In re: Case No. J99-01111-DMD

KAKE TRIBAL CORPORATION,

Debtor.

SITUK ADAMS,

Plaintiff and Counterclaim Defendant,

KAKE TRIBAL CORPORATION,

Defendant and Counterclaimant.

Bancap No. 01-90064

Adversary No. J01-90064-DMD

Chapter 11

This action for negligence and wrongful discharge came before the court for trial on August 8 and 9, 2002, in Juneau. It is a core proceeding under 28 U.S.C. § 157(b)(2)(B). This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the district court’s order of reference. After deducting all setoffs on account of the defendant’s counterclaim, I find for the plaintiff in the sum of $58,800.34. Adams is also entitled to recover attorneys' fees in accordance with Alaska Civil Rule 82 and costs of suit. He will have ten days from the date of the entry of this memorandum and an accompanying order to file a motion for such fees and costs.

Situk Adams is a shareholder in Kake Tribal Corporation. Kake Tribal Corporation, organized under the Alaska Native Claims Settlement Act, ¹

filed for chapter 11 relief on October 9, 1999. While Kake was in chapter 11, its shop building in Kake, Alaska was consumed by fire on March 7, 2000. After the fire, the shop was rebuilt and continued to be used for maintenance and repair of vehicles and equipment.

Adams was shop foreman at the facility. He owned a substantial number of Snap-On tools which he kept at the shop. The tools were used by Adams and other employees at the shop in the course of their work as mechanics. His tools were in the shop at the time of the fire. Adams filed a lawsuit in state court on August 31, 2001, seeking damages from Kake for the destruction of his tools in the fire. Kake removed the action to this court.

On November 15, 2001, Adams filed a limited objection to confirmation of Kake’s amended plan of reorganization. At the combined disclosure statement/confirmation hearing held on November 19, 2001, Adams also raised his objection to confirmation. He wanted Kake to escrow sufficient funds on confirmation to pay his claim, which he alleged had priority as an administrative expense, in full. A hearing to determine whether funds should be escrowed on account of Adams’ claim was held on December 6 and 7, 2001. Adams gave testimony at this hearing regarding his contention that Kake’s negligence had caused the fire. Seven days later, on December 14, 2001, Kake advised Adams that the shop was being closed. He was discharged on December 21, 2001. Adams’ limited objection to confirmation of plan

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was overruled by an order issued December 28, 2001. The shop was reopened in early January, 2002. Two of Adams’ coworkers were rehired. Adams did not apply for his former position.

Kake’s amended plan of reorganization was confirmed February 19, 2002. On March 5, 2002, Adams moved to amend his complaint in this adversary proceeding to add a count for wrongful discharge. Leave to amend was granted on April 2, 2002. Kake’s answer to the amended complaint included a counterclaim for $10,000.00 against Adams for amounts due Kake for the purchase of a housing trailer. Both parties agree Adams may setoff approximately $7,000.00 in unreimbursed medical expenses against this obligation, leaving a balance of $3,000.00 owed to Kake.

Kake alleges that Adams’ complaint must be dismissed because he has failed to name the proper defendant. Kake says Adams was an employee of Kake Tribal Logging and Timber, Inc. (“KTL&T”), a wholly owned subsidiary of Kake Tribal Corporation. Any harm Adams suffered, Kake maintains, should be borne by the subsidiary which is not a party to this litigation. While a parent corporation generally is not liable for the wrongs of its wholly owned subsidiary, an exception to this rule exists where the subsidiary is a “mere instrumentality” of the parent. ²

The Alaska Supreme Court has identified 11 factors that determine whether a subsidiary is acting as a mere instrumentality of its parent. These include:

(a)The parent corporation owns all or most of the capital stock of the subsidiary.

(d)The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

(f)The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g)The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to it by the parent corporation.

(h)In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own.

(j)The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest.

It is not necessary, of course, that all eleven of these factors be found in order to conclude that the subsidiary is the mere instrumentality of its parent. A parent corporation which does not permit its subsidiary to exercise an

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individual status may not expect that the subsidiary’s independence will be recognized elsewhere. ³

Application of these factors in this case leads me to conclude that Kake Tribal Corporation and KTL&T are so closely intertwined that they should not be treated as separate entities. First, Kake owns all the stock of KTL&T, and caused it to be incorporated in 1981. Second, Kake and KTL&T have common officers and directors. Samuel Jackson is the president and CEO of Kake as well as the president of KTL&T. There are five directors of KTL&T, who also serve as directors of Kake.

Next, the evidence in this case and the financial records filed in Kake’s main bankruptcy case reflect that Kake has been financing KTL&T’s operations. Sam Jackson testified that, at the time he took over as Kake’s chief financial officer, KTL&T was about $1 million “in the hole.” Written memos Jackson prepared dealing with the KTL&T shop indicated that Kake was financing this venture. On December 5, 2001, Jackson wrote a memo to Adams requiring pre-approval of all repair shop credit, “[d]ue to the limited cash flow of Kake Tribal Corporation during these slow winter months.” ⁴

In a memo about closing the shop, Jackson wrote that “Kake Tribal Corporation cannot continue to absorb the costs of this program.” ⁵

Jackson testified at trial that, ultimately, the losses from the auto repair shop were being borne by Kake.

The monthly financial reports filed in Kake’s main bankruptcy case also reflect that Kake was financing KTL&T. ⁶

The cash receipts and disbursements information

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found in these financial reports indicate that Kake paid KTL&T nearly $1,000,000.00 between September of 1999 and February, 2002, but received only $350,000.00 in payments from KTL&T or joint ventures engaged in timber operations during the same time period. Kake made 44 transfers, totaling $328,617.11, to KTL&T’s payroll account between September 1, 1999, and February 15, 2002. KTL&T was financed by Kake during the course of the chapter 11 proceeding.

The financial records filed in Kake’s main bankruptcy case also reflect that KTL&T was grossly undercapitalized. Kake’s initial balance sheet of September 30, 1999, listed $1,982,809.31 “[d]ue from Kake Tribal Logging,” as an asset. ⁷

Kake’s initial bankruptcy schedules were not consistent with this number, however. On Schedule B, Kake indicated that “affiliate Kake Tribal Logging & Timber, Inc.” owed it but $244,258.31, and listed the value of KTL&T’s stock as zero. ⁸

Subsequent monthly balance sheets reflected that KTL&T owed Kake $2.2 million. ⁹

On Kake’s September 30, 2000, balance sheet this sum mysteriously decreased to $645,756.34 without explanation. ¹⁰

It declined further, to $228,401.77, on the May 31, 2001, balance sheet, ¹¹

and then increased slightly to $290,401.77 on the June 30, 2001,

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balance sheet. ¹²

It was eliminated from succeeding statements altogether, ¹³

until it reappeared in the January, 2002, balance sheet as a receivable due from Kake Timber in the sum of $300,990.88. ¹⁴

KTL&T also owed substantial amounts to other creditors. Kake’s original “List of Creditors Holding 20 Largest Unsecured Claims,” listed ten unsecured creditors of KTL&T, whose claims exceeded $532,000.00. ¹⁵

A September 30, 2000, Supplementary Consolidating Balance Sheet revealed that KTL&T had $170,000.00 in current assets, nearly $2,000,000.00 in current liabilities and a negative shareholder’s equity of $1,246,000.00. ¹⁶

When Kake received $5,000,000.00 from the United States Forest Service in May of 2001, it “loaned” $255,687.00 to KTL&T to keep it in operation. ¹⁷

Unquestionably, KTL&T was grossly undercapitalized in 1999 and 2000.

On a “Summary of Balance Sheet and Income Statement for partial year ending July 31, 2001,” Kake indicates that KTL&T had a positive equity of $1,163,940.00 on its balance sheet with net income of $1.23 million. ¹⁸

The same statement indicates

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that KTL&T’s current liabilities exceeded current assets by over $160,000.00, however. Just 6 months later, Kake filed a liquidation analysis that indicated it had “[n]o equity in sub’s assets; subs lack ability to repay full debt owed to parent.” ¹⁹

The analysis concludes that $100,000.00 could be realized in the hypothetical liquidation of KTL&T in January 2002. The weight of the evidence supports the conclusion that KTL&T was grossly undercapitalized at the time Kake filed its petition, and throughout the pendency of Kake’s bankruptcy case.

There is also evidence that Kake paid the salaries and other expenses of KTL&T. Situk Adams produced pay stubs which showed he was paid from Kake’s payroll account in 1996, 1997, 1998 and 1999. ²⁰

His 1999 W-2, however, indicated that his employer was KTL&T. ²¹

He also received W-2s from KTL&T for 2000, and 2001. ²²

While no pay stubs were produced that showed Adams had received wages directly from Kake during 2000 and 2001, Kake was nonetheless funding KTL&T’s payroll. Its monthly financial reports, as indicated above, reflect that it transferred $328,617.11 to KTL&T’s payroll account between September 1, 1999, and February 15, 2002. In fact, the financial reports indicated that Kake paid KTL&T almost $1million during this time period. Further, Jackson indicated in written memoranda and his trial testimony that Kake was ultimately responsible for financing the KTL&T shop. Kake was paying KTL&T’s salaries and expenses.

The next factor to consider in determining whether to pierce the corporate veil is whether the subsidiary had business and assets outside of what was conveyed to it by the parent. KTL&T had business with entities other than Kake. It formed joint ventures for logging with Whitestone Logging and others. It also incurred substantial liabilities to outside creditors. KTL&T appears to have had substantial assets in the form of equipment, but that equipment had been fully depreciated. Conversely, the KTL&T shop was being operated in a building owned by Kake, but KTL&T did not have a lease for use of the premises. Kake’s Schedule B reflected that KTL&T used several of its vehicles. ²³

While KTL&T did have assets of its own, it relied heavily on Kake’s assets for the conduct of its business.

Another factor to examine is whether the parent corporation describes the subsidiary as a department or division rather than an independent subsidiary, or refers to the subsidiary’s business as its own. There is extensive evidence showing that KTL&T was frequently described as a department or division of Kake. Kake’s initial bankruptcy petition included KTL&T as a division of Kake, and its first list of the 20 largest unsecured claims included eight creditors of KTL&T. ²⁴

Although Kake’s petition was subsequently amended to delete KTL&T, there are several other instances where Kake referred to KTL&T as a department or division. The many cash transfers between KTL&T, its joint ventures, and Kake are described as “intercompany transfers” one hundred and twenty times in the monthly cash receipt and disbursement reports filed in Kake’s bankruptcy case from September, 1999, through February, 2002.

A form entitled “Approval of Change of Position/Change of Pay,” dated May 31, 2001, evidencing a raise and promotion for Situk Adams as employee of the “KTL&T Auto & Marine Repair” shop is on a Kake Tribal Corporation form and refers to KTL&T as a “department” of Kake. ²⁵

In a memorandum of the same date to Kake’s payroll department, Jackson stated, “The KTC Board of Directors approved a recommendation from the Logging Committee at the May 22nd Board Meeting to turn over all management of the KTL&T shop repair program to Situk Adams.” ²⁶

The layoff notices given to each of the shop employees in December, 2001, were on a printed form entitled “Kake Tribal Logging & Timber Division – Employee Layoff/Termination Notice.” ²⁷

There are other indications that the line between parent and subsidiary was often blurred. For example, a letter dated October 25, 2001, to Kake’s attorney from Alaska National Insurance Company, states:

We understand that plaintiff was an employee of KTC who worked at KTC’s location at 101 Main Street in Kake, which is a maintenance facility for KTC’s vehicles and heavy equipment. Plaintiff’s job was to service, maintain and repair these vehicles. Plaintiff alleges that in his position as a shop foreman he was required to use his own tools in performing work for KTC as did other KTC employees in the shop. These tools were stored in a maintenance facility owned by KTC. These facts were confirmed by KTC. ²⁸

In sum, Kake routinely described and treated KTL&T as a department or division, rather than an independent subsidiary.

There is little evidence to indicate that the parent corporation used the property of KTL&T as its own. Kake’s monthly financial reports do reflect, however, that it received almost $350,000.00 from KTL&T or joint ventures in which KTL&T was involved, between September, 1999, and February, 2002.

The next factor to consider is whether the directors and executives of the subsidiary acted independently in the interests of the subsidiary. Here, there is little evidence to show such independent action. There really were no active, independent executives of the subsidiary. Sam Jackson was president of KTL&T, but the memoranda he wrote pertaining to decisions involving the KTL&T shop were signed by him as “president and CEO” of Kake. ²⁹

Duff Mitchell was the chief operating officer of Kake; he was never an officer of KTL&T. He testified, however, that he “overlapped” with KTL&T by helping it finance equipment, negotiate contracts and oversee banking operations and making sure it had enough to make payroll. There is no evidence to show KTL&T had independent management. Rather, the officers of Kake ran the subsidiary as one of its divisions.

The final criteria to examine is whether the formal legal requirements of the subsidiary are observed. Aside from the fact of its actual incorporation, no evidence regarding KTL&T’s observance of formal legal requirements has been submitted. However, not all of the factors listed in Jackson must be found in order to determine

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whether a subsidiary is the mere instrumentality of its parent. ³⁰

After reviewing the totality of the evidence, I find that the majority of the factors weigh in favor of piercing the corporate veil in this case. I conclude that KTL&T was a mere instrumentality of Kake. In light of this conclusion, Adams has named the proper party as a defendant to this suit, and his negligence claim can be resolved on the merits. ³¹

Damages arising from torts committed by the debtor while a chapter 11 case is in progress are generally administrative expenses which must be paid in full. ³²

Adams’ first claim alleges that Kake has breached its duty to conserve and protect property by failing to maintain insurance on the shop and its contents during the course of its chapter 11 proceeding.

A bankruptcy trustee or chapter 11 debtor in possession has a fiduciary obligation to each creditor of the estate. ³³

He has a duty to “exercise that measure of care and diligence that an ordinarily prudent person would exercise under similar circumstances.” ³⁴

In my view, an ordinarily prudent property and business owner would maintain fire insurance on the shop property and its contents. But what if the contents are owned, in part, by others and simply used by Kake to produce income

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and to maintain its vehicles and equipment? I think a reasonable and prudent person would still maintain coverage over such personal property because the tools and testing equipment here were integral to Kake’s business operations regardless of who owned them. Without such tools and testing equipment, Kake could not maintain and repair the vehicles and equipment used in its logging ventures to generate income. Kake was negligent in failing to ensure that it had insurance on the shop building and its contents in the course of its chapter 11 proceeding. Kake owed a duty of reasonable care to Adams and it breached that duty causing him harm. ³⁵

Kake also had a duty to exercise reasonable care because it owned and controlled the Kake shop.

A landowner or owner of other property must act as a reasonable person in maintaining his property in a reasonably safe condition in view of all the circumstances, including the likelihood of injury to others, the seriousness of the injury, and the burden on the respective parties of avoiding the risk. ³⁶

A landowner’s duty to maintain his property can’t be delegated to his employees; nor can it be delegated to independent contractors. ³⁷

Adams also alleges Kake was negligent in failing to hire a competent contractor to install a new waste oil heater in the shop and by failing to maintain a safe working environment for its employees. The new waste oil heater had been installed

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in the shop just shortly before the fire occurred. I agree with fire investigator John Glenn that the fire was caused by an oversized burner nozzle on the newly installed waste oil heater. ³⁸

Glenn suspected the waste oil heater was installed and worked on by unqualified people. ³⁹

Those suspicions were confirmed at trial.

Adams asked Jackson about installing a new waste oil heater in the shop because the old furnace no longer worked and it was very cold in the building. Kake’s management had a duty to exercise reasonable care in the selection of a person or company that was qualified to install the new waste oil burner in the shop. Duff Mitchell hired an employee and shareholder of Kake, Reggie Skeek, to install the waste oil heater. Skeek was hired over Adams’ protest. Adams preferred that an outside, independent contractor, Richard Woods, be hired. Both Skeek and Woods were electricians. Adams had observed the work of both men, and had some concerns about Skeek’s competency to install the new waste oil burner.

Mitchell opted to hire Skeek for two reasons. First, Skeek was a shareholder and Kake’s employment manual specified that qualified shareholders be given a hiring preference. Second, Skeek would do the job for less than Woods, who would bid it as an independent contractor. Skeek’s certification as an electrician did not necessarily mean that he was competent to direct the installation of the new waste oil heater. In fact, Skeek testified that he had not installed such a furnace before. Skeek also testified that he was paid $18.00 an hour for doing the work or, in his words, “pretty cheap.” Skeek was negligent in placing a burner with an improperly sized nozzle in

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the heater. The placement of the incorrect nozzle caused the fire and the resulting damages.

Kake contends Adams was also to blame for causing the fire. Skeek testified that Adams, or some of the other shop employees, assisted in installing a portion of the new waste oil burner. Skeek also said that Adams, or other shop employees, were the ones who gave him the improper nozzle to place in the burner. ⁴⁰

However, even if these employees were at fault, the ultimate blame must lie with Kake. Kake restricted Adams’ options for the installation of the waste oil burner and required him to have the work performed by unqualified individuals.

Kake argues that hiring an outside contractor would have been unduly burdensome because of its poor financial condition. Due to the high likelihood of fire or serious injury which could result from a defectively installed waste oil heater, Kake should have been much more prudent in its selection of an installer. If it could not afford to have the job done properly, it could have opted not to do the job at all. Instead, Kake cut corners in the installation of the waste oil burner. It was installed by unqualified personnel of Kake’s selection, and a fire ensued.

Kake’s negligence caused Situk Adams harm. But how much harm has Adams suffered? He seeks $112,909.00 for the replacement costs of his Snap-On tools and electrical equipment. Adams paid about $70,000.00 for the tools when he purchased them, primarily in 1990 and 1991. He had an extensive collection of hand tools, plus electronic and diagnostic equipment. He maintained his tools meticulously and took pride in them.

Snap-On hand tools are recognized as the best tools in the business. They have a lifetime warranty. This warranty is voided if the tools have been in a fire. All of Adams’ hand tools lost their lifetime warranty once they had been in the shop fire. ⁴¹

Adams is entitled to be placed back in his original position before the fire, with tools having a lifetime warranty. Kake argues that reasonable damages to Adams for the loss of his tools would be 50 percent of the original cost. It points out that these hand tools had been used continuously for almost 10 years before they were destroyed in the fire. I disagree with Kake’s assessment of the damages. Thomas Weske, the Snap-On dealer for Southeastern Alaska, stated that used Snap-On hand tools, in good condition, generally sell for 65 to 70 percent of their replacement cost. Weske also stated that, contrary to the company’s written warranty, he would honor Snap-On’s lifetime guaranty to any “customer,” regardless of whether that customer was an original or secondary purchaser. I conclude that Adams’ hand tools, though used, had a higher value than placed on them by Kake. Adams is entitled to 70 percent of the replacement cost of his hand tools, or the sum of $58,519.75. ⁴²

Adams’ electrical tools and diagnostic equipment must be treated differently. Most had but a one year warranty. The warranties on all of Adams’ electrical tools and diagnostic equipment had expired long before the fire. Weske agreed that, generally, such items depreciated more rapidly than hand tools. He did state, how-

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ever, that Adams’ oscilloscope, his most expensive electrical item, had a value of $7,500 at the time of the fire. This tool cost $12,195.00 and is no longer produced. The remaining electrical items, with a replacement cost of $17,114.35, I value at 20 percent of cost or the sum of $3,422.87. Total harm to Adams arising from the fire is the sum of $69,442.62. ⁴³

Having determined Adams’ damages for the loss of his tools, the court must next decide whether Adams’ negligence contributed to his loss and apportion fault accordingly. ⁴⁴

Adams’ tools and electronic instruments were very expensive. He had invested almost $70,000.00 to acquire an extensive selection of top quality tools. As a mechanic, he knew it was his responsibility to furnish his own tools for work. He knew that his tools were vital to Kake’s maintenance of its logging equipment and vehicles. The other employees in the shop also used his tools in the course of their employment. In spite of this, Adams never asked Kake if his tools would be covered by Kake’s insurance policies in the event of their loss or damage. He also failed to obtain independent insurance coverage for them. He knew that Reggie Skeek, a man whom he considered to be unqualified, would be installing a waste oil heater in the Kake shop, yet he failed to remove his valuable tools from the premises.

Adams’ own negligence contributed to his loss, and he must bear a portion of the damages. After consideration of all the facts and circumstances, I allocate 40 percent of the total fault to him. Adams is entitled to recover 60 percent of the total loss, or the sum of $41,665.57, from Kake.

Adams claims Kake has breached the implied covenant of good faith and fair dealing because it terminated his employment in retaliation for testimony he gave in Kake’s bankruptcy case. Retaliatory discharge can create a claim for breach of the implied covenant of good faith and fair dealing that exists in all employment contracts, even at-will employment contracts. ⁴⁵

Retaliatory discharge is defined as “the discharge of the employee by the employer in retaliation for some activity protected by public policy, such as the employee’s exercise of some political or legal right, or the employee’s investigation of possible violations of law by the employer.” ⁴⁶

To establish a prima facie case of retaliatory discharge, the employee must show that he engaged in some protected activity, that the employer subjected him to adverse employment action, and that there was a causal connection between the protected activity and the employer’s action. ⁴⁷

A causal connection can be inferred from the proximity in time between the employee’s protected action and the adverse employment action. ⁴⁸

Adams has established a prima facie case for retaliatory discharge against Kake. Adams was given a raise and promoted to the position of shop manager for the auto maintenance facility in May of 2001. Jackson testified that Adams got the raise because he was doing a good job. Adams never received written reprimands or

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warnings about his job performance; Kake was generally happy with his performance.

Prior to receiving his raise and promotion, Adams had approached Kake about reimbursement for his fire damaged tools, but it wasn’t until after his promotion that he filed suit against Kake for this loss, on August 31, 2001. Kake formally tendered defense of this action to its general liability carrier in September, 2001. ⁴⁹

In late October, 2001, the insurance company determined that, because there was no coverage under the policy for this claim, it was not obligated to defend the suit. ⁵⁰

On November 15, 2001, Adams filed a limited objection to Kake’s proposed reorganization plan in the chapter 11 case, in which he argued that Kake should be required to escrow funds sufficient to pay his administrative expense claim, once allowed. ⁵¹

A hearing on the issue of whether funds should be escrowed was scheduled for December 6, 2001. One day before the hearing, on December 5, 2001, Sam Jackson sent Adams a memo regarding limiting credit at the auto shop. The memo stated:

Due to the limited cash flow of Kake Tribal Corporation during these slow winter months, I am requesting that all credit accounts for the repair shop be limited to $500.00. We are experiencing difficulty with collecting throughout the KTL&T Company both for repair services, rock delivery, and excavation. All estimates for repair services that exceed the limit should be pre-approved so that we can have the individual make scheduled payment arrangements at the office. That way if a customer fails to meet their scheduled obligations, we will have a more immediate

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remedy to the situation from this end to collect the amount. ⁵²

The memo anticipated a slow down in business during the winter months, but said nothing about the possibility of the shop closing.

The next day, on December 6, 2001, Adams testified in favor of escrowing funds to cover his claim. He explained why he felt Reggie Skeek wasn’t qualified to do the repairs on the furnace at the shop. He talked about how his tools had been damaged in the fire. He discussed how the damaged hand tools would bend or break under pressure and how their chrome finish crumbled off with use. He said he and the other mechanics at the shop were using damaged tools in the course of their work because that was all they had. After the fire, Kake hadn’t provided any new tools for the mechanics at the shop, so all the mechanics had pooled their remaining tools to keep the shop going. Adams’ counsel clarified the claim against Kake. He noted that Adams’ claim for negligence was based not only on the repairs performed by Skeek, but also on Kake’s failure to insure and maintain the shop building in a safe condition.

Just eight days after Adams testified in Kake’s main bankruptcy case, Sam Jackson prepared another memo regarding the auto shop. In this memo, Jackson informed Adams that the auto shop was going to be closed. It stated:

After careful consideration of all aspects of our operation, I feel that it is in the best interest of KTL&T to terminate the operations of the Kake Tribal Automotive and Marine Repair shop as soon as possible. This is based on several factors that have prompted this decision.

First and foremost, the program is not paying its way. The revenue on a monthly basis does not cover expenses,

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including wages and salaries. Kake Tribal Corporation cannot continue to absorb the costs of this program. . . . .

Second, we are continuing to see an increase in accounts receivable from this operation. We cannot continue to operate on a credit basis. . . . .

Third, issues have been raised in a lawsuit against the company that may create a potential liability for the company. It has been claimed that tools currently being used at the shop are dangerous and could break. I have discussed this with our attorney, and we feel that it is in our best interest to have those tools removed from our premises so that we do not incur additional potential liability.

Fourth, we expected a couple of things to occur prior to this decision, which have not materialized. We expected the bankruptcy to be resolved by now . . . . We also expected to be in negotiations with Sealaska by now for a 2002 harvest contract . . . . If we did have a contract, we would be able to justify remaining open to repair equipment and prepare for the upcoming logging season.

Finally, another shop has opened here in town and we are uncertain if there is enough business to support two repair shops in a community this size. . . . ⁵³

The shop closed on December 21, 2001. Adams received a termination notice, which was signed by Sam Jackson. ⁵⁴

The notice gave the following reasons for termination: “1) Revenue insufficient to support current shop activities. 2) Lack of tools. 3) Increase in competition from competing business.” ⁵⁵

Adams prepared layoff

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notices for the other shop employees, stating “lack of work” as the reason for this action. ⁵⁶

On December 28, 2001, this court entered an order overruling Adams’s limited objection to confirmation. The shop facility reopened in early January, 2002, roughly two weeks after it had closed. Kake’s plan was confirmed in February, 2002. A contract with Sealaska was finally negotiated in March of 2002.

Because of the proximity in time between when Adams testified at the hearing and when he received notice of termination, he has established a prima facie case of retaliatory discrimination. An employer may rebut this by producing “admissible evidence which would allow the trier of fact rationally to conclude that the employment decision had not been motivated by discriminatory animus.” ⁵⁷

Several facts in this case support a finding that Kake’s closure of the shop was motivated by legitimate business concerns. First, because the shop was closed, Adams was not the only employee affected by Kake’s actions. Second, the reasons for closing the shop, stated in Jackson’s December 14 memo, were all reasonable and supported by the record. The shop had not been supporting itself, Kake’s plan had not yet been confirmed, and the Sealaska negotiations for a 2002 timber harvest contract hadn’t been concluded. Further, a competing auto repair shop had opened in Kake.

“ If the employer successfully rebuts the inference of retaliation that arises from the establishment of a prima facie case, then the burden shifts once again to the plaintiff to show that the defendant’s proffered explanation is merely a pretext for

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discrimination.” ⁵⁸

Adams has carried this burden. The shop reopened in early January, 2002 . Sam Jackson testified that he reopened the shop solely so that unfinished repairs could be completed. He said it would take about 10 days to complete the unfinished work. However, the shop stayed open even after the work was completed. Mr. Jackson stated that a second consideration in reopening the shop was to have an inventory of KTL&T’s equipment done, in anticipation of an upcoming contract with Sealaska. But the shop was purportedly closed because there was no contract with Sealaska. Mr. Jackson said the shop couldn’t stay open because it was losing a lot of money, yet conceded that it continued to lose money after it reopened. In fact, other than the issuance of this court’s decision that Kake didn’t need to escrow funds for Adams’ claim, nothing material had changed between the time the shop closed and the time it reopened.

Further, Adams’s termination notice specified that his lack of tools was a reason for termination. But Adams’ tools had been damaged in the fire almost two years earlier, in March of 2000. He had been working with fire damaged tools at the time he received his raise and promotion in May of 2001. The condition of Adams’ tools didn’t appear to be an issue to Kake until after he filed a conditional objection to Kake’s plan and gave testimony in the bankruptcy case.

Finally, Kake has pointed out that Adams didn’t reapply for his former position when the shop reopened. However, Adams testified that he felt reapplication would be futile because he couldn’t get new tools. He also testified that he had been told by Kake personnel that his position had been terminated. In fact, Adams was the only shop employee who received a written termination, rather than layoff, notice. ⁵⁹

Viewing the evidence as a whole, I conclude Adams’ termination was in retaliation for his opposition and testimony in Kake’s bankruptcy case, rather than motivated by legitimate business concerns. Kake’s discharge of Adams breached the covenant of good faith and fair dealing which exists in all employment contracts.

Breach of the covenant of good faith and fair dealing results in contract damages. “The goal of contract damages is to place the nonbreaching party in as good a position as if the contract had been fully performed.” In the case of wrongful discharge, this generally means that the employee is “entitled to the total amount of the agreed upon salary for the unexpired term of his employment, less what he could earn by making diligent efforts to obtain similar employment.” ⁶⁰

Adams testified that, after the shop closed, he tried to find work as a mechanic with several other potential employers, but could not be hired without tools. Jackson testified that if Adams had reapplied for work at the shop, Kake probably could have hired him on as a mechanic, but there would not have been an opening for him until the spring of 2002, when the shop had a shortage of mechanics. Adams became self-employed in June, 2002, when he started doing maintenance and repair work for local fishermen. He has had his clients provide him with tools for the work he does.

Adams was unemployed for a period of five months, from January through May of 2002. He was receiving $5,000.00 per month in salary at the time his employment was terminated. While he is entitled to damages for wrongful discharge, I feel he could have done more to shorten the length of his unemployment and mitigate his damages. First, he testified that he could have found work with other employers if he had tools. But he did not need $100,000.00 worth of Snap-On tools

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in order to work as a mechanic. Snap-On sales representative, Thomas Weske, testified that Adams’ purchase of his company’s tools was on the “higher end” of the spectrum. Most Kake mechanics didn’t purchase as many Snap-On tools as Adams did. Additionally, other mechanics in the Kake shop were able to satisfy the requirement of providing their own tools by purchasing Craftsmen or other less expensive brands of tools. Bruce Ward, another shop employee, found work outside of Kake after the shop closed. Ward testified that he was required by his employer, Capital Chevrolet, to provide his own tools. But Ward’s tool investment consisted of about $1,100 in Snap-On tools and $1,000 in other brands.

Adams could have returned to work as a mechanic sooner than June, 2002, if he had made a small investment in new tools. I feel that, had such an investment been made, Adams could have found work by the spring of 2002. This is also when Jackson indicated that Kake might have been able to hire additional new mechanics back at the shop. Accordingly, Adams’ damages for wrongful discharge is the sum of 3 months salary, for the period January through March of 2002, in the amount of $15,000.00

Kake has filed a counterclaim against Adams seeking to recover the sum of $10,000.00, representing the balance owed on Adams’ purchase of a “housing trailer” from it. The trailer was transferred to Adams in March, 2000. ⁶¹

Adams had previously invested about $39,000.00 in the trailer to bring it up to code and make it liveable. ⁶²

Both parties agree that this sum is owed Kake, and that Adams may offset

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unreimbursed medical expenses he has incurred against this obligation. Adams has introduced invoices for these unreimbursed medical expenses, which total $6,949.87. ⁶³

Deducting these unreimbursed expenses against the trailer debt leaves a balance of $3,050.13. This balance will be set off against Kake’s damages to Adams.

Kake is liable to Adams for the loss of his tools, in the sum of $41,665.57, and for wrongful discharge, in the sum of $15,000.00. Adams is entitled to prejudgment interest on these sums, from the date each claim accrued. Adams’ claim for negligence arose on March 7, 2000, the date the fire destroyed his tools. His claim for wrongful discharge accrued on December 21, 2001, when Kake terminated his employment at the shop. Prejudgment interest will be awarded at the rate specified by state law, which is currently 4.25%. ⁶⁴

Prejudgment interest on the $41,665.57 damage award for Adams’ tools accrues at the rate of $4.85 per day, and totals $4,651.15 through the date of this memorandum. Prejudgment interest on Adams’ wrongful discharge damages of $15,000.00 accrues at the rate of $1.75 per day, and totals $533.75 through the date of this memorandum. Kake’s liability to Adams in this proceeding, including prejudgment interest through October 22, 2002, is $61,850.47. From this amount will be deducted the sum of $3,050.13, representing the balance Adams owes to Kake for the trailer purchase, after setoff of unreimbursed medical expenses. Accordingly, Adams is entitled to entry of judgment against Kake in this proceeding in the amount of $58,800.34. He is also entitled to recover attorneys' fees

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in accordance with Alaska Civil Rule 82 and costs of suit. ⁶⁵

He will have ten days from the date of the entry of this memorandum and an accompanying order to file a motion for such fees and costs.