John v. John

• Decision Date: 24 November 1989
• Docket Number: No. 88-1507,88-1507
• Parties: Erica P. JOHN, as an Officer and Director of De Rance, Inc., Wisconsin Non-Stock, Non-Profit Corporation, and Donald A. Gallagher, as an Officer, Director and Trustee of De Rance, Inc., Plaintiffs-Respondents, v. Harry G. JOHN, as a Director and Trustee of De Rance, Inc., Defendant-Appellant. d
• Court: Wisconsin Court of Appeals

Page 795

450 N.W.2d 795

153 Wis.2d 343

Erica P. JOHN, as an Officer and Director of De Rance, Inc Wisconsin Non-Stock, Non-Profit Corporation, and Donald A Gallagher, as an Officer, Director and Trustee of De Rance Inc., Plaintiffs-Respondents, v. Harry G. JOHN, as a Director and Trustee of De Rance, Inc. Defendant-Appellant. ^d No. 88-1507.

Court of Appeals of Wisconsin.

Submitted on Briefs Sept. 5, 1989.

Opinion Released Nov. 24, 1989.

Opinion Filed Nov. 24, 1989.

Pappas & Stewart by David C. Pappas, on the briefs, Madison, for defendant-appellant.

O'Neil, Cannon & Hollman, S.C., and Cannon & Dunphy, S.C. by Thomas G. Cannon, on the briefs, Milwaukee, for plaintiffs-respondents.

Before SULLIVAN, FINE and BROWN, JJ.

SULLIVAN, Judge.

Harry G. John appeals from a judgment permanently enjoining him from serving as a director and trustee of De Rance, Inc. and ordering him to pay equitable disgorgement of $1,171,418 plus interest to De Rance. John raises eleven issues on appeal. He argues that:

(1) the trial court lacked jurisdiction to remove him as a director and trustee of De Rance because De Rance is a religious corporation and that statutes authorizing removal of corporate directors and trustees do not grant jurisdiction in this case;

(2) the trial court had no other jurisdictional basis to command his removal;

(3) the trial court's exercise of jurisdiction violated his rights to religious freedom under the state and federal constitutions;

(4) the trial court abused its discretion by failing to consider less restrictive sanctions than his removal;

(5) the trial court's findings of gross misconduct were clearly erroneous and do not support the sanction of his removal;

(6) the trial court's findings that John received notice of the action and that the plaintiffs, Erica P. John and David A. Gallagher, had authority to commence this action were clearly erroneous;

(7) the trial court erred under statutory and common law in denying him indemnification for the costs of his defense (8) the trial court abused its discretion in permitting Gallagher and Mrs. John to finance their litigation expenses with De Rance funds while not extending the same privilege to Mr. John;

(9) the trial court abused its discretion in granting Gallagher and Mrs. John leave to amend their complaint;

(10) the trial court violated John's due process and equal protection rights by denying him a jury trial; and,

(11) the trial court violated John's federal due process rights by granting equitable disgorgement, a remedy that the plaintiffs did not request until several weeks after conclusion of the trial.

We conclude that the trial court had jurisdiction over this matter and that its exercise of jurisdiction did not violate John's constitutional rights to religious freedom; that the trial court properly determined that John's conduct constituted "gross misconduct" and did not abuse its discretion in imposing sanctions; and, that John was deprived of no other substantial right resulting in prejudicial error. Therefore, we affirm the decision of the trial court.

After a lengthy trial, the trial court filed comprehensive findings of fact. They number 203 and cover 93 pages of a record that approximates 23,000 pages. For the most part, they are undisputed on appeal and trace John's activities as treasurer, chief financial officer, director, and trustee for De Rance and its investment activities. The court found that John had committed gross misconduct and breached his fiduciary duties as a director and trustee of De Rance. In specific findings of fact too comprehensive to fully detail in the context of this opinion, the trial court determined that John had engaged in a pervasive pattern of abuse of office including securities fraud, tax fraud, perjury, self-dealing, conflicts of interest, corporate fraud, lying to the board of directors, breach of fiduciary duties, deception and disobedience of the board of directors, waste, and mismanagement of De Rance and its investments in Santa Fe Communications, Inc. (Santa Fe) and HBI Acquisition Corp. (HBIAC) including extensive investments in fraudulent deep sea treasure hunts.

De Rance, a non-stock corporation organized under Chapter 181, Stats., was established in 1946. John funded it in the early 1950's by three deeds of gift valued at $14 million, consisting of his inherited stock in the Miller Brewing Company. De Rance was organized to provide financial support for religious, charitable and educational causes. Until 1970, De Rance grants were paid from Miller stock dividends. In 1970 De Rance sold its 47% equity position in Miller to the Philip Morris Company for $97 million. From 1970 to 1984, grants totaled $125 million and were made principally, but not exclusively, to Roman Catholic charities and institutions. The market value of De Rance's assets was $188 million in 1983.

From its creation until September of 1982, De Rance operated exclusively as a grant-making organization. In September of 1982, John incorporated Santa Fe as a non-profit, non-stock corporation under Chapter 181, Stats. It was organized for the purpose of producing and broadcasting radio, television, and cinema programs and publishing printed matter of a religious and educational nature consistent with the teachings of the Holy See. Through Santa Fe, John hoped to establish a national television and satellite communications empire. To that end, John caused De Rance, Santa Fe, and HBIAC to acquire substantial interests in television and radio stations and to establish several production facilities with all funds provided by De Rance. The trial court found that John's mismanagement caused De Rance to accumulate more than $86 million in unnecessary and wasteful expenses related to these investments.

Until October of 1984, John was the sole donor, trustee, chairman of the board of directors, president and chief executive officer, and treasurer and chief financial officer of De Rance. The trial court characterized John as De Rance's "dominant authority:"

Defendant was the dominant authority in controlling the course of events at De Rance, Santa Fe, and HBIAC by virtue of (a) his original contributions of Miller Brewery Co. stock to De Rance, (b) his holding the key executive and financial positions in all three entities, (c) his domineering personality, and (d) his secretive and manipulative manner of operating these entities in such a way as to exclude all but himself from making the critical decisions, and the acquiescing personalities of both plaintiffs.

As of October, 1984, Erica John was an officer and member of the board of directors of De Rance, and Donald Gallagher was an officer, director and trustee of De Rance.

The procedural history of the case is succinctly set forth in the trial court's findings of fact:

On October 5, 1984, defendant was suspended as an officer, director and trustee of De Rance by an ex-parte order of this Court upon a showing of an appearance of abuse of his trust pursuant to Section 776.32(3), Wis.Stats. On October 15, 1984, defendant was removed from his positions as president and treasurer of De Rance by action of the board of directors of De Rance. This removal was ratified and confirmed at a special meeting of the board of directors of De Rance on January 2, 1985. Plaintiffs used proper corporate procedures to remove defendant from his positions as president and treasurer. Defendant's suspension as a director and trustee of De Rance was continued through the trial by virtue of a stipulation for the entry of a preliminary injunction in this action which was signed by the Court on February 11, 1985. Defendant was permanently removed from his positions as trustee and director of De Rance by decision of this court on August 21, 1986.

Judgment was entered on December 21, 1987.

We will set forth additional facts as needed, and, at the risk of being mistaken for a member of the species Ursus Saltandus, we will principally address John's eleven issues seriatim. See State v. Waste Management of Wisconsin, Inc., 81 Wis.2d 555, 564, 261 N.W.2d 147, 151 (1978).

JURISDICTIONAL ISSUES

The trial court concluded that its exercise of jurisdiction in this case was proper. It stated: "The Court possesses inherent equity jurisdiction and statutory jurisdiction pursuant to section 776.32(4) of the Wisconsin Statutes over the parties and subject matter of this action." However, John contends that De Rance is a religious corporation, free of the requirements and constraints that apply to commercial corporations, and that it is not subject to state subject-matter civil jurisdiction.

John contends that sec. 776.32, Stats., does not vest the trial court with jurisdiction over him, and, alternatively, that the court has no inherent equitable power in this matter. ¹ Subsections (3) and (4) of that statute vest the court with authority to suspend corporate officers and directors on appearance of abuse of trust and to remove them "upon proof or conviction of gross misconduct." John relies on sec. 776.46, Stats., which expressly excludes "religious corporations" from the provisions of Chapter 776, Stats. ² He argues that De Rance qualifies as a "religious corporation" under either Chapter 187, Stats., or sec. 182.030, Stats. ³

An action under sec. 776.32 is essentially equitable in nature. McGivern v. Amasa Lumber Co., 77 Wis.2d 241, 257, 252 N.W.2d 371, 378 (1977) (discussing the predecessor to sec. 776.32). The standard of review in equity cases is whether the findings of the trial court are against the great weight and clear preponderance of the evidence. W.H. Pugh Coal Co. v. State, 105 Wis.2d 123, 127, 312 N.W.2d 856, 858 (Ct.App.1981). ⁴

The trial court found:

De Rance is a non-profit, non-stock corporation organized under the Wisconsin Non-Stock Corporation Act, Wis.Stats.Ch. 181.... De Rance is not a religious corporation within the meaning of sections 182.030, 776.46,...