Alaska Law Blog

This is still a free country, so long as you stay out of Arizona or have your immigration papers in order. Freedom of contract is one the central principles of American law that is even recognized in the Constitution (in a kinda, sorta way). But this does not mean that you can put any damn thing into a contract and expect to be able to enforce it.

We’ve touched on this theme before, but a recent Ninth Circuit decision underscores the point. In Narayan v. EGL, Inc. three guys in California who drove delivery trucks for EGL, a Texas based company, sued for overtime compensation, reimbursement of business expenses, and other obligations California law says employers have to pay. EGL stiff-armed the drivers by pointing out that the contracts the guys signed said they were independent contractors, not employees. The contracts also said that Texas law governed their relationship.

Amazingly enough, the trial judge – apparently another platinum level member of the Adam Smith fan club -- accepted EGL’s position. He ruled that Texas law applied and shackled the drivers with the distainful servitude of being mere independent contractors.

The Ninth Circuit reversed on appeal, as well it should have. The Nines said that Texas law applied only to claims arising out of the contract itself, not ones based on statutes. Since the drivers' claim did not depend on interpreting any contract provision or even require a contract to exist, the appeals court said the provisions of Texas law didn’t matter. California law was what was important, and under California law it was a question of fact whether the drivers were actually employees or independent contractors.

(At the start of the opinion, I was thinking the Court of Appeals was going to get into a nuanced discussion of the exotic choice of laws notion, renvoi. Alas, the court skipped the discussion whilst going straight for a renvoi result.)

So EGL is going to face a jury on the drivers' claims. And while it’s understandable that EGL would take a flyer on putting these clauses into its contracts, you have to wonder about why it pushed things so far. I mean, regardless of what the contract says, you can’t really expect to avoid applying California labor law to folks working for a living in California, now can you? If EGL’s contractual sleight-of-hand had worked then you’d find Scrooge Industries Inc. and its like always electing to apply Somalia maritime law to its employment contracts, just to avoid those pesky U.S. statutes about overtime, minimum wage, child labor and such.

It does not happen often. Usually judicial decorum and hidebound notions of professionalism prevent it. But every once in a great while, an appellate court takes a swipe at a lawyer. No matter what a lawyer does or fails to do in arguing a case, appellate judges usually let it pass without comment. So it was a bit jarring – but nonetheless refreshing -- to find Chief Judge Alex Kozinski of the Ninth Circuit upbraiding a D.C. intellectual property law firm in a recent opinion.

The case was Toyota Motor Sales v. Tabari. It seems Mr. and Ms. Tabari made a living by brokering the sale of Lexus automobiles. They practiced their trade through that series of tubes we all know so well as the Wonderful World Wide Web. Their websites were named “buy-a-lexus.com” and “buyorleasealexus.com”. Toyota wanted to stop the Tabaris from including “lexus” in their domain names. So it sued them for trademark infringement.

Now, anyone familiar with Chief Judge Kozinski’s views on the First Amendment and trademarks ought to know how this one was likely to come out. The Honorable Judge Kozinski is on record as a stalwart defender of free speech and as a guy who looks skeptically at any broad application of intellectual property rights. In an interview he gave to the libertarian magazine Reason a few years back, the Chief Judge said: “Owners of copyrights and other intellectual property rights are very grabby. They think they own everything, or they think they invented everything.”

And sure enough the opinion Judge Kozinski wrote in Toyota Motor Sales v. Tabari found that the injunction the District Court issued in Toyota’s favor had to be dissolved. The opinion held that trial judge applied the wrong law to the facts and sent the case back for a new determination.

There are several interesting aspects to the opinion, but the one that particularly caught my eye was footnote 12 that took Toyota’s counsel to task over how the right to jury trial issue had been handled. (Cast your mind way, way back to law school and the protection for the right to jury trial established in the Beacon Theatres case.) Chief Judge Kozinski said, in effect, that Toyota’s counsel went a step beyond cagey in arguing this issue:

Toyota artfully maneuvered to obscure this factual overlap [bearing on the Beacon Theatres issue] before trial and again on appeal . . . Toyota evidently hoped that the district court would not notice the careful parsing of its language, and that the Tabaris (who are defending this case pro se) would not call it to the court’s attention. Toyota is playing the same game on appeal . . . Toyota is only telling half the story by talking about only half of the relevant claims; Toyota admitted as much in its motion for summary judgment. Such selective memory exceeds the bounds of zealous advocacy.

Yes, I know Judge Kozinski softened his rebuke by using the name of the party rather than the names of the lawyers or the law firm. But the rebuke of Toyota’s counsel is unmistakable. Even this softened language was too much for Senior Circuit Judge Fernandez, who wrote a concurrence to say that “I am unable to join in the gratuitous slap at counsel for Toyota in the majority opinion, which I see as entirely unnecessary to our decision or even to the upholding of the marmoreal surface of the law.”

(Kudos to Judge Fernandez or his over-educated clerks on the use of the obscure word marmoreal. I admit I had to look it up in the dictionary. I thought at first that it might mean “of or related to the family of the hoary marmot.”)

Chief Judge Kozinski even took a sort of backhanded swing at the trial judge. Judge Kozinski’s opinion said that “many of the district court’s errors seem to be the result of unevenly-matched lawyering, as Toyota appears to have taken advantage of the fact that Tabaris appeared pro se.” I took this statement as implying that the trial judge himself was the one who was over matched. I mean, any pro se litigant who can recognize -- let alone cogently argue -- a Beacon Theatres issue is doing better than a lot of lawyers could do.

But Judge Kozinski had a solution for the uneven lawyering as well. In the very last sentence of the opinion, he wrote: “To avoid similar problems on remand, the district court might consider contacting members of the bar to determine if any would be willing to represent the Tabaris at a reduced rate or on a volunteer basis.”

You know, I was with the Chief Judge all the way up to the end there. I support Chief Judge Kozinski in calling out lawyers when they engage in bad or sloppy lawyering. This sort of criticism does not happen often enough. Lawyers need to know that their shortcomings and hijinks are noticed.

The last sentence of the opinion, though, just made me laugh. It is all well and good to promote pro bono service to the needy public. But, I cannot imagine a District Court Judge having nothing better to do than to hunt up a free lawyer for a car dealer who does not want to have to pay for legal counsel to defend his business. And I would think the idea of having a meddling government official (albeit a judge) step in to decide what is in the best interests of independent business owners would run against the libertarian grain.

Smarter fellows than I have observed that the rules of evidence are a systematic effort to keep the truth from seeping into the courtroom. As one of the authors of the Notable British Trials series observed way back in 1933, the “law of evidence has been built up by generations of judges distrustful of the capacity of juries.” The evidence rules are the law’s way of saying that the trial judge is the only one in the courtroom with a lick of common sense.

Obviously this thesis overstates things a smidge. But I fear that the Alaska Supreme Court’s recent decision in Mueller v. Buscemi demonstrates that there is actually something to this view. (And, yes, I admit that I only read the opinion because I thought it might involve wacky Steve Buscemi or the Coen Brothers. Sadly, it does not and the entertainment value of the decision is vastly reduced.)

The Mueller case involved a simple slip and fall in a parking lot outside a commercial building. (Warning: Gravity In The Area!) The plaintiff rolled snake eyes in front of the jury on her claim against the building owner. The plaintiff blamed the adverse outcome on the trial judge not allowing in evidence of other accidents. Specifically, the trial court kept the plaintiff from giving the jury evidence that a pregnant woman fell in front of the building two weeks before the plaintiff’s accident; that on the same day as the plaintiff’s accident another woman complained about falling in front of the building; and that on the same day as the plaintiff’s accident, a guy fell and hurt his knee in front of the building.

Citing the established evidence rule, the Supreme Court said that the plaintiff was entitled to bring this evidence in only if she showed the other falls occurred “under substantially similar circumstances.” This she failed to do, according to the court, because the plaintiff fell in the back parking lot and the other falls happened in the front of the building. As such, the other falls “are not necessarily probative of the conditions that existed in the building’s rear parking lot.”

Hmmmm . . . It seems fairly obvious from the opinion that the presentation of plaintiff’s case was lacking. In other words, the plaintiff may have deservedly lost at trial.

Yet, in the rush to confirm the outcome, the Supreme Court gave an exceedingly tight interpretation to the evidence rules. I mean, you have to wonder about the science underlying the Supreme Court’s microclimatic application of the law of evidence. We’ve got people falling like ten pins outside this building. But the jury is not entitled to know about this because perhaps it might have snowed more in the front of this building than the back?

How close do the other accidents have to be to the exact spot where the plaintiff took a tumble to meet the requirements of the evidence rules? Ten yards? Ten feet? Ten inches? It just seems like the court is using the blunt edge of the evidence rules to cut things too finely.

Also, as we know from our prior discussion of slip and fall cases, negligence requires proof of more than just something bad happening. You have to show that the defendant had time to find out about a dangerous condition and correct it. Wouldn’t multiple prior gravitational adventures in the front of the building be pertinent to the question of the owner’s notice of dangerous conditions surrounding the building? If the owner had heeded the prior incidents, a sanding crew could have been called in to check all of the exterior areas. The evidence should have come in for the jury to decide how much bearing it had on the case.

One hopes that the next time evidence of “similar accidents” comes into play, the Mueller court’s cramped interpretation of the evidence rules won’t be followed too closely. The Alaska courts ought to trust in the common sense of jurors to be able to, among other things, understand the difference between the front and back of a building.

This post is a follow-up to a couple of prior postings. I realize this makes it look like I lack creativity since I’m not saying anything new. But I can’t help it. The fascist running dog who is the Virtual Managing Editor of the alaskalawblog.com has insisted that I do more linking back to prior blog postings. He says this is necessary for “search engine optimization.” I don’t even know what that means. Goofy legal stuff -- like maiden rents or the fertile octogenarian -- I understand. Website technospeak, I don’t get.

In any event, updating of a couple of earlier blog postings is my attempt at keeping the e-tyrant at bay.

On the first of October, I wrote about limitation of liability clauses in this post. I ran into a problem with one of these horrid clauses a week or two ago and had to forcibly cut its heart out. In the process, though, I found a 2008 Colorado case that I think illustrates the points I was making in the earlier post.

In the Colorado case, a retail merchandise distributor, Core-Mark, had a large warehouse where it stored inventory. Core-Mark entered into a contract with a security company, Sonitrol, to install and monitor an alarm system in the warehouse. The alarm system utilized sound detectors. If sound over a certain level was detected, the system recorded it and alerted a central monitoring facility. The operators at the central monitoring facility were then supposed to listen in live to determine if anything underhanded was afoot and call the authorities if necessary.

One night three miscreants broke into Core-Mark’s warehouse. They spent hours inside, making a heckuva racket, looting the place. The alarm company’s sound detectors picked it all up and repeatedly alerted the central monitoring facility. The operators there (who must have been busy updating their blogs) just kept turning the alarm off. When the burglars finally left they set the warehouse on fire. The alarm company never called the police or the fire department. The warehouse and everything in it burned to the ground. The total loss amounted to about $20 million.

Core-Mark sued the alarm company since – Gee! – Sonitrol was hired to protect the warehouse and did not actually do it. Sonitrol pulled the “can’t touch this” dance, pointing to the limitation of liability clause in its contract. The clause said Sonitrol’s “liability shall be limited to a sum equal to the total of one-half year’s monitoring payments, or five hundred dollars ($500) whichever is less.” So Sonitrol argued that it was A-OK to pay Core-Mark a grand total of $500 for its loss.

The trial court judge -- who was apparently a platinum level member of the Adam Smith fan club -- accepted the alarm company’s position. Core-Mark appealed and the Colorado Court of Appeals reversed. The appellate court paid lip service to freedom of contract but dug around in the dusty corners of the law library to find a restriction that applied. Judge Ney’s opinion said it was against public policy (in Colorado, anyway) to have a contract provision that exonerated a party from its own “willful and wanton” conduct. So the appellate court sent the case back – some six years after the fire occurred and about five years after the lawsuit started -- for a jury trial on whether Sonitrol’s actions were “willful and wanton.”

(By the way, isn’t “Ney” just a great name for a judge, especially if Monty Python were the outfit doing the judicial appointments? “We are the judges who say NEY.” )

The Core-Mark case demonstrates my original point. You can put these things in contracts but you better not count on them as always covering your southern quadrant. The case also points up the reason I detest these clauses. I mean, who wants to hire a burglar alarm company who says we can’t really be responsible for calling the cops when the burglars break in? You’re better off doing business with someone who will actually stand behind their promises. Or just putting the fake "Protected By" stickers on the windows and doors.

One other follow-up note I need to squeeze in. After writing about tribal sovereign immunity in this post a couple weeks back, I found that some people were thinking I was referring to ANCSA corporations. (OK, OK, I only know of this one guy who actually got confused.) ANCSA corporations are formed under state law and do not get the benefit of sovereign immunity. I was talking about federally recognized Indian tribes and the entities that the tribes set up as authorized under federal Indian law. ANCSA corporations and tribes are different organizations, although the shareholders/members of the two overlap.

Hey, it’s an easy mistake to make. As one of my esteemed colleagues is fond of saying: “The law is tricky she-it.”

One businessman shakes hands with another. They have just struck a deal and signed a contract. Each guy thinks he’s going to get something out of the transaction. But one guy could be dead wrong about what he’s getting.

You see, the cagey guy of these two has built an escape hatch into the contract. He’s limited his downside risk by stacking the deck in his favor. If he breaches his obligations under the contract, he’s got it set up so that the other guy can’t do much about it. He’s slipped in a provision that says the most he can liable for is the equivalent of the fees he was paid in the deal. Perhaps the provision even restricts that further to just a month or so of the fees that have been paid. So if it happens that the other guy loses out on $5 million in profits because the cagey guy did not perform as promised, all the other guy can claim under the terms of the contract is the $999.95 that the cagey guy charges every month for his services (which, of course, he fails to actually perform).

Is this legal? Can Mr. Nanny-Nanny-Boo-Boo really skate out of his responsibilities that way? As with many other areas of the law, the answer is a resounding MAYBE!

In looking at this problem, you have to start with the assumption that the limitation on liability is going to be upheld, unless there is some specific exception that can be found. The law still recognizes freedom of contract, more or less. If you want to make this kind of a deal, the law will let you, as long as you don’t step into some recognized exception.

There are a long list of exceptions, though. In a transaction for the sale of goods, the Uniform Commercial Code (UCC) applies. The UCC lets a seller limit the warranties given and the remedies allowed for breach of a warranty. (At least it allows this in a non-consumer deal.) But the UCC does not let a seller leave the buyer with his hindquarters completely hanging out there flapping in the breeze. The UCC says that a remedy limitation will not be honored if the circumstances cause the remedy to “fail of its essential purpose.” In other words, if the limited remedy provides for no real remedy at all, it won’t be upheld.

But the UCC does not apply when a contract is one for services. So are service contracts the land of the free and the home of the brave when it comes to limitations of liability? Not always. The free and the brave can get their choke chains pulled up short when they aren’t looking. YOWCH!

For example, the Alaska Supreme Court has said that it is not going to permit limitation of liability clauses in a construction contract, or even in any contract that is a first cousin to a construction contract, like a construction manager’s contract, or an architect’s contract, or an engineer’s contract. It took an expansive reading of the Alaska Anti-Indemnity Statute (AS 45.45.900) to get to this result, but the Supremacies got there nonetheless.

Another example. A limitation of liability clause in a contract may not apply when a tort claim can be based on the exact same conduct. The court may just ignore the contractual limitation and apply the regular tort rules regarding a recovery.

This very thing happened to the poor title companies who tried to limit their liability for goofing up a title report. The title report said that the title company was only liable for the amount stated in the report, which was a measly $250. The Alaska Supreme Court jerked the title company’s choke chain on that one. The Supreme-O-Mites effectively said:

“Fine, you can limit the damages that can be recovered in a breach of contract action. But there’s a tort claim here too, for negligent misrepresentation. Under the tort claim, you -- Nanny-Nanny-Boo-Boo Title Company -- are liable for the full amount of the loss your foul up caused.”

(OK, OK. It was actually First American Title Insurance Co.)

My approach to these things is to advise business folk to think twice before doing a deal with someone who insists on a limitation of liability clause. If they aren’t going to stand behind their word, is this really someone you want to do business with? I mean, who really needs a Swiss cheese contract full of holes. Sometimes you have to just live with it, but it's something that you should only accept with eyes wide open.

And if my client happens to be the Mr. or Ms. Nanny-Nanny-Boo-Boo in the transaction? I tell them that this is still the land of free and the home of brave so you can charge right ahead. But you better not always count on being able to skate out your obligations, lest the choke chain of the law get pulled up rather smartly.

Bob Dylan, genius poet and songwriter that he is, had a terrific line in the song Shelter From The Storm. Well, actually, the whole song is downright terrific but I want to focus in on this one particular line. (The song was from Dylan’s masterpiece album Blood On The Tracks.) The line I refer to goes as follows:

“I bargained for salvation an’ they gave me lethal dose.”

(To get the full effect, you have to wail out the line with squinting eyes and keening voice.)

I suspect the lawyers who put together the Stock Purchase Agreement that Argan, Inc. used in selling to Western Filter Corporation have a similar view of the United States Court of Appeals for the Ninth Circuit. Those lawyers bargained for a time limit on their client’s obligations under the agreement. The Ninth Circuit took their time limit and gave them a karate chop in the throat with it.

The case I’m talking about is Western Filter Corp. v. Argan, Inc., decided on August 25, 2008. The case stems from Western Filter’s purchase of the corporate stock of a competitor in the filter business, Puroflow, Inc., an Argan subsidiary. The Stock Purchase Agreement used in the transaction contained the usual representations and warranties on the seller’s part. The Agreement went on to say that some of the representations and warranties “shall survive the Closing for a period of one year.”

Within the one year period, Western Filter discovered what it said was a breach of the representation and warranty on the accuracy of Puroflow’s financials. (The specific issue was overvalued inventory.) Western Filter figured it had been gypped to the tune of about $2 million. But Western Filter did not actually bring suit against Argan until more than one year after the deal closed. Argan defended by saying the one year survival period in the contract ran out. The trial judge agreed and tossed the claim.

The Ninth Circuit reversed. Going out of its way to avoid applying the terms of the contract as any normal person would, the Ninth Circuit panel said the survival clause in the agreement did not unambiguously change the California period of limitations for bringing suit. The court therefore ruled that Western Filter had the right to maintain its claim.

The Ninth Circuit’s interpretation of the survival clause makes little sense in the real world. In essence, the court said the one-year “survival” period only set out the time period for discovering a breach of a representation and warranty; it did not establish any limit for asserting a claim for breach. But I can tell you from firsthand experience that absolutely no one in a deal of this nature would ever negotiate over the “discovery” period for bringing a claim. The negotiations are all about how long there is to make a claim for a violation.

What the Ninth Circuit actually said was that the one-year period established the time within which a breach could occur. But that is completely impossible. A breach of a representation and warranty as to financial condition has to occur, if at all, no later than the date of closing. On this point, the Ninth Circuit's opinion betrayed a less than clear understanding of merger and acquisition transactions. What the Ninth Circuit's decision has to be understood to really mean, and what it sort of said elsewhere, was that the one-year period was for discovering a breach had occurred.

Hey, I readily concede that the survival clause in the Stock Purchase Agreement could have been better worded. The agreement could have expressly defined the word “survival” to mean the time within which to assert a claim for breach. I also might have added my favorite phrase: “And we really, really mean it here, judge.” (In Alaska, though, even this might not have done any good.)

Yet, the Ninth Circuit’s interpretation of the clause is screwy. It would have been far better if the court had just fessed up, saying that it knew what the clause really meant, but that it disliked these kinds of limitations so it wasn't going to apply the clause. That would have been an honest and still lethal dose, although not really in accordance with California law.

By the way, I want to be on the record as saying that I think almost everyone out there is wrongly reporting the lyrics for Shelter From The Storm. Most sources give this line for the song:

“And the one-eyed undertaker, he blows a futile horn.”

I am sure that the correct phrase is “feudal horn.” Horns can be “feudal” (old) but they can’t really be “futile.” (That is, I guess, unless they don't make any sound, in which case they cannot be "blown.") I realize its poetry and literal meaning is not required. But I’m sticking with my interpretation of the song. At least, I'm sticking with it until the day old Robert Zimmerman hisownself comes into my office and shows me his notebook from 1974 to prove me wrong.

(I’m offering up my innocence here. Please don’t repay me with scorn.)

People complain about the snail’s pace of civil litigation. It takes a minimum of a year for almost any case to get to trial. Bigger and more complex cases take even longer.

If you ask around, you find that many civil litigation lawyers blame the delay on all the family law cases. The trial courts are clogged with divorce, child custody, division of marital property, domestic violence, and child in need of aid proceedings. The judges spend so much time refereeing for all these angry people who for one reason or another can’t run their own lives that they have no time to deal with the “regular” civil lawsuits. (You know, the really important “regular” civil cases, like the ones involving a slip and fall in a grocery store, or a State of Alaska employee who is unfairly disciplined for being an impossible jerk who won’t do any real work.)

It used to be that the Anchorage Superior Court had one particular judge assigned to handle the family law cases. But that practice was never actually authorized by statute so it was abandoned a while back. Now, all the Superior Court judges on the civil side get a slice of the family law cases, whether they want them or not. The civil judges have to juggle all these prickly family law disputes where emotions run high with their “regular” caseload where usually only something unimportant like millions of dollars are at stake.

Some have suggested that Alaska set up its own family law court to handle these cases, as other states have done. But I’ve got another idea. (Notice, I did not say a better idea.) I think the State ought to set up a Judge Judy type program on cable TV. The State could hire some shrill or half-insane retired judge to act as the star of the show. (A few candidates come to mind.) And give the family law litigants the option of volunteering to submit their dispute to a TV judge rather than a real one. No doubt this will clear out a bunch of cases because I bet any number of star-struck dillweeds would jump at the chance to be on TV.

Of course, you would need a savvy TV production person to screen the cases. You would want to televise only the really juicy ones. Like ones involving infidelity, custody disputes over pets, or the misuse of duct tape. (“I tell you, your honor, since he didn’t pay child support, I had to restrain the kids and feed them bowls of paint chips for dinner!”) With good case screening, the State would have a hit TV show on its hands. It could even make some money from all the advertisers wanting to sponsor the show. (“The Alaska Justice Show, brought to you by your friends at VECO Corporation.”)

I have to admit that I question whether the family law TV show would really speed up the pace of “regular” civil litigation much. The civil litigation process, with all that discovery and whatnot, just takes awhile. Besides, you need to give the hard-working lawyers in those cases enough time to earn their fees. But at least the Alaska Justice Show will keep us entertained while waiting for our "regular" civil cases to come up on the docket.

The Alaska Supreme Court does not often delve into the world of commercial lease clauses. When it does so, we commercial real estate lawyers have to sit up and take notice. The rest of you out there can safely ignore these court decisions because they are B-O-R-I-N-G. But those of us toiling in the field have to read them whether we want to or not.

A few weeks ago the Court decided Carr-Gottstein Foods Co. v. Wasilla, LLC. The case turned on the application of a . . .wait for it now . . . WAIVER clause in a commercial lease. And I mean, really, is it possible to get any S-E-X-I-E-R than that? (OK, maybe a waiver clause tied into an insurance subrogation claim would be just a bit more dazzling, but we can’t always get everything we want.)

It seems that in 1996 Safeway's predecessor (Carr’s) moved out of the stand-alone liquor store it had been leasing in Wasilla from some formerly affiliated company, which I’ll just call Landlord LLC for simplicity. Safeway moved its liquor store into part of its main grocery store space that it was also renting from Landlord LLC. Landlord LLC knew about the move and even helped with it. Landlord LLC later affirmed for lenders that Safeway was not in default on its lease. The head man at Landlord LLC (a lawyer no less) said he thought the move was a technical default under the lease but he decided that he would “keep his options open” and not declare the tenant in default until the “economic ramifications” shook out. (The technical legal term for this is "lying in the weeds.")

Some six years later, after letting the situation ride without complaint, Landlord LLC sued Safeway for breaching the lease. Landlord LLC based its case on the use restrictions in the lease (supermarket only) and the prohibition against subleasing (the liquor store was technically owned by a separate entity). Landlord LLC offered up a creative damage theory to go with its claim. Since Safeway had fully paid its rent to Landlord LLC all along for the main store, Landlord LLC said its damages were the loss of rentals on the stand-alone store that had been vacated years earlier. Sure, the lease for that stand-alone store had expired six years ago, but Landlord LLC claimed that if Safeway had not moved its liquor store to the main building then it would have continued to rent the stand-alone store to sell liquor and it would have paid rent on it all those years.

So the reality was that Landlord LLC was suing to recover rent under a lease that did not actually exist for premises that the supposed tenant did not actually occupy. Can you spell C-H-U-T-Z-P-A-H?

It was not hard for the Supreme Court to decide that this was not a situation crying out for the terrible swift sword of justice. (Or even the terrible slow sword of justice, which would be a more accurate characterization.) But the Court did two interesting things in leaving Landlord LLC hanging out there with its chutzpah flapping in the breeze: (1) the Court decided Landlord LLC had waived its default claims as a matter of law; and (2) the Court sidestepped the anti-waiver clause in the lease by saying it only applied to future breaches.

In finding waiver as a matter of law, the Court’s decision deviated from the conventional wisdom that waiver is a fact issue, one that has to be decided by the jury. The Court in effect held that some instances of waiver are just soooooo obvious that even a lowly Superior Court judge can make that call. (As opposed to letting unsophisticated jurors flip a coin in the back room.) Unfortunately, though, the Court gave no practical guidance for distinguishing waivers as a matter of law that the judge should decide from the more garden variety waivers that are fact issues to be punted to the jury.

In characterizing the waiver clause as being applicable only to future breaches, the Court ducked the more difficult question of on-going obligations under the lease. Sure, the past breaches of the “use” and “sublease” covenants of the lease were waived. But those covenants impose on-going obligations on the tenant that are theoretically violated anew with each day the liquor store remains in operation on the main premises. Isn’t the anti-waiver clause meant to apply in exactly that sort of situation? The Court did not really come to grips with this.

But don’t get me wrong. I am not criticizing the Supreme Court’s decision. I have no doubt the outcome of the case was entirely correct. Even if the anti-waiver clause should not have been sidestepped, the clause itself can be treated as being waived. It’s the same thing as orally amending a contract that says it can only be amended in writing, because the writing requirement itself can be orally modified. It sounds wacky, I know, but there is a lot of 24-carat legal authority vouching for it as the real deal.

And, you know, if the circumstances are so egregious that a mere trial court judge should be able to figure it out, then there’s got to be a waiver of the anti-waiver clause as a matter of law. Because the fundamental truth is, at bottom, the law just does not let you get away with this C-R-A-P.

(Hey, I warned you upfront that it was B-O-R-I-N-G.)

You see it again and again in lawsuits over contracts. Almost everyone gets confused when its comes to conditions. The courts frequently mess up on the rules that apply to conditions. The lawyers often don’t realize the problems they are dealing with involve conditions. And the clients don’t even know what conditions are. The result is that some poor schmuck who has charged off suing the other side thinking he was given the shaft gets smacked down in court. The poor schmuck finds out that, because of the failure of a condition, the shaft was part of his deal all along.

A condition in a contract is simply something that has to happen before something else happens. Easy to say, but not so easy to apply. Conditions are imposed on one party’s obligation to perform under the contract. The contract might say, for example, that Andy Hardy does not have to buy Aunt Milly’s house until Andy Hardy first sells his existing home. If Andy Hardy cannot sell his existing home then the condition has failed and he is never obligated to actually fork over the money for Aunt Milly’s house.

But what if Andy Hardy does not really try very hard to sell his existing home because he’s too busy “pitching some woo” with Polly Benedict? Can Aunt Milly take Andy to court and complain that Andy’s out-of-control hormones kept him from making a decent effort to fulfill the condition? This gets us into conditions creating "implied promises" and the ever popular "excuse of conditions." Aunt Milly might have a good case here, if you can ignore the fact that Andy’s dad is Judge Hardy.

Conditions can be tricky because the contract may not make it clear exactly what is a condition. Time deadlines are often put in contracts but the deadlines are not always stated as being a condition to performance. The courts are no help in straightening the situation out because judges don’t really like conditions very much. The failure of a condition means the jackass on one side of the deal does not have to deliver on his promise. For some odd reason, this raises a judge’s hackles. So a judge can go to some lengths to say that the time deadline in the contract that every normal person would think is pretty darn important does not really mean much at all.

The sale contract says: “The closing deadline shall be April 1, 2008.” When Andy Hardy fails to show up at the title company on that date with his dough, Aunt Milly calls the deal off and makes a separate deal to sell her house to Beezy Anderson for more money. So Andy takes Aunt Milly to court to force her to sell the house to him. Not surprisingly, Judge Hardy sides with his boy Andy on the matter. The old judge (who might well have sat in contracts class with a young Charles Kingsfield) rules the closing deadline wasn’t a condition after all. It was more like an aspirational guideline. So it was okey-dokey for Andy to take a couple of extra weeks to get his cash together and wander into the title company with it. (Besides, Andy had to go to the doctor to get treatment for the social disease he caught along with Polly’s “woo.”)

Poor Aunt Milly’s lawyer is left outside the courthouse scratching his head as to what part of the word “deadline” the judge did not understand. But what the guy really needed in his appearance before the Honorable Old Fogey was a contract provision that said: “The closing deadline shall be April 1, 2008, time being of the essence. The parties’ obligations to close are expressly conditioned on the deadline being met.” (That last sentence is actually redundant, since "time being of the essence" is a phrase of art that means performance on time is an express condition. But you can't count on judges actually knowing this, since its not explained on red wine labels or anything else a judge is likely to actually read. So it does not hurt to use the lawyer's trick of saying the same thing over again in a different way. In fact, if I was writing the contract, I would be tempted to drive the point home by adding the line: “And judge, we really, really mean it.")

The law on contract conditions can get trickier still when you delve into the necromancy of “constructive conditions” and the accompanying two-headed beast of "substantial performance/material breach." The law here is filled with vague lists of "factors" that have to be considered, along with brain-numbing concepts. Its enough to make strong men and women of the Bar promise the Lord-High-Chancellor-of-Us-All that they will swear off “woo” forever if they can just get a clue about what the heck this legal mumbo-jumbo means. If you have the ill-fortune to stumble into this area, you might be able to figure out the nuances of the law after a good bit of study. But you are going to have a damned hard time getting old Judge Hardy to follow along, especially after he's had a glass or two of red wine.

The court system is a very strange place. Too often people put themselves inside it when they have no business being there. They start out all revved up about righting some perceived injustice. But they quickly discover that they have just placed their foot on the first step down into Hades and they cannot back out. They’d be much better off steering clear of the courts altogether.

Many years ago, I had an odd encounter when I was clerking for a federal judge in Portland, just after I graduated from law school. The Portland federal courthouse in those days had nothing like the security the courthouses now have. Anyone could get inside the courthouse and walk right up to the door of the judge’s chambers, if so inclined. The door to our chambers was kept locked, though. There was a camera and an intercom system just outside the door. Visitors had to push the buzzer to connect with the judge’s secretary before she would admit them through the door. The secretary was a formidable old battleaxe, who disliked me and all other pipsqueak law clerks something fierce. But the whole security set up was nothing that a determined nutjob could not have gotten past if he was bent on getting revenge against the judge.

There weren’t many people who actually bothered trying to be admitted to chambers. But we did get a regular visitor to the checkpoint right outside the door. Every month or so an older looking gentleman would show up. He was always dressed neatly but he was clearly not quite all there mentally. He would walk up to the security camera and, without pushing the buzzer to connect on the intercom, he would hold up a hand-written piece of paper. He would stand there for maybe 15 minutes, holding his paper up to the security camera. If he stood there too long, the battleaxe would call someone to come up from the clerk’s office to get rid of him, but he would always wander off before anyone actually showed up to escort him out.

One day curiosity got the better of me. After the guy had been standing there with his paper up to the camera for maybe 15 minutes, I went out to see what this fellow was all about. The battleaxe growled at me but I went out nonetheless. The guy was turning to leave just as I walked out the door. He was shocked to see me; it must have been like one of the gods had just descended from Olympus to mingle with the mortals.

“Can I help you?” I asked. The guy stared at me all wide-eyed and held out his piece of paper. I looked at it but I couldn’t make out what it was trying to say. The words were in English but they made no sense at all.

“I don’t understand,” I said. He started talking in a strange language that I had never heard before. “Prosim zabramit mi,” he said. It could have been Czech or another Slavic tongue, but to me it made as much sense as Klingon.

He gestured emphatically to the paper. “Prosim zabramit mi!” And he held it up in front of my face. The old battleaxe, who had been watching on the security camera, barked over the intercom: “I’m calling the U.S. Marshal!”

The guy seemed harmless enough so I didn’t want to see him dragged away in handcuffs. I put my hand on his shoulder and lead him back down the hallway to the elevator. As we were waiting for the elevator to show up, he was jabbering away in that strange lingo of his.

The elevator arrived finally and I gently nudged him into it. He held up the paper to my face again, through the open door. Right then it occured to me that this guy just wanted someone to hear about his plight. He had a grievance and he wanted to petition the government for redress, just like it says in the Constitution. He thought that holding the paper up to the camera was the way you asked for relief from the court.

As the door started to close I said to him: “Sir, we have heard your complaint and we will look into it.” I gave him the Vulcan salute that Mr. Spock used on Star Trek. The guy put his hands down and, as the door closed, he smiled so brightly it was like a Roman candle went off in that elevator car.

The guy never showed up outside our chambers again. I guess he was content that his grievance had been heard, whatever it was. And, although I couldn’t be sure, it kind of seemed like the old battleaxe was just a wee bit nicer to me afterwards.

Now when I have clients who are bound and determined to file a lawsuit and sue the evil snakes on the other side, I always caution them about getting in over their heads. I’m also tempted to take them over to the courthouse and have them just tell their tale to one of the security cameras there, instead of actually filing a lawsuit. They would probably feel better afterwards and in most cases it would save them a lot of money and anguish in the long run.

* * * *
Read up on the Czech language here.

You can buy a Klingon dictionary and other useless stuff through the Klingon Language Institute.

The U.S. Marshals Service has its own website with a lot of interesting things on it, including their "Most Wanted" list. And don't try to sneak a cell phone past them at the federal courthouse because they still have the legal authority to form a posse to hunt down outlaws.

The Alaska Supreme Court’s decision last week in Mullins v. Oates is a cautionary tale for those selling real estate in Alaska. The case shows that you have to be careful about how your deal gets put together. For just this reason, its always helpful to have a pessimistic, worrywart real estate lawyer in your corner who can point out the pitfalls up ahead.

In the Mullins case, Alice Oates, the owner of some land and a building in the burgeoning metroplex of Tok, Alaska, sold the property to Margret Mullins. Mullins apparently lacked the ability to get a bank loan so Oates engaged in a form of owner financing for the deal. Oates sold the property to Mullins under a contract of sale. (The phrase “contract of sale” should mean that red lights are flashing for all the cynical real estate lawyers out there. The red lights are also probably flashing even for the optimistic, sunny-side-of-the-street real estate lawyers out there, if there actually are any such creatures.)

You see, a sale on a contract means that the seller hangs on to the title to the real estate until the seller is paid in full. The buyer gets the immediate right to occupy the property and can even make improvements to it while its being paid off. But if the buyer fails to make the required payments, the contract says that the seller can take the property back and throw the buyer out into the street. At least, the contract gives the seller that right in theory.

The problem with this arrangement is that the law does not know what to do when a default occurs. Equity abhors a forfeiture and so do most judges. The courts don’t like to see the poor buyer get stiffed on the property after perhaps making years of payments and even erecting a building or two. To complicate matters further, there is no easy remedy available to the seller to enforce the requirement that the buyer get lost after failing to make the payments. The non-judicial foreclosure procedure that is available for deeds of trust does not apply to contract deals. The contract seller ordinarily has to go to court for a judicial foreclosure to actually terminate the buyer’s rights.

(As an aside, I will point out that on occasion one comes across a lower court judge who has no problem enforcing a contract as written, even if it means a forfeiture occurs. These rare and enlightened beings -- who are like a fresh summer breeze blowing through the mausoleum that is the courthouse -- are almost certain to have the highest reversal rates in the appellate courts.)

So poor Alice Oates had to go to court to throw out Margret Mullins when the required payments were not made. It turned out that the sweet, hard-working Maggie Mullins who Oates originally made her deal with later changed into the buyer from hell. The transformation was one worthy of Large Marge in the movie Pee-Wee’s Big Adventure.

Large Marge Mullins represented herself in the lawsuit and battled over nearly everything. The parties eventually struck a settlement, but Mullins disavowed it and went as far as accusing the Magistrate who brokered the deal of coercion. Large Marge also wrapped herself in the Constitution, desperately claiming that she was being deprived of equal protection of the law and due process by being held to the deal she had made.

The Alaska Supreme Court rejected Large Marge’s arguments and upheld the lower court’s judgment in favor of Alice Oates. The end result was a judgment confirming the property belonged to Oates. The only problem was that the confirmation finally came more than six full years after Mullins stopped making payments on the property. This is in contrast to the four or five months that a non-judicial foreclosure would have taken if the original deal had been structured correctly.

But have we heard the last of Margret Mullins? Perhaps not. Its unclear whether the judgment in Alice Oates' favor is really an order for judicial foreclosure or not. The argument can be made that it has to viewed that way. In a judicial foreclosure setting, Mullins would have a one-year right of redemption through which she could regain the property. We can only hope that Large Marge Mullins does not tumble to this issue. Or just maybe she will come to the belated realization that nothing in the Tok metroplex is really worth fighting over after all.

By the way, the best line from Pee-Wee's Big Adventure comes when Pee-Wee is talking with the cafe waitress, Simone, about her dream to live in Paris one day. Pee-Wee encourages Simone to just go for it, at which point the following dialogue occurs:

Simone: I know you're right, Pee-Wee. But, . . .

Pee-Wee: Everyone I know has a big "But." (Sigh.) C'mon, Simone, let's talk about your big "But."

The Alaska Supreme Court issued two new opinions today. Moore v. Peak Oilfield Service Co. reaffirmed prior Alaska Supreme Court case law that a defendant in a civil personal injury lawsuit who is convicted of driving while intoxicated must be found to have acted negligently and reckless as a matter of law. The Court further clarified that such a ruling did not preclude the defendant driver from arguing that his or her negligence/recklessness was not a legal cause of the plaintiff's injury.

In Amerada Hess Pipeline Corp. v. Regulatory Commission of Alaska, the Alaska Supreme Court affirmed the Superior Court's finding that shipping rates charged by the owners of the Trans-Alaska Pipeline were unreasonable and unjust from 1997 to 2007 and that refunds must be given. The Alaska Supreme Court did not address the issues raised by the pipeline owners, but incorporated by reference the Superior Court's 44 page opinion.

A popular form of incorporation that Atkinson Conway & Gagnon often deals with, both in creating them and in structuring deals using them, is the Limited Liability Corporation. There is, however, a nasty little penalty lurking in Alaska’s Limited Liability Company statute that both other practitioners in this state and owners and managers of those LLCs should be aware of.

As with most business forms, members of an LLC have a statutory right to review the books and records of the LLC. What is different about LLCs, is that if a manger or member of an LLC refuses a member’s rightful demand to examine the books of the LLC, that manager or member is personally liableto the demanding member for a penalty in the amount of either $5,000 or 10% of the value of the demanding member’s interest in the LLC, whichever is greater. Consequently, by refusing a rightful demand to review the books and records of an LLC, a manager or member of an LLC runs not only the risk of litigation to compel production of the books but personal liability that, for a highly valued LLC, could be hundreds of thousands of dollars.

So think twice about shooting off that snide letter to your business partner, telling him to go stick his head in the sand when he asks to see the books. You just might get a costly bill in return.

Continue reading for the full statute.

Continue reading " A Trap For The Unwary In Alaska's LLC Statute " »

In today’s specialized and interconnected business world, banks, law firms, and accountants often find themselves drawn into litigation over financial statements that are either incomplete or false. The Enron and WorldCom cases are great examples of this. In those cases, plaintiffs, often shareholders and creditors, sue law firms, banks, and accountants, alleging that they are liable for their losses because they “aided and abetted” directors and officers who defrauded the company and shareholders. Atkinson Conway & Gagnon has litigated these claims on several occasions in Alaska, both in the course of defending banks and law firms and in representing corporations against accountants that have aided company officers and directors in defrauding the corporation.

This theory of liability, also known as “tortuous assistance of breach of fiduciary duty” can significantly expand the liability of accountants, banks, and law firms, including exposing them to joint and several liability in states that otherwise provide for strict allocation of fault, such as Alaska.

On January 15, 2008, the United States Supreme Court issued an important decision limiting the scope of “aiding and abetting claims.”. Ruling 4 to 3, the United States Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 did not authorize a private right of action against third parties for aiding and abetting violations of securities law. Instead, plaintiffs who wish to sue banks, accountants and law firms for securities law violations must show that they relied upon an affirmative material misrepresentations by those entities. While banks, law firms, and accountants may be subject to aiding and abetting liability when they have a direct relationship with aggrieved plaintiffs, this is an important decision that limits the liability faced by banks, accountants, and law firms in the shareholder lawsuits that are so often filed when negative financial information is released by corporations.

Atkinson Conway & Gagnon and all Alaskans are carefully watching the litigation arising out of the Exxon Valdez oil spill. After more than eighteen years, the case is still active. In late 2006, the Ninth Circuit affirmed a $2.5 billion punitive damage award against Exxon. With interest, the total punitive damage award against Exxon is estimated to be in excess of $4.5 billion. As expected, Exxon has appealed this decision to the United States Supreme Court.

The primary focus of Exxon’s appeal is the argument that punitive damages were not available under traditional maritime principles. Exxon is not seeking to just reduce the punitive damage award, but eliminate it entirely. The United States Supreme Court has a short summary of the issues it will be deciding.

Oral argument before the United States Supreme Court is scheduled for Wednesday, February 27, 2008. Below are links to the Supreme Court briefs that have been filed, including amicus briefs. Whatever the Supreme Court’s decision, it is certain that all Alaskans will be closely following this case and that it will have substantial impacts on both Alaskans and the law governing the availability punitive damages.

Primary briefs

Exxon's Appeal Brief

Plaintiff's Appeal Brief

Amicus Briefs

In support of Exxon

Chamber of Commerce amicus brief

Transport and Shipowners amicus brief

American Petroleum Institute amicus brief

Washington Legal Foundation amicus brief

Product Liability Advisory Council amicus brief

In support of Plaintiffs

Alaska Legislative Council Amicus Brief

Senator Stevens, Senator Murkowski, and Representative Young's amicus brief