Smith v. Grand Canyon Expeditions Co.

Citations: 2003 UT 57; 84 P.3d 1154; 489 Utah Adv. Rep. 3; 2003 Utah LEXIS 137; 2003 WL 22950137Docket: 20010667

Court: Utah Supreme Court; December 16, 2003; Utah; State Supreme Court

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The case involves Marc Smith's appeal regarding the termination of his employment and the financial settlement from Grand Canyon Expeditions Company concerning his stock buyout. The Supreme Court of Utah reviewed the trial court's rulings on Smith's motion to amend his complaint and Grand Canyon's summary judgment motions. The court affirmed the trial court's decisions on most points, but reversed its refusal to dismiss the individual defendants, remanding for their dismissal.

Smith, previously employed by Grand Canyon Expeditions, Inc. before its sale and rebranding, continued with the new entity as vice president and shareholder. His employment terms were defined in an agreement that included a buy-sell provision for his stock. After six years, Smith was asked to resign amid contentious circumstances, leading to a negotiated separation agreement that outlined his resignation, stock valuation, severance pay, and a waiver of the non-compete clause.

Despite the separation agreement, conflict persisted. Years later, Grand Canyon received a substantial tax refund related to the state of Arizona's unlawful tax collection, which included amounts paid during Smith's tenure. This refund was not disclosed in the separation agreement, complicating the financial dynamics post-employment.

Mr. Smith initiated legal action against Grand Canyon and its principals, alleging breach of his employment contract due to his termination and a breach of the implied covenant of good faith and fair dealing. He contended that Grand Canyon undervalued his stock buyout and excluded the Arizona tax refund from the net book value. Smith attempted to amend his complaint to recover part of the tax refund based on unjust enrichment, but this was unsuccessful. 

In response, Grand Canyon filed multiple motions for summary judgment, leading to the trial court's rulings: (1) dismissal of Smith's breach of contract claim regarding his termination, citing accord and satisfaction; (2) dismissal of claims related to the stock valuation; (3) preservation of the claim concerning the Arizona tax refund; (4) dismissal of punitive damages claims; (5) dismissal of claims for attorney fees; and (6) denial of Smith's motion to amend his complaint for unjust enrichment. 

In the subsequent interlocutory appeal, the court reviewed these rulings, particularly focusing on the accord and satisfaction defense raised by Grand Canyon. Smith challenged the procedural grounds, arguing that Grand Canyon failed to properly plead this defense. However, the court found that Smith had adequate notice of the defense, and thus the trial court was correct in considering it. 

The court then examined the elements of accord and satisfaction, which require (1) a bona fide dispute over an unliquidated amount, (2) a payment made in full settlement of the entire dispute, and (3) acceptance of that payment. Smith contested the establishment of these elements, but the court disagreed, indicating that the record supported the trial court's decision to dismiss Smith's wrongful discharge claims.

Mr. Smith challenges the trial court's finding of a bona fide dispute regarding an unliquidated claim at the time the separation agreement was executed. His acknowledgment of potential concerns about his employment termination satisfies the bona fide dispute requirement for accord and satisfaction. The dispute over his employment contract with Grand Canyon involved uncertain economic consequences, qualifying as a good-faith disagreement under the first element of accord and satisfaction. 

The separation agreement clearly states that the severance pay and release from the non-compete covenant served as full settlement of the employment dispute, as it explicitly prohibits any additional claims related to the employment agreement's breach. Mr. Smith has not provided evidence indicating the parties intended for any claims to survive the agreement. 

It is uncontested that Mr. Smith accepted the severance pay and benefited from the release from the non-compete clause, fulfilling all three criteria for accord and satisfaction, justifying the trial court's dismissal of his breach of contract claims.

Regarding Mr. Smith's stock valuation claims, the trial court did not extend its accord and satisfaction analysis to this issue but found no material facts in dispute concerning the alleged breach of the implied covenant of good faith and fair dealing in the buy-sell agreement. Grand Canyon held the right to purchase Mr. Smith's stock based on its net book value, determined by an accountant per generally accepted accounting principles (GAAP), which was deemed conclusive.

Mr. Smith argues that the company’s value was artificially low due to the accounting practices used, which, while compliant with GAAP, did not reflect the reasonable expectations of the parties. He contends that the buy-sell agreement granted Grand Canyon discretion in determining net book value and that it abused this discretion, violating the implied covenant of good faith and fair dealing, which requires parties to act reasonably when exercising discretion in a contract.

The implied covenant of good faith and fair dealing is inalienable, but its applicability hinges on how clearly the parties have defined their expectations and limitations within the contract. In this case, Mr. Smith and Grand Canyon explicitly identified "net book value" as the valuation standard for Mr. Smith's stock, which necessitated several implied terms regarding the assessment process. However, they concretely established this by delegating the valuation to the company's accountant and mandating adherence to Generally Accepted Accounting Principles (GAAP), thereby greatly limiting the role of implied terms.

The trial court noted that GAAP's flexibility does not automatically confirm compliance with the covenant of good faith and fair dealing, indicating that the covenant should not extend beyond the contract's explicit terms. Since the contract clearly defined the discretionary performance aspects, the implied covenant's relevance was minimized. The trial court found that Mr. Smith's expert testified that the accountant's practices, though "aggressive," remained within GAAP parameters. No disagreements regarding material facts were raised on appeal concerning the accounting practices, leading to the conclusion that Grand Canyon did not breach its implied covenant.

Additionally, Grand Canyon appealed two rulings related to Mr. Smith's Arizona tax refund claims. The first challenge was against the admission of Mr. Smith's accounting expert, Derk Rasmussen, who asserted that Grand Canyon’s treatment of the tax refund as anything other than a "prior period adjustment" violated GAAP. This opinion is crucial to determining if there was a breach of the implied covenant regarding the tax refund under their buy-sell agreement. The second argument from Grand Canyon contended that the implied covenant was nullified upon the contract's termination, a point that will be addressed subsequently.

Mr. Rasmussen's expert testimony was upheld by the trial court, which Grand Canyon challenged as flawed based solely on its own expert's opinion. Grand Canyon did not dispute Mr. Rasmussen's qualifications or the novelty of his expertise, arguing instead that his assessment of their accounting practices was unreliable under Utah's Rule 702 of Evidence. The court clarified that disputes over competing opinions in established fields should be resolved by the trier of fact, and found no abuse of discretion in accepting Mr. Rasmussen's testimony regarding the accounting treatment of the Arizona tax refund.

In another matter, Grand Canyon contested the trial court's refusal to dismiss Mr. Smith's claim of breaching the implied covenant of good faith and fair dealing related to the Arizona tax refund. Grand Canyon argued that this covenant was extinguished once it fulfilled its obligations under the buy-sell agreement, citing a court of appeals decision. However, the court noted that determining whether a contract has terminated often involves significant factual inquiry, particularly in cases where performance is claimed as a form of termination. Since Grand Canyon had not completed payments to Mr. Smith when it received the tax refund, the court ruled against concluding, as a matter of law, that Mr. Smith's contractual relationship had ended, and thus the implied covenant still applied. The court affirmed the trial court's denial of summary judgment on this issue and also upheld Mr. Rasmussen's opinion testimony regarding the refund's accounting treatment.

Mr. Smith's claim for punitive damages was dismissed by the trial court, a decision affirmed on appeal. The court ruled that punitive damages are only recoverable for torts, not for contract breaches, citing case law. Mr. Smith did not plead any tort claims in his original complaint, only vague allegations of misconduct related to his termination, which were deemed insufficient for a tort claim. Thus, the court confirmed the dismissal based on the contract nature of the issues.

Similarly, the court affirmed the dismissal of Mr. Smith's claim for attorney fees. The trial court correctly noted that attorney fees can only be recovered if permitted by statute or contract, and Mr. Smith's request did not meet these criteria or fall within any established exceptions.

Mr. Smith's motion to amend his complaint to add a claim for unjust enrichment was also denied. The court emphasized that the trial court has broad discretion in allowing amendments and will not be overturned unless there is an abuse of discretion. While Utah's rules favor liberal amendment, this is limited by the trial judge's assessment of the case. Mr. Smith's request to amend for the third time was based on Grand Canyon's alleged failure to share an Arizona tax refund, but the court noted that a legally insufficient or futile claim cannot be added.

The allegation of unjust enrichment fails to meet the necessary legal standards, which require proof of (1) a benefit conferred on one party by another, (2) the conferee's knowledge or appreciation of the benefit, and (3) circumstances making it inequitable for the conferee to retain the benefit without compensation. In this case, the benefit was conferred by the state of Arizona, not by Smith, rendering the unjust enrichment claim legally insufficient. Consequently, the trial court's denial of Smith's motion to amend his complaint was appropriate.

Regarding the alter ego claims against individual defendants, Grand Canyon argues that these individuals were not parties to any contract with Smith, thus lacking individual liability. However, the trial court found sufficient factual issues related to Grand Canyon's corporate structure to warrant further examination. The corporate form can be disregarded if there is a unity of interest and ownership, suggesting that observing the corporate form would result in fraud or an inequitable outcome. The trial court noted that the corporate structure was a closely held 'S' corporation, with most refund monies distributed to a small group of shareholders.

While the trial court's observation about the lawful nature of 'S' corporations is accurate, it does not imply impropriety or inequity relevant to an alter ego analysis. Therefore, the higher court reverses the trial court's decision concerning the dismissal of individual defendants and remands for action consistent with this opinion, while affirming the trial court's decisions on all other issues. Chief Justice Durham and other justices concurred with Justice Nehring's opinion. Justice Russon did not participate, and District Judge Ronald E. Nehring sat in his place.