Massey v. Conseco Services, L.L.C.

• Decision Date: 22 January 2008
• Docket Number: No. 29A05-0610-CV-565.,29A05-0610-CV-565.
• Citation: 879 N.E.2d 605
• Parties: James D. MASSEY and Margaret E. Massey, Appellants-Defendants, v. CONSECO SERVICES, L.L.C., Appellee-Plaintiff.
• Court: Indiana Appellate Court

879 N.E.2d 605

James D. MASSEY and Margaret E. Massey, Appellants-Defendants, v. CONSECO SERVICES, L.L.C., Appellee-Plaintiff.

No. 29A05-0610-CV-565.

Court of Appeals of Indiana.

January 22, 2008.

Henry J. Price, Ronald J. Waicukauski, Carol A. Nemeth, Price Waicukauski & Riley, LLC, Indianapolis, IN, Attorneys for Appellants.

Ryan L. Leitch, William P. Means, Riley Bennett & Egloff, LLP, Indianapolis, IN, Scott A. McMillin, Stephen C. Hackney, Kirkland & Ellis LLP, Chicago, IL, Attorneys for Appellee.

OPINION

MAY, Judge.

James D. Massey appeals from summary judgment for Conseco Services, L.L.C. ("Conseco Services") on its breach of contract claim and the dismissal of his counterclaims.¹ We affirm.

FACTS AND PROCEDURAL HISTORY

Massey was a member of the board of directors of Conseco, Inc. ("Conseco") from 1994 to 2000 and served on the board's audit committee. Massey was neither an officer nor an employee of Conseco.

From 1996 to 2000, Conseco had a program known as the D&O Loan Program ("Program"). Pursuant to the Program, Conseco made arrangements with several banks to loan money to its directors and officers for the purchase of Conseco stock. Conseco guaranteed the loans. The directors and officers could also borrow money from Conseco Services, a subsidiary of Conseco, to cover the interest owed on the loans from the banks.

Massey participated in the Program from 1996 to 2000 and borrowed about $15 million to purchase Conseco stock. He also signed a promissory note in Conseco Services' favor ("the Note") to cover the interest on his bank loan, which amounted to over $4 million.

By 1997, Conseco had accumulated a significant amount of debt. In 1997, a report by Ray Dirks Research stated Conseco suffered "massive deterioration in cash flow from 1994 through 1996," (Appellant's App. at 838), and opined "Conseco's true operating earnings per share is negative when and if it is properly presented and ... it will worsen rapidly under current management." (Id. at 948.) In 1998 and 1999, Colin Devine, an investment analyst with Salomon Smith Barney, published additional reports questioning Conseco's cash flow. According to Massey, Conseco's senior management assured the board of directors these reports were inaccurate.

On April 14, 2000, Conseco acknowledged it had overstated its income on its quarterly financial statements in 1999 by $367.6 million and issued restated earnings. Due to these overstatements, the Securities and Exchange Commission instituted proceedings that resulted in a cease-and-desist order in 2004. The SEC found:

Throughout fiscal 1999, Conseco ... made materially false and misleading statements about [its] earnings in Commission filings and in public statements announcing their earnings, overstating [its] results by hundreds of millions of dollars. This massive overstatement occurred primarily because [Chief Financial Officer Rollin] Dick and [Chief Accounting Officer James] Adams conducted a fraudulent accounting scheme....

(Id. at 924-25.)

The value of Conseco shares dropped as the maturity date of Massey's Note approached. Massey extended the maturity date by refinancing his Note on November 22, 2000. He stepped down from the board of directors in December of 2000.

Conseco filed for bankruptcy in December of 2002, and Massey's stock became worthless. Conseco restructured its debts, and the bankruptcy court confirmed a plan of reorganization. Conseco alleges it repaid the bank loans in full and is now pursuing its rights as a guarantor against the Program participants in separate proceedings in Illinois.

Conseco Services sued Massey on the Note he executed to cover his interest on the bank loans. Massey asserted several affirmative defenses and counterclaims. Conseco Services filed a motion for partial summary judgment on its own claims and a motion to dismiss Massey's counterclaims. The trial court granted Conseco Services summary judgment on its breach of contract claim and dismissed Massey's counterclaims.

DISCUSSION AND DECISION

Massey asserts the trial court erred by: (1) concluding the "alter ego" doctrine is inapplicable to this case; (2) dismissing his counterclaim based on the "change of control" provision that appeared in some versions of the Program; (3) rejecting his indemnity defense and dismissing his counterclaim premised on the same facts; (4) dismissing his breach of fiduciary duty counterclaim; (5) rejecting his fraudulent inducement defense and dismissing his counterclaim premised on the same facts; (6) concluding he could not assert a defense based on Regulation U; and (7) concluding he could not assert a defense of failure of a condition precedent.

We review de novo a grant of a motion to dismiss for failure to state a claim upon which relief can be granted. Green Tree Servicing, LLC v. Auditor & Treasurer of Howard County, 868 N.E.2d 1, 3 (Ind.Ct.App.2007). A grant of such a motion is proper if the allegations in the complaint are incapable of supporting relief under any set of circumstances. Id.

In reviewing summary judgment, we apply the same standard as the trial court. Wright v. American States Ins. Co., 765 N.E.2d 690, 692 (Ind.Ct.App.2002). Summary judgment is appropriate if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). "Any doubt as to a fact, or an inference to be drawn, is resolved in favor of the non-moving party," here, Massey. Sanchez v. Hamara, 534 N.E.2d 756, 757 (Ind.Ct.App. 1989). The moving party bears the burden of proving there is no genuine issue of material fact; however, once this burden is sustained, the opponent may not rest on the pleadings, but must set forth specific facts showing there is a genuine issue for trial. T.R. 56(E); Oelling v. Rao, 593 N.E.2d 189, 190 (Ind.1992). We consider only the evidence designated to the trial court. T.R. 56(H); Mangold ex rel. Mangold v. Ind. Dep't of Natural Res., 756 N.E.2d 970, 973 (Ind.2001). We affirm summary judgment on any legal basis supported by the designated evidence. Bernstein v. Glavin, 725 N.E.2d 455, 458-59 (Ind.Ct.App.2000), trans. denied 741 N.E.2d 1248 (Ind.2000). The appellant bears the burden of persuading us the grant of summary judgment was erroneous. Bank One Trust No. 386 v. Zem, Inc., 809 N.E.2d 873, 878 (Ind.Ct.App. 2004), trans. denied 822 N.E.2d 975 (Ind. 2004).

1. "Alter Ego" Doctrine

Several of Massey's counterclaims and defenses are based on conduct of Conseco. Massey seeks to hold Conseco Services liable by alleging Conseco Services is the "alter ego" of Conseco. Therefore, as a preliminary matter, we must determine whether this doctrine is available to Massey. We conclude that it is not.

The legal fiction of a corporation may be disregarded "where one corporation is so organized and controlled and its affairs so conducted that it is a mere instrumentality or adjunct of another corporation." Indiana courts refuse to recognize corporations as separate entities where the facts establish that several corporations are acting as the same entity.

Oliver v. Pinnacle Homes, Inc., 769 N.E.2d 1188, 1191 (Ind.Ct.App.2002) (citations omitted), trans. denied 783 N.E.2d 698 (Ind.2002). The party seeking to pierce the corporate veil bears the burden of proving "the corporate form was so ignored, controlled or manipulated that it was merely the instrumentality of another and that the misuse of the corporate form would constitute a fraud or promote injustice." Aronson v. Price, 644 N.E.2d 864, 867 (Ind.1994).

Although piercing the corporate veil is normally a fact-sensitive inquiry, the trial court did not err by concluding as a matter of law the doctrine is not applicable in this case. Indiana decisions consistently hold the doctrine may be invoked to prevent fraud or unfairness to third parties. McQuade v. Draw Tite, Inc., 659 N.E.2d 1016, 1020 (Ind.1995); Aronson, 644 N.E.2d at 867; Oliver, 769 N.E.2d at 1191; Smith v. McLeod Distributing, Inc., 744 N.E.2d 459, 462 (Ind.Ct.App.2000). Massey was an outside director, but he was not a third party. He was a director of Conseco and understood the corporate organization of Conseco and Conseco Services. See McQuade, 659 N.E.2d at 1020 ("While we have expressed willingness to use our equitable power to disregard the corporate form to prevent fraud or unfairness to third parties, we perceive little likelihood that equity will ever require us to pierce the corporate veil to protect the same party that erected it.") (emphasis in original). Nor has Massey designated evidence these corporations abused the corporate form or that such abuse would result in a fraud or injustice to him.² Accordingly, the trial court did not err in determining, as a matter of law, that Massey could not treat Conseco Services as the alter ego of Conseco.

A. Change of Control

One of Massey's counterclaims alleges there was a change of control of Conseco, and the Program contained a provision that obligated Conseco to purchase his stock when there was a change of control. Massey acknowledges this claim is not viable against Conseco Services unless he can treat Conseco Services as the alter ego of Conseco. Because the trial court properly concluded the alter ego doctrine is not available to Massey, this counterclaim does not state a claim against Conseco Services, and the trial court did not err by dismissing it.³

B. Indemnity

Massey also argues the Conseco bylaws obligate it to indemnify him for litigation arising out of his actions as a director. This claim cannot be brought against Conseco Services because Massey cannot pierce the corporate veil to hold it liable. Massey has not stated a claim against Conseco Services, and the trial court properly dismissed his counterclaim premised on the indemnity provisions of Conseco's bylaws.⁴

C. Fiduciary Duty

In another counterclaim, Massey alleged he "was required to sign a power of attorney authorizing loans...