Brown v. Foulks

• Court: Kansas Supreme Court
• Writing for the Court: PRAGER
• Citation: Brown v. Foulks, 657 P.2d 501, 232 Kan. 424 (Kan. 1983)
• Decision Date: 14 January 1983
• Docket Number: No. 53381,53381
• Parties: VaRena E. BROWN, Plaintiff-Appellant, and Cross-Appellee. v. Gene FOULKS, Judith Foulks, and N.E. Foulks, Inc., Defendants-Appellees, and Cross-Appellants.

Page 501

657 P.2d 501

232 Kan. 424

VaRena E. BROWN, Plaintiff-Appellant, and Cross-Appellee. v. Gene FOULKS, Judith Foulks, and N.E. Foulks, Inc. Defendants-Appellees, and Cross-Appellants.

No. 53381.

Supreme Court of Kansas.

Jan. 14, 1983.

Syllabus by the Court

1. The term "fiduciary relation" has reference to any relationship of blood, business, friendship, or association in which one of the parties reposes special trust and confidence in the other who is in a position to have and exercise influence over the first party.

2. Courts have consistently refused to give an exact definition to, or to fix definite boundaries of, that class of human relations which, by principles of common honesty, require fair dealing between the parties, and which is commonly known as fiduciary relations.

3. Where a fiduciary relationship exists, the law does not permit the fiduciary to make use of that relation to benefit his own personal interests at the expense of the other party. A fiduciary is under a duty to refrain from situations wherein his own interests are brought into conflict with those of his trust, irrespective of good or bad faith on his part.

4. Under the factual circumstances set forth in the opinion, it is held that a fiduciary relationship existed between the parties and that there was a breach thereof.

Ken W. Strobel, of Williams, Larson, Voss, Strobel & Estes, Dodge City, argued the cause, and Max Eugene Estes, Dodge City, of the same firm, was with him on the briefs for plaintiff-appellant and cross-appellee.

Jack E. Dalton, of Mangan, Dalton & Trenkle, Chartered, Dodge City, argued the cause and was on the brief for defendants-appellees and cross-appellants.

PRAGER, Justice:

This is an action in equity for an accounting and for judgment for any sums found to be due. Plaintiff is VaRena E. Brown, widow of W.A. (Bill) Brown. The defendants are Judith Foulks, plaintiff's daughter; Gene Foulks, husband of Judith Foulks; and Foulks Pipe, Inc., a Nebraska corporation, wholly owned by Gene and Judith Foulks.

Following the completion of discovery, the case was submitted to the court on a stipulation of fact, the discovery depositions of the parties and witnesses, and certain exhibits. The facts in the case are not really in dispute and essentially are as follows: W.A. (Bill) Brown was the husband of plaintiff, VaRena Brown, and the father of defendant Judith Foulks. In the early 1950's, Bill Brown started a business at Dodge City known as W.A. Brown Enterprises. It was a sole proprietorship, engaged in the sale to well drillers of irrigation pipe, both perforated and nonperforated, and also related well-drilling supplies. VaRena did not participate in the business in any way. Prior to 1964, Gene Foulks was teaching school in Nebraska. Bill Brown, thinking about his eventual retirement, expressed the wish that Gene and Judith would move back to Dodge City, so that Gene Foulks could learn the business and eventually take it over. After several discussions, Gene and Judith Foulks moved to Dodge City in 1964. Gene Foulks immediately went to work for Brown Enterprises to learn the business.

During 1967, Bill Brown had discussions with his attorney regarding a plan to dispose of the business in such a way as to accomplish two objectives: Furnish VaRena a retirement income for the rest of her life and, at the same time, vest the family business in Gene and Judith Foulks on Bill's death. The matter was discussed by the Browns and Foulks and culminated in an agreement dated December 27, 1967, executed by VaRena Brown, Gene Foulks, and Judith Foulks. Simply stated, this agreement provided as follows:

(1) Upon the death of Bill Brown and the receipt of benefits of a life insurance policy in the amount of $22,000 owned by Foulks on the life of Bill Brown, VaRena would convey all of her interest in W.A. Brown Enterprises, including all inventory and equipment, goodwill, and accounts receivable, but not the land or buildings, to Gene and Judith Foulks.

(2) In addition, Foulks would pay VaRena the total sum of $45,000 over a period of years.

(3) As further consideration for the transfer, VaRena was to receive a stated percentage of the gross sales of W.A. Brown Enterprises, and/or successors, for the remainder of her life.

(4) The conveyance should be construed as a sale, and VaRena would have no managing interest in the business.

(5) Foulks would lease the building and land for a period of not less than five years for $200 per month plus a percentage of gross sales.

At the time this agreement was signed, the business of Brown Enterprises was that of a wholesale distributor of irrigation pipe, casings, and supplies. The business bought the supplies and sold them to the well driller, who ultimately sold the supplies to the customer of the well driller. The trade area of Brown Enterprises included Kansas, Nebraska, Colorado, the Texas panhandle, and Montana. Prior to the death of Bill Brown, the business continued along with Bill in complete charge until 1970, when Bill Brown and one E.P. Ernst invented and patented a machine that would perforate pipe. The perforation machine was installed in the business for use in Dodge City. From 1970 on, the business changed from a simple wholesale pipe distributorship to the manufacturer of a product--perforated pipe.

This development of the pipe perforator led to a codicil to Bill Brown's will. That codicil directed that VaRena be granted a life estate in the perforation machine and that the machine be leased to Gene and Judith with a royalty of 10cents per foot of pipe perforated to be paid to VaRena. In the event VaRena predeceased Bill Brown or on her death, the machine was bequeathed in equal shares to Judith and Gene. Bill Brown died December 21, 1971. Immediately upon his death, Gene Foulks took over and began managing the business. During the period of administration of Bill's estate, VaRena, although serving as executrix, left all business decisions to Gene Foulks, who took care of everything related to the business. In December of 1972, by order of the probate court, the assets and ownership of the business were transferred to VaRena Brown.

Shortly thereafter, pursuant to the agreement of December 1967, VaRena conveyed the business to Gene Foulks who accepted ownership of the physical assets of Brown Enterprises. From December 1972 until October of 1974, Gene Foulks conducted the business in accordance with the terms and conditions of the agreement. During this period of time, VaRena received the life insurance proceeds, rental on the land and buildings, her agreed percentage of the gross sales, and royalties from the perforation machine, all pursuant to the December 1967 agreement. The business prospered under Gene's management. In 1973, the business had total sales in the amount of approximately $2,032,000. VaRena received $14,444 for perforation royalties. The total payments to VaRena for the year 1973 amounted to approximately $53,900. In 1974, things got even better. That year total sales of the business amounted to $3,692,000. From December 1972 until October 1974, the nature of the business remained basically the same as it had been prior to Bill's death. Then trouble arose. Gene and Judith became dissatisfied with the arrangement and approached VaRena about selling the land to them. Early in 1974, Gene began making overtures to change the percentage of gross sales to be paid to VaRena. Gene's accountant attempted to negotiate a new agreement; these negotiations were unsuccessful. VaRena decided to stick to the original agreement in accordance with Bill Brown's wishes.

On October 15, 1974, Gene Foulks formed Foulks Pipe, Inc., a Nebraska corporation. The incorporators and sole stockholders were Gene and Judith Foulks. Gene was president and Judith was secretary of the corporation. Judith Foulks, in a conversation with her mother, admitted that part of the intention of forming the Nebraska corporation was so that Gene and Judith could avoid having to pay VaRena the percentage of gross sales that she was entitled to under the terms of the 1967 agreement. The Nebraska corporation was incorporated without Gene saying anything to VaRena. VaRena found out about the Nebraska corporation only after she asked Judith why Gene was spending so much time in Nebraska.

From this time on, the business of the Nebraska corporation expanded, while that of W.A. Brown Enterprises decreased. In 1975, the gross sales of W.A. Brown Enterprises decreased to $1,487,558, and in 1976 it dropped to $1,460,574. The Nebraska corporation enjoyed gross sales of $1,563,991 in 1975, and $2,242,246 in 1976. The combined gross sales of W.A. Brown Enterprises and Foulks Pipe, Inc. amounted to $3,051,549 in 1975, and $3,702,820 in 1976. During this same period, the amount of pipe perforated at W.A. Brown Enterprises at Dodge City substantially decreased. For the calendar years 1975 and 1976, the percentage payments received by VaRena under the 1967 agreement did not include any percentage of the gross sales recorded by the Nebraska corporation. The effect was to reduce her payments for those two years to less than one-half of the amount she had received for the two years prior to the establishment of the Nebraska corporation.

In January 1977, VaRena Brown commenced this action seeking an accounting of the gross sales of the two businesses and for judgment for her percentage of the gross sales figures reflected by the accounting. The books, records, and finances of W.A. Brown Enterprises and Foulks Pipe, Inc., were audited by accountants employed by both sides. Plaintiff commissioned the firm of Elmer Fox, Westheimer & Company to review the exhibits and records and to render a special report on the transactions of the two companies. From the stipulations, discovery depositions, and the numerous exhibits submitted into evidence, the management of the two businesses was brought into...