Opinion
Supreme Court No. S-13641.
November 30, 2011.
Appeal from the Superior Court of the State of Alaska, Third Judicial District, Anchorage, Sen K. Tan, Judge, Superior Court No. 3AN-04-13743 CI.
Appearances: Michael J. Walleri, Law Offices of Michael J. Walleri, Fairbanks, for Appellant. David D. Clark, Law Offices of David Clark, Anchorage, for Appellee.
Before: Carpeneti, Chief Justice, Fabe, Winfree, Christen, and Stowers, Justices.
NOTICE
Memorandum decisions of this court do not create legal precedent. A party wishing to cite a memorandum decision in a brief or at oral argument should review Appellate Rule 214(d).
MEMORANDUM OPINION AND JUDGMENT
Entered pursuant to Appellate Rule 214.
I. INTRODUCTION
Shareholders brought a derivative suit against three members of the board of directors of Leisnoi, Inc. for a variety of issues involving shareholder meetings and annual reports. The superior court found in favor of the directors on the majority of the issues, but found that the directors breached their fiduciary duty by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring this requirement to the attention of the board. The court determined that the directors were the prevailing parties, and awarded them enhanced attorney's fees based upon the shareholders' nearly bad faith conduct and excessive litigation. The shareholders appeal the superior court's determination of prevailing party status and its enhanced attorney's fees award. We affirm the superior court's determinations.
II. FACTS AND PROCEEDINGS
Appellants Joann Holmes and M itch Gregoroff are shareholders of Leisnoi, Inc. (Leisnoi), an Alaska Native Corporation. Appellees Kane Wolf, Carole Pagano, and Frank Grant are three of five directors on Leisnoi's board. The plaintiff shareholders sued these three directors claiming that in violation of Alaska law they (1) failed to hold annual shareholder meetings, (2) failed to provide annual shareholder reports, (3) failed to conduct an annual audit and provide a summary of the audit, (4) breached their fiduciary duty by failing to hold annual meetings and failing to provide annual reports, and (5) failed to appoint an interim director.
Leisnoi is certified under the Alaska Native Claims Settlement Act as a Village Corporation for Kodiak's Woody Island. See Holmes v. Wolf, 243 P.3d 584, 586 (Alaska 2010) ( Holmes I); Leisnoi, Inc. v. Stratman, 835 P.2d 1202, 1203-04 (Alaska 1992). Holmes and Gregoroff are two of the 11 plaintiff shareholders who were parties in this lawsuit when it concluded at the superior court level. Holmes I, 243 P.3d at 588.
The suit was originally filed as a shareholder derivative action, but the superior court dismissed the derivative claims after the shareholders failed to file a required bond, leaving only the shareholders' direct actions against the directors.
After a bench trial, the superior court concluded that (1) the individual directors did not fail to hold annual meetings because it is the duty of the board, not individual directors, to hold meetings; (2) the individual directors did not fail to provide annual shareholder reports because the duty to provide an annual shareholder report rests with the corporation and the board, not with individual directors; (3) the individual directors did not breach their fiduciary duty by failing to call annual meetings, or by failing to send out annual reports; and (4) the directors were properly elected or appointed to the board. The superior court also concluded, however, that the individual directors violated their fiduciary duties by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring the requirement to the attention of the board.
We affirmed these aspects of the superior court's rulings in Holmes I, 243 P.3d at 590.
43 U.S.C. § 1606(o) (2006) provides in pertinent part: "The accounts of the Regional Corporation shall be audited annually in accordance with generally accepted auditing standards by independent certified public accountants or independent licensed public accountants, certified or licensed by a regulatory authority of the State or the United States." 43 U.S.C. § 1607(c) provides that § 1606(o) applies to Village Corporations like Leisnoi. Despite the superior court's breach of fiduciary duty finding regarding this federal annual audit requirement, there was no harm to the corporation given its financial condition at that time. See Holmes I, 243 P.3d at 600 (describing Leisnoi's financial condition as "on the brink of disaster").
The directors moved for enhanced attorney's fees. Addressing the factors in Civil Rule 82(b)(3), they argued that they were the prevailing parties; that the shareholders had made the litigation "unduly complex, difficult and onerous"; that the trial was lengthy; that their attorney-related expenses were reasonable; that the number of attorneys used was reasonable; that their attorneys attempted to minimize fees; that the shareholders were not motivated to act in the corporation's best interest; that the "litigation was not brought in good faith"; that the shareholders "bombard[ed]" the directors with litigation despite knowing that Leisnoi's "going concern status is challenged every day"; that it was good policy to deter plaintiffs who were similarly situated to the shareholders because the motivations behind the lawsuit were not in Leisnoi's shareholders' best interests; and that the corporation was "forced to spend an inordinate amount of money" defending the directors against claims motivated by the shareholders' personal reasons.
The superior court found "[t]here is no doubt that [the directors] prevailed here." The superior court found the trial "was not complex or particularly lengthy"; the directors' attorney had reasonable rates and staffing; and the directors acted to minimize litigation "while the [shareholders'] efforts were designed to litigate every conceivable issue." The court found that "[t]he significance of the issues at stake was not economic," and the fees reflected the number of hours put into the litigation. The court found that "the litigation was fought over control of the corporation." The court was unwilling to find bad faith but stated "this case comes close" and "[t]he manner of litigation . . . borders on vexatious." Finally, the court found the litigation was pursued for "personal vendettas."
The superior court concluded that the directors were clearly the prevailing parties and granted the directors $79,861.75 in enhanced attorney's fees, 50% of their reasonably incurred fees. The shareholders appeal, arguing that the directors cannot be found to be the prevailing parties because they violated their fiduciary duty and the superior court abused its discretion in awarding enhanced fees.
III. DISCUSSION
A. Standard Of Review
We will not disturb a superior court's determination of prevailing party status unless it is manifestly unreasonable. We review attorney's fees awards for an abuse of discretion, reversing if the award is "arbitrary, capricious, manifestly unreasonable, or [if it] stemmed from improper motive." B. The Superior Court Did Not Abuse Its Discretion In Concluding That The Directors Were The Prevailing Party.
Jerue v. Millett, 66 P.3d 736, 740 (Alaska 2003) (citing Ashley v. Baker, 867 P.2d 792, 796 (Alaska 1994)).
Wagner v. Wagner, 183 P.3d 1265, 1266-67 (Alaska 2008) (quoting Ware v. Ware, 161 P.3d 1188, 1192 (Alaska 2007)) (internal quotation marks omitted); Strong Enters., Inc. v. Seaward, 980 P.2d 456, 458 (Alaska 1999)).
The shareholders argue that directors who have been found to have violated their fiduciary duty cannot as a matter of law be considered prevailing parties. The directors argue that they should be found the prevailing parties because they prevailed on the majority of the claims and because they acted in good faith. We agree with the directors.
The directors won on every issue except breach of fiduciary duty for failing to (1) inform themselves of the federal requirement pertaining to Alaska Native Corporations to conduct annual financial audits and (2) bring this requirement to the board's attention. This is a relatively minor breach given the poor financial condition of the corporation: the superior court found the reason the directors were unable to hold annual audits was because Leisnoi simply did not have the money to pay for them. The superior court further found that "the directors . . . acted in good faith and in the best interests of Leisnoi" and were "serving on apro bono basis for the benefit of Leisnoi and its shareholders." We affirmed these findings in Holmes I, 243 P.3d at 590.
Alaska case law does not support the shareholders' contention that "a Director who has been found to violate his fiduciary duties cannot, a fortiori, be a prevailing party." The shareholders cite three cases in support of this proposition, but the cases do not discuss whether directors who breach their fiduciary duties can be the prevailing parties. No Alaska case law supports this proposition.
Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1331 (Alaska 1997) (issue of prevailing party not addressed); Stevens ex rel Park View Corp. v. Richardson, 755 P.2d 389, 396 (Alaska 1988) (prevailing party and fiduciary duties not discussed); Moses v. McGarvey, 614 P.2d 1363, 1367 (Alaska 1980) (discussion of prevailing party status limited to "[i]t is not disputed that the shareholders prevailed in the litigation and were entitled to an award of costs and attorney's fees under the provisions of Alaska Civil Rule 82").
The shareholders argue that we applied the "policy" that directors who breach their fiduciary duty cannot be prevailing parties in Jerue v. Millett. But Jerue applied no such policy. In that case, with reference to Alaska Civil Rule 23.1(j), we noted that "whether plaintiff shareholders are `prevailing parties' in a shareholder derivative action should turn on whether their lawsuit is `successful in whole or in part.'" Civil Rule 23.1(j) adds that "if anything is received as a result of the judgment, . . . the court may award to the plaintiff or plaintiffs . . . reasonable attorney fees," but that "[t]his subsection does not apply to a judgment rendered only for the benefit of injured shareholders and limited to the recovery of the loss or damage sustained by them." The holding in Jerue applies to shareholders in their capacity as plaintiffs in shareholder derivative actions, that is, where plaintiffs are standing in the shoes of the corporation and bringing a derivative action for the benefit of all shareholders and the corporation.
66 P.3d 736 (Alaska 2003).
Alaska Civil Rule 23.1(j) states:
If the derivative action is successful, in whole or in part, or if anything is received as a result of the judgment, compromise, or settlement of that action, the court may award to the plaintiff or plaintiffs reasonable expenses, including reasonable attorney fees, and shall direct an accounting to the corporation for the remainder of the proceeds. This subsection does not apply to a judgment rendered only for the benefit of injured shareholders and limited to a recovery of the loss or damage sustained by them.
Jerue, 66 P.3d at 743 (citing AS 10.06.435(j); Civil Rule 23.1(j); 13 TIMOTHY P. BJUR JAMES SOLHEIM, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 6045.01, at 366 (1995 rev.)).
The shareholder derivative claims here were dismissed before trial. The action proceeded directly (not derivatively) against individual board members and was instituted by shareholders representing their own individual interests. The superior court awarded attorney's fees based upon a judgment against the shareholders for their direct causes of action against the directors. Civil Rule 23.1(j) and Jerue therefore do not apply to the attorney's fees at hand. Instead, we apply our customary Civil Rule 82 prevailing party jurisprudence.
The shareholders also argue that the directors cannot be the prevailing parties because we held in Jerue that directors cannot be prevailing parties when derivative claims are dismissed for procedural reasons related to Civil Rule 23.1. The shareholders mischaracterize both the procedural posture of this case and our holding in Jerue. We held in Jerue that, under the facts of that particular case, the directors did not meet the burden of proof on the issue of prevailing party status; we did not make a blanket statement that dismissal for procedural reasons bars directors from being prevailing parties. In the case at hand, the superior court awarded attorney's fees to the directors after concluding that most of the shareholders' direct claims had no merit. The attorney's fees award was not based on derivative claims or a procedural dismissal of a derivative claim.
We review the superior court's prevailing party determination under Civil Rule 82(a), which we have interpreted to provide that the prevailing party is "the party who has successfully prosecuted or defended against the action, the one who is successful on the main issue of the action and in whose favor the decision or verdict is rendered and the judgment entered."
Shepherd v. State, Dep't of Fish Game, 897 P.2d 33, 44 (Alaska 1995) (quoting Adoption of V.M.C., 528 P.2d 788, 795 n. 14 (Alaska 1974)) (internal quotation marks omitted).
It was not manifestly unreasonable for the superior court to determine that "[t]here is no doubt that [the directors] prevailed here." The superior court found against the shareholders in their allegations that the directors had failed to hold an annual shareholder meeting within a 13-month period; the individual directors failed to provide annual shareholder reports; the individual directors breached their fiduciary duty by failing to call annual meetings and by failing to send out annual reports; and the directors had failed to appoint an interim director. The shareholders only partially succeeded on one claim because the court found that the directors breached their fiduciary duty by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring the requirement to the attention of the board.
Furthermore, in the related appeal the shareholders argued that the superior court should have barred Leisnoi from indemnifying the directors after the court found the directors breached their fiduciary duties with respect to the audited financial reports. We concluded: "[I]t is clear that the superior court did not err in declining to bar Leisnoi from indemnifying the defendant directors because . . . the defendants' success on the merits of this case entitled them to indemnification." It would be inconsistent to conclude that the directors succeeded on the merits but were not prevailing parties.
Holmes I, 243 P.3d at 590.
Id.
Because the directors prevailed on all but one small part of one main issue, the superior court did not abuse its discretion in concluding that they were the prevailing parties.
C. The Superior Court Did Not Abuse Its Discretion In Awarding Enhanced Fees.
The shareholders also argue that the superior court erred in awarding the directors enhanced fees under Civil Rule 82. Rule 82(b)(2) provides that when "the prevailing party recovers no money judgment, the court shall award the prevailing party in a case which goes to trial 30 percent of the prevailing party's reasonable actual attorney's fees." Rule 82(b)(3) allows the court in its discretion to vary any fee awarded under 82(b)(2) based upon the following factors:
See Cizek v. Concerned Citizens of Eagle River Valley, Inc., 71 P.3d 845, 851 (Alaska 2003) ("The court retains broad discretion to award fees and to alter the amount it intends to award." (citing Taylor Constr. Servs., Inc. v. URS Co., 758 P.2d 99, 102-03 (Alaska 1988))).
(A) the complexity of the litigation;
(B) the length of trial;
(C) the reasonableness of the attorneys' hourly rates and the number of hours expended;
(D) the reasonableness of the number of attorneys used;
(E) the attorneys' efforts to minimize fees;
(F) the reasonableness of the claims and defenses pursued by each side;
(G) vexatious or bad faith conduct;
(H) the relationship between the amount of work performed and the significance of the matters at stake;
(I) the extent to which a given fee award may be so onerous to the non-prevailing party that it would deter similarly situated litigants from the voluntary use of the courts;
(J) the extent to which the fees incurred by the prevailing party suggest that they had been influenced by considerations apart from the case at bar, such as a desire to discourage claims by others against the prevailing party . . .; and
(K) other equitable factors deemed relevant.
The superior court appears to have addressed factors (A) through (I).
The court found that the trial was not "complex or particularly lengthy," impliedly concluding that factors (A) and (B) did not warrant enhanced fees. In addressing factors (C) through (F), the court found that the directors' attorney had "reasonable hourly rates and staffing" and acted to minimize the litigation, but that the "[shareholders'] efforts were designed to litigate every conceivable issue." The shareholders argue that it was the superior court, not the shareholders, who extended the litigation by holding trial when all issues could have been resolved on the motions. There is no merit to this argument.
The record supports the superior court's finding that the directors attempted to minimize the litigation, while the shareholders did not. The shareholders admit that their motion practice in this case was "extensive" and "thorough." The shareholders filed four separate complaints, adding 17 plaintiffs after the first amended complaint. Seven plaintiffs were later dismissed. The shareholder derivative suit alleged six separate counts and requested 11 forms of relief. Over the course of the litigation, the superior court correctly dismissed all the derivative claims and all but part of one direct claim, granting only declaratory relief. The record reveals that the superior court did not abuse its discretion in determining that the shareholders extended the litigation by attempting to litigate "every conceivable issue."
The superior court ordered the directors to "bring to the Board of Directors the necessity of conducting an annual audit."
Regarding factor (G), the superior court found that the shareholders came close to exhibiting bad faith conduct. It found that the shareholders refused to join the balance of Leisnoi's board and the corporation itself as defendants, despite the court's repeated admonishments that complete relief could not be awarded without them. It found that the suit appeared to be a personal vendetta rather than a suit for better corporate governance. It also found that the shareholders were disorganized, because only one appeared at trial. The shareholders argue that these allegations are not supported by the record and do not form a basis to enhance fees because the court did not make an explicit bad faith finding.
A court must find bad faith or vexatious conduct to award full fees, but we have held that awarding fees up to 75% does not require an explicit finding of bad faith. The superior court is "in the best position to determine whether a party's behavior was excessively litigious or in bad faith." There is sufficient evidence in the record to support the superior court's decision to enhance fees based upon the shareholders' near-vexatious conduct. The court warned the shareholders that they could not receive relief without joining all directors and the corporation, but the shareholders failed to join those necessary parties. Based on the evidence and the record, the superior court's decision to enhance fees as a result of the shareholders' poor conduct was not manifestly unreasonable.
Cole v. Bartels, 4 P.3d 956, 961 (Alaska 2000) (affirming award of enhanced fees).
Reid v. Williams, 964 P.2d 453, 461-62 (Alaska 1998) (citing Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1331 (Alaska 1997); Stone v. Int'l Marine Carriers, Inc., 918 P.2d 551, 558 (Alaska 1996); Wickwire v. McFadden, 633 P.2d 278, 281 n. 6 (Alaska 1981)).
The court addressed factor (H), the relationship between the amount of work performed and the matter at stake, but did not use it as a basis to enhance fees. The court also considered factor (I), the extent to which a given fee award would deter similarly situated litigants from use of the courts. The court stated:
In considering this factor, this court does have the concern that some of the plaintiffs in the case were just following along, rather than acting as the moving force behind the litigation and later sustaining it. Indeed during the trial, putative plaintiffs were dropped from the case. There is a group among the plaintiffs that did not actively participate in the litigation and should not be responsible for paying enhanced fees.
Out of the 11 plaintiffs remaining when trial began, only one attended trial. In the final judgment, the superior court ordered only the 11 remaining to jointly and severally pay the attorney's fees.
The superior court's decision to enhance fees based on the shareholders' litigation of every conceivable issue and near-vexatious conduct was not an abuse of discretion. We affirm the award of enhanced fees.
IV. CONCLUSION
We AFFIRM the superior court's prevailing party determination and its award of enhanced attorney's fees.