TSI Holdings, Inc. v. Buckingham

• Decision Date: 06 April 1995
• Docket Number: No. 94-2147-JWL.,94-2147-JWL.
• Citation: 885 F. Supp. 1457
• Parties: T.S.I. HOLDINGS, INC., and New Progress, Inc., Plaintiffs, v. John C. BUCKINGHAM and Cincinnati Insurance Company, Defendants.
• Court: U.S. District Court — District of Kansas

885 F. Supp. 1457

T.S.I. HOLDINGS, INC., and New Progress, Inc., Plaintiffs, v. John C. BUCKINGHAM and Cincinnati Insurance Company, Defendants.

No. 94-2147-JWL.

United States District Court, D. Kansas.

April 6, 1995.

William W. Humphrey, III, Rose, Brouillette & Shapiro, P.C., Kansas City, MO, for plaintiffs.

Timothy J. Sear, Polsinelli, White, Vardeman & Shalton, Overland Park, KS, for John C. Buckingham.

Robert F. Rowe, Jr., McAnany, Van Cleave & Phillips, P.A., Lenexa, KS, Victor C Peters, Nancy K Tordai, Keith B Daniels, Jr., Hanson & Peters, Chicago, IL, Terri Savely Bezek, Olathe, KS, for Cincinnati Ins. Co.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

I. Introduction

This case involves claims brought by plaintiffs T.S.I. Holdings, Inc. ("TSI") and New Progress, Inc. ("New Progress") against defendants John C. Buckingham and Cincinnati Insurance Company ("Cincinnati"). New Progress is a wholly-owned subsidiary of TSI. Defendant Buckingham was president of TSI and New Progress and also a director of New Progress. The various claims arise out of the plaintiffs' contentions that defendant Buckingham, through his positions at TSI and New Progress, wrongfully appropriated monies from the companies for his own personal use. Counts I-IV of the complaint consist of breach of fiduciary duty claims, a breach of promissory note claim, and a RICO claim by plaintiffs against defendant Buckingham. Plaintiffs' claims against defendant Buckingham are currently stayed due to the fact that he has filed for bankruptcy.

The focus of this case currently centers on Count V of the plaintiffs' first amended complaint. Count V is a breach of insurance contract claim by New Progress against Cincinnati. Effective September 30, 1991, Cincinnati issued a Commercial Crime Insurance Policy covering New Progress for losses occurring from employee dishonesty. On September 17, 1992, New Progress filed a Proof of Loss with Cincinnati in the amount of $230,111.73, which amount it claimed as damages arising out of Mr. Buckingham's actions. Cincinnati subsequently denied coverage under the policy. In Count V, New Progress seeks recovery from Cincinnati under the policy in the amount of the $200,000 policy limit. New Progress also seeks a determination that it is entitled to recover its reasonable attorney's fees in connection with the action pursuant to Section 155 of the Illinois Insurance Code due to Cincinnati's vexatious and unreasonable handling of its claim.

This matter is currently before the court on a number of dispositive and procedural motions. The dispositive motions include New Progress' motion for partial summary judgment as to Cincinnati's third affirmative defense (Doc. # 40), which deals with Cincinnati's defense that New Progress is not the proper party to bring this action. Also pending are Cincinnati's motion for summary judgment on Count V of the first amended complaint (Doc. # 66) and New Progress' Motion for partial summary judgment on Count V of its first amended complaint (Doc. # 62). While not denominated as cross-motions for summary judgment, these two motions discuss the same issues will be treated as if they were cross-motions by the court.

In addition to the dispositive motions, the parties have filed a plethora of motions to strike various testimony and evidence offered in conjunction with the summary judgment motions. These various motions to strike include: Cincinnati's motion to strike the affidavits and statements submitted by New Progress in support of its motion for partial summary judgment as to Cincinnati's third affirmative defense (Doc. # 47); New Progress' motion to strike the affidavit of Victor C. Peters submitted in support of Cincinnati's motion for summary judgment (Doc. # 76); New Progress' motion to strike the affidavit of John C. Buckingham (Doc. # 86); and Cincinnati's motion to strike the affidavit of H.J. Nichols, the exhibit attached thereto, and paragraph 42 of New Progress' statement of additional material facts submitted in opposition to Cincinnati's motion for summary judgment (Doc. # 91).¹

For the reasons set forth below, the court finds that New Progress is the proper party to bring this action. Accordingly, New Progress' motion for partial summary judgment as to Cincinnati's third affirmative defense (Doc. # 40) is granted. The court further finds that defendant Buckingham was not an "employee" of New Progress as that term is defined in the Cincinnati Policy. Accordingly, Cincinnati's motion for summary judgment on Count V of the first amended complaint (Doc. # 66) is granted and New Progress' Motion for partial summary judgment on Count V of its first amended complaint (Doc. # 62) is denied. The court further finds that the evidence contested in the various motions to strike filed by the parties was not relevant to the court's ruling on the summary judgment motions and those motions to strike are therefore denied as moot.

II. Factual Background

TSI and New Progress are both corporations duly organized and existing according to the laws of the state of Kansas. TSI is a holding company for a number of different subsidiaries, including New Progress, which is wholly-owned by TSI. New Progress is a manufacturer of refined fuel tank trucks.

John Buckingham was hired by TSI in June of 1991 to be its president and to oversee several of the subsidiaries of TSI, including New Progress. As president of TSI, Mr. Buckingham was responsible for the financial affairs of all of TSI's subsidiaries, and the financial structure of TSI as a whole. Essentially, Mr. Buckingham was responsible for preparing the consolidated financial return of the various subsidiary corporations for TSI.

Mr. Buckingham also held the positions of vice president and secretary of New Progress from July 2, 1991 to January 13, 1992, and president of New Progress from January 14, 1992 to July 9, 1992. From July 1, 1991 to July 9, 1992, Mr. Buckingham was also a director of New Progress. Mr. Buckingham was perceived at all times by the New Progress people reporting to him to be the chief executive officer of that corporation. Mr. Buckingham was responsible for running the day-to-day operations of New Progress and his work involved overseeing New Progress' organization, management, production, profitability, union relations, hiring, firing and all other functions that a typical president of a corporation would do. In addition, Mr. Buckingham performed work for several other subsidiaries of TSI.

In addition to Mr. Buckingham, the New Progress Board of Directors consisted of Steven Paul, Melvyn Paul, and Philip Hodes. The bylaws of New Progress provide that the directors are responsible for managing the business and affairs of the corporation. The parties dispute the actual amount of control and direction the directors had over Mr. Buckingham's work. Cincinnati contends that the board of directors of New Progress never instructed or directed Mr. Buckingham to undertake or perform any specific work for New Progress and in fact did nothing to direct or control Mr. Buckingham's work. New Progress, on the other hand, contends that the New Progress board of directors met frequently to discuss various issues relating to the corporation, and that the directors, as a whole, told Mr. Buckingham what to do with respect to New Progress.

When it was time for Mr. Buckingham to be paid, he received all of his pay from TSI by means of a paycheck that was issued to him by TSI. Additionally, Mr. Buckingham's W-2 form was issued by TSI. In turn, TSI's subsidiaries, including New Progress, would pay a management fee to TSI which was used to pay the salaries or portions of salaries of people who were doing work on their behalf. The management fee New Progress paid to TSI included reimbursement for services rendered to New Progress by Mr. Buckingham and others who split their time between New Progress and other TSI subsidiaries.

During the period from October 18, 1991 through July 7, 1992, New Progress was the named insured under a Commercial Crime Insurance Policy, policy number CAP 786 72 07, issued by Cincinnati (the "Cincinnati Policy"). The Cincinnati Policy provides that Cincinnati will pay for losses resulting directly from "employee dishonesty" as that term is defined in the Cincinnati Policy.

New Progress contends that from approximately October 18, 1991 through July 7, 1992, Mr. Buckingham improperly instructed that checks be drawn on the New Progress corporate bank account in the aggregate amount of $199,701.99 to pay for his own personal expenses and to provide cash for his personal use. New Progress also contends that during this period Mr. Buckingham also improperly used a New Progress American Express card to pay for his own personal expenses, which card had an unpaid balance of $30,409.74 on July 7, 1992. Cincinnati, on the other hand, contends that Mr. Buckingham did have the authority to use the checks and credit card in the manner he did, and that Mr. Buckingham had authorization to use the monies for personal expenses on the understanding that he would repay the monies to New Progress out of his year-end bonus. Cincinnati further disputes the amount alleged by New Progress to have been spent by Mr. Buckingham on personal matters.

On September 17, 1992, New Progress filed a proof of loss with Cincinnati in the amount of $230,111.73, which amount it claimed as damages resulting from Mr. Buckingham's conduct. Cincinnati subsequently denied coverage of New Progress' claim under the Cincinnati Policy.

Also during the period from October 18, 1991 through July 7, 1992, TSI and its subsidiaries were the named insureds under another Crime Insurance Policy, policy no. 81319527-A, which was issued by the Federal Insurance Company (the "Federal Policy"). On August 24, 1992, TSI filed a Proof of Loss with Federal arising out of Buckingham's actions. On April 23, 1993, Federal "loaned" to TSI and New Progress...