Cohen v. Battaglia (Supreme Court)

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 99,793

BARTON J. COHEN, as Trustee of the Barton J. Cohen Revocable Trust,
and A. BARON CASS, III, as Trustee of the A. Baron Cass Family Trust,
u/t/a dated March 22, 1989, as amended,
Appellants,

v.

MARION BATTAGLIA,
Appellee.

SYLLABUS BY THE COURT

1.
Whether a district court erred by granting a motion to dismiss for failure to state a
claim is a question of law subject to unlimited review.

2.
When a district court has granted a motion to dismiss for failure to state a claim,
an appellate court must accept the facts alleged by the plaintiff as true, along with any
inferences that can reasonably be drawn therefrom. The appellate court then decides
whether those facts and inferences state a claim based on plaintiff's theory or any other
possible theory. If so, the dismissal by the district court must be reversed.

3.
Factual disputes cannot be resolved in ruling on dispositive motions.

Review of the judgment of the Court of Appeals in 41 Kan. App. 2d 386, 202 P.3d 87 (2009).
Appeal from Johnson District Court; JANICE D. RUSSELL, judge. Opinion filed February 8, 2013.
Judgment of the Court of Appeals affirming the district court is reversed. Judgment of the district court is
reversed, and the case is remanded to the district court.
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R. Pete Smith, of McDowell, Rice, Smith & Buchanan, P.C., of Kansas City, Missouri, argued the
cause, and Alleen Castellani VanBebber, of the same firm, was with him on the briefs for appellants.

E. Ann Wright, of The Accurso Law Firm, of Kansas City, Missouri, argued the cause, and Louis
C. Accurso, of the same firm, was with her on the briefs for appellee.

The opinion of the court was delivered by

NUSS, C.J.: The trial court dismissed the claims of two trustees alleging Marion
Battaglia tortiously interfered with their existing contracts and prospective business
relationships. A Court of Appeals panel affirmed the dismissal but on a different ground.
We granted review and now reverse because the panel inappropriately resolved factual
issues on a dispositive motion. We therefore remand to the trial court for additional
proceedings.

FACTS

According to the trustees' amended petition, the salient facts are as follows:

Defendant Marion Battaglia owned a 20 percent interest in Baron Development
Company, LLC (BDC), a Kansas limited liability company. He also owned 2,222 shares
of common stock in The Baron Automotive Group, Inc. (BAG). The balance of the BDC
membership interest and the BAG common stock shares were owned by A. Baron Cass
and the Barton J. Cohen Revocable Trust.

On August 30, 2005, Battaglia sold his BDC stock to Cass and the Cohen Trust.
Battaglia also contemporaneously sold his BDC membership interest to BDC via a
"Redemption Transaction." Per its terms, BDC paid Battaglia $419,809 in cash and
issued a promissory note for $1,259,434. Under a related "Pledge Agreement," the note
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was secured for Battaglia by a first-priority security interest in his 20 percent membership
interest in BDC.

Per the "Pledge Agreement," the BDC promissory note to Battaglia became due
and payable in full if either BDC or BAG were ever sold to an unrelated party. Per that
agreement, BDC further promised not to sell any portion of Battaglia's security interest in
membership with BDC without his consent. But his consent was no longer required once
all of the obligations under the note were performed and the "[t]ermination date" of the
agreement was reached.

After these transactions with Battaglia were completed, Cass transferred all of his
interests in BDC and BAG to the A. Baron Cass Family Trust.

In October 2006, the Cohen and Cass trustees and BAG made an agreement with
Group 1 Automotive, Inc. (Group 1). Per the agreement, (1) trustees would sell to Group
1 100 percent of the membership interests in BDC (including Battaglia's 20 percent
security interest) and (2) BAG would sell to Group 1 all of its assets. The trustees
believed Battaglia's consent was not required because the sale of the BDC interests would
occur simultaneously with full payment of the promissory note to him.

Once Battaglia learned of the sale agreements, however, he insisted on knowing
the purchase price and other details. The trustees refused the request because Battaglia
was not a "seller" under the sale agreements, the transactions with Group 1 were
confidential, and disclosure of such information might jeopardize the agreements.
Battaglia responded by arguing that he was entitled to copies of the sale agreements
because of his presidency of BAG and his security interest in BDC. Counsel for trustees
and BAG countered that Battaglia was not entitled to see the documents because
Battaglia was not a shareholder of BAG, a member of BDC, or a director of either. He
therefore had no interest except as the holder of a promissory note.
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Battaglia knew that the sales transaction was supposed to close on January 16,
2007. So 4 days earlier his attorney, Louis C. Accurso, filed a civil action in the circuit
court of Jackson County, Missouri, naming Cohen, the Cohen Trust, Cass, BAG, and
BDC as defendants (the Missouri action). Among other things, the suit alleged that the
trustees breached their fiduciary duties to Battaglia by engaging in self-dealing and
financially manipulating BAG and BDC in order to dilute Battaglia's ownership interest.
That same day, Accurso faxed to Group 1's general counsel a copy of the Missouri action
along with the following letter: "Please find enclosed a file-stamped copy of a lawsuit
filed today on behalf of Marion Battaglia. If you have any questions or comments, please
do not hesitate to contact me."

After receiving the letter and a copy of the Missouri action from Battaglia's
attorney, Group 1 refused to close the transaction without altering the agreements to
include a supplemental indemnification agreement from BDC, the Cohen Trust, and the
Cass Trust. Group 1 also now required that $2,500,000 be placed in escrow for its
benefit. Their demands were met, with the trustees allegedly incurring substantial
attorney fees as a result.

After closing, the Cohen and Cass trustees filed the instant lawsuit against
Battaglia. They alleged claims for tortious interference with a contract, tortious
interference with a business expectancy, and also requested specific performance of the
"pledge agreement." Included in their claims was an allegation that Accurso's conduct in
"[s]ending the letter and a copy of the petition for the Missouri action served no purpose
except to interfere with the sale transactions."

The trial court dismissed the specific performance claim for lack of subject matter
jurisdiction because the claim was so intertwined with those in Battaglia's Missouri
action. That claim's dismissal was never appealed and is no longer in issue.
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Battaglia filed a motion to dismiss the two remaining tortious interference claims
under K.S.A. 60-212(b), which the trial court ultimately granted. The court's decision was
based in part on § 773 of the Restatement (Second) of Torts (1979). The trustees
appealed.

The Court of Appeals panel rejected the rationales of the district court. But the
panel nevertheless affirmed the dismissal on a different ground, i.e., § 772 of the
Restatement (Second) of Torts (1979). See Cohen v. Battaglia, 41 Kan. App. 2d 386,
387-89, 202 P.3d 87 (2009). We granted the trustees' petition for review and obtain
jurisdiction over their § 772 issue under K.S.A. 20-3018(b). But Battaglia did not file a
cross-petition for review of the panel's rejection of the trial court's various rationales
which had favored him.

ANALYSIS

Issue: At the time the instant suit was filed, the Court of Appeals was not in a position to
decide the truth of the claims set out in the Missouri action.

Standard of Review

Whether a district court erred by granting a motion to dismiss for failure to state a
claim is a question of law subject to unlimited review. Campbell v. Husky Hogs, 292
Kan. 225, 227, 255 P.3d 1 (2011). Additionally, when a district court has granted a
motion to dismiss for failure to state a claim, an appellate court must accept the facts
alleged by the plaintiff as true, along with any inferences that can reasonably be drawn
therefrom. The appellate court then decides whether those facts and inferences state a
claim based on plaintiff's theory or any other possible theory. If so, the dismissal by the
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district court must be reversed. Zimmerman v. Board of Wabaunsee County Comm'rs,
293 Kan. 332, 356, 264 P.3d 989 (2011).

Analysis

In the trustees' amended petition, they allege that Battaglia committed tortious
interference with a contract and tortious interference with a prospective business
relationship by both filing the Missouri lawsuit and then later faxing to Group 1 a suit
copy with an attached invitation to inquire. "While these torts tend to merge somewhat in
the ordinary course, the former is aimed at preserving existing contracts and the latter at
protecting future or potential contractual relations." Turner v. Halliburton Co., 240 Kan.
1, 12, 722 P.2d 1106 (1986).

The elements of tortious interference with a contract are: (1) the contract; (2) the
wrongdoer's knowledge thereof; (3) his intentional procurement of its breach; (4) the
absence of justification; and (5) damages resulting therefrom. Burcham v. Unison
Bancorp, Inc., 276 Kan. 393, 423, 77 P.3d 130 (2003).

Similarly, the elements of tortious interference with a prospective business
advantage or relationship are: (1) the existence of a business relationship or expectancy
with the probability of future economic benefit to the plaintiff; (2) knowledge of the
relationship or expectancy by the defendant; (3) a reasonable certainty that, except for the
conduct of the defendant, plaintiff would have continued the relationship or realized the
expectancy; (4) intentional misconduct by defendant; and (5) incurrence of damages by
plaintiff as a direct or proximate result of defendant's misconduct. Burcham, 276 Kan.
393, Syl. ¶ 15.

In the trial court's order addressing Battaglia's motion to dismiss these particular
claims, it rejected two of Battaglia's three arguments: (1) the trustees failed to show that
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there was a breach of contract, and (2) Battaglia did not have specific knowledge of the
terms of the contract between Group 1 and the trustees. Despite prevailing on these
arguments, the trustees asked the Court of Appeals to review them. The panel affirmed.
Cohen, 41 Kan. App. 2d at 396. Because Battaglia filed no cross-petition asking us to
review these panel holdings adverse to him, we do not consider them. See Lee Builders,
Inc. v. Farm Bureau Mut. Ins. Co., 281 Kan. 844, 848, 137 P.3d 486 (2006).

The trial court did adopt Battaglia's third argument—that a lawsuit simply cannot
serve as the basis for a tortious interference claim. The court first embraced Battaglia's
argument that the trustees' lawsuit was premature because the Missouri lawsuit had not
yet terminated in their favor. The trustees asked the Court of Appeals to review this point,
and the panel rejected the trial court rationale. Cohen, 41 Kan. App. 2d at 396. Because
Battaglia filed no cross-petition asking us to review this particular panel holding adverse
to him, we do not consider it. See Lee Builders, 281 Kan. at 848.

The trial court also relied upon Restatement (Second) of Torts § 773, to dismiss
the amended petition. That section states:

"One who, by asserting in good faith a legally protected interest of his own or
threatening in good faith to protect the interest by appropriate means, intentionally causes
a third person not to perform an existing contract or enter into a prospective contractual
relation with another does not interfere improperly with the other's relation if the actor
believes that his interest may otherwise be impaired or destroyed by the performance of
the contract or transaction." (Emphasis added.) Restatement (Second) of Torts § 773
(1979).

The court apparently concluded that by filing the Missouri lawsuit Battaglia
merely was "asserting in good faith [his] legally protected interest"—his first priority
security interest in BDC.

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The trustees asked the Court of Appeals to review this point, and the panel
rejected the trial court rationale. Cohen, 41 Kan. App. 2d at 396. Because Battaglia filed
no cross-petition asking us to review this particular panel holding adverse to him, we do
not consider it. See Lee Builders, 281 Kan. at 848.

While generally rejecting the various rationales of the trial court, the panel did sua
sponte conclude that a different section of Restatement (Second) of Torts § 772, applied.
That section states:

"One who intentionally causes a third person not to perform a contract or not to
enter into a prospective contractual relation with another does not interfere improperly
with the other's contractual relation, by giving the third person

(a) truthful information, or

(b) honest advice within the scope of a request for the advice." (Emphasis added.)
Restatement (Second) of Torts § 772.

After surveying Kansas law and concluding that § 772 should be adopted as the law in
this state, the panel then held that § 772 compelled dismissal of the trustees' amended
petition.

In the trustees' petition for review, they inform us of the single "[i]ssue decided by
court of appeals of which review is sought." They specifically state:

"[p]laintiffs/appellants seek review of the Court of Appeals' determination that
Restatement (Second) of Torts § 772(a) (1979) should be adopted as the law in Kansas
and that its application requires dismissal of Count one and two of the amended petition."

We begin our review of this sole issue by recognizing that not all interference in
"present or future contract relationships is tortious" because a "person may be privileged
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or justified to interfere with contractual relations in certain situations." Turner v.
Halliburton Co., 240 Kan. at 12.

To determine whether a party is justified in interfering, this court has looked at
factors including the (1) nature of the interferer's conduct; (2) the character of the
expectancy with which the conduct interfered; (3) the relationship between the various
parties; (4) the interest sought to be advanced by the interferer; and (5) the social
desirability of protecting the expectancy or the interferer's freedom of action. Turner, 240
Kan. at 13 (citing 45 Am. Jur. 2d, Interference § 27); see also Restatement (Second) of
Torts § 767 (1979) (listing factors to consider in order to determine if the defendant's
conduct was improper).

The panel held that the specifics of § 772 essentially trump consideration of the
general "seven-factor balancing test found in §767." 41 Kan. App. 2d at 404. The panel
specifically held:

"Here, Trustees have attempted to impose liability on Battaglia for Accurso's
conduct in notifying Group 1 of the existence of the Missouri action. Applying § 772(a),
we find Accurso's conduct on behalf of Battaglia conveyed nothing but truthful
information and, thus, is not actionable. For this reason, we affirm the district court's
decision to dismiss." (Emphasis added.) 41 Kan. App. 2d at 404.

The problem is the panel's conclusion that Accurso conveyed only "truthful
information" was effectively a factual determination which is inappropriate on a
dispositive motion. See Seaboard Corporation v. Marsh Inc., 295 Kan. 384, 392, 284
P.3d 314 (2012) ("[F]actual disputes cannot be resolved in ruling on a motion to dismiss;
instead, the well-pleaded facts of the petition must be read in the light most favorable to
the plaintiff."); Osterhaus v. Toth, 291 Kan. 759, 785, 249 P.3d 888 (2011) ("On
summary judgment, [Kansas appellate courts] generally do not resolve factual
questions."); Green Const. Co. v. Black & Veach Engineers & Architects, No. 89-2291-0,
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1990 WL 58780, at *5 (D. Kan. 1990) (denying summary judgment motion because
"truthfulness" under § 772[a] is a jury question).

It is true that the Missouri lawsuit was indeed on file and Accurso conveyed a true
fact when communicating only that point to Group 1. But Accurso did more: he sent a
full copy of the petition to Group 1, and it contained mere allegations, i.e., their
truthfulness had yet to be proven.

Because this litigation was in its early stages when dismissed, we cannot ascertain
the effect of this Accurso communication upon Group 1. ARY Jewelers v. Krigel, 277
Kan. 27, 38-39, 82 P.3d 460 (2003) ("[A] motion to dismiss typically is filed [early] in
the case when many facts are undiscovered and the legal theories may be in flux."). But
as the trustees suggest, it can be inferred that Group 1 refused to close with them not
because of mere notice of a Missouri suit—but because of Battaglia's unsettling
allegations within the suit, e.g., the trustees breached "their fiduciary duties owed to
Battaglia" in order to "dilute the value of [his] net ownership interest" in BAG and BDC.
Among other allegations, the Missouri petition states that the trustees financially
manipulated the companies by "engag[ing] in self-dealing" and "siphon[ing] off profits"
in order to avoid paying their business associate Battaglia his rightful compensation. And
to use a more serious but analogous example, if Battaglia had filed a suit containing
utterly false allegations about the trustees' criminal histories and their complete lack of
business ethics, he could not successfully claim privilege to tortious interference by
arguing that his mere communication about his suit's filing was true.

On a closely related point, we note the panel suggests that because truth is an
absolute defense to defamation, truth should also be an absolute defense to tortious
interference under § 772. Cohen, 41 Kan. App. 2d at 404 ("Under the law of defamation,
no liability exists for true statements."). If we borrow, purely for purposes of argument,
that suggested analog, we observe that the simple act of truthfully notifying another of
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one's lawsuit would be protected from a defamation claim—because the existence of the
suit itself is true. But one's knowingly untrue allegations contained within the petition
would not be protected from such a claim. Otherwise, false and damaging claims
ironically could be made with impunity under the guise of a lawsuit—to the practical
exclusion of other, risky forums and communication media. See Ruebke v. Globe
Communications Corp., 241 Kan. 595, 598, 738 P.2d 1246 (1987) (A communications
company may be liable for defamation if it publishes "a matter that is both defamatory
and false."); cf. K.S.A. 60-211(b) ("the signature of a person [on a pleading] constitutes a
certificate . . . that . . . [3] the allegations and other factual contentions have evidentiary
support." If pleading signed in violation of this section, court shall impose appropriate
sanction.).

One final point bears mention. In the trustees' supplemental brief to this court, they
ask us to reconsider some of the arguments that they presented to the Court of Appeals
but did not raise in their petition for review. We generally do not consider issues that are
not presented in the petition for review. Rucker v. DeLay, 295 Kan. 826, 289 P.3d 1166
(2012) (absent application of a permissive exception for plain error, this court will not
consider any issues not presented in the petition for review or fairly included therein).

Judgment of the Court of Appeals affirming the district court is reversed.
Judgment of the district court is reversed. The case is remanded.

JAMES A. PATTON, District Judge, assigned.