Halley v. Barnabe

• Decision Date: 08 June 2001
• Docket Number: No. 293, No. 83, No. 411, No. 605.
• Citation: 24 P.3d 140,271 Kan. 652
• Parties: LARRY W. HALLEY, Appellant, v. KEVIN BARNABE, BILL E. CREACH, SHARLA CREACH and INFOTECH, INC., Appellees. INFOTECH OF KANSAS CITY, LLC, and LARRY W. HALLEY, Appellants, v. INFOTECH, INC., BILL CREACH, BILL E. CREACH, SHARLA CREACH, and KEVIN BARNABE, Appellees. INFOTECH OF KANSAS CITY, LLC, and BILL CREACH, Appellants, v. LARRY HALLEY and SEARCH ONE, INC., Appellees.
• Court: Kansas Supreme Court

271 Kan. 652

24 P.3d 140

LARRY W. HALLEY, Appellant, v. KEVIN BARNABE, BILL E. CREACH, SHARLA CREACH and INFOTECH, INC., Appellees.

INFOTECH OF KANSAS CITY, LLC, and LARRY W. HALLEY, Appellants, v. INFOTECH, INC., BILL CREACH, BILL E. CREACH, SHARLA CREACH, and KEVIN BARNABE, Appellees.

INFOTECH OF KANSAS CITY, LLC, and BILL CREACH, Appellants, v. LARRY HALLEY and SEARCH ONE, INC., Appellees.

Nos. 83,293, 83,411, 83,605.

Supreme Court of Kansas.

Opinion filed June 8, 2001.

Phillip C. Rouse, of Douthit Frets Rouse & Gentile, L.L.C., of Kansas City, Missouri, argued the cause, and Jennifer L. Benedict, of the same firm, was with him on the briefs for appellants Larry W. Halley and Infotech of Kansas City, LLC, and for appellees Larry W. Halley and Search One, Inc. Kevin J. Odrowski and Shelley I. Ericsson, of the same firm, were with him on the briefs for appellants Larry W. Halley, and Infotech of Kansas City, LLC.

Nathan C. Harbur, of Nathan C. Harbur, Chartered, of Leawood, argued the cause and was on the briefs for appellants Infotech of Kansas City, LLC, and Bill Creach and for appellee Bill Creach.

J. Nick Badgerow, of Spencer Fane Britt & Browne LLP, of Overland Park, argued the cause, and Jennie M. DeVeney, of the same firm, was with him on the briefs for appellees Bill E. Creach, Sharla Creach, and Infotech, Inc.

LARSON, J.:

This consolidated appeal of three separate actions between two members of a limited liability company raises a myriad of claims and issues which were disposed of below in two cases by granting motions to dismiss and, in the third, by the denial of a motion for summary judgment that is before us in an interlocutory appeal.

Because of the enactment of the Kansas Revised Limited Liability Company Act (KRLLCA), K.S.A. 2000 Supp. 17-7662 et seq., which we deem to be retroactive and procedural in nature, we reverse the granting of the motions to dismiss, affirm the denial of summary judgment, and remand all three cases for further proceedings.

Explanation of the claims of each case and the argument thereunder is not so easily or simply stated.

Factual and procedural background

Bill Creach and Larry Halley jointly formed Infotech of Kansas City, LLC (LLC) in 1995, as member-managers and 50% owners. The members executed an operating agreement governing the LLC, which recognized the right of the managers to engage in other business activities so long as they did not compete with the business of the LLC.

At the time the LLC was formed, Bill Creach and his wife, Sharla Creach, co-owned Infotech, Inc. Sometime after forming the LLC, Bill Creach transferred all his interest in Infotech, Inc., to the corporation, making his wife the sole owner; his son, Bill E. (Gene) Creach, became its president.

One of the defendants in one of the cases, Kevin Barnabe, was originally an employee of the LLC and later Infotech, Inc. Due to his bankruptcy filing and pursuant to an order of the bankruptcy court, which is an issue in this appeal, Barnabe has been dismissed as a party.

There is an additional corporation involved, Search One, Inc., which is owned by Halley.

The LLC provided independent contractor programmers to numerous metropolitan Kansas City businesses from 1995 until 1997, when controversy arose between Bill Creach and Halley and the litigation in issue here began.

In the first lawsuit (district court case No. 98CV237), Bill Creach sued Halley and Search One, Inc., on behalf of himself and the LLC. Bill Creach and the LLC alleged that Halley had breached his fiduciary duties to the LLC, competed with the LLC, and did not perform his agreed responsibilities. Bill Creach prayed for dissolution on behalf of himself and the LLC (as well as a determination that Halley had forfeited his interest in the LLC), damages for breach of the operating agreement, damages for breach of fiduciary duties, and an injunction requiring the defendants to refrain from further harmful acts to the LLC. It was also requested that a receiver be appointed to help dissolve the deadlocked LLC. On behalf of the LLC only, Bill Creach prayed for damages for tortious interference with a business relationship.

Halley counterclaimed for damages arising from the alleged collusive and competitive conduct of Bill, Gene, and Sharla Creach, as well as Barnabe and Infotech, Inc. Halley requested damages for breach of contract and various torts, and he also requested an accounting and an injunction precluding the named parties from competing with the LLC.

Bill Creach, on behalf of himself and the LLC, moved for summary judgment, claiming that Halley's counterclaims must be dismissed because it was not brought on behalf of or against the LLC. Judge James Franklin Davis denied the plaintiffs' motion. In upholding Halley's rights, the court held that there were genuine issues of material facts precluding summary judgment on any of Halley's counterclaims and that, as a matter of law, Halley could bring his counterclaims directly even though it involved derivative claims, by applying to limited liability companies the closed corporation derivative exception created in Richards v. Bryan, 19 Kan. App.2d 950, 879 P.2d 638 (1994).

In the second case (district court case No. 98CV1290), Halley individually sued Sharla Creach, Gene Creach, Kevin Barnabe, and Infotech, Inc. He alleged various torts and breach of contract. The defendants filed a motion to dismiss claiming that Halley lacked standing to file the suit individually. Judge Gerald T. Elliott granted the defendants' motion to dismiss.

Halley filed a third suit (district court case No. 98CV4900) on behalf of himself and the LLC against Bill Creach, Gene Creach, Sharla Creach, Kevin Barnabe, and Infotech, Inc. Halley and the LLC alleged various torts, breach of fiduciary duty, and breach of contract. The plaintiffs also requested an injunction to stop the defendants from committing further harmful acts to the LLC. The defendants filed a motion to dismiss. Judge Janice D. Russell found that the LLC lacked authority to file suit without the consent of Bill Creach and that Halley's claim should be dismissed because a derivative suit is not available to one of two 50% owners of a limited liability company.

The three appeals

After the summary judgment motion to Halley's counterclaims was denied, Bill Creach and the LLC obtained the right to take an interlocutory appeal pursuant to K.S.A. 60-2102. On appeal, they contend that Halley lacked standing to file a direct individual claim or that he could not bring a derivative claim on behalf of the LLC. Bill Creach is represented by separate counsel from the remaining defendants (Infotech, Inc., Sharla Creach, and Gene Creach).

Halley and the LLC appeal the trial court's granting of motions to dismiss in both the other actions.

Halley and the LLC filed a consolidated brief as to cases Nos. 98CV1290 and 98CV4900 in which they contend the trial court erred (1) in deciding he lacked standing to bring a direct suit for damages, (2) in dismissing the LLC's claims and deciding the LLC could not file the claims without the approval of Bill Creach, and (3) in dismissing his claims and deciding he could not maintain a derivative action against the defendants.

The other defendants (Infotech, Inc., Sharla Creach, and Gene Creach) did not file a cross-appeal but contend res judicata should bar Halley from proceeding in case No. 98CV4900 in the name of the LLC and that count III in case No. 98CV1290 and count V. in case No. 98CV4900 are legally deficient.

After Halley's brief was filed, he advised the court, pursuant to Supreme Court Rule 6.09(b) (2000 Kan. Ct. R. Annot. 41), as to amendments in the statutory provisions relating to limited liability companies in Kansas and contends that under the provisions of the KRLLCA, derivative suits by members are authorized. The other parties did not file responses to Halley's Rule 6.09 filing.

Standards of Review

We are required to review rulings on motions to dismiss, the denial of summary judgment, and statutory amendments. We first set forth our standard of review which drives the results we reach. The granting of motions to dismiss has not been favored by our courts. The manner in which they should be reviewed was set forth in Ripley v. Tolbert, 260 Kan. 491, 493, 921 P.2d 1210 (1996), where we quoted Bruggeman v. Schimke, 239 Kan. 245, 247-48, 718 P.2d 635 (1986), as follows:

"`"Our scope of review, where the trial court has sustained a motion to dismiss, is concisely defined in Knight v. Neodesha Police Dept., 5 Kan. App.2d 472, 620 P.2d 837 (1980):

"`"When a motion to dismiss under K.S.A. 60-212(b)(6) raises an issue concerning the legal sufficiency of a claim, the question must be decided from the well-pleaded facts of plaintiff's petition. The motion in such case may be treated as the modern equivalent of a demurrer." Syl. ¶ 1.

"`"Disputed issues of fact cannot be resolved or determined on a motion to dismiss for failure of the petition to state a claim upon which relief can be granted. The question for determination is whether in the light most favorable to plaintiff and with every doubt resolved in plaintiff's favor, the petition states any valid claim for relief. Dismissal is justified only when the allegations of the petition clearly demonstrate plaintiff does not have a claim." Syl. ¶ 2.

"`"In considering a motion to dismiss for failure of the petition to state a claim for relief, a court must accept the plaintiff's description of that which occurred, along with any inferences reasonably be drawn therefrom. However, this does not mean the court is required to accept conclusory allegations on the legal effects of events the plaintiff has set out if these allegations do not reasonably follow from the description of what happened, or if these allegations are contradicted by the description itself." Syl. ¶ 3.'"

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