Opinion ID: 1132344
Heading Depth: 2
Heading Rank: 2

Heading: The 1980 Agreement and Summary Judgment

Text: Summary judgment was granted based upon the 1980 settlement agreement to return a permit to the Bakers. In reviewing that decision, we first address the issue of the validity of the settlement agreement. We are in accord with the Browns' contention that the settlement agreement was invalid. The settlement agreement is not an independent transaction. In 1977, a promissory note was prepared for the original sale and transfer of the STARBURST. The parties stipulated in the note that the Browns would return the permit in the event of default. This language gives the Bakers a right to retake the permit. However, the Bakers assert that all parties to the mortgage knew that the language in the note would not create a right of repossession, encumbrance or interest in the permit. Rather, they allege, the language was a `covenant' or promise to return the permit. According to the Uniform Commercial Code as codified in Alaska, a security interest is created if the transaction is intended to create a security interest. AS 45.09.102(a)(1). Security interest is defined in AS 45.01.201(37) as an interest in personal property or fixtures which secures payment or performance of an obligation... . The Bakers' explanation is internally inconsistent and merely an attempt to innocuously rename the transaction. Despite their assertion, the intent and function of the language of the promissory note was to secure the return of the permit if the Browns defaulted on the mortgage payments. When it is found that a security interest as defined in Section 1-201(37) was intended, this Article applies regardless of the form of the transaction or the name by which the parties may have christened it. Queen of the North, Inc. v. LeGrue, 582 P.2d 144, 148 (Alaska 1978) (footnote omitted, emphasis added). An encumbrance or reservation of a security interest in a limited entry fishing permit is illegal under AS 16.43.150(g). Except as otherwise provided by this statute, an entry permit may not be (1) pledged, mortgaged, leased, or encumbered in any way; (2) transferred with any retained right of repossession or foreclosure... . Thus, the promise to return the permit, incorporated into the 1977 promissory note, is a security interest and thus violates AS 16.43.150(g). The next question is what effect, if any, should be given to the illegal agreement and how did the security agreement affect the alleged oral agreement of June 1978 and the settlement agreement of January 28, 1980, in which the Browns agreed to return the permit. The Restatement (Second) of Contracts § 320(1) (Tent. Draft No. 12, 1977) states the rule that a promise is unenforceable if legislation so provides, or if the interest in enforcement is clearly outweighed by the public policy against enforcement. Generally, one who has himself participated in an illegal act cannot be permitted to assert in a court of justice any right founded upon or growing out of the illegal transaction. .... However, it is not the case that all unlawful agreements are ipso facto void. If the denial of relief is disproportionately inequitable the right to recover will not be denied. 14 Williston on Contracts § 1630A (3d ed. 1972). Factors a court should consider in performing this balancing include: the justified expectations of the parties; the forfeiture that would result from non-enforcement of the agreement; any special public interest in enforcement; the strength of the public policy that the agreement violates, as shown by legislation or court decision; the likelihood that refusal to enforce will further that policy; and the seriousness of the misconduct. Restatement (Second) of Contracts § 320(1) (Tent. Draft No. 12, 1977). ... [T]here is a strong presumption that agreements in violation of a statute will not be sanctioned by the courts. Jackson Purchase, Etc. v. Local Union 816, 646 F.2d 264, 267 (6th Cir.1981) (citations omitted). [1] The Limited Entry Act was directed at regulating entry into the fisheries to promote conservation. AS 16.43.010(a). The legislature also sought to avoid subjecting fishermen to economic coercion as a result of holding a valuable license to participate in the fishery. See 1973 House Journal 504. Subsection (g) resulted from this aim; its effect is to allow fishermen to take advantage of the value of their permits if they no longer wish to participate in the fishery, but to prevent the forced loss of livelihood that would result from court-ordered sales of permits. Therefore, because the security agreement contravenes and defeats the purpose of the statute and because we see no special public interest in enforcing the illegal agreement, this portion of the original sales agreement is unenforceable. See Belgelfer v. Najarian, 381 Mass. 177, 409 N.E.2d 167, 175 (1980). We also find that the alleged oral agreement of June, 1978 and the settlement agreement of January, 1980 are also invalid and unenforceable. It is a well-settled doctrine that if an agreement grows immediately out of, or is connected with, an illegal or immoral act or agreement, a court cannot lend its aid to enforce it, though it is in fact a new agreement. Otherwise, it has been pointed out, an enforceable contract could rise from the funeral pyre of one that was void. Upon the question whether a particular contract sought to be enforced arises out of an illegal transaction, the court will not be restricted to a partial statement of the facts, but will consider all the circumstances connected with the transaction so as to ascertain its real nature. If the connection between an original illegal transaction and a new promise can be traced, if the latter is connected with and grows out of the former, no matter how many times and in how many different forms it may be renewed, it cannot form the basis of a recovery. Repeating a void promise cannot give it validity. 17 Am.Jur.2d Contracts § 218 (1964) (footnotes omitted). See also Orange County, Etc. v. Irvine Co., 139 Cal. App.3d 195, 188 Cal. Rptr. 552 (Cal. App. 1983); Union Collection Co. v. Buckman, 150 Cal. 159, 88 P. 708, 711 (1908); Sweinhart v. Bamberger, 166 Misc. 256, 2 N.Y.S.2d 130, 133 (Sup.Ct. 1937); Bayer v. Burke, 338 N.W.2d 293 (S.D. 1983); and Beverage Co. v. Villa Marie Co., 69 S.D. 627, 13 N.W.2d 670, 671 (1944). The nexus between the security clause and later agreements is too close to support independent rationales for the transactions and none have been proposed. From the record it is clear that the promissory note formed the incentive for the subsequent oral and written agreements. Because the promissory note, the alleged oral agreement, and the settlement agreement are invalid and unenforceable, the Bakers' motion for summary judgment should have been denied. As such, there is also no longer a genuine issue of fact in regard to Bakers' cause of action which requested damages for loss of the permit and loss of income based upon the illegal transaction. Accordingly, the trial court is hereby directed to set aside the jury verdict and judgment rendered in favor of the Bakers, and to enter judgment in favor of the Browns' motion for summary judgment dismissing the Bakers' complaint.