Kauffman-Harmon v. Kauffman

• Decision Date: 03 December 2001
• Docket Number: No. 00-603.,00-603.
• Citation: 2001 MT 238,36 P.3d 408,307 Mont. 45
• Parties: Elizabeth KAUFFMAN-HARMON and Rebecca Kauffman-Piotrowski, on behalf of all shareholders of Kauffman Land & Livestock, a Montana corporation, Plaintiffs and Appellants, v. David V. KAUFFMAN, Jr., individually, Kauffman Land & Livestock, a Montana corporation; and David V. Kauffman, Sr., and Ruth E. Kauffman, jointly and severally, Defendants and Respondents, and David V. Kauffman, Jr., individually, Third-Party Plaintiff, v. Kauffman Land & Livestock, a Montana corporation, Third-Party Defendant.
• Court: Montana Supreme Court

36 P.3d 408

2001 MT 238

307 Mont. 45

Elizabeth KAUFFMAN-HARMON and Rebecca Kauffman-Piotrowski, on behalf of all shareholders of Kauffman Land & Livestock, a Montana corporation, Plaintiffs and Appellants, v. David V. KAUFFMAN, Jr., individually, Kauffman Land & Livestock, a Montana corporation; and David V. Kauffman, Sr., and Ruth E. Kauffman, jointly and severally, Defendants and Respondents, and David V. Kauffman, Jr., individually, Third-Party Plaintiff, v. Kauffman Land & Livestock, a Montana corporation, Third-Party Defendant.

No. 00-603.

Supreme Court of Montana.

Submitted on Briefs March 7, 2001.

Decided December 3, 2001.

For Appellants: Bradley D. Dantic, Worden, Thane & Haines, Missoula, MT.

For Respondent David V. Kauffman, Jr.: Paul A. Sandry, Warden, Christianson, Johnson & Berg, Kalispell, MT.

For Respondents David V. Kauffman, Sr., and Ruth E. Kauffman: James C. Bartlett, Attorney at Law, Kalispell, MT Justice JIM REGNIER delivered the Opinion of the Court.

¶ 1 Elizabeth-Kauffman Harmon and Rebecca Kauffman Piotrowski (hereinafter "Elizabeth and Rebecca") appeal from the Findings of Fact, Conclusions of Law and Order issued by the Eleventh Judicial District, Flathead County on June 16, 2000.

¶ 2 Although the appellants present seven issues on appeal, we find one issue dispositive: Do principles of equity, such as judicial estoppel and the clean hands doctrine, prevent Dr. David V. Kauffman, Sr., and Ruth E. Kauffman from claiming the corporation's assets and stock are held in resulting and constructive trusts?

¶ 3 We reverse and remand for further proceedings.

BACKGROUND

¶ 4 Kauffman Land and Livestock is a family controlled and operated corporation which has been in existence for approximately 25 years. The four children of Dr. David V. Kauffman, Sr. (hereinafter "Dr. Kauffman"), and Ruth E. Kauffman (hereinafter "Mrs. Kauffman") each own 25% of the stock of the corporation. The four shareholders are David V. Kauffman, Jr. (hereinafter "David"), Stephen L. Kauffman (hereinafter "Stephen"), Elizabeth and Rebecca.

¶ 5 Dr. and Mrs. Kauffman have resided in Flathead County since the 1960's when Dr. Kauffman established a medical practice there. Dr. and Mrs. Kauffman acquired several pieces of real property in the Flathead Valley over the years while Dr. Kauffman was practicing medicine. In 1975, Dr. and Mrs. Kauffman consulted an attorney, John Lence, regarding their business affairs and estate planning. After reviewing their assets, Lence informed them that they faced severe estate tax consequences if they wished to transfer assets to their children upon their death. Lence recommended the formation of a corporation as the simplest and best estate plan and the best vehicle to preserve the estate. He indicated that they could transfer their assets to the corporation, receive shares of stock, and then gift the shares of stock to their children to avoid estate taxes.

¶ 6 Dr. and Mrs. Kauffman formed the corporation entitled Kauffman Land and Livestock on or about January 19, 1976, and transferred several large pieces of real property to the corporation. In consideration for the assets, the corporation issued 10,000 shares of common stock to Dr. Kauffman and 10,000 shares of common stock to Mrs. Kauffman. The corporation's business activities consisted of farming, ranching, grazing and real estate rental. The corporation was primarily formed to preserve Dr. and Mrs. Kauffman's assets from possible future creditors since Dr. Kauffman did not carry medical malpractice insurance and to serve as estate planning vehicle through which estate taxes could be minimized.

¶ 7 In 1986, Dr. Kauffman faced two medical malpractice lawsuits. In one of the cases, a judgment was entered for approximately $50,000 against Dr. Kauffman. Shortly thereafter, while on a family ski vacation, Dr. Kauffman voluntarily gifted to Mrs. Kauffman all of his shares of the corporation's stock. The paperwork was backdated so that it appeared that the stock transfer occurred significantly prior to the 1986 judgment. During a subsequent debtor's examination hearing relating to the judgment, Dr. Kauffman testified that he had no rights or interest in the corporation and no substantial assets in his control or ownership. Based upon Dr. Kauffman's testimony, the tort victims and their attorney concluded that there were no assets to execute on to satisfy the judgment.

¶ 8 After Dr. Kauffman's stock transfer to Mrs. Kauffman, Mrs. Kauffman gifted her full stock in the corporation to her children over a number of years. Currently, each of the four children owns one-quarter of the stock and has served as one of four directors. Mrs. Kauffman acknowledged that she knowingly and voluntarily gifted the stock to her children and did not place any conditions, restrictions or limitations on her children's stock ownership.

¶ 9 A dispute arose among the shareholders regarding management of the corporate properties and the amount of debt owed to David by the corporation. On July 10, 1998, Elizabeth and Rebecca instituted a shareholder derivative action and petitioned the court for judicial review and determination of the following: the debt owed to David, the fair and appropriate method of payment of the debt, whether David committed a breach of his fiduciary duties, whether David should be removed as an officer and director of the corporation, and a resolution of the shareholders' deadlock. After the case commenced, David called a special meeting of the board of directors to issue additional stock to himself and a transfer of certain corporate properties to his parents. Elizabeth and Rebecca objected. Subsequently, the District Court issued a temporary restraining order and preliminary injunction to enjoin the issuance of stock to David and the transfer of corporate assets to Dr. and Mrs. Kauffman.

¶ 10 On July 28, 1999, Elizabeth and Rebecca filed a second amended petition which included a request that the court set aside the transfer of certain corporate property to Dr. and Mrs. Kauffman. On September 8, 1999, David responded and also filed a third party complaint against the corporation seeking payment of his debt. On October 27, 1999, Dr. and Mrs. Kauffman filed a responsive pleading, which was amended on December 1, 1999, to allege that the corporation's assets and stock were held in a resulting or constructive trust. Dr. and Mrs. Kauffman also filed a motion to bifurcate the trial requesting that the court order a separate trial solely on their claims. David supported the motion; however, Elizabeth and Rebecca opposed the motion. The court bifurcated the trial and Dr. and Mrs. Kauffman's claims were tried by the court sitting without a jury. On June 16, 2000, the District Court issued its Findings of Fact, Conclusions of Law and Order in which it concluded that the transfers of assets and shares of stock by Dr. and Mrs. Kauffman created a resulting trust and a constructive trust and ordered that the corporation's assets and stock be conveyed to Dr. and Mrs. Kauffman. Elizabeth and Rebecca appeal from the order bifurcating the trial and the court's conclusion that resulting and constructive trusts were created.

STANDARD OF REVIEW

¶ 11 Dr. and Mrs. Kauffman's claims involving the existence of resulting and constructive trusts are claims in equity. See § 72-33-218, MCA, and § 72-33-219, MCA. Therefore, in reviewing this matter, we are guided by § 3-2-204(5), MCA, which requires that in equity cases and in matters of an equitable nature, we review "all questions of fact arising upon the evidence presented in the record...." In reviewing the findings of fact, we determine if the court's findings are clearly erroneous; and, in reviewing the conclusions of law, we determine if the court's interpretation of the law is correct. Hansen v. 75 Ranch Co., 1998 MT 77, ¶ 20, 288 Mont. 310, ¶ 20, 957 P.2d 32, ¶ 20 (citations omitted). Further, this Court, sitting in equity, is empowered to determine all questions involved in the case and to do complete justice, including the power to fashion equitable results. Blaine Bank of Montana v. Haugen (1993), 260 Mont. 29, 35, 858 P.2d 14, 18 (citation omitted).

DISCUSSION

¶ 12 Do principles of equity, such as judicial estoppel and the clean hands doctrine, prevent Dr. David V. Kauffman, Sr., and Ruth E. Kauffman from claiming the corporation's assets and stock are held in resulting and constructive trusts?

¶ 13 Elizabeth and Rebecca argue that Dr. and Mrs. Kauffman are barred from claiming that resulting and constructive trusts exist pursuant to equitable principles of judicial estoppel and the unclean hands doctrine. We have consistently recognized a fundamental principle of equitable jurisprudence that one who seeks equity must do equity. See Hall v. Lommasson (1942), 113 Mont. 272, 124 P.2d 694. Consequently, we must first address Elizabeth and Rebecca's equitable arguments before we can ascertain whether resulting and constructive trusts were created.

¶ 14 Elizabeth and Rebecca first argue that Dr. and Mrs. Kauffman should be barred from their claims under the long-recognized equitable doctrine of judicial estoppel. We agree in part, whereas we find that Dr. Kauffman is barred by judicial estoppel from raising his claims that resulting and constructive trusts exist. However, no evidence was presented to indicate that Mrs. Kauffman's claim should be barred by the doctrine of judicial estoppel, as the evidence does not establish that Mrs. Kauffman made a past judicial statement contradicting her current claim.

¶ 15 The fundamental purpose of judicial estoppel is to protect the integrity of the judicial system and thus to estop a party from playing "fast and loose" with the court system. See Fiedler v. Fiedler (1994), 266 Mont. 133, 140, 879 P.2d 675, 679 (citations omitted). Hence, the doctrine of judicial estoppel binds a party to his or her judicial declarations, and precludes a party...