Hemphill v. Shore

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 102,938

DANIEL L. HEMPHILL,
Appellant,

v.

JAY F. SHORE, Trustee of the SHORE FAMILY TRUST,
Appellee.


SYLLABUS BY THE COURT

1.
When a motion to dismiss raises an issue concerning the legal sufficiency of a
claim, the question must be decided from the well-pleaded facts of a plaintiff's petition.
Dismissal is justified only when the plaintiff's allegations clearly demonstrate the plaintiff
does not have a claim. When a district court has granted a motion to dismiss, an appellate
court must accept as true the facts alleged by plaintiff, along with any inferences that can
reasonably be drawn from the facts. The appellate court then must decide whether those
facts and inferences state a claim based on plaintiff's theory or any other possible theory.
If so, the dismissal by the district court must be reversed.

2.
A district court judge's legal interpretation of a trust instrument is subject to de
novo review on appeal.

3.
A trust instrument's inclusion of language limiting a trustee's payout of income
and invasion of principal and distribution of proceeds from its sale to situations in which
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the trustee deems such payout or distribution necessary to provide for the beneficiaries'
"health, education, support or maintenance" means that the trust is not purely
discretionary. Additional language stating the grantors' purpose to provide for
beneficiaries' "specified needs" reinforces this interpretation.

4.
A petition and attached integral trust instrument adequately plead a cause of action
for constructive fraud when they demonstrate the existence of a confidential relationship
between the parties and the defendant's betrayal of that relationship or breach of a duty
arising from it.

5.
Plaintiff's petition and response to defendant's motion to dismiss alleged sufficient
facts to demonstrate applicability of the discovery rule in K.S.A. 60-513(a)(3) and
inapplicability of the 10-year statute of repose in K.S.A. 60-513(b). Thus plaintiff's cause
of action for constructive fraud was timely filed.

Review of the judgment of the Court of Appeals in 44 Kan. App. 2d 595, 239 P.3d 885 (2010).
Appeal from Sedgwick District Court; TIMOTHY H. HENDERSON, judge. Opinion filed December 7, 2012.
Judgment of the Court of Appeals affirming the district court is affirmed in part and reversed in part.
Judgment of the district court is affirmed in part, reversed in part, and remanded.

Aaron L. Kite, of Rebein Bangerter PA, of Dodge City, argued the cause and was on the briefs for
appellant.

Jeffery L. Carmichael, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued
the cause, and Shannon M. Braun, of the same firm, was with him on the brief for appellee.

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The opinion of the court was delivered by

BEIER, J.: Plaintiff Daniel L. Hemphill appeals the district court's statute of
limitations dismissal of his lawsuit against his uncle, defendant Jay F. Shore, as trustee of
the Shore Family Trust. The Court of Appeals affirmed in Hemphill v. Shore, 44 Kan.
App. 2d 595, 239 P.3d 885 (2010), and we accepted this appeal on Hemphill's petition for
review.

We hold that three of four of Hemphill's causes of action are time barred, but his
claim based on constructive fraud survives. The controlling trust instrument established a
confidential relationship between plaintiff as beneficiary and defendant as trustee, and it
limited defendant's discretion to pay out income and distribute proceeds from the sale of
principal to provide only for defendant's health, education, support, or maintenance.
Plaintiff has alleged that defendant did both for merely personal purposes and that
plaintiff was unaware of the trust and defendant's actions until within 2 years before
filing suit. We thus affirm in part and reverse in part the rulings of the district court judge
and the Court of Appeals panel and remand to the district court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

In 1984, grantors Lee Shore and Linna S. Shore created the Shore Family Trust.
The principal of the irrevocable trust consisted of farmland in Stanton County. The trust
instrument designated as "principal beneficiaries" the grantors' children, defendant Jay
and plaintiff's mother, Susan; their spouses; and "any children subsequently born to Jay
and Susan." Jay and Susan were named trustees; on the death of one, the other was
designated to continue as sole trustee.

Other potentially pertinent provisions of the trust instrument read:
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"ARTICLE IV
"DISPOSITIVE PROVISIONS

"The Trustee shall hold the trust property for the primary benefit of the principal
beneficiaries . . . .

. . . .

"B. General Dispositive Provisions. . . .

"1. Lifetime Disposition of The Shore Family Trust. During the lifetimes of Jay
F. Shore and Susan L. Shore, the Trustee, in said Trustee's sole discretion, shall pay the
income of The Shore Family Trust to Jay F. Shore and Susan L. Shore and/or their issue,
in such amounts as the Trustee may deem necessary to provide for said income
beneficiaries' health, education, support or maintenance. . . .

"In the event the income of The Shore Family Trust is insufficient, in the
Trustee's sole discretion, to provide for the health, education, support or maintenance of
Jay F. Shore and Susan L. Shore, the Trustee may invade the principal of The Shore
Family Trust to the extent said Trustee deems necessary to provide for the benefit of Jay
F. Shore and Susan L. Shore.

"2. Termination. If not earlier terminated by distribution of all assets under the
foregoing provisions, The Shore Family Trust shall terminate upon the death of the
survivor of Jay F. Shore or Susan L. Shore. On termination, the Trustee shall distribute
one-half (1/2) of the then remaining assets of The Shore Family Trust, including any
undistributed income therefrom or any part thereof to the children of Jay F. Shore in
equal shares, per stirpes; and one-half (1/2) of the then remaining assets of The Shore
Family Trust, including any undistributed income therefrom or any part thereof to the
children of Susan L. Shore, in equal shares, per stirpes . . . .

. . . .
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"ARTILE VII
"TRUST ADMINISTRATION

. . . .

"G. Accounting by Trustee. The Trustee may render an accounting at any time to
the beneficiaries of the trusts created herein, and the written approval of a beneficiary
shall be final, binding and conclusive upon any person then or thereafter interested in the
trust for that beneficiary.

. . . .

"I. Discretionary Termination. Notwithstanding any other provision of this
instrument, if the Trustee, in said Trustee's sole and absolute discretion, determines that
the expense of continuing a trust created hereunder has become greater than the trust
assets and the existing situation warrant, the Trustee may terminate such trust and
distribute the trust property, including any undistributed income, to the persons then
entitled to income, with one (1) share distributed to each beneficiary surviving, and the
share of any predeceased named beneficiary shall be distributed to their issue, per stirpes.

. . . .

"K. Reports. The Trustee shall render periodic reports at least annually, to each
beneficiary then eligible to receive the current income of the trust. Each report shall show
all receipts, disbursements and distributions during the period covered, and the assets
then held in the trust. The Trustee's records shall be open at all reasonable times to the
inspection of the beneficiaries of any Trust and to their accredited representatives.

. . . .

"M. Trustee Guidelines. Without in any way limiting the discretion herein given
to the Trustee, Grantor suggests that the primary purpose of The Shore Family Trust is to
provide for the specified needs of Jay F. Shore and Susan L. Shore in equal shares; and
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provided their needs are satisfied to provide for the specified needs of the children of Jay
F. Shore and Susan L. Shore; and provided their needs are satisfied, to provide for the
specified needs of the issue of the children of Jay F. Shore and Susan L. Shore."

Susan died on January 20, 1992, leaving plaintiff Hemphill as her only child.
According to plaintiff's response to the defense motion to dismiss in this case, plaintiff,
who was age 7 or younger when his mother died, was unaware of the trust or its
provisions until his grandmother's estate was probated in 2008. Neither he nor his natural
guardian had ever received a report on the existence of the trust or the status of its assets.

Plaintiff filed this lawsuit on April 8, 2009, attaching a copy of the trust instrument
to his petition.

In Plaintiff's second amended petition, which the district judge permitted to be
filed at the same time he ruled on the motion to dismiss, plaintiff alleged that defendant
sold the farmland that formed the principal of the trust and "distributed all or a substantial
portion of the proceeds to himself, which proceeds were, upon information and belief,
used by Defendant for his own personal purposes"; that "Defendant's actions were self-
dealing and a violation of the Declaration of Trust, the intent of the Trust," his obligations
under the Kansas Uniform Trust Code and applicable prior law, and "his various duties as
a trustee of the Trust, including the duty of loyalty and duty of good faith and fair
dealing"; that the "principal and income of the trust were . . . knowingly converted by
Defendant to his own personal use in violation of the express and implied terms of the
trust and the intent of the trust settl[o]rs"; and that defendant

"was a fiduciary with respect to Plaintiff, and violated his fiduciary duty and duty of
loyalty by converting the principal and income of the Trust to his own personal use
immediately after the death of Plaintiff's mother. He also violated his duty as a fiduciary
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with respect to Plaintiff, breaching the duty of loyalty, duty of good faith and fair dealing,
and other duties placed upon him by virtue of his fiduciary relationship with Plaintiff."

These and other allegations were set up to support plaintiff's four causes of action:
breach of trust, breach of fiduciary duty, conversion, and constructive fraud. Plaintiff
sought imposition of a constructive trust "on the property of the Trust for the benefit of
the beneficiaries" and "such other and further relief in Plaintiff's favor as the Court deems
just and equitable."

Defendant moved to dismiss the action, arguing that the applicable statutes of
limitations and repose barred all of plaintiff's claims.

The district judge ruled in defendant's favor, holding that the trust was a
"discretionary trust granting broad discretionary powers to the trustee to distribute . . .
income and to invade princip[al]." His journal entry of dismissal continued:

"IT IS FURTHER BY THE COURT FOUND that based upon the Trust
Agreement, that in the Trustee's sole discretion the Trustee had the right to invade
princip[al] to the extent said Trustee deemed it necessary to provide for the benefit of Jay
F. Shore and Susan L. Shore. The Trust document is full of discretionary language giving
the Trustees the ability to invade princip[al] when they deem necessary in their sole
discretion.

". . . The plaintiff has requested the inclusion of a claim for constructive trust and
alleges generally that the actions of the Trustee were betrayal of trust but does not allege
any specific acts of fraudulent conduct o[r] misuse or theft of any trust assets.

"THE COURT FURTHER FOUND that based on Stark v. Mercantile Bank NA,
29 Kan. App. 2[d] 717, 725, 33 P.3d 609 (2000), that not every nondisclosure by a trustee
is necessarily fraudulent and the Court must evaluate the allegations of fraud set forth in
the Petition. When evaluating the pleadings in the Amended Petition submitted by the
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Plaintiff relating to the allegations of constructive fraud, the allegations are that Mr.
Shore failed to act appropriately. The Shore Family Trust was a discretionary trust
granting Defendant full and sole discretion with regard to his actions and conduct.

"IT IS FURTHER BY THE COURT FOUND that based on the facts as ple[d],
both in the First Amended Petition and the Second Amended Petition, the statute of
limitations is not tolled and Plaintiff's claims are barred by the statutes of limitations."

Plaintiff appealed unsuccessfully to the Court of Appeals.

The panel gave short shrift to plaintiff's conversion and breach of fiduciary duty
causes of action. On the conversion claim, the panel stated that any conversion, i.e., the
sale of the farmland, took place in 1992 or 1993 or both and thus was barred by the 2-
year statute of limitations period of K.S.A. 60-513(a)(2) or by the 10-year statute of
repose under K.S.A. 60-513(b). The panel also cited the 10-year statute of repose on the
breach of fiduciary duty claim. Hemphill, 44 Kan. App. 2d at 600-01.

Moreover, to the extent plaintiff attempted to rely on his minority at the time the
conversion and breach of fiduciary duty claims arose, the panel held that the 1-year
accommodation contained in K.S.A. 60-515(a) for persons who are minors when their
causes of action accrue was limited by the 8-year statute of repose in the same
subsection; the 8 years had run long before plaintiff filed suit. Hemphill, 44 Kan. App. at
601-02.

In rejecting plaintiff's breach of trust claim for failure to provide accountings and
reports, the panel first ruled that the Kansas Uniform Trust Code, which did not become
effective until January 1, 2003, did not apply. Hemphill, 44 Kan. App. 2d at 602. Under
earlier governing law, the panel ruled, plaintiff's claim that defendant breached the trust
was barred by the 5-year statute of limitations in K.S.A. 60-511(1), which covers causes
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of action arising out of written contracts or promises. In the Court of Appeals' view, any
obligation to account or report ended with defendant's sale of the farmland in 1993 at the
latest, and no cause of action for breach of the trust could be brought later than 1998.
Hemphill, 44 Kan. App. 2d at 602-03.

The panel then turned to plaintiff's constructive fraud claim. It first recited the
definition of such a claim from Nelson v. Nelson, 288 Kan. 570, 583, 205 P.3d 715
(2009):

"'"'[A] breach of a legal or equitable duty which, irrespective of moral guilt, the law
declares fraudulent because of its tendency to deceive others or violate a confidence, and
neither actual dishonesty [n]or purpose of intent to deceive is necessary.'" [Citation
omitted.] Two additional elements must also be proven in order to establish constructive
fraud: (1) a confidential relationship, and (2) a betrayal of this confidence or a breach of a
duty imposed by the relationship. [Citation omitted.]' Schuck v. Rural Telephone Service
Co., 286 Kan. 19, 26, 180 P.3d 571 (2008)."

The panel then noted the general rule that fraud must be pled with particularity.
See K.S.A. 60-209(b). But it observed that this court had not determined whether this
heightened pleading standard applied to constructive fraud, an issue on which there is a
split of authority. Hemphill, 44 Kan. App. 2d at 603-04; see Nelson, 288 Kan. at 583-84.
The panel ultimately was persuaded that constructive fraud claims should be subject to
the heightened pleading standard, Hemphill, 44 Kan. App. 2d at 604-06, and it decided
that plaintiff's allegations did not measure up:

"Hemphill's second amended petition alleges that '[s]hortly after Susan L. Shore's
death, the Trust's remaining trustee, Defendant, sold the farm ground that previously
comprised the principal of the Trust and distributed all or a substantial portion of the
proceeds to himself, which proceeds were upon information and belief, used by
Defendant for his own personal purposes.' This allegation does not identify the time,
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place, or content of the sale of the 'farm ground.' Moreover, the allegation does not assert
anything was improper or fraudulent about the sale of the farm land or about the
distribution of the proceeds from the sale of the farm land.

"As stated earlier, Hemphill filed suit in this matter on April 8, 2009. Even the
latest period of the alleged wrongdoing—the selling of the farm land and the
misappropriation of the proceeds from the sale of the farm land in 1993—occurred over
15 years before the filing of the suit. Hemphill has failed to either plead or present any
facts which indicate when the alleged fraud was discovered. In addition, the petition fails
to allege that the fraud was not and could not have been discovered earlier than 2 years
preceding the commencement of suit on April 8, 2009." Hemphill, 44 Kan. App. 2d at
606-07.

After further analysis, the panel held that plaintiff's petition failed to state a claim upon
which relief could be granted and affirmed the district judge's dismissal of this case.
Hemphill, 44 Kan. App. 2d at 607-10.

DISCUSSION

When a motion to dismiss raises an issue concerning the legal sufficiency of a
claim, the question must be decided from the well-pleaded facts of plaintiff's petition.
K.S.A. 60-212(b)(6). Dismissal is justified only when the plaintiff's allegations clearly
demonstrate that plaintiff does not have a claim. Miller v. Sloan, Listrom, Eisenbarth,
Sloan & Glassman, 267 Kan. 245, 250, 978 P.2d 922 (1999). When a district court has
granted a motion to dismiss, an appellate court must accept as true the facts alleged by
plaintiff, along with any inferences that can reasonably be drawn from the facts. The
appellate court then must decide whether those facts and inferences state a claim based on
plaintiff's theory or any other possible theory. If so, the dismissal by the district court
must be reversed. Rector v. Tatham, 287 Kan. 230, 232, 195 P.3d 364 (2008).

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Although defendant attached an affidavit and trust tax return to his motion to
dismiss, it is evident from the district court judge's journal entry of dismissal that the
judge did not consider the affidavit or tax return in his ruling. We therefore continue to
treat the motion as one to dismiss rather than one for summary judgment. See Seaboard
Corporation v. Marsh Inc., 295 Kan. 383, ___, 284 P.3d 314, 319-21 (2012).

Unlike the materials attached to the motion to dismiss, the trust instrument itself
was considered by the district court and the Court of Appeals and may be considered by
this court; it qualifies as integral to the plaintiff's second amended petition, to which it
was attached and in which it was referenced. See K.S.A. 60-209(h). We treat the trust
instrument like any other written instrument on appeal, which means the district judge's
legal interpretation of its language is subject to our de novo review. See Miller v. Kansas
Dept. of S.R.S., 275 Kan. 349, 353, 64 P.3d 395 (2003).

By the time the parties reached oral argument before this court, they were in
agreement that plaintiff's breach of trust, breach of fiduciary duty, and conversion causes
of action were time barred. They further agreed that, if plaintiff's constructive fraud claim
was adequately pled, including the timing of plaintiff's discovery of defendant's alleged
betrayal of the confidential relationship between the parties, this suit could survive for
pursuit of judgment on that one cause of action.

These agreements considerably simplify the task before us. In their wake we
discern a series of three questions that must be answered to resolve this appeal: (1) Did
the district court judge correctly interpret the language of the trust instrument to invest
defendant with totally unfettered discretion to pay out income and invade and distribute
the proceeds from sale of the trust principal for his personal benefit? (2) Regardless of the
statute of limitations, did plaintiff allege facts to support the elements of constructive
fraud sufficient to meet the applicable pleading standard? and (3) Once defendant moved
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to dismiss, arguing that his affirmative defense of the statutes of limitations and repose
barred the plaintiff's claims as a matter of law, did plaintiff respond with adequate
allegations that, if proved, would make the discovery rule of K.S.A. 60-513(a)(3)
applicable and the 10-year statute of repose in K.S.A. 60-513(b) inapplicable?

We analyze and answer each of these three questions in the sections below.

Interpretation of Trust Instrument

The first question focuses on the trust instrument language. Our fundamental goal
in interpreting such an instrument is implementation of the grantors' intent. If the trust
language is plain and unambiguous, then the grantors' intent can be ascertained from
language used. If the trust language is ambiguous, then a construing court must place
itself as nearly as possible in the position of the grantors and consider all of the language
in the entire instrument to ascertain the intent. McGinley v. Bank of America, N.A., 279
Kan. 426, 437, 109 P.3d 1146 (2005).

Kansas recognizes both discretionary trusts and support trusts. A discretionary
trust is established when the grantor gives the trustee discretion to make distributions
from the trust, and the beneficiary has no legal authority to force the trustee to make a
distribution to the beneficiary from either the income or principal. Miller, 275 Kan. at
354. A support trust, on the other hand, is established when the trustee "is required to
inquire into the basic support needs of the beneficiary and provide for those needs," and
the beneficiary has the legal right to demand payment for support. Miller, 275 Kan. at
354.

Both the district court judge and the Court of Appeals panel treated the language
of the trust instrument as though it unambiguously established a purely discretionary
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trust. The instrument does include several references to decisions to be made in "the sole
discretion" or in "the discretion" of the trustee. At least one provision, that governing
discretionary determination of the trust, places the determination of the continuing
economic usefulness of the trust in the trustee's "sole and absolute discretion." Still other
provisions reference decisions to be made "as the Trustee determines."

However, when we focus on the provision most critical to this appeal, the one on
which plaintiff's constructive fraud claim hinges, Article IV, Section B.1, a more limited
picture of the trustee's authority emerges. Under the first paragraph of that subsection, the
trustee is permitted, in the trustee's sole discretion to pay income generated by trust assets
only in those amounts the trustee "deems necessary" to provide for Jay's, Susan's and/or
their children's "health, education, support or maintenance." (Emphasis added.) Under
the second paragraph of that subsection, the trustee may determine whether the income of
the trust is sufficient to provide for "the health, education, support or maintenance"
(emphasis added) of Jay and Susan in the trustee's "sole discretion"; only if such an
insufficiency exists—that is, one obstructing provision for the health, education, support
or maintenance—may the trustee invade principal as the "Trustee deems necessary to
provide for the benefit of" Jay and Susan.

The Shore Family Trust's limitation of trustee payment of income and invasion or
distribution of proceeds from the sale of the principal farmland to those situations when it
is necessary to provide for the health, education, support, or maintenance of Jay and
Susan is not mere window dressing. The list of those four purposes is a term of art under
the Internal Revenue Code, known collectively as "ascertainable standards" and whose
inclusion affects calculation of estate and gift taxes. See 26 U.S.C. § 2041(b)(1)(A)
(2006) (gross taxable estate of deceased person does not include trust assets decedent
could have consumed, invaded, appropriated for own benefit during lifetime, if power of
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appointment limited by ascertainable standards related to person's "health, education,
support, or maintenance").

"The underlying concept in the definition of an ascertainable standard rests upon
the premise that a person who holds the power to render decisions pursuant to an
ascertainable standard, such as a discretion given to a trustee to make distributions out of
income or accumulations, really does not have a power, but rather a duty. It is basically a
question of accountability . . . . Words such as support, education, maintenance, care,
necessity, illness, and accident are generally regarded as providing ascertainable
standards; while words such as happiness, pleasure, desire, benefit, best interest, and
well-being are generally not regarded as being sufficiently definite so as to provide
ascertainable standards.

"'[A different result is not required] by reason of the fact that the trustees' power
was discretionary, for the exercise of that power was limited by an external standard
fixed by the agreement itself. And although it may be true that a court of equity ordinarily
will not substitute its discretion for that of the trustee, nevertheless, even where the power
is granted in terms of the "sole" or "uncontrolled" discretion of the trustee, it will review
his action to determine whether in light of the standards fixed by the trust instrument,
such discretion has been honestly exercised.' [Citations omitted.]" Estate of Fred A.
Cutter, 62 T.C. 351, 356 (Tax Ct. 1974).

See e.g., Markham v. Fay, 74 F.3d 1347, 1358 (1st Cir. 1996) (citing cases interpreting
trustee powers for federal estate tax; ascertainable standards limit trustee discretion when
principal, income to be distributed for specific purpose such as education, support);
Outwin v. Commissioner of Internal Revenue, 76 T.C. 153, 161-62, 168-69 (Tax Ct.
1981) (lack of ascertainable standards in trusts means no surrender of dominion and
control over trust assets); Falk v. Commissioner of Internal Revenue, T.C. Memo 1965-
22, No. 139-63, 1965 WL 622 (Tax Ct. 1965) (trust instrument limiting trustees' power to
distribute income, principal to when necessary for wife's "adequate care, comfort, support
and maintenance," considering other funds available to her, provided ascertainable
15

standards); see also Hyde v. United States, 950 F. Supp. 418, 419 (D.N.H. 1996) (citing
26 U.S.C. § 2041[b][1][A] [1994]; Treas. Reg. § 20.2041-1[c], -3[c][2] [1995]) (defining
ascertainable standards needed to avoid estate tax); Estate of Schlotterer v. United States,
421 F. Supp. 85, 90 (W.D. Penn. 1976) ("no question that if the power to consume either
income or corpus is limited by . . . provisions for the life tenant's health, education,
support or maintenance in her usual comfortable circumstances, these are ascertainable
standards"); National Bank of Com. of San Antonio v. United States, 369 F. Supp. 990,
992 (W.D. Tex. 1973) (trustee's limitation to spending for "'benefit'" of wife "'so loose'"
that trustee effectively "'uncontrolled'"); Loyd v. United States, 319 F. Supp. 237, 239
(W.D. Tenn. 1970) (direction to trustee to encroach on corpus for pleasure of niece
inadequate as reasonably ascertainable standard); Carlson v. Sweeney, Dabagia,
Donoghue, 895 N.E.2d 1191, 1193-94 (Ind. 2008) (ascertainable standards for
distribution of trust principal needed to avoid estate tax liability). The inclusion of
ascertainable standards in the trust instrument in this case means that the trust was not
purely discretionary. This means that Jay, as sole trustee after Susan's death, was not free
to pay out income or invade the principal for any amorphous "benefit" to himself. The
district court judge and the Court of Appeals erred on this point.

In addition to what we know generally about trust instrument scrivener and grantor
motivations to include ascertainable standards to limit a trustee's discretion for tax
purposes, other language in the trust instrument at issue here supports our assessment of
the grantors' intent. Article VII, Section M is labeled "Trustee Guidelines," and it
expressly states that the primary purpose of the trust "is to provide for the specified
needs" of Jay and Susan "in equal shares." If this primary purpose is accomplished, then
the purpose shifts to provide for the "specified needs" of their children. The specified
needs in this section are intended to refer back to those four listed in Article IV, Section
B.1. The grantors expressly dedicated both income and principal to funding these needs,
16

not to grant a general benefit to Jay. Again, the district judge and the Court of Appeals
panel erred to the extent they interpreted or construed the trust instrument otherwise.

Adequacy of Pleading of Constructive Fraud

The second question we must address is whether plaintiff alleged facts to support
the elements of constructive fraud sufficient to meet the applicable pleading standard.

Our Court of Appeals panel was correct that this court has not previously decided
whether a constructive fraud cause of action is subject to K.S.A. 60-209(b)'s heightened
pleading standard. See Nelson, 288 Kan. at 583-84; compare K.S.A. 60-209(b)
(circumstances constituting fraud "shall be stated with particularity") and K.S.A. 60-
208(a)(1) (pleading shall contain "short and plain statement of the claim showing that the
pleader is entitled to relief"). But we disagree with the panel on whether the question
requires an answer in this case. Putting aside for the moment any potential time bar, we
hold that plaintiff's pleading of his constructive fraud claim in his second amended
petition, with its attachment of the integral trust instrument, met either standard.

Constructive fraud does not require proof of actual dishonesty or a purpose or
intent to deceive. It requires only that a confidential relationship existed between the
parties and that defendant's behavior constituted a betrayal of this confidence or a breach
of duty imposed upon him by his relationship with plaintiff. The law calls such a betrayal
or breach "fraud" because of its tendency to deceive or to violate a confidence, regardless
of moral guilt. See Schuck, 286 Kan. at 26.

The trust instrument before us demonstrates the undeniable existence of a
confidential relationship between, on the one hand, plaintiff as a beneficiary and, on the
other hand, defendant as sole trustee during the period between Susan's death in 1992 and
17

what defendant represents was the termination of the trust in 1995. As we have discussed
in the preceding section, the trustee's authority to pay out trust income or invade and
distribute proceeds from the trust principal was not limitless. In paragraphs 11, 14, and 18
of the second amended petition, plaintiff repeatedly alleged that defendant appropriated
the assets of the trust for his own personal purposes, which the ascertainable standards in
the trust instrument did not allow. If true—and on motion to dismiss we are required to
assume such truth—these allegations are sufficient to constitute a betrayal of the parties'
confidential relationship or a breach of a duty the relationship imposed. Such a betrayal
or breach is worthy of its legal classification as a constructive fraud, regardless of
whether defendant bears any moral guilt.

Application of Statutes of Limitations and Repose

The third question is whether plaintiff responded adequately to defendant's
assertion in his motion to dismiss of the statutes of limitations and repose as affirmative
defenses. Plaintiff argues correctly that a defendant has the burden to raise such
affirmative defenses. See Meek v. Ames, 175 Kan. 564, 567-68, 266 P.2d 270 (1954).
But, once that happened through defendant's motion to dismiss, plaintiff bore the burden
to allege facts supporting his argument that his claim was not time barred. See Slayden v.
Sixta, 250 Kan. 23, 26, 825 P.2d 119 (1992).

Here, plaintiff filed a memorandum in opposition to the defense motion to dismiss,
as well as a motion to amend his first amended petition, which was granted. We therefore
rely on plaintiff's allegations in both the memorandum in opposition, see Meek, 175 Kan.
at 567 (plaintiff's allegations in reply to be considered in whether defense asserted in
answer, motion rebutted), and the second amended petition to determine whether plaintiff
asserted facts, if assumed to be true, that would make the discovery rule of K.S.A. 60-
513(a)(3) applicable and the 10-year statute of repose in K.S.A. 60-513(b) inapplicable.
18


Plaintiff correctly relies upon our decision in Jennings v. Jennings, 211 Kan. 515,
507 P.2d 241 (1973), for the governing legal framework on this set of issues. In that case,
the plaintiff beneficiaries sued the person to whom they believed a trustee had transferred
trust assets in violation of the grantors' intent. The defendant argued that the applicable
statutes of limitations and repose barred the action.

This court first addressed whether the cause of action sounded in fraud and
concluded that "a trustee who breaches or repudiates a trust agreement commits an act
which necessarily encompasses fraud." Jennings, 211 Kan. at 524. It then examined the
record to determine whether the plaintiffs discovered or should have discovered the
fraudulent acts of the trustee more than 2 years before filing suit. It determined that the
record supported the plaintiffs' position that they had no "knowledge or information
which would arouse suspicion or alert them to wrongdoing on the part of the trustee"
during his lifetime. Jennings, 211 Kan. at 523. The plaintiffs filed suit 4 months after the
trustee's death, which fell well within 2 years after their discovery of the fraud, as
required under what is now K.S.A. 60-513(a)(3). Jennings, 211 Kan. at 520, 523-25.

In addition, the Jennings court rejected the defense assertion that the 10-year
statute of repose now in K.S.A. 60-513(b) was applicable. It stated:

"The provision for the ten-year limitation period does not mention fraud or the discovery
of fraud, but refers to those cases where the fact of injury may become ascertainable
sometime following the act causing the injury. In an action based upon fraud, its
discovery is simultaneous with the discovery of the injury resulting therefrom. In order to
harmonize the statute and give effect to each of its provisions we must conclude the
legislature did not intend that an action based on fraud was subject to the ten-year
limitation." Jennings, 211 Kan. at 527.

19

In this case, plaintiff's second amended petition does not speak directly to the issue
of when defendant's alleged constructive fraud was discovered. However, it does state
that plaintiff was born sometime between the execution of the trust instrument in
December 1984 and the death of plaintiff's mother in January 1992. At most, this means
plaintiff was 7 years old when his mother died. Plaintiff's memorandum in opposition to
the defense motion to dismiss does speak directly to the timing of discovery, stating
clearly that plaintiff "did not even discover the existence of the Trust until his
grandmother's estate was probated in 2008."

Assuming as we must the truth of this statement, plaintiff did not discover the
alleged fraud or learn facts that would lead a reasonably prudent person to investigate
until within 2 years before the filing of this lawsuit, as required by K.S.A. 60-513(a)(3).
See Robinson v. Shah, 23 Kan. App. 2d 812, 824-25, 936 P.2d 784 (1997) (citing Dalton
v. Lawrence National Bank, 169 Kan. 401, Syl. ¶ 6, 219 P.2d 719 [1950]). And the 10-
year statute of repose in K.S.A. 60-513(b) does not apply to actions for fraud. See
Jennings, 211 Kan. at 527. Hence, plaintiff's constructive fraud cause of action was
timely filed.

CONCLUSION

Plaintiff Hemphill adequately pled a timely constructive fraud claim. He attached
the integral trust instrument to his pleadings, which demonstrated the existence of a
confidential relationship between himself and defendant. We interpret that instrument as
a matter of law to have placed certain limitations on the nature of the uses to which
defendant could put trust income and principal; and plaintiff's pleadings alleged that
defendant deviated from those purposes when he paid out trust income and distributed
proceeds from the sale of the trust principal farmland. These allegations satisfied either
the usual pleading standard or heightened pleading standard applicable to fraud. In
20

addition, plaintiff's response to defendant's assertion of the affirmative defenses of the
statutes of limitations and repose was an allegation we must, at this stage of the
proceedings, take as true: The plaintiff did not discover the existence of the trust nor any
constructive fraud arising out of it until 2008, less than 2 years before filing suit.

The judgment of the Court of Appeals is affirmed in part and reversed in part. The
judgment of dismissal by the district court is affirmed in part and reversed in part, and the
case is remanded to the district court for further proceedings consistent with this opinion.