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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Alaska Fur Gallery, Inc. v. Hwang (3/31/2017) sp-7164

Alaska Fur Gallery, Inc. v. Hwang (3/31/2017) sp-7164

         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  

                                                                                     

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                   THE SUPREME COURT OF THE STATE OF ALASKA  



ALASKA FUR GALLERY, INC.,                                 )  

                                                          )    Supreme Court No. S-16132  

                           Appellant,                     )  

                                                          )    Superior Court No. 4FA-14-03039 CI  

         v.                                               )  

                                                          )    O P I N I O N  

TOK HWANG,                                                )  

                                                          )    No. 7164 - March 31, 2017  

                           Appellee.                      )  

                                                          )  



                  Appeal  from  the  Superior  Court  of  the  State  of  Alaska,  

                                      

                  Fourth  Judicial  District,  Fairbanks,  Douglas  Blankenship,  

                  Judge.  



                  Appearances:    Cabot  Christianson,  Law  Offices  of  Cabot  

                  Christianson,  P.C.,  Anchorage,  for  Appellant.    Robert  A.  

                                              

                  Sparks,  Law  Office  of  Robert  A.  Sparks,  Fairbanks,  for  

                  Appellee.  



                  Before:  Stowers, Chief Justice, Winfree, Maassen, Bolger,  

                  and Carney, Justices.  



                  WINFREE, Justice.  



I.       INTRODUCTION  



                  A sublessee entered into an agreement containing an option to purchase the  

                                                                       



lessee's interest in the lease and leasehold improvements.  When the sublessee attempted  

                                      



to exercise the option the lessee declined to sell, claiming the option was unenforceable.  



The sublessee sued, seeking, among other things, to enforce the option provision.  The  

                                                                                        


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

superior court held that the provision was too uncertain to enforce either as an option or         



as an agreement to negotiate.  The sublessee appeals; we affirm the superior court's  



decision.  



II.        FACTS AND PROCEEDINGS  



                      Tok  Hwang  owns  a  lessee  interest  in,  and  related  improvements  on,  a  



                                 

commercial lot (the leasehold) near the Denali National Park entrance.  Hwang leases the  



lot from a third party for $20,000 annually.  Hwang subleased the leasehold to Alaska  



                                                                          

Fur Gallery, Inc. in April 2012. The sublease (the lease) provided that Alaska Fur would  



                                                  

pay $55,000 annual rent for a three-summer term.  The disputed provision stated, in full:  



                                                   

"Lease  includes  an  option  to  purchase  premises  with  lease  amount  to  be  applied  to  



negotiated purchase price."  



                                                                     

                      In 2014 Manuel Hernandez, one of Alaska Fur's owners, sought to exercise  



                                    

the purchase option. Alaska Fur retained certified appraiser E. Chilton Hines to appraise  



the leasehold as "a basis for discussion with Hwang" about the purchase price.  Hines  



                                                                                    

valued the leasehold at $150,000 to $155,000.  He noted that the appraisal was difficult  



                                                                   

because he was not given building plans, locals were reluctant to share information about  



                                                                         

property values, and information about sales of comparable properties was non-existent.  



Although Hines's appraisal did not include a fair market rental rate, he expressed that  



$55,000 per year was "very high and above market in my judgment."  



                                                                                           

                      Hernandez later stated in an affidavit that he "was aware that $55,000 was  



                                                                                                            

far higher than the fair rental rate," but he had agreed to that rate when negotiating the  



lease because Alaska Fur "anticipated exercising the option to purchase," and "it was  



                                                                   

important to [Alaska Fur] that the lease provided that rental payments were a credit to  



                                                                                                                                 

the purchase price if the option was exercised."  Hernandez further stated that after the  



                                                                 

appraisal Hwang "refused to negotiate the purchase price or any aspect of the option to  



                                                                          

purchase," and the parties failed to reach an agreement about selling the leasehold.  In  



                                                                     -2-                                                              7164
  


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

                                                                                                     

a letter to Alaska Fur, Hwang's attorney asserted that no "price  or  terms were ever  



                                                       

agreed to between the parties," and that Alaska Fur was not "entitled to application of  



any of the rent to any of the purchase price for the [leasehold]."  



                    Alaska  Fur  filed  suit,  alleging  that  Hwang  had  breached  the  lease  by  



                                                                                                            

refusing to negotiate for the sale of the leasehold and by not applying the rental payments  



                                                   

to the purchase price. Alaska Fur sought an order transferring the leasehold from Hwang  



to Alaska Fur "for no additional consideration."  



                    Hwang moved for dismissal and for summary judgment, arguing that the  



                                                                                     

option did not comply with the statute of frauds and that any agreement to negotiate was  



                                                                                                               

unenforceable.  Alaska Fur also moved for summary judgment, claiming that Hwang's  



                                                                                         

refusal to negotiate violated the implied covenant of good faith and fair dealing and an  



implied agreement to negotiate in good faith.  Alaska Fur proposed that the court remedy  



the breach of those duties by declaring the appraised value be the leasehold purchase  



                                                                                      

price.    Alaska  Fur  alternatively  requested  damages  in  the  amount  of  the  difference  



between its rental rate and the fair market rental rate.  



                    Although  the  parties'  arguments  focused  on  the  statute  of  frauds  and  



                                                                                                             

whether the disputed option provision created a duty to negotiate, the superior court  



                                                       

ruled that the option provision was unenforceable as written.  The court deemed price,  



                                                                                                                  

or at least a method to calculate price, "an essential term of a contract."  The court found  



no evidence the parties intended that the purchase price be the appraised fair market  



                                                                                                     

value; because there was no price or method for determining price, the court determined  



that the option provision therefore was unenforceable.  The court further ruled that the  



                           

option provision could not be enforced as an agreement to negotiate because the parties  



                                         

had provided no means of resolving negotiation disputes.  Because the court found the  



                                                                                                     

option provision unenforceable, it did not reach the leasehold value issue or whether rent  



should have been applied to the purchase price.  



                                                               -3-                                                         7164
  


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

                   Alaska Fur appeals the superior court's summary judgment decision.  



III.      STANDARD OF REVIEW  



                                                                                                     1  

                   "We review questions of summary judgment de novo."   "We treat the  

                                                                        



interpretation of contract language as a question of law and interpret the language de  

                          



          2  

novo."   "When applying the de novo standard of review, we apply our 'independent  

                                                                                      



judgment  to  questions  of  law,  adopting  the  rule  of  law  most  persuasive  in  light  of  

precedent, reason, and policy.' "3  



IV.       DISCUSSION  



                   The parties' arguments on appeal are similar to those before the superior  



court.  We nonetheless look directly to the substance of the superior court's order and  

                                                                                  



affirm its determination that the  provision, by its own language, is too indefinite to  

                                                 



enforce either as an option or as an agreement to negotiate.  



          A.       The Provision Is Not Enforceable As A Purchase Option.  



                   The  superior  court  ruled  that  the  option  to  purchase  the  leasehold  was  



                                                              

unenforceable because it contained neither a purchase price nor a method of determining  



the purchase price.  Contracts must be sufficiently definite to enforce.  Although we  



                                                                                                               

recognize that "contracts tend to be skeletal," we will not enforce a contract when "the  



                                                                                         

character of a gap in an agreement manifests failure to reach an agreement rather than  



          1         Cikan v. ARCO Alaska, Inc., 125 P.3d 335, 338-39 (Alaska 2005) (citing  



Mech.  Contractors  of  Alaska,  Inc.  v.  State,  Dep't  of  Pub.  Safety ,  91  P.3d  240,  244  

                              

(Alaska 2004)).  



          2         Cook  v.  Cook,  249  P.3d  1070,  1077  (Alaska  2011)  (citing  Norton  v.  



Herron , 677 P.2d 877, 880 (Alaska 1984)).  



          3         ConocoPhillips Alaska, Inc. v. Williams Alaska Petroleum, Inc., 322 P.3d  

                                                                                                                 

 114, 122 (Alaska 2014) (quoting Russell ex rel. J.N. v. Virg-In , 258 P.3d 795, 802  

(Alaska 2011)).  



                                                            -4-                                                      7164
  


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

a sketchy agreement, or where gaps cannot be filled with confidence that the reasonable  

                                                       



                                                                       4  

expectations of the parties are being fulfilled."   Although we have the power to "fill  

                               



gaps in contracts to ensure fairness where the reasonable expectations of the parties are  

clear,"5 we will not "impose on the parties any performance to which all the parties did   



not or would not have agreed."6  



                                                   

                    We have filled gaps in contracts when we could determine with reasonable  



                                                     7  

                                                        In City of Kenai v. Ferguson we enforced a lease  

certainty what the parties intended. 



provision  that  the  future  rent  amount  "shall  be  subject  to  re-negotiation,"  with  no  



                                                                           8  

                                                                                                        

specification  how  to  determine  the  new  amount.                           We  determined  that  by  expressly  



calling for renegotiation every 5 years over the course of the 55-year lease, the parties  



                                                                                                                                 9  

                                                            

reasonably intended the rental value to "adjust[] to fluctuations in market conditions." 



                                                                                                        

And in that case the lessee's substantial investment in the property, in reliance on the  



                                                                                                         

lease, supported the superior court's decision to "imply a reasonable fair market rent if  



          4         Rego v. Decker , 482 P.2d 834, 837-38 (Alaska 1971) (first citing                                Ansorge  



v. Kane , 155 N.E. 683 (N.Y. 1927); then citing Blanchard v. Detroit, Lansing, & Lake  

Mich. R.R. Co. , 31 Mich. 43 (1875); and then citing 5A ARTHUR L. CORBIN , CONTRACTS  

                                                             

 1174, at 293 (1964)).  



          5         Davis v. Dykman , 938 P.2d 1002, 1007 (Alaska 1997) (first citing Rego ,  



482 P.2d at 837; then citing Yeon St. Partners v. Envtl. Consulting Servs., Inc., 865 P.2d  

                                                                                                                      

 1325, 1327 (Or. 1993)).  



          6         Id. (citing Rego , 482 P.2d at 837).  



          7         See  Prokopis  v.  Prokopis,  519  P.2d  814,  818  (Alaska  1974)  (granting  



specific performance of oral contract because "we think the reasonable expectations of  

                                                                                                            

the parties are readily ascertainable").  



          8         732 P.2d 184, 185, 188 (Alaska 1987).   



          9         Id. at 188.  



                                                               -5-                                                         7164
  


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

                 10  

necessary."          In Rego v. Decker we enforced an option to purchase that included detailed  

                                               



information about the transaction, like the purchase price, the terms of payment, the form  

                                                                                                     

of deed and title insurance, and the impact of lease termination on the option.11  Although  

                                                                         



the option was silent about security provisions, we determined that "the decree can be  



fashioned  to  provide  that  the  plaintiff  furnish  adequate  security  for  his  agreed  

performance," filling a small gap to "achiev[e] justice between the parties."12  



                   We have declined to fill gaps in cases when the parties' intent was less  



evident.  In Davis v. Dykman we held that an insurance settlement offer for policy limits  

                                                                                



plus Rule 82 attorney's fees based on the value of an anticipated jury verdict was too  



uncertain  to  enforce  without  "a  specific  method  for  arriving  at  an  anticipated  jury  



             13  

verdict."        We declined to fill that gap because it was "an essential term to which the  



                                 14  

parties did not agree."              Likewise in  Valdez Fisheries Development Ass'n v. Alyeska  

                       



Pipeline Service Co. we held that a letter failing to specify the price and duration of a  

proposed lease "preclude[d] finding a meeting of minds."15  



                   In this case the reasonable expectations of the parties are not clear enough  

                                                                                  



to order specific performance.  The option provision is less than skeletal, containing  



          10       Id.  



          11       482 P.2d at 835-36, 838.  



          12       Id.  at 838 (first citing 5A CORBIN , supra note 4,  1137, at 98, 101; then  



citing City of La Follette v. La Follette Water, Light, & Tel. Co., 252 F. 762 (6th Cir.  

1918); and then citing Tayloe v. Merchs.' Fire Ins. Co. of Baltimore, 50 U.S. 390, 405  

                                                                                  

(1850)).  



          13       938 P.2d 1002, 1007 (Alaska 1997).  



          14       Id. at 1007.  



          15       45 P.3d 657, 665-67 (Alaska 2002) (citing Davis , 938 P.2d at 1006).  



                                                             -6-                                                      7164
  


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

                                                                                                              16 

                              

neither a purchase  price nor a method for determining a purchase price;                                         it fails to  



                              

                                                                                                    

mention fair market value, appraised value, negotiation processes, or payment terms, and  



to provide any guidance for either the parties or a court attempting to enforce it.  The  



                                                                                                           

superior court found no evidence that the parties intended the purchase price to be the  



                                          

appraised fair market value.  Unlike Rego the option provision contains no key terms, so  

enforcing the provision would go far beyond filling in one missing piece.17  



                                                                                  

                    The only factor weighing in Alaska Fur's favor is its stated reliance on the  



                                                                                                     

option when it agreed to pay what it allegedly knew "was far higher than the fair rental  



        18  

                     

rate."        But  we  have  held  that  "testimony  as  to  [parties']  subjective  intentions  or  



                                                                                                         

understandings will normally accomplish no more than a restatement of their conflicting  



                19  

positions."         Hernandez's after-the-fact affidavit does not demonstrate Alaska Fur's  



intent  upon  entering  into  the  contract  because  "such  self-serving  statements  are  not  



                                          20  

                                              Moreover, any alleged departure from fair market rent  

considered to be probative." 



does not show that ordering sale of the leasehold at no additional consideration would  



                                                              21 

                                                                                                     

fulfill the parties' reasonable expectations.                     Based on these facts we cannot say that the  



          16        See id.; Davis , 938 P.2d at 1007-08.  



          17        See 482 P.2d at 838.  



          18        See City of Kenai v. Ferguson, 732 P.2d 184, 188 (Alaska 1987).  



          19       Jarvis   v.   Ensminger ,   134   P.3d   353,   361   (Alaska   2006)   (quoting  



Sprucewood Inv. Corp. v. Alaska Hous. Corp., 33 P.3d 1156, 1162 (Alaska 2001)).  



          20       Dimeff v. Estate of Cowan , 300 P.3d 1, 11 (Alaska 2013) (quoting Peterson  



v. Wirum, 625 P.2d 866, 870 (Alaska 1981)).  



          21        Alaska Fur's  alternative  request  for  damages  of  "the  $105,000 excess of the  



rental payments over the fair rental  value," based on  the claim that  the fair market rental  

value  of  the  leasehold  is  $20,000  rather  than  $55,000,  is   misleading   at  best.    The  

                                                                                                           (continued...)  



                                                             -7-                                                        7164
  


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

option provision is anything more than a non-binding statement of the possibility of  



purchasing the leasehold.  



          B.        The Provision Is Not Enforceable As An Agreement To Negotiate.  



                                                  

                    Alaska Fur argues that the term "negotiated purchase price" created an  



                                                                                                  

enforceable agreement to negotiate, and that Hwang breached that agreement by refusing  



                                                                                                             

to negotiate.  Hwang claims that no such agreement was created, and that even if an  



agreement existed, negotiations occurred but were unsuccessful.  



                           

                    We will enforce an agreement to negotiate only if it contains a "specific  



                                                   22  

                                                                                   

way of resolving . . . differences,"                  as well as a "basis for determining . . . breach or for  

giving an appropriate remedy."23  If we cannot "discern when the agreement to negotiate  



                                                                       24  

                                                                           Even when an agreement meets this  

has been breached," then we cannot enforce it. 



standard, each party "retain[s] the ability to say 'no' to the terms proposed by the other  



          21        (...continued)  



appraiser noted that $55,000 annual rent was probably "above market," but he made no  

                                                                     

appraisal of fair market rental value for the leasehold with improvements, merely stating  

                                    

that $20,000 was an appropriate rate for ground rent.  Although the superior court later  

                                                                                  

relied on Alaska Fur's incorrect statement that the fair market rental rate, rather than the  

                                                                                                                       

ground rent, was $20,000, neither Alaska Fur's incorrect assertion of the leasehold's  

rental value nor any other part of the record provides a basis for damages.  Alaska Fur  

                                                         

also asks that the superior court address issues of "revenue and expenses" on remand,  

                

without further explanation, but we find no reason to remand that issue.  



          22        Davis v. Dykman , 938 P.2d 1002, 1008-09 (Alaska 1997).  



          23  

                                                                                                

                    Id. at 1008-09 (first citing Ohio Calculating, Inc. v. CPT Corp., 846 F.2d  

                                                                                                            

497, 501 (8th Cir. 1988); then citing  W. Airlines, Inc. v. Lathrop Co., 499 P.2d 1013,  

1019 (Alaska 1972)).  



          24  

                                                      

                    Valdez Fisheries Dev. Ass'n v. Alyeska Pipeline Serv. Co., 45 P.3d 657, 667  

(Alaska 2002) (citing Davis , 938 P.2d at 1009).  



                                                               -8-                                                         7164
  


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

          25                                                                                                   26 

                                                                             

party,"      and thus "an agreement to negotiate is not an agreement to agree."                                    Finally,  



recovery for breach of an agreement to negotiate is limited to "costs associated with the  

negotiations themselves."27  



                                                                                                        

                    The disputed provision here fails to meet the standard for an agreement to  



                                          

negotiate.  The lease's only reference to negotiation is the phrase "negotiated purchase  



             

price."     Merely mentioning negotiation does not create an enforceable agreement to  



              28  

negotiate.           The  superior  court  correctly  noted  that  the  provision  did  not  "create  a  



method  for  resolving  a  dispute  about  the  purchase  price."    The  parties  themselves  



                                                                      

disagree about the definition of "negotiation" and whether any negotiation occurred,  



demonstrating the lease's lack of clarity.  And even if we chose to interpret the word  



                                                                     

"negotiated"  to  create  a  binding  agreement,  Alaska  Fur  has  claimed  no  damages  



                                                                                    

associated with the negotiations themselves.  Alaska Fur cannot use failure to negotiate  



                                                                              

as an avenue to obtain an award of the leasehold.   We therefore affirm the superior  



court's ruling that the provision did not create an enforceable agreement to negotiate.  



          C.       Hwang Did Not Breach The Duty Of Good Faith And Fair Dealing.  



                   Alaska  Fur  claims  the  implied  covenant  of  good  faith  and  fair  dealing  



                                                                               

created  a  duty  that  Hwang  "enter  into  good  faith  negotiations  for  the  sale  of  the  



                                                      

[leasehold]."  A "covenant of good faith and fair dealing is implied in all contracts in  



Alaska," and it "prevents each party from doing anything that will injure the right of the  



          25       Davis , 938 P.2d at 1009.  



          26        Valdez Fisheries, 45 P.3d at 667 (citing Davis , 938 P.2d at 1009).  



          27       Id.  



          28       See id. at 663, 667   (holding letter stating intent to "begin the process of  



negotiating a contract" was not an enforceable agreement to negotiate); Davis, 938 P.2d  

at 1008-09 (holding letter stating party was "willing to work . . . and negotiate" was not  

                                                                                                                    

an enforceable agreement to negotiate).  



                                                             -9-                                                       7164
  


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

                                                                   29  

                              

other to receive the  benefits of the agreement."                      But the covenant's purpose "is to  



effectuate the reasonable expectations of the parties, not to alter or add terms to the  



              30                                                                            31 

                                                                                                             

contract,"       and it "will not create a duty where one does not exist."                      Because we hold  



that the disputed provision was unenforceable as either an option to purchase or an  



agreement to negotiate, Hwang did not breach any duty or injure any right by refusing  



                            

to negotiate or sell the leasehold.  As the superior court noted, "both [Alaska Fur] and  



[Hwang] accepted the risk that they would be unwilling to agree upon a purchase price  



                                                          

and retained the opportunity to say no to a purchase price that they found unsatisfactory."  



We will not interpret the implied covenant to impose a duty to negotiate or sell the  



leasehold contrary to the parties' reasonable expectations.  



V.       CONCLUSION  



                   We AFFIRM the superior court's decision.  



         29       Askinuk Corp. v. Lower Yukon Sch. Dist. , 214 P.3d 259, 267-68 (Alaska  



2009) (first citing  Casey v. Semco Energy Inc., 92 P.3d 379, 384 (Alaska 2004); then  

citing Ellingstad v. State, Dep't of Nat. Res. , 979 P.2d 1000, 1009 (Alaska 1999)).  



         30        Witt v. State, Dep't of Corr.        , 75 P.3d 1030, 1034 (Alaska 2003) (citing Era  



Aviation, Inc. v. Seekins , 973 P.2d 1137, 1141 (Alaska 1999)).  



         31        Casey, 92 P.3d at 385 (quoting Lorenz v. CSX Corp. , 736 F.Supp. 650, 656  

                              

(W.D.Pa. 1990)).  



                                                         -10-                                                   7164
  

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