Newton v. Hornblower, Inc.

• Decision Date: 21 July 1978
• Docket Number: No. 48654,48654
• Citation: 224 Kan. 506,582 P.2d 1136
• Parties: James G. NEWTON, Appellee, v. HORNBLOWER, INC., Hornblower, Ltd., Hanover House, Inc., E. H. Gubser and Edward I. Cohen, Appellants.
• Court: Kansas Supreme Court

Page 1136

582 P.2d 1136

224 Kan. 506

James G. NEWTON, Appellee, v. HORNBLOWER, INC., Hornblower, Ltd., Hanover House, Inc., E H. Gubser and Edward I. Cohen, Appellants.

No. 48654.

Supreme Court of Kansas.

July 21, 1978.

Syllabus by the Court

1. A petition in a shareholder derivative action shall allege with particularity the efforts made by plaintiff to obtain the desired action from the board of directors or other comparable authority and, if necessary, from the shareholders. The petition shall also include the reasons for plaintiff's failure to obtain the desired action, or for not making the effort to obtain such action. K.S.A. 60-223a.

2. No requirement of a demand prior to bringing a shareholder derivative action is necessary when the petition recites circumstances showing the demand would be futile.

3. The test on a motion to dismiss a petition under K.S.A. 60-223a, for failure to make a prior demand on the board of directors for the desired action, is whether any set of facts can be shown that would prove the making of the demand would have been futile. Following Jannes v. Microwave Communications, Inc., 57 F.R.D. 18 (N.D.Ill.1972).

4. The determination of whether a prior demand for action by the corporate directors is necessary or would be a futile act is within the sound discretion of the trial court.

5. Under the facts of this case, the trial court did not abuse its discretion in finding that where the board of directors were themselves accused of self-dealing, demand upon them to sue themselves would be futile.

6. Absent actual knowledge of the wrongful activities on the part of co-directors, such wrongful activities cannot be imputed to the other director unless, in the exercise of reasonable care attending his responsibilities, he should have been aware of suspicious circumstances demanding corrective action. Harman v. Willbern, 374 F.Supp. 1149 (D.Kan.1974), aff'd., 520 F.2d 1333 (10th Cir. 1975).

7. A party cannot take advantage of defenses of waiver, laches, estoppel and statute of limitations where such party's own concealment resulted in the delay in discovering the alleged wrongful activities.

8. Officers and directors of a corporation occupy a strict fiduciary relationship with respect to both the corporation and its shareholders. The same fiduciary standard applies as between directors.

9. Any unfair transaction undertaken by one in a fiduciary relationship may result in liability for unjust enrichment of the fiduciary. Where the fairness of a fiduciary transaction is challenged, the burden of proof is upon the fiduciary to prove by clear and satisfactory evidence that such transaction was fair and done in good faith.

10. Where the trial court found that corporate directors failed to meet the burden of proof in showing good faith and the fairness of certain questioned transactions, and where such finding is supported by competent evidence, the finding will not be disturbed on appeal.

11. The qualifications of an expert witness and the admissibility of his testimony are within the sound discretion of the trial court.

12. When compensation is voted by the officer-directors of a corporation to themselves, the amount must be reasonable and commensurate with the value of the services rendered and the burden of proving the same is upon such directors.

13. Punitive damages, as well as actual damages, are proper where a breach of a fiduciary duty is involved.

14. Attorney fees and costs of litigation may be taken into consideration in arriving at the amount of punitive damages in an appropriate case. Brewer v. Home-Stake Production Co., 200 Kan. 96, 434 P.2d 828 (1967).

15. The long established rule in Kansas is that attorney fees, as such, are not recoverable as a separate item of damages absent statutory authority.

Milo M. Unruh, of Arn, Mullins, Unruh, Kuhn & Wilson, Wichita, argued the cause, and Edward F. Arn, Wichita, was with him on the brief for appellants.

Darrell D. Kellogg, of Kahrs, Nelson, Fanning, Hite & Kellogg, Wichita, argued the cause, and Clark R. Nelson, Wichita, was with him on the brief for appellee.

HOLMES, Justice:

This is an action brought individually and derivatively by James G. Newton, plaintiff-appellee, against Hornblower, Inc., a Kansas corporation, Hornblower, Ltd., a Kansas limited partnership, Hanover House, Inc., a Kansas corporation, E. H. Gubser and Edward I. Cohen. Judgments were entered in favor of plaintiff in varying amounts and in connection with varying claims totaling $133,331.03 actual damages, $100,000.00 punitive damages against Gubser, and $125,000.00 punitive damages against Cohen. In addition, attorneys fees and litigation expenses in the amount of $69,576.06 were allowed plaintiff against Cohen, Gubser, Hornblower, Inc. and Hornblower, Ltd. An additional judgment was rendered in favor of Newton, as Trustee for Velmer J. Gardner, in the amount of $4,030.80 actual damages, and punitive damages against Gubser in the amount of $3,067.00 and against Cohen in the amount of $3,833.00.

The parties are not in agreement as to the complicated factual situation, a recitation of which covers 19 pages of the appellants' brief and 22 pages of the appellee's brief. We will attempt to condense those facts considerably.

Hornblower, Inc. was organized in June of 1962 by Newton, Gubser and Cohen, each investing the sum of $400.00 in return for one-third of the corporate stock. The corporation was formed for the primary purpose of acting as the general partner of Hornblower, Ltd. in connection with the construction, ownership and operation of a Ramada Inn in Wichita, Kansas.

Hornblower, Ltd., a Kansas limited partnership, was organized in September, 1962, with Hornblower, Inc., the general partner, owning 60%, Newton, Gubser and Cohen limited partners, each owning 13% And Gardner, a limited partner, with 1%. Gardner formerly had certain rights to a Ramada Inn franchise for the Sedgwick County area and in return for his release of those rights to Hornblower, Inc. and Hornblower, Ltd., he received a 1% Interest in the limited partnership. Hornblower, Inc. obtained from Ramada Inns, Inc. of Phoenix, Arizona, an exclusive franchise for the construction, ownership and operation of Ramada Inns in Sedgwick County, Kansas. This franchise was subsequently assigned by Hornblower, Inc. to Hornblower, Ltd.

Ramada Inn East was constructed on leased ground at 8300 East Kellogg, Wichita, and opened for business in April of 1963. Hornblower, Inc. was the management entity for the motel and Hornblower, Ltd. was the operating entity. Hornblower, Ltd. paid to Hornblower, Inc. a management fee of 5% Of the gross income from Ramada Inn East. In addition, Hornblower, Inc., as the general partner of Hornblower, Ltd. received 60% Of the profits of the partnership.

Cohen, Newton and Gubser were the original officers and directors of Hornblower, Inc. and each took an active part in the construction and operation of the motel through December, 1964. In December, 1964, Newton resigned as an officer of Hornblower, Inc. but retained his position as a director. From that time forward, Cohen and Gubser were the managing officers and directors of Hornblower, Inc. and handled the management and operation of the motel. Newton withdrew from any active participation in the management of the corporation or the limited partnership.

The original motel consisted of 110 rooms plus restaurant, banquet and recreational facilities. It has proved highly successful over the years and has been quite profitable to all three of the original principals.

Hanover House, Inc., a Kansas corporation, was organized in May, 1967, with its stockholders being Cohen and the immediate family of Gubser. The corporation was organized to operate the restaurant at the motel and to furnish and equip a 47-room addition to the motel.

Plaintiff brought this action for actual and punitive damages claiming that defendants Cohen and Gubser had systematically taken actions beneficial to themselves individually and detrimental to plaintiff, Hornblower, Inc. and Hornblower, Ltd. Specific claims include excessive management fees and salaries, misappropriation of corporate funds and assets, payment of expenses of Hanover House, Inc. by Hornblower, Inc. and Ltd., and, among others, misappropriation of business opportunities.

With the foregoing identification of the parties and limited factual background, we will proceed to the issues raised by appellants and develop additional facts as may be necessary to discuss the points involved.

Appellants designate some 18 different points in their record on appeal but have consolidated the principal ones in their briefs and arguments to 9.

I

Appellants' first point attacks the jurisdiction of the trial court due to certain alleged deficiencies in the pleadings and pretrial order. The contention is that the second amended petition, the last one filed, along with certain amendments allowed by the pretrial order, are insufficient to meet the requirements for a derivative action under K.S.A. 60-223a and therefore the court lacked jurisdiction.

K.S.A. 60-223a provides:

"Derivative actions by shareholders. In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the petition shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the state of Kansas which it would not otherwise have. The petition shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or...