KANSAS PUBLIC EMPLOYEES
RETIREMENT SYSTEM
Plaintiff
v. Case No. 93 CV 389
MICHAEL K. RUSSELL
Defendant
This matter is before the Court on Kansas Public Employee Retirements System's (KPERS) Motion for Partial Summary Judgment. KPERS seeks judgment against Michael Russell on Count II of the petition and a determination of some, but not all, damages. The Court denies KPERS's motion. Defendant Michael Russell has also filed a Motion for Summary Judgment on all issues. Russell's motion for summary judgment is granted.
GENERAL OVERVIEW OF CASE
This is one of a number of suits brought by KPERS to recover investments. In this suit, KPERS is attempting to recover about $7.85 million from investments made in a business which will be referred to in shorthand fashion as "Emblem." (1) Michael Russell is the only Defendant remaining before this Court as summary judgment has been granted as to some defendants and settlement has been reached by others.
In Count II of this action, KPERS has alleged that Michael Russell, as a trustee of KPERS, committed a breach of trust and fiduciary duty. Some of the issues raised by summary judgment have been before the Court through previous motions for summary judgment. On July 31, 1997, the Court issued a decision denying KPERS' motion for summary judgment on Counts II and IV against all Defendants. The Court found that issues of material fact existed. On December 24, 1998, the Court issued a decision granting summary judgment for several Defendants. This decision was appealed and this court's decision was affirmed in KPERS v. Russell, 269 Kan. 228, 5 P.3d 525 (2000). On March 9, 1999, the Court granted in part and denied in part a motion for summary judgment of Defendants Reimer & Koger and Kenneth Koger. While the December 24, 1998, and March 9, 1999, decisions do not address Russell's potential liability, many common issues of law were considered.
Through the current motion, KPERS again seeks judgment against Russell on Count II, arguing that additional facts not in the record on July 31, 1997, are uncontroverted and provide a basis for judgment in KPERS favor. Count II alleges that Michael Russell, while a trustee of the KPERS's trust, committed a breach of trust resulting in damages. Russell argues that there can be no liability under the facts which KPERS argues as the basis for its claim.
FINDINGS OF FACT
1. KPERS is an instrumentality of the State of Kansas (K.S.A. 74-4903) which, through its governing board of trustees (K.S.A. 74-4905), manages the Kansas public employees' retirement fund. The seven trustees in place at the time of the investment at issue were appointed by the Governor of Kansas and confirmed by the Senate to serve overlapping four-year terms.
2. Michael K. Russell was a KPERS trustee from 1983 to 1987. He was chairman of the KPERS board of trustees from August 1985 to July 1987.
3. Beginning in 1973, Reimer & Koger served as an investment manager for some of KPERS's publicly traded investments. Reimer & Koger was an investment firm, incorporated under the laws of the State of Kansas and licensed with the Securities and Exchange Commission.
4. Kenneth Koger, who had a background as a securities industry analyst and investment banker, was an officer, director and agent of Reimer & Koger.
5. On November 11, 1975, KPERS entered into a written contract with Reimer & Koger. The contract is referred to as an Investment Counselor Agreement.
6. Prior to 1985, Reimer & Koger managed two investment portfolios for KPERS: the Kansas Equity Fund and the Kansas Debt Fund (KDF).
7. In February 1985, the Trustees merged the Kansas Debt and Kansas Equity Funds into a single portfolio called the Kansas Investment Fund (KIF), the funds of which were authorized to be invested in economically targeted direct placement investments. Investments in the Kansas Investment Fund were titled and held in the name of the nominee partnership, KDF, which was created specifically for that purpose.
8. On December 27, 1985, KPERS and Reimer & Koger entered into a Special Investment Advisory Services Agreement, supplementing the Investment Counselor Agreement and authorizing Reimer & Koger to make investments. Among other things, the Special Investment Advisory Services Agreement authorized certain types of investments, including venture capital and other nontraditional financing in the form of debentures, notes, stocks, options, and warrants, among others. Reimer & Koger was delegated the responsibility of, "selecting and making suitable and appropriate Investments on behalf of KPERS . . . in accordance with the Guidelines" as then established by the KPERS Board.
9. Although the Special Investment Advisory Services Agreement was not executed until December 27, 1985, Reimer & Koger was asked to begin making direct placement investments for the KIF as early as February of 1985 pursuant to an oral contract between the parties, under basically the same terms and conditions as those ultimately embodied in the written agreement.
10. If an investment fell within KPERS guidelines, Reimer & Koger was authorized to make the investment without consulting with the Trustees.
11. In 1984, KPERS' overall investment advisor, Callan & Associates, performed a "Manager Review" of Reimer & Koger. Callan & Associates noted that Reimer & Koger's "relative equity performance has deteriorated in recent periods." However, it was noted that long term performance was still superior to stock market averages. The conclusion of the report was: "Performance deterioration and possibility of change in application of investment philosophy warrant discussions with Reimer & Koger to determine if growth of firm, in terms of assets, accounts and people, is impacting ability to deliver above average long term results." (Plaintiff's Summary Judgment Exhibit 1, at 0401002345)
12. In a file memo dated February 26, 1985, Ken Koger documented "comments" about a meeting with Marshall Crowther, the Executive Secretary of KPERS. Among other things, Koger wrote: "Other things that were discussed: Mr. Russell and our need to pacify him. Marshall made the point that he certainly wasn't a fan of ours." (Plaintiff's Summary Judgment Exhibit 4, at 0502002370).
13. On March 6, 1985, Koger recorded additional "comments" related to a meeting with Mike Russell. Russell was critical of Reimer & Koger and displayed "general grumpiness." Among comments was one that Russell "pointed out that we [Reimer & Koger] didn't stay close to Bill Thomas at G.K. Baum . . . ." (Plaintiff's Summary Judgment Exhibit 9, at 0165001005).
14. During the period from 1983 through at least 1985, George K. Baum & Company (Baum & Co.) provided investment banking and consulting services to assist Emblem in obtaining financing. Thomas, a vice-president of George K. Baum Company, was a shareholder-director of Emblem. George K. Baum bought $3,000 shares of Emblem stock in 1983 for $16,500. Both Baum and Thomas were personal friends of Russell. Baum & Co. was one of two firms that were underwriters when American Cities Business Journal (ACBJ) went public. Russell was chairman of the board of the ACBJ.
15. From time to time in 1985, Koger met with Thomas to discuss possible investment opportunities for KPERS' funds. One of the possible investments Thomas mentioned to Koger was Emblem.
16. Emblem Tape and Label Company designed, manufactured, and marketed graphic specialty products, including pressure sensitive labels, business forms and speciality packaging products. Emblem had offices and production facilities in Kansas City, Kansas, and Denver, Colorado. Sales representatives were located in Arizona, Utah and Ohio. In December 1982, ETL Corporation (ETL) was organized for the purpose of acquiring all of the common stock of Emblem Tape and Label Company. In January of 1983, ETL acquired 100 per cent of the common stock of Emblem Tape and Label Company and operated the business through a wholly owned subsidiary named Emblem Graphic Systems, Inc. Emblem's sales for fiscal year 1984 were nearly $7 million.
17. The directors of ETL were Tom W. Olofson, Jerry L. Haney, Dennis L. O'Hara, Thomas W. Van Dyke, G. Kenneth Baum, Frank L. Victor, Michael K. Russell, William D. Thomas. The shareholders, number of shares of common stock owned, the percentage of outstanding common stock, and the purchase price for the stock owned by each were:
Tom W. Olofson 52,000 52% $286,000
Jerry L. Haney 33,000 33% 181,500
G. Kenneth Baum 3,000 3% 16,500
Frank L. Victor 3,000 3% 16,500
Michael K. Russell 3,000 3% 16,500
Thomas W. Van Dyke 3,000 3% 16,500
William D. Thomas 3,000 3% 16,500
18. Russell became a director of ETL in January 1983. He purchased his stock in ETL on January 5, 1983 for $16,500.
19. Olofson and Haney were the general partners of T&J Investment Company (T&J). Emblem leased its Kansas City and Denver facilities from T&J under five year leases starting October 1, 1984, under which monthly lease payments were $11,500 for the Kansas City facility and $15,500 for the Denver facility with increases of $500 per month in each of the second through fifth years for the Kansas City facility and $1,000 per month in each of the second through fifth years for the Denver facility. On September 30, 1985, Emblem owed T&J approximately $836,852.00.
20. During the fiscal year ending September 30, 1984, Olofson was paid approximately $120,000 to be chairman of Emblem's board of directors and its CEO. Olofson was paid $96,000 for fiscal year 1986.
21. Olofson was a director and shareholder of the Kansas City Bank & Trust. He owned shares of American Cities Business Journal, a business operated by Russell, valued at $65,000 on June 30, 1986.
22. Haney was paid a salary of $102,000 during the fiscal year ending September 30, 1984.
23. Victor was an officer of the Bank of Kansas City, at a time when the Bank of Kansas City made a loan to Emblem. Later Victor left the Bank of Kansas City and became chairman of the board of directors and president of Norbank, a bank he purchased with two other people. Norbank made loans to Emblem. As of September 30, 1985, Emblem owed Norbank at least $295,873. Victor was a stockholder in ACBJ.
24. Van Dyke was an attorney with Linde Thomson Fairchild Langworthy Kohn & Van Dyke, P.C. At various times and for various purposes, Van Dyke or the Linde Thomson firm represented ETL; ACBJ; Reimer & Koger; Baum & Co.; Russell, Worley & Co.; Olofson; and Haney. Van Dyke also owned stock in ACBJ.
25. Under an agreement dated October 18, 1984, Emblem retained Baum & Co. for the purpose of obtaining long term financing for Emblem in an amount ranging from a million to 1.5 million. Under the agreement, Baum & Co. was to be receive a fee equivalent to 2.5 percent of the money obtained unless the financing was placed with KPERS, in which case the fee would be 1.5 percent of the money obtained. The agreement was signed by Olofson. There is no evidence that the agreement was discussed at an Emblem board meeting.
26. In January of 1985, Emblem obtained a $900,000 working capital loan from the Johnson County Bank in order to finance its operations and to launch a new line of "electronic printing and composite imaging" business.
27. As a condition of making the $900,000 loan, the Johnson County Bank required that certain of Emblem's shareholders guarantee a portion of the loan. The guarantees were limited to indicated percentage amounts of the outstanding debt as follows:
Jerry L. Haney 16.67 %, maximum of $150,000 principal
Tom W. Olofson 16.67 %, maximum of $150,000 principal
Michael K. Russell 22.22 %, maximum of $200,000 principal
William D. Thomas 11.11 %, maximum of $100,000 principal
Thomas Van Dyke 22.22 %, maximum of $200,000 principal
Frank L. Victor 11.11 %, maximum of $100,000 principal
28. On January 18, 1985, the directors of ETL authorized the issuance of warrants in amounts equal to 1,500 shares of common stock for each $100,000.00 guaranteed by the stockholders at an exercise price of $5.50.
The warrants were issued as follows:
Jerry L. Haney 2,250 shares
Tom W. Olofson 2,250 shares
Michael Russell 3,000 shares
William D. Thomas 1,500 shares
Thomas Van Dyke 3,000 shares
Frank L. Victor 1,500 shares
29. In 1985, Emblem also obtained financing from the Bank of Kansas City. On July 30, 1985, Emblem owed a balance of approximately $2.692 million to the Bank of Kansas City (earlier operating as Kansas City Bank & Trust) secured by accounts receivable, equipment, inventory and a building. Russell was a director of the Kansas City Bank & Trust and a shareholder in either the bank or its holding company. Olofson was also a director and Victor was an employee of the bank from 1979 to 1983. At some point Russell served as chairman of the Bank's board. In 1985 or 1986, the Bank experienced problems with some capital accounts because of some bad loans. During 1985 and 1986, Russell worked on several plans to restructure the Bank to inject capital into the Bank. These included plans in which Russell's ownership interest would have increased.
30. Emblem, primarily through the services of Baum, continued to seek financing. Without financing, in the words of Jerry Haney, Emblem would face curtailing some operations and "dramatically cutt[ing] back development." With financing, according to Haney, the board members were enthusiastic about the prospects for Emblem to become a "major factor in the electronic printing area. . . ." Haney Depo. at 120:8-20.
31. In the answers to interrogatories of Baum & Co., it is stated: "At an Emblem board meeting in 1985, Mike Russell suggested showing the Emblem investment to KPERS' investment advisers." (Plaintiff's Summary Judgment Exhibit 16, answer 4).
32. Thomas mentioned Emblem as a possible investment to Ken Koger sometime in 1985. Koger testified that mention may have been made in June or perhaps earlier. On August 2, 1985, Ken Koger visited Emblem's facilities in Denver, Colorado. Another analyst from Reimer & Koger, Kevin Mahoney accompanied Koger. Mahoney was looking at Emblem for a different portfolio than KPERS. After the trip, Koger dictated a memo summarizing his impressions. In conclusion he wrote: "I was struck by the quality of management and the business plan. For a company of this size, I think it has perhaps the best management team I have seen . . . . When this company goes public, I would be shocked if it doesn't carry an extraordinarily high multiple." (Defendant's Summary Judgment Exhibit 8, at 01230000901).
33. Koger also visited the Kansas City facility; interviewed various members of Emblem management, including middle and upper management; asked questions of members of the board of directors; spoke to industry analysts, customers and suppliers; reviewed financial information of other publicly-traded companies in the label industry, including historical reports; evaluated appraisals; reviewed Olofson and Haney's personal financial condition; evaluated product lines and barriers to entry; and reviewed financial information provided by Emblem. Koger also made a financial analysis of the effect on Emblem of repaying the KPERS's loans. In doing this Koger utilized computer models prepared by Baum & Co., but made changes in the assumptions that he "thought might be worthy of consideration . . . ." (Koger Depo. at 100:7.)
34. Thirty to forty-five days after beginning his review of Emblem, Koger asked Russell for his opinion of Emblem's management. There is some dispute regarding the wording of the reply, but the reply was generally favorable. In an affidavit dated May 14, 1998, Koger stated:
Michael Russell's recommendation regarding the management of Emblem was but a small fraction of the overall due diligence performed on the Emblem investment. Had Michael Russell not been asked his opinion regarding the management of Emblem, R&K [Reimer & Koger] would have made the investment based upon the results of the remainder of the due diligence.
35. Baum and Company produced a Confidential Memorandum concerning ETL Corporation and its operating subsidiary Emblem Graphic Systems, Inc. and KPERS potential financing. This memorandum, dated August 13, 1985, outlined terms of a $2.9 million equipment loan and a $2.5 million subordinated debenture. The memorandum also included a listing of Emblem's directors and shareholders, including Russell, and stated that stock warrants held by Russell and others would be canceled in exchange for cash upon completion of the KPERS investment. It is stated: "Additionally, prior to the closing of the financing contemplated hereby it is anticipated that Mr. M. K. Russell will resign as a member of the board of directors and will sell his stock back to the Company in exchange for an as yet undetermined amount of Subordinated Notes." (Plaintiff's Summary Judgment Exhibit 40). Baum & Company distributed the memorandum to Reimer & Koger.
36. Other than commenting on Emblem's management, Russell did not participate in Koger's investigation of or in the negotiation of the terms of KPERS's financing.
37. At a subsequent board meeting of Emblem directors, there was discussion of the KPERS's financing. At the meeting, Russell stated he might have to resign and sell his stock.
38. In a memorandum to the file dated September 11, 1985, and showing a "cc: Marshall Crowther" ( KPERS Executive Secretary), Koger stated:
We discussed Mr. Russell's Board seat and stock holdings in Emblem Graphics, for which we are contemplating doing a private placement.
Mr. Russell at first thought that he should resign his Board seat, but when I made the comment that he would still be a stockholder, he decided that he should sell his common stock.
Plaintiff's Summary Judgment Exhibit 61, at 0201000278.
39. Russell resigned as a director of ETL in a letter dated September 12, 1985, and addressed to Tom Olofson:
Please accept this letter as my formal resignation from the Board of Directors of ETL Corp. . . . .
I have checked with my attorney regarding [a] potential legal conflict should you enter into a financial arrangement with George K. Baum & Co. and Reimer & Koger. I feel that because Kenneth Baum is a member of the board of American City Business Journals of which I am Chairman and a principal shareholder and because of my position on the board of Kansas Public Employees Retirement System that an appearance of conflict, if not in fact a legal conflict, would exist. This action will be in the best interest of the company and to my position within both my own company and the KPERS Board.
Plaintiff's summary judgment exhibit 43, at 1080001709.
40. On September 16, 1985, the directors of ETL unanimously approved the repurchase of Russell's stock and the repurchase of his warrants upon execution of the loan agreements with KPERS. The purchase price for the stock was established by a formula in the Stock Redemption Agreement which had been established on May 31, 1994, and then without amendment incorporated into a Second Amendment to the Stock Redemption Agreement dated June 13, 1985. Based upon the book value of the Company of $537,000 on June 20, 1985, the per share purchase price under the terms of the Stock Purchase Agreement was $16.11, for an aggregate purchase price of $48,330 for the 3,000 shares repurchased from Russell. Russell and ETL negotiated a three-year note, with annual interest of 10 percent, in lieu of cash. Tom Olofson sent a letter dated September 24, 1985 to Michael K. Russell in which Olofson advised Russell of the various actions of the board of ETL in accepting Russell's resignation, authorizing the repurchase of stock, authorizing the note, extinguishing the loan guarantees, and authorizing the repurchase of the common stock warrants. The letter includes: "cc/ Kenneth H. Koger, William D. Thomas." Plaintiff's Summary Judgment Exhibit 47, at 0502006440.
41. Russell received a $48,330 note from Emblem dated September 24, 1985. Under the agreement Russell was entitled to a cash payment.
42. On September 30, 1985, Reimer & Koger invested almost $5.3 million of KPERS's trust funds in Emblem. The agreement was made by Reimer & Koger without presentation to the KPERS Board of Trustees because Reimer & Koger believed the investment was within the terms and guidelines of the direct placement program.
43. Under the Securities Purchase Agreement dated September 30, 1985, the Emblem companies agreed to use proceeds of the KIF financing to pay: (i) approximately $900,000 of the debt to the Johnson County Bank which had been guaranteed by Russell and other shareholders; (ii) $915,000 to reduce the Bank of Kansas City line of credit and $152,540 for payment of a Bank of Kansas City note; (iii) $836,852 for repayment of advances by T&J and subordinated debt to T&J; (iv) $295,873 for repayment of debt due Norbank; (v) and $137,000 for the fees of Baum & Co.
44. Emblem fulfilled a September 16, 1985, resolution of the ETL Corporation Board by purchasing the stock warrants granted on January 18, 1985 in connection with the loan guarantees to the Johnson County Bank. Russell received $6,000 for his warrants.
45. On September 22, 1986, Emblem paid Russell $4,833 in interest on the note it gave him for his stock.
46. On January 30, 1987, a Reimer & Koger analyst wrote: "In summary, I continue to be impressed with the potential for strong growth. It seemed apparent to me that they are scrambling for cash to tide them over until the revenues from the electronic printing are realized." (Plaintiff's Summary Judgment Exhibit 59, at 0123000836).
47. In September 1986, Emblem made its first interest payment to Russell. After a December 1986 newspaper account publicly disclosed Russell's personal interest in Emblem, Emblem's directors decided to pay Russell's note early. On February 5, 1987, Emblem paid Russell's note for $48,330.
48. On February 20, 1987, another analyst wrote that orders were up 63 percent over February 1986 and revenues are running at $880,000 per month. The analyst catalogued the margins, customer base, competition, and problems facing the company. He then wrote:
Emblem is considering a second round of private financing in the $2-$3 million neighborhood.
Tom [Olofson] stated that they need this financing to take advantage of a strategic window of opportunity in capitalizing on the composite imaging business before their competitors. If they can't secure the financing, then they might have to sell the company at a devalued price, according to Tom.
Ken [Koger] responded unequivocally that we should not be considered as a source for this financing and that they should seek other sources. His rationale was their blatant disregard of the covenants they had previously agreed to and, through not having audited financials, we do not have an accurate picture of their financial position.
Plaintiff's Summary Judgment Exhibit 57, at 0123000820-21.
49. In 1987, Reimer & Koger approved three loans to ETL: (1) on July 27 a loan in the amount of $200,000; (2) on August 24, 1987, in the amount of $250,000; and (3) on September 18, 1987, in the amount of $300,000. On October 29, 1987, these three loans were rolled into a $763,627.78 "ETL Subordinated Debenture". Also, on October 29, 1987, Reimer and Koger, on behalf of KDF, waived defaults in covenants.
50. On February 3, 1988, Reimer & Koger executed a letter agreement pursuant to which KPERS was to provide ETL with up to $1 million in additional capital, to forbear on principal payments on KPERS' equipment loan, and to forbear on principal and interest payments on the debentures for a period of time.
51. In May 1988, KDF, Merchants Bank, Emblem and its major shareholders entered into an "Intercreditor Agreement". Under the agreement, KDF: (1) invested an additional $500,000 in Emblem in exchange for preferred stock; (2) canceled its $2.5 million and $763,627 debentures in exchange for preferred stock; and (3) provided the $1 million as agreed in the February 3, 1988 letter in exchange for preferred stock.
52. In the summer of 1988, Reimer & Koger approved investing another $300,000.
53. In December 1988, California Labels, Inc. (Cal Labels) agreed to purchase the assets of Emblem. On December 2, 1988, an Asset Purchase Agreement was executed by Cal Labels, Emblem, Haney, Olofson, T&J Investments, and Merchants Bank, which was a principal creditor of Emblem, Olofson, and Haney. The agreement was between Emblem Graphic Systems, Inc., a corporation; KDF, a Kansas general partnership; Tom Olofson; Jerry Haney; California Labels, Inc., a corporation; Emblem Label Systems, a corporation; and Merchants Bank.
54. Paragraph 10(d) of the Asset Purchase Agreement included the following language:
KDF, Merchants, Olofson and Haney shall execute releases for any and all claims, damages and liabilities arising out of the operation of Emblem and the relationship of the parties with Emblem and each other prior to the closing.
55. On December 2, 1988, a Release was executed contemporaneously to the asset Purchase Agreement.
56. Paragraph 1 of the December 2, 1988, Release provides:
1. Release and Covenant Not to Sue. KDF and the Investors hereby release, remit and forever discharge each of the other parties to this agreement together with any officers, directors, partners, stockholders, employees, principals, agents, counsel, subsidiaries, or controlling persons of the foregoing, together with any heirs, legatees, devisees and personal representatives, (all such affiliated persons being referred to collectively as the "Indemnified Persons"), from any and all claims, demands, liabilities, obligations, losses, damages and causes of action, whether known or unknown, based on, arising out of, or directly or indirectly relating to either (i) the business, management or operation of the Emblem or ETL Corp.; (ii) the sale, purchase, ownership, exchange or pledge of any of the securities or debt obligations of Emblem or ETL Corp.; (iii) any action taken by any party or Indemnified Person in its or his capacity as a shareholder, creditor, officer or director of Emblem or ETL; (iv) any personal guarantee of any indebtedness of Emblem or ETL; or (v) any prior negotiations, representations, understandings, agreements, discussions or dealings among any of the parties hereto or other Indemnified Parties (the transactions described in clauses (i) through (v) being collectively referred to as the "Transactions"). The release granted to any party in the foregoing sentence shall be conditioned upon the closing of the sale contemplated under the Purchase Agreement and the performance by the released party of its obligations under the Agreement. The parties further represent, covenant and warrant that, they have not commenced or prosecuted, nor will any of them commence or prosecute, any form of action or proceeding against any party or any Indemnified Person, based on, or arising out of, or directly or indirectly relating to the Transactions.
57. Joe Pelofsky, an attorney with Shughart Thomson & Kilroy who represented Olofson and Haney in the sale, testified at his deposition:
Q. When this document was negotiated, who did you intend would be released by this document?
A. My understanding was that the release was intended to settle all of the liabilities between the parties.
Q. Between Messrs. Olofson and Haney and KDF?
A. Anybody else who had any liability.
Q. Who drafted the language which is contained in paragraph 1 of the release agreement?
A. I don't recall. It would have been pretty standard if it wasn't there for us to have added it because when you have entities like this, we just swept up everybody who had any relationship.
Defendant's Summary Judgment Exhibit 33, Pelofsky Depo. at 28: 10-22.
58. Olofson testified at his deposition:
Q. What was to be released? Why?
A. I think the general purpose of that kind of release is to simply avoid the potential for any future litigation on the part of any of the parties involved, and I think in this kind of a set of business circumstance that that sort of a release is an appropriate thing to do.
Q. You were a party to the release?
A. Yes.
Q. And you were represented by counsel in negotiating it I take it?
A. Correct.
Q. What was your understanding of what it was that that release was supposed to be?
A. That release would cover all of the parties that were involved in the various Emblem/KPERS' transactions and that the basic purpose of that release for all parties would be to avoid the subject of any litigation arising out of anything to do with Emblem in the future.
Q. Did you understand that to include the KPERS' initial investment of September 30, 1985?
A. Oh, the understanding was it would include everything. It would go-it would go back to the very, very beginning of Emblem all the way through the very, very end of Emblem and cover everything in between, and I think it was -- it was clearly written to reflect that.
Defendant's Summary Judgment Exhibit 32, Olofson Deposition at 277:18 to 278:20.
59. At his deposition, Haney agreed with this testimony of Olofson when it was read to him.
60. On January 9, 1989, Reimer & Koger advised the KPERS Board that the KPERS/KDF investment would be written down from $8.2 million to $750,000. The $750,000 had been reduced to an interest-bearing note and a 10 percent equity interest in Emblem's purchaser.
61. Michael Russell filed several "Statements of Substantial Interests" with the Kansas Public Disclosure Commission.
In a statement dated May 31, 1984, he listed on a "Statement of Substantial Interests" the business of Emblem Tape & Label. Under the column for "Description of Interest" he listed "No Interest Held." Under the column for "Position Held By You" he listed "Director". Plaintiff's Summary Judgment Exhibit 64, at 1210000104.
A statement filed in May of 1985, included the same statements regarding Emblem.
The Statement of Substantial Interest filed on December 24, 1986, included a listing of Emblem and stated a "3% Interest" under the "Description of Interest" column. The "Positions Held By You Column" listed Russell as an Emblem "Director".
62. In January 1987, the Kansas Attorney General began an investigation in cooperation with the Kansas Public Disclosure Commission. The investigation related to allegations that Russell had participated in the making of contracts between KPERS and businesses in which he held a substantial interest in violation of K.S.A. 46-233. The record indicates that the Commission considered that Russell had a substantial interest in Emblem within the definition provide by K.S.A. 46-229(a). The Commission knew that Russell had been asked by Koger regarding Emblem's management and had given a "strong, positive response." Defendant's Summary Judgment Exhibit 14, at 0502006484. On February 18, 1987, the Public Disclosure Commission wrote Russell, stating: "From our investigation, we have concluded there is no evidence to support an allegation of a violation of any law within our jurisdiction." Defendant's Summary Judgment Exhibit 13, at 040077952.
63. Two days later, the Executive Secretary of KPERS sent reports of the findings to consultants and investment managers of KPERS.
64. In a report by the Attorney General before the House Committee on Pensions, Investments and Benefits, dated March 4, 1987, an Assistant Attorney General wrote:
It apparently was decided last month by the Public Disclosure Commission, after reviewing our investigation and any inquiry conducted by its own staff that none of the above constituted violation[s] of conflict of interest laws. In fact, as I believe is clear from the above report, the only real question before the commission was whether the recommendation provided on the Emblem Graphics investment by RUSSELL constituted participation in the making of a contract. It would appear the commission determined it did not. In that interpretation of the state conflict of interest laws is generally reserved to the commission, I made no recommendation on this matter and did not state a conclusion. I viewed our role as investigative and find no fault with the commission's interpretation.
Defendant's Summary Judgment Exhibit 14, at 0502006491.
65. KPERS did not seek to intervene in the Public Disclosure Commission proceedings nor did KPERS seek judicial review of the Commission's findings and conclusion.
66. On June 7, 2000, KPERS and Reimer & Koger executed a settlement agreement and mutual covenant not to sue. The agreement provided in part:
This Agreement is intended to settle claims that are denied and contested, and it is the result of a compromise between KPERS on the one hand and R&K, Koger and Diebel on the other. It provides rights and benefits solely to the parties specifically named in it and their past or present trustees, heirs, employees, agents, attorneys, representatives, predecessors, successors or assigns as applicable. This Agreement does not settle or compromise any claim any party to it has or may have against any other defendant in any of the Lawsuits or any person(s) other than the parties to the Agreement.
Plaintiff's Summary Judgment Exhibit 78, at page 2.
CONTENTIONS OF THE PARTIES
In essence, KPERS argues the uncontroverted evidence establishes self-dealing on the part of Michael Russell. KPERS argues that Russell pushed Koger toward Emblem at a time when Koger's relationship with Russell as chairman of the KPERS board was precarious and, as a result, was a time when Koger was seeking to "repair fences" in the relationship with Koger. KPERS argues that Russell and his business associates benefited from the investment of KPERS. Russell realized a significant gain on his investment and was released from personal guarantees of debts. Fellow shareholders also received relief from personal debt, plus they benefited from fees, salaries, rental income, new loans and in other ways.
KPERS's theory of breach of trust is two-fold. First, KPERS argues that a breach of trust occurs when a trustee profits from a transaction involving the trust. Second, it argues that the trust is governed by all legal requirements of the trust, which in this case included Kansas' conflict of interest statute that is a part of the Governmental Ethics Law. KPERS argues Russell violated this statute by participating in the making of a contract between Emblem and KPERS.
Russell argues that the uncontroverted facts establish that he did not commit a breach of trust. Further, he argues that he has been released from all claims through the release executed at the time of the purchase of Emblem by Cal Labels and in KPERS settlement of its claims against Reimer & Koger.CONCLUSIONS OF LAW
A. Standard on Summary Judgment
Recently, the Kansas Supreme Court restated the well-established standard against which the parties' motions must be considered:
"Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may be reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case."
Mitchell v. Liberty Mutual Insurance Company, ____ Kan. ___, 24 P.3d 711 (2001), quoting Bergstrom v. Noah, 266 Kan. 847, 871-72, 974 P.2d 531 (1999).
B. Conflict of Interest
The parties disagree as to what standard should be applied to Russell's actions relating to KPERS initial investment in Emblem. KPERS argues that Russell should be held liable based upon the fact he personally benefited from a KPERS's investment and that he violated the Kansas conflict of interest statute which created a statutory duty upon him as trustee.
In prior decisions, this Court specifically reserved the issue of whether the statutory standard and remedy precluded the common law claim made by KPERS. Russell now urges the Court to find that the conclusion of the Public Disclosure Commission is conclusive, is an exclusive remedy, and that the standard substitutes for the common law standards relating to self-dealing.
1. State Governmental Ethics Law and the Russell Investigation
In the Governmental Ethics Law, the Legislature specified the standard for state officers or employees participating in the making of a contract which is the context in which this case arises. As amended in 1983 and as in effect at the time of the events in controversy, K.S.A. 46-233 provided, in part:
(a) No state officer or employee shall in the capacity as such officer or employee participate in the making of a contract with any person or business by which such officer or employee is employed or in whose business such officer or employee has a substantial interest and no such person or business shall enter into any contract where any state officer or employee, acting in such capacity, is a signatory to or a participant in the making of such contract and is employed by or has a substantial interest in such person or business.
1983 Kan. Sess. L. Ch. 172, § 9.
Russell was subject to the terms of the state ethics law as a "state officer" (K.S.A. 46-221). KPERS is a public, state entity. K.S.A. 74-4903 created KPERS as a "body corporate and an instrumentality of the state" with its trustees appointed by the governor. The duties of a trustee are imposed by the legislature in K.S.A. 74-4921.
Thus, the restrictions of K.S.A. 46-233 applied to Russell if he held a "substantial interest."
"Substantial interest" was defined in K.S.A. 46-229 as owning a legal or equitable interest exceeding $5,000 or 5 percent of any business, whichever is less. This test was applied to the twelve month period before the making of the contract. Id. at § 1. Russell paid $16,500 for his 3,000 shares of ETL stock in January of 1983 and received a note in the face amount of $48,330 when he sold the stock in September of 1985. Thus, Russell held a "substantial interest" in ETL within the twelve-month period before KPERS entered into a contract with the company on September 30, 1985.
At the time of the transaction in question, K.S.A. 46-233(a) prohibited a state officer or employee with a "substantial interest" to be: (1) a signatory to the contract or (b) a participant in the making of the contract. (2) The evidence establishes that Russell was not a signatory. At most, there is evidence that Russell participated in the making of the contract.
Investigating a possible violation of this provision, the Kansas Public Disclosure Commission determined that there was no violation of K.S.A. 46-229(a). On February 18, 1987, the Public Disclosure Commission wrote Russell, stating: "From our investigation, we have concluded there is no evidence to support an allegation of a violation of any law within our jurisdiction." Defendant's Summary Judgment Exhibit 13, at 040077952.
Two days later, on February 20, 1987, the Executive Secretary of KPERS sent reports of the Public Disclosure Commission's determination to various investment managers and consultants. KPERS took no action.
In a report by the Attorney General before the House Committee on Pensions, Investments and Benefits, dated March 4, 1987, an Assistant Attorney General wrote:
It apparently was decided last month by the Public Disclosure Commission, after reviewing our investigation and any inquiry conducted by its own staff that none of the above constituted violation[s] of conflict of interest laws. In fact, as I believe is clear from the above report, the only real question before the commission was whether the recommendation provided on the Emblem Graphics investment by RUSSELL constituted participation in the making of a contract. It would appear the commission determined it did not. In that interpretation of the state conflict of interest laws is generally reserved to the commission, I made no recommendation on this matter and did not state a conclusion. I viewed our role as investigative and find no fault with the commission's interpretation.
Defendant's Summary Judgment Exhibit 14, at 0502006491.
The Commission (3), defined at K.S.A. 46-253, performed the investigation pursuant to the Governmental Ethics Act. Under the Act's provisions, a preliminary investigation can be performed pursuant to K.S.A. 46-260 without the filing of a complaint. If the Commission makes specific findings of fact and conclusions of law that there is a reasonable suspicion that a violation of the state governmental ethics law has occurred, the Commission can take evidence and subpoena witnesses. Alternatively, an investigation may occur after the filing of a complaint. K.S.A. 46-256. If after the preliminary investigation, the Commission determines probable cause exists for believing the allegations of the complaint, a hearing is conducted. The statutes impose the following powers and procedures:
The Commission's procedures allow for intervention. Throughout the procedural regulations, reference is made to "the petitioner or party". K.A.R. 19-7-1 et seq. The term "party" is defined as meaning "the complainant, respondent, and any other person authorized by the commission to intervene in any proceeding." K.A.R. 19-7-1(h). An intervenor, as any other party, has rights to participate in pre-hearing proceedings (K.A.R. 19-7-3) and during the hearings (K.A.R. 19-7-4). "Petitioners or parties shall have the right of presentation of evidence, cross-examination, objection and motion." K.A.R. 19-7-5. A "party" may submit proposed findings and conclusions (K.A.R. 19-7-11), stipulate to settlement (K.A.R. 19-7-11), appeal recommended reports to the entire commission and present oral arguments thereon (K.A.R. 19-7-14), and request a rehearing (K.A.R. 19-7-16).
An intervenor has a right to bring an action for review of an agency action under the Act for Judicial Review and Civil Enforcement of Agency Actions. See K.S.A. 77-603(f) and (g) to include intervenors and K.S.A. 77-611 which gives standing to parties in the agency action.
If there is found to be a violation of the Governmental Ethics Act, there are several remedies available for violations of the Act:
2. Alternative Remedies Doctrine
Given this statutory framework, Russell argues that the statutory remedy "preempts" KPERS's claim and that no common law cause of action exists. Although his argument is phrased in terms of preemption, Russell seeks a holding that KPERS action is precluded under the alternative remedies doctrine. The alternative remedies doctrine is a substitution of law concept in which a statutory claim is substituted for the common law claim if the substituted statute provides an adequate alternative remedy. Flenker v. Willamette Industries, Inc. 266 Kan. 198, 202, 967 P.2d 295 (1998).
The doctrine was considered by the Kansas Supreme Court when analyzing the Kansas Campaign Finance Act (CFA), K.S.A. 25-4142, et seq. In Nichols v. Kansas Political Action Committee, 270 Kan. 37, 11 P.3d 1134 (2000), the Supreme Court determined that there was no common-law remedy applicable to the plaintiff's allegations. 270 Kan. at 46. Thus, for the plaintiff to have a claim arising from various campaign finance issues, a private cause of action had to be found in the CFA. In making this analysis, the Supreme Court applied a two-part test: first, requiring a showing that the statute was designed to protect a specific group of people rather than to protect the general public and, second, requiring an indication in the legislative history that a private right of action was intended. 270 Kan. at 48, citing Cort v. Ash, 422 U.S. 66, 78, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975); OMI Holdings, Inc. v. Howell, 260 Kan. 305, 340, 918 P.2d 1274 (1996); Jack v. City of Wichita, 23 Kan. App. 2d 606, 611, 933 P.2d 787 (1997). The Kansas Supreme Court reviewed the CFA, which much like the Governmental Ethics Law, sets out the method of procedure for selecting the commission, authorizes the investigation and prosecution of complaints, affords due process protections for such proceedings, and imposes both civil and criminal remedies. The Court concluded:
It is apparent that the legislature designed a comprehensive scheme for enforcement of the CFA. . . . In this case involving alleged campaign contribution violations, too, the only reasonable conclusion that can be drawn is that the legislature intended for alleged violations of the CFA to be processed by the Commission.
The two-part test, which amounts to a formula for ascertaining legislative intent, is superfluous in these circumstances. . . .
270 Kan. at 50-51. The Court found that the CFA was designed to protect the public, not individual candidates. Further, while in that case the legislative history was not documented, the Supreme Court found: "The plain scheme of the CFA, however, makes resort to history of its enactment unnecessary." 270 Kan. at 52. After consideration of these factors the Supreme Court concluded: "The statutorily created wrong is to be remedied in the manner prescribed by the legislature, which in the case of the CFA is via a complaint filed with the Commission." 270 Kan. at 52.
In this case, there is a common-law remedy for breach of trust. Thus, the issue becomes whether the statutory standard enacted in the Governmental Ethics Law replaces the common-law standard and becomes an exclusive remedy. Russell argues that it does and argues that otherwise state officers would be subject to dual and inconsistent standards. KPERS argues that there is no provision for damages and, therefore, there is no adequate substitute remedy resulting in a violation of section 18 of the Bill of Rights of the Kansas Constitution, citing Bair v. Peck, 248 Kan. 824, 839, 811 P.2d 1176 (1991) and Kansas Malpractice Victims Coalition v. Bell, 243 Kan. 333, 350.
A comprehensive scheme of enforcement and of remedies was enacted in the Governmental Ethics Law. In fact, the remedies available, including restitution, are more comprehensive that under the CFA. The Legislative history provided as part of the record on summary judgment reveals that the Governmental Ethics Law is aimed at protecting the public and not at particular individuals or even particular governmental agencies. KPERS does not discuss the impact of K.S.A. 46-290 which allows the Commission to bring an action in Court and to seek equitable remedies and restitution. In Kansas, restitution is to make the victim whole by reimbursing the victim for the actual loss suffered and, in general, is based upon general damage principles and may be more liberal than standards applied in a civil damage suit. See State v. Hinckley, 13 Kan. App. 2d 417, 418, 777 P.2d 657 (1989). Thus, damages can be recovered. However, illustrating the intent to make the action an exclusive remedy, the suit is to be brought by the Commission. Thus, the Court holds that any action for a violation of the Governmental Ethics Law is to be prosecuted by the Commission and no private right of action exists.
KPERS, however, argues that Russell's argument and, thus, the conclusion that there is no private right of action is irrelevant because KPERS is not seeking damages under a claim of violation of the statute. Rather, KPERS's claim is based upon a violation of a fiduciary duty for failing to comply with a statutory standard. KPERS argues that a trustee must comply with all statutory provisions, including the Governmental Ethics Law. In turn, Russell argues that, if this is so, the conclusion of the Public Disclosure Commission must still be given conclusive effect and that the Legislature intended for the only remedy to be the action before the Commission. Following the analysis of the Kansas Supreme Court in Nichols, this Court finds that the plain scheme of the Governmental Ethics Law and its legislative history create a wrong that is to be remedied via a complaint filed with the Public Disclosure Commission. The statute creates an exclusive, statutory remedy.
Hence, on this basis the Court would grant summary judgment in favor of Russell on the claim of a violation of the statutory duty.
3. Conclusive Effect of Decision
Alternatively, the Court will consider Russell's argument that the determination of the Public Disclosure Commission precludes further litigation of the issue. The Public Disclosure Commission reached the determination: "From our investigation, we have concluded there is no evidence to support an allegation of a violation of any law within our jurisdiction." (Defendant's Summary Judgment Exhibit 13, at 040077952). KPERS did not intervene nor seek judicial review of the Public Disclosure Commission's conclusion that there was no evidence to support an allegation that Russell violated any Kansas Governmental Ethics laws. Consequently, Russell argues KPERS is without standing to assert a claim that Russell breached the trust by violating K.S.A. 46-233.
In support of his argument, Russell cites W.S. Dickey Clay Manufacturing Co. v. Kansas Corporation Commission, 241 Kan. 744, 740 P.2d 584 (1987). In that case, the underlying administrative action was a review by the Kansas Corporation Commission of a franchise agreement between the Gas Service Company and the City of Pittsburg, Kansas. Dickey Clay Manufacturing, a substantial user of natural gas, sought to intervene in the KCC proceeding after the hearing, decision and denial of motions for rehearing. Dickey Clay's request was denied as a matter of law and, when renewed, as untimely. Dickey Clay then filed a petition for judicial review. The Supreme Court upheld the district court's determination that it lacked jurisdiction to review the administrative determination. The Court found that Dickey Clay lacked standing because it had not exhausted administrative remedies and was not a party to the proceeding since the motion to intervene had been filed in an untimely manner and denied. 241 Kan. at 750.
Relying on this holding, Russell argues that KPERS's exclusive remedy was in the administrative proceeding and its failure to intervene in the Public Disclosure Commission proceedings bars KPERS's claim. In making this argument, Russell telescopes several steps of analysis into one step. Certainly, if KPERS were seeking to change the Public Disclosure Commission's determination and have it impose remedies, KPERS would have had to intervene, seek determination in the proceedings that Russell had violated terms of the Governmental Ethics Act, and then pursue a judicial review of the determination. Wichita Federal Savings & Loan Association v. Black, 245 Kan. 523, 535, 781 P.2d 707 (1989). However, that does not answer the question of whether the Public Disclosure Commission's determination precludes a collateral determination of the same or similar issues by KPERS.
Kansas follows the general rule stated by the United States Supreme Court in United States v. Utah Construction & Mining Co., 384 U.S. 394, 86 S. Ct. 1545, 16 L. Ed. 2d 642 (1966): "When an administrative agency is acting in a judicial capacity and resolves disputed issues of fact properly before it which the parties have had an adequate opportunity to litigate, the courts have not hesitated to apply res judicata to enforce repose." This rule was adopted by the Kansas Supreme Court. See, e.g., Wichita Federal Savings & Loan Association v. Black, 245 Kan. at 535. The Kansas Supreme Court has also applied the doctrine of collateral estoppel to administrative decisions (Goetz v. Board of Trustees, 203 Kan. 340, 349, 454 P.2d 481 (1969)).
For collateral estoppel to apply, there must have been a prior decision on the merits; the parties must be the same or in privity; the issue must have been determined and necessary to support the judgment; and the quality and extensiveness of the procedure must justify the preclusive effect. Huelsman v. Kansas Department of Revenue, 267 Kan. 456, 458, 980 P.2d 1022 (1999), quoting Jackson Trak Group, Inc. v. Mid States Port Authority, 242 Kan. 683, 690, 751 P.2d 1222 (1988).
In this case, a decision was made on the merits by the Public Disclosure Commission. In Goetz v. Board of Trustees, 203 Kan. 340, 349, 454 P.2d 481 (1969), the Kansas Supreme Court made it clear that the administrative action need not have been appealed to court for there to be collateral effect to issues decided; the estoppel involved is not application of estoppel by judgment. 203 Kan. at 352. Determinations that there is not sufficient evidence to proceed in an administrative action can be a judgment on the merits. Huelsman v. Kansas Department of Revenue, 267 Kan. at 459; City of Manhattan v. Huncovsky, 22 Kan. App. 2d 189, 913 P.2d 227 (1996).
Further, the Court finds that the second requirement of privity is satisfied. In Huelsman, the Supreme Court noted that "[w]hether a party is in privity with another for purposes of collateral estoppel is a policy decision." 267 Kan. at 458. Similarly, in Goetz the Court noted, "a determination of the question as to who are privies requires careful examination into the circumstances of each case as it arises." 203 Kan. at 350-51. In that case, even though there was no legal privity between husband and wife in the sense that a judgment for or against the one would be conclusive as to the other, the Supreme Court found that there was sufficient mutuality for application of the doctrine of estoppel to an administrative determination that a spouse's disability was not work related. The Court determined this decision was conclusive as to a subsequent survivor's claim which was dependent upon the cause of death, which was the same illness as the disability, having been work-related. 203 Kan. at 350-52.
Is there mutuality between KPERS and the Public Disclosure Commission? Regarding KPERS, the Supreme Court has held that "the beneficiaries under the trust are the taxpayers of Kansas. The beneficiaries of KPERS's investments activities are not KPERS members and beneficiaries, but rather Kansas taxpayers and the taxpayers of hundreds of public entities throughout the state who provide retirement plans to their employees through KPERS's provisions." KPERS v. Reimer & Koger Associates, Inc., 262 Kan. 635, 648, 941 P.2d 1321 (1997). Hence, any loss in this case is not a private loss, rather a public loss recoverable on behalf of Kansas taxpayers. Further, the Kansas courts apply the "arms of the same governmental body" test. Huelsman v. Kansas Department of Revenue, 267 Kan. at 460. Utilizing this test, the Court of Appeals determined that the state, as a prosecutor, and the Kansas Motor Vehicle Department were both arms of the same government -- the State -- and, thus, in privity. State v. Parson, 15 Kan. App. 2d 374, 808 P.2d 444 (1991). Applying these principles, the Court finds there is sufficient mutuality for the parties to be in privity for purposes of application of collateral estoppel. In both the proceedings before the Commission and before this court, action was taken by a state entity on behalf of the citizens and taxpayers of Kansas.
Further, KPERS had notice of the action and the right to intervene, but did not.
The next issue is whether the proceeding is of like quality and extensiveness so as to be given collateral estoppel effect. Huelsman v. Kansas Department of Revenue, 267 Kan. 456, 462, 464, 980 P.2d 1022 (1999). The Kansas Supreme Court has determined that an acquittal in a criminal case does not bar subsequent civil, remedial proceedings at the administrative level. Noting the differences of burden of proof and the difference between strict construction of statutes in criminal proceedings and remedial construction in civil proceedings, the Court held a criminal proceeding had neither preclusive effect nor implicated double jeopardy when subsequent remedial proceedings were instituted. 267 Kan. 462-64, citing United States v. One Assortment of 89 Firearms, 465 U.S. 354, 104 S. Ct. 1099, 79 L. Ed. 2d 361 (1984). Here, there were several remedies available to the Public Disclosure Commission, including criminal and civil remedies. The civil remedies include bringing suit in court to seek an injunction, restraining order, restitution, writ of mandamus or other equitable remedy. Thus, the full panalopy of procedures available in this case were available through and as a result of the administrative determination. While a different burden of proof may have applied to any criminal action against Russell, the Commission could have pursued civil remedies carrying the same burden of proof as applicable in this case.
Further, even though there has been extensive discovery spanning several years in this case, the information in the summary judgment record that is material to this issue is basically the same as was available to the Public Disclosure Commission. The record reveals that the Commission knew that Michael Russell had a significant interest in Emblem and that, when asked by Koger about Emblem's management, he had replied favorably. The Commission also had available to it the records showing that Russell and other Emblem investors benefitted from the investment. However, the Commission determined that this did not constitute a violation of the Governmental Ethics Law. The Court finds that the factual record of issues material to the decision was in essence the same as available to this court.
Thus, at least under the circumstances of this case, there was no disparity between the quality and extensiveness of the procedures available.
Hence, the Court finds that under the circumstances of this case the determination by the Public Disclosure Commission that there was no violation of K.S.A. 46-233 is conclusive. Russell can have no liability for breach of the duty under the statute.
C. Common Law Breach of Trust
Again, the Court finds that the Governmental Ethics Law is the exclusive remedy for conflict of interest issues involving public officers. The Court finds that the statute is a comprehensive alternative remedy. Further, if two standards are to be applied, public officers are placed in a situation of believing they have complied with a statute, only to find that they could still have liability. In this case, for example, Russell consulted with an attorney, divested his interest in Emblem, and believed he had complied with the conflict of interest provisions.
The Court finds that the legislature intended for the statute to be the exclusive standard. Hence, Russell can have no liability at common-law.
However, if there remains a common-law standard, the Court finds that the uncontroverted facts establish that there is no liability. In previous rulings, this Court has held that a trustee is not liable simply because the trustee may have personally benefitted from a transaction. KPERS asks the Court to apply a strict, per se liability standard which would require merely a showing that there was self-dealing.
In light of the arguments the Court has re-examined the Kansas authority. Most recently, the Kansas Supreme Court addressed the issue in Gillespie v. Seymour, 250 Kan. 123, 823 P.2d 782 (1991) (Gillespie I). This is the first of four Gillespie cases which have been cited extensively by all parties. In this first decision, the Court was considering the potential liability of several parties, including a co-trustee of two revocable inter vivos trusts. The co-trustee, Dorthea Seymour, became a trustee years after the establishment of the trusts and as a successor trustee to her mother upon her mother's death in 1973. Beginning in 1965, the trusts invested in oil and gas properties through a company known as Arrowhead. Arrowhead was owned by Dorthea and her husband Paul Seymour, Jr. Over a thirteen-year period after Dorthea became a co-trustee, the trusts continued to make yearly investments in the company owned by Dorthea and her husband. The investments were in amounts ranging from $110,000 to $300,000. At trial, actual and punitive damages were awarded against Dorthea. In reviewing the finding of liability against Dorthea as co-trustee, the Court did not impose an absolute prohibition against self-dealing. Rather the Court announced "a duty to be informed on all Trust business and to act in the best interests of the Trust." The Court continued, stating:
She knew the Trust was investing in Arrowhead, a company in which she owned a substantial interest. She should have exercised heightened diligence in ascertaining whether such investments were in the Trust's best interests.
Id. at 145. Hence, the Court did not apply a strict rule.
In Fiedler v. Howell, 6 Kan. App. 2d 565, 631 P.2d 249 (1981), the Kansas Court Appeals also rejected a strict, per se liability rule in conflict of interest situations. The test stated by the Kansas Court of Appeals was whether the interests of the beneficiary are diminished and whether the apparent conflict of interest manifests itself by controlling the guardian's actions. Id. at 567-68. The holding concluded with a requirement that the harm or benefit be caused by the conflict of interest: "We therefore hold that a case-by-case approach must be taken in alleged conflict of interest circumstances to determine whether the beneficiary of the trust is actually harmed or the trustee is rewarded by the dual interests." Id.
Applying this holding to the facts of this case, it is not sufficient to establish that KPERS was harmed by the investment in Emblem. KPERS must establish that this harm resulted because of the conflict of interest situation and because the apparent conflict of interest manifested itself by controlling Reimer & Koger's decision to invest.
In prior rulings, this Court determined that issues of fact existed on this question. Both parties ask the Court to reexamine this finding. Russell also asks the Court to determine that Russell can have no liability as a result of the KPERS board's delegation to Reimer & Koger of the investment decisions regarding the Kansas Investment Fund. Russell argues that Gillespie I is inapplicable because the trustees did not delegate the decision. Although Dorothea was passive to the extent of deferring to her co-trustee aunt's decision, Dorothea participated in the investments and in fact signed the checks. Similarly, in other authority cited by KPERS, the trustee had not delegated the investment decision to a third party. Citing G. Bogert, The Law of Trusts and Trustees § 557, at 156-158 (Rev. 2d ed. 1980) and A. Scott and W. Fratcher, The Law of Trusts § 225, at 414 (4th ed. 1987), Russell notes that at common law a trustee can only be liable for negligent selection or supervision of an agent, not for the negligence, inefficiency or criminal conduct of the agent. KPERS does not allege fault in these respects. Rather, its claims for harm arise from the investment decision made by Reimer & Koger, a decision which required no action by KPERS' trustees. Russell notes that there can be no self-dealing because he was not the one who made the investment. It was Reimer & Koger who made the decision to make the investment. Reimer & Koger did not seek the approval or ratification of the board of KPERS. Koger's testimony and affidavit establish that it was entirely his decision and that Russell did not cause the decision to be made or participate in the decision. With regard to the investigation, even though KPERS may find fault with the efforts, Koger did determine after its due diligence that Emblem was an good investment. The documents before the Court note the various analysis done and the reasons Reimer & Koger felt the investment was advisable. Further, Koger stated that the investment would have been made regardless of whether Russell had been asked about the management team. Given this evidence, KPERS must bring forward evidence to establish that Russell's conflict of interest manifested itself by controlling Reimer & Koger's decision to invest. KPERS presents no such evidence and summary judgment in favor of Russell is appropriate.
D. Release Based upon Reimer & Koger Settlement
Closely related to this issue is Russell's argument that he was released from liability in the settlement of KPERS' claims against Reimer & Koger. On June 7, 2000, KPERS and Reimer & Koger executed a settlement agreement and mutual covenant not to sue. The agreement provided in part:
This Agreement is intended to settle claims that are denied and contested, and it is the result of a compromise between KPERS on the one hand and R&K, Koger and Diebel on the other. It provides rights and benefits solely to the parties specifically named in it and their past or present trustees, heirs, employees, agents, attorneys, representatives, predecessors, successors or assigns as applicable. This Agreement does not settle or compromise any claim any party to it has or may have against any other defendant in any of the Lawsuits or any person(s) other than the parties to the Agreement.
Plaintiff's Summary Judgment Exhibit 78, at page 2.
Although it is clear that this language does not expressly include Russell, he argues that the covenant not to sue has the effect of discharging him because his liability is purely vicarious. He argues that since it was Reimer & Koger who made the investment in Emblem and not the trustees of KPERS he did not self-deal. Russell cites York v. Intrust Bank, N.A., 265 Kan. 271, 962 P.2d 405 (1998), to argue that he has been released:
If the liability of InTrust is purely vicarious within the meaning of the cases cited in Atkinson [v. Wichita Clinic, P.A. , 243 Kan. 705, 707, 763 P.2d 1085 (1988)](see Jacobson v. Parrill, 186 Kan. 467, 351 P.2d 194 [1960], and Wilkerson v. Lawrence, 193 Kan. 92, 391 P.2d 997 [1964]), the covenant not to sue would have the effect of discharging InTrust from liability notwithstanding the express clause stating the "Yorks expressly reserve the right to further prosecute the lawsuit against defendants InTrust Bank, M.B., Sharon West, and Plaza Del Sol Real Estate, Inc." If, however, the Yorks may successfully hold InTrust independently responsible for its own actions and not merely for the conduct of other actors, the covenant not to sue has no effect on InTrust's liability.
265 Kan. at 284.
In Jacobson v. Parrill, the Supreme Court explained:
It has been held that under that [respondeat superior] doctrine the liability of the master to a third person for injuries inflicted by a servant in the course of his employment and within the scope of his authority, is derivative and secondary, while that of the servant is primary, and absent any delict of the master other than through the servant, the exoneration of the servant removes the foundation upon which to impute negligence to the master. . . .
While this court has held that a master may be jointly sued with the servant for a tort of the latter committed within the scope of his authority or employment [citations omitted] they are not joint tort-feasors in the sense that they are equal wrongdoers without right of contribution, for the master may recover from the servant the amount of loss caused to him by the tort, including any sum he has been required to pay a third person on account of it . . .; such payments made by the master, in the absence of fault on his part, are not made by him as a wrongdoer, but by reason of his obligation to answer for the act of the servant. The liability of the servant, on the other hand, arises wholly because of his personal act in doing the wrong; it does not arise out of the relation of master and servant, but exists upon the common law obligation that every person must so act or use that which he controls, as not to injure another.
186 Kan. at 473-74.
In this case the decision to invest was exclusively that of Reimer & Koger. Neither Russell nor KPERS's board had any role in making, approving, ratifying, or consenting to the decision to make the investment. KPERS argues that Russell is independently liable because he participated in the making of the contract and because he did not reveal his conflict of interest to the board of KPERS. The Court has found that, as a matter of law, Russell did not violate the conflict of interest statute. Furthermore, since it was Reimer & Koger who would make the decision, it was Reimer & Koger who needed to be aware of the potential conflict. The record is undisputed that Reimer & Koger was fully aware of all aspects of Russell's interest. Thus, there is no liability independently.
Since KPERS's theory of recovery is that Reimer & Koger's investment of KPERS's funds in Emblem constituted a trustee's use of funds for self-benefit, recovery depends upon attributing the decision to invest to Russell. In other words, the alleged conflict of interest only occurs if the acts of investment are attributed to Russell. Under York, Russell was discharged from liability by the release as to any of Koger's actions in which Koger was acting as the agent and Russell had no separate liability. The Court has found that there is no separate liability as to Russell and he is therefore released as to any vicarious claims.
E. Release from Liability Based on Purchase Agreement
Russell argues that he was released from all claims in this matter based upon the release executed on December 2, 1988, when Cal Labels purchased Emblem. This release has previously been considered by this Court in granting summary judgment to other defendants in this case, specifically Linde Thomson Langworthy Kohn & Van Dyke P.C. and Thomas W. Van Dyke. This decision was appealed and this court's decision was affirmed in KPERS v. Russell, 269 Kan. 228, 5 P.3d 525 (2000).
The Release Agreement was by and among KDF and Olofson, Haney and T&J Investments. In the agreement, Olofson, Haney and T&J Investments were collectively referred to as the "investors". The release provided:
1. Release and Covenant Not to Sue. KDF and the Investors hereby release, remit and forever discharge each of the other parties to this agreement together with any officers, directors, partners, stockholders, employees, principals, agents, counsel, subsidiaries, or controlling persons of the foregoing, together with any heirs, legatees, devisees and personal representatives, (all such affiliated persons being referred to collectively as the "Indemnified Persons") . . . . .
In applying this language in the release agreement, the same rules that apply to the construction of contracts and written instruments apply. If the language of the instrument is unambiguous, there is no room for rules of construction. KPERS v. Russell, 269 Kan. at 236, citing In re Cherokee County Revenue Bonds, 262 Kan. 941, 953, 946 P.2d 83 (1997). Russell argues that the language is ambiguous because it includes officers, directors and stockholders when the named parties are either partnerships or individuals. However, superfluous language does not equate with ambiguity. The language of the release unambiguously defined "Indemnified Persons" to include "officers, directors, partners, stockholders . . . of the foregoing . . . ." The foregoing are KDF, Olofson, Haney, and T&J Investments.
Russell also noted that the Kansas Supreme Court upheld the construing of the Release Agreement with the Asset Purchase Agreement. KPERS v. Russell, 269 Kan. at 236. Paragraph 10(d) of the Asset Purchase agreement made the sale of Emblem's assets contingent upon the execution of a mutual release:
KDF, Merchants, Olofson and Haney shall execute releases for any and all claims, damages and liabilities arising out of the operations of Emblem and the relationship of the parties with Emblem and each other prior to the Closing.
Russell argues that this release requires KDF to execute a release for any and all claims arising out of the operations of Emblem. The Release Agreement specified the type of claims to be released as including:
any and all claims, demands, liabilities, obligations, losses, damages and causes of action, whether known or unknown, based on, arising out of, or directly or indirectly relating to either (i) the business, management or operation of the Emblem or ETL Corp.; (ii) the sale, purchase, ownership, exchange or pledge of any of the securities or debt obligations of Emblem or ETL Corp.; (iii) any action taken by any party or Indemnified Person in its or his capacity as a shareholder, creditor, officer or director of Emblem or ETL; (iv) any personal guarantee of any indebtedness of Emblem or ETL; or (v) any prior negotiations, representations, understandings, agreements, discussions or dealings among any of the parties hereto or other Indemnified Parties (the transactions described in clauses (i) through (v) being collectively referred to as the "Transactions"). The release granted to any party in the foregoing sentence shall be conditioned upon the closing of the sale contemplated under the Purchase Agreement and the performance by the released party of its obligations under the Agreement. The parties further represent, covenant and warrant that, they have not commenced or prosecuted, nor will any of them commence or prosecute, any form of action or proceeding against any party or any Indemnified Person, based on, or arising out of, or directly or indirectly relating to the Transactions.
Russell argues the two documents must be construed together to the effect that Russell was released because of having been a stockholder and director of Emblem. However, to reach this result the Court must add terms and basically rewrite the agreement. The documents do not release Emblem; therefore, its directors and shareholders are not released except for those specifically named.F. Participation in Reimer & Koger's Breach of Trust
The other count against Russell alleges he participated in the breach of trust of Reimer & Koger. At pretrial, KPERS indicated it would be dismissing this count, but the order has not been entered. Therefore, the Court will consider Russell's arguments that he is entitled to full summary judgment.
The elements of participation in a breach of trust are as defined in Gillespie v. Seymour, 14 Kan. App. 2d 563, 796 P.2d 1060 (1990), wherein the Court discussed the theory of participation in a breach of trust by quoting Bogert, Trusts and Trustees § 901 as follows:
"The wrong of participation in a breach of trust is divided into two elements: (1) an act or omission which furthers or completes the breach of trust by the trustee, and (2) knowledge at the time that the transaction amounted to a breach of trust, or the legal equivalent of such knowledge.
"Mere knowledge by a third person that a breach of trust is in process, coupled with a failure to notify the beneficiary or to interfere with the action of the trustee, does not amount to a participation in a breach. Such conduct is inaction which may be reprehensible under the highest standards of ethics, but no legal duty has been violated. On the other hand, if the third party by any act whatsoever assists the trustee in wrongfully transferring the benefits of the trust property to the trustee, another person, or the alleged participant, or aids in destroying or injuring that property, there has been conduct upon which liability can be predicated, if the requisite state of mind existed in the defendant.
"In order that the third party be liable as a participant, it is not necessary to show that he benefited as a result of the transaction."
14 Kan. App. 2d at 569-70, quoting Bogert, Trusts and Trustees § 901 (2d ed. 1982).
Thus, the participation must be active. The evidence is clear that Russell took no part in negotiating the sale; he did not make the decision to invest. Furthermore, the only evidence before the Court is that Russell's opinion as to the quality of management did not cause the investment. Rather, Ken Koger stated that he would have made the investment based upon the information he had gathered even if Russell had not been asked for his opinion. Additionally, the record establishes that Koger, the other investment advisors, and the other investors had confidence in the investment. Consequently, there is no evidence of the type of participation necessary for an independent tort of participation in breach of trust.
CONCLUSION
Thus, the Court finds that Russell's motion for summary judgment should be granted. KPERS's motion is denied. All additional motions are moot and this case is removed from the Court's trial calendar.
IT IS SO ORDERED. No further journal entry is required.
_________________________________________
Marla J. Luckert, District Judge
The undersigned hereby certifies that a copy of the above and foregoing was deposited in the United States Mail, postage prepaid on the _____ day of December 2001, addressed to the following:
Gene Schiltz
77 West Wacker Drive
Suite 4800
Chicago, Illinois 60601
R. Pete Smith
605 West 47th Street
Suite 350
Kansas City, MO 64112
_______________________________________
1. Emblem Tape and Label Company was purchased in December 1982 by ETL Corporation which operated the business through a wholly owned subsidiary named Emblem Graphic System, Inc. Except where specificity is necessary to an understanding of the fact, the parties and the court have generally referred to the business as Emblem.
2. Subsequent amendments added language prohibiting the state officer or employee from being "substantially involved in the preparation of the contract." 1991 Kan. Sess. L. Ch. 150 § 25. This term is defined as meaning "having approved or disapproved a contract or having provided significant factual or specific information or advice or recommendations in relation to the negotiated terms of the contract." Id.
3. The Commission has undergone name changes since the time of the investigation of Russell: first, to the Kansas Commission on Governmental Standards and Conduct (1991 Kan. Sess. L., ch. 150, § 29) and, subsequently, to the Kansas Governmental Ethics Commission (1998 Kan. Sess. Ch. 117, § 21).