Alaska SC reinstates major fraud judgment

By Jessica M. Karmasek | Feb 17, 2012


JUNEAU, Alaska (Legal Newsline) - The Alaska Supreme Court last week overturned a lower court ruling that a company had to pay damages to its former business partner, who allegedly cheated it out of millions.

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, AIC'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, AIC conveyed a 20 percent ownership interest to Ellsworth and entered into an operating agreement that provided for Ellsworth's continued management of AIC's operations through PDI.

Starting in 1998, PDI leased two aircraft to AIC and provided aircraft support services for them.

The aircraft leases were at the center of AIC's 2005 lawsuit against PDI and Ellsworth, which accused the two of fraud, breach of the covenant of good faith and fair dealing, violation of the state's Unfair Trade Practices Act, breach of the parties' operating agreement and conversion.

AIC alleged Ellsworth charged it well above market rates and sometimes double-billed it for using the aircraft, and that he was paying improper bonuses, forging documents and shredding evidence of his abuses.

A jury returned a verdict of $7.3 million in favor of AIC on its UTPA claims and $7.3 million on its claims for common law fraud and breach of fiduciary duty.

Though the jury decided that PDI and Ellsworth engaged in conduct that was fraudulent, it decided that they did not materially breach the parties' operating agreement.

AIC 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. That motion was denied.

However, Superior Court Third District Judge Sen K. Tan entered judgment notwithstanding the verdict nullifying the $7.3 million award for violations of the UTPA.

His ruling was premised on the court's conclusion that the conduct the jury found to be fraudulent was exempt from the UTPA because it dealt with aviation, an industry regulated by the Federal Aviation Administration.

The superior court awarded attorney fees and costs to PDI and Ellsworth.

AIC appealed; PDI and Ellsworth cross-appealed to the state's high court.

The Supreme Court, in its Feb. 10 ruling, affirmed:

- The superior court's denial of the motion for judgment notwithstanding the verdict seeking a ruling that the UTPA does not apply to intra-corporate disputes;

- The court's determination that AIC's aircraft lease claims were not barred by the statute of limitations;

- The court's decision to deny PDI access to discovery in support of its abuse of process claim; and

- The court's decision to apply the clear and convincing evidence standard of proof to the quasi-estoppel defense.

In its 53-page decision, the Court also reversed:

- The court's judgment notwithstanding the verdict on PDI's argument that AIC's claims were exempt from the UTPA;

- The court's order denying the motion for judgment notwithstanding the verdict on PDI's fraud in the inducement claim; and

- The court's ruling on material breach.

Justice Morgan Christen -- who has since moved to the U.S. Court of Appeals for the Ninth Circuit -- said the Court held that the jury's findings of fraud and wilful misconduct, under the circumstances of the case, required the finding that PDI materially breached the operating agreement as a matter of law.

The Court also vacated Tan's determination of prevailing party, award of attorney fees and award of prejudgment interest.

In the light of its rulings, the Court said PDI's claims of statutory and contractual indemnity were "moot."

Cook Inlet Region Inc., an owner of AIC along with drilling giant Nabors Industries, said Friday the Court's decision "sets the public record straight" about the integrity and business practices of "key" Alaska oilfield service operators.

"AIC, CIRI and Nabors were direct victims of Mr. Ellsworth's fraud and misconduct and AIC's business has suffered because of his unfair trade practices and breaches of duty," the company said in a statement.

"This decision vindicates CIRI's, AIC's and Nabors' long-standing reputations as principled business partners and honest corporate citizens that deal in good faith with customers, owners and the public."

Ellsworth currently owns and manages Alaska Frontier Constructors, an oilfield services firm.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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