Oberhelman v. Barnes Inv. Corp.

• Decision Date: 30 November 1984
• Docket Number: No. 56332,56332
• Citation: 690 P.2d 1343,236 Kan. 335
• Parties: Homer H. OBERHELMAN, Appellant, v. BARNES INVESTMENT CORPORATION and Arthur M. Nease, Jr., Appellees.
• Court: Kansas Supreme Court

Page 1343

690 P.2d 1343

236 Kan. 335

Homer H. OBERHELMAN, Appellant, v. BARNES INVESTMENT CORPORATION and Arthur M. Nease, Jr., Appellees.

No. 56332.

Supreme Court of Kansas.

Nov. 30, 1984.

Syllabus by the Court

1. General principles relating to the duty of a corporate officer and director stated and applied.

2. K.S.A. 17-6303 authorizes loans by a corporation to its officers and directors when in the judgment of the directors such loans may reasonably be expected to benefit the corporation, and upon such terms as the directors shall approve.

3. K.S.A. 17-6304 provides that certain corporate transactions with an officer or director shall not be void or voidable if certain criteria set forth in the statute are met.

4. In a stockholder's derivative action against the president, majority stockholder and director of the corporation to recover certain interest-free loans plus a reasonable rate of interest, the record is examined and it is held: (1) The trial court erred in finding the loans were valid under K.S.A. 17-6303 and properly ratified under K.S.A. 17-6304; (2) the trial court erred in finding the action barred by the statute of limitations, laches and estoppel; and (3) the judgment of the trial court is reversed and the case is remanded with directions as more fully set forth in the opinion.

Charles S. Arthur, III of Arthur, Green, Arthur & Conderman, Manhattan, argued the cause and was on brief for appellant.

Bruce H. Wingerd, Clay Center, argued the cause and was on brief for appellees.

HOLMES, Justice:

This is an action brought by a minority shareholder of a close corporation on his own behalf and as a stockholder's derivative action on behalf of the corporation. Plaintiff, Homer H. Oberhelman, seeks to recover the principal and interest on loans Barnes Investment Corporation (Barnes, or the corporation) made to defendant, Arthur M. Nease, Jr., who is the majority shareholder, president, and chairman of the Board of Directors. Plaintiff also sought punitive damages. The trial court entered judgment for defendants and plaintiff appeals.

The trial court, in its memorandum decision, made the following findings of fact with which plaintiff concurs:

"1. The defendant, Arthur M. Nease, Jr. purchased the controlling interest of the State Exchange Bank of Barnes, Kansas, in 1963, and has been president of the bank since that time. In 1964, he invited Homer H. Oberhelman, the plaintiff, to serve as a director of the bank and he served in that capacity until his resignation in January, 1981.

"2. The Barnes Investment Corporation was formed May 1, 1969. The sole shareholders, directors and officers of the corporation were Arthur M. Nease, Jr., president and treasurer, owning 80% of the stock; Homer H. Oberhelman, vice-president, owning 20% of the stock, and Marilyn Nease, wife of Arthur, secretary, owning one share of stock. There has never been any change in the shareholders, directors or officers.

"3. The Barnes Investment Corporation was formed to hold the shares of The State Exchange Bank for the purpose of a tax shelter as to the dividend income paid by the bank.

"4. When he purchased control of the bank, Nease also acquired an insurance agency which operated in the bank building. The ownership of the insurance agency was transferred to the investment corporation to satisfy Internal Revenue Service regulations and the premium income accrued to the investment company. Nease was the agent who wrote policies on behalf of the insurance company and serviced them. He was the individual responsible for the conduct of the insurance business although other persons working in the bank did some of the routine work of the agency from time to time.

"5. In two separate letters, or memoranda, from Nease to Oberhelman in early 1969, Nease outlined his purposes in the formation of the investment corporation, the estimated income, assets and liabilities. As outlined, the net income of the investment corporation would be utilized to reduce a loan from a Kansas City bank incurred for the purchase of bank stock in the amount of $57,000.00. Nease also informed Oberhelman by these letters that he would be willing to purchase the stock of Oberhelman in the investment corporation at some time in the future.

"6. By a letter memorandum signed by both men and dated July 3, 1971, Oberhelman agreed that he would not sell his stock in the investment corporation until 1976 when Nease would purchase it according to one of two options stated in the agreement.

"7. Formal meetings of the officers, directors or stockholders of The Barnes Investment Corporation were never held after its formation until July, 1983. Nease and Oberhelman discussed matters concerning the corporation at bank director meetings and on numerous informal meetings between the men. These discussions were never reduced to any writing in the nature of minutes.

"8. Nease, as managing officer of The Barnes Investment Corporation, began making loans to himself from the corporation in 1972. Through 1982, these loans reached a total of $82,712.03, and in 1983 the total became $89,912.03. The Kansas City bank loan of $57,000.00 was not reduced.

"9. The loans to Nease made by the investment corporation are interest free and unsecured. There are at least two indications of interest being paid on the loans, but in each instance, Nease claimed a management fee in the exact amount of the interest and, effectively, the loans bear no interest.

"10. In 1976, when discussions arose between Nease and Oberhelman concerning the purchase of Oberhelman's stock by Nease, Oberhelman directed his accountant to determine the fair market value of his stock. In addition to other records, the accountant examined the corporate annual reports filed with the Secretary of State.

"11. A written agreement to purchase was prepared, but apparently misstated the purchase price by $2,000.00 and it was to be corrected. For reasons not clear, and not too important, the agreement was never completed and nothing else was done as to the 1971 purchase agreement until 1981.

"12. During the investigation by Oberhelman's accountant into the affairs of the investment corporation, it was discovered that Nease had made loans to himself from the investment corporation.

"13. In 1978, Oberhelman examined the books of account of the investment corporation. He asked Nease what rate of interest he was paying on his loans, and Nease responded with 'going rate' or 'market rate.'

"14. Oberhelman was a regular participant in the directors' meetings of The State Exchange Bank. He was aware of the dividends paid by the bank to the investment corporation, and participated in 1978, and annually thereafter, in the resolution giving Nease the right to operate the insurance agency on bank premises and to share in the profits of the agency.

"15. Very early in July, 1980, immediately following the meeting of the bank directors, Oberhelman learned for certain that the loans to Nease were not interest bearing. He did not call a meeting of the investment corporation directors or stockholders. He did not then discuss the matter further with Nease nor did he seek the advice of his accountant or attorney.

"16. The books of account of The Barnes Investment Corporation were at all times open and available to Oberhelman for his inspection."

It was stipulated at pretrial that if a meeting of the shareholders of Barnes were to be held that a majority of the shares would be voted to ratify and affirm the loans made to Nease and that the Oberhelman shares would be voted against such a proposal. In fact, in July, 1983, after this suit was filed a formal meeting of the stockholders was held and a resolution to ratify and affirm the loans was passed with the Nease shares being voted in favor and the Oberhelman shares being voted against the resolution. At about the same time a formal board of directors meeting was held and an employment contract entered into between Barnes and Nease. While the parties seem to contend that Nease and Oberhelman were the only shareholders, the record indicates that Mrs. Nease and Mrs. Oberhelman each owned one share of stock. Additional facts will be presented as they become pertinent to the issues on appeal.

In holding for the defendants the trial court made the following conclusions of law:

"1. The loans made to Arthur M. Nease, Jr. by The Barnes Investment Corporation are not unlawful or void transactions but are specifically authorized by K.S.A. 17-6303.

"2. The loans have been ratified and affirmed by a majority of the voting stock of The Barnes Investment Corporation.

"3. Plaintiff's purported cause of action is barred by the statute of limitations, K.S.A. 60-513(a)(3)(4).

"4. Considering the great amount of time elapsing between the time when the plaintiff learned of the loans and when he determined to file this action, the plaintiff is barred from maintaining the action by the doctrine of laches.

"5. Plaintiff acquiesced in the loan policies of The Barnes Investment Corporation and is now estopped to deny their validity.

"6. Judgment is entered herein for the defendants and against the plaintiff. Costs are taxed to the plaintiff."

Before turning to the specific issues a review of several general principles relating to the duty of a corporate director and officer is in order. In Newton v. Hornblower, Inc., 224 Kan. 506, 582 P.2d 1136 (1978), we held:

"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." Syl. p 8.

"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...