Doyle v. Union Ins. Co.

• Decision Date: 20 March 1979
• Docket Number: No. 41780,41780
• Citation: 202 Neb. 599,277 N.W.2d 36
• Parties: John R. DOYLE, in person, and for all persons similarly situated, Appellee, v. UNION INSURANCE COMPANY, a corporation, et al., Appellants.
• Court: Nebraska Supreme Court

Page 36

277 N.W.2d 36

202 Neb. 599

John R. DOYLE, in person, and for all persons similarly situated, Appellee, v. UNION INSURANCE COMPANY, a corporation, et al., Appellants.

No. 41780.

Supreme Court of Nebraska.

March 20, 1979.

Syllabus by the Court

1. A shareholders' suit proceeding as a cause for damages on behalf of the policyholders and based upon the premise that the corporate directors violated their fiduciary duties is an equitable action and triable de novo in this court.

2. Section 44-224.05, R.R.S.1943, which authorizes the Director of Insurance of the State of Nebraska to approve or disapprove contracts of bulk reinsurance, by which a domestic insurance company operating on other than the stock plan, may cede its business to another licensed insurer, and which statute requires that such contract of bulk reinsurance make a fair and equitable provision for distribution to policyholders of the ceding company of their equity in the surplus funds, does not abrogate the common law duties of corporate directors to policyholders of a mutual insurance company and the approval of the contract by the Director of Insurance does not insulate the directors of the company from liability for violation of their fiduciary duties.

3. Directors are fiduciaries or trustees and must comply with the applicable fiduciary duties in their dealings with the corporation.

4. Where a director has acted in complete good faith and breached no fiduciary duties, then he is not liable for mere mistakes in judgment; but a violation by a director of a duty required by law, whether willful, fraudulent, or negligent, is a breach of trust and the director is liable for any damages proximately caused by the breach.

5. Directors should have a general knowledge of the manner in which the corporate business is conducted; and, where the duty of knowing exists, ignorance because of neglect of duty on the part of a director creates the same liability as actual knowledge and failure to act on that knowledge.

6. A communication between a lawyer and a client is not privileged under the provisions of section 27-503, R.R.S.1943, if the services of the lawyer are sought or obtained to enable or aid anyone to commit or plan to commit what the client knew, or reasonably should have known, to be a fraud.

7. A trustee is required to dispose of trust property on the most advantageous terms which it is reasonably possible for him to secure for the benefit of those whom he represents. Where he breaches this duty, the measure of damages is the difference between the price for which the property was sold and its fair and reasonable market value at the time of the sale.

8. The testimony of expert witnesses is not treated any differently in the fact-finding process than that of witnesses generally when it comes to determining the weight and credibility of the testimony, whether the fact finder is the judge or the jury.

9. The issue of whether void or voidable acts of corporate directors may be ratified by an approving vote of the shareholders arises only when there has been full disclosure to the shareholders of all material facts.

Willkie, Farr & Gallagher, New York City, Crosby, Guenzel, Davis, Kessner & Kuester, Lincoln, for appellants.

M. J. Bruckner and W. Scott Davis, Lincoln, Michael McCormack, Omaha, for appellee.

Heard before BOSLAUGH, McCOWN, CLINTON, BRODKEY, and WHITE, JJ., and BLUE, District Judge, and KUNS, Retired District Judge.

CLINTON, Justice.

This is a class action by John R. Doyle, a policyholder of Union Insurance Company, a mutual company which dealt in property and casualty insurance, on behalf of himself and all other persons who were policyholders of the company on December 31, 1972. The action was commenced on March 16, 1973, in the District Court for Lancaster County against Union and the directors of Union to restrain the defendants from certain actions proposed to be taken on March 19, 1973, and praying for such other and additional relief as might be just and equitable. Equitable relief was denied and the action proceeded thereafter in February 1976, as a cause for damages on behalf of the policyholders, founded upon the premise that the directors had violated their fiduciary duties in "selling" the assets of Union to a newly created stock company for less than their real value.

On July 29, 1977, the court rendered judgment against certain of the defendants in the sum of $2,567,500 and the costs of the action. The cause as to other defendants was dismissed on motion for summary judgment.

The occasion for this action was a plan, since accomplished, originated by Maurice R. Gerleman and William R. Berkley, a New York financier, to "sell" Union (hereinafter Old Union) to a new stock insurance company, hereinafter called New Union, substantially all of the shares of which would be owned by Houston General Insurance Company of Fort Worth, Texas, and Traders and General Insurance Company of Dallas, Texas. These two companies are wholly-owned subsidiaries of Finevest Services, Inc., a New York corporation of which Berkley is the principal owner and operator. The vehicle by which the sale was accomplished was the ceding of Old Union's business to New Union by a contract of bulk reinsurance under the provisions of section 44-224.05, R.R.S.1943. The contract included provision for the purchase of the assets of Old Union by New Union and distribution to the policyholders of their equity in The apparent theory upon which the case was tried was that the directors breached their fiduciary duties to the policyholders by: (1) Acting in their own interest or the interest of some of them; (2) selling the company for less than its fair value; and (3) failing to make complete and adequate disclosures to the policyholders in the proxy statements by which policyholders' approval of the terms of the contract were solicited.

the surplus funds of Old Union. The plan was approved by the Director of Insurance of the State of Nebraska and a majority of the policyholders of Old Union.

The defendants-appellants make 26 assignments of error. The assignments fall into the following categories: (1) The court erred in not finding that the approval of the transaction by the Director of Insurance and his finding that the formula for distribution of policyholders' surplus was fair and equitable insulated the directors from any liability they might otherwise have. (2) The evidence does not support the findings of the court that the defendants were negligent or otherwise failed in their fiduciary duties; and the defendants in any event can be liable only if grossly negligent, and the evidence does not support such a finding. (3) The court erred in admitting into evidence privileged communications between Maurice Gerleman and James Sedgwick, counsel for Gerleman and Old Union. (4) The court erred in not using a proper measure of damages, and the evidence does not support the amount of damages as found by the court. (5) The court erred in not determining that ratifying policyholders are not entitled to share in the judgment proceeds; therefore the amount of the judgment must in any event be reduced. (6) The court erred in not giving appellants credit for a $2,200,000 tax escrow account, which will be distributed to the policyholders in addition to the $8,300,000 dividend approved by the Director of Insurance if an income tax dispute with the Internal Revenue Service is resolved favorably to Old Union.

A shareholders' suit of this kind is an equitable action, which, except for the fact of dissolution of Old Union, would have been for the benefit of the corporation and not the shareholders. It is triable de novo in this court. Rettinger v. Pierpont, 145 Neb. 161, 15 N.W.2d 393. However, when the evidence on material questions of fact is in irreconcilable conflict, we do, in determining the weight of the evidence, consider the fact that the trial court observed the witnesses and their manner of testifying and must have accepted one version of the facts rather than the other. The appellants assert that the court's findings were not based upon resolution of issues involving credibility of witnesses and therefore the trial court's findings are to be accorded no weight. A careful reading of the record shows that questions of credibility and weight are involved. Apparently the court considered a reference of some factual issues for determination by a jury which it has the discretionary power to do in equity cases. § 25-1105, R.R.S.1943; Bank of Stockham v. Alter, 61 Neb. 359, 85 N.W. 300. However, all parties waived the proffered jury trial on such issues. We affirm.

Because of the size of the record, we must at times discuss the evidence in a conclusional way. We treat the assignments in the order in which we have listed them, amplifying the discussion as necessary to embrace the scope of the argument of the appellants.

EFFECT OF THE APPROVAL OF THE DIRECTOR OF INSURANCE

Section 44-224.05, R.R.S.1943, provides that any domestic insurance company operating other than on the stock plan may cede its business to another licensed insurer "by a contract of bulk reinsurance upon compliance with this section." The statute requires that the contract be first filed with and approved by the Director of Insurance and also approved by a majority of the stockholders. It provides that the Director of Insurance shall not approve the plan unless "he finds it to be fair and equitable to the policyholders of Each insurer . . . ." (Emphasis supplied.) It further provides that the contract shall make provision "for Section 44-224.08, R.R.S.1943, provides that all special meetings of policyholders called pursuant to section 44-224.05, R.R.S.1943, shall be called upon a printed notice which must contain, among other things, (1) a brief statement of the substance of the bulk reinsurance contract and (2) a brief statement of the plan for distribution of surplus...