Case Title: Carson v. Davidson

Citation: 248 Kan. 543, 808 P.2d 1377

Docket Number: 

State: kansas

Court: Kansas Supreme Court

Date: 1991-04-12T00:00:00Z

Document:
808 P.2d 1377 (1991)
248 Kan. 543
William D. CARSON and Norma I. Carson, Appellants,
v.
J.M. DAVIDSON and Danny Martin, Appellees.
No. 65279.

Supreme Court of Kansas.
April 12, 1991.
*1378 Charles D. Green, of Arthur, Green, Arthur, Conderman & Stutzman, of Manhattan, argued the cause and was on the briefs, for appellants.
Troy V. Huser, of Myers, Pottroff & Ball, of Manhattan, argued the cause, and *1379 Dan H. Myers, of the same firm, was with him on the brief, for appellee J.M. Davidson.
David K. Clark, of Law Offices of David K. Clark, of Fredonia, was on the brief, for appellee Danny Martin.
McFARLAND, Justice:
In this action plaintiffs William D. and Norma I. Carson are seeking to recover on a judgment they have against a dissolved corporation from defendants J.M. Davidson and Danny Martin, who were the stockholders receiving the assets of the corporation upon dissolution. Recovery is sought under the trust fund doctrine. The district court held that Kansas has not adopted the trust fund doctrine and entered summary judgment in favor of defendants. Plaintiffs appeal therefrom.
The facts may be summarized as follows. Prior to April 1983, Tuttle Creek Development, Inc., (TCD) was a valid Kansas corporation. J.M. Davidson and Danny Martin were its sole officers, directors, and stockholders, each owning 50% of the stock. The corporation's only significant asset was a facility known as Colonial Gardens Mobile Home Park.
In April of 1983, TCD and the plaintiffs entered into a contract whereby plaintiffs would purchase the facility for $650,000 the same to be paid by a combination of assumption of mortgage indebtedness, execution of promissory notes to the individual defendants herein, and actual cash outlay. The contract provided that the cash was to be paid directly to Davidson and Martin, rather than to the corporation. The closing of the sale took place in July 1983, and the defendants received the cash payment as specified.
In July 1984, the corporate charter of TCD was revoked by the Kansas Secretary of State for failure to file its 1983 annual report. The corporate existence of TCD has never been revived. In July 1983, TCD had filed for an Internal Revenue Code Sec. 337 liquidation.
On May 15, 1986, plaintiffs herein filed an action against TCD and defendant Davidson, alleging breach of contract (case No. 86-C-178 in the Riley County District Court). Plaintiffs claimed that those defendants had promised to secure a 30-foot easement for expansion of the mobile home park. The case was tried to a jury. The trial court refused to submit the breach of contract claim against Davidson to the jury on the basis the same was barred by K.S.A. 17-7101(b). Plaintiffs' claim against Davidson based upon promissory estoppel was submitted to the jury. The jury held in favor of plaintiffs on their claim against TCD, fixing damages at $12,200. The jury held in favor of Davidson on the promissory estoppel claim against him. The verdict was returned on April 14, 1988, and no appeal was taken therefrom. In June 1988, a general execution was issued against TCD and returned unsatisfied.
On March 15, 1989, the action herein was commenced by plaintiffs to collect the TCD judgment from defendants Davidson and Martin as stockholders of TCD under the trust fund doctrine. Plaintiffs and defendants each sought summary judgment. Judgment was entered in favor of defendants on the ground the doctrine authorizing such an action had not been adopted in Kansas. Plaintiffs appeal therefrom.
19 Am.Jur.2d, Corporations § 2714 describes the trust fund doctrine as follows:
*1380 Probably the leading case on this doctrine is Pierce v. United States, 255 U.S. 398, 41 S. Ct. 365, 65 L. Ed. 697 (1921). In Pierce, the Waters Pierce Oil Company, a Missouri corporation, was indicted for violation of the Elkins Act by receiving rebates. In 1913, the company sold and transferred all its property to the Pierce Oil Corporation and distributed the proceeds, through trustees, to the stockholders of the now-defunct corporation. 255 U.S.  at 400, 41 S. Ct.  at 366. The case was tried in 1914. The company was convicted and fined $14,000. In 1915, the conviction was upheld on appeal, and, thereafter, execution was issued against the corporation. When the execution went unsatisfied, the United States sued the stockholders, as well as the defunct corporation and the trustees. The trial court dismissed the action against the corporation and the trustees, but granted the sought-after relief against the stockholders. The Eighth Circuit affirmed. The United States Supreme Court affirmed, reasoning:
Moreover, the Supreme Court rejected the argument that the judgment could not be collected because the judgment was not entered by the trial court until one year after the company divested itself of the property and the proceeds were distributed to the shareholders, reasoning as follows:
In Kansas, we have long held that capital stock in a corporation is a trust fund for the benefit of general creditors of the corporation. Brokerage Co. v. Dunn, 91 Kan. 64, 136 Pac. 939 (1913).
In Clark v. Pargeter, 142 Kan. 781, 52 P.2d 617 (1935), certain stockholders issued their promissory note to the insolvent corporation. The note was assigned to certain stockholders and creditors. The corporation went into receivership. The receiver brought this action to set aside credit given on the note and the assignment of it and to recover possession of the note. The Clark facts are quite different from those before us, but the following two excerpts from Clark are significant as to whether the trust fund doctrine has been adopted in Kansas:
The facts and holding in Welden v. American Steel & Wire Co., 143 Kan. 125, 53 P.2d 1195 (1936), are summarized in its syllabus as follows:
In reaching this conclusion, this court discussed the trust fund doctrine and held it inapplicable under the factsprimarily because the claim arose under the Workers Compensation Act, which provides for no such cause of action against the purchaser of a corporation's assets.
In reaching its conclusion that the trust fund doctrine had not been adopted in Kansas, the trial court in the case before us relied in part upon Speer v. Dighton Grain, Inc., 229 Kan. 272, 624 P.2d 952 (1981). The trial court recognized that Speer was distinguishable factually but felt the case offered "some guidance." We do not agree. In Speer the creditor-plaintiff was not seeking to follow corporate assets in the hands of stockholders. Rather, he was suing directors and officers for their alleged mismanagement of the corporation. We held:
There were no assets being held by stockholders involved in Speer. Hence, the trust fund doctrine could not be applicable. Put another way, plaintiff Speer was not pursuing corporate assets in the hands of stockholders.
The Tenth Circuit Court of Appeals applied the trust fund doctrine to a case arising in Kansas in Koch v. United States, 138 F.2d 850 (10th Cir.1943). The Koch opinion held:
We conclude the trust fund doctrine is viable in Kansas. Said doctrine is summarized as follows: Under the trust fund doctrine the assets of a dissolved corporation are a trust fund against which the corporate creditors have a claim superior to that of the stockholders, and creditors have the right to follow such assets into the hands of stockholders who hold assets as though *1382 the stockholders were trustees. A stockholder of a dissolved corporation receiving assets of a dissolved corporation is liable to respond to a creditor of the corporation only to the extent of the assets so received or the value thereof if the same have been disposed of by the stockholder.
Accordingly, we hold the district court erred in entering summary judgment in favor of the defendants on the ground that the trust fund doctrine had never been adopted in Kansas.
Before concluding, a second issue raised by defendant Davidson must be discussed. As a second ground for the granting of summary judgment in his favor, this defendant claimed this action as to him was barred by the doctrine of res judicata. By virtue of its holding on the trust fund doctrine issue, the trial court did not reach this issue. As will be recalled, Davidson was a defendant in the earlier action brought by plaintiffs against the corporation (and Davidson).
In In re Estate of Reed, 236 Kan. 514, 519-20, 693 P.2d 1156 (1985), we discussed the principles and requirements of res judicata as follows:
Have the four conditions necessary for res judicata to attach herein been met? We think not.
In the earlier action the plaintiffs sued: (1) the corporation for breach of contract and (2) Davidson on theories of breach of contract and promissory estoppel. In the case before us, the plaintiffs are suing Davidson and Martin as stockholders possessing *1383 assets of TCD, against which corporation the plaintiffs have a judgment.
Plaintiffs could not have maintained this action until they had a judgment against the corporation and the execution thereon had been returned unsatisfied. These requirements are set forth in K.S.A. 17-7101(b), which provides:
Therefore, the prior action against Davidson on other causes of action does not bar the claim herein.
The judgment is reversed and the case is remanded for further proceedings.