Alaska Interstate Constr., LLC v. Pac. Diversified Invs., Inc.

• Decision Date: 10 February 2012
• Docket Number: Nos. S–13478,S–13667.,s. S–13478
• Citation: 279 P.3d 1156
• Parties: ALASKA INTERSTATE CONSTRUCTION, LLC, Peak Alaska Ventures, Inc. and Nabors Alaska Services Corporation, Appellants/Cross–Appellees, v. PACIFIC DIVERSIFIED INVESTMENTS, INC., John Ellsworth, Individually, and Anchorage Aviation Center, LLC, Appellees/Cross–Appellants.
• Court: Alaska Supreme Court

279 P.3d 1156

ALASKA INTERSTATE CONSTRUCTION, LLC, Peak Alaska Ventures, Inc. and Nabors Alaska Services Corporation, Appellants/Cross–Appellees,

v.PACIFIC DIVERSIFIED INVESTMENTS, INC., John Ellsworth, Individually, and Anchorage Aviation Center, LLC, Appellees/Cross–Appellants.

Nos. S–13478, S–13667.

Supreme Court of Alaska.

Feb. 10, 2012.

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.

Before: CARPENETI, Chief Justice, FABE, CHRISTEN, and STOWERS, Justices.

OPINION

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 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 premisedon 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 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, 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. 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 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...