Indiana Law Review


III. Business Associations

Paul J. Galanti*

A. Securities Act Derivative Liability

Arnold v. Dirrim,^ the most significant business associations

case decided during the survey period, brings home with a venge-

ance the adage that "ignorance of the law is no defense." In Arnold,

the Indiana Court of Appeals affirmed a class action judgment hold-

ing Arnold, a director of National Guaranty Corporation (NGC), deri-

vatively liable to NGC shareholders under section 23-2-l-19{b)^ of the
Indiana Securities Act.^

The complaint, originally filed against NGC and its president,
alleged that the plaintiffs had purchased NGC shares pursuant to a
false and misleading prospectus. An amended complaint was filed
that added NGC officers and directors, including Arnold, as defen-
dants and sought permission to bring the suit as a class action on

behalf of all purchasers of NGC shares after October 15, 1969.' The

*Professor of Law, Indiana University School of Law — Indianapolis. A.B., Bow-
doin College. 1960; J.D., University of Chicago, 1963.

'398 N.E.2d 426 (Ind. Ct. App. 1979).

'IND. Code § 23-2-l-19(b) (1971) (current version at Ind. Code § 23-2-l-19(b) (1976)).

This section read as follows when the Arnold cause of action arose:

Every person who directly or indirectly controls a seller liable under subsec-
tion (a) [Ind. Code § 23-2-l-19(a)], every partner, officer or director of such a

seller, every person occupying a similar status or performing similar func-

tions, every employee of such a seller who materially aids in the sale, and
every broker-dealer or agent who materially aids in the sale are also liable
jointly and severally with and to the same extent as the seller, unless the

nonseller who is so liable sustains the burden of proof that he did not know,
and in exercise of reasonable care could not have known, of the existence of

the facts by reason of which the liability is alleged to exist. There is con-

tribution as in cases of contract among the several persons so liable.
Ind. Code § 23-2-l-19(b) was amended in 1975 by substituting the words "seller or pur-

chaser" for "seller" and "sale or purchase" for "sale," thus extending civil liability to

purchasers as well as sellers of securities. The amendment was not material to the
Arnold decision. 398 N.E.2d at 430 n.l. See generally Galanti, Business Associations,

1975 Survey of Recent Developments in Indiana Law, 9 Ind. L. Rev. 33, 63 (1975)

[hereinafter cited as Galanti, 1975 Survey]. Before the 1975 amendment, Ind. Code §
23-2-l-19(b) was identical to Uniform Securities Act (U.L.A.) § 410(b) (Master Ed.
1978).

'Ind. Code §§ 23-2-1-1 to -24 (1976 & Supp. 1980). For discussions of the Indiana
Securities Act see generally Boehm, Federal Business Law and the Indiana Lawyer:
The Impact of the Securities Law on the General Practitioner, 48 Ind. L. J. 216 (1973);
Pasmas, Securities Issuance and Regulation: The New Indiana Securities Law, 38 Ind.
L. J. 38 (1962); Note, Securities Registration Requirements in Indiana, 3 Ind. Legal F.
270 (1969); Doxsee, Securities Problems in Indiana, 17 Res Gestae No. 9, at 6 (1973).

'398 N.E.2d at 430.

91



92 INDIANA LAW REVIEW [Vol. 14:91

amended complaint alleged that sales of NGC shares after October
15, 1969, were made pursuant to a false, misleading, and inadequate
prospectus in violation of Indiana Code section 23-2-l-19(a).^ In addi-
tion, the amended complaint alleged that shares sold after the pro-
spectus expired on October 15, 1970, were unregistered; therefore,
the sale of these shares was in violation of section 23-2-1-3/ Arnold
was held liable for sales of NGC shares during both periods.^

=IND. Code § 23-2-l-19(a) (1971) (currently codified at Ind. Code § 23-2-l-19(a)

(1976)). Before the section was amended in 1975, it provided that:

(a) Any person who
(1) offers or sells a security in violation of sections 201 [Id. § 23-2-1-3],

204(d) [Id. § 23-2-l-5(d)], 301(a) [Id. § 23-2-l-8(a)] or 502(b) [Id. § 23-2-l-14(b)]; or

(2) offers or sells a security by means of any untrue statement of a

material fact or any omission to state a material fact necessary in order to

make the statements made, in the light of the circumstances under which
they are made, not misleading (the buyer not knowing of the untruth or

omission), and who does not sustain the burden of proof that he did not
know, and in the exercise of reasonable care could not have known, of the un-

truth or omission, is liable to the person buying the security from him, who
may sue either at law or in equity to recover the consideration paid for the
security, together with interest at six per cent per year from the date of

payment, costs, and reasonable attorneys' fees, less the amount of any in-

come received on the security, upon the tender of the security and any in-

come received on it, or for damages if he no longer owns the security.

Damages are the amount that would be recoverable upon a tender less the
value of the security when the buyer disposed of it and interest at six per
cent per year from the date of disposition.

Section 23-2-l-19(a) was similar but not identical to Uniform Securities Act (U.L.A.)
§ 410(a) (Master Ed. 1978). Ind. Code § 23-2-l-19(a) (1976) now provides that:

Any person who offers, purchases or sells a security in violation of any of the
provisions of this chapter, and who does not sustain the burden of proof that
he did not know, and in the exercise of reasonable care could not have

known, of the violation, is liable to any other party to the transaction, who
did not knowingly participate in the violation or who did not have, at the
time of the transaction, knowledge of the violation, who may sue either at
law or in equity to rescind the transaction or to recover the consideration

paid, together, in either case, with interest at eight percent (8%) per year

from the date of payment, costs, and reasonable attorneys' fees, upon the

tender of the security or consideration received by the person bringing the

action.

Although the specific language of § 23-2-l-19(a) has changed, the same result would be
reached if Arnold were brought today.

'Ind. Code § 23-2-1-3 (1976) makes it "unlawful for any person to offer or sell any

security in this state unless (1) it is registered under this act [§§ 23-2-1-1 to -25] or (2)

the security or transaction is exempted under section 102 [§ 23-2-1-2]." This provision is

identical to Uniform Securities Act (U.L.A.) § 301 (Master Ed. 1978).
Ind. Code § 23-2-l-5(d) (1976) requires that "[s]o long as any offering continues, the

prospectus shall be revised and brought current by the filing of an amended prospec-

tus at least once every twelve (12) months after the registration statement becomes ef-

fective and so long as the offering is not discontinued."

'398 N.E.2d at 430.



1981] SURVEY-BUSINESS ASSOCIATIONS 93

Before a corporate director who is not an actual seller of securi-
ties can be held liable derivatively under section 23-2-l-19(b), the cor-

poration or actual seller must have made a sale proscribed by sec-
tion 23-2-l-19(a)/ The trial court found that NGC's prospectus^ was
misleading, and therefore in violation of section 23-2-l-19(a),"'

because it failed to adequately disclose: (1) material transactions be-

tween NGC and a second corporation controlled by NGC's directors;
(2) circumstances of the second corporation's acquisition, control, and

resale of NGC shares, including how the second corporation had
"created" the market price for NGC shares; (3) material transactions
between NGC and a third corporation; and (4) the NGC directors' in-
direct ownership of NGC shares through various entities."

The court of appeals agreed with the trial court's conclusion
that the prospectus was inadequate and misleading'^ in omitting in-

'IND. Code § 23-2-l-19(a) (1976). Although the complaint alleged in part that NGC
sold unregistered securities and the court referred to selling unregistered securities,

398 N.E.2d at 430, 435, there was no actual discussion whether such sales were in fact

made. Either this point was not pursued by Arnold or, because Arnold was appealing

from a negative judgment, the court concluded there were no grounds upon which he

could appeal this point. A negative judgment will not be reversed unless it is contrary
to law. Id. at 434; see Kroger Co. v. Haun, 379 N.E.2d 1004 (Ind. Ct. App. 1978). Fur-

thermore, a decision of a trial court will not be disturbed as "contrary to law" unless

the trial court reached a conclusion contrary to the only conclusion that can be drawn

from the evidence. See Umbreit v. Chester B. Stem, Inc., 373 N.E.2d 1116 (Ind. Ct.

App. 1978); Chaney v. Tingley, 366 N.E.2d 707 (Ind. Ct. App. 1977). See generally 4A
B. Bagni, L. Giddings & K. Stroud, Indiana Practice, Appellate Procedure § 107
(1979) [hereinafter cited as Bagni, Giddings & Stroud].

'Securities can be registered for sale under the Indiana Securities Act in two

ways. Securities being offered pursuant to a registration statement filed under the

federal Securities Act of 1933, § 5, 15 U.S.C. § 77e (1976), may be "registered by coor-
dination" under Ind. Code § 23-2-1-4 (1976). Under this procedure, the primary
documents filed with the Indiana Securities Commissioner are copies of the form of

prospectus filed with the Securities and Exchange Commission, id. § 23-2-l-4(b)(l),

although the Indiana Securities Commissioner may require or request other documents
and information. Id, §§ 23-2-l-4(b)(2)-(4), (c)(2)-(5).

If the securities are not being offered pursuant to a registration statement and

prospectus filed under the federal Securities Act of 1933, Ind. Code § 23-2-1-5 (1976)
specifies in far more detail the information and documents which must be filed with

the Indiana Securities Commissioner in a "registration by qualification." The offering

in Arnold apparently was not subject to the Securities Act of 1933; therefore, the

registration should have been in compliance with id. § 23-2-1-5. For a discussion of the

registration requirements under the Indiana Securities Act, see generally authorities

cited in note 3 supra. See also I, IV L. Loss, Securities Regulation 49-61, 2222-34 (2d

ed. 1961 & Supp. 1969) [hereinafter cited as Loss); J. MoFSKY, Blue Sky Restrictions
on New Business Promotions 59-72 (1971).

'"Ind. Code § 23-2-l-19(a) (1976).
"398 N.E.2d at 431.

''Id, at 433.



94 INDIANA LAW REVIEW [Vol. 14:91

formation specifically required by section 23-2-l-5(b).'^ The court also
found that the prospectus failed to comply with a rule of the Indiana

Securities Commissioner'^ requiring a prospectus to contain informa-

tion not expressly required by the Act which is necessary under the

circumstances to make the prospectus not misleading/'' Further-
more, the antifraud provision of the Indiana Securities Act prohibits

the omission of material facts "necessary in order to make the state-
ments made in the light of the circumstances under which they are
made, not misleading,"'^ and section 23-2-l-19(a), as it was phrased
when Arnold arose, specifically provided for civil liability when
"material" facts were not disclosed in a sales transaction if the

buyer was unaware of the omission.'^
An omitted fact must be "material" before civil liability will be

imposed under the Indiana Securities Act.'^ The Act does not, how-
ever, define the term "material."'^ The Arnold court, relying on
Holmes v. Bateson,^° concluded that the "central consideration in
determining materiality is whether a reasonable investor would at-

tach importance to the information when deciding on his course of
action."^' No Indiana authority for the appropriate test for "mater-
iality" was cited. Although several decisions under the Indiana

'^IND. Code § 23-2-l-5(b) (1976).
'*Id. § 23-2-l-5(b)(l)(P) authorizes the adoption of such rules.

'=710 IND. Ad. Code l-2-7(d) (1979).
"Ind. Code § 23-2-1-12 (1976). This section, which is similar to Uniform Securities

Act (U.L.A.) § 101 (Master Ed. 1978), in full provides:
It is unlawful for any person in connection with the offer, sale or purchase of

any security, either directly or indirectly, (1) to employ any device, scheme

or artifice to defraud, or (2) to make any untrue statements of a material fact
or to omit to state a material fact necessary in order to make the statements
made in the light of circumstances under which they are made, not
misleading, or (3) to engage in any act, practice or course of business which

operates or would operate as a fraud or deceit upon any person.

"Ind. Code § 23-2-l-19(a) (1976), as it is currently worded, does not specify the
particular acts which result in civil liability but rather imposes such liability for a

"violation of any of the provisions of this chapter." The same standards, however

would apply.

'*The Indiana Securities Act phrases certain facts that must be contained in a

prospectus in terms of materiality. E.g., Ind. Code § 23-2-l-5(b)(l)(B) (1976) ("a descrip-

tion of any material interest in any material transaction with the issuer") (emphasis

added). Of course, the seller of securities which have been registered, but were not

registered at the time of the sale, will not escape liability even if all material facts are

disclosed because such sales still would violate the Indiana Securities Act. Id. §
23-2-1-3.

"In fact, the definition of "fraud" and similar terms is phrased in terms of

"materiality." Id. § 23-2-l-l(d).

^"583 F.2d 542 (1st Cir. 1978).

^'398 N.E.2d at 433.



1981] SURVEY-BUSINESS ASSOCIATIONS 95

Securities Act have discussed "material facts," none have specified

or established any standard/^

The court's reliance on Holmes is interesting. Holmes, unlike Ar-

nold, was not brought under a state securities act based upon the

Uniform Securities Act. Holmes was brought under section 10(b) of

the Securities Exchange Act of 1934,^^ and Securities and Exchange

Commission Rule lOb-5.^^ S & F Supply Co. v. Hunter^^ would have
been appropriate authority in Arnold. In Hunter the Utah Supreme

Court construed a provision similar to section 23-2-l-19(a)^* and con-

cluded that "materiality" is an objective standard and that a "mater-

ial fact" is "something which a buyer or seller of ordinary in-

telligence and prudence would think to be of some importance in de-

termining whether to buy or sell."^^

There is, of course, nothing amiss with using federal authority

to establish the requisite standards for state securities law viola-

tions. It is particularly appropriate to use federal authority in con-

struing a civil liability provision like section 23-2-l-19(a); section

23-2-l-19(a) is based on section 410(a)(2) of the Uniform Securities Act
which is "almost identical with § 12(2) of the Securities Act of
1933."^* It is irrelevant that Holmes was a section 10(b)^® and rule
lOb-5 case,'" and not a section 12(2) case,^' because even Hunter^^

"See Rousseff v. Dean Witter & Co., 453 F. Supp. 774 (N.D. Ind. 1978); B & T
Distribs., Inc. v. Riehle, 359 N.E.2d 622 (Ind. Ct. App.), vacated, 266 Ind. 646, 366

N.E.2d 178 (1977); Theye v. Bates, 166 Ind. App. 652, 337 N.E.2d 837 (1975); Soft Water
Utils., Inc. V. LeFevre. 159 Ind. App. 529, 308 N.E.2d 395 (1974). Cf. Menten v. Church-
man, 112 Ind. App. 309, 42 N.E.2d 426 (1942) (representation as to future earnings of
the stock held to be vital inducement in the sale of options for the stock and therefore

material).

^n5 U.S.C. § 78j(b) (1976).

'^7 C.F.R. § 240.10b-5 (1980).
^^527 P.2d 217 (Utah 1974).

'«lND. Code § 23-2-l-19(a) (1976).
"527 P.2d at 221. Accord, Lane v. Midwest Bancshares Corp., 337 F. Supp. 1200

(E.D. Ark. 1972); Allen v. Schauf, 202 Kan. 348, 449 P.2d 1010 (1969). See also Bradley
V. Hullander, 272 S.C. 6, 249 S.E.2d 486 (1978).

''Uniform Securities Act (U.L.A.) § 410(a)(2) at 672 (Master Ed. 1978). For a com-
parison of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77 l{2) (1976), with
equitable rescission, from which it was adapted, see generally III, IV Loss, supra note

9. at 1699-705, 1708-21, 3831-42. Section 410(a)(2) of the Uniform Act. like Ind. Code §
23-2-1-12 (1976), the general fraud provision, applies even if the security is registered,

exempted, or sold in violation of registration requirements. See Uniform Securities
Act (U.L.A.) § 410(a)(2) (Master Ed. 1978).

™See 15 U.S.C. § 78j(b) (1976).

"See 17 C.F.R. § 240.106.5 (1980).
"15 U.S.C. § 111(2) (1976).
^'527 P.2d at 221 n.lO.



96 INDIANA LAW REVIEW [Vol. 14:91

relied on SEC v. Texas Gulf Sulphur Co.,^^ the seminal rule lOb-5
decision, in positing the test of materiality. The Arnold court had no

difficulty in determining that the omissions from the NGC prospec-
tus were "material." These omissions were clearly facts that a

reasonable investor would deem important in making an investment
decision.^*

Because the NGC shares were sold by the corporation and not
by Arnold as an individual, his liability depended on the scope of

section 23-2-l-19(b).^^ This provision subjects five categories of per-

sons to derivative liability for unlawful sales of securities.^^ Arnold

argued that liability could be imposed only on persons who mater-
ially aided the unlawful sale. He contended that the phrase "who
materially aids in the sale," which is part of the clause imposing

liability on "employees" of sellers, also applies to and modifies the

clause imposing derivative liability on "every partner, officer, or

director of such a seller" for unlawful sales by the seller.

Although the argument is not specious, the court of appeals was
clearly correct in rejecting it and holding that directors are liable

under section 23-2-l-19(bP regardless of whether they materially aid

the transaction unless, of course, they can sustain their statutory

defense that they did not and could not reasonably have knowledge

of the facts on which liability was predicated. The court noted that

'HOI F.2d 833 (2d Cir. 1968), cert, denied, 394 U.S. 976 (1969) 404 U.S. 1005 (1971).

Of course the fortunes of Texas Gulf have waned in recent years, but Judge Water-
man, in writing for the majority, at one point stated that a "basic test of materiality . . .

is whether a reasonable man would attach importance ... in determining his choice of
action in the transaction in question." 401 F.2d at 849 (emphasis in original) (quoting

List V. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir. 1965)).

The Supreme Court made it clear in TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438 (1976) that the test of materiality is a "would influence" and not a "might

influence" test. In TSC, the Court stated that a fact is material

if there is a substantial likelihood that a reasonable shareholder would con-

sider it important in deciding how to vote. . . . Put another way, there must
be a substantial likelihood that the disclosure of the omitted fact would have

been viewed by the reasonable investor as having significantly altered [sic]

the "total mix" of information made available.
Id, at 449. TSC involved the proxy provisions of the Securities Exchange Act of 1934,
but the test of materiality laid down in that case applies to all federal securities laws.
See Alton Box Bd. Co. v. Goldman, Sachs & Co.. 560 F.2d 916, 920 (8th Cir. 1977).

'^398 N.E.2d at 433.

''The text of Ind. Code § 23-2-l-19(b) (1971) (current version at IND. Code §
23-2-l-19(b) (1976)). is set forth in note 2 supra.

'*Ind. Code § 23-2-l-19(b) (1976). The categories are: (1) every person who directly
or indirectly controls a seller liable under id. § 23-2-l-19(a); (2) every partner, officer, or

director of such a seller; (3) every person occupying a similar status or performing

similar functions; (4) every employee of such a seller who materially aids in the sale;
and (5) every broker-dealer or agent who materially aids in the sale.

'Ud. § 23-2-l-19(b).



1981) SURVEY-BUSINESS ASSOCIATIONS 97

from a grammatical and punctuation standpoint the provision im-

poses absolute liability on directors because of their status. If the

legislature had intended to make only those directors liable who
materially aided the transaction it would have been a simple matter

to insert the "materially aids" phrase into the director clause.'*

Furthermore, the Arnold construction of section 23-2-l-19(bP is

logical considering the purpose of the Indiana Securities Act. The

Act is intended to protect investors; this goal can best be achieved

by subjecting those who control or manage the seller of securities to
absolute liability. It is logical to hold those who control sellers, and
thus presumably can prevent unlawful securities transactions, to a

high standard to protect the investing public. It would be unreason-

able, however, to hold those who are mere employees of the seller,
or who are securities broker-dealers or agents, to the same high
standard if they are not materially involved in the transaction be-

cause they are not in a position to control the activities of the seller.

Decisions from several other jurisdictions construing blue sky

law provisions similar or identical to section 23-2-l-19(b) also have

made absolute the liability of directors and officers of a corporation
selling securities in violation of those acts. The Arnold court cited
and relied on Rzepka v. Farm Estates, Inc.'^" and Foelker v. Kwake*^
in support of this proposition, and Moerman v. Zipco, Inc.*^ and Mit-
chell V. Beard*^ for the related proposition that employees, broker-

dealers, and agents are liable only if they materially aid in the sale

notwithstanding that no similar restriction applies to those in a con-

trol position.

The Arnold court also rejected Arnold's claim that he had
established the "lack of knowledge" defense provided by section

^'398 N.E.2d at 433-34. The Arnold court does not point this out, but it is impor-

tant to note that the phrase "who materially aids in the sale" appears twice in Ind.
Code § 23-2-l-19(b) (1976): (1) with respect to employees of the seller; and (2) with
respect to broker-dealers or agents. Thus, two of the five categories of persons sub-

jected to liability under id. § 23-2-l-19(b) are qualified by a "materially aid" phrase.

This is a clear indication that the legislature did not intend to qualify the three re-

maining categories.

^''IND. Code § 23-2-l-19(b) (1976).
*°83 Mich. App. 702, 269 N.W.2d 270 (1978).
^'279 Or. 379, 568 P.2d 1369 (1977). Accord, Collins v. Fitzwater, 277 Or. 401, 560

P.2d 1074 (1977); Day v. Saunders, 270 Or. 432, 528 P.2d 513 (1974); Ludwig v. Mutual
Real Estate Investors, 18 Wash. App. 33, 567 P.2d 658 (1977).

"302 F. Supp. 439 (E.D.N.Y. 1969).

"256 Ark. 926, 513 S.W.2d 905 (1974). Accord, Alton Box Bd. Co. v. Goldman,

Sachs & Co., 560 F.2d 916 (8th Cir. 1977); Rucker v. La-Co, Inc., 496 F.2d 850 (8th Cir.
1974); Labenz v. Labenz, 198 Neb. 548, 253 N.W.2d 855 (1977); Cola v. Terzano, 129
N.J. Super. 47, 322 A.2d 195 (1974), aff'd sub nom. Cola v. Packer, 156 N.J. Super. 77,

383 A.2d 460 (1977); McClellan v. Sundholm, 89 Wash. 2d 527, 574 P.2d 371 (1978).



98 INDIANA LAW REVIEW [Vol. 14:91

23-2-l-19(b)." Arnold alleged that he had been misled by the assur-

ances from NGC's president that all stock sales complied with the
Indiana Securities Act."^ However, the evidence strongly suggested

that Arnold was aware of many of the transactions that were not
adequately described in the NGC prospectus. In effect, Arnold was
contending that although he knew of the facts, he did not know of
their legal significance. In other words, he pleaded that he was "ig-

norant of the law."" The court relied on Rzepka and Moerman in
holding that derivative liability is imposed on those who know the
applicable facts without regard to their knowledge of the law.^^

This is a reasonable construction of the defense provided by sec-
tion 23-2-l-19(b).** The defense is not phrased in terms of good faith
but refers to actual or constructive knowledge of "the existence of
the facts by reason of which the liability is alleged to exist"*^ The
essence of the defense is the reasonable care exercised by the de-
fendant; although a director's sophistication and his reasonable
reliance on information transmitted by an expert might be factors in
determining his knowledge, "they are not the sole determinants for
establishing his liability."^"

"Under Ind. Code § 23-2-l-19(b) (1976) a person charged with derivative liability
can escape liability if he "sustains the burden of proof that he did not know and in the
exercise of reasonable care could not have known, of the existence of the facts by

reason of which the liability is alleged to exist."

'^398 N.E.2d at 434-35.

"M at 435.
"The Arnold court, quoting Moerman v. Zipco, Inc., 302 F. Supp. 439 (E.D.N.Y.

1969). stated:

Nothing persuades this court that Connecticut or the drafters of the Uniform

Laws intended to do away with the common law rule that ignorance of the
law is no defense. The Connecticut statute provides only that ignorance of
the applicable facts, after the exercise of reasonable care, is a defense. There

is no suggestion that defendant's knowledge of the law is a necessary ele-

ment of a cause of action.

398 N.E.2d at 435 (quoting 302 F. Supp. at 450).

"Ind. Code § 23-2-l-19(b) (1976).
"M (emphasis added). The Arnold court correctly declined to read a good faith

defense into the statute because the legislature had not. 398 N.E.2d at 435. See Town
of Schererville v. Vavrus, 389 N.E.2d 346, 350 (Ind. Ct. App. 1979).

^°398 N.E.2d at 435. In effect the Arnold court is requiring directors and officers

of corporations subject to the Indiana Securities Act to meet the same standard of
care imposed by section 11(b) of the Securities Act of 1933, 15 U.S.C. § 77k(b) (1976), on

directors and other signatories of registration statements filed with the SEC. See Feit
V. Leasco Data Processing Equip. Corp., 332 F. Supp. 544 (E.D.N.Y. 1971); Escott v.

BarChris Constr. Corp., 283 F. Supp. 643 (S.D.N.Y. 1968). See generally Folk, Civil

Liabilities Under the Federal Securities Acts: The BarChris Case, 55 Va. L. Rev. 1,
199 (1969): Comment, Escott v. BarChris: How Much Diligence Is Due, 17 U. Kan. L.
Rev. 651 (1969).



1981] SURVEY-BUSINESS ASSOCIATIONS 99

Arnold also correctly held that section 23-2-l-19(aP' does not re-

quire a plaintiff to show reliance.^^ The only burden imposed by the

then applicable provision is that the plaintiff buyer not know "of the

untruth or omission."^^ Although not cited, this construction is sup-

ported by Forres tal Village, Inc. v. Graham^* which construed the

comparable section of the District of Columbia Securities Act. Fur-

thermore, reliance is not an element of a cause of action under sec-

tion 12(2) of the Securities Act of 1933,^^ upon which the Indiana

derivative liability section^^ is based.

Arnold also raised an unsuccessful statute of limitation defense.

The Indiana Securities Act statute of limitations in effect at the

time of the suit provided that an "[a]ction under this section shall be

commenced within two [2] years after discovery by the person bring-
ing the action of a violation of this act and not afterwards."" The

'IND. Code § 23-2-l-19(a) (1971) (current version at Ind. Code § 23-l-2-19(a) (1976)).
"398 N.E.2d at 435.

^'IND. Code § 23-2-l-19(b) (1971) (current version at Ind. Code § 23-2-l-19(b) (1976)).

The present provision requires that a plaintiff "not knowingly participate in the viola-

tion or . . . not have, at the time of the transaction, knowledge of the violation." Id. §
23-2-l-19(a).

'*551 F.2d 411 (D.C. Cir. 1977). Of course, it should be noted that the Utah

Supreme Court in S & F Supply Co. v. Hunter, 527 P.2d 217, 221 (Utah 1974), observed

that a state securities act could not

fairly be understood as meaning that a buyer can naively or blindly purchase

stock without concern for the truth or reasonableness of representations

made, [and] then if it later develops that it would serve his interest, assert a

claim of falsity of a representation about which he previously had no concern,

and upon which he had placed no reliance, as a basis for avoiding his con-

tract. This is fairly deducible from the parenthetical clause in the statute

quoted above (the buyer not knowing of the untruth or omission).

However, this does not seem to impose a reliance element so much as it imposes a

semblance of a duty of care on the part of the plaintiff. See also McGraw v. Matthaei,
388 F. Supp. 84 (E.D. Mich. 1972); Lane v. Midwest Bancshares Corp., 337 F. Supp.

1200 (E.D. Ark. 1972). See generally discussion of B & T Distrib. Inc. v. Riehle, 359
N.E.2d 622 (Ind. Ct. App. 1977), rev'd, 266 Ind. 646, 366 N.E.2d 178 (1977) in Galanti,

Business Associations, 1977 Survey of Recent Developments in Indiana Law, 11 Ind.

L. Rev. 27, 28-35 (1978) [hereinafter cited as Galanti, 1977 Survey].

'^Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980). See also Johns
Hopkins Univ. v. Hutton. 422 F.2d 1124 (4th Cir. 1970), cert, denied, 416 U.S. 916

(1974). See generally 3A H. Bloomenthal. Securities and Federal Corporate Law
§8.23 (1980 rev.); Ill Loss, supra note 9, at 1645 n.83. Some causal connection must be
shown, however, between the misleading communication and the sale. Jackson v. Op-

penheim, 533 F.2d 826 (2d Cir. 1976). There is clearly such a connection when the

misleading communication is in a prospectus.

=«IND. Code § 23-2-l-19(a) (1976).

"Ind. Code § 23-2-l-19(e) (1971) (current version at Ind. Code § 23-2-M9(e) (1976)).

The statute was amended in 1975 to increase the period to three years. See generally

Galanti, 1975 Survey, supra note 2, at 63. Cf. Rousseff v. Dean Witter & Co., 453 F.
Supp. 774 (N.D. Ind. 1978) (applying the three year statute of limitations to an action

brought subsequent to the enactment of the three year limitation).



100 INDIANA LAW REVIEW [Vol. 14:91

court of appeals rejected his contention that the statute started run-

ning when a plaintiff "in the exercise of reasonable care should have
discovered the violations."^* Relying on the specific language of the

Act, the court found that the Act does not intimate any reasonable

diligence standard on the part of the plaintiff.^'

The court also held that although the class was not certified un-
til April 9, 1974, the filing of the amended complaint in April, 1973
tolled the statute of limitations for all members of the class.®" Fur-
thermore, the court rejected Arnold's contention that each member
of the class was obliged to prove that he discovered the violations
within two years before the amended complaint was filed."

At first glance it may seem harsh to impose substantial liability
on a director who has been misled by the president of a corporation
into believing that the legal requirements for the sale of securities

have been satisfied.®^ Arnold, however, can at least seek contribu-

tion from the remaining defendants: the last sentence of section

23-2-l-19(b) provides for "contribution as in cases of contract among
the several persons so liable."" Thus, the liability imposed on Ar-

^«398 N.E.2d at 440.

^^Id. The rule argued for by Arnold does obtain under the Securities Act of 1933,

§ 13, 15 U.S.C. § 77m (1976). See Johns Hopkins Univ. v. Hutton, 422 F.2d 1124 (4th
Cir. 1970), cert, denied, 416 U.S. 916 (1974). See generally III Loss, supra note 9, at

1742-43.

"'398 N.E.2d at 439. In this respect, the court followed the position urged by Pro-

fessor Moore. See 3B MooRES Federal Practice 1 23.50, at 23-434 (1980).
"'398 N.E.2d at 440. The court recognized that a plaintiff might have to prove

facts to prevent the running of the statute when a defendant raising the statute as an
affirmative defense has gone forward with evidence that a claim is barred; however,

the burden of pursuasion still remains on the defendant asserting the bar. Id. When
the Dirrims' suit was certified as a class action, it was treated as a certified class ac-

tion from the day the amended complaint was filed. Id.
'The Indiana General Corporation Act permits directors in satisfying their duty

of care to the corporation to "rely on information, opinions, reports or statements . . .

in each case prepared or presented by: (A) one (1) or more officers or employees of the

corporation whom the director reasonably believes to be reliable and competent in the
matter presented . . . ." Ind. Code § 23-1-2-1 1(a)(2) (Supp. 1980). This provision,
however, relates to a director's general duty of care to a corporation and would not af-

fect the express statutory liability imposed by the Act. Id. § 23-2-l-19(b) (1976). See

generally discussion on the amendments to § 23-l-2-ll(a) in Galanti, 1977 Survey, supra
note 54, at 47-50.

Attorney-directors should take note that there is authority holding that a lay-

director subject to derivative liability under a state securities act has a cause of action

for legal malpractice against an attorney-director who was a corporation's legal
counsel. The cause of action is based on the attorney-director negligently failing to ad-
vise the corporation as to the registration requirements and liability provisions of the

securities act. Collins v. Fitzwater, 277 Or. 401, 560 P.2d 1074 (1977). Moreover, the

Collins court held that the lay-director's claim against the attorney could be assigned

to the purchasers of the unregistered securities. Id. at 408-09, 560 P.2d at 1078.

"Ind. Code § 23-2-l-19(b) (1976). According to the Commissioners on Uniform



1 98 1
]

SURVEY-BUSINESS ASSOCIA TIONS 1 1

nold will theoretically be spread among all those responsible for the
management, or more accurately the mismanagement, of NGC."''

B. Limited Partnership Liability

Plaza Realty Investors v. Bailey^^ was a diversity action decided
during the survey period by the Federal District Court for the

Southern District of New York."* It is only the second reported deci-
sion applying the Indiana Uniform Limited Partnership Act.**^

The action was brought by Plaza against VIP Center, an Indiana
limited partnership, as the maker of a promissory note, and Bailey,
as the managing general partner of VIP Center. The court granted
Plaza's unopposed motion for summary judgment against VIP
Center"* but dismissed the action against Bailey. The primary
ground for dismissing the action against Bailey, a Florida resident

who never personally appeared in New York, was that Bailey had in-
sufficient contacts with New York to satisfy the due process clause
of the United States Constitution"® and to sustain personal jurisdic-

tion under New York's long arm statute.^" The court, however, did
not content itself with dismissing the action on jurisdictional

Laws, this provision is intended to act as "a safeguard to avoid the common law rule
which prohibits contribution among joint tort-feasors." Uniform Securities Act, 7A
U.L.A. 672 (Master Ed. 1978). Arnold is not completely deserving of sympathy. In a

companion case, Arnold v. Dirrim, 398 N.E.2d 442 (Ind. Ct. App. 1979), an appeal from

an order in a proceedings supplemental action brought to collect the $553,439.36 judg-

ment against Arnold, the court of appeals upheld the trial court's finding that certain
property transfers by Arnold to his wife, son, and a controlled corporation were

fraudulent as to the plaintiffs.

"'In addition to the securities act issues, the defendant unsuccessfully raised

numerous procedural issues which are beyond the scope of this survey article.
'^484 F. Supp. 335 (S.D.N.Y. 1979).

""The suit originally was commenced in a New York state court but was removed
to the federal court pursuant to 28 U.S.C. §§ 1441(a), 1446 (1976). 484 F. Supp. at 338.

"Ind. Code §§ 23-4-2-1 to -31 (1976). The Indiana Act is based on the 1916 Uniform
Limited Partnership Act and not the Revised Uniform Limited Partnership Act

adopted by the Commissioners on Uniform Laws in 1976. Revised Uniform Limited
Partnership Act (U.L.A.) §§ 1101-1105 (Master Ed. Supp. 1980).

"484 F. Supp. at 338.

"U.S. Const, amend. V.

'"N.Y. Civ. Prac. Law § 302 (Consol.).
Neither the fact that the note was payable in New York nor that telephone calls

and other interstate telephonic communications were made across state lines established
sufficient contacts with the state. Although transacting business through an agent in

New York would satisfy the requirements, the evidence showed that the person who
negotiated the real estate transaction in New York was not acting on Bailey's behalf.
The court also found that Bailey had not ratified those acts merely by becoming VIP
Center's managing general partner and receiving some benefits in the form of tax sav-
ings. 484 F. Supp. at 345-48.



102 INDIANA LAW REVIEW [Vol. 14:91

grounds but also made findings of fact and conclusions of law sup-
porting a dismissal on the merits."

A threshold issue in Bailey was what law controlled. The court
decided that Indiana law would apply. A major factor in this deci-
sion was that the note itself recited that Indiana law should govern
and the conflict of laws rules of New York give great deference to
the intent of the parties in choice of law questions.^^ Furthermore,

Indiana had numerous significant contacts with the transactions in
question." The same result probably would have been reached if
New York law had been applied because that state has also adopted
the Uniform Limited Partnership Act.'" Furthermore, as the Bailey
court observed, the case was one where "virtually all jurisdictions
would be expected to follow general common law principles."'^ Thus,
although the ruling on the merits in Bailey can be categorized as

dictum, it is still significant because the Indiana Limited Partner-

ship Act is based on the widely adopted Uniform Limited Partner-

ship Act.'^

A brief recounting of the facts in Bailey is necessary to under-
stand the court's conclusion that Bailey was not personally liable on
the partnership's note even though he was the general partner. The
normal rule is that the general partner of a limited partnership is

personally liable for partnership debts." VIP Center was organized
in 1973 to develop a multi-purpose real estate complex on land previ-

ously conveyed to Plaza on a sale and leaseback basis by VIP Cen-

"The court undertook this seemingly unnecessary task to avoid duplication of

judicial effort in the event that it was determined on appeal that the court had per-

sonal jurisdiction over Bailey. 484 F. Supp. at 348.

"484 F. Supp. at 348-49. See CBS, Inc. v. Tucker, 412 F. Supp. 1222, 1226 n.5

(S.D.N.Y. 1976).

"484 F. Supp. at 349. The note was made by an Indiana limited partnership; it

was secured by Indiana real estate; and the documents in question were executed,

delivered, and recorded in Indiana.

'*N. Y. Partnership Law §§ 90-119 (Consol.).
^^484 F. Supp. at 349 (quoting Lee v. Joseph E. Seagram & Sons, Inc., 552 F.2d

447, 451 n.3 (2d Cir. 1977)).

"Forty-seven states, the District of Columbia, and the Virgin Islands have limited

partnership acts based on the 1916 Uniform Limited Partnership Act. 6A U.L.A. 99

(Supp. 1980).

"A limited partnership must have a least one general partner, Ind. Code §
23-4-2-1 (1976), who is "subject to all the restrictions and liabilities of a partner in a

partnership without limited partners." Id. § 23-4-2-9. See Kitchell Corp. v. Hermansen,

8 Ariz. App. 424. 446 P.2d 934 (1968); Atlanta Warehouses, Inc. v. Housing Auth., 143

Ga. App. 588, 239 S.E.2d 387 (1977); Cummings v. Nordmark, 73 Wash. 2d 322, 438

P.2d 605 (1968). See also Ind. Code §§ 23-4-1-9, -15, -17, -18 (1976). See generally J.

Crane & A. Bromberg. Partnership § 26, at 150 (1968) [hereinafter cited as Crane &

Bromberg]; H. Reuschlein & W. Gregory. Handbook on the Law of Agency and
Partnership § 264, at 436-37 (1979) [hereinafter cited as Reuschlein & Gregory].



1981] SURVEY-BUSINESS ASSOCIATIONS 103

ter's original limited partner.^* VIP Center eventually became the
owner of the improvements being constructed on the land and the

lessee under the land lease with Plaza. Unfortunately, VIP Center
ran out of money and defaulted on the land lease with the plaintiff
and on a first mortgage on the real estate."

The original general partner sought new partners*" who would
advance the funds necessary to complete the project. He found one
potential general partner who in turn interested defendant Bailey's
parents (the "senior Baileys") in becoming limited partners. One of
Bailey's law partners conducted negotiations on behalf of the senior

Baileys. Although these proved unsuccessful, they led to direct

negotiations between Plaza and the senior Baileys. These negotia-

tions eventually culminated in the senior Baileys' agreeing, on

December 27, 1974, to become limited partners in VIP Center.^'
A major issue in Plaza Realty was whether Plaza intended to

look only to the property as security on the promissory note or

whether the partners were to be personally liable on the promissory

note as well. A related issue was whether Bailey was involved with
VIP Center on December 27, 1974. The court concluded that Bailey
was not a general partner on that date because he did not agree to
become the general partner until December 30. Moreover, he did not
acquire partner status until the transaction was closed on December
31, 1974.«^

The timing of the closing was influenced by tax considerations,*'^
and was somewhat complicated because the various parties in in-
terest were located in three states.** The order in which the various
documents were executed was critical to the ultimate outcome of
the case. The promissory note in issue and other documents were

''484 F. Supp. at 339.

"Following the default, VIP Center's interest in the leasehold was assigned to
Plaza which thereby became the owner of the improvements as well as the owner of
the land. Id.

'"New partners could take advantage of the substantial tax losses available to the

partnership. Id. at 339-40.

"M at 340-41.
"Id. at 352. Plaza was unaware of Bailey's involvement in VIP Center until after

the closing. Id. at 342. Bailey became the general partner in return for 1% of VIP
Center's tax deduction for the year 1974. He also invested $11,000 in the limited part-
nership. Id.

'The transaction whereby Bailey and his parents invested in VIP Center had to
be completed before noon on December 31, 1974, to permit them to take advantage of
VIP Center's losses on their 1974 tax returns. Id. at 343.

'*The holder of the first mortgage was in New York; a trustee of Plaza, who was
also a member of the law firm representing Plaza, and an Indiana attorney authorized
to sign documents on behalf of Bailey were in Indiana; Bailey's law partner represen-
ting the interests of the Baileys was in Florida. Id. at 342-43.



104 INDIANA LAW REVIEW [Vol. 14:91

signed by VIP Center's original general partner on December 30,
1974. None of these documents were exchanged, however, until the
amendment to the limited partnership agreement required by the
Indiana Limited Partnership Act*^ had been signed on December 31,
1974/' If Bailey was a general partner when the note was executed,
then he would be personally liable for the entire obligation. If,
however, he became a general partner after the note was executed,
then he would be liable only to the extent of his interest in VIP
Center property."

The court concluded that Bailey did not become VIP Center's
managing general partner until an amended limited partnership cer-
tificate specifying his status as a general partner was filed as re-
quired by section 23-4-2-25(5) of the Indiana Limited Partnership

Act.** The filing did not occur until after the note was delivered to
Plaza. The court found that although Bailey agreed on December 30
to become the general partner and the amended limited partnership
agreement specifically provided that it was "to be effective as of
December 30, 1974,"*^ the filing of the amendment was the control-
ling factor.

The result in Plaza Realty absolving Bailey from liability seems
to be correct. The evidence indicates that Plaza intended the real
estate to be the security on the promissory note. The action against
Bailey was presumably taken when Plaza realized that the security
was inadequate or that holding Bailey personally liable was more
convenient.'"

'^IND. Code § 23-4-2-24(2)(d) (1976).
'M84 F. Supp. at 343.

''IND. Code § 23-4-1-6(2) (1976) provides that the Indiana Uniform Partnership Act,
id. §§ 23-4-1-1 to -43, applies "to limited partnerships except in so far as the statutes

relating to such partnerships are inconsistent herewith." See Horn v. Builders Supply
Co., 401 S.W.2d 143 (Tex. Civ. App. 1966). Ind. Code § 23-4-1-17 (1976) in turn provides:
"A person admitted as a partner into an existing partnership is liable for all the obliga-
tions of the partnership arising before his admission as though he had been a partner

when such obligations were incurred, except that this liability shall be satisfied only
out of partnership property. " (emphasis added).

««IND. Code § 23-4-2-25(5) (1976).
89484 F. Supp. at 343, 349. In so doing, the court summarily rejected Plaza's argu-

ment that Ind. Code § 23-4-1-17 (1976) did not apply because VIP Center was a shell,
rather than a "existing partnership," and that in reality a new partnership was being
formed. Id. at 349, 351. The court reasoned that although there was a change in VIP
Center's management when Bailey became the managing general partner, the nature
of the partnership business was unchanged. Furthermore, the court noted that both
parties were aware that the continuity of the limited partnership was essential if the
senior Baileys were to receive tax benefits from the transaction. It was to maintain
this continuity that the original general partner was retained when the note to Plaza
was executed. Id. at 351-52.

'"VIP Center's general partner who executed the note would have been personally
liable, see note 77 supra, except that as part of the overall restructuring of the project,



1981) SURVEY-BUSINESS ASSOCIATIONS 105

There is little law on the question of whether an amendment
pertaining to the membership of a limited partnership becomes ef-

fective when the agreement is reached or when the amended cer-
tificate is filed. The Indiana Limited Partnership Act provides that

"[a] certificate is amended . . . when ... [an appropriate writing] is
filed for record in the office of the county recorder of the county

where the principal place of business of the partnership is located."*'

This provision cannot mean that a general partner, upon agreeing to
join the limited partnership, will never be bound on prior partner-

ship obligations until the amended certificate is filed. The Plaza
Realty court acknowledged this but concluded that its result was ap-
propriate because the amended certificate was timely filed and
Bailey had not acted on behalf of the partnership before it was
filed.'^ Furthermore, Plaza had not relied on Bailey's participation in

the venture when it decided to convey the real estate in question.'^
The one case the court found relevant to the issue of when an

amendment to a limited partnership certificate becomes effective
tangentially supported the court's result. In Harry David Zutz In-
surance, Inc. V. H.M.S. Associates, Ltd.,^* the court upheld service of

process on a limited partnership's former general partner before an

amended certificate was filed reflecting this change, even though
the limited partnership had agreed that the former general partner

no longer served in that capacity. The court's decision in Zutz was
appropriate. One of the purposes for filing a limited partnership cer-
tificate is to permit creditors to determine who is involved in the
partnership.'^ This purpose would be defeated if a creditor could not

rely on the information in a filed certificate.*^

Plaza Realty, however, was not the typical situation where
courts have held persons acting for a "limited partnership" liable for

partnership obligations after an agreement was signed but before a
certificate was filed. The Plaza Realty court addressed the typical

Plaza granted him a general release from liability. 484 F. Supp. at 341 n.5. Plaza ap-

pears to have made a tactical mistake in releasing the original general partner from
liability or in failing to specify that as part of the arrangement the incoming managing
general partner would be personally liable.

"IND. Code § 23-4-2-25(5) (1976).
'M84 F. Supp. at 351.

'Yd. The court observed that Plaza had received all the consideration it had
bargained for: the senior Baileys joined the partnership and transferred over a million

dollars in cash and notes to VIP Center. Id.
"360 A.2d 160 (Del. Super. Ct. 1976).

''See Hoefer v. Hall, 75 N.M. 751. 411 P.2d 230 (1965).
"This was not a problem in Plaza Realty. Plaza did not appear to be particularly

concerned who the general partner was, or was going to be, when the note was ex-
ecuted. 484 F. Supp. at 342. Zutz is therefore not controlling here since the parties in

Zutz knew who was to be mvolved before the certificate was filed.



106 INDIANA LAW REVIEW [Vol. 14:91

situation in its discussion of whether a limited partnership comes in-
to existence at the time the partnership agreement is reached or at
the time the certificate is filed.'^ The language of the 1916 version of
the Uniform Limited Partnership Act is vague as to when existence
commences, and the cases cited in Plaza Realty are generally con-
cerned with whether a putative "limited partner" becomes a general
partner when the certificate is either not filed or is not timely
filed.®* A person erroneously believing himself to be a limited part-
ner can limit his liability even if the certificate is never filed.®' The
Revised Uniform Limited Partnership Act, approved in 1976, ex-
pressly provides that a limited partnership is formed at the time the
certificate of limited partnership is filed.'""

"484 F. Supp. at 350-51. Ind. Code § 23-4-2-2(l)(b) (1976) requires the filing of a
limited partnership certificate containing certain specified information. For a model

limited partnership certificate see Reuschlein & Gregory, supra note 77, at 579-81.
For a model limited partnership agreement see id. at 573-78. Under Ind. Code §
23-4-2-2(2) (1976), a limited partnership is formed if there has been substantial com-

pliance in good faith with the requirements of id. § 23-4-2-2(1).

''See, e.g.. Peerless Mills, Inc. v. American Tel. & Tel. Co., 527 F.2d 445 (2d Cir.
1975): Ruth v. Crane. 392 F. Supp. 724 (E.D. Pa. 1975), aff'd, 564 F.2d 90 (3d Cir. 1977):
Franklin v. Rigg, 143 Ga. App. 60, 237 S.E.2d 526 (1977). There is additional authority,

including an Indiana decision, in support of the rule that failure to comply with the re-

quirements of the Uniform Limited Partnership Act deprives the limited partner of

limited liability status. See, e.g., Filesi v. United States, 352 F.2d 339 (4th Cir. 1965);

Bisno V. Hyde, 290 F.2d 560 (9th Cir. 1961), cert, denied, 368 U.S. 959 (1962); Tiburon

Nat'l Bank v. Wagner, 265 Cal. App. 2d 868, 71 Cal. Rptr. 832 (1968); Arrow Petrol. Co.
V. Ames, 128 Ind. App. 10, 142 N.E.2d 479 (1957); Hoefer v. Hall, 75 N.M. 751, 411 P.2d

230 (1965). But see United States v. Coson, 286 F.2d 453, 461-62 n.l3 (9th Cir. 1961).

The Limited Partnership Act does not specify when the certificate must be filed,

but it has been held that a reasonable time, determined by the circumstances of the

particular case, is allowed for filing. Stowe v. Merrilees, 6 Cal. App. 2d 217, 44 P.2d

368 (1935). A late filing of a limited partnership certificate will not bar the creation of
a limited partnership if the plaintiff has not been injured by the delay. Franklin v.

Rigg, 143 Ga. App. 60, 237 S.E.2d 526 (1977).

"Ind. Code § 23-4-2-11 (1976) provides that such a person is not bound on partner-

ship obligations when upon "ascertaining the mistake he promptly renounces his in-
terest in the profits of the business, or other compensation by way of income." See,
e.g., Giles v. Vette, 263 U.S. 553 (1924); Vidricksen v. Grover, 363 F.2d 372 (9th Cir.

1966); Graybar Elec. Co. v. Lowe, 11 Ariz. App. 116, 462 P.2d 413 (1969); Solomont v.

Polk Dev. Co., 245 Cal. App. 2d 488, 54 Cal. Rptr. 22 (1966); Franklin v. Rigg, 143 Ga.

App. 60, 237 S.E.2d 526 (1977); Gilman Paint & Varnish Co. v. Legum, 197 Md. 665, 80
A.2d 906 (1951); Rathke v. Griffith, 36 Wash. 2d 394, 218 P.2d 757 (1950).

'""Revised Uniform Limited Partnership Act (U.L.A.) § 201(b) (Supp. 1980). The
Plaza Realty court stated that the Revised Act has not been adopted by the states.

484 F. Supp. at 350. However, the Revised Act has been adopted in Connecticut, Conn.

Gen. Stat. §§ 34-9 to -38 (1979), and Wyoming, Wyo. Stat. §§ 17-14-201 to -1104 (Supp.
1980). Interestingly, the Revised Act does not expressly specify when an amendment
to a certificate of limited partnership becomes effective. Section 202(a) provides that

the certificate is amended by filing a certificate of amendment, and section 202(e) pro-



1981] SURVEY-BUSINESS ASSOCIATIONS 107

Because the VIP Center note was a preexisting partnership
obligation when Bailey became the general partner, Bailey could only
be personally liable beyond his interest in the venture if he expressly

or impliedly adopted the obligation. The court cited Lucas v.
Coulter,^"^ a pre-uniform act case, for this proposition. Interestingly,

it did not cite Wheat v. Hamilton,^"^ which held that although an in-
coming partner is not liable for the prior partnership debts without

his consent, very slight testimony will suffice to establish an

assumption of those debts. Arguably, a case can be made that a per-
son who becomes a general partner of a limited partnership in a
major restructuring of the partnership and who is aware that a ma-
jor new partnership obligation is being incurred would be liable for
that obligation unless a contrary intent is clearly shown. Admitted-

ly, this might not be the customary practice,'"' but the customary

practice seems risky. A more advisable practice would be to state
expressly in the relevant documents whether the incoming general

partner is, or is not, to be held personally liable for the newly incur-

red obligation.

The Plaza Realty court, convinced that Plaza did not intend to
hold Bailey personally liable and looking only to the real estate as

security on the note, stated that if by law Bailey was liable on the
note, the court would have reformed the note and inserted an ex-
culpatory clause relieving him from personal liability.'" On the
authority of Pearson v. Winfield^°^ the court concluded that there

vides that a person will not incur any liability because an amendment to a limited part-
nership certificate has not been filed if the amendment is filed within thirty days of
the event. Therefore, the same result reached in Plaza Realty would presumably be

reached in a jurisdiction that has adopted the Revised Act. See generally Hecker,

Revised Uniform Limited Partnership Act: Relationship of Firm and Its Members to
Third Parties, 27 Kan. L. Rev. 1 (1978).

""104 Ind. 81, 3 N.E. 622 (1885). See generally Crane & Bromberg. supra note 77,
§ 88(b).

'»^53 Ind. 256 (1876).

'"'The court noted that the Indiana attorney who acted for the Baileys at the clos-
ing testified that the practice in Indiana with respect to this type of transaction was to

execute the documents pertaining to the new obligation before the amendment to the
certificate of limited partnership was executed and to record the amended certificate
after all other documents were recorded. 484 F. Supp. at 350.

'"484 F. Supp. at 352, 354.

'°n60 Ind. App. 613. 313 N.E.2d 95 (1974). The court distinguished Adams v.
Wheeler, 122 Ind. 251. 23 N.E.2d 760 (1890), which reformed a deed wherein the

drafters had inadvertantly stated that Adams assumed a debt to Wheeler, because
Plaza was seeking to hold Bailey liable by operation of law as a general partner of the

VIP Center. 484 F. Supp. at 353. It did, however, accept Adams for the proposition
that where the parties have agreed that only property should stand behind a pro-

missory note, and not the personal assets of the purchaser, an instrument which does

not reflect this intention should be reformed. Most of the testimony convinced the



108 INDIANA LAW REVIEW [Vol. 14:91

was a mutual mistake which justified reforming a contract differing
in its written form from what was actually agreed upon by the par-

ties.

In this respect the court seems to be correct. The intent of the
parties when the agreement was reached on December 27 was that
Plaza's security would be in the real estate and would not include

the personal assets of the former general partner or the unknown
incoming general partner. The transaction was structured to ac-
complish that end; it would be unjust to give Plaza a second oppor-

tunity to hold the incoming general partner personally liable. Of

course, a clause in the note exculpating the incoming general part-

ner, as the Plaza Realty court would have accomplished by reforma-

tion, is a far more appropriate and safer procedure to follow.

C. Franchisor Liability

A third significant case during the survey period was the deci-
sion of the United States Court of Appeals for the Seventh Circuit

in Oberlin v. Marlin American Corp.^°^ Oberlin involved the impact
of the Lanham Trademark Act'°^ on Indiana agency law. The case
arose from an unsuccessful marketing effort of a portable electronic

telephone designed to fit within an attache case and to operate on

the same frequencies available to mobile telephone installations. The
manufacturer of the device'"* gave the defendant Marlin American
Corporation the exclusive right to market the attache phone in all
but a few states. The agreement obligated Marlin to try to establish
a sales and marketing program in its assigned territory and pro-
vided that Marlin was an "independent contractor," and not an
agent of the manufacturer.'"®

Marlin established a nationwide franchising plan. As part of this
plan a meeting was held in Indianapolis where a Marlin represen-
tative made a presentation praising the investment potential of an
attache phone franchise. The plaintiff's husband became a franchise
zone distributor of the telphones for central Indiana. When it
became clear that the phone could not be successfully marketed in
his territory,"" the plaintiff's husband brought a diversity action

court that the property was to be the only security on the note. The most favorable

testimony that plaintiff could elicit was ambiguous. 484 F. Supp. at 354.
"^596 F.2d 1322 (7th Cir. 1979).

""15 U.S.C. §§ 1051-1127 (1976 & Supp. Ill 1979).
""The device was made by Melabs of California which was eventually acquired by

defendant S.C.M. Corporation. 596 F. 2d at 1324.

'"Id.

""No numbers were available frrtm Indiana Bell Telephone Company for these
phones. Id. at 1235.



1981] SURVEY-BUSINESS ASSOCIATIONS 109

alleging that: (1) Marlin had fraudulently induced him to accept the

distributorship, with the liability of defendants SCM and Melabs
based on an alleged principal-agency relationship; (2) Marlin had

breached the distributorship agreement; and (3) a conspiracy existed

among the three defendants.'"

Marlin was dismissed from the suit before trial for lack of per-
sonal jurisdiction. Consequently the second count, in which only

Marlin was charged as a defendant, was dismissed."^ The district
court directed a verdict for Melabs and SCM on the remaining
counts after the plaintiff had presented her evidence.'" Thus, the

issue on appeal was whether the plaintiff had presented sufficient
evidence of an agency relationship between Marlin and the two
defendants to go to the jury. The court of appeals affirmed the trial
court and held that she had not presented sufficient evidence."^

The court initially observed that the provision in the agreement
between Melabs and Marlin denominating Marlin as an independent
contractor rather than an agent was of no significance."^ Although
the court cited no authority, it is well settled that in determining

whether a principal/agent or employer/independent contractor rela-
tionship exists depends on what the relationship is in fact and not
what the parties call it."® The key issue in determining the nature of
the relationship is the extent of control the employer exercises over

the putative agent. If the employer retains a substantial amount of
control over the operation of the contracting party, the courts will

determine that a principal/agent relationship exists. If, however, only

minor control is retained, the employer/independent contractor

"'Id. William Oberlin died before the trial and his wife was substituted as plain-

tiff. Id.

"Tlaintiff attempted to argue that Marlin's dismissal was error, but the court of

appeals was satisfied that she had abandoned below any argument that the court had

jurisdiction. Consequently, the issue was improperly raised on appeal. 596 F.2d at 1325

n.l. See United States v. Sanchez. 422 F.2d 1198, 1201-02 (2d Cir. 1970).

"'596 F.2d at 1325-26. The plaintiff did not appeal from the directed verdict on the

conspiracy count. Id. at 1325 n.2.

"*The court, as is proper, noted that the correctness of the ruling was tested by

considering only the operative facts favorable to the plaintiff, disregarding conflicting

unfavorable testimony and drawing all inferences most strongly in her favor. Id. at

1326. See Gunning v. Cooley, 281 U.S. 90 (1930); Hohmann v. Packard Instrument Co.,
471 F.2d 815 (7th Cir. 1973); Kish v. Norfolk & W. Ry., 426 F.2d 1132 (7th Cir. 1970).
See generally 9 C. Wright & A. Miller. Federal Practice & Procedure § 2536 (1971)
[hereinafter cited as Wright & Miller].

"^596 F.2d at 1326.

'"See Bartels v. Birmingham, 332 U.S. 126 (1947); Bond v. Harrel. 13 Wis. 2d 369,

108 N.W.2d 552 (1961). See generally W. Seavey, Handbook of the Law of Agency §
84C (1964) [hereinafter cited as Seavey].



110 INDIANA LAW REVIEW [Vol. 14:91

status obtains. This status insulates the employer from liability to

third parties except in certain circumstances."^

Typically, the issue of whether a party to an agreement is an in-

dependent contractor arises when an injured worker is attempting
to hold the employer of his employer liable for a bodily injury."* An
independent contractor, however, also can be an agent of the

employer and even bind him by unauthorized representations and

contracts."® This status, however, also depends on the degree of con-

trol exercised over the work done.^^° Thus, to a considerable extent

the Oberlin court's distinction between the principal/agent and

employer/independent contractor status was not accurate. The court

should have been deciding in terms of agent or non-agent indepen-

dent contractors. The ultimate issue, however, would be the same:

did Melabs or SCM control Marlin's work.
Oberlin contended that the defendants had the requisite degree

of control because the marketing agreement gave Melabs the right

to approve all contract forms used by Marlin and required uniform

terms, conditions, and prices to be offered to ultimate distributors.'^'

The court rightly rejected the contention that control of contract

forms makes a distributor an agent. '^^ The control that defeats in-

dependent contractor status is control over the means by which the

activities contracted for are to be accomplished and not control over

mere incidental or peripheral matters. Melabs' control over forms

and contracts was incidental to the main effort of Marlin's obligation

to develop the franchise program.

Oberlin also argued that the provision in the marketing agree-

ment that distributorships established by Marlin would be transfer-
red to Melabs in the event of Marlin's default or bankruptcy

"'See Prest-0-Llte Co. v. Skeel, 182 Ind. 593, 106 N.E. 365 (1914); Curl v.

Bethlehem Steel Corp., 390 N.E.2d 709 (Ind. Ct. App. 1979); Cummings v. Hoosier
Marine Properties, Inc., 363 N.E.2d 1266 (Ind. Ct. App. 1977); Burkett v. Crulo Truck-

ing Co., 355 N.E.2d 253 (Ind. Ct. App. 1976); Hale v. Peabody Coal Co., 168 Ind. App.

336, 343 N.E.2d 316 (1976). See generally Restatement (Second) of Agency §§ 2(3),
214, 220, 250, 251 (1958); Restatement (Second) of Torts §§ 409-429 (1965);
Reuschlein & Gregory, supra note 77, § 51; Seavey, supra note 116, §§ 6B, 84C; W.
Sell, Agency §§ 19, 95, at 86 (1975) [hereinafter cited as Sell].

"'See note 117 supra.

'"See generally Seavey, supra note 116, at 8; Sell, supra note 117, at 16.

''"See Automatic Canteen Co. of America v. State Bd. of Equalization, 238 Cal.
App. 2d 372, 47 Cal. Rptr. 848 (1965); Dumas v. Lloyd, 6 111. App. 3d 1026. 286 N.E.2d
566 (1972); Kablitz v. Hoeft. 25 Wis. 2d 518. 131 N.W.2d 346 (1964).

'^'596 F.2d at 1326.

'"Smith V. Cities Serv. Oil Co., 346 F.2d 349 (7th Cir. 1965); Hancock v.
Minneapolis-Moline, Inc., 482 P.2d 426 (Colo. Ct. App. 1971); Burkhalter v. Ford Motor
Co., 29 Ga. App. 592, 116 S.E. 333 (1923); Coe v. Esau. 377 P.2d 815 (Okla. 1963). See
generally Seavey, supra note 116, § 84, at 145.



1981] SURVEY-BUSINESS ASSOCIATIONS 111

demonstrated the necessary control. This, too, was rejected because
the provisions applied only in the extraordinary circumstances of

bankruptcy or default. '^^

The plaintiff's third major argument, although rejected by the
court, was based on an intriguing theory. She argued that Melabs
exercised control over Marlin's operations because it had approval

rights over the use of the SCM trademark in advertising
materials. '^^ The Lanham Trademark Act requires the owner of a
registered trademark to supervise a licensee's operations and sub-

jects the owner to the loss of the trademark for failure to exercise
such control. '^^ The Oberlin court, however, held that this obligation
is designed to ensure the integrity of the trademark and prevent its

use to deceive the public as to the quality of the goods or services

bearing the name.'^* The theory that the control a trademark owner
must exercise over a licensee constitutes "control" for purposes of
agency law is intriguing, but it is doubtful that Congress intended to

make every trademark licensor a "principal" under state agency law
when it adopted the Lanham Trademark Act.'^^ Furthermore, the
duty of supervision is narrowly limited to ensure the integrity of a

registered trademark. This supervision, in and of itself, does not

establish the degree of control over day-to-day operations necessary

to support a conclusion that the licensor is exercising the control of

a principal.'^*

'"596 F.2d at 1326. See Western Adjustment & Inspection Co. v. Gross Income
Tax Div., 236 Ind. 639, 142 N.E.2d 630 (1957); Gross Income Tax Div. v. Fort Pitt
Bridge Works. 227 Ind. 538, 86 N.E.2d 685 (1949).

'"596 F.2d at 1326-27.

'^nS U.S.C. §§ 1055, 1064(c), 1127 (1976). See generally 3, 4 Callman, The Law of
Unfair Competition Trademarks and Monopolies §§ 78.2, 98.3(c) (3d ed. 1969).

"'596 F.2d at 1327. See Sheila's Shine Prod. Inc. v. Sheila Shine, Inc., 486 F.2d 114
(5th Cir. 1973); Turner v. HMH Publishing Co., 380 F.2d 224 (5th Cir.), cert, denied, 389
U.S. 1006 (1967); Dawn Donut Co. v. Harfs Food Stores, Inc., 267 F.2d 358 (2d Cir.
1959).

""A trademark license agreement without more does not create a fiduciary rela-
tionship between the licensor and licensee. Noel Holding Corp. v. Carvel Dari-Freeze
Stores, Inc., 140 N.Y.S.2d 640 (Sup. Ct. 1955).

'^'See Smith v. Cities Serv. Oil Co., 346 F.2d 349 (7th Cir. 1965); McLaughlin v.
Chicken Delight, Inc., 164 Conn. 317, 321 A.2d 456 (1973); Arthur Murray, Inc. v.
Smith, 124 Ga. App. 51. 183 S.E.2d 66 (1971); Coe v. Esau. 377 P.2d 815 (Okla. 1963);
Murphy v. Holiday Inns, Inc., 216 Va. 490, 219 S.E.2d 874 (1975). There appears to be
no Indiana authority directly on point, but Oberlin considered Thompson Farms, Inc.
V. Corno Feed Prod., 366 N.E.2d 3 (Ind. Ct. App. 1977), as bearing on the point. In
Thompson Farms, the court held that a distributor was a mere conduit in a promo-
tional scheme devised by the principal and hence was not liable where there was a
direct contractual relationship between the principal and the ultimate purchaser of the
product. Id. at 12-13.



112 INDIANA LAW REVIEW [Vol. 14:91

The Oberlin court also rejected the contention that there was an
"agency by estoppel" created by the use of the SCM trademark/^®
The court distinguished Sheraton Corp. of America v. Kingsford
Packing Co.,^^'' where the franchisor hotel corporation was estopped
to deny the debts of the operator of a local Sheraton Inn. The estop-
pel in Sheraton was created when Sheraton knowingly permitted its
trade name to be used in the course of business by the franchisee, a
separate entity, without qualification or indication of separate

ownership. In Oberlin, however, the defendants clearly maintained a

distinction between themselves and Marlin. The plaintiff's reliance
in Sheraton was reasonable and a result of the company's own
business activities. This, however, was not true in Oberlin.^^^

D. Indiana Business Takeover Offers Act

The validity of the 1979 Indiana Business Takeover Offers Act"^
was upheld by the United States District Court for the Southern
District of Indiana in City Investing Co. v. Simcox.^^^ The complaint
was filed in connection with a tender offer by a City Investing sub-
sidiary for the shares of Stokely-Van Camp Inc., an Indiana corpora-
tion with its principal place of business in Indianapolis. The com-
plaint sought a declaratory judgment that the Takeover Offers Act
was invalid and also sought injunctive relief barring the defendants
from enforcing the Act against City Investing and its subsidiary.'^*
The plaintiffs contended they were denied a fair hearing before an
unbiased decision maker on their tender offer because of the alleged

'^596 F.2d at 1327 n.5.

''"162 Ind. App. 470, 319 N.E.2d 852 (1974).

'"Various evidentiary points were raised in Oberlin, but with one exception these

are beyond the scope of this survey. The exception was the court's statement that an
agent's extrajudicial statement about a purported agency made while not in the
presence of the alleged principal are inadmissible to establish the relationship in the

absence of substantial independent evidence of the agency. 596 F.2d at 1328. See

Phenix Ins. Co. v. Jacobs, 23 Ind. App. 509, 55 N.E. 778 (1899). This is a well settled

rule, see generally Sell, supra note 117, at 26 n.l6, that is essential to avoid subjecting

enterprises to agency liability merely on the statement of a putative agent.

"'Ind. Code §§ 23-2-3.1-1 to -11 (Supp. 1980). The Act is discussed in Galanti, Cor-
porations, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L. Rev. 133,
161-72 (1980) [hereinafter cited as Galanti, 1979 Survey]. The earlier Indiana Business
Takeover Act, Ind. Code §§ 23-2-3-1 to -12 (1976), was repealed by Act of Mar. 9, 1978,
Pub. L. No. 2, § 2251, 1978 Ind. Acts 2 when the new Indiana Business Takeover
Offers Act was adopted in 1979.

^^476 F. Supp. 112 (S.D. Ind. 1979).

"Yd. at 113. The defendants were the Indiana Secretary of State, the Indiana

Securities Commissioner, the Indiana Attorney General, and Stokely-Van Camp, Inc. as
an intervenor. The complaint also sought money damages in an unspecified amount,
but that claim was stricken by the court. Id.



1981] SURVEY-BUSINESS ASSOCIATIONS 113

prejudgment of the case by the Indiana Securities Commissioner. In

addition, the plaintiffs contended that the Takeover Offers Act

violated the supremacy'^^ and commerce clauses""* of the United
States Constitution both on its face and as applied to the plaintiffs. '^^

The facts and chronology of the tactical moves that resulted in
the reported decision are somewhat complex. The initial legal move
occurred on May 22, 1979, when the Indiana Securities Commis-
sioner, as authorized by the Takeover Offers Act,'^* issued an order

directing the plaintiffs to cease and desist from purchasing Stokely

shares until they had complied with the Act and the antifraud provi-

sions of the Indiana Securities Act.'^^ The order provided for a
prompt hearing upon request of the plaintiffs. Simultaneously, the
State of Indiana instituted an action for injunctive relief in the

Marion County Superior Court and obtained a temporary restrain-

ing order barring the plaintiffs from making further purchases.'^" On
June 1, 1979, the plaintiffs filed the instant suit in federal court and
moved in the superior court to dissolve the temporary restraining
order and the Commissioner's cease and desist order and to dismiss

the state's complaint. Following an evidentiary hearing on June 4,
1979, the superior court denied the plaintiff's motion and also denied

the state's motion for a preliminary injunction.'*^ Prior to the June
15, 1979 hearing ordered by the Securities Commissioner to con-
sider the merits of his May 22 cease and desist order, the plaintiffs,
as the defendants in the superior court proceeding, filed an answer
and counterclaim demanding an injunction against being penalized
for failure to comply with "the unconstitutional provisions of the

Takeover Act.'"*'
Following his hearing, the Securities Commissioner issued an

order on June 19, 1979, wherein he determined that the plaintiffs
had intentionally disseminated false and misleading statements

regarding their intentions in violation of the antifraud provision of

"'U.S. Const, art. VI, cl. 2.

"Yd. art. I, §8, cl. 3.
137/1'476 F. Supp. at 113-14. The claim of unconstitutionality as applied to the plain-

tiffs was withdrawn in open court. Id. at 114.
"*lND. Code § 23-2-3.1-10(a) (Supp. 1980).
'''Id. § 23-2-1-12 (1976).

'"476 F. Supp. at 114. This action is authorized by Ind. Code § 23-2-3.1-10(a) (Supp.
1980).

'^'476 F. Supp. at 114.

'"Id. The claim was still pending when City Investing was decided. On emergency
application to the superior court, the plaintiffs requested the June 15, 1979 hearing be
prohibited. On June 14, 1979, the superior court set aside the Securities Commissioner's
cease and desist order on the ground that a hearing was required before the order could
be issued, but the court refused to prohibit the scheduled hearing. Id.



114 INDIANA LAW REVIEW [Vol. 14:91

the Securities Act and that their conduct constituted a takeover
offer as defined in the Takeover Offers Act.'" The order prohibited
the plaintiffs from proceeding with the tender offer and from fur-
ther acquisition of Stokely shares until they were in compliance.'"

The plaintiffs did not prevail in the federal suit. In denying the
requested relief, the City Investing court concluded that: (1) the

Securities Commissioner was not biased or prejudiced against the
plaintiffs and had conducted himself in accordance with Indiana law;

(2) the defendants had neither harassed nor attempted to harass the

plaintiffs; (3) the plaintiffs would not be injured if the equitable

relief demanded was not granted because City Investing's sub-
sidiary had announced that it was discontinuing purchasing Stokely
shares due to the recessionary nature of the economy; (4) although

the court had both personal and subject matter jurisdiction, the

plaintiffs had failed to prove all legal elements of the complaint; (5)

the plaintiffs had failed to prove irreparable injury because the

appeal to the Indiana Court of Appeals from the Securities Commis-
sioner's cease and desist order was an adequate remedy at law; and
(6) the plaintiffs had not been deprived of due process of law.'^^

The court held, in effect, that it did not have to resolve the con-
stitutional challenge to the Takeover Offers Act because the plain-

tiffs, having announced that they were not making a tender offer for
the Stokely shares, lacked standing as an aggrieved offeror.'" It also

held that there was a question of state law regarding whether the
acquisition of shares was a "takeover offer" within the meaning of
the Act. Because resolution of this issue could dispose of the case, it

was unnecessary for the court to decide the constitutionality of the
Act."^

As is often the case, immediately after determining that it did
not have to resolve the plaintiffs' challenge, the court went to the
"merits" and upheld the validity of the Takeover Offers Act. It opin-

ed that the Act did not conflict with the rights of an offeror to make a

'"IND. Code § 23-2-3.1-l(i) (Supp. 1980).
'"476 F. Supp. at 115. On July 6, 1979, plaintiffs filed a notice of appeal of this

order with the Indiana Court of Appeals pursuant to Ind. Code § 23-2-3.1-11 (Supp.
1980).

'"476 F. Supp. at 115.

"'Id.

'"Id. at 116. The court was in effect applying the abstention doctrine of Railroad
Comm'n v. Pullman Co., 312 U.S. 496 (1941). See generally C. Wright. Handbook of
THE Law of Federal Courts § 52, at 218-21 (3d ed. 1976); 17 C. Wright. A. Miller &
E. Cooper, Federal Practice & Procedure § 4241 (1978). The court also concluded
that the injunctive relief being sought by plaintiffs was barred by the federal Anti-
Injunction Act, 28 U.S.C. § 2283 (1976). 476 F. Supp. at 116.



1981] SURVEY-BUSINESS ASSOCIATIONS 115

tender offer under section 14(d) of the Williams Act.'" The court

found that the Act was not an obstacle to the goals of the federal

act and thus was not preempted under the supremacy clause simply

because the Takeover Offers Act's provisions differed from those

chosen by Congress. The court also concluded that the Takeover Of-
fers Act did not impose an impermissible burden on interstate com-

merce; section 28(a) of the Securities and Exchange Act of 1934'*'

purportedly gives states the right to regulate such transactions. The
court, however, only reached conclusions and did not discuss to any

great extent'^" the grounds for invalidating state takeover statutes

raised in Great Western United Corp. v. Kidwell.^^^ Thus, City In-
vesting should not be considered to be the final and definitive state-

ment on the validity of the Indiana Takeover Offers Act.
Furthermore, even if the Takeover Offers Act did not conflict

with the Williams Act when City Investing was decided, it is impor-
tant to note that since then the SEC has adopted tender offer rules
that could well create a fatal conflict for state takeover statutes

under the supremacy clause. '^^ For example, SEC rule 14d-2(b)'^^ re-
quires that a tender offer commence within five business days of its
public announcement. Sections 6 and 8 of the Takeover Offers Act'"
effectively delay the commencement of a tender offer for fifteen
business days after a statement concerning the offer is filed with

the Securities Commissioner and the target company. '^^ To deem the
filing of the tender offer statement with the Commissioner and the
target company to not be a "public announcement" would do
violence to the common understanding of the term, particularly if
the offeror simultaneously communicates with the target company
shareholders. Consequently, the Takeover Offers Act would seem to
conflict with federal law and must fall under the supremacy clause.'^®

''^5 U.S.C. § 78n(d) (1976).

•"M § 78bb(a).
'^"476 F. Supp. at 116.
'='439 F. Supp. 420 (N.D. Tex. 1977), aff'd, 577 F.2d 1256 (5th Cir. 1978), rev'd on

other grounds, sub. nom. Leroy v. Great Western United Corp., 443 U.S. 173 (1979).
See generally Galanti, 1979 Survey, supra note 132, at 161-72; Galanti, 1977 Survey,

supra note 54, at 46-47; Galanti, 1975 Survey, supra note 2, at 52-59.

'^'U.S. Const, art. VI, cl. 2.

"'^7 C.F.R. § 240.14d-2(b) (1980) (effective January 7, 1980). See also 17 C.F.R. §
240.14d-l to e-2 (1980). The SEC takes the position in SEC Release No. 34-16384 (Nov.
29, 1979) that Rule 14d-2(b) will preempt state takeover acts. 44 Fed. Reg. 70326, 70330
(1979).

'^'IND. Code § 23-2-3.1-6, -8 (Supp. 1980).
'''Id. §§ 23-2-3.1-3, -5.

"'U.S. Const, art. VI, cl.2. Of course, this would not include tender offers that are
not subject to the Williams Act, but there are relatively few offers of such a nature.

The Williams Act applies to tender offers for equity securities registered pursuant to



116, INDIANA LAW REVIEW [Vol. 14:91

A conflict like this has been raised in other jurisdictions. In GM
Sub Corp. V. Liggett Group, Inc.,^^'' the court accorded a presump-
tion of validity to rule 14d-2 and concluded it might conflict with the

Delaware takeover act'^^ requirement that an announcement of a
tender offer be made 20 days before the offer becomes effective.
The Delaware Supreme Court concluded that the offeror might not
be able to comply with both the Williams Act and the state statute

and that it was improper for the lower court to restrain the offeror
from complying with the Williams Act.'^' It did, however, remand to
give the target company an opportunity to show that compliance
with SEC rule 14d-2 and the state statute was possible and to attack
the validity of the federal rule.'®"

In Eure v. Grand Metropolitan Ltd.,^^^ a North Carolina court
ruled that the provision of the North Carolina Takeover Act'^^ set-
ting a thirty-day period for the commencement of a tender offer was
unenforceable because it directly conflicted with the five-day period

of rule 14d-2(b). The court held that this conflict made compliance
with both regulations a "physical impossibility."'*^ Although Eure
might not stand for the proposition that state regulation of tender

offers is completely prohibited, if the delay feature of state takeover

acts is unenforceable, then the rest of the regulations are probably

irrelevant.

section 12 of the Securities Exchange Act of 1934, 15 U.S.C. § 78(1) (1976), which in-

cludes corporations with assets exceeding $1,000,000 and 500 shareholders. Id. §
78(l){g){l).

Ind. Code § 23-2-3.1-6 (Supp. 1980) permits a takeover offer to "be made" less than
fifteen business days after the statement is filed with the Securities Commissioner if

he so orders. This provision, however, is subject to id. § 23-2-3.1-8 which prohibits the

purchase of or payment for shares for fifteen business days after the offer is made.
''M15 A.2d 473 (Del. 1980).

'^*Del. Code Ann. tit. 8, § 203 (Supp. 1980).
'^'More accurately the court concluded that a temporary restraining order was not

an abuse of discretion but that interim injunctive relief should not be continued. 415

A.2d at 477. In Wylain, Inc. v. TRE Corp., 412 A.2d 338 (Del. Ch. 1980) the court held
that the Delaware Act was not preempted by the Williams Act, but Wylain was decid-

ed before GM Sub. See also Strode v. Esmark, Inc., [Current] Fed. Sec. L. Rep. (CCH) t
97,538 (Franklin Cir. Ct., (Ky.) May 13, 1980).

""'415 A.2d at 480. Because the jurisdiction granted in section 27 to enforce the

Securities Exchange Act of 1934 is exclusively federal, 15 U.S.C. § 78aa (1976), there

would seem to be some doubt as to whether a state court could pass on the validity of
the SEC rule. See, e.g., American Distilling Co. v. Brown, 295 N.Y. 36, 64 N.E.2d 347
(1945). Cf. Eure v. Grand Metropolitan Ltd., [1979-1980 Transfer Binder] Fed. Sec. L.
Rep. (CCH) 197,383, at 97, 529 (N.C. Super. April 18, 1980) (court declared state statute

preempted by rule 14d-2(b)).
'"[1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) 197,383, at 97,529 (N.C.

Super. April 18, 1980).

"^N.C. Gen. Stat. § 78B-4(a) (Supp. 1977).

"^1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) 197,383, at 97,529.



198 1
]

SUR VEY-BUSINESS ASSOCIA TIONS 117

The court in City Investing, however, might have been justified
in refusing the injunctive relief sought by the plaintiffs. In Telvest,

Inc. V. Bradshaw,^^* the United States Court of Appeals for the

Fourth Circuit held that a district court erred in temporarily enjoin-

ing the enforcement of the Virginia takeover act before deciding the

constitutional challenge on the merits. Although the court of appeals

imagined potential conflicts that could not be reconciled, it concluded

that the trial court had not adequately considered whether the

Virginia act and the Williams Act could be reconciled."'^

The Telvest court did not decide whether the Virginia statute
imposed an impermissible burden on interstate commerce and merely
noted that such a burden would have to be shown by Televest.""*
Even if state statutes can be reconciled with the Williams Act and
rule 14d-2, and conceivably the Indiana Takeover Offers Act can be
reconciled if the Securities Commissioner permits a tender offer to

become effective within five days of a public announcement while
barring any share acquisition for a fifteen-day period, the commerce
clause issue might well be the death knell of state takeover statutes.

The Supreme Court in Great Western did recognize that states can
still regulate securities transactions.'®' However, the offeror in the
GM Sub and Eure cases had to file disclosure documents in
Delaware, New Jersey, and North Carolina and was subject to litiga-
tion in the same three states. It is difficult to see how three states
can have a legitimate interest'** in regulating a tender offer. If they

do, then it is difficult to see how they can avoid conflicting regula-
tions which might discourage the making of tender offers, thereby
placing an undue burden upon interstate commerce.

E. Consideration for Shares

The validity of a corporation's issuance of shares to a majority
shareholder was upheld in Garbe v. Excel Mold, Inc.^^^ In Garbe, two

""618 F.2d 1029 (4th Cir. 1980).

"Yd. at 1035. The Telvest court did not consider whether there was any conflict
between the Virginia statute and rule 14d-2 but noted that the SEC concluded in SEC
Release No. 34-16384 (Nov. 29, 1979). 44 Fed. Reg. 70326. that its regulations conflicted

with state statutes even if the Williams Act itself was not in conflict. 618 F.2d at 1036
n.lO.

"Vd
'"443 U.S. a 182. The Court pointed out that section 28(a) of the Securities Ex-

change Act of 1934, 15 U.S.C. § 78bb(a) (1976), was intended to save state blue sky
laws from exemption. 443 U.S. at 182 n.l3. A state blue sky law might prevent an
issuer from selling securities in that particular state, but none others, whereas a state
takeover act can completly stymie a tender offer in all states.

"'See Pike v. Bruce Church. Inc., 397 U.S. 137 (1970); Huron Portland Cement Co.
v. City of Detroit, 362 U.S. 440 (1960).

"'397 N.E.2d 296 (Ind. Ct. App. 1979).



118 INDIANA LAW REVIEW [Vol. 14:91

minority shareholders challenged the issuance of shares by Excel

Mold in substantial part for the difference between the fair market
value of equipment conveyed to Excel Mold by the majority
shareholder and the allocated value of the equipment in a purchase
agreement whereby the majority shareholder acquired the equip-
ment/'"

The value allocated to the machinery equipment of the business
in the agreement was $244,200, although it was appraised by an in-
dependent third party expert at a value of $395,800. Thus the equip-
ment was worth $151,600 more than the amount specified in the
agreement.^'' The plaintiff shareholders, who were employees of the
firm, were invited to make cash investments in Excel Mold. The ma-
jority shareholder invested $5,000 in cash and assigned the equipment

to Excel Mold as consideration for his shares. He received approx-
imately 80 percent of the issued shares.'"

The minority shareholders sued, alleging that there was no con-
sideration for the majority shareholder's shares other than the

$5,000. The only issue on appeal was whether it was contrary to law
for the majority shareholder to receive shares in exchange for the

difference between the fair market value of equipment conveyed to
Excel Mold and the value as specified in the original purchase agree-
ment.'"

The Garbe court acknowledged that a shareholder of a closely
held corporation stands in a fiduciary relationship to other

shareholders and consequently must deal fairly, honestly, and openly
with the corporation and the other shareholders. ''* It did, however.

""M at 297. The majority shareholder had acquired the business from its former
parent corporation. The majority shareholder, the vice president and general manager

of the subsidiary, had acquired all the assets with borrowed funds. Id.

'''Id.

"'Id. at 298.

'"M The court noted in passing that no gain or loss was recognized for tax pur-
poses on the transfer of the assets to the corporation under section 351 of the Internal

Revenue Code. I.R.C. § 351. The basis of the equipment to the corporation would be

the allocated value rather than the fair market value. Because of the incumbrances,

the shareholder's basis for his shares was zero. Upon selling the stock, however, he

would be taxed on the full benefit of his bargain. 397 N.E.2d 298 n.2.

'"The court cited Motor Dispatch. Inc. v. Buggie, 379 N.E.2d 543 (Ind. Ct. App.

1978) and Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 301

N.E.2d 240 (1973), discussed in Galanti, Business Associations, 1974 Survey of Recent

Developments in Indiana Law, 8 Ind. L. Rev. 24, 42-46 (1974). See generally Conway,

The New York Fiduciary Concept in Incorporated Partnerships and Joint Ventures,
30 FORDHAM L. Rev. 297 (1961); Hornstein, Judicial Tolerance of the Incorporated Part-
nership, 18 L. & CONTEMP. Prob. 435 (1953). See also Cressy v. Shannon Continental
Corp., 378 N.E.2d 941 (Ind. Ct. App. 1978) discussed in Galanti, 1979 Survey, supra

note 132, at 150-55.



1 98 1

1

SURVEY-BUSINESS ASSOCIA TIONS 1 1

9

recognize that the Indiana General Corporation Act controls matters

for which it specifically provides. '^^ In Garbe the relevant provision

was section 23-l-2-6(e) which provides in pertinent part, with respect

to the consideration for corporate shares, that

[t]he consideration for the issuance of shares of any corpora-

tion may be paid, in whole or in part, in money, in other pro-
perty, tangible or intangible .... In the absence of actual
fraud in the transaction, the judgment of the board of direc-
tors as to the value of such property . . . shall be

conclusive.^''^

The equipment was clearly "property" valued by the board of
directors of Excel Mold at $151,600. Because the record showed that
plaintiffs at least acquiesced in the method of valuing the majority
shareholder's shares, which was outlined to them at a board of direc-
tors meeting,'" a conclusion of "fraud" was not inevitable. Such a
conclusion would be necessary before the negative judgment could
be reversed on appeal.'^* A transaction like the one in Garbe could
be fraudulent if the property is drastically overvalued. The Garbe
transaction, however, could not be labeled fraudulent because the

appraisal establishing the value of the equipment, which was not
questioned at trial, was by a disinterested expert. '^^

F. Liability of Agents

The peril of an agent who commits a tort while acting on behalf
of his principal was clearly demonstrated in Howard Dodge & Sons,
Inc. V. Finn.^^" The court of appeals in Finn reversed a judgment in
favor of Richard Dodge, the individual defendant, who was
secretary-treasurer of Dodge & Sons and remanded with instruc-
tions to enter judgment in favor of the plaintiff Finn. The action was
for converting heating and air conditioning equipment furnished by
Dodge & Sons as a subcontractor of Millikan. Dodge & Sons was
building a new home for Finn and had delivered the equipment to the

"^Accord, Somers v. AAA Temporary Servs., Inc., 5 111. App. 3d 931, 284 N.E.2d
462 (1972).

'"Ind. Code § 23-l-2-6(e) (1976) (emphasis added). For a discussion of what con-
sideration is proper for the issuance of shares see generally H. Henn, Handbook of
THE Law of Corporations §§ 167-168 (2d ed. 1970) [hereinafter cited as Henn]; 1 G.
HoRNSTEiN, Corporation Law & Practice § 247 (1959) [hereinafter cited as
Hornstein].

'"397 N.E.2d at 298-99.

"*See Umbreit v. Chester B. Stem, Inc., 373 N.E.2d 1116 (Ind. Ct. App. 1978). See
generally Bagni. Giddings & Stroud, supra note 8, § 107.

'"397 N.E.2d at 299.

""391 N.E.2d 638 (Ind. Ct. App. 1979).



120 INDIANA LAW REVIEW [Vol. 14:91

construction site and had billed Millikan for the materials and labor

involved. Millikan in turn billed Finn, who paid Millikan in full for
the specific items furnished by Dodge & Sons/*'

Eventually Finn terminated the construction contract with

Millikan because of various defaults. Millikan then notified Dodge &
Sons of the termination. Subsequently, Richard Dodge and some
employees removed some of the equipment from the job site.'*^ Finn
filed an action for replevin after demanding a return of the equip-

ment and a supplemental complaint for conversion when Dodge &
Sons was unable to comply. The trial court entered judgment for
Finn against Dodge & Sons but refused to enter judgment against
Richard Dodge. Both Dodge & Sons and Finn appealed from this
judgment.

The court of appeals had no difficulty affirming the judgment
against Dodge & Sons.'*^ The court concluded that the evidence
established that Dodge & Sons had appropriated the personal pro-
perty of Finn to its own use and benefit "in exclusion and defiance
of the owner's rights and under an inconsistent claim of title" and

was therefore guilty of tortious conversion.'*^ Finn asserted his im-
mediate unqualified right to possession and superior claim to title on

two theories: that the equipment had become fixtures to his real
property, and that under the Indiana Uniform Commercial Code'*^ he
owned the heating and air conditioning equipment.

The court did not decide the first contention but concluded that
title to the equipment had passed to Finn, despite any reservation of

a security interest, when Dodge & Sons completed the physical
delivery.'** Thus, title passed to Millikan when the equipment was
delivered to the construction site and in turn passed to Finn when
he paid Millikan's bills specifically listing the equipment.'*' Conse-

quently, the judgment against Dodge & Sons was proper because it
converted Finn's property when it reasserted dominion over the
equipment.

The court, however, reversed as to Richard Dodge and reaffirmed
the long standing doctrine that an agent is personally liable for a tor-

"7d. at 640.

'''Id.

"'The court noted that if there was sufficient evidence to support the trial court's

judgment on any theory the judgment would not be disturbed. Id. See Devine v. Grace

Constr. & Supply Co., 243 Ind. 98, 181 N.E.2d 862 (1962); Dubreuil v. Pinnick, 383
N.E.2d 420 (Ind. Ct. App. 1978); Utica Mut. Ins. Co. v. Ueding, 370 N.E.2d 373 (Ind. Ct.

App. 1977); Ertle v. Radio Corp. of America, 354 N.E.2d 783 (Ind. Ct. App. 1976).
'"391 N.E.2d at 640-41. See Yoder Feed Serv. v. Allied Pullets, Inc., 359 N.E.2d

602 (Ind. Ct. App. 1977); Sikora v. Barney, 138 Ind. App. 686, 207 N.E.2d 846 (1965).

'«=lND. Code § 26-1-1-101 to -10-106 (1976).
''«391 N.E.2d at 641. See Ind. Code § 26-1-2-401 (1976).
«'391 N.E.2d at 641.



1981] SURVEY-BUSINESS ASSOCIATIONS 121

tious act performed on behalf of his principal. All relevant Indiana

authority on this point is from the nineteenth century.'** The court

relied on the Indiana Supreme Court decision in Berghoff v.
McDonald}^^ holding an agent personally liable for wrongfully detain-

ing the goods of another for his principal.

Finn and Berghoff are in accord with the general rule as to an

agent's personal liability. As Professor Seavey points out: "An agent
who innocently deals with the possession of chattels of another on
account of the principal may be liable to one who is entitled to
them."''" Seavey also observes that many of the cases where an agent
is held liable for converting property of another "involved the

repossession of property to which the principal believes he is

entitled."'^' This is exactly the Finn situation.

The authority cited by Seavey, for the most part, is also from
the nineteenth century,''^ but the relatively recent New Hampshire
Supreme Court decision in New England Box Co. v. GilberV^^ also
supports this proposition. In Gilbert the court held the officers of a

corporation who disposed of chattels, which the plaintiff had purchas-
ed from the corporation, personally liable as agents.

Whether Richard Dodge was acting in good faith in repossessing
the equipment is irrevelant. As Dean Sell points out, an agent's
liability for conversion does not depend on bad faith, and even if he

mistakenly believes the chattels are his principal's "it is immaterial

how reasonable that belief may be."'*" Sell does point out that the
agent's acts must seriously interfere with the rights of the third
party and that the agent's mere possession of the goods is insuffi-
cient to constitute a conversion.'*^ It is apparent in Finn that Dodge
was actively involved in the repossession of the heating and air con-
ditioning equipment.

It is not clear if reversing the judgment in favor of Richard

Dodge was of great economic significance because of Dodge & Sons'
liability. It might be significant, however, if there was some ques-
tion as to the financial health of the corporation. Of course, if Finn

"'Berghoff v. McDonald, 87 Ind. 549 (1882); McNaughton v. City of Elkhart, 85
Ind. 384 (1882); Blue v. Briggs, 12 Ind. App. 105, 39 N.E. 885 (1895); Block v. Haseltine,
3 Ind. App. 491, 29 N.E. 937 (1892).

''"87 Ind. 549 (1882).

""Seavey, supra note 116, § 131.

"'See Haas & Howell v. Godby, 33 Ga. App. 218, 125 S.E. 897 (1924); Warder-
Bushnell & Glessner Co. v. Harris, 81 Iowa 153, 46 N.W. 859 (1890); McPartland v.
Read, 93 Mass. (11 Allen) 231 (1865).

"nOO N.H. 257, 123 A.2d 833 (1956). See generally Henn, supra note 164, § 230; 1
HORNSTEIN, supra note 176, § 518.

"*See Sell, supra note 117, § 198, at 178.



122 INDIANA LAW REVIEW [Vol. 14:91

enforced the judgment against Dodge, Dodge would not be entitled
to contribution from the corporation because of the general rule, as
unwise as it may be, of prohibiting contribution among joint tort-
feasors.'^* In addition, an agent, forced to pay damages because of
his torts, cannot recover these damages from his principal. '^^

G. Corporate Officer's Authority

The court in Morton v. E-Z Rake, Inc^^^ affirmed a judgment

that the vice president and secretary of E-Z Rake had rightfully
discharged plaintiffs for cause but remanded with instructions that
one of the plaintiffs was entitled to ten percent of defendant's net

profits pursuant to his employment agreement.''® The plaintiffs
alleged that the officer was without authority to discharge them

because discharging employees was a nondelegable duty of E-Z

Rake's board of directors. The basis of this argument was the "cor-

porate norm" as reflected in E-Z Rake's bylaws which vested the
management and control of the business in the board of directors.^""
The plaintiffs also sought support for their allegations from the pro-

vision of the Indiana General Corporation Act specifying the

authority of officers and agents of a corporation.^*"

The Morton court, however, recognized that although a board of
directors is charged with control and management of a corporation's
business, it may authorize officers to act on behalf of the corporation
by resolution, course of dealing, acquiescence, or ratification.^"^ The
court did not clearly resolve whether the vice president had the

""See generally Restatement (Second) of Torts § 886A(3) (1979); W. Prosser.
Handbook of the Law of Torts § 50 (4th ed. 1971).

"'Duncan Hill, L.R. 8 Ex. 242 (1873). See generally Reuschlein & Gregory, supra
note 77, § 89(B), at 147; Seavey. supra note 116, § 168(M). In fact, the principal may
have a cause of action for indemnity against the agent. W. Prosser. supra note 196, §
51.

"«397 N.E.2d 609 (Ind. Ct. App. 1979).

"Vd. at 610, 614.

'""M at 612. Prior to 1977, section 23-l-2-ll(a) of the Indiana General Corporation

Act specifically provided: "The business of every corporation shall be managed by a
board of directors." Ind. Code § 23-l-2-ll(a) (1976). In 1977 the relevant language was
amended to read: "All corporate powers shall be exercised by or under the authority
of, and the business and affairs of a corporation shall be managed under the direction
of, a board of directors except as may be otherwise provided in this article or the ar-
ticles of incorporation." Id. § 23-l-2-ll(a)(l) (Supp. 1980). This amendment, which was
patterned on the Model Business Corporation Act, 1 ABA-ALI Model Bus. Corp. Act
Ann. § 35 (2d ed. 1971), is discussed in Galanti, 1977 Survey, supra note 54, at 47-50.

'"'Ind. Code § 23-1-2-13 (1976).
^"^397 N.E.2d at 617. See Crowe v. Gary State Bank, 123 F.2d 513, 516 (7th Cir.

1941). See generally Henn. supra note 176, §§ 223-227; 1 HORNSTEIN, supra note 176, §
513.



1981] SURVEY-BUSINESS ASSOCIATIONS 123

authority to fire the plaintiffs because the directors had ratified the

vice president's actions. They did so indirectly by confirming at a
board meeting the two individuals who had been appointed to suc-
ceed the plaintiffs. The plaintiffs were given the opportunity to at-
tend this meeting at the company's expense.^"^

One of the plaintiffs was entitled to a share of E-Z Rake's pro-
fits. If E-Z Rake intended the ten percent profit increment as just a
bonus to which the plaintiff was not entitled as a matter of right,
then the agreement was inartfully drawn.^°* Any construction of the
agreement would be favorable to the plaintiff because the agree-
ment was prepared by the defendant's attorney.^"^ The court
recognized that the incremental payment loosely could be termed a
"bonus or incentive plan," but it was satisfied that the payment was
as much a part of the plaintiff's regular compensation as his fixed
monthly salary. Even if the employee was fired for cause during the
fiscal year, there were no grounds for reforming the agreement to
provide for denying the increment because the agreement did not
provide for, nor anticipate, the termination of employment.^"^ As the
court noted, "Had E-Z Rake intended to limit the profit-sharing por-
tion of Paligraf's compensation in the manner it now presents, the
necessary provision could have easily been placed in the contract."^"

The other plaintiff did not fare as well because he was not
wrongfully discharged. He did not have an employment contract;
consequently, his employment was terminable at will. He claimed,
however, that he was entitled to vacation and severance pay
because of one instance where a salesman upon discharge had
received a sum of money which the plaintiff characterized as
"severance pay." E-Z Rake presented evidence that the payment
was for commissions due on sales. Although the plaintiff had six
weeks unused vacation time, he did not present any evidence that

'"'397 N.E.2d at 612-13. See State ex rel. Guaranty Bldg. & Loan Co. v. Wiley, 100
Ind. App. 438, 196 N.E. 153 (1935). The court refused to disturb the conclusion that the

plaintiffs were fired for cause because evidence showed they were discharged for

refusing to obey a direct order given by E-Z Rake's vice president and secretary. 397

N.E.2d at 613.

™'See Walling v. Plymouth Mfg. Corp., 139 F.2d 178 (7th Cir. 1943), cert, denied,

322 U.S. 741 (1944). The court appears to have confused the plaintiffs in discussing this

issue, or at least used the name of the wrong plaintiff. 397 N.E.2d at 613.
""'See Colonial Mortgage Co. v. Windmiller, 376 N.E.2d 529, 531-32 (Ind. Ct. App.

1978); Mandle v. Owens, 164 Ind. App. 607, 613, 330 N.E.2d 362, 366 (1975).

""See Flynn v. Koppers Co.. 567 F.2d 741 (7th Cir. 1977).
^"397 N.E.2d at 614. The plaintiff was appealing from a negative judgment, but

reversal was proper because the trial court's construction and interpretation of the

employment contract was clearly contrary to the only correct interpretation that could

be drawn from the evidence. Id. See generally Bagni, Giddings & Strovd, supra note 8,
§ 102.



124 INDIANA LAW REVIEW [Vol. 14:91

vacation time could be accrued and payment made upon termination
of employment.^"* The evidence on these issues was in conflict;
therefore, the Morton court rightfully refused to disturb the trial
court's judgment.

H. Partnership Status

An intriguing argument against partnership liability was raised
and rejected in Endsley v. Game-Show Placements, Ltd^"^ Endsley
affirmed a judgment against the defendant Endsley for a partner-

ship debt to Game-Show. Endsley argued that section 23-4-1-7(4) of
the Indiana Uniform Partnership Act which provides "receipt by a

person of a share of the profits of a business is prima facie evidence

that he is a partner in the business"^" requires the actual receipt of

money as profits before the inference of partnership can arise. The
court rejected this narrow construction of the statute by noting that

the language refers to the receipt of a "share" of the profits and not

to the receipt of the profits.^"

Although the word "share" does not by itself determine
legislative intent, the court is clearly correct. The key in determin-
ing the existence of a partnership is the intention, deducible from

the acts of the parties, to do something which in law constitutes a
partnership.^^^ Thus, the essential element of section 23-4-1-7(4)^" of
the Partnership Act is the parties' intent regarding the division of
profits that hopefully will result from the endeavor. To construe this
section otherwise would produce the anomolous result that a statute

imposing liability on partners would not apply to business ventures
that fail at the outset.^'^

Furthermore, section 23-4-1-7(4) only establishes that receiving a
share of the profits is prima facie evidence that a person is a part-

^°«397 N.E.2d at 614.

^"MOl N.E.2d 768 (Ind. Ct. App. 1980).

""IND. Code § 23-4-1-7(4) (1976). This provision is identical to the Uniform Part
NERSHiP Act (U.L.A.) § 7. The Indiana statute defines a partnership as "an association
of two or more persons to carry on as co-owners a business for profit." Ind. Code §
23-4-1-6 (1976). See generally Crane & Bromberg, supra note 77. §§ 12-14.

^'401 N.E.2d at 770.

''See Breinig v. Sparrow, 39 Ind. App. 455, 80 N.E. 37 (1907); Breinig v. Sparrow,

39 Ind. App. 702, 80 N.E. 40 (1907).

^'^IND. Code § 23-4-1-7(4) (1976).
^'*401 N.E.2d at 770. Endsley also argued that Game-Show must prove that he

agreed to share losses as well as profits. Id. This argument was summarily dismissed.
The general rule, in the absence of agreement to the contrary, is that partners share
losses in the same proportion as they share profits. See Kopka v. Yockey, 76 Ind. App.
218, 131 N.E. 828 (1921). See Trifunovic v. Marich, 343 N.E.2d 825 (Ind. Ct. App. 1976).

See generally Crane & Bromberg, supra note 77, § 14e.



1981] SURVEY-BUSINESS ASSOCIATIONS 125

ner; it specifically provides that the inference of partnership "shall

[not] be drawn if such profits were received"^'^ for certain
enumerated purposes. The court concluded that the record establish-

ed Endsley was to receive a share of the profits, and that he had not
rebutted the inference of partnership by showing his share was to be
received as one of the excepted types of payment.^'* Although End-

sley was not actively involved in the day-to-day operations of the
enterprise, as was the case in Puzich v. Pappas,^" the evidence
showed that he in fact had acted on behalf of the partnership.^'^ The
court acknowledged that there was conflicting testimony but refus-
ed to reverse the trial court because the evidence did not lead solely

to the conclusion that Endsley was not a partner.^'^
Finally, the court rejected Endsley's contention that the trial

court had used a present business relationship between Endsley and
his co-entrepreneur to find a partnership existed at the time of the

Game-Show contract. Using a present relationship is not a proper
ground for determining that a partnership existed previously. The
trial court in Endsley, however, could not have done so because the

present relationship was corporate.^^"

^'^Ind. Code § 23-4-1-7(4) (1976). The presumption is not to be drawn where profits
are received in payment:

(a) as a debt by instalment or otherwise,

(b) as wages of an employee or rent to a landlord,

(c) as an annuity to a widow or representative of a deceased partner,
(d) as interest on a loan though the amount of payment vary with the

profits of the business,

(e) as the consideration for the sale of good will of a business or other

property by instalments or otherwise.

Id. See Huteson v. United States, 67 F.2d 731 (7th Cir. 1933), cert, denied, 292 U.S. 627

(1934). See generally Crane & Bromberg, supra note 77, § 14A; Reuschlein &
Gregory, supra note 77, § 178.

^'MOl N.E.2d at 770.
'"161 Ind. App. 191, 314 N.E.2d 795 (1974), discussed in Galanti, 1975 Survey,

supra note 2, at 44-46.

"*401 N.E.2d at 771. Apparently he borrowed capital for the enterprise and in the

loan agreement stated that the business was a partnership and that the interest on the

loan "will be computed on the basis of partnership return prepared and filed on behalf

of [the partnership]." Id.

Game-Show did not argue that Endsley was a partner by estoppel under Ind.
Code § 23-4-1-16 (1976). Instead, Game-Show used the loan agreement as an admission
in documentary evidence to show a pattern of partnership activities. 401 N.E.2d at 771

n.3. Endsley apparently had admitted in an action upon that note that he was involved

in the operation of the enterprise. Id. at 771.

'"401 N.E.2d at 771-72.

"°/d. at 772. The court also concluded that damages were properly determined and
that Endsley had not sufficiently established that the damages had been mitigated. Id.
at 773. See Jones v. Abriani, 169 Ind. App. 556, 350 N.E.2d 635 (1976); Hirsch v. Mer-

chants Nat'l Bank, 166 Ind. App. 497, 336 N.E.2d 833 (1975).



126 INDIANA LAW REVIEW (Vol. 14:91

/. Special Charter Corporation

A decision that warrants at least a passing reference is Union
Insurance Co. v. State ex rel. Indiana Department of Insurance. '^'^^ In
Union the court reaffirmed the doctrine that although the

legislature can regulate the conduct and relations of special charter

corporations,^^^ the prohibition against such corporations in the 1851

Indiana Constitution^^^ invalidated legislative attempts to give

Union's predecessors perpetual existence by amending the original
charter.^^^ The court found that increasing Union's duration from fifty
years to perpetuity was tantamount to creating a new corporation,
and therefore was repugnant to the constitution.^^^

The court also rejected Union's arguments that its contract with
the state had been "impaired." The court stated that when Union's
license, in other words the fifty year duration, expired, so did its
special privilege.^^^ Equally unsuccessful was the argument that
previous litigation on the issue of Union's legitimate existence acted

as res judicata to bar the present challenge.^^' Consequently, Union

was no longer a valid special charter insurance company and was
therefore subject to regulation by the Indiana Department of In-
surance.^^*

J. Statutory Developments

The most significant statutory enactment during the survey
period was section 2 of Public Law Number 160^^^ which amended
section 23-1-2-18 of the Indiana General Corporation Act.^^" Prior to

the amendment, section 23-1-2-18 permitted only a corporation with
500 or more shareholders to lend funds to officers or directors for
purposes of purchasing its shares or to sell shares to officers or

directors on credit. The amendment eliminated the size requirement.

^^'401 N.E.2d 1372 (Ind. Ct. App. 1980).

'^'City of Indianapolis v. Navin, 151 Ind. 139, 147-48, 47 N.E. 525, 527 (1898).

'"Ind. Const, art. XI, § 13.

"Vn re Bank of Commerce. 153 Ind. 460, 53 N.E. 950, 55 N.E. 224 (1899), appeal

dismissed, 189 U.S. 505 (1903).
'^'401 N.E.2d at 1377.

''"In re Bank of Commerce, 153 Ind. 460. 53 N.E. 950, 55 N.E. 224 (1899), appeal

dismissed, 189 U.S. 505 (1903).

'"401 N.E.2d at 1377-80.

''«IND. Code § 27-1-3-19 (1976).
"'Act of Sept. 1, 1980, Pub. L. No. 160. § 2, 1980 Ind. Acts 1494. Section 1 of Pub.

L. No. 160 amended Ind. Code § 23-1-2-4 (1976) to require that the corporate name of
all Indiana professional corporations include "Corporation," "Incorporated," "Profes-

sional Services Corporation," "Professional Corporation," or an abbreviation thereof.

"°Ind. Code § 23-1-2-18 (Supp. 1980).



1981] SURVEY-BUSINESS ASSOCIATIONS 127

The section now permits such loans or credit sales to officers or
directors of any size Indiana corporation.

To a degree, the amended provision reflects the common trend
toward lessening statutory restraints on activities of corporate

management to the possible detriment of shareholders.^^' It does not,
however, go nearly as far in this direction as section 47 of the Model

Business Corporation Act^^^ which permits loans or credit assistance

to any employee, including directors, if the "board of directors

decides that such loan or assistance may benefit the corporation."^^^

The Model Act almost gives the board carte blanche in lending cor-
porate money to officers or directors.

Presumably the legislature intended to assist officers and direc-

tors of small closely held corporations by eliminating the numerical

requirement. Assuming this was the intent, it is not certain if it will
be effective. Such loans or credit sales are permitted only where the
unpaid balance of loans and credit sales "made pursuant to this sec-
tion does not and will not thereby exceed five per cent (5%) of the

then current market value of [the corporation's] outstanding shares,

or if such shares have no regularly quoted market value, five per

cent (5%) of the net assets of the corporation."^^" The proviso is
clearly worded in the aggregate; consequently, unless the corpora-
tion is fairly substantial, the amount of money it can lend or the
number of shares it can sell on credit to any one person would be
relatively small.

Section 23-1-2-18 also requires that the loan or sale be made pur-
suant to a plan approved by a majority of the shareholders of the

corporation and a majority of the shareholders of the class of shares

affected.^^^ Of course, if a closely held corporation wishes to make
such loans or credit sales, the chances of any objection to
shareholder approval are probably minimal. The importance of com-
pliance with this requirement, however, cannot be over emphasized.

Loans or credit sales under section 23-1-2-18 are excepted from the

proscription of section 23-l-10-2(e) of the General Corporation Act.^^®

Section 23-l-10-2(e) makes directors who vote for or assent to loans
to officers or directors jointly and severally liable to the corporation

^"The restriction forbidding loans to corporate officers and directors is to protect

the corporation, its shareholders and creditors. Stadium Realty Corp. v. Dill, 233 Ind.

378, 119 N.E.2d 893 (1954). See generally Eisenberg, The Model Business Corporation
Act and the Model Business Corporation Act Annotated, 29 Bus. Law. 1407 (1974).

""1 ABA-ALI Model Bus. Corp. Act Ann. § 47 (2d ed. 1971).
"Vd. § 47 at 950.

"*lND. Code § 23-1-2-18 (Supp. 1980).
^^^Id. The provision bars the corporation from delivering the share certificates un-

til the loan is repaid or the last installment payment on the credit sale is made. Id.
'"Id. § 23-M0-2(e).



128 INDIANA LAW REVIEW [Vol. 14:91

for the amount of the loan until it is repaid. Consequently, a loan or
sale which does not comply with section 23-1-2-18 could result in per-

sonal liability on the part of the directors who voted for it.^^^
The only other noteworthy legislation in the business area was

Public Law Number 186^^* which amended sections 7, 17, and 23 of
the Indiana Uniform Disposition of Unclaimed Property Act.^^' The
amendments provide that a business association^*" issuing securities
is deemed to be the holder of those securities for purposes of the
Unclaimed Property Act when they have been abandoned.^*^ The
amendments also relieve the issuer of liability when such securities
are delivered to the Attorney General's Unclaimed Property Divi-
sion of the Indiana Attorney General's office pursuant to the Act.^"

In addition, the amendments change the manner in which abandoned
securities may be disposed of by the attorney general and require
him to dispose of such abandoned securities within one year after
the date on which they are presumed to be abandoned.^"'

'''See Stadium Realty Corp. v. Dill, 233 Ind. 378, 119 N.E.2d 893 (1954). Good faith,

and even ignorance of the law, on the part of the directors would not be a defense.

Maclary v. Pleasant Hills, Inc., 35 Del. Ch. 39, 109 A.2d 830 (1954).

^'«Act of Feb. 27, 1980, Pub. L. No. 186, §§ 1-3, 1980 Ind. Acts 1602.

'^'IND. Code §§ 32-9-1-7, -17, -23 (Supp. 1980). The Indiana Uniform Disposition of
Unclaimed Property Act, id. §§ 32-9-1-1 to -45 (1976 & Supp. 1980), is perhaps a
misnomer. It is a "substantial adoption" of the major provisions of the Revised 1966

Uniform Disposition of Unclaimed Property Act, but "it contains numerous variations,

omissions and additional matter." 8 U.L.A. 76 (Master Ed. 1972). The changes effected

by Pub. L. No. 186 are not reflected in the Uniform Act.

^"A business association "means any corporation, including both for profit and

not-for-profit corporations, joint stock company, business trust, partnership, eleemosy-

nary organization or cooperative association and every other association or organiza-

tion of two (2) or more individuals." Ind. Code § 32-9-l-3(c) (1976).
'"Id. § 32-9-1-7(3) (Supp. 1980).

'*'Id. § 32-9-1-17.

'*'Id. § 32-9-1-23.