Johnson v. Kolman, a Div. of Athey Products Corp.

Decision Date19 February 1987
Docket NumberNo. 15388,15388
Citation412 N.W.2d 109
PartiesLester H. JOHNSON, Plaintiff and Appellant. v. KOLMAN, A DIVISION OF ATHEY PRODUCTS CORPORATION, Defendant and Appellee. . Considered on Briefs
CourtSouth Dakota Supreme Court

Scott G. Hoy, of Swanson, Carlsen, Carter Hoy & Anderson, Sioux Falls, for plaintiff and appellant.

John E. Burke, Sioux Falls, for defendant and appellee.

SABERS, Justice.

Lester H. Johnson (Johnson) appeals from a summary judgment dismissing his complaint for wrongful termination, breach of employment and severance contracts, fraud and breach of fiduciary duty against Kolman. We reverse and remand.


Kolman, a division of Athey Products Corporation (Athey), is a manufacturer of various types of heavy equipment. Most of Kolman's sales involve bids to customers, with the lowest bidder normally receiving the contract. Kolman hired Johnson in 1966, and over the years Johnson was promoted until he became the general manager of Kolman's Sioux Falls office.

In February of 1984, James Cloonan (Cloonan), the Athey president, contacted Johnson and told him that he had a man who could fill an open district representative position at the Sioux Falls office. This man was Don Blalock, a long time acquaintance of Cloonan. Johnson met with Blalock and determined that Blalock was not suited for the position since he did not have an engineering degree, which was required for the position, and had not dealt directly with contractors and distributors. Cloonan reluctantly accepted Johnson's decision.

At about the same time, an Athey directive informed Johnson that the profit margin in the bids Johnson made should go no lower than 25%. About a year later, Johnson decided that he needed to lower the profit margins in order to generate business. In January of 1985, Johnson bid a contract using an 18% profit margin. Upon discovering this, and without warning, Cloonan told Johnson to resign or be fired. Johnson chose to resign.

After his resignation, Johnson entered into a severance agreement with Kolman for severance payments amounting to three months salary. Kolman ceased payments under this contract after one month, claiming that Johnson breached the contract by looking for another job in the industry.

Johnson filed a claim for unemployment insurance benefits in April of 1985. Shortly thereafter, the South Dakota Department of Labor ruled that Johnson was ineligible for benefits since he had been discharged for work-connected misconduct. The agency's determination notice stated that the ruling would be final unless Johnson filed an appeal within nine days after the mailing of the notice. An appeal by Johnson would have resulted in a hearing before an appeals referee. Johnson did not appeal the agency's intitial decision.

Johnson filed this suit against Kolman, asserting breach of employment contract and severance contract, wrongful termination, fraud, and breach of fiduciary duty. Kolman had immediately hired Don Blalock to replace Johnson as Kolman's general manager, but Johnson evidently did not become aware of it until after he filed his claim for unemployment benefits. Johnson claimed that there was a conspiracy within the corporation to remove him from his position for the purpose of placing Don Blalock in that position. The trial court granted summary judgment to Kolman on the ground that Johnson failed to exhaust his administrative remedies before bringing suit.


The issue raised by Johnson is whether the doctrine of exhaustion of administrative remedies applies in this case. Johnson argues that the doctrine does not apply since the Department of Labor has no jurisdiction to decide matters such as breach of contract, wrongful termination, and fraud. He contends that application of the doctrine serves only to improperly deny him access to the courtroom and that the trial court erred in granting summary judgment. We agree.


The doctrine of exhaustion of administrative remedies is one of the fundamental principles of administrative law and jurisprudence. The doctrine is broadly stated as the withholding of judicial relief on a claim or dispute cognizable by an administrative agency until the administrative process has run its course. Zar v. S.D. Bd. of Examiners of Psychologists, 376 N.W.2d 54 (S.D.1985); Gottschalk v. Hegg, 89 S.D. 89, 228 N.W.2d 640 (1975); see also Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 58 S.Ct. 459, 82 L.Ed. 638 (1938). In South Dakota, the exhaustion doctrine has been codified in the Administrative Procedures Act (SDCL ch. 1-26). SDCL 1-26-30 states: "A person who has exhausted all administrative remedies available within any agency ... is entitled to judicial review under this chapter." The classic example of failure to exhaust an administrative remedy is the failure to appeal from an administrative decision to a higher tribunal within the administrative system. 2 Am.Jur.2d Administrative Law Sec. 608.

This court applied the exhaustion doctrine in a recent case which is almost directly on point, Weatherwax v. Hiland Potato Chip Co., 372 N.W.2d 118 (S.D.1985). In that case, Weatherwax filed for unemployment insurance benefits, but the Department of Labor denied his claim. Rather than appealing the agency's decision, he filed suit in circuit court for wrongful discharge. He argued that he had a separate and distinct cause of action for wrongful discharge which could be pursued independently in circuit court even though he did not appeal the agency's decision. This court disagreed and ruled that a plaintiff who does not exhaust all remedies for unemployment compensation is precluded from bringing an action in circuit court alleging wrongful discharge by his employer. 372 N.W.2d at 120. See also Tombollo v. Dunn, 342 N.W.2d 23 (S.D.1984), where this court ruled that the plaintiff was unable to bring an independent circuit court action premised upon her alleged wrongful termination for sexual harassment prior to a final determination of the Division of Human Rights.

A reexamination of the authorities on the exhaustion doctrine leads us to the conclusion that the trial court erred by applying the doctrine in this case. By definition, the exhaustion doctrine applies only to disputes cognizable by an administrative agency. Zar, supra; Gottschalk, supra. In other words, a party must exhaust all available administrative remedies only if the agency actually has authority to deal with the particular question raised. In this case, the only dispute cognizable by the Department of Labor was whether or not Johnson was eligible for unemployment insurance benefits. SDCL 61-6-2, SDCL 61-6-14. In making that determination, the department was limited to examining Johnson's conduct to see whether it fell within the narrow definition of "misconduct," as set forth by statute. 1 Therefore, had Johnson attempted to appeal the department's initial decision on unemployment benefits directly to circuit court, without going through the department's appeal process, the exhaustion doctrine would undoubtedly apply. However, this is not the case here. In this lawsuit, Johnson does not raise the issue of unemployment compensation; rather, he raises the issues of breach of contract, wrongful termination, breach of severance agreement, fraud, and breach of fiduciary duty. The focus of this suit is on the employer's conduct rather than on Johnson's conduct. 2 More importantly, the Department of Labor has no authority whatsoever to deal with these issues; they are simply not cognizable by the agency. Consequently, the exhaustion doctrine cannot be used to bar Johnson's suit against Kolman.

This result is consistent with the general rule that administrative agencies have only such adjudicatory jurisdiction as is conferred upon them by statute. Springville Com. Sch. Dist. v. Iowa Dept. of Pub. Inst., 252 Iowa 907, 109 N.W.2d 213 (1961); Montana Bd. of Nat. Res. & Con. v. Montana Power Co., 166 Mont. 522, 536 P.2d 758 (1975); 2 Am.Jur.2d Administrative Law Sec. 328.

Even if part of the wrongful termination of employment issue is cognizable by the Department of Labor, the facts of the case bring it within one of the exceptions to the exhaustion doctrine. It is well settled that exhaustion is not required when the administrative remedies are inadequate. N.L.R.B. v. Industrial Union of Marine & Ship Wkrs., 391 U.S. 418, 88 S.Ct. 1717, 20 L.Ed.2d 706 (1968); K. Davis, Administrative Law Treatise Sec. 26:11 (2d ed. 1983); B. Schwartz, Administrative Law Sec. 173 (1976). The record shows that if Johnson had been awarded unemployment compensation by the agency, the maximum benefit amounts would have been $129 per week, up to a total sum of $3,354. It is unlikely that such amounts would be sufficient to compensate Johnson should he be successful in this lawsuit. Even though the "amount" of compensation is not determinative of the "adequacy of the remedy" question, we are satisfied that Johnson has not yet had his day in court on this issue in this case. Furthermore, an award of unemployment benefits would not provide any remedy for his claims of breach of employment contract and severance contract, fraud, and breach of fiduciary duty.


Although the trial court based its decision solely on the exhaustion doctrine, it may be argued that the trial court's decision should be affirmed under the doctrine of res judicata. In Weatherwax, supra, Justice Wuest filed a separate opinion arguing that the exhaustion doctrine should not be applied since the plaintiff did not have an administrative remedy for wrongful discharge. Justices Wuest and Wollman would have affirmed using the theory of issue preclusion, a branch of res judicata, under which administrative findings may be afforded res judicata effect provided they meet certain procedural requirements. 372 N.W.2d at 121.

The doctrine of res judicata may...

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