Rieff v. Evans

Citation630 N.W.2d 278
Decision Date31 May 2001
Docket NumberNo. 99-0313.,99-0313.
PartiesMary M. RIEFF, Individually and on Behalf of a Class of Policyholders of Allied Mutual Insurance Company, Appellant, v. John E. EVANS, Douglas L. Anderson, Harold S. Evans, Jamie H. Shaffer, James W. Callison, James M. Hoak, Jr., Mark W. Putney, George E. Moore, William J. Hancock, James D. Kirkpatrick, Charles I. Colby, Herschel G. Langdon, Charles F. Morgan, Hardy G. Kuykendall, Walter J. Fayle, and Allied Group, Inc., Appellees, Allied Mutual Insurance Company, Nominal Defendant-Appellee, Nationwide Mutual Insurance Company, Intervenor Defendant-Appellee.
CourtUnited States State Supreme Court of Iowa

Thomas D. Waterman, Robert A. Van Vooren, Terry M. Giebelstein, and Jed E. Brokaw of Lane & Waterman, Davenport, Brad J. Brady, Robert J. O'Shea, and Matthew L. Preston of Brady & O'Shea, P.C., Cedar Rapids, Jason B. Adkins and David L. Kelston of Adkins & Kelston, P.C., Boston, Massachusetts, and Daniel E. Bacine and Leslie Molder of Barrack, Rodos & Bacine, Philadelphia, PA, for appellant.

David L. Brown and John A. McClintock of Hansen, McClintock & Riley, Des Moines, and Bruce W. Foudree, Michael R. Hassan, Sarah M. Weil, and John F. Kloecker of Lord, Bissell & Brook, Chicago, IL, for appellees-directors of Allied Mutual Insurance Company.

Glenn L. Smith of Finley, Alt, Smith, Scharnberg, Craig, Hilmes & Gaffney, P.C., Des Moines, and J. William Koegel, Jr. of Steptoe & Johnson, Washington, DC, for appellee-Allied Group, Inc.

Douglas E. Gross and Harold N. Schneebeck of Brown, Winick, Graves, Gross, Baskerville, and Schoenebaum, P.L.C., Des Moines, and Michael A. Reiter, Frederick R. Ball, and Raquel daFonseca of Duane, Morris & Heckscher, L.L.P., Chicago, IL, for appellee-Nationwide Mutual Insurance Company.

Tom Riley and Hugh G. Albrecht of Tom Riley Law Firm, P.L.C., Cedar Rapids, Paul Alan Levy of Public Citizen Litigation Group, Washington, DC, and Theresa Amato of Citizen Advocacy Center, Elmhurst, IL, amicus curiae for Public Citizen, the Citizen Advocacy Center, the Coalition for Consumer Rights, and the Consumer Federation of America.

Bruce L. Braley of Dutton, Braun, Staack & Hellman, P.L.C., Waterloo, amicus curiae for the Iowa Trial Lawyers Association.

John M. (Jack) Manders of Drake University, amicus curiae as a professor.

Fred M. Haskins of Patterson Law Firm, Des Moines, amicus curiae for the Iowa Insurance Institute.

A. John Frey, Jr. of Frey, Haufe & Current, P.L.C., Clinton, amicus curiae for the National Association of Mutual Insurance Companies.

Russell L. Samson of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, amicus curiae for the Iowa Association of Business and Industry.

Considered en banc.

SNELL, Justice.

A group of policyholders, represented by Mary M. Rieff, appeal the dismissal of their lawsuit against two insurance companies and numerous individual defendants who were or are directors of Allied Mutual Insurance Company (Mutual). The defendants also include Allied Group, Incorporated (Group). Mutual is a nominal defendant and Nationwide Mutual Insurance Company (Nationwide) is an intervenor defendant. A motion to dismiss the lawsuit was filed by the defendants. The district court sustained the motion to dismiss holding that the policyholders lacked standing to proceed with the lawsuit and the suit was barred by a statute of limitations. We reverse the dismissal of the policyholders' suit in part and remand for further proceedings.

I. Background Facts and Proceedings

This appeal is from a case with many issues, parties, attorneys, claims, counts, and legal theories. Initially, the suit was brought on behalf of a mutual insurance company by its policyholder under the theory of a shareholder's derivative suit. As we stated in Weltzin v. Nail:

A derivative lawsuit is unique in that the shareholders allege the company's directors have directly harmed it by their acts and omissions such that the company has suffered a loss. The shareholders indirectly assert their rights through the rights of the company.

Weltzin v. Nail, 618 N.W.2d 293, 295 (Iowa 2000). Later, the suit was amended to include class action claims brought individually by the policyholders. The policyholders allege a claim of "de facto demutualization" or "de facto conversion" under this action. The main thrust of both actions is that the directors of Mutual, through their association with Group, committed several breaches of duties for which the policyholders and the company itself are owed compensation. Below are the facts alleged by the policyholders in their pleading.

Allied Mutual Insurance Company incorporated Allied Group, Inc. in 1974. Mutual primarily operated as a private citizen insurer for home and automobile. Group engaged in the casualty and life insurance business. Until 1985, Group was a totally dependent subsidiary of Mutual. Group had no employees of its own, and Mutual provided for all of Group's services. Many of the directors of Mutual were also the directors of Group. Prior to 1985, Mutual owned 100% of Group's stock. In 1985, the directors, who are most of the defendants in this proceeding, offered 21% of Group's stock publicly. Rather than Mutual receiving the benefits of this sale, the proceeds totaling $16.4 million went to Group's subsidiaries. This transaction began the process that would ultimately result in a role reversal between Mutual and Group.

A pool had always existed between Mutual and Group and its subsidiaries containing the assets, profits, and premiums of their business. Initially, Mutual controlled the pool and Group received 15%. The defendant directors began to slowly increase Group's share in 1985, first to 38%, in 1987 to 41%, in 1990 to 53%, in 1992 to 60%, and in 1993 to 64%. Thus, in 1985 Mutual received 85% of the benefits from the joint pool, but by 1993 Mutual's share had decreased to 36%. Finally, in January of 1993, Mutual gave up all control of the pool to a subsidiary of Group for no consideration.

By 1989, all Mutual employees had been reclassified as Group employees, in turn making Mutual completely dependent on Group for its workforce. Eventually, in February of 1993, Mutual sold off all of Group's remaining common stock, giving up any possibility of sharing in Group's growth and success. As a result of the sell-off of Mutual's control to Group, the policyholders allege that the directors have allowed themselves several generous grants since 1985 worth many millions of dollars. From 1985 to 1993, Mutual slowly restructured itself, which the policyholders allege benefited the individual directors, Group, and its shareholders, and was to Mutual's detriment. In all, the policyholders conclude the defendants exchanged assets worth more than $900 million at the time of the original petition for consideration of only $126 million. Further, because Mutual was essentially subsumed under Group, the policyholders argue, what in fact occurred was a demutualization.

Demutualization occurs when a private mutual company converts to a publicly held stock company. In order for a mutual company to do this by statutory procedure, it must follow strict guidelines ensuring fairness to its policyholders. See Iowa Code ch. 515G (1997) (describing mutual insurance company conversions). Mutual's policyholders argue these procedures were not followed, and they suffered harm as a result.

In December 1997, Rieff filed a derivative suit against the individual directors/officers of Mutual and Group and Group individually. She later amended her petition in June 1998 to include class claims and a class of injured policyholders. The amended petition asserts eight counts against all named defendants. The petition alleges five derivative claims and three class action claims, the main one being de facto demutualization. The petition requests relief for Mutual and its policyholders. A summary of the amended petition is included below:

Count I Breach of Fiduciary Duty (Derivative Claim);

Count II Waste of Corporate Assets (Derivative Claim);

Count III Improper Transfer of Control (Derivative Claim);

Count IV Intentional Interference with Business Advantage and Contracts (Derivative Claim);

Count V Equitable Relief (Derivative Claim);
Count VI De Facto Conversion (Class Action Claim);
Count VII Breach of Fiduciary Duty (Class Action Claim); and

Count VIII Intentional Interference with Advantageous Business and Contractual Relationships (Class Action Claim).

Nationwide intervened as a defendant in 1998 following its purchase agreement with and for Allied and its subsidiaries. The policyholders sought to enjoin this sale from going through pending their litigation. In July 1998, a hearing was held on the policyholders' motion for temporary and permanent injunction against the sale of all Allied companies to Nationwide. This motion was denied. The directors/officers, together with Group, also filed a motion to dismiss the policyholders' amended petition. They argued policyholders have no standing to bring a derivative suit, the statute of limitations bars the basis for the claims, and the policyholders have otherwise failed to state a cognizable claim for which relief can be granted.

The district court agreed with each argument made by the defendants. It granted the motion to dismiss in its entirety. The district court's opinion has caused quite a stir among those in the insurance and legal communities. Six amicus curiae briefs have been filed since the policyholders took their appeal to our court. The issue generating the most dispute is whether a policyholder has standing to bring a derivative suit on behalf of her mutual company. This right is unequivocally recognized for shareholders by state statute. Iowa Code § 490.740. A similar right for policyholders may also be found in past precedent. Rowen v. LeMars Mut. Ins. Co., 230 N.W.2d 905 (Iowa 1975) (Rowen I). We have never addressed...

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