Richards v. Bryan

• Citation: 19 Kan.App.2d 950,879 P.2d 638
• Decision Date: 12 August 1994
• Docket Number: No. 70,605,70,605
• Parties: Donald P. RICHARDS, Appellant, v. David M. BRYAN, Edwyn R. Bryan, Margie E. Bryan, Ginny Dark, and Bryan World Tours, Inc., Appellees.
• Court: Court of Appeals of Kansas

Page 638

879 P.2d 638

19 Kan.App.2d 950

Donald P. RICHARDS, Appellant, v. David M. BRYAN, Edwyn R. Bryan, Margie E. Bryan, Ginny Dark, and Bryan World Tours, Inc., Appellees.

No. 70,605.

Court of Appeals of Kansas.

Aug. 12, 1994.

Order Denying Appellant's Motion for Rehearing or

Modification but Modifying the Opinion of the

Court for Purposes of Clarification

Sept. 27, 1994.

Syllabus by the Court

1. A summary judgment proceeding is not a trial by affidavits, and the parties must always be afforded a trial when there is a good faith dispute over the facts. The scope of appellate review is to read the record in the light most favorable to the party who defended against the motion for summary judgment, and where reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.

2. The party defending against the motion for summary judgment must establish each element of its cause of action in order to avoid summary judgment. The moving party is entitled to a judgment as a matter of law if the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof.

3. The construction of a contract is a question of law, and an appellate court's review of conclusions of law is unlimited.

4. A contract will be enforced as written so long as its terms are certain and do not conflict with pertinent statutes or with public policy.

5. Kansas imposes a very strict fiduciary duty on officers and directors of a corporation to act in the best interests of the corporation and its stockholders.

6. When a shareholder believes that an officer or director of the corporation has breached his or her fiduciary duty, the shareholder may file a derivative action under K.S.A. 60-223a or, in certain circumstances, an individual damage suit.

7. A claim is said to be derivative if injury is either to the corporation directly or to the shareholder but mediated through the corporation.

8. A shareholder may only litigate as an individual if the wrong to the corporation inflicts a distinct and disproportionate injury on the shareholder or if the action involves a contractual right of the shareholder which exists independently of any right of the corporation.

9. Directors have the power to control and direct the affairs of a corporation, and in the absence of fraud courts will generally not interfere, on behalf of a dissatisfied stockholder, with the discretion of the directors on questions of corporate management, policy, or business.

10. Oppressed minority shareholders may bring direct suits for breaches of fiduciary duties by the majority, even though the minority shareholders' grievance is primarily based on damage to the corporation.

11. A new cause of action for close corporation freeze-outs is recognized in Kansas.

12. If a corporation is closely held, a court, in its discretion, may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery if it finds to do so will not (1) unfairly expose the corporation to a multiplicity of actions; (2) materially prejudice the interests of creditors of the corporation; or (3) interfere with a fair distribution of the recovery among all interested persons.

13. Whether a cash advance to a corporation is intended as capital or as a loan is a question of fact for the trier of fact.

14. Trial courts have inherent power to impose sanctions for litigation misconduct. The standard of review of a trial court's discovery order, including orders granting sanctions, is abuse of discretion.

15. Under K.S.A. 60-237(a)(4), a court is required to afford a litigant the opportunity for a hearing on his or her motion for a protective order and on the other party's motion to compel discovery before sanctions can be imposed.

Richard F. Hayse, of Morris, Laing, Evans, Brock & Kennedy, Chartered, Topeka, and Jeffery L. Carmichael and Jana D. Abbott, of Morris, Laing, Evans, Brock & Kennedy, Chartered, Wichita, for appellant.

Randall J. Forbes and S. Eric Steinle, of Frieden, Haynes & Forbes, Topeka, for appellees.

Before GREEN, P.J., BRAZIL, J., and DAVID L. THOMPSON, District Judge, Assigned.

DAVID L. THOMPSON, District Judge, Assigned:

This appeal arises from an action for personal damages brought by Donald Richards (Richards) against the majority shareholders of Bryan World Travel of Overland Park, Inc. (Travel). Richards, a minority shareholder in Travel, appeals the trial court's grant of summary judgment in favor of the defendants, claiming that the majority effectively froze him out of all management decisions and denied him a reasonable return on his investment. Richards further contends that the majority fraudulently induced him to invest in Travel and then breached the formation agreement. Richards also appeals the trial court's imposition of sanctions against him for failure to comply with a discovery order.

In the summer of 1982, Richards met with David Bryan of Bryan World Tours, Inc. (Tours) in order to discuss a possible business relationship. A short time after the first meeting, David Bryan gave Richards a document entitled "Introducing Bryan Travel Service Partnership Plan" (Partnership Plan) which described how an interested investor could establish a branch office of Tours by contributing capital and services to the enterprise. The Partnership Plan contained various estimates of expenses and earnings based upon Tours' experience in the travel industry in Topeka. The Partnership Plan stated that

"[b]eginning with the second year, the President-investor will receive a salary of $2,000 per month ($24,000 per year). This salary will thereafter remain the same and future increases in the President-investor's remuneration will come in the form of 49% participation in the profits of the company and will be given in the form of dividends or a bonus."

The Partnership Plan estimated that in three or four years the president's annual income would be $91,688. The Partnership Plan also contained the following disclaimer "This proposal has not been read or approved by any official or semi-official agency of the government nor has it been analyzed by any accountant or any professional investment advisors.

"This document is not a solicitation to sell stock. This is intended to set forth the possibilities of a working 'partnership' between our company and the right person. The figures used to arrive at our conclusions are based on the experience of BRYAN WORLD TOURS in Topeka and upon assumptions and projections.

"We have made no promises or agreements that are not set forth in writing and signed by both parties.

"It is the responsibility of the prospective President-investor to analyze the possibilities with the aid of his own independent advisor and then decide if he/she is willing to accept whatever financial risks are involved."

Richards did not seek the advice of an attorney or a financial advisor concerning any of the information in the Partnership Plan before deciding to enter into a business relationship with Tours.

On October 13, 1982, Travel was incorporated pursuant to the terms and conditions of a contract called the "Articles of Agreement" (Agreement). Under the Agreement, Richards was to invest $35,000 as operating capital and to serve as president and chief executive officer of Travel for one year without pay. In exchange for this investment, Richards and his wife would receive 49% of the capital stock of Travel and, beginning October 15, 1983, Richards was to receive a salary of $24,000 per year for his services. The remaining 51% of Travel was to be owned by Tours, whose stockholders, directors, and officers are David Bryan, Edwyn Bryan, Margie Bryan, and Ginny Dark. The Agreement contains the following language concerning the employment of Richards:

"7. Officers: Richards will serve as President and Chief Executive Officer of the new corporation and will continue to be appointed as such at the annual Board of Directors meetings as long as he is performing his duties credibly. However, in no case, save sale of Richards' stock, will he lose his share in the profits and life of the company."

In exchange for a management fee equal to 1% of the gross annual sales of Travel, Tours promised to provide training for officers and staff of Travel at the Bryan Travel College, to interface Travel's computer system with the computer system of Tours, to prepare applications to qualify Travel as a travel agency, to provide continuing management assistance in the form of monthly financial reports and payroll checks, and to supply all legal work for the formation of Travel.

The Agreement provided that after Travel had been in operation for three years, Richards had the right to purchase all or any number of additional shares of stock. The formula for valuation of the stock was established to be one-half of the past annual gross sales of Travel, divided by the total number of shares outstanding. All additional shares purchased by Richards were to remain nonvoting until such time as 100% of the stock was purchased by him.

Finally, the Agreement stated: "These two parties have set out fully their agreement with relationship to each other and there is no other except what is contained herein. Any addition or changes must be set out in writing and signed by both parties." The Agreement made no mention of bonuses or dividends. At the first meeting of incorporators on October 20, 1982, David Bryan, Edwyn Bryan, Margie Bryan, and Donald Richards were elected to the board of directors of Travel. The Articles of Agreement were also ratified at this time, as were the bylaws of the corporation. Richards was not present at this meeting. The bylaws contained the following provisions concerning dividends and finance:

"Section 1. Dividends, to be paid out of the...