Family Case Review: Kesling v. Kesling

Case: Andrew Kesling v. Dorothy Kesling, Adam Kesling and Emily Kesling

Case Summary – by Mike Kohlhaas 

HELD:  After a dissolution court purportedly expanded the issues for arbitration to include disputes between a Husband and his Siblings in their roles as fellow shareholders in two closely-held corporation, the Indiana Court of Appeals held that the arbitrator exceeded the scope of her authority by denying Husband’s motion to terminate arbitration after Husband and Wife appeared and advised the arbitrator that they had reached a settlement with regard to their custody, child support, and property division issues.  The Court further held that Husband was entitled to request a jury trial and could not be compelled to submit to arbitration in regard to Siblings’ claim that he had breached a fiduciary duty in his capacity as majority shareholder.

FACTS AND PROCEDURAL HISTORY:  In September, 2005, Wife filed a petition for dissolution of marriage.  Then, in August, 2007, Wife filed a Motion for Joinder of Persons Needed for Just Adjudication, seeking to join Husband’s Siblings as parties to the dissolution action.  After the motion was denied, the Siblings filed a Motion to Intervene, alleging that Husband as a majority shareholder of Company II, had sold a hotel owned by Company II without providing notice of the closing date to Wife or Siblings.  The Siblings further alleged that Husband sought to use the proceeds to repay a loan made to Company II from Company I rather than make a shareholder distribution to Siblings and divide Husband’s shareholder distribution with Wife.  The Siblings requested that they be permitted to intervene in the dissolution action for the limited purpose of providing for an accounting and distribution of such sale proceeds as per Company II’s operating agreement and an agreement of Company II’s counsel.  After a hearing in August, 2007, the dissolution court granted Siblings the right to intervene for the limited purpose of seeking injunctive relief as minority shareholders in net proceeds realized from the sale of a certain hotel which were commingled with marital assets until such time as the marital property interests in those proceeds could be determined vis-a-vis their interests as minority shareholders.  Shortly thereafter, the dissolution court ordered Husband to make distribution of funds in such amount and at such time as consistent with the Motion of Company II.  Contemporaneously, the order for intervention and a temporary restraining order were dissolved.

In July, 2008, Siblings, as minority shareholders of Company I, filed a second Motion to Intervene, for the limited purpose of protecting their rights as shareholders and preventing the [Internal Revenue Code] 1031 land exchange with regard to Company I.  Siblings alleged that Husband had executed a Letter of Intent to sell a hotel owned by Company I and sought to accomplish a non-taxable transfer through a “1031 exchange” and thereby avoid distribution of proceeds due Siblings and Wife.  Siblings advised the dissolution court that they had previously intervened on a “different issue.”  The dissolution court granted the intervention of Siblings, for the limited purpose of providing for an accounting and distribution of any sale proceeds related to Company I and regarding the disputed issue of the 1031 land exchange proposed by the Letter of Intent.

In May, 2009, Husband and Wife filed a stipulation for the appointment of an arbitrator.  In August, 2010, Husband, Wife, and Siblings appeared before the arbitrator. Husband and Wife, by their respective counsel, advised the arbitrator that they had reached a settlement with regard to their custody, child support, and property division issues. Husband further advised the arbitrator that his proposal for the 1031 exchange had been withdrawn and thus the issue was moot. He moved to terminate the arbitration. The Siblings responded that they were entitled, by trial court order, to an accounting of the funds distributed. The arbitrator denied Husband’s motion to terminate arbitration and permitted the Siblings to present evidence regarding shareholder distributions.  The arbitrator then found that Husband had

received an overpayment and ordered him to refund to Company I and make a distribution to one of the Siblings.

On review, the Court stated that parties are only bound to arbitrate those issues that by clear language they have agreed to arbitrate, and arbitration agreements will not be extended by construction or implication to cover any other matters.  The Court found that the dissolution court purportedly expanded the issues for arbitration to include disputes between Husband and Siblings in their roles as fellow shareholders in two closely-held corporations. The Court also found it apparent that Husband did not consent to arbitration of such breadth.  The Court determined that the essence of the Siblings’ claim was that Husband had breached a fiduciary duty in his capacity as majority shareholder.  As such, the Court ruled that Husband was entitled to request a jury trial and could not be compelled to submit to arbitration.

OUTCOME: The Court of Appeals reversed the judgment entered upon the arbitration award.

To view the text of this opinion in its entirety, click here: Andrew Kesling v. Dorothy Kesling, Adam Kesling and Emily Kesling

 

Mike Kohlhaas is a partner in Bingham McHale’s Private Client Group. Within the Private Client Group, Mike concentrates his practice in a variety of personal representations, including the areas of matrimonial law and wealth transfer planning. Mike has represented many of the wealthiest individuals and families in Indiana, and from across the country, in capacities that range from the usual (divorce, wealth transfer, or tax counsel) to the novel (counseling clients in response to attempted blackmail schemes, clients targeted in criminal investigations, etc.)

Mike has been named a multi-year recipient of the Indiana Super Lawyers Rising Star award after being nominated and selected by his attorney peers within the legal community. The “Rising Star” recognition is awarded to the top attorneys in Indiana under the age of 40, and no more than 2.5% of eligible lawyers are selected to the list.

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