Opinion
No. 105 643.
2012-08-3
James BECKER, and The Estate of Norman Becker, Deceased, by and through William Becker, Special Administrator, Appellants, v. Harold KNOLL, Appellee.
Appeal from Finney District Court; Philip C. Vieux, Judge. Philip Ridenour, of Martindell Swearer Shaffer Ridenour LLP, of Cimarron, for appellants. Gerald O. Schultz, Charles E. Owen, II, of Charles E. Owen, II, P . A., of Garden City, for appellee.
Appeal from Finney District Court; Philip C. Vieux, Judge.
Philip Ridenour, of Martindell Swearer Shaffer Ridenour LLP, of Cimarron, for appellants. Gerald O. Schultz, Charles E. Owen, II, of Charles E. Owen, II, P . A., of Garden City, for appellee.
Before GREENE, C.J., GREEN and BUSER, JJ.
MEMORANDUM OPINION
PER CURIAM.
James Becker and the Estate of Norman Becker, deceased, by and through William Becker (Becker), appeal from the trial court's decision which found that Harold Knoll did not breach his fiduciary duty to the Finney County Water Users Association (FCWUA). On appeal, Becker argues that the trial court erred in ruling that there was clear and satisfactory evidence to support its conclusion that Knoll did not breach his fiduciary duty owed to FCWUA. We agree. Accordingly, we reverse and remand with directions.
The underlying facts of this case are found in Becker v. Knoll, 291 Kan. 204, 205–06, 239 P.3d 830 (2010). In Knoll, our Supreme Court affirmed in part and reversed in part this court's ruling in Becker v. Knoll, 40 Kan.App.2d 1049, 199 P.3d 786 (2008). Specifically, our Supreme Court ruled that “[t]he Court of Appeals should have applied a de novo standard to review whether the district court properly applied the law—the shifted burden of proof—to the facts.” 291 Kan. at 212. Moreover, our Supreme Court held that this court erred in applying the appropriate burden of proof. Our Supreme Court reasoned:
“Instead of the plaintiffs having to prove that damages occurred because Morehouse was working privately for Knoll, Knoll should have had to prove by clear and satisfactory evidence that his private use of Morehouse did not interfere with his performance in overseeing the irrigation system ..., Under a proper application of the burden of proof, the plaintiffs would not be required to show that Morehouse did not work his required hours; rather Knoll would be required to present evidence showing that Morehouse actually worked his required hours.” 291 Kan. at 212.
Consequently, our Supreme Court remanded the case to the trial court with instructions “to reconsider its findings of fact and conclusions of law in light of the properly allocated burden of proof.” 291 Kan. at 213.
On remand, the trial court ruled that although Becker established a prima facie case that Knoll breached his fiduciary duty, Knoll rebutted Becker's prima facie case by “clear and satisfactory” evidence. Therefore, the trial court held that Knoll did not breach the fiduciary duty that he owed to FCWUA. In particular, the trial court declared:
“Within this context and the applied burden of proof necessary after a prima facie case has been found, it has been shown by clear and satisfactory evidence that there was no self-dealing, no assertion of self-interest, no misfeasance and no malfeasance on the part of the defendant, Harold Knoll, to the detriment of the Corporation or the defendants.”
Did the Trial Court Err in Ruling that there was Clear and Satisfactory Evidence to Support Its Conclusion that Knoll Did not Breach His Fiduciary Duty?
On appeal, Becker argues that Knoll failed to present clear and satisfactory evidence to show that he did not breach his fiduciary duty. Becker makes the following contentions; (1) that under the evidence presented at the bench trial, the trial court could not have found that Morehouse worked his required hours for FCWUA, and (2) that under the evidence presented at the bench trial, the trial court could not have concluded that Knoll met his burden to prove that he acted in good faith and in fairness of the transaction because Knoll refused to maintain employment records for Morehouse. On the other hand, Knoll argues that there was clear and satisfactory evidence to support the trial court's ruling that he met his burden of proof. Standard of Review
Becker and Knoll disagree as to the applicable standard of review. Becker contends that the applicable standard of review is substantial competent evidence. On the other hand, Knoll maintains that the applicable standard of review is as follows:
“The standard of review, as here, the Defendant had the burden to rebut the Plaintiffs case by clear and convincing evidence the Appellate Court considers whether, after a review of all the evidence, viewed in the light most favorable to the party having the burden of proof, it is convinced that a rational fact finder could have found the determination to be highly probable.”
Both Becker and Knoll have incorrectly stated the applicable standard of review. Our Supreme Court expressly addressed this issue in Knoll when it determined that a de novo standard of review applies when an appellate court reviews whether the trial court properly applied the law to the facts. Knoll, 291 Kan. at 212. The court's reasoning in Knoll reads as follows:
“The second problem with the opinion below is that the Court of Appeals applied a substantial competent evidence standard to reviewing the district court factual conclusions, While it is true that the record contained evidence supporting the factual findings by the district court, those findings were made in the context of the wrong burden of proof. The Court of Appeals should have applied a de novo standard to review whether the district court properly applied the law—the shifted burden of proof—to the facts.” 291 Kan. at 212 (citing Owen Lumber Co, v. Chartrand, 283 Kan. 911, 915–16, 157 P.3d 1109 [2007] [appellate review of district court application of law to facts is unlimited] ).
Consequently, this court's review is unlimited.
When a plaintiff has established a prima facie case alleging a breach of fiduciary duty, “the burden of proof is on the fiduciary to establish the fairness of the transaction, and to this end he must fully disclose the facts and circumstances, and affirmatively show his good faith.” (Emphasis added.) Knoll, 291 Kan. at 207. In this case, at the direction of our Supreme Court, the trial court ruled that Becker established a prima facie case alleging that Knoll breached his fiduciary duty owed to FCWUA, On appeal, Knoll concedes that Becker established a prima facie case alleging a breach of fiduciary duty. In his brief, Knoll states: “Given that [Becker] did establish a prima facie case [Knoll] is required to show by clear evidence that he acted in fairness and in good faith to the corporation.” Thus, this court must determine if Knoll met his burden to establish the fairness of his self-dealing transaction, i.e., Knoll's use of Morehouse, a FCWUA employee, to complete labor on his farm. To satisfy his burden, Knoll was required to show by clear and satisfactory evidence that he acted in good faith.
A fiduciary or confidential relationship is described as a unique degree of trust and confidence between parties. In a fiduciary relationship, one party has superior knowledge, skill, or expertise and is under a duty to represent the interest of the other party. Knoll, 291 Kan. at 208. Indeed, “[a] director of a corporation owes a high fiduciary duty to the other stockholders of the corporation.” 291 Kan. at 208. When a director acts under a motivation to disregard the corporation's interest, he or she must show the “utmost good faith and the most scrupulous inherent fairness of the bargain.” [Citations omitted.] 291 Kan. at 208.
Kansas sets a higher fiduciary duty standard for directors and officers of a corporation than other jurisdictions. Moreover, Kansas “imposes a very strict fiduciary duty on officers and directors of a corporation to act in the best interest of the corporation and its stockholders.” Knoll, 291 Kan. at 208. Here, because Becker established a prima facie case of Knoll's breach of fiduciary duty, Knoll had to show that his employment of Morehouse was entirely fair to FCWUA.
First, Becker maintains that Knoll failed to meet his burden to prove the fairness of the transaction because Knoll failed to show that Morehouse worked all of the hours required by FCWUA. FCWUA's corporate bylaws allowed the president and the other board members to employ ditch association employees privately, but the bylaws required the president or any employing board member to maintain records of the use of corporate employees for private purposes.
Although Knoll failed to maintain records of his private use of Morehouse, the trial court found that Knoll met his burden, in part, because the ditch was “properly cared for.” In other words, because the ditches were “properly cared for,” an inference could be made that Morehouse worked at least the minimum 40 hours each week for FCWUA. Thus, Morehouse never worked for Knoll while he should have been working for FCWUA. Becker contends, however, that the trial court used “flawed logic” in reaching its determination that Morehouse worked his required 40 hours each week.
The trial court's reasoning is a non sequitur, meaning that it does not necessarily follow. Simply because the ditches may have been properly maintained does not prove that Morehouse worked his required hours. Becker illustrates the trial court's flawed logic in its brief:
“By analogy, does the court really intend to suggest that if the courthouse janitor has the courthouse ‘properly cared for’ after only twenty hours work that the janitor can then work in the judge's [personal] flower garden the remaining twenty hours of his forty hour work week because the ‘properly cared for’ courthouse is irrefutable proof that the janitor did not work on the judge's flowers when he should have been at the courthouse and that the janitor always worked a full forty hour work week at the courthouse?”
Becker's illustration is persuasive. A “properly cared for” ditch, in and of itself, is insufficient evidence to show that Morehouse worked his required 40 hours each week. As mentioned earlier, because Becker was a fiduciary of FCWUA he was required to show that his personal use of Morehouse was entirely fair to FCWUA. Moreover, there was testimony at trial that the ditch was not properly cared for because Becker and other shareholders alleged that the ditch was overcome with weeds, that the ditch flooded their land, and that the ditch lacked irrigation water.
Knoll, however, relies on Morehouse's testimony that Morehouse always worked his required hours for FCWUA. Thus, Knoll argues that Morehouse's testimony supports the trial court's conclusion that Knoll did not breach his fiduciary duty to FCWUA. The relevant portion of Morehouse's trial testimony reads as follows:
“[KNOLL'S COUNSEL]: When you were hired, [by FCWUA] were you told what your hours would be?
“[MOREHOUSE]: I was required to work a 40–hour workweek
“[KNOLL'S COUNSEL]: Did you sometimes work—have to work more than that?
“[MOREHOUSE]: Oh, yes....
“[KNOLL'S COUNSEL]: How often did you see Harold Knoll when you worked there?
“[MOREHOUSE]: Just about every day.
“[KNOLL'S COUNSEL]: Did Harold Knoll ever tell you that you had to come over and work on his farm?
“[MOREHOUSE]: No, sir.
“[KNOLL'S COUNSEL]: Did you ever think that you had to work on Harold Knoll's farm to stay in his good graces?
“[MOREHOUSE]: No sir.
“[KNOLL'S COUNSEL]: While you were employed by the ditch company, did you ever do any work on Harold Knoll's farm?
“[MOREHOUSE]: After hours, yes.”
Knoll also relies on his own testimony at trial to support his argument that the trial court did not err in ruling that he did not breach his fiduciary duty to FCWUA. In particular, Knoll maintains in his brief that “Morehouse was hired by the Board of Directors to work 40 hours per week[,] and that he (Knoll) always required him to work his 40 hours.”
Moreover, the trial court found Morehouse's testimony to be credible. The trial court stated that its “impression of Morehouse [was] that of a simple man of limited education who, when taking into account his testimony and all of the other evidence and testimony at trial, appeared to be truthful and as accurate as he could be.” Certainly, Morehouse's testimony was some evidence that he worked the hours required by his employer, FCWUA. Nevertheless, Knoll's contention that he did not breach his fiduciary duty is called into question because he did not maintain employment records of his private use of Morehouse, which he was required to do under the corporate bylaws. Knoll, 291 Kan. at 212.
As discussed earlier, when a plaintiff has established a prima facie case alleging a breach of fiduciary duty, ‘ “the burden of proof is on the fiduciary to establish the fairness of the transaction, and to this end he must fully disclose the facts and circumstances, and affirmatively show his good faith.” ‘ (Emphasis added.) Knoll, 291 Kan. at 207. Here, Knoll failed to keep records to establish the fairness of his transaction. The trial court, however, found that Knoll's failure to keep records did not affect Knoll's ability to meet his burden of proof. The trial court stated that “[a]lthough no records were kept regarding [Morehouse's] working hours[,] the evidence presented clearly and satisfactorily concludes that he did in fact carry through with his responsibilities to the corporation and the ditch was properly cared for.” This finding hinges on Morehouse's testimony. Thus, the principal factual question before the trial court was whether the testimony of Morehouse was truthful. Indeed the trial court found Morehouse's testimony to be truthful. Yet, the only tool available to evaluate the truthfulness of Morehouse's testimony would have been Morehouse's employment records, which records were within the control of Knoll to maintain.
Surely, Knoll should not be in a stronger position because he willfully defied the corporate bylaws to maintain Morehouse's employment records than he would have been in had he maintained Morehouse's employment records and merely refused to produce those records. For example, if Knoll had maintained Morehouse's employment records as he was required to do and he had failed to produce those records at trial, an adverse inference could be drawn. Briefly stated, the adverse inference rule states that when parties have relevant evidence within their control which they fail to produce, this failure gives rise to an inference that the evidence is unfavorable to them. See, e.g., Interstate Circuit, Inc. v. United States, 306 U.S. 208, 226, 83 L.Ed. 610, 59 S.Ct. 467 (1939) (“The production of weak evidence when strong is available can lead only to the conclusion that the strong would have been adverse.”).
Although the adverse inference rule is inapplicable to our situation because Knoll failed to maintain records on Morehouse's work hours and there are no records to produce, Knoll should not be allowed to profit from his failure to maintain employment records on Morehouse's work hours. Thus, when Knoll chose not to maintain employment records on Morehouse's work hours, it is only natural to suppose that had he kept those records, they would have been harmful to his contention that he did not breach his fiduciary duty to FCWUA. Moreover, this inference is further strengthened by Knoll's defiance in failing to maintain employment records on Morehouse when he was required to do so for his private use of Morehouse.
Thus, Knoll's failure to maintain employment records on Morehouse when he was required to do so renders an inference that if such records had been maintained, they would be unfavorable to Knoll. Because Knoll failed to present clear and satisfactory evidence that he acted in good faith and fairness to FCWUA, we reverse and remand with directions to the trial court to enter judgment for the plaintiffs for both direct and derivative causes of action and to determine derivative damages to FCWUA and direct damages to plaintiffs and to determine whether punitive damages should be allowed to plaintiffs and to FCWUA.