Bergeson v. Life Insurance Corporation of America
| Citation | 265 F.2d 227 |
| Decision Date | 16 April 1959 |
| Docket Number | 5977,6000.,No. 5914,5914 |
| Parties | L. Bryan BERGESON, Appellant, v. LIFE INSURANCE CORPORATION OF AMERICA, a corporation, Cleo H. Bullard, Lewis R. Rich, Adrian S. Wright, W. Meeks Wirthlin, Harry D. Pugsley, Lawrence H. Birrell, Herbert J. Zimmerman, and J. Robert Thomas, Appellees. Cleo H. BULLARD, Adrian S. Wright and W. Meeks Wirthlin, Appellants, v. L. Bryan BERGESON and Life Insurance Corporation of America, a corporation, Appellees. Cleo H. BULLARD, Adrian S. Wright, W. Meeks Wirthlin and Lewis R. Rich, Appellants, v. L. Bryan BERGESON and Life Insurance Corporation of America, a corporation, Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
COPYRIGHT MATERIAL OMITTED
George M. McMillan, Salt Lake City, Utah, for L. Bryan Bergeson.
Ray R. Christensen, Salt Lake City, Utah (Moreton, Christensen & Christensen, Salt Lake City, Utah, were with him on the brief), for Lawrence H. Birrell, Herbert J. Zimmerman and J. Robert Thomas.
Calvin Rampton, Salt Lake City, Utah (David K. Watkiss and Harry D. Pugsley, Salt Lake City, Utah, pro se, were with him on the brief), for Harry D. Pugsley.
S. N. Cornwall, Salt Lake City, Utah (Jack B. Darragh, Irene Warr, and Joseph C. Fratto, Salt Lake City, Utah, were with him on the brief), for Cleo H. Bullard, Adrian S. Wright and W. Meeks Wirthlin, and Lewis R. Rich.
No appearance for Life Insurance Corporation of America.
Before HUXMAN, MURRAH, and BREITENSTEIN, Circuit Judges.
These three interrelated appeals arise from a stockholder's derivative suit in which federal jurisdiction is based upon diversity of citizenship. Bergeson, the plaintiff below, sued as a stockholder in, and for the benefit of, Life Insurance Corporation of America.1
The complaint sets out two claims. The first is directed against Bullard, Rich, Wright, Wirthlin and Pugsley,2 as officers and directors of the company and as members of a partnership known as Licoa Agency Company, and against Birrell, Zimmerman and Thomas,3 as partnership members of an accounting firm. It charges that the defendants improperly and negligently caused the company to come into existence with an impaired financial condition.
The second claim goes only against the members of the Licoa group and alleges that they improperly and in violation of their fiduciary duty as corporate officers and directors issued company stock without consideration.
Defendant Pugsley, a member of the Licoa group, raised the defense of res adjudicata and obtained a summary judgment in his favor on each count.
The motions of all defendants for summary judgment on the first claim were sustained on the ground that there was no showing of any damage to the company.
The issues in connection with the second claim were presented to the court for determination on the basis of a stipulation of facts, answers to interrogatories, responses to requests for admission, depositions, and pre-trial conference statements. The court held that the members of the Licoa group, except Pugsley, were jointly and severally liable for the market value of 2,000 shares of stock issued to the Licoa partnership, fixed the market value of the stock at $20 per share, and entered judgment against these defendants in the sum of $40,000.
No. 5914 is an appeal by plaintiff Bergeson from the judgment in favor of Pugsley on both claims and in favor of all defendants on the first claim.
No. 5977 is an appeal by defendants Bullard, Wright and Wirthlin, members of the Licoa group, from the adverse judgment on the second claim. It was filed for protective purposes as defendant Rich, the other group member against whom the judgment was entered, had moved for a new trial and thus stayed the appeal time as to him.
In No. 6000 defendants Bullard, Wright, Wirthlin and Rich all join in an appeal from the adverse judgment on the second claim. This appeal was taken after Rich's motion for new trial had been denied. The only difference between No. 5977 and No. 6000 is that Rich is a party to No. 6000 but not to No. 5977.
The twice supplemented record in these appeals is lengthy and complex. The disorderly method of presentation is so coupled with the inclusion of extraneous material and the omission of relevant material that he who would find a pertinent fact must travel an intricate labyrinth, the paths of which lead more often to confusion rather than understanding. All this is in a case in which, so far as we can ascertain, there is not a single disputed factual issue.
The basic facts are relatively simple. Sometime in 1951 defendants Bullard, Wright, Wirthlin and three others, who are not parties hereto, formed a partnership known as Licoa Agency Company.4 Prior to the events with which we are concerned, one of the three others sold his interest to defendants Pugsley and Rich, each obtaining one-half thereof. The partnership, in April, 1951, caused the organization, under Utah law, of a mutual benefit life insurance company known as Life Insurance Corporation of America, the company for whose benefit this derivative suit was brought. The defendant members of the Licoa partnership were, at varying times, officers and directors of the company so organized. To assist the new company in getting started the partnership advanced to it about $23,800 and supplied furniture and equipment of the value of $4,145. The partnership was to receive overriding commissions on all insurance written by the company. The company engaged in the business of a mutual insurer but its operations were not financially successful.
In May, 1952, the members of the company voted to change from a mutual company to a stock company and adopted amendments to the articles of incorporation to effectuate this change. A permit was obtained by the company from the Utah Securities Commission to make a public offering of its stock and, under the direction of the Utah Insurance Commissioner, an escrow agreement was made with the Utah Savings and Trust Company under which the proceeds from the sales campaign were to be put in escrow. A campaign was then undertaken to sell 20,000 shares of stock at $20 per share. Subscription notes were used which commonly provided for installment payments with no right to collect deficiencies. In the event of default the subscriber would receive only the stock for which he had paid at the $20 offering price and the company could not maintain an action to recover the unpaid installments.
The company employed an accounting firm in which defendants Birrell, Zimmerman and Thomas were partners. The accounting services were performed principally by one McGee who was joined as a defendant but dismissed for lack of service. On June 22, 1953, the accountants made a letter report to the company on its financial condition and therein showed assets in the amount of $214,780. This report was furnished to the Utah Insurance Commissioner who, on July 7, 1953, authorized the company to do business as a stock insurance company and also authorized the release of the escrow. The company then began business as a stock insurer.
The partnership, Licoa Agency Company, was terminated except for the distribution of assets as of January 31, 1954, and then had as its only asset a claim against the company on account of the cash advanced, the equipment furnished, and the claimed overriding commissions. On or prior to March 25, 1954, the exact date appearing nowhere in the record, the directors of the company approved the issuance of company stock to the partnership in satisfaction of the claim asserted by the partnership against the company.
In March, 1954, the company submitted its annual report to the Utah Insurance Commissioner who, after examination, disallowed as admitted assets items totaling $144,062.82 and found that with such disallowance the capital of the company was impaired. The company was given time to make good the deficiency and in October, 1955, a reorganization was effected. Bankers Life and Casualty Company, an Illinois corporation, put $200,000 into the company for approximately 90% of its stock. Stock outstanding before the reorganization was exchanged for new stock in the ratio of one share of new stock for each 13.5324 shares of the old stock.
In May, 1953, plaintiff Bergeson purchased 83 shares of company stock for $1,660. Upon the reorganization these 83 shares were voluntarily exchanged for 6.1334 shares.
We are not impressed with defense arguments that the requirements of Rule 23(b), F.R.Civ.P., 28 U.S.C.A., governing secondary actions by shareholders, have not been satisfied. The trial court found to the contrary and we agree. The defense of laches was interposed by certain defendants and while the trial court recognized some merit in the defense it made no express finding thereon. The defense of laches is primarily addressed to the trial court.5 In the absence of a trial court finding we have carefully examined the record and are convinced that the action is not barred by laches.
The plaintiff's basic contentions in his first claim are that the Licoa group defendants have breached a fiduciary duty which they owed the company as promoters, directors and officers, and that the accountants have breached a similar duty which is claimed to have arisen from the alleged fact that their partner McGee was a promoter and his responsibility is theirs. Corporate officers and directors have a fiduciary or quasi fiduciary relationship to a corporation which requires them to act loyally and in good faith without assuming any position in conflict with the interests of the corporation.6 While the responsibility of promoters is not so clearly defined, they too must act fairly and honestly in their dealings with the corporation.7 This fiduciary duty is said to have been breached by the misconduct of the defendants relating to the financial condition of the company and resulting in the company securing...
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