Scott v. Bodor, Inc.

• Decision Date: 16 May 1991
• Docket Number: No. 20A03-8910-CV-00443,20A03-8910-CV-00443
• Citation: 571 N.E.2d 313
• Parties: John R. SCOTT, Scott Financial Organization, Inc., Thomas J. Brown, Thomas J. Brown & Associates, Appellants-Defendants, v. BODOR, INC., Appellee-Plaintiff. 1
• Court: Indiana Appellate Court

Page 313

571 N.E.2d 313

John R. SCOTT, Scott Financial Organization, Inc., Thomas J Brown, Thomas J. Brown & Associates, Appellants-Defendants, v. BODOR, INC., Appellee-Plaintiff.

No. 20A03-8910-CV-00443. ¹

Court of Appeals of Indiana Fifth District.

May 16, 1991.

Peter G. Tamulonis, Thomas J. Jarzyniecki, Jr., Kightlinger & Gray, Indianapolis, for appellants-defendants.

Michael R. Parker, Michael Rosiello, Michael A. Klein, Barnes & Thornburg, Indianapolis, Paul D. Refior, Refior Law Office, Warsaw, for appellee-plaintiff.

SHARPNACK, Judge.

This case comes to us on interlocutory appeal from the denial of defendant's motion for partial summary judgment. ² The motion was addressed to the two counts of plaintiff's complaint based on allegations of actual and constructive fraud. The third count for professional negligence is not before us. The plaintiff is Bodor, Inc., a corporation that implemented a "supplemental income" plan that was presented to it by the defendants Scott and Brown. The fraud claims are based on representations which the defendants, for purposes of this appeal only, admit were made in the course of presenting the plan to the plaintiff. The plan was funded by the purchase of life insurance from the sale of which the defendants shared commissions.

We conclude that there are genuine issues of material fact to be resolved by trial and affirm the trial court denial of partial summary judgment.

ISSUES

The parties identify numerous issues for review. We consolidate and restate these issues as follows:

1. Whether the plaintiff presented facts sufficient to create a genuine issue of material fact on the question of whether the defendants made misrepresentations of past or existing fact.

2. Whether the plaintiff presented facts sufficient to create a genuine issue of material fact on the question of whether it was entitled to rely upon the defendants' misrepresentations.

3. Whether the defendants' actions can constitute a constructive fraud under Indiana law.

FACTS

The following facts are those most favorable to the plaintiff as the nonmoving party. The plaintiff is a closely held Indiana corporation. Robert and Stephen Kesler own one hundred percent of its stock. Robert, Stephen, and Robert's wife Doris are all officers of the corporation.

In 1983, defendant Scott contacted Bodor in order to offer his services as a financial planner. Scott told Robert Kesler that he could offer Bodor a variety of plans that would provide income tax advantages to Bodor. Bodor eventually retained Scott, and, over the course of several years, he set up various insurance and investment plans for Bodor. He also provided tax planning advice to the company and to Robert Kesler. Scott advised John Bishopp, Bodor's controller, on the manner in which the contributions to these plans were to be entered on Bodor's books. Eventually, Scott became Bodor's general financial advisor, with unfettered access to Bodor's offices and financial information. Bodor's officers trusted Scott and never consulted third parties for advice concerning any financial arrangements which Scott made on behalf of Bodor. Scott also became a personal friend to Robert Kesler.

In 1985, Bodor's officers met with Scott to discuss the company's tax situation for the year. Scott suggested that a supplemental income plan would be extremely beneficial, and he recommended that Bodor's officers meet with defendant Thomas J. Brown, the owner of defendant Thomas J. Brown & Associates, Inc. Scott proclaimed Brown to be an expert in "supplemental income" plans, and he asked whether Bodor's officers would be willing to listen to a presentation on the plan by Brown. Bodor's officers agreed to hear the presentation.

In November of 1985, Brown flew to Indiana from his principal place of business in Tampa, Florida to pitch the plan. He presented the plan in a meeting with Robert and Stephen Kesler, accountant Raymond Plummer, Bishopp, and Scott which took place in Bodor's corporate offices. Scott introduced Brown to the Bodor officers as his associate, and Brown proceeded to explain the supplemental income plan to the Bodor officers. Brown told the Bodor officers that the supplemental income plan had two features which were extremely important to Bodor: the corporation could take an immediate tax deduction for any funds it contributed to the program and could retrieve any funds it paid in if it needed to do so. When Steve Kesler asked if the plan was a life insurance vehicle, Brown replied that it was primarily an investment vehicle with a small life insurance component. When Robert Kesler told Scott that he did not want the program if it was only a life insurance policy, Scott assured him that it was an investment procedure. Neither Brown nor Scott mentioned that the program was exclusively a whole life insurance policy, and the plan brochure prepared by Brown did not mention that the plan was to be funded exclusively through life insurance.

Within a month after the meeting, Robert Kesler decided to implement the plan. He also decided, however, that Bodor should not make the $260,000 principal payment that Scott and Brown had suggested. Instead, he decided that Bodor should contribute only $130,000 in the first year. He notified Scott of the decisions, and Scott began to prepare the documents, including insurance applications for Bodor's principal officers, necessary to implement the plan.

Those of Bodor's officers who were to be insured under the plan assisted Scott in filling out their life insurance applications. Each of the insured officers underwent a physical examination as part of the application process. Each of the insured officers signed a policy application, and Robert signed each application in his capacity as president of Bodor, the policy owner. When they were presented to the Bodor officers to be signed, the policy applications specified neither the cost or amount of the insurance to be procured; Scott filled in that information after he obtained the signatures on the applications. The Bodor officers were unable to discern the nature or extent of the insurance coverage from the policy applications.

Scott also prepared for Robert's signature a letter to the insurer to accompany the first principal payment. The letter stated neither the nature nor the extent of insurance coverage to be procured. In addition, the letter did not specify that all the funds to be paid in were to be used as insurance premiums. In late December of 1985, after the paperwork had been completed, Bodor issued its check for $130,000 to fund the first year of the plan. Bodor took a deduction for the $130,000 paid into the plan for the 1985 tax year.

In March of 1986, some three months after the implementation of the plan, Scott presented amended insurance applications to Robert for signature. These applications, which were the first documents that stated the face value of the insurance policy to be shown to any Bodor officer, did not state the nature or the cost of the insurance to be procured. Robert, as was his custom with regard to documents prepared for Bodor by his trusted friend and advisor Scott, signed the applications without reading them.

Scott never presented Bodor's officers with copies of the insurance policies or any other documents concerning the supplemental income plan despite Robert Kesler's requests for such documentation. Robert was not appraised of the existence of the whole life policy until an employee, Dawn Hoffman, found copies of the policies in Bishopp's desk sometime in the spring of 1987. Bishopp stated that he had not placed the policies in the desk, and that he did not know who had placed them there.

In the second year of the plan, 1986, Bodor earned greater profits and increased its contribution to the plan to $240,000 in order to earn a larger deduction. When Robert instructed Hoffman, who was temporarily replacing Bishopp as controller because Bishopp was ill, to issue a check to Scott for the second year principal payment, Hoffman asked him to explain the plan to her. Robert told her he would more fully explain the plan later, but he said the beauty of the plan was that Bodor could retrieve the money later if the company needed it. He also told her that the contribution was tax deductible.

In order to make the second year payment, Bodor borrowed $240,000 from the Ameritrust National Bank. James Stout, a vice-president of the bank, met with Robert and Scott to negotiate the loan. Based on information supplied by Scott, Stout prepared a memorandum for submission to the loan committee. The relevant portion of this memorandum stated:

[F]unds to be used to fund a deferred pension program for the company. Will be repaid at $20M plus interest each month. This will save approximately $100M in taxes for 1986.

Bodor deducted the $240,000 principal payment from its 1986 taxes.

In April of 1987 Bodor's officers discovered that the $370,000 that Bodor had put into the plan was not tax deductible. Robert Kesler met with Scott in an attempt to determine what had gone wrong with the tax deduction. Scott confirmed that the contributions to the plan were not deductible, and the conversation became heated. Robert demanded that Bodor's funds immediately be withdrawn from the plan, and he asked when the funds would be returned. Scott replied that he did not know, but that he would call the insurer to find out. He went into Robert Kesler's private office, and when he returned, he said that he had called Los Angeles and that he had been told that Bodor would get most of its payments back. Bodor's phone records for the day in question show that no one made a call to Los Angeles from Robert's office on that day.

Scott later informed Robert that most of Bodor's funds in the plan would not be returned. Bodor has managed to recover only $117,000 of its $370,000 investment. Bodor has terminated all of its business dealings with Brown and Scott.

DECIS...