Opinion ID: 2570512
Heading Depth: 1
Heading Rank: 1

Heading: equitable setoff

Text: Collis and Hughes assert that the trial court erred by refusing to allow Collis an equitable setoff from the judgment against him, setting forth several reasons why the court's decision was in error. Collis and Hughes ask this court to remand the matter to the district court for a determination of the proper amount of setoff. An appellate court's standard of review on a district court's determination regarding the remedy of equitable setoff is one of abuse of discretion. See New Dimensions Products, Inc. v. Flambeau Corp., 17 Kan. App.2d 852, Syl. ¶ 5, 844 P.2d 768 (1993) (The denial of the remedy of setoff to a defendant who has violated the equitable `clean hands' doctrine is within the discretion of the trial court.); Carson v. Chevron Chemical Co., 6 Kan. App. 2d 776, 793, 635 P.2d 1248 (1981) (quoting Taylor v. Taylor, 180 Kan. 213, 218, 303 P.2d 133 [1956]) (a setoff as between judgments is within the discretion of the court ... it will only be disturbed ... where it appears that the setoff has operated to the prejudice of a third party without notice ... and he complains). Collis and Hughes claim on appeal that the trial court should have allowed them to set off from the judgment against them the amount Mynatt misappropriated from Mynatt Truck. On appeal, however, Collis and Hughes no longer appear to claim that the district court should have allowed a setoff of the amount of the 1995 corporate distribution, Collis' ownership interest in Mynatt Truck, or any retained earnings Collis might have in Mynatt Truck. We also note that Collis and Hughes do not appear to challenge any of the district court's findings of fact on appeal, but rather claim that the trial court erred as a matter of law. `Determinations of fact, unappealed from, are final and conclusive.' Powell v. Simon Mgt. Group, L.P., 265 Kan. 197, 199, 960 P.2d 212 (1998) (quoting Justice v. Board of Wyandotte County Comm'rs, 17 Kan. App.2d 102, 109, 835 P.2d 692, rev. denied 251 Kan. 938 [1992]).
Collis and Hughes assert that although they may have been barred from recovering damages from a counterclaim due to the operation of the statute of limitations, the running of the statute of limitations did not preclude Collis from obtaining equitable set-off. The interpretation and application of a statute of limitations is a question of law for which the appellate court's review is unlimited. Likewise, the court's review of conclusions of law is unlimited. Dougan v. Rossville Drainage Dist., 270 Kan. 468, 472, 15 P.3d 338 (2000). The district court specifically found in favor of Mynatt and Mynatt Truck in regard to Collis and Hughes' counterclaims. In its memorandum decision, the district court observed: Although Collis now complains about various payments made by the corporation for Mynatt's personal benefit, Collis was aware of virtually all of those expenses as they were made. Collis signed the checks and coded the payments for purposes of the corporation's accounting records. Collis' claims for breach of fiduciary duty against Mynatt are rejected for two reasons. First, with respect to virtually all of Collis' claims or potential claims, they are time-barred. Collis signed almost all of the checks, coded transactions for accounting purposes, and supervised all accounting functions; he was well aware each time that Mynatt wrote a check or used company funds that went for a personal use. Second, given the deceitful conduct set forth here on the part of Collis, Collis' knowledge of any wrongful conduct by Mynatt vis-a-vis the corporation, and the far greater scope of Collis' wrongful conduct, the court finds that a direct action by Collis against Mynatt personally should not be allowed here as it would `interfere with a fair distribution of the recovery among interested persons.' Collis and Hughes contend that the district court erred in concluding that their counterclaims were barred by the statute of limitations rather than construing the counterclaims as requests for setoff. They assert that under K.S.A. 2001 Supp. 60-213(d), counterclaims are not time-barred when claimed as equitable setoff. First, we consider whether the statute of limitations bars Collis and Hughes' request for equitable setoff. This court has previously stated: `Statutes of limitation are usually considered to be remedial rather than substantive, in that the remedy only and not the right or obligation is barred....' Waechter v. Amoco Production Co., 217 Kan. 489, 519, 537 P.2d 228 (1975) (quoting Rochester American Ins. Co. v. Cassell Truck Lines, 195 Kan. 51, 55, 402 P.2d 782 [1965]). `When considering the effect of the running of the statute of limitations this court is committed to the general doctrine, almost universally recognized by the courts and textwriters, that there is a substantial distinction between a claim asserted as a pure defense and one where affirmative relief is sought. Statutes of limitation are not intended to affect matters asserted strictly in the defense of an action. [Citations omitted.]' .... As a general rule a setoff, counterclaim or cross-claim has the nature, characteristics and effect of an independent action or suit by one party against another. Accordingly, in the absence of a statute to the contrary, a demand pleaded by way of a setoff, counterclaim or cross-claim is regarded as an affirmative action in most jurisdictions, and therefore, unlike a matter of pure defense, is subject to the operation of the statute of limitations. [Citations omitted.] (Emphasis added.) Rochester American Ins. Co. v. Cassell Truck Lines, 195 Kan. 51, 56, 402 P.2d 782 (1965). Beginning in 1909, however, our legislature enacted statutes excluding cross-demands, counterclaims, and setoffs from the operation of the statute of limitations under certain specified circumstances. See Rochester American Ins. Co., 195 Kan. at 57-58 (discussing L. 1909, ch. 182, § 102; G.S. 1949, 60-715; and K.S.A. 60-213[d] [Corrick]). K.S.A. 2001 Supp. 60-213(d) states: When cross demands have existed between persons under such circumstances that, if one had brought an action against the other, a counterclaim or cross-claim could have been set up, neither can be deprived of the benefit thereof by the assignment or death of the other or by reason of the statute of limitations if arising out of the contract or transaction set forth in the petition as the foundation of plaintiff's claim or connected with the subject of the action; but the two demands must be deemed compensated so far as they equal each other. The United States District Court for the District of Kansas has noted: In sum, the law of Kansas is that if the counterclaim is not brought before the running of the statute of limitations, then the counterclaim cannot be used as an affirmative action. However, the counterclaim can still be used as a pure defense or as a set off against the plaintiff's claim if the claim, `(a) coexisted with the plaintiffs' claim and (b) arises out of the contract or transaction on which the plaintiffs' claim is based.' Hatfield v. Burlington Northern Railroad Co., 747 F. Supp. 634, 641 (D. Kan. 1990) (quoting Lightcap v. Mobil Oil Corporation, 221 Kan. 448, 464, 562 P.2d 1 [1977]). Here, Collis and Hughes filed a counterclaim on April 14, 1997, alleging that on various dates Mynatt had dissipated corporate assets of Mynatt Truck for his own benefit in breach of his fiduciary duties. An action for an alleged breach of fiduciary duty is governed by the 2-year statute of limitations of K.S.A. 2001 Supp. 60-513. Cornett v. Roth, 233 Kan. 936, 940-41, 666 P.2d 1182 (1983). The statute of limitations would act to bar any affirmative action by Collis against Mynatt for breach of fiduciary duty 2 years after the fact of injury [became] reasonably ascertainable. K.S.A. 2001 Supp. 60-513(a) and (b). Collis admitted in his trial testimony that as early as 1990 he was aware that Mynatt had the corporation pay for some of his personal expenses. Collis did not become a shareholder in the corporation until September 30, 1993; however, Collis was appointed vice president and general manager of the corporation in 1990. Officers and directors of a corporation occupy a strict fiduciary relationship with respect to both the corporation and its shareholders. The same fiduciary standard applies as between directors. Newton v. Hornblower, Inc., 224 Kan. 506, Syl. ¶ 8, 582 P.2d 1136 (1978). Collis could clearly bring an action for breach of fiduciary duty against Mynatt after he was made a corporate officer in 1990. After he was made a corporate officer, Collis knew that the corporation was paying for Mynatt's personal expenses because he was responsible for the review and approval of bills and for determining to which general ledger account the bills were to be charged when paid. In the context of affirmative counterclaims, the district court correctly determined that the statute of limitations barred virtually all of Collis' claims or potential claims with the exception of the check Mynatt wrote to himself in late 1995 for $17,000 to offset the Kubota tractor payments made by Collis for Collis' benefit. As for Collis and Hughes' request for setoff, this court has stated that even an outlawed claim may be used as a setoff if it (a) coexisted with the plaintiffs' claim and (b) arises out of the `contract or transaction' on which the plaintiffs' claim is based. Lightcap, 221 Kan. at 464. While the term transaction may encompass a contract, it is larger in scope and more comprehensive than contract and may relate to matters entirely in tort. United States Hoffman Machinery Corp. v. Ebenstein, 150 Kan. 790, 792, 96 P.2d 661 (1939), opinion adhered to on rehearing, 152 Kan. 198, 103 P.2d 788 (1940). Collis and Hughes' claims generally can be said to arise out of the transaction on which Mynatt and Mynatt Truck's claims were based; however, we must determine whether Collis and Hughes' claims coexisted with the claims of Mynatt and Mynatt Truck. Mynatt testified at trial that he began looking through corporate checks in approximately October or November 1995. Assuming that the fact of injury was reasonably ascertainable to Mynatt and Mynatt Truck at that time, an action for breach of fiduciary duty would accrue in October or November 1995 and remain viable until October or November 1997. As the district court noted, the only breach of fiduciary duty claim Collis could have possibly initiated against Mynatt accruing in late 1995 would be a claim in regard to the check Mynatt wrote to himself for $17,000 in compensation for the corporate funds Collis used for the Kubota tractor. Because both Collis and Mynatt could entertain claims alive from October or November 1995 through October or November 1997, we find that these particular claims coexisted. See Lightcap, 221 Kan. at 464. Because Collis' claim for breach of fiduciary duty coexisted with Mynatt and Mynatt Truck's claim and arose from the same transaction which Mynatt and Mynatt Truck claimed in their petition, we conclude that Collis' claims against Mynatt individually for breach of fiduciary duty were not barred by the statute of limitations for the purpose of obtaining a setoff from the judgment awarded to Mynatt.
Next, Collis and Hughes assert that the district court erred in interpreting Richards v. Bryan, 19 Kan. App.2d 950, 879 P.2d 638 (1994), as providing an alternative basis for denying Collis' request for setoff. `This court's review of conclusions of law is unlimited.' [Citation omitted.] Powell, 265 Kan. at 202. Here, Collis and Hughes contend that Collis' counterclaims were authorized by the test in Richards. They argue that the district court misinterpreted the fair distribution of the recovery prong of the three-part test set forth in that case, considering that prong a balancing test of the respective wrongdoing of the parties rather than as a directive to consider the effect of recovery on any other nonparty shareholders. In response to Collis and Hughes' assertion, Mynatt and Mynatt Truck argue that the Court of Appeals impermissibly exercised judicial legislation in Richards and urge this court to overrule that case. Alternatively, Mynatt and Mynatt Truck urge this court to uphold the district court's determination that Collis' counterclaims were impermissible because they would interfere with a fair distribution of recovery among all interested persons. In their reply brief, Collis and Hughes contend that Richards was not a prohibited exercise of judicial legislation resulting in an expansion of K.S.A. 60-223a. They assert that because Mynatt relied on the trial court's interpretation and application of Richards, Mynatt may not argue on appeal that the holding should be overruled. At the hearing on Collis and Hughes' motion to alter or amend, counsel for Mynatt and Mynatt Truck stated: But in our view, Your Honor, there areit's three-fold. Perhaps the most significant is that under the Richards v. Bryan case this court found specifically that the claim in Mr. Collis' favor under the Richards v. Bryan case could not be sustained because it would interfere with a fair distribution of recovery among all interested persons, which is in violation of the Richards v. Bryan case. That is to say this Court made a specific express finding of fact which is fatal to that claim. Judge Leben denied Collis' request for setoff, and stated: With respect to [Collis' and Hughes' request for set-off], I would say that I generally agree with each of the three rationales put forward by [counsel for Mynatt] in his responsive brief. I'll comment on a couple of them. I've already dealt with the Richards v. Bryan issue in the memorandum decision. With respect to the mutuality issue, I also agree with [counsel for Mynatt] that there was not a claim presented in the pretrial order related to the K-1 or against the corporation itself and, therefore, I do not believe that there is any mutuality which would be required for a set off. With respect to the last argument of a failure of proof, I agree with that as well and would add that my understanding of the evidence was that the amended K-1 reflected transactions that had already occurred, not transactions that were about to occur. It was an amended K-1 for a prior year and it does not seem logical to me that it would be an indication that there was some further payment remaining to be made by the corporation to Mr. Collis. Certainly if that were in fact the case, as is now alleged by the defendant, proof that was persuasive to me certainly was not presented at trial. That was not my understanding of the significance of that document from the evidence that was presented, and I think [counsel for Mynatt] is correct that this does represent a failure of proof on behalf of [Collis and Hughes], even if such a claim was properly presented in the pretrial order and did not run afoul of the Richards v. Bryan rule. So, that will be the ruling of the Court on that motion. Mynatt and Mynatt Truck did not argue before the district court that the Court of Appeals impermissibly exercised judicial legislation in Richards which should be overruled, and the district court never rendered a decision on it. To the contrary, Mynatt and Mynatt Truck relied on the district court's use of the Richards test to support the argument that Collis and Hughes were not entitled to equitable setoff. A new legal theory may not be asserted for the first time on appeal or raised in a reply brief. [Citation omitted.] Wood v. Groh, 269 Kan. 420, 434, 7 P.3d 1163 (2000). Generally, a party is not allowed to raise an issue on appeal not presented previously to the district court or inconsistent with the position taken before the district court. Baugher v. Hartford Fire Ins. Co., 214 Kan. 891, Syl. ¶ 6, 522 P.2d 401 (1974); Pink Cadillac Bar & Grill, Inc. v. USF&G Co., 22 Kan. App.2d 944, 955, 925 P.2d 452 (1996), rev. denied 261 Kan. 1086 (1997). None of the three exceptions to this general rule listed in In re Conservatorship of Marcotte, 243 Kan. 190, 196, 756 P.2d 1091 (1988), apply here. See Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 827, 934 P.2d 65 (1997) (finding that the issue of the coverage period of an insurance policy was not contested before the district court and consequently was not properly before this court on appeal). Because Mynatt and Mynatt Truck failed to raise this issue before the trial court, this court will not consider it for the first time on appeal. The remaining issue for our consideration is whether the district court misinterpreted the fair distribution of the recovery prong of the three-part test, erring in its interpretation of Richards as providing an alternative basis for denying Collis' request for setoff. In Richards, Donald Richards purchased 49% of the stock of Bryan Travel Service, a Kansas corporation, in 1982. The other 51% of the stock was owned by Bryan World Tours, Inc. (Tours). Richards served as president and chief executive officer of Bryan Travel Service and served on its board of directors. The other three positions on board of directors were filled by stockholders, directors, and officers of Tours. Richards served as president and chief executive officer for the first year without drawing a salary, and then drew a salary of $2,000 per month with no increase until the conclusion of his employment. The board of directors never authorized a dividend or bonus. Tours afforded financial backing to Bryan Travel Service through a series of loans made without Richards' consent or knowledge and assessed interest against the loans. Bryan Travel Service was to repay the loans whenever there was any surplus cash flow. According to Richards, the loans were in reality capital contributions and the loan payments were disguised dividend payments for Tours. In 1987, the board of directors of Bryan Travel Service became dissatisfied with Richards' job performance and resolved to either ask him to resign or to terminate him. After his termination, Richards, the minority shareholder, filed suit against the majority shareholder Tours, its directors, officers, and shareholders, alleging fraud, breach of contract, and breach of fiduciary duty. The district court disposed of Richards' claims through a grant of summary judgment, and Richards appealed. The Court of Appeals noted that at the heart of Richards' fiduciary duty claim was the allegation that the defendants manipulated the financial papers of Bryan Travel Service to hide profits in order to avoid paying him additional compensation by way of dividends or bonuses. The Court of Appeals found that while Richards could bring an individual claim of injury for the termination of his employment, all other breach of fiduciary duty claims involved injuries to the corporation which should have been brought in a shareholders derivative action under K.S.A. 60-223a. However, the Court of Appeals noted: [A]n increasing number of courts [were] abandoning the distinction between a derivative and a direct action because the only interested parties [were] the two sets of shareholders. Furthermore, some courts have recognized that it is often difficult and futile to bring a derivative action against a closely held corporation. As explained by one authority, `[e]ven if a minority shareholder overcomes procedural hurdles in a derivative action, a strong disadvantage is that any recovery accrues to the corporation and hence remains under the control of the very parties who may have been defendants in the litigation.' [Citation omitted.] For this reason, some courts permit oppressed minority shareholders to bring direct suits for breaches of fiduciary duties by the majority, even though the minority shareholders' grievance is primarily based on damage to the corporation. [Citation omitted.] Richards, 19 Kan. App.2d at 962-63. Relying in part on this court's holding in Sampson v. Hunt, 233 Kan. 572, 584-85, 665 P.2d 743 (1983), that `directors have the power to control and direct the affairs of the corporation, and in the absence of fraud, courts will generally not interfere on behalf of a dissatisfied stockholder with the discretion of the directors on questions of corporate management, policy or business,' (emphasis added) the Court of Appeals crafted a close corporation exception to the requirement that a minority shareholder bring a derivative action. 19 Kan. App.2d at 964. Noting that Richards had presented substantial evidence of fraudulent inducement, the Court of Appeals opined that this court would recognize an exception to the requirement that a minority shareholder bring a derivative action when frozen out of the management of a close corporation through oppressive majority conduct. 19 Kan. App. 2d at 964. The Richards court concluded that if a corporation is closely held, a court, in its discretion, may treat an action raising derivative claims as a direct action if it finds to do so will not (1) unfairly expose the corporation to a multiplicity of actions; (2) materially prejudice the interests of creditors in the corporation; or (3) interfere with a fair distribution of the recovery among all interested persons. 19 Kan. App.2d at 965. Mynatt and Mynatt Truck argue that the district court's determination that Collis' claims for breach of fiduciary duty should not be allowed because it would interfere with a fair distribution of recovery constitutes a negative finding. They assert that such a finding cannot be disturbed absent a showing of arbitrary and capricious disregard of undisputed evidence. A negative finding by the trial court means the party with the burden of proof failed to meet that burden. An appellate court will not disturb such a finding absent proof of an arbitrary disregard of undisputed evidence, or some extrinsic circumstance such as bias, passion, or prejudice. In re Estate of Haneberg, 270 Kan. 365, Syl. ¶ 6, 14 P.3d 1088 (2000). Collis and Hughes contend that the district court misinterpreted the third prong of the three-part test set forth in that case, incorrectly interpreting a fair distribution of recovery to mean a balancing test of the respective wrongdoing of the parties rather than as a directive to consider the effect of recovery on any other nonparty shareholders. We find that the district court's statements in the memorandum decision indicate that it applied an incorrect interpretation of the legal requirement of the third prong of the test. As such, the district court's conclusions in regard to the third prong cannot be characterized as a negative finding. The Richards court cited within the opinion the persuasive authority of the American Law Institute's Principles of Corporate Governance: Analysis and Recommendations § 7.01(d), p. 733 (Tentative Draft No. 11, 1991). The American Law Institute subsequently adopted and promulgated § 7.01(d) on May 13, 1992, noting that although subsection (d) related to an issue infrequently faced by courts, the rule was consistent with the trend of recent decisions. A.L.I., Principles of Corporate Governance: Analysis and Recommendations § 7.01(d), Comment a. Comment e of § 7.01(d) states: Essentially, § 7.01(d) follows the position taken by the Ninth Circuit in Watson v. Button, 235 F.2d 235 (9th Cir. 1956), which found that the usual policy reasons requiring an action that principally alleges an injury to the corporation to be treated as a derivative action are not always applicable to the closely held corporation. The facts of Watson are illustrative: a multiplicity of actions could not have resulted in that case, because there were only two shareholders; creditors could not have been injured, because each shareholder had agreed to be individually liable for corporate debts; finally, and individual recovery would not have prejudiced the rights of any other shareholders. ... Although § 7.01(d) does not follow the fullest potential reach of Donahue to the extent of converting all intracorporate disputes that would be normally characterized as derivative actions into direct actions whenever the case involves a closely held corporation, it gives the court discretion to treat the action as direct if the policy considerations enumerated in Comment d are satisfied. In general, when a direct action is brought on behalf of the entire class of injured shareholders and the corporation's solvency is not in question, there is less reason to insist that the action be brought derivatively. The court should then have equitable power to treat the action as direct if the corporation is closely held.... (Emphasis added.) A.L.I., Principles of Corporate Governance: Analysis and Recommendations § 7.01(d), Comment e. The American Law Institute's comments appear to indicate that a fair distribution of the recovery requires a court to consider the effect of recovery on any nonparty shareholders as Collis and Hughes assert. Here, all interested shareholders were parties to the suit, and individual recovery would not have prejudiced the rights of any nonparty shareholders and thus would not have interfered with a fair distribution of the recovery. However, even if we find the district court's holding was a misinterpretation of the third prong, Collis and Hughes' contentions ignore the obvious. In the case of a closely held corporation, the decision whether to allow a party to proceed with a direct suit in lieu of a derivative action is entrusted to the court's discretion. Even if all three prongs of the test were met, the district court, in its equitable power and discretion, could deny Collis and Hughes the ability to proceed directly. [A] trial court's reason for its decision is immaterial if the ruling is correct for any reason. [Citation omitted.] KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 110, 118, 936 P.2d 714 (1997). Because Richards entrusts the decision of whether to allow a direct action involving a close corporation to the court's discretion, the district court did not err in using that case as an alternative basis for denying Collis' request for setoff.
Next, Collis and Hughes argue that strict mutuality is not required for an equitable setoff and assert that the district court erred as a matter of law by relying on the lack of strict mutuality between the parties as a basis for denying equitable setoff to them. Collis and Hughes request a remand to the district court to determine the proper amount of setoff that should be allowed. The function of an appellate court is to determine whether the trial court's findings of fact are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is such legal and relevant evidence a reasonable person might accept as sufficient to support a conclusion. See Sampson v. Sampson, 267 Kan. 175, 181, 975 P.2d 1211 (1999). An appellate court's review of conclusions of law is unlimited. Lindsey v. Miami County National Bank, 267 Kan. 685, 689-90, 984 P.2d 719 (1999). At the posttrial hearing, the district court stated: With respect to the mutuality issue, I also agree with [counsel for Mynatt] that there was not a claim presented in the pretrial order related to the K-1 or against the corporation itself and, therefore, I do not believe that there is any mutuality which would be required for a set off. On appeal, Collis and Hughes do not challenge the district court's finding that they did not make a claim against the corporation itself in the final pretrial order. Collis and Hughes assert, however, that the district court erred in failing to allow them an equitable setoff against the judgment granted to the corporation solely because the parties lacked strict mutuality. Collis and Hughes contend that under equitable principles, a court is not bound by the fiction of a corporate entity and, thus, argue they did not need to plead or prove veil-piercing for the court to evaluate their claim for setoff against Mynatt and Mynatt Truck. The thrust of Collis and Hughes' contention is that there is a well-recognized exception to the requirement of strict mutuality when a court's equitable powers are invoked. They maintain that when equitable setoff is requested, a court cannot simply deny setoff based on lack of mutuality alone, but must proceed to consider the facts and circumstances of the case before denying setoff. In support of their contention that the exception to strict mutuality is well-recognized, Collis and Hughes cite three foreign cases: Black & Decker Mfg. Co. v. Union Tr. Co., 53 Ohio App. 356, 4 N.E.2d 929 (1936); Poultry Growers v. Westark Prod. Cred., 246 Ark. 995, 440 S.W.2d 531 (1969); and Feucht v. Real Silk Hosiery Mills, Inc., 105 Ind. App. 405, 12 N.E.2d 1023 (1938). Collis and Hughes also contend that the appellate courts of Kansas have recognized the equitable exception to strict mutuality in various contexts in Carson v. Chevron Chemical Co., 6 Kan. App. 2d 776, 635 P.2d 1248 (1981); Atchison County Farmers Union Co-op Ass'n v. Turnbull, 241 Kan. 357, 736 P.2d 917 (1987); Taylor v. Taylor, 180 Kan. 213, 303 P.2d 133 (1956); Docking v. Commercial National Bank, 118 Kan. 566, 235 Pac. 1044 (1925); and in Pierce v. Security Co., 60 Kan. 164, 55 Pac. 853 (1899). They claim that in Carson the Court of Appeals indicated that a court's failure to consider equitable setoff based solely on a lack of strict mutuality would be error. Mynatt and Mynatt Truck present a two-part argument in support of the district court's decision not to allow Collis and Hughes a setoff. First, Mynatt and Mynatt Truck maintain that Kansas case law requires mutuality, i.e., that the judgments be between the same parties, for setoff. They contend that the Kansas cases cited by Collis and Hughes did not concern nonmutual claims. In support, they cite Alexander v. Clarkson, 100 Kan. 294, 164 Pac. 294 (1917); State ex rel. Stephan v. Commemorative Service Corp., 16 Kan. App.2d 389, 823 P.2d 831 (1991); and Mohr v. State Bank of Stanley, 244 Kan. 555, 770 P.2d 466 (1989). Second, Mynatt and Mynatt Truck declare that even though an exception to the requirement of mutuality has not been specifically recognized in Kansas, should this court recognize the exception cited in Collis and Hughes' brief, Collis would fail to pass its application. In Atchison County Farmers Union Co-op Ass'n, defendant Turnbull sought to set off his co-op equity credit account against a debt he owed to the plaintiff co-op on an open account. Equity credits are not an indebtedness presently due and payable, but instead represent an interest to be paid at an unspecified later date determined by the board of directors. Thus, Turnbull sought to set off an unmatured interest against a presently due judgment. The bylaws of the co-op specified that equity credit accounts could be retired for members attaining age 65 or moving their farm operation from the co-op's territory. Turnbull argued that since he had not farmed since 1983, had not produced agricultural products since 1981, and had lost his home and all of his farmland, principles of equity required that he be allowed to set off his co-op equity credits against his debt. There, this court recited the applicable rules relative to the case: To allow a debt not maturing during an action to be set off against one already due would be to change the contract and advance the time of payment. Equitable setoffs of unmatured obligations may be allowed under special circumstances, such as insolvency of the obligor or probable difficulty in collecting the obligation at maturity, but such setoffs are largely within the court's discretion. 241 Kan. at 361. An equitable setoff will be allowed when the party seeking it shows some equitable ground therefor, and it is necessary to promote justice, to avoid or prevent wrong or irremediable injustice, or to give effect to a clear equity of the party seeking it. There is some authority to the effect that the equitable grounds which will warrant overriding the statutory law have been limited to insolvency or nonresidence, but it is generally held that these are not the sole grounds. 80 C.J.S., Set-off and Counterclaim § 5. 241 Kan. at 362. The trial judge overrode the co-op's bylaws and statutory law, adopting the principle of equitable setoff due to insolvency, and allowed Turnbull to set off his equity credits. On appeal, this court considered whether the trial judge could override statutory law (on cooperatives) and apply equitable principles, or whether the legislature had made a statement of public policy prohibiting the application of equity. Noting that the granting or withholding of relief properly depends upon considerations of public interest, this court found that the declared public policy of Kansas was to encourage cooperative marketing associations. This court thus held that the trial judge could neither grant an equitable setoff to Turnbull nor substitute his judgment for the Co-op's board of directors. 241 Kan. at 363. Atchison County Farmers Union Co-op Ass'n involves mutual but not coexistent (presently due) debts. Because the question of nonmutual claims is not the focus of the decision, the case is not clearly on point. Likewise, in Taylor v. Taylor, 180 Kan. 213, 303 P.2d 133 (1956), there was no question of mutuality of the parties because certainly in an action for divorce and division of property there is mutuality of parties and of claims. 180 Kan. at. 218. Docking, 118 Kan. 566, was a case where the receiver of an insolvent bank sought to establish the priority of his claim on a deposit account set up by the insolvent bank at Commercial National Bank. Commercial National Bank argued that its right to set off the indebtedness of the insolvent bank against the deposit account superceded the right of the receiver to the funds. Again, this case involves priority of claims on a deposit account and does not directly concern the question of mutuality between parties requesting a setoff of judgments. In Pierce, 60 Kan. 164, the court considered whether a stockholder in a Kansas corporation who was statutorily liable to corporate creditors could, by way of setoff or defense, extinguish his liability to a judgment creditor of the corporation because the corporation was indebted to him on claims and demands greater than the value of his stock that accrued before he became liable to the third party as a stockholder. Under the statute, any creditor could institute an independent action against any stockholder for enforcement of corporate debts up to the value of his or her stock. 60 Kan. at 166. The Pierce court found that [t]he claim of the stockholder is not a set-off in its technical legal sense, but it is an equitable defense which he is entitled to make. 60 Kan. at 165. Whether the Pierce court was alluding to the lack of mutuality of the parties or pointing to the fact that the obligations did not arise from the same transaction is unclear. Because the Pierce court characterizes the claim of the defendant as an equitable defense, not a setoff, we decline to rely on Pierce as supporting the proposition that mutuality is not required for equitable setoff. Carson, 6 Kan. App.2d 776, the final Kansas case cited by Collis and Hughes, involved several lawsuits consolidated on appeal which arose after the herbicide Paraquat, manufactured by Chevron Chemical Co., failed to kill existing weeds after being applied to the no-till acreage of several farmers. In discussing the Carson case, the description of that case's complicated procedural history has been simplified to focus solely on the issue important here. The second part of the Carson appeal discussed district court case No. 77-C-4, where Donald Johnson brought suit against defendants Chevron Chemical Company and Waits Homegas, Inc., the retailer and applicator of the herbicide. Waits counterclaimed against Johnson for the amount of the herbicide bill. Almost 2 years before the jury verdict, Johnson assigned to Collingwood Grain Company the right to receive up to $50,000 of any proceeds awarded to him in the case after attorney fees were deducted. The jury awarded judgment to Johnson against Chevron in the amount of $28,350 and against Waits in the amount of $5,000. In addition, the jury awarded Waits $3,360 on its counterclaim against Johnson. After the verdict, Collingwood Grain filed a motion to intervene and asserted its right to priority in the judgments awarded to Johnson. The district court held that Johnson's assignment to Collingwood Grain was valid, denied setoff of Waits' judgment against Johnson, and held that when Waits paid the judgment due, the proceeds should be forwarded to Collingwood Grain pursuant to its assignment. Waits appealed, asserting that the trial court erred in finding that no right of setoff existed. The Court of Appeals refused to overturn the trial court's denial of setoff, stating that it was apparent from the record that the trial court was cognizant of the rule in Taylor and was exercising its discretion in ordering that there be no setoff. 6 Kan. App.2d at 793. The Court of Appeals noted that the trial court did not deny Waits' request because the possibility of a setoff did not exist, but rather justified its decision based on the trial court's discretionary power discussed in Taylor, which stated: `It may be conceded that the mere fact that mutual judgments exist does not as a matter of right entitle a party to have one set off against that of the other. It has often been held, however, that a setoff as between judgments is within the discretion of the court to which the application is made, that the court shall take into consideration the equities between the parties or those claiming under them with notice thereof, and that if the court to which the application is made allows the setoff, it will only be disturbed in a case such as is under consideration here where it appears that the setoff has operated to the prejudice of a third party without notice of the equities when an assignment has been made to him and he complains.' [Taylor] 180 Kan. at 218. .... The mere existence of mutual judgments, though rendered in the same court and about the same time, does not entitle a party to an order or judgment of setting one of them off against the other upon demand. `Whether the power to set off judgments shall be exercised is to be determined in every case upon equitable considerations, and it will never be done where it will operate as an injustice or infringe upon the substantial rights of others.' [Citation omitted.] 6 Kan. App.2d at 793. Our review of Carson reveals that mutuality between Waits and Johnson was not in question and, thus, does not serve as justification for Collis and Hughes' proposition that strict mutuality is not required. We turn now to the Kansas cases cited by Mynatt and Mynatt Truck. In Alexander, 100 Kan. 294, the court considered whether an equitable setoff should be allowed where one party had assigned his interest in a favorable judgment from the litigation to a bank. First, the court noted: There is no objection to an equitable proceeding to set off one judgment against another unless intervening rights are prejudiced thereby. 100 Kan. at 297. Because a bank had acquired the assignment of Clarkson's judgment against Alexander and it was subject to a lien, the court saw no way to allow a setoff. The Alexander court stated: `The existence of mutual judgments does not entitle a party to have one set off against the other arbitrarily as a matter of right. Whether application for set-off is by motion or through a proceeding in equity, it is to be determined upon equitable considerations, and is only allowed when it will promote substantial justice. This was the ruling in Herman v. Miller, 17 Kan. 328, where it was said that the exercise of that power is in a measure discretionary, and it will not be exercised in cases in which it would be inequitable so to do. [Citations omitted.] .... `The setting off of one judgment against another is not a legal right, but is a matter of grace, and the question whether a set-off should or should not be decreed rests in the sound discretion of the court to which the application is made.... The action of a court of law in granting or refusing a set-off is governed by the principles of equity and justice, and allowed only where good conscience requires it. It will never be permitted when the effect would be to deprive a party of his legal rights. 100 Kan. at. 298. Before one judgment can be set off against another judgment there must be mutuality in those judgments and no contravening equities. 100 Kan. 294, Syl. ¶ 2. Because the assignments of the judgments sought to be set off attached before the proceeding to set off the judgments had begun, the Alexander court found the judgments were not mutual and were never coexistent cross-demands in the hands of the parties. Thus, the court foreclosed the possibility of a setoff. In Commemorative Service Corp., 16 Kan. App.2d 389, the Court of Appeals held that an individual defendant in a breach of contract action involving the sale of burial markers on a preneed basis through nine cemetery corporations could not set off amounts owed to him by the new owners of the corporations from the damages award against him because the new owners were not parties to the action. The court found that the defendant seeks a remedy which is not possible within the context of the current litigation. The parties whom he contends he should be allowed to set off against are not parties to this action, and, obviously, he will have to seek another forum in which to assert those claims. 16 Kan. App.2d at 407. In Mohr, 244 Kan. 555, Tri-County, a farm implement dealership, obtained a judgment against the State Bank of Stanley (Stanley Bank) for recovery on checks forged by James Lloyd, a coowner of Tri-County who had embezzled money from the company. Stanley Bank based its claim for setoff on Kansas Bankers Surety Company's (KBS) (surety for the bank) liquidated contract claim against Tri-County. The trial court denied Stanley Bank's motion for setoff and Stanley Bank appealed. There, this court wrote: Stanley Bank claims a right of setoff based on claims of KBS, not Stanley Bank. KBS is not a party to this action. Both KBS and its assignor, John Deere, contested previous efforts to bring them into this litigation. In Alexander v. Clarkson, 100 Kan. 294, 299, 164 Pac. 294 (1917), which is cited by Stanley Bank, this court found that there could be no setoff because the two judgments involved were not mutual. Stanley Bank relies on Herman v. Miller, 17 Kan. 328, 332 (1876). In Miller this court said, `[A] party must be the absolute and beneficial owner of a judgment before he can have it off-set a judgment against him.' KBS is obligated to reimburse Stanley Bank for the judgment in favor of Tri-County; however, KBS is not a party to this action and its claims against Tri-County arise from its settlement with John Deere, not its role as surety for Stanley Bank. The judgment against Stanley Bank and the claims against Tri-County are not mutual for purposes of setoff. In addition, KBS' claims against Tri-County were not matured at the time of Stanley Bank's motion for setoff.... It was not an abuse of discretion for Judge Bouska in case No. 61,167 to deny Stanley Bank's motion for setoff. .... At the hearing on the various motions, the attorney for KBS and Stanley Bank requested an evidentiary hearing on the factual issues raised by the motions. Carson v. Chevron Chemical Co., 6 Kan. App.2d 776, 635 P.2d 1248 (1981), is cited in support of the argument that an evidentiary hearing should have been held on the motion for setoff. In Carson, the trial court conducted a post-judgment hearing to determine the priorities in the proceeds of the judgment. The Court of Appeals did not address the issue of the appropriateness of an evidentiary hearing. In Carson, it was clear that mutual judgments were involved; therefore, the trial court found it necessary to conduct an evidentiary hearing. In the case at bar, it is clear, without any evidentiary hearing, that mutuality does not exist between Stanley Bank and Tri-County. Stanley Bank is not attempting to offset its own claim, but the claim of KBS, which is not a party to this action. In addition, even if there were mutuality, there is no judgment upon which to base a setoff. An evidentiary hearing was not necessary to make such a determination. 244 Kan. at 565-66. From the Kansas cases cited by the parties, we are able to synthesize the following general precepts are applied by Kansas courts. First, setoff requires mutuality, meaning that the same parties owe a sum of money to each other. There must be at least two distinct debts or judgments that have matured at the time of the motion for setoff. The entities indebted to one another must both be parties to the litigation. In addition, the parties' judgments or debts must coexist, i.e., both must be determined, presently due, and owing at the time of setoff. A district court need not conduct a postjudgment evidentiary hearing unless it is clear mutual coexisting judgments are involved. Further, the party seeking equitable setoff must demonstrate equitable grounds for its application. The setoff must not prejudice intervening rights. Moreover, an equitable setoff will not be upheld on appeal where it contradicts public policy. Finally, equitable setoff is not a legal right, but is a matter of grace, and the question whether a setoff should be decreed rests in the sound discretion of the court to which the application is made. Although the district court properly denied equitable setoff based on the lack of strict mutuality between the parties, it is clear from the record that the district court considered the scope of the wrongful conduct of both parties and balanced the equities of both parties in coming to a decision. Collis and Hughes admit in their brief that the district court performed a balancing test of the respective wrongdoing of the parties. A party seeking equitable setoff must demonstrate equitable grounds for its operation. In its memorandum decision, the district court wrote that given the knowledge of any wrongful conduct by Mynatt vis-a-vis the corporation, and the far greater scope of Collis' wrongful conduct, the court finds that a direct action by Collis against Mynatt personally should not be allowed here as it would `interfere with a fair distribution of the recovery among interested persons.' This statement is an indication that the district court did not find that Collis and Hughes had demonstrated equitable grounds for the application of the remedy of equitable setoff. Mynatt and Mynatt Truck also maintain on appeal that (1) the unclean hands doctrine bars Collis from obtaining an equitable setoff; (2) Collis and Hughes cannot set off claims against Mynatt individually due to their failure to allege or prove a claim for alter ego or piercing the corporate veil; and (3) Collis and Hughes may not set off claims since the trial court did not find they were damaged. Because we are upholding the district court's decision to deny equitable setoff for the reasons discussed above, we need not address the remaining assertions of Mynatt and Mynatt Truck.