Opinion
Supreme Court No. S-13508.
July 27, 2011.
Appeal from the Superior Court of the State of Alaska, Third Judicial District, Anchorage, Peter A. Michalski, Judge, Superior Court No. 3AN-05-06339 CI.
Appearances: Gregory S. Wing, pro se, Anchorage, Appellant. Robert C. Erwin, Deveaux Associates, 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
Gregory Wing and Kirk Schaub were owners of Body Tech Gym (Body Tech), a small neighborhood gym in Anchorage. For most of the time they owned the company, Schaub acted as manager of the gym. In August 2004 Body Tech lost its lease, and in November 2004 Wing agreed to purchase Schaub's share of the company. Under the purchase agreement, Wing agreed to pay Schaub $20,000 in cash and to sign a $50,000 promissory note due in January 2005. Schaub agreed to relinquish his share of the company and to assist Wing in the transfer of assets into his name. Wing relocated Body Tech after he purchased Schaub's share of the gym.
Wing did not pay the $50,000 promissory note and Schaub sued to enforce the note. Wing raised several counterclaims, including claims that Schaub breached the purchase agreement and the covenant of good faith and fair dealing, that Schaub made fraudulent misrepresentations during the negotiations, and that Schaub breached his fiduciary duty to Wing by making unauthorized withdrawals from Body Tech's accounts. At the end of a six-day trial, the superior court entered judgment in Schaub's favor, concluding that Wing owed Schaub pursuant to the promissory note and that Wing had not proven his counterclaims. Wing appeals.
We hold that it was error for the superior court to conclude that Schaub did not breach the purchase agreement and the covenant of good faith and fair dealing. We therefore reverse that part of the superior court's decision determining that Schaub did not breach the purchase agreement, did not breach the covenant of good faith and fair dealing, and did not convert Wing's property. We affirm that part of the superior court's decision determining that Wing did not prove his breach of employment contract, breach of fiduciary duty, and fraud claims. We vacate the superior court's attorney's fee award and remand for: (1) a determination of whether Schaub's breaches were material and therefore excused Wing's failure to pay the promissory note, and (2) a calculation of any damages that may have resulted from Schaub's breaches.
II. FACTS AND PROCEEDINGS
A. Body Tech Gym
In July 2002 Gregory Wing, Kirk Schaub, and Tim Sweeny purchased Body Tech Gym, a small neighborhood gym. At the time of the purchase Wing lived in Anchorage, and Schaub lived in Florida and worked for Anheuser-Busch. The investors intended for Schaub eventually to serve as manager of Body Tech after he moved from Florida to Anchorage. In July 2003 Schaub returned to Alaska to take over as manager of the gym; he would hold the position until November 2004.
In addition to managing the gym, Schaub took clients as a personal trainer at Body Tech. Schaub was also an Alaska distributor for Cytosport products, distributing the products to other vendors in the Anchorage area. Schaub also sold Cytosport products at Body Tech.
At trial the parties presented conflicting testimony on what Schaub's compensation was for managing Body Tech. Schaub testified that they had agreed that he would receive $5,000 a month, all sales from his Cytosport distribution business (including 100% of profits from Body Tech's Cytosport sales), and all of his personal training fees. Wing testified that they had agreed that Schaub would receive ten percent of gross sales from the gym, all proceeds from Cytosport sales outside the gym, and all of his personal training fees.
While Schaub managed Body Tech he did not segregate his personal finances from the business's finances. He used the company accounts to pay his bills, his mortgage, and other expenses. He used his personal credit card for company expenses. Schaub also deposited the money that he received from personal training fees and product sales into the company accounts.
During Schaub's tenure as manager, Body Tech contracted with Cornerstone Credit Services (Cornerstone) to provide two forms of services. First, Body Tech contracted with Cornerstone to act as a collections agency for past-due accounts. Cornerstone would send Body Tech money that it recovered from delinquent members. Second, Body Tech contracted with Cornerstone to process electronic funds transfers (EFTs). Cornerstone provided a computer program to Body Tech that would allow the gym to track billing and payments via credit card. The program would gather all the monthly credit card transactions and send them to Cornerstone to process. Cornerstone would then deposit the funds from the transactions into a Body Tech checking account.
Body Tech had a main checking account at Northrim Bank to which both Wing and Schaub had access. On July 26, 2004, Wing froze Schaub's access to the Northrim bank account. In response, Schaub opened a second Body Tech checking account at Northern Skies Federal Credit Union on July 30, 2004. That same day, Wing restored Schaub's access to the Northrim bank account. After Wing restored his access to the Northrim account, Schaub continued to use the Northern Skies bank account for deposits and to pay business and personal obligations.
On August 2, 2004, Schaub received notice that Body Tech was going to lose its lease and that the gym had to move or shut down. Schaub informed Wing of the notice around August 23, and they obtained an extension on the lease until November 17 to find a place to relocate the gym.
B. Negotiation Of The Purchase Agreement
Wing and Schaub could not agree on where to relocate Body Tech and on November 2, 2004 began negotiations regarding which of them would purchase the other's interest in the gym. Wing offered to sell his interest to Schaub, but Schaub declined the offer. The parties engaged in two days of negotiation over a purchase price for Wing to buy Schaub's share of the gym. Wing and Schaub documented their negotiations primarily through several handwritten sheets of paper that they introduced in evidence at trial.
During the negotiations, Schaub told Wing that he had loaned Body Tech $9,900 in August 2004. Schaub also told Wing how much he had withdrawn from Body Tech accounts during his tenure as manager. According to Wing, Schaub stated that he withdrew a total of $63,090. According to Schaub, the amount he had taken out was $97,863 in total draws. One section of the negotiation document that seems to address Schaub's withdrawals states "[check] acct draws 63090." It also states "$ draw 6000."
Wing decided to buy Schaub's interest and continue operating the gym as "World Gym." On November 10, 2004, the parties signed the purchase agreement under which Schaub would sell Wing his share of Body Tech for an up-front payment of $20,000 cash and a promissory note for $50,000 payable on January 15, 2005. Schaub was to retain $12,000 worth of equipment. The promissory note further stated that "[i]f any suit or action is instituted to collect this Note . . . [Wing] . . . agrees to pay . . . a reasonable sum as attorney fees in such action or suit."
C. Body Tech After The Purchase Agreement
1. Schaub's transfer of Body Tech financial information and accounts to Wing
Under the purchase agreement, Wing was to receive Body Tech's records, financial accounts, and customer membership information. Wing also was to receive Body Tech's phone number and all accounts receivable earned before the sale.
At the time of the purchase, Wing had access to Body Tech's Northrim bank account, but Schaub was the sole signer on Body Tech's Northern Skies bank account. Wing did not learn of the Northern Skies bank account until after the sale, and he had to go through his lawyer to gain access to the account. The Northern Skies bank account was not transferred into Wing's name until December 6, 2004.
On the day the purchase agreement was signed, Schaub recorded a message on Body Tech's answering machine instructing callers to "please contact [him] directly" if they had "questions regarding Body Tech effective November 10." Although Wing changed the phone number into his name approximately five days later, Wing did not realize that Schaub had recorded the message for several weeks. Schaub had not given Wing the passwords to change the message. Wing eventually changed the message after he sent proof of corporate ownership to the phone company.
After he signed the purchase agreement, Wing asked Schaub where the customer billing information was; Schaub replied it was on the computer. But the customer billing information, including past billing information, was missing from the computer.
Schaub did not tell Wing about Body Tech's contracts with Cornerstone. Wing did not learn about Body Tech's EFT contract with Cornerstone until trial in January 2009. Because Wing did not have access to the EFT account information through Cornerstone or on the computer, he had to recreate the billing accounts and manually charge Body Tech members' credit cards.
Wing did not learn about Body Tech's accounts receivable collections contract with Cornerstone until several months after the sale. Schaub also did not inform Cornerstone that he had sold his stake in Body Tech to Wing. Cornerstone's records show that Cornerstone received a call from Schaub on March 14, 2005 regarding the buy out of Body Tech by World Gym, and a note in Cornerstone's file memorializing the call states: "[T]he collection accounts were not part of the sale agreement, leave the address the way it is, refer World Gym to Kirk, do not disclose anything." Wing eventually gained access to the account.
Between November 2004 and March 2005, Cornerstone sent several Body Tech collections checks to Schaub's personal post office box. Schaub did not turn over these checks, which totaled approximately $2,800, to Wing until April 2005. 2. Later developments
On November 15, 2004, five days after Wing and Schaub signed the purchase agreement, Body Tech closed at its original location. On November 29, 2004, Schaub sent a letter to all Body Tech gym members without Wing's knowledge. The letter stated that "BodyTech has closed." The letter also stated that the members had "the option to continue training at World Gym who has offered to honor existing BodyTech member contracts if you choose to train at the World Gym facility." Schaub testified that he sent the letter to describe what happened to the gym to those members who did not regularly visit the gym. After Schaub sent the letter, he received e-mails and letters from members who interpreted his letter as giving the members an option to cancel their contracts. Schaub did not respond to these e-mails or forward them to Wing.
Wing eventually relocated Body Tech to a nearby location, spending over $98,000 in the process. After moving Body Tech, Wing operated Body Tech as a World Gym franchise for two years before selling the gym to the Alaska Club. He testified that the gym averaged a loss of approximately $3,000 per month during this two-year period.
Wing never paid Schaub $50,000 as required by the promissory note and the purchase agreement.
D. Procedural History
On March 24, 2005, Schaub sued Wing in superior court, claiming that Wing had failed to pay the promissory note. In response, Wing raised six counterclaims, including: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) breach of fiduciary duty; (4) restitution; (5) fraud; and (6) conversion. A six-day trial on the claims began on January 26, 2009.
On March 18, 2009, the superior court issued its Decision and Order. The court found that Wing had failed to pay the note and that Schaub's case was therefore "virtually stipulated." It held that Wing had failed to prove his case on all of his counterclaims, and ruled in favor of Schaub overall. The superior court awarded Schaub full attorney's fees under the attorney's fee provision in the promissory note, omitting only a small portion of the fees attributable to Sweeny as an intervenor. Wing appeals.
Tim Sweeny was a minority owner of the gym. Schaub purchased Sweeny's 10% ownership of the gym in July 2003. Sweeny participated in the suit as an intervenor, but was ultimately dismissed from the case.
III. DISCUSSION
A. Standard Of Review
We apply our independent judgment when reviewing the trial court's interpretation of a contract. We review the trial court's findings of fact, including those on the credibility of witnesses, for clear error. We will find clear error only if, after a thorough review of the record, we come to a "definite and firm conviction that a mistake has been made." We review factual findings in the light most favorable to the prevailing party below.
N. Pac. Processors, Inc. v. City Borough of Yakutat, 113 P.3d 575, 579 (Alaska 2005).
Romero v. Cox, 166 P.3d 4, 7 (Alaska 2007) (citing Soules v. Ramstack, 95 P.3d 933, 936-37 (Alaska 2004)).
Id. at 8.
Id. (citing N. Pac. Processors, Inc., 113 P.3d at 579).
Whether a party breached a contract or the covenant of good faith and fair dealing is a question for the trier of fact. However, we may review the application of legal doctrine to undisputed facts without the usual deference to the superior court. Thus, we may review de novo the court's determination that these undisputed facts do not prove a breach of the contract or the covenant of good faith and fair dealing. B. Schaub Breached The Purchase Agreement And The Covenant Of Good Faith And Fair Dealing.
See Rockstad v. Erikson, 113 P.3d 1215, 1219 (Alaska 2005); Luedtke v. Nabors Alaska Drilling, Inc., 834 P.2d 1220, 1223 (Alaska 1992).
Id. (citing Foss Alaska Line, Inc. v. Northland Servs., Inc., 724 P.2d 523, 526 (Alaska 1986)).
Id.
At trial, Wing presented several claims for breach of contract and breach of the covenant of good faith and fair dealing. The superior court held that Schaub did not breach the contract or violate the duty of good faith and fair dealing. Wing argues that the superior court erred in holding that he did not prove six of his claims. Wing argues that he suffered significant damages due to Schaub's breaches and that Schaub's breaches should excuse Wing's failure to pay the promissory note.
1. Schaub's November 2004 letter and Schaub's answering machine message
Wing argues that Schaub "clearly intended to get as many members as possible to cancel their contracts" by sending the November 2004 letter to Body Tech members, a violation of the subjective prong of the covenant of good faith and fair dealing. He similarly argues that Schaub violated the covenant of good faith and fair dealing by recording a message on Body Tech's answering machine instructing customers to contact Schaub directly.
Wing also argues that Schaub breached section 1(d) of the purchase agreement by changing the Body Tech answering machine message. Section 1(d) of the purchase agreement states: "Seller shall retain the rights to use the name Body Tech However, the rights to the phone number 338-2639 shall pass to Purchaser under this Agreement." But Wing received the rights to the phone number and was able to transfer the number to his name five days after signing the agreement. Schaub did not breach section 1(d) of the purchase agreement.
The superior court concluded that Schaub did not breach the purchase agreement or the covenant of good faith and fair dealing by sending the November 2004 letter, noting that the letter was an "accurate description of what had happened" because "[i]t correctly set out the options for the customers." The superior court also concluded that the answering machine message was "not a breach of contract and the fact that Mr. Wing was slow to deal with the message merely reflects a pattern of ineffectiveness he demonstrated as a businessman."
We have held that:
The covenant of good faith and fair dealing is implied in every contract to give effect to the reasonable expectations of the parties, preventing each party from interfering with another party's right to receive the benefits of the agreement. The implied covenant has both a subjective and an objective prong. The subjective prong prohibits one party from acting to deprive the other of the benefits of the contract. The objective prong requires both parties to act in a way that a reasonable person would consider fair.
Hawken Nw., Inc. v. State, Dep't of Admin., 76 P.3d 371, 381 (Alaska 2003) (quoting McConnell v. State, Dep't of Health Soc. Servs., 991 P.2d 178, 184 (Alaska 1999)) (internal quotation marks omitted).
It was error to conclude that Schaub did not breach the covenant of good faith and fair dealing by sending the November 2004 letter. We base our holding not on the fact that the November 2004 letter "could have been worded more perfectly" when it stated that Body Tech was "closed," but on the fact that it was deceptively worded. Schaub's letter was perhaps true in the most literal sense because Body Tech was losing its lease at its then-current location and would be temporarily shut down. But the letter was false in the most commonly understood sense: as Schaub knew, Body Tech gym would continue to be open under new management at a new location.
Wing also argues that Schaub breached section 4.6 of the purchase agreement by sending the November 2004 letter and recording his message on Body Tech's answering machine. Section 4.6 of the purchase agreement states: "Seller agrees . . . to do all things that are reasonabl[y] necessary for the vesting and transfer of assets to the Purchaser." We interpret Schaub's promise to "do all things reasonabl[y] necessary" to include, by negative implication, a promise not to do things that impede the transfer of assets to Wing. As we discuss below, the November 2004 letter misrepresented Body Tech's relocation and enabled members to cancel their contracts. We therefore hold that Schaub's November 2004 letter also breached his duties under section 4.6 of the purchase agreement and therefore constituted a breach of the covenant of good faith and fair dealing.
The letter's misrepresentation, that the gym was permanently closed instead of merely relocating, is important because every Body Tech member's contract had an "opt-out" clause that allowed the member to cancel the contract if the gym closed. The letter therefore seems to instruct its recipients that they could cancel their Body Tech contracts. The letter reinforces this implied meaning by stating that members had the "option" to continue training at another gym. Schaub's message did not go unnoticed; several members contacted Schaub and Wing in response to the letter to request cancellation of their Body Tech memberships. Schaub did not forward to Wing any of the e-mails or letters he received from Body Tech members in response to his November 2004 letter. Even if Schaub did not intend to sabotage the contracts by sending the letter, as he claims, it is clear to us that the letter had the effect of sabotaging Wing's business. We therefore hold that the trial court's factual finding on the letter's accuracy was clearly erroneous.
It was also error to conclude that Schaub did not breach the covenant of good faith and fair dealing by leaving a message on Body Tech's answering machine directing customers to contact him directly. Schaub does not dispute the facts relevant to Wing's claim. Schaub changed the message on Body Tech's answering machine on the evening that he sold his share of Body Tech to Wing. The new message directed Body Tech customers to contact Schaub directly. Schaub did not tell Wing about the existence of the message, and did not give Wing the passwords to change the message. We therefore hold that the trial court's finding that Schaub's conduct was not a breach of the covenant of good faith and fair dealing was unsupported by the record and thus clearly erroneous.
2. Cornerstone collection accounts
Wing also argues that the superior court erred in concluding that Schaub did not breach sections 1(h) and 4.6 of the contract when he failed to give Wing access to Body Tech's collections account with Cornerstone and possession of the Cornerstone collection checks. Section 1(h) of the purchase agreement states that Wing "will retain and collect all cash and accounts receivable" earned before the execution of the agreement. Section 4.6 of the purchase agreement states: "Seller agrees . . . to do all things that are reasonabl[y] necessary for the vesting and transfer of assets to the Purchaser."
Section 1(h) of the purchase agreement states: "Purchaser will retain and collect all cash and accounts receivable. . . . Seller further agrees to cooperate and assist Purchaser with the orderly transfer of the Electronic Fund Transfers ("EFT") for Body Tech's members."
The relevant language of section 4.6 is set out in footnote 11.
It was error to hold that Schaub did not breach the purchase agreement by failing to tell Wing about the Cornerstone collections account. It was also error to hold that Schaub did not breach the purchase agreement by failing to promptly turn over the Cornerstone collections checks. Both the superior court's written findings and the record support our conclusion.
The superior court ruled that Schaub had not breached the contract by failing to give Wing information about the Cornerstone collections contract or by failing to give Wing the collections checks. But the court also found that "[t]he fact that [Schaub] initially didn't want to share information about the funds to be collected does suggest that at least momentarily he had larceny in his heart." This finding irreconcilably conflicts with the court's legal conclusion. If Schaub did not tell Wing about the Cornerstone contract, he necessarily breached his duty under section 4.6 to assist Wing in transferring Body Tech assets. It is inconsistent to say that Schaub was "assisting" Wing while he simultaneously withheld vital information about Body Tech's contracts and assets. Likewise, if Schaub failed to hand over the collections checks with "larceny in his heart," he necessarily breached his duty under section 1(h) to hand over Body Tech's accounts receivable, and section 4.6's requirement that he was "to do all things reasonabl[y] necessary" to transfer the gym's assets to Wing.
The record supports the superior court's finding that Schaub did not turn over the information about the contract or the checks. Wing testified that Schaub never informed him of the Cornerstone collections account; he only learned of the account when Cornerstone called Body Tech expecting to talk to Schaub, but Wing answered the phone. Schaub did not present any evidence showing that he told Wing about the Cornerstone collections account. Additionally, the record shows Schaub called Cornerstone and stated that the collection accounts were not part of the purchase agreement, and instructed Cornerstone not to disclose anything to Wing. Wing undisputedly did not receive access to the Cornerstone collections account until March 2005. Finally, Schaub did not turn over several collections checks he received from Cornerstone until April 2005. Under our de novo review of the undisputed facts, we hold that Schaub breached both the contract and the covenant of good faith and fair dealing by actively impeding Wing's ability to collect Body Tech's accounts receivable in violation of sections 1(h) and 4.6 of the purchase agreement.
3. Cornerstone EFT account
Wing argues the superior court erred in failing to hold that Schaub breached sections 1(g), 1(h), and 4.6 of the purchase agreement by failing to tell Wing about Body Tech's EFT contract with Cornerstone. The superior court did not make findings on Wing's claim that Schaub breached the purchase agreement by not telling Wing about the EFT account.
Under section 1(h) of the purchase agreement, Schaub agreed to "assist [Wing] with the orderly transfer of the Electronic Fund Transfers ("EFT") for Body Tech's members." Likewise, under section 4.6, Schaub agreed to "do all things reasonabl[y] necessary for the . . . transfer of the EFT's." We interpret these provisions of the purchase agreement to impose an affirmative duty on Schaub to inform Wing about the existence of the Cornerstone EFT contract. Wing testified that he did not receive any information about the EFTs from Schaub, and that he was not even aware of the existence of the Cornerstone contract until the trial. Schaub did not dispute either of these assertions at trial and does not address the issue on appeal. We therefore hold that Schaub breached sections 1(h) and 4.6 of the contract and the covenant of good faith and fair dealing by failing to inform Wing of the existence of the Cornerstone EFT contract.
4. Northern Skies bank account
Finally Wing argues that Schaub breached section 1(g) of the purchase agreement by failing to immediately transfer Body Tech's Northern Skies bank account into his name. The superior court did not make findings on Wing's claim that Schaub breached the purchase agreement by failing to turn over the bank account.
Section 1(g) of the purchase agreement states in relevant part: "Seller . . . acknowledges and agrees that all records of Body Tech, its members, bank records, accounts, etc., are property of the Purchaser and must be turned over upon execution of this Agreement."
Section 1(g) of the purchase agreement states that "bank records . . . are property of the Purchaser and must be turned over upon execution of the Agreement." Wing testified, and Schaub does not dispute, that Wing did not know about the Northern Skies account at the time they signed the purchase agreement. Instead, Wing did not receive access to the account until December 6, 2004, nearly a month after his purchase of Body Tech. We therefore hold that Schaub breached section 1(g) of the purchase agreement and the covenant of good faith and fair dealing by failing to turn over the bank account immediately.
5. Summary
In conclusion, we hold that Schaub breached the purchase agreement and the covenant of good faith and fair dealing by sending the November 2004 letter. Wing testified that Body Tech's member contracts were the primary assets that he purchased. The record supports Wing's assertion: Body Tech gym had few other assets because it was about to lose its lease and its gym equipment was encumbered by loans. Schaub's November 2004 letter, besides being objectively unfair, deprived Wing of some of the member contracts that he had purchased; several members cancelled their contracts in response to the letter.
We likewise hold that Schaub breached the purchase agreement and the covenant of good faith and fair dealing by failing to assist Wing in the transfer of the EFT accounts. The purchase agreement specifically required Schaub to assist Wing in transferring the EFTs for Body Tech members in sections 1(h) and 4.6.
Finally we hold that Schaub breached the purchase agreement and the covenant of good faith and fair dealing by failing to: (1) inform Wing about the Cornerstone collection account; (2) turn over approximately $2,800 in Cornerstone collections checks immediately; and (3) turn over access to the Northern Skies bank account immediately. The record shows that Wing, as the sole owner of Body Tech, was in a precarious financial position at the time of the purchase agreement. Body Tech was about to lose its lease and would have to relocate. Wing eventually incurred more than $98,000 in costs associated with relocating the gym, and had an upcoming obligation to pay Schaub the $50,000 promissory note.
We therefore reverse the superior court's conclusion that Schaub's actions did not constitute a breach of either the purchase agreement or the covenant of good faith and fair dealing and the court's conclusion that Wing breached the purchase agreement by failing to pay the promissory note, and we remand for a determination of whether Schaub's actions constituted a material breach. On remand, the superior court should consider what both parties contemplated at the time of contract formation and determine what damages, if any, Wing suffered through Schaub's breaches of both the purchase agreement and the covenant of good faith and fair dealing. The court should also determine the extent to which Schaub's breaches and related torts excused Wing's payments under the note. The court has the discretion to reopen evidence on remand, especially given Wing's undisputed claim that he did not know of the existence of the EFT account until the second day of trial. C. Wing's Other Arguments 1. Wing's conversion claim
Wing argues that Schaub's breaches of the purchase agreement and the covenant of good faith and fair dealing excuse Wing's failure to pay the $50,000 promissory note. Every breach of contract gives rise to a claim for damages, Alaska Energy Auth. v. Fairmont Ins. Co., 845 P.2d 420, 423 n. 3 (Alaska 1993) (quoting RESTATEM ENT (SECOND) OF CONTRACTS § 236 cmt. b (1981)), and all material breaches justify the injured party's temporary suspension of performance. RESTATEMENT (SECOND) OF CON TRACTS § 242 cmt. a (1981). But only an uncured material breach will discharge the injured party's remaining duty of performance. Id. A breach is material if it goes to the "essence" of the contract or if it is "of such a nature as to defeat the object of the parties in making the contract." 14 RICHARD A. LORD, W ILLISTON ON CONTRACTS § 43.6, at 578-79 (4th ed. 2000); see Estate of Lampert ex rel. Thurston v. Estate of Lampert ex rel. Stauffer, 896 P.2d 214, 219 (Alaska 1995) (holding that plaintiff may be entitled to rescission if defendant's actions "destroyed the `essence' of the bargain." (citing RESTATEMENT (SECOND) OF CONTRACTS §§ 372-73 (1981))). Because the materiality of a breach is a question of fact reserved for the trial court, see Wirum Cash, Architects v. Cash, 837 P.2d 692, 708 (Alaska 1992); see also Hensley v. E. R. Carpenter Co., Inc., 633 F.2d 1106, 1109-10 (5th Cir. 1980) (remanding to trial court to determine if breach was material), we remand for a determination of whether Schaub's breach excused Wing's failure to pay the promissory note. It will be up to the trial court to determine whether, given the importance of the EFTs, Schaub's failure to assist Wing in transferring the EFTs went to the "essence" of the contract. Likewise, it is up to the trial court to determine whether, given Body Tech's precarious financial condition — of which Schaub was clearly aware — Schaub's failure to disclose the Cornerstone account and hand over Body Tech's assets went to the "essence" of the purchase agreement. See 14 RICHARD A. LORD, WILLISTON ON CONTRACTS § 43.6, at 578-79 (4th ed. 2000) ("[W]hether a nonperformance is sufficiently material [to suspend or discharge the other party's duty to perform] is a question of fact. . . . Generally, such nonperformance will attain this level of materiality only when it goes to the . . . essence of the contract or is of such a nature as to defeat the object of the parties. . . .").
For instance, Wing should be due damages from any contracts that Body Tech members cancelled because of Schaub's November 2004 letter. At minimum, Wing should be due damages equal to the interest on the collection checks Schaub did not turn over.
See, e.g., Oberhansly v. Oberhansly, 798 P.2d 883, 888 (Alaska 1990).
The superior court held that Wing "failed to prove conversion of corporate or personal money or property." It stated that "[t]here is no proof related to Mr. Schaub's handling of Mr. Wing's money." Wing argues that the superior court erred in holding that Schaub did not convert his property.
Conversion is "an intentional exercise of dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel."
RESTATEMENT (SECOND) OF TORTS § 222A (1965).
As discussed above, the Cornerstone collection checks were Wing's property after the execution of the purchase agreement. Schaub does not dispute that it was several months before he turned over some of the collection checks to Wing. We therefore conclude, on the undisputed facts, that Schaub interfered with Wing's possession of his property. Furthermore, although "ultimately the funds of the corporation still to be collected were paid" to Wing, the return of the converted property does not absolve a tortfeasor of liability. Instead, the tortfeasor's return of the property diminishes the damages recoverable for the conversion.
See KK Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 717 (Alaska 2003).
RESTATEMENT (SECOND) OF TORTS § 922 (1965).
Id.
We hold that it was legal error to conclude that Schaub did not convert Wing's property. On remand, the superior court should determine any damages Wing suffered due to Schaub's conversion.
2. Wing's breach of employment contract, breach of fiduciary duty, and fraud claims
Wing raises several arguments regarding Schaub's actions before their execution of the purchase agreement. He argues that Schaub breached his employment 2003). agreement by withdrawing more than his management fee from company funds. He also argues that Schaub breached his fiduciary duty to Wing by making these unauthorized withdrawals from Body Tech's funds. Wing argues that Schaub committed fraud by representing during the purchase negotiations that he had withdrawn $63,090 in total draws when he had actually withdrawn more than $110,000.
Wing also argues Schaub committed fraud by representing that he had loaned the company $9,900. Schaub testified that the money was a loan from his father that he deposited in Body Tech's accounts. Wing presented evidence that the money was actually cash from Body Tech's daily sales. The superior court did not clearly err in crediting Schaub's testimony over Wing's testimony.
The superior court concluded that Wing had not proved that Schaub breached his employment contract or his fiduciary duty to Wing. It also concluded that Wing had not proved his fraud claims. The superior court seems to have implicitly found that Schaub withdrew the amount of money he was authorized to withdraw under his employment contract. It also seems to have implicitly found that Schaub did not make fraudulent statements during the negotiations.
W hile they ostensibly organized Body Tech as a corporation, neither Wing nor Schaub followed any corporate formalities. Schaub's employment contract was an oral contract, and Body Tech's records under his tenure as manager consisted mostly of handwritten notes that are difficult to decipher. The parties presented conflicting testimony on how much Schaub would be paid for managing the gym, and the amount that Schaub withdrew from Body Tech accounts. Wing and Schaub's negotiation document is difficult to understand, but the document appears to support Schaub's testimony regarding his withdrawals. G iven the conflicting testimony presented at trial, we defer to the superior court's factual findings on these claims. We cannot say the superior court clearly erred in its implicit findings, and we affirm the court's conclusion that Wing did not prove his claims.
The n egotiations document states "[check] acct draw s 63090." It also states "$ draw 6000." This evidence reinforces the superior court's findings because Schaub probably would not have told Wing during negotiations that he had withdrawn $63,090 in "total" draws when the negotiations document also states that he withdrew $63,090 in "checking account" draws and that he withdrew the additional "cash" draws listed on the sheet.
3. Attorney's fees
After entering its order in Schaub's favor, the superior court awarded Schaub full attorney's fees under the promissory note's "reasonable attorney fee" enforcement provision. Because we hold that Schaub breached the covenant of good faith and fair dealing and the purchase agreement, we also vacate the superior court's attorney's fee award.
IV. CONCLUSION
For the reasons described above, we REVERSE that part of the superior court's decision determining that Schaub did not breach the purchase agreement, did not breach the covenant of good faith and fair dealing, and did not convert Wing's property. We AFFIRM that part of the superior court's decision determining that Wing did not prove his breach of employment contract, breach of fiduciary duty, and fraud claims. We VACATE the superior court's attorney's fee award, and we REMAND for further proceedings consistent with this opinion.