Resolution Trust Corp. v. Scaletty

• Decision Date: 17 March 1995
• Docket Number: No. 72230,72230
• Citation: 891 P.2d 1110,257 Kan. 348
• Parties: , 63 USLW 2628 RESOLUTION TRUST CORPORATION, Plaintiff, v. James E. SCALETTY, Paul LaForge, E. W. Miller, Dr. Charles F. Henderson, Charles J. Scaletty, Tony Dechario, Montie Taylor, James B. Mitchell, and Myrtle Hucke, Defendants.
• Court: Kansas Supreme Court

Page 1110

891 P.2d 1110

257 Kan. 348, 63 USLW 2628

RESOLUTION TRUST CORPORATION, Plaintiff, v. James E. SCALETTY, Paul LaForge, E. W. Miller, Dr. Charles F. Henderson, Charles J. Scaletty, Tony Dechario Montie Taylor, James B. Mitchell, and Myrtle Hucke, Defendants.

No. 72230.

Supreme Court of Kansas.

March 17, 1995.

Syllabus by the Court

1. The doctrine of adverse domination is recognized in Kansas as the appropriate method for determining, under K.S.A. 60-513(b), when injury to a corporation by its directors is readily ascertainable by the corporation. The particular form of the doctrine to be applied is the disinterested majority version, wherein the fact of injury is deemed not to have been readily ascertainable until there exists a disinterested majority of nonculpable directors.

2. The doctrine of adverse domination is applicable to claims by a corporation against its directors based upon negligence, gross negligence, or breach of fiduciary duty.

Donald W. Giffin of Spencer Fane Britt & Browne, Kansas City, MO, argued the cause, and Curtis E. Woods, J. Nick Badgerow, Samuel P. Logan, Michael F. Saunders, and Jan P. Helder, Jr., of the same firm, were with him on the briefs for defendant, Paul LaForge.

Lee H. Woodard of Woodard, Blaylock, Hernandez, Roth & Day, Wichita, argued the cause, and Rachelle Worrall Smith, of the same firm, and Neysa L. Day of Resolution Trust Corp., Kansas City, MO, was with him on the briefs for plaintiff, Resolution Trust Corp.

Charles N. Henson of Wright, Henson, Somers, Sebelius, Clark & Baker, LLP, Topeka, was on the brief for amicus curiae Kansas Bankers Ass'n.

Stephen M. Kerwick of Foulston & Siefkin, Wichita, was on the brief for amicus curiae Kansas Ass'n of Defense Counsel.

McFARLAND, Justice:

This case is before the court on two questions certified by the United States Court of Appeals for the Tenth Circuit pursuant to the Uniform Certification of Questions of Law Act, K.S.A. 60-3201 et seq. The questions are:

1. "Under Kansas law, does an action against corporate directors accrue only when those directors no longer control or 'adversely dominate' the corporation?"

2. "If so, does adverse domination delay accrual or toll the statute of limitations when the directors were guilty only of negligence, gross negligence, or breach of fiduciary duty?"

The facts are set forth in the certification order as follows:

"BACKGROUND

LaForge was a director of the state-chartered Peoples Savings & Loan Association of Parsons, Kansas (PSLA). In April and May 1983, the PSLA directors approved participations in three loans for condominium projects in Texas. The Resolution Trust Corporation (RTC) claims that the directors' approval was negligent, grossly negligent, and a breach of fiduciary duty. They allege in particular that the directors lacked the expertise to make reasonable judgments about whether to buy such participations; relied upon unverified representations of the loan originator or broker; did not require and analyze sufficient information to make a reasonable decision; did not establish procedures to monitor the analysis of participation loans by PSLA's officers; and did not monitor or evaluate appraisal reports.

LaForge resigned in February 1985, after the board received and reviewed a joint federal and state examination report criticizing two of the three participations. Two of the remaining seven directors also resigned after LaForge. However, the board filled only one vacancy: in January 1986, Beulah Neff, a longtime PSLA employee, became a director. Apparently the rest of the board remained the same at least until the Federal Savings & Loan Insurance Corporation (FSLIC) became the conservator of PSLA on February 28, 1989. The RTC subsequently became receiver of PSLA in May 1990. The RTC in its corporate capacity acquired this claim and filed its complaint on February 27, 1992."

The underlying action and its procedural history may be described and summarized as follows:

In its complaint, the Resolution Trust Corporation (RTC) sought damages under Kansas common law from the bank officers and directors of PSLA for negligence, gross negligence, and breach of fiduciary duties stemming from PSLA's purchase of the three loan participations which were approved by the board of directors in April and May 1983. A participation loan is generally originated by a bank, savings and loan association, or other financial institution which finds other lenders willing to participate in the funding of the loan, ordinarily for a fee which is paid by the borrower. The complaint makes no allegations of fraud, insider loan, self-dealing, or any profit-making by any defendant.

On July 30, 1992, LaForge filed a motion for summary judgment, contending that the action against him was barred by the Kansas two-year statute of limitations, K.S.A. 60-513. On September 30, 1992, the district court held that the action against LaForge was not barred because the principle of adverse domination, as articulated in Farmers & Merchants Nat. Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990), and other federal cases, tolled the Kansas statute. The district court decision herein is Resolution Trust Corp. v. Scaletty, 810 F.Supp. 1505 (D.Kan.1992). On July 30, 1993, LaForge filed a second motion for summary judgment, which was denied on October 29, 1993. On January 19, 1994, LaForge's petition to take an interlocutory appeal was granted. In due course, the certification order was issued herein by the Tenth Circuit.

Before proceeding to the discussion of the certified questions, one preliminary matter needs resolution. RTC has filed a motion to strike an issue raised by LaForge in a letter to the court dated January 20, 1995, under authority of Supreme Court Rule 6.09(b) (1994 Kan.Ct.R.Annot. 34). This issue (whether knowledge by regulators commences the statute of limitations) might be construed as being included within the bare language of Certified Question No. 1. However, as noted by RTC, this issue was not before the Tenth Circuit, although it had been argued at one time to the district court. Further, a reading of the Tenth Circuit's discussion in the order of certification as to why Question No. 1 was being asked precludes a conclusion that the knowledge of regulators issue was intended to be included. We conclude the motion to strike should be granted.

QUESTION NO. 1

The adverse domination doctrine operates to toll the running of the statute of limitations when the directors or officers charged with wrongful conduct dominate the board of the corporation to the extent that there are no directors who have knowledge of the facts giving rise to possible liability who could have or would have induced the corporation to sue. Farmers & Merchants Nat. Bank v. Bryan, 902 F.2d at 1523. The doctrine arises due to the control of the institution by culpable officers and directors, which precludes the possibility of filing suit because these individuals cannot be expected to sue themselves or to initiate any action contrary to their own interests. Resolution Trust Corp. v. Fleischer, 826 F.Supp. 1273, 1276 (D.Kan.1993).

The principle underlying the doctrine of adverse domination was articulated in Federal Deposit Ins. Corp. v. Hudson, 673 F.Supp. 1039, 1042 (D.Kan.1987), as follows:

"This approach reasons that as long as a bank is dominated by the same wrongdoers against whom a cause of action exists, the statute of limitations is tolled. The rationale behind this theory is that the wrongdoers cannot be expected to bring an action against themselves. Only when a new entity takes control of the bank, be it a receiver or a new board of directors, can suit against the wrongdoers be brought as a practical matter."

There are two major versions of the doctrine: the "disinterested majority" and the "single disinterested director" versions. In Hecht v. Resolution Trust, 333 Md. 324, 635 A.2d 394 (1994), the different versions were described. In the disinterested majority version, "claims by a corporation do not accrue and/or limitations do not run ... until there exists a disinterested majority of nonculpable directors." 333 Md. at 339, 635 A.2d 394. Control of the institution by culpable directors and officers gives them the power to withhold information concerning their wrongful activities, without which shareholders have no meaningful opportunity to bring suit. This version operates under a presumption that the culpable directors and officers cannot be expected to sue themselves or institute any action contrary to their own interests. See Federal Deposit Ins. Corp. v. Bird, 516 F.Supp. 647, 652 (D.P.R.1981); Hecht, 333 Md. at 340, 635 A.2d 394. Limitations do not begin to run against an officer who resigns if the other culpable directors remain in control of the organization after the resignation because the remaining directors are unlikely to initiate action which could reveal their own wrongdoing. Federal Sav. and Loan Ins. Corp. v. Williams, 599 F.Supp. 1184, 1193 (D.Md.1984).

Under the single disinterested director version, limitations would not run only so long as there was no one with knowledge of facts giving rise to possible liability who could or would have induced the corporation to bring an action. Hecht, 333 Md. at 340-41, 635 A.2d 394; see Bryan, 902 F.2d at 1522-23; Fleischer, 826 F.Supp. at 1276. Pursuant to this version, plaintiff has the burden of showing that the culpable directors had full, complete, and exclusive control of the corporation and must negate the possibility that an informed director or shareholder could have induced the corporation to institute suit. Bryan, 902 F.2d at 1522-23; see Fleischer, 826 F.Supp. at 1278.

Who has the burden of proof is one of the significant differences between the two versions. Under the disinterested majority version, the plaintiff enjoys a presumption that the course of action does not accrue so long as the culpable directors...