Indiana Law Review


II. Business Associations

Paul J. Galanti*

A. Partnership Liability for Punitive Damages

Two related cases decided during the survey period, Husted v.
McCloud^ and Husted v. Gwin,^ should be of special interest to attorneys

who represent partnerships and, even more so, to those who practice
in partnerships. Both cases involved the propriety of awarding damages

against a partnership and the estate of a deceased partner for the wrongful

acts of the surviving partner,^ an attorney guilty of converting client

funds to his own use."^
The court of appeals' decision in McCloud,^ affirming the award

of compensatory and punitive damages against the defendant attorney

and the partnership, has been the subject of some criticism.^ Admittedly

it was a close case, with the line between liability and nonliability a

difficult one to draw. It is submitted, however, that the court of appeals'

decision in McCloud properly construed the Indiana Uniform Partnership
Act^ and properly applied general principles of agency law.

There were three issues presented to the Indiana Supreme Court in

McCloud. First, whether it was proper to award punitive damages against

an individual defendant attorney for his admittedly criminal acts;^ second,

whether it was proper to award punitive damages against his partnership;

and third, whether that partnership should be held liable for compensatory

damages.^

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

'450 N.E.2d 491 (Ind. 1983) (vacating 436 N.E.2d 341 (Ind. Ct. App. 1982)).

H46 N.E.2d 1361 (Ind. Ct. App. 1983).
^It is not absolutely clear if the award in Gwin represented compensatory or punitive

damages. However, in comparing the amount of the avv'ard, $80,000, to the amount

wrongfully converted by the attorney, $59,295.56, it appears that the award was primarily

compensatory. Id. at 1362. If the award did represent punitive damages, it would be in

error in light of the subsequently decided McCloud case. See 450 N.E.2d 491 (Ind. 1983).
See also infra notes 5-48 and accompanying text.

•The action in McCloud was brought by an executor alleging the conversion of
estate funds. 450 N.E.2d at 492. The funds converted in Gwin were the balance of proceeds

remaining from the sale of a farm in execution of a judgment. 446 N.E.2d at 1362.

H36 N.E.2d 341 (Ind. Ct. App. 1982).
^Jackson, Professional Responsibility, 1982 Survey of Recent Developments in Indiana

Law, 16 Ind. L. Rev. 265, 279-82 (1982).

Tnd. Code §§ 23-4-1-1 to -43 (1982).
**The individual defendant was convicted and imprisoned for his misconduct in

handling clients' funds pursuant to a plea bargain. 450 N.E.2d at 493.

'Id. at 492. See also 436 N.E.2d at 344.

57



58 INDIANA LAW REVIEW [Vol. 18:57

The first issue involved the apphcation of the doctrine of Taber v.

Hutson.^^ The Taber doctrine precludes punitive damages against a de-
fendant who is, or may be, subject to criminal prosecution for the same
act. Recognizing that "the awarding of punitive damages in Indiana is

discretionary,"" the court of appeals in McCloud "resolved" the Taber
issue by declining to rule that the award of punitive damages against

the defendant was an abuse of the trial court's discretion.'^

The supreme court did not discuss the Taber issue to any extent.

Rather, it merely recited the details of the written plea agreement, and

noted that in sentencing Husted, the McCloud matter had apparently
been considered by the trial court. '^ The supreme court found punitive

damages inappropriate because "[t]he public interest in punishing Husted

and in deterring him from such misconduct was fully satisfied by the

sentence [he] received.""^ Therefore, the court held punitive dam.ages

were inappropriate. The court manifested its unwillingness to reconsider

the Taber doctrine by simply citing Taber without discussing the wisdom

of its holding.'^

It is possible that the court was exhibiting its reluctance to award

punitive damages in a civil suit.'^ More convincing, however, is the
possibility that the reference to "public interest" reflects the court's

concern that tort defendants not be overpunished. Unlike many cases
involving the Taber issue, Husted was in fact imprisoned. Arguably then,

the court considered the quantum, rather than the number, of punish-

ments, expressing concern that tort defendants not be punished to excess,

particularly where they have been sentenced to prison.'^

'°5 Ind. 322 (1854).

"436 N.E.2d at 346 (citation omitted).

'-Id. Instead, the court of appeals relied on Smith v. Mills, 385 N.E.2d 1205 (Ind.

Ct. App. 1979). Smith held that punitive damages were allowed where the defendant was

not subject to criminal charges for that act. The defendant in Smith, similar to Husted,

had entered a plea bargaining agreement with the prosecutor, which prevented the State

from punishing Smith for the alleged act in question. Id. at 1207. Further, the court of

appeals in McCloud declined to require a finding that an award of punitive damages
would serve the public interest, and rejected Husted's contention that McCloud was estopped

from recovering such damages. 436 N.E.2d at 345-46.

"450 N.E.2d at 493.

''Id.

'Tor a recent discussion of the Taber rule, see Note, Double Jeopardy and the Rule

Against Punitive Damages of Taber v. Hutson, 13 Ind. L. Rev. 999 (1980).
'^See generally Note, The Imposition of Punishment by Civil Courts: A Reappraisal

of Punitive Damages, 41 N.Y.U.L. Rev. 1158 (1966).

'^Such an approach has been recommended as striking "the most equitable balance

between the individual's interest in protection against multiple punishment and society's

interest in regulating undesirable conduct." Note, supra note 15, at 1020,

The Taber issue was mooted to a substantial degree by legislation adopted during the

1984 session of the Indiana General Assembly. Ind. Code § 34-4-30-2 (Supp. 1984). This
section provides that "[i]t is not a defense to an action for punitive damages that the



1985] SURVEY—BUSINESS ASSOCIATIONS 59

The second issue resolved by the McCloud court was the propriety
of awarding punitive damages against the partnership. The court could

have easily disposed of this issue by ruling that because Husted was

not liable for punitive damages, the partnership itself could not be liable

under section 13 of the Indiana Uniform Partnership Act (Act).'^ This

section of the Act binds a partnership for the wrongful acts or omissions

of a partner within the ordinary course of business of the partnership.

Yet the court did not take this route. Rather, it held that Husted's

receipt of the funds to settle the McCloud estate was within the course
of the law firm's business.''^ Thus, pursuant to section 14 of the Act,^"

the firm was responsible to make good the loss suffered by McCloud,
thus compelling the payment of compensatory damages. 2' The court did

conclude, however, that the conversion of funds which would (or could

but for Taber) justify punitive damages was outside of the ordinary

course of the partnership's business; thus, no hability could attach to

the partnership for punitive damages. ^^

It is superficially appeahng to relieve an innocent partner of hability

from punitive damages for another partner's wrongdoing.'^ The position

defendant is subject to criminal prosecution for the act or omission that gave rise to the

civil action." Id. However, a plaintiff cannot recover both punitive damages and treble

damages for damages to property pursuant to the section of that chapter. Id. § 34-4-30-1.

Section 2 does not contain any restrictive language, and thus it does not appear to be

limited to punitive damage suits for offenses against property, even though section 1 does

relate solely to such offenses. Furthermore, a showing of clear and convincing evidence

is now required to support punitive damages in any civil action. Ind. Code §§ 34-4-34-1
to -2 (Supp. 1984).

'**Ind. Code § 23-4-1-13 (1982) (This section binds the partnership to a partner's

wrongful act and holds the partnership liable to the same extent as the partner committing

the wrongful acts.). See generally 2 Z. Cavitch, Business Organizations § 24.02 (1984);

J. Crane & A. Bromberg, Law of Partnership § 54 (1968) [hereinafter cited as Crane
& Bromberg]; H. Reuschlein & W. Gregory, Agency & Partnership § 203 (1979)
[hereinafter cited as Reuschlein & Gregory].

'M50 N.E.2d at 494.

-"Ind. Code § 23-4-1-14 (1982) (binding a partnership for a partner's breach of
trust).

-'Thus, the McCord court rather summarily, but correctly, resolved the third issue
by holding the partnership liable for the funds converted by Husted. 450 N.E.2d at 494.

"M at 494-95.
"A court may be reluctant to impose penal liability on partners for acts not expressly

authorized by them, see Blau v. Lehman, 368 U.S. 403 (1962), but there is authority for

imposing criminal and penal sanctions on a partnership and innocent copartners for the

wrongful acts of a partner. See, e.g.. Ex parte Casperson, 69 Cal. App. 2d 496, 159
P.2d 88 (1945); State v. O'Kelley, 258 Mo. 345, 167 S.W. 980 (1914). However, some
courts require a showing of guilty knowledge on the part of partners before the conviction

of a partnership for a criminal act can be used to punish the individual partners. See

United States v. A. & P. Trucking Co., 358 U.S. 121 (1958). See also United States v.
Ward, 168 F.2d 226 (3rd Cir. 1948); United States v. Quinn, 141 F. Supp. 622 (S.D.N.Y.

1956).



60 INDIANA LAW REVIEW [Vol. 18:57

taken by the McCloud court, however, cuts against one of the major
premises underlying vicarious habihty and agency law principles: that

the principal who is in a position to exercise some degree of control
over an agent^^ can be liable to a third party if that agent commits a

wrong while acting within the scope of his authority." The key factor

in determining the liability of a principal is the scope of the agent's

authority; for a partnership, the corollary is the scope of the partnership's

business. It goes without saying that intentional torts are more likely

to be outside of an agent's authority, or outside the scope of a part-

nership's business, than are negligent torts. ^^ However, this does not

mean that intentional torts, including those that might result in punitive
damages, can never be within the ordinary course of a partnership's

business.

The line between what is within and what is without the ordinary

course of business is not an easy one to draw. The primary factor

appears to be the nexus between the questioned act and the purpose of

the partnership.'^ Thus, it might be said that an attorney driving his

own car from the office to the court is not involved in partnership
business since the manner in which a partner gets about is his own
affair. ^^ The attorney in court, however, or the attorney handling an

estate which the partnership was retained to probate, is engaged in

partnership business. Therefore, the partnership should be liable for the

misfeasance and malfeasance of the partner if a nexus exists between

the wrongful act and the matter for which the firm was retained. If

Husted had intentionally struck McCloud with his car out of a fit of
pique, the firm should not be liable for punitive damages. But where,

as here, funds belonging to a chent are given to an attorney in connection

with a matter which the firm is handling, and then later embezzled, the

firm should be subject to punitive damages, depending of course on the

^Under the Indiana Uniform Partnership Act, partners are agents of the partnership

with regard to partnership business, Ind. Code § 23-4-1-9(1) (1982). See also Crane &
Bromberg, supra note 18, § 49.

-'Restatement (Second) of Agency § 219 (1958). The "agent" in this context is
generally that species of agents known as "servants." Id. However, a principal may be
liable for the torts of nonservant agents, particularly when the element of deceit is involved.
Id. §§ 256-61. See W. Prosser & W. Keeton, Handbook of the Law^ of Torts § 70,
at 508 (5th ed. 1984).

^^Restatement (Second) of Agency § 235 (1958). It is settled that in certain cases,
particularly those involving servants in a managerial capacity, a principal can be subjected

to punitive damages. Id. § 217C. The nature of the principal-agent relationship in a
partnership would fit within this rule because partners are in effect principals and agents

at the same time. Ind. Code §§ 23-4-1-9,-18 (1982). See Fitzgerald v. Edelen, 623 P.2d
418 (Colo. Ct. App. 1980); American Nat'l Bank & Trust Co. v. First Wisconsin Mortgage
Trust, 577 S.W.2d 312 (Tex. Civ. App. 1979).

~^See Crane & Bromberg, supra note 18, §§ 49, 54.
^"Crane & Bromberg, supra note 18, § 54, at 309 n.92.



1 985] SUR VEY—BUSINESS ASSOCIA TIONS 6

1

State of the Taber doctrine and the reprehensibleness of the attorney's

conduct.

The common law was reluctant to impose liability on a partner who
did not authorize, participate, or ratify the wrongful act giving rise to

punitive damages.''^ Professors Crane and Bromberg, however, state that

if, under section 13 of the Uniform Partnership Act,^" "the partnership

is liable to the same extent as the guilty partner, and punitive damages

are recoverable against him, it would seem to follow that punitive damages

would be recoverable against the partnership, regardless of the innocence

of other partners."^'

Following this hne of reasoning, the court of appeals in Husted

determined, that once an individual partner is held liable for conduct

deemed within the ordinary course of the partnership business, the

partnership is also liable for damages flowing from such conduct, re-

gardless of the other partners' knowledge. ^^ Furthermore, section 13 of

the Indiana Act binds the partnership for any "loss or injury . . .

caused . . ., or any penalty [that] is incurred, [by a partner]. "^^ Therefore,

the court of appeals' interpretation of the Act as imposing punitive

damages on the law firm cannot fairly be deemed as "somewhat strained. "^'^

Indeed, a more reasonable interpretation of the provision would recognize

-"^See Crane & Bromberg, supra note 18, § 54, at 317-18 nn. 42-45.
^"Codified in Indiana at Ind. Code § 23-4-1-13 (1982).
"Crane & Bromberg, supra note 18, § 54, at 317 (footnote omitted). The author

of an annotation on the derivative Uability of partners for punitive damages footnotes

section 13 after referring to the general rule of nonliability for punitive damages, but

states that the applicability of the provision to liability of a partner for punitive damages

has not been judicially determined. Annot., 14 A.L.R. 4th 1315, 1336 n.6 (1982).

^-Husted V. McCloud, 436 N.E.2d at 347.

"Ind. Code § 23-4-1-13 (1982).
^"At least one author has, however, found the court of appeals' decision "somewhat

strained." Jackson, supra note 6, at 281-82.

The Husted court grasps the "any penalty" language as a basis for the

imposition of punitive damages against the partnership. However, this language

clearly does not refer to a penalty incurred by a partner due to his wrongful

act or omission, but to a penalty incurred by any person, not a partner in the

partnership.

Id. at 281.

If wrongful acts or omissions of a partner acting in the ordinary course of the business

of the partnership, or with the authority of his copartners, cause "loss or injury . . .

to any person, not being a partner in the partnership, or any penalty is incurred," Ind.

Code § 23-4-1-13 (1982), section 13 imposes liability on a partnership . . . "to the same

extent as the partner so acting or omitting to act." Id. The basis for Jackson's assertion

is that the "any penalty" language in the statute refers to a penalty incurred by "any

person, not a partner in the partnership.'' Jackson, supra note 6, at 281.

Unfortunately, this is not a grammatical reading of section 13 because the qualifying

phrase "not being a partner in the partnership" is between the "loss or injury" phrase

and the "penalty" phrase. If the drafters of the Act had intended the provision to apply



62 INDIANA LA IV REVIEW [Vol. 18:57

that it seems to contemplate that a partnership should be derivatively

liable for the wrongs committed by a partner in the ordinary course of

business. ^^

It is often argued, however, that the conversion of client's funds is

not usually within the ordinary course of a law firm's "business." Courts

recognize this and, instead, often look to the reason for which the funds

were received. "^^ For example, if the funds were received so that they

might be invested by an attorney at his discretion, it would be unlikely

that this could be termed as received in the ordinary course of business.
^^

Whereas, if funds were received in the settlement of an estate, or as

proceeds from a foreclosure sale, such receipts could properly be con-

to penalties incurred by nonpartners, the provision would have been worded to impose

liability for "loss or injury caused to or penalty incurred by any person not being a

partner in the partnership." The phrasing of the section leads to the conclusion that the

drafters contemplated the "penalty" would be incurred by the wrongfully acting partner

rather than the victim. This interpretation of section 13 is supported by cases imposing

statutory usury penalties on partnerships and individual partners. See Calimpco, Inc. v.

Warden, 100 Cal. App. 2d 429, 224 P. 2d 421 (195), overruled, Fazzi v. Peters, 68

Cal. 2d 590, 68 Cal. Rptr. 170, 440 P. 2d 242, (1968). See also Wright v. E-Z Finance

Co., 267 S.W.2d 602 (Tex. Civ. App. 1954). See generally Crane & Bromberg, supra
note 18, § 54(f), at 318-19 (noting that the Uniform Partnership Act imposes liability on

the partnership for " 'any penalty . . . incurred' by a partner acting in the ordinary course

of business or with the authority of his co-partnerships").

The reference in section 13 to "injury ... to any person, not being a partner," Ind.

Code § 23-4-1-13 (1982), probably was intended to allow actions against a partnership

even if the offending partner had a personal immunity, and to codify the partnership's

nonliability when one partner injured another. Crane & Bromberg, supra note 18, §
54(d).

'The general rule at common law was that punitive damages were not recoverable
from a partnership or an innocent partner. Yet some courts imposed liability in cases

involving fraud in the conduct of the ordinary course of the partnership's business, wherein

the copartners had neither ratified nor authorized the conduct. See Annot., 14 A.L.R.

4th 1315, 1336-38 (1982). In at least one jurisdiction that had adopted the Uniform

Partnership Act, however, a partner who had neither participated in nor ratified an action
was held not Hable in exemplary damages for a conversion by a copartner. Broudy-Kantor

Co. v. Levin, 135 Va. 283, 116 S.E. 677 (1923). That court's reliance on a pre-Act case

denying punitive damages against an innocent partner, and its failure to mention the Act,

which had been in effect for only a few years, suggests that the statute was simply

overlooked. Compare Meleskr v. Pinero Int'l Restaurant, Inc., 47 Md. App. 526, 424

A.2d 784 (1981) (court imposed punitive damages on an innocent partner without even

discussing the Uniform Partnership Act).

''See Riley v. Larocque, 163 Mis. 423, 297 N.Y.S. 756, 767 (N.Y. Sup. Ct. 1937).

See, e.g.. Rouse v. Pollard, 130 N.J. Eq. 204, 209, 21 A.2d 801, 804 (N.J. 1941) ("it

is [not] a characteristic function of the practice of law to accept clients' money for deposit
and future investment in unspecified securities at the discretion of the attorney . . . .");

Cook V. Brundidge, Fountain, Elliott & Churchill, 533 S.W.2d 751 (Tex. 1976) (An
attorney's acceptance of a check, payable to him "as Attorney for" his client, for the

purpose of investing the money, presented a question of fact with respect to the required

conditions for partnership liability.).

^^ Rouse V. Pollard, 130 N.J. Eq. 204, 209, 21 A.2d 801, 804 (N.J. 1941).



1985] SURVEY—BUSINESS ASSOCIATIONS 63

sidered within the scope of the ordinary course of business. In McCIoud,

the converted funds were received in connection with a legal matter

being handled by the Husted firm,^^ and therefore the finding of the

court of appeals that the partnership was liable for Husted's actions is

not too unreasonable.

Of course where the wrongful acts are purely personal, and have
no real nexus with the partnership's business, it is appropriate to absolve

the innocent partners under general principles of agency law.^*^ However,

even in those instances another possible ground for imposing liability

on the partnership exists. It has been held in other jurisdictions that

even where the defendant partner's actions are not considered in the

ordinary course of the partnership's business, the partnership might have

a duty to the plaintiff to exercise care in operating its business."^ That

is, if the firm had in any way closed its eyes to Husted's wrongdoing,

it should be held Hable. In both Indiana cases, it appeared that the

deceased partner was aware of Husted's misconduct before it was un-

covered.'^' The deceased partner's failure to put an end to Husted's

defalcations in McCloud may have justified partnership liability for
punitive damages under section 13,^^2 even if the conversion of funds
were found not to be within the ordinary course of the law firm's

business.

The supreme court in McCloud did uphold the award of compen-
satory damages against the partnership"*^ under section 14 of the Indiana

Act."^ If the damages awarded in Husted v. Gwin'^^ were in fact com-

pensatory damages rather than punitive,'^ the result in Gwin should stand
even after McCloud, since it is clear the misappropriated funds resulted

from legal work performed by the law firm."*^
The supreme court in McCloud emphasized that punitive damages

^«450 N.E.2d at 492.

''^Restatement (Second) of Agency § 235 (1958).
'°See Riley v. Larocque, 163 Misc. 423, 297 N.Y.S. 756 (N.Y. Sup. Ct. 1937) (dicta);

McClay v. Kelsey Seybold Clinic, 456 S.W. 2d 229 (Tex. Civ. App. 1970), aff'd, 466 S.W.2d
716 (Tex. 1971). But see Richmond Guano Co. v. E.I. DuPont de Nemours & Co., 284
F. 803, 808, 809 (4th Cir. 1922).

^'Husted V. Gwin, 446 N.E.2d at 1363 n.3.

^^ND. Code § 23-4-1-13 (1982).
^H50 N.E.2d at 494.

'^Ind. Code § 23-4-1-14 (1982). This provision binds a partnership to make good
the loss when partners or the partnership receive funds which are misapplied by a partner.

^M46 N.E.2d 1361 (Ind. Ct. App. 1983).

'^^See supra note 3.

^H46 N.E.2d at 1362. See Douglas Reservoirs Water Users Ass'n v. Maurer & Garst,
398 P.2d 74, 77 (Wyo. 1965). The Gwin court relied on Ind. Code § 23-4-1-13 (1982).
The supreme court's later construction of section 13, in McCloud, should not change the

result in Gwin however, because in McCloud, the supreme court found the firm liable
under Ind. Code § 23-4-1-14 (1982). 450 N.E.2d at 494.



64 INDIANA LAW REVIEW [Vol. 18:57

are not meant to compensate a plaintiff, but are intended to punish a

wrongdoer and to deter others/^ This is undoubtedly true, but the court

ignored an important point. By prohibiting punitive damages against a

partnership and its innocent partners, the court is inviting partners to

be unduly "innocent" if they have any inkling that a partner is engaged

in wrongdoing. Partners would be much more inclined to police the
conduct of copartners if they realized that failure to do so could result

in a punitive damage judgment. As a result, such a sanction would be
much more potent as a deterrent than simply subjecting the malefactor
alone to punitive damage liability.

B. Appraisal Rights

One of the more interesting business cases decided during the survey
period was Perlman v. Permonite Manufacturing Co^^ Minority share-

holders, dissenting from a corporate merger, brought this diversity action

to have the value of their shares determined as of the effective date of

a corporate merger. ^<^ One of the few reported cases^' construing the
appraisal provision of the Indiana General Corporation Act," Perlman

is an excellent primer on the factors a court will consider in appraising

the shares of a closely held corporation involved in a merger or con-

sohdation.

In Perlman, the plaintiffs owned 48 of the 145 issued and outstanding
shares of Midland Enterprises (Midland), an Indiana corporation, which

was merged along with its wholly owned subsidiary into Permonite, an
Illinois corporation." The court used the net asset value method of

M50 N.E.2d at 495. The court observed "that the rationale behind punitive damages
in Indiana prohibits awarding such damages against an individual who is personally innocent
of any wrongdoing." Id. But cf. Guild v. Herrick, 51 N.Y.S.2d 326 (N.Y. Sup. Ct. 1944)
(lack of knowledge is no defense when partner should have known securities were being
manipulated in course of partnership business).

^'568 F. Supp. 222 (N.D. Ind. 1983), affd, 734 F.2d 1283 (7th Cir. 1984).
^°568 F. Supp. at 223.

''See Republic Finance & Inv. Co. v. Fenstermaker, 211 Ind. 251, 6 N.E.2d 541
(1937); General Grain, Inc. v. Goodrich, 140 Ind. App. 100, 221 N.E.2d 696 (1967).

"The right to appraisal is found at Ind. Code § 23-1-5-7 (1982). This provision
applies both to mergers (one or more constituent corporations merge into another constituent
corporation) and to consolidations (two or more constituent companies cease to exist and
a new corporation emerges from the transaction). Id. § 23-1-5-1. See generally H. Henn
& J. Alexander, Laws of Corporations § 346 (3d ed. 1983) (discussing the differences
and similarities between mergers and consolidations) [hereinafter cited as Henn & Alex-
ander]. Shareholders of a corporation selling all, or substantially all, of its assets for

purposes of ending or changing the nature of its business are also entitled to have their

shares appraised. Ind. Code §§ 23-1-6-1, -5 (1982).
"568 F. Supp. at 223. Apparently, plaintiffs followed proper procedures in exercising

their right of appraisal because no issue was raised by the defendant corporation regarding
the procedures followed. A dissenting shareholder who does not follow the proper pro-



1 985] SUR VEY—BUSINESS ASSOCIA TIONS 65

valuing Midland's shares. ^"^ This method assumes that on the effective

date of a merger, a corporation's value equals the fair market value of

its assets less the fair market value of its liabilities. Consequently, the

court substituted the fair market values of Midland's assets and liabilities

for their stated book values to arrive at an adjusted balance sheet. ^^

The first adjustment, a downwards revision of the notes receivable

held by the two companies, was made because the interest rates on the
notes were substantially below the appropriate market rate. Thus, the

notes' values on the date of the merger were adjusted to reflect the

right to receive payment of the principal in 1985, along with an ap-

propriate yield to maturity. ^^

The value of the property, plant, and land of both Midland and

its subsidiary, as of the merger date, had to be adjusted upwards to

reflect increased fair market value over book value." The property of

the subsidiary was subsequently sold, producing an undisputed capital

gains tax liability on the part of the corporation. As a result, the fair

market value of this property was reduced by an amount equal to the

tax liability. ^^ The end result of this entire process was an adjusted

balance sheet.

However, the court did not award the plaintiffs their pro rata interest

in this value. Instead, it discounted the value of the shares by thirty-

five percent. ^^ This figure included a fifteen percent discount to the

cedures is presumed to have assented to the merger or consoHdation. Ind. Code § 23-1-
5-7 (1982). See Gabhart v. Gabhart, 267 Ind. 370, 370 N.E.2d 345 (1977).

^''568 F. Supp. at 223. Both plaintiffs' and defendants' appraisal experts used this

approach. Id. This is not the only method available for establishing the value of dissenting

shares in a merger or consolidation. See generally Henn & Alexander, supra note 52,
§ 349, at 1002-03. Unfortunately, "value" is not defined in the statute, nor is any clue

given as to its meaning.

^'568 F. Supp. at 223. The same process was used to determine the fair market

value of Midland's wholly-owned subsidiary, a Midland asset. Id. Current assets and

liabilities of the two corporations did not have to be adjusted. Id. at 224.

'"Id. at 224.

"M The court considered the testimony of defendants' real estate expert to be more
reliable than the testimony of plaintiffs' witness who, not surprisingly, placed a higher

value on the land. Id. at 224-25.

'^Id. at 224. Presumably the tax liability would not have been considered if the

property had not been on the market at the date of the merger.

'^Id. at 226. The court ignored the testimony of one of the plaintiffs on the value

of the dissenting shares because it was contradicted by the plaintiffs' as well as defendants'

experts. Id. The court also concluded that even if the value of the surviving corporation's

shares were relevant, there was no rehable estimate as to their value. The only arm's

length valuation involving these shares was an estate tax determination for one shareholder

less than four months after the merger. This figure, using the merger exchange rate,

resulted in a value for the Midland shares roughly the same as the value determined by

the court (IRS value was $2,265.50 per share; court determined value was $2,849.85). Id.

One other transaction involving shares of the surviving corporation which would have



66 INDIANA LAW REVIEW [Vol. 18:57

reflect plaintiffs' minority shareholder status in a relatively small, closely

held, nonpublic corporation. The value of the shares was reduced because

as a minority, the dissenting shareholders did not possess the power to

either force a dividend or a liquidation, or control corporate policy or

operations.^" The court then made an additional fifteen percent discount
to reflect the virtual nonexistence of a market for the plaintiffs' shares.^'

The court reasoned that, generally, minority shareholders are unable

to sell their shares, except to the majority holders or unless the majority

holders are also selling their shares. This lack of demand causes the
price of shares to decrease. This factor seems questionable, however

because the lack of a market should be reflected in the minority interest

valuation. Finally, the court discounted the minority interest's shares an

additional five percent to reflect the risk associated with holding Mid-

land's shares because of its "size and lack of diversity. "^^

The Perlman court, in applying Indiana law, analyzed the two Indiana

decisions involving appraisal rights: Republic Finance & Investment Co.
V. Fenstermaker^^ and General Grain, Inc. v. Goodrich. ^^ In Republic

Finance, dissenting shareholders of a corporation brought an action to

determine the value of their shares upon the consolidation of their

corporation with a constituent corporation.^- The company appealed.

substantially increased the value of the shares was discounted by the court because: (1)
it was not an arm's length transaction; and (2) it had occurred a year before the merger.

Id. at 226, 233.

The latter transaction did help plaintiffs in one respect. One shareholder owned only
one share, the value of which was substantially less than the $10,000 diversity jurisdiction

requirement. 28 U.S.C. § 1332 (1982). The court was satisfied that her claim in the

complaint was made in "good faith" because the value of her share derived from this

sale exceeded $10,000. See Horton v. Liberty Mutual Ins. Co., 367 U.S. 348, 352-54

(1961) (allowing reference to the complaint to determine the amount in controversy, unless

it appears the amount was not stated in good faith). The testimony was rejected in valuing

the* Midland shares, but it did satisfy the requirement of Zahn v. International Paper

Co., 414 U.S. 291 (1973), that each plaintiff individually must satisfy the jurisdictional

amount. 568 F. Supp. at 227-28.
^°568 F. Supp. at 226. This is an overstatement as far as forcing dividends is

concerned, as it is well settled in Indiana that a minority shareholder can force a dividend

in an appropriate case. See Cole Real Estate Corp. v. Peoples Bank & Trust Co., 160
Ind. App. 88, 310 N.E.2d 275 (1974), discussed in Galanti, Business Associations, 1974

Survey of Recent Developments in Indiana Law, 8 Ind. L. Rev. 24, 35-42 (1974).
^'568 F. Supp. at 226, 231-32.

^^Id. at 226. Not surprisingly, the discounts were based on testimony of defendants'

stock appraisal expert. Plaintiffs' expert neither computed nor recognized a discount. Id.

He did concede on cross-examination that such a discount would have been appropriate
had he not been asked to value Midland itself. Id. at 232.

"211 Ind. 251, 6 N.E.2d 541 (1937).
^140 Ind. App. 100, 221 N.E.2d 696 (1966).

^The appraisal procedures are the same for mergers and consolidations. Ind. Code

§ 23-1-5-7 (1982). See supra note 52.



1 985] SURVEY—BUSINESS ASSOCIA TIONS 67

arguing that the trial court had reHed too heavily on the book value

of the assets, ignoring the company's own estimates of value.
The supreme court held that in placing a value upon dissenting

shares, a court must take into account all relevant factors and consid-

erations. "[W]eight should be given to the following considerations:

Market value of stock, actual evaluation of assets, book value of assets,

going value, prospects of corporation, character of assets (frozen or

liquid), earnings, and general economic conditions. "^^ The Republic

Finance court also held that the value of the dissenting shares should

be determined immediately before the merger or consolidation. With that

approach then, dissenting shareholders neither receive an increase in

value resulting from the transaction nor are they charged with any

expenses of bringing about the transaction.^^

Like Republic Finance, General Grain, Inc. v. Goodrich^^ emphasized

that the ultimate issue in an appraisal proceeding is to determine the

fair market value of the dissenting shares. ^^ This requires consideration

of a number of elements of value:

book value, liquidating value, stock market value, evidence of

sales in the market, the type of market available, the condition

of the issues [sic] financial, managerial, (and) past and their

present, as well as future possibilities and probabilities together

with all the other elements which tend to affect the fair market

value, for cash . . . .^^

The court of appeals in General Grain considered the financial

^211 Ind. at 254, 6 N.E.2d at 542, quoted in Perlman v. Permonite Mfg. Co., 568

F. Supp. 222, 228. The Republic Finance court also indicated that appraisals of assets

and liabilities could be of greater assistance than book value or "a statement based upon

arbitrary figures, such as costs and arbitrary percentage reserves." 211 Ind. at 255, 6

N.E.2d at 542. The stock market value of shares of a pubhcly traded corporation was

helpful but not necessarily conclusive in valuing shares; in addition, the value given to

both tangible and intangible assets should have been going concern value and not liquidation

value unless the corporation was in financial distress and liquidation inevitable. Id. at

254-55, 6 N.E.2d at 542.
^^211 Ind. at 255, 6 N.E.2d at 543. In general, the approach taken in Republic

Finance is similar to the approach other courts have taken in appraisal proceedings. See

generally Henn & Alexander, supra note 52, § 349, at 1002-04 nn. 12-16.
^^40 Ind. App. 100, 221 N.E.2d 696 (1966).

'•"Id. at 109-11, 221 N.E.2d at 701.

™/c/. at 110, 221 N.E.2d at 701. The court was not willing to rely solely on the

"market" price for valuing corporate shares, although such a price would be a factor.

Id. at 111, 221 N.E.2d at 701-02. Departure from the market's price in determining the

value of securities has occurred in other contexts. See Beecher v. Able, 435 F. Supp. 397,

407-09 (S.D.N.Y. 1977) (value of debentures adjusted upwards from the market price because

of perceived overreaction by market to negative news in an action under § 11 of the

Securities Act of 1933. 15 U.S.C. § 77k(e) (1976)). But see Feit v. Leasco Data Processing

Equip. Corp., 332 F. Supp. 544, 585-86 (S.D.N.Y. 1971). See generally R. Jennings &
H. Marsh, Securities Regulation 758-59 (5th ed. 1982).



68 INDIANA LAW REVIEW [Vol. 18:57

condition of the constituent corporations, and reversed the trial court

because it had overemphasized the book value of the shares when the

corporation was in financial trouble.^'

Republic Finance was helpful to the Perlman defendants. In Perlman,

the plaintiffs' expert had considered the effect of the merger in valuing

the plaintiffs' shares. Relying on Republic Finance, ^^ the Perlman court

deemed this improper, and deferred to the defendants' witness, who had
not considered the merger agreement in his appraisal. ^^

At the time of the Perlman decision, no Indiana authority existed

regarding the appropriateness of discounting the value of the plaintiffs'

shares from their pro rata interest in the value of Midland. ^"^ The court

considered and rejected the Iowa Supreme Court's decision in Woodward
V. Quigley.^^ In Woodward, the Iowa court refused to apply a minority

discount factor because a discount would permit a majority to force

out a minority without paying them their proportionate share of the

actual value of the corporation. Furthermore, Woodward declined to
follow a line of tax cases in which the lack of a market for a minority

interest was found to justify a discount. ^^ The Woodward court reasoned
that the purpose of the Iowa appraisal was to determine the "real"

value of dissenting shares. ^^ It was not clear what "real" value meant,

but apparently the Perlman court was convinced that the Iowa statute

reflected a policy not present in the Indiana appraisal statute. ^^

Rather, Perlman adopted the view of Moore v. New Ammest, Inc.,''^
which held that Kansas law valued dissenting shares based on all relevant

factors, and thus the value of a dissenter's shares was his "proportionate

interest in a going concern. "^^ At least this is how the Perlman court
characterized Moore, even though the reference to an interest in a going

concern is arguably closer to the Woodward rationale. Yet in discounting
the dissenting shares, the Kansas court reasoned that a minority's pro-

portionate interest in a going concern is less than a pro rata share of

its assets and, therefore, discounting was appropriate. ^*

^'140 Ind. App. at 112-13, 221 N.E.2d at 702-03.
'^211 Ind. 251, 6 N.E.2d 541 (1937). See supra note 67 and accompanying text.
"568 F. Supp. at 230.

'^The court could not resist taking a dig at the attorneys when it noted that it had
located two cases on point while neither party had cited any relevant case law. 568 F.
Supp. at 230 (citing Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38, modified,
257 Iowa 1160, 136 N.W.2d 281 (1965); Moore v. New Ammest, Inc., 6 Kan. App. 2d
461, 630 P.2d 167 (1981)).

"257 Iowa 1077, 133 N.W.2d 38, modified, 257 Iowa 1160, 136 N.W.2d 281 (1965).
^'^257 Iowa at 1087, 133 N.W.2d aat 42-44.
''Id. at 1087, 133 N.W.2d at 43-44.
^**Ind. Code § 23-1-5-7 (1982).
'"6 Kan. App. 2d 461, 630 P. 2d 167 (1981).
'"Id. at 467, 630 P. 2d at 173 (quoting Tri-Continental v. Battye, 31 Del. Ch. 523,

526, 74 A.2d 71, 72 (1950)).
''6 Kan. App. 2d at 474-75, 630 P. 2d at 177. The discount would not be appropriate



1 985] SUE VEY—BUSINESS ASSOCIA TIONS 69

There was no real discussion of the propriety of the fifteen percent

discount for the nonmarketabihty of the Midland shares. The Moore
rationale would apply to this factor as well; and in actuality, the court

did apply a thirty percent discount, reflecting all the negatives incumbent

with minority status. ^^ The defendants, however, did not prevail on all

points: the court refused to allow an additional discount to reflect capital

gains taxes that would become due if Midland's assets were sold.^^ This

discount was rejected because it assumed Midland's assets would be

liquidated. Such an assumption conflicted with the requirement of Re-

public Finance that assets be
*

'valued in the context of the corporation

as a going concern, unless the corporation is in distress and liquidation

inevitable.
"«^

The final issue presented to the Perlman court was whether pre-

judgment interest on the value of the shares was proper. The court

concluded it was not.^^ The Indiana appraisal statute does not expressly

provide for interest. The plaintiffs argued that denying interest would

be unjust to dissenting shareholders since the statute itself precludes

them from participating ''in dividends or in corporate management from
the date of the merger. "^^ Furthermore, they argued that section 7 of

the statute provides that the '"practice, procedure and judgment' in

stock valuation cases 'shall be the same, so far as practicable, as that

under eminent domain cases. '"^^

Although the eminent domain statute now includes interest from the
date of taking, ^^ the court in General Grain found that it did not provide

for interest when the General Corporation Act was adopted in 1929,
and that the subsequent amendment to provide for interest was not
retroactive.^^ The General Grain court questioned whether interest, even

if authorized in case law, could be considered a part of the "practice,

procedure and judgment" of the eminent domain laws, because the right

was more substantive than procedural. ^^ As a result, appraisal rights are

if there were a market for the corporation's shares which would reflect the minority

interest. That is to say, the market value could be less than the "enterprise value" of

the shares. See Perlman v. Feldman, 154 F. Supp. 436 (D. Conn. 1957).

"^Plaintiffs did not challenge the five percent discount for Midland's size and non-

diverse business. 568 F. Supp. at 232.

^Id. (citation omitted). The court did deduct the capital gains liability for the

property of the Midland subsidiary which was in fact sold. Id. at 224.

''Id. at 233-35.

^Id. at 233.

''Id. at 233 (quoting Ind. Code § 23-1-5-7 (1982)).
«nND. Code § 32-11-1-8 (1982).
^'General Grain, Inc. v. Goodrich, 140 Ind. App. 100, 108-09, 221 N.E.2d 696, 700

(1966).

'^Id. Apparently, interest had been awarded in eminent domain cases prior to the

amendment to section 32-11-1-8 to satisfy just compensation requirements of the Indiana



70 INDIANA LAW REVIEW [Vol. 18:57

considered like any other unliquidated claim, and dissenting shareholders

are not entitled to interest until final judgment is entered.^'

The Perlman court refused to distinguish General Grain on the ground

that the merger there occurred before the eminent domain statute was

amended. ^^ It rejected the plaintiffs' contention, concurring with the

doubts of the court in General Grain that interest is part of the "practice,

procedure and judgment" of the eminent domain laws.^^ The Perlman

court found that any inequity in denying interest was a matter properly

addressed by the General Assembly. ^^ The statute had been amended
twice since General Grain, without providing for postmerger interest.

Thus, the Perlman court was satisfied that the legislature intended to

let the General Grain interpretation stand. ^^ Consequently, dissenting

shareholders are not entitled to interest until final judgment is entered. ^^

The Perlman treatment of the interest issue, while no doubt correct as

a matter of law, is narrow, unfortunate, and inequitable as far as

dissenting shareholders are concerned.

There is a paucity of decisions interpreting the rights of dissenting

shareholders in a merger or consolidation to have the value of their

shares determined. The Perlman decision, although somewhat harsh on

the interest issue, fills in some of the interstices left by Republic Finance

and General Grain.

C. "Informal" Corporate Dissolution

Practitioners who are tempted to terminate a corporation's affairs
by failing to file annual reports with the Secretary of State should take

note of Duncan v. Jones. "^^ In Duncan, the court of appeals reversed
"a summary judgment of the Hancock Circuit Court awarding one-half
of a corporate bank account to [Jones, the] plaintiff, "^^ who owned
half of the particular corporation. Jones brought this action against a

savings and loan to collect one-half of an account, opened by Duncan

Constitution, art. I, § 21. See Schnull v. Indianapolis Union Ry. Co., 190 Ind. 572, 131
N.E. 51 (1921). The Perlman court summarily rejected a constitutional argument for
interest. 568 F. Supp. at 235 n.6.

"'140 Ind. App. at 109, 221 N.E.2d at 701.
'^^568 F. Supp. at 234.

''Id.

^'Id. at 234-35.

""'Id.

*140 Ind. App. at 109, 221 N.E.2d at 701.

^M50 N.E.2d 1019 (Ind. Ct. App. 1983).
''^Id. at 1020. The court also ordered the trial court to grant defendant financial

institution's Rule 12(B)(7) motion, Ind. R. Tr. P. 12(B)(7), to join the corporation and
the other shareholder as indispensable parties, and to grant the latter parties' petition to
intervene. 450 N.E.2d at 1023.



1985] SURVEY—BUSINESS ASSOCIATIONS 71

without any corporate formalities. Only Duncan was authorized to with-

draw funds from the account. '^^

Jones argued that the Secretary of State had revoked the rights and

privileges of the corporation, and had declared the articles of the cor-

poration forfeited for failure to file annual reports. The Secretary of

State's action alone, he contended, terminated the corporation's existence

so that the bank account became divisible between the two shareholders

as tenants in common. '°°

The court of appeals, in reversing the judgment, held that under

the Indiana General Corporation Act, when a corporation's articles have
been forfeited for failing to file annual reports, an involuntary dissolution

action by the Attorney General is required for a formal winding up of

the corporation's affairs. '^^ Until this procedure is complete, a corpo-

ration, although in limbo with a forfeited franchise and without corporate

rights and privileges, maintains sufficient status as a separate entity to

preclude a collateral challenge to its existence.'"^ Therefore, Jones had

no claim to the corporation's assets until they had been distributed to

him through proper corporate or judicial action.'^

The Duncan court appears to have reached the correct result. Yet,
it is understandable how Jones could conclude, as did the trial court,
that the corporation ceased to exist when the articles were administratively

forfeited by the Secretary of State. The General Corporation Act provides
that nothing in the corporate dissolution section is to limit the Secretary

of State's authority "to revoke the rights and privileges of any corporation

'^MSO N.E.2d at 1021.

"^Id. Sit 1020-21. See Ind. Code § 23-1-8-1 (1982) (requiring corporations to file annual
reports).

'"'Ind. Code §§ 23-1-1-1 to -3-8-1 (1982).
'"M50 N.E.2d at 1022. The court of appeals relied expressly on two sections of the

Act to determine the existence of such a requirement. Ind. Code § 23-1-7-3 (1982) (providing

for involuntary corporate dissolution by a circuit or superior court), Ind. Code § 23-1-

10-1 (1982) (describing corporate forfeiture). Apparently, the forfeiture of the articles puts

a corporation in some sort of purgatorial limbo. See infra note 103 and accompanying

text.

Section 23- 1-10- 1(b) provides that when the Secretary of State certifies to the Attorney

General that a corporation has failed to file annual reports for two consecutive years,

and consequently has forfeited its corporate franchise, rights, and privileges, the Attorney

General is to proceed by information against the corporation for the purpose of having

the forfeiture declared. Ind. Code § 23-l-10-l(b) (1982). Section 23-l-7-3(d) provides that

the existence of a corporation being involuntarily dissolved ceases when the clerk of the

court causes a certified copy of the judgment or order of dissolution to be filed in the

office of the Secretary of State. Ind. Code § 23- 1-10- 1(b) (1982).
^°'See Knotts v. Clark Constr. Co., 191 Ind. 354, 358, 131 N.E. 921, 922 (1921);

Barren Creek Ditching Co. v. Beck, 99 Ind. 247, 249-50 (1884); Logan v. Vernon R.R.,

90 Ind. 552, 556-57 (1883); President of Hartsville University v. Hamilton, 34 Ind. 506,

509 (1870).

"^Department of Treasury v. Crowder, 214 Ind. 252, 15 N.E.2d 89 (1938).



72 INDIANA LAW REVIEW [Vol. 18:57

to carry on and transact business, or to declare forfeit the articles of

incorporation ... for failure to file the annual report for two (2)
successive years . . .

."'°^ This provision was designed to ensure the right

of the Secretary of State to act administratively against delinquent cor-

porations. Arguably, this administrative forfeiture clause could be in-

terpreted to mean that if the Secretary of State certifies a delinquent
corporation to the Attorney General, who then brings an involuntary
dissolution action, corporate existence ceases only when the court's judg-

ment is filed with the Secretary of State; if, however, the Secretary of

State does not certify the delinquency to the Attorney General, corporate

existence ceases when the articles are delcared forfeited by the Secretary

of State. Although plausible, this argument would tend to discourage

following the proper procedures for dissolving corporations.'^ A more
reasonable interpretation is that the administrative forfeiture clause trig-

gers another section of the General Corporation Act.'^^ That section

imposes criminal and civil liability on persons who, with intent to defraud,

exercise corporate powers after a corporation has been dissolved, or its

articles of incorporation canceled. '^^

Arguably, another source of confusion is that Indiana has two

separate corporate annual report statutes. '^^ The purpose of the second

statute is to require annual reports from corporations not required to

file annual reports under any other Indiana act."° Thus, the reporting

requirements of the second statute would not apply to corporations

organized under the Indiana General Corporation Act. Moreover, the

statute authorizes the Secretary of State to administratively revoke the

corporate franchise of domestic corporations'" failing to file annual

reports for two years. This section applies to "any domestic corpora-

tion.""^ In addition, the procedure for reinstating a corporation whose

franchise has been revoked for failure to file an annual report is set

forth in the statute."^ The statute specifies that when a corporation is
reinstated, it **shall be deemed to have continuously existed since" its

rights and privileges were revoked, and its articles forfeited.'"*

'°^lND. Code § 23-l-7-3(g) (1982).
"^The General Assembly has recognized that a corporation will survive to some extent

even after it is dissolved. See, e.g., Ind. Code § 23-1-7-3(0 (1982) (General Corporation
Act authorizes a receiver of a dissolved corporation to collect and otherwise realize upon

and distribute assets of the corporation not distributed prior to the dissolution.).

'"^IND. Code § 23-l-10-5(a) (1982).
'°«The word "canceled" is used in Ind. Code § 23-l-10-5(a), while "forfeited" is

used in Ind. Code §§ 23-1-7-3,-10-1. Yet, in context, the terms appear to be synonymous.
"«Ind. Code §§ 23-1-8-1; 23-3-4-1 to -2 (1982).
"»/c?. § 23-3-4-1.

'"M § 23-3-4- 1(c).

"^IND. Code § 23-3-4-1.6 (1982).
"Vof. § 23-3-4-1. 6(c).



1 985] SUR VEY—BUSINESS ASSOCIA TIONS 73

The provisions of this reinstatement clause suggest a legislative lack

of concern for the niceties of following dissolution procedures. The

provision permitting reinstatement undercuts the argument that the con-

duct of a business after its articles have been forfeited could be evidence

of fraudulent intent under the General Corporation Act. As a result,

anyone who, despite any fraudulent intent, operated a business as a

corporation after forfeiture could undo the adverse consequences simply

by filing the delinquent reports. This is a possible and an unfortunate

result, as it would virtually turn the penalty provision into a dead letter.

It is not necessarily an inevitable result; the reinstatement provisions are

intended to help those who have not filed their annual reports in a
timely manner, more through inadvertence than through improper or

fraudulent motives. There is no reason why the two sections (reinstatement

and annual report) cannot be "harmonized."

If people involved in a corporation settle its affairs by selling its

assets, paying all creditors, and distributing the balance to themselves

without complying with the statutory dissolution provisons, no one is

truly harmed except the state, which has lost fees that would have been

paid if the proper procedures had been followed. In such a case the

informal dissolution approach would not be a subject of shame, although

not to be encouraged. The problem with an informal approach is that

claims against the corporation might be unknown or overlooked before
assets are distributed. This could subject the directors to civil and even

criminal liability."^

It is hoped that attorneys would not intentionally dissolve corpo-

rations informally if only out of a sense of professional pride. If they

do, their clients might end up like the plaintiff in Duncan. ^^^ This is

the most troublesome aspect of the case. The result in Duncan is correct,

but a great deal of time, money, and effort was spent in the litigation

which could have been avoided if the proper, formal procedures had

been followed.

D. Partnership Liability

Often a partnership is formed when two people simply agree to
enter into business together."^ Once partnership status is established,

partners become subject to unlimited personal liability."^ To protect
against such liability, business ventures are often carefully formed so

that they do not appear to be partnerships."^ In J.M. Schultz Seed Co.

"4nd. Code § 23-1-10-2 (1982).
''H50 N.E.2d 1019 (Ind. Ct. App. 1983).

"Ind. Code § 23-4-1-6. See generally Crane & Bromberg, supra note 18, ch. 2.
"«lND. Code § 23-4-1-15.

''"See, e.g., Martin v. Peyton, 246 N.Y. 213, 158 N.E. 77 (1927) (finding that the

relationship defendants intended to form was, as a matter of law, a partnership.).



74 INDIANA LAW REVIEW [Vol. 18:57

V. Robertson, ^^^^ however, it was a matter of luck partnership status was

not found.

The court of appeals in Schultz affirmed a negative judgment of

the Boone County Circuit Court in a creditor's suit against a putative
partner for a partnership debt.'^' In this case, defendant Robertson told

the Schultz representative that he wanted to talk to "his partner" King

before signing the note; he then signed the note as "partner. "'^^ When
the note was not paid, Schultz sued both Robertson and King as partners.

The trial court found that no partnership existed on the date of the

note, and therefore judgment was entered against Robertson. Because

King had neither signed nor agreed to pay the note, he was not liable

for the debt.''^ On appeal, Schultz argued that the evidence compelled
the conclusion that Robertson and King were partners and, thus, King

should be individually liable for the debt.

The central issue in Schultz was whether or not King and Robertson

were partners at the time of the transaction. Taking note that the common
law in Indiana provides no clear cut definition of a partnership, the

court of appeals first turned to the Indiana Uniform Partnership Act

(Act).'^^ The Act defines a partnership as "an association of two or

more persons to carry on as co-owners a business for profit."'^- Although

the statute provides some guidance, '^^ whether the elements of a part-

nership have been estabhshed is a question of fact.'^^ The court of

appeals, noting its Hmited standard of review over questions of fact,

held that the trial court could legitimately conclude that King and

Robertson had no intent to form a partnership at the time in question,

but rather, had a debtor-creditor relationship. '^^ The evidence brought

forth at trial revealed that before the Schultz note was signed King had

cosigned bank notes for Robertson. King had met also with Schultz

'-"451 N.E.2d 62 (Ind. Ct. App. 1983).

'-'Id. at 63.

'^-Id.

'^'Id.

'^IND. Code §§ 23-4-1-1 to -43. (1982). See also 451 N.E.2d at 64.

'-=Ind. Code § 23-4-1-6.

'^^Section 7 of the Act contains rules to be used in determining whether or not a

partnership exists. Subsection 3 provides that the sharing of gross receipts does not "of

itself" establish a partnership. Ind. Code § 23-4-1-7(3) (1982). Subsection 4 provides that

receipt of a share of a business' profits is prima facie evidence of a partnership. However,

this last inference is not to be drawn if the profits are received in payment of a debt,

or as interest on a loan, even if payments vary with the profits of the business. Ind.

Code § 23-4-1-7(4). See also. Crane & Bromberg, supra note 18 §§ 15, 19.
'^'Musgrave v. Madonna, 168 Ind. App. 145, 341 N.E.2d 789 (1976). See Vohland

V. Sweet, 433 N.E.2d 860 (Ind. Ct. App. 1982). See generally Crane & Bromberg, supra
note 18, §§ 4(c), at 35-36; 14A, at 77. Furthermore, the burden of persuasion is on the

party asserting the partnership. Id. at 36.

'^M51 N.E.2d at 65.



1985] SURVEY—BUSINESS ASSOCIATIONS 75

representatives in an attempt to arrange a debt schedule for repaying

Robertson's note. Finally, King gave Schultz his personal financial state-

ment.'^'^ Robertson testified that he thought King was his partner at the

time the note to Shultz was signed. King, however, considered himself

a creditor until early 1980 when they filed a tax return stating they were

partners.'^" King testified that "he had no voice in the management,

but was consulted by Robertson on some major decisions."'^' No written
or oral partnership agreement had been agreed to, nor was any agreement

even discussed until 1980. Furthermore, no agreement to share profits

had been entered into.

Regardless of the truth of King's statements, none of them actually

precluded the existence of a partnership. Although King might have had

no voice in the management of the business, there is no need to show

daily involvement by a partner to estabhsh a partnership.'^^ The key is

the objective intent of the parties, inferred from their actions. '^^

A partnership is a consensual relationship, but there is no need for
an express contract, oral or written. '^"^ If an agreement is required, it

may be express or implied. '^^ It is even possible for a partnership
relationship to exist when the parties believe that they are not partners.'''^

Profit sharing is a primary attribute of the co-ownership element

of a partnership.'^^ However, an express agreement between partners to

share profits is unnecessary,'^^ because silence as to how profits are to
be shared simply leads to the conclusion that they are to be shared

equally. '^^ Presumably, in most partnerships, partners expect to make a
profit, and have some thoughts as to how such profits are to be divided.
Yet in a case such as Schultz, where the business was losing money
when King became a putative partner, such a presumption might not

^^Id. at 63. All contact between Schultz and King occurred after the chemicals were

sold, so Schultz did not rely on his credit in making the sale. Id. See infra text accompanying

notes 144-47.

'^°451 N.E.2d at 64. Robertson borrowed money from King and placed it in a capital

account on his books, but King carried the loans as notes receivable until they decided

to treat the venture as a partnership for tax deduction purposes. Id.

'''Id. at 64.

''^See Vohland v. Sweet, 433 N.E.2d 860, 864 (Ind. Ct. App. 1982); Endsley v.

Game-Show Placements, Ltd., 401 N.E.2d 768, 770-71 (Ind. Ct. App. 1980).
'"C/. Restatement (Second) of Agency §§ 1, 15, 26 (1957).
'^^See Crane & Bromberg, supra note 18, § 5(b), at Al-AZ.
'^^Kavanaugh v. England, 232 Ind. 54, 58, 110 N.E.2d 329, 331 (1953); Crane &

Bromberg, supra note 18, § 5(b).

'^^See Crane & Bromberg, supra note 18, § 5(a), at 41-42 n.46.
'"Ind. Code § 23-4-1-7(4) (1982); See generally Crane & Bromberg, supra note 18,

§§ 14, 14A.

'^'^Crane & Bromberg, supra note 18, § 65(a), at 366.



76 INDIANA LAW REVIEW [Vol. 18:57

exist.
''^^ Thus, the fact that the defendants did not agree to share profits

does not lead inevitably to the conclusion that no partnership existed.

However, as the court pointed out, it could reverse the decision

below only if the evidence led solely to the conclusion that there was

a partnership."^' The court of appeals noted that the federal income tax

return filed by King and Robertson could be evidence of a partnership,''^^

but the trial court could just as easily have considered the return, and

Robertson's treatment of King's loan as a capital account, as an effort

"to credit losses against other income. '"^^ In other words, it was possible

to conclude, as did the trial court, that Robertson and King had a

debtor-creditor relationship and thus were not partners. Schultz' argument

of a partnership by estoppel was also rejected by the court. "^ The

Indiana Act provides that a person can be liable if he is simply held

out as a partner. "^^ If the representation is private, only the persons to

whom it was made may benefit; if the representation is public, generally
anyone can rely on it, even if it is not made or communicated to them.'^^
Here, there was no evidence that Schultz was aware of King when the

chemicals were sold or the note signed; thus, Schultz could not be said

to have relied on the existence of King as a partner.''*^ Because estoppel

requires a holding out and a reliance, Schultz's argument was rejected.

Schultz reached an eminently reasonable result. "^^ Because the burden

of persuasion is on the party asserting the existence of the partnership,

the decision should be that a partnership does not exist if the evidence

of intent is evenly balanced, as was the case here. It is interesting to

note, however, that arguably the judgment would have been affirmed,
even if the trial court had found for Schultz.

"^Generally, there is no requirement that the parties agree to share losses; loss sharing

is regarded as a consequence of partnership. Crane & Bromberg, supra note 18, § 14(e).
"^'Vohland v. Sweet, 433 N.E.2d 860, 865 (Ind. Ct. App. 1982).
'^^Guthrie v. Foster, 256 Ky. 753, 764, 76 S.W.2d 927, 931-32 (1934). See also Crane

& Bromberg, supra note 18, § 14(a), at 66 n.95.
'^H51 N.E.2d at 65. The court did not opine as to how the Internal Revenue Service

might react.

'''Id. at 65.

'^'Ind. Code § 23-4-1-16 (1982). See generally Crane & Bromberg, supra note 18,
§ 36.

'^See Crane & Bromberg, supra note 18, § 36, at 197-98. There is authority to the
contrary. Brown & Begelow v. Roy, 132 N.E.2d 755, 756-57 (Ohio Ct. App. 1955), but
it is generally recognized by authorities that there must be reliance in both situations. This
means that the third person must know of the representation in some way. See Crane
& Bromberg, supra note 18, § 36, at 197-98. Section 16 of the Indiana Act is ambiguous
on this point. However, it does refer to acting on the "faith of such representation." Ind.
Code § 23-4-1-16 (1982). The subsequent reference to "whether the representation has or
has not been made or communicated" to the person extending credit, id., just means it
is irrelevant how he learned of the representation. Crane & Bromberg, supra note 18,
§ 36, at 198.

'^^51 N.E.2d at 65.

"**It would have been unfair to treat King as a partner for what appears to have



1985] SURVEY—BUSINESS ASSOCIATIONS 11

F. Share Repurchase Agreements

Decided during the survey period, Anacomp, Inc. v. Wright^'^'^ is a
warning to attorneys to exercise care in drafting share sale and buy

back agreements. In Anacomp, the court of appeals affirmed in part,
and vacated in part, a judgment of the Hendricks County Circuit Court. '^°

Wright, a stockholder, brought the action for an accounting arising out

of an executive employment and stock sale agreement.

The prehminary agreement in dispute provided for Wright's purchase

of Anacomp shares as an equity incentive arrangement: some immediately,
and the balance over a five-year period. It also provided that Wright

would sell and Anacomp would repurchase the shares at the initial
^purchase price, if the agreement were terminated before the end of five

years. Efforts to arrive at a definitive employment agreement were

unsuccessful and the relationship ended on December 15, 1978.'^'

A purported addendum to this preliminary agreement was drafted
by Anacomp shortly after the agreement was signed. The addendum
stated that cash dividends would become Wright's property, but that

shares paid as stock dividends would be '''treated as a part of the

originating shares, and . . . will be repurchased if the buy back ar-

rangement is exercised along with the originating shares that are sold.'"'^^

At the end of the employment negotiations, Wright had more shares,

as a result of stock dividends and stock splits, than he had purchased

initially. The ultimate issue was whether or not Wright had to return
those shares along with his initial purchase. The court said he did not.'"

One preliminary issue decided by the court was whether or not
Wright was bound by the addendum. The court easily disposed of

Anacomp's argument that by stipulating to the addendum's admission

into evidence, Wright foreclosed any issue regarding the effect of the

document.'^"* Stipulations are agreements respecting business before a

court, and are favored because litigation can be simplified and expedited

if certain facts are admitted. '^^ Although parties may be bound by
stipulations, stipulations are not construed to admit facts which the

been a very generous gesture to aid Robertson at considerable personal expense. To impose
additional losses on King after the losses he already had suffered would have been
particularly unfortunate.

'^'449 N.E.2d 610 (Ind. Ct. App. 1983), reh'g denied, July 6, 1983.
''"/of. at 610. The court vacated an award of prejudgment interest on agreement by

the parties. Id. at 617-18. Anacomp argued that awarding "both interest and dividends
was so internally inconsistent and irreconcilable that [it] should be granted a new trial."
Id. at 615. The court concluded any inconsistency was remedied by vacating the prejudgment
interest. Id.

'''Id. at 612-13.

'"/c?. at 614 n.2 (quoting the Record at 85).

'''See id. at 612.

'^M at 614-15. Wright testified that he had not seen the document until after he
left Anacomp's employ. Id.

'"Marshall County Redi-Mix, Inc. v. Matthew, 447 N.E.2d 1165, 1167 (Ind. Ct. App.



78 INDIANA LAW REVIEW [Vol. 18:57

parties obviously intended to controvert. '^^ It was clear to the court that

Wright had stipulated to the admissiblity of the addendum to expedite
the litigation, not as an assent to the assertion that it was part of the

agreement. If Wright had agreed to the addendum, there would have

been no reason to file suit.'^^ It is Hkely that Wright was simply agreeing

to admit the addendum into evidence for the trial court's consideration
rather than admitting its purported effect. The court of appeals affirmed

the lower court, agreeing that the addendum was not part of the original
agreement.

'^*^

Anacomp also asserted that the failure to reach a definitive em-
ployment agreement constituted a failure of consideration. Thus, Ana-

comp argued, recission was the proper remedy whereby the original
shares plus dividends should be returned to Anacomp, and Wright would
receive the amount of his investment plus interest. The court of appeals

rejected this argument, finding that the share transaction was actually

a separate and distinct agreement, which was not affected by the parties'

failure to reach a definitive employment agreement.
'"^^

The court also rejected Anacomp' s argument that Wright would have
to return all of the shares in his possession in order to return the parties

to the status quo, that is, reconvey the same percentage of equity he

had originally purchased. '^^ The court noted that the total share package

proposed by Anacomp might have supported an inference of propor-
tionate ownership, but the argument could not prevail because Wright

did not purchase all of the stock offered. The court reasoned that

because "the stock issued to Wright was restricted, there [was] nothing

to- stop Anacomp from recovering that proportionate interest when it
[bought] back those shares."'^'

This reference to the restrictions placed on the stock originally issued

to Wright is misleading. The restrictions on those shares were needed

to satisfy the requirements of the federal securities laws. Such restrictions

simply limit the ability of certain shareholders to sell their securities on

the open market; they do not obligate the issuer to repurchase them.

1983); Raper v. Union Fed. Sav. & Loan Ass'n, 166 Ind. App. 482, 488, 336 N.E.2d
840, 844 (1975).

'^^Marshall County Redi-Mix, Inc. v. Matthew, 447 N.E.2d 1165, 1167 (Ind. Ct. App.

1983); Raper v. Union Fed. Sav. & Loan Ass'n, 166 Ind. App. 482, 488, 336 N.E.2d
840, 844 (1975).

'"449 N.E.2d at 615.

'''Id.

'^'^Id. at 615-16. Arguably, if Wright had been seeking to rescind, Anacomp's argument
might have been more persuasive. Instead, Wright was merely seeking a determination of
his rights under the repurchase agreement.

'^M at 616.



1 985] SURVEY—BUSINESS ASSOCIA TIONS 79

In fact, Wright would have been free to sell the shares on the open

market once he satisfied the requirements of the federal securities laws.

If the court meant that the restrictions required Wright to resell the

shares to Anacomp, it is difficult to understand how it could hold that
the additional shares were not part of the buy back agreement.

Arguably, the court misconstrued the restrictive nature of the ad-

ditional shares received by Wright. However, the court did strike a rather

interesting balance between the equities. The court noted that "Wright's
ownership position was based on the investment of funds which he

borrowed[,]"'^2 and therefore, Wright had to pay interest while Anacomp
had use of the principal. The court found that while permitting Wright

to keep the shares issued as dividends might be a windfall to him,

Anacomp benefited by repurchasing the shares at a price substantially
below the market price. Thus, Anacomp makes it clear that if a company
issues shares as part of an employee incentive program and wishes to

obligate the employee to reconvey, not only the initial block but also

any shares received as stock dividends or stock splits, it should make
it explicit in the agreement. '^^

Without such an agreement, it is settled that dividends belong to

the owner of the shares at the time the dividend is declared. '^'^ Anacomp
argued that even if Wright were permitted to keep the stock dividends,

he was not entitled to those shares received as a result of the stock

splits. Although the court recognized a difference between the two,'^^ it

refused to treat the two differently. The court found that often the

terms might be used interchangeably, the key being whether there was

a transfer of accumulated earnings into capital or just a mere increase

'"These agreements are generally upheld if they are not tainted with fraud. Id. See

Shortridge v. Plates, 458 N.E.2d 301 (Ind. Ct. App. 1984); Steck v. Panel Mart, Inc.,

434 N.E.2d 97 (Ind. Ct. App. 1983), discussed in Galanti, Business Associations, 1983

Survey of Recent Developments in Indiana Law, 17 Ind. L. Rev. 31, 38-40 (1984). See

also Helms v. Duckworth, 249 F.2d 482 (D.C. Cir. 1957); In re Estate of Mather, 410

Pa. 361, 189 A.2d 586 (1963). See generally 18 Am. Jr. 2d Corporations § 314 (1965) (promises

to repurchase by person other than corporation).

^^See Bright v. Lord, 51 Ind. 272, 276 (1875). See also Henn & Alexander, supra
note 52, § 332. Of course, this is an overstatement because there are different rules

concerning allocation of dividends on shares in trusts. See generally id. § 333.

'^^"Stock dividends suggest a capitahzation of earnings or profits together with a

distribution of the added shares which evince those assets transformed into capital," 449

N.E.2d at 617 (citation omitted), while "stock splits" denote "a mere increase in the

number of shares evincing ownership without altering the amount of capital, surplus, or

segregated earnings." Id. (citing 19 Am. Jr. 2d Corporations § 808, at 284 (1965)). See
generally Henn & Alexander, supra note 52, §§ 329-30, Although a share dividend affects
the capital of a corporation and a split does not, neither changes a shareholder's proportional

interest in the corporation.



80 INDIANA LAW REVIEW [Vol. 18:57

in the number of shares.'^ Because additional earned or capital surplus

was transferred to the capital stock account of Anacomp whenever stock
splits were declared, the court of appeals rejected Anacomp's argument

and upheld the lower court's treatment of the share splits and share

dividend as the same.'^^

The result in Anacomp is correct. The propriety of Wright keeping
the additional shares, although he had actually paid for less than half

of his total holdings, is as irrelevant as Anacomp's possible windfall

from repurchasing the shares at the purchase price, while having use of

the funds upon which Wright was paying interest. Anacomp simply failed
to provide in the agreement that Wright actually signed that Wright was

obligated to reconvey not only the initial block of shares but any

additional shares that might be issued as a dividend or as the result of

a stock split.

G. Principal-Agent Relationship

Elements of the principal-agent relationship were at issue in Hope
Lutheran Church v. Chellew.^^^ In Hope Lutheran, the court of appeals
reversed a judgment in favor of purchasers of life memberships in a

retirement home project which failed; the judgment had been entered
on a jury verdict. '^^

A retired Lutheran minister proposed the retirement home project
to the Federation of Lutheran Churches of Indianapolis. •^^ Interested,

the federation appointed an ad hoc committee to consider the proposal;

the federation then funded an option on a parcel of land where the

home could be built.

'^'449 N.E.2d at 617. The court stated:

Courts have recognized, however, that what is demoninated [sic] by a corporation

as a stock dividend may in truth be a stock split and vice versa. . . . Thus,
while the corporation's denomination of an issue of stock to shareholders as a

stock dividend or a stock split may be useful and definitive for certain purposes,
courts, where necessary, will look behind that denomination to the essence of

the corporate transaction to determine whether the dividend was in actuality

issued as a result of a transfer of accumulated earnings into capital or as a

mere increase in the number of shares of stock.
449 N.E.2d at 617 (citations omitted). See In re Tealdis Trust, 16 Misc. 2d 685, 182

N.Y.S.2d 68 (N.Y. Sup. Ct. 1958).
167449 N.E 2d at 617. Outside of the trust context however, there is no reason why

shares issued in a split would not belong to the record owner—at least in the absence
of a separate agreement.

"'«460 N.E.2d 1244 (Ind. Ct. App. 1984).

'^Vc?. at 1245. Plaintiffs did not appeal a directed verdict in favor of defendants that

rejected their efforts to pierce the corporate veil and Hold the directors personally liable.
Id. at 1252 n.ll.

'™460 N.E.2d at 1245. The Federation is made up of several Lutheran churches in
the Indianapolis area. However, not all defendant churches were members of the Federation.
Id. at 1245 n.3.



1985] SURVEY—BUSINESS ASSOCIATIONS 81

Soon thereafter, bylaws and articles of incorporation were drafted

for an Indiana not-for-profit corporation that would operate the home.

The articles stated that the corporation was to be "a joint agency" of

the participating congregations and that control would be vested in a

board of directors made up of laypersons and ministers divided equally

among the four national Lutheran bodies.'^' Copies of the corporate

documents were sent to all Lutheran churches in central Indiana along

with application forms stating that membership in the corporation would

'"in no way or manner financially obligate" "^^ the congregations.

Directors were elected by the member congregations to manage the
corporation's affairs when it was organized. Among other things, the
board of directors ''approved the contracts to be used in selling life

memberships to prospective residents of the retirement home."'^^ Al-

though a substantial number of memberships were sold, eventually the

project failed as a result of zoning and financing problems. The plaintiffs,

who had purchased memberships, then sued for the return of their

downpayments.

The question confronting the court of appeals in Hope Lutheran
was whether the participation of the churches "in the creation and

operation of [the corporation gave] rise to an actual or apparent agency

or agency by estoppel relationship."'^^ The court's analysis of the actual

agency theory started out correctly with the premise that agency is a

relationship "resulting from the manifestation of consent by one party

to another that the latter will act as an agent for the former. Additionally,

the agent must acquiesce to the arrangement and be subject to the

principal's control. "'^^ However, when the court summarized the required

'''Id. at 1246.

''^Id. (quoting the Record at 2034).
'^'460 N.E.2d at 1247. The actual sales were made by representatives of a sales agency

retained by the corporation. Id.

'''*Id. The court might have been more accurate if it had used the term "authority"

rather than "agency" in stating the issue. For if the churches had been held liable, it

would have been because the corporation had actual or apparent authority to act for

them or because they were estopped. See generally W. Seavey, Agency § 8 (1964) ("An
agent may have power to create relations between the principal and a third person because
of authority, apparent authority, estoppel, or inherent agency power.") [hereinafter cited

as Seavey], Imprecision is not uncommon in agency cases, and it probably would not
have made any difference in the outcome of the case if the word "authority" had been
used.

'"460 N.E.2d at 1247 (emphasis added) citing Lafayette Bank & Trust Co. v. Price,
440 N.E.2d 759, 761 (Ind. Ct. App. 1982); Lewis v. Davis, 410 N.E.2d 1363, 1366 (Ind.

Ct. App. 1980); Mooney-Mueller-Ward, Inc. v. Woods, 175 Ind. App. 302, 307, 371
N.E.2d 400, 403 (1978)). See generally Seavey, supra note 174, § 2 ("Agency deals with

the rules apphcable to the legal relations which arise when two persons agree that one
is to act for the benefit of the other in accordance with the other's directions."). This

definition closely parallels the definition of agency in Restatement (Second) of Agency
§ 1 (1958).



82 INDIANA LAW REVIEW [Vol. 18:57

elements of an actual agency relationship, it seemed to require that the

principal have exerted control over the agent in fact. ^'^^ This is an unduly

narrow reading of the control element in the actual agency relationship.

It is generally accepted that the right to control is essential, but a

principal's failure or disinclination to actually exercise control does not

negate the relationship.'^^

Next, the Hope Lutheran court relied on Mooney-Mueller-Ward,
Inc. V. Woods. '^^ In Mooney-Mueller-Ward, the court found that where

the putative principal exerted absolutely no control over the operation

of the business, the evidence was insufficient to support a finding of

an actual agency relationship.'^^ Yet, it does not follow from the non-

exercise of and apparent nonexistence of control in Mooney-Mueller-

Ward that the churches in Hope Lutheran did not possess the right to
control the retirement home.

The plaintiffs argued that the "joint agency" statement in the articles
of incorporation was a manifestation of the churches' wish that the

retirement home corporation act as their agent. They argued that the
control element of the relationship was satisfied because the defendants

had sent delegates to annual meetings, and had ministers or laypersons

serving on the board of directors. '^°

These arguments were rejected as the court concluded that any

involvement of the churches in organizing the corporation ended when

the corporation was formed and became a distinct and separate entity.'^'

The court characterized the "joint agency" statement as simply referring

to the retirement home as an agency in itself, '^^ finding support from
testimony of the attorney who had drafted the incorporation documents.
Although the attorney's testimony was uncontradicted, it appeared to

be inconsistent with the document itself. Yet the court of appeals ignored

this fact. The articles did not say the home was to be a joint agency;
rather, it said the corporation was to be a joint agency. It is established

that a corporation can be an agent, and its acts will bind the principal

even if the corporate fiction is maintained. '^^

Hope Lutheran correctly recognized that the retirement home project
was controlled by its board of directors. '^"^ From this proposition, the

'M60 N.E.2d at 1247-48.

'''See generally Seavey, supra note 174, §§ 3E, 84C, 145.

"M75 Ind. App. 302, 371 N.E.2d 400 (1978).
''H60 N.E.2d at 1248. Cf. Courtney v. G.A. Linaker Co., 173 Ark. 777, 293 S.W.

723 (1927) (Although principal no longer exercised control over agent, court required
notice of revocation before power to bind principal expired.).

'«°460 N.E.2d at 1248.

''Ud. at 1248-49.

'''See, May v. Ken-Rad Corp., 279 Ky. 601, 131 S.W.2d 490 (1939).
'M60 N.E.2d at 1249.



1 985] SURVEY—BUSINESS ASSOCIA TIONS 8S

court concluded that the corporation's actions were the result of the

board of directors acting as a board. This is possible, yet it is not the

only conclusion. It is just as possible that the "joint agency" reference

was an objective manifestation that the corporation would be the agent

of the member congregations, with control being exercised by the members
and ministers serving on the board as their representatives.'^^ At least

there appeared to be enough evidence below to sustain this proposition.

Furthermore, this last result would have been possible without doing

violence to another general proposition: that members of a not-for-profit

corporation are not liable for acts of the entity unless they participate

in those acts. Thus, an actual agency relationship in Hope Lutheran
could have been found.

An apparent agency relationship or more accurately, apparent au-
thority, requires a manifestation by the principal to a third party that

an agent has authority, along with the third party reasonably relying

on the manifestation.'^^ This general proposition was recognized in Hope
Lutheran,^^^ as was the proposition that the manifestations or statements

made by the agent are not sufficient to create an apparent agency

relationship.'^^ The court agreed with the defendants' assertion that no

representations were made to the plaintiffs that the home was the churches'
agent or that they exercised control over the corporation.'^^ The plaintiffs

argued that the churches, by permitting the corporation to use the word

Lutheran in the name of the home and in promotional literature, led

'''Cf. Zahn v. Transamerica Corp., 162 F.2d 36 (3d Cir. 1947).

^^^See Seavey, supra note 174, § 8D.

'**M60 N.E.2d at 1248.

'''Id. (citing Storm v. Marsischke, 159 Ind. App. 136, 138, 304 N.E.2d 840, 842

(1973)).

It is interesting to note that another district of the court of appeals, in Hartke v. Moore-

Langen Printing & Publishing Co., 459 N.E.2d 430 (Ind. Ct. App. 1984), affirmed a
judgment against former Senator Vance Hartke for campaign printing expenses because,

in part, plaintiff acted reasonably in relying on the representation by Hartke's campaign

manager (the agent) that he was "Hartke's agent." Id. at 432. Hartke, like Hope Lutheran,
cited Stuteville v. Downing, 181 Ind. App. 197, 391 N.E.2d 629 (1979), as estabhshing

the elements of an apparent agency relationship. 459 N.E.2d at 432. See also Hope
Lutheran, 460 N.E.2d at 1248. However, the court in Hartke did not note the proposition

made in Storm v. Marsischke, 159 Ind. App. 136, 304 N.E.2d 840 (1973), that repre-
sentations made by a putative agent but rather will not create the apparent agency
relationship, but rather representation must be from the principal to the third party. It
is possible that the Hartke court just mentioned the campaign manager's statements in
passing, as there was sufficient evidence that Hartke had held out his well-known campaign
manager as his agent. See Seavey, supra note 174, § 21 (general rules for interpreting
consensual agreements.). Of course, if this is true, the Hartke court can be faulted for
careless use of language by making it at least "appear" that an agent's statements might
estabhsh the apparent agency relationship.

'**M60 N.E.2d at 1249. Of course, there is no need to manifest "control" over the
corporation if the churches manifested that the corporation was their agent. It would just

follow.



84 INDIANA LAW REVIEW [Vol. 18:57

them to believe that the home was supported by both Lutheran churches
in general, and the participating congregations in particular.'*^"

For support, the plaintiffs looked to Purcell v. Summers,^^^ which

enjoined a dissident group from using the name, "Methodist Episcopal

Church, South," after a merger of three Methodist churches, because

the name gave the impression that the group was the successor to one
of the constituent churches. The Hope Lutheran court was not persuaded
by this use of "trade name law."'^^ ^ concluded that the Purcell
defendants were not using the terms in a generic sense, unHke the

defendants in Hope Lutheran. Here, the word "Lutheran" was used in
a generic sense as a broad reference to a particular Protestant denom-
ination.'^^ Arguably however, it was not unreasonable for the members

of the Lutheran congregations to perceive that their church was affiliated

with a corporation that had "Lutheran" in its name, especially when

the corporation had the blessing of the congregations. '^'*

The court found that the individual congregations could have inserted

their individual congregational names in the name of the home if they
had wished to convey affihation with the home.'^^ Yet this is not a very

practical suggestion, as nineteen separate congregations were involved.

In fact, the number of congregations involved might have been the

reason why the term "Lutheran" was used. That is, the term was used
to convey the involvement of the defendant churches in the affairs of

the retirement home without listing every congregation in the corporate
name; or at least, it would seem that a jury might so conclude. '^^

The plaintiffs' agency by estoppel argument also failed. The court

stated that equitable estoppel requires a defendant to have made false
representations or to have concealed material facts with knowledge of,

or ability to learn, the true facts; the represenations must have been

made to the plaintiffs with the intent to induce reliance on those state-
ments; and, the plaintiffs must have changed their position in reliance

"^'145 F.2d 979 (4th Cir. 1944).

"M60 N.E.2d at 1250.

'''Id. at 1250, n.8.

''^''The court did not discuss the statement in the application sent out to individual

churches, that membership would not financially obligate the congregation. This is un-

derstandable because such a restriction would not be effective against third parties, at

least as far as apparent authority is concerned. See generally Seavey, supra note 174, §§

8A, 75E (placing limitations on an agent's authority).
'"'460 N.E.2d at 1250-51.

'"'^The court also stated that the term "Lutheran" in the home's name "did not

exhibit the degree of control . . . necessary to create an apparent agency." Id. at 1251.

The relevance of this assertion is questionable, as apparent authority depends on the

manifestation of authority to act, not necessarily actual control over the putative agent.

See Seavey, supra note 174, § 8D.



1985] SURVEY—BUSINESS ASSOCIATIONS 85

on the statements. '^^ The plaintiffs argued that these elements were

satisfied when the defendants permitted the use of ''Lutheran" in the
home's name without disclosing that the individual congregations would
not be financially responsible for the home's operations. The court

rejected this argument because the representations in question were made
by the corporation rather than the churches. '^^ Although this is facially

true, it was a very narrow reading of the trial court record. The churches

were involved in organizing the home, and were also members of the

corporation. They could be deemed to have represented their involvement

to their parishioners to at least that extent.
'^^

It is easy to sympathize with the defendant churches if they had

been subjected to substantial financial liability for the failed venture.

Such a liability would presumably had to have been satisfied from

contributions by parishioners. The plaintiffs who lost their downpayments
for the home are also deserving of sympathy, particularly because the
opinion in Hope Lutheran does not preclude a finding that the plaintiffs
could reasonably rely on their perceptions that the individual congre-

gations were involved. If this is the case, then a jury presented with

the evidence could also have so concluded.

H. Statutory Developments

There were several statutory developments during the survey period

which are of interest to those practicing in the business law area. None,

however, effected major changes.

/. Corporation Name.—One such development was an amendment
to the corporate name provision of the Indiana General Corporation
Act.^°° The prior statutory provision^^' contained numerous restrictions

on the use of a corporate name that was the same as, or confusingly
similar to, the name of a corporation that had ceased to exist as a

""460 N.E.2d at 1251 (quoting Kokomo Veterans, Inc. v. Schick, 439 N.E.2d 639,
643 (Ind. Ct. App. 1982)).

'^H60 N.E.2d at 1252. The court stated that Kokomo Veterans, 439 N.E.2d 639 (Ind.
Ct. App. 1982), did not adopt the Restatement (Second) of Agency § 8B (1958) definition
of "estoppel," although the elements in § 8B are similar to those considered in Kokomo
Veterans 460 N.E.2d at 1251 n.lO. It is not clear why the court, in Hope Lutheran, was

reluctant to adopt § 8B.

'"^Judge Neal filed a concurring opinion emphasizing that corporations are organized

to conduct business with Hmited liability. 460 N.E.2d at 1252 (J., Neal, concurring). This

certainly is true, as is his further statement that interested persons participating in a

corporation's business are not subject to residual liability as long as the corporate entity

is respected. Id. It is possible to disagree, however, with his conclusion to the extent that

the churches' involvement might well have gone beyond mere interest, particpation, and

support.

^""Ind. Code § 23-1-2-4 (Supp. 1984). A similar change was made to the Indiana
Not-For-Profit Corporation Act. Ind. Code § 23-7-1. l-5(b) (Supp. 1984).

^o'lND. Code § 23-l-2-4(b) (1982).



86 INDIANA LAW REVIEW [Vol. 18:57

result of a merger, consolidation, or a special corporate transaction,

without the consent of any successor corporations. Indiana Code section
23-l-2-4(b), as amended, ^^^ now permits a corporation to take a name
that is not distinguishable from the name of another corporation that
has ceased to exist, or a corporation that is changing its corporate name
or withdrawing from transacting business in Indiana. '°^

The amendment of this section is commendable. Changing the re-

quirement that a corporation not "[t]ake or assume a corporate name

the same as, or confusingly similar to," the name of other corpora-

tions,^^ to a requirement that the name be "distinguishable" from the
name of other corporations or reserved corporate names, is a worthwhile
statutory simplification. The one word "distinguishable" says as much
as the prior phrase, yet is not subject to a charge of legalese.

The amount of time for which a proposed corporation name can
be reserved was increased from 30 to 120 days.^°^ In many cases the
30 day period simply was not long enough to complete the organization

of a domestic corporation or a foreign corporation intending to apply

for a certificate of admission. ^^^ The 30 day reservation was renewable,

but extending the period probably will reduce substantially the need for

renewing the right to a name.

Furthermore, the 120 day period parallels section 9 of the Model

Business Corporation Act,^^^ although there are dissimilarities between

the two. The Model Act specifically directs the Secretary of State to
determine if the reserved name is available for corporate use, while
section 23-l-2-4(c) of the Indiana Act does this by implication. Addi-

tionally, the Model Act permits the transfer of a right to a reserved
name, while section (c) does not.^^^ A similar provision probably should
have been included in section (c). As it now stands, that section might
preclude or at least hinder someone from forming a corporation with

2<'2lND. Code § 23-l-2-4(b) (1982 & Supp. 1984).
-•"Use of corporate names not distinguishable from the name of domestic or qualified

foreign corporations with written consent is still permitted. Ind. Code § 23-l-2-4(b)(2)(B)
(Supp. 1984).

The Act also repealed Ind. Code § 23-l-2-4(c)(1982), which had given the shareholders
of dissolved corporations or corporations whose terms had expired "preemptive" rights
in the corporation's name under certain circumstances.

2"^Ind. Code § 23-l-2-4(b) (1982) (amended 1984).
-"Tnd. Code § 23-l-2-4(c) (Supp. 1984). Additionally, the filing fee for preempting

a corporate name was raised to $20.00. Ind. Code § 23-3-2-2-(0) (Supp. 1984).
'"^Presumably, there would be less of a problem for a corporation changing its name,

or an existing foreign corporation intending to qualify, but there still could be problems
for pubhcly held corporations that might have to schedule a shareholders meeting. Ind.
Code § 23-l-2-4(c)(2)-(4) (Supp. 1984).

^o^Model Business Corp. Act § 9 (1971).
^'''Compare Model Business Corp. Act § 9 (1971) with Ind. Code § 23-l-2-4(c)

(Supp. 1984).



1985] SURVEY—BUSINESS ASSOCIATIONS 87

a name reserved by another person, or a corporation intending to change

its name, even if there were no objection.

Section 23-l-2-4(b)(2) prohibits the taking of a corporate name not
distinguishable from a reserved name, except that the section permits

the taking of a name of "another corporation" with its written consent. ^°'^

This written "consent" provision is hmited by its terms to existing

corporations, and does not refer to a person intending to form a

corporation, or an existing corporation intending to change its name.

Although the Secretary of State's office might permit the use of a

reserved name with the consent of the person entitled to the exclusive
right to the name, the authority to do so probably should have been

included in section (b)(2)(B), or the Model Act should have been followed

more closely.

Another simplification was brought about in the corporate name
area. Also simplified were the procedures to be followed by a foreign

corporation applying for admission to do business in Indiana under an

assumed name, when the requirements of section (b) preclude admission

under its true corporate name.^'°

2. Resident Agents. —SQctions 23-l-2-5(b), (c)^" and 23-1-1 l-6(b),

(c)^'^ were added to the General Corporation Act.^'^ These provisions,

respectively, specify procedures to be followed when a resident agent of

one or more domestic or one or more foreign corporations changes

address. The Act now permits one filing to cover all corporations rep-
resented by the agent, provided that each corporation has been notified

in writing of the change. Admittedly, this reduces paperwork, but it

does not reduce fees. The Indiana General Corporation Fee Act was

amended so that the fee is four dollars for each corporation represented.^''*

3. Shareholder Meetings.—Boards of directors or director committees
have been allowed to conduct meetings "by means of a conference

telephone or similar communications equipment by which all persons

participating in the meeting can communicate with each other" since
1982. 2'^ The section of the General Corporation Act relating to share-

holder meetings has now been amended to permit corporations with no
more than ten shareholders to hold shareholder meetings in a similar

-••^iND. Code § 23-l-2-4(b)(2)(B) (Supp. 1984).
21(1

-"IND. CoDE§ 23-1-1 l-3(b)-(c) (Supp. 1981). The Model Act uses a different approach to
solve this problem. See Model Business Corp. Act § 108(c) (1971).

^'^iND. Code § 23-l-2-5(b), (c) (Supp. 1984).
"''Ind. Code § 23-1-1 l-6(b), (c) (Supp. 1984). Parallel provisions were added to the

Indiana Not-For-Profit Corporation Act. Ind. Code §§ 23-7-1 .l-6(b)(c), 23-7-1.1-
53(b)(c)(Supp. 1984).

-'^IND. Code § 23-3-2-20) (Supp. 1984).
-'^IND. Code § 23-1-2-1 1(h) (1982).



88 INDIANA LAW REVIEW [Vol. 18:57

fashion. ^'^ This change, recognizing the miracles of modern telecom-

munications and how much of the ordinary business of corporations is
carried on by such means, is as worthwhile for shareholder meetings as

the 1982 change was for directors. There is nothing magical about the

number ten but limiting the provision was certainly not unreasonable.
It is possible to have a substantial number of persons communicating

by a telecommunication system, but there comes a point of diminishing

returns where confusion and a lack of clear communication might become

a problem.
^'^

The only question that can be raised about section 23-l-2-9(b) is

that it does not track the comparable director meeting provision. ^'^ That

provision authorizes the telephonic meeting "unless otherwise provided"

in the articles of incorporation or bylaws. Section 9(b) specifies that

such meetings are authorized if "expressly permitted by its articles of

incorporation or bylaws. "^^^ The approach taken in the section dealing

with directors' meetings is preferable. If there is some reason shareholders
of closely held corporations would not wish to have such meetings, they

could so provide. However, unless they have taken anticipatory steps

to amend the articles or the bylaws, it is distinctly possible that a
situation might arise where there is a need and a desire to have a

telephonic shareholder meeting which would not be permitted. ^^° Attor-

neys representing small corporations should seriously consider taking

steps to permit telephonic meetings before the need arises, or face the

frustration of having a procedure available by law but not available to

the particular corporation.

4. Corporate Dissolutions.—Minor changes were made to the cor-
porate dissolution procedures. The board of directors of a dissolving

corporation must now notify the unclaimed property section of the
Attorney General's office, the Department of Revenue, and the Indiana

Employment Security Division of its dissolution, to request any clearances
required by law.^^' The dissolution of shell corporations was also sim-

-'^Ind. Code § 23-l-2-9(b) (Supp. 1984). Participation by these means constitutes
presence in person at the meeting. Id.

The Indiana Not-For-Profit Corporation Act was also amended to permit conference
call meetings for corporations with no more than ten members. Ind. Code § 23-7-1.1-
9(b) (Supp. 1984).

^'There is no comparable limit on the size of boards of directors or director committees
that may have conference call meetings. Ind. Code § 23-1-2-1 1(h) (1982).

'''Id.

^"IND. Code § 23-l-2-9(b) (Supp. 1984) (emphasis added).
'^It must be remembered that the shareholder consent mechanism might not be

available in such a case because the consents must be signed prior to the action. Ind.
Code § 23-l-2-9(p) (Supp. 1984). Also, all shareholders must sign the consent; this re-
quirement might preclude using the mechanism.

^^'Act of Mar. 7, 1984, Pub. L. No. 130-1984, § 4, 1984 Ind. Acts 1125 (codified
as amended at Ind. Code § 23- 1-7- 1(b)(3) (Supp. 1984)). The clearances and notices are



1985] SURVEY—BUSINESS ASSOCIATIONS 89

plified. Publication of notices of dissolution for corporations that have

no assets or liabilities is no longer required; in conjunction, a statement

that the corporation has no assets is now permitted in lieu of filing a
copy of the published notice that the corporation is being dissolved. ^^^

5. Delinquent Annual Reports.—The rather cumbersome statutory
provisions for revoking the rights and privileges of domestic and foreign

corporations delinquent in filing annual reports for two years was recast

and simpHfied by amending section 23-3-4- 1(c) of the Indiana Annual

Report Act.^^^ The new provision increases the time in which corporations

can rectify their delinquent status from 30 days to 90 days, and specifies

the time frame for administrative revocation by the Secretary of State.

The changes would not appear to have any effect on the holding of

Duncan v. Jones.^^"^

6. The Indiana Uniform Trade Secrets Act. ^^^—The General Assembly
also made some changes to the Indiana Uniform Trade Secrets Act.^^^
One change was moving the provision authorizing a court to order
payment of a reasonable royalty for no longer than the period during

which a misappropriated trade secret could have been barred from the

injunctive relief section^^^ to the section authorizing damages for trade

secret misappropriations. ^^^ This change is noted because there is no

counterpart in the Uniform Trade Secrets Act,^^^ upon which the Indiana

Act is based.

It is not clear what this section adds to the Trade Secrets Act. If

neither damages, which represent the actual losses suffered by the owner

of a trade secret, nor the unjust benefit obtained by the misappropriator

can be established, and injunctive relief is not appropriate, it is hard

not required when incorporators surrender a certificate of incorporation before commencing
business. Ind. Code § 23-l-7-l(a) (Supp. 1984).

The procedure for surrendering the certificate of a not-for-profit corporation was

also simpHfied. Act of Mar. 7, 1984, Pub. L. No. 130-1984 § 17, 1984 Ind. Acts 1125

(codified at Ind. Code § 23-7-1. l-33(a) (Supp. 1984)).
^^^ND. Code § 23-l-7-l(b)(3), 1(b)(4)(F) (Supp. 1984).
^23Ind. Code § 23-3-4-1 (c) (Supp. 1984).
^M50 N.E.2d 1019 (Ind. Ct. App. 1983), discussed at supra at notes 97-116.
^^'Ind. Code §§ 24-2-3-1 to -8 (1982) discussed in Galanti, Business Associations,

1982 Survey of Recent Developments Indiana Law, 16 Ind. L. Rev. 25, 50-56 (1983).

^^•^IND. Code §§ 24-2-3-1 to -8 (1982).
"^Act of Feb. 29, 1984, Pub. L. No. 50-1984, § 3, 1984 Ind. Acts 625 (codified as

amended at Ind. Code § 24-2-3-3(b) (Supp. 1984)).
^^«IND. Code § 24-2-3-4(b) (Supp. 1984).
^^^Unif. Trade Secrets Act §§ 1-12, 14 U.L.A. 541 (1980). The Indiana Act continues

to authorize an imposed royalty if a court determines that it would be unreasonable to

prohibit future use of the misappropriated trade secret, but for no longer than the period

of use could have been prohibited. Ind. Code § 24-2-3-3(b) (1982 & Supp. 1984). Unlike
the comparable provision of the Uniform Act, Unif. Trade Secrets, Act § 2, 14 U.L.A.
542 (1980), this authority is limited to "exceptional circumstances," indicating a legislative

intent that the enforced royalty provision is to be used sparingly.



90 INDIANA LAW REVIEW [Vol. 18:57

to see what basis there is for imposing any monetary sanction on a

misappropriator. In fact, it is questionable whether there has been a

misappropriation of a trade secret other than in a metaphysical sense,

under these circumstances. Perhaps it is an attempt to impose some
monetary sanction where the exemplary damages provision permitting

double damages for a willful and malicious misappropriation would not

be available. ^^°

-^"iND. Code § 24-2-3-4(a) (1982).