Boland v. Engle, 96-1929
| Decision Date | 12 May 1997 |
| Docket Number | No. 96-1929,96-1929 |
| Parties | John C. BOLAND, Plaintiff-Appellant, v. Clyde Wm. ENGLE, Phillip J. Robinson, Harold Sampson, Gerald M. Tierney, Richard H. Kendall, Everett A. Sisson, J. Frank Surface, Forest D. Richardson, Jr., Wisconsin Real Estate Investment Trust, Hickory Furniture Company, Defendants-Appellees, and Indiana Financial Investors, Inc., Nominal Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Laurence D. Paskowitz, Roy L. Jacobs, Michael P. Fuchs (argued), Wolf, Popper, New York City, Richard N. Bell, Cohen & Malad, Indianapolis, IN, for Plaintiff-Appellant.
William D. Heinz (argued), Patricia A. Bronte, Norman M. Hirsch, Jenner & Block, Chicago, IL, Harry L. Gonso, Ice, Miller, Donadio & Ryan, Indianapolis, IN, for Defendants-Appellees Clyde W. Engle, Harold Sampson, Everett A. Sisson.
Gerald M. Tierney, Chicago, IL, for Defendant-Appellee Wisconsin Real Estate Investment Trust.
Craig D. Doyle, Leeuw, Plopper & Beeman, Indianapolis, IN, for Defendant-Appellee Indiana Financial Investors, Inc.
Before WOOD, Jr., KANNE, and ROVNER, Circuit Judges.
John Boland is a shareholder of Indiana Financial Investors, Inc. (Indiana Financial). Boland brought suit alleging that its president and chairman of the board, Clyde Engle, has masterminded a complicated scheme to "upstream" the assets of Indiana Financial to other corporations controlled by Engle. Boland's complaint set forth seven claims: two derivative counts (i.e., on behalf of Indiana Financial) alleging that Indiana Financial's directors and its parent company had breached their common-law fiduciary duties; two derivative counts for breach of contract against the companies to which Engle has allegedly spirited away Indiana Financial's assets; and three direct counts (i.e., on behalf of Boland himself) against Indiana Financial's directors and its parent company alleging violations of the Investment Company Act (ICA) of 1940, 15 U.S.C. sec.sec. 80a-1 to -64.
The individual defendants moved for dismissal for failure to state a claim, and the District Court dismissed the five counts against them. The District Court held 1) that the common-law fiduciary duty counts required Boland first to demand action from Indiana Financial's board of directors, and 2) that the ICA counts should have been pleaded derivatively. Boland then requested the District Court to dismiss all remaining counts so he would have a final judgment from which to appeal. Because we find the District Court's persuasive reasoning to have resolved the issues, we affirm the judgment. We also hold that when Boland requested dismissal he forfeited any opportunity after this appeal to go back and make demand on the Indiana Financial board.
Clyde Engle operates a corporate pyramid of interconnected public and private companies. Indiana Financial is an Indiana corporation that has traditionally managed a diversified portfolio of real estate investments. Although Indiana Financial is a public corporation and had 617 shareholders in November 1993, the company lies at the bottom of Engle's pyramid. Boland alleges that Engle has shifted assets from Indiana Financial up the corporate pyramid, first to Indiana Financial's corporate parent, Hickory Furniture Company (Hickory), and ultimately to Engle himself through two more intermediate corporations. In the place of these assets, Engle has left behind, according to Boland, only promissory notes which Engle's companies never repay to Indiana Financial. Boland alleges that Indiana Financial's net worth has fallen from over $11 million in 1989 to only $205,000 in 1993.
As to the details of this alleged scheme, Engle has an effective ownership interest in Indiana Financial of approximately 32 percent. 2 Engle has been a director of Indiana Financial since 1980, its chairman since 1986, and its president since 1992. Defendant Harold Sampson has also been a director since 1986, but defendants Everett A. Sisson and J. Frank Surface were directors only between 1986 and 1992. All four of these defendants have also held director or officer positions in other companies in Engle's corporate pyramid. 3
After writing a Fortune magazine article in 1984 stating that Engle was misusing his control of Indiana Financial and Hickory, Boland became an Indiana Financial shareholder in 1988. His 1993 complaint challenges the propriety of Indiana Financial's actions regarding four transactions with Hickory. The first occurred in 1987, when Indiana Financial conveyed real estate to Hickory in exchange for two promissory notes due in 1992. Hickory defaulted on the notes in 1992 and continues to be in default to this day. The second transaction occurred in 1988 when Indiana Financial conveyed its Indianapolis Hilton Hotel property to Hickory in exchange for a promissory note due in 1989. Hickory failed to repay that note in 1989, and Indiana Financial agreed in 1990 to extend the maturity date to 1992, but Hickory again defaulted. The third transaction involved Indiana Financial paying cash to Hickory in exchange for an interest in a promissory note that another Hickory subsidiary had issued to Hickory. The other subsidiary, Wisconsin Real Estate Investment Trust (WREIT), never paid Indiana Financial when the note came due in 1992. The fourth transaction occurred in 1992 and 1993 when Indiana Financial advanced $668,500 to Hickory on an unsecured basis. Boland alleges that no rational business would have lent money without security to a company in Hickory's financial straits. Indiana Financial, moreover, has not tried to collect on any of these obligations or to enforce whatever security interests it retains.
Boland alleged seven causes of action in his complaint. Boland alleged two common-law causes of action against Indiana Financial directors and against Indiana Financial's parent company, Hickory. These claims alleged that the defendants breached their fiduciary duties to Indiana Financial when they caused Indiana Financial to enter into the last three transactions listed above. Boland pleaded these counts derivatively, but he asserted that the normal demand requirement was excused because 1) a majority of Indiana Financial board members in 1993 were directors and/or officers of Hickory and WREIT, 2) a majority of the board has benefitted financially from the challenged transactions, and 3) the board's actions would not have been the result of reasonable business judgment. The District Court dismissed these two causes of action with respect to the individual defendants, holding that Boland had not supplied adequate reasons for failing to make demand.
Boland also brought two derivative breach of contract causes of action against Hickory and WREIT, respectively. These claims alleged that Hickory and WREIT were in breach on their unpaid notes owed to Indiana Financial. The District Court did not initially consider these claims because Hickory and WREIT never sought their dismissal.
Finally, Boland brought three ICA claims directly, in his own right, against Indiana Financial directors and Hickory. Boland alleged that Indiana Financial qualified as an investment company because securities exceeded 40 percent of its assets and that Indiana Financial's transactions therefore became subject to the ICA. See 15 U.S.C. § 80a-3(a)(3). Boland further alleged that three of the Indiana Financial transactions violated ICA provisions that prohibit 1) investment companies from lending funds to or purchasing securities from an affiliate, 15 U.S.C. § 80a-17; 2) fiduciaries of an investment company from breaching their duties to the investment company, 15 U.S.C. § 80a-35(a); and 3) the conversion of assets of investment companies, 15 U.S.C. § 80a-36(a). The District Court, however, dismissed Boland's ICA claims against the individual defendants for failure to state a claim. The court held that Boland needed to plead the ICA counts derivatively rather than directly.
Rather than making demand upon Indiana Financial's board or repleading his ICA claims, Boland tried to appeal the District Court's ruling immediately. He voluntarily dismissed the appeal, however, when this court reminded Boland that he did not yet have a final decision, which 28 U.S.C. § 1291 requires for appellate jurisdiction. Boland did not yet have a final decision because the five dismissed counts were dismissed only as to the individual defendants (not with respect to Hickory) and because the District Court had never even considered Boland's breach of contract actions against Hickory and WREIT. Rather than trying to comply with the District Court's ruling, however, Boland asked the District Court to dismiss all remaining counts in order to finalize the judgment for appeal. The District Court granted Boland's motion and dismissed the entire case with prejudice on March 19, 1996.
Boland argues on appeal that the District Court should not have dismissed his common-law derivative claims alleging breach of fiduciary duty. As mentioned above, the District Court held that Boland never adequately explained his failure to demand action from Indiana Financial's board prior to bringing suit. And because Boland never made demand, the District Court refused to let Boland's derivative claims go forward.
What Boland should have done regarding demand is governed by both federal procedural requirements and state substantive law. The Federal Rules of Civil Procedure provide that when a shareholder brings a derivative action to enforce a right that the corporation has failed to enforce, the complaint shall "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors ... and the reasons for the plaintiff's failure to obtain the action or for not making the effort." Fed.R.Civ.P. 23.1...
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