Opinion ID: 2570512
Heading Depth: 2
Heading Rank: 3

Heading: Doctrine of strict mutuality

Text: 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.