Bergeson v. Life Insurance Corporation of America

• Decision Date: 16 March 1959
• Docket Number: No. C-61-57.,C-61-57.
• Citation: 170 F. Supp. 150
• Parties: L. Bryan BERGESON, Plaintiff, v. LIFE INSURANCE CORPORATION OF AMERICA, a corporation; Cleo H. Bullard; Lewis R. Rich; Adrian S. Wright; W. Meeks Wirthlin; Harry D. Pugsley; Robert L. McGee; Lawrence H. Birrell; Herbert J. Zimmerman; J. Robert Thomas, Defendants.
• Court: U.S. District Court — District of Utah

170 F. Supp. 150

L. Bryan BERGESON, Plaintiff, v. LIFE INSURANCE CORPORATION OF AMERICA, a corporation; Cleo H. Bullard; Lewis R. Rich; Adrian S. Wright; W. Meeks Wirthlin; Harry D. Pugsley; Robert L. McGee; Lawrence H. Birrell; Herbert J. Zimmerman; J. Robert Thomas, Defendants.

No. C-61-57.

United States District Court D. Utah, Central Division.

May 2, 1958.

Judgment Affirmed in Part and Reversed in Part March 16, 1959.

COPYRIGHT MATERIAL OMITTED

George M. McMillan, of McKay, Burton, McMillan & Richards, Salt Lake City, Utah, for plaintiff.

Jack B. Darragh, Salt Lake City, Utah, for defendant Cleo H. Bullard.

Joseph C. Fratto, Salt Lake City, Utah, for defendant Lewis R. Rich. S. N. Cornwall, of Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah, for defendants Adrian S. Wright and W. Meeks Wirthlin.

Harry D. Pugsley, of Pugsley, Hayes & Rampton, Salt Lake City, Utah, pro se.

Ray R. Christensen, of Moreton, Christensen & Christensen, Salt Lake City, Utah, for defendants Lawrence H. Birrell, Herbert J. Zimmerman and J. Robert Thomas.

Judgment Affirmed in Part and Reversed in Part March 16, 1959. See 265 F.2d 227.

CHRISTENSON, District Judge.

This is a derivative action by a stockholder on behalf of the Life Insurance Corporation of America against former directors who allegedly caused the corporation to issue capital stock to themselves of a value of approximately $40,300 without the corporation's receiving any value therefor. The complaint was in two counts. Summary judgment for all defendants was granted on the first count. The second count is against defendants Bullard, Wright, Wirthlin, Rich and Pugsley. Summary judgment was granted Pugsley on the second count, which is more explicitly discussed later in this opinion. Unless otherwise indicated, Bullard, Wright, Wirthlin and Rich will be referred to as "defendants".

The case against the defendants as to the second count has been submitted upon the depositions on file and a stipulation of facts. The stipulation of facts, incorporated by reference as findings of fact, is briefly as follows:

Sometime during 1951 the partnership known as LICOA Agency was formed. The defendants and some persons not parties to this action owned an interest in this partnership. The partnership caused the organization of a mutual benefit life insurance company known as "The Life Insurance Corporation of America." The partnership contributed money, property and services to the company and in return received an agreement by the mutual company to pay commissions on all insurance sales of the company. The defendant members of the partnership were the officers and directors of the company. In the summer of 1952 the policyholders voted to change from a mutual company to a stock company. Application was made to the Securities Commission of the State of Utah to make a public offering of 20,000 shares of stock, par value $10, for $20 a share. A stock sales program was instituted with the knowledge of the Insurance Commissioner of the State of Utah. Plaintiff purchased 80 shares at this time. No indication was given by the partnership to prospective purchasers that the amounts which had been contributed by it up to that time ($23,888.17 in cash and $4,145 in furniture and fixtures) would be treated or enforced as a liability of the mutual company. The books of the mutual company did not show any liability to the partnership for these advances which, on the contrary, had been treated as contributed surplus. The partnership did carry them on its own records as an account receivable from the mutual company. By June, 1953, the mutual company was insolvent and any claim that the partnership might have had against it was valueless.

There was no showing that the investing public or other policyholders of the mutual company were ever informed of the agreement by the mutual company, which purported to be binding on the stock company, to pay commissions to the partnership on all insurance sales. There was no showing that the investors, such as plaintiff, were informed of the purported liability to the partnership. Indeed, it may fairly be inferred from the facts before the Court that quite the opposite was true.

In June, 1953 the partnership executed a note in the amount of $25,000 in favor of the stock company and a stock certificate for 1,250 shares was filled out in favor of the partnership but was never delivered. In March of 1954 the Insurance Commissioner disallowed several assets of the stock company, among which was the $25,000 note of the partnership. The stock company thereupon wrote the note off and cancelled the stock certificates. Meanwhile, the partnership had been dissolved and the only asset which it claimed was a claim against the stock company for $40,300.17 which consisted of the amounts previously advanced and referred to here, and $12,267 in claimed commissions on insurance sales of both the mutual and stock companies.

In March and April, 1954 the directors issued to the partnership as fully paid stock 1,863 shares and in August, 1954 another 127 shares, in satisfaction of the claim of the partnership and for a release from the alleged contract. The shares were distributed in part to the defendants herein as follows: Bullard, 622 shares; Wright, 260 shares; Wirthlin, 260 shares; Rich, 130 shares. The defendants, except Rich, had acted as the board of directors in approving and authorizing the issuance of this stock. Defendant Rich had ceased to be a member of the board of directors on September 26, 1953. The stock company then became insolvent in 1955 and was reorganized. The plaintiff and defendants were given one share in the reorganized company for every 13.5324 shares held by them in the old company. Additional findings of fact, not inconsistent with the stipulated facts, are made in the remainder of the opinion.

Under the facts of this case the corporation has a right of action against the defendants. The rule believed to be controlling here is that announced in the early case of Hayward v. Leeson, 176 Mass. 310, 57 N.E. 656, 49 L.R.A. 725. A corporation can recover from promoters who controlled it the value of stock issued to them in exchange for property in excess of its reasonable value. This is so even though the corporation while controlled by the promoters ratified the transaction. Old Dominion Copper Mining & Smelting Co. v. Bigelow, 188 Mass. 315, 74 N.E. 653, second opinion at 203 Mass. 159, 89 N.E. 193, 40 L.R.A.,N.S., 314 affirmed 225 U.S. 111, 32 S.Ct. 641, 56 L.Ed. 1009. The Tenth Circuit recently followed these cases in San Juan Uranium Corporation v. Wolfe, 1957, 241 F.2d 121, 123, saying, "* * * the technical assent of the corporation through its promoters to the deceptive transaction is no defense to an action by the corporation when freed of its bonds."

The defendants seek to invoke a principle applied in Johnson v. Louisville Trust Co., 6 Cir., 1923, 293 F. 857, and annotated in 56 A.L.R. 396. In this case, however, the original incorporators were the only stockholders and the only ones contemplated. The plaintiff there argued that any transaction between the corporation and its promoters was void if the promoters benefited from the transaction. In answering that contention the Court stated (at page 861):

"Conceding, for the purposes of this opinion, that such would be the result in case of fraud, concealment, or misrepresentation, coupled with mere majority action, or as against new stockholders, such rule would scarcely seem applicable where, as here, there is, as found by the referee, an absence of fraud, misrepresentation, or concealment, where everything was open, where all interested parties concurred, where the corporate action merely carried out the previously existing agreement, * * * where no new stockholders' rights have intervened, and where nothing seems to have been done to mislead or deceive prospective creditors." (Emphasis added.)

In the present case there was fraud within the meaning of Hayward v. Leeson, supra 176 Mass. 310, 57 N.E. 660, wherein the Court stated:

"It is a fraud for promoters to undertake to decide for the future stockholders in the corporation to be organized that one-third of the whole capital stock of that corporation is a fair remuneration for their services as promoters, * * * without disclosing that fact to the subscribers, and without getting their consent to the payment of that remuneration."

It is likewise fraud not to disclose to prospective owners the extent of liabilities of the corporation to the promoters in order to enhance the capital position of the company, and to issue stock to the promoters in satisfaction of this liability. This is particularly true when, by not showing the liability, a sizable deficit is turned into a moderate surplus.

In Taylor v. Citizens' Oil Co., 1918, 182 Ky. 350, 206 S.W. 644, the Kentucky court, in construing constitutional and statutory provisions similar to those of Utah,¹ allowed a corporation to recover from promoters the inflated value of property which they had transferred to the corporation for common stock. Utah has permitted creditors to recover under similar conditions. Henderson v. Turngren, 1894, 9 Utah 432, 35 P. 495; Salt Lake Hardware Co. v. Tintic Milling Co., 1896, 13 Utah 423, 45 P. 200. Although there are no cases directly in point in Utah, in Roberson v. Draney, 1918, 53 Utah 263, 178 P. 35, 37, the court reviewed the general authorities in this area and noted approval of the doctrine of the Old Dominion Copper cases, supra. The Utah court distinguished the case before it on the ground that the evidence was conclusive "that there was neither fraud, concealment, deception, nor misrepresentation on the part of (defendants)." The plaintiff stockholders in that action knew and consented, and in fact, benefited from the transaction of which they complained. It seems reasonable to assume that the Utah court would follow the...