Hundahl v. United Benefit Life Ins. Co., Civ. A. No. CA-3-77-1405-G.
| Citation | 465 F. Supp. 1349 |
| Decision Date | 08 February 1979 |
| Docket Number | Civ. A. No. CA-3-77-1405-G. |
| Parties | John C. HUNDAHL, Individually, Derivatively, as Class Representative, and as Co-Executor of the Estate of Ernest Hundahl, Deceased, Mark Hundahl, Individually, and as Class Representative v. UNITED BENEFIT LIFE INSURANCE COMPANY, Mutual of Omaha Insurance Company, V. J. Skutt, John D. Minton, Albert W. Randall, and Hugh V. Plunkett, Jr. |
| Court | U.S. District Court — Northern District of Texas |
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Mark A. Martin, John H. Marks, Jr., and Hal L. Sanders, Jr., Dallas, Tex., for plaintiffs.
James E. Coleman, Jr., Carrington, Coleman, Sloman, Johnson & Blumenthal, Dallas, Tex., for United Benefit Life Ins.; Donald F. Evans, United Benefit Life Ins. Co., Omaha, Neb., of counsel.
John L. Hauer and W. Michael Byrd, Jr., Akin, Gump, Hauer & Feld, Dallas, Tex., Bobby D. Dyess, Elliott, Churchill, Hansen, Dyess & Maxfield, Dallas, Tex., for Mutual of Omaha; Willis B. Snell, Francis M. Gregory, Jr. and James F. Jordan, Sutherland, Asbill & Brennan, Washington, D.C., Frank J. Barrett, Mutual of Omaha Ins. Co., Omaha, Neb., of counsel.
H. Robert Powell and William B. Finkelstein, Hughes, Luce, Hennessy, Smith & Castle, Dallas, Tex., for individual defendants.
Broad judicial interpretation of the antifraud provisions of the federal securities laws has encouraged private parties to prosecute corporate disputes in federal courts. The breadth of this statutory construction has resulted from the way in which the courts have resolved certain unescapable policy questions. These questions, which arise whenever a court must explicate the judicially created rights of action under the securities laws, concern the nature of federalism and the proper role of the judiciary in the resolution of corporate disputes. Recent decisions of the Supreme Court signal a change in the policies and a retreat for the federal courts in securities regulation. The motion for partial summary judgment in this case requires this court to determine whether the pleadings and other documents submitted to this point raise substantial questions of fact that fall within these apparently contracting boundaries for federal judicial roles. It requires a judgment not only that a retrenchment has been plainly signaled, but also where today that moving line is "properly" drawn.
This action is brought by John C. Hundahl and Mark Hundahl, who assert individual, derivative, and class action claims. John C. Hundahl sues individually as a current shareholder of the United Benefit Life Insurance Company (United), derivatively on behalf of United, as representative of a class composed of all current minority shareholders of United, and, finally, as co-executor of the estate of Ernest Hundahl, deceased. Mark Hundahl sues individually and as representative of the class of persons who have sold shares of United stock since 1965. Named as defendants are the Mutual of Omaha Insurance Company (Mutual); Vestor J. Skutt (Skutt), chief executive officer and chairman of the board of directors of both Mutual and United; John D. Minton (Minton), president and chief operating officer of Mutual and a director of both Mutual and United; Albert W. Randall (Randall), senior executive vice president of Mutual and United and a director of United; Hugh V. Plunkett (Plunkett), vice chairman of Mutual's board of directors, a director of United and former chairman of the Mutual policyholders investment-executive committee, which is alleged to have engineered Mutual's October, 1977 tender offer for United stock; and, finally, United, which is a defendant for derivative purposes only.
The complaint sets forth a panoply of acts alleged to violate the antifraud provisions of the federal securities laws and the common law of Texas and asks for injunctive and monetary relief, and an accounting. Jurisdiction is founded on diversity of citizenship and on section 27 of the Securities Exchange Act, 15 U.S.C. § 78aa (1976).
The defendants have moved for summary judgment with respect to all claims based on federal law1 and have supplemented their motion with a substantial volume of documents and affidavits. Plaintiffs, in turn, have vigorously opposed the motion for summary judgment, and have presented this court with an equally formidable array of documents. Before examining in greater detail the portions of the complaint and supporting documents pertinent to the disposition of this motion, the factual setting of the litigation must be outlined.
Mutual and United are both major insurance companies incorporated and headquartered in the State of Nebraska. United is a stockholder-owned life insurance company, while Mutual is a mutual legal reserve company engaged principally in the sale and underwriting of health and accident insurance. Mutual's present ownership of greater than 80% of the shares of United is the result of a series of purchases that date back nearly 30 years. As early as 1949, Mutual was urged by the National Association of Insurance Commissioners (NAIC) to acquire all outstanding shares of United in order to eliminate the continuing risk of conflict of interest inherent in the joint operation of the companies. Mutual's gradual acquisition of United stock, though, has been a long and difficult process, impeded in part by Nebraska laws that limited the amount of surplus Mutual could invest in another insurance company. The task of acquiring all United shares was made even more difficult by substantial increases in the value of United stock during the period in question. A number of plans for consolidation of the corporations were pondered, but none proved feasible.
By October 5, 1977, Mutual had managed to acquire, through a series of open-market purchases, approximately 71.49% of United stock. On that date Mutual announced an offer to buy from minority shareholders 8.51% of the shares of United. The tender offer expired on October 26, 1977, after Mutual had succeeded in its effort to attain an interest in United greater than 80%. This suit was filed on October 24, 1977.
The allegations made by the plaintiffs that relate to claims based on federal law focus primarily on Mutual's plan to acquire United stock and the methods employed to carry out that plan, and on the October, 1977 tender offer.
With regard to Mutual's acquisition plan, plaintiffs assert that Mutual and the individual defendants engaged in a complex series of actions aimed at artificially depressing the price of United shares to the end that Mutual might more easily acquire 100% ownership of United. The scheme allegedly consisted of the following elements: improper allocation to United of certain expenses that should have been borne by Mutual; improper restriction of dividends to United shareholders; creation of unnecessarily large United reserves for policy reevaluation and contingencies; use of grossly conservative accounting principles in the preparation of United's financial reports; and, finally, failure to disclose the foregoing acts as well as the true value of United's assets in United's financial reports. The plaintiffs claim that this alleged scheme to manipulate the price of United stock and the alleged misrepresentations in United's financial reports violate section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1978), promulgated by the Securities Exchange Commission pursuant to that section.2
In support of their claim that the defendants' activities violated Rule 10b-5, the plaintiffs set forth in some detail pertinent elements of Mutual's management of United during the period of time covered by the complaint. The record shows, and the defendants do not dispute, that during that period Mutual showed a strong and continuous interest in the acquisition of United stock, and that Mutual implemented a number of managerial decisions that significantly affected the relationship between Mutual and United as well as United's corporate policies. There follows a brief outline of the relevant events.
The documents and affidavits submitted disclose a continuing effort by Mutual dating at least as far back as 1951 to acquire shares of United, as well as an awareness of the possible effect of United policies on the value of United stock. In 1951, for instance, Mutual sought from a Nebraska state court a declaratory judgment as to the legality of a proposed purchase of United shares. Mutual learned that at that time it could invest no more than 35% of its surplus in United stock. A 1953 report of the policyholders investment-executive committee of Mutual shows that at least as early as that date Mutual was aware of the possible effect upon Mutual's acquisition goals of United's dividend policies. During the years that followed, Mutual conducted, or directed outside experts to conduct studies to evaluate the stock of United. In 1961, a special subcommittee of the Mutual Investment Committee was appointed for the purpose of overseeing the acquisition of United stock. In 1962, a plan to merge the two companies was considered, but was found to be unfeasible.
Throughout this period, Mutual made substantial open-market purchases of United stock. In 1968, Mutual, fearing that disclosure of its purchasing efforts might raise the price of United stock, conducted its purchases through an intermediary. In 1976, Mutual obtained a number of fractional shares of United that resulted from a 25% stock dividend. Finally, at each annual meeting from 1970 through 1977, Mutual policyholders adopted a resolution authorizing the policyholders investment-executive committee to implement a program to acquire shares of United and other subsidiaries.
Also central to the plaintiffs' allegations is the history of allocation of joint expenses between Mutual and United. Between 1949 and 1962, expenses...
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