Kirchoff v. Selby
| Decision Date | 08 December 1998 |
| Docket Number | No. 26S01-9812-CV-760,26S01-9812-CV-760 |
| Citation | 703 N.E.2d 644 |
| Parties | Ralph KIRCHOFF and Wilma Kirchoff, Appellants (Defendants/Counterclaimants Below), v. Jeff W. SELBY and Diane L. Selby, Appellees (Plaintiffs/Counterdefendants Below). |
| Court | Indiana Supreme Court |
This case deals with the liability of sellers and others under the Indiana Securities Act (the "Indiana Act"). In view of the significant differences between the Indiana Act and § 12 of the Securities Act of 1933, we hold that the elements of a claim under § 19 of the Indiana Act are different in several respects, notably that Indiana law specifically permits recovery under some circumstances from categories of persons different from those in federal securities laws.
By the mid 1980's Ralph Kirchoff had served as chairman of the board of Worthington State Bank (the "Bank") for over a decade. Ralph and his wife, Wilma, (the "Kirchoffs") owned 992 shares or 49.6% of the 2000 outstanding shares of Bank stock. In 1986, the Board of Directors of the Bank hired Douglas Austin & Associates to value the Bank and prepare a prospectus to facilitate its sale. The prospectus was circulated to various persons including Mark Van Eaton, then a stock broker with City Securities Corporation of Indianapolis. In August 1987, Van Eaton made an offer to purchase all 2,000 outstanding shares of the Bank's stock.
Van Eaton then incorporated Worthington Bancshares, Inc. (the "holding company") for the purpose of acquiring the Bank's 2,000 outstanding shares. Van Eaton was the sole director and officer of the holding company. Van Eaton acquired 1,300 shares of the 2,000 authorized shares of the holding company for a total of $1,000 or 77cents per share. Over the next year the holding company sold additional shares of its own newly issued stock for $2,300 each, and also exchanged some of its newly issued shares for Bank shares on a one for one basis. 1 The holding company also borrowed $2,570,000 from Summit Bank. Ultimately, the cash raised in these transactions was used to acquire all 2,000 shares of the Bank's stock at $2,300 each.
At the end of these transactions, some of which are described in more detail later, the holding company had shareholders in five groups:
(1) Van Eaton, who acquired 65% of the equity for $1,000;
(2) former shareholders of the Bank who received cash for part of their Bank shares and also exchanged some Bank shares for holding company shares on a one to one basis;
(3) one Bank shareholder who exchanged all of his 1.25% of the Bank for 1.25% of the holding company;
(4) one Bank shareholder who exchanged all of his 1.25% of Bank shares for holding company shares and also purchased an additional 3% of the holding company for $138,000 cash; and
(5) Jeff and Diane Selby (the "Selbys"), who furnished cash (all of it borrowed from either the Bank or the Kirchoffs) in the amount of $494,500 for 10.75% of the holding company.
Category (2) included the Kirchoffs who had owned 49.5% of the Bank and ended up with 13.75% of the holding company, $1,749,391 in cash and $630,000 in notes. All of those who exchanged shares received the same number of shares and percentage ownership in the holding company as they had held in the Bank, but their interests were now junior to the $2,570,000 debt to Summit Bank.
The Selbys acquired 215 of the 700 shares the holding company sold, but the route they took to that result is disputed. For reasons explained below, the parties contend that important legal results depend on whether the Selbys bought securities from the Kirchoffs or from the holding company. As also explained in more detail later, the paper trail is ambiguous on this issue as well as many others. There are plainly notes from the Selbys to the Kirchoffs for $244,000 and to the Bank for $250,000. The Kirchoffs contend that the Selbys purchased 215 newly issued shares (10.75%) of the holding company, and never bought shares from the Kirchoffs. Under this version, (1) the Selbys borrowed $250,000 from the Bank, (2) the Selbys borrowed $244,500 from the Kirchoffs, (3) the Selbys paid the total of $494,500 to the holding company to purchase their holding company shares and (4) the Selbys pledged the resulting 215 shares of the holding company to the Kirchoffs as security for the $244,500 note.
The Selbys maintain that they purchased 215 shares of the Bank directly from the Kirchoffs and later exchanged the Bank shares for shares in the holding company. They contend that the $244,500 note to the Kirchoffs and the loan proceeds of their $250,000 note to the Bank were the payment of the purchase price of Bank stock from the Kirchoffs. In support of this view the Selbys point to a "Stock Exchange and Subscription Agreement," of which more later. It is sufficient at this point to note that there is no document that directly supports a transfer of shares from the Kirchoffs to the Selbys.
The Kirchoffs are also unable to point to any document that conclusively supports their view that the Selbys purchased holding company shares in a Kirchoff-free transaction. They assert inferential support in the fact that the Bank's stock transfer ledger contained no record that any shares of the Bank were ever owned by the Selbys. The Kirchoffs also assert that the checks written by the Bank and the Kirchoffs evidence the proceeds of the loans to the Selbys and were endorsed by the Selbys to the holding company and deposited in its account at Summit bank. Some but not all of these checks are in the record.
However the parties arrived at that point, by November 1988, the holding company had obtained all of the 1,008 shares of Bank stock not owned by the Kirchoffs. The Kirchoffs' 992 shares of Bank stock were then transferred to the holding company and the holding company surrendered all of the certificates for Bank shares in exchange for a single certificate registered in the holding company's name for all 2,000 shares. This was then pledged as security for the holding company's loan from Summit Bank. At the same time, the Kirchoffs lent $630,000 to the holding company to finance its acquisition of Bank shares.
In December 1988, Van Eaton replaced Ralph Kirchoff as Chairman of the Board of the Bank. Van Eaton operated the Bank, at times with Kirchoff's help, until the Bank was seized by the Indiana Department of Financial Institutions ("DFI") on November 19, 1991 and the Federal Deposit Insurance Corporation ("FDIC") was appointed receiver. In 1993, the FDIC initiated three administrative enforcement actions against Van Eaton, individually and as the Bank's officer and director. These alleged unsafe and unsound banking practices, breaches of fiduciary duty, excessive salary and bonus payments without board approval and willful disregard for the Bank's safety and soundness. These proceedings were ultimately settled by consent decrees that, inter alia, prohibited Van Eaton from further participation in the affairs of a financial institution.
After the DFI seized the Bank, the Selbys sued the Kirchoffs. The Selbys' complaints asserted common law claims for fraud and breach of fiduciary duty and a claim for deception under Indiana Code § 35-43-5-3. Ultimately claims under the Indiana Securities Act were added, albeit in a rather oblique manner described in Part II.G. The Kirchoffs counterclaimed for the Selbys' default on the $244,500 promissory note. After a two week trial, the jury returned a verdict in favor of the Selbys for $730,000 and against the Kirchoffs on their counterclaim on the note.
Shortly after trial, Donna Fink, a paralegal employed by the Selbys' attorney, Dean Richards, contacted Bruce Kirchoff, the Kirchoffs' son and an attorney. Fink met with Bruce Kirchoff and told him that she had assisted Richards in altering documents introduced into evidence at the trial. Specifically, Fink stated that she assisted Richards, Jeff Selby and Van Eaton in altering the "Stock Exchange and Subscription Agreement" by using whiteout to cover portions of the document, photocopying it, and tracing signatures onto the manufactured document. Fink also stated that shortly after a copy of the Bank Prospectus was admitted at trial as Exhibit 10, she had witnessed the Selbys and their attorney alter it in several critical respects, including removing some unspecified pages. The altered document was then offered and admitted at trial as Exhibit 12 to support the theory that Ralph Kirchoff failed to disclose the Bank's troubled loans. Fink also said she was present when the Selbys, Richards and Van Eaton rehearsed false testimony.
In the meantime, the Selbys, in what may have been an attempted preemptive strike, filed a post trial motion for sanctions, requesting that a disciplinary action be initiated, and for assessment of damages and attorney fees against Ralph Kirchoff and his attorney, alleging that they had improperly communicated with the trial judge and had filed affidavits and documents prior to trial that Ralph Kirchoff admitted at trial were incorrect.
Based on the claim of altered evidence, the Kirchoffs filed a motion to correct error and requested a new trial. In the alternative, they moved for judgment on the evidence on the grounds that the Selbys failed to prove several elements of a claim under the Indiana Act, including privity between purchaser and seller, a purchase of the stock for value and the existence of a legal loss. The trial court heard evidence on October 30 and 31, 1995 on the Selbys' motion for sanctions and the Kirchoffs' motions to correct error and for judgment on the evidence. The court denied the Kirchoffs' motion for judgment on the evidence, granted the Kirchoffs' motion to correct...
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