Melrose v. Capitol City Motor Lodge, Inc.
| Decision Date | 30 December 1998 |
| Docket Number | No. 49S00-9708-CV-444,49S00-9708-CV-444 |
| Citation | 705 N.E.2d 985 |
| Parties | Herbert MELROSE, Appellant (Cross-Claim Plaintiff below), v. CAPITOL CITY MOTOR LODGE, INC., Appellee (Cross-Claim Defendant below). |
| Court | Indiana Supreme Court |
Marvin Mitchell, Mitchell Hurst Jacobs & Dick, Steven K. Huffer Huffer & Weathers, P.C., Indianapolis, IN, Attorneys for Appellant.
Ronald E. Elberger, V. Samuel Laurin, III, George T. Patton, Jr., Bose McKinney & Evans, Indianapolis, IN, Attorneys for Appellee.
After a closely held corporation decided to liquidate, Smulyan, a director-shareholder, sought to purchase corporate-owned insurance policies on his life for their cash surrender value. Melrose, another director-shareholder, objected on grounds that Smulyan's life expectancy made the policies far more valuable than their cash surrender value. The trial court held that Smulyan's purchase did not violate his statutory or fiduciary duties to the corporation. We agree and affirm.
Three shareholders, Smulyan, Melrose and Rowley, owned all of the issued and outstanding shares of Capitol City Motor Lodge, Incorporated ("Capitol"). The three were also the sole directors of the corporation. 1 In 1986, the directors authorized an "Agreement for Purchase of Shares on Death" ("Buy-Sell Agreement") that required Capitol to purchase all of the shares owned by a shareholder in the event of that shareholder's death. 2 To fund the purchase of the shares the Buy-Sell Agreement required Capitol to purchase life insurance on its shareholders, namely Smulyan, Melrose and Rowley. Pursuant to this requirement, Capitol procured five life insurance policies on Smulyans life. Three of these policies (the "Policies") were issued by National Fidelity Life Insurance Company ("National") and are the sole policies at issue in this appeal.
After engaging in business for some years, a decision was made to liquidate Capitol. On June 15, 1994, the directors approved a Plan of Liquidation and Distribution of Assets ("Liquidation Plan"). The Liquidation Plan instructed the directors to sell all of Capitol's assets. Further direction provided by the plan included:
After the effective date, the Board of Directors and the Officers of the Corporation shall sell all of the assets of the Corporation. Any sale shall be made on the terms and conditions and for consideration that the Board deems reasonable and in the best interest of the Corporation and of its shareholders. The Board of Directors and Officers of the Corporation may execute any instruments that are necessary to transfer title to the property and assets.
Following adoption of the Liquidation Plan, steps were taken to wind up Capitol's business. On January 9, 1995, a board of directors meeting was held at which all directors were present. 3 At the meeting, Smulyan proposed the transaction that is at the heart of this case with the following resolution:
RESOLVED, Each shareholder is given the right to purchase the policies on that shareholder's life at net cash value from Capitol City Motor Lodge, Inc. and given the right to name his preferred beneficiary.
(the "Resolution") (R. at 310.) After discussion of the proposal, Smulyan and Rowley voted in favor of the Resolution. Melrose voted against it. After the Resolution passed, Smulyan exercised his right to purchase the Policies for cash surrender value. 4 Capitol assigned all of its rights, title and interest in the Policies to Smulyan who in turn named his wife the primary beneficiary on each of the Policies.
Shortly thereafter, National received conflicting claims concerning the validity of the Resolution and the assignment of the Policies from Capitol to Smulyan. As a result, on September 19, 1995, National filed a "Complaint for Interpleader," requesting court direction as to its obligations with respect to the Policies.
On November 21, 1995, Melrose filed his answer and cross-claim maintaining, among other counts, that Smulyan (1) violated the Liquidation Plan (Count I); (2) breached a fiduciary duty owed to the shareholders (Count II); and, (3) relied upon an invalid corporate resolution when he acquired the Policies (Count III). Smulyan moved for partial summary judgment on these counts and on March 18, 1996, the trial court granted summary judgment in favor of Smulyan. 5
Finding the Resolution valid, the court required National to honor the assignment of the Policies to Smulyan. The court further found that directors Smulyan and Rowley did not breach a fiduciary duty owed to either Melrose or Capitol by voting in favor of the Resolution nor, in so doing, had the board of directors breached the Liquidation Plan.
After the trial court made its partial summary judgment final, Melrose promptly appealed to the Court of Appeals. This Court granted transfer pursuant to Ind. Appellate Rule 15(M).
We are presented with the following issues: (1) whether Ind.Code § 27-1-12-17, a provision of the Insurance Code, preempts provisions of general corporate law concerning transactions involving insurance on the lives of corporate shareholders and directors; and (2) whether the purchase of corporate-owned life insurance by the insured for its cash surrender value violates the corporate conflict of interest statute, Ind.Code § 23-1-35-2, or breaches a shareholder's fiduciary duty to fellow shareholders.
Melrose asserts that in granting summary judgment in favor of Smulyan, the court implicitly held that "insurance policies are a unique type of asset, not subject to the usual rules of corporate governance." Appellant Br. at 28. Smulyan urges us to uphold the Resolution passed by the board of directors pursuant to Ind.Code § 27-1-12-17. 6 Ind.Code § 27-1-12-17 (1993). Smulyan contends that the last paragraph of Ind.Code § 27-1-12-17 validates the Resolution and exempts him from any conflict of interest claims under the Indiana Business Corporation Law: "No person shall, by reason of interest in the subject matter, be disqualified from acting as a director, or as a member of the executive committee of such corporation on any corporate act touching such insurance." Ind.Code § 27-1-12-17 (1993). Such a determination would necessarily rest on the premise that this provision of the Insurance Code trumps a director's corporate obligations under Indiana's Business Corporation Law. 7 We are not prepared to draw such a conclusion.
The Indiana Business Corporation Law applies to all domestic corporations closely held and public corporations alike. See Ind.Code Ann. §§ 23-1-17 (Introduction) & 23-1-17-3(a) (West 1989). Title 23 sets forth corporate director duties, responsibilities, and standard of conduct expected of corporate directors. See Ind.Code §§ 23-1-35-1 to 23-1-35-4. Title 27, on the other hand, specifically applies to any organization operating, representing or attempting to do insurance business in Indiana. See Ind.Code § 27-1-2-2 (1993). Chapter 12 thereof addresses life insurance policy requirements and confers certain rights, powers and privileges on the life insurance company. Ind.Code § 27-1-12-1 (1993). Nevertheless, our ultimate determination as to which statute governs in this instance rests on principles of statutory construction. Our main objective in statutory construction is to determine, effect and implement the intent of the legislature. Sullivan v. Day, 681 N.E.2d 713, 717 (Ind.1997); Freeman v. State, 658 N.E.2d 68, 70 (Ind.1995); Matter of Lawrance, 579 N.E.2d 32, 38 (Ind.1991); Superior Constr. Co. v. Carr, 564 N.E.2d 281, 284 (Ind.1990). Where two statutes presumably relate to the same subject matter, we attempt to construe the statutes so that both can stand. Kramer v. Beebe, 186 Ind. 349, 355, 115 N.E. 83, 85 (1917).
We find that the purpose of Ind.Code § 27-1-12-17 is to limit a life insurance company's duty of inquiry into the validity of corporate authority or the regularity of corporate proceedings in a transaction involving insurance on the life of a general business corporation's directors, officers, agents or employees. The life insurance company is entitled to good faith reliance on a proper corporate certificate.
It is true that the language of Ind.Code § 27-1-12-17 authorizes general corporations to purchase insurance on the lives of directors, officers, agents and employees (including individuals who participate in the decision to purchase the insurance) and to maintain that insurance even after the insured's service to the corporation ceases. But in light of the overall purpose of this section, we believe this language simply makes clear that a life insurance company need not inquire as to whether a corporate customer is acting ultra vires in purchasing or maintaining life insurance in any of the circumstances specified. This simply reinforces the limited extent of an insurance company's duty of inquiry. We find no justification to go beyond this point to hold that this language exempts such insurance transactions from the conflict of interest provisions of the Business Corporation Law and the fiduciary duty provisions of the common law. In fact, we find it highly unlikely that the legislature would have intended such an exemption without providing therefor in the Business Corporation Law.
Melrose contends that the Resolution approving the sale of corporate-owned life insurance to shareholders was invalid under the conflict of interest laws governing the behavior of directors of corporations organized in this state. He further alleges that in voting to approve the sale of corporate-owned life insurance to shareholders, Smulyan breached his fiduciary duty of fair dealing owed to the corporation and fellow shareholders.
Indiana Business Corporation Law defines a conflict of interest transaction as follows:
(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of...
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