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

Heading: Richards v. Bryan

Text: 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.