BECKER v. KNOLL

• Decision Date: 17 September 2010
• Docket Number: No. 99,548.,99
• Citation: 239 P.3d 830
• Parties: James BECKER and the Estate of Norman Becker, Deceased, by and through William Becker, as Special Administrator, Appellants, v. Harold KNOLL, Appellee.
• Court: Kansas Supreme Court

239 P.3d 830

James BECKER and the Estate of Norman Becker, Deceased, by and through William Becker, as Special Administrator, Appellants, v. Harold KNOLL, Appellee.

No. 99,548.

Supreme Court of Kansas.

Sept. 17, 2010.

COPYRIGHT MATERIAL OMITTED.

Syllabus by the Court

1. The standard for reviewing whether a plaintiff has presented a prima facie case is de novo.

2. In a suit alleging a breach of fiduciary duties by a corporate officer, the plaintiff has the burden of establishing a prima facie case of the breach. If the plaintiff succeeds in meeting this obligation, the burden shifts to the defendant to show by clear evidence that the defendant acted in fairness and good faith to the corporation.

3. Kansas sets a higher standard or stricter fiduciary duty for directors and officers of corporations than some jurisdictions. Kansas imposes a very strict fiduciary duty on officers and directors of a corporation to act in the best interests of the corporation and its stockholders.

4. A director of a corporation owes a high fiduciary duty to the other stockholders of the corporation. This duty of loyalty requires that the best interests of the corporation and its shareholders take precedence over any self-interest of a director, officer, or controlling shareholder that is not shared by the stockholders generally.

5. Self-dealing in a corporate context means participation in a transaction that benefits oneself instead of another who is owed a fiduciary duty.

6. Appellate review of a district court's application of the law to the facts is unlimited.

Philip Ridenour, of Ridenour and Ridenour, of Cimarron, argued the cause and was on the briefs for appellants.

Charles E. Owen, II, of Law Offices of Charles E. Owen, II, P.A., of Garden City, argued the cause and was on the briefs for appellee.

The opinion of the court was delivered by ROSEN, J.:

The Finney County Water Users Association (FCWUA) is a private Kansas corporation originally chartered in 1930. One purpose of the corporation is to provide the shareholders with irrigation water by maintaining a system of ditches and canals that feed water from the Arkansas River to a series of irrigation laterals north of Garden City.

FCWUA employs a full-time “ditch rider,” whose job is to maintain the ditches and canals. The ditch rider is also responsible for directing water into the laterals for delivery to the shareholders. Leonard Morehouse was the ditch rider from March 1998 through March 2003. He was hired with the understanding that he would work a minimum of 40 hours a week. He usually worked longer hours in the summer, when he might work as many as 100 hours in a week, than in the winter, when he might work as few as 23 hours in a week.

Defendant Harold Knoll was elected president of FCWUA in 1995 and has remained in office since that time. Knoll supervised Morehouse and gave him weekly work assignments. In December 2001, FCWUA amended its bylaws to allow the president and other board members to employ ditch association employees privately and to require the employing board member to document any such employment.

Witnesses disagreed on the amount of time expended and the nature of the work performed by Morehouse on both FCWUA duties and for Knoll's private enterprises. There was disputed testimony that Morehouse worked on Knoll's farm for some 30 to 45 days during the summer of 2002 and was not maintaining ditches during that time. Knoll testified that Morehouse “pitched in and helped” on Knoll's farm several times a week “after he had his full days work for the ditch company,” but that he never took Morehouse away from his job duties for the ditch company to work on his farm. Some of Morehouse's work on Knoll's farm was performed without compensation and some was compensated in labor exchange, beef, and acheck for $500. As stated above, the corporate bylaws were amended to require maintaining records of the use of corporation employees for private purposes. Knoll nevertheless did not keep records of the time that Morehouse devoted to working on Knoll's farm and the time that Morehouse worked on the irrigation system, and there was testimony that Knoll refused to keep such records.

There was testimony that the plaintiffs and other shareholders experienced both flooding and lack of irrigation water because of poor canal maintenance. The plaintiffs alleged they lost crops and were forced to find other sources of irrigation water.

In May 2004, the plaintiffs filed suit against Knoll, seeking damages for breach of a fiduciary duty and seeking his removal as an officer and director of the corporation. After a trial to the bench, the district court found that the plaintiffs had failed to establish a prima facie case and had failed to demonstrate that Knoll's conduct resulted in damages to the plaintiffs. The plaintiffs took a timely appeal to the Court of Appeals. The Court of Appeals affirmed the resulting judgment in favor of Knoll, which found that, while the plaintiffs had succeeded in establishing a prima facie case, the factual findings by the district court nevertheless supported judgment for Knoll. Becker v. Knoll, 40 Kan.App.2d 1049, 199 P.3d 786 (2008).

This court granted the plaintiffs' petition for review and subsequently granted a motion to substitute William Becker, as special administrator of the estate, for Norman Becker, who had passed away.

The first issue before us relates to the evidentiary burdens that the law places on the opposing parties. The district court found that the plaintiffs failed to make a prima facie case for self-dealing on Knoll's part. The Court of Appeals reversed this finding but held the error was harmless, and we agree in part and reverse in part, finding the error was not harmless.

The proper standard for reviewing whether a plaintiff has presented a prima facie case is de novo. We have held that “[p]rima facie evidence is evidence sufficient to sustain a verdict in favor of the issue it supports, even though it may be contradicted by other evidence.” Frick Farm Properties v. Kansas Dept. of Agriculture, 289 Kan. 690, Syl. ¶ 10, 216 P.3d 170 (2009). In Frick, this court considered whether the defendant had established a prima facie case for terminating a water right. The court examined the evidence in the record and concluded it was sufficient to meet statutory requirements for a prima facie case. See 289 Kan. at 708, 216 P.3d 170. This analysis is consonant with de novo review. The reviewing court does not weigh the evidence to find the more meritorious position, but merely determines whether the evidence exists to establish the position in the first place. The Court of Appeals correctly held that determining whether a plaintiff presented a prima facie case is a matter of law subject to de novo review. Becker, 40 Kan.App.2d at 1052-53, 199 P.3d 786.

The district court and the Court of Appeals found that, in a suit alleging a breach of fiduciary duties by a corporate officer, the plaintiff has the burden of establishing a prima facie case of the breach. If the plaintiff succeeds in meeting this obligation, the burden shifts to the defendant to show by clear evidence that the defendant acted in fairness and good faith to the corporation. This analysis is correct.

We have previously held:

“Any unfair transaction induced by a fiduciary relationship between the parties gives rise to a liability with respect to unjust enrichment of the fiduciary. Where such transaction is attacked, 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. [Citations omitted.] Where the fairness of the transaction is challenged, there must be an affirmative showing of fairness and good faith, the burden being upon the parties seeking to sustain such transactions to prove this by clear and satisfactory evidence. [Citations omitted.]” Newton v. Hornblower, Inc., 224 Kan. 506, 518, 582 P.2d 1136 (1978).

In Richards v. Bryan, 19 Kan.App.2d 950, 965, 879 P.2d 638 (1994), our Court of Appeals explained the burden-shifting this way:

“ Newton requires a complaining party to offer more than a bald allegation of impropriety, while still assigning the ultimate burden of proof to the fiduciary. This somewhat confusing shift in the burden of proof was very well explained in Cookies Food Products v. Lakes Warehouse, 430 N.W.2d 447 (Iowa 1988). In Cookies, the plaintiff was first required to make out a prima facie showing of self-dealing. After that was established, the burden then shifted to the defendant to prove that its actions were done in good faith. After the defendant presented its evidence, the plaintiff was then afforded the opportunity to counter with rebuttal arguments. 430 N.W.2d at 453.”

Two concepts underlie this shift in the burden of persuasion. The first is that a director of a corporation owes a high fiduciary duty to the other stockholders of the corporation. In re Hesston Corp., 254 Kan. 941, 982, 870 P.2d 17 (1994). “The duty of loyalty requires that the best interests of the corporation and its shareholders take precedence over any self-interest of a director, officer, or controlling shareholder that is not shared by the stockholders generally. [Citations omitted.]” McCall v. Scott, 239 F.3d 808, 824 (6th Cir.2001).

Other jurisdictions have elaborated on this fiduciary duty:

“ ‘[A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other.... The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him....’ [Citation omitted.]” Cadle Co. v. D'Addario, 268 Conn. 441, 455, 844 A.2d 836 (2004).

“Corporate directors must act in their...