Broad v. Sealaska Corp.

Sealaska Corporation, a Native regional corporation organized under the Alaska Native Claims Settlement Act (ANCSA), established a “settlement trust” as authorized in an amendment to ANCSA. This trust, titled the Elders’ Settlement Trust (EST), provides a one time $2000 payment to each Sealaska shareholder who reaches sixty-five years of age. The plaintiffs, who are shareholders of Sealaska under age sixty-five, filed a class action complaint in Alaska state court claiming that creation of the settlement trust violated state corporations law and the provisions of ANCSA. Sealaska removed to federal district court and the parties stipulated to deferring the request for class certification.

The plaintiffs appeal from the district court’s order granting summary judgment in favor of Sealaska on all claims. The district court had jurisdiction under 28 U.S.C. § 1441(a) and this Court has jurisdiction under 28 U.S.C. § 1291. We review a district court’s grant of summary judgment de novo. Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). We affirm.

I.

Congress enacted ANCSA, 43 U.S.C. § 1601 et seq., in 1971 “to achieve a fair and just settlement of all aboriginal land [in Alaska] . . . with maximum participation by Natives in decisions affecting their rights and property.” 43 U.S.C. § 1601 note (Supp. 1995) (Congressional Findings and Declaration of Policy for ANCSA Amendments of 1987). To accomplish this goal, ANCSA created regional corporations to hold and manage the Native land settlements. Congress amended ANCSA in 1987 to ensure the continuing success of the Native corporations. The amendments included a provision permitting a corporation to create a “settlement trust,” a vehicle into which a corporation could transfer assets that were to be used for the health, education, and welfare of the trust beneficiaries. Assets held in these trusts enjoy protection from the corporation’s creditors.

Sealaska, which is the Native Corporation for the Southeast Panhandle of Alaska, saw the settlement trust as a means to recognize the contributions of its elder shareholders and to assist them financially. The board of directors adopted a resolution to establish the EST, a trust that would be funded with corporate assets, and that would distribute $20 per share to shareholders aged sixty-five or older.

The board sent to all shareholders a proxy statement for the 1991 shareholder meeting and a description of the proposal, both of which included information about the benefits and disadvantages of the EST. The resolution received an affirmative vote from 50.7 percent of all outstanding shares, and thereby passed. The board appointed trustees and authorized the President and CEO to prepare the trust document. As of December 10, 1991, the trust has been operating according to the terms of the resolution.

In September 1992 the plaintiffs filed a class action suit in the Alaska Superior Court claiming that the cash disbursements paid out through the trust constitute a constructive dividend. They assert that this dividend is an illegal distribution because it discriminates between Sealaska shares of the same class.

Sealaska removed the case to federal court, and the parties filed cross-motions for summary judgment. In their answer to Sealaska’s motion, the plaintiffs raised several additional claims. First, they argued that the proxy materials Sealaska supplied to its shareholders did not comply with applicable law because the information given was misleading and omitted material facts. Second, they argued that nonvoting shareholders should have been allowed to vote on the establishment of the EST. Finally, they claimed that the EST, under authority of federal law, takes property from the shareholders without just compensation, and thus violates their rights under the Fifth Amendment of the United States Constitution.

The district court issued several orders, which, taken together, entered judgment in favor of Sealaska and against the plaintiffs on all claims. The plaintiffs appealed asserting an additional claim under the Due Process Clause of the Fifth Amendment. We affirm the district court’s judgment on all claims, and dismiss the Due Process claim because it is not properly before us.

II.

The plaintiffs’ original complaint contended that the EST’s disbursement of funds to elder shareholders is illegal as a discriminatory distribution under Alaska corporations law. Sealaska countered that the settlement trust provisions of ANCSA preempt state law in this respect and, therefore, the EST is a valid settlement trust authorized by ANCSA. We affirm the district court’s holding that ANCSA displaces contrary state law with respect to settlement trusts, and that the EST is proper under ANCSA.

Under the Alaska Corporations Code a corporation must give equal treatment to all shares of the same class and must make its distributions without discrimination. Alaska Stat. § 10.06.305(b). Both parties agree that the EST discriminates against shareholders who have not yet reached age sixty-five. Therefore, if the EST distributions are treated as shareholder dividends, then the payments made through the trust would violate Alaska state law and would be illegal unless authorized by ANCSA.

The district court correctly concluded that ANCSA’s provisions explicitly preempted state law with respect to corporate resolutions that establish settlement trusts. But the relevant inquiry is not whose law governs the establishment of the trust, but instead whether a state law that prohibits the actions taken by the trust is preempted by federal law. Preemption of state law regarding trust distributions is not explicitly covered by the ANCSA settlement trust provisions. Nevertheless, we find that ANCSA implicitly preempts state law in this respect.

Congress provided that conveyance of assets into settlement trusts must be carried out “in accordance with the laws of the State (except to the extent that such laws are inconsistent with [sections 1629b and 1629e of ANCSA]).” 43 U.S.C. § 1629e(a)(1)(A) (Supp. 1995) (emphasis added). Section 1629e requires that each trust be established “to promote the health, education, and welfare of its beneficiaries and to preserve the heritage and culture of Natives.” 43 U.S.C. § 1629e(b)(1). Furthermore, it limits the use of these trusts, specifically prohibiting trusts that “discriminate in favor of a group of individuals composed only or principally of employees, officers, or directors of the settlor Native Corporation.” 43 U.S.C. § 1629e(b)(1)(C).

According to its plain language, then, ANCSA prohibits settlement trusts that discriminate in favor of corporate insiders, but does not otherwise prohibit trusts that discriminate in favor of other groups of shareholders. This statutory section suggests that ANCSA anticipates that trusts may discriminate in favor of a particular class of shareholders. As a result, a state law that prohibits discriminatory trusts conflicts with ANCSA. When federal and state laws actually conflict, the state law is preempted. See Wisconsin Public Intervenor v. Mortier, 501 U.S. 597, 605, 115 L. Ed. 2d 532, 111 S. Ct. 2476 (1991) (“Such a conflict arises when… a state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'”) (quoting Hines v. Davidowitz, 312 U.S. 52, 85 L. Ed. 581, 61 S. Ct. 399 (1941)).

Additionally, the Alaska Corporations Code itself recognizes ANCSA’s supremacy when conflicts arise: “a corporation organized under [ANCSA] is governed by [ANCSA] to the extent [ANCSA] is inconsistent with [the Alaska Corporations Code].” Alaska Stat. § 10.06.960(f). Because ANCSA allows trusts that discriminate in favor of some shareholders, and the Alaska Corporations Code proscribes such actions, federal and state law conflict. In such cases, the federal law prevails. Thus, Alaska corporations law abdicates in favor of ANCSA with respect to settlement trust distributions.

Plaintiffs further contend that even if ANCSA does govern establishment of the EST, the EST is a misuse of the settlement trust option for two reasons: (1) because Congress only envisioned the trusts as land protection devices, and (2) because Congress did not intend settlement trusts to confer special benefits on subclasses of Natives. We reject both these arguments and affirm the district court’s holding that the EST conforms with the provisions and purpose of ANCSA.

First, the argument that the settlement trust was intended only as a method by which corporations could shield land from creditors is belied by ANCSA’s text and history. The EST, admittedly, does not aim specifically to protect land. [1] But the text of ANCSA imposes no limitation on what can properly be the res of the trust. It allows Native Corporations to convey “assets (including stock or beneficial interests therein) to a Settlement Trust.” 43 U.S.C. § 1629e(a)(1)(A). The permissible purposes given in the text do not relate only to interests in land: “The purpose of a Settlement Trust shall be to promote the health, education, and welfare of its beneficiaries and preserve the heritage and culture of Natives.” 43 U.S.C. § 1629e(b)(1). Furthermore, ANCSA does specifically proscribe several purposes, [2] but nowhere does the text of ANCSA’s settlement trust option prohibit the purposes espoused by the EST.

Second, nothing in the text of the settlement trust provisions prohibits trust distributions to less than all shareholders. In his dissent, Judge Kleinfeld argues that the EST is nothing more than an impermissible “birthday present” to elder shareholders at the expense of those not yet 65 years old. Under his interpretation of the settlement trust option, any use of a settlement trust to benefit a subset of shareholders is improper. Such an interpretation of Section 1629e would render the settlement trust option superfluous for any purpose except as a land preservation mechanism. Alaska law and ANCSA already allow regional corporations to distribute dividends to all shareholders equally. Admittedly, the Native corporations could still use settlement trusts to preserve Native land and to protect it from creditors, while making equal distributions to all shareholders through the trust instead of through traditional corporate dividends. But nothing in ANCSA supports such a limited interpretation of the settlement trust provisions.

The legislative history of the 1987 amendments to ANCSA suggests a much more expansive purpose for settlement trusts:

Settlement Trusts are expected to serve two principal functions. They are intended to be permanent, Native-oriented institutions which shall hold and manage, in perpetuity, any historic or culturally significant surface lands, sites, cemeteries, traditional use areas, or monuments, for the benefit of the beneficiary population. . . .
 
The other prime function relates to the health, education and economic welfare of its beneficiaries. . . . At the discretion of the trustees, [trust assets or income from trust assets] can be used to provide scholarships and other educational benefits. Assets can be used to improve health care delivery or facilities, pay for needed health care and otherwise be devoted to bettering the health of the beneficiary Native community. Finally, the Trust assets may be used to bolster the economic well- being of the beneficiaries. Trust distributions may be used to fight poverty, provide food, shelter and clothing, and serve comparable economic welfare purposes. Additionally, cash distributions of trust income may be made on an across-the-board basis to the beneficiary population as part of the economic welfare function.

133 Cong. Rec. H11,933 (daily ed. Dec. 21, 1987) (House Explanatory Statement), reprinted in 1987 U.S.C.C.A.N. 3299, 3307-08 (emphasis added). This description clearly permits across-the-board distributions to all shareholders. But it permits these distributions in addition “provide food, shelter and clothing” then it seems reasonable that distributions will be made based on need, rather than on an across-the-board basis.

In promulgating the 1987 amendments, Congress noted that the corporate structure is not in every instance “well adapted to the reality of life in Native villages and to the continuation of traditional Native cultural values.” 43 U.S.C. § 1601 note (Congressional Findings and Declaration of Policy for ANCSA Amendments of 1987) (Supp. 1995). Therefore, Congress intended the amendment to “enable the shareholders of each Native Corporation to structure the further implementation of the settlement in light of their particular circumstances and needs.” Id. To require that settlement trust distributions be treated in every way like corporate dividends would simply reinforce the corporate structure, and limit the flexibility with which shareholders could structure their settlement.

Both the text and the legislative history support the contention that Congress intended settlement trusts as flexible instruments that would serve a number of purposes besides simply shielding Native land from creditors. Section 1629e gives a broad statement of the permissible purposes for settlement trusts, i.e., to promote the health, education, and welfare of the Native population. Nothing in this section explicitly prohibits distributions to less than all shareholders, except groups composed primarily of corporate insiders. [3] Although, as the dissent suggests, Alaska corporations law could serve to prohibit such distributions, the legislative history of the settlement trust provisions suggests that Congress intended to allow distributions to subsets of shareholders. Therefore, given the broad statement of purpose for settlement trusts, and the further elaboration of this purpose in the legislative history, the most reasonable interpretation of Section 1629e would allow Native corporations to establish settlement trusts to benefit subclasses of shareholders.

Congress placed few limitations on the use of settlement trusts, thus enabling Native Corporations the greatest flexibility to structure their settlement to best fit the particular needs of their community. This might be construed to suggest that Native Corporations can use settlement trusts to contravene Alaska corporations law with impunity, and to thereby disadvantage many shareholders.

ANCSA does, however, limit the use of settlement trusts in several ways. It proscribes some trust activities, and defines the specific purposes for which these trusts may be created, i.e., for the health, education, and welfare of the Native community. Although this allows a wide range of applications, to simply quote this language in the preamble of a settlement trust resolution does not by itself confer validity on the proposed trust, as the dissent suggests. Judicial review of these trusts will prevent egregious violations of the settlement trust option, such as those “bizarre transfers” cited by the dissent. For example, these limits would easily preclude a trust that sought merely to discriminate against shareholders who were not members of the majority shareholders’ extended family.

Furthermore, ANCSA requires majority or supermajority shareholder approval before corporations may transfer assets to these trusts. 43 U.S.C. § 1629b(d). As with any major corporate decision, shareholder approval does not necessarily guarantee that the outcome is the most prudent course of action. But it does provide some measure of oversight.

Finally, ANCSA specifies that Alaska state law governs settlement trusts in many instances, insofar as the state laws do not conflict with ANCSA. For example, Alaska trust law governs the creation and management of the trust, and Alaska corporations law defines the requirements for proxy solicitation materials, as is discussed in part III below.

These limitations should provide shareholders with sufficient protection with respect to settlement trusts, while also leaving enough flexibility to meet Congress’ goals.

In conclusion, the ANCSA settlement trust provisions preempt Alaska Corporations Code with respect to discriminatory settlement trusts. Sealaska’s establishment of the EST conforms with the provisions and purpose of the ANCSA settlement trust option. We therefore hold that the EST is a proper use of the settlement trust provisions of ANCSA.

III.

Even if Sealaska properly created the EST as authorized by ANCSA, the plaintiffs argue that shareholder approval of the EST was improper under Alaska corporations law, and that disputed issues of fact render summary judgment improper. We agree with the district court’s grant of summary judgment in favor of Sealaska on this issue.

First, the plaintiffs contend that the proxy solicitation materials sent to shareholders were misleading and omitted material facts. The 1987 ANCSA amendments make clear that proxy statements and solicitations made in the course of a Native Corporation’s efforts to establish a settlement trust must comply with state law. 43 U.S.C. § 1629b (Supp. 1995). Alaska law prohibits solicitations and proxy statements that contain material misrepresentations, i.e., statements that are “false or misleading with respect to a material fact [or] omit[] a material fact necessary in order to make a statement made in the solicitation not false or misleading.” 3 Alaska Admin. Code, tit. 3, § 08.315(a); see also TSC Indus. v. Northway, 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976) (same); Brown v. Ward, 593 P.2d 247, 249-50 (Alaska 1979) (although the letter of federal proxy rules does not apply to ANCSA corporations, the spirit does).

The plaintiffs assert a variety of claims that material facts were not disclosed or were concealed in the proxy materials. For example, they claim that Sealaska omitted a material fact by expressing the cost of the EST as a lump sum of about $ 6 million rather than as cost per share. The district court found, however, and we agree, that the proxy solicitation materials comported with Alaska law, and that plaintiffs failed to raise genuine issues of fact as to whether they were misleading or omitted material facts.

Second, plaintiffs assert that shareholder approval of the EST resolution is invalid because nonvoting shares were not allowed to vote on the proposal. ANCSA provides that shares held by non-Natives that were acquired through inheritance do not carry voting rights. 43 U.S.C. § 1606(h)(2)(C) (Supp. 1995). Then, it specifically conditions approval of a settlement trust upon majority vote of “the total voting power of the corporation,” defined as “all outstanding shares of stock that carry voting rights.” 43 U.S.C. §§ 1629b(d)(1)(A) and 1629b(e) (emphasis added). Thus, ANCSA itself provides that nonvoting shares have no right to vote on corporate resolutions establishing settlement trusts.

The plaintiffs seek to avoid this conclusion by arguing that under state law, nonvoting shares do get to vote on certain fundamental corporate changes. This argument fails, however, because, as discussed previously, section 1629b expressly states that corporate resolutions to establish a settlement trust shall be governed by the provisions of ANCSA, “notwithstanding any provision . . . of the laws of the State.” 43 U.S.C. § 1629b(a). Thus, the nonvoting shares were properly denied the right to vote on the EST resolution.

Give the foregoing, we reject plaintiffs’ claim that shareholder approval of the EST resolution was invalid and affirm the district court’s grant of summary judgment on this claim

IV.

The plaintiffs’ final argument is that section 1629e of ANCSA is unconstitutional as applied to them for two reasons: first, allowing creation of the EST impairs the shareholders’ “contract” rights under the articles of incorporation, and thus, section 1629e violates the Due Process Clause of the Fifth Amendment; second, because it authorizes Sealaska to transfer $6 million of its corporate equity to the EST, section 1629e permits a “taking” of the disadvantaged shareholders’ property in violation of the Fifth Amendment.

Plaintiffs assert their due process claim for the first time on appeal. Generally, an appellate court will not hear an issue raised for the first time on appeal. Golden Gate Hotel Ass’n v. San Francisco, 18 F.3d 1482, 1487 (9th Cir. 1994) (citing Singleton v. Wulff, 428 U.S. 106, 120, 49 L. Ed. 2d 826, 96 S. Ct. 2868 (1976)). To have been properly raised below, “the argument must be raised sufficiently for the trial court to rule on it.” In re E.R. Fegert, Inc., 887 F.2d 955, 957 (9th Cir. 1989). Because this issue was not raised below, we decline to reach the merits.

AS to the takings claim, we agree with the district court that, as a matter of law, the claim fails. However, we do not agree with the district court’s reasoning on this issue.

The district court began its analysis “with the assumption that the use of corporate assets to create the EST amounted to a taking of the non-voting shareholders [sic] equity in the corporation for which no compensation was provided.” We question the validity of this assumption. The property interest plaintiffs seek to protect is the value of their Sealaska stock. [4] But takings cases almost universally involve governmental action that affects ownership rights in real property, and plaintiffs cite no case authority for their claim that the Takings Clause protects their interest in Sealaska’s corporate equity.

Furthermore, corporate shareholders do not directly own any part of a corporation’s property or assets. They only own shares of stock, which represent a proportionate interest in the corporate equity remaining after a corporation meets all its other debts and obligations. The profits themselves belong to the corporation, and do not pass to the shareholders unless and until the board of directors declares a dividend. Thus, the plaintiff shareholders have no proprietary interest that could have been “taken.”

Nevertheless, even if we accept the premise that plaintiffs’ interest in Sealaska’s corporate equity may be the subject of a takings claim, the claim still fails for lack of sufficient government action. Takings jurisprudence encompasses two lines of authority: physical occupation cases, and regulatory takings cases. Compare Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 73 L. Ed. 2d 868, 102 S. Ct. 3164 (1982) (holding that New York law requiring landlords to allow cable television companies to install cables in their buildings constituted a physical intrusion sufficient to be a taking) with Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 112 S. Ct. 2886, 2895, 120 L. Ed. 2d 798 (1992) (indicating that when a government land use regulation forces the owner of real property “to sacrifice all economically beneficial uses [of his property,] he has suffered a taking”). Plaintiffs allege no physical invasion of property, so their claim must fall into the regulatory taking category.

Regulatory takings generally require some government regulation or other government action that compels the owner to sacrifice all economically viable use of his or her property. E.g., Lucas, 505 U.S. 1003, 112 S. Ct. 2886, 120 L. Ed. 2d 798 (the state’s coastal preservation statute prevented the landowner from building any structure on his property). In this case, Sealaska was not in any way compelled by the federal government to create the EST. The settlement trust option is just that – an option. That Sealaska’s action was authorized by federal law does not transmute it into government action sufficient for the Fifth Amendment. Without governmental encouragement or coercion, actions taken by private corporations pursuant to federal law do not transmute into government action under the Fifth Amendment. See, e.g., Fidelity Financial Corp. v. Federal Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064, 93 L. Ed. 2d 998, 107 S. Ct. 949 (1987) (finding no government action in a bank’s loan decision even though the bank was created by a federal agency to accomplish federal objectives, was subject to extensive federal regulation, and some of the bank’s directors and managers were appointed by a federal bank board). But see Ginn v. Mathews, 533 F.2d 477, 480 (9th Cir. 1976) (finding governmental action in an employment decision made by the Economic Opportunity Council of San Francisco, but emphasizing that the Council was operating with almost exclusively federal funds); Burton v. Wilmington Parking Authority, 365 U.S. 715, 6 L. Ed. 2d 45, 81 S. Ct. 856 (1961) (finding government action largely on the basis that the defendant, a private lessee, received significant financial support from the parking authority). Even in cases in which the court found government action, it often reiterated the general principle that “where the action taken is entirely by a private corporation with no overriding or pervasive [government] involvement, the provisions of the First, Fifth, and Fourteenth Amendments impose no limitations upon that action.” Ginn, 533 F.2d at 479.

In this case, Sealaska is a private corporation that established the EST using private funds. The operation of the trust is not subject to governmental oversight. Furthermore, Sealaska was neither encouraged nor coerced into creating the EST by the federal government. It merely exercised its option under ANCSA to transfer its assets to a settlement trust. We therefore affirm the grant of summary judgment in favor of Sealaska on the plaintiffs’ takings claim. [5]

V.

Through instruments like the settlement trust, Congress sought to expand the ability of Native Corporation shareholders to “structure the further implementation of the settlement in light of their particular circumstances and needs.” 43 U.S.C. § 1601 note (Supp. 1995) (Congressional Findings and Declaration of Policy for ANCSA Amendments of 1987). Sealaska did just that, establishing its Elders’ Settlement Trust to address concerns related to the welfare of its elder shareholders. We conclude that Sealaska’s Elders’ Settlement Trust is a legitimate use of the settlement trust option as authorized by ANCSA, and that such use comports with the plain language and the purpose of the ANCSA amendments. The district court’s order granting summary judgment in favor of Sealaska on all claims is AFFIRMED.


Dissent by: KLEINFELD, Circuit Judge

Dissent

I respectfully dissent.

Sealaska, organized as a business corporation, decided to give each shareholder a $2,000 birthday present at age 65. That discriminates by age, because at the time of the decision, not all the shareholders were 65. Several directors would immediately or soon receive this substantial gift. Many shareholders would not receive the gift for decades. The present value of the gift, assuming a 5% interest rate, is $ 2,000 to a 65 year old director, $ 284 to a 25 year old shareholder.

This discriminatory cash gift to shareholders, as the majority acknowledges, would violate Alaska corporation law, if federal law does not provide otherwise. Under the Alaska Corporations Code, all Alaska corporations must treat all shares in the same class equally with respect to dividends and other rights. Alaska Stat. §§ 10.06.542, 10.06.305(b).

The preemption analysis used in the majority opinion is mistaken, because any preemption is illusory. There cannot be federal preemption of state law in this case, because there cannot be any conflict between the two laws. The state law says that a native corporation can do anything ANCSA permits. AS 10.06.090(f). That means there can be nothing which ANCSA permits but state law prohibits, so there can be no conflicting state law to preempt. ANCSA says that a conveyance to a settlement trust should be in accord with Alaska law except to the extent that state law is inconsistent with ANCSA. 43 U.S.C. § 1629e(a)(1)(A). That means that there can be no preemption of the field. If federal law permits the particular discriminatory cash transfer through the settlement trust, state law does too, and if not, not.

The majority opinion says that “according to its plain language, then, ANCSA prohibits settlement trusts that discriminate in favor of corporate insiders, but does not prohibit trusts that discriminate in favor of other groups of shareholders.” Maj. op. at 5872. The “plain language” consists only of the prohibition. The non-prohibition described in that sentence is an inference from silence, not an expression by Congress in plain language. The provision which provides the basis for the majority’s conclusion states only what is prohibited, not what is permitted:

The purpose of a Settlement Trust shall be to promote the health, education, and welfare of its beneficiaries and preserve the heritage and culture of Natives. A Settlement Trust shall not –

(A) operate as a business;

(B) alienate land or any interest in land received from the settlor Native Corporation (except if the recipient of the land is the settlor corporation); or

(C) discriminate in favor of a group of individuals composed only or principally of employees, officers, or directors of the settlor Native Corporation. An alienation of land or an interest in land in violation of this paragraph shall be void ab initio and shall not be given effect by any court.

43 U.S.C. § 1629e(b)(1) (emphasis added). The majority reasons that because the statute prohibits trusts that discriminate in favor of employees, officers, and directors, “but does not otherwise prohibit trusts that discriminate in favor of other groups of shareholders[,] this statutory section suggests that ANCSA anticipates that trusts may discriminate in favor of a particular class of shareholders.” Maj. op. at 5872.

This method of reasoning, inferring from the explicit prohibition of one form of discrimination the implicit authorization of all other forms, is a traditional application of the maxim, expressio unius est exclusio alterius. Quoting the maxim is less fashionable than it used to be before Karl Llewellyn’s famous attack. See Karl N. Llewellyn, Remarks on the Theory of Appellate Decision and the Rules or Canons About How Statutes Are to Be Construed, 3 Vand. L. Rev. 395, 401-406 (1950), as reproduced in, Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals App. C, 521-35 (1960). But the logic of the maxim, that listing several specific things implies an intention to exclude others, is the only way to get from a statutory prohibition of some conduct to implied permission for other conduct. This is how the majority gets from the “shall not” in the statute to the majority’s statement that “ANCSA anticipates that trusts may discriminate in favor of a particular class of shareholders.”

The expressio unius analysis is often correct, but not always. It does not make sense here. Anytime a statute contains a list, the question arises whether the list exhausts all the things the legislature intended to permit or prohibit. The inference that a list excludes things not on the list does not relieve us of our duty to make sense of the statute:

Most strongly put, the expressio unius, or inclusio unius principle is that ‘when a statute limits a things to be done in a particular mode, it includes a negative of any other mode.’ Raleigh & Gaston Ry. Co. v. Reid, 80 U.S. (13 Wall.) 269, 270, 20 L. Ed. 570 (1871). This is a rule of interpretation, not a rule of law. The maxim is ‘a product of logic and common sense,’ properly applied only when it makes sense as a matter of legislative purpose. Alcaraz v. Block, 746 F.2d 593, 607-08 (9th Cir. 1984). Like the principle of construing a modifying clause to modify only the closer antecedent, the expressio unius principle describes what we usually mean by a particular manner of expression, but does not prescribe how we must interpret a phrase once written. Understood as a descriptive generalization about language rather than a prescriptive rule of construction, the maxim usefully describes a common syntactical implication. ‘My children are Jonathan, Rebecca and Seth’ means ‘none of my children are Samuel.’ Sometimes there is no negative pregnant: ‘get milk, bread, peanut butter and eggs at the grocery’ probably does not mean ‘do not get ice cream.’

Longview Fibre Co. v. Rasmussen, 980 F.2d 1307, 1312-13 (9th Cir. 1992).

It does not make sense to suppose that Congress meant, by the list in § 2629e(b)(1), to permit any kind of discrimination, except “discrimination in favor of . . . employees, officers or directors.” Consider, by analogy, that Congress in the Americans With Disabilities Act said “no covered entity shall discriminate against a qualified individual with a disability.” 42 U.S.C. § 12112. The ADA does not by that prohibition imply that discrimination by reason of age, sex, and race are permissible. The provision prohibits one kind of discrimination, and leaves it to other federal and state laws to prohibit others. That is the sensible way to read the prohibition in the statute before us.

This makes sense as a Congressional purpose. Congress might have felt that there were special risks to Native corporations that they would be taken advantage of by employees, officers and directors through the Settlement Trust mechanism, unique to Native Corporations, so more protection of shareholders from this device was needed than for ordinary business corporations, but felt that for other risks, state law protections were adequate. One of the virtues of the Alaska Native Claims Settlement Act was the creation of a large number of Alaska Native leaders experienced in business as well as politics, and employment opportunities in towns and villages where there had previously been little work for money wages. But this virtue could become a vice if the corporations were operated for the benefit of their employees, who might not be natives or shareholders, instead of for all the Natives who owned stock and would inherit stock.

Virtually any transfer of corporate assets could be provided for in a resolution which, in its preamble, said that the transfer was to “promote the . . . welfare of its beneficiaries,” and, so long as the recipients were Alaska Natives, to “preserve the heritage and culture of Natives.” Unless someone thinks of a distinction in some future case, the majority holding implies that Congress meant to permit some bizarre transfers of Native corporation assets. For example, a Native corporation might decide that a particular candidate for office was likely to promote the health, education, and welfare of Alaska Natives better than competing candidates, and that Native culture would best be preserved by using a trust to pay $2,000 to each Native who signed an affidavit that he or she had voted for the named candidate. Quite a few Alaska native villages have fewer than 100 people, and many have under 300. See The Alaska Almanac: Facts About Alaska 17th Edition 130-31, 147-53 (Carolyn Smith ed.) (1993). Village Corporations may create settlement trusts under ANCSA. 43 U.S.C. §§ 1602 (defines “Native Corporation” to include “Village Corporation”) & 1629e (permits any Native Corporation to create a settlement trust). Under the majority construction of the statute, a village corporation, a majority of whose shareholders were linked by blood or property to a large extended family, might decide that Native culture was best preserved by funneling the assets through a settlement trust out to their family and not the other families in the village.

The majority says that “judicial review of these trusts will prevent egregious violations of the settlement trust option, such as [these] ‘bizarre transfers.'” But it does not say how. The majority opinion establishes that the federal law preempts state law, and “does not otherwise prohibit trusts that discriminate in favor of other groups of shareholders,” and “trusts may discriminate in favor of a particular class of shareholders.” Maj. op. at 5872. I hope that subsequent panels distinguish the case at bar if “bizarre transfers” through settlement trusts are made, but I do not see a basis, in the majority’s ratio decidendi, for making a distinction.

In any corporation, Native or not, people with more power than others may try to translate their power into money. It is unlikely that Congress meant to deprive Native corporation shareholders of all the protections state corporation law generally gives to shareholders against discriminatory distributions of corporate assets. Yet the hypothetical forms of discrimination described above would not be “in favor of a group of individuals composed only or principally of employees, officers, or directors,” so under the majority holding, any state law prohibiting such discrimination would be preempted. None of this seems likely to have been the intent of Congress, because it does not make any practical sense.

If we are to apply the expressio unius principle to anything, it should be to the statutory provision speaking directly to how to enhance benefits to elders. There is a special provision for issuance of up to 100 additional shares of regional corporation stock to natives who have attained the age of 65:

A Regional Corporation may amend its articles of incorporation to authorize the issuance of additional shares of Settlement Common Stock to –
. . .
(III)  Natives  who  have  attained  the  age  of  65,  for  no consideration or for such consideration and upon such terms and conditions as may be specified in such amendment or in a resolution approved by the board of directors pursuant to authority expressly vested in the board by the amendment. The amendment to the articles of incorporation may specify which class of Settlement Common Stock shall be issued to the various groups of Natives.

43 U.S.C. § 1606(g)(B)(i).

The expressio unius inference, as applied to this section, implies that Congress intended that discrimination in favor of elders would take place only through regional corporations, not village corporations, and exclusively through amendments to the articles of incorporation issuing more stock to elders (which may, in turn, yield more dividends). See 43 U.S.C. § 1606(g)(b)(iv) (common stock issued to elders as the result of a special amendments shall not have rights to certain distributions unless a majority of shareholders specially grant such rights). Accordingly, we could assume that Congress intended to leave in place state prohibitions against other forms of discrimination in favor of elders.

One use of settlement trusts is to preserve native corporation assets from creditors, see 43 U.S.C. § 1629e(c)(5), and from the consequences of accidental corporate dissolution. The statute states the purpose of settlement trusts, “to promote the health, education, and welfare of its beneficiaries and preserve the heritage and culture of Natives.” 43 U.S.C. § 1629e(b). Most corporations cannot operate for such purposes, so excluding discriminatory dividends from the purposes does not strip the statute of practical effect. We need not decide whether the statements in the legislative history, such as that settlement trusts can be used to award scholarships to individuals, are correct. Perhaps such scholarship programs are permissible, so long as the criteria for the scholarship awards are nondiscriminatory. Or perhaps this snippet of legislative history was a consolation prize to someone who did not get what he or she wanted in the statute. We should not assume the answer to one difficult question not before us in order to resolve another.

The majority relies too heavily, in my view, on the “House Explanatory Statement.” Maj. op. at 5874. We should construe the statute, not the legislative history. See Kenneth W. Starr, Observations About the Use of Legislative History, 1987 Duke L.J. 371 (1987). Reliance on legislative history is often the “equivalent of entering a crowded cocktail party and looking over the heads of the guests for one’s friends.” Conroy v. Aniskoff, 507 U.S. 511, 519, 123 L. Ed. 2d 229, 113 S. Ct. 1562 (1993) (Scalia, J. concurring). The majority infers from the statement in the House Explanatory Statement that if scholarships are permissible, then so are birthday presents. A stronger inference would be that if “distributions of trust income may be made on an across-the board basis,” House Explanatory Statement, 133 Cong. Rec. H11,933, (daily ed. Dec. 21, 1987), reprinted in, 1987 U.S.C.C.A.N. 3299, 3308, then they cannot be made on a discriminatory basis.

In sum, the statute says some types of discrimination are prohibited, and also says that Native corporations can provide for issuance of additional shares of stock to elders. The majority reads a negative pregnant into the discrimination section but not the elders section. I do not see why the first inference is any stronger than the second, and see good reason for the contrary view. The majority infers from the statement about scholarships in the legislative history that discriminatory distributions are permitted, but draws no inference that they are prohibited from the “across-the-board” language about distributions in the same paragraph. We must necessarily exercise judgment on difficult questions to decide the extent to which the statute exposes Native shareholders to discriminatory distributions of corporate assets. I believe Congress left in place more of the state law protection generally applicable to corporate shareholders than the majority does.

Skaflestad v. Huna Totem Corp.

I. INTRODUCTION

In keeping with a recommendation by Huna Totem Corporation’s board of directors, the company’s shareholders voted to put a large sum of available funds into a settlement trust. Certain shareholders later filed a class action, alleging that proxy information Huna Totem sent them in creating the trust was materially misleading because it failed to disclose that, once established, the trust could not be modified or terminated by shareholders unless two-thirds of its trustees recommended the action. After a bench trial, the superior court entered judgment for Huna Totem, finding that, although some of its proxy information was incomplete and ambiguous, the totality of the information was not materially misleading. Because the superior court applied the correct test of materiality and the evidence supports its ruling, we affirm the judgment in Huna Totem’s favor.

II. FACTS AND PROCEEDINGS

Huna Totem Corporation is an Alaska Native village corporation organized under the Alaska Native Claims Settlement Act (ANCSA).[1] In 1993 Huna Totem entered into a tax settlement with the IRS that left the corporation with more than $ 35 million in unrestricted cash in 1994. In debating what to do with these funds, Huna Totem’s board of directors grew interested in the idea of establishing a settlement trust, and eventually the board proposed that its shareholders dedicate the settlement funds to a settlement trust.[2]

In May 1994 the board sent shareholders an introductory “Shareholder Information Packet” describing the recent IRS settlement and introducing the idea of a settlement trust. This packet described the proposed trust in general terms, emphasizing that the information it contained was “not by any means a complete discussion of all of the important aspects of the Trust.” In addressing how the trust could be modified or changed once adopted, the packet said only that “at periodic intervals — initially five years after the Trust is established, and then once every ten years thereafter — the beneficiaries could, by vote of a two thirds of all units, choose to distribute some or all of the accumulated income and principal, or to terminate the Trust entirely.” The preliminary packet promised that “shareholders will be hearing and learning more about the Trust in the upcoming months, and will receive additional, detailed information.”

In keeping with this promise, two months later, in July 1994, Huna Totem sent its shareholders a formal proxy solicitation that covered the proposed trust’s review and termination provisions in far greater detail. The solicitation explained that, once established, the trust could be amended or ended by shareholders only if the action was recommended by the trust’s board of trustees:

The accumulated income and Settlement Trust principal generally would not be available to be distributed, except that five years after the Settlement Trust is established, and then once every ten years thereafter — upon a recommendation of two-thirds of the trustees, ratified by a two-thirds vote of the unit holders, some or all of the accumulated income and principal could be distributed or the Settlement Trust could be terminated entirely.

This explanation mirrored the provisions of the proposed settlement trust itself, the full text of which accompanied the July 1994 proxy solicitation as an appendix.

After the corporation mailed the proxy solicitation in late July 1994, members of its board conducted a series of shareholder workshops to discuss the proposed trust. Shareholders then overwhelmingly approved the trust proposal at a special meeting in September 1994, and the trust was established.

The five-year review began in January 2000. Huna Totem solicited shareholder comments and held public meetings in several cities. The corporation also hired a research company to survey shareholders’ opinions on the trust; this “survey showed that a substantial majority of unit holders favored continuation of the Trust, although many wanted some distribution of the trust corpus.” In March 2000 the trustees voted to recommend a “relatively small” partial liquidation of the trust. Shareholders were then sent an information packet and a ballot to vote on this recommendation. They voted to ratify the trustees’ recommendation by a six-to-one ratio. The settlement trust subsequently paid shareholders distributions of $ 50 per share, totaling roughly $ 4.4 million; the rest of the trust assets, about $ 40 million by then, remained in the settlement trust, subject to further review in ten years.

Soon after the board of trustees issued its five-year recommendation, several dissatisfied shareholders filed the class action at issue here, seeking to terminate and invalidate the settlement trust in its entirety because, they alleged, the information provided to shareholders by Huna Totem before the trust was adopted materially misled them concerning their right to vote on the issue of termination. In particular, these shareholders argued that the proxy materials led them to believe that shareholders would have the unqualified right to vote on the trust’s continued existence without regard to any recommendation by the trust’s board of trustees. The shareholders based their claims in large part on the preliminary packet of information provided to shareholders in May 1994, which stated that shareholders “could” vote to review the trust in five years but did not explain that the shareholder vote would be contingent on the trustees’ recommendation. According to the class action shareholders, the confusion generated by these preliminary communications was perpetuated by oral representations made by directors who met with shareholders to answer questions after Huna Totem mailed its formal proxy solicitation in July 1994. Huna Totem denied these allegations, claiming that its proxy materials accurately explained the five-year review process.

After a four-day bench trial, Superior Court Judge Patricia A. Collins ruled in favor of Huna Totem. Although Judge Collins believed that “the actual Proxy Statement is clear and unambiguous,” she found that the “oral statements by directors and the ‘brief’ review of the proposed trust included in shareholder materials distributed prior to the vote were ambiguous in that they omitted information about the role of the trustees in the review process and procedure regarding future shareholder votes to modify or terminate the trust.” But noting that, under Brown v. Ward, Alaska law deems proxy materials to be materially misleading or false only ” ‘if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote,'”[3] the judge found that any information omitted from Huna Totem’s preliminary materials or the directors’ post-solicitation oral communications was not materially misleading in light of “the total mix of information available about the review process.”[4] Furthermore, though emphasizing that she was “not at all convinced that the alleged omissions had any impact on the initial vote to create the trust,” Judge Collins alternatively found that the plaintiffs’ proposed remedies — setting aside the trust, an award of nominal damages, and/or a revote on establishing the trust — would be barred as inequitable “because of the long delay in seeking court intervention” and the significant harm that would inevitably result from ” ‘unscrambling’ the trust at this late date.”

The plaintiffs/shareholders appeal.

III. DISCUSSION

A. Standard of Review

The two central issues in this case — whether the superior court applied the wrong legal test in determining materiality and whether the court erred in failing to find material misstatements under the correct legal standard — primarily present questions of law; but the issue of materiality also implicates issues of fact.[5] We review the trial court’s legal determinations using our independent judgment and review its factual determinations for clear error.[6]

B. Alaska Securities Law

Alaska corporations created under ANCSA are exempt from the federal Securities Act of 1933 and Securities Exchange Act of 1934.[7] To the extent that the shareholders’ claims are not directly governed by ANCSA, then, they are controlled by Alaska law rather than federal securities law.[8] Nevertheless, as we held in Brown v. Ward, interpretations of relevant SEC and federal common law prohibitions against material falsehoods in proxy statements provide a “useful guide” in interpreting similar securities issues arising under state law in ANCSA cases.[9]

The Alaska Securities Act prohibits misrepresentations of material fact in proxy solicitations:

A person may not, in a document filed with the administrator or in a proceeding under this chapter, make or cause to be made an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.[10]

Under this provision, a two-fold analysis applies to misrepresentation issues in proxy solicitation cases, requiring courts to ask, first, whether any statements amounted to misrepresentations and, if so, whether those misrepresentations are material when considered “in the light of the circumstances under which they are made.”[11]

The relevant definition of “misrepresentation,” as set forth in 3 AAC 08.315(a), includes both positive statements and omissions:

[A] statement that, at the time and under the circumstances in which it is made (1) is false or misleading with respect to a material fact; (2) omits a material fact necessary in order to make a statement made in the solicitation not false or misleading; or (3) omits a material fact necessary to correct a statement, in an earlier communication regarding the solicitation of a proxy for the same meeting or subject matter, which has become false or misleading.

Under these provisions, then, statements or omissions qualify as misrepresentations when they are “misleading or false,” and “a misleading or false statement ‘is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.'”[12]

C. Shareholders’ Claims

1. Alleged misapplication of a scienter requirement

The shareholders first assert that the trial court erred by applying the wrong legal standard to their proxy solicitation claims. Specifically, they claim, Judge Collins imposed a scienter requirement and refused to impose liability because she found that management did not intend to deceive the shareholders. Huna Totem does not dispute that it would be improper to require scienter in determining materiality but insists that Judge Collins applied the correct materiality standard and did not require scienter. The record supports Huna Totem’s position.

The shareholders base their scienter argument on several comments in the court’s oral and written rulings in which Judge Collins expressed her view that the legal dispute in the present case was not the result of “bad people or bad motives.” In her oral decision, for example, Judge Collins prefaced a remark about the shareholders’ request for declaratory and injunctive relief with the observation that there was an “absence of fraud and intent to deceive.” When discussing the evidence concerning false and misleading proxy materials in her subsequent written findings, Judge Collins made the same point, stressing that, “as stated in [the] oral findings, the court is convinced that there was no intent by the directors of Huna Totem Corporation to mislead shareholders about the Settlement Trust.”

But as Huna Totem correctly points out, the challenged comments concerning the corporation’s lack of intent or bad faith did not address Judge Collins’s application of the Brown v. Ward materiality test. Rather, when read against the background of the decision as a whole, these comments reflect little more than the court’s desire to mend the relationship between Huna Totem and its shareholders, which the court described as having degenerated into “finger pointing” and “name calling” during the trial. Indeed, in her oral findings, Judge Collins expressly described her remarks on scienter as comments preliminary to her decision:

Before I enter my oral findings, . . . I think it’s important that I make some preliminary observations about the case and about the persons involved in the case. Many disputes come before the court where the parties . . . attempt to portray the opposing party as bad people with bad motives. This case is no different. Those kinds of allegations have been made. I am convinced that this case does not involve bad people or bad motives[.]

And although the court returned to this theme at several points in its oral and written findings, it directed its comments not to the issue of materiality, but to the “tenor of argument and discussion between the [parties].” In contrast, when addressing the issue of materiality, Judge Collins described and applied Brown v. Ward‘s objective “reasonable shareholder” test with pinpoint accuracy, never mentioning or hinting at any consideration of motives or scienter.

The shareholders nonetheless insist that “the court directly linked” its decision against them to their failure to prove scienter. In support of this claim, they point to “one particular sentence” toward the end of the oral findings, in which Judge Collins observed: “Given the absence of fraud and intent to deceive and the other factors I’ve mentioned here today, I believe it would be unfair and unjust to grant the declaratory and injunctive relief sought by the plaintiffs.” But the shareholders overstate the significance of this reference to scienter. For it had nothing to do with the superior court’s application of Brown v. Ward‘s objective materiality test; instead, by its own terms, the comment focused exclusively on Judge Collins’s alternative basis for ruling: as we have described above, the judge’s alternative ruling addressed the remedies requested in the lawsuit, concluding that they would be inappropriate even if the plaintiffs had proved a material misrepresentation. As Judge Collins correctly recognized, the plaintiffs’ request for equitable remedies necessarily raised equitable issues on which scienter had direct bearing. In context, then, Judge Collins’s comment simply confirms her understanding and correct application of Brown v. Ward‘s objective test of materiality. We thus find no merit in the shareholders’ claims that Judge Collins wrongly imposed a scienter requirement in deciding the issue of materiality.

2. Materiality of Huna Totem’s omissions

In addition to claiming that the trial court applied the wrong legal test of materiality, the shareholders maintain that the proxy materials are materially false and misleading under the right standard.

As previously noted,[13] after hearing the testimony at trial and reviewing the various documents shareholders had received regarding the trust, Judge Collins determined that, while some of the documents were ambiguous, their ambiguities were not material. Specifically, Judge Collins found that Huna Totem’s July 1994 proxy solicitation gave shareholders a complete and accurate picture of the periodic review process: “The proxy statement and the full text of the settlement trust that was submitted to the shareholders is neither overly simplified nor unclear.” Given the broad distribution and ready availability of this information, the court concluded, “the total mix of materials submitted to the Huna Totem shareholders was essentially accurate if to some degree overly simplified”; and in the court’s view, any ambiguities or omissions in the May 1994 preliminary information packet or in the directors’ post- solicitation oral presentations were immaterial under Brown v. Ward‘s objective test, which defines a misleading or false statement as ” ‘material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.'”[14]

In propounding a contrary view on appeal, the shareholders concentrate primarily on the incompleteness of the preliminary information distributed in May 1994, insisting that the confusion generated by this information sowed a lasting seed of ambiguity that violated the “clear statement rule” and Huna Totem’s duties of disclosure, completeness and candor; omitted facts “so obviously important” to individual shareholders as to be material as a matter of law; and should therefore be resolved in favor of the shareholders under ordinary rules of contract interpretation.

But the shareholders’ narrow focus on the trial court’s finding of an ambiguity in Huna Totem’s preliminary information impermissibly views that information in isolation, mistakenly disregarding the need to decide the materiality of a particular omission in light of the totality of available information. For as we have already observed, the Alaska Securities Act expressly requires us to determine the materiality of a statement’s omissions contextually, rather than in isolation, by considering whether the statement “omits to state a material fact necessary in order to make the statement made, in the light of the circumstances under which [it is] made, not misleading.”[15] Or as Judge Collins more simply phrased it, the pertinent inquiry here was whether “the total mix of materials submitted to the Huna Totem shareholders was essentially accurate.” (Emphasis added.)

Here, no matter how sketchy the corporation’s initial description of its proposed settlement trust might seem, the uncontroverted facts establish that Huna Totem’s preliminary packet of information was labeled as a “brief introduction” to the proposed settlement trust; it expressly warned the shareholders of its own incompleteness and promised more information to follow. Keeping this promise, Huna Totem delivered the proxy solicitation itself — the most crucial document — which provided each shareholder a complete and accurate summary of the proposed trust’s review process, as well as a copy of the entire settlement trust document.

Applying Brown v. Ward‘s objective test to the total mix of available information, as the securities act requires, we conclude, as Judge Collins did, that a reasonable shareholder considering the information actually provided would not have been likely to find the information omitted from Huna Totem’s preliminary packet and post-solicitation oral communications to be important in deciding how to vote.[16] 

We thus affirm the superior court’s materiality ruling.[17]

3. Appropriateness of shareholders’ proposed remedies

Finally, the shareholders argue that Judge Collins erred in her alternative ruling rejecting as inequitable their proposed remedies of declaratory relief, injunctive relief, and nominal damages. Because the superior court issued its alternative ruling on the assumption that Huna Totem’s proxy materials might ultimately be found to be materially misleading — an eventuality that has not materialized — we need not consider the superior court’s alternative ground for decision.

IV. CONCLUSION

We AFFIRM the superior court’s judgment.

Hotch v. Klukwan, Inc.

MEMORANDUM AND ORDER RE: MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

Defendants Klukwan, Inc. (KLI) and the Trustee Defendants (collectively KLI Defendants) move to dismiss certain of Ms. Hotch’s claims for failing to state a claim for which relief can be granted. Ms. Hotch opposes the KLI Defendants’ motion. The KLI Defendants’ motion is, for the following reasons, GRANTED IN PART and DENIED IN PART.

I. Issues

The KLI Defendants’ motion to dismiss presents four issues:

  1. Whether the court has the legal authority to remove KLI Trust Trustees from office.
  2. Whether the court has the legal authority to reform the KLI Trust instruments to provide that KLI Trust Trustees cannot also be members of the KLI Board of Directors.
  3. Whether the court has the legal authority to terminate the General Income Trust (GIT).
  4. Whether the court has the legal authority to issue an injunction enjoining any further distributions from the GIT.

II. Facts

Ms. Hotch alleges in her Second Amended Complaint, in pertinent part, that:

  1. KLI is an Alaska Native Claims Settlement Act (ANCSA) corporation.
  2. KLI chartered and registered 3 ANCSA Settlement Trusts in 1995: the GIT, LIT,[1] and ET. Klukwan, Inc. funded the Trusts. KLI is the settlor for each Trust. The Trust documents provide that the Trustees of all 3 Trusts are the Directors of KLI.
  3. The individual Defendants were all KLI Trust Trustees and KLI Board members “during the times relevant to this suit.”[2]
  4. The KLI Defendants ”have been looting the three [KLI] Trusts” to provide income for KLI by means of an illegal loan from the GIT to CIV, charging exorbitant fees and collecting advances under the Service Agreements, and using KLI Trust funds to pay for KLI annual meetings.[3]
  5. The GIT Trustees breached their fiduciary duties by approving the CIV loan.[4]
  6. KLI was out of funds by 2005. The KLI Directors (KLI Trusts’ Trustees) devised a scheme to use Service Agreements as vehicle for charging the KLI Trusts exorbitant amounts for managements services performed by KLI employees and to collect from the KLI Trusts $3.6 million in advance payments for services to be performed under the Service Agreements.[5]
  7. The Trustees breached their fiduciary duties by approving the transfers of funds per the Service Agreements, or by not knowing about the transfers.[6]
  8. The Trustees are “looting” the KLI Trusts by improperly having the Trusts pay for KLI’s expenses.[7]
  9. The Trustees interpreted the GIT Trust Agreement as requiring that the principal balance not be below the 1998 level of $28,666,417 until 2009. The Trustees reiterated this policy in 2008, when the balance was approximately $17.5 million by maintaining that there would be no distributions until the balance was returned to $28,666,417 or greater. The Trustees suddenly changed course in 2009 and authorized distributions. The Trustees voted 5-4 on December 2, 2010 to approve a distribution of at least $2.22 million.[8]
  10. The GIT Trustees violated the Alaska Uniform Prudent Investor Act by leaving $2.27 million of the GIT’s funds in a money market account after they decided not proceed with the 2010 beneficiary distribution.[9]
  11. The Trustees violated their fiduciary duties by: not “employing the ordinary safeguards available to them”; withholding information from minority Trustees; and, failing to provide required monthly financial reports to all of the Trustees.[10]
  12. KLI conveyed timberland to the LIT in 2004. KLI illegally amended the conveyance in 2007 so that it retained the right to harvest timber on the conveyed lands. KLI entered into a Timber Agreement with Alcan in 2007 for the harvesting of trees on the conveyed land. KLI has retained the contract payments. KLI unlawfully extended the Timber Agreement. Alcan gave a promissory note in the amount of $875,000 to a KLI subsidiary (K-Ply, Inc.) in 2007. The note was sold to the LIT in 2007 in violation of section 13.2 of the LIT Trust Agreement. The LIT has not received any of the interest paid on the note. The Trustees breached their fiduciary duties by purchasing the note.[11]
  13. The KLI Trusts are improperly indemnifying the individual Defendants by paying attorney’s fees and other costs associated with this case.[12]

Ms. Hotch’s Prayer for Relief in her Second Amended Complaint includes requests that:

  1. The court declare that the individual Defendants have violated their fiduciary duties owed to the KLI Trusts.
  2. The court find that “the LIT’s purchase of the Alcan Note was a violation of fiduciary duties.”
  3. The court find that the Trustee defendants violated their fiduciary duties by improperly receiving indemnification from the KLI Trusts in the form of the KLI Trusts paying their attorney’s fees and costs herein.
  4. The court remove the individual defendants from office as Trustees of the KLI Trusts and prohibit them from ever serving as Trustees of a KLI Trust in the future.
  5. The court reform the KLI Trusts to provide that the Trustees will not also be members of the KLI Board of Directors.
  6. The court require a vote of the KLI Trustees on whether to terminate the GIT and related full disclosure. In the alternative, that the court order the GIT terminated and the balance of its funds distributed to the Beneficiaries.
  7. The court issue an injunction prohibiting the KLI Trusts from making any further disbursements to KLI unless the GIT is terminated per § 7 of the GIT Trust Agreement.
  8. The court find that the individual Defendants are liable for the KLI Trusts’ losses causes by the “defendants” breach of fiduciary duties.
  9. The court award her damages for the “defendants” breaches of “their” duties of disclosure per AS 10.06.450(d).
  10. The court award damages for the losses incurred by the KLI Trusts.
  11. The court award punitive damages to “compensate the plaintiff” for the “defendants” conduct.
  12. The “defendants” be required to pay judgment damages, pre-judgment interest, “plaintiff’s litigation costs,” and attorney’s fees “that are incurred in this action.”
  13. And such other relief as the court determines is just and proper.

III. Discussion

a. Parties’ Positions

The KLI Defendants argue that Ms. Hotch, in requesting that the court remove KLI Trust Trustees from office, reform the KLI Trusts’ Trust Agreements, terminate the GIT and enjoin distributions from the GIT, is seeking relief which the court does not have the legal authority to provide because: the KLI Trusts are not parties; Ms. Hotch has not stated a claim for reformation under AS 13.36.345 or AS 13.36.350; and, in any event, federal law (ANCSA) preempts any authority the court may have under Alaska trust law to provide the relief requested.

Ms. Hotch counters that the KLI Defendants’ motion must be denied because: the motion focuses on her requests for relief and not on her underlying claims; she has sufficiently pled a claim for reformation; ANCSA does not preempt the Alaska Trust Code; and, the court has the authority under AS 10.06.463 to remove Trustee Defendants from their positions Directors of KLI.

b. Law

The court issued a decision on March 30, 2012 which addressed the KLI Defendants’ claim that the KLI Trusts are indispensable parties. The same is incorporated herein by this reference.

Alaska Civil Rule 12(b)(6) provides that a defendant may present by way of motion the defense that the plaintiff has failed to state a claim upon with relief can be granted. “A complaint should not be dismissed [on this basis] ‘unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'”[13]

“[I]t is enough that the complaint set forth allegations of fact consistent with some enforceable cause of action on any possible theory.”[14] The court “must presume all factual allegations of the complaint to be true and [make] all reasonable inferences…in favor of the non-moving party.”[15] “[M]otions to dismiss for failure to state a claim are disfavored and should rarely be granted.”[16]

Alaska Statute 13.36.015(a), in part, provides:

By registering a trust, or accepting the trusteeship of a registered trust, the trustee submits personally to the jurisdiction of the court[17] in any proceeding under AS 13.36.035 relating to the trust that may be initiated by any interested person while the trust remains registered…

Alaska Statute 13.36.035, in part, provides:

(a) The court has exclusive jurisdiction of proceedings initiated by interested parties concerning the internal affairs of trusts, including trusts covered by (c) of this section. Except as provided in (c) and (d) of this section, proceedings that may be maintained under this section are those concerning the administration and distribution of trusts, the declaration of rights, and the determination of other matters involving trustees and beneficiaries of trusts. These include proceedings to

(1) appoint or remove a trustee under AS 13.36.076;

(2) review trustee’s fees and to review and settle interim or final accounts;

(3) ascertain beneficiaries, determine any question arising in the administration or distribution of any trust including questions of construction of trust instruments, instruct trustees, and determine the existence or nonexistence of any immunity, power, privilege, or right; and

(4) release registration of a trust.

(b) Neither registration of a trust nor a proceeding under this section results in continuing supervisory proceedings. The management and distribution of a trust estate, submission of accounts and reports to beneficiaries, payment of trustee’s fees and other obligations of a trust, acceptance and change of trusteeship, and other aspects of the administration of a trust shall proceed expeditiously consistently with the terms of the trust, free of judicial intervention and without order, approval, or other action of any court, subject to the jurisdiction of the court as involved by interested parties or as otherwise exercised as provided by law.

(c) A provision that the laws of this state govern the validity, construction, and administration of the trust and that the trust is subject to the jurisdiction of this state is valid, effective, and conclusive for the trust if

(1) some or all of the trust assets are deposited in this state and are being administered by a qualified person; in this paragraph, “deposited in this state” includes being held by a checking account, time deposit, certificate of deposit, brokerage account, trust company fiduciary account, or other similar account or deposit that is located in this state;

(2) a trustee is a qualified person who is designated as a trustee under the governing instrument or by a court having jurisdiction over the trust;

(3) the powers of the trustee identified under (2) of this subsection include or are limited to

(A) maintaining records for the trust on an exclusive or nonexclusive basis; and

(B) preparing or arranging for the preparation of, on an exclusive basis or a nonexclusive basis, an income tax return that must be filed by the trust; and

(4) part or all of the administration occurs in this state, including physically maintaining trust records in this state.

(d) The validity, construction, and administration of a trust with a state jurisdiction provision are determined by the laws of this state, including the

(1) capacity of the settlor;

(2) powers, obligations, liabilities, and rights of the trustees and the appointment and removal of the trustees under AS 13.36.076; and

(3) existence and extent of powers, conferred or retained, including a trustee’s discretionary powers, the powers retained by a beneficiary of the trust, and the validity of the exercise of a power.

Alaska Statute 13.36.076(a),(b) provide, in part, that:

Removal of trustee. (a) A trustee may be removed from office…

(3) under a procedure specified in the trust instrument;

(4) by a court on petition by the settlor, a co-trustee, a qualified beneficiary, or the court on its own initiative, if

(A) the court finds…a basis for removal under (b)… there is not a trust protector or another specified person who is currently acting and who may contacted by the settlor, trustee, or qualified beneficiary…, and there is not a procedure for removal specified in the trust instrument.

(B) notwithstanding the appointment of a trust protector under AS 13.36.070 or the existence of a procedure for trustee removal specified in the trust instrument, there has been a serious breach of trust as specified in (b)(1) of this section.

(b) A trustee may be removed from office under (a)(4)…if the court finds that removal would be in the best interests of all beneficiaries and,

(1) for (a)(4)(A) or (B)… the trustee has committed a serious breach of trust under the terms of the trust and AS 13.36.070 – 13.36.290; or

(2) for (a)(4)(A) of this section,

(A) a lack of cooperation among co-trustees substantially impairs the administration of the trust;

(B) a trustee is unfit, is unwilling, or persistently fails to administer the trust effectively; or

(C) there has been a substantial change of circumstances not anticipated by the settlor, removal is requested by all of the qualified beneficiaries,[18] the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable co-trustee or successor trustee is available.

Alaska Statute 13.36.095(b) provides: “Subject to AS 13.36.105 – 13.36.220, a trustee is personally liable for obligations arising from ownership or control of property of the trust estate of for torts committed in the course of administration of the trust estate only if personally at fault.”

Alaska Statute 13.36.180(a), (b) provides:

(a) A trustee who has incurred personal liability for a tort committed in the administration of the trust is entitled to exoneration for the liability from the trust property if the trustee has not discharged the claim, or to reimbursement… out of trust funds if the trustee has paid the claim, if the trustee… was not guilty of personal fault in incurring the liability.

(b) If a trustee has incurred personal liability for a tort committed in the administration of the trust and that tort increases the value of the trust property, the trustee is entitled to exoneration or reimbursement to the extent of the increase in value as a result of the tort even though the trustee would not otherwise be entitled to exoneration or reimbursement.

Alaska Statute 13.36.190 provides that: “A trustee may be held personally liable for a tort committed by the trustee… subject to the rights of exoneration or reimbursement under AS 13.36.180.”

Alaska Statute 13.36.198 provides: “If a trustee violates a provision of AS 13.36.105 – 13.36.200, the trustee may be removed as a trustee under AS 13.36.076 and… a beneficiary, co-trustee, or successor trustee may retreat the violation as a breach of trust.”

Alaska Statute 13.36.345(a) provides: “On petition by a trustee, settlor, or beneficiary, a court may modify the administrative or dispositive terms of an irrevocable trust or terminate an irrevocable trust if, because of circumstances not anticipated by the settlor, modification or termination would substantially further the settlor’s purposes in creating the trust.[19]

Alaska Statute 13.36.350 provides:

(a) On petition by a trustee… a court may reform the terms of an irrevocable trust, even if the trust instrument is not ambiguous, to conform to the settlor’s intent if the failure to conform was due to a mistake of fact or law, whether in expression in the trust or inducement to create the trust, and if the settlor’s intent can be established by clear and convincing evidence.

(b) A court may consider evidence including direct evidence contradicting the plain meaning of the text, when determining the settlor’s intent or for any other purpose under this section.

Alaska Statute 13.36.390(1)(B) provides that a “party in interest” for an irrevocable trust means “each trustee serving at the time” and “each beneficiary entitled to receive a mandatory distribution of income or principal from a trust…”

Alaska Statute 10.06.463 provides that:

The superior court may, at the suit of the board or the shareholders holding at least 10 percent… remove from office a director for fraudulent or dishonest act, gross neglect of duty, or gross abuse of authority or discretion with reference to the corporation and may bar from reelection a director removed in that manner for a period prescribed by the court. The corporation shall be made a party to the suit.

The Alaska Supreme Court has stated:

There is a presumption against federal preemption of state law, and preemption doctrine “enjoin[s] seeking out conflicts between state and federal regulation where none clearly exists”…

There are three major types of federal preemption of state law: “express,” “field,” and “conflict” preemption. Express preemption occurs when Congress explicitly declares an intent to preempt state law in a particular area…

Field preemption is the term used when the federal law governing a particular area is so comprehensive and so complete that Congress is said to have completely occupied a field, leaving no room for state law…

Conflict preemption occurs when a state law and a federal law are in conflict, either because compliance with both state and federal law is impossible or because the state law “stands as an obstacle to accomplishment of the full purposes and objectives of Congress.”[20]

The Alaska Supreme Court has also stated:

The law of federal preemption “is derived from the supremacy clause of… the federal Constitution”… Thus, state regulation that conflicts with federal law cannot stand.

To determine whether congress has preempted state action… we “look to the policy, intent, and context of the federal statute to determine whether application of the state law would frustrate operation of the federal one.” Generally, we apply a two-step analysis to preemption questions. First, we look to see whether Congress has overtly preempted the subject matter the state wishes to regulate, either explicitly, by declaring its intent to preempt all state authority, or implicitly, by occupying the entire field of regulation on the subject in question. Second, if neither kind of direct preemption is found, we look to whether federal and state law conflict in this particular instance. If state and federal regulations openly conflict of if state regulations obstruct the purpose of federal regulations, then the supremacy clause blocks the state regulation.[21]

43 U.S.C. 1629e provides, in part:

(a) Conveyance of corporate assets

(1)(A) A Native Corporation may convey assets… to a Settlement Trust in accordance with the laws of the State (except to the extent that such laws are inconsistent with this section and section 1629b of this title).

...

(b) Authority and limitations of a Settlement Trust

(1) The purpose of a Settlement Trust shall be to promote the health, education, and welfare of its beneficiaries and preserve the heritage and culture of Natives. A Settlement Trust shall not —

(A) operate as a business;

(B) alienate land or any interest in land received from the Settlor Native Corporation (except if the recipient of the land is the settlor corporation…); or

(C) discriminate in favor of a group of individuals composed only or principally of employees, officers, or director of the settlor Native Corporation. An alienation of land or an interest of land in violation of this paragraph shall be void ab initio and shall not be given effect by any court.

(2) A Native Corporation that has established a Settlement Trust shall have exclusive authority to —

(A) appoint the trustees of the trust; and

(B) remove the trustees of the trust for cause.

Only a natural person shall be appointed a trustee of a Settlement Trust. An appointment or removal of a trustee in violation of this paragraph should be void ab initio and shall not be given effect by any court.

The legislative history for 43 U.S.C. 1629e provides, in part:

The Settlement Trust section is intended to enable Native Corporations to convey assets to Settlement Trusts in which the assets may be better manage for the benefit of Alaska Natives. The provision is in recognition of the fact the corporate form of ownership, as mandated by the Act, has not always served the best interests of the Alaska Natives, and that in many cases the purposes of the Act may be carried out better by allowing Alaska Natives to alter their form of ownership.

Settlement Trusts are expected to serve two principal functions. They are intended to be permanent, Native-oriented institutions which shall hold and manage, in perpetuity, any historic or culturally significant surface lands… for the benefit of the beneficiary populations. It shall manage any other surface lands conveyed or culturally significant assets in like fashion. The Trusts will require income generated from assets conveyed to it, or other sources, to carry out these responsibilities.

The other prime function relates to the health, education and economic welfare of its beneficiaries. Trusts may receive conveyances… or other assets which it must manage prudently, and passively, in the interests of its beneficiaries, and in conformance with the terms and conditions set forth in the trust instrument and this Act…  

Subsection (b)(1) establishes certain requirements and characteristics of the Settlement Trust. By doing so, Congress expressly intends to preempt State law with regard to these elements of Settlement Trusts. By requiring that these trusts be registered with the State of Alaska, Congress seeks to establish that the laws of the State of Alaska, rather than any other State, apply and that the State is the proper venue and jurisdiction. Congress does not, however, intend to prohibit diversity jurisdiction in the federal courts.

While setting forth Settlement Trust characteristics, Congress intentionally left discretion to the Native Corporations to formulate and state the terms and conditions governing the Trust through the trust instrument, consistent with the provisions of this Act and State law. Specifically, the settler Native corporation shall have the authority to set forth the terms and conditions contained in the trust instrument, including but not limited to the employment of agents and professionals, investment standards, bonding requirements, indemnities, accumulations, distributions, or restrictions on alienation of beneficial interests. State courts will retain their traditional authority to determine question as to trust validity, administration, and construction. Enforcement of trust terms, application of prudent man requirements, and other conventional trust oversight functions will remain within the purview of State courts, to the extent they would be governed by those courts under existing law.[22]

The Alaska Supreme Court has not addressed the extent to which the Settlement Trust provisions of ANCSA preempt Alaska trust law.

The 9th Circuit Court of Appeals in Broad v. Sealaska Corp.[23] held that the provision in 43 U.S.C. § 1629e prohibiting Settlement Trusts from engaging in certain types of discrimination preempted application of provisions of the Alaska corporation code which prohibited other types of discrimination. The Court found that:

According to its plain language, then, ANCSA prohibits settlement trusts that discriminate in favor of corporate insiders, but does not otherwise prohibit trusts that discriminate in favor of other groups of shareholders. This statutory section suggests that ANCSA anticipates that trusts may discriminate in favor of this particular class of shareholders. As a result, a state law that prohibits discriminatory trusts conflicts with ANCSA. When federal and state laws actually conflict, the state law is preempted.[24]

The Court also noted that: “Finally, ANCSA specifies that Alaska state law govern settlement trusts in many instances, insofar as state laws do not conflict with ANCSA. For example, Alaska trust law governs the creation and managements of the trust…”[25]

c. Decision

1. Removal of Trustee Defendants

The KLI Defendants’ motion to dismiss is denied with respect to Hotch’s request that the court remove the present Defendant Trustees from office for three reasons.

First, applying the Alaska Civil Rule 12(b)(6) standards, Ms. Hotch has stated a claim for which relief can be granted if Alaska law is not preempted by federal law.[26] Alaska trust law (AS 13.36.035(a)(1), AS 13.36.076) authorizes a court to remove a trustee under certain limited circumstances. Ms. Hotch has pled, and conceivably could prove, a set of facts that would warrant a removal order.

Second, ANCSA has not preempted the related Alaska trust law. Congress did not expressly preempt Alaska trust law with respect to the removal of ANCSA Settlement Trust trustees. Congress has not entirely occupied the field. To the contrary, Congress intended that State trust law, in many circumstances, would apply to ANCSA Settlement Trusts. Alaska trust law does not impermissibly conflict with 43 U.S.C. § 1629e(b)(2)(A),(B). It is presumed that Congress did not intend to preempt Alaska law. The related legislative history specifically states that Congress intended preemption with respect to the “Authority and Limitations of a Settlement Trust” provisions set forth in 43 U.S.C. § 1629e(b)(1). The legislative history does not reference preemption with respect to 43 U.S.C. § 1629e(b)(2). The legislative history does reflect that Congress intended that Alaska courts would otherwise “retain their traditional authority to determine questions[s] as to trust…administration…”

43 U.S.C. § 1629e(b)(2)(A),(B), read in context, provides that ANCSA corporation settlors retain the exclusive authority[27] to appoint and remove ANCSA Settlement Trust trustees until a need arises for state court intervention under the narrow circumstances authorized by the Alaska Trust Code. So compliance with both federal and state law is not impossible and Alaska law does not stand as an obstacle to the accomplishment of the full purposes and objectives of Congress.[28]

Third, per the court’s March 30, 2012 decision, the KLI Trusts are not indispensable parties.

2. Reform KLI Trust Agreements

The KLI Defendants’ motion is granted with respect to Ms. Hotch’s claim for relief in the form of the court reforming the KLI Trusts’ trust instruments to provide that the KLI Trust Beneficiaries will henceforth elect the KLI Trust Trustees and that the Trustees cannot also be members of the KLI Board of Directors.

The court has the authority in limited circumstances under Alaska law to order such relief per AS 13.36.345(a) and AS 13.36.050.

But the Alaska trust law on this point is preempted by federal law. 43 U.S.C. § 1629e(b)(2)(A),(B) specifically provides that the ANCSA corporation settlor shall have the “exclusive authority” to appoint Settlement Trust trustees. The court has determined above that this “exclusive authority” does not conflict with Alaska trust law with respect to the removal of a Settlement Trust trustee. But that ruling does not involve reforming Settlement Trust instruments to provide for a permanent change in the method of selecting Settlement Trust trustees in a manner which directly conflicts with federal law. It would be impossible to comply both with the federal law (43 U.S.C. § 1629e(b)(2)(A), appointment to be made by the ANCSA corporation settlor, KLI) and Alaska trust law as embodied in a court order granting Ms. Hotch this relief (appointment to be made by the KLI Trust beneficiaries).[29] This same rationale would also prevent the court from issuing an order that any Trustee Defendant removed by the court could not be re-elected or re-appointed by KLI.

3. Terminate GIT/ET

The KLI Defendants’ motion is denied with respect to Ms. Hotch’s claim for relief that the court require the GIT Trustees to vote on terminating the GIT, and the court itself terminating the GIT if the Trustees do not vote to do so, for four reasons. First, the court has the authority under AS 13.36.045(a) to grant the relief requested in very limited circumstances. Second, Ms. Hotch could conceivably prove a set of facts which would support the court finding that this is the very rare case in which such relief is warranted. Third, ANCSA does not preempt Alaska law on this point. This involves a matter of trust management and/or validity which ANCSA provides is the subject of Alaska trust law. Congress has not expressly preempted this area of Alaska law, it has expressly not occupied this field, and there is no conflict between ANCSA and Alaska law in this regard. Fourth, the KLI Trusts are not indispensable parties.

4. Enjoin GIT Distributions

The KLI Defendants’ motion is denied with respect to Ms. Hotch’s claim for relief that the court enjoin distributions from the GIT until it is terminated for the same four reasons stated above with respect to her termination claim for relief.

IV. Conclusion

The KLI Defendants’ Civil Rule 12(b)(6) motion is granted with respect to Ms. Hotch’s claims for relief that: the court modify the KLI Trusts’ beneficiaries: and, the Trustees cannot also be members of the KLI Board of Directors. And the motion is granted with respect to Ms. Hotch’s claim for relief that the court order that any Trustee Defendant removed from office by the court could not subsequently be reappointed (elected) by KLI. The remainder of the KLI Defendants’ motion is denied.

The court recognizes that a court order removing one or more Trustee Defendants from office may be a hollow remedy as federal law provides that it is KLI who appoints the KLI Trust Trustees and KLI has provided that the KLI Trust Trustees are the KLI Board of Directors, which such a Trustee presumably would continue to be, which would, in essence, result in automatic reappointment.[30]

IT IS SO ORDERED.

Dated at Ketchikan, Alaska this 17th day of April 2012.

Trevor N. Stephens, Superior Court Judge