Court Opinion

ID: 8482900
Source: CourtListenerOpinion
Date Created: 2022-11-10 16:03:54.923079+00
Date Added: 2024-06-11T16:49:42.742451
License: Public Domain

NOT DESIGNATED FOR PUBLICATION

                                            No. 124,605

             IN THE COURT OF APPEALS OF THE STATE OF KANSAS

                                           NVLCC, LLC,
                                            Appellant,

                                                   v.

                              NV LENEXA LAND HOLDINGS, LLC,
                                        Appellee.

                                  MEMORANDUM OPINION

       Appeal from Johnson District Court; PAUL C. GURNEY, judge. Opinion filed November 10, 2022.
Affirmed.

       Justin T. Balbierz and Mark J. Lazzo, of Mark J. Lazzo, P.A., of Wichita, for appellant.

       Robert S. Caldwell, of Caldwell & Moll, L.C., of Overland Park, for appellee.

Before ARNOLD-BURGER, C.J., BRUNS and HURST, JJ.

       PER CURIAM: NVLCC, LLC appeals from the district court's ruling that it did not
prove the essential elements of civil conspiracy against NV Lenexa Land Holdings, LLC.
Although the parties asserted various claims against one another before the district court,
the only issue presented on appeal is whether the district court erred in denying NVLCC,
LLC's conspiracy claim after hearing the evidence presented at a two-day bench trial.
Based on our review of the record on appeal in light of Kansas law, we conclude that the
district court did not err in finding that NVLCC, LLC failed to prove one or more
requisite elements of its civil conspiracy claim. Thus, we affirm.

                                                   1
                                             FACTS

       At the outset, we note that most of the material facts in this case have been
stipulated to by the parties. In particular, the parties stipulated to the factual findings
made by an arbitrator in a collateral arbitration proceeding. Moreover, the facts material
to the resolution of this appeal were set forth in a 22-page journal entry issued by the
district court. Accordingly, we will summarize the facts in this section and will address
additional facts as necessary in the analysis section of our opinion.

       The appellant, NVLCC, LLC, is a Kansas limited liability company. Steve and
Julia Sobek—who are not parties to this appeal—own all the membership interests in the
company. The appellee, NV Lenexa Land, LLC, is also a Kansas limited liability
company with several members. Considering the similarities in the names of these
limited liability companies—as well as the fact that several other limited liability
companies were involved in the underlying real estate transaction—we will refer to the
parties to this appeal as the appellant and the appellee throughout the remainder of this
opinion.

       In 2015, Sobek located a 3 1/2-acre tract of land near the Lenexa City Center that
he believed would be "ripe for residential development." Searching for potential partners
to help purchase and develop the real property, Sobek contacted Zach Henderson and his
wife, Jessica Spalding. Both indicated an interest in developing the property and
recommended bringing a couple with whom they had previously worked—Neil Robinson
and his wife, Elisabeth Embry—into the deal.

       The three couples subsequently formed Parthenon Investing, LLC (Parthenon).
However, the couples did not hold membership interests in Parthenon in their own
names. Instead, each couple formed separate limited liability companies to hold one-third
membership interests in Parthenon. Under the terms of an operating agreement entered

                                               2
into by the members, Henderson and Sobek were to serve as the initial co-managers of
Parthenon.

       Pursuant to the operating agreement, the co-managers were granted "full and
exclusive right, power, and authority to manage the affairs of the Company and make all
decisions with respect thereto." In addition, the agreement provided that the "right,
power, and authority of the [co-managers] pursuant to this Agreement shall be liberally
construed to encompass all acts and activities in which a limited liability company may
engage under the Kansas Act."

       Complicating matters further, the three couples also used their separate limited
liability companies to form North Village Fund, LLC (North Village Fund) as a vehicle
to hold title to the real property during development and construction of the project. It is
undisputed that the parties intended that Parthenon serve as the manager of North Village
Fund and that any profits were to be divided evenly between Parthenon's members. Each
member of North Village Fund made initial investments of approximately $3,333. There
is no evidence in the record to suggest that any additional contributions were made by the
members of North Village Fund.

       In September 2015, North Village Fund purchased the real property in Lenexa for
$850,000. Approximately half of the funds used to purchase the land was obtained from
various investors, and North Village Fund borrowed the remaining $425,000 from
CoreFirst Bank. The loan was secured by a first mortgage on the real property. In
addition, the loan was personally guaranteed by the Sobeks, Henderson, Spalding,
Robinson, and Embry.

       Over the course of the next year, the proposed development of the real property
stalled, and the relationship between the various stakeholders began to deteriorate.
Significantly, a dispute arose between Sobek and Henderson as to what company to use

                                              3
to obtain needed funding and financing. As a result, Henderson scheduled a special
meeting of the members of Parthenon held on September 19, 2016, at which North
Village Fund's purchase of the real property was ratified. In addition, Sobek was removed
as Parthenon's co-manager, and Robinson was appointed to serve as co-manager in his
place.

         On October 5, 2016, Henderson and Spalding created Elux Homes, LLC (Elux
Homes). Spalding was the sole member and manager of the new limited liability
company. According to a press release, Elux Homes planned to build a single-family
smart home community at Lenexa City Center. However, Sagebrush Companies, Inc.
(Sagebrush) acquired the promissory note and mortgage on the real property from
CoreFirst Bank a few months later and commenced a foreclosure action in district court.

         North Village Fund then entered into an agreement to sell the real property to
Plutus Development, Inc. (Plutus Development) for $1.3 million. However, this sale was
never completed. Shortly thereafter, on March 8, 2017, Henderson created another
limited liability company—the appellee in this case—in which Elux Homes was the sole
member and manager. Less than a week later, Plutus Development assigned its rights
under the real estate sale agreement to the appellee. Henderson executed the assignment
both in his capacity as chief executive officer of Plutus Development and as manager of
the appellee.

         The next day, North Village Fund transferred its sole asset—the real property in
Lenexa—to the appellee for $1.3 million. We pause to note that the parties to this appeal
have agreed that $1.3 million was the approximate value of the real property at the time
of transfer. To pay the outstanding balance on the promissory note and mortgage against
the real property, the appellee obtained a $470,000 loan from Richmond Morgan, LLC.
The loan documents were executed by Henderson in his capacity as manager of the
appellee and in his capacity as manager of North Village Fund.

                                              4
       Additionally, the appellee delivered an unsecured $850,000 promissory note to
North Village Fund. The note was signed by Henderson in his capacity as the appellee's
manager. Furthermore, the terms of the promissory note were set by Henderson acting
concurrently in his capacity as manager of North Village Fund and manager of the
appellee. According to Henderson, he entered into these transactions to avoid having the
real property go through foreclosure.

       On July 1, 2017, Andy Talbert—a real estate professional involved in capital
formation—was named as the appellee's manager. Talbert began working on obtaining
investors for the development of the property. His attempts were successful and
eventually the appellee began the process of developing the real property.

       After learning that North Village Fund had sold the real property to the appellee,
the appellant instituted an arbitration proceeding against Parthenon, Henderson, and
Robinson. The proceeding was brought under a mandatory arbitration clause in
Parthenon's operating agreement. In the arbitration proceeding, the appellant asserted—
among other things—that Henderson had breached his fiduciary duty of loyalty.

       On June 18, 2019, the arbitrator commenced a 3-day arbitration hearing. After
considering the evidence presented by the parties, the arbitrator ruled in favor of
Parthenon and Robinson. However, the arbitrator concluded that Henderson had breached
his fiduciary duty of loyalty and granted the appellee an award in the amount of $283,333
plus interest at the rate of 6% per annum.

       Specifically, the arbitrator found that "[t]he unfairness relating to the transfer of
the Property arose not from the fact of the transfer, or from the purchase price per se . . .
but from the terms and subsequent handling of the loan from North Village Fund to NV
Lenexa Land Holdings . . . ." The arbitrator reasoned that because North Village Fund is

                                              5
owned and managed by Parthenon, the harm was suffered by Parthenon's members—
which included the appellant.

       In determining the amount of the award, the arbitrator explained:

       "North Village Fund/Parthenon no longer have the Property and instead have a non-
       paying, unsecured $850,000 Promissory Note with an illusory due date which may be
       extended into perpetuity. By putting North Village Fund and Parthenon in that position,
       Henderson breached his fiduciary duties. The injury to Parthenon member NVLCC is that
       it has been deprived of its one-third share of the proceeds from the sale of the Property.
       Thus, an award against Henderson and in favor of NVLCC is appropriate in the amount
       of 33.33% of $850,000, or $283,333, with interest at the annual rate of 6% from March
       14, 2017 until full payment."

       The arbitration award was not appealed. Moreover, the appellant obtained a
confirmation of the award in Johnson County District Court. Accordingly, the appellant
has an in personam judgment against Henderson for the amount of the award.

       On November 2, 2018, while the arbitration proceeding was still pending, the
appellant filed this action asserting several claims against the appellee seeking to hold it
jointly and severally liable for Henderson's breach of fiduciary duty. During the pendency
of this action, the appellee sold the real property to a third party for $2,150,000. So that
the sale could close, the appellant agreed to release the lis pendens against the real
property that resulted from the filing of this action. In exchange, the appellee agreed to
place $350,000 from the sale proceeds into escrow pending the outcome of this case.
Consequently, at closing $1,019,500 was paid to North Village Fund to pay off the
amount due under the promissory note, $350,000 was placed into escrow, and
$598,498.27 was paid to the appellee. Ultimately, the appellant received a check in the
amount of $20,701.88 as a return on its initial investment of $3,333.34.

                                                    6
       The district court conducted a bench trial in this case on April 8 and 9, 2021.
When the matter came to trial, the appellant had only two remaining claims against the
appellee—a claim for civil conspiracy and a claim for unjust enrichment. The district
court also considered the appellee's counterclaims against the appellant as well as the
appellee's third-party claims against the Sobeks. The only remaining claim material to the
issue on appeal is the civil conspiracy claim.

       Prior to trial, the parties stipulated to the findings of fact set forth in the arbitration
award. In addition, the parties presented the testimony at trial of Sobek, Henderson, and
Talbert regarding the convoluted web of transactions that occurred relating to the
purchase, proposed development, and transfer of the real property. Following the trial,
counsel for the parties presented closing arguments as well as proposed findings of fact
and conclusions of law to the district court.

       On June 29, 2021, the district court filed a comprehensive 22-page journal entry of
judgment in favor of the appellee. Significant to this appeal, the district court ruled that
the appellant had failed to establish the essential elements of a civil conspiracy. First, the
district court concluded that the appellant had failed to prove that "two or more parties"
participated in a conspiracy. Second, the district court concluded that the appellant had
failed to prove that the alleged conspirators had committed "an unlawful act resulting in
an unlawful result."

       In particular, the district court ruled the element of "two or more persons" was not
satisfied because—at all times relevant to this case—Henderson was acting in his
capacity as manager of the appellee and in his capacity as manager for North Village
Fund. The district court reasoned that "there is no evidence that 'two or more persons'
conspired" because "there were two entities, managed by the same person, who signed
and approved the transaction in question." As a result, "the transfer of the Property was
neither contemplated nor executed by and between 'two or more persons.'" In addition,

                                                7
the district court found that the element of an "unlawful overt act" was not satisfied
because the appellant had not proved that the appellee committed an act independent of
Henderson's breach of fiduciary duty.

       In reaching its decision, the district court explained:

               "72. 'For a civil conspiracy claim to be actionable, Kansas law requires [the]
       "commission of some wrong giving rise to a cause of action independent of the
       conspiracy."' . . . Therefore, Defendant NV Lenexa must have personally committed an
       unlawful act for a claim of civil conspiracy to exist.
               "73. Here, there was no unlawful act which produced an unlawful result. The
       Property was transferred to Defendant NV Lenexa after a foreclosure action was
       commenced by Sagebrush on the Property. With a pending foreclosure action against the
       Property, Henderson, via North Village Fund, transferred the Property to Defendant NV
       Lenexa under the Note so that the Property could be developed. This was a fair market
       transaction and, according to the arbitrator, was not done for any improper purpose. If the
       transaction was not improper, it cannot be considered to be an unlawful act with an
       unlawful result.

               ....

               "76. There was no determination by the arbitrator of any unlawful act by
       Defendant NV Lenexa. Quite the contrary, Defendant NV Lenexa paid fair market value
       for the Property. Plaintiff is attempting to hold Defendant NV Lenexa liable under a
       standard that requires an unlawful act that did not occur. Moreover, the arbitrator found
       the sole 'wrong' was a breach of the fiduciary duty by Henderson to Parthenon, which
       does not involve Defendant NV Lenexa."

       The district court noted that the "only party to this action that gained from the sale
of the property was Plaintiff via Parthenon—which received a significant return on its
investment." The district court also dismissed the appellee's counterclaims and third-party
claims. Likewise, the district court further ordered that the $350,000 being held in escrow

                                                     8
from the sale of the real property be remitted to the appellee based on an agreement by
the parties regarding the outcome of this litigation.

       After the district court denied its motion to alter or amend the judgment, the
appellant timely appealed to this court.

                                           ANALYSIS

Standard of review

       After hearing the testimony, reviewing the documentary evidence, considering the
stipulated facts, and listening to the arguments of counsel, the district court ruled that the
appellant had failed to meet its burden to prove the essential elements of civil conspiracy.
In reaching its decision, the district court appropriately entered findings of fact and
conclusions of law. As a result, because this appeal involves a mixed question of fact and
law, we apply a bifurcated standard of review.

       We review the district court's findings of fact under a substantial competent
evidence standard. In doing so, we disregard any conflicting evidence or other inferences
that might be drawn from the evidence. Next, we exercise an unlimited standard in
reviewing the district court's conclusions of law. See Gannon v. State, 305 Kan. 850, 881,
390 P.3d 461 (2017).

Civil Conspiracy Claim

       On appeal, the appellant contends that the district court erred in finding that it
failed to meet its burden of proving the essential elements necessary to establish a civil
conspiracy. Under Kansas law, the appellant was required to prove each of the following
essential elements of a civil conspiracy at trial: "'(1) two or more persons; (2) an object
to be accomplished; (3) a meeting of the minds in the object or course of action; (4) one

                                              9
or more unlawful overt acts; and (5) damages as the proximate result thereof.' [Citations
omitted.]" State ex rel. Mays v. Ridenhour, 248 Kan. 919, 927, 811 P.2d 1220 (1991); see
Mid-Continent Anesthesiology, Chtd. v. Bassell, 61 Kan. App. 2d 411, 433, 504 P.3d
1069 (2021), rev. denied 315 Kan. 968 (2022). A failure to prove any one of these
elements is fatal to the appellants claim. See Stoldt v. Toronto, 234 Kan. 957, 967-68, 678
P.2d 153 (1984).

       In other words, a civil conspiracy requires a "'concert of action'" between more
than one person. See Aeroflex Wichita v. Filardo, 294 Kan. 258, 275, 275 P.3d 869
(2012). Here, a review of the record reveals that the district court carefully considered the
evidence presented by the parties and determined that the appellant had failed to establish
that "two or more persons" had conspired to commit an unlawful act. We conclude that
this finding is based on substantial competent evidence in the record on appeal.

       Important to the determination of whether two or more persons acted in concert is
the alleged unlawful act. Appellant's argument has evolved, and it now contends that "the
unlawful overt act in furtherance of the conspiracy was the stipulated breach by
Henderson of his fiduciary duty of loyalty to Plaintiff" rather than the property transfer
itself. Therefore, the two or more persons required to form a conspiracy must be
Henderson and appellee, acting through Henderson, and not the two entities that were
parties to the property transfer.

       Corporations are separate and distinct legal entities that act through their officers,
directors, and agents. See Iola State Bank v. Biggs, 233 Kan. 450, 456, 662 P.2d 563
(1983); Mid-Continent Anesthesiology, 61 Kan. App. 2d at 428. As a creation of legal
fiction, a corporation can act only through natural persons. See Dean Operations, Inc. v.
One Seventy Assocs., 257 Kan. 676, 680, 896 P.2d 1012 (1995); Lokay v. Lehigh Valley
Co-Op. Farmers, Inc., 342 Pa. Super. 89, 97, 492 A.2d 405 (1985) ("A corporation is a
creature of legal fiction, and must 'act' through its officers, directors or other agents."). As

                                              10
fictional creatures, corporate entities do not—and cannot—have a state of mind. Instead,
the knowledge and state of mind of their agents are imputed to them. See Holley v. Allen
Drilling Co., 241 Kan. 707, Syl. ¶ 5, 740 P.2d 1077 (1987) (knowledge obtained by agent
acting within scope of authority is the knowledge of the principal).

       Similarly, a limited liability company is a distinct legal entity that is a creature of
statute. See K.S.A. 2021 Supp. 17-7662 et seq. We recognize that limited liability
companies are hybrids to the extent that they are treated like corporations for liability
purposes and treated like partnerships for tax purposes. Nevertheless, they can only act
through natural persons. K.S.A. 2021 Supp. 17-7663(l) (defining "person" to include a
limited liability company); see Black's Law Dictionary 340 (10th ed. 2014) (limited
liability company is "[a] statutorily authorized business entity that it characterized by
limited liability for and management by its members and managers, and taxable as a
partnership for federal income-tax purposes").

       Like a corporation, a limited liability company can act solely through its duly
authorized agents. See Dean Operations, 257 Kan. at 680; Monarch Transport, LLC v.
FKMT, LLC, No. 105,487, 2012 WL 3629861, at *10 (Kan. App. 2012) (unpublished
opinion) (corporation is fictional person that may act only through natural persons such
as its officers and agents); Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F.Supp.2d
1200, 1227 (D. N.M. 2011) (corporation is artificial entity that may only act through its
agents). Moreover, like a corporation, a limited liability company does not—and
cannot—have a state of mind. Thus, just like corporate entities, the knowledge and state
of mind of their agents are imputed to limited liability companies. See Golden Rule Ins.
Co. v. Tomlinson, 300 Kan. 944, 956, 335 P.3d 1178 (2014) (when agent acts with
principal's authorization, the agent's acts are generally imputed to principal); City of
Arkansas City, v. Anderson, 243 Kan. 627, 635, 762 P.2d 183 (1988) ("law of agency
generally imputes the knowledge of an agent to the principal").

                                              11
       Although the district court did not reference the intracorporate doctrine in its
findings, the appellant argues that it was somehow misapplied in this case. However, the
doctrine is quite applicable when determining whether Henderson (as agent of the
appellee) and the appellee (as a creation of legal fiction) can conspire together to breach
Henderson's fiduciary duty to appellant. Under the intracorporate doctrine, a corporation
or other legal entity cannot conspire with its own agents because this would be the same
as conspiring with oneself. See McAndrew v. Lockheed Martin Corp., 206 F.3d 1031,
1036 (11th Cir. 2000). The intracorporate doctrine is based on the basic agency principles
discussed above that the acts of the agents of a legal entity are deemed to be the acts of
the legal entity. So, the acts of the agent and the acts of the legal entity are considered to
be the actions of a single legal actor. See Dickerson v. Alachua Cty. Comm'n, 200 F.3d
761, 767 (11th Cir. 2000). Accordingly, such actions do not meet the element of "two or
more persons" in a claim of civil conspiracy.

       In York v. InTrust Bank, N.A., 265 Kan. 271, 293, 962 P.2d 405 (1998), the Kansas
Supreme Court similarly recognized that "agents . . . acting only in their official
capacities on behalf of a corporate defendant and whose acts are considered those of the
corporation may not form a conspiracy with the corporation." We find the same to be true
of agents acting on behalf of a limited liability company. Consequently, we conclude that
because there is substantial competent evidence in the record on appeal to establish that
Henderson was acting in his official capacity as an agent of the appellee at all times
material to this appeal, the district court correctly determined that the appellant failed to
meet its burden of proving a conspiracy between "two or more persons" as required by
Kansas law.

       We note that courts in other jurisdictions have reached similar conclusions. In
Elliott v. Tilton, 89 F.3d 260 (5th Cir. 1996), the United States Court of Appeals for the
Fifth Circuit found that corporate agents of an incorporated church could not be liable for
civil conspiracy under Texas law—which has the same elements as Kansas—because the

                                              12
church could not conspire with itself. 89 F.3d at 265. Although the Elliott court noted the
law recognizes an exception when an agent is not acting in the best interests of its
principal, it found no evidence that the agents were not acting for the benefit of the
corporation. 89 F.3d at 265. See Vulcan Materials Co. v. Atofina Chemicals Inc., 355
F.Supp.2d 1214 (D. Kan. 2005) (corporation cannot conspire with itself).

       The appellant cites York for the proposition that the element of "two or more
persons" can be satisfied when a corporation conspires with its own agents. 265 Kan. at
293. But the facts in York are substantially different from those in this case. As our
Supreme Court found in York, the alleged agents—an independent contractor and a
licensed realtor—were "clearly separate entities with contractual relationships with each
other and with [the corporation]. In pursuing the conspiracy at issue, they were not acting
in any capacity as officials of [the corporation] so that their activities could be deemed
acts of [the corporation]." 265 Kan. at 293. As such, our Supreme Court concluded that
the asserted agents were outsiders "acting with their own individual interests involved."
265 Kan. at 294.

       In contrast, there is substantial competent evidence in the record to establish that
Henderson is the sole manager and duly appointed agent of the appellee. Further, the
appellee has failed to point us to any evidence in the record that proves Henderson was
not acting in the best interests of the appellee in approving the real estate transaction. As
the district court found, "Henderson did not receive any compensation and the transfer of
the Property . . . was undertaken by Parthenon (the manager of North Village Fund) as
permitted under the Parthenon Operating Agreement." Likewise, the district court pointed
out that "[t]he transfer was made to preserve the asset (the Property) and prevent a
foreclosure."

       In summary, the appellant fails to point to any evidence in the record to establish
that Henderson was acting outside the scope of his authority when he signed the real

                                              13
estate sale agreement. As the arbitrator found, "Henderson didn't gain any 'property'
[from the sale of the property to the appellee], and whether he gained any 'profit or
benefit' is questionable and not proved." Of course, this factual finding—as well as others
made by the arbitrator—was stipulated to by the parties prior to trial.

       We, therefore, conclude that the district court did not err in determining that the
appellant failed to establish the essential element of "two or more persons" conspiring to
commit an unlawful act. Because the failure to establish an essential element prevents the
appellant from prevailing on its claim of civil conspiracy, it is not necessary for us to
reach the remaining arguments raised by the parties in their briefs.

       Affirmed.

                                             14