Kansas water group gets second shot at lawsuit against president

Jessica M. Karmasek Sep. 22, 2010, 3:31pm


TOPEKA, Kan. (Legal Newsline) - The Kansas Supreme Court, in an opinion filed late last week, has remanded a case against a private corporation's elected president who is charged with neglecting a system of ditches and canals in favor of his own farm.

The Finney County Water Users Association, also referred to as FCWUA, is a private Kansas corporation originally chartered in 1930. One purpose of the corporation is to provide irrigation water by maintaining a system of ditches and canals that feed water from the Arkansas River to a series of irrigation laterals north of Garden City.

FCWUA employs a full-time "ditch rider," whose job it is to maintain the ditches and canals. The ditch rider is also responsible for directing water into the laterals for delivery to the shareholders.

Leonard Morehouse was the ditch rider from March 1998-March 2003. He was hired with the understanding that he would work a minimum of 40 hours a week. He usually worked longer hours in the summer -- as many as 100 hours in a week -- than in the winter, when he might work as few as 23 hours in a week.

The defendant in the case, Harold Knoll, was elected president of FCWUA in 1995 and has remained in office since. Knoll supervised Morehouse and gave him weekly work assignments.

In December 2001, FCWUA amended its bylaws to allow the president and other board members to employ ditch association employees privately and to require the employing board member to document any such employment.

Subsequently, witnesses disagreed on the amount of time expended and the nature of the work performed by Morehouse on both FCWUA duties and for Knoll's private enterprises.

There was disputed testimony that Morehouse worked on Knoll's farm for some 30-45 days during the summer of 2002 and was not maintaining ditches during that time.

Knoll testified that Morehouse "pitched in and helped" on his farm several times a week "after he had his full days work for the ditch company," but that he never took Morehouse away from his job duties for the ditch company to work on his farm.

Some of Morehouse's work on Knoll's farm was performed without compensation and some was compensated in labor exchange, beef and a check for $500.

Knoll failed to keep records of the time that Morehouse devoted to working on his farm and the time that Morehouse worked on the irrigation system, and there was testimony that Knoll refused to keep such records.

There also was testimony that the plaintiffs, including the Becker family, and other shareholders experienced both flooding and lack of irrigation water because of poor canal maintenance. The plaintiffs alleged they lost crops and were forced to find other sources of irrigation water.

Then, in May 2004, the plaintiffs filed suit against Knoll, seeking damages for breach of a fiduciary duty and seeking his removal as an officer and director of the corporation.

After a bench trial, the district court judge found that the plaintiffs had failed to establish a prima facie case and had failed to demonstrate that Knoll's conduct resulted in damages to the plaintiffs.

The plaintiffs took their case to the Kansas Court of Appeals. The appeals court affirmed the resulting judgment in favor of Knoll, which found that, while the plaintiffs had succeeded in establishing a prima facie case, the factual findings by the district court nevertheless supported judgment for Knoll.

The Court, in its opinion, noted that Kansas sets a higher standard or stricter fiduciary duty for directors and officers of corporations than some jurisdictions.

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

The Court also noted that a director of a corporation "owes a high fiduciary duty to the other stockholders of the corporation."

"This duty of loyalty requires that the best interests of the corporation and its shareholders take precedence over any self-interest of a director, officer, or controlling shareholder that is not shared by the stockholders generally," it wrote.

Justice Eric S. Rosen, who authored the Court's opinion, wrote in the decision filed on Friday that the standards applied in both of the lower courts were "erroneous."

The judgment of the appeals court affirming the district court was affirmed in part and reversed in part, the Court ruled.

The Court also ordered the judgment of the district court reversed and the case be remanded to the district court "with instructions to reconsider its findings of fact and conclusions of law in light of
the properly allocated burden of proof."

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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