Kirchoff v. Selby

• Decision Date: 24 June 1997
• Docket Number: No. 26A01-9601-CV-34,26A01-9601-CV-34
• Citation: Kirchoff v. Selby, 686 N.E.2d 121 (Ind. App. 1997)
• Parties: Blue Sky L. Rep. P 74,154 Ralph KIRCHOFF and Wilma Kirchoff, Appellants/Cross-Appellees-Defendants/Counterclaimants, v. Jeff W. SELBY and Diane L. Selby, Appellees/Cross-Appellants-Plaintiffs/Counterdefendants.
• Court: Indiana Appellate Court

Page 121

686 N.E.2d 121

Blue Sky L. Rep. P 74,154

Ralph KIRCHOFF and Wilma KirchoffAppellants/Cross-Appellees-Defendants/Counterclaimants, v.Jeff W. SELBY and Diane L. SelbyAppellees/Cross-Appellants-Plaintiffs/Counterdefendants.

No. 26A01-9601-CV-34.

Court of Appeals of Indiana.

June 24, 1997.

Patrick A. Shoulders, Robert L. Burkart, Ziemer, Stayman, Weitzel & Shoulders, Evansville, for Appellants/Cross-Appellees-Defendants/Counterclaimants.

Dean E. Richards, Indianapolis, for Appellees/Cross-Appellants-Plaintiffs/Counterdefendants.

OPINION

BAKER, Judge.

Appellees/cross-appellants Jeff and Diane Selby received a judgment of $730,000 on their claim for securities fraud against appellants/cross-appellees Ralph and Wilma Kirchoff.When the Kirchoffs presented newly discovered evidence suggesting that some of the Selbys' trial exhibits were fabricated and some of their trial testimony was perjured, the trial court set aside the verdict and ordered a new trial.The Kirchoffs now appeal, claiming that they were entitled to judgment on the evidence prior to the jury's verdict.The Selbys also appeal, asserting that the trial court erred in granting the motion for a new trial and in dismissing a disciplinary action which the Selbys had initiated against Ralph Kirchoff and his attorneys following the trial.

FACTS

The John Grisham-like ¹ facts in this appeal are very much in dispute.For approximately eleven years, until December 8, 1988, Ralph Kirchoff was Chairman of the Board of Worthington State Bank(Worthington Bank) located in Worthington, Indiana.During his term as chairman, Ralph owned 892 of the 2000 outstanding Worthington Bank shares of stock and, in addition, his wife, Wilma, owned 100 shares of the stock.

In 1986, the Board of Directors of Worthington Bank began to explore the possibility of selling the bank.As a result, they hired Douglas Austin & Associates, Inc. to prepare various documents regarding the bank's financial condition, including a Confidential Bank Sales Prospectus (Bank Prospectus) dated February 1987.The Bank Prospectus was distributed to various persons interested in purchasing Worthington Bank, including Mark D. Van Eaton, an investment broker.After Van Eaton reviewed the Bank Prospectus and other Worthington Bank documents, he offered to purchase all 2000 shares of Worthington Bank stock.

To facilitate the purchase, Van Eaton incorporated a holding company, Worthington Bancshares, Inc.(Bancshares), of which he was the sole officer, director and shareholder.Bancshares' application for holding company status indicated that its purpose was to acquire all 2000 shares of Worthington Bank stock.This application was approved by the Federal Reserve Board on October 30, 1988.

Thereafter, Bancshares entered into an agreement to purchase Worthington Bank stock for $2,398.58 per share.To raise money for the purchase, Bancshares issued and sold 700 shares of its stock for $2,300 per share.Ralph Kirchoff purchased 275 shares for $632,500.Additionally, Jeff and Diane Selby executed subscription agreements to purchase 195 and 20 shares of Bancshares stock respectively.To finance their purchases, the Selbys borrowed $250,000 from Worthington Bank and $244,500 from the Kirchoffs in December 1988.According to the Selbys, they borrowed the money in order to purchase shares of Worthington Bank stock from the Kirchoffs, which the Selbys then exchanged for Bancshares stock.In contrast, the Kirchoffs contend that the loans supplied the Selbys with the money to purchase Bancshares stock and that the Selbys never directly owned Worthington Bank stock.

To obtain the remainder of the money needed to purchase the Worthington Bank stock, Bancshares obtained a loan from Summit Bank for $2,570,000.The loan documents indicated that the purpose of the loan was to assist Bancshares in purchasing the 2000 outstanding shares of Worthington Bank stock.On November 30, 1988, the Kirchoffs transferred their stock certificates representing 992 shares in Worthington Bank to Bancshares.Prior to that date, Bancshares had obtained the remaining 1008 shares of outstanding Worthington Bank stock.Shortly thereafter, Bancshares tendered all 2000 shares back to Worthington Bank and received a single stock certificate representing the 2000 shares.On January 3, 1989, Bancshares paid each Worthington Bank shareholder $2,398.58 for his or her shares, including $239,858 to Wilma Kirchoff for her 100 shares and $2,139,533.36 to Ralph Kirchoff for his 892 shares.²

While Bancshares was arranging the financing for this transaction, Van Eaton replaced Ralph Kirchoff as Chairman of the Board of Worthington Bank on December 8, 1988.Thereafter, on November 14, 1991, the Indiana Department of Financial Institutions(DFI) seized Worthington Bank and appointed the Federal Deposit Insurance Corporation(FDIC) as its receiver.Van Eaton then instituted an action against the DFI in the Hancock Circuit Court seeking damages for wrongful seizure.Van Eaton's action is pending at the time of this appeal.At the same time, the FDIC initiated three administrative enforcement actions against Van Eaton for unsafe and unsound banking practices, all of which were settled on December 22, 1994.As a result of the administrative actions, Van Eaton made restitution to Worthington Bank and agreed not to participate in any banking activities in the future.

At approximately the same time the DFI seized Worthington Bank, the Selbys instituted the current action against the Kirchoffs for securities fraud.In essence, the Selbys alleged that the Kirchoffs fraudulently misrepresented that Worthington Bank was a worthy investment by failing to reveal the quality of various loans held by the bank in the Bank Prospectus.R. at 74-93.In response, the Kirchoffs filed a counterclaim against the Selbys for defaulting on the promissory note executed by them in December 1988.From July 31, 1995, to August 15, 1995, a jury trial was held on the claims, after which the Kirchoffs moved for judgment on the evidence.The trial court denied the Kirchoffs' motion and the jury returned a verdict in favor of the Selbys for $730,000.The jury also found for the Selbys on the Kirchoffs' counterclaim.

Following the verdict, but prior to the trial court's entry of judgment, Donna Fink, who was employed as a legal assistant by the Selbys' attorney, contacted Bruce Kirchoff, the Kirchoffs' son.Fink informed Bruce that she had assisted the Selbys' attorney in creating evidence and rehearsing false testimony for the trial.In particular, Fink alleged that the Selbys and their attorney altered the Bank Prospectus, which had been admitted during trial as Exhibit 10, by removing numerous pages from the prospectus and manipulating its letterhead to generate cover and introduction pages.This allegedly manufactured evidence, which was introduced as Exhibit 12, was introduced to support the Selbys' theory that Ralph Kirchoff had failed to disclose all of Worthington Bank's troubled loans.Additionally, Fink stated that she had assisted the Selbys' attorney in creating trial Exhibit 61, a Stock Exchange and Subscription Agreement (Subscription Agreement) which was signed by the Selbys and Van Eaton, by tracing the signatures onto the documents.This Subscription Agreement provided that the Selbys agreed to purchase Worthington Bank stock for $2,300 per share and exchange it for Bancshares stock.Fink also stated that she assisted the Selbys' attorney in inventing and rehearsing testimony that the Selbys executed the Subscription Agreement at Worthington Bank on November 13, 1988.On September 5, 1995, Fink gave a sworn statement, which was made available to the Selbys, in which she repeated all of these allegations.

On September 7, 1995, the Selbys filed a motion for sanctions, disciplinary action, damages and attorney fees against Ralph Kirchoff and his attorney.This motion sought sanctions on the basis of Ralph's admission during trial that he had filed affidavits and documents prior to trial which contained errors and his requests during trial to correct those erroneous documents.Specifically, the Selbys argued that Ralph Kirchoff and his attorney should be sanctioned for filing these alleged "perjurious" documents.Additionally, the motion accused Ralph and his attorney of fabricating Fink's statement.The next day, the Kirchoffs filed a motion to correct error in which they argued that they were entitled to a new trial on the basis of newly discovered evidence.In the alternative, the Kirchoffs moved for judgment on the evidence on the grounds that the documentary evidence presented at trial showed conclusively that the Kirchoffs did not sell the Selbys any shares of Worthington Bank stock and, therefore, the Selbys and the Kirchoffs were not in privity.Additionally, the Kirchoffs argued that they were entitled to judgment on the evidence because the Selbys failed to demonstrate several other requirements for recovery under the Securities Regulation Act, including the requirements that they purchase the stock for value, that they suffer a legal loss as a result of the alleged fraud and that they tender the stock back to the fraudulent party prior to initiating their civil claim.

Thereafter, on October 30, 1995, the trial court held a hearing on the Selbys' motion for sanctions and the Kirchoffs' motions to correct error and for judgment on the evidence.However, after the Selbys stated that they were not seeking a monetary penalty from the Kirchoffs but were merely seeking an admonishment, the trial court dismissed the motion for sanctions.The parties then presented evidence on the motion to correct error.Specifically, the Kirchoffs presented the testimony of Fink regarding the manufactured exhibits and perjured testimony.In response, the Selbys presented testimony, primarily in the form of affidavits, that Fink fabricated her allegations for...