Kesling v. Kesling

• Citation: 546 F.Supp.2d 627
• Decision Date: 26 March 2008
• Docket Number: No. 3:06-CV-805 PPS.,3:06-CV-805 PPS.
• Parties: Peter C. KESLING, Plaintiff, v. Andrew C. KESLING, Defendant.
• Court: U.S. District Court — Northern District of Indiana

546 F.Supp.2d 627

Peter C. KESLING, Plaintiff, v. Andrew C. KESLING, Defendant.

No. 3:06-CV-805 PPS.

United States District Court, N.D. Indiana, South Bend Division.

March 26, 2008.

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Carl A. Greci, Gerard T. Gallagher, James H. Ham, III, Kathryn E Anderson, Baker & Daniels, South Bend, IN, for Plaintiff.

Michael W. Hile, Thomas G. Burroughs, Katz & Korin PC, Indianapolis, IN, for Defendant.

MEMORANDUM OPINION AND ORDER

PHILIP P. SIMON, District Judge.

Plaintiff Peter Kesling trusted his son Andrew; so much so that he agreed to sell him controlling interest in the corporation he built and ran for decades. Assuming the allegations in Peter's Complaint are true, Andrew was not the man he thought. Andrew was stealing from the company and never told Peter about it before the sale. According to Peter, he was duped by his son's nondisclosure and therefore he was defrauded. This unfortunate lawsuit is the fight over the spoils. Peter seeks to rescind the transaction and regain control of the corporation. Despite his efforts to construct a legal theory upon which he can reverse the transaction, there is no basis in law to do so. Andrew's Motion for Summary Judgment [DE 17] is GRANTED.

BACKGROUND

The parties essentially agree about the pertinent facts, and where they don't, I recount them in the light most favorable to Peter, the nonmoving party. TP Orthodontics, Inc. ("TPO"), manufactures and supplies products for the orthodontic industry. (See Pl's Br. in Opp'n to Def.'s Mot. for Summ. J. [DE27] ("Response") at 1; see also Def.'s Br. in Supp. of Mot. for Summ. J. [DE 18] ("Brief) at 2-3.) TPO is an Indiana corporation founded in 1955 by Peter and his dad. (See Br. at 2.) Peter served as President from approximately 1960 until 1981, and he was Chairman of the Board of Directors from 1981 until about 2002. (See Resp. at 1.) Although he resigned the chairmanship in 2002, Peter continued to serve on the Board of Directors and has remained active in the company serving as a consultant to the Research and Development Department. (Pl's Ans. to Def.'s 1st Set of Interrogs. to Pl. [DE 18-12] ("Interrogatory Answers") at 2.)

From 1984 until 1988, Andrew served on TPO's board. (See Br. at 3.) Since 1988, Andrew also served as president of TPO; he succeeded his father as Chairman of the Board in 2002. (See Resp. at 1.) Prior to the transaction at issue here, Andrew owned less than five percent of the voting shares of the company. (Id.) Peter, by contrast, owned over fifty percent of the voting shares of TPO, and thus he had the controlling interest.

Throughout the decades they worked together, Peter developed a trust in his son Andrew. Andrew had good management skills, and by 2004 Peter believed it was in the best interests of TPO to transfer voting control of the company to Andrew. (Resp. at 1.) Consequently, in June 2004, Peter agreed to sell his majority ownership to Andrew. (Id. at 1-2.) Pursuant to two agreements between Peter and Andrew, Andrew acquired slightly more than fifty-one percent of the voting shares of TPO, (see Br. at 3-4 & 6-7), and agreed to pay Peter approximately $765,000.00, (see Resp. at 1-2). Under the two agreements, the protocol for determining the price of the shares was dictated by a 1973 agreement, which was amended in 1993. (See Br. at 5-6). After the 2004 transaction, Andrew became the majority shareholder of TPO, and he remained its President and Chairman of its Board.

From 1992 until the present, Andrew has been party to several licensing agreements with TPO. (See Compl. [DE1] ¶ 5.) Of particular importance to the present case, a 1992 licensing agreement granted TPO a license to use technology described by the claims of U.S. Patent Number 5,263,859, a patent on which Andrew was the named inventor. (Id.) Pursuant to the License Agreement, Andrew assigned to TPO the exclusive right to use the invention disclosed by the '859 Patent in exchange for five percent of the net sales generated by such use.

TPO paid Andrew royalties for several years evidently without much issue. But in 2005 Peter came to believe that at least some of the payments under the License Agreement were improper because the products for which the royalties were paid were not covered by the '859 Patent. (See Resp. at 2.)¹ This is when the shine evidently came off Andrew in his dad's mind. But a year earlier, when the transaction took place, Peter was not aware that the royalty payments were improper, and he openly admits that he did not question Andrew about the royalties or investigate the subject in connection with the 2004 transaction. (Resp. at 23.) The subject, it seems, never even came up. Peter says this is because Andrew knowingly and intentionally hid it from him. (Compl. ¶ 7.) Had he known that Andrew was receiving royalties not due him, Peter claims that he never would have entered into the transaction and turned over control of the company to Andrew. (Id. ¶ 8.) The allegations concerning the improper receipt of royalties is the crux of the fraud claims.

Having discovered that TPO was making royalty payments that were not necessary under the License Agreement, Peter presented his concerns to TPO's Board. (See Br. at 7-8.) TPO's long-time patent counsel initially determined the payments were proper. He later changed his mind after another lawyer was consulted and arrived at the opposite conclusion. (See id.) Peter then sent a letter to Andrew demanding Andrew return the royalty payments and threatening a shareholder derivative suit. (Id. at 8-9.) The parties agreed to submit the question to a committee appointed by the Board, which would then investigate the propriety of the payments. (Id. at 9-10.) Although the independence and thoroughness of the committee's review is hotly contested, the committee ultimately concluded that the payments to Andrew were entirely proper. (Id. at 18.)

Dissatisfied with the committee's conclusion, Peter filed this case in Indiana state court which was removed here on diversity grounds (Andrew is a citizen of Michigan, Peter of Indiana and the amount in controversy plainly exceeds $75,000). Boiled to its essence, the Complaint contends that Peter was the victim of a fraud premised on the fact that his son never disclosed that he was accepting royalty payments from TPO to which he was not entitled, and that Peter would never have sold controlling interest in the company had he known this fact. Andrew now moves for summary judgment.

DISCUSSION

Although discovery has not yet concluded, Andrew filed the present Motion for Summary Judgment [DE17]. Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. Pro. 56(c).

One of the contested issues is the propriety of summary judgment even though discovery has not yet closed. Andrew argues that summary judgment is premature because more discovery is needed related to the investigation and conclusions of the special committee appointed by TPO's Board. (Resp. at 21.) But because I conclude that the committee's determination is irrelevant, and because further discovery will not alter the legal conclusions upon which this Order is based, I see no reason to invoke Rule 56(f).

There are three causes of action at play which the parties agree are governed by Indiana law: a violation of the Indiana Securities Act, (Compl. ¶¶ 9-12); constructive fraud, (id. ¶¶ 13-18); and actual fraud, (id. ¶¶ 19-23). Peter seeks one remedy: rescission of the 2004 transaction. (See id. ¶¶ 12, 18 & 23).² But before diving into the merits of each of these claims, I must dispense with Andrew's claim that this lawsuit is, in essence, a derivative action subject to Indiana Code § 23-1-32-4(c).

1. PETER'S CLAIM THAT THIS IS A SHAREHOLDER DERIVATIVE ACTION

Under Indiana law, shareholder derivative actions "are suits asserted by a shareholder on the corporation's behalf against a third party ... because of the corporation's failure to take some action against the third party." G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 234 (Ind. 2001) (quotation marks and citations omitted). These are actions brought to redress an injury sustain by a corporation. Id. Yet, even in the shareholder context, there is a fine line between actions vindicating corporate interests and those based upon a primary or personal right. Id. at 235. For example, actions seeking to "recover for loss of a corporate opportunity, to recover corporate waste, and to recover damages to a corporation caused by an officer or director's self-dealing" are typically derivative. Id. On the other hand, actions "to vindicate rights belonging to the shareholders themselves," such as the "right to vote, compel dividends, prevent oppression or fraud against minority shareholders, inspect corporate books and to compel shareholder meetings" are considered direct, or individual, actions. Marcuccilli v. Ken Corp., 766 N.E.2d 444, 449 (Ind.Ct.App.2002).

Derivative actions are governed by Indiana Trial Rule 23.1 and by Indiana Code § 23-1-32-1, and they are subject to different requirements than suits vindicating individual rights. See G & N Aircraft, 743 N.E.2d at 234-35. Generally, in a derivative action, a shareholder must first ask the board of directors take action. In re Guidant S'holders Derivative Litig., 841 N.E.2d 571, 572-73 (Ind.2006). The board may then establish a committee to investigate the allegations and determine whether the corporation should pursue litigation. See Ind.Code § 23-1-32-4. If the committee determines that pursuing a derivative action is not in the corporation's best interests, that determination is presumed to be conclusive. Cutshall v. Barker, 733 N.E.2d 973, 978 (Ind.Ct.App.2000...