Indiana Law Review


1976] SURVEY—BUSINESS ASSOCIATIONS 67

m. Basinoss Associations

Paul J. Galanti*

There were four judicial decisions during the period covered
by this survey worth noting.' However, there were only minor
legislative developments.

Professor of Law, Indiana University School of Law—Indianapolis. A.B.,
Bowdoin College, 1960; J.D., University of Chicago, 1963.

The author wishes to express his appreciation to Douglas J. Atz and
Stephen R. Nelson for their assistance in preparing this survey.

'There were several cases warranting a passing reference. One is
Trifunovic v. Marich, 343 N.E.2d 825 (Ind. Ct. App. 1976), affirming a
judgment denying Trifunovic's claim for half of the capital loss of an invest-
ment partnership. The arrangement contemplated Trifunovic furnishing the
capital and Marich making the investment decisions. Marich's skills were
questionable and most of the capital was lost. The court recognized that the
Indiana Uniform Partnership Act contemplates partners sharing partnership
losses, Ind. Code § 23-4-1-18 (a) (Burns 1972), and that a partner has a right
of contribution from other partners. Id. § 23-4-1-40 (d),(f). See Goldstein v.
Burstein, 185 Cal. App. 2d 725, 8 Cal. Rptr. 574 (1960) ; see generally J. Crane
& A. Bromberg, Partnership §§ 65(a), 90 (1968). These obligations can be
modified by agreement, and the court concluded the agreement of the parties
contemplated Marich would not be bound to share in the losses. See Petersen
v. Petersen, 284 Minn. 61, 169 N.W.2d 228 (1969) ; see generally J. Crane &
A. Bromberg, supra § 65.

A contractee's liability for the negligence of an independent contractor
was in issue in Hale v. Peabody Coal Co., 343 N.E.2d 316 (Ind. Ct. App. 1976).
Hale was employed by a subcontractor of a contractor selected by Peabody
for a construction project. He was injured in a fall from a scaffold. Summary
judgment for defendants was affirmed. The court held that Hale's employer
was an independent contractor and not a servant of defendants because they
retained only general supervisory control over the work, Prest-0-Lite Co. v.

Skeel, 182 Ind. 593, 106 N.E. 365 (1914) ; and that he was not within the
various exceptions to the general rule that a contractee is not vicariously

liable to the servants of an independent contractor. See generally W. Prosser,
Handbook of the Law of Torts § 71 (4th ed. 1971) ; Restatement (Second)
OF Torts §§409-29 (1965). The court also rejected Hale's claim that defend-
ants were personally negligent, concluding they had provided a safe place to
work and Hale's injury was caused by a fall from facilities owned and main-
tained solely by his employer. See generally W. Prosser, supra at 469-70;
Restatement (Second) of Torts §413 (1965).

In Day v. State, 341 N.E.2d 209 (Ind. Ct. App. 1976), the court reversed
the conviction of the president of a professional association for failing to file

the required expense statement for a lobbyist. He had not paid the lobbjdst
personally and so was not obligated to file the report. The court refused to
construe Ind. Code § 2-4-3-4 (Burns 1972) to impose a filing duty on all of-

ficers or members of the association who knew of the payments since the
legislature considered the unincorporated association to be a separate legal

entity apart from its members. Consequently, the association itself could be



58 INDIANA LAW REVIEW [Vol. 10:67

A. Restraint of Trade

An unusual, but interesting, case is Citizens National Bank
V. First National Bank,^ in which the Second District Court of
Appeals reversed and remanded a decision of the Wells Circuit
Court granting the defendants' motions to dismiss. Citizens is a
rara avis, one of the few reported treble damage actions brought
under the Indiana Antitrust Act.^ The suit culminated Citizens'
efforts to open a banking office in Marion, where the two de-
fendants operate.

Although Citizens' efforts began before 1966 it did not
succeed until 1970. Its initial attempt was as a state bank in
Van Buren and failed because the Indiana Financial Institutions
Act bars branch banks in cities the size of Marion already served
by existing banks.^ Citizens then tried a new tack and petitioned
the United States Comptroller of the Currency to become a na-

fined for failing to file the requisite report, United States v. A & P Trucking
Co., 358 U.S. 121 (1958), but not an individual officer innocent of the in-
fraction.

A case emphasizing the risks of ignoring corporateness is Smith v. Kinney,
338 N.E.2d 507 (Ind. Gt. App. 1975), affirming a directed verdict for de-
fendant. Smith claimed injury from Kinney's undisclosed conflict of interest
in a land annexation proceeding. His mistake was to sue in his own name
although the title to the land was in a corporation he owned. The corporation,
of course, is a separate entity apart from its shareholders, Benner-Coryell
Lumber Co. v. Indiana Unemployment Compensation Bd., 218 Ind. 20, 29
N.E.2d 776 (1940) ; and consequently a shareholder under ordinary circum-
stances cannot for convenience ignore the corporation and recover on claims
belonging to the corporation. See Progress Tailoring Co. v. FTC, 153 F.2d 103
(7th Cir. 1946) ; Cutshaw v. Fargo, 8 Ind. App. 691, 34 N.E. 376 (1893) ;
see generally 6 Z. Cavitch, Business Organizations § 118.02 (rev. ed. 1976)
[hereinafter cited as Cavitch] ; 1 W. Fletcher, Cyclopedia of the Law op
Private Corporations § 25 (rev. vol. 1974) [hereinafter cited as FLE?rcHER]

;

H. Henn, Handbook op 'the Law op Corporations §§ 149, 151 (2d ed. 1970)
[hereinafter cited as Henn] ;N. Lattin, The Law of Corporations §§ 12-14
(2d ed. 1971) [hereinafter cited as Lattin] ; Comment, Corporations: Disre-

gard of the Corporate Entity for the Benefit of Shareholders, 1963 DUKE L.J.
722.

=331 N.E.2d 471 (Ind. Ct. App. 1975) (Sullivan, P.J.).

^Ind. Code §§24-1-2-1 to -12 (Burns 1974). The Indiana Code contains

other provisions relating to anticompetitive conduct. Id. §§ 24-1-1-1 to -6; -3-1

to ^5; and -4-1 to -4. Although the bulk of antitrust litigation is federal, 16J

J. VON Kalinowski, Business Organizations, Antitrust Laws and Trade
Regulation § 81.01 [5] (rev. ed. 1976) [hereinafter cited as von Kalinowski],

state antitrust laws do serve la valid supplementing purpose. E. Kintner, An
Antitrust Primer 159-63 (2d ed. 1973). There is no federal preemption of

state antitrust laws. Standard Oil Co. v. Tennessee, 217 U.S. 413 (1910).

'*IND. Code §28-1-17-1 (Burns 1974). See generally Note, Branch Bank-

ing, 38 Notre Dame Law. 315 (1963).



1&76] SURVEY—BUSINESS ASSOCIATIONS 59

tional banking association^ with a main office in Marion and a
branch in Van Buren. The Comptroller solicited comments from
the defendants, who, not surprisingly, objected to another bank
in Marion. Their objections were to no avail, and the Comptroller
granted preliminary approval of the application. The defendants
then sought injunctive relief in the federal courts, contending that

designating Marion as the **main office'* was a ploy to circumvent
the federal ban against branch banks where state banks are
barred under state law.* The district court agreed and enjoined
the Comptroller/ The Seventh Circuit modified and affirmed
the injunction," and eventually Citizens opened a Marion office
in March 1970.

Citizens, however, was not satisfied and in early 1971 filed
suit in the Grant Superior Court alleging that the defendants had
conspired and schemed to restrain banking in Marion in violation
of the Indiana Antitrust Act.' This alleged conspiracy primarily

stemmed from the defendants' intervention in the Comptroller's
proceeding and subsequent suit for injunctive relief, actions
aimed at keeping Citizens from the Marion market and done with
the intent and design to monopolize that market. Fortunately
Citizens alleged in a "catchall" paragraph 6 of the complaint that
the defendants did "other acts and things" to further their objec-
tive of keeping banking competition from Marion and its environs.'"

^12 U.S.C. § 35 (1970) sets forth the requirements a state bank must
meet to become a national banking association. Id. § 30 authorizes a national
bank to relocate in certain circumstances with the Comptroller's approval.
See Traverse City State Bank v. Empire Nat'l Bank, 228 F. Supp. 984 (W.D.
Mich. 1964).

n2 U.S.C. § 36(c) (1970). See Union Savings Bank v. Saxon, 335 F.2d
718 (D.C. Cir. 1964). Federal law determines whether a banking facility of
a national banking association is a branch. Virginia ex rel. State Corp.

Comm'n v. Farmers & Merchants Nat'l Bank, 515 F.2d 154 (4th Cir. 1975).
For a discussion of the history and purposes of the federal policy on branch
banks, see First Nat'l Bank v. Walker Bank & Trust a>., 385 U.S. 262, 256-62
(1966).

^Marion Nat'l Bank v. Saxon, 261 F. Supp. 373 (N.D. Ind. 1966).
«Marion Nat'l Bank v. Van Buren Bank, 418 F.2d 121 (7th Cir. 1969).

The modification authorized Citizens to drop the Van Buren "branch" request
from the application, thus eliminating the section 36(c) issue raised by the
defendants in their district court injunction suit, 261 F. Supp. 373. However,
there appears to be a Van Buren branch. 331 N.E.2d at 474.

'Ind. Code § 24-1-2-1 (Burns 1974) prohibits combinations in restraint
of trade or to prevent competition. Id. § 24-1-2-2 prohibits monopolization and

attempts to monopolize. Dye v. Carmichael Produce Co., 64 Ind. App. 653,
116 N.E. 425 (1917). Services as well as commodities are covered by the Act.
Fort Wayne Cleaners & Dyers Ass'n v. Price, 127 Ind. App. 13, 137 N.E.2d
738 (1956). See generally Note, Price-Fixing Within the Barber Industry,

34 iND. L.J. 621 (1959).

'°ZZ1 N.E.2d at 474.



60 INDIANA LAW REVIEW [Vol. 10:57

Citizens claimed defendants* acts caused it to lose the profits it

would have earned during the interim between approval of its
application and opening of the banking office, and prayed for
treble damages, as provided by the Act," of $2,850,000.

The defendants removed the suit to the United States District
Court for the Northern District of Indiana, and Citizens moved
to remand the cause to the state court. Subsequently, the de-
fendants filed separate motions to dismiss for failure to state a

claim. However, the court did not rule on them before remanding
the suit to the Grant Superior Court. One defendant filed a sup-
plemental brief in the state court in support of its motion to
dismiss. Citizens then moved for a default judgment, claiming
that no timely responsive pleadings had been filed since the
motions to dismiss had not been refiled after remand. The venue
of the case was changed to the Wells Circuit Court, which over-
ruled Citizens* motion for default and granted defendants* motions
to dismiss. One motion was granted by applying res judicata and
the other on several substantive and procedural grounds, the
most significant of which were that: (1) Citizens had not sus-
tained injury to any legal right; (2) it had failed to allege any

public injury or unreasonable restraint of trade; and (3) de^

fendants* acts were constitutionally protected from antitrust

challenge.'^

The first issue decided by the appellate court was whether

the motions to dismiss were properly before the trial court after

remand. The court, relying on Riehl v. National Mutual Insur-

"IND. Code §24-1-2-7 (Burns 1974) authorizes treble damage actions

plus costs of suit and reasonable attorneys' fees. There was an unexplained

discrepancy in the figures for Citizens* anticipated yearly profits, the profits

for the three and one-half year period covered by the suit, and the total

damages claimed. However, in federal antitrust cases all a plaintiff must do

is establish with reiasonable probability a causal connection between defendant's

acst and a loss of anticipated revenue. Flintkote Co. v. Lysfjord, 246 F.2d 368,

392 (9th Cir.), cert, denied, 355 U.S. 835 (1957). Once this is done, the trier

of fact can fix damages by "a just and reasonable estimate . . . based on

relevant data." Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946).
Difficulty in determining damages is not an excuse for denying recovery.

Id. at 265-66. The injury suffered, however, must be measurable in dollars.

See generally ABA Antitrust Law Developments 285 (1975) [hereinafter
cited as ABA 1975 Developments]; 16N von Kalinowski, supra note 3, at
§ 115.03.

'^The court stated the appeal presented three issues: (1) whether the

motions to dismiss were properly before the trial court; (2) whether the trial

court erred in not entering a default judgment; and (3) whether it erred in

granting the motions to dismiss. 331 N.E.2d at 476.



1976] SURVEY—BUSINESS ASSOCIATIONS OT

ance Co.y^^ concluded that the remand of the case was complete
and included the filed but unresolved motions to dismiss. At most,
the failure to refile was an inconsequential irregularity, and so
defendants were not in default.''* To "cover" itself the court also
concluded that even if defendants were in technical default,
Citizens was not entitled to a default judgment as a matter of law.
Although the trial rule'^ then in effect seemed to mandate a default
judgment, the court held the decision was within the trial court's
discretion, as under present Trial Rule 55.'*

On the merits, the court held the trial court erred in ruling
that Citizens had sustained no injury to a legal right and therefore
lacked standing to sue. The thrust of defendants' arguments was
that the Act'' protects only those whose "business or property"
has been injured and Citizens had no such "business or property"
until it opened the Marion office. The problem with this position
was twofold : it assumed that the only anticompetitive acts alleged
related to the Comptroller's proceeding, which fell before para-
graph 6 of the complaint; and that there could not be an illegal
conspiracy to keep someone from entering a business.

A threshold problem facing the appellate court was the dearth
of cases construing the Indiana Antitrust Act. The court therefore
relied upon federal decisions from cases involving violations of
federal antitrust laws. Although the language of the Indiana Act

'^374 F.2d 739 (7th Cir. 1967). See also Viles v. Sharp, 248 F. Supp. 271

(W.D. Mo. 1965). In fact, if the action has been remanded by the federal
court pursuant to 28 U.S.C § 1447(c) (1970), disposition of the motion to
dismiss is properly for the state court. Doran v. Elgin Coop. Credit Ass'n, 95
F. Supp. 455 (D. Neb. 1950). See generally 14 C. Wright, A. Miller & E.
Cooper, Federal Practice and Procedure §§3738-39 (1976).

'^331 N.E.2d at 476, citing Riehl v. National Mut. Ins. Co., 374 F.2d at

742. Riehl involved a removed action but the Citizens court could not see why
the same rationale would not apply to a case that has been remanded.

'*IND. Ann. Stat. § 2-1102 (Burns 1967 Repl.) (current version at Ind.
R. Tr. p. 55).

'*The court cited as authority Custer v. Mayfield, 138 Ind. App. 575, 205

NJ].2d 836 (1965) and 10 C. Wright & A. Miller, Federal Practice and
Procedure §2685 (1973) (discussing Federal Rule 55).

''The reference here is to Ind. Code §§24-1-2-1, -7 (Burns 1974). The
court stated that section 24-1-2-1 was "substantially patterned" after section
1 of the Sherman Antitrust Act, 15 U.S.C. § 1 (1970). 331 N.E.2d at 478 n.5.
Perhaps "influenced" would be more accurate since section 24-1-2-1 is far
more specific than the Sherman Act provision which has been labeled a
"charter of economic freedom," Report of the Attorney General's National
Committee to Study the Antitrust Laws 1 (1955), but characterized as a
legislative command for a judicially developed common law of antitrust, P.
Areeda, Antitrust Analysis 11104, at 5 (2d ed. 1974). See generally 16
von Kalinowski, supra note 3, § 2.01. Ind. Code § 24-1-2-7 (Bums 1972)
authorizes treble damage suits by a person injured "in his business or
property."



62 INDIANA LAW REVIEW [Vol. 10:67

differs from the federal Sherman Antitrust Act,'® there is suf-
ficient similarity to section 4 of the Clayton Antitrust Act''

authorizing federal treble damage suits to justify utilizing federal
cases to resolve the issue of Citizens' standing. The standing
requirement is to insure recovery only by those whose injury has
been proximately caused by an antitrust violation.^"

The defendants claimed the complaint failed to establish
standing because Citizens did not allege any "public injury." At
one time federal courts often required a showing of a general
injury to the competitive process in an antitrust action.^' However,

as the appellate court pointed out, the United States Supreme
Court has rejected this requirement." At least in actions alleging
per se violations of the Sherman Act, a conclusion that conduct

'ns U.S.C. §§ 1-11 (1970). See authorities cited at note 17 supra.
'^15 U.S.C. §15 (1970). The court's statement that section 24-1-2-7 is

"substantially patterned" after section 4 is accurate. 331 N.E.2d at 478 n.6.

This fact was noted in Sandidge v. Rogers, 167 F. Supp. &53, 556 (S.D. Ind.
1958).

^°Some federal courts take the approach that the injury must be a "direct"
oresult of defendant's violation. See, e.g., Productive Inventions v. Trico Prods.

CJorp., 224 F.2d 678 (2d Cir. 1955), cert, denied, 350 U.S. 936 (1956). Others

take a more liberal approach and allow recovery to a plaintiff in a "target
area" which defendants could reasonably foresee would be affected by a con-

spiracy. See, e.g., Twentieth Century Fox Film Corp. v. Goldwyn, 328 F.2d

190, 220 (9th Cir.), cert, denied, 379 U.S. 880 (1964) ; Karseal Corp. v. Rich-

field Oil Corp., 221 F.2d 358, 362-64 (9th Cir. 1955). Although the Supreme

Court has not directly passed on the issue, its pronouncements seem to support

the broader approach. See Hospital Bldg. Co. v. Trustees of Rex Hosp., 423

U.S. 820 (1976) ; Mandeville Island Farms, Inc. v. American Crystal Sugar

Co., 334 U.S. 219, 236 (1948) (scope of jurisdiction cases). But see Hawaii v.

Standard Oil Co., 405 U.S. 251, 262-63 (1972) (the general economy of a

state is not "business or property"). See generally ABA 1975 Developments,
supra note 11, at 257-61; 16L vON Kalinowski, supra note 3, §§ 101.01-.02;

Note, Standing to Sue for Treble Damages Under Section U of the Clayton
Act, 64 COLUM. L. Rev. 570 (1964). The Citizens court took pains to emphasize

that the standing element does not derogate the broad notice pleading rules

of Indiana or in the federal courts. 331 N.E.2d at 479 n.8. See note 31 infra

and accompanying text. A pleading is sufficient if it apprises defendants of
facts from which injury accrued and upon which damages may be assessed.
Farm Bureau Ins. Co. v. Clinton, 149 Ind. App. 36, 269 N.E.2d 780 (1971).

^^See, e.g.. Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 273
F.2d 196, 200 (7th Cir. 1959), rev'd per curiam, 364 U.S. 656 (1961); Ken-

near-Weed Corp. v. Humble Oil & Ref. Co., 214 F.2d 891 (5th Cir. 1954),
eert. denied, 348 U.S. 912 (1955).

^^The ruling occurred in Klor's, Inc. v. Broadway-Hale Stores, Inc., 359

U.S. 207 (1959), which was not cited in Citizens, and was reaffirmed in

Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961),
which was cited.



1^6] SURVEY—BUSINESS ASSOCIATIONS <8

violates the antitrust laws "is inherently a declaration that it
offends the public interest/'"

A more crucial aspect of the standing issue was whether
Citizens sufficiently alleged a causal connection between its in-
jury and the defendants' acts. The court concluded that the com-
plaint was sufficient and rejected defendants' argument that
persons holding only an expectancy of entering a business do not
have a "business" interest under the antitrust laws. Although
there is some authority to support the defendants' contention,^'*
the sounder approach adopted by the court of appeals in Citizens
rejects this myopic view of antitrust and recognizes that the aim
of antitrust laws, to promote competition and prevent undue
restraints of trade, can be thwarted as much by precluding a new
entrant as by destroying an existing business.^^

Of course, courts must take care to allow only those plain-
tiffs who, in the words of an early leading case, have the "inten-
tion and preparedness to engage in business."^* One case relied
on in Citizens to elaborate on this requirement is Denver Petroleum
Corp. V. Shell Oil Co.,^^ which posited the elements to be considered
in determining whether suit can be maintained by a prospective
entrepreneur. Among these factors are the background and

"P. Areeda, Antitrust Analysis 11159, at 69 (2d ed. 1974). There
is, however, still some debate whether public injury must be alleged in rule of
reason cases. Compare Syracuse Broadcasting Corp. v. Newhouse, 295 F.2d
269, 277 (2d Cir. 1961) with Lamb Enterprises, Inc. v. Toledo Blade Co., 461
F.2d 506, 517 (6th Cir.), cert, denied, 409 U.S. 1001 (1972) and Donlan v.
Carvel, 209 F. Supp. 829, 831 (D. Md. 1962). Supreme Court dictum does
seem to support the position that public injury is not an element in any section
1 case. In re MoConnell, 370 U.S. 230, 231 (1962). See generally ABA 1975
Developments, supra note 11, at 265-67; 16M von Kalinowski, supra note 3,
§ 105.02 [7]. A claim of public injury alone will not support a treble damage
action and plaintiff must plead and prove injury to himself. Sam S. Gold-
stein Indus., Inc. v. Botany Indus., Inc., 301 F. Supp. 728, 734 (S.D. N.Y. 1969).

^*See Duff v. Kansas City Star Co., 299 F.2d 320, 323 (8th Cir. 1962)

;

LaRouche v. United Shoe Mach. Corp., 166 F. Supp. 633 (D. Mass. 1958).
^^See, e.g., Woods Exploration & Prod. Co. v. Aluminum Corp. of America,

438 F.2d 1286, 1310 (5th Cir. 1971), cert, denied, 404 U.S. 1047 (1972);
Denver Petroleum Corp. v. Shell Oil Co., 306 F. Supp. 289 (D. Colo. 1969)

;

Waldron v. British Petroleum Co., 231 F. Supp. 72, 81-82 (S.D. N.Y. 1964).
See generally ABA 1975 Developments, supra note 11, at 261-62. "Property"
as used in section 4 is generally construed to include any interest protected by
law and can be broader than "business." Waldron v. British Petroleum Co.,
231 F. Supp. at 86-87; see generally 16L VON Kalinowski, supra note 3,
§ 101.02.

"American Banana Co. v. United Fruit Co., 166 F. 261, 264 (2d Cir. 1908),
aff'd on other grounds, 213 U.S. 347 (1909).

2^306 F. Supp. 289, 307-08 (D. Colo. 1969). See also Waldron v. British
Petroleum Co., 231 F. Supp. at 81-82; see generally 16L von Kalinowski,
supra note 3, § 101.02.



64 INDIANA LAW REVIEW [Vol. 10:67

experience of the persons involved, their successes or failures

in related businesses, their financial capabilities and resources,
and the affirmative actions taken towards entry into the new
market.

Citizens easily sustained the "burden" imposed by Denver
Petroleum because of its banking experience, the Comptroller's
preliminary approval of the application, and the prior acquisition
of a building in Marion. Although the appellate court cautioned

that Citizens might not be able to prove its intent and preparedness
to enter the banking business in Marion,^® there is little doubt

how the court viewed the situation. The court probably was in-
fluenced by the fact that Citizens did enter the Marion market
once the challenges ended.

The appellate court next considered the argument that the
complaint was insufficient because it emphasized the defendants'
efforts to bar the Comptroller's authorization. There is no question
that the complaint was mainly aimed at those particular actions;
but Citizens advisedly, or perhaps fortuitously, had included its
catchall allegation. Thus, even if the attack on the defendants'

attempts to block governmental approval should fail. Citizens

might still recover under other grounds; and it is conventional
wisdom that a motion to dismiss is improper under Trial Rule
12(B) (6) unless it appears to a certainty that the plaintiff is not
entitled to relief under any set of facts.^' The court emphasized
that a complaint need not state all elements of a cause of action

and that other procedures are available to properly advise a
defendant of the gravamen of a complaint, such as a motion for
more definite statement under Trial Rule 12(E) or discovery pro-
cedures under Trial Rule 26.

The trial court had apparently followed federal antitrust
doctrine of an earlier time requiring greater pleading specificity

in antitrust cases than in other federal actions.^^ However, as the

Citizens court rightly noted, this view no longer prevails. It is now
well established that antitrust cases are not an exception to the
liberal federal pleading rules,^^ and there is no reason why the

^°331 N.E.2d at 480. The court also issued the customary caveat that it
was not indicating views on other matters by reversing the judgment. Id. at 476.

^'State V. Rankin, 260 Ind. 228, 230, 294 N.E.2d 604, 606 (1973). See also

Sacks V. American Fletcher Nat'l Bank & Trust Co., 258 Ind. 189, 279 N.E.2d
807 (1972) ; Farm Bureau Ins. Co. v. Clinton, 149 Ind. App. 36, 269 N.E.2d
780 (1971); 1 W. Harvey, Indiana Practice 601 (1969).

^°See, e.g., United Grocers' Co. v. Sau-Sea Foods, Inc., 150 F. Supp. 267,
269 (S.D. N.Y. 1957) ; Baim & Blank, Inc. v. Warren-Connelly Co., 19 F.R.D.
108, 109 (S.D. N.Y. 1956).

3 'See Nagler v. Admiral Corp., 248 F.2d 319 (2d Cir. 1957), relied on in
Citizens. See also Dailey v. Quality School Plan, Inc., 380 F.2d 484, 486 (5th



1976] SURVEY—BUSINESS ASSOCIATIONS 66

same approach should not apply under the Indiana Act. Since the
catchall allegation paragraph 6 could cover circumstances justify-
ing relief, the trial court's draconian step of dismissing the com-
plaint was inappropriate.

Defendants also claimed the suit was barred by the statute
of limitations. The trial court had agreed, applying the two year
statute "for a forfeiture of penalty given by statute,"" The appel-
late court did not decide whether that statute was the appropriate
one but concluded dismissal was improper because the face of the
complaint did not clearly show that the action was barred by that
statute." Again paragraph 6 saved Citizens. If the only overt acts
were defendants' administrative and judicial efforts, the statute
might have started to run in June 1968. The court, applying the
rule that the statute does not commence to run until the comple-
tion of the last overt act in furtherance of the conspiracy,^"* rea-

soned that paragraph 6 permitted a showing of subsequent acts
that would toll the statute. In fact, from the complaint's face
the statute might not have started running until March 1970,
when the Marion office was opened. The court recognized that
the last overt act might have occurred earlier and conceivably the
suit was time barred, but stated that this possibility did not justify
granting a motion to dismiss. However, a motion for summary
judgment might be appropriate at a later time.

The court then considered the key issue raised by Citizens'
appeal, the contention that defendants' actions were protected
under the Noerr-Pennington-Trucking Unlimited^^ doctrine con-

Cir. 1967). The Supreme Court has cautioned against summary procedures
in antitrust litigation. Norfolk Monument Co. v. Woodlawn Memorial Gardens,
Inc., 394 U.S. 700 (1969); Poller v. Columbia Broadcasting Sys., Inc., 368

U.S. 464, 473 (1962). See generally 16J, M VON Kalinowski, supra note 3,
§§81.06[1], 105.07[2].

^=IND. Code §34-1-2-2 (Burns 1973). The court in Sandidge v. Rogers,
167 F. Supp. 553, 555-56 (S.D. Ind. 1958), applied a predecessor statute to an
antitrust complaint arising before the current four year Clayton Act statute
of limitations, 15 U.S.C. § 15b (1970), became effective. The statute of limita-
tion of the forum controlled prior to the adoption of section 4B of the Act.
Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390 (1906)

;

Schiffman Bros. v. Texas Co., 196 F.2d 695 (7th Cir. 1952).
"331 N.E.2d at 483, citing American States Ins. Co. v. Williams, 151 Ind.

App. 99, 278 N.E.2d 295 (1972).
^'*The court adopted the federal court approach here. See Hazeltine Re-

search, Inc. V. Zenith Radio Corp., 418 F.2d 21 (7th Cir. 1969), rev'd on other

grounds, 401 U.S. 321 (1971); Northern Ky. Tel. Co. v. Southern Bell Tel. &
Tel. Co., 73 F.2d 333 (6th Cir. 1934). See generally 16J von Kalinowski,
supra note 3, § 81.04 [2].

"California Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508

(1972); UMW v. Pennington, 381 U.S. 657 (1965); Eastern R.R. Presidents
Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961). The doctrine



^ INDIANA LAW REVIEW [Vol. 10:67

ferring antitrust immunity on concerted actions aimed at influenc-
ing governmental decisions even if reprehensible in nature and
done with an anticompetitive intent. The rationale of the doctrine,
as propounded in Eastern Railroad Presidents Conference v. Noerr
Motor Freight, Inc.^'' is that Congress did not intend to apply the
antitrust laws to concerted efforts seeking legislative action

because of constitutional considerations.^^ Although Noerr was a
statutory construction case, the Supnsme Court raised the doctrine
to a constitutional level in California Motor Transport Co, v.
Trucking Unlimited,^'^ justifying it on first amendment grounds''
and applying it to efforts to influence governmental actions
through litigation as well as lobbying. UMW v. Pennington"^^
furnished the other element appropriate to Citizens by immuniz-
ing joint actions undertaken to influence administrative decisions.

Even though Noerr-Pennington-Trucking Unlimited bars
antitrust attacks on joint actions akin to defendants' efforts, the
appellate court was correct in reversing the judgment since para-
graph 6 was broad enough to cover "nongovernmental" aspects of
the putative conspiracy. These aspects could justify antiti^st

recovery even if allegations of the attempt to influence the Comp-
troller and the subsequent litigation were disregarded."^^

Furthermore, even if the complaint were limited to the efforts
to bar governmental approval. Citizens might fall within the

"sham exception" to the doctrine recognized in Noerr and de-
veloped in Trucking Unlimited. This exception to the immunity
applies where a defendant's aim is not to influence government
action but is merely a disguised anticompetitive effort.'*^ The

lias generated considerable academic comment. See authorities cited in Galanti,

Seventh Circuit Review—Antitrust, 62 Chi.-Kent L. Rev. 203, 208 n.l5 (1976)
[hereinafter cited as Galanti, Antitrust}. See generally ABA 1975 Develop-
ments, supra note 11, at 410-11 ; 16F von Kalinowski, supra note 3, §§ 46.08,
46.04.

3<'365 U.S. 127 (1961).

"7d. lat 132 n.6, 139. See Galanti, Antitrust, supra note 36, at 209.
3^404 U.S. 508 (1972). See generally 2 M. Handler, Twenty-Five Years

OF Antitrust 1023-24 (1973) [hereinafter cited as Handler].

395ee 404 U.S. at 610-11.

^°381 U.S. 657 (1965).

'*'An antitrust victim can recover for anticompetitive acts that do not

involve governmental action even if some aspects of a conspiracy are protected.

See Semke v. Enid Auto. Dealers Ass'n, 456 F.2d 1361 (10th Cir. 1972).
'*^331 N.E.2d at 484 n.lO. The "sham exception" was raised in Noerr

because of a fear that the Sherman Act would be eviscerated whenever some
state activity is involved. See Galanti, Antitrust, supra note 35, at 210; see

generally 16F vON ICALINOWSKI, supra note 3, § 46.04 [3]. There has been some
debate on the question of whether Trucking Unlimited has narrowed the

Noerr holding. Compare 2 Handler, supra note 37, at 1017-30 with ABA 1976
Developments, supra note 11, at 410 and Oppenheim, Antitrust Immunity for



1976] SURVEY—BUSINESS ASSOCIATIONS 67

complaint in Citizens does not seem to fall within the sham excep-
tion, but it is not inconceivable that it might; and the court was
therefore justified in holding the motion to dismiss improper.

Of course, if the only anticompetitive acts were those aimed at
government action, the suit would be inappropriate and a motion
for summary judgment would be in order.

The final aspect of Citizens was whether the action was barred
by the res judicata doctrine or as a collateral attack on the earlier

federal decisions.''^ Once again the court turned to paragraph 6
and noted that Citizens could possibly prove facts subsequent to

the federal litigation that would not be barred by either doctrine.
The court also wisely acknowledged that the various defenses
might preclude some of the issues even if they did not preclude the
suit. However, the plethora of grounds raised at this pleading

stage failed to justify a motion to dismiss. Citizens was entitled
to present its case although it might not in fact make a case/^

B. Securities Law Fraud

In Green v. KaroV^ the Third District Court of Appeals

reached the right result but, in one respect, on erroneous grounds.

The suit alleged a violation of the Indiana Securities Act^* (Blue
Sky Act) ; the federal Securities Act of 1933"=' (1933 Act) ; the
federal Securities Exchange Act of 1934"° (1934 Act) and imple-

Joint Efforts to Influence Adjudications Before Administrative Agencies and
Courts—From Noerr-Pennington to Trucking Unlimited, 29 Wash. & Lee L.
Rev. 209, 217-24 (1972). See also Metro Cable Co. v. CATV of Rockford, Inc.,
516 F.2d 220 (7th Cir. 1975), discussed in Galanti, Antitrust, supra note 35,
at 205-16; Bob Layne Contractor, Inc. v. Bartel, 504 F.2d 1293 (7th Cir. 1974),
discussed in Galanti, Antitrust, supra, at 204 n.l.

^^Marion Nat'l Bank v. Van Buren Bank, 418 F.2d 121 (7th Cir. 1969)

;

Marion Nat'l Bank v. Saxon, 261 F. Supp. 373 (N.D. Ind. 1966).
'*'*The court could not resist the opportunity to take a probably well-de-

served dig at the parties for not resolving the preliminary issues before the

suit reached the appellate level. See 331 N.E.2d at 485.
-•^344 N.E.2d 106 (Ind. Ct. App. 1976) (Staton, J.), also discussed in

Harvey, Civil Procedure, infra at 112.
^^IND. Code §§ 23-2-1-1 to -25 (Burns Supp. 1976). For a general discus-

sion of Blue Sky Acts see 14 Fletcher, supra note 1, §§ 6738-44; Henn, supra
note 1, §§305-08; Lattin, supra note 1, §44. State securities legislation is
extensively and critically treated in L. Loss & E. Cowett, Blue Sky Laws
(1958). See also Pasmas, Securities Issuance and Regulation: The New
Indiana Securities Law, 38 Ind L.J. 38 (1962).

*^15 U.S.C. §§77a-77aa (1970). The commentary on federal regulation

of securities is legion. The classic reference is L. Loss, Securities Regulation

(2d ed. 1961 & Supp. 1969), but other selected references can be found in D.
Ratner, Securities Regulation 27 (1975).

*n5 U.S.C. §§ 78a-78hh (1970).



68 INDIANA LAW REVIEW [Vot 10:67

meriting rule lOb-5;^' money had and received; and common law
fraud/° It arose from Green's efforts to recover $30,000 paid in
1967 for securities of a Costa Rican sugar refinery. The securities
had not been registered with the Indiana Securities Commissioner
under the Blue Sky Act^' or with the Securities and Exchange Com-
mission under the 1933 Act."

In an earlier case^^ involving Dr. Karol, the Third District had
ruled that the sale of these securities to another doctor in Fort

Wayne was not within either the small offering exemption^* or the
isolated non-issuer transaction exemption" of the Blue Sky Act.
However, unlike the earlier plaintiff, who acted promptly when
the fortunes of the company soured in 1969, Dr. Green did not
sue until May 1972. The trial court initially defaulted Karol for
failing to plead ; however the entry was set aside and the directed
verdict for Karol entered. Thus, the issues before the appellate

court were: (1) whether the trial court abused its discretion in

setting aside the default entry; and (2) whether it erred in direct-
ing a verdict on the state and federal securities issues and the
count for money had and received.

On the first issue, the court concluded the trial court did not
abuse its discretion in setting aside the default entry under Trial

Rule 55(A)." Since no default judgment had been entered, the
requirement of Trial Rule 55(C) that default judgments can only

^'17 C.F.R. §240.10b-5 (1975).

*°The common law fraud count was submitted to the jury, and Green did
not appeal an adverse verdict. 344 N.E. 2d at 109 n.3.

^'IND. Code § 23-2-1-3 (Burns Supp. 1976) prohibits the sale of securities
unless registered in accordance with icf. §§ 23-2-1-4 to -7 or the security or

transaction is exempt under id. § 23-2-1-2. See generally Pasmas, Securities
Issuance and Regulation: The New Indiana Securities Law, supra note 43.

"Section 5 of the 1933 Act, 16 U.S.C. § 77e (1970), prohibits the sale,

offer to sell, or offer to buy unregistered securities unless the securities are
exempt under section 3, id. § 77c, or the transactions are exempt under section

4, id, § 77d. See 11 H. Sowards, Securities Regulation § 2.01 (1975) [herein-
after cited as Sowards].

^mippensteel v. Karol, 804 N.E.2d 796 (Ind. Ct. App. 1973), discussed

in Galanti, Business Associations, 197Ji. Survey of Recent Developments in
Indiana Law, 8 Ind. L. Rev. 24, 29-35 (1974) [hereinafter cited as Galanti,
1974 Survey].

^^IND. Code §23-2-l-2(b) (10) (Burns Supp. 1976). For a general discus-
sion of Blue Sky Act exemptions see Note, Securities Registration Require-
ments in Indiana, 3 Ind. Legal F. 270, 285-94 (1969). See generally 14
Fletcher, supra note 1, § 6754; Doxsee, Securities Problems in Indiana, 17

Res Gestae 6 (Sept. 1973).

*^IND. Code § 23-2-1-1 (b) (1) (Bums Supp. 1976).
*'The court cited as authority Citizens Nat'l Bank v. First Nat'l Bank,

831 N.E.2d 471 (Ind. Ct. App. 1975), discussed at text accompanjring notes

13-16 supra.



1976] SURVEY—BUSINESS ASSOCIATIONS 69

be set aside in accordance with the strict requirements of Trial

Rule 60(B) did not apply/' The Green court did recognize the role
of default judgments in enforcing rules of procedure, but tempered
its application with the judicial preference for deciding a case on
its merits. Although the defaulted party must establish that a de-
fault judgment would result in an injustice, any doubts in the
propriety of entering the default judgment should be resolved
against the moving party/® In affirming the trial court, the appel-
late court emphasized the amount of money and the importance of
the issues involved. The court also noted that the delay was short;
did not prejudice Green; was inadvertent, even if it did not
satisfy the "excusable neglect" standard of Trial Rule 60(B);*'

and, in particular, that Karol had an apparently meritorious
defense.

On the merits, the appellate court started from the premise
that Trial Rule 50 permits a directed verdict only if there is no
evidence, with all fair and rational inferences, to support a verdict
for the nonmoving party.*° In essence, there must be either no
evidence on a crucial factual issue necessary to support a verdict

or a clear defense supportable by the evidence. Karol prevailed
on both points. The court concluded that the securities law viola-
tions were time barred and there was no evidence to support
liability for money had and received.

The Green result seems correct but the discussion of the
statute of limitations for the possible 1934 Act violation, although
correct, really was irrelevant. What appears to have happened is
that neither the courts nor the parties realized that Congress with-

held from state courts jurisdiction to entertain 1934 Act claims.
Section 27 of the Act*' grants federal district courts the excltisive

jurisdiction to enforce its provisions.*^ There is considerable au-

^^Green, a Third District Court of Appeals decision, appears to conflict

with the Second District Court of Appeals decisions in Henline, Inc. v. Martin,

348 N.E.2d 416 (Ind. Ct. App. 1976), and Glennar Mercury-Lincoln, Inc. v.
Riley, 338 N.E.2d 670 (Ind. Ct. App. 1975) (discussed in Harvey, Civil Pro-

cedure, infra at 91), which seem to require compliance with Trial Rule

60(B) in attacking a default entry.
"5ee Clark County State Bank v. Bennett, 336 N.E.2d 663 (Ind. Ct.

App. 1975) ; Duncan v. Binford, 151 Ind. App. 199, 278 N.E.2d 691 (1972).
^'See Henline, Inc. v. Martin, 348 N.E.2d 416 (Ind. Ct. App. 1976) ; Con-

tinental Assurance Co. v. Sickels, 145 Ind. App. 671, 252 N.E.2d 439 (1969).
''°See Miller v. Griesel, 308 N.E.2d 701, 707 (Ind. 1974); Jordanich v.

(Jerstbauer, 153 Ind. App. 416, 287 N.E.2d 784 (1972).
*'15 U.S.C. §78aa (1970). See generally llA E. Gadsby, Business Or-

ganizations, Securities Regulation §5.03 [3] (1976). [hereinafter cited as

Gadsby] .

*^Even though state courts lack 1934 Act jurisdiction, there is no pre-

emption problem. Section 28(a) of the 1934 Act, 15 U.S.C. §78bb(a) (1970),



70 INDIANA LAW REVIEW [Vol. 10:57

thority construing the impact of section 27 on state courts. One
leading case is American Distilling Co. v. Brown,''^ in which the
New York Court of Appeals affirmed dismissal of a complaint
filed under section 16(b) of the 1934 Act" in a stronger case for
state jurisdiction than Green. Unlike section 10(b) and rule lOb-5,
where the civil cause of action has been implied/^ section 16(b)
specifically authorizes a corporation or a shareholder in a deriva-

tive suit to recover "short swing" profits by a statutory insider
in "any court of competent jurisdiction."** Notwithstanding the

provides that rights and remedies under the Act are cumulative, although
recovery is limited to actual damages, and that the jurisdiction of state securi-
ties commissions is unaffected except where it conflicts with the Act or imple-
menting rules. See People v. Birrell, 46 Misc. 2d 1053, 261 N.Y.S.2d 609
(Sup. Ct. 1965).

In Herron Northwest, Inc. v, Danskin, 1 Wash. App. 818, 464 P.2d 435
(1970), the trial court had exercised jurisdiction over a claim involving stock
purchase margins allegedly violating Regulation T, promulgated under section
7(a) of the 1934 Act, 15 U.S.C. § 78g(a) (1970). On appeal the court rejected
the possible Regulation T claim but remanded the case to see whether plaintiff
had stated a claim under an alternatively pleaded state law count. Similarly,
in Pierce v. Richard Ellis & Co., [1969-1970 Transfer Binder] Fed. Sec. L.
Rep. (CCH) ^92,579 (N.Y. Civil Ct. 1970), the court held that the 1934 Act
barred a state court rule lOb-5 action but that the alleged stock "churning"

could constitute common law fraud as well. Finally, in Goodbody & Co. v.
Penjaska, 8 Mich. App. 64, 153 N.W.2d 665 (1967), the court allowed an action
to recover on a margin account because it was a common law action for debt
and not an action under Regulation T.

"295 N.Y. 36, 64 N.E.2d 347 (1945), aff'g 269 App. Div. 763, 54 N.Y.S.2d
855 (App. Div.), affg 184 Misc. 431, 51 N.Y.S.2d 614 (Sup. Ct. 1944).

^^15 U.S.C. §78p(b) (1970). See generally llA Gadsby, supra note 61,
§ 8.02 ; Woodside, Resume of the Report of the Special Study of Securities
Markets and the Commission's Legislative Proposals, 19 Bus. Law. 463, 476
(1964).

*^The implied cause of action initially was recognized in Kardon v. Na-
tional Gypsum Co., 73 F. Supp. 798, 802 (E.D. Pa. 1947) , discussed in Note,
Implied Liability Under the Securities Exchange Act, 61 Harv. L. Rev. 858
(1948). The Supreme Court has confirmed the existence of the cause of
action. Affiliated Ute Citizens v. United States, 406 U.S. 128, 150^54 (1972)

;

Superintendent of Ins. v. Bankers Life «& Cas. Co., 404 U.S. 6, 13 n.9 (1971).
However, the majority of the Court today, with a demonstrated hostility

toward an expansive reading of rule lOb-^5, conceivably would rule otherwise

if the existence of an implied cause of action were not so well established.
See Ernst & Ernst v. Hoohfelder, 425 U.S. 185 (1976) ; Blue Chip Stamps
V. Manor Drug Stores, 421 U.S. 723 (1975). See generally Business Week,
Sept. 1, 1976, at 57. It is even possible to wonder if decisions such as J.I. Case
Co. V. Borak, 377 U.S. 426 (1964), and Mills v. Electric Auto-Lite Co., 396

U.S. 375 (1970), recognizing in general that private enforcement of SEC
rules may supplement SEC action, would be decided the same way today. Cf.
TSC Indus., Inc. v. Northway, Inc., 96 S. Ct. 2126 (1976). See generally llA
Gadsby, supra note 61, § 5.03.

'*15 U.S.C. § 78p(b) (1970). The section 16(b) action is a sui generis
proceeding aimed at discouraging insider trading by allowing the issuer to



1976] SURVEY—BUSINESS ASSOCIATIONS 71

superficial soundness of the argument that the specific language
of section 16(b) gives a court with jurisdiction over the defendant

jurisdiction over the cause of action, the New York court concluded
section 27 controlled/' The rationale for the restrictive rule, ac-
cording to the court in Investment Associates, Inc. v. Standard
Power & Light Corp., *® was a Congressional intent to have consis-
tent and efficient enforcement of the Act. State court jurisdiction
is so inconsistent with the Congressional intent that a 1934 Act

violation cannot be raised as a defense in a state court suit/'

The Green court, however, was correct in considering
whether there had been a 1933 Act violation because section 22 (a) '''

grants state and territorial courts concurrent jurisdiction to
enforce any liability or duty/' The policies of the two Acts differ
so much that the 1933 Act specifically bars removing cases from
state to federal courts/^ Apparently the 1933 Act jurisdiction was
not thoroughly researched by the parties in Green because research
might have disclosed Schnall v. Loeb, Rhoades & Co./^ a New York
case rejecting jurisdiction of an action brought pursuant to the
1934 Act but upholding 1933 Act jurisdiction. Although Green's
complaint was not specific, at least as restated by the appellate
court, any 1933 Act relief could only be based on sections 12(1),

recover profits made by the insiders specified in section 16(a), 15 U.S.C.
§77p(a) (1970), in almost all situations even where the insider did not in
fact make a profit in an ordinary financial sense. See Smolowe v. Delendo
Corp., 136 F.2d 231 (2d Cir.), cert, denied, 320 U.S. 751 (1943). See generally

11A Gadsby, supra note 61, § 8.02 [1]. The Supreme Court's current hostility
to a broad reading of the 1934 Act has carried over into the section 16(b)
area. See Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232

(1976).
*^295 N.Y. at 36, 64 N.E.2d at 348-49.
*«29 Del. Ch. 225, 48 A.2d 501 (1946). See also Standard Power & Light

C^orp. V. Investment Assocs., 29 Del. Ch. 593, 51 A.2d 572 (1947).
^'Investment Assocs. v. Standard Power & Light Corp., 29 Del. Ch. 225,

48 A.2d 501 (1946). However, in McGregor v. Consolidated Airborne Sys.,
Inc., [1964-66 Transfer Binder] Fed. Sec. L. Rep. (CCH) U 91,410 (N.Y. Co.
Sup. Ct. 1964), a rule lOb-5 violation was allowed as a counterclaim but the
court did not discuss section 27.

7°15 U.S.C. §77v(a) (1970).
^'See Wilko v. Swan, 346 U.S. 427 (1953) ; American General Life Ins. Co.

V. Miller, [1964-66 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1[ 91,448 (Bal-
timore, Md. Super. Ct. 1964) ; Schnall v. Loeb, Rhoades & Co., [1970-71 Trans-
fer Binder] Fed. Sec. L. Rep. (CCH) U 93,104 (N.Y. Co. Sup. Ct. 1971) ; Negin
V. Cico Oil & Gas Co., 46 Misc. 2d 367, 259 N.Y.S.2d 434 (N.Y. Co. Sup. Ct.
1965). See generally llA Gadsby, supra note 61, § 10.07[l][b].

"15 U.S.C. §77v(a) (1970). See Wilko v. Swan, 346 U.S. 427, 431

(1953).

^3 [1970-71 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1193,104 (N.Y. Co.
Sup. Ct. 1971).



72 INDIANA LAW REVIEW [Vol. 10:67

12(2) and 17J* There was therefore no problem with an Indiana
court exercising jurisdiction because all the transactions occurred
in this state/^

Although the Indiana Court had jurisdiction, it is clear the
statute of limitations of section 13^* determined whether the section
12 actions were time barred. For a violation of section 12(2),
involving untrue statements or omissions of material facts, suit

must be brought within one year of discovery of the violation, or
when it should have been discovered by the exercise of reasonable
diligence, but no later than three years after the sale. Section 13
is more narrowly drawn than section 12(1), and suit must be
brought within one year of the violation and three years from the
bona fide offering of the security.^'

The limitation provisions are exclusive, and the three year
provision does not extend the one year provision, and vice versa.^*
In other words, a section 12(2) suit involving an untrue statement
of a material fact brought the day after the violation is discovered,

but over three years after the sale, is barred, as is a suit brought

a year and a day from discovery of the violation but well within the
three year period. The requirement that section 12(1) rescission
suits, involving sales of securities in violation of section 5 of the

'nh U.S.C. §§771(l)-(2), 77q (1970). Since the securities had not been
registered, liability on account of a false registration statement under section
11, id, § 77k (1970), was foreclosed. See 344 N.E.2d at 112 n.9; see generally
11 SOWARDS, supra note 52, § 9.02.

^^It is settled that the personal jurisdiction requirements of state law
must be met even for the federal cause of action. Negin v. Cico Oil & Gas
Co., 259 N.Y.S.2d 434, 436 (N.Y. Co. Sup. Ct. 1966). The fact that a federal
court in a state might have venue under section 22(a) does not automatically
give a state court jurisdiction. Id. The restriction cuts both ways, and the
broad federal process provisions cannot be used as a sham to obtain juris-
diction to enforce a pendent claim. Ratner v. Scientific Resources Corp., 53

F.R.D. 325 (S.D. Fla. 1971), appeal dismissed, 462 F.2d 616 (5th Cir. 1972).

See generally Mills, Pendent Jurisdiction and Extraterritorial Service Under
the Federal Securities Laws, 70 COLUM. L. Rev. 423 (1970).

^n5 U.S.C. § 77m (1970) ; cf. Herget v. Central Nat'l Bank & Trust Co.,
324 U.S. 4 (1945). For a general discussion of the statute of limitations for
1933 Aet violations, see 11 Sowards, supra note 52, § 9.05.

'^The statutory period for a section 11 action on a false registration
statement is one year from the discovery of the violation, or when it should
have been discovered, with an outside limit of three years after the bona

fide offering of the security to the public. Thus section 11 is treated in part
like section 12(1) and in part like section 12(2).

^^See, e.g., Gallik v. Franklin, 145 F. Supp. 315, 316 (S.D. N.Y. 1956);

Osborne v. Mallory, 86 F. Supp. 869, 874 (S.D. N.Y. 1949); Shonts v.

Hirliman, 28 F. Supp. 478, 486 (S.D. Cal. 1939). The same rule applies to

state Blue Sky statutes patterned on section 13. See WoodhuU v. Minot
Clinic, 259 F.2d 676 (8th Cir. 1958). See generally 11 Sowards, supra note 11,

§ 9.05 at 9-28.2.



1976] SURVEY—BUSINESS ASSOCIATIONS 73

1933 Act/' must be brought within one year of the violation and
three years of the offering seems somewhat anomalous. However,
the prospectus delivery requirements of section 5 are continuous,

and a violation is possible even after a proper initial public offer-
ing.*^ The importance of section 13 cannot be overemphasized since
compliance is an essential ingredient of a suit.*' Failing to plead
facts conforming to section 13 is fatal to a 1933 Act claim" and a
plaintiff must allege both the date the fraud was discovered and
that it could not have been discovered sooner through the exercise
of reasonable diligence.*^

Green's suit was not filed until May 1972, and it was clear to
the court that Green's possible section 12(1) violation was barred
in February 1968, one year after the transaction ; and the possible
section 12(2) violation was barred in February 1970, three years
after the sale, regardless of when Green discovered or could have
discovered any misstatements. Although the issue was raised in
the context of the court's discussion of the 1934 Act, the appellate

court was satisfied that Green was aware of Karol's misrepresen-
tations as early as January 1968, and had indications of nondis-
closure in the summer of 1968 and June 1971.

The appellate court also considered possible claims under the
antifraud provisions, section 17 of the 1933 Act*^ and section

^'15 U.S.C. §77e (1970).
^See, e.g., SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir.

1972). See generally 11 SOWARDS, supra note 52, §§7.06, 9.05.
"'5ee, e.g., Newburg v. American Dryer Corp., 195 F. Supp. 345 (E.D.

Pa. 1961). See generally 11 Sowards, supra note 52, § 9.05, at 9-29 to -30.

*^Premier Indus., Inc. v. Delaware Valley Fin. Corp., 185 F. Supp. 694,
696 (E.D. Pa. 1960).

*='Dale V. Rosenfeld, 229 F.2d 855, 858 (2d Cir. 1956) ; Osborne v. Mal-

lory, 86 F. Supp. 869, 876 (S.D. N.Y. 1949).
*'*The court apparently assumed that a violation of section 17 gives rise

to an implied cause of action despite the express civil remedies of the 1933
Act. Although the consensus is that there is a cause of action, see 11 Sowards,
supra note 52, § 10.01 [i], it is more restricted than the implied action ujider
the 1934 Act. It is available only where fraud and not mere negligence is
alleged, see Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 n.2 (2d Cir.

1951); cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), and perhaps
only where a plaintiff is a purchaser of securities who could sue under section
12, see Greater Iowa Corp. v. McLendon, 378 F.2d 783, 788-91 (8th Cir. 1967) ;
cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). As Pro-
fessor Loss points out, 3 L. Loss, Securities Regulation 1785-86 (2d ed.

1961), too broad a reading of section 17 would undermine the carefully

structured civil remedy of section 12(2). Of course, this might be the goal
of a plaintiff running afoul of the statute of limitations of section 13. See

Osborne v. Mallory, 86 F. Supp. 869 (S.D. N.Y. 1949). Unfortunately, the

fact that the Supreme Court has not ruled on the existence of an implied cause

of action under section 17 was noted by Justice Rehnquist in Blue Chip
Stamps V. Manor Drug Stores, 421 U.S. at 733 n.6, and there is contemporane-



74 INDIANA LAW REVIEW [Vol. 10:67

10(b) and rule lOb-5 of the 1934 Act, but ultimately concluded
that these actions also were time barred. Since these provisions
merely imply a cause of action, there is no express statute of
limitations applicable to suits under these provisions. In these

situations federal courts look to the law of the forum" for an
appropriate statute. However, this is not always a simple process,
since there may be two possible statutes : the general fraud statute
or the Blue Sky Act statute. In deciding which is appropriate, the
courts choose the statute that best effectuates the remedial pur-

poses of the security laws and closely tracks the express provisions
of the 1933 Act.'*

The court followed the current trend towards utilizing the
Blue Sky rather than the fraud statute.*' Consequently, the court
held that the potential section 17°° action and the putative 1934 Act
actions are controlled by the two year period provided in the Blue

ous evidence that section 17 was limited to injunctive relief or, in appropriate
cases, criminal prosecution. See, e.g., Landis, Liability Section of Securities

Act, 18 Am. Accountant 330, 331 (1933). See also SEC v. Texas Gulf Sul-
phur Co., 402 F.2d 833, 867 (2d Cir. 1968) (Friendly, J., concurring), cert,
denied, 394 U.S. 976 (1969).

^^See, e.g., Holmberg v. Armbrecht, 327 U.S. 392 (1946). See generally
IM. Gadsby, supra note 61, §5.03 [4] [a]; 11 So^wards, supra note 52,
§9.0i5[l]. Suits to enforce liability under section 18 of the 1934 Act must be
brought within one year of discovery of the facts constituting the cause of

action but no later than three years from the date the action occurred, 15
U.S.C. § 78r (1970).

«*344 N.E.2d at 113, citing Parrent v. Midwest Rug Mills, Inc., 455 F.2d
123 (7th Cir. 1972); Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.), cert,
denied, 400 U.S. 852 (1970) ; Corey v. Bache & Co., 355 F. Supp. 1123 (S.D.
W. Va. 1973). For a general discussion of the statutes of limitations issue,
see Einhorn & Feldman, Choosing a Statute of Limitations in Federal Securi-
ties Actions, 25 Mercer L. Rev. 497 (1974) ; Schulman, Statutes of Limita^
tions in lOb-5 Actions: Complication Added to Confusion, 13 Wayne L. Rejv.
635 (1967).

^''However, cases using the fraud statute still predominate numerically.

See Einhorn & Feldman, supra note 86, at 500 n.21. The authors note that the
Seventh Circuit's holding in Parrent now represents the view of federal
courts applying Illinois law. Id. at 113. The Green court either ignored or
was unaware of Morgan v. Koch, 419 F.2d 993 (7th Cir. 1969), in which the
court applied the Indiana fraud statute in a rule lOb-5 action. However,

the parties in Morgan had agreed that the six year statute applied. Id. at 997.
In Corey v. Bache & Co., 355 F. Supp. 1123 (S.D. W. Va. 1973), transferred
from the Southern District of Indiana pursuant to 28 U.S.C. § 1404(a)

(1970), the court also applied the Indiana Blue Sky provision, citing Parrent.
fisparrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972), and

Carey v. Bache & Co., 355 F. Supp. 1123 (S.D. W. Va. 1973), involved sec-
tion 17 and rule lOb-5 claims. Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.),
cert, denied, 400 U.S. 852 (1970) was a rule lOb-5 action. There are cases

applying the general fraud statute of limitations to section 17 suits. See,

e.g., Osborne v. Mallory, 86 F. Supp. 869 (S.D. N.Y. 1949).



1^76] SURVEY—BUSINESS ASSOCIATIONS 76

Sky Act in effect at the time of the transactions.*' The six year
general fraud statute of limitations'" was rejected because the
Blue Sky Act more closely tracks the federal law, even though the
civil liability provisions of the Indiana Act and the two federal
acts are not identical."

The court in Green applied the doctrine that the statute com-
mences for the federal actions when the fraud is discovered or
should have been discovered through reasonable diligence.'^ As
the court in Parrent v. Midwest Rug Mills, Inc.,''^ relied on in
Green, stated, "[T]he statute does not begin to run until the fraud
is discovered where a plaintiff injured by fraud 'remains in ignor-
ance of it without any fault or want of diligence or care on his
part . . . .' '"^ Consequently, it is possible that a 1934 Act claim in

a federal court may be barred before a Blue Sky violation controlled
by the same statute of limitations, because the violation could have

«'That provision, Ch. 333, § 507(e), 1961 Ind. Acts 1024, required suits to

be brought no later than two years after the contract of sale. In 1969, this
was amended to two years after discovery of the violation, Ind. Code
§ 23-2-1-19 (e) (Bums 1972), and in 1975 the period was increased to three
years. Ind. Code § 23-2-1-19 (e) (Burns Supp. 1976). See Galanti, Business
Associations, 1975 Survey of Recent Developments in Indiana Law, 9 Ind.
L. Rev. 33, 63 (1975) [hereinafter cited as Galanti, 1975 Survey]. The Green
court recognized that the legislature can alter the time within which suit must
be brought, Meyers v. Hoover, 300 N.E.2d 110 (Ind. Ct. App. 1973), but
applied the rule that a barred action cannot be revived by a lengthened limi-
tations period. Oberg v. D. 0. McComb & Sons, 127 Ind. App. 278, 141 N.E.2d
135 (1957).

One point mentioned in Green in adopting the Blue Sky statute was the
"trend" toward applying rule lOb-5 to negligent as well as intentional mis-
representations. Of course, the "trend" was blunted by the Supreme Court's
decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), requiring
scienter in a rule lOb-5 action. The scienter requirement has since been im-
posed in an SEC action seeking injunctive relief under rule lO'b-5. SEC v.
Bausch & Lomb, Inc., 45 U.S.L.W. 2156 (S.D. N.Y. Sept. 16, 1976). Cer-
tainly, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975),
demonstrates hostility to an expansive reading of the rule. See discussion and
authorities cited in note 65 supra.

'°IND. Code §34-1-2-1 (Burns 1973).

"For a discussion of the rationales for selecting the appropriate statute,
see Einhorn & Feldman, supra note 86; see also llA Gadsby, supra note 61,
§5.03[4][a].

"5ee, e.g., Holmberg v. Armbrecht, 327 U.S. 392 (1946) ; Parrent v.

Midwest Rug Mills, Inc., 455 F.2d 123, 128 (7th Cir. 1972); Vanderboom v.
Sexton, 422 F.2d 1233, 1240 (8th Cir. 1970) ; see generally llA Gadsby, supra

note 61, §5.03 [4] [a]. This policy applies to both actions in law and equity-

Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972).
"455 F.2d 123 (7th Cir. 1972).
'^/d. at 128, quoting from Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348

(1874) (emphaais added).



76 INDIANA LAW REVIEW [Vol. 10:67

been discovered sooner by the exercise of reasonable diligence.'^
As previously discussed, the appellate court concluded Green

had had indications of Karol's misdeeds as early as January 1968.'*

Therefore, the possible actions under sections 17 and 10(b) and
rule lOb-5 were barred in 1970, or in 1971 if the three year period
were to be applied. The possible Blue Sky action was clearly barred,
because the then-effective statute started the period running at
the formation of the contract of sale rather than from discovery
of the fraud as presently provided.'^

Green also contended that Karol had waived the limitations
defenses. KaroFs counsel had made some comments that there
were no limitations defenses to the sections 17 and 10(b) actions,
but the court found that the statement was not an unequivocal
waiver. At most, the attorney had incorrectly stated the law. The
court also concluded that the trial court had not erred in directing
the verdict on the common law count of money had and received
since Green had paid the funds to the corporation, rather than to
Karol, and there was no evidence that Karol had requested Green
to pay the corporation for KaroFs benefit.'®

C. Securities Act Exemptions and Defenses

The Second District Court of Appeals took an interesting
approach in denying relief in Theye v, Batea,'''^ a Blue Sky Act suit
brought in Marion Superior Court to recover the purchase price' °°

of stock of Development Corporation of America [DCA]. The
stock had not been registered in compliance with the Act.'^' The
appellate court affirmed a judgment for defendants.

'^This assumes the statute of limitations for a possible Blue Sky claim
commences with actual discovery of the violation rather than following the
federal rule. Of course, laches might be a possibility. See Galanti, 1975 Sur-
vey, supra note 89, at 63.

'*iSee text accompanying notes 83-84 supra.
"^^Compare Ch. 333, § 607(e), 1961 Ind. Acts 1024 with IND. CODE §23-2-

1-19 (e) (Burns Supp. 1976).
985ee Conklin v. Smith, 3 Ind. 286 (1852).
9^337 N.E.2d 837 (Ind. Ct. App. 1975) (Buchanan, J.), also discussed in

Harvey, Civil Procedure, infra at 98.

'°°IND. Code § 23-2-1-19 (a) (1) (Burns 1972), then in effect, authorized
purchasers of unregistered securities to recover the consideration paid. Sub-

section (b) imposed joint and several liability on officers and directors of
sellers of unregistered securities unless a due diligence defense could be estab-

lished . The current language of section 23-2-1-19 (a) allows recovery by pur-
chasers if they "did not knowingly participate in the violation or who did not
have, at the time of the transaction knowledge of the violation . . . ." Conse-

quently the result reached in Theye might well be mandated by the current

civil penalty provision.

'°^See note 51 supra.



1976] SURVEY—BUSINESS ASSOCIATIONS TI

DCA was formed to assist in franchising a spaghetti res-
taurant based in Fort Wayne. Individual defendant, William
Bates, was a promoter of DCA and chairman and chief executive
officer of a number of satellite corporations designed to implement
DCA's franchise development program. Before meeting with
Theye and Elzey, as prospective investors. Bates had obtained
financial information from the owners of the restaurant substan-
tially overstating the restaurant's monthly gross income. He
passed the information on, at least to Theye. Although other indi-
viduals and two corporations agreed to acquire DCA shares in a
subscription agreement, only plaintiffs Theye and Elzey paid cash
for their shares. '°^ Plaintiffs became directors and officers of DCA
when it was formed. The company eventually failed, and plaintiffs
sued.

The appellate court determined there were two issues pre-
sented on appeal : ( 1 ) whether the failure to register the securities

was a violation of section 23-2-1-3 of the Blue Sky Act; and (2)
whether Bates* financial representations were fraudulent within
the meaning of sections 23-2-1-1 (d) and 12 of the Act. As to the
first issue, defendants contended the securities were exempt from
registration under the then-effective non-public offering exemption

of section 23-2-1-2 (b) (10).'°^ As to the second, they simply con-
tended the trial court correctly ruled there was no fraud.

The appellate court held the securities were not exempt as a
private offering. The sales ostensibly fell within the exemption
because the offers were made to no "more than 20 persons in this
state." However, DCA did not comply with the statutory conditions

'°^Bates* consideration for his shares was "promotional services." 337
N.E.2d at 839. The Indiana General Corporation Act, Ind. Code § 23-1-2-6 (e)
(Bums Supp. 1976), provides that the consideration for shares may be money,
property (which would include securities) and services actually rendered.
Future services are not proper consideration for shares, but apparently this

was not a problem with Bates' "promotional services." See generally 4A
Cavitch, supra note 1, § 90.01 [3].

'°^The (b) (10) private offering exemption in effect at the time of the

transaction exempted offers to sell securities directed at no more than 20
persons in Indiana provided that each buyer "represents in writing to the

seller that he is purchasing such securities for investment." The (b) (10)
exemption was in issue in Hippensteel v. Karol, 304 N.E.2d 796 (Ind. Ct. App.
1973), discussed in Galanti, 1974^ Survey, supra note 53, at 29-35. The cur-
rent (b)(10) exemption, Ind. Code § 23-2-1-2 (b) (10) (Burns Supp. 1976),
exempts a security offer by the issuer if there are no more than 35 purchasers

of the securities. The written representation is still required. Id. § 23-2-1-

2(b) (10) (iii). See generally Galanti, 1975 Survey, supra note 89, at 59-60;

Note, Maryland Blue Sky Reform: One State's Experiment with the Private

Offering Exemption, 32 Md. L. Rev. 273 (1972) ; Note, Revising the Private

Placement Exemption, 82 Yale LJ. 1512 (1973).



78 INDIANA LAW REVIEW [Vol. 10:S7

for exemption by getting "investment letters" '°^ from each buyer,
or by providing in the stock subscription agreement that the shares
were purchased for investment purposes. Since the Act specifically
imposes the burden of proof on a party claiming the benefit of an
exemption/ °^ the exemption claim failed.

Plaintiffs, however, could not rescind the transactions and
recover their investment despite the non-exempt sales. The court
barred them from recovery under the theory of in pari delicto, or
equal fault, because they had cooperated with defendants' violation
of the Act in not registering the shares. Although there is no
Indiana authority on applying the doctrine of in pari delicto to the
purchase of corporate stock, '°^ the court chose to follow an Ameri-
can Law Reports annotation' °^ positing that purchasers of stock
who participate in organizing or managing a corporation are pre-
cluded from rescinding their purchases under securities laws.'°*

The annotation points out that under the maxim the defend-
ant prevails when both parties are equally wrong. This accords
with the position of Justice Harlan in Perma Life Mufflers, Inc.

"^Defendant Karol lost on this issue in Hippensteel v. Karol, 304 N.E.2d
706 (Ind. Ct. App. 1973), See generally Doxsee, supra note 54, at 9; 11 Sow-
ARDS, supra note 52, §4.02[l][c].

'°^IND. Code § 23-2-1-16 (j) (Bums Supp. 1976) provides that the burden
of proof of an exemption or classification "shall be upon the party claiming
the benefits of such exemption or classification." See Worsley v. State, 317
N.E.2d 908 (Ind. Ct. App. 1974), discussed in Galanti, 1975 Survey, supra note

89, at 50-52; Hippensteel v. Karol, 304 N.E.2d 796, 798 (Ind. Ct. App. 1973).
lod'pjjg court did cite American Mut. Life Ins. Co. v. Bertram, 70 N.E.

258 (Ind. 1904), in which an insured who had participated in the issuance
of iUegal insurance contracts was precluded from recovering premiums paid.

'°7Annot., 84 A.L.R.2d 479 (1962). The case giving rise to the annota-
tion, Popper V. Havana Publications, 122 So. 2d 247 (Fla. Ct. App. 1960),
was actually decided on an estoppel ground. The annotation does discuss the
in pari delicto doctrine, which appears to be primarily a California develop-

ment. See cases cited 84 A.L.R.2d at 492. The California cases do make clear
that mere knowledge of the illegality does not preclude a purchaser from
asserting the invalidity of the contract. See, e.g., Randall v. California Land
Buyers Syndicate, 217 Cal. 594, 20 P.2d 331 (1933).

'°®Another approach was taken by an Illinois court in Stevens v. Crystal
Lake Trans. Sales, Inc., 30 111. App. 3d 745, 332 N.E.2d 727 (1975), in which
recovery was denied to the purchaser of corporate shares in violation of the
Illinois Blue Sky Act, III. Rev. Stat. ch. 12iy2, §§ 137.1-.19 (1973). The
plaintiff, who was president of the corporation, was barred from rescinding
the purchase because of the provision in the Illinois Act, id. § 137.13, making
officers and directors who participate or aid in illegal sales "jointly and sev-
erally liable" to the purchasers. This provision, which is similar to Ind. Code

§ 23-2-1-19 (b) (Burns Supp. 1976), was construed to deny rescission to the

corporate officer responsible for the violation. See also Nash v. Jones, 224

Ga. 372, 162 S.E.2d 392 (1968); Moore v. Manufacturers Sales Co., 335 Mich.

606, 56 N.W.2d 397 (1953). Cf. iND. Code § 23-2-1-19 (a) (Burns Supp. 1976).



1976] SURVEY—BUSINESS ASSOCIATIONS 79

V. International Parts Corp.'°'' However, the Theye court overlooked
the fact that this view did not prevail in Perma Life. Rather the
Supreme Court decided the policy of the Sherman Antitrust Act
could be best effectuated if parties to unlawful agreements were
permitted to bring treble damage actions even though they them-
selves had incurred some legal liability. Although the Perma Life
rationale might apply to the Theye situation, it does not seem
unjust or inequitable to refuse relief to plaintiffs, who actively
participated in forming and operating DCA and were not simply
innocent purchasers of sharesJ

'°

On the fraud issue, plaintiffs ran into the inexorable difficulty
of reversing the negative judgment that defendants had not com-
mitted fraud.'" There was evidence that Bates had knowingly
misrepresented the restaurant's gross income, but there was some
unspecified evidence to the contrary. Consequently, there was no
error in ruling for defendants."^

D. Preincorporation Contracts and the
De Facto Doctrine

A somewhat opaque opinion which may or may not have prop-
erly applied corporate law doctrines is Sunman^Dearborn CommzL-
nity School Corp. v. KraUZepf-Freitag & Associates, "Mn which
the First District Court of Appeals reversed a Franklin Circuit

Court judgment for plaintiff K.Z.F. in a suit seeking the reasonable
value of architectural and engineering services. One difficulty in
resolving the issues presented by the case is that it is not easy to

'°'^392 U.S. 134, 153 (1958) (Harlan, J., dissenting).

"°A.C. Grost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38 (1941),
held that rescission may be denied where the 1933 Act has been violated, if
granting relief would frustrate its purpose. However, Henderson v. Hayden,
Stone, Inc., 461 F.2d 1069 (5th Cir. 1972), allowed rescission where recovery
would fail to serve, but not frustrate, the purpose of the 1933 Act. In pari
delicto was rejected in a sections 12 and 17 and rule lOb-5 action in Nathan-
son V. Weis, Voisin, Cannon, Inc., 325 F. Supp. 50 (S.D. N.Y. 1971) on policy

grounds. Waiver and estoppel, but not laches, were allowed as defenses to a
section 12(1) suit in Straley v. Universal Uranium & Milling Corp., 289 F.2d
370 (9th Cir. 1961). See also Harrison v. Bloomfield Bldg. Indus. Inc., 435

F.2d 1192 (6th Cir. 1970) ; Kuehnert v. Texstar, Inc., 412 F.2d 700 (5th Cir.

1969). See generally 11 Sowards, supra note 52, § 9.04 [2].
'''See, e.g., Hippensteel v. Karol, 304 N.E.2d 796, 798 (Ind. Ct. App.

1973) ; Engelbrecht v. Property Developers, Inc., 296 N.E.2d 798 (Ind. Ct.

App. 1973).

"^The trial court might not have used the same analysis as the appellate

court, but the judgment was affirmed since it was sustainable for the reasons

given. See Sheraton Corp. of America v. Kingsford Packing Co., 319 N.E.2d

852 (Ind. Ct. App. 1974).
"^338 N.E.2d 707 (Ind. Ct. App. 1975) (Lybrook, J.).



80 INDIANA LAW REVIEW [Vol. 10:67

"know the players," even with a scorecard. Another is that part
of the case appears to have "fallen between the floorboards."

There were two contracts supposedly involved in the dispute

:

a 1963 contract for architectural and engineering services signed
by the trustees of the three school townships involved, and a 1967
contract with a school building corporation signed by school trus-
tees of different townships as officers of the building corporation.

The corporation was formed three months after the contract was
signed and was liquidated before K.Z.F.'s suit was filed. To compli-
cate matters, the school townships had been absorbed by Sunman-
Dearborn. At least it was clear Sunman-Dearborn was bound on
the valid contracts and obligations of the predecessor school town-
ships, and the issue was whether the predecessor townships had
been bound by the contracts.

However, the court discussed only the 1967 contract, and
much of the discussion is confusing. After struggling to find the
building corporation was the bound entity, the court allowed
reformation of the contract to bind the school townships as re-

quested by K.Z.F."^ The ignored 1963 contract had also been made
with the school townships.

Although the battle was won, the war was lost when the court
concluded that K.Z.F. had failed to show that the contracts, perhaps
including the 1963 agreement, were executed in compliance with
the procedures of the Township Reform Act.^'^ Consequently the
contracts were not enforceable. The court probably should have
assumed the contracts were with the school townships and decided
the case on the Reform Act ground.

Unfortunately the court seemed determined to find that

K.Z.F. had contracted with the building corporation despite the
eventual reformation. To bind the corporation, nonexistent when
the contract was signed, the court relied primarily on the de facto
doctrine, which treats a defectively incorporated enterprise as if

all the formalities for de jure incorporation had been met."* The

"^The court cited its decision in Pearson v. Winfield, 313 N.E.2d 95 (Ind.
Ot. App. 1974), as developing the principles underlying reformation of con-
tracts for mutual mistake. See generally 3 A. Corbin, Contracts § 540 (1960).
Part of the confusion of the opinion is that the court at one point stated

"absent evidence entitling Krai to reformation . . . [the] school townships

were not bound by the agreement." 338 N.E.2d at 710. The court appeared to
be stating a conclusion that reformation was not proper, while actually the
court was indicating it would see if there was evidence justifying reformation.

"«IND. Code §§17-4-28-1 to -29-5 (Burns 1974).
'"^The court misstated the doctrine when it said "in an action on a con-

tract with a de facto corporation, neither the purported corporate entity nor

the party dealing with it as such may question its de jure existence." 338
N.E.2d at 709. Actually the doctrine can only apply where the entity is not



1976] SURVEY—BUSINESS ASSOCIATIONS 81

appellate court thought the doctrine was appropriate because the
facts seemed to fit the standard formulation of the doctrine, that
is, there was: (1) a valid law under which the corporation could
have been validly formed; (2) a colorable attempt to organize
thereunder; and (3) an actual exercise of corporate powers.'"

The court may have had some doubts about the second element
because the only effort to incorporate had been an abortive effort
to incorporate as a not-for-profit corporation. Consequently, the

court backstopped its argument with the separate, but related,
principle of equitable estoppel. Under this approach, a person who
deals with an entity held out as a corporation cannot assert the
nonexistence of the corporation when a dispute arises."®

One problem with the court's approach is it ignores the pos-
sibility, albeit remote, that the de facto and estoppel concepts are
no longer good law in Indiana. Cases'" do support the doctrines,

but they do not consider the impact and interaction of sections
23-1-3-4 and 23-1-10-5 of the Indiana General Corporation Act.
The former provides that corporate existence commences when
the certificate of incorporation is issued and that the certificate is
"conclusive evidence of the fact that the corporation has been incor-

porated." It is therefore not inconceivable that corporate existence

in any form is precluded unless the certificate has been issued. At
this point the corporation's de jure status is presumed. '^° The legis-

a de jure corporation because of failure to comply substantially with all man-
iiatory conditions precedent to incorporation. 3A Cavitch, supra note 1,
§ 63.02 [1]. Under the de facto doctrine, the defectively organized entity is
regarded as a corporation for most purposes except direct attack on its exis-
tence by the state. Henn, supra note 1, § 140. See generally 3A Cavitch,
supra note 1, §§ 63.01-.04; 8 Fletcher, supra note 1, §§ 3759-65; Henn, supra
note 1, §§ 139-45; Lattin, supra note 1, §§ 56-61.

'^^Some authorities require a fourth element, good faith, see, e.g.. United
Sewing Mach. Distrib. Inc. v. Calhoun, 95 So. 2d 453 (Miss. 1957) ; see also
Frey, Legal Analysis and the "De Facto" Doctrine, 100 U. Pa. L. Rev. 1153,
1156 (1952), but it is often omitted because "good faith" is encompassed by
the colorable compliance element. Henn, supra note 1, § 140, at 240.

''^See Jennings v. Dark, 175 Ind. 332, 92 N.E. 778 (1910) (de facto

existence is generally not considered a prerequisite for the application of

equitable estoppel). For a discussion of "corporation-by-estoppel", see 3

A

Cavitch, supra note 1, § 63.04 [2]; Henn, supra note 1, § 141; Lattin, supra
note 1, § 59; Comment, Estoppel to Deny Corporate Existence, 31 Tenn. L.
Rev. 336 (1964).

'""See, e.g., Jennings v. Dark, 175 Ind. 332, 92 N.E. 778 (1910); Aetna

Life Ins. Co. v. Weatherhogg, 103 Ind. App. 506, 4 N.E.2d 679 (1936).
'2°See Western Mach. Works v. Edwards Mach. & Tool Corp., 223 Ind.

655, 63 N.E.2d 535 (1945), holding that the statutory conditions before

commencing business, now codified at Ind. Code § 23-1-3-5 (Burns Supp.
1976), had nothing to do with the formalities required for de jure existence.

See generally 3A Cavitch, supra note 1, §63.02[2]; Henn, supra note 1,
§142.



82 INDIANA LAW REVIEW [Vol. 10:i57

lature obviously intended to discourage exercise of corporate

powers without compliance with the Act by imposing, under sec-
tion 23-1-10-5, criminal and civil liability on persons who know-
ingly, willfully and with intent to defraud use the name of or act
on behalf of a corporation before it has been authorized to do
business. Denying de facto corporateness would help accomplish
this objective.

Furthermore, there is some authority that the two sections,
which are similar to sections 56 and 146, respectively, of the
Model Business Corporation Act,^^' taken together eliminate the
de facto doctrine and estoppel. In Robertson v. Levy^^^ the court
construed two provisions of the District of Columbia corporation
act based on the Model Act provisions^" to eliminate the doctrines.
According to Robertson all corporate attributes, including limited

liability, commence when the certificate is issued. The concept of
de facto incorporation has been criticized,

'^^ and the criticisms are
probably well taken ; but vengeance might not be "ours" and, under

appropriate circumstances, perhaps a court should bind the pur-

ported corporation or the other party to a contract.'" To a certain
extent the Robertson approach was recognized in Edward Shoes,
Inc. V. Orenstein,^^^ in which section 23-1-10-5 was construed as

'='2 ABA-AU Model Bus. Corp. Act Ann. §§56, 146 (2d ed. 1971).
'"197 A.2d 443 (D.C. Ct. App. 1964). See 3A Cavitch, supra note 1,

§ 63.02 [2] ; Henn, supra note 1, §§ 140-42. See also Swindel v. Kelly, 499
P.2d 291 (Alas. 1972) ; Kiamesha Dev. Corp. v. Guild Property, Inc., 4 N.Y.2d
378, 151 N.E.2d 214, 175 N.Y.S.2d 63 (1958); Timberline Equip. Co. Inc.

V. Davenport, 267 Ore. 64, 514 P.2d 1109 (1973) ; 3A Cavitch, supra note 1,
§ 63.02 [2] [a]. The comment to Model Act section 56 states that under its
unequivocal provisions, any steps short of securing a certification of in-
corporation would not constitute apparent compliance. Therefore a de facto
corporation cannot exist under the Model Act. 2 ABA-ALI Model Bus.
Corp. Act Ann. §56, 1[2 (2d ed. 1971). This is even stronger language than
the comparable comment to former section 50. 1 ABA-ALI Model Bus. Corp.
Act Ann. §50, ^[4 (1960). But see Cranson v. International Bus. Machs.
Corp., 234 Md. 477, 200 A.2d 33 (1964) ; Vincent Drug Co. v. Utah State
Tax Comm'n, 17 Utah 2d 202, 407 P.2d 683 (1965).

'^^The Model Act provisions were then numbered sections 50 and 139.
See 1 ABA-ALI Model Bus. Corp. Act Ann. §§50, 139 (1960).

^^*See, e.g., Frey, Legal Analysis and the "De Facto" Doctrine, 100 U.
PA. L. Rev. 1153, 1178-80 (1952).

'"iSee Comment, 43 N.C. L. Rev. 206, 210 (1964) criticizing Robertson
for abolishing the estoppel concept as well as the de facto doctrine. The
author points out that estoppel applies to a particular transaction, while the

de facto doctrine imparts a general corporate status; and that the security
of certain transactions should be protected. The author does recognize that
estoppel should apply only where all the traditional elements have been satis-
fied. Id. at 208. Cavitch also acknowledges the tempering effect of estoppel.

3A CAVITCH, supra note 1, § 63.04 [2] at 63-77.
'"333 F. Supp. 39 (N.D. Ind. 1971).



1976] SURVEY—BUSINESS ASSOCIATIONS 83

eliminating common law liability for defective incorporation and
requiring fraudulent conduct before a shareholder could be held

liable to a creditor.

Admittedly, there are certain difficulties with construing the

Act as abolishing the two doctrines. First, section 23-1-10-5

requires a fraudulent intent before personal liability will be im-

posed, unlike section 146 of the Model Act. This creates an obvious
distinction.^ ^^ Second, the Indiana provisions predate the Model Act
provisions relied on in Robertson, and cases such as Aetna Life
Insurance Co, v. Weatherhogg^^^^ recognizing both doctrines, would
have to be overruled. Sunmarir-Dearhorn may be correct, but it
would have been interesting if the court had analyzed the impact
of the two provisions on the de facto doctrine.

Another intriguing aspect of Sunman-Dearborn is that the
court, and perhaps the parties, apparently did not recognize that
the 1967 contract was a preincorporation contract. The court could
then have absolved the school townships by applying the settled
rule that a corporation is not bound on promoter's contracts made
on its behalf prior to incorporation unless it expressly, or perhaps

impliedly, assumes responsibility.'^' However, the failure to discuss

the preincorporation contract may be attributable to the fact that
there was evidence tending to show that the townships had taken
some steps which might have been deemed an adoption of the con-
tract.

K.Z.F. might have been more successful if it had pursued the
trustees as promoters. It is well settled that promoters who con-
tract for nonexistent corporations are personally liable on the

contracts unless it can be clearly shown the third party did not
intend to bind them personally. '^° The trustees would have argued

'^^The court in Cranson v. International Bus. Machs. Corp., 234 Md. 477,
200 A.2d 33 (1964), implicitly assumed that section 56, specifying the effect
of the certificate, did not by itself preclude an estoppel defense. See W. Gary,
Cases and Materials on CoRPORA'noNS 79 (4th ed. unabrid. 1969) ; Comment,
43 N.C. L. Rev. 206 (1964).

'^n03 Ind. App. 506, 4 N.E.2d 679 (1936).
'"See Speedway Realty Co. v. Grasshoff Realty Corp., 248 Ind. 6, 216

N.E.2d 845 (1966); Indianapolis Blue Print & Mfg. Co. v. Kennedy, 215
Ind. 409, 19 N.E.2d 554 (1939). See also McArthur v. Times Printing Co.,
48 Minn. 319, 51 N.W. 216 (1892). See generally 3 Cavitch, siipra note 1,
§ 56.02; Henn, supra note 1, §§ 108-14; Lattin, supra note 1, § 29-30.

'3°Stanley J. How & Assocs., Inc. v. Boss, 222 F. Supp. 936 (S.D. Iowa
1963); Decker v. Juzwick, 121 N.W.2d 652 (Iowa 1963); O'Rorke v. Geary,
207 Pa. 240, 56 A. 541 (1903). iSee generally 3 Cavitch, supra note 1,

§56.01 [2]; Henn, supra note 1, §108, at 181; Restatement (Second) of
Agency §§ 326-27 (1958) ; Note, Preincorporation Agreements, 11 Sw. L.J.
509 (1957). Generally, promoters are bound under a contract theory, but

they can be bound for breach of an implied warranty of authority from a



84 INDIANA LAW REVIEW [Vol. 10:67

that signing as officers of the building corporation expressed an
intent not to be personally bound. This might have been so, but it
is not certain that it would have overcome what amounts to a pre-
sumption in favor of the promoter's liability. For example, in the
leading case of Stanley J. How & Associates, Inc. v, Boss^^^ the
court held that a contract signed by Boss as "agent for a Minnesota
corporation to be formed who will be the obligor"' ^^ did not estab-
lish that How was to look only to the new corporation and not to
Boss. The court noted the parties might have contemplated a nova-
tion whereby Boss would be liable only until the corporation was
formed and became bound on the contract.'"

Of course the third party can agree to look only to the con-
templated corporation for performance of the contract, in effect
making an offer and taking the risk that the corporation will be
formed and assume liability.'^'* A case on point here is Qimker Hill,
Inc. V. Parr.^^^ Defendants contemplated organizing a cemetery

and ordered nursery stock, at plaintiff's urging, before the cor-
poration was formed. The particular corporation was never
formed, but the promoters were excused notwithstanding the
general rule because clearly plaintiff did not intend to bind them
personally. Quaker Hill may be particularly appropriate in a
Sunman-Dearhorn situation because the signers were not engaged
in a true business venture. In fact, it is not impossible that the
Sunman-Dearhorn court used the de facto-estoppel issue just to

nonexistent principal. See Henn, supra note 1, § 108, at 181 n.l3. Of course
if the third party is aware that the corporation has not yet been formed the
implied waranty would be negatived. Professor Henn discusses the various
categories of promoter-third party contracts at id. §§ 108-614.

' = '222 F. Supp. 936 (S.D. Iowa 1963).
'"7d. at 939.

'^^When a novation occurs the corporation is substituted for the pro-
moter as the party bound on the contract in all respects, and the liability
of the promoter ceases. See Henn, supra note 1, § 111, at 185. The same
result occurs when a court permits a preincorporation contract to be "rati-
fied", see, e.g., Chartrand v. Barney's Club, Inc., 380 F.2d 97 (9th Cir. 1967),
despite the theoretical difficulty presented by the nonexistent principal. See
McArthur v. Times Printing Co., 48 Minn. 319, 51 N.W. 216 (1892); 1 Re-
statement (Second) of Agency § 82 (1958) ; see generally Henn, supra.
at 184. Adoption of a contract by a newly formed corporation does not end
the liability of the promoter to the third party. Stanley J. How & Assocs.,
Inc. v. Boss, 222 F. Supp. 936 (S.D. Iowa 1963) ; Henn, supra at 185.

'^^Stewart Realty Co. v. Keller, 118 Ohio App. 49, 193 N.E.2d 179 (1962).
If the promoter is responsible for the corporation's not being formed, liability

might be based on misrepresentation or a breach of an implied promise to

form the corporation. See Henn, supra note 1, §§ 108 at 181 n.l3, 110; see
generally 3 Cavitch, supra note 1, § 56.01 [3],

'=^148 Colo. 45, 364 P.2d 1056 (1961). See generally Henn, srapra note 1,
§109.



1976] SURVEY—BUSINESS ASSOCIATIONS 66

protect the trustees. The decision was equitable and fair,''* but
certainly not clear or explicit.

As noted above, Sunman-Dearborn ultimately escaped liability
for the 1967 contract, and probably the 1963 contract, under the
Township Reform Act.'^^ The Act was construed as precluding
contracts not made in accordance with its requirements because of
the provision declaring noncomplying contracts **null and void."'"
Unlike the interpretation of some statutes, where "void" is con-
strued as "voidable,"' '' the courts have applied the Township Re-
form Act in a rather draconian fashion, so that the Act appears
to be an absolute bar to recovery under any theory including
quantum meruit.^ ^°

E. Statutory Developments

The 1976 session of the Indiana General Assembly produced
only two statutory developments of significance."^' The first in-
volved several amendments to the Indiana Business Takeover

'^*5ee Comment, 43 N.C. L. Rev. 206, 211 (1964).
'^^IND. Code §§ 17-4-28-1 to -29-6 (Burns 1974).
^^^Id. §17-4-29-5. See, e.g., State ex rel. Siebrase v. Meiser, 201 Ind.

337, 168 N.E. 185 (1929) ; Peck-Williamson Heating & Ventilating Co. v.
Steen School Township, 30 Ind. App. 637, 66 N.E. 909 (1903). The
Sunman-Dearborn court stated that the Act requires: (1) authorization and
approval of trustee contracts by the township advisory board; (2) appropri-
ation of funds for payment of contemplated services; and (3) a complete
written record of authorization, approvals and appropriation. See Heeter v.
Western Boone Co. Community School Corp., 147 Ind. App. 153, 259 N.E.
99 (1970).

'"5ee, e.g., Doney v. Laughlin, 50 Ind. App. 38, 41-43, 94 N.E. 1027,

1028 (1911); see also State ex rel. State Tax Comm'n v. Garcia, 77 N.M.
703, 705, 427 P.2d 230, 232 (1967).

'^°Miller v. Jackson Township, 178 Ind. 503, 99 N.E. 102 (1912); Heeter

V. Western Boone Co. Community School Corp., 147 Ind. App. 153, 259
N.E.2d 99 (1970). To rub salt into K.Z.F.'s wounds, since it might have
been an innocent victim acting in good faith, the Sunman-Dearborn court

considered the township trustees as special agents with limited statutory

authority, and K.Z.F. therefore had the burden of establishing their au-

thority and compliance with the Act. Mitchelltree School Township v. Hall,

163 Ind. 667, 72 N.E. 641 (1904). Failure to sustain this burden required

reversal.

^'*'Other enactments worth noting are Ind. Code § 23-2-1-15(c) (Bums
Supp. 1976), amending id. § 23-2-1-15 (c) (Burns 1972) to provide that funds

accruing from the operation of the Securities Division are to be placed in the

Indiana general fund rather than a special account; and id. § 23-2-1-15 (d)

(Burns Supp. 1976) to provide that the expenses incurred by the Attorney

General in assisting the Securities Division should be paid out of funds

appropriated to the Attorney General for the administration of his office.



86 INDIANA LAW REVIEW [Vol. 10:67

ActJ^= The amendment to Indiana Code section 23-2-3-1 (i) (2)
reduced the threshold of application, and hence increased the num-
ber of target companies protected by the Act. The Act originally
was inapplicable to takeovers of target companies with less than
100 shareholders of record at the time of the offer. '^^ This figure
was reduced to 50. Consequently, companies with 50 to 100 share-
holders are now covered.

The amendments to sections 23-2-3-12 (b) and (c) clarified the
application of the Act to certain types of regulated companies. The
Act originally exempted acquisitions of financial institutions
whose securities are subject to regulation by the Department of
Financial Institutions.'^^ The 1976 amendment limits the exemption
to situations in which the takeover offer is subject to approval by
the Department. A similar change was made for corporations sub-
ject to regulation by the Public Service Commission. '"^^ These
changes make the Act internally consistent since the Act origin-
ally applied to other regulated industries only when the contem-
plated acquisition was subject to approval by another agency."**

The amendments also allow appeals from final orders of the
Securities Commissioner to the appellate courts and application
to the supreme court for a petition to transfer the cause, as with
other civil cases.' ^^ Formerly, appeals were to the circuit or su-
perior courts. '"** Amended section 23-2-3-11 now provides that an
assignment of errors that the Commissioner's decision is contrary

to law presents issues of both the sufficiency of the facts found to
sustain the decision and the sufficiency of the evidence to sustain

the findings of fact upon which it was rendered.
The other statutory development of significance was a change

in the provisions of the General Corporation Act regulating the

'^^IND. Code §§23-2-3-1(1), -11, -12(b), (c) (Burns Supp. 1976). The
Business Takeover Act was adopted in 1975 and is discussed in Galanti, 1975
Survey, supra note 89, at 52-59.

'^^Act of Apr. 29, 1975, Pub. L. No. 263, § 1, 1975 Ind. Acts 1471.

'^^/d!. § 12, 1975 Ind. Acts 1481. The Financial Institutions Act, iND.
Code §§ 28-1-1-1 to -8-3 (Burns 1973) describes the institutions whose secu-
rities are regulated by the Department of Financial Institutions.

'^=IND. Code §§8-1-1-1 to -9-37 (Burns 1973) describes corporations
subject to Public Service Commission regulation.

^

'^''Takeovers of insurance companies were exempted from the outset
where the offer is subject to the approval of the Insurance Commissioner or

is exempt from such approval. Id. § 23-2-3-12 (a) (Burns Supp. 1976). The
authority of the Insurance Commissioner is found in id. §§ 27-1-1-1 to -5

(Bums 1975). Takeovers of corporations subject to federal regulation were
exempted where the takeover is subject to approval by a particular agency.
Id. § 23-2-3-12 (d) (Burns Supp. 1976).

i^'iND. Code §23-2-3-11 (Burns Supp. 1976).
'^«Act of Apr. 29, 197^, Pub. L. No. 263, § 11, 1^75 Ind. Acts 1480-81.



1976] SURVEY—BUSINESS ASSOCIATIONS g?

admission of foreign corporations.'^' A perennial problem for such
corporations has been the requirement that no corporation may be
admitted if its corporate name is the same as, or confusingly simi-
lar to, the name of an Indiana corporation or a foreign corporation
already authorized to transact business in the state. '^° This might
not be a problem for a corporation in a developmental stage, but an

existing foreign corporation is faced with the choice of either

changing its name in its home state or getting the consent of the
other corporation. Often, neither alternative is practicable. The
amendment solves the problem by permitting such corporations
to qualify under an assumed business name. Thus, a corporation

can select a name for use in Indiana without disturbing its opera-
tions in other jurisdictions.

Conceptually, this approach presents no problems because

the Indiana Assumed Business Names Act'^' clearly permits a
corporation to do business under a name other than its formal
corporate name. In order to qualify under amended section
23-1-11-3, the corporation must have made a good faith, but
unsuccessful, effort to obtain the written consent from the other
corporation to use the name, documented by an affidavit signed
by the two principal officers of the corporation. The admission
application must reflect both the true corporate name and the
assumed name; and the corporation must file the affidavit and
the certificate of assumed business name'^^ in addition to the

other documentation a foreign corporation must file in order to be
admitted.'"

"*'IND. Code §23-1-11-3 (Burns Supp. 1976), amending id. §23-1-11-3
(Burns 1972).

'5°/d. § 23-1-11-3 (b) (Bums Supp. 1976). For a slightly different ap-
proach to this problem, see 2 ABA-ALI Model Bus. Corp. Act Ann. § 108,
TI2 (2d ed. 1971).

'*^lND. Code §23-15-1-1 (Bums Supp. 1976). Some jurisdictions ap-
parently do not. See Kansas Milling Co. v. Ryan, 152 Kan. 137, 102 P.2d 970

(1940) ; People v. Ferdinand, 172 Misc. 595, 15 N.Y.S.2d 506 (Mag. Ct. 1939).
See also Seagram Distillers Co. v. Foremost Sales Promotions, Inc., 13 111.
App. 3d 166, 300 N.E.2d 490 (1973).

'"IND. Code §23-15-1-1 (Burns 1972).
'"/d. §23-1-11-4.