IN THE SUPREME COURT OF THE STATE OF KANSAS1
No. 87,418
WILLIAM S. MYNATT and MYNATT
TRUCK & EQUIPMENT, INC.,
A Kansas corporation,
Appellees.
v.
DAVID W. COLLIS and ANN M. HUGHES,
Appellants.
SYLLABUS BY THE COURT
1. An appellate court's standard of review on a district court's determination regarding the remedy of equitable setoff is one of abuse of discretion. A setoff as between judgments is within the discretion of the court. It will only be disturbed where it appears that the setoff has operated to the prejudice of a third party without notice and he or she complains.
2. A district court's determinations of fact, unappealed from, are final and conclusive.
3. The interpretation and application of a statute of limitations is a question of law for which the appellate court's review is unlimited. Likewise, the court's review of conclusions of law is unlimited.
4. When considering the effect of the running of a statute of limitations an appellate court is committed to the general doctrine, almost universally recognized by the courts and textwriters, that there is a substantial distinction between a claim asserted as a pure defense and one where affirmative relief is sought. Statutes of limitation are not intended to affect matters asserted strictly in the defense of an action. As a general rule a setoff, counterclaim, or cross-claim has the nature, characteristics, and effect of an independent action or suit by one party against another. Accordingly, in the absence of a statute to the contrary, a demand pleaded by way of a setoff, counterclaim, or cross-claim is regarded as an affirmative action in most jurisdictions, and, therefore, unlike a matter of pure defense, is subject to the operation of the statute of limitations.
5. When cross-demands have existed between persons under such circumstances that if one had brought an action against the other, a counterclaim or cross-claim could have been set up, neither can be deprived of the benefit thereof by the assignment or death of the other or by reason of the statute of limitations if arising out of the contract or transaction set forth in the petition as the foundation of plaintiff's claim or connected with the subject of the action, but the two demands must be deemed compensated so far as they equal each other. K.S.A. 2001 Supp. 60-213(d).
6. A new legal theory may not be asserted for the first time on appeal or raised in a reply brief. 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.
7. 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.
8. 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.
9. 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. "A fair distribution of the recovery" requires a court to consider the effect of recovery on any nonparty shareholders. Under the facts of this case, all interested shareholders are parties to the suit and individual recovery will not prejudice the rights of any nonparty shareholders and thus will not interfere with a fair distribution of the recovery.
10. 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.
11. 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 as a reasonable person might accept as sufficient to support a conclusion.
12. 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. Equitable grounds that will warrant overriding the statutory law include, but are not limited to, insolvency or nonresidence.
13. 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.
14. 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 a setoff 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. 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.
15. The setting off of one judgment against another 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. The action of a court of law in granting or refusing a setoff 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 or her legal rights.
16. The following general precepts are applied by Kansas courts in determining setoff rights. First, a 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 post-judgment 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.
17. When reviewing a punitive damages award, the standard of review remains one of abuse of discretion. An appellate court first determines whether the provisions of K.S.A. 60-3701 have been applied by the trial court in setting the amount of punitive damages. Once that determination has been made, the amount awarded will be set aside only upon a showing that the trial court abused its discretion, which is another way of saying that the action of the trial court was arbitrary, capricious, or unreasonable. When determining the amount of punitive damages to be awarded under K.S.A. 60-3701, it is incumbent on the trial court to make sufficient findings of fact to afford meaningful appellate review thereof.
18. To warrant an award of punitive damages, a party must prove to the trier of fact by clear and convincing evidence that the party against whom the damages are sought acted with willful or wanton conduct, fraud, or malice.
19. Punitive damages are not given upon any theory that the plaintiff has any just right to recover them, but are given only upon the theory that the defendant deserves punishment for his or her wrongful acts and that it is proper for the public to impose them upon the defendant. No right of action for punitive damages is ever given to any private individual who has suffered no real or actual damage.
20. Punitive damages do not depend on the financial condition of the party wronged, but rather upon the financial wherewithal of the party at fault who has acted maliciously or oppressively. The amount of punitive damages is often said to be based upon the sum that is perceived to punish or to deter the offending conduct. That sum may depend upon the financial size and strength of the defendant, the degree of the community's outrage, and other factors. Punitive damages, accordingly, may enrich the recovering party, who obtains a windfall to the extent that he or she is placed in a better position than he or she enjoyed before the offensive conduct occurred.
Appeal from Johnson district court; STEVE LEBEN, judge. Opinion filed November 1, 2002. Affirmed.
Anthony F. Rupp, of Shughart, Thomson & Kilroy, P.C., of Overland Park, argued the cause, and Susan C. Hascall, of the same firm, was with him on the briefs for appellants.
Randolph G. Willis, of Rasmussen, Willis, Dickey & Moore, L.L.C., of Kansas City, Missouri, argued the cause, and Matthew S. Jensen, of the same firm, was with him on the brief for appellees.
The opinion of the court was delivered by
ABBOTT, J.: This is a lawsuit brought by William S. Mynatt, Mynatt Truck & Equipment, Inc. (Mynatt Truck), a Kansas corporation, against David W. Collis and Ann M. Hughes, husband and wife. Highly summarized, the lawsuit was to recover money used by the two individuals for their own personal use and for punitive damages in favor of Mynatt and Mynatt Truck.
William Mynatt formed Mynatt Truck & Equipment, Inc., in 1988. Mynatt was the president of Mynatt Truck and owned all 1,000 shares of common stock issued. Sometime in 1988, David Collis began working for Mynatt Truck as a mechanic. Mynatt promoted Collis to vice president and general manager in 1990.
On September 30, 1993, Mynatt sold Collis 250 shares of his common stock. Collis executed a promissory note in the amount of $12,500 to Mynatt in consideration for the shares. The promissory note granted Mynatt a security interest in Collis' shares to guarantee the note.
At some point, Mynatt and Collis also formed a company called B&D Leasing to finance sales and make lease arrangements with customers.
From the time of his appointment as vice president and general manager in 1990 until March 1996, Collis was responsible for the review and approval of bills and for determining which general ledger account the bills were to be charged to when paid. Collis was also primarily responsible for opening company mail. Mynatt generally managed corporate sales, leaving responsibility of most of the other operations of Mynatt Truck to Collis. Mynatt and Collis were the only persons authorized to issue corporate checks from 1990 until March 1996. The vast majority of checks issued were signed by Collis. Mynatt only occasionally signed checks.
From 1990 through 1996, Collis routinely brought his two credit card statements and Hughes' credit card statement to work and had Mynatt Truck pay the full balance due, even though the credit card transactions were, for the most part, personal charges. Collis admitted he customarily buried these personal credit card payments by coding them to legitimate business accounts. Mynatt Truck paid Collis' personal credit card charges for such things as visits to a massage parlor, a Nordic Track exercise machine, shotguns and ammunition, boating supplies, and jewelry. Collis never discussed his practice of burying these charges with Mynatt or anyone else at Mynatt Truck and stated that it was not likely Mynatt could tell the payments were fraudulent by looking at the corporate financial statements.
Collis also issued corporate checks to himself, to his wife, and to cash for his own benefit. During the same time period, it was rare for Mynatt to get checks for cash or cash advances. Collis made a deposit on a Toyota Land Cruiser, purchased a Corvette, paid for a boat dock, and purchased a Kubota tractor and attachments for the tractor with corporate funds. Collis wrote corporate checks to pay for items Hughes purchased to decorate their home. Again, Collis buried these payments paid for with corporate funds by writing the checks to cash or coding the expenses to legitimate business accounts. Collis also engaged in other unauthorized business-swapping transactions where corporate customers Bill Curth, Ronan Roofing, and Arbor Care traded work on Collis' personal residence in exchange for work performed on their vehicles at Mynatt Truck. Collis admitted all these practices were dishonest, fraudulent, and illegal.
In March 1996, Collis resigned as an officer and shareholder of Mynatt Truck, taking a company truck and tools with him. Collis formed Collis Equipment Company, a direct competitor with Mynatt Truck. In May or June 1996, Collis returned to Mynatt Truck and blacked out most of the information regarding his personal expenses on his credit card statements.
In March 1997, Mynatt and Mynatt Truck filed suit against Collis and Hughes. In the petition, Mynatt made an individual claim against Collis for amounts owing on the promissory note. Mynatt additionally asked the court to determine that certain real property titled in the names of Mynatt, Collis, and both of their wives was held in trust for Mynatt Truck, or alternatively sought a reformation of the deed to reflect ownership by the corporation.
Mynatt and Mynatt Truck together alleged that Collis wrongfully used or dissipated corporate assets to benefit himself and Hughes. Collis and Hughes generally denied the allegations and contended that Collis had been authorized to use corporate assets for his personal benefit. In addition, Mynatt and Mynatt Truck advanced claims against Collis for conversion and unjust enrichment, fraud, and breach of fiduciary duty. Mynatt Truck also sought judgment against Collis and Hughes for business loans advanced to Collis.
Collis filed a counterclaim alleging that Mynatt dissipated corporate assets of Mynatt Truck for his own benefit and failed to pay Collis for 55 days of vacation. Collis asserted that Mynatt used corporate funds to pay for personal expenses, an airplane, life insurance, personal income taxes, legal and accounting fees, and family travel expenses. Collis also sought the dissolution and an accounting of B&D Leasing, the general partnership owned by Collis and Mynatt.
Prior to trial, Mynatt and Mynatt Truck asked for leave to seek punitive damages pursuant to K.S.A. 2001 Supp. 60-3703. Following a hearing, the district court granted leave to claim punitive damages.
A 7-day bench trial was conducted by Judge Leben in January and April 1999. The district court issued a memorandum decision summarizing its findings of facts and conclusions of law on March 16, 2001.
In its findings of fact, the district court specifically found:
"7. Although a variety of expenditures were made for the benefit of Collis' wife, Ann, she was never an employee of Mynatt Truck. Although Collis indicated that she ran some errands for the company, he agreed that she rarely did so after 1992.
"8. Collis admits taking about $5,000 to $6,000 worth of tools with him when he left Mynatt Truck. (At a later point in his testimony, during the second part of the trialwhich took place about three months after the first partCollis claimed he only took about $2,000 worth of tools when he left. This unexplained, significant difference is typical of his testimony. The court accepts the statement he made on this subject from the first day of his testimony, which was based on his earlier deposition testimony.)
"9. A Kubota tractor was purchased by Collis with company funds. It never had any business purpose. Collis took the tractor home with him and still has it. Mynatt Truck paid approximately $12,000 for the tractor.
"10. On the Curth transaction, Collis admitted at one point in his testimony that he actually wasn't sure that he ever 'settled up with' Mynatt regarding that transaction. Previously, he had testified that he had paid Mynatt about $2,500 in connection with the Curth transaction.
"11. Collis' basic claim was that he had had a conversation with Mynatt in 1990 in which Mynatt had authorized the compensation over and above Collis' salary that Collis took in the ensuing years. Collis' own testimony, however, really didn't support that claim. Collis testified that he and Mynatt had discussed Collis' desire for a raise in 1990 and that Mynatt had told Collis that the company didn't have enough money to give him a raise, but that Collis could 'pad [his] expense account a bit.' Even if that were true, padding the expense account 'a bit' would not have been authority for the wholesale expenditures made for Collis' personal benefit. Collis' recollections of this conversation with Mynatt varied in significant respects between his deposition and trial testimony and even within his trial testimony. The court recognizes that it is difficult for any witness to keep any story 100% straight over an extended period of time, even if it is the truth. In this case, however, the changes and variances were significant and the court simply does not believe Collis' version of these events.
"12. Collis agreed that he owed Mynatt Truck for a number of the checks written for this personal expenses, including all of those in category F on Exhibit HHHH. There is no logical reason why he should owe for these checks, in relatively modest sums, if, as he claims, Mynatt had authorized the taking of much larger sums as part of the 'padding' of his expenses or even a greater agreement designed to increase Collis' compensation from Mynatt Truck.
"13. As examples of some of the checks written by Collis, check number 5283 was written to his wife for $4,500. Collis, in his own handwriting, coded that to the equipment inventory account on the general ledger of Mynatt Truck. Check number 5889 for $12,100.35 went to pay off Collis' boat loan; Collis coded that to the equipment inventory account as well. Check number 6347 for $5,439.19 for down payment on a personal Toyota Land Cruiser was coded to the company's parts inventory. Check number 6013 for $1,187.07 for an attachment for his tractor was coded to the company's parts inventory.
"14. Mynatt Truck, with the concurrence of Mynatt and Collis, declared a $50,000 bonus for Mynatt and Collis in 1995. No bonuses were declared or awarded at any other time. Plaintiffs have credited this bonus against the amounts claimed against Collis; the court finds that this is an appropriate method for calculating the damages, while honoring the bonus agreement.
"15. Mynatt admits that he received cash that was not reported as income or included on the company's books in four or five significant deals, all negotiated by Collis. Mynatt admits having received $12,000 cash on the Century Lumber deal, a transaction on which Mynatt has made some claims in this lawsuit.
"16. In late 1995, Mynatt and Collis had a meeting regarding a list of questionable checks that Collis had written on the company accounts. The checks written by Collis to purchase the Kubota tractor and its attachments were included among those discussed. After the meeting, Mynatt wrote a check to himself on the company account for $17,000. He did this because Collis had taken the Kubota tractor for his personal use and Mynatt felt that a compensating payment should be made to himself.
"17. Some expenses of Mynatt's wife, including gas expenses, were paid by Mynatt Truck. She did not do any work for the company, but did serve as a corporate director and was a guarantor of the corporation's debt.
"18. Although Collis now complains about various payments made by the corporation for Mynatt's personal benefit, Collis was aware of virtually all of those expenses as they were made. Collis signed the checks and coded the payments for purposes of the corporation's accounting records.
"19. Although Collis claims that his payment of large personal expenses with company funds was authorized, on at least three occasions he charged significant expenses against his own loan account on the corporation's accounting ledgers. No satisfactory explanation for why this was done in three cases, but not in others, was given.
"20. After Collis left Mynatt Truck, he returned to the business, took his credit card statements, and blacked out most of the information regarding his personal expenses.
"21. Collis agrees that he failed to 'settle up' with Mynatt regarding the Arborcare transaction.
"22. Collis admitted that his paying for a Corvette through the corporation, when he already had another corporate vehicle, was not a proper corporate expense. (Later in his testimony, Collis took the opposite position. The court agrees with his admission.)
"23. Collis admitted that his subscription, paid for by the company, to Star Tech journal was improper, as that journal did not relate to the industry in which Mynatt Truck operated.
"24. The policy for all employees at Mynatt Truckestablished by Colliswas that vacation time had to be used during each calendar year or it was lost. This was true for Collis as well as for other employees.
"25. Collis agreed that he owed the following:
$8,933.37 plus interest of $1.24 per day after January 15, 1999 on the promissory note given by Collis for his shares of Mynatt Truck;
$10,000 for Mynatt's interest in HRE stock;
$17,100 for the pickup truck taken by Collis at the time of his resignation;
$46,928.45 in credit card charges that were his personal expenses paid for by the corporation (admitted to once his claim that Mynatt had agreed that Collis could run virtually unlimited personal expenses through the corporation is rejected); and
$2,074.62 in checks identified in category F on Exhibit HHHH.
"26. The court did not find Collis' testimony to be credible for a number of reasons, some of which have been mentioned here. The court generally agrees with the discussion found in paragraphs 4 through 7 of plaintiffs' proposed findings regarding Collis' credibility.
"27. Mynatt never authorized the paying of large quantities of Collis' personal expenses with corporate funds or the 'burying' of Collis' personal transactions in the corporate books by coding them to non-personal account categories.
"28. Mynatt did pay some personal expenses with corporate funds, something that is not infrequentin relatively modest amountsin closely held corporations, its legality (or illegality) notwithstanding. Mynatt's expenditures of this nature did not approach the level of Collis', however. Nor did Mynatt authorize the large-scale personal expenditures from corporate funds, which was mostly engaged in by Collis without Mynatt's knowledge or consent.
"29. Collis engaged in several 'trade-outs' in which he obtained services from third parties for himself, personally, in exchange for equipment or services of Mynatt Truck. By this practice, Collis received personal benefits that were paid for by the company. Mynatt was aware of this practice in some instances, but not aware of it in others. Such transactions were not generally authorized. Thus, unless specific authority from Mynatt was shown, they should be considered unauthorized self-dealing by Collis.
"30. The Curth trade-out, which netted a value of $5,000 for Collis, was not authorized by Mynatt and Mynatt was unaware of it. The same is true for the Arborcare trade-out, which netted a value of $2,000 for Collis.
"31. The Ronan Roofing transaction, in which Collis received value of $6,800, was not authorized by Mynatt and Mynatt was unaware of it. Collis coded the payment to Ronan Roofing, in exchange for which he received services, to a Mynatt Truck repairs account.
"32. The trade-out with Bolivar Insulation was known to Mynatt and authorized by him. Collis testified that he shared a cash payment from Bolivar with Mynatt. Mynatt agreed that he received some cash payments. The court finds that Bolivar Insulation was one of them.
"33. Plaintiffs have presented a claim that Collis should reimburse checks written by him with respect to three categories. The first category, totaling $39,964.43, is for checks payable to cash; the second, totaling $17,883.33, is for checks written to purchase tools; the third, totaling $36,090.36, is for checks written to various third parties for Collis' benefit. The court finds that plaintiffs have a valid claim under the first and third categories, but not the second. Collis has provided a sufficient explanation for the purchase of tools, which are certainly needed in the normal operation of the business, to justify substantial expenditures. The court has separately found, however, that Collis admitted taking $5,000 to $6,000 in company-owned tools with him when he left the company's employment. Thus, the court finds damages of $5,000 with respect to the claim regarding tools in place of the $17,883.33 claimed by plaintiffs.
"34. As noted in the court's legal conclusions, Collis, as a fiduciary, had the burden to prove the propriety of questioned transactions once a prima facie showing of impropriety had been made. Plaintiffs did so with respect to the transactions for which damages have been awarded and Collis did not adequately prove the appropriateness of his dealings. It may well be that some of the cash obtained by Collis was for legitimate purposes. In light of the large sums that Collis took from the corporation for illegitimate purposes, however, it cannot be presumed that these cash payments were proper. Collis has no records to support his claims that they were appropriate and plaintiffs rightly point out that Collis' credit card charges for gas would have provided most or all of his appropriate gas reimbursements. Collis' other explanations for the checks for cash and to third parties are found insufficient to explain away the apparent improprieties of these transactions.
"35. No damages are awarded to plaintiffs with respect to the Century Lumber claim. Because no damages are awarded on it, the court will not recount in detail the convoluted nature of this transaction and claim. The court rejects any damage claim associated with this transaction because Mynatt admits having received $12,000 in cash (along with Collis) in connection with the underlying transaction; Mynatt Truck or B&D Leasing or both retain a claim against Century Lumber that has not yet been pursued. Further, no evidence was presented that tied Collis into the apparent fraud in the transfer of title to the truck originally sold to Century Lumber by B&D Leasing. Given that this transfer of the truck title, free of the lien of either B&D Leasing or Mynatt Truck, was apparently fraudulent, substantial proof of Collis' involvement would have been required. It simply was not present.
"36. No damages are awarded to plaintiffs with respect to the Kubota tractor transactions. Mynatt, in response to the Kubota tractor transactions, wrote a check to himself from the corporation in an equivalent amount to make up for Collis' self-dealing on these transactions. Mynatt concluded at the time that the payment to himself equalized those disbursements. While Mynatt did not authorize the Kubota tractor transactions in advance, his payment of an equivalent amount to himself later constituted an after-the-fact ratification of the Kubota tractor payments.
"37. The court rejects plaintiffs' claim for $13,481.19 in 'questionable' credit card charges or for $8,643.43 in credit card charges for 'meals' over a five-year period. Unlike the blacked out charges, the court does not find sufficient evidence of the impropriety of these transactions to require more-than-normal proof by Collis of the appropriateness of these transactions. Certainly some expense for meals, including on occasions when customers may have been entertained, would have been appropriate. Given the length of the time period involved in these claims, there is not a sufficient showing that these transactions were improper.
"38. The court rejects plaintiffs' claim for $8,000 arising out of a loss on trade-in of a Winnebago. The court finds that plaintiffs failed to prove that this loss was caused by any improper or unauthorized act of Collis.
"39. The court rejects plaintiffs' claim of damages related to an Army truck. Collis has stated that he will sign the title to the truck, which would obviate any damage claim. The court will include an order for Collis to sign the title and to cooperate in transfer of that vehicle to Mynatt Truck's ownership.
"40. The court rejects plaintiffs' claim of damages related to a Model A car. The court finds that plaintiffs failed to prove that this loss was caused by any improper or unauthorized act of Collis.
"41. Credit card charges directly for the benefit of Collis' wife were made in the amount of $13,481.19. Plaintiffs should have recovery for those amounts, for which no corporate benefit was received."
The district court found that Collis defaulted on the promissory note securing his interest in shares of Mynatt Truck common stock and awarded Mynatt damages of $8,933.37 plus interest of $1.24 per day after January 15, 1999. The court also found in favor of Mynatt in regard to monies given to Collis for an investment in Hydraulic Repair & Engineering, Inc. (HRE) stock and awarded Mynatt $10,000 in damages.
The district court awarded damages to Mynatt Truck in connection with its claims against Collis for conversion, unjust enrichment, fraud, and breach of fiduciary duty. In addition, the district court found that Collis' conduct constituted both willful fraud and breach of fiduciary duty and awarded Mynatt Truck $125,000 in punitive damages.
The district court awarded Mynatt $8