685 P.2d 1211 (Alaska 1984), 6861, Native Alaskan Reclamation and Pest Control, Inc. v. United Bank Alaska

Docket Nº:6861, 6925.
Citation:685 P.2d 1211
Opinion Judge:BURKE, Chief Justice.
Party Name:NATIVE ALASKAN RECLAMATION AND PEST CONTROL, INC., an Alaskan Corporation, Appellant and Cross-Appellee, v. UNITED BANK ALASKA, an Alaskan Banking Association, Appellee and Cross-Appellant.
Attorney:Bruce E. Gagnon, Patrick B. Gilmore, Atkinson, Conway, Bell & Gagnon, Anchorage, for appellant and cross-appellee. Robert L. Eastaugh, Delaney, Wiles, Hayes, Reitman & Brubaker, Inc., Anchorage, for appellee and cross-appellant.
Judge Panel:Before BURKE, C.J., RABINOWITZ and COMPTON, JJ., and HANSON, Superior Court Judge. [ * ]
Case Date:March 23, 1984
Court:Supreme Court of Alaska

Page 1211

685 P.2d 1211 (Alaska 1984)


Alaskan Corporation, Appellant and Cross-Appellee,


UNITED BANK ALASKA, an Alaskan Banking Association, Appellee

and Cross-Appellant.

Nos. 6861, 6925.

Supreme Court of Alaska

March 23, 1984

Page 1212

As Modified on Denial of Rehearing June 15, 1984.

Page 1213

Bruce E. Gagnon, Patrick B. Gilmore, Atkinson, Conway, Bell & Gagnon, Anchorage, for appellant and cross-appellee.

Robert L. Eastaugh, Delaney, Wiles, Hayes, Reitman & Brubaker, Inc., Anchorage, for appellee and cross-appellant.

Before BURKE, C.J., RABINOWITZ and COMPTON, JJ., and HANSON, Superior Court Judge. [*]


BURKE, Chief Justice.

This appeal arises out of an action for breach of contract.


    Appellant, Native Alaskan Reclamation and Pest Control, Inc. [NAR-PC], is a closely held Alaskan corporation engaged in the business of specialty contract flying. NAR-PC's business activities include the operation of fire retardant aircraft in the suppression of wild fires for the federal government and the State of Alaska. NAR-PC's chief executive officer and principal shareholder is Lester Risley.

    In mid-1977, Risley learned that eleven Grumman TS2A ["S-2"] United States military aircraft were to be sold as surplus in Japan. Desiring to purchase and convert the planes to aircraft suitable for use in the suppression of forest fires, Risley contacted the appellee, United Bank Alaska [UBA], in an attempt to obtain financing for the S-2 project. Jerry Sutton, a UBA loan officer, expressed interest in the project, and Risley flew to Japan in late September, 1977, to inspect the planes. Being favorably impressed with the planes' condition, Risley submitted a bid in October, which was accepted by the United States government on January 13, 1978.

    UBA agreed to help finance the project and on January 27, 1978, UBA and NAR-PC entered into a standard loan agreement. UBA agreed to loan NAR-PC $200,000 and NAR-PC promised to repay the loan with 12% interest. As collateral for the loan, NAR-PC assigned its interest in all parts and inventory owned by NAR-PC, and its interests in six of the eleven S-2 planes purchased in Japan. NAR-PC also assigned all monies receivable under NAR-PC's BLM contract No. 81-0013. Risley provided a personal guarantee on the loan as well.

    In connection with the S-2 loan, Risley presented UBA with a self-prepared financial statement showing a net worth of approximately $1,200,000 as of January 10, 1978. Over $820,000 of this amount was attributable to corporate stock owned by Risley. Sutton interpreted this financial statement as yielding a "Tangible Net Worth" of $107,651. This figure represented the "funds that Mr. Risley within a short period of time, ... say 12 months, could turn into ready cash."

    The planes were subject to forfeiture if NAR-PC failed to remove them by March 14, 1978. Risley planned to minimally refurbish the planes so that they could be flown from Japan to Taiwan. Upon arrival in Taiwan, the planes would be converted for use in fire fighting, rendered airworthy by Air Asia, Ltd., and then flown to the United States. The total cost of refurbishing and converting all eleven S-2's was estimated at $1,200,000.

    Risley planned to use the UBA loan, NAR-PC's contract revenues, and his personal resources to return one or two S-2's to the United States. With the plane or planes in the United States as collateral, Risley could then obtain long term financing

    Page 1214

    to pay off the UBA loan and finance the delivery of one or two more S-2's. The process would be repeated until all eleven S-2's had been delivered.

    Upon execution of the loan documents, UBA immediately advanced $100,000 to NAR-PC which was used to pay part of the S-2 purchase price and project expenses. On April 13, 1978, the balance of the loan was committed to Air Asia, Ltd., in Taiwan, in the form of a $100,000 letter of credit, which was to expire on June 30, 1978.

    The project, however, did not go as smoothly as planned. The Japanese had apparently removed parts and replaced them with inoperable parts. Risley estimated that the S-2 project would incur additional costs of $100,000 as a result of this parts "cannibalization." Risley also encountered problems with Japanese customs which were not resolved until late April. It was not until mid-May that several planes were ready to be ferried to Taiwan.

    In early June, Sutton, apparently following orders from his supervisors, notified Risley that UBA would not honor the letter of commitment and that no further credit would be extended to NAR-PC. Sutton also informed Risley that UBA requested that all existing loans be paid off as soon as possible and that NAR-PC and Risley transfer their business to another lending institution.

    Risley attempted to find replacement financing. NANA Regional Corporation turned down Risley's invitation to invest in the S-2 project. Security National Bank and National Bank of Alaska also denied Risley's requests for a loan which would enable NAR-PC to repay all the money. Risley's application to the State of Alaska, Division of Business Loans, requesting a $300,000 loan ($150,000 to refinance the existing debt owed UBA, and $150,000 to finance the S-2 project), was denied as well. Risley's attempt to line-up individual investors, as opposed to institutional investors, likewise failed.

    On July 28, 1978, the planes were forfeited and the United States government refunded part of the purchase price, $82,074.40, to Risley and retained $20,000.16 as liquidated damages. Risley delivered the refunded amount to UBA in partial payment of NAR-PC's loan. After a lawsuit and settlement between Risley and the United States government, Risley was given a second opportunity to purchase the eleven S-2's at the original price. Under this second bid, Risley had until January 23, 1979, to remove the S-2's. Being unable to find financing, Risley again forfeited his interest in the planes and suffered an additional $20,518.60 liquidated damages. Most of the planes were ultimately sold as scrap in Japan.

    After failing to obtain refinancing, NAR-PC filed this action for breach of contract against UBA in September 1978, seeking specific performance of the loan agreement. UBA counterclaimed against NAR-PC alleging default on two promissory notes executed by NAR-PC prior to the S-2 loans.

    The case was tried without a jury and the trial lasted six weeks. The court issued its first memorandum of decision on February 17, 1981. The court concluded that while UBA did breach the loan agreement, UBA was discharged from its obligation to pay NAR-PC damages since NAR-PC was unable to prove that it could have performed all of its obligations under the loan contract (i.e., paid off the $200,000 loan) had UBA not been in breach. The court also dismissed UBA's counterclaims without prejudice, finding that since the two promissory notes' collateral (a Cessna 402) had not yet been sold, the counterclaims were premature as no deficiency yet existed.

    The lower court issued a second memorandum of decision on April 12, 1982, and a supplemental memorandum of decision on April 20, 1982, which changed the holding in the case on several important points. The court continued to find that UBA breached the agreement. The court, however, reversed itself on the discharge of duty to pay damages issue and, instead, concluded NAR-PC would have been able

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    to perform its contract obligations had UBA not breached the loan agreement. The court found that UBA's breach caused the damages alleged by NAR-PC, that NAR-PC took reasonable steps to mitigate its damages, and that UBA's affirmative defenses (misrepresentation, excuse, estoppel) were not supported by the weight of the evidence. The court found NAR-PC's damages to be:

    (1) Reliance damages (expenses incurred prior to breach) $97,394.22.

    (2) Mitigation damages (expenses incurred after breach in effort to save project) $86,705.97.

    (3) Expectancy damages (money NAR-PC would have earned had UBA not breached) $2,921,605 which was then reduced by interest costs of $536,000 leaving total expectation damages of $2,385,605.

    Despite its findings on damages, the court found that NAR-PC could only recover its mitigation damages. The court based this ruling on its finding that UBA, at the time of contracting, only had reason to foresee loss of the S-2 project as a possible result of its breach, not a probable result. The court felt that UBA could reasonably have expected NAR-PC to obtain a replacement loan, thereby saving the S-2 project. Therefore, no recovery was allowed for the reliance or expectation damages.

    The court also changed its earlier ruling on UBA's counterclaims. Finding that UBA's failure to sell the Cessna 402 (collateral) was commercially unreasonable, the court concluded that the burden shifted to UBA to prove the value of the Cessna 402. UBA's failure to meet this burden resulted in the court finding that the two notes were satisfied in their entirety and that UBA was not entitled to a deficiency judgment. The court dismissed the two counterclaims with prejudice.

    NAR-PC's principal argument on appeal is that the trial court erred in finding that NAR-PC's inability to obtain replacement financing and the resulting loss of the S-2 project were not foreseeable as a probable result of UBA's breach at the time of contracting. An ancillary argument is that the trial court erred in reducing NAR-PC's expectation damage figure by the amount of interest that NAR-PC would have paid on the loans necessary to deliver the eleven S-2's to the United States ($536,000).

    UBA cross-appeals on several different issues. First, it argues...

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