Wallace, Saunders, Austin, Brown & Enochs, Chartered v. Louisburg Grain Co.

Citations: 16 Kan. App. 2d 30; 818 P.2d 805; 1991 Kan. App. LEXIS 562Docket: No. 65,840

Court: Court of Appeals of Kansas; August 2, 1991; Kansas; State Appellate Court

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Wallace, Saunders, Austin, Brown, Enochs, Chartered (Wallace-Saunders) filed a lawsuit against Louisburg Grain Company, Inc. (Louisburg) and K-M Land Company, Inc. (K-M) for the payment of legal services. Wallace-Saunders is appealing a trial court ruling that dismissed its pleadings and determined that its judgment lien does not take precedence over liens held by Southwest National Bank, the City of Arkansas City, and the City of Hesston, who are intervenors in the case. This case is the eighth involving Louisburg, K-M, and the Andersons to reach appellate courts in Kansas and Missouri, with a history of prior litigation detailed in City of Arkansas City v. Anderson.

Wallace-Saunders had previously represented the intervenors in various lawsuits against the Andersons and their companies from 1986 to 1990. The trial court's focus was on validating Wallace-Saunders' judgment lien against Louisburg and K-M, following their suit filed on December 21, 1988. Louisburg and K-M, through A. Scott Anderson, admitted the debt but claimed inability to pay. A judgment was entered in favor of Wallace-Saunders on January 4, 1989, after the defendants confessed judgment.

Subsequently, Wallace-Saunders attempted to execute the judgment on real property owned by Louisburg in Miami County. The intervenors had prior judgments against A. Scott Anderson and had registered these judgments in Miami County, along with a direct judgment against Louisburg and K-M, which further complicated the issue of lien priority.

K-M wholly owns Louisburg, which is in turn fully owned by A. Scott Anderson and his family. On January 12, 1990, intervenors filed a motion to set aside a writ of execution and deny an order of sale, claiming that Louisburg and K-M were alter egos of Anderson. They alleged extensive litigation against Anderson over the past five years and argued that the judgment obtained by Wallace-Saunders, representing the Andersons, was collusive or fraudulent, referencing the Kansas Supreme Court case City of Arkansas City v. Anderson, which identified five out of six badges of fraud in their situation. The motion alleged that Anderson was attempting to defraud creditors and questioned the propriety of Wallace-Saunders' judgment lien against its own clients.

On May 21, 1990, the district court granted the intervenors' motion, highlighting the appearance of fraud and the defendants' prior litigation. The court recognized a confidential relationship between the plaintiffs and defendants and noted irregularities regarding the timing of the lawsuit and the writ of execution. The court ordered a trial to examine the validity and priority of judgment liens and mandated the production of extensive documentation and correspondence related to Anderson, K-M, and Louisburg from January 1, 1987, to the present, including time records and employment agreements.

On October 8, 1990, the court denied Wallace-Saunders’ request to file an interlocutory appeal regarding an in-camera inspection order. Wallace-Saunders objected to the discovery order, claiming the requested information was protected by attorney-client privilege and the work product doctrine. The intervenors contended that Wallace-Saunders had established a prima facie case of fraud involving the Andersons, asserting that Wallace-Saunders had long represented the Anderson interests, including in transactions invalidated by the Kansas Supreme Court. The court also struck Wallace-Saunders’ pleadings and ruled that its judgment did not take precedence over other liens on the real estate in question.

Wallace-Saunders raised three issues on appeal: (1) the court improperly ordered the production of privileged documents; (2) the court abused its discretion by striking pleadings due to non-compliance with discovery; and (3) the intervenors’ motion was untimely. The central issue is whether the attorney-client privilege applies to the court-ordered discovery. 

K.S.A. 1990 Supp. 60-226(b) outlines the general scope of discovery, allowing parties to obtain relevant, non-privileged information. K.S.A. 1990 Supp. 60-226(c) permits the court to limit discovery through protective orders, while K.S.A. 60-426 defines the attorney-client privilege, stipulating that communications between a lawyer and client are protected unless related to the commission of a crime or tort. The intervenors argued that communications between Wallace-Saunders and the Andersons were not privileged because the law firm was not acting on their behalf when it sued Louisburg and K-M, and that the privilege was waived under K.S.A. 60-426(b)(1). The court agreed, noting that the intervenors sufficiently demonstrated fraud justifying some level of discovery, referencing six indicators of fraud identified by the Kansas Supreme Court.

In the case of City of Arkansas City v. Anderson, the court evaluated the presence of several "badges of fraud" to establish a strong case against the defendants. Wallace-Saunders admitted to representing the Andersons and Louisburg in prior litigation and continues this representation, indicating awareness of the ongoing litigation. Although insolvency of the companies was not definitively proven, circumstances suggested it was likely, and the trial court noted that the disputed property might be one of the companies' last remaining assets. The court also concluded that the transaction in question deviated from normal business practices, as fee collection typically does not involve litigation.

The court referenced the requirement for a prima facie showing of fraud to invoke the 'crime or fraud' exception under K.S.A. 60-426(b)(1). Wallace-Saunders argued that communications with its clients were confidential, but the court ordered the firm to produce all relevant communications from January 1, 1987, onward, citing the potential relevance to the established prima facie case of fraud. The court held that not all communications were privileged, particularly those made outside of professional confidence.

Furthermore, the conflict of interest rules indicated that Wallace-Saunders could not represent both the companies and pursue a lawsuit against them for fee collection, thus rendering all communications discoverable. The court justified the discovery order based on the evidence of fraud and collusion surrounding the judgment by A. Scott Anderson on behalf of Louisburg and K-M. Lastly, the court affirmed that the decision to grant or deny a motion to strike is at the court's discretion, emphasizing that such discretion is not deemed abused if reasonable minds could differ on the court's action.

K.S.A. 60-237(b)(2) outlines sanctions for noncompliance with discovery orders, allowing the presiding judge to impose various remedies, including: (A) establishing facts in favor of the compliant party, (B) preventing the noncompliant party from supporting or opposing claims, or introducing evidence, and (C) striking pleadings, staying proceedings, dismissing the action, or rendering a default judgment against the noncompliant party. The trial court holds significant discretion in enforcing discovery orders, but the Kansas Supreme Court emphasizes that severe sanctions like dismissal or default judgment should only be applied as a last resort when lesser sanctions are inadequate. The court recognizes that stringent sanctions are justified in cases of willful disregard for court orders. 

In this case, Wallace-Saunders failed to comply with a court order to produce documents, citing attorney-client privilege and claiming the documents were not discoverable as they were unrelated to the pending suit. This refusal contradicted the court's order, and the withheld documents were deemed crucial for establishing the relationships among parties, particularly regarding potential fraud or collusion. The trial court's decision was upheld as correct.

Additionally, Wallace-Saunders argued that the motion to set aside the writ of execution was not timely under K.S.A. 60-260(b), which allows relief from a judgment for reasons such as fraud, provided the motion is made within a reasonable time and, for certain reasons, within one year. K.S.A. 33-102 declares any fraudulent conveyances made to hinder or defraud creditors as void.

Wallace-Saunders argues that the intervenors' motion was untimely, citing a one-year limit under K.S.A. 60-260(b) since their judgment was obtained on January 4, 1989, and the motion was filed on January 12, 1990. However, the analysis indicates the intervenors' action was timely. K.S.A. 33-102 supports a public policy against fraudulent transactions, declaring such transactions void, which applies to judgments obtained with intent to defraud creditors. K.S.A. 60-260(b) may not apply to non-parties, and even if it does, it provides relief from final judgments or orders. The intervenors' motion aimed to set aside the writ of execution and deny the order of sale—not to overturn the judgment itself—filed within 2.5 months of the request for special execution, well within the one-year period for challenging an order under K.S.A. 60-260(b). Thus, the motion seeks to prevent enforcement of the judgment based on claims of fraud, rendering the intervenors' action permissible and timely under both K.S.A. 33-102 and K.S.A. 60-260(b). The court affirmed this finding.