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No. 00-603
IN THE SUPREME COURT OF THE STATE OF MONTANA
2001 MT 238
ELIZABETH KAUFFMAN-HARMON and REBECCA KAUFFMAN-PIOTROWSKI,
on behalf of all shareholders of Kauffman Land & Livestock, a Montana corporation,
Plaintiffs and Appellants,
v.
DAVID V. KAUFFMAN, JR., individually, KAUFFMAN LAND & LIVESTOCK,
a Montana corporation; and DAVID V. KAUFFMAN, SR., and RUTH E. KAUFFMAN,
jointly and severally,
Defendants and Respondents,
and
DAVID V. KAUFFMAN, JR., individually,
Third-Party Plaintiff,
v.
KAUFFMAN LAND & LIVESTOCK, a Montana corporation,
Third-Party Defendant.
APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
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The Honorable Ted O. Lympus, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Bradley D. Dantic, Worden, Thane & Haines, Missoula, Montana
For Respondent David V. Kauffman, Jr.:
Paul A. Sandry, Warden, Christianson, Johnson & Berg, Kalispell, Montana
For Respondents David V. Kauffman, Sr., and Ruth E. Kauffman:
James C. Bartlett, Attorney at Law, Kalispell, Montana
Submitted on Briefs: March 7, 2001
Decided: December 3, 2001
Filed:
__________________________________________
Clerk
Justice Jim Regnier delivered the Opinion of the Court.
¶1 Elizabeth Kauffman-Harmon and Rebecca Kauffman-Piotrowski (hereinafter "Elizabeth
and Rebecca") appeal from the Findings of Fact, Conclusions of Law and Order issued by
the Eleventh Judicial District, Flathead County on June 16, 2000.
¶2 Although the appellants present seven issues on appeal, we find one issue dispositive:
Do principles of equity, such as judicial estoppel and the clean hands doctrine, prevent Dr.
David V. Kauffman, Sr., and Ruth E. Kauffman from claiming the corporation's assets and
stock are held in resulting and constructive trusts?
¶3 We reverse and remand for further proceedings.
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BACKGROUND
¶4 Kauffman Land and Livestock is a family controlled and operated corporation which
has been in existence for approximately 25 years. The four children of Dr. David V.
Kauffman, Sr. (hereinafter "Dr. Kauffman"), and Ruth E. Kauffman (hereinafter "Mrs.
Kauffman") each own 25% of the stock of the corporation. The four shareholders are
David V. Kauffman, Jr. (hereinafter "David"), Stephen L. Kauffman (hereinafter
"Stephen"), Elizabeth and Rebecca.
¶5 Dr. and Mrs. Kauffman have resided in Flathead County since the 1960's when Dr.
Kauffman established a medical practice there. Dr. and Mrs. Kauffman acquired several
pieces of real property in the Flathead Valley over the years while Dr. Kauffman was
practicing medicine. In 1975, Dr. and Mrs. Kauffman consulted an attorney, John Lence,
regarding their business affairs and estate planning. After reviewing their assets, Lence
informed them that they faced severe estate tax consequences if they wished to transfer
assets to their children upon their death. Lence recommended the formation of a
corporation as the simplest and best estate plan and the best vehicle to preserve the estate.
He indicated that they could transfer their assets to the corporation, receive shares of
stock, and then gift the shares of stock to their children to avoid estate taxes.
¶6 Dr. and Mrs. Kauffman formed the corporation entitled Kauffman Land and Livestock
on or about January 19, 1976, and transferred several large pieces of real property to the
corporation. In consideration for the assets, the corporation issued 10,000 shares of
common stock to Dr. Kauffman and 10,000 shares of common stock to Mrs. Kauffman.
The corporation's business activities consisted of farming, ranching, grazing and real
estate rental. The corporation was primarily formed to preserve Dr. and Mrs. Kauffman's
assets from possible future creditors since Dr. Kauffman did not carry medical malpractice
insurance and to serve as estate planning vehicle through which estate taxes could be
minimized.
¶7 In 1986, Dr. Kauffman faced two medical malpractice lawsuits. In one of the cases, a
judgment was entered for approximately $50,000 against Dr. Kauffman. Shortly
thereafter, while on a family ski vacation, Dr. Kauffman voluntarily gifted to Mrs.
Kauffman all of his shares of the corporation's stock. The paperwork was backdated so
that it appeared that the stock transfer occurred significantly prior to the 1986 judgment.
During a subsequent debtor's examination hearing relating to the judgment, Dr. Kauffman
testified that he had no rights or interest in the corporation and no substantial assets in his
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control or ownership. Based upon Dr. Kauffman's testimony, the tort victims and their
attorney concluded that there were no assets to execute on to satisfy the judgment.
¶8 After Dr. Kauffman's stock transfer to Mrs. Kauffman, Mrs. Kauffman gifted her full
stock in the corporation to her children over a number of years. Currently, each of the four
children owns one-quarter of the stock and has served as one of four directors. Mrs.
Kauffman acknowledged that she knowingly and voluntarily gifted the stock to her
children and did not place any conditions, restrictions or limitations on her children's stock
ownership.
¶9 A dispute arose among the shareholders regarding management of the corporate
properties and the amount of debt owed to David by the corporation. On July 10, 1998,
Elizabeth and Rebecca instituted a shareholder derivative action and petitioned the court
for judicial review and determination of the following: the debt owed to David, the fair
and appropriate method of payment of the debt, whether David committed a breach of his
fiduciary duties, whether David should be removed as an officer and director of the
corporation, and a resolution of the shareholders' deadlock. After the case commenced,
David called a special meeting of the board of directors to issue additional stock to himself
and a transfer of certain corporate properties to his parents. Elizabeth and Rebecca
objected. Subsequently, the District Court issued a temporary restraining order and
preliminary injunction to enjoin the issuance of stock to David and the transfer of
corporate assets to Dr. and Mrs. Kauffman.
¶10 On July 28, 1999, Elizabeth and Rebecca filed a second amended petition which
included a request that the court set aside the transfer of certain corporate property to Dr.
and Mrs. Kauffman. On September 8, 1999, David responded and also filed a third party
complaint against the corporation seeking payment of his debt. On October 27, 1999, Dr.
and Mrs. Kauffman filed a responsive pleading, which was amended on December 1,
1999, to allege that the corporation's assets and stock were held in a resulting or
constructive trust. Dr. and Mrs. Kauffman also filed a motion to bifurcate the trial
requesting that the court order a separate trial solely on their claims. David supported the
motion; however, Elizabeth and Rebecca opposed the motion. The court bifurcated the
trial and Dr. and Mrs. Kauffman's claims were tried by the court sitting without a jury. On
June 16, 2000, the District Court issued its Findings of Fact, Conclusions of Law and
Order in which it concluded that the transfers of assets and shares of stock by Dr. and Mrs.
Kauffman created a resulting trust and a constructive trust and ordered that the
corporation's assets and stock be conveyed to Dr. and Mrs. Kauffman. Elizabeth and
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Rebecca appeal from the order bifurcating the trial and the court's conclusion that resulting
and constructive trusts were created.
STANDARD OF REVIEW
¶11 Dr. and Mrs. Kauffman's claims involving the existence of resulting and constructive
trusts are claims in equity. See § 72-33-218, MCA, and § 72-33-219, MCA. Therefore, in
reviewing this matter, we are guided by § 3-2-204(5), MCA, which requires that in equity
cases and in matters of an equitable nature, we review "all questions of fact arising upon
the evidence presented in the record. . . ." In reviewing the findings of fact, we determine
if the court's findings are clearly erroneous; and, in reviewing the conclusions of law, we
determine if the court's interpretation of the law is correct. Hansen v. 75 Ranch Co., 1998
MT 77, ¶ 20, 288 Mont. 310, ¶ 20, 957 P.2d 32, ¶ 20 (citations omitted). Further, this
Court, sitting in equity, is empowered to determine all questions involved in the case and
to do complete justice, including the power to fashion equitable results. Blaine Bank of
Montana v. Haugen (1993), 260 Mont. 29, 35, 858 P.2d 14, 18 (citation omitted).
DISCUSSION
¶12 Do principles of equity, such as judicial estoppel and the clean hands doctrine, prevent
Dr. David V. Kauffman, Sr., and Ruth E. Kauffman from claiming the corporation's assets
and stock are held in resulting and constructive trusts?
¶13 Elizabeth and Rebecca argue that Dr. and Mrs. Kauffman are barred from claiming
that resulting and constructive trusts exist pursuant to equitable principles of judicial
estoppel and the unclean hands doctrine. We have consistently recognized a fundamental
principle of equitable jurisprudence that one who seeks equity must do equity. See Hall v.
Lommasson (1942), 113 Mont. 272, 124 P.2d 694. Consequently, we must first address
Elizabeth and Rebecca's equitable arguments before we can ascertain whether resulting
and constructive trusts were created.
¶14 Elizabeth and Rebecca first argue that Dr. and Mrs. Kauffman should be barred from
their claims under the long-recognized equitable doctrine of judicial estoppel. We agree in
part, whereas we find that Dr. Kauffman is barred by judicial estoppel from raising his
claims that resulting and constructive trusts exist. However, no evidence was presented to
indicate that Mrs. Kauffman's claim should be barred by the doctrine of judicial estoppel,
as the evidence does not establish that Mrs. Kauffman made a past judicial statement
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contradicting her current claim.
¶15 The fundamental purpose of judicial estoppel is to protect the integrity of the judicial
system and thus to estop a party from playing "fast and loose" with the court system. See
Fiedler v. Fiedler (1994), 266 Mont. 133, 140, 879 P.2d 675, 679 (citations omitted).
Hence, the doctrine of judicial estoppel binds a party to his or her judicial declarations,
and precludes a party from taking a position inconsistent with previously made
declarations in a subsequent action or proceeding. Fieldler, 266 Mont. at 139, 879 P.2d at
679 (citation omitted). See also In re Raymond W. George Trust, 1999 MT 223, ¶ 51, 296
Mont. 56, ¶ 51, 986 P.2d 427, ¶ 51. Although judicial estoppel may be regarded as a form
of estoppel, "it is not strictly one of estoppel, but partakes rather of positive rules of
procedure based on manifest justice and, to a greater or lesser degree, on considerations of
the orderliness, regularity, and expedition of litigation", and "those elements such as
reliance and injury, or prejudice to the individual, which are generally essential to the
operation of equitable estoppel, may not enter into judicial estoppel, at least not to the
same extent". Rowland v. Klies (1986), 223 Mont. 360, 367, 726 P.2d 310, 315 (quoting
31 C.J.S. Estoppel, § 117B, pp. 623-627 (1964)).
¶16 A party claiming that judicial estoppel bars another party from re-litigating an issue
must show that: (1) the estopped party had knowledge of the facts at the time he or she
took the original position; (2) the estopped party succeeded in maintaining the original
position; (3) the position presently taken is inconsistent with the original position; and (4)
the original position misled the adverse party so that allowing the estopped party to change
its position would injuriously affect the adverse party. George Trust, ¶ 51 (citing Fiedler,
266 Mont. at 140, 879 P.2d at 679). We conclude that all four elements have been met and
preclude Dr. Kauffman from asserting his equitable claims.
¶17 First, Dr. Kauffman was aware of the facts at the time the original position was taken.
He knowingly transferred all of his assets to his wife and then testified that he owned no
rights, title, or interest in and to any of the corporation's stock or assets during a debtor's
examination hearing conducted after the judgment was entered against him in the medical
malpractice action.
Second, he successfully maintained this position because no claim was made to pierce the
corporate veil nor was an attempt made to levy a judgment against the corporation's assets.
Third, Dr. Kauffman's current equitable claims of resulting and constructive trusts are
inconsistent with his previous position that he did not have ownership or control of any
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corporate assets. Since Dr. Kauffman claimed that he had no interest in the corporation or
its assets during a previous legal action, he is now barred from claiming an interest in the
corporation or its assets.
¶18 Finally, Dr. Kauffman's original position misled both the plaintiffs in the medical
malpractice action and in the current action. Relying on Dr. Kauffman's testimony at the
debtor's examination hearing, the plaintiffs in the medical malpractice action believed Dr.
Kauffman had no assets in the corporation to execute on to satisfy the judgment. Similarly,
evidence presented in this case shows that Elizabeth and Rebecca were misled by Dr.
Kauffman's position in that they both believed that they were full shareholders in the
corporation. Both Elizabeth and Rebecca testified that they had expended significant time
and money as shareholders in the corporation. Clearly, the plaintiffs in both the medical
malpractice case and the case at hand relied to their detriment on Dr. Kauffman's prior
judicial declarations that he had no right to or control over the assets of the corporation.
Accordingly, we conclude that Dr. Kauffman is barred by judicial estoppel from raising
equitable claims that resulting or constructive trusts exist.
¶19 Elizabeth and Rebecca also claim that Dr. and Mrs. Kauffman are further barred from
bringing their claims by the clean hands doctrine. The doctrine of clean hands provides
that "[p]arties must not expect relief in equity, unless they come into court with clean
hands." See In re Marriage of Burner (1991), 246 Mont. 394, 397, 803 P.2d 1099, 1100
(citations omitted). Thus, "[n]o one can take advantage of his own wrong." Section 1-3-
208, MCA. Accordingly, this Court will not aid a party whose claim had its inception in
the party's wrongdoing, whether the victim of the wrongdoing is the other party or a third
party. See Murphy v. Redland (1978), 178 Mont. 296, 309, 583 P.2d 1049, 1056 (citation
omitted).
¶20 Likewise, the Restatement (Second) of the Law of Trusts, § 422 (1957), states:
Where the owner of property transfers it inter vivos upon an intended trust which
fails for illegality, a resulting trust does not arise if the policy against permitting
unjust enrichment of the transferee is outweighed by the policy against giving relief
to a person who has entered into an illegal transaction.
¶21 Further, Comment a to the Restatement (Second) of the Law of Trusts, § 422 (1957),
provides:
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The rule stated in this Section is based upon the weighing of the interests of the
parties and the public interest. As between the parties it is just that a resulting trust
should be imposed in order to prevent the transferee from being unjustly enriched at
the expense of the transferor. The interest of the public, however, may require that
the transferee be permitted to enrich himself unjustly at the expense of the
transferor. The result of the refusal of the court to enforce a resulting trust is not
only to penalize the transferor but to enrich the transferee. . . . It is impossible to
state a definite rule which will determine in all cases whether a resulting trust will
be imposed or not, since the court will consider all the circumstances involved in the
particular case.
¶22 Accordingly, a court of equity generally will not aid one who has caused title to his or
her property to be transferred to another for the purpose of defrauding creditors. The
evidence in this case reveals that Dr. and Mrs. Kauffman knowingly transferred assets to
the family corporation, in part, to circumvent judgment creditors and in part, to avoid
estate taxes. Here, the evidence also establishes that Dr. Kauffman failed to carry
insurance on his medical practice and subsequently protected his corporate assets from
judgment creditors by transferring his ownership interest in the corporation to his wife.
Further, when Dr. Kauffman transferred his stock to Mrs. Kauffman, the stock certificates
were backdated to appear that the stock transfer occurred significantly prior to the medical
malpractice judgment to prevent his victims in that case from levying those assets.
Subsequently, Dr. Kauffman specifically testified that he had no control or ownership over
the assets of the corporation to prevent the judgment creditors from reaching those assets.
Consequently, Dr. and Mrs. Kauffman's willful actions are sufficient to invoke the clean
hands doctrine.
¶23 Moreover, Elizabeth and Rebecca will not be unjustly enriched by the utilization of
the clean hands doctrine. Elizabeth and Rebecca were gifted stock in the corporation,
accepted the stock ownership and have relied on their ownership over the past number of
years. As shareholders, Elizabeth and Rebecca have expended substantial amounts of
personal time and finances. Dr. and Mrs. Kauffman cannot now attempt to controvert their
previous actions which disposed of their assets to defraud Dr. Kauffman's creditors and
prevent execution on their property.
¶24 We thus conclude that Dr. and Mrs. Kauffman are barred from asserting their claims
by the clean hands doctrine. To deny such relief would permit Elizabeth and Rebecca, as
well as the other shareholders of the corporation, a gross wrong at the hands of Dr. and
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Mrs. Kauffman who brought about this condition. See § 1-3-208, MCA.
¶25 Because Dr. and Mrs. Kauffman's claims are barred we need not address subsequent
issues. We remand this case for a full trial on the remaining claims.
¶26 Reversed and remanded for further proceedings consistent with this Opinion.
/S/ JIM REGNIER
We Concur:
/S/ TERRY N. TRIEWEILER
/S/ W. WILLIAM LEAPHART
/S/ JAMES C. NELSON
/S/ PATRICIA COTTER
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