Indiana Law Review


24 INDIANA LAW REVIEW [Vol. 8:24

annexation . . . notwithstanding the provisions of any other law."70

The appellants contended that the statute unconstitutionally vested
legislative power in the courts by permitting discretionary control
over municipal action. The court rejected appellant's argument and
held that the statute did not vest legislative power in the courts
but, rather, authorized the courts to determine whether the city had
complied with all the statutory requirements for annexation.

Although the statute provides that courts "may" order annex-
ation, it was given a mandatory construction. The court of appeals
reasoned that, although "may" normally implies discretion, it will
be construed to mean "shall" when its ordinary meaning would
defeat the objective of the statute and the intent of the legislature.
Thus, if the court finds compliance with the annexation statute, it

must order the annexation.71

III. Business Associations

Paul J. Galanti*

The following survey of developments in the corporate area
during the past year should be considered an overview rather than
an extensive analysis. 1

A. Securities Fraud

A somewhat unusual securities fraud case was before the First
District Court of Appeals in Soft Water Utilities, Inc. v. LeFevre.7

The court affirmed a judgment for plaintiff entered by the Putnam
County Circuit Court. The suit arose out of LeFevre's April 8, 1959,
purchase of 2,080 shares of what he believed was a new issue of
50,000 common shares of Soft Water Utilities [SWU]. In fact,

70Ind. Code § 18-5-10-25 (Ind. Ann. Stat. § 48-722, Burns Supp. 1974)
(emphasis added).

7, 297 N.E.2d at 919.
*Associate Professor of Law, Indiana University Indianapolis Law School.

B.A., Bowdoin College, 1960; J.D., University of Chicago, 1963.
The author wishes to express his appreciation to Thomas J. Blee for his

assistance in preparing this survey of corporate developments.

'A case worth noting in passing is Lindenborg v. M & L Builders &
Brokers, Inc., 302 N.E.2d 816 (Ind. Ct. App. 1973), in which the court re-

stated the well established principle that changing the name of a corpora-
tion does not affect its liability for indebtedness previously incurred. See,

e.g., Rice v. Fletcher Savings & Trust Co., 215 Ind. 698, 22 N.E.2d 809 (1939).
2308 N.E.2d 395 (Ind. Ct. App. 1974) (Robertson, J.).



1974] SURVEY—BUSINESS ASSOCIATIONS 25

they were previously issued shares that had been purchased by
defendant Farrell, a licensed stockbroker employed by SWU as a
selling agent for the new issue. The actual sale was made by Far-
rell's employee, Hurst. A prospectus covering the issue had been
prepared and registered with the Indiana Securities Commissioner
under the Indiana Securities Law in effect in 1959.3 The prospectus
contained a balance sheet showing the net worth of the corporation
as $343,690.85. This figure would have been increased by approxi-
mately $250,000 if the entire issue had been sold at the asking price
of $5 a share.

An intriguing aspect of the case is that it was not based on the
civil remedy provided in the then effective Securities Law. That
remedy was rescission of the transaction by the purchaser.4 Rather,
LeFevre's suit was for damages for common law fraud. The deci-
sion does not explain his rationale, but presumably he was moti-
vated by the two year statute of limitations applicable to rescission
actions.

5 The appellate court held that rescission was not the ex-
clusive remedy available to purchasers since the statute specifically
provided that "the rights and remedies provided by this act shall be
in addition to any and all other rights and remedies that may exist
at law or in equity."6

Thus, the key to the LeFevre case was whether plaintiff had
established the four essential elements of common law fraud : mate-
rial misrepresentations, scienter, reliance by plaintiff, and injury.

7

Central to the misrepresentation element was the evidence that Far-
rell had "made a market" in SWU stock by trading approximately

3 Ch. 120, §§1-25, [1937] Ind. Acts 656 (repealed 1961); ch. 30, §§1-12,

[1941] Ind. Acts 71 (repealed 1961) ; ch. 35, §§ 1-4, [1947] Ind. Acts 98

(repealed 1961) ; ch. 239, § 1, [1949] Ind. Acts 791 (repealed 1961) ; ch. 194,

§§1-3, [1951] Ind. Acts 526 (repealed 1961); ch. 127, §1, [1953] Ind. Acts

438 (repealed 1961); ch. 290, §1, [1955] Ind. Acts 829 (repealed 1961); ch.

224, §1, [1959] Ind. Acts 536 (repealed 1961).
4Ch. 120, §19, [1937] Ind. Acts 656 (repealed 1961). This provision con-

trasts with the civil penalty section of the current Securities Law, Ind. Code

§ 23-2-l-19(a) (l)-(2) (Burns 1972), which provides for rescission or dam-

ages in the event the purchaser no longer owns the security sold in violation

of the Act.
5 Ch. 120, §19, [1937] Ind. Acts 656 (repealed 1961).
6Ch. 120, §22, [1937] Ind. Acts 656 (repealed 1960). The saving clause

in the current statute, adopted in 1961, provides that a right of action con-

ferred by the prior law is not impaired or abrogated by its repeal. Ind. Code

§23-2-1-23 (Burns 1972).
7Edwards v. Hudson, 214 Ind. 120, 122, 14 N.E.2d 705, 706 (1938);

Middlekamp v. Hanewich, 147 Ind. App. 561, 566, 263 N.E.2d 189, 192 (1970)

;

Farm Bureau Mut. Ins. Co. v. Seal, 134 Ind. App. 269, 277, 179 N.E.2d 760,
763 (1962). For a general discussion of common law fraud, see W. Prosser,

Law of Torts §§105-10 (4th ed. 1971) [hereinafter cited as Prosser]; Re-
statement of Torts §§525-49 (1938).



26 INDIANA LAW REVIEW [Vol. 8:24

17,000 previously issued shares. He apparently followed the "clas-
sic" investment advice of buying low at $2 to $4 a share, and selling
high at $5 per share as specified in the prospectus for the new is-
sue. Hurst's specific misrepresentations were flagrant and appar-
ent. LeFevre was told that the new issue of 50,000 shares was
almost sold out, whereas in fact only 1,089 shares were ever sold.
LeFevre was led to believe he was buying the new issue whereas in
fact he was buying stock owned by Farrell. Hurst told LeFevre
that the funds obtained through the sale would go to the corporate
treasury, but the $10,400 paid for the stock apparently went to
Farrell rather than to the corporation. If most of the new issue had
been sold and the proceeds received by SWU, its net worth would
have been augmented by approximately $250,000 less the broker's
fee owed Farrell, which was far more than the approximately
$5,500 actually received. The court concluded that the fact that the
"misrepresentations were material cannot be seriously contested."8

SWU contended that no false representations were made be-
cause the transaction had shifted from the new to the prior stock
when LeFevre disclosed that he did not have the necessary cash,
as required by the prospectus, to buy the new stock. LeFevre in-
stead offered Hurst 1,000 shares of another company in exchange
for the SWU stock. Farrell eventually approved the deal and cred-
ited LeFevre with $10,000. SWU argued that LeFevre, as an expe-
rienced investor, must have known that the subject matter of the
transaction had changed; ergo, no false representations had been
made. LeFevre responded that it was his understanding that Far-
rell would either sell the stock on the open market or buy it himself
and use the proceeds to purchase the new issue SWU shares. The
trial court accepted LeFevre's understanding of the transaction

and the appellate court concluded the finding was adequately sup-
ported by the record.

The court next considered the scienter, or guilty knowledge,

element of the fraud action. The court acknowledged that Hurst

might not have been aware of the falsity of his representations, but

considered this irrelevant since Hurst received his information and

instructions from Farrell and since the evidence was such that sci-

enter readily could be inferred to Farrell.
9 The court categorically

6308 N.E.2d at 397.
9The evidence indicated that, as SWU's exclusive agent for selling the

new issue, Farrell had convinced the board of directors that it was neces-
sary for him to trade in the previously issued stock. Since he bought and

sold approximately 17,000 old shares, while selling only 1,089 new shares,
the trial court was correct in concluding that previously issued stock was
being sold as new and that Farrell was aware of the false representations
being made by Hurst in furthering the fraudulent scheme. Id. at 398.



1974] SURVEY—BUSINESS ASSOCIATIONS 27

rejected SWU's suggestion that scienter and the other elements of
the fraud cause of action cannot be established by inference. The
law in this respect is well settled. Positive evidence of fraud is not
required and it is sufficient if a plaintiff proves facts and circum-
stances from which fraud fairly can be inferred. 10

The deception and reliance element was satisfied by LeFevre's
showing that he reasonably relied on the SWU prospectus which
referred only to the new issue stock ; further, his questions concern-
ing SWU's use of the proceeds showed sufficient care and diligence
in guarding against fraud since the answers did not put him on
notice to investigate further. As the court stated, "a person has
a right to rely upon representations where the exercise of reason-
able prudence does not dictate otherwise." n This is particularly

true when the statements are not obviously false on their face or
when, as here, the facts are peculiarly within the knowledge of the
seller.

12 The injury element was satisfied by the trial court's find-
ing that LeFevre had paid $10,400 for an interest in a corporation
which had a net worth substantially less than the value represented.
Since SWU had not received the proceeds from LeFevre's purchase
nor from any of the other supposed sales of the new issue stock, its
prospects for future growth and increased profits were consider-
ably diminished.

All of this only established that Farrell had committed fraud.
To recover against SWU, LeFevre had to establish an agency or
conspiracy relationship between Farrell and the corporation. The
court of appeals concluded that an agency relationship had been
established. Farrell had been employed by SWU for the purpose
of selling the new issue of stock. This at least clothed Farrell, and
his employee Hurst, with the apparent authority to make represen-
tations on behalf of the principal, SWU. Basic to the concept of
apparent authority is the principal's manifestation to the third

party that the agent is authorized to negotiate or make represen-
tations on the principal's behalf. 13 This "holding out" element was

wSee Grissom v. Moran, 290 N.E.2d 119, 123 (Ind. Ct. App. 1972); Ed-
wards v. Hudson, 214 Ind. 120, 122, 14 N.E.2d 705, 706 (1938) ; Middlekamp

v. Hanewich, 147 Ind. App. 561, 566, 263 N.E.2d 189, 192 (1970).

"308 N.E.2d at 398. See Grissom v. Moran, 290 N.E.2d 119, 124 (Ind.

Ct. App. 1972) ; Voorhees v. Cragun, 61 Ind. App. 690, 700, 112 N.E. 826,

829 (1916).
' 7See Grissom v. Moran, 290 N.E.2d 119, 124 n.10 (Ind. Ct. App. 1972);

Kluge v. Ries, 66 Ind. App. 610, 117 N.E. 262 (1917). See generally Prosser

§108, at 715-18; cf. Restatement (Second) of Agency §171 (1958).
}3See Gizzi v. Texaco, Inc., 437 F.2d 308 (3d Cir. 1971) ; Storm v. Marsis-

chke, 304 N.E.2d 840, 842 (Ind. Ct. App. 1973) (discussed at text accompany-

ing notes 103-13 infra) ; Farm Bureau Mut. Ins. Co. v. Coffin, 136 Ind. App. 12,
17-18, 186 N.E.2d 180, 183 (1962). See generally Restatement (Second) of



28 INDIANA LAW REVIEW [Vol. 8:24

satisfied in LeFevre by the statement in the prospectus that Farrell
had the exclusive contract to sell the new issue. 14

Although not all authorities agree, 15 the LeFevre court adopted
the position of the Restatement (Second) of Agency that an entirely-
innocent principal who puts an agent in a position to commit fraud
while apparently acting within his authority is liable for the

fraud.
16 The comments to the relevant section of the Restatement

emphasize that it was the principal who placed the agent in the posi-
tion to consummate the fraud and that, from the point of view of
the third person, the transaction would seem regular on its face.
It is irrelevant that the principal is innocent and might not have

received the benefits of the fraud. Of course, there is no question
of liability if the principal is involved in the fraud.

17
Since the

LeFevre court found apparent authority, it did not consider whether
Farrell or Hurst had actual authority to make the representations
in question.

At this point, the appellate court differed with the trial court's
conclusion that Farrell and SWU had conspired to defraud LeFevre.
There is authority that, under extraordinary circumstances, a cor-

poration can conspire with its officers or independent agents, 10 but

the general rule is that a corporation and its agents acting within
the scope of their authority are one entity and hence cannot con-
spire.

19 The court concluded that the LeFevre case was within the

Agency §§8, 27 (1958) ; W. Seavey, Law of Agency § 8D (1964) [herein-
after cited as Seavey].

M308 N.E.2d at 399.
^ 5See, e.g., Mills v. Lewis Wood Preserving Co., 93 Ga. App. 398, 91

S.E.2d 785 (1956) ; Mesce v. Automobile Ass'n, 8 N.J. Super. 130, 135-36, 73
A.2d 586, 588-89 (App. Div. 1950).

1 6Restatement (Second) of Agency §261, comment a at 570-71 (1958).
See Bowman v. Home Life Ins. Co., 243 F.2d 331 (3d Cir. 1957) ; Old Line
Auto. Insurors Co. v. Kuehl, 127 Ind. App. 445, 451-52, 141 N.E.2d 858, 861

(1957). See generally Restatement (Second) of Agency §§257-58, 264-65

(1958) ; Seavey §§ 60, 61, 92.
,7Dellefield v. Blockdel Realty Co., 128 F.2d 85, 91 (2d Cir. 1942) ; Ashby

v. Peters, 128 Neb. 338, 258 N.W. 639 (1935). See generally Restatement
(Second) of Agency § 257 (1958) ; Seavey § 92C.

}6See, e.g., Albrecht v. Herald Co., 390 U.S. 145 (1968) ; Poller v. Colum-
bia Broadcasting System, Inc., 368 U.S. 464, 469-70 (1962) ; Tamaron Distrib.
Corp. v. Weiner, 418 F.2d 137 (7th Cir. 1969).

,9The court cited Johnston v. Baker, 445 F.2d 424 (3d Cir. 1971) ; Pear-
son v. Youngstown Sheet & Tube Co., 332 F.2d 439 (7th Cir. 1964) ; and the
leading case on point, Nelson Radio & Supply Co. v. Motorola, 200 F.2d 911
(5th Cir. 1952), cert, denied, 345 U.S. 925 (1953). The Nelson court drolly
commented that the president, sales manager and other officers and employees
of Motorola were "certainly a unique group of conspirators." 200 F.2d at
914. See also Goldlawr v. Shubert, 276 F.2d 614 (3d Cir. 1960); Johnny
Maddox Motor Co. v. Ford Motor Co., 202 F. Supp. 103 (W.D. Tex. 1960).



1974] SURVEY—BUSINESS ASSOCIATIONS 29

general rule rather than the exception. One of the cases cited by
the court was Johnston v. Baker,70 wherein the Court of Appeals
for the Third Circuit, recognizing that normally a corporation can-
not conspire with its agents, nonetheless concluded that the fact of
agency alone will not preclude a finding of conspiracy when there
is evidence that the conspirators were acting for their personal
interests and at least one of the parties to the conspiracy was not
an employee or agent "as such" of the corporation. Perhaps Hurst,
who was at best a sub-agent of SWU, fell into that category and
even Farrell might have been sufficiently independent as a broker
to satisfy the requirement. Certainly Farrell was not acting solely
in SWU's interests. The Johnston court declined to rule whether
the personal interests of a conspirator alone would sustain a con-
spiracy charge without a non-employee or non-agent defendant but
intimated that it might so rule in an appropriate case. 21 Although
it is possible that the LeFevre court erred on the conspiracy issue,
agreement with the trial court would only have been an additional
ground for affirming a judgment which would stand, in any event,
on the agency showing.22

B. Indiana Securities Law Exemptions

The consequences of not complying with the registration re-
quirements of the Indiana Securities Law23 were amply demon-
strated in Hippensteel v. Karol,74 in which the Third District Court
of Appeals reversed the Allen County Superior Court and instructed

it to enter judgment for plaintiff Hippensteel. Hippensteel was a
case of first impression in Indiana and presents some interesting
problems for private individuals, as opposed to brokers or issuers,

who sell securities. The case arose when defendant Karol, a doctor,
sold securities of Ingenio La Gartia, a Costa Rican sugar refinery,
to nine of his professional associates and colleagues. The securities
were not registered with the Indiana Securities Commissioner.

25

20445 F.2d 424 (3d Cir. 1971). The judgment for plaintiff was affirmed
in this action against the owner and the president of a hotel corporation

alleging- a conspiracy to injure plaintiff's business.
2 Ud. at 427.
22The court also rejected SWU's contention that it was error for the

trial court to award prejudgment interest. The court concluded that LeFevre's

damages, determined to be $6,644, were ascertainable at the time of the sale

and that interest in such a case is appropriate. New York, C. & St. L. Ry.
v. Roper, 176 Ind. 497, 503-04, 96 N.E. 468, 472 (1911).

23 Ind. Code §§23-2-1-1 to -25 (Burns 1972).
24304 N.E.2d 796 (Ind. Ct. App. 1973) (Staton, J.).

"The registration provision of the Indiana Securities Law, Ind. Code
§23-2-1-3 (Burns 1972), is as follows:

It is unlawful for any person to offer or sell any security in this



30 INDIANA LAW REVIEW [Vol. 8:24

They were sold in units of one share of stock and a debenture at
$6,000 a unit. The transaction with Hippensteel was the last of
the nine.

Karol's involvement with Ingenio La Gartia began when he
purchased twenty units for $120,000. After attending a share-
holders meeting in January, 1967, he decided to sell eighteen of the
twenty units at his original cost of $108,000. The opinion does not
indicate if Karol became soured on the investment at the meeting.
Subsequent to the sales, he came under pressure from the manage-
ment and other shareholders of the Costa Rican company to rein-
vest. He did reinvest in May, 1967, when he purchased eight addi-
tional units of the unregistered securities. Either he still had some
doubts about the company or he actually was in the securities busi-
ness because, in July, 1967, he sold five units to Hippensteel for

an agreed price of $30,000. When it became apparent to Hippen-
steel, within the two year statute of limitations,26 that the company
might be in financial difficulty, he filed his complaint alleging that

(1) the sale of the securities was fraudulent at common law and
violated the fraudulent practices provision of the Securities Law,27

state unless (1) it is registered under this act or (2) the security

or transaction is exempted under section 102 [Id. § 23-2-1-2].

The statute provides two methods of registering securities. Id. § 23-2-1-4

sets forth the procedures for registration by coordination when a registra-
tion statement has been filed with the Securities and Exchange Commission

in connection with the same offering under the Federal Securities Act of

1933, 15 U.S.C. §§ 77a-77aa (1970). The more complex registration by quali-

fication procedures, which apply when no registration statement will be filed
with the SEC, are set forth in Ind. Code §23-2-1-5 (Burns 1972). For a
brief, but comprehensive, comparison of the treatment of nonissuer trans-

actions under the Securities Act of 1933 and the state securities acts, com-

monly known as "Blue Sky Laws," see Note, Regulation of Nonissuer Trans-
actions Under Federal and State Securities Registration Laws, 78 Harv. L.
Rev. 1635 (1965). For a general discussion of Blue Sky Laws, see 14 W.
Fletcher, Private Corporations §§ 6738-44 (perm. repl. ed. 1965) [here-

inafter cited as Fletcher] ; H. Henn, Law of Corporations §§ 306-08 (1970)
[hereinafter cited as Henn]; N. Lattin, Corporations §44 (2d ed. 1971)
[hereinafter cited as Lattin]. State securities legislation is extensively and
critically treated in L. Loss & E. Cowett, Blue Sky Laws (1958). For a
general discussion of registration requirements under the Indiana statute,

see Note, Securities Registration Requirements in Indiana, 3 Ind. Legal F.
270 (1969).

26Ind. Code § 23-2-1-19 (e) (Burns 1972).
27
Id. §23-2-1-12 provides:

It is unlawful for any person in connection with the offer, sale or

purchase of any security, either directly or indirectly, (1) to em-

ploy any device, scheme or artifice to defraud, or (2) to make any
untrue statements of a material fact or to omit to state a material

fact necessary in order to make the statements made in the light of
circumstances under which they are made, not misleading, or (3) to



1974] SURVEY—BUSINESS ASSOCIATIONS 31

and (2) the sale violated the registration requirements of the Secu-
rities Law and thus was voidable under the civil penalty section.28

After a two day trial, the court found that Hippensteel had
failed to prove his statutory and common law fraud allegations and
that the sale was exempt from the registration requirements of the
statute. Only the exemption issue was before the appellate court
since the negative judgment on the fraud question presented no
issue for review.

29 On the exemption issue, the court of appeals
held that the trial court erred in concluding that Karol had success-
fully met his burden of establishing that the transaction was ex-
empt.

30 Karol claimed the transaction was exempt on two statutory
grounds. The first one discussed was Indiana Code section 23-2-1-
2(b) (10), which exempts the offer or sale of unregistered securi-
ties if, during a period of twelve consecutive months, the offeror

has not directed offers to sell securities of the same class to more
than twenty persons.31

Karol unquestionably had offered the securities to less than
twenty persons, but he ran afoul of the additional requirement that

either each buyer must represent in writing to the seller that the
securities are purchased for investment purposes or the seller must
obtain a ruling of the Securities Commissioner waiving the condi-

tions.
32 The purchasers no doubt bought the securities for invest-

engage in any act, practice or course of business which operates or

would operate as a fraud or deceit upon any person.
This provision closely parallels rule 10b-5, 17 C.F.R. 240.10b-5 (1973), prom-

ulgated by the SEC under section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. §78j(b) (1970). Like the Indiana Securities Law in effect
in 1959 which was involved in Soft Water Utilities, Inc. v. LeFevre, 308
N.E.2d 395 (Ind. Ct. App. 1974), discussed at text accompanying notes 2-22

supra, the rights and remedies available under the current act are not ex-

clusive. Ind. Code § 23-2-1-19 (h) (Burns 1972).
28Ind. Code §23-2-1-19 (Burns 1972). This section provides that one

who offers or sells a security by means of misrepresentations, either active

or passive, is liable to the purchaser for the amount paid or for damages in

the event the purchaser no longer owns the security. The civil penalty is in

addition to the criminal penalties authorized by id. § 23-2-1-18.
29See Schuh v. State, 251 Ind. 403, 406, 241 N.E.2d 362, 364 (1968) ;

Engelbrecht v. Property Developers, Inc., 296 N.E.2d 798, 801 (Ind. Ct.

App. 1973).
30Ind. Code § 23-2-1-16 (j) (Burns 1972) provides that the burden of

proof of an exemption or a classification from the application of the act

"shall be upon the party claiming the benefits of such exemption or classifi-

cation." For a general discussion of exemptions under the Indiana act, see

Note, Securities Registration Requirements in Indiana, 3 Ind. Legal F. 270,

285-94 (1969).
31 Ind. Code § 23-2-1-2 (b) (10) (Burns 1972). Excluded from this calcu-

lation are persons receiving offers which would otherwise be exempt.
32
Id. This provision is based on Uniform Securities Act § 402(b) (9).



32 INDIANA LAW REVIEW [Vol. 8:24

ment, albeit speculative investment. However, Karol could produce
neither the so-called investment letters

33
nor a ruling of the Com-

missioner. Thus the appellate court was constrained to hold that
he had failed to carry his burden establishing the exemption. While
Karol no doubt argued that section 23-2-1-2 (b) (10) laid a statu-

tory trap for the non-professional seller of unregistered securities,

the court had no choice except to follow the explicit language of the
statute and deny the exemption on this ground. 34

The second possible exemption35 discussed by the court was
provided by Indiana Code section 23-2-1-2 (b) (1), which exempts
"any isolated nonissuer transaction, whether effected through a
broker-dealer or not."

36 Thus the court was required to decide
whether the sale of the eighteen units for $108,000 during early
1967 and the somewhat later sale to Hippensteel of five units for
$30,000 could be considered "isolated transactions." The court said
no. In so holding, it was the first Indiana court to construe the
meaning of the word "isolated." This was a difficult task since
"definitional indefiniteness is . . . traditionally and probably inevi-
table"

37
in this area of the law and is only eased somewhat by the

fact that the language was taken verbatim from the Uniform Secu-
rities Act.

38

The appellate court noted that although isolated transaction

exemptions are nearly universal, the form varies and the authori-

ties on point are limited. In fact, only three of the twenty-seven

jurisdictions that have adopted the Uniform Securities Act have

"Investment letters are, or perhaps more accurately were, quite sig-

nificant in the "private placement exemption" under section 4(1) of the

Securities Act of 1933, 15 U.S.C. §77d(l) (1970). The past tense reference

is prompted by rule 144, 17 C.F.R. §230.144 (1973), recently promulgated

by the SEC, which rule substantially tightens the requirements for disposing

of unregistered securities. See generally Miller & Seltzer, The S.E.C.'s New
Rule 1U, 27 Bus. Law. 1047 (1972) ; Wheat, Phillips, Wander & Garrett,
Developments in Private Placements, Distribution of Restricted Securities;

Rule 1U, 28 Bus. Law. 483 (1973).
34304 N.E.2d at 802. See generally Note, Securities Registration Require-

ments in Indiana, 3 Ind. Legal F. 270, 291-92 (1969).
35 The court recognized that the decision had to be affirmed if there were

an alternative basis supporting the trial court's conclusions. See Indiana &
Mich. Elec. Co. v. Schnuck, 298 N.E.2d 438, 438 (Ind. 1973) ; 3 F. Wiltrout,

Indiana Practice §2790(1) (1967).
36Ind. Code § 23-2-1-2 (b) (1) (Burns 1972).
37304 N.E.2d at 800. The court cited L. Loss & E. Cowett, Blue Sky

Laws 317-19 (1958), and the Official Comments to sections 305 (i) and (j)
of Uniform Securities Act § 305, although the latter reference is somewhat
obscure.

35Uniform Securities Act § 402(b) (1) (as amended August, 1958). See
generally Note, Securities Registration Requirements in Indiana, 3 Ind.

Legal F. 270, 286-87 (1969).



1974] SURVEY—BUSINESS ASSOCIATIONS 33

case law interpreting the exemption.39 The court relied primarily
on Nelson v. State,40 in which the Oklahoma Court of Criminal
Appeals affirmed the conviction of Nelson for selling unregistered
stock. In so doing, the court defined the term "isolated sale" to
mean "one standing alone, disconnected from any other . . . [and]
of a nonrecurring nature engaged in by persons not engaged in the
securities business. . . ,"

4
' A similar approach was adopted by the

Kentucky Court of Appeals in Commonwealth v. Allen,42 in which
case the defendant had contacted thirty persons but had sold un-
registered securities to only ten. The Allen court held that evidence
of all the sales or offers determines whether the sale in question
was an isolated transaction. The Hippensteel court likewise ex-
amined all of KaroPs transactions in rejecting his exemption
argument.

The appellate court also cited Allen v. Schauf,43 in which the
Kansas Supreme Court held that a challenged transaction was ex-
empt. The Schauf case is instructive because the result turned not
on an analysis of the particular transaction but on the application
of an administrative regulation defining isolated transactions as

those in which the number of persons solicited during any twelve
month period is less than four.44 The Indiana court showed a clear
preference for this "definitive regulations" approach. The court

not only expressed regret that it had no choice but to adopt the

approach of the Oklahoma court in Nelson,45 but also very point-

edly noted that two states, Mississippi and Tennessee, had promul-

gated administrative regulations defining the limits of their stat-

utes' exemptions.46

39Al!en v. Schauf, 202 Kan. 348, 449 P.2d 1010 (1969) ; Commonwealth
v. Allen, 441 S.W.2d 424 (Ky. Ct. App. 1969); Sisson v. State, 404 P.2d 55,
(Okla. Crim. App. 1964) ; Nelson v. State, 355 P.2d 413 (Okla. Crim. App.
1960). See 69 Am. Jur. 2d Securities Regulation—State §79, at 1113 (1973).

40355 P.2d 413 (Okla. Crim. App. 1960). The Nelson case was followed
in Sisson v. State, 404 P.2d 55 (Okla. Crim. App. 1964), in which the court

held that the sale of securities of an insurance company to more than ten
persons did not qualify under the exemption.

41 355 P.2d at 420. Further, the court stated that the word isolated is
not a word of art, but "is a term the application of which must depend on the
facts of each case." Id.

42441 S.W.2d 424 (Ky. Ct. App. 1969).
43202 Kan. 348, 449 P.2d 1010 (1969).
44
2 Kan. Ad. Rules & Reg. § 81-1-1.

45304 N.E.2d at 801.
46
Id. at 801 n.3. Section 75-71-53.3 of the Mississippi Blua Sky Law,

Miss. Code Ann. §§75-71-1 to -57 (1972), exempts isolated transactions,
which are defined by Mississippi Regulation § 138(c) as not more than two
transactions of similar character within any consecutive six month period.
The Tennessee statute, Tenn. Code Ann. § 48-1632 (D) (1964), also exempts



34 INDIANA LAW REVIEW [Vol. 8:24

The court seemed to favor the isolated transaction approach
taken by non-uniform act jurisdictions which do not have adminis-
trative regulations.

47
It is doubtful that the court would have ruled

for Karol even if it had been free to rely on the interpretations
given to other statutes. Perhaps it simply felt that the rule of cases
such as Kneeland v. Emerton4 * was clearer and easier to apply. In
Kneeland, the Massachusetts Supreme Court dealt at length with
the isolated transaction problem and opined that an exempt sale
was " [a] ny isolated sale of any security by the owner thereof . . .
such sale not being made in the course of repeated or successive
transactions of a like character . . . ,"

49 In rejecting defendant's

challenge to the constitutionality of the provision, the Kneeland

court pointed out that the reference to "repeated and successive
transactions of a like character" was intended to contrast with the
term "isolated sales" and stated that, in fact, as few as two succes-
sive sales of securities can remove the second sale from the exempt
category if it is determined that the seller intended to make re-
peated and successive sales of the unregistered security.50 This

poses an intriguing possibility in the context of Hippensteel. Could

the first sale be considered as part of a "repeated and successive"
transaction and, if so, could the first purchaser rescind his purchase

if not barred by the statute of limitations ?

To make clear its point on the regulatory approach to the iso-
lated sales exemption, the Hippensteel court opined that, "without

an administrative regulation, only strict compliance with the statu-

tory requirements will effect an exemption."
51

Since the last of nine

separate sales within a six month period of twenty-three units of

securities for $138,000 could be deemed an "isolated transaction"

only by a quantum stretch of the imagination, Karol failed to estab-

lish an exemption under section 23-2-1-2 (b) (1). Thus Hippensteel

was clearly entitled to rescind the transaction under the Securities

Law. The result in Hippensteel is not shocking but its stringent

application in other situations might give a sharp investor a perfect

speculative investment, that is, one with high potential gain and no

such transactions. This exemption has been limited by the Tennessee Division

of Securities to no more than ten repeated and successive transactions. See
generally Miller, Procedures Under the Tennessee Securities Law, 28 Tenn.
L. Rev. 303, 308 (1961).

47304 N.E.2d at 801 n.4.
4S280 Mass. 371, 183 N.E. 155 (1932).
49Id. at 381, 183 N.E. at 160. Since the sale was by a registered broker,

the court simply ruled that he could not benefit from an exemption designed
for the owners of unregistered securities.

50
Id. at 388-89, 183 N.E. at 163.

51 304 N.E.2d at 802.



1974] SURVEY—BUSINESS ASSOCIATIONS 35

downside risk so long as suit is filed before the statute of limita-
tions runs.

C. Fiduciary Obligations and Dividend Policies

The obligations of a majority shareholder of a closely held
corporation and the situation in which a court of equity will order
the payment of a corporate dividend were the issues resolved by
the Third District Court of Appeals in Cole Real Estate Corp. v.
Peoples Bank & Trust Co.57 Plaintiff bank, as trustee, owned 86
of the 4,120 common shares of Cole Real Estate Corporation and
brought this suit against the corporation and Helen F. Cole, who
was the owner of the balance of the stock and the corporation's
president, treasurer and sole employee. The trustee sought an ac-
counting for and recovery of corporate assets and an order declar-
ing a dividend. The trial court held that Cole had converted corpo-
rate assets to her own use and benefit and that the corporation had
sufficient assets to permit a dividend of $1 per share for each of

the years from 1964 to 1970. The sole issue on appeal was the suffi-
ciency of the evidence supporting the findings of the trial court.

The appellate court concluded that the evidence was sufficient and
affirmed the judgment after modifying it by reducing the amount
of the award.53

Although the corporation was formed in 1935, there was little
evidence that a corporate identity had been maintained. Cole had

not filed annual reports for several years and the most recent board

of directors meeting was held in 1954 when the corporation was
reorganized. Cole testified that she could not recall when the present
board took office. She knew the General Corporation Act required
annual meetings of shareholders,

54
but none had been held because

of a lack of interest. Cole had the use of two company-owned cars

and lived rent free in a home owned by the corporation which served
as the corporate office from which she managed the business. She

further testified that she had set her own salary from 1964 to 1970,
ranging from $4,593.16 in 1964 to a high of $10,998.20 in 1967,

without consulting the board of directors.

52310 N.E.2d 275 (Ind. Ct. App. 1974) (Staton, J.).
53
Id. at 282. The trial court awarded attorneys' fees to the Peoples

Bank. The amount of these fees was also reduced on appeal. The court

noted that the defendants had made only a weak attack on this award and

concluded that the award was justified in an equitable proceeding by a

minority shareholder to compel those in control to restore money wrongfully

converted. Id. at 280 n.3. See Princeton Coal & Mining Co. v. Gilchrist,
51 Ind. App. 216, 224, 99 N.E. 426, 428-29 (1912); Atwater v. Elkhorn

Valley Coal Land Co., 184 App. Div. 253, 171 N.Y.S. 552, aff'd, 227 N.Y.

611, 125 N.E. 912 (1918).
S4Ind. Code § 23-1-2-9 (b) (Burns 1972).



36 INDIANA LAW REVIEW [Vol. 8:24

Defendants first attacked the judgment on the "assumption,"
in the words of the court, that the minority shareholder could not
maintain the derivative action because of failure to exhaust intra-

corporate remedies before filing suit.55 Although this is a well set-
tled principle of corporate law,

56
it is equally well settled that a

demand for corporate action is unnecessary prior to filing suit on
behalf of a corporation when the directors have acted in their own
interests or the majority shareholder has acted illegally or oppres-

sively in the corporate name.57 The court cited First Merchants
National Bank & Trust Co. v. Murdoch Realty Co.56 as authority.
Murdoch involved corporate officers who had mortgaged company-

55310 N.E.2d at 278. Perhaps "assumption" was the right word since
the actual theory of the case is not absolutely clear. Although a shareholder

derivative action, rather than a direct action, is the normal method of re-
covering corporate assets from insiders who have abused their trust, the
court here refers to the suit as an individual action. The rationale in sup-
port of derivative actions is clear. The corporation itself, rather than the
individual shareholder, has been injured by the acts of the defendants and
the cause of action normally lies with the corporation. Thus, any right of
action by a shareholder is "derived" from the action accruing to the corpora-
tion. See Gordon v. Elliman, 306 N.Y. 456, 119 N.E.2d 331 (1954). This is
true even in those derivative actions in which recovery goes to the share-
holders rather than to the corporation. See, e.g., Perlman v. Feldmann, 219
F.2d 173 (2d Cir.), cert, denied, 349 U.S. 952 (1955). For a general
discussion comparing derivative actions with direct actions, see 5 Fletcher
§2171; Henn §§358, 360; Lattin §102.

56Tevis v. Hammersmith, 31 Ind. App. 281, 66 N.E. 79 (1903). Derivative
actions are controlled by the provisions of the Indiana Rules of Trial Pro-

cedure which provide, in pertinent part, that the shareholder must "allege
with particularity the efforts, if any, made by the plaintiff, to obtain the
action he desires from the directors or comparable authority and the reasons
for his failure to obtain the action or for not making the effort. . . ." Ind.
R. Tr. P. 23.1. The requirement that a plaintiff shareholder exhaust intra-
corporate remedies before suit is designed to afford the corporation an
opportunity to conduct its own litigation since it is the principal party in
interest. See, e.g., Kowalski v. Nebraska-Iowa Packing Co., 160 Neb. 609,
71 N.W.2d 147 (1955). See generally 3 Fletcher §1284; 13 id. §§5963,
6008; 2 W. Harvey, Indiana Practice 365-75 (1970); Henn §§364-67;
Lattin § 105.

57See First Merchants Nat'l Bank & Trust Co. v. Murdock Realty Co.,
Ill Ind. App. 226, 39 N.E.2d 507 (1942). See also Somberg v. Bluemschine,
8 F.R.D. 198 (S.D.N.Y. 1948); Campbell v. Loew's, Inc., 36 Del. Ch. 563,

134 A.2d 852 (1957); Reed v. Norman, 48 Cal. 2d 338, 309 P.2d 809 (1957).
If the board of directors declines to enforce the corporation's right in the

exercise of sound business judgment, unaffected by personal interest, the
shareholder will be barred from bringing the action. See, e.g., Swanson v.
Traer, 249 F.2d 854, 858-59 (7th Cir. 1957). See generally 2 Fletcher

§535; 3 id. §1283; 2 W. Harvey, Indiana Practice 365 (1970); Henn
§365; Lattin § 105.

58111 Ind. App. 226, 39 N.E.2d 507 (1942).



1974] SURVEY—BUSINESS ASSOCIATIONS 37

owned property to secure individual debts. When suit was brought
to foreclose the mortgage, a minority shareholder was permitted to
intervene on behalf of the corporation. The court reasoned that
corporate officers, whose conduct was being questioned, could not
be expected to adequately defend an action involving dissipation
of corporate assets. Since it would have been "an idle gesture"59

for the shareholder to demand that the corporate officials defend
the action, the court placed the suit among those actions in which
shareholders can act directly.60 While the theory of the Cole case
might be obscure, there can be little doubt that it would have been
futile to require the bank to demand that Cole sue herself.

Defendant Cole then contended, or "assumed," that there was
insufficient proof that the compensation she had personally set for
herself was so unreasonable as to amount to a conversion of corpo-
rate assets. The court recognized that setting the compensation of
corporate personnel is primarily the province of the board of direc-

tors and that courts should interfere only in exceptional circum-
stances. It stated that "to be successful, an attack on the amount
of compensation paid to a corporate officer-employee must support
a finding that the salary in question is unreasonable or unfair."

61

The court cited Green v. Felton^ in which minority shareholders
alleged that the directors and majority shareholders of a company
had fraudulently elected themselves directors and had fixed their

salaries at excessive levels. In ruling for the defendants, the Green

court observed

:

But to give the court authority to set aside the action of
majority stockholders or board of directors, legally acting

under the rules of the company, legally adopted, there

must appear injustice or oppression, or circumstances
amounting to fraud.63

Finding little comfort in the rule of the Green case, the appellate

court neatly sidestepped the problem by concluding that Cole was

59Id. at 237, 39 N.E.2d at 512.
60The court relied on Marcovich v. O'Brien, 63 Ind. App. 101, 114 N.E.

100 (1916), which delineated those instances when the law recognizes the
right of shareholders to institute or defend actions directly, including "where

a majority of the stockholders are illegally or oppressively pursuing a course

in the name of the corporation, which is in violation of the right of the
other stockholders and can only be restrained by a court of equity." Id. at

111, 114 N.E. at 103.
61 310 N.E.2d at 279. For a general discussion of corporate compensation,

see 3 Fletcher §1110; 5 id. §§2109 et seq.; Henn §§243-45, 255; Lattin
§77; 2 H. O'Neal, Close Corporations §§8.10, 8.12 (1971).

6242 Ind. App. 675, 84 N.E. 166 (1908).
63
Id. at 685-86, 84 N.E. at 170.



38 INDIANA LAW REVIEW [Vol. 8:24

outside the ambit of the Green rule, since she ran the corporation
"unbridled by even a modicum of corporate formality.

"

64

The Cole court recognized that, in certain respects, closed cor-
porations may be distinguished from their publicly owned counter-
parts on matters of corporate formality and internal operation.
However, this concession does not countenance the use of corporate
assets by insiders for their personal gain. 65 The court then posited
that equity will provide a remedy when a majority shareholder
appropriates the corporate earnings for salaries.

66 But equivocating
once again, and not wishing to "act as the regulator of a private
corporation ... in determining what is a fair and reasonable com-
pensation/'

67
the court put the burden of establishing the unreas-

onableness of the compensation on the minority shareholder bring-

ing the action. The real problem with the opinion is that the court
did not make clear whether this rule applies only when formal cor-
porate action has occurred or when, as in Cole, the challenged offi-

cer has not followed what can be called the corporate "rules."
In resolving the burden issue, the court relied on two non-

Indiana decisions: Coleman v. Plantation Golf Club, Inc.bb and
Seitz v. Union Brass & Metal Manufacturing Co. 69 The Coleman
case clearly supports the proposition advanced by the Cole court.
The Coleman court held that the minority shareholder bringing the
derivative action was required to prove that the salaries were not
reasonable or, stated conversely, that they were clearly excessive

and wasteful. The Seitz case was an action to compel a corporation
to declare a dividend and to compel certain officers to repay exces-

sive salaries. The Minnesota court ordered the dividend but re-
fused to compel the officers to repay their salaries because the dis-

senting shareholder had not proved the requisite wrongdoing or

64310 N.E.2d at 279.

"Madding v. Indiana Dep't of State Revenue, 270 N.E.2d 771 (Ind. Ct.
App. 1971); Tower Recreation, Inc. v. Beard, 141 Ind. App. 649, 231 N.E.2d
154 (1967) ; First Nat'l Bank & Trust Co. v. Murdock Realty Co., Ill Ind.
App. 226, 39 N.E.2d 507 (1942).

66The court cited Wayne Pike Co. v. Hammons, 129 Ind. 368, 27 N.E.
487 (1891), in which the supreme court affirmed a judgment for a minority

shareholder who charged that corporate officers and majority shareholders
were paying themselves exorbitant salaries and using corporate funds to

purchase equipment for personal business.
67310 N.E.2d at 279. See generally 5 Fletcher §2122; Lattin §77, at

266. Many authorities clearly put the burden on the recipient to prove that
the compensation is fair and reasonable when his participation was neces-
sary to approve the compensation or salary. See Church v. Harnit, 35 F.2d

499 (6th Cir. 1929), cert, denied, 281 U.S. 732 (1930). Cf. Globe Woolen Co.
v. Utica Gas & Elec. Co., 224 N.Y. 483, 121 N.E. 378 (1918).

68212 So. 2d 806 (Fla. App. 1968).
69152 Minn. 460, 189 N.W. 586 (1922). See Annot., 27 A.L.R. 300 (1923).



1974] SURVEY—BUSINESS ASSOCIATIONS 39

oppression.
70 The Seitz court emphasized that the salaries had been

fixed on a regular basis by the board of directors, which was not
true in Cole.

After ostensibly putting the burden on the plaintiff, the appel-
late court undercut its position by concluding that the burden "was
met by showing an unauthorized appropriation of corporate assets
to Helen Cole's own use in the absence of reasonable justification." 7 '

The court did not discuss the reasonable value of the use of the
home and the automobiles. More importantly, there was no inquiry
into the compensation received by officers of similarly situated
corporations. Such an inquiry would seem essential, even when a
court is reluctant to overturn the findings of the lower court.

Rather, the court seemed to take the position that, since Cole had
not observed the corporate formalities, any compensation she re-
ceived from her unilateral acts would be unreasonable and exces-
sive. This probably is a correct and desirable result that will force
corporate personnel to comply with the less than burdensome cor-
porate formalities required by both the common law and the Gen-
eral Corporation Act. However, the result could have been reached

without this judicial "tour de force" if the court had simply stated
that a dominant owner of a corporation who ignores such formali-
ties has the burden of justifying his salary or compensation.72

The second issue in Cole was whether the trial court erred in
ordering a dividend. The appellate court held that the judgment was
supported by sufficient evidence. The court recognized that the de-
cision to declare a dividend is within the discretion of the board of

directors, subject to certain statutory requirements.
73 A court will

compel a dividend in appropriate cases but, as the court noted, the

burden of proof on a shareholder seeking such relief is necessarily

stringent and "only a clear abuse of discretion, established by proof

70152 Minn, at 464-65, 189 N.W. at 588.
71 310 N.E.2d at 280.
77See authorities cited note 67 supra. See also Henn § 255. After con-

cluding that the trial court was correct on the liability issue, the appellate

court found that the trial court erred in computing the judgment based on

an assessed conversion of $75 per month over the seven year period. Thus,

it reduced the judgment from $7,000 to $6,300 pursuant to Ind. R. App. P.

15 (M).
73Ind. Code § 23-1-2-15 (Burns 1972) sets forth the statutory require-

ments for dividends. The provision gives corporate directors the power, sub-

ject to any restrictions contained in the articles of incorporation, to declare

and pay dividends on outstanding shares. The section requires that the divi-

dends be paid only out of unreserved and unrestricted earned surplus and

precludes the payment of dividends if the corporation is, or thereby becomes,

insolvent or if the stated capital of the corporation is, or thereby becomes,

impaired. Partial liquidating dividends paid out of capital surplus are per-

mitted by id. § 23-1-2-15 (f )

.



40 INDIANA LAW REVIEW [Vol. 8:24

of bad faith, oppressive or illegal action, will justify the interven-
tion of a court of equity." 74

The court cited three Indiana cases to support the general
proposition that a court can order dividends: Star Publishing v.
Ball,

75 W.Q. O'Neall Co. v. O'Neall, 76 and Rubens v. Marion-Wash-
ington Realty Corp.77 While these cases were initiated by preferred
shareholders, the Cole court held that such relief was not limited to
that class of shareholders. In general, directors may exercise dis-
cretion in deciding to pass dividends, even on cumulative preferred
stock.

78 As the Cole court rightly observed, the key element in an
action to order payment is a showing of an abuse of discretion in
passing a dividend. Thus, there is no logical reason why the remedy
would be foreclosed to common shareholders. The court cited two
New York cases in support of this proposition : City Bank Farmers
Trust Co. v. Hewitt Realty Co. 79 and Gordon v. Elliman.™

In City Bank, the court recognized that a petition to compel

dividends on common stock could be granted under appropriate cir-
cumstances. However, the court refused to compel payment because

minority shareholders are barred from interfering with the man-

agement of the corporation so long as the directors are acting hon-

74310 N.E.2d at 280. For a general discussion of actions to compel the

payment of dividends, see 11 Fletcher §5325; Henn §§328 & 360, at
759-80; Lattin §§144-45; 2 H. O'Neal, supra note 81, §8.08; Comment,

Proposals to Help the Minority Shareholder Receive Fairer Dividend Treat-

ment from the Closely Held Corporation, 56 Nw. U.L. Rev. 503 (1961) ; Note,
Minority Shareholders' Power to Compel Declaration of Dividends in Close
Corporations—A New Approach, 10 Rutgers L. Rev. 723 (1956).

75 192 Ind. 158, 134 N.E. 285 (1922). The court ordered dividends on
preferred shares since the owner of all the common stock had paid himself
five percent common stock dividends while passing the preferred dividends.

76108 Ind. App. 116, 25 N.E.2d 656 (1940). The court ordered payment
of dividends when the majority shareholder in bad faith refused to declare
them. The court, however, refused to affirm that portion of the trial court's
ruling mandating the corporation to pay future dividends, stating that the
duty to declare dividends "rests in the sound discretion of the directors."

Id. at 130, 25 N.E.2d at 662. A court may interfere only on a showing of
abuse of that discretion. Id.

77116 Ind. App. 55, 59 N.E.2d 907 (1945), noted in 44 Mich. L. Rev. 318

(1945). The court held that, when mandatory dividends were subject to cer-
tain conditions, the shareholders' remedy was in equity until the dividend
was declared.

78Guttmann v. Illinois Central R.R., 189 F.2d 927 (2d Cir.), cert,
denied, 342 U.S. 867 (1951) ; Matter of Carlisle, 53 Misc. 2d 546, 278 N.Y.S.2d
1011 (Sur. Ct. 1967). See generally H. Ballentine, Ballentine on Cor-
porations §231 (rev. ed. 1946); 11 Fletcher §5325; Henn §§325, 327;
Lattin § 144.

79257 N.Y. 62, 177 N.E. 309 (1931).
6O306 N.Y. 456, 119 N.E.2d 331 (1954).



1974] SURVEY—BUSINESS ASSOCIATIONS 41

estly and within their discretionary powers. In other words, the
plaintiffs had failed to meet their burden of proving abuse of dis-
cretion. The court, in Gordon, also concluded that common share-
holders can sue to compel dividends on a corporation's common
stock.

81 The main holding of Gordon, however, was that such
equitable actions are derivative rather than direct in nature.82

In disposing of the argument that payment of the dividend
would require an invasion of capital, the Cole court pointed out that
dividends are not necessarily paid out of current taxable income but
rather are paid out of the corporation's earned surplus which has
built up over the years.63 In the court's opinion, the record showed
that Cole Real Estate Corporation had sufficient earned surplus to
pay the dividends for each of the years without invading capital.

Moreover, even after the payment of the dividends, the company
would still maintain a sizeable earned surplus.

Of course, the mere financial ability to pay a dividend will not
justify a court's interference since a corporation has the right to

retain earned surplus to insure financial stability and to effect in-

ternal policies and programs.84 The key question is whether the de-
cision not to declare a dividend clearly demonstrates oppressive

8,
It is interesting to note that the Cole court did not cite or rely upon

the classic case of Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668

(1919). The Dodge brothers, who ultimately formed their own automobile
company, were minority shareholders of the Ford Motor Company. They
sued to compel a dividend out of the corporation's substantial accumulated

cash and surplus after Henry Ford, the majority shareholder, had declined
to declare dividends. Ford preferred to share corporate gains with the

public by reducing the price of Ford cars. In effect, Ford made the com-
pany less profitable. After recognizing that corporate managers have a great
deal of discretion in determining the use of corporate funds, the Michigan

Supreme Court concluded that the company was not a "semi-eleemosynary
institution" and affirmed the lower court's decree that a dividend of

$19,275,000 be paid. The Dodge case is noted in 20 Colum. L. Rev. 93

(1920); 17 Mich. L. Rev. 502 (1919); 28 Yale L.J. 710 (1919).
82Not all authorities agree on this point. See, e.g., Knapp v. Bankers

Sec. Corp., 230 F.2d 717 (3d Cir. 1956). See generally 11 Fletcher § 5326.1;
Henn §360, at 759-60; Lattin §145. In effect, Gordon has been overruled
by statute. N.Y. Bus. Corp. Law §627 (McKinney 1954). The Cole court
stated it was unnecessary to decide the status of the action. 310 N.E.2d at
281 n.5.

83The court again rejected the argument that the plaintiff had failed to
exhaust intracorporate remedies. The court noted that a similar contention
was raised and rejected in W.Q. O'Neall Corp. v. O'Neall, 108 Ind. App. 116,
25 N.E.2d 656 (1940).

&4See, e.g., City Bank Farmers Trust Co. v. Hewitt Realty Co., 257 N.Y.
62, 177 N.E. 309 (1931); Jones v. Costlow, 349 Pa. 136, 36 A.2d 460 (1944).
See generally 11 Fletcher § 5325; Henn § 320; 2 H. O'Neal, supra note 61,
§ 8.08, at 59-60. For a basic discussion of the accounting principles relevant
to dividends, see Henn § 319 and authorities cited id. at 633 n.l.



42 INDIANA LAW REVIEW [Vol. 8:24

action by the controlling shareholder. In Cole, the court concluded
that this requirement was satisfied by the showing that Cole had
withdrawn all of the earnings of the corporation in salary and com-
pensation in lieu of declaring dividends which, albeit to only a small
degree, would be shared by the beneficiaries of the trust repre-
sented by the plaintiff bank.65 Finally, the court upheld the order
against Cole which set off the amount of the judgment against the
amount of dividends accruing on her shares. The court followed the
rule that a debt of a shareholder owed to a corporation may be set
off against a declared dividend, which is, in fact, a debt owed to
the shareholders.

86

D. Fiduciary Obligations of Corporate Management

The fiduciary duty of a shareholder of a closely held corpora-
tion was a major issue in Hartung v. Architects Hartung/Odle/
Burke, Inc.,* 7 in which the First District Court of Appeals affirmed
a $17,500 damage judgment against Hartung entered by the Greene
County Circuit Court.88 The litigation arose out of the short-lived
corporate successor to a sole proprietorship headed by Hartung.
Odle and Burke, architect employees of Hartung, joined with him
as incorporators of the new venture. Each owned equal shares of the
corporation and were directors. Hartung was the president of the
corporation and Odle and Burke were unspecified officers. The
firm's offices and its clients were assigned to the corporation when
it was formed. The corporate venture was ill-advised and defendant
Hartung resigned approximately four months after the corporation
was formed. Odle and Burke individually and as corporate officers
then sued for damages caused by a breach of Hartung's fiduciary
obligations to the corporation. More particularly, Hartung was
charged with usurping corporate opportunities and corporate assets.

Hartung made a three pronged attack on the judgment against
him. He claimed that (1) the evidence was insufficient to establish
a fiduciary duty, (2) assuming a fiduciary duty existed, the evi-

85The plaintiff bank owned only 86 shares and the total amount it would
receive as dividends for the seven year period was $602. It is possible to
wonder why the case was not settled long before it got to the appellate level.

bbSee Fricke v. Angemeier, 53 Ind. App. 140, 101 N.E. 329 (1913). See
also Harr v. Bankers Sec. Corp., 129 Pa. Super. 547, 196 A. 522 (1938) ;
11 Fletcher § 5374.

67301 N.E.2d 240 (Ind. Ct. App. 1973) (Robertson, J.).
e8Hartung was also ordered to contribute $1,362.32 as his co-guarantor's

share of a corporate note that had been satisfied by plaintiffs Odle and Burke.
Hartung contended that a co-guarantor of a note could not be forced to con-
tribute when the principal obligor had sufficient funds. The court rejected
this contention under both the Uniform Commercial Code § 3-416(1), and the
common law. Hamilton v. Meiks, 210 Ind. 610, 4 N.E.2d 536 (1936).



1974] SURVEY—BUSINESS ASSOCIATIONS 43

dence did not show it had been breached, and (3) even if the duty
had been breached, plaintiffs had failed to show specific and non-
speculative damages.

89 On the first issue, the court concluded that
Hartung was under a fiduciary duty to act fairly, honestly, and
openly with the corporation and his associates in all three of his
capacities—as director, officer, and shareholder.

Although directors and officers have long been treated as
fiduciaries under Indiana law,90 the court relied on two non-Indiana
cases to establish Hartung's fiduciary obligation as a shareholder

:

Helms v. Duckworth9 ^ and Manis v. Miller.92 Helms was an action
to cancel a stock purchase agreement which provided that, upon
the death of either of the two owners of a corporation, the survivor
was entitled to buy the deceased's shares at a price of $10 or as
renegotiated annually by mutual agreement. The price was never
changed. The District of Columbia Court of Appeals concluded that,
since the defendant, who was the minority shareholder, might never
have intended to renegotiate the stock price in line with his agree-

ment, he had breached the duty owed his fellow shareholder. The
court enunciated the belief that "the holders of closely-held

stock . . . bear a fiduciary duty to deal fairly, honestly, and openly

with their fellow stockholders and to make disclosures of all
essential information."

93

Manis was a contest between the estates of the owners of a cor-
poration who had agreed that neither would sell his stock without
first offering it to the other. The agreement further provided that,

if the offer were declined, the corporation would be deemed dis-

solved and either owner could solicit the business of any of its

customers. One of the shareholders offered to sell his shares. When
the offer was declined, he organized a new corporation and took
over the facilities and equipment of the allegedly dissolved corpora-

tion. The New York court, in the derivative action, ruled that the
takeover was a breach of the shareholder's duty to the corporation,

89301 N.E.2d at 242-43.
90The court cited Central Ry. Signal Co. v. Longden, 194 F.2d 310 (7th

Cir. 1952) (officer) ; Leader Publishing Co. v. Grant Trust & Savings Co.,
182 Ind. 651, 108 N.E. 121 (1915) (officer) ; Hill v. Nisbet, 100 Ind. 341

(1885) (director) ; Tower Recreation, Inc. v. Beard, 141 Ind. App. 649, 231

N.E.2d 154 (1967) (director). The Leader case is discussed at text accom-

panying notes 97-99 infra. For a general discussion of the fiduciary obliga-

tions of corporate personnel, see 3 Fletcher § 838; Henn §§ 235-42, 268, and
authorities cited id. at 458 n.3; Lattin §§ 79-80.

91 249 F.2d 482 (D.C. Cir. 1957).
92 19 N.Y.2d 875, 227 N.E.2d 596, 280 N.Y.S.2d 675 (1967). See generally

13 Fletcher § 5811; Henn § 268; Conway, The New York Fiduciary Concept
in Incorporated Partnerships and Joint Ventures, 30 Fordham L. Rev. 297

(1961).
93249 F.2d at 487.



44 INDIANA LAW REVIEW [Vol. 8:24

notwithstanding the fact that it was ostensibly permitted by the
agreement. The purported dissolution was a nullity, and the duty
continued in the absence of the legal dissolution of the corporation.94

Hartung made the intriguing argument that, since the "in-
corporated partnership" consisted of professionals, a fiduciary duty
could not arise. His contention, which the court noted was not sup-
ported by authority, was that professionals serving clients must
have more "leeway" in their relationships with corporate asso-
ciates. He argued that a stringent fiduciary duty would unduly
restrict the freedom needed to maintain his professional status.
In rejecting this contention, the court posited that the critical

factor giving rise to the duty was not the work product of the
corporation but rather was the relationship expected by the prin-
cipals among themselves and with the corporation. Although it is
conceivable that the duty owed corporate associates might be ac-
commodated under some circumstances to the duty owed profes-
sional clients, the court was correct in refusing to accept the broad
exemption claimed by Hartung.95 The court of appeals also re-
jected Hartung's contention that no duty existed at the time of the
alleged breach because he had severed his relationship with the
corporation on June 15, 1971. The court concluded that the evidence
did not sustain the claim of severance of the relationship, since it

appeared that Hartung had maintained sufficient contact until
mid-July to maintain, as well, his fiduciary duty.

96

With respect to Hartung's second argument, the court found
that the evidence presented at trial supported the finding that Har-

tung had breached his duty. His first offense was in taking over the
firm's office for his own use while still with the company. Although
the lease was on a month-to-month basis, the court concluded the
corporation had a sufficient expectancy of renewal to make the

94Professor Henn cites both Manis and Helms for the proposition that,
"in the close corporation, not only do the normal fiduciary duties of control-

ling shareholders apply, but in addition the courts are prone to require a

higher standard of fiduciary responsibility." Henn § 268.
95Perhaps Hartung's argument would be more persuasive if the corpora-

tion involved had been formed under one of Indiana's professional corporation

acts. Ind. Code §§ 23-1-13-1 to -11 (Burns 1972) (general) ; id. §§ 23-1-13.5-1

to -6 (Burns Supp. 1974) (accounting) ; id. §§ 23-1-14-1 to -21 (Burns 1972)

(medical); id. §§23-1-15-1 to -21 (dental).
96 Generally, the fiduciary obligation terminates with the relationship,

19 AM. Jur. 2d Corporations §§1273, 1282 (1965), but liability will attach
for acts commenced during the period of the relationship but completed later.
The duty also precludes the use of confidential information obtained before
the termination of the relationship. See, e.g., California Intelligence Bureau
v. Cunningham, 83 Cal. App. 2d 197, 188 P.2d 303 (1948). See generally
Comment, The Obligation of a High-Level Employee to His Former Em-
ployer: The Standard Brands Case, 29 U. Chi. L. Rev. 339 (1962).



1974] SURVEY—BUSINESS ASSOCIATIONS 45

lease a corporate asset. The court relied on Leader Publishing Co. v.
Grunt Trust & Savings Co.97 In Leader, the president, who was the
major shareholder of a corporation, leased company property to
himself rather than transferring it to the trust company as pro-
vided in a mortgage. He also leased in his name the building in
which the property was located. The Indiana Supreme Court found
his actions potentially or constructively fraudulent as against the
interests of the corporation and held that he would be deemed to
hold title to the property as trustee.98 Although Leader involved
a transaction between the corporation and its president, the Har-
tung court found the principle of the Leader case applicable to
Hartung's transactions with a third party."

The other actions of Hartung were more serious. The evidence
indicated that he contacted clients during the period of corporate

turmoil and informed them he would be willing to continue as their
architect after withdrawing from the corporation. Some clients
subsequently left the corporation. The court applied the well
settled principle that a fiduciary cannot lure away business
belonging to the corporation.

100 The trial court found that Har-
tung had persuaded an employee of the firm to join him after
he left. This, too, was improper conduct since it is well established
that a high level fiduciary can breach his duty by luring away
corporate personnel.

10
' Hartung also sent letters to twenty of the

firm's creditors, which letters announced the demise of the enter-

97182 Ind. 651, 108 N.E. 121 (1915).
98The Leader court stated that the private interests of corporate officers

must yield to their official duties:
If ... an officer takes in his own name the title to property con-
veniently designed for the use of the business of the corporation and

occupied by it the law will deem such an act, prima facie, at least,

potentially fraudulent as against the corporation and the officer will

at the instance of the corporation be held to hold the title as trustee

for its use.

Id. at 661, 108 N.E. at 124-25. This was quoted by the Hartung court, 301
N.E.2d at 244. For a general discussion of the "corporate opportunity"

doctrine, see 3 Fletcher §§ 861.1 to 867; Henn § 237; Lattin § 79; Slaughter,
The Corporate Opportunity Doctrine, 18 Sw. L.J. 96 (1964). Of course, the

circumstances must be examined to determine if the opportunity is personal

to the individual. Burg v. Horn, 380 F.2d 897 (2d Cir. 1967).
"301 N.E.2d at 244. See also McKay v. Wahlenmaier, 226 F.2d 35 (D.C.

Cir. 1955) ; Acker, Merrall & Condit Co. v. McGaw, 106 Md. 536, 68 A. 17
(1907) ; 3 Fletcher § 861.

100The authorities are legion. The court cited Schildberg Rock Prods. Co.

v. Brooks, 258 Iowa 759, 140 N.W.2d 132 (1966) ; Hoggan & Hall & Higgins,
Inc. v. Hall, 18 Utah 2d 3, 414 P.2d 89 (1966). See generally note 98 supra.

y0} See, e.g., Standard Brands, Inc. v. United States Partition & Packaging
Corp., 199 F. Supp. 161 (E.D. Wis. 1961); Duane Jones Co. v. Burke, 306

N.Y. 172, 117 N.E.2d 237 (1954).



46 INDIANA LAW REVIEW [Vol. 8:24

prise and were phrased to give the impression that Odle and Burke
had been expelled as business associates. In many of the fiduciary
obligation cases, such reprehensible conduct aggravates the situ-

ation and often is crucial in a determination of liability. 102

Hartung's third argument failed when the court concluded that
the injury caused Odle and Burke was not speculative or conjec-
tural. More specifically, the fees Hartung received from former
corporate clients, plus the expenses and inconveniences suffered by
Odle and Burke when they vacated the office and terminated the
corporate affairs, sustained the award of $17,500.

E. Agency Authority and Joint Ventures

Several agency concepts were involved in the per curiam deci-
sion of the Second District Court of Appeals in Storm v. Mar-
sischke™3 which affirmed a judgment of the Marion County Supe-
rior Court dismissing the complaint against defendant, McCormick
Lumber, at the end of plaintiff's case. The complaint alleged that
McCormick Lumber, acting through employee Winters, had become
bound on a construction contract between the Storms and the other
defendants

104
or at least had entered into a joint venture with them.

The contracting parties had been brought together by Winters, who
had represented to the Storms that the lumber company would
enter into the contract with them. At the time of the signing, how-
ever, Winters told the Storms that the lumber company would act
only as a supplier and would not be a party to the contract.

Plaintiffs first argued that Winters had actual or apparent
authority to negotiate for and bind the company on the construction
contract. The court did not discuss the actual authority issue but
only made a passing reference to the fact that there was no sub-
stantial evidence that Winters was a "general agent." The court
also rejected the apparent authority argument because there was
no showing that McCormick manifested to them that Winters had
the claimed authority.

105 To bind the company on this theory,
plaintiffs had the burden of showing that the company had held
out Winters as a general agent, or as a special agent clothed with

l02See Comment, The Obligation of a High-Level Employee to His Former
Employer: The Standard Brands Case, 29 U. Chi. L. Rev. 339 (1962).

1O3304 N.E.2d 840 (Ind. Ct. App. 1974).
,04A default judgment had been entered prior to trial against Marsischke,

Wagner and the Duane Construction Company.
,OS304 N.E.2d at 842. The court cited Kody Eng'r Co. v. Fox & Fox Ins.

Agency, Inc., 303 N.E.2d 307 (Ind. Ct. App. 1973); State Life Ins. Co. v.

Thiel, 107 Ind. App. 75, 20 N.E.2d 693 (1939). For a general discussion of

apparent authority, see Restatement (Second) of Agency §§8, 27 (1958);
Seavey §8D.



1974] SURVEY—BUSINESS ASSOCIATIONS 47

more authority than actually conferred, 106 and that plaintiffs had
reasonably relied on this representation. The key is proof of
affirmative action on the part of the principal. 107

The court concluded there was no substantial evidence that
Winters had been clothed with the appearance of authority. He
had contacted the Storms when he heard of their plans and intro-
duced them to Marsischke and Wagner; thus the Storms might
have thought they were negotiating with the lumber company. The
court, in fact, conceded there was a "suspicion" that the lumber
company was involved in the project. However, the Storms should
have realized that this notion was mistaken when they signed a
contract naming the Duane Construction Company as the con-
tractor. Winters' comment that the company "normally conducted
its business in this manner" 103 had to be discounted since an agent's
statements are irrelevant in establishing his authority.

A second, and somewhat more persuasive argument, was that
Winters possessed inherent authority109 to bind the lumber com-
pany. The Storm court stated that there was no Indiana case which
expressly recognized the principle but noted that Farm Bureau
Mutual Insurance Co. v. Coffin

uo
possibly applied the underlying

rationale. The theory was rejected here since the Storms had failed
to show that Winters was a general agent.

Plaintiffs' final argument was that it was error not to find
the lumber company a partner or joint venturer with the construc-
tion company. The premise of this argument was that the presi-
dent of McCormick Lumber was also a director of a successor cor-

poration to the construction company. The court recognized that

the corporate fiction can be disregarded to prevent fraud or injus-

106Farm Bureau Mut. Ins. Co. v. Coffin, 136 Ind. App. 12, 186 N.E.2d
180 (1962).

,07304 N.E.2d at 843, quoting from Pan Am. World Airways, Inc. v.
Local Readers Serv., Inc., 143 Ind. App. 370, 377, 240 N.E.2d 552, 556 (1968).

See generally Restatement (Second) of Agency §285 (1958); Seavey
§75D (1964).

1O8304 N.E.2d at 843.
,09This concept, which often overlaps with apparent authority, exists

apart from any manifestation or holding out by the principal. Rather it

rests solely on the agency relationship, i.e., the agent has a certain authority

simply by being employed in a capacity that would normally carry the au-

thority contemplated or perceived by the third party. For a general discus-

sion of the principle of inherent agency power, see Restatement (Second)

of Agency § 8A (1958) ; Seavey § 59D. The court noted, 304 N.E.2d at
844 n.5, that a special agent has been recognized as possessing inherent agency

power but that this issue had not been presented. See generally Restate-

ment (Second) of Agency § 161A (1958).
no136 Ind. App. 12, 186 N.E.2d 180 (1962).



48 INDIANA LAW REVIEW [Vol. 8:24

tice
1 '

' but concluded that a common board alone was insufficient to
negate the existence of separate legal entities. The court relied on
Hart, Schaffner & Marx v. Campbell" 2 in which it was held that,
absent fraud or bad faith, the mere fact that the officers of one cor-
poration were the shareholders, directors and officers of another
did not justify a conclusion that the independent legal existence of
the second corporation should be ignored.

The plaintiffs contended that Voorhees-Jontz Lumber Co. v.
Bezek" 3 supported their argument that a joint venture existed be-
tween the lumber company and the construction company. In Voor-
hees-Jontz, the court held that two similar corporations were acting
in concert but, in Storm, as the court pointed out in distinguishing

the case, there was no history of prior practices that would justify
a finding that McCormick Lumber was either directly or through
authorized agents referring parties to the construction company
under the representation that the two worked together.

F. Notification of Change of Ownership

Meggs v. Central Supply Co." 4 is another case illustrating the
importance of observing legal formalities in conducting business

transactions. The suit was brought by a supplier against both the
present and former owners of a sole proprietorship to recover for

merchandise ordered after the sale of the business. Meggs, the for-

mer owner, had some dealings with Central Supply in the past.
Meggs did not notify his suppliers of the sale of the business at the
time it was sold, although written notice was eventually sent to
Central Supply. The Henry County Circuit Court entered a judg-
ment against Meggs for supplies ordered after the business was sold
and before the notice was received. The First District Court of

Appeals affirmed. 115

The court did not expressly articulate the theory of liability

but apparently used the doctrines of equitable estoppel and fraudu-

lent or negligent misrepresentations.
116 The court relied on general

1,1 The court cited Feucht v. Real Silk Hosiery Mills, Inc., 105 Ind. App.

405, 12 N.E.2d 1019 (1938). See also In re Clarke's Will, 204 Minn. 574,

578-79, 284 N.W. 876, 878 (1939). For a general discussion of the appro-
priateness of disregarding the corporate fiction in certain situations, see

1 Fletcher §§41-46; Henn §§138, 146-49; Lattin §§11, 13-18.
,,a110 Ind. App. 312, 320-21, 38 N.E.2d 895, 899 (1942).
,13137 Ind. App. 382, 209 N.E.2d 380 (1965).
1,4307 N.E.2d 288 (Ind. Ct. App. 1974) (Lowdermilk, J.). Although the

Meggs case involved a sole proprietorship, a similar situation might arise
upon the sale of a corporation.

u5Id. at 289. The other defendant, the purchaser Brown, defaulted.
U6Id. at 292. See generally J. Crane & A. Bromberg, Law of Partner-

ship §36 (1968).



1974] SURVEY—BUSINESS ASSOCIATIONS 49

authority
1 ' 7 and an Indiana case, Elverson v. Leeds," 6 which had

not been discovered by the parties. In Elverson, a supplier recovered
from the former owner of a greenhouse for supplies ordered in the
firm name by the former owner's son who had purchased the busi-
ness. As in Meggs, the suppliers had not been informed of the sale.
The Elverson court concluded that, between the former owner and
her son, there was neither a principal-agency relationship nor a
partnership that would have required the retiring partner to notify
creditors.'

19

However, the Elverson court did analogize to the partnership

situation, reasoning that a third party dealing with a business has

the right to assume that the supposed owner will be liable for the

firm's orders until there is notification to the third party of a

change in ownership.' 20 The key to liability under Elverson is that

the new owner must use the firm name with the knowledge, consent
and approval of the former owner. This element was satisfied in

Meggs by the showing that the business name and goodwill of the

enterprise were among the assets sold by Meggs. The key to escap-

ing liability under Elverson is a showing that the supplier had ac-

tual or constructive knowledge of the transfer of the business. Con-

structive knowledge, for example, from a newspaper disclaimer of

liability, might suffice for tradepersons who were familiar with the

firm but had no actual dealings with it. However, actual notice is

the only sure technique by which a former owner may escape lia-

bility to those with whom he has had prior dealings.

"'Hendley v. Bittinger, 249 Pa. 193, 94 A. 831 (1915); 52 Am. Jur.

Trademarks §38 (1944).
11897 Ind. 336 (1884). The court referred to Elverson as a "hog" case

presumably because the case was discovered while "rooting through the

archives." 307 N.E.2d at 290.
11 'The Indiana Uniform Partnership Act, Ind. Code §23-4-1-35 (Burns

1972), provides that a partner can bind a dissolved partnership to third per-

sons who had neither actual nor constructive notice of the dissolution. Id.

§ 23-4-1-16 provides that a person who permits another to represent him as a

partner to third persons is liable to such third persons. See generally J. Crane

& A. Bromberg, Law of Partnership §§ 80-82 (1968).
120The Elverson court pointed out that in either case, whether one is

engaged in a partnership or in a business under an assumed name, the result

should be the same:

Third parties are just as likely to lend their credit, and just as likely

to be defrauded as though she were a retiring partner; . . . She en-

gages in business under a firm name, which imports a partnership,

and the business continues under such name, without any notice that

she has ceased her connection with it. Why should she not be treated
like such partner, and held to the same obligations?

97 Ind. at 339.



50 INDIANA LAW REVIEW [Vol. 8:24

G. Statutory Developments

The 1974 session of the 98th Indiana General Assembly adopted
several significant amendments to the Indiana General Corporation
Act and to other provisions of the Indiana Code relating to corpo-
rate affairs.

121

1. Class Voting of Shares

The provision of the General Corporation Act specifying the
shareholders entitled to vote on proposed amendments to articles
of incorporation was revised by deleting subsection (b), which
provided that a series of shares of a class would be treated as a
separate class for purposes of class voting.

122
This particular sub-

section has had an unusual legislative career and it is difficult to
divine the legislative intent. The provision was not included when
Indiana Code section 23-1-4-4 was adopted in its present form in
1967.

123
but the provision was added by the General Assembly in

1969.
124 Thus the recent amendment returned the section to its

121 Other acts passed by the General Assembly that deserve noting in-

clude: (1) Ind. Pub. L. No. 125 (Feb. 20, 1974), amending Ind. Code

§ 27-8-5-10 (Ind. Ann. Stat. § 39-4260, Burns Supp. 1974) (to allow co-
ordination of benefits under group hospital, medical or surgical expense poli-

cies)
; (2) Ind. Pub. L. No. 130 (Feb. 15, 1974), amending the Indiana Credit

Union Act, Ind. Code §§ 28-7-1-1 et seq. (Burns Supp. 1974) (to permit state
chartered credit unions to compete more effectively with federal credit

unions); (3) Ind. Pub. L. No. 121 (Feb. 14, 1974), amending Ind. Code

§ 27-1-12-2 (Ind. Ann. Stat. § 39-4202, Burns Supp. 1974) (to permit the
investment of certain insurance company funds in mutual funds) ; (4) Ind.

Pub. L. No. 123 (Feb. 14, 1974), amending Ind. Code § 27-1-20-20 (Ind. Ann.
Stat. § 39-5020, Burns Supp. 1974) (to permit insurance companies to pub-

lish financial statements prepared on a basis other than the accounting

method required by the Insurance Department) ; (5) Ind. Pub. L. No. 150

(Feb. 13, 1974), amending the Offenses Against Property Act, Ind. Code

§ 35-17-5-13 (Ind. Ann. Stat. § 10-3040, Burns Supp. 1974) (to permit the
inference that the owner of property is a corporation)

; (6) Ind. Pub. L.

No. 124 (Feb. 15, 1974), amending Ind. Code §27-4-1-4 (Ind. Ann. Stat.
§39-5304, Burns Supp. 1974) (to make it an unfair or deceptive practice
for insurance companies to refuse to make payments under health and hos-
pital insurance policies to for-profit medical facilities)

; (7) Ind. Pub. L.

No. 127 (Feb. 15, 1974), amending Ind. Code §28-1-2-2 (Burns Supp. 1974)
(to increase the size of the Indiana Department of Financial Institutions in
order to admit a representative from state chartered credit unions).

,22Ind. Pub. L. No. 112 (Feb. 12, 1974), amending Ind. Code §23-1-4-4
(Burns Supp. 1974). The act was deemed an emergency measure and became
effective upon passage.

,23 Ch. 275, §23, [1967] Ind. Acts 811 (codified at Ind. Code §23-1-4-4
(Burns Supp. 1974)).

,24Ch. 187, §11, [1969] Ind. Acts 508 (repealed 1974).



1974] SURVEY—BUSINESS ASSOCIATIONS 51

original form, which was derived from the Model Business Corpo-
ration Act.

125

The General Assembly no doubt reasoned that the owners of
a series of shares of a class should not have a greater proportional
say in passing on amendments than they would have if the shares
had been issued as a class. In fact, the former provision made it
possible for a small group of shareholders of a company with one
class but several series of shares to defeat an amendment over-
whelmingly approved by the other owners of the corporation even
when the proposed amendment did not have a significant impact
on the series shareholders' rights or interests. The possibility of
such a veto might well have been the motivation behind deleting
subsection (b).

However, the General Assembly may have gone too far. A
concern about an unjustified veto power is legitimate, but it is
conceivable that an amendment to the articles of incorporation
would affect the interests of only one series. In such a case, a veto

power might well be appropriate. Although Indiana appears to be
the only state that treated a series of a class as a separate class for

all votes, the comments to section 60 of the Model Business Corpo-
ration Act indicate that several Model Act states provide that a
series shall vote as a class when that series, but no other, will be
affected by a proposed amendment or when the effect on that
series differs from the effect on other series. 126 The comments
also indicate that several non-Model Act jurisdictions mandate that

a series vote as a class when affected by a proposed amendment.
127

This appears to be an eminently reasonable compromise between

the interests of the corporation and the interests of series' owners,

and the General Assembly might well consider another change to

section 23-1-4-4 in the next session.

2. Professional Accounting Corporations

Another significant development in the corporate area was the

adoption of the Professional Accounting Corporation Act.
128

1252 ABA-ALI Model Bus. Corp. Act Ann. §60 (1971). See Deer &
Burns, The 1967 Amendments to the Indiana General Corporation Act, 43

Ind. L.J. 14, 28 (1967).
1262 ABA-ALI Model Bus. Corp. Act Ann. §60, comment II 3.02 (1971),

indicates that Connecticut, Georgia, Illinois, Virginia and Wisconsin have

such a provision.
}27Id. comment If 3.03 indicates that Delaware, Florida, Massachusetts,

New Jersey, New York and Oklahoma have different statutory provisions
that require a series vote when a series will be affected by a proposed

amendment.
12SInd. Pub. L. No. 113 (Feb. 18, 1974), amending Ind. Code §§ 23-1-13.5-1

to -6 (Burns Supp. 1974). The act took effect on July 1, 1974, under an



52 INDIANA LAW REVIEW [Vol. 8:24

Although Indiana has had professional corporation acts for a num-
ber of years,

129
the approach of the Accounting Corporation Act

differs significantly from the others. It is a totally different stat-
ute rather than an adaptation. It is also somewhat less complex
than the others.

The Act establishes shareholder qualifications and imposes
certain restrictions on the management of accounting corporations.
The qualifications and restrictions depend on whether the corpora-
tion is a corporation of certified public accountants,

130
a corpora-

tion of public accountants131 or a corporation of accounting practi-

tioners.
132

Unlike the other three professional corporation acts

that have specific provisions relating to corporate names, 133 voting
trust restrictions,

134
conflicts of interest,

135 annual reports and cer-
tifications,

136 and reporting of ownership changes, 137 section 1 of

the Accounting Corporation Act simply provides that:

One or more individual persons may organize a corpora-
tion for the practice of public accounting under the gen-

eral corporation law. The corporation shall not be

emergency provision. Although there are other benefits deriving from the

incorporation of a professional practice, such as unlimited duration and

limited liability on non-professional matters, the prime motivation for using

the corporate form has been the tax benefits available to corporations and

their employees. These benefits traditionally have been unavailable to sole

practitioners or partnerships. See generally Henn § 77. The legal periodicals
are replete with articles discussing tax considerations for professional cor-

porations. See, e.g., Levenfeld, Professional Corporations and Associations,

8 Houston L. Rev. 47 (1970) ; Overbeck, Current Status of Professional As-
sociations and Professional Corporations, 23 Bus. Law. 1203 (1968) ; Strong
& Holdsworth, Incorporating a Professional Practice—A Comprehensive
Checklist, 16 Prac. Law. 69 (May, 1970) ; Weinberg, A Brief Look at the
Advantages and Disadvantages of Professional Incorporation, 6 Creighton
L. Rev. 17 (1973). It should be noted that the liberalization of benefits avail-

able to self-employed persons under the Keogh Act, 26 U.S.C. §§ 401-04

(1970), has somewhat reduced the drive toward professional incorporation.
129Ind. Code §§23-1-13-1 to -11 (Burns 1972) (General Professional Cor-

poration Act) ; id. §§ 23-1-14-1 to -21 (Medical Professional Corporation Act) ;
id. §§23-1-15-1 to -21 (Dental Professional Corporation Act). Attorneys can
incorporate under the General Act pursuant to an order of the Indiana Su-
preme Court effective April 10, 1970. Order in the Matter of Professional
Corporations, 253 Ind. xxviii (1970).

I30Ind. Code §23-1-13.5-4 (Burns Supp. 1974).
3y
Id. §23-1-13.5-5.

37Id. §23-1-13.5-6.
]33Id. §§23-1-13-5 (general), -14-7 (medical), -15-7 (dental) (Burns

1972)
34
Id. §§23-1-13-8 (general), -14-11 (medical), -15-11 (dental).

35
Id. §§23-1-13-11 (general), -14-17 (medical), -15-17 (dental).

36
Id. §§23-1-13-11 (general), -14-19 (medical), -15-19 (dental).

37
Id. §§23-1-13-11 (general), -14-20 (medical), -15-20 (dental).



1974] SURVEY—BUSINESS ASSOCIATIONS 53

required to have more directors than shareholders, but at
least one director shall be a shareholder. The other direc-
tors need not, but may, be shareholders. 138

The Act requires stock purchase agreements to keep shares from
nonqualified persons but contains nothing comparable to the de-
tailed stock purchase and valuation provisions of the other acts.' 39

Not surprisingly, the new Act recognizes the role of the Indi-
ana State Board of Public Accountancy in the regulation of the
profession. The Act specifically provides that persons associated
with accounting corporations who practice within Indiana, as well
as the corporations themselves, are subject to the authority of the

Board to the same extent as partnerships. 140 Since there might be
differences between a partnership practice and a corporate practice,
the General Assembly authorized the Board to issue further cor-
porate regulations consistent with or required by the public wel-
fare.

141

As noted, the requirements for the three types of accounting
corporations vary. Common to all is the requirement that the sole
purpose and business of the corporation be to furnish services not
inconsistent with the accountancy law and the regulations of the
Board. However, in a corporation of certified public accountants,

the corporate managers and all but one shareholder may be certi-
fied public accountants of other states.

142 Here the Act no doubt

contemplates nationwide accounting firms. Shareholders and man-

agers actually practicing in the state must be licensed in Indiana.
143

The relevant sections of the Act for public accounting and account-
ing practitioner corporations require that all persons associated

with the corporation be licensed in Indiana.
144

The Accounting Corporation Act permits foreign accounting

corporations to render professional services in Indiana if the serv-

ices are consistent with the regulations of the Board and if the

foreign corporations are registered with the Board.
145 The other

,38
/d. §23-1-13.5-1 (Burns Supp. 1974). The main requirement is that

all shareholders must be licensed accounting professionals.

^Compare id. §§ 23-1-13.5-4 (e), -5(d) and -6(d), with id. §§23-1-14-18
and -15-18 (Burns 1972).

}40
Id. §23-1-13.5-3 (Burns Supp. 1974). The Indiana Public Accountancy

Law is id. §§ 25-2-1-1 to -23.
,4,

/d. § 23-1-13.5-3 provides that the Board may prescribe regulations con-
cerning the name of the corporation, affiliations with other organizations,
and the liability of shareholders.

,42
/d. § 23-1-13.5-4 (b) to (d).

X43
Id. § 23-1-13.5-4 (d).

x44
Id. §§ 23-1-13.5-5 (b) & (c) (public accounting corporation), -6(b) &

(c) (accounting practitioner corporation).
M5Jd. § 23-1-13.5-2.



54 INDIANA LAW REVIEW [Vol. 8:24

professional corporation acts prohibit mergers or consolidations

with foreign corporations.
146 The Accounting Corporation Act is

silent on this point, but presumably mergers or consolidations are

permitted pursuant to the applicable provisions of the General Cor-

poration Act147 so long as the surviving or new corporation complies
with the Act.

3. Not-for-Profit Corporations—Indemnification
of Corporate Personnel and Liability Insurance

The General Assembly belatedly recognized that officers and
directors of Indiana not-for-profit corporations are as entitled to

indemnification for expenses incurred in defending lawsuits as are

their counterparts in general corporations or Indiana insurance

corporations. The General Assembly also recognized that such cor-
porations should be empowered to purchase and maintain liability
insurance for corporate personnel. These recognitions were accom-
plished by the addition of two new subsections, (b) (9) and (b) (10),
to the general powers section of the Indiana Not-For-Profit Corpo-
ration Act.

148 The action was belated, however, since the General
Corporation Act has had an indemnification provision since 1959149

and the Indiana Insurance Law has had one since 1973.

'

50
In addi-

tion, corporations under those two acts were authorized to purchase
what is commonly called "director and officer" or "D & 0" insur-
ance in 1973. 151

The not-for-profit insurance provision, subsection (b) (10), is
identical to the provisions added to the other acts in 1973. How-
ever, the not-for-profit indemnification provision, subsection (b)

(9), differs from the comparable indemnification section of the

General Corporation Act and the reason for this difference is not

apparent. It is possible that there was no intent to treat not-for-

profit corporations differently. Subsection (b) (9) is the same as

the pre-1973 General Corporation Act indemnification provision

except that, in subsection (b) (9), indemnification is limited to de-

,46
/d. §§23-1-13-10 (general), -14-21 (medical), -15-21 (dental) (Burns

1972).
147Jd. §§ 23-1-11-15, -16.
148Ind. Pub. L. No. 114 (Feb. 12, 1974), amending Ind. Code §23-7-1.1-4

(b)(9) & (10) (Burns Supp. 1974).
,49Ind. Code § 23-1-2-2 (b) (9) (Burns Supp. 1974).
150Ind. Pub. L. No. 271 (April 13, 1973), amending Ind. Code §27-1-7-2

(b)(8) (Ind. Ann. Stat. § 39-3702 (b) (8), Burns Supp. 1974).
15, lND. Code § 23-1-2-2 (b) (10) (Burns Supp. 1974) (General Corpora-

tion Act); id. §27-1-7-2 (b)(9) (Ind. Ann. Stat. § 39-3702 (b) (9)) (Insur-
ance Law). For a discussion of the 1973 amendments, see Galanti, Corpora-

tions, 1973 Survey of Indiana Law, 7 Ind. L. Rev. 77, 103-09 (1973).



1974] SURVEY—BUSINESS ASSOCIATIONS 55

fenses of civil actions and does not extend to defenses of criminal
actions. Thus, the drafters may have inadvertently, rather than
intentionally, used a superseded statutory provision as a model.
Whatever the explanation, the inescapable fact is that the in-
demnification provisions are different.

In fact, the indemnification provision is inconsistent with the

insurance provision. The insurance provision refers to "directors,
officers, employees or agents" of the corporation, whereas the
indemnification provision refers only to "directors or officers."

The indemnification provisions of both the General Corporation Act
and the Insurance Law authorize indemnification of corporate per-
sonnel other than directors and officers.' 52 The failure to include
these additional corporate personnel in the not-for-profit indemnity

provision might, therefore, seem a step backward, but the problem
may be more apparent than real. As is common to statutory indem-
nification provisions,

153
subsection (b) (9) is not exclusive and does

not impair rights that might be authorized by provisions in the
articles of incorporation, bylaws, or other corporate acts or docu-

ments. 154 Presumably, indemnification for employees or agents of

a corporation can be authorized by these methods. However, it is
possible that a court might strictly construe subsection (b) (9) to

' 52This is also the position of the drafters of the Model Business Cor-

poration Act. See 1 ABA-ALI Model Bus. Corp. Act Ann. §5 (1971). The
Model Act annotation lists Connecticut, Massachusetts and Minnesota as au-
thorizing indemnification of agents and employees as well as officers and
directors. Employees are included in the California, Ohio, Rhode Island,

and South Carolina statutes. Connecticut goes still farther and protects the

shareholders of a corporation as does North Carolina under some circum-

stances. Id. at 227. The protection accorded employees and agents is apart
from whatever protection they enjoy under the general principles of agency
law. See Henn § 379, at 800 n.2; Restatement (Second) of Agency §§ 439-40
(1958) ; Seavey § 168.

153 The Model Act indemnification provision is nonexclusive as appar-
ently are the statutes in the majority of jurisdictions. 1 ABA-ALI Model
Bus. Corp. Act Ann. §5, at 225 (1971). See Henn §380, at 806; Lattin
§ 78, at 281 & § 114, at 449-50. See also L. Ratner, Protecting the Cor-
porate Officer and Director from Liability (1970) ; Jervis, Corporate
Agreements to Pay Directors' Expenses in Stockholders Suits, 40 Colum. L.
Rev. 1192 (1940).

}54See Henn §§379-80; Lattin §§78, 114. There is authority which
cautions against over-reliance on such a provision when the indemnification
goes substantially beyond the statute or when it could be characterized as
unjust or inequitable. Teren v. Howard, 322 F.2d 949 (9th Cir. 1963). An-
other risk is that a poorly drafted bylaw or other indemnification provision
could be deemed as restricting rather than expanding available indemnifica-
tion. See Essential Enterprises Corp. v. Dorsey Corp., 182 A.2d 647 (Del.

Ch. 1962). See generally Loftin, Indemnification of Corporate Executives,

1 Liabilities of Corporate Officers and Directors 69 (1968).



56 INDIANA LAW REVIEW [Vol. 8:24

preclude such indemnification, thus limiting employees and agents
of not-for-profit corporations to the insurance protection author-

ized by subsection (b) (10).
In contrast with the provisions of the other two acts which

permit indemnification of expenses incurred in defending both

civil and criminal suits, the not-for-profit provision is limited to
civil actions.

155
It is understandable that the General Assembly

would not want a corporation to pay fines imposed on a director
or officer, but there is no reason why not-for-profit directors or
officers, like their for-profit counterparts, should not be indemni-

fied for expenses incurred in successfully defending criminal prose-

cutions. Of course, the nonexclusive nature of the provision would
probably be helpful here.

Subsection (b) (9) limits indemnification to "expenses actually

and reasonably incurred ... in connection" with the defense, while

the current General Corporation Act provision only limits indemni-

fication to those expenses "reasonably incurred."
156 Presumably

the "actually and reasonably incurred" language was carried over
from the pre-1973 General Corporation Act provision157 and was
included because the legislature was concerned that deleting

"actually" would encourage a less careful attitude in defending

actions. Unfortunately, retaining "actually" might preclude a cor-

poration from making advances to finance a defense or making

payments directly to a third party such as an attorney, thus forcing

the defendant to pay and then seek reimbursement. 158

As it did in 1973 when the other two acts were amended, the
General Assembly failed to specify whether settlement expenses are

covered by subsection (b) (9).
159 Another apparent oversight was

the omission of language authorizing indemnification of expenses

incurred in defending claims or actions "arising out of a person's

155Compare Ind. Code § 23-7-1.1-4 (b) (9) (Burns Supp. 1974), with id.

§ 23-1-2-2 (b) (9), and id. § 27-1-7-2 (b) (8) (Ind. Ann. Stat. § 39-3702 (b) (8)).
y56Compare Ind. Code § 23-7-1.1-4 (b) (9) (Burns Supp. 1974), with id.

§ 23-1-2-2 (b) (9). See Galanti, supra note 151, at 106. The Model Act refers
to "actually and reasonably." 1 ABA-ALI Model Bus. Corp. Act Ann. § 5
(1971).

157Ch. 24, §1, [1959] Ind. Acts 73, as amended, ch. 187, §1, [1969] Ind.

Acts 491.
}5aSee Galanti, supra note 151, at 106.
]S9

Id. Some indemnification provisions specifically refer to settlement
expenses. See 1 ABA-ALI Model Bus. Corp. Act Ann. § 5(a) (1971) ; Henn
§ 380, at 811 nn.46-49. It is, of course, possible that settlement expenses might
be expenses "reasonably incurred" in defending a claim and might also be
covered in a provision in the articles of incorporation, or the bylaws, or

otherwise as authorized by the nonexclusive proviso of Ind. Code § 23-7-1.1-4
(b)(9) (Burns Supp. 1974).



1974] SURVEY—BUSINESS ASSOCIATIONS 57

status" as an officer or director.' 60 The officers and directors of
not-for-profit corporations are limited to claims based on acts done
in their official capacities and may not seek indemnity for claims
that might arise simply because they are officers or directors.' 61

Similar to the provisions of the other two acts, the indemnifica-
tion provision is not liberal toward persons who have not been com-
pletely successful in defending suits. This contrasts with statutes

in some jurisdictions, the Model Business Corporation Act, 162 and
even the indemnification provisions of other Indiana statutes.'

63

These statutes do permit indemnification for the unsuccessful

defendant if he has at least met prescribed standards, such as "act-
ing in good faith and in a manner reasonably believed to be in or
not opposed to the best interest of the corporation, and, with respect

to any criminal actions or proceeding, had no reasonable cause to
believe his conduct was unlawful."' 64 To prohibit wrongdoers from
seeking indemnification for all unsuccessful defenses, these statutes

often adopt various techniques for an independent determination
that indemnification is proper. These techniques include advice of

independent legal counsel, ratification by disinterested directors
or by shareholders, or an order by the court hearing a derivative
action.'

65

Subsection (b) (9) permits the indemnification of persons ser-

ving as officers or directors of other corporations on behalf of the

not-for-profit corporation. However, this indemnification provis-

ion applies only to corporate business enterprises and not to part-

nerships, joint ventures, trusts or other enterprises as permitted

}b0See 1 ABA-ALI Model Bus. Corp. Act Ann. § 5, at 219-20 (1971).
,6, £ee generally Galanti, supra note 151, at 106 n.144; Knepper, Cor-

porate Indemnification and Liability Insurance for Corporation Officers and

Directors, 25 Sw. L.J. 240 (1971). Again, the nonexclusive proviso may be
of some help. See note 159 supra.

162
1 ABA-ALI Model Bus. Corp. Act Ann. §5, at 227-28 (1971). See

generally Henn §380, at 809-11; Galanti, supra note 151, at 107.
,63See Ind. Code § 28-1-5-2 (b) (8) (Burns Supp. 1974), which authorizes

commercial banks to indemnify trustees or officers against expenses and

amounts paid in settlement in certain actions, and Ind. Pub. L. No. 129

(Feb. 15, 1974), amending Ind. Code §28-6-1-45 (Burns Supp. 1974), which

accords similar protection to trustees and officers of savings banks.
164

1 ABA-ALI Model Bus. Corp. Act Ann. § 5(a) & (b), at 214 (1971).
See generally Henn § 380, at 809-11. This so-called business judgment rule
has afforded a great deal of protection against liability for errors and con-

duct. See Freeman v. Hare & Chase, Inc., 16 Del. Ch. 207, 142 A. 793 (1928)

;

Symposium—Officers* and Directors' Responsibilities and Liabilities, 27 Bus.
Law. 1 (1972).

165For the jurisdictions adopting the various techniques, see 1 ABA-ALI
Model Bus. Corp. Act Ann. § 5, at 231-35 (1971) ; Henn § 380, at 810 n.38.



58 INDIANA LAW REVIEW [Vol. 8:24

under the General Corporation Act.' 66 Again, the probable explana-
tion is that pre-1973 statutory language was used as a model. How-
ever, the limitation is not significant since not-for-profit corpora-
tions are less likely than for-profit corporations to be involved in
non-corporate business enterprises. Nonetheless, the General As-
sembly might well be advised to amend section 23-7-1.4-4 of the In-
diana Not-For-Profit Corporation Act to conform to the General
Corporation Act and the Insurance Law, for reasons of symmetry
and also because officers and directors of not-for-profit corpora-
tions should be treated equally with their for-profit or insurance
counterparts.

Subsection (b) (10), the insurance provision, is the same as in
the General Act and the Insurance Law. 167 The provision is based on
the relevant section of the Model Act168 and authorizes insurance
even in those cases when the not-for-profit corporation could not
grant indemnification under subsection (b)(9). Conceivably this

provision could cause corporate personnel to be less careful in ful-

filling their duties to the corporation, but no doubt public policy
would preclude insuring against gross negligence, self-dealing, or

conduct amounting to total abdication of corporate responsibil-

ities.'
69 This assumes, of course, that insurance covering such acts

could be found. As Professor Bishop points out in his excellent
article on indemnification, insurers are not inclined to develop or

retain insurance policies which might serve to increase the risks in-

sured against.
170 The self-interest of insurance companies would as-

sure that "D & 0" insurance would not be counter-productive. More
likely, a court would limit the provision to situations involving
ordinary negligence in the performance of a duty to the corpora-

166Ind. Code § 23-1-2-2 (b) (9) (Burns Supp. 1974). See Galanti, supra
note 151, at 105.

167Ind. CODE § 23-1-2-2 (b) (10) (Burns Supp. 1974) (General Corpora-
tion Act); id. § 27-1-7-2 (b) (9) (Ind. Ann. Stat. § 39-3702 (b) (9) ) (In-
surance Law). See generally Galanti, supra note 151, at 107-09.

168
1 ABA-ALI Model Bus. Corp. Act Ann. § 5(g) (1971).

169For a general discussion of liability insurance, see Henn § 380, at 812;
Bishop, Sitting Ducks and Decoy Ducks: New Trends in Indemnification of
Corporate Directors and Officers, 77 Yale L.J. 1078, 1087 (1968) ; Knepper,
Corporate Indemnification and Liability Insurance for Corporation Officers
and Directors, 25 Sw. L.J. 240 (1971); Kroll, Some Reflections on Indemni-
fication Provisions and S.E.C. Liability Insurance in the Light of Barchris
and Globus, 24 Bus. Law. 681, 687-92 (1969).

170Bishop, Sitting Ducks and Decoy Ducks: New Trends in Indemnifica-
tion of Corporate Directors and Officers, 11 Yale L.J. 1078, 1094 (1968).
For a discussion of the terms of a typical "D & O" policy and an evaluation
checklist, see Hinsey & DeLancey, Directors and Officers Liability Insurance—
An Approach to its Evaluation and a Checklist, 23 Bus. Law. 869 (1968).



1974] SURVEY—CIVIL PROCEDURE 59

tion. Under this construction, the indemnification insurance pro-
vision would be no more harmful to the public interest than is
automobile liability insurance.

IV. Civil Procedure and Jurisdiction

William F. Harvey*

The following survey of Indiana cases is intended as an over-
view of significant developments in the area of civil procedure and
jurisdiction during the judicial term extending from May, 1973,
through May, 1974. Because the discussion is synoptic in nature,
it does not purport to provide either exhaustive coverage or exten-

sive analysis of the cases.

A. Jurisdiction and Service of Process

Indiana's long-arm statute 1 has been the subject of interpreta-

tion this past year in the federal courts. In Valdez v. Ford, Bacon
& Davis, Texas, Inc.* Judge Sharp, in a memorandum opinion,
espoused a liberal construction of the scope of Trial Rule 4.4. In

reviewing historical precedents and scholarly exegeses of the rule,
he found that

:

Indiana Trial Rule 4.4 is intended to extend personal juris-

diction of courts sitting in this State, including this one

in this case, to the limits permitted under the due process

clause of the Fourteenth Amendment.3

The question of the scope of Trial Rule 4.4 arose on the motion of
Texas Tank, Inc., one of the defendants, to dismiss under Federal
Rule of Civil Procedure 12(b) (2) for lack of jurisdiction over the
person. In connection with this motion, Texas Tank asserted that
the service of process made upon it by certified mail to its office in
Dallas, Texas, was impermissible under Federal Rule of Civil Pro-
cedure 4 and could only be allowed by incorporating into the fed-
eral rule the service of process procedures of Indiana, particularly

Trial Rule 4.4.

*Dean, Indiana University Indianapolis Law School. A.B., University of
Missouri, 1954; J.D., Georgetown University, 1959; LL.M., Georgetown Uni-
versity, 1961.

The author wishes to extend his appreciation to Susan B. Tabler for her
assistance in the preparation of this discussion.

'Ind. R. Tr. P. 4.4.
262 F.R.D. 7 (N.D. Ind. 1974).
3Id. at 14.