsidiary of Cook 

Inlet Region, Inc. (CIRI).  The joint venture retained Ellsworth to manage AIC under a 

three-year consulting contract.        Ellsworth managed AIC through Pacific Diversified 
Investments, Inc. (PDI), a company he owned.1           The management contract between AIC 

and PDI contained a non-compete clause naming PDI and Ellsworth in his personal 

capacity. 

                In 1998, with PDI's management contract about to expire, Carl Marrs, then 

president of CIRI and Peak, suggested offering Ellsworth an ownership interest in AIC 

to   keep   him   engaged    in  the  company.      Marrs     convinced    Ellsworth    to  convert    a 

forthcoming bonus into a 20% ownership interest in AIC.  He and Ellsworth negotiated 

"some of the key business terms" between themselves.  Ellsworth also negotiated terms 

with Mark Kroloff, an attorney who acted on behalf of CIRI and Peak; Keith Sanders, 

        1       Throughout   this   opinion,   we   use   "PDI"   to   refer   to   Pacific   Diversified 

Investments and John Ellsworth, except for instances when it is necessary to distinguish 
between them.      We also use "AIC" to refer to all cross-appellees collectively, except 
where it is necessary to distinguish Peak or Nabors. 

                                                  -4-                                              6650 

----------------------- Page 5-----------------------

who was then CIRI's general counsel; Charlie Cole, PDI and Ellsworth's lawyer; and 

Kathy Ellis, in-house counsel for Nabors.         The operating agreement gave Ellsworth an 

ownership interest in AIC and responsibility for managing AIC. 

                The parties' operating agreement included a non-compete clause paralleling 

the three-year management agreement the parties had entered into in 1995. By its terms, 

the non-compete clause applied to Ellsworth personally and to PDI. 

                PDI continued to manage AIC from 1998 through April 30, 2005.  During 

this period, the ownership of AIC was split: Peak owned 40%; Nabors owned 40%; and 

PDI owned 20%. 

                Later, PDI leased two aircraft to AIC and contractually agreed to provide 

aircraft   support   services   for   them. The   first   lease   was   the   October   1,   1998   Letter 
Agreement.  The second was the Sakhalin Jet Lease.2            AIC paid over $20 million to PDI 

under these two leases. 

                In 2005, the other owners of AIC decided to change its management.  They 

purchased PDI's 20% ownership interest and assumed management responsibility. 

                AIC filed suit against PDI in May 2005 claiming conversion, breach of the 

covenant of good faith and fair dealing, and breach of the parties' operating agreement. 

AIC    filed  an  amended     complaint   in   September     2006    adding   claims   of   fraud  and 

violation of the Unfair Trade Practices Act (UTPA).              PDI responded with more than 

twenty counter-claims, many of which were dismissed before trial. The relevant counter- 

claims on appeal to our court are Ellsworth's claim that he was fraudulently induced to 

enter the operating agreement containing the non-compete clause, PDI's claim that AIC 

abused the judicial process by reporting its suspicions of fraud to the FBI and the U.S. 

        2       The lease agreements were made with Anchorage Aviation Center, LLC 

(AAC), a wholly-owned subsidiary of PDI through which PDI provided aircraft services. 
The parties stipulated that PDI and AAC can be treated as a single entity in this litigation. 

                                                 -5-                                              6650 

----------------------- Page 6-----------------------

Attorney's Office, and the claim that AIC breached the operating agreement by not 

paying the contractual premium price of $12 million for PDI's ownership interest in AIC. 

Before trial, PDI conceded over-billing AIC by $1,902,827. 

               The evidence at trial established that the October 1, 1998 Letter Agreement, 

signed by Peak and Nabors, called for PDI to provide aircraft services to AIC at $1,467 

per flight hour.  In 2002, PDI began charging monthly fees of $100,000 to AIC for the 

use of one aircraft, regardless of the time the aircraft was used by AIC.  AIC introduced 

evidence showing that neither Peak nor Nabors gave prior approval for this change. 

AIC's forensics auditor, FTI Consulting, ultimately concluded that the October 1, 1998 

Letter Agreement resulted in approximately $6 million in overpayments. 

               The Sakhalin Jet Lease required AIC to pay $125,000 per month for use of 
a jet.3 AIC claimed damages for payments made on this lease in excess of arms-length, 

fair market compensation.     FTI opined that $9.8 million of the $12.5 million AIC paid 

to PDI for services under the Sakhalin Jet Lease were overpayments, based on a rate of 

$5,000 per flight hour for 552.5 hours of business use. 

               In all, FTI's testimony was that approximately $17 million of the payments 

made pursuant to the aircraft leases was billed at a rate that exceeded market value, billed 
for services not received, or was otherwise fraudulent.4     AIC also presented evidence of 

       3       While    Ellsworth   managed    AIC,   it   formed  SakhalinMorNefteMontazh 

Alaska Projects, LLC (SAP), a wholly-owned subsidiary of AIC, to lease  aircraft.  The 
parties stipulated to treating AIC and SAP as the same entity. 

       4       FTI   determined    that  there  were  $17,172,728     in  total  aircraft  related 

damages.  He made this determination using the following breakdown: PDI gain on sale 
of Gulfstream III s/n 466: $936,103; other aircraft-related damages:         $474,379; flight 
hours invoiced, but not flown: $1,412,139; undocumented use of Westwind II s/n 436: 
$60,294;   non-reimbursable expenses billed by PDI:         $1,571,767.    To this, FTI added 
non-business or undocumented use of an Astra   SP   s/n 062 and Astra SPX s/n 121: 
                                                                                 (continued...) 

                                              -6-                                         6650
 

----------------------- Page 7-----------------------

improper or fraudulent credit card charges and charges for expenses unrelated to AIC's 

business, and AIC alleged that some of its assets were sold at below market value after 

AIC gave notice that it would no longer use PDI to manage its operations. 

                PDI argued at trial that AIC should be estopped from enforcing the parties' 

operating agreement because it was modified by the parties' "words and conduct" and 

it would be unconscionable to enforce it.   PDI also argued that any misconduct or errors 

in billing did not materially breach the operating agreement because the objective of the 

operating agreement was to make a profit and AIC was profitable during the period PDI 

managed it. PDI argued that its conduct was exempt from the Unfair Trade Practices Act 

(UTPA) because the parties were not in competition, because the leases did not meet the 

Act's definition of "goods and services," and because the Act does not apply to intra- 

corporate disputes. As explained, Ellsworth argued that he was fraudulently induced into 

signing the operating agreement containing the non-compete clause.                   Contrary to the 

express language of the non-compete agreement, Marrs and Ellsworth both testified that 

they did not intend for it to cover Ellsworth personally. 

                The jury found that PDI committed unfair and deceptive acts under the 

UTPA related to the aircraft leases and that this conduct caused more than $7.3 million 

in damages to AIC.  The jury awarded the same amount, $7.3 million, on AIC's claims 

of fraud by non-disclosure, fraud by affirmative misrepresentation, conversion, breach 

of fiduciary duty, and breach of the covenant of good faith and fair dealing relating to 

the   aircraft   leases. The   jury   also   awarded   $350,000   for   conversion   and   breach   of 

fiduciary duty arising from improper credit card billings; approximately $23,000 for 

        4(...continued) 

$1,362,990; billing in excess of $1,467 per hour due to rate change: $916,767; non- 
business or undocumented use of Gulfstream III jet s/n 437: $608,805; and AAC-SMAK 
Gulfstream III jet lease damages: $9,829,484. 

                                                  -7-                                              6650 

----------------------- Page 8-----------------------

payments   of   expenses   unrelated   to   AIC's   business,   and   approximately   $85,000   for 

breach of fiduciary duty and breach of the covenant of good faith and fair dealing related 

to improper sales of assets at below market value after PDI received notice that it was 

being removed as manager of AIC.             The jury decided that Ellsworth   was personally 

bound by the non-compete provision in the operating agreement, but it also decided that 

he was fraudulently induced into entering into the operating agreement containing the 

non-compete provision. 

                Despite its findings of fraudulent conduct by PDI, the jury decided that PDI 

did not materially breach the operating agreement and that Peak and Nabors were not 
excused from their contractual obligations.5          The jury awarded PDI $12 million under 

two of the operating agreement's provisions.   One required payment of a premium price 

for   PDI's    ownership     interest  in  AIC.     The    other  required    payment     of  incentive 

compensation for PDI's 2005 management services. 

                In post-trial motion practice, the superior court ruled that AIC's aircraft- 

related   claims   were   exempt   from   the   UTPA.     The   superior   court   granted   judgment 

notwithstanding the jury's verdict (JNOV) to PDI,   overturning the jury's verdict on the 

UTPA claims and denying AIC's motion for treble damages.   The superior court denied 

the motion for JNOV that Peak and Nabors filed in which they argued that the jury's 

findings   of   fraud,   bad   faith,   and   wilful   misconduct   established   that   PDI   materially 

breached the operating agreement as a matter of law.   The superior court upheld the $12 

million award in favor of PDI. Later, PDI was determined to be the prevailing party and 

awarded attorney's fees and costs. 

                Both AIC and PDI appeal. 

        5       The jury also found that PDI's breach of the covenant not to compete was 

not a material breach of the operating agreement. 

                                                  -8-                                               6650 

----------------------- Page 9-----------------------

III.    STANDARD OF REVIEW
 

                In   reviewing     orders    granting   or   denying    JNOV      motions,    we   must 

"determine whether the evidence, when viewed in the light most favorable to the non- 

moving party, is such that reasonable persons could not differ in their judgment of the 
facts."6   In   addition,   "[t]o   the   extent   that   a   ruling   on   a   motion   for   [JNOV]   involves 

questions of law, those questions will be reviewed de novo."7 

                A superior court's finding that an issue has been tried by consent, or that 
it was raised in a motion for directed verdict, is reviewed for abuse of discretion.8 

                The superior court's determination of when a statute of limitations begins 

                                9                                                                1 
to run is a question of fact  that we review under the clearly erroneous standard. 

                Discovery orders are reviewed under the "deferential abuse of discretion 
standard."11  We apply our independent judgment to determine whether a challenged jury 

instruction states the law correctly.12        Errors in jury instructions are not grounds for 

reversal unless the errors are prejudicial.13 

        6       Richey v. Oen, 824 P.2d 1371, 1374 (Alaska 1992). 
 

        7       Sisters of Providence in Wash. v. A.A. Pain Clinic, Inc., 81 P.3d 989, 999
 

n.10 (Alaska 2003). 

        8       Tufco, Inc., v. Pac. Envtl. Corp., 113 P.3d 668, 673-74 (Alaska 2005). 

        9       Solomon v. Interior Hous. Auth., 140 P.3d 882, 883 (Alaska 2006). 

        10      Williams   v.   Williams,   129   P.3d   428,   431   (Alaska   2006)   (citing John's 

Heating Serv. v. Lamb, 46 P.3d 1024, 1033 n. 28 (Alaska 2002)). 

        11      In re Mendel, 897 P.2d 68, 72 n.7 (Alaska 1995). 

        12      City of Kodiak v. Samaniego, 83 P.3d 1077, 1082 (Alaska 2004). 

        13      State v. Carpenter, 171 P.3d 41, 54 (Alaska 2007). 

                                                  -9-                                             6650
 

----------------------- Page 10-----------------------

IV.	    DISCUSSION 

        A.	    The Superior Court Erred By Granting PDI's Motion For JNOV On 
               The Applicability Of The UTPA To Aircraft Leases. 

               Alaska's UTPA provides that "[u]nfair methods of competition and unfair 

or   deceptive   acts  or  practices  in  the  conduct  of  trade  or  commerce     are  declared 
unlawful."14   The UTPA broadly prohibits unfair competition and fraudulent conduct 

pertaining to the sale of "goods or services" in "consumer transactions."15          In addition 

to enforcement by the state attorney general, the UTPA provides a private right of action 

by any "person who suffers an ascertainable loss of money or property as a result of 
another person's act or practice declared unlawful [under the UTPA]."16          Two elements 

must be proven to establish a prima facie case of unfair or deceptive acts or practices: 

"(1) that the defendant is engaged in trade or commerce; and (2) that in the conduct of 
trade or commerce, an unfair act or practice has occurred."17      The engaged-in-commerce 

prong encompasses both consumer and business-to-business transactions.18 

               Alaska Statute 45.50.481 carves out three exemptions from the UTPA. The 

pertinent exemption relating to conduct regulated by other statutory schemes appears in 

AS 45.50.481(a)(1): 

               Nothing in [the UTPA] applies to . . . an act or transaction 
               regulated    under    laws   administered    by   the  state,  by  a 

        14	    AS 45.50.471(a). 

        15	    AS 45.50.471(b). 

        16     AS 45.50.531(a). 

        17     Odom     v.   Fairbanks   Mem'l   Hosp.,   999  P.2d   123,   132  (Alaska   2000) 

(quoting State v. O'Neill Investigations, Inc., 609 P.2d 520, 534 (Alaska 1980)). 

        18     W.Star Trucks, Inc. v. Big Iron Equip. Serv., Inc., 101 P.3d 1047, 1048-49 

(Alaska 2004). 

                                              -10-	                                         6650
 

----------------------- Page 11-----------------------

               regulatory     board   or  commission      except   as  provided    by 
               AS     45.50.471(b)(27)     and   (30),   or  officer  acting   under 
                statutory authority of the state or of the United States, unless 
               the law regulating the act or transaction does not prohibit the 
               practices declared unlawful in AS 45.50.471. 

We have said that the UTPA exemption only applies where a "separate and distinct 

statutory   scheme" regulates acts and practices, and the acts or practices "are therein 
prohibited."19 

               The jury returned a verdict of $7.3 million in favor of AIC on its UTPA 

claims, but the superior court vacated that award by granting PDI's motion for JNOV. 

On appeal, AIC first argues that PDI should not have been permitted to argue that its 

conduct falls under the subsection of the UTPA exempting conduct regulated by other 

laws    because   this  argument    was   raised  for  the  first  time  after  the  jury  had  been 

discharged.   In response, PDI argues that the superior court did not abuse its discretion 

when it ruled that the exemption issue was tried by consent and that AIC was on notice 

that "there were many regulations concerning aircraft leasing." 

                1.	    PDI's UTPA exemption defense was impermissibly raised for 
                       the first time in its motion for JNOV. 

               The record shows that PDI's amended answer did not include an affirmative 

defense arguing that its conduct was exempt from the UTPA; PDI's answer made no 

mention of "exemptions" at all. But the superior court ruled that the exemption issue was 

properly raised.    The superior court initially determined, "[i]n reviewing the directed 

verdict motion in this case, this court finds that the UTPA issues were properly raised, 

and the [motion for JNOV] is properly before this court."             In an order on motion for 

partial reconsideration, the superior court appears to have determined that the UTPA 

exemption claims were tried with the express or implied consent of the parties.  The 

        19      O'Neill Investigations, Inc., 609 P.2d at 528. 

                                                -11-                                            6650 

----------------------- Page 12-----------------------

order on reconsideration cited Civil Rule 15(b)20 and Rollins v. Liebold.21                 In granting 

PDI's     post-trial   motion,   the  superior   court   observed,   it   was   "accurate   to  say   that 

regarding the UTPA, general arguments were raised, rather than the specific arguments 

detailed here . . . [n]onetheless, . . . the issue of the UTPA was raised."               The superior 

court ultimately decided that AIC had been on notice of PDI's exemption argument, 

reasoning: "[i]t was certainly no secret that there were many regulations concerning 

aircraft leasing, and it was [AIC] who called an expert in this area." 

                We recognize that the only aviation expert was the one called by AIC, but 

the   expert    did  not   address    whether    the   Federal    Aviation    Administration      (FAA) 

specifically regulates the conduct at issue in this case.           As discussed more fully below, 

AIC's expert only   expressed   an   opinion   that one of the   two   aircraft   leases   violated 

regulations   promulgated   by   the   FAA.   This   testimony   was   offered   in   the   context   of 

        20      Civil Rule 15(b) provides: 

                When issues not raised by the pleadings are tried by express 
                or implied consent of the parties, they shall be treated in all 
                respects   as   if   they   had   been   raised   in   the   pleadings.   Such 
                amendment of the pleadings as may be necessary to cause 
                them to conform to the evidence and to raise these issues may 
                be made upon motion of any party at any time, even after 
                judgment; but failure so to amend does not affect the result of 
                the trial of these issues. If evidence is objected to at the trial 
                on the ground that it is not within the issues made by the 
                pleadings, the court may allow the pleadings to be amended 
                and shall do so freely when the presentation of the merits of 
                the action will be subserved thereby and the objecting party 
                fails to satisfy the court that the admission of such evidence 
                would prejudice the party in maintaining the party's action or 
                defense upon the merits. The court may grant a continuance 
                to enable the objecting party to meet such evidence. 

        21      512 P.2d 937, 940-41 (Alaska 1973). 

                                                  -12-                                             6650
 

----------------------- Page 13-----------------------

expressing the expert's opinion that the second lease was improperly operated under a 

part of the FAA regulations that covers air transportation generally rather than the part 

of the regulations that covers the transportation of passengers. The expert explained that 

operating this way required less paperwork, and allowed PDI's practice of improperly 

billing AIC to go undetected for an extended period of time. 

                We do not accept AIC's argument that the superior court erred by using 

AIC's own expert testimony against it, but our review of the record convinces us that 

AIC did not ask its expert to address whether the FAA specifically regulates the type of 

conduct at issue in this case because AIC was not on notice that PDI would argue that 
the exemption applied until after the jury was discharged.22             The record shows that AIC 

was prejudiced by this lack of notice. 

                There     is  another   problem     with   allowing    PDI    to  advance    the  UTPA 

exemption argument for the first time in a motion for JNOV: the rules do not permit new 

arguments in motions for JNOV.           Alaska Rule of Civil Procedure 50 provides that "[a] 

motion     for  directed   verdict   shall   state  the  specific   grounds    therefor"    and   if  it  is 

denied,"the court is deemed to have submitted the action to the jury subject to a later 
determination of the legal question raised by the motion."23             After a verdict is returned, 

a party who has moved for a directed verdict may move for JNOV to have "judgment 
entered in accordance with the party's motion for directed verdict."24              We have held that 

        22      PDI first raised its UTPA exemption defense in its opening memorandum 

in   support   of   the   defendants'   post-verdict   joint   motion   for   directed   verdict   on   the 
plaintiffs' claim under the UTPA.  Despite being titled as a motion for directed verdict, 
the superior court treated this post-verdict motion as a motion for JNOV. 

        23      Alaska R. Civ. P. 50(b). 

        24      Id. 

                                                  -13-                                             6650
 

----------------------- Page 14-----------------------

the grounds for a JNOV motion must be the same as those raised in a directed verdict 
motion.25 

                At oral argument in the superior court, PDI's position was that the two 

aircraft   leases   did   not   meet   the   UTPA's   definition   of   "competition"   or   "goods   and 

services" and that there was no consumer relationship between PDI and AIC. On appeal, 

PDI characterizes the argument it made in the trial court somewhat differently, arguing 

its position was that the UTPA only applies to transactions "in the conduct of trade or 

commerce."       In   our   view,   the   superior   court   reasonably   understood   PDI's   primary 

argument to be that the UTPA applies to consumers, that AIC was not a consumer, and 

that the leases are not covered under the UTPA because the UTPA applies only to goods 

and services and a lease is neither a good nor a service.             The superior court correctly 
rejected this argument, citing Western Star Trucks, Inc. v. Big Iron Equipment Services.26 

                PDI was allowed to bring its motion for JNOV on the issue of the UTPA 

exemption because the superior court decided the issue had been raised generally during 

the trial and generally at the directed verdict level.           In reaching this conclusion, the 
superior court cited Sisters of Providence in Washington v. A.A. Pain Clinic, Inc.27 and 

Richey v. Oen.28 

        25      See, e.g., Roderer v. Dash, 233 P.3d 1101, 1108 (Alaska 2010). 

        26      101 P.3d 1047, 1052 (Alaska 2004) ("the legislative history of the [UTPA] 

indicates that while consumer protection was the dominant motive underlying the act, the 
act was not intended to be limited to consumer transactions.").  Thus, the UTPA applies 
to unfair practices in business-to-business transactions as well as business-to-consumer 
transactions. 

        27      81 P.3d 989 (Alaska 2003). 

        28      824    P.2d   1371,   1374   (Alaska   1992)   (general   directed   verdict   motion 

insufficient support for subsequent JNOV). 

                                                  -14-                                            6650
 

----------------------- Page 15-----------------------

                 PDI argues that the superior court correctly construed PDI's pre-verdict, 

oral directed verdict motion to encompass the argument it advanced in its post-verdict 
JNOV motion.         It cites Domke v. Alyeska Pipeline Services Co., Inc.29 and Sisters of 

Providence in Washington v. A.A. Pain Clinic, Inc. in support of this argument.30                    In our 

view,   neither   case   supports   PDI's   position.      Both   concern   motions   for   JNOV   that 

encompassed issues contained within the directed verdict motions that preceded them. 

And, as discussed below, both were limited to unique facts. 

                 In Domke v. Alyeska Pipeline, Domke filed a motion for directed verdict 

on   "liability"   for   its   claim   that   an   Alyeska   employee   tortiously   interfered   with   its 
contractual relationship.31        When the directed verdict motion was orally argued, the 

superior court instructed Domke's lawyer to address whether there were material facts 

at issue and to focus on whether "Alyeska and [its employee] were justified in their 
actions."32    The motion for directed verdict was denied and Domke later moved for 

JNOV on the issue of Alyeska's vicarious liability for its employee's actions.33  Alyeska 

argued that Domke's failure to          move for directed verdict on vicarious liability waived 
its ability to seek a JNOV on the issue.34        But our court held that "the limited focus of the 

argument   invited   by   the   court   .   .   .   [made   it]   unrealistic   to   view   Domke's   failure   to 

        29       137 P.3d 295, 300 (Alaska 2006).
 

        30       81 P.3d at 1008 n.63. 
 

        31
      137 P.3d at 298, 300. 

        32       Id. at 300. 

        33       Id. 

        34       Id. 

                                                    -15-                                              6650
 

----------------------- Page 16-----------------------

expressly mention vicarious liability as a waiver of the point."35   We did not hold that a 

directed verdict motion on "liability" was sufficient to preserve the issue of vicarious 

liability for JNOV - as argued by PDI - but instead held that the superior court's 

express limitation of Domke's oral presentation of his motion for JNOV required that the 

motion be read more broadly. "Under the circumstances, [Domke's] general motion for 

a directed verdict establishing Alyeska's liability can best be seen as encompassing all 

reasonably apparent theories of liability, including the theory that the   company was 
vicariously liable . . . ."36 

                In Sisters of Providence, plaintiffs Borello and Chandler sued Providence 
claiming various types of anti-competitive conduct.37  Providence unsuccessfully moved 

for directed verdict on "all damage claims" and then moved for JNOV on damages 

arising    from   Chandler's    efforts   to  obtain  a  temporary     restraining   order  requiring 

Providence to complete a medical procedure as scheduled, including the fees incurred 
in that effort.38  Our court held that the requirement to preserve the damages issue for 

JNOV was met by Providence's motion for directed verdict on general damages.39                     At 

best, Sisters of Providence represents an instance where a more general directed verdict 

motion     was   allowed    to  serve  as  the  basis  for  a  more   specific   motion    for  JNOV 

encompassed by the pre-verdict motion. Sisters of Providence did not permit an entirely 

        35      Id. 

        36      Id. 

        37      81 P.3d 989, 995 (Alaska 2003). 

        38      Id. at 1008 n.63. 

        39      Id. (citing Metcalf v. Wilbur, Inc., 645 P.2d 163, 170 (Alaska 1982)). 

                                                 -16-                                           6650
 

----------------------- Page 17-----------------------

new theory to be raised in support of a post-verdict motion seeking to set aside the jury's 

verdict. 

                Most recently, in Roderer v. Dash, we reiterated that a motion for JNOV 

"may be entered only 'in accordance with [a previously advanced] motion for directed 
verdict.' "40   Roderer was a medical malpractice case where the physician's directed 

verdict motion argued:        (1) plaintiff did not present sufficient evidence to support a 

finding of "severe permanent physical impairment"; and (2) plaintiff did not present 

evidence to support a finding that there had been malpractice at more than one vertebral 
space.41  But the physician's JNOV motion argued that plaintiff did not present sufficient 

expert witness   testimony   on   standard   of care, breach, or causation.42         We   held   that 

because Roderer's motion for directed verdict did not encompass the issues raised in his 
motion for JNOV, the superior court correctly denied it.43 

                There are sound reasons for the requirement that motions for JNOV must 

be preceded by a directed verdict motion on the same issue.                 A motion for directed 

verdict at the close of evidence allows litigants to seek rulings on questions of law and 

to resolve factual issues that are not in dispute.       The requirement puts the non-moving 

party on notice of the moving party's arguments and allows the non-moving party to cure 

        40      233 P.3d 1101, 1108 (Alaska 2010) (quoting Alaska R. Civ. P. 50(b)). 

        41      Id. 

        42      Id. 

        43      Id.  See also Richey v. Oen, 824 P.2d 1371, 1374 (Alaska 1992), an auto 

accident case involving a rear-end collision.   Plaintiff's motion for directed verdict "on 
the issue of negligence of the Defendant driver" was granted.             When the jury awarded 
no damages, plaintiff moved for JNOV arguing that no reasonable jurors could decide 
that she suffered no damages.   We held that the JNOV was improper because plaintiff's 
directed verdict motion had addressed "negligence," not damages or causation. 

                                                 -17-                                           6650
 

----------------------- Page 18-----------------------

any   potential   deficiencies   of   proof   so   that   cases   can   be   decided   on   their   merits.44 

Requiring a motion for directed verdict as a prerequisite to a motion for JNOV respects 

the jury's fact-finding role. 

                Here, PDI's oral motion for directed verdict was premised on its argument 

that its conduct did not violate the UTPA because AIC and PDI were not in competition, 

because the aircraft leases were not contracts for "goods or services," and because there 

was no consumer relationship between the parties.  But because the motion for directed 

verdict made no mention of the Federal Aviation Regulations (FARs) or exemptions to 

the UTPA, the motion for JNOV was improper. 

                2.	     PDI   did   not   establish   that   its   conduct   was   exempt   from   the 
                        UTPA. 

                PDI also failed to show it was entitled to JNOV on the merits. The superior 

court ruled that the UTPA claims were exempt under AS 45.50.481(a)(1) because the 
misconduct AIC alleged in relation to its aircraft leases was regulated by other laws.45 

        44      See, e.g.,McKinnon v. City of Berwyn, 750 F.2d 1383, 1388 (7th Cir. 1984) 

("It gives the opposing party a chance to repair - more precisely, to ask the judge for 
leave to repair - the deficiencies in his proof before it is too late."); Lowenstein v. 
Pepsi-Cola Bottling Co., 536 F.2d 9, 11 (3d Cir. 1976) ("A motion for [JNOV], without 
prior notice of alleged deficiencies of proof, comes too late for the possibility of cure 
except   by   way   of   a   complete   new   trial.").  See  Fed.   R.   Civ.   P.   50(a)(1)   advisory 
committee's  note (1991 amendments)  ("In no event . . . should the court enter judgment 
against a party who has not been apprised of the materiality of the dispositive fact and 
been afforded an opportunity to present any available evidence bearing on that fact."). 

        45	     AS 45.50.481(a)(1)states: 

                Nothing in [the UTPA] applies to . . . an act or transaction 
                regulated      under    laws   administered      by   the  state,   by   a 
                regulatory     board    or  commission       except   as  provided     by 
                AS     45.50.471(b)(27)       and   (30),   or  officer   acting   under 
                statutory authority of the state or of the United States, unless 
                                                                                         (continued...) 

                                                  -18-	                                            6650
 

----------------------- Page 19-----------------------

But the superior court cited the FAA and the FARs generally.                    The FAA is primarily 

concerned       with   aviation    safety,   not   redressing    claims    of  fraudulent     billing   and 
conversion.46 The only specific regulation identified by PDI or the superior court was the 

truth-in-leasing requirement under FAR Part 91.47              Part 91 does not address the acts or 

transactions underlying AIC's UTPA claims - double billing, billing for services not 

received, unreasonable and allegedly excessive termination fees, or fraudulent charges 

for upgrading an aircraft entirely unrelated to AIC's business.  Part 91's truth-in-leasing 

provision requires the disclosure of: (1) regulations covering aircraft maintenance; (2) 

the person responsible for the operational control of the leased aircraft; and (3) the ability 
to obtain the pertinent operational regulations from the FAA.48                  PDI did not meet its 

burden of showing the UTPA exemption was applicable to AIC's claims because it did 

not establish that the FAA specifically regulates the fraudulent conduct AIC alleged in 

connection with its aircraft leases. 

        45(...continued) 

                 the law regulating the act or transaction does not prohibit the 
                 practices declared unlawful in AS 45.50.471. 

        46       49 U.S.C.  40101 et seq.; see also Montalvo v. Spirit Airlines, 508 F.3d 

464, 468 (9th Cir. 2007) ("The FAA and regulations promulgated pursuant to it establish 
complete and thorough safety standards for air travel. . . ."); Abdullah v. Am. Airlines, 
Inc.,   181   F.3d   363,   367   (3d   Cir.   1999)   (holding   that   the   FAA   and   relevant   federal 
regulations      "establish    complete     and   thorough     safety   standards    for   interstate   and 
international air transportation"). 

        47       14 C.F.R.  91.23 (2011). 

        48       14 C.F.R.  91.23(a). 

                                                   -19-                                              6650
 

----------------------- Page 20-----------------------

                The   UTPA       exemption   only   applies   where:      (1)   "the   business   .   .   .   is 
regulated elsewhere"; and (2) "the unfair acts and practices are therein prohibited."49                In 

granting PDI's motion for JNOV, the superior court observed that AIC advanced  what 

became Jury Instruction 19, which explained to the jury that AIC alleged the "Sakahlin 

jet lease is illegal under the Federal Aviation Regulations."             This instruction relates to 

the testimony of AIC's aviation expert, Delvin Fogg, who testified that PDI operated the 

second aircraft lease in violation of the FARs because it should have operated under Part 

 135 rather than Part 91. 

                The superior court cited Fogg's testimony that operating under Part 91 
rather   than   Part   135   resulted   in   $12   million   of   damages.50 But   Fogg   testified   that 

operation under Part 135 increases safety regulation and the volume of paperwork that 

must be kept and filed with the FAA because Part 135 governs commuter and on-demand 
passenger operations; Part 91 governs aircraft operations generally.51               Fogg opined that 

PDI's decision to operate the leased aircraft under Part 91 subjected the lease to a lower 

level of scrutiny and allowed PDI's fraudulent billing practices to go undetected for a 

longer period.  According to Fogg, if PDI had operated the aircraft under Part 135, as he 

        49      Smallwood   v.   Cent.   Peninsula   Gen.   Hosp., 151   P.3d   319, 329   (Alaska 

2006);  State     v.  O'Neill   Investigations,     609   P.2d   520,   528   (Alaska    1980)   (UTPA 
exemption applies where "separate and distinct statutory scheme" regulates acts and 
practices, and the acts and practices "are therein prohibited.").  Accord Pepper v. Routh 
Crabtree, APC, 219 P.3d 1017, 1023-24 (Alaska 2009); Matanuska Maid, Inc. v. State, 
620 P.2d 182, 186 (Alaska 1980). 

        50      The superior court described Fogg's testimony as establishing a "theme that 

there are specific regulations applicable to . . . aircraft transactions."  After reviewing the 
passages of Fogg's testimony cited by the superior court, it appears these are merely 
instances where Fogg discusses FAR Parts 91 or 135. 

        51      See, e.g., 14 C.F.R.  135.63 (2010) (Recordkeeping Requirements). 

                                                  -20-                                             6650
 

----------------------- Page 21-----------------------

thought it should have done, the FAA-required paperwork would have resulted in more 

questions about the transaction and might have resulted in AIC not agreeing to the lease. 

Fogg testified: 

                 Well,   if   you   follow   the   rules   like   they're   supposed   to   be 
                 followed,   like   I   would   follow   and   how   I   recommend   to   a 
                 client, if you're going to lease an airplane, you need to follow 
                 the   provisions   under   [Part]   91.23,   fill   out   the   paperwork 
                 included in your   contracts.       When that would have got to 
                 Oklahoma City, the [Flight Inspection Safety District Office] 
                 in Anchorage would have been advised, someone would have 
                 come out and asked: What are you using this airplane for? 
                 Well, we're flying freight and billing people for it; but we're 
                 flying people that are not employees of AIC or Sakhalin, and 
                 we're billing   for it.    I think   at that point -  if that   was   the 
                 intention at that point, I think the FAA would have said, well, 
                 you   might   consider   getting   a   Part   135   certificate,   because 
                 we'll violate you if you start flying that way.  So what would 
                 have happened in that case, at that point I think a prudent 
                person would have said, well, maybe we shouldn't do this, 
                 and we might not be sitting here today. 

Fogg did not testify that the FARs comprehensively regulate aircraft leases, or that the 

FAA specifically prohibits the conduct at issue in this case - he was not asked those 

questions.   Fogg's testimony was that if PDI had operated the leased aircraft under Part 

135 rather than Part 91, AIC may not have entered into the lease or PDI's fraudulent 

billing may have been discovered earlier. 

                 In ruling that the UTPA claims were exempt under AS 45.50.481(a)(1), the 

superior court also relied on AIC's argument, in response to a pre-verdict motion to 

exclude Fogg's testimony, that "violations of FARs committed by Defendants are not 

other bad acts, they are the bad acts complained of in this action."   But it is important to 

place AIC's argument in context.             Before trial, PDI moved to exclude Fogg's FAR 

testimony under Evidence Rule 404(b)               as impermissible evidence of other bad acts. 

                                                   -21-                                              6650
 

----------------------- Page 22-----------------------

AIC's statement that violations of FARs committed by defendants "are the bad acts 

complained   of"   was   not   an   acknowledgment   that   the   aircraft   lease   may   have   been 

specifically regulated by laws other than UTPA.               AIC was arguing that Fogg's FAR 

testimony was relevant to refuting PDI's claim that it should be entitled to indemnity for 

its defense costs because it was acting as AIC's agent.              AIC also argued that Fogg's 

testimony was relevant to PDI's claim that AIC abused the judicial process by reporting 

its suspicions that PDI violated the FARs and Internal Revenue Code to the FBI and U.S. 

Attorney's Office. 

                PDI   also   cited   the   Airline   Deregulation   Act   (ADA)   in   arguing   that   its 

conduct was exempt from the UTPA.                The ADA contains a provision similar to the 

UTPA prohibiting "unfair or deceptive practice[s] or an unfair method of competition 
. . . [by an] air carrier."52   The superior court rejected this argument because the ADA 

only applies to "air carriers."       Air carriers must be common carriers or carriers of U.S. 
mail to be covered by the ADA.53          No one argued that PDI was a "carrier of U.S. mail" 

and to be an interstate common carrier, PDI would have had to have held itself out to the 
public as a provider of air transportation services for passengers or property.54                  PDI 

provided air transport services to AIC, not the general public.   It did not establish that it 

was a common carrier. 

        52      49 U.S.C.  41712(a) (2006). 

        53      49    U.S.C.      40102(a)(2)     (defining    "air  carrier"   as  undertaking     "air 

transportation"); 49 U.S.C.  40102(a)(25) (defining "interstate air transportation" as 
"the   transportation   of   passengers   or   property     by   aircraft   as   a   common   carrier   for 
compensation"). 

        54      United States v. Contract Steel Carriers, 350 U.S. 409, 410 n.1 (1956) ("A 

common carrier   is one which holds itself out to the general public to engage in the 
transportation by motor vehicle of passengers or property.") (internal quotation marks 
omitted). 

                                                  -22-                                            6650
 

----------------------- Page 23-----------------------

                PDI did not raise its exemption claim until after the jury was discharged. 

Even   if   the   argument   had   been   timely   raised,   PDI   did   not   establish   that   the   FARs 

specifically regulate the aircraft-lease-related conduct complained of in this case: double 

billing, billing for services not received, unreasonable and excessive termination fees, 

and fraudulent charges for upgrading an aircraft completely unrelated to AIC business. 

The superior court correctly ruled that the ADA does not apply to the aircraft leases at 

issue in this case, but it erred in granting PDI's motion for JNOV on the applicability of 

UTPA exemptions. 

        B.	     The Superior Court Did Not Err By Denying The Motion For JNOV 
                That   Sought   A   Ruling   That   The   UTPA   Does   Not   Apply   to   Intra- 
                Corporate Disputes. 

                PDI argues that an alternative basis for affirming the superior court's ruling 

is that the UTPA does not apply to intra-corporate disputes.  The superior court rejected 

this argument.     We find no error in the superior court's ruling. 
                The   UTPA   is   a   remedial   statute.55  Under   the   UTPA,   a   claimant   must 

establish: "(1) that the defendant is engaged in trade or commerce; and (2) that in the 
conduct   of   trade   or   commerce,   an   unfair   act   or   practice   has   occurred."56 We   have 

broadly construed the "engaged-in-commerce" prong to encompass purchases of goods 

and services in business-to-business commercial transactions as well as in individual 
consumer transactions.57 

        55      State v. O'Neill Investigations, 609 P.2d 520, 528 (Alaska 1980). 

        56      Odom      v.   Fairbanks   Mem'l   Hosp.,   999     P.2d   123,   132  (Alaska    2000) 

(quoting O'Neill, 609 P.2d at 534). 

        57      See W. Star Trucks, Inc. v. Big Iron Equip. Serv., Inc., 101 P.3d 1047, 

1048-49 (Alaska 2004). 

                                                  -23-	                                           6650
 

----------------------- Page 24-----------------------

                PDI argues that "[t]ransactions can be either arms-length or fiduciary; they 

cannot be both" and "[c]ourts uniformly recognize that arms-length and that fiduciary 

relationships   are   mutually   exclusive."      PDI   argues   that   because   it   was   acting   as   a 

fiduciary of AIC, it could not have been transacting at arms-length with AIC, and so the 

UTPA should not apply to transactions between them. In PDI's view, AIC was incorrect 

to allege that the UTPA applied to the parties' aircraft lease-related dealings because "the 

UTPA is not designed to be a tool of corporate governance." 

                PDI   cites   several   cases   in   support   of   this   position:  Stadt   v. Fox News 
Network LLC,58 Skinner v. Metropolitan Life Insurance Co.,59  OrbusNeich Medical Co. 

v. Boston Scientific Corp,60 Szalla v. Locke,61 and Schwenk v. Auburn Sportsplex, LLC.62 

In our view, these cases do not support PDI's contention that corporate relationships are 

exclusively arms-length or fiduciary.          In Stadt v. Fox News Network LLC, Fox News 
obtained an exclusive license agreement from Stadt to use a video.63                Stadt alleged that 

Fox News continued to air the video and claimed ownership of it after the licensing 
agreement   with      Stadt   expired.64   Stadt   brought   several   claims     against   Fox   News, 

        58      719 F. Supp. 2d 312, 323 (S.D.N.Y. 2010). 

        59      2010 WL 2175834, at *11 (N.D. Ind. May 27, 2010). 

        60      694 F. Supp. 2d 106, 116 (D. Mass. 2010). 

        61      657 N.E.2d 1267, 1268-69 (Mass. 1995). 

        62      483 F. Supp. 2d 81, 87-88 (D. Mass. 2007). 

        63      719 F. Supp. 2d at 316. 

        64      Id. 

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----------------------- Page 25-----------------------

including a claim for breach of fiduciary duty.65             The court in that case determined that 

"the [c]omplaint alleges insufficient facts to establish that Stadt and Fox had a fiduciary 
relationship, as opposed to a typical, arms-length business relationship."66                 The case does 

not support PDI's assertion that fiduciary and arms-length relationships are mutually 

exclusive. 

                 The dispute in Skinner v. Metropolitan Life Insurance Co. arose from a life 
insurance contract.67       Skinner "entered into a life insurance policy which provided that 

she would no longer need to pay premiums if she became totally disabled."68                       But when 

Skinner      "submitted      proof    of  her   total  disability,    MetLife     refused    to   waive    her 
premiums."69       Skinner   brought   claims   for   breach   of   contract,   bad   faith,   fraud,   and 

intentional infliction of emotional distress.70  Skinner addressed the relationship between 

an insurer and its insured and observed, "[t]he Indiana Supreme Court has stated that the 

contractual   relationship   between   an   insurer   and   an   insured   is   'at   times   a   traditional 

arms-length dealing between two parties, as in the initial purchase of a policy, but is also 
at times one of a fiduciary nature,' and sometimes it is an adversarial relationship."71 

Skinner stands for the proposition that the relationship between an insurer and its insured 

        65       Id.
 

        66       Id. at 323. 
 

        67       2010 WL 2175834 at *1 (N.D. Ind. May 27, 2010).
 

        68       Id.
 

        69       Id. 
 

        70       Id.
 

        71       Id.  at   *11   (quoting  Erie     Ins.   Co.   v.  Hickman,   622      N.E.2d    515,   518 

(Ind.1993)). 

                                                     -25-                                               6650
 

----------------------- Page 26-----------------------

is, in varying circumstances, arms-length, fiduciary, or adversarial; it does not support 

PDI's argument that the relationship between two corporate entities involved in a joint 

enterprise cannot be arms-length in some instances, and fiduciary in others. 
                 PDI also relies on  OrbusNeich Medical Co. v. Boston Scientific Corp.72 

The parties in that case entered into a confidential disclosure agreement while exploring 
a joint venture opportunity.73       After the joint venture talks collapsed, Orbus alleged that 

Boston      Scientific    misappropriated       stent   designs    disclosed     under    the   disclosure 
agreement.74     The relationship of the parties was relevant to determining under which 

legal   doctrine   the   statute   of   limitations   tolled.75 The   court   observed,   "[t]hough   the 

existence   of   a   fiduciary   relationship   is   typically   a   factual   determination,   '[b]usiness 

relationships or arms length transactions do not in general rise to the level of a fiduciary 
relationship.' "76 The court's conclusion, that one party placing confidence and trust in 

the other party does not necessarily transform a business relationship into a fiduciary 

relationship,   is   consistent   with   the   general   observation   that   business   or   arms-length 

relationships do not become fiduciary relationships as a matter   of course; it is not a 

holding that they can never rise to this level.  Orbus does not support the contention that 

arms-length and fiduciary relationships are mutually exclusive. 

        72       694 F. Supp. 2d 106 (D. Mass. 2010). 

        73      Id. at 110. 

        74      Id. 

        75      Id. at 115. 

        76      Id. at 116 (quoting Savoy v. White, 139 F.R.D. 265, 267 (D. Mass.1991)). 

                                                   -26-                                              6650
 

----------------------- Page 27-----------------------

                The   disputes   in  Szalla77   and  Schwenk78     arose   from   attempts   to   form   or 

dissolve     limited   partnerships    or  corporations;   both    courts   concluded     that   disputes 

concerning the formation or separation of those entities did not constitute "commercial 

transactions" within the meaning of the UTPA.   In contrast, AIC's largest claim against 

PDI arose from AIC's allegation that PDI fraudulently administered two commercial 

leases of PDI-owned aircraft.   As to the aircraft leases, PDI's relationship with AIC was 

that   of  a  vendor    providing    aircraft   and  aircraft   support   services   in  a  commercial 

transaction.    PDI's status as part owner of AIC does not exempt the actions it took as a 

vendor from the purview of the UTPA. 

                A case that is more analogous to the facts of this one is Sara Lee Corp. v. 
Carter, a case from North Carolina.79         An employee of Sara Lee who was authorized to 

purchase computer parts and services for Sara Lee set up four separate businesses to 

engage   "in   self-dealing   by   supplying   Sara   Lee   with   computer   parts   and   services   at 
allegedly excessive cost."80       The court held that although the defendant had a fiduciary 

relationship with the company as an employee, "defendant and plaintiff clearly engaged 

in buyer-seller relations in a business setting, and thus, . . . defendant's fraudulent actions 
[fell] within the . . . statutory prohibition of unfair and deceptive acts."81 

        77      657 N.E.2d 1267, 1268-69 (Mass. 1995). 

        78      483 F. Supp. 2d 81, 83, 87 (D. Mass. 2007). 

        79      519 S.E.2d 308 (N.C. 1999). 

        80      Id. at 309. 

        81      Id. at 312. 

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----------------------- Page 28-----------------------

                During oral argument before our court, PDI argued that the North Carolina 
Supreme Court's subsequent decision in White v. Thompson82 represented a departure 

from Sara Lee.  PDI urged us to read Whiteas an instance where unfair conduct between 

partners was held to be outside the scope of North Carolina's UTPA.                  White concerned 
ACE Fabrication and Welding (ACE),83 a company formed by Charles White, Earl Ellis, 

and   Andrew   Thompson   to   perform   specialty   construction   and   fabrication   work   for 
Smithfield Packing Company, Inc.84  ACE hired Thompson's father, Douglas Thompson, 

as   an   accountant.85     White     and   Ellis  later  claimed    that   Andrew     Thompson:       (1) 

misinformed them of ACE's scheduled projects; (2) sent jobs intended for ACE to a 

small group he formed outside of the partnership (PAL); (3) conspired with workers at 

Smithfield to divert work intended for ACE to PAL; and (4) conspired with his father to 
improperly maintain and keep the books for ACE.86 

                The jury found that Andrew Thompson breached his fiduciary duty to ACE 
and the superior court awarded treble damages under the UTPA.87                 On appeal, the North 

Carolina Supreme Court held that the UTPA did not apply because there was only a 

        82      691 S.E.2d 676 (N.C. 2010). 
 

        83      Id. at 677.
 

        84      Id.
 

        85      Id.
 

        86      Id. at 676-78. 

        87      Id. at 678. 

                                                  -28-                                             6650
 

----------------------- Page 29-----------------------

breach of a fiduciary duty and Thompson's conduct occurred within ACE's "internal 
operations."88 

                 The   primary   distinction   between      White  and   this   case   is   that,   in White, 

Thompson was funneling business from ACE to a business that he operated for his own 

benefit.     His breach was failing to meet his fiduciary obligations to ACE by sending 

business elsewhere. In contrast, PDI owned two aircraft that it leased to AIC. In relation 

to the aircraft leases, AIC and PDI acted as separate entities in arms-length transactions. 

The relationship between PDI and AIC fits more closely with the conduct in Sara Lee, 

where an employee set up business entities that contracted to provide computer parts and 

services for Sara Lee. 

                 In   this   case,   the   superior   court   cited   the   Connecticut   case  Spector   v. 
Konover89 to support its conclusion that the UTPA applies to related-party transactions. 

In Spector, the defendant placed funds into an account where they were commingled 
with   funds   from   other   businesses   he   ran.90   He   withdrew   money   designated   for   the 

company   that   Spector   and   Konover   jointly   operated   and   used   it   to   profit   his   other 
enterprises.91   The court held that the UTPA applied to Konover's conduct and affirmed 

that "where one's actions go 'well beyond governance of the [partnership], and [place] 
him in direct competition with the interests of the [partnership]' " UTPA claims apply.92 

In our view, the superior court correctly concluded that PDI's interest in the aircraft 

        88      Id. at 680. 

        89       747 A.2d 39 (Conn. App. 2000). 

        90      Id. at 42-43. 

        91      Id. 

        92      Id. at 46 (citing Fink v. Golenbock, 680 A.2d 1243 (Conn. 1996)). 

                                                   -29-                                              6650
 

----------------------- Page 30-----------------------

leases was in direct conflict with AIC's interest, just as Konover's conduct placed his 

interest in direct competition with the interests of the partnership. 

                We find no error in the superior court's denial of PDI's motion for JNOV 

on the issue of the applicability of the UTPA to intra-corporate actions.             Even where a 

party   has a fiduciary relationship with a business entity, the UTPA can apply if the 

parties also engage in arms-length commercial transactions.             The evidence established 

that   PDI's   interaction   with   AIC   constituted   a   "commercial   transaction"   within   the 

meaning of the UTPA. 

        C.	     The Superior Court Erred In Not Ruling As A Matter Of Law That 
                The Jury's Finding of Fraudulent Conduct Was A Material Breach Of 
                The Operating Agreement Under The Circumstances Of This Case. 

                The jury found that PDI's fraudulent conduct and breach of the covenant 

of good faith and fair dealing resulted in $7.3 million in damages during the 6 1/2 years 

it managed AIC.  PDI conceded that it inappropriately billed AIC $1,902,827 in charges 

but in its closing argument, PDI argued that because AIC made significant profits under 

its direction, the operating agreement's central purpose was satisfied. PDI suggested that 

AIC's profitability during this period rendered any breach of the operating agreement 

immaterial. 

                The    jury's  special   verdict  form   reflects  its  finding  that  PDI   did  not 

materially   breach   the   operating   agreement.     The   jury   awarded   PDI   the   contractual 

premium price of $12 million as compensation for PDI's ownership interest in AIC. AIC 

moved for JNOV.        It argued that the jury's verdict was inconsistent as a matter of law 

because the jury could not find that PDI engaged in fraudulent conduct without also 

deciding   that   PDI   had   materially   breached   the   parties'   operating   agreement.     The 

superior court ruled that "the question of whether defendants materially breached the 

contract, and thus whether plaintiffs' performance is excused, was appropriately sent to 

                                                -30-	                                          6650
 

----------------------- Page 31-----------------------

the jury as it present[ed] questions of fact."          The superior court reasoned that "PDI 

continued   to   manage   AIC,   to   bid   for   and   perform   contracts,   and   continued   to   earn 

money" and that the jury could have properly found that the fraud was immaterial.  On 

appeal, AIC argues the superior court erred by denying its motion for JNOV.   We agree 

with AIC. 

                1.      AIC was not required to move for directed verdict. 

                PDI argues that AIC did not preserve its right to move for a JNOV on the 

materiality of its breach because AIC did not file a motion for a directed verdict arguing 

that PDI's fraudulent misconduct was a material breach of the operating agreement.  As 

explained, a motion for directed verdict normally is required to preserve an issue for a 

subsequent motion for JNOV.           But there is an exception to this rule when the basis for 

a JNOV motion is an inconsistency in a jury's verdict that could not have been known 

before   the   case   was   submitted   to   the   jury. A   motion   for   JNOV   to   resolve   such   an 
inconsistency is proper.93 

                This case falls within the exception.         It was only after the special verdict 

revealed the jury's findings that PDI engaged in fraud and intentional misconduct but did 

not materially breach the operating agreement, that it became apparent there might be an 

inconsistency in the verdict.      Under these circumstances, AIC's motion for JNOV was 

properly raised even though it was not preceded by a motion for directed verdict on the 

same issue. 

        93      See, e.g., Pierce v. S. Pac. Transp. Co., 823 F.2d 1366, 1369-70 (9th Cir. 

1987) (holding that directed verdict is not prerequisite to JNOV when particular  finding 
by jury negates the party's liability); Traders & Gen. Ins. Co. v. Mallitz, 315 F.2d 171, 
175 (5th Cir. 1963) (holding general rule that "failure to move for a directed verdict 
precludes a review as to the sufficiency of the evidence" not applicable where JNOV 
motion goes "to the proper judgment to be entered upon the special verdict"). 

                                                  -31-                                            6650
 

----------------------- Page 32-----------------------

                2.	     The jury's finding that PDI engaged in fraud by affirmative 
                        misrepresentation and non-disclosure required the conclusion 
                        that PDI materially breached the operating agreement under 
                        the circumstances of this case. 

                AIC argues that the affirmative misrepresentations and non-disclosures PDI 

made in conjunction with the aircraft leases materially breached the operating agreement 

as a matter of law.  It argues that PDI's material breach excused Peak and Nabors from 

the contractual obligation to pay a premium price for PDI's 20% ownership interest in 
AIC.94 

                Our decision in Coffel v. Steward supports AIC's argument.95                Coffel and 

Steward      "were    co-owners     of  a  Piper   PA-12    aircraft.  The    plane   was   wrecked     in 

September 1972, . . . when the plane [piloted by Steward] turned over on a remote lake 
on the Alaska Peninsula."96       Coffel accepted $3,500 for his interest in the plane because 

Steward told Coffel that the aircraft had been "totalled" and "the parties had agreed that 

if either party wrecked the aircraft he would pay his co-owner $3,500 for the latter's 
interest."97  It was later revealed that Steward had been able to make sufficient repairs to 

allow the plane to be flown to Anchorage and restored.98           Coffel brought suit establishing 

        94      Peak and Nabors do not dispute that PDI is entitled to compensation for its 

20%   ownership   interest   in   AIC.    The   only   evidence   of   the   fair   market   value   of   the 
interest valued it at $3,931,200. 

        95      611 P.2d 543, 546 (Alaska 1980). 

        96      Id. at 544. 

        97	     Id. 

        98	     Id. 

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----------------------- Page 33-----------------------

at trial that the restored value of the plane was $18,000.99            The superior court ruled that 

"Steward was guilty of fraud in negotiating his purchase of Coffel's interest."100               And the 

superior court concluded that the finding of fraud constituted a material breach of the 

parties' agreement. 

                 On appeal, we held "that every contract contains an implied term that the 

parties thereto will act honestly toward one another with respect to the subject matter of 
the contract."101    We held that there was sufficient evidence to support the "conclusion 

that   Steward   was   guilty   of   fraud    in   negotiating   his   purchase   of   Coffel's   one-half 
interest"102 and that the superior court's finding of fraud was sufficient support for its 

conclusion that "Steward materially breached the contract."103                Finally, we said, "[t]his 

breach,   in   our   opinion,   was   a   material   breach,   sufficient   to   preclude   Steward   from 
enforcing the remaining terms of the agreement, i.e., the $3,500 buy-out provision."104 

Our decision in Coffel is supported by the rule in other jurisdictions that fraud and other 

forms of intentional wrongdoing constitute material breaches of contract as a matter of 
law.105 

        99      Id. at 545.
 

        100     Id. at 546.
 

        101     Id. at 546.
 

        102     Id.
 

        103     Id.
 

        104     Id.
 

        105      See, e.g., Christopher Village, LP v. United States, 360 F.3d 1319, 1336
 

(Fed. Cir. 2004) (holding that company's "conscious effort to defraud" by submitting 
false data "constitutes a material breach as a matter of law"); First Interstate Bank of 
                                                                                           (continued...) 

                                                   -33-                                              6650
 

----------------------- Page 34-----------------------

                At trial, PDI suggested that the purpose of the operating agreement was to 

make a profit, and because that purpose was achieved, the jury reasonably decided its 
conduct was not a material breach.106       We have not addressed this argument before, but 

in  Larken, Inc. v.    Larken Iowa City LP, the Iowa Supreme Court rejected it.107              The 

Iowa court wrote that "[w]hile profitability is a significant purpose of the management 

        105(...continued) 

Idaho v. Small Bus. Admin., 868 F.2d 340, 342-44 (9th Cir. 1989) (upholding summary 
judgment ruling that bank's unauthorized disbursements and false statements constituted 
material     breach   of  contract    relieving   the  Small    Business    Administration      from 
performance of loan guarantee); LJL Transp., Inc. v. Pilot Air Freight Corp., 962 A.2d 
639,   652   (Pa.   2000)   (affirming   summary   judgment   decision   that   franchisee's   fraud 
constituted material breach of contract justifying immediate termination of franchise 
agreement      despite   contrary    contract   provision    because    "[s]uch   a  breach    is  so 
fundamentally destructive, it understandably and inevitably causes the trust which is the 
bedrock foundation and veritable lifeblood of the parties' contractual relationship to 
essentially evaporate"). 
                PDI cited  Wirum & Cash, Architects v. Cash, 837 P.2d 692, 708 (Alaska 
 1992), to support its contention that a finding of fraud does not necessitate a finding of 
material breach.  But Wirum dealt solely with breach of fiduciary duty, not fraud. It does 
not control the outcome of this case. 

        106     The superior court appears to have adopted a similar reasoning. In denying 

AIC's motion for judgment notwithstanding the verdict, the superior court wrote: 

                In the context of the amounts of money involved in this case, 
                over the course of the relationship between the parties, AIC 
                was worth about $40 million, and AIC made approximately 
                $39 million for each of the partners.       Thus, given the many 
                components of the Operating Agreement and the continued 
                performance of the Operating Agreement, the jury could have 
                found     that   the   breach    was    not   material.    Although 
                Ellsworth/PDI   may   have   taken   liberties   with   AIC   money, 
                PDI    continued    to  manage    AIC,   to  bid  for  and  perform 
                contracts, and continued to earn money. 

        107     589 N.W. 2d 700, 701 (Iowa 1999) (en banc). 

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----------------------- Page 35-----------------------

agreement,      the  honesty    of  the   parties  is  also  an   integral,  although    unexpressed, 
component of the agreement."108          The court held that the "acts of self-dealing found by 

the district court were so serious that they frustrated one of the principal purposes of the 

management agreement, which was to manage the hotel in the best interests of the owner 
and to be honest and forthright in its dealings."109  The court further explained that self- 

dealing is a breach of the implied duty of honesty and fidelity that goes "to the heart of 

the contract" and that "no amount of payment for past thefts by [a self-dealing party] 
could ever restore the business trust and confidence."110 

                We find the rationale of the Iowa Supreme Court to be compelling, and it 

is directly applicable to the facts of this case.   The jury found that PDI's misconduct and 

self-dealing     constituted   fraud   by   affirmative    misrepresentation     and   fraud   by   non- 

disclosure.    Its special verdict form includes findings that PDI violated the UTPA by: 

(1) engaging in unfair or deceptive acts in connection with aircraft services; (2) failing 

to disclose material information in connection with the aircraft leases; and (3) making 

false or misleading representations in connection with aircraft services.               The jury also 

found that PDI:  (1) converted money or property belonging to AIC in connection with 

aircraft services; (2) breached its fiduciary duties in connection with aircraft services; and 

(3) breached its duty of good faith and fair dealing in connection with aircraft services. 

The jury assessed the damages attributable to this conduct at $7,316,157.  The reasoning 
in Coffel is sound, and it has been echoed by other courts in similar situations.111                We 

        108     Id. 

        109     Id. at 704. 
 

        110     Id. at 704-05 (internal quotation marks and citations omitted). 
 

        111     See Optimal Interiors, LLC v. HON Co., 2011 WL 1207231, at *9 (S.D.
 

                                                                                        (continued...) 

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----------------------- Page 36-----------------------

agree   with   the   Iowa   Supreme   Court   that   honesty   of   the   parties   to   a   management 

agreement is an integral component of the agreement, and we specifically reject the view 

that fraud cannot constitute a material breach just because the defrauded party still makes 

a profit. 

                 On appeal, PDI argues that every finding of fraud should not amount to a 

material breach.  It provides the hypothetical example of a long-time employee stealing 

a   box   of   pencils   on   the   last   day   of   work   and   posed   the   question   whether   such   an 

indiscretion should warrant the termination of the employee's pension benefits.  The 

extreme example PDI cites is not one we are confronted with; the jury in this case found 

multiple   acts   of   fraudulent   conduct   by   PDI   extending   over   a   multi-year   period   that 

caused millions of dollars in damages. 

                 On   the   facts   of   this   case,   the   jury's   finding   that   PDI   committed   fraud 

compels the conclusion that PDI materially breached the operating agreement as a matter 

of law; given the nature of the parties' relationship and the jury's findings regarding 

PDI's conduct, reasonable persons could not differ on this question.  The superior court 

erred by not granting AIC's motion for JNOV on the issue of the materiality of PDI's 
breach.112 

         111(...continued) 

Iowa Mar. 14, 2011); Trinity Indus., Inc. v. Greenlease Holding Co., 2010 WL 419420, 
at *5 (W.D. Pa. Jan. 29, 2010); Manpower Inc. v. Mason, 377 F. Supp. 2d 672, 679 (E.D. 
Wis. 2005); LJL Transp., Inc., 962 A.2d at 644. 

         112     PDI also argues that the doctrine of invited error bars AIC's argument on 

the materiality of PDI's breach.         But AIC does not dispute that this issue of materiality 
was   properly   submitted   to   the   jury;   it   argues   that   reasonable   jurors   could   not   have 
concluded the breach was immaterial.             The invited error doctrine does not apply. 

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        D.	      The   Motion   For   JNOV   On   Ellsworth's   Fraud   In   The   Inducement 
                 Claim Should Have Been Granted. 

                 The   parties'   operating   agreement   prohibited   "PDI   [and]   its   Affiliates, 

including Ellsworth," from engaging in any similar business in Alaska for one year after 

PDI was no longer a member of AIC.  In an early pre-trial proceeding, the superior court 

granted AIC's request for an injunction prohibiting Ellsworth and PDI from competing 
with AIC.113     At trial, Marrs and Ellsworth both testified that the parties did not intend 

Ellsworth to be bound personally when they negotiated the operating agreement.  After 

hearing the evidence, the superior court decided the operating agreement was ambiguous 

as to whether Ellsworth was personally bound by the non-compete clause, and it sent the 

issue to the jury.      It observed that some provisions of the operating agreement only 

referred to PDI, but that even those parts of the agreement acknowledged Ellsworth's 

status as PDI's sole shareholder. 

                 The jury decided that the parties did intend to personally bind Ellsworth to 

the   operating     agreement's   non-compete         clause.   It   also  found    that   Ellsworth   was 

fraudulently induced into signing the agreement.  Based on these findings, the superior 

court ruled that the preliminary injunction prohibiting Ellsworth from competing with 

AIC   had   been   improvidently   granted   and   it   ruled   that   Ellsworth   was   entitled   to   the 

$500,000 bond posted when the injunction was entered. 

                AIC filed motions for summary judgment, directed verdict, and JNOV on 

PDI's   claim   of   fraud   in   the   inducement.    All   of   these   motions   were   denied   by   the 

superior court.  AIC argues on appeal that the superior court erred by allowing the jury 

        113      Initially, the superior court entered an injunction enforcing the non-compete 

agreement   against   PDI   only.      AIC   petitioned   for   review   and   our   court   directed   the 
superior   court   to   determine   whether   Ellsworth   could   be   protected   by   a   bond.      The 
superior court then required AIC to post a $500,000 bond and it extended the scope of 
the injunction so that it applied to Ellsworth personally, as well as PDI. 

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----------------------- Page 38-----------------------

to decide whether oral representations inconsistent with the parties' written contract 
could support a claim for fraud in the inducement.114 

                Ellsworth argues that he signed the operating agreement only in his capacity 

as president of PDI.      He points to the signature line on the operating agreement, which 

identifies him as president of PDI, and to the fact that the agreement did not have a 

separate signature line for Ellsworth to sign in his individual capacity.               Ellsworth also 

cites a series of cases from Illinois where courts have considered ambiguities between 

the   language   of   agreements   purporting   to   bind   persons   individually   and   signatures 

indicating that an individual is the agent of a separate entity.  Under such circumstances, 

courts have found contracts sufficiently ambiguous to allow the presentation of extrinsic 

evidence to resolve the ambiguity.           But none of these cases dealt with claims that the 
signing party was fraudulently induced to enter agreements in a personal capacity.115 

Further, the jury in this case did hear the extrinsic evidence concerning the negotiation 

and drafting of the operating agreement, and it resolved any ambiguity in AIC's favor. 

                In Johnson v. Curran we examined the consideration of parol evidence in 
a   claim   that   one   party   was   fraudulently   induced   to   enter   into   a   written   contract.116 

        114     PDI     argues    that  AIC    waived    this  argument      by  failing   to  raise  the 

inconsistency in the verdict before the jury was discharged.  But we agree with AIC that 
this is not an instance where the verdict form itself presents   an   inconsistency.   The 
question     is  whether    the  evidence    supported    the   jury's  finding   that   Ellsworth   was 
fraudulently induced into entering the operating agreement containing the non-compete 
provision. 

        115     Zahl v. Krupa, 850 N.E.2d 304 (Ill. App. 2006); Addison State Bank v. 

Nat'l Maint. Mgmt., Inc., 529 N.E.2d 30 (Ill. App. 1988); Wottowa Ins. Agency, Inc. v. 
Bock, 472 N.E.2d 411 (Ill. 1984); Knightsbridge Realty Partners, Ltd.-75 v. Pace, 427 
N.E.2d 815 (Ill. App. 1981). 

        116     633 P.2d 994, 997 (Alaska 1981). 

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----------------------- Page 39-----------------------

Johnson      involved     a  contract   between     Le   Pussycat     Lounge     and   a  band    called 
Jabberwock.117     The parties' written agreement provided that the band would perform at 

the nightclub, but the club owner testified that the parties also orally agreed that the show 
could be cancelled with two weeks' notice if the band did not draw enough patrons.118 

The cancellation provision was not included in the written contract.119              Jabberwock did 

not draw the crowd the owner expected and she gave the band notice that the agreement 
would be terminated.120      The band sued to recover payment for the two weeks remaining 

in its written contract.121   The owner of the nightclub asserted an affirmative defense that 

the band orally modified the contract and counterclaimed for false representation and 
fraud because the band did not draw a sufficient crowd.122               The district court granted 

partial summary judgment in favor of the band "on the basis of the executed written 
contract" and entered final judgment pursuant to Civil Rule 54(b).123             The superior court 

affirmed the judgment, but on appeal to our court we held that "parol evidence . . . [is] 

admissible [in a fraudulent inducement claim] even if the written contract is viewed as 
completely integrated."124      We also held that the allegedly inconsistent oral promise was 

insufficient to show fraudulent inducement, affirming the district court's order granting 

        117     Id. at 995. 

        118     Id. 

        119     Id. 

        120     Id. 

        121     Id. 

        122     Id. 

        123     Id. 

        124     Id. at 997 

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----------------------- Page 40-----------------------

summary judgment on that claim.125           We held that a claim for fraudulent inducement can 

only succeed if there is a demonstration that the party "misapprehended the content of 
the written agreement" or "was induced to sign it by any deception, active or passive."126 

Here, Ellsworth asserted misapprehension and deception, but he did not point to any 

evidence in the record that supported his assertions. 

                 The jury found that AIC and PDI intended Ellsworth to be bound to the 

non-compete provision, and our review of the record convinces us that this finding was 

amply   supported   by   the evidence.         First we consider the 1998   operating   agreement 

entered into by Nabors, Peak, and PDI.   It included the sale of a  20% ownership interest 

in AIC to PDI and an agreement that PDI would manage AIC.  The jury heard evidence 

establishing that the non-compete provision binding Ellsworth was in all seventeen drafts 

of   the  operating     agreement     generated     during   the   parties'  negotiations.     Ellsworth 

admitted to reading the draft operating agreement.               Second, we consider that all parties 

were represented by experienced counsel during the negotiation process, including PDI 

and Ellsworth.   It is also notable that PDI and Ellsworth negotiated other changes to the 

operating     agreement's      non-compete       provision,    but  not   a  change    that  would    have 

removed   Ellsworth   from   its   scope.       Finally,   we   consider   that   the   1995   agreement 

required approval by the boards of directors for                Peak/CIRI and for Nabors, and the 
boards   considered   documents   that   included   the   non-compete   clause.127          Counsel   for 

Peak/CIRI,   Mark   Kroloff,   and   the   CEO   for   Nabors,   Gene   Isenberg,   testified   that   a 

personal non-compete clause for Ellsworth was a key term of the parties' agreement. 

        125     Id. at 998.
 

        126     Id.
 

        127      The boards of Peak and Nabors voted on formation of the joint venture.
 

CIRI's board voted to authorize Peak to enter into the joint venture. 

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----------------------- Page 41-----------------------

                PDI   argues   that   the   potential   discrepancy   in   the   operating   agreement's 

signature line may be an indication that Ellsworth was fraudulently induced into signing 

the contract.    But the case law from Illinois that PDI relies on does not stand for the 

proposition PDI advances, and PDI offeres no other arguments to support this claim. 

Our own case law requires a showing that Ellsworth "misapprehended the content of the 
written agreement" or "was induced to sign it by any deception, active or passive."128 

No such showing was made. 

                The   superior   court   erred   by   not   granting   JNOV   on   PDI's   fraud   in   the 
inducement claim.129 

        E.	     The Superior Court Did Not Err By Determining That AIC's Aircraft 
                Lease Claims Were Not Barred By The Statute Of Limitations. 

                PDI argues that the statute of limitations barred AIC's claims for aircraft 

lease payments made more than two years before AIC's tort claims were filed and more 

than three years before AIC's contract claims were filed.             The superior court ruled that 

a three-year statute of limitations period applied because this case primarily involved 

claims of breach of fiduciary duty.        The exception was AIC's UTPA claims, which are 

governed   by   a   two-year   statute   of   limitations.  All   parties   agree   that   the   statute   of 

limitations defense was a matter for the superior court to decide. 

                PDI does not appeal the limitation periods determined by the superior court. 

Instead, PDI argues that the superior court erred when it decided, as a finding of fact, 

when     the  statute   of  limitations   began    running.    AIC    counters    that  the  statute   of 

        128	    Johnson, 633 P.2d at 998. 

        129     PDI argues that AIC's pre-trial injunction was erroneously entered and that 

its damages should not be limited to the amount of the bond posted when the injunction 
was granted.     But because the evidence did not support the finding that Ellsworth was 
fraudulently induced into signing the operating agreement containing the non-compete 
clause, we do not need to reach this damages issue. 

                                                  -41-	                                           6650
 

----------------------- Page 42-----------------------

limitations was tolled for an extended period of time because PDI's fraudulent conduct 

prevented it from discovering PDI's wrongdoing.            But in PDI's view,     AIC was not 

entitled to the benefit of a tolling period because it was utterly unreasonable in failing to 

discover PDI's fraudulent activities, and the superior court's ruling to  the contrary was 
clearly erroneous.130 

               Evidence was introduced at trial to show that Carl Marrs was responsible 

for supervising Ellsworth's management of AIC, but the superior court determined, 

"Marrs never actively supervised or scrutinized . . . Ellsworth, but rather allowed him 

carte blanche to manage AIC."  In late 2004, Ellsworth directed his attorney to look into 

breaking PDI's operating agreement with AIC.  Also in late 2004, Marrs left CIRI.  AIC 

and PDI later agreed to use Marrs as a mediator to discuss ending the agreement between 

AIC and PDI. AIC purchased PDI's interest in the joint venture on April 30, 2005.  Peak 

and Nabors took over management of AIC in August of that year and discovered what 

they suspected was fraudulent and criminal activity by PDI after PDI was replaced.  Peak 

and Nabors also discovered that PDI had shredded 6,000 pounds of documents shortly 

before    leaving  AIC;   AIC   suggested    that  this  hindered  its  ability  to  discover  and 

document its claims. Peak and Nabors reported their suspicion of criminal activity to the 

FBI and the United States Attorney's Office shortly after they assumed management 

responsibility for AIC. 

               To counter PDI's statute of limitations argument, AIC presented expert 

testimony that it was not possible to detect PDI's fraudulent conduct sooner because 

financial statements PDI provided to AIC did not contain specific enough information 

        130    Palmer v. Borg-Warner Corp., 838 P.2d 1243, 1251 (Alaska 1992) ("[A] 

party   should   be  charged   with   knowledge    of  .  .  .  fraudulent  misrepresentation  or 
concealment only when it would be utterly unreasonable for the party not to be aware of 
the deception."). 

                                              -42-                                           6650 

----------------------- Page 43-----------------------

about   the   use   of   the   aircraft   under   the   two   leases. The   evidence   showed   that   PDI 

provided one-or-two-page invoices listing the hours flown and amount charged.                        PDI 

started charging $100,000 in monthly fees for the use of one jet in 2002, but the invoices 

did   not   provide   any   details   about   the   passengers   or   the   purpose   of   flights. AIC's 

forensics auditor, Paul Ficca, testified that PDI's fraud was systematic, continuous, and 

covered-up assiduously.         Ficca identified   several instances of fraudulent conduct he 

suggested Peak and Nabors could not have discovered because they had not had access 

to complete records.      These examples include:         (1) $1.4 million in charges for hours of 

aircraft services when the jet did not fly; (2) charges of $100,000 - $125,000 per month 

for aircraft services when PDI did not have a plane available for AIC's use; and (3) 

charges of over $700,000 for pilot wages and training that were PDI's responsibility 

under the leases. 

                After considering the evidence, the superior court concurred with the jury's 

findings and ruled that there had been "both non-disclosure and active misrepresentation 

regarding the aircraft services."        The court specifically found that "[t]he information 

necessary to evaluate whether there were causes of action did not surface until, at the 

earliest, when PDI and Mr. Ellsworth were removed as the Managing Partner of AIC." 

Because the superior court found that it was only after taking over AIC's management 

that Peak and Nabors had access to the information that revealed their causes of action, 

the superior court was not clearly erroneous in determining that the statute of limitations 
was tolled on its claims prior to August of 2005.131            AIC filed suit in 2005. 

        131     Hutton   v.   Realty   Execs.,   Inc.,   14   P.3d   977,   980   (Alaska   2000)   ("[T]he 

statute of limitations does not begin to run until the plaintiff discovers, or reasonably 
should discover, the existence of all the elements of his or her cause of action.") (citing 
Greater Area Inc. v. Bookman, 657 P.2d 828, 829 (Alaska 1982)). 

                                                  -43-                                                6650 

----------------------- Page 44-----------------------

                PDI also argues the superior court erred by failing to rule on its summary 

judgment motion raising the statute of limitations defense until after trial. But resolution 

of   this   defense   required   extensive   factual   testimony   and   we   have   recognized   that 

addressing the substantive merits of a claim at a preliminary evidentiary hearing can 
create tension with a party's right to a jury trial.132     Further, though PDI argues that the 

court's    procedure    resulted   in  an  "undifferentiated    jury  award"    that  "undoubtedly 

included sums for claims that were time barred," our review of the record does not show 

that PDI objected to the court's procedure.           If PDI wished to secure a differentiated 

damages award, it was PDI's burden to make this request at trial. 

                The superior court did not clearly err by deciding AIC's claims were not 

barred by the statute of limitations. 

        F.	     The Superior Court Did Not Abuse Its Discretion By Denying PDI 
                Access To Discovery In Support Of Its Abuse Of Process Claim. 

                When Peak and Nabors discovered that PDI's conduct may have amounted 

to fraud, they reported PDI's actions to the FBI and the United States Attorney's Office. 

One of PDI's counterclaims alleged that AIC abused the judicial process by making these 

reports.   To support its claim for abuse of process, PDI sought discovery of attorney- 

client   communications   between   AIC   and   its   counsel   under   Alaska   Evidence        Rule 
503(d)(1).133    A discovery master appointed by the superior court concluded that PDI 

failed to establish a prima facie case that a crime or fraud had been committed when AIC 

reported its suspicions to the U.S. Attorney's Office and to the FBI, and he recommended 

        132	    Williams v. Williams, 129 P.3d 428, 431 (Alaska 2006). 

        133     Communications between attorneys and clients are generally privileged and 

not subject to discovery.  But Alaska Evidence Rule 503(d)(1) provides an exception to 
attorney-client privilege "[i]f the services of the lawyer were sought, obtained or used 
to enable or aid anyone to commit or plan to commit what the client knew or reasonably 
should have known to be a crime or fraud." 

                                                -44-	                                          6650
 

----------------------- Page 45-----------------------

that the superior court deny discovery of the privileged communication between AIC and 

its counsel.     The superior court adopted the discovery master's recommendation.  At 

trial,  AIC    gave   notice   that  it  intended   to  introduce     evidence    that  PDI   may    have 

committed   a   federal crime   through   a   fraudulent   $1.8   million   loan   application.      PDI 

responded by moving to dismiss its abuse of process claim, with prejudice.  The superior 

court orally granted PDI's motion. 

                PDI   appeals   the   superior   court's   order   denying   it   discovery   of   AIC's 

attorney-client privileged communications.             It argues this discovery was relevant to its 

abuse   of   process   claim   and   that   the   attorney-client   privilege   must   give   way   on   the 

grounds that AIC perpetrated a fraud or illegal act by reporting its conduct to the United 

States Attorney's Office and FBI. 

                The first reason this portion of PDI's appeal is not meritorious is that this 

argument was waived.  We have repeatedly held that a party cannot preserve an issue for 
appeal if it agrees to the dismissal or settlement of the claim.134          PDI did not preserve its 

right to appeal the superior court's discovery ruling. 

                Even if this argument had been preserved, the superior court did not abuse 

its discretion by refusing to permit discovery of AIC's privileged communications.  PDI 

is correct that there is an exception to the attorney-client privilege that can apply if  the 

party seeking discovery is able to establish a prima facie case that the communications 
at issue involved perpetration of a crime or fraud.135           But Peak and Nabors argued that 

they reported what they believed to be criminal activity by PDI, and in order for PDI to 

show a prima facie claim of abuse of process, PDI would have had to establish not only 

        134      Uncle Joe's Inc. v. L.M. Berry & Co., 156 P.3d 1113, 1120-21 (Alaska 

2007); Legge v. Greig, 880 P.2d 606, 607-09 (Alaska 1994). 

        135     Alaska R. Evid. 503(d)(1). 

                                                  -45-                                                6650 

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an ulterior purpose, but also a wilful act in the use of the process "not proper in the 
regular conduct of the proceeding."136            PDI does not cite any evidence in the record 

supporting its assertion that AIC wrongfully reported evidence of what it believed to be 
criminal   activity.137    The   jury   found   PDI   liable   for   fraud   and   conversion,   and   these 

findings were not appealed.  On this record, we cannot say that the superior court abused 
its discretion by denying PDI access to privileged communications.138 

        G.	      The    Superior      Court's    Quasi-Estoppel        Instruction      Was    Not 
                 Erroneous. 

                 Quasi-estoppel was one of the defenses PDI asserted in response to AIC's 

claims that it   breached the contractual and fiduciary duties it owed AIC pursuant to the 

operating agreement and the Alaska Revised Limited Liability Company Act (LLC Act). 

PDI   argued   that   the   operating   agreement   was   amended   by   the   parties'   "words   and 
conduct,"139 and that it would be unconscionable to enforce it.  The superior court found 

        136	     Greywolf v. Carroll, 151 P.3d 1234, 1243-44 (Alaska 2007) (quoting Sands 

v. Living World Fellowship, 34 P.3d 955, 961 (Alaska 2001)). 

        137      There is no evidence that criminal charges were ever pursued against PDI 

or Ellsworth. 

        138      PDI also claims that there should have been an in camera review of the 

documents it requested, but as is the   case with the order on discovery, the decision 
"[w]hether   or   not   to   grant   in   camera   review   is   within   the   discretion   of   the   judge." 
Mogg v. Nat'l Bank of Alaska, 846 P.2d 806, 814 (Alaska 1993) (citing                      Cent. Constr. 
Co.   v.   Home   Indem.   Co., 794   P.2d   595, 599   (Alaska   1990)). We   find   no   abuse   of 
discretion here. 

        139      Ellsworth testified that shortly after the operating agreement was signed, 

Marrs   told   him   to   "run   the   company   as   if   [I]   owned   it   a   hundred   percent,   to   make 
money," and "[t]hat's the way I operated."               When asked whether he considered the 
operating agreement to be "out the window," Ellsworth testified that he "thought there 
was no reason really to look at the agreement."             In a March 2005 letter written shortly 
                                                                                           (continued...) 

                                                   -46-	                                             6650
 

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that PDI did not expect the operating agreement to be enforced and that it would not have 

been enforced if Marrs had remained at the helm of CIRI and Peak. 

                The superior court submitted the quasi-estoppel defense to the jury using 

an instruction that PDI challenges on appeal. The instruction asked the jury to decide 

whether Peak and Nabors asserted through words or conduct that Ellsworth and PDI 

were entitled to receive additional funds beyond arms-length value, whether Peak and 

Nabors had full knowledge of all relevant facts when they represented that Ellsworth and 

PDI were entitled to receive the additional funds beyond arms-length value, and whether 

Peak's and Nabors's prior position was so inconsistent with                  their current efforts to 

recover     the  funds   and   damages      that  it  would   be   unconscionable      to  allow    such 

           140 
recovery. 

                On appeal, PDI argues that the superior court applied the wrong burden of 

proof to the quasi-estoppel defense. It contends that PDI should only have been required 

to prove the elements of quasi-estoppel by a preponderance of the evidence rather than 

the clear and convincing standard. AIC responds that this equitable defense should have 
been decided by the court rather than by the jury,141 but it also argues that the superior 

        139(...continued) 

before he left AIC, Ellsworth reminded Marrs that in their original negotiation Ellsworth 
did not intend the non-compete provision to apply to him personally. 

        140     PDI did not argue that quasi-estoppel would have excused fraud or other 

intentional torts.    The instruction directed the jury to consider the defense only as to 
claims for breach of fiduciary duty and breach of contract. 

        141     See Dressel v. Weeks, 779 P.2d 324, 329 n.4 (Alaska 1989) ("Thus, in 

determining whether the doctrine of quasi-estoppel is applicable to the matter before it, 
the trial court should consider whether the party asserting the inconsistent position has 
gained an advantage or produced some disadvantage through the first position; whether 
the    inconsistency     was    of  such    significance     as  to  make     the   present   assertion 
                                                                                        (continued...) 

                                                  -47-                                            6650
 

----------------------- Page 48-----------------------

court   provided   the   jury   with   the   proper   instruction   on   the   burden   of   proof   for   this 

defense. 

                Quasi-estoppel " 'appeals to the conscience of the court to prevent injustice' 

by precluding a party from taking a position so inconsistent with one [it] has previously 
taken that circumstances render assertion of the second position unconscionable."142  PDI 

claims "[Peak and Nabors] with full knowledge of the relevant facts, showed through 

both words and conduct that they believed [PDI was] entitled to take certain actions and 

[to] charge [AIC] for certain costs, and that it was unconscionable for   them to later 

change their position and allege that the charges are fraudulent." PDI does not claim that 

the operating agreement permitted PDI to earn fees in excess of "arms-length value," and 

Alaska's     LLC     Act   requires   operating     agreements     and    amendments       to  operating 
agreements be in writing.143      It also expressly requires the written consent of all members 

to "authorize a manager or member to perform an act on behalf of the company that 
contravenes an operating agreement of the company,"144  and it states that self-dealing 

transactions by a manager or managing member are void unless approved by an official 

        141(...continued) 

unconscionable; and whether the first assertion was based on full knowledge of the 
facts.")   (emphasis   added)   (quoting Jamison   v.   Consol.   Util.,   Inc.,   576   P.2d   97,   102 
(Alaska 1978)). 

        142     Rockstad v. Erikson, 113 P.3d 1215, 1223 (Alaska 2005) (quotingJamison, 

576 P.2d at 102.) 

        143     See AS 10.50.570(g) ("Before filing a certificate of conversion to a limited 

liability company with the department, a limited liability company agreement must be 
approved in the manner provided for by the document, instrument, agreement, or other 
writing governing the internal affairs of the other entity and the conduct of its business, 
or by applicable law, as appropriate."). 

        144     AS 10.50.150(c)(3). 

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----------------------- Page 49-----------------------

vote at a meeting of the members after full disclosure.145                Relying on AS 10.50.150(c), 

the superior court ruled as a matter of law that the operating agreement could not be 
orally modified.146      Despite this ruling, the trial court agreed to instruct the jury on the 

quasi-estoppel defense, and PDI was allowed to argue it to the jury. 

                 We agree that equitable claims are typically decided by the court rather than 

the jury, but superior courts are free to submit such questions to the jury for advisory 
opinions, and that may have been the intent of the superior court here.147                  We do not find 

error in the superior court's instruction on the burden of proof for this defense.                     Under 

our precedent in Dressel v. Weeks, the proper burden of proof for quasi-estoppel is clear 
and   convincing   evidence.148        This   is   the   standard   the   superior   court   used   in   its   jury 

instruction      and   PDI    cites   no   Alaska     case   in   support    of   the  proposition      that   a 

                                                                                                         , 
"preponderance of the evidence" standard is the correct one for quasi-estoppel.149                         150 

         145     AS 10.50.140(a). 

         146     The superior court made this ruling in granting AIC's motion for partial 

summary judgment regarding oral modification to the AIC operating agreement. 

         147     See Alaska R. Civ. P. 39(c). 

         148     779 P.2d 324, 330-31 (Alaska 1989). 

         149     PDI did cite authority showing that other states use this standard in quasi- 

estoppel claims. 

         150     We also observe that the jury decided that PDI was liable under contract, 

tort, and UTPA theories for actions it took in conjunction with the aircraft leases.  The 
equitable quasi-estoppel defense only applied to the claims for breach of contract and 
breach of fiduciary duty.           The jury awarded over $7.3 million in damages on AIC's 
fraud, conversion, and UTPA claims.               Even if we found error in this jury instruction, 
AIC would still be entitled to at least $7.3 million in damages for conduct related to the 
aircraft leases. 

                                                     -49-                                                6650
 

----------------------- Page 50-----------------------

        H.	     We Vacate The Superior Court's Determination Of Prevailing Party. 

                Under Alaska Civil Rule 82, "[e]xcept as otherwise provided by law or 

agreed to by the parties, the prevailing party in a civil case shall be awarded attorney's 
fees."151  "The prevailing party is the one who has successfully prosecuted or defended 

against the action, the one who is successful on the 'main issue' of the action and 'in 
whose favor the decision or verdict is rendered and the judgment entered.' "152                  The 

superior court ruled that PDI was the prevailing party and it awarded fees and costs in 

its favor.  In light of our resolution of the issues presented on appeal, the superior court's 

prevailing party determination must be vacated and remanded for reconsideration.  The 

superior court's award of attorney's fees is also vacated. 

        I.	     PDI And Ellsworth's Claim Of Statutory And Contractual Indemnity 
                Is Moot. 

                PDI argues that it was error for the superior court to solely award Rule 82 

attorney's fees to PDI rather than awarding attorney's fees to both PDI and Ellsworth as 

a matter of statutory and contractual indemnity.          The superior court noted the LLC Act 

contains    two   provisions    relevant   to  fees  incurred   by  members:      (1)   a  mandatory 

indemnification provision under AS 10.50.148(c); and (2) permissive indemnity under 

AS 10.50.148(a) and (b). The superior court determined neither statutory nor contractual 

indemnity applied to the case. 

                PDI    only   sought    indemnification     "for  those   litigation  expenses     that 

reflected 'the extent that [it was] successful on the merits' and therefore had a right to 

indemnity   under   AS   10.50.148(c)."      On   appeal,   PDI   gauges   its   success   by   the   "net 

        151	    Alaska R. Civ. P. 82(a). 

        152     Progressive Corp. v. Peter ex rel. Peter, 195 P.3d 1083, 1092 (Alaska 

2008) (quoting Hillman v. Nationwide Mut. Fire Ins. Co., 855 P.2d 1321, 1327 (Alaska 
1993)). 

                                                 -50-	                                            6650 

----------------------- Page 51-----------------------

judgment" in its favor.  In PDI's view, PDI was successful on two claims:  the fraudulent 

inducement claim and the claim that PDI's breach was immaterial and did not excuse 

Peak and Nabors from paying the contractual premium price of $12 million to purchase 

PDI's ownership interest.  We reverse the superior court's order denying the motion for 

JNOV on PDI's fraud in the inducement claim, and we reverse the superior court's ruling 

on material breach, holding that the jury's findings of fraud and wilful misconduct under 

the circumstances of this case require the conclusion that PDI materially breached the 

operating   agreement   as   a   matter   of   law.  PDI's   claim   of   statutory   and   contractual 

indemnity is therefore      moot. 

        J.      We Vacate The Award Of             Prejudgment Interest. 

                As    explained,    PDI   conceded     before   trial  that  it  over-billed  AIC    by 

$1,902,827.  The superior court awarded prejudgment interest in favor of AIC on its tort 

claims, starting the accrual of prejudgment interest as of February 9, 2000.  PDI appeals, 

arguing that the court's calculation was erroneous. 

                Under Alaska law, prejudgment interest must be awarded by the superior 
court absent extraordinary circumstances.153          We have held that "[p]rejudgment interest 

should be denied 'in only the most unusual case,' such as double recovery."154                For tort 

claims (such as fraud) prejudgment interest begins to accrue on the date of the injury.155 

        153     Farnsworth v. Steiner, 638 P.2d 181, 184 (Alaska 1981); see also Cole v. 

Bartels, 4   P.3d 956, 958-59 (Alaska 2000) ("[P]rejudgment interest is awarded as a 
matter of course."). 

        154     State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1158 (Alaska 

 1989) (quotingAm. Nat'l Watermattress Corp. v. Manville, 642 P.2d 1330, 1343 (Alaska 
 1982)). 

        155     K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 725 n.71 (Alaska 

2003). 

                                                 -51-                                            6650
 

----------------------- Page 52-----------------------

In K & K Recycling, Inc. v. Alaska Gold Co., our court established that where an ongoing 

course of conduct breaches a contract, prejudgment interest may be calculated as of the 

beginning of such conduct and the superior court need not calculate interest "from the 
date of each impediment."156 

                 AIC   asked   the   superior   court   to   award   prejudgment   interest   beginning 

February 9, 2000, the date of the first of a series of invoices that were included in the 

$1,902,827 over-billing PDI admitted to before trial. 

                 PDI raises two arguments on appeal.             First, PDI argues that the superior 

court must be able to determine the actual date AIC's tort claims accrued and that the 

failure to make this determination results in either too much or too little prejudgment 

interest.   Second, PDI argues that the superior court awarded prejudgment interest from 

an   arbitrarily   selected   date   -   February   9,   2000   -   and   that   using   that   date   over- 

compensated AIC because some of the wrongful billings were made at significantly later 

dates.   In particular, PDI      observes that the parties had not yet entered into the second 

aircraft lease as of the date the superior court began calculating prejudgment interest. 

PDI observes that the superior court's "award of prejudgment interest was apparently 
based on a 'continuing course of conduct' theory," explained in K & K Recycling.157 

                 We   do   not   reach    the   merits   of   PDI's   argument   on   the   calculation   of 

prejudgment interest because on remand a new judgment will be entered.  Here, we only 

observe that the record does not appear to include a clear explanation of the methodology 

used by the superior court to calculate prejudgment interest.                On remand, the superior 

court should make detailed findings explaining its prejudgment interest calculation so the 

litigants can readily understand the court's reasoning. 

        156      Id. at 725. 

        157      Id. 

                                                   -52-                                                 6650 

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V.     CONCLUSION 

               We AFFIRM the superior court's denial of PDI's motion for JNOV seeking 

a ruling that the UTPA does not apply to intra-corporate disputes.          We AFFIRM the 

superior court's determination that AIC's aircraft lease claims were not barred by the 

statute of limitations.   We AFFIRM the superior court's decision to deny PDI access to 

discovery in support of its abuse of process claim. We also AFFIRM the superior court's 

decision to apply the clear and convincing evidence standard of proof to PDI's quasi- 

estoppel defense. 

               We REVERSE the superior court's ruling on the motion for JNOV on the 

issue whether PDI's conduct was exempt from the UTPA.  We REVERSE the superior 

court's ruling on the JNOV addressing material breach and hold that the jury's findings 

of   fraud  and  wilful  misconduct    under   the  circumstances    of  this  case  require  the 

conclusion that PDI materially breached the operating agreement as a matter of law.  We 

REVERSE the superior court's order denying the motion for JNOV on PDI's fraud in 

the inducement claim, and we VACATE the superior court's determination of prevailing 

party, award of attorney's fees, and award of prejudgment interest.           PDI's claim for 

statutory and contractual immunity is moot. 

                                             -53-                                         6650
 
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