WILLIS H. SUTER AND C. CARTER SUTER; INDIVIDUALLY AND DERIVATIVELY AS SHAREHOLDERS OF FRANTZ, INC. v. HENRY C. MAZYCK; THOMAS C. ROSER AND FRED F. ROSER, III
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RENDERED: APRIL 13, 2007; 2:00 P.M.
TO BE PUBLISHED
MODIFIED: JULY 13, 2007; 10:00 A.M.
Commonwealth of Kentucky
Court of Appeals
NO. 2006-CA-000506-MR
WILLIS H. SUTER AND C. CARTER SUTER;
INDIVIDUALLY AND DERIVATIVELY AS
SHAREHOLDERS OF FRANTZ, INC.
v.
APPELLANTS
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE PAMELA R. GOODWINE, JUDGE
ACTION NO. 05-CI-02601
HENRY C. MAZYCK; THOMAS C. ROSER AND FRED F.
ROSER, III
APPELLEES
OPINION
VACATING AND REMANDING
** ** ** ** **
BEFORE: THOMPSON AND WINE, JUDGES; KNOPF,1 SENIOR JUDGE.
THOMPSON, JUDGE: The appellants, Willis H. Suter and C. Carter Suter, individually
and derivatively on behalf of Frantz, Inc., filed this action against the appellees, Henry C.
Mazyck, Thomas C. Roser, and Fred F. Roser, III, alleging that the appellees breached
their fiduciary duty as majority shareholders and officers and directors of Frantz, Inc.
The circuit court granted summary judgment to the appellees. Because we find that the
1
Senior Judge William L. Knopf sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and KRS 21.580.
summary judgment was granted before the Suters had a reasonable opportunity to
complete discovery, we vacate the summary judgment and remand the case to the circuit
court.
Frantz, Inc. is a closely-held family corporation that has been operating a
plumbing and air conditioning contracting business since 1950. By 1977, the sole
shareholder in Frantz was W.C. Suter, Jr. Over a period of time after 1977, Mr. Suter
gifted 900 shares of Frantz to each of his three natural sons: Willis Suter, Carter Suter,
and Robert Suter, now deceased. He also gave 900 shares to each of his three adopted
children: Thomas C. Roser, Fred F. Roser, III, and Ann Mazyck, jointly with her
husband, Henry Mazyck. Thus, the total amount of shares gifted was 5,400.
After Mr. Suter died in 1990, his shares were reacquired by Frantz leaving
only the 5,400 gifted shares held by his children as issued and outstanding. In January
2003, Robert Suter died and his shares were reacquired by the corporation. As a result,
the combined shares of Willis and Curtis constituted a minority position in Frantz with
the appellees having a combined majority position.
At the time of Robert's death, all of the children sat on Frantz's Board of
Directors and were officers of the corporation. However, in May 2005, at a special
shareholders' meeting, by a 3-2 shareholder vote, the Suters were removed from Frantz's
Board of Directors.
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PROCEDURAL HISTORY
One month after their removal from the Board, on June 14, 2005, the
Suters, individually and derivatively on behalf of Frantz, filed the present action alleging
that the appellees had breached their fiduciary duty as majority shareholders, officers and
directors of the corporation. Specifically, the complaint alleges that: (1) the appellees'
children were paid by Frantz for work not actually performed; (2) the appellees submitted
false reimbursement requests that charged Frantz for personal expenses; (3) personal trips
and vacations were charged to Frantz by the appellees; (4) the appellees abused and failed
to repay their personal expense accounts; (5) the appellees provided family members with
unauthorized personal benefits paid for by Frantz; (6) Frantz's corporate employees were
used for personal jobs; (7) corporate records were removed or destroyed by appellees; (8)
the appellees paid unauthorized and unwarranted bonuses; and (9) the appellees used
threatening, abusive and oppressive actions intended to “squeeze” the Suters from the
corporation.
The record reveals that during the eight months between the filing of the
complaint and the summary judgment, the case was active and the subject of furious
litigation between the parties. On June 27, 2005, the Suters filed a motion for a
temporary injunction seeking to have the court declare that their removal from the Board
was void since it was not accomplished in accordance with KRS 271B. 8-080(3) and
sought their reappointment as directors. The court denied the temporary injunction on
July 19, 2005.
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While the motion for the temporary injunction was pending and prior to
filing their answer, the appellees deposed the Suters. An answer was filed on July 8,
2005, and the appellees also filed a request for production of documents requesting that
the Suters produce various documents including time sheets, job tickets, invoices,
receipts and other documents to support the allegations made in the complaint.
On November 8, 2005, the Suters filed a motion to compel discovery. In
that motion they stated that a set of interrogatories and request for production of
documents had been hand-delivered to defense counsel on July 20, 2005, and after
agreeing to several extensions, on September 27, 2005, they were informed that the
requested documents were available at defense counsel's office. Upon arriving at the
office, the Suters' counsel found thousands of documents stacked in boxes, the vast
majority of which were not responsive to the document request and not relevant to the
case. Although the order is missing from the record, the court's docket shows that the
motion to compel was denied on November 29, 2005.
On January 3, 2006, the Suters filed a motion to amend the complaint to
include a breach of contract action against Frantz as a result of the corporation's failure to
purchase appellants' stock in accordance with the corporation's amended stock purchase
agreement and seeking dissolution of the corporation pursuant to KRS 271B. 14-300 et.
seq.2 While that motion was pending and before the Suters deposed the appellees or
2
The motion to amend the complaint was denied. The Suters filed a separate action in the
Fayette Circuit Court which remains pending.
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made further discovery requests, on January 14, 2006, the appellees moved for summary
judgment.
THE APPELLEES' MOTION FOR SUMMARY JUDGMENT
The basis for the appellees' summary judgment motion was as follows: (1)
there was no evidence to support the allegations in the complaint; (2) the Suters had
unclean hands and acquiesced to the alleged acts of the appellees which precluded relief;
and (3) the alleged misuse of corporate assets was moot because, after the filing of the
complaint, the Board enacted policies to prevent further misuse.
In support of their motion, the appellees relied heavily on Willis's and
Curtis's depositions. To refute the allegation that the appellees used corporate assets for
their personal benefit, the appellees pointed out that Willis and Curtis testified that they
had also used Frantz's “118 accounts” to pay personal expenses.3 Through Willis's and
Curtis's depositions, the appellees established that the accounts had been in existence at
least since the death of Mr. Suter and both Willis and Curtis testified that they had used
the accounts. Additionally, both admitted that they had taken trips paid for by Frantz and
that Frantz employees had been used without compensation to work on their homes. The
appellees also produced evidence that although the Suters complain about the bonuses
paid in 2004, the Suters received the same bonuses.
3
118 accounts are accounts used by Frantz to pay expenses for shareholders and employees
which are then reimbursed to Frantz.
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.
THE SUTERS' RESPONSE TO THE MOTION
FOR SUMMARY JUDGMENT
The Suters filed a timely response to the motion for summary judgment.
They argued that summary judgment would be premature and, at the very least, they
should be given the opportunity to depose the appellees. The appellees had not been
deposed, they contended, through no fault of their own but because of the appellees'
failure to comply with discovery request. They also denied that their past use of the 118
accounts and occasional use of corporate employees for their personal use were sufficient
to make their hands so “unclean” as to preclude recovery. They further denied that they
acquiesced to appellants' abuses of corporate assets.
In support of their response, the Suters detailed the specific financial
documents requested from appellees but that remained unreceived. Additionally, Willis
and Curtis submitted affidavits stating that their use of the 118 accounts was limited and
that neither had used the accounts for several years. In addition, they submitted invoices
and service work orders which, they maintained, demonstrated that Tommy Roser,
Thomas Roser's son, was paid for work that he did not actually perform. Additionally,
the Suters included a “sampling” of personal items charged to Frantz by the appellees.
Finally, they submitted letters written in 2003 by Willis, then Executive Vice President to
Hank Mazyck, then President, expressing his concern about the personal expenditures by
Frantz's shareholders, as well as Tommy Roser's employment.
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A hearing was held on the motion for summary judgment at which both
parties orally presented their arguments. At its conclusion, the court indicated that the
summary judgment would be granted because the case could be resolved in the separate
action filed against the corporation seeking its dissolution. On February 8, 2006, the
circuit court granted appellees' motion for summary judgment.
We now turn to the contentions on appeal.
STANDARD OF REVIEW
The proper standard of review in appeals from summary judgments has
frequently been recited and is concisely set forth in Lewis v. B&R Corporation, 56
S.W.3d 432, 436 (Ky.App. 2001) as follows:
The standard of review on appeal when a trial court grants a
motion for summary judgment is “whether the trial court
correctly found that there were no genuine issues as to any
material fact and that the moving party was entitled to
judgment as a matter of law.” The trial court must view the
evidence in the light most favorable to the nonmoving party,
and summary judgment should be granted only if it appears
impossible that the nonmoving party will be able to produce
evidence at trial warranting a judgment in his favor. The
moving party bears the initial burden of showing that no
genuine issue of material fact exists, and then the burden
shifts to the party opposing summary judgment to present “at
least some affirmative evidence showing that there is a
genuine issue of material fact for trial.” (citations omitted).
A summary judgment is a final order and, therefore, should not be
entered “as a form of penalty for failure of the plaintiff to prove his case quickly
enough.” Conley v. Hall, 395 S.W.2d 575, 580 (Ky. 1965). It is proper only after
the party opposing the motion has been given ample opportunity to complete
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discovery and then fails to offer controverting evidence. Pendleton Bros.Vending,
Inc. v. Com. Finance & Administration Cabinet, 758 S.W.2d 24, 29 (Ky. 1988)
(citing Hartford Insurance Group v. Citizens Fidelity Bank & Trust Co., 579
S.W.2d 628 (Ky. 1979)).
In Roberson v. Lampton, 516 S.W.2d 838 (Ky. 1974), the
court cautioned against the use of summary judgment as a means of luring a
party into a “premature showdown” by forcing the opposing party to try his
case on the merits. Citing Conley, supra, the court stated:
We think that it should be borne in mind that the motion for
summary judgment is not a trick device for the premature
termination of litigation. Its function is to secure a final
judgment as a matter of law when there is no genuine issue of
a material fact...The burden is on the movant to establish the
nonexistence of a material fact issue. He either establishes
this beyond question or he does not. If any doubt exists, the
motion should be denied. Id. at 840.
The holding in Roberson has been given a narrow construction in that the movant does
not have to show that the party opposing a motion for summary judgment actually
completed discovery but only that the opposing party had the opportunity to do so.
Hartford Ins. Group, supra. Absent a sufficient opportunity to develop the facts,
however, summary judgment cannot be used as a tool to terminate the litigation.
ARE THE ALLEGATIONS IN THE COMPLAINT MOOT?
If, as appellees contend, the issues raised in the complaint are moot by
reason of the adoption of corporate policies addressing the Suters' allegations, then, as a
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matter of law, summary judgment was proper. Further discovery would, therefore, be
meaningless.
We are not persuaded, however, that the allegations are moot. Following
the filing of the complaint, the Frantz Board of Directors instituted new policies
regarding the 118 accounts, payment of personal expenses and all of the other allegations
of misuse of corporate funds made by the Suters. The new policies, however, can prevent
only future abuses and make no provision for compensating either the corporation or its
shareholders for past abuses.
WAS SUMMARY JUDGMENT PREMATURE?
The remaining issues raised in the summary judgment motion are factual
issues. Thus, for summary judgment to be properly granted, the party opposing the
motion must have been given adequate opportunity to discover the relevant facts. Only if
that opportunity was given do we reach the issue of whether there were any material
issues of fact precluding summary judgment.
Whether a summary judgment was prematurely granted must be determined
within the context of the individual case. In the absence of a pretrial discovery order,
there are no time limitations within which a party is required to commence or complete
discovery. As a practical matter, complex factual cases necessarily require more
discovery than those where the facts are straightforward and readily accessible to all
parties.4 In this case, the facts involve the parties' dealings with the assets of a multimillion dollar corporation over a period of more than ten years and are factually complex.
4
For instance, foreclosure actions are generally ones where the facts are known to all parties.
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Both at the circuit court level and now before this court, the appellees have
argued vehemently for the application of the unclean hands doctrine as a complete
defense to their alleged misconduct. While the Suters' depositions established that they
had in the past used corporate assets for their personal use, we find that they are not
precluded from pursuing the relief requested.
The unclean hands doctrine is a rule of equity that forecloses relief to a
party who has engaged in fraudulent, illegal, or unconscionable conduct but does not
operate so as to “repel all sinners from courts of equity.” Dunscombe v. Amfot Oil Co.,
201 Ky. 290, 256 S.W. 427, 429 (1923). “The transaction with respect to which there
was misconduct must be connected with the matter in litigation in order for the doctrine
of unclean hands to apply.” Eline Realty Co. v. Foeman, 252 S.W. 2d 15, 19 (Ky. 1952).
And although the operation of the maxim is broad, it is not without limitation and will not
apply to all misconduct or to “every act smacking of inequity or deceit” in relation to the
matter in which the relief is sought. Parris' Adm'r v. John W. Manning & Sons, 284 Ky.
225, 144 S.W.2d 490, 492 (Ky. 1940). Applied specifically to a stockholder's derivative
action, the plaintiffs must have not engaged in conduct which would forfeit their right to
seek equitable relief for the malfeasance of the corporate directors, officers, or majority
shareholders. See Tierno v. Puglisi, 279 A.D.2d 836, 838, 719 N.Y.S.2d 350 (N.Y.
2001).
While we agree that the Suters had, in the past, used the 118 accounts,
taken “incentive” trips charged to Frantz, taken bonuses from the corporation and, at least
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on one occasion, used corporate employees for their personal use, their contention is that
since becoming majority shareholders, the appellees have looted the corporation for their
own benefit. They claim that the appellees have utilized the 118 accounts and corporate
credit accounts to such an extent as to constitute an abuse of the corporation for their
personal benefit, and have paid Tommy Roser for work that was not performed. The
limited record does not reveal the extent of the appellees' use of corporate funds or
whether the payments made to Tommy Roser were for his legitimate service to Frantz.
The appellees contend and the circuit court apparently agreed, that no
matter how de minimus the conduct of the Suters, their use of the corporate assets
precludes the relief sought. Under the appellees' application of the unclean hands
doctrine, no matter how horrendous the conduct of the defendant, the plaintiff's hands
must be spotless. We disagree.
The unclean hands doctrine is a rule of equity and, therefore, should not be
applied if to do so reaches an inequitable result. When the plaintiff has engaged in
conduct less offensive than that of the defendant, the rule will not preclude the plaintiff's
recovery. As stated in Goodyear Tire & Rubber Co. v. Overman Cushion Tire Co. 95
F.2d 978, 983 (6th Cir. 1938):
[I]t is to be noted that the rule is not inexorable that a
plaintiff, who comes into court with unclean hands, is always
to be denied relief, regardless of other circumstances in the
case, for the maxim should not be applied where an
inequitable result would be reached. If a defendant has been
guilty of conduct more unconscionable and unworthy than
that of the plaintiff, the rule may be relaxed. (citations and
internal quotation marks omitted).
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The reasoning in Goodyear has sound application to a derivative action where the action
is brought on behalf of a corporation. If, as appellees suggest, the Suters' participation in
the personal use of corporate assets, no matter how minor or infrequent, precludes them
from seeking to halt the majority shareholders' looting of the corporation, then the
corporation and their position as minority shareholders would be left vulnerable to
financial collapse without redress. Equity cannot condone such a result.
There are material issues of fact as to the extent of the the Suters'
misconduct and that of the appellees'; under the Steelvest, Inc. v. Scansteel Service
Center, Inc., 807 S.W.2d 476 (Ky. 1991) standard, therefore, summary judgment was not
proper. Having determined that there is insufficient evidence in the record to support the
judgment, however, the question remains as to whether the Suters were given the
opportunity to conduct further discovery or if they simply failed to conduct the necessary
discovery.
If the Suters are to prevail, the corporate records containing time sheets,
reimbursement requests, credit card bills, and other financial records which would either
prove or disprove their allegations are crucial. As appellants point out, deposing the
appellees before this information was obtained would severely limit any questions in
regard to the alleged misuse of corporate personnel and assets.
Promptly after the complaint was filed, the Suters served interrogatories
and a request for production of documents; however, it was not until September 2005 that
the records were made “available” to the Suters. After their motion to compel was denied
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on November 29, 2005, and faced with thousands of documents, some of which were not
relevant or requested, the Suters were left to sift through the mountain of paper to gain
their information. Yet, just six weeks later, the appellees moved for summary judgment.
Under the circumstances, we hold that the Suters did not have a reasonable time to
complete discovery.
For the same reason summary judgment is not proper on the basis of the
unclean hands doctrine, so it is on the basis that the Suters acquiesced in the appellees'
conduct. While they may have to an extent participated in the use of corporate assets for
their personal benefit, the allegations in the complaint, if true, go far beyond the Suters'
admitted uses.
In the interest of judicial efficiency, there is, of course, a limitation on the
time the parties have to complete discovery; in fairness to all parties such a limitation is
most easily expressed in a pretrial order. On remand, the court shall afford the Suters a
reasonable time to complete discovery. Summary judgment motions by either party may
then be properly considered.
Based on the forgoing, the summary judgment is hereby vacated and the
case remanded to the circuit court for proceedings consistent with this opinion.
ALL CONCUR.
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BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEES:
Warren J. Hoffman
J. Bradford Derifield
Frost Brown Todd LLC
Lexington, Kentucky
Thomas W. Miller
Elizabeth C. Woodford
Miller, Griffin & Marks, PSC
Lexington, Kentucky
ORAL ARGUMENT FOR APPELLANTS:
ORAL ARGUMENT FOR
APPELLEES:
J. Bradford Derifield
Thomas W. Miller
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