Golconda Screw, Inc. v. West Bottoms Ltd.

• Decision Date: 28 April 1995
• Docket Number: No. 71600,71600
• Citation: 20 Kan.App.2d 1002,894 P.2d 260
• Parties: GOLCONDA SCREW, INC., Appellee, v. WEST BOTTOMS LTD., Alvin H. O'Connell, and Mary A. O'Connell, Appellants.
• Court: Kansas Court of Appeals

Page 260

894 P.2d 260

20 Kan.App.2d 1002

GOLCONDA SCREW, INC., Appellee, v. WEST BOTTOMS LTD., Alvin H. O'Connell, and Mary A.

O'Connell, Appellants.

No. 71600.

Court of Appeals of Kansas.

April 28, 1995.

Syllabus by the Court

1. Punitive damages are awarded to punish the wrongdoer for the malicious, vindictive, or willful and wanton invasion of another's rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongs.

2. Punitive damages may be awarded incident to equitable relief without an award of actual damages.

3. Punitive damages may be awarded in an action to set aside a fraudulent conveyance pursuant to K.S.A. 33-102.

4. On the facts of this case, punitive damages are appropriate to punish the willful transfer of a judgment debtor's only asset to avoid execution and to deter others from doing so.

Charles J. Hyland and James P. O'Hara, of Shughart Thomson & Kilroy, P.C., Overland Park, for appellee.

Dean D. Garland, Shawnee, for appellants.

Before PIERRON, P.J., BRAZIL, J., and RON ROGG, District Judge, assigned.

RON ROGG, District Judge, assigned:

West Bottoms Ltd., (West Bottoms), Alvin H. O'Connell, and Mary A. O'Connell appeal from the district court's judgment awarding punitive damages and attorney fees. They also appeal from the district court's disregard of the corporate form by imposing joint and several liability on West Bottoms and the O'Connells individually.

Subsequent to the date for argument on this matter, which both parties waived, we received notice from the appellee that appellant West Bottoms had filed a Chapter 7 petition in the United States Bankruptcy Court. We stayed further formal action on this appeal after receipt of the notice.

On December 29, 1994, we received a motion from appellants asking that our stay be lifted. On February 9, 1995, we received a motion from the appellee requesting that the stay be lifted as well. The automatic stay imposed by 11 U.S.C. § 362(a)(1) (1988) applies only to actions or proceedings commenced against the debtor. This appeal was commenced by the debtor, not against the debtor, and the automatic stay does not apply. We consulted on March 8, 1995, with Carl Clark, the trustee in bankruptcy, who has no objection to our proceeding to resolve the appeal as requested by the debtor and possible creditor. We therefore proceed to rule on this appeal.

The notice of appeal identifies three issues ruled upon in the memorandum decision and journal entry of judgment entered on March 7, 1994. These are the three issues this court will consider. Earlier judgments of the district court are not before us for consideration other than for the purpose of accepting the district court's factual findings. See Hess v. St. Francis Regional Med. Center, 254 Kan. 715, 869 P.2d 598 (1994).

Alvin has been the president and treasurer of West Bottoms since its incorporation in 1986. Mary, Alvin's wife, is a director, vice-president, and secretary. The O'Connells are the only directors, shareholders, and officers of West Bottoms.

In the summer of 1991, West Bottoms entered into a commercial real estate contract with Golconda Screw, Inc., (Golconda) in which Golconda agreed to purchase a warehouse owned by West Bottoms. Alvin signed the contract on behalf of West Bottoms. The sale was to close on November 1, 1991.

The contract did not close because certain repairs were not performed as required by the contract. Litigation conducted in Johnson County concluded in a judgment in favor of Golconda for breach of contract and attorney fees.

As of November 1, 1991, the O'Connells were personally indebted to Robert Pettit in excess of $138,000 and to Bill Renzenberger for $20,000. These debts were personal debts secured by real property owned by the O'Connells as individuals. The district court specifically found the debts to be personal debts of the O'Connells and not corporate debts of West Bottoms.

On November 4, 1991, West Bottoms held a special directors' and stockholders' meeting and resolved to transfer the warehouse to J.P. Enterprise, "a corporation to be formed and owned by Stockholders, all of which are promissory noteholders of West Bottoms, LTD." Alvin was the only noteholder of West Bottoms. The incorporation fee was paid by West Bottoms.

The articles of incorporation for J.P. Enterprise designated Mathilde Pearson, an elderly neighbor of the O'Connells, as registered agent. The articles also indicated Pettit and Pearson were the stockholders and directors, and that they had waived notices of meetings as evidence by their signatures. The minutes expressing these facts were not signed by Pettit or Pearson. Pettit was in Saudi Arabia and did not know of the formation of the corporation or his status as an officer. Pearson was not present at the meetings either.

Alvin is also the secretary and treasurer of J.P. Enterprise, formed November 7, 1991. Incorporation documents list the office of J.P. Enterprise at Pearson's residence. Renzenberger is the president and Pettit is the vice-president.

The warehouse that Golconda contracted to purchase was West Bottoms' only asset other than a cash account with a balance of approximately $300. West Bottoms' 1991 tax return listed assets of $224.07.

Golconda brought this action in Wyandotte County seeking to set aside the transfer of the warehouse to J.P. Enterprise as a fraudulent conveyance pursuant to K.S.A. 33-102. Golconda requested punitive damages and attorney fees. Golconda also requested the district court to disregard the corporate form of West Bottoms and impose liability on the O'Connells individually.

The district court found:

"It was clear to O'Connell on the day of scheduled closing that he was to be sued or voluntarily pay damages....

"Since the attempted contract to sell the building was by the O'Connells in the corporate capacity, any damages arising to the plaintiffs would have to be satisfied out of corporate assets (the building.) So he did what he did to defeat their claim."

The district court set aside the conveyance of the warehouse to J.P. Enterprise and awarded Golconda punitive damages in the amount of $10,000 and attorney fees of $10,000. It also imposed joint and several liability on West Bottoms and on the O'Connells individually.

Was the award of punitive damages in this case authorized under Kansas law?

West Bottoms argues punitive damages cannot be awarded as a matter of law. An appellate court's review of conclusions of law is unlimited. Gillespie v. Seymour, 250 Kan. 123, 129, 823 P.2d 782 (1991).

Golconda brought this action pursuant to K.S.A. 33-102, which provides:

"Every gift, grant or conveyance of lands, tenements, hereditaments, rents, goods or chattels, and every bond, judgment or execution, made or obtained with intent to hinder, delay or defraud creditors of their just and lawful debts or damages, or to defraud or deceive the person or persons who shall purchase such lands, tenements, hereditaments, rents, goods or chattels, shall be deemed utterly void and of no effect."

The district court set aside the conveyance, and West Bottoms does not appeal that judgment.

West Bottoms asserts that a general trend in other states disallows the award of punitive damages in a fraudulent conveyance case.

"Although there is authority to the contrary, it has been held improper to award a money judgment against the judgment debtor where the creditor already has a judgment against him for the debt. Exemplary damages may not be granted as incidental relief in an action to set aside a fraudulent conveyance." 37 C.J.S., Fraudulent Conveyances § 444, p. 1298 (1994 Supp.).

The authority cited for the above C.J.S. quotation is Miller v. Kaiser, 164 Colo. 206, 433 P.2d 772 (1967). This statement of law is hinged on a more general proposition, which apparently still holds true in Colorado, that the "award of exemplary or punitive damages in equity actions or as incidental to the equitable relief, is generally held to be improper." [Emphasis added.] 164 Colo. at 215, 433 P.2d 772 (citing Annot., 48 A.L.R.2d 947).

The Colorado Supreme Court went on to say:

"The equitable remedy of setting aside a fraudulent conveyance on a complaint of a judgment creditor in our view is not compatible with an award of exemplary damages. Inherent in this remedy is the restoration of the ownership status in a fraudulent transferor thereby allowing a judgment creditor to reach the asset, and aid him in the collection of this judgment debt. Where the single remedy of voiding a fraudulent conveyance is sought and secured by the judgment creditor, an additional award of exemplary damages, even where the evidence goes to the extent of showing that the fraudulent transferor and transferee acted with malice, intent, and design in an effort to hinder or prevent the collection of a judgment, is inherently not includable as a part of the remedy or as incidental thereto. It is our conclusion that the trial court in an equitable action involving an alleged fraudulent conveyance, does not have the inherent power to award exemplary damages." 164 Colo. at 215-16, 433 P.2d 772.

West Bottoms also cites Gilmore v. Tucker, 83 Cal.App.3d 664, 148 Cal.Rptr. 86 (1978). This citation is improper as the opinion was withdrawn by order of the California Supreme Court. See 83 Cal.App.3d 672, 148 Cal.Rptr. 75 (1978).

Kansas has not decided the specific issue of whether punitive damages may be awarded in an action to set aside a fraudulent conveyance. Despite numerous cases indicating punitive damages are not available absent an award of actual damages (see, e.g., Enlow v. Sears, Roebuck & Co., 249 Kan. 732, Syl. p 7, 822 P.2d 617 [1991]; McConwell v. FMG of Kansas City Inc., 18 Kan.App.2d 839, Syl p 8, 861 P.2d 830 [1993], rev. denied 254 Kan. ---- [February 2, 1994], punitive or exemplary damages may be awarded incidental to equitable relief. Capitol Fed'l Savings & Loan...