Indiana Law Review Developments in Business Associations Law Paul J. Galanti* I. Municipal Antitrust Liability Just as municipalities and local governments were having prospects of liability under federal antitrust law' lessened by congessional^ and judicial action,^ the Indiana Court of Appeals has decided a case exposing them to Hability under the Indiana Antitrust Act/ In Ciiy of Auburn *Professor of Law, Indiana University School of Law—Indianapolis. A.B., Bowdoin College, 1960; J.D., University of Chicago, 1963. 'The principal federal antitrust statute is the Sherman Antitrust Act, 15 U.S.C. §§ 1-11 (1982). It is supplemented by the Clayton Antitrust Act. Id. §§ 12-26. See generally S. Oppenheim, G. Weston & J. McCarthy, Federal Antitrust Laws 7-21 (4th ed. 1981); L. Sullivan, Antitrust § 3 (1977). 'The Local Government Antitrust Act of 1984, 15 U.S.C. §§ 34-36 (Supp. 1985), prohibits the recovery of damages, interest, costs, and fees from general or special governmental units which might have violated the antitrust laws. The Act does not immunize the units from antitrust liability because it leaves intact the possibility of injunctive relief. Rather, it removes the incentive of treble damages otherwise available to antitrust plaintiffs. Section 4 of the Clayton Act, id. § 15, authorizes the recovery of treble damages, costs, and fees. ^In Town of Hallie v. City of Eau Claire, 105 S. Ct. 1713 (1985), the United States Supreme Court held that the defendant city was immune from antitrust liability under the state action doctrine of Parker v. Brown, 317 U.S. 341 (1943). The effect of Hallie was to clarify uncertainty about municipal antitrust liability that followed the Court's decisions in City of Lafayette v. Louisianna Power & Light Co., 435 U.S. 389 (1978), and Community Communications Co. v. City of Boulder, 455 U.S. 40 (1982). Hallie held that unlike private parties which are entitled to antitrust immunity only if they can demonstrate that the state clearly articulated and affirmatively expressed an anticompetitive policy, Southern Motor Carriers Rate Conference v. United States, 105 S. Ct 1721 (1985), local governments qualify for the Parker v. Brown exemption by demonstrating that the state has authorized regulation rather than competition even if it has not compelled such conduct. A general grant of authority to a community such as a typical home rule statute is not sufficient, however, to trigger the exemption. 455 U.S. 40 (1982). There were more than 250 pending antitrust suits involving local governmental units when Hallie was decided. These included Unity Ventures v. Village of Grayslake and County of Lake, No. 81C 2745 (N.D. 111. filed 1981) where a judgment of $28.5 million was awarded. This judgment would likely bankrupt the municipality. The Local Government Antitrust Act might aid Grayslake because the damage prohibition can be given a retroactive effect under some circumstances. 15 U.S.C. § 35(b) (Supp. 1985). "•Ind. Code §§ 24-1-2-1 to -12 (1982). The Indiana Code contains other provisions proscribing anticompetitive conduct. Id. §§ 24-1-1-1 to -6; -3-1 to -5; and -4-1 to -4. Although the bulk of antitrust litigation is federal, 16 J. Von Kalinowski, Business Organizations, Antitrust Laws and Trade Regulation § 81. 01 [5] (rev. ed. 1976), state antitrust laws serve a valid supplementary purpose. See generally E. Kintner, Antitrust Primer 159-63 (2d ed. 1973). State antitrust laws are not preempted by the federal antitrust laws. Standard Oil Co. v. Tennessee, 217 U.S. 413 (1910). 67 68 INDIANA LAW REVIEW [Vol. 19:67 v. Mavis,' the court affirmed a judgment^ for plaintiff Mavis following a Whitley Circuit Court jury trial. Although there are similarities between the Indiana Antitrust Act and the federal antitrust laws,^ there is no federal counterpart to section 24-1-2-3,^ which was involved in Mavis. Section 24-1-2-3, as it was worded when Mavis arose, prohibited schemes or other efforts that "limit, restrain, retard, impede or restrict bidding for the letting of any contract for private or public work ..." and combinations or con- spiracies that ''stifle or restrict free competition for the letting of any contract for private or public work. . . ."^ Mavis claimed that Auburn and defendant D & L Communications "contrived" to develop radio communication equipment specifications favoring equipment sold by D & L before ostensibly open and competitive bidding to sell radios to the Auburn fire department.'^ Consequently, Mavis did not have a reasonable chance of selling his equipment," and he was injured to the extent of the time lost in preparing a useless bid.'- Auburn and D & L did not dispute the judgment that section 24- 1-2-3 was violated'^ but argued that Mavis' expenses were inherent in preparing any competitive bid."* The court dismissed this argument by noting that collusion between the government and a favored bidder was just the type of conduct section 24-1-2-3 was intended to prohibit. The ^468 N.E.2d 584 (Ind. Ct. App. 1984). Judge Hoffman concurred and filed a separate opinion. Id. at 587. ^Even though Mavis' damages were trebled under Ind. Code § 24-1-2-7 (1982), his damages of $1,458 were substantially less than his attorney's fees of $17,092. 468 N.E.2d at 585. Section 24-1-2-7 is patterned after section 4 of the Clayton Act, 15 U.S.C. § 15 (1982), and authorizes a person injured in business or property by a violation of the Act to bring a civil action seeking treble damages, costs and attorney's fees. The Mavis litigation was of long standing. Suit was originally filed in 1974 and resulted in summary judgment for Auburn. This judgment was reversed in 1980. A jury verdict for Mavis was set aside by the trial court. A second verdict for Mavis, which was the subject of the appeal, was entered in March, 1983. 468 N.E.2d at 584 n.l. See Sandidge v. Rogers, 167 F. Supp. 553 (S.D. Ind. 1958); Dan Purvis Drugs, Inc. v. Aetna Life Ins. Co., 412 N.E.2d 129 (Ind. Ct. App. 1980), discussed in Galanti, Business Associations, 1981 Survey of Recent Developments in Indiana Law, 15 Ind. L. Rev. 31, 31-34 (1982); and Citizens Nat'l Bank v. First Nat'l Bank, 165 Ind. App. 116, 331 N.E.2d 471 (1975), discussed in Galanti, Business Associations, 1976 Survey of Recent Developments in Indiana Law, 10 Ind. L. Rev. 57, 58-67 (1976). iND. Code § 24-1-2-3 (1982). 'Id. The provision was amended in 1978 to eliminate verbiage. Acts of 1978, Pub. L. No. 2-1978, § 2404, 1978 Ind. Acts 474. '"468 N.E.2d at 584. ''Id. at 586. 'The judgment was three times the value of Mavis' lost time. Id. at 584-85. 'Id. at 586. '*Id. 1986] BUSINESS LAW 69 collusion resulted in the expense of preparing a useless bid, which was what Mavis sought to recover rather than the profits he might have obtained had he secured the bid.'^ The result in Mavis is reasonable on its face, but it is possible to wonder why Auburn did not challenge the finding that it had violated section 24-1-2-3. Certainly the provision can apply to a municipality that tampers with the competitive bidding process, but there is nothing in the language mandating its application."^ Unlike section 24-1-2-1 of the Indiana Antitrust Act,'^ section 24-1-2-3 contains no absolute requirement of concerted action in either its original or amended form. Thus, it is possible to hold a party such as D & L liable, assuming that its conduct impeded the bidding process, while discharging the municipality. The word "absolute" is used advisedly because of the recent decision in Tilbury v. City of Fort Wayne.^^ Tilbury affirmed a summary judgment for the defendants in an action alleging Fort Wayne officials violated section 24-1-2-3 by conspiring to deprive the plaintiff of construction contracts for which he was the lowest bidder.'^ The Tilbury rationale was that the defendants were officials, or at least quasi-officials, of Fort Wayne and were acting for the city as an entity. Consequently, the city of Fort Wayne could not "scheme, contract or combine with itself. . . ."'° Tilbury, therefore, interprets the present version of section 24-1-2-3 as requiring concerted action. 2' The provision now uses the terms "scheme, contract or combination. "^^ These terms are also used in section 24-1- 2-1 of the Act, which does require concerted action. ^^ ^-Id. at 585-86. The court thus distinguished cases cited by Auburn where plaintiffs were denied rehef because they had failed to prove they would have received the bid but for the antitrust violation. See M.C. Mfg. Co. v. Texas Foundries, Inc., 517 F.2d 1059 (5th Cir. 1975); Ovitron Corp. v. General Motors Corp., 512 F.2d 442 (2d Cir. 1975); A.J. Goodman & Son, Inc. v. United States Lacquer Mfg. Corp., 81 F. Supp. 890 (D. Mass. 1949); Urban Prod. Int'l, Ltd. v. National Disposal Serv., 32 111. App. 3d 299, 336 N.E.2d 138 (1975). "•Not surprisingly, there is no legislative history on section 23-1-2-3, which was originally enacted in 1907. Acts of 1907, ch. 243, § 3. 'Tnd. Code § 24-1-2-1 (1982). This provision is patterned after section 1 of the Sherman Act, 15 U.S.C. § 1 (1982), which requires concerted action. 'H71 N.E.2d 1183 (Ind. Ct. App. 1984). '-'Id. at 1184. ''7<^. at 1186. The Supreme Court recently took a position similar to Tilbury when it overruled the long established intra-enterprise conspiracy doctrine propounded in United States V. Yellow Cab Co., 332 U.S. 218 (1947), and held that a parent corporation could not conspire with its wholly owned subsidiary. Copperweld Corp. v. Independence Tube Corp., 104 S. Ct. 2731 (1984). ^'471 N.E.2d at 1186. ^^IND. Code § 23-1-2-3 (1982). "Orion's Belt, Inc. v. Kayser-Roth Corp., 433 F. Supp. 301 (S.D. Ind. 1977); Rumple V. Bloomington Hosp., 422 N.E.2d 1309 (Ind. Ct. App. 1981). 70 INDIANA LAW REVIEW [Vol. 19:67 Of course, statutes are to be construed consistently and harmoni- ously,-' but when Mavis arose, the wording of the two provisions differed sufficiently to support the proposition that section 24-1-2-3 could apply to unilateral as well as concerted conduct distorting the competitive bidding process. Section 24-1-2-3 did use terms such as "understandings," "arrangements," "contracts," "agreements," or "combinations," which connote concerted action, but the statute also referred to "schemes," "designs," and "plans" which could be formulated and carried out by one entity.-' The language was changed in 1978 to parallel section 24- 1-2-1, which would seem to indicate a legislative intent to change the scope of section 24-1-2-3. It must be recalled, however, that the purpose of the Act that amended the section^^ was to rewrite the criminal sanctions for violating the Act and numerous other Indiana statutes. It is possible the drafters merely intended to eliminate verbiage rather than change the substantive scope of section 24-1-2-3. If so, Tilbury might be wrong in narrowly reading section 24-1-2-3. It must be conceded, however, that the present language does tend to connote concerted rather than individual action. If the Tilbury interpretation of section 24-1-2-3 requiring collusion is correct, then the probability of holding a third party such as D & L liable by itself while absolving Auburn is lessened. Otherwise, the result will be something akin to a one person tango. A collusion re- quirement with respect to public bids would undercut the argument against holding the governmental unit liable for any antitrust violation under section 24-1-2-3.^^ Assuming there is merit to reducing municipal antitrust exposure, as seems to be the case on the federal level, the General Assembly might well consider revising section 24-1-2-3 to impose Hability only on a third party tampering with a competitive bidding process, at least for public works, but not on the governmental unit itself. Recent federal developments'^ bring to question the wisdom of subjecting governmental units to harsh antitrust sanctions. The amounts involved in Mavis were small compared to some cases, ^^ and there is Httle likelihood that a judgment of less than $20,000 will bankrupt Auburn. It must be re- ^M71 N.E.2d at 1186 (citing Matter of Lemond, 274 Ind. 505, 413 N.E.2d 228 (1980), and Board of Medical Registration & Examination v. Turner, 241 Ind. 73, 168 N.E.2d 193 (I960)). "Ind. Code § 24-1-2-3 (1978), amended by Acts of 1978, Pub. L. No. 2, § 2404, 1978 Ind. Acts 474. ^"Acls of 1978, Pub. L. No. 2, § 2404, 1978 Acts 474. ^'Section 24-1-2-3 also covers letting of contracts for private works. '"See Town of Hallie v. City of Eau Claire, 105 S. Ct. 1713 (1985); Local Government Antitrust Act of 1984, 15 U.S.C.A. §§ 34-36 (Supp. 1985). ^in Unity Ventures v. Village of Grayslake, No. 81 C 2745 (N.D. 111. filed 1981), a judgment of $28.5 million was entered against the village and Lake County. 1986] BUSINESS LAW 71 membered, however, that the judgment ultimately will be paid by the taxpayers. The purpose of section 24-1-2-3, and of the entire Antitrust Act, is to prohibit anticompetitive behavior, '''' but this objective can be accomplished by making the outside party involved in rigging the bidding process liable.^' In fact, sole treble damage liability in a case such as Mavis might be a more effective deterrent. The premise of the Supreme Court's decision in Parker v. Brown^^ was that Congress did not intend the Sherman Act to displace the field of state economic regulation and that states were free to adopt a system of regulation in lieu of free competition. There are limits to the Parker V. Brown exemption," and perhaps the wisdom of permitting states to interfere in economic activities is suspect in this day of deregulation. The rationale, however, is basically a tenet of federalism which might carry over to the relationship between states and local government units. This view does not follow as a matter of course from the recent federal developments, but it is something the General Assembly might wish to consider. The courts may also wish to reconsider the point if section 24-1-2-3 arises again in a suit against an Indiana municipality.^"^ The Mavis opinion does not discuss what was done to influence the specifications for the communications equipment. It is possible, however, that efforts to influence specifications to favor one vendor's products should be immune from antitrust challenge as the natural consequence of the need to purchase specialized rather than fungible equipment. Perhaps the D & L system was the best for the needs of the Auburn fire department, and specifications favoring D & L could have benefited ^"Royer v. State ex rel. Brown, 63 Ind. App. 123, 112 N.E. 122 (1916). -This argument would not apply to rigging the bidding process for private works, which is also proscribed by section 24-1-2-3. In such cases treble damages against both parties would be appropriate in addition to the relief afforded by section 24-1-2-4. Ind. Code § 24-1-2-4 (1982). "317 U.S. 341 (1943). "See, e.g., Cantor v. Detroit Edison Co., 428 U.S. 579 (1976). See generally L. Sullivan, Antitrust § 238(a)-(b) (1977); Areeda, Antitrust Immunity for "State Action" after Lafayette, 95 Harv. L. Rev. 435 (1981). ^"It is unlikely Auburn would be subject to liability if the suit were under the Sherman Antitrust Act because of Hallie. In Community Communications Co. v. City of Boulder, 455 U.S. 40 (1982), the court held that a broad grant of home rule authority was not sufficient to protect local governmental action from antitrust scrutiny. The Indiana Code, however, specifically authorizes governmental units to establish, maintain, and operate firefighting and fire prevention systems and specifies that they may provide facilities and equipment for a system. Ind. Code § 36-8-2-3 (1982). This should be a sufficient grant of authority to permit an anticompetitive bidding process if the city so desires. The wisdom of such a process is questionable but, presumably, that is a matter for the electorate. Indiana law generally requires bidding for most public works or public purchases of materials and supplies except where relatively small amounts of money are involved. Ind. Code §§ 5-16-1-1.1 to 2-3, 5-17-1-1 to -5, 36-1-12-1 to -5 (1982). 72 INDIANA LAW REVIEW [Vol. 19:67 the city. It would be ironic if Auburn were liable for three times Mavis' expenses plus the cost of buying a superior D & L system. Of course, this argument fails where basically fungible products are involved and specifications precluding competitors would be based on irrelevant con- siderations.'' George R. Whitten, Jr., Inc. v. Paddock Pool Builders, Inc. {Whitten D" held that an effort by a vendor to influence a public body to adopt its specifications for a public pool was outside the scope of Parker v. Brown/' Whitten, however, gave a particularly narrow reading to the Noerr-Pennington-Trucking Unlimited doctrine. ^^ Furthermore, it was only a decision on the defendant's motion for summary judgment, and ultimately the defendant prevailed. It was eventually determined that the defendant's unilateral effort to get the municipality to purchase its product was not an antitrust violation. ^^ Consequently, D & L's conduct may have been lawful under the Sherman Act, but it must be remembered thai there is no federal counterpart to section 24-1-2-3. In conclusion. Mavis cannot be criticized as an implausible reading of section 24-1-2-3 of the Indiana Antitrust Act, particularly as it is now worded. The result of imposing liability on Auburn, however, is open to criticism on policy grounds because the taxpayer of the local governmental unit is the ultimate bearer of the liability. The state should protect the competitive bidding process, but imposing treble damage liability on a vendor who distorts the process, even if the conduct does not violate the Sherman Act,'*^ would satisfy this objective. 'A far-fetched example might be specifications for the purchase of paper clips that called for delivery in yellow boxes where one vendor used yellow boxes and all other vendors used green boxes. This is far-fetched, perhaps, but this is the kind of conduct which has no economic justification. M24 F.2d 25 (1st Cir.), cert, denied, 400 U.S. 850 (1970). ''Id. at 31. ""See California Motor Transp. Co. v. Trucking Unhmited, 404 U.S. 508 (1972); United .Mine Workers of America v. Pennington, 387 U.S. 657 (1965); Eastern R.R. Presidents Conference v. Noerr Motor Freight Co., 365 U.S. 127 (1961); see also Metro Cable Co. v. CATV of Rockford, Inc., 516 F.2d 220 (7th Cir. 1975) (action by officers of defendant corporation to influence municipality to deny a CATV franchise to plaintiff within doctrine). "George R. Whitten, Jr., Inc. v. Paddock Pool Builders, Inc., 508 F.2d 547 (1st Cir. 1974), ceri. denied, All U.S. 1004 (1975). It has been asserted that the Supreme Court's decision in Trucking Unlimited, 404 U.S. 508 (1972), implicitly overruled Whitten I. Reaemco, Inc. v. Allegheny Airlines, 496 F. Supp. 546, 556 n.6 (S.D.N.Y. 1980). Some courts, however, have taken the position that the doctrine does not apply where public officials are involved in the conspiracy. E.g., Duke & Co. v. Foerster, 521 F.2d 1277, 1281-82 (3d Cir. 1975). "The court of appeals also rejected the city's argument that it should have been permitted to show that other factors led to D & L's getting the contract. 468 N.E.2d at 586. Assuming the position of the court on the liability of Auburn under section 24-1- 1986] BUSINESS LAW 73 II. Sale of Business Doctrine Under Indiana law, as is now the case under federal law, a security is a security is a security. With apologies to Gertrude Stein, this comment reflects the impact of Wisconics Engineering, Inc. v. Fisher,^^ which dealt with the so-called "sale of business doctrine" under the Indiana Securities Act."*^ Wisconics anticipated the United States Supreme Court decision in Landreth Timber Co. v. Landreth,'^^ which held that the sale of one hundred percent of the shares of a business was the sale of a "security" within the meaning of federal securities law.^"* The Landreth decision resolved a dispute that had generated considerable commentary"^^ and sharply divided the circuit courts. '^^ Wisconics was an interlocutory appeal of a decision of the Huntington Circuit Court granting summary judgment in favor of plaintiff Fisher against Wisconics Engineering'^^ and the two principals behind Wisconics. Wisconics Engineering had purchased one hundred percent of the out- standing shares of Fisher's incorporated business, Fisher Engineering. 2-3 is correct, this holding is correct. If the relationship between D & L and the city in fact was an illegal restraint on the competitive bidding process, the violation occurred before the bidding. Therefore, any factors considered by the city in actually selecting the D & L bid were irrelevent and properly excluded at trial. ^'466 N.E.2d 745 (Ind. Ct. App. 1984). ^^IND. Code §§ 23-2-1-1 to -24 (1982). ^'105 S. Ct. 2297 (1985). See also Gould v. Ruefenacht, 105 S. Ct. 2308 (1985), decided as a companion case to Landreth. ^^The two primary federal securities acts are the Securities Act of 1933, 15 U.S.C. §§ Ildi-ll2i3i (1982), and the Securities Exchange Act of 1934, id. §§ 78a-78jj (1982). *The Wisconics court cited only a few of the articles and comments written on the subject. 466 N.E.2d at 761. See Coffey, The Economic Realities of a ''Security": Is There a More Meaningful Formula?, 18 Case W. Res. 367 (1967); Rapp, Federal Securities Laws Should Protect Some Purchasers of All or Substantially All of a Corporation's Stock, 32 Case W. Res. 595 (1982); Selden, When Stock is Not a Security: The "Sale of Business" Doctrine Under the Federal Securities Laws, 37 Bus. Law 637 (1982); Thompson, The Shrinking Definition of a Security: Why Purchasing All of a Company's Stock is not a Federal Security Transaction, 57 N.Y.U.L. Rev. 225 (1982). ""^The circuit courts that had adopted the sale of business doctrine included the Seventh, Canfield v. Rapp & Son, Inc., 654 F.2d 459 (1981); Fredericksen v. Poloway, 637 F.2d 1147, cert, denied, 451 U.S. 1017 (1981); the Ninth, Landreth Timber Co. v. Landreth, 731 F.2d 1348 (1984), rev'd, 105 S. Ct. 2297 (1985); the Tenth, Chandler v. K., Inc., 691 F.2d 443 (1977); and the Eleventh, King v. Winkler, 673 F.2d 342 (1982). The circuit courts that had rejected the doctrine included the Second, Golden v. Garafalo, 678 F.2d 1139 (1982); the Third, Gould v. Ruefenacht, 737 F.2d 320 (1984), aff'd, 105 S. Ct. 2308 (1985); the Fourth, Coffen v. Pohshing Machines, Inc., 596 F.2d 1202, cert, denied, 444 U.S. 868 (1979); the Fifth, Dailey v. Morgan, 701 F.2d 496 (1983); and the Eighth, Cole v. PPG Indus., Inc., 680 F.2d 549 (1982). ''Wisconics was a Delaware corporation owned equally by the individual defendants. It had been formed solely for the purpose of acquiring and holding all Fisher Engineering shares. 466 N.E.2d at 748. 74 INDIANA LAW REVIEW [Vol. 19:67 The individual defendants had guaranteed the promissory note that was the subject o( the htigation. The note represented a substantial portion of the purchase price. The court of appeals reversed the judgment for Fisher and remanded/'^ The business was not as successful as defendants Fitzpatrick and Zenner had anticipated/'' and eventually Wisconics defaulted on the note/'' The defendants maintained that Wisconics' problems were the result of Fisher's fraudulent misrepresentations, while Fisher contended the defendants had looted the corporation and misappropriated assets to themselves." The trial court granted Fisher's second motion for summary judg- ment.'- It found, in essence, that the defendants had approached Fisher to buy his business and had been furnished audited corporate finanical statements for five years and, more importantly, possessed the business experience to understand the statements." The trial court also concluded that the sale of Fisher Engineering did not involve a sale of a security under the "economic reality test" because the defendants had purchased one hundred percent of the shares and no profits or losses could be derived from the entrepreneurial or managerial efforts of anyone other than themselves.^"* The defendants raised six issues on appeal, ^^ but only two of these are pertinent to this review. ^^ The first of these was whether the trial court erred in determining that the defendants had not set forth specific facts supporting their affirmative defense of common law fraud sufficient to preclude summary judgment." The defendants, who had the burden ^"Id. The court affirmed insofar as the trial court ruled against defendants on their common law fraud defense. Id. ''Id. at 749 n. 3. ^'Id. at 750. The note contained an acceleration clause, and all principal and interest became due on default. Id. at 749. 'Id. at 749. The shares had been pledged as security on the note. Fisher elected to vote the shares and regained control of Fisher Engineering. Id. at 750. Eventually, the corporation was placed in a bankruptcy reorganization proceeding operated under Fisher's control. Id. 'Id. at 750. The second motion for summary judgment appeared to have been more narrowly focused than the first motion. Id. 'Id. at 750-51. ''Id. at 751. ''Id. at 748. "The court rejected four procedural arguments raised by defendants concerning the granting of summary judgment. Id. at 751-54. Various arguments were also raised on appeal pertaining to the secured transaction provisions of the Indiana Uniform Commercial Code. IND. Code §§ 26-1-9-101 to -507 (1982). An impairment of collateral under Ind. Code § 26-1-3-606 was also alleged. The Wisconics court concluded that there were issues of fact that had to be resolved with respect to these defenses. 466 N.E.2d at 762-67. '466 N.E.2d at 754-55. 1986] BUSINESS LAW 75 of establishing their affirmative defense, ^'^ were disadvantaged because their defense consisted of indefinite, imprecise, and general statements about Fisher's representations rather than specific facts which would show a genuine material issue. Regardless of whether the inadequacies of the defendants' affidavits were inadvertent or whether they could not be any more specific under the circumstances, there does not appear to be much doubt that Fisher's alleged representations fell short of actionable common law fraud. ^^ In fact, the defendants probably could not have been more specific because they had been given ample opportunity to examine the books, records, and other information on Fisher Engi- neering. ^° A particularly interesting aspect of the court's discussion of the fraud issue was its reference to an investment letter signed by the defendants.^' Some may consider investment letters to be mere technicalities required by the Indiana Securities Act to eliminate the need to register securities before sale. The court, however, gave the investment letter in this case great weight and determined that the letter's representations and state- ments demonstrated an economic and financial sophistication that would make their claim of reliance on vague general representations by Fisher "inconceivable."^^ Wisconics would seem to make it more difficult to allege common law fraud in a securities case where the purchasers have signed an investment letter. The court of appeals also concluded the defendants' affidavit was inadequate because Fisher's representations were either statements of opinion rather than facts, or were factual representations pertaining to future events. ^^ As a general proposition, neither expressions of opinion nor statements as to future expectations are grounds for fraud. ^"^ This is particularly so where, as here, sophisticated businessmen had the opportunity to scrutinize what they were buying. ^^ The second pertinent issue raised on appeal by the defendants was the trial court's finding that the sale of Fisher Engineering did not involve a sale of a security. By rejecting the "sale of business" doctrine '"Id. at 755. The court relied on Johnson v. Padilla, 433 N.E.2d 393 (Ind. Ct. App. 1982), and Costello v. Mutual Hosp. Ins., Inc., 441 N.E.2d 506 (Ind. Ct. App. 1982). '''Id. at 755-59. ^'Id. at 757. ''Id. ''Id. ''Id. at 756, 758-59. ''See Automobile Underwriters v. Rich, 222 Ind. 384, 53 N.E.2d 775 (1944); Balue V. Taylor, 136 Ind. 368, 36 N.E. 269 (1893); Harness v. Home, 20 Ind. App. 134, 50 N.E. 395 (1898). '^Wisconics, 466 N.E.2d at 758. The court pointed out that ordinary prudence and diligence would make Fitzpatrick and Zenner request specific data supporting any rep- resentations of profitability. Id. at 757-58. 76 INDIANA LAW REVIEW [Vol. 19:67 and accepting that the word "security" as used in section 23-2-l-l(k) of the Indiana Securities Act^^ means "stock," whether it is one share of many sold for investment purposes or all shares sold to shift control of a business, the Wisconics court subjected Fisher to possible liability under section 23-2-1-12 of the Indiana Securities Act,^^ the antifraud provision of the Act. Section 23-2-1-12 makes the seller of securities Hable for fraudulent acts, for untrue statements of material facts, or for misleading omissions of material facts. ^*^ The central consideration in determining the ma- teriality of an omission is whether a reasonable investor would attach importance to the information when making an investment decision. ^^ Section 23-2-1-12 liability differs from common law fraud in that reUance by the purchaser is not required.^" There is no assurance that the defendants will prevail in Wisconics on remand, but some of Fisher's alleged misrepresentations or omissions might be sufficient to estabhsh a defense to Fisher's suit on the note^' even though his statements were insufficient to establish a common law fraud defense. The major portion of the court's discussion on the application of the Indiana Securities Act to the transaction was on the so-called economic reality test utilized by the Seventh Circuit in Canfield v. Rapp & Son, Inc.'^ In Canfield, the court held that words in the definition section of the Securities Exchange Act of 1934^^ were not to be given their literal meaning and that a share of "stock" was a security for federal securities law purposes only if it: (1) represented an investment in a common venture, and (2) was premised upon a reasonable expectation of profits, (3) to be derived from the entreprenurial or managerial efforts of others. ^^ Under this rationale, the sale of a going concern that just '^Ind. Code § 23-2-l-l(k) (1982). As the Wisconics court noted, relying on Arnold V. Dirrim, 398 N.E.2d 426 (Ind. Ct. App. 1979), securities fraud is broader in scope than common law fraud. 466 N.E.2d at 759 n.8. ^IND. Code § 23-2-1-12 (1982). ""The provision is patterned after section 101 of the Uniform Securities Act, Unif. Sec. Act § 101, 7A U.L.A. 568 (Master ed. 1978), which in turn is patterned after SEC rule lOb-5, 17 C.F.R. § 240.10b-5 (1982). "Arnold, 398 N.E.2d at 433. See generally Galanti, Business Associations, 1980 Survey of Recent Developments in Indiana Law, 14 Ind. L. Rev. 91 (1981). ^"Arnold, 398 N.E.2d at 435-36. "'466 N.E.2d at 759-60. '^654 F.2d 459 (7th Cir. 1981), discussed in Galanti, Business Associations, 1982 Survey of Recent Developments in Indiana Law, 16 Ind. L. Rev. 25, 41-46 (1983) [hereinafter cited as 1982 Survey]. 15 U.S.C. § 78c(a)(10) (1982). Canfield also alleged a violation of the Securities Act of 1933, id. § 77q(a). The definition of security in the 1933 Act is substantially the same as the definition in the 1934 Act and they are considered functional equivalents. Canfield, 654 F.2d at 463 n.5. '654 F.2d at 463. The Canfield court, as well as the other courts that had adopted 1986] BUSINESS LAW 11 happens to be structured as a stock transfer is not subject to federal antifraud rules because the essence of the transaction is the transfer of the business to which the * 'stock sale" was a mere incident. As noted above, the circuits were split on the sale of business doctrine, and some courts specifically rejected a narrow reading of security. ^^ In Golden v. GarafalcP^ and Gould v. Ruefenacht,^^ the courts reasoned that the economic reality test was appropriate where an "unusual or unique" instrument was involved but not when the instrument was labeled "stock" and possessed all the characteristics typically associated with stock. ^^ It was this reading of the definition of security that prevailed in the Supreme Court. ^^ The Seventh Circuit is now bound to follow Wisconics in applying Indiana law in diversity or pendent jurisdication cases under the Erie doctrine^^ and Landreth and Gould in applying federal law. This is worth noting because, in Canfield, the Seventh Circuit also applied its narrow definition of security under federal securities law to the Indiana Securities Act.«' The Wisconics court, in rejecting the sale of business doctrine, ^^ found support for its position in B & T Distributors, Inc. v. Riehle.^^ The court of appeals in Riehle^"^ had concluded section 23-2-1-12 applied to the sale of a business^^ and this aspect of the case was affirmed by the Indiana Supreme Court. ^^ Although Riehle is not the clearest decision and was subsequently reversed, it did apply the antifraud provision to the sale of a business. This was an implicit recognition that the transaction was a sale of securities within the meaning of section 23-2- 1-1 (k). How- ever, the sale of business doctrine was not directly considered in the case. No one can seriously argue that the narrow view of decisions like Canfield is implausible. Nor can it be seriously denied that it may be the sale of business doctrine, relied on United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), although the instrument involved in Forman labeled "stock" really represented only an interest in a cooperative apartment. ''^See supra note 46. '^678 F.2d 1139 (2d Cir. 1982). "737 F.2d 320 (3d Cir. 1984), aff'd, 105 S. Ct. 2308 (1985). '^Golden, 678 F.2d at 1143. '''Landreth, 105 S. Ct. at 2302. See generally Galanti, 1982 Survey, supra note 72, at 43-44. «"Erie R.R. v. Tompkins, 304 U.S. 64 (1938). '''Canfield, 654 F.2d at 463 n.5. «H66 N.E.2d at 761. "266 Ind. 646, 366 N.E.2d 178 (1977). •^^359 N.E.2d 622 (Ind. Ct. App. 1977), rev'd on other grounds, 266 Ind. 646, 366 N.E.2d 178 (1977). ^'359 N.E.2d at 624-25. ^'•266 Ind. 646, 647, 366 N.E.2d 178, 179 (1977). 78 INDIANA LAW REVIEW [Vol. 19:67 inappropriate to subject a sale of an entire business to attack under federal or state securities laws simply because it is structured as a stock transfer where a similar but differently structured transaction can be attacked only on common law fraud grounds. As the Wisconics court rightly noted,'' however, this really is a matter for legislative determi- nation/'' III. Securities Fraud Another interesting case involving the Indiana Securities Act decided during the survey period was Crook v. Shearson Loeb Rhoades, Inc.^"^ Crook sued Shearson,^" alleging that actions of two Shearson brokers violated the antifraud provisions of the federal Commodity Exchange Act"^' and the Indiana Securities Act^^ and constituted common law fraud. ^' Shearson counterclaimed for a debit balance in Crook's account.^"* Crook apparently did not appreciate the risk involved in trading commodity futures. He made a profit on some trades, but overall he suffered substantial investment losses. ^^ Eventually, Shearson liquidated his account, but there was a large debit balance even after taking funds from a money market account. '^^ It also appears that the two brokers might have overreached because there was no evidence that Crook had given them discretionary authority to trade his account. ^^ Furthermore, they neither followed Shearson procedures relating to new commodity trading accounts nor determined if speculative investments were appropriate for Crook.^^ The court concluded that Crook did not understand the concept of "margin" and its significance in commodity trading. ^^ He apparently ^466 N.E.2d at 762. "'Defendants were not satisfied with a substantial reduction in attorney's fees awarded to Fisher. Id. at 767-68. The court of appeals concluded they were challenging the decision to award fees rather than the reasonableness of the fees. Defendants were successful to the extent that the award could be predicated only upon a favorable judgment on the promissory note and the decision on the note was reversed. Id. at 768. This is clearly right, but it is certainly reasonable to anticipate that fees would be imposed on defendants if Fisher should happen to prevail at the trial. "'591 F. Supp. 40 (N.D. Ind. 1983). *'Now known as Shearson/American Express, Inc. Id. at 42. "'7 U.S.C. § 6(b) (1976). «lND. Code §§ 23-2-1-12, -19 (1982). ^'591 F. Supp. at 42. '''Id. at 47. *M Crook apparently hoped that the market would rally to cover his losses and a bad check he had given Shearson. Id. -^Id. at 43. N '^Id. at 44. •^Id. at 43. 1986] BUSINESS LAW 79 had signed a Shearson Commodity Customer Agreement but had not received a Risk Disclosure Statement that should have been attached to the agreement. '^"^^ More significantly, the court concluded that even if he had received this statement, the true risks involved would not have been fully explained.'"' Obviously, Crook was not an appropriate investor to be engaged in commodity trading. He understood that substantial profits could be made in a short time by such investing, but he did not understand that the quid pro quo for these possible riches was the possibility of substantial losses. Nor did he understand the steps or procedures that could limit losses in such trading. '"^ The Crook decision should give persons in the securities industry some concern because now the broker operates at his peril if he merely gives documents explaining investment risks. It will take a clear record of explanation as to what is involved to preclude the unsuccessful investor from claiming he or she has not been apprised of the risks. This might not be a significant problem with the typical person investing in stocks, but it could be with an unsophisticated, speculative investor in options or futures. "^^ The complaint in Crook alleged a violation of section 6b(A)'°'^ of the Commodity Exchange Act. This provision is similar to section 10(b) of the Securities Exchange Act of 1934,'°^ and there is an implied right of action under section 6b'°^ just as there is under section 10(b). It is well settled that negligent conduct is not enough to establish liability under section 10(b) and Rule lOb-5, and a plaintiff must show scienter to prevail. '°^ However, the negligence-scienter issue has not been settled under the Commodity Exchange Act."^^ The Crook court concluded it '""/£/. at 43-44. ""M at 44. '"Vaf. at 48. '"-At a minimum, Crook warns brokerage firms to examine commodity customer agreements to determine if there has been a change in the customer's status. The court noted that a new account agreement was executed by the plaintiff in January, 1980, and that a commodity customer agreement received in July, 1980, indicated "a change in occupation and title." It concluded that "an occupational change could signal a change in the financial condition of a customer about which a broker should inquire." 591 F. Supp. at 44. '"^7 U.S.C. § 6b(A) (1982). '"^5 U.S.C. § 78j(b) (1982). '"^Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353 (1982). '"^Aaron v. SEC, 446 U.S. 680 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). '"*'The Commodity Futures Trading Commission has concluded negligence can support liability under section 6b(A). Gordon v. Shearson Hayden Stone, Inc., Comm. Fut. L. Rep. (CCH) 1 21,016 (1980). This position has been rejected by some courts. First Com- modity Corp. V. CFTC, 676 F.2d 1, 4 (1st Cir. 1982). Another court views the scienter question 80 INDIANA LAW REVIEW [Vol. 19:67 did not have to decide the issue because the brokers had acted recklessly, '°^ and recklessness has satisfied the scienter requirement in cases brought under both the Securities Exchange Act"° and the Commodity Exchange Act."' The most intriguing aspect of Crook for purposes of this review is the discussion of the Indiana Securities Act. The court quoted section 23-2-1-12,"- which prohibits fraudulent practices in connection with the offer, sale, or purchase of a security. The court then stated that "LC. 23-2-1-19 provides for the recovery of damages if a violation is proven.""^ Section 23-2-1-12 is similar to section 101 of the Uniform Securities Act,"^ and ahhough the language of these provisions is similar to the language of section 10(b), it has been held that the standard of Hability is negligence rather than scienter."- Because the evidence established the scienter necessary, or perhaps necessary, for a violation of section 6b(A) of the Commodity Exchange Act, the negligence standard of section 23- 2-1-12 was clearly satisfied."^ There is only one problem with the court's discussion of the Indiana Securities Act. Section 23-2-1-19"^ is patterned after section 410(a) of the Uniform Securities Act,"^ which provides for damages if a violation is estabhshed and the investor no longer owns the security."' Unfortunately, section 23-2-l-19(a) was amended in 1975 to eliminate the language referring to damages if the securities are no longer owned by the investor, which appears to leave rescission as the only authorized remedy for an injured purchaser.'^" Unlike section as unsettled. Kotz v. Bache Halsey Stuart, Inc., 685 F.2d 1204, 1207 (9th Cir. 1982). '"^591 F. Supp. at 48. Scienter would seem necessary for a violation of section 6b(A) because the provision makes unlawful actions that "cheat or defraud or attempt to cheat or defraud." This is much stronger language than found in section 10(b) of the 1934 Act and implementing rule lOb-5. 17 C.F.R. § 240.10b-5 (1982). '"E.g., Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977); Sundstrand Corp. V. Sun Chemical Corp., 553 F.2d 1033 (7th Cir.), cert, denied, 434 U.S. 875 (1977). "'See Kotz, 685 F.2d at 1207; First Commodity Corp., 676 F.2d at 4. "Mnd. Code § 23-2-1-12 (1982). "^591 F. Supp. at 49. "^Unif. Sec. Act. § 101, 7A U.L.A. 568 (Master ed. 1978). •"Rousseff V. Dean Witter & Co., Inc., 453 F. Supp. 774 (N.D. Ind. 1978). See also State v. Fries, 214 Neb. 874, 337 N.W.2d 398 (1983); Bradley v. Hullander, 272 S.C. 6, 249 S.E.2d 86 (1978); State v. Temby, 108 Wis. App. 521, 322 N.W.2d 528 (1982). "^591 F. Supp. at 49. "Mnd. Code § 23-1-2-19 (1982). ""Umf. Sec. Act § 410, 7A U.L.A. 670 (Master ed. 1978). "'Section 23-2-1-19 provided for damages when Rousseff, relied on by the Crook court, arose. Rousseff, 453 F. Supp. at 778. '^'Act of April 30, 1975, Pub. L. No. 265-1975, § 15, 1975 Acts 1402, 1444 (amending Ind. Code § 23-2-1-19 (1972)). The primary purpose for amending § 23-2-1-19 was to 1986] BUSINESS LAW 81 410,'^' nothing in section 23-2-1-19 authorizes a damage action for transactions after 1975. Certainly it cannot be argued that the Indiana General Assembly impliedly created a cause of action where securities are no longer owned by repealing statutory language expressly creating a cause of action. The current language of section 23-2-1-19 appears to have escaped the notice of the parties and the court, or perhaps it was simply ignored. Because Crook had been closed out of his position in 1980, he no longer owned any security. '^^ The court also discussed Crook's allegation that Shearson's liability could be based on common law fraud. '^^ It concluded there was a fiduciary relationship between Crook and the Shearson brokers who exercised de facto control over his account and that the elements of common law fraud under Indiana law were satisfied. '^'' The court found that the brokers failed to disclose all material facts and did not adequately explain the material facts that were disclosed. '^^ Although awarding damages under section 23-2-1-19 might be ques- tionable, the Commodity Exchange Act violation and common law fraud justified compensatory damages. '^^ Crook did not get all he wanted because the court rejected his claim for punitive damages. '^^ Shearson may have acted recklessly, but it did not do so knowingly or deliber- ately.'^^ Punitive damages to deter future misconduct were considered inappropriate because Shearson had procedures and policies designed to protect unsophisticated investors such as Crook and it only had to follow them.'^^ Of course, if there are procedures that have been ignored, punitive damages might be appropriate to ensure that brokerage firms will keep a tighter rein on brokers. However, if the court is right in insisting that the terms of agreements such as the Shearson Commodity Customer Agreements have to be explained to and completely understood by customers under penalty of punitive damages, the potential liability give a cause of action to sellers as well as purchasers of securities. See generally Galanti, Business Associations, 1975 Survey of Recent Developments in Indiana Law, 9 Ind. L. Rev. 33, 63 (1975). '^'Damages are available for violations of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77(1)(2) (1982), from which § 410 was derived. '"591 F.Supp. at 47. '"M at 49-50. '''Id. See Hall-Hottel Co. v. Oxford Square Co-op, Inc., 446 N.E.2d 25 (Ind. Ct. App. 1983); Peoples Trust Bank v. Braun, 443 N.E.2d 875 (Ind. Ct. App. 1983); Plymale V. Upright, 419 N.E.2d 756 (Ind. Ct. App. 1981); Fleetwood Corp. v. Mirich, 404 N.E.2d 38 (Ind. Ct. App. 1980). '2^591 F. Supp. at 50. ''""Id. at 50-52. The court did not fix the precise amount of recovery because it was not aware of the appropriate interest rate. Id. at 51-52. '-'Id. at 50-51. '''Id. at 51. ''"Id. 82 INDIANA LAW REVIEW [Vol. 19:67 of brokerage firms would be draconian. Compensatory damages plus interest probably is appropriate relief for investors like Crook. '^^ IV. Closely Held Corporations, Fiduciary Duties, and Derivative Suits One case decided during the survey period demonstrates the problems that can flow from a casually run family business. It also decided several issues pertaining to shareholder derivative actions which had not been resolved previously by Indiana courts. Consequently, the decision in Dotlich V. Dotlich^^^ is worth noting by Indiana attorneys representing closely held corporations. In Dotlich, the court of appeals affirmed in substantial part a judgment of the Johnson Circuit Court against two directors of a closely held corporation.'^^ The action by Sam Dotlich, one of four brothers, against two of his brothers alleged fraud and breach of their fiduciary duties as directors of a family corporation in which the four brothers were directors and equal shareholders. The dispute was over ownership of various parcels of real estate. The trial court imposed a constructive trust on property held by defendant Monnie DotHch, ordering him to convey it to the corporation. Monnie was also assessed compensatory and, with his brother Mechel, punitive damages as well as attorney's fees and costs. The trial court also appointed a receiver to take over the business of the cor- poration. Sam, Mechel, and the fourth brother, Merko DotHch, were ordered to reimburse the corporation for the value of their homes which had been built with corporate funds. The court of appeals affirmed the judgment except for the attorney fee award and the assessing of punitive damages against Mechel Dotlich.'" The corporation was a successor to a partnership of the four brothers. Real estate purchased by the partnership with partnership funds had been titled in Monnie's name.'^'' Even after the two family corporations '^The court awarded Crook reasonable attorney's fees, except for expenses and attorney's fees for a deposition which had to be cancelled because of inclement weather. Id. at 52. Crook's conduct barred full recovery from Shearson even though Shearson had failed to follow its own policies to prevent investors such as Crook from engaging in commodities trading. Once Crook began "using" Shearson, hoping the market would rally, he became the guilty party, justifying an award to Shearson on its counterclaim. Id. '^'475 N.E.2d 331 (Ind. Ct. App. 1985). '"/^. at 350-51. '^^Defendant Monnie Dotlich counterclaimed for an accounting. The counterclaim was severed from the derivative action and was pending at the time of the Dotlich decision. Id. at 337-38. ""It is interesting to speculate whether the problems that beset the Dotlich brothers could have been avoided if the title to the real estate had been taken in the name of the partnership as clearly permitted by § 23-4-1-8(3) of the Indiana Uniform Partnership Act. 1986] BUSINESS LAW 83 were formed, '^^ title to property purchased with corporate funds, except for the residences, '^^ was put in Monnie's name alone.'" Monnie claimed ownership in the six parcels of real estate titled in his name. Mechel sided with Monnie on this issue and claimed absolute ownership of his home. Sam and Merko contended the corporation beneficially owned all nine parcels. '^^ Sam did not discover the property title situation until 1976.'^^ He attempted to have the corporation remedy the title irregu- larities for all nine parcels, but he was not successful."*^' It was clear at this point that Monnie was claiming all property in his name.'^' Sam's suit charged Monnie and Mechel with breaching their fiduciary duty to the corporation by converting corporate opportunities to their own ben- efit. Monnie was accused of mismanaging corporate affairs, and Mechel was accused of aiding and abetting. "^^ Several issues were raised on appeal, '"^^ most of which related to business associations law.'^^ The first issue was whether Sam could be an adequate representative for the corporation in maintaining a derivative action as required by Indiana Trial Rule 23.1."*^ The defendants argued that Sam was disqualified because his home was constructed with cor- porate funds on property purchased with corporate funds and so engaged Ind. Code § 23-4-1-8(3) (1982). See generally J. Crane & A. Bromberg, Law of Part- nership § 38 (1968). '"Only one of the corporations was involved in the litigation. 475 N.E.2d at 336. '"/c^. The homes of three of the brothers, including the plaintiff's, were purchased and maintained by the corporation although titled in the names of the individuals. '"M at 337. ''""Id. '""Before Sam filed the shareholder derivative action he introduced a resolution at a meeting of the directors to have all corporate property titled in the corporate name. This motion failed to pass when the two defendant directors voted against it. Id. '''Id. '^The fourth brother, Merko, was brought in as a necessary party to the action. Id. The suit sought to have the property conveyed to the corporation and to assess punitive damages against the defendants. It also requested a court-appointed receiver for the corporation. The trial court entered a judgment in favor of the corporation, imposing a constructive trust on Monnie and compelling him to transfer title to the corporation. The three homes were found to be corporate property and the three brothers were ordered to pay the corporation the value of their respective residences. This issue was deemed to have been tried by the implied consent of the parties. Id. at 349-50. Punitive damages, attorney's fees, and expenses were assessed against Monnie and Mechel in favor of the corporation. Id. at 337-38. '"H75 N.E.2d at 338. '""The defendants also raised statute of frauds and statute of limitation issues. 475 N.E.2d at 340-42. '"^Ind. R. Tr. p. 23.1. The rule bars a derivative action if it appears that the plaintiff does not fairly and adequately represent the interest of shareholders in enforcing the right of the corporation. 84 INDIANA LAW REVIEW [Vol. 19:67 in the same misconduct charged against them.'^^ The Dotlich court recognized that where all shareholders participate in a wrongful act, no shareholder would be able to bring a derivative suit,"*^ and even the corporation would be barred from suing. ''^^ It rejected this argument under the circumstances because Sam recognized the corporation ben- eficially owned his residence, while the defendants were resisting the corporation's claim. '•^'^ Mechel further argued that Sam was both plaintiff and defendant in suing derivatively. This argument was properly rejected even though there is no Indiana authority directly on point. '^° The flaw in Mechel's argument was that it ignored the fundamental premise that a derivative action is an indirect effort to enforce the rights of the corporation and not an effort to pursue rights personal to the shareholder.'^' He also argued that a director should not be able to bring a derivative action."- The court, relying on the New York case of Tenney v. Ro- senthal,^-^ held that a shareholder who is a director is not barred from suing derivatively because the right to sue facilitates performance of a director's stewardship obligation.'^"* Tenney involved a statute authorizing a director to sue derivatively, but Dotlich used this policy ground to justify applying the rationale to all derivative suits. '^^ This result is clearly correct. To rule otherwise would mean that a minority director wishing to protect the interests of a corporation would be precluded from doing so. He would be unable to get the board of directors to act, and would be unable to sue as a shareholder because he was on the board. This '^^475 N.E.2d at 339. ''-Id. '''See Ross v. Tavel, 418 N.E.2d 297 (Ind. Ct. App. 1981). See generally 13 W. Fletcher, Cyclopedia of the Law of Private Corporations § 5972 (Callaghan 1984). It is even possible for the sins of a shareholder to live beyond his ownership. For example, in Bangor Punta Operations, Inc. v. Bangor & Aroostook R.R., 417 U.S. 703 (1974), and Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W. 1024 (1903), the corporations were unable to bring an action in their own names where the present owners were unable to bring derviative suits because they were not contemporaneous owners. This presents the ironic situation of not being able to do something directly because the same action could not be done indirectly. "475 N.E.2d at 339. There is nothing unusual in the resolution of this issue and, in fact, it is consistent with Gabhart v. Gabhart, 267 Ind. 370, 370 N.E.2d 345 (1977). ""The Dotlich court relied on 13 W. Fletcher, supra note 148, at § 5947. '''In unusual cases, it is possible that relief in a derivative action may run in favor of minority shareholders rather than the corporation. E.g., Perlman v. Feldman, 219 F.2d 173 (2d Cir. 1955), cert, denied, 349 U.S. 952 (1954). ''-475 N.E.2d at 339. '"6 N.Y.2d 204, 189 N.Y.S.2d 158, 160 N.E.2d 463 (1959). ''M75 N.E.2d at 339. '"The same rationale has been used to permit minority trustees to sue majority trustees on behalf of a charitable corporation. Holt v. College of Osteopathic Physicians, 61 Cal. 2d 250, 40 Cal. Rptr. 244, 394 P.2d 932 (1964). 1986] BUSINESS LA W 85 *'Catch-22" situation could eliminate the derivative action in the context of closely held corporations. Both defendants also argued that Sam had not alleged the particular efforts to obtain the requested relief as required by Rule 23.1. They contended that the demand required by the rule must be explicit.'^'' The court recognized that under certain circumstances the demand requirement is excused. '^^ The demand was not excused in Dotlich, but Sam's res- olution attempting to have all parcels titled in the corporate name was sufficient because the board of directors had had the opportunity to remedy the complaint and avoid litigation. '^*^ The failure to pass the resolution was a rejection of "nonjudicial efforts to obtain the relief requested in the derivative complaint. '"^^ One aspect of the defendants' statute of limitations argument should be noted. They argued that Sam's lack of knowledge of Monnie's claim did not constitute the active concealment needed to toll the running of the statute.'^'' The court recognized, relying on Forth v. Forth, ^^^ that conceahng a cause of action entails some kind of "trick" or contrivance. It concluded, however, that Monnie's fiduciary duty to the corporation and the other shareholder-directors obviated the need for active and in- tentional concealment.'" His failure to disclose his intentions concerning the property tolled the statute and all actions were timely.'" This is one more indication of the willingness of Indiana courts to hold principals in closely held corporations to a rather high standard of loyalty.'^'' Dotlich also refined the concept of corporate opportunity under Indiana law. The court emphasized that Monnie had the burden of proving he had not violated his fiduciary duty. The law presumes fraud when it is shown that a fiduciary has attempted to benefit from a questioned transaction.'^^ At this point the burden of proof shifts to '5^475 N.E.2d at 340. '''Id. at 340 n.2. Tevis v. Hammersmith, 31 Ind. App. 281, 66 N.E. 912, aff'd, 161 Ind. 74, 67 N.E. 672 (1903). '5H75 N.E.2d at 340. ''""Id. '"^Id. at 341. '^'409 N.E.2d 641 (Ind. Ct. App. 1980). '"475 N.E.2d at 341. The court relied on Forth, 409 N.E.2d 641 (Ind. Ct. App. 1980), and Guy v. Schuldt, 236 Ind. 101, 138 N.E.2d 891 (1956). '"475 N.E.2d at 341. ''*Id. See Cressy v. Shannon Continental Corp., 177 Ind. App. 224, 378 N.E.2d 941 (1978), discussed in Galanti, Business Associations, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L. Rev. 133, 150-55 (1980); Hartung v. Architects Hartung/ Odle/Burke, Inc., 157 Ind. App. 546, 301 N.E.2d 240 (1973), discussed in Galanti, Business Associations, 1974 Survey of Recent Developments in Indiana Law, 8 Ind. L. Rev, 24, 42-46 (1974). See also Motor Dispatch, Inc. v. Buggie, 177 Ind. App. 347, 353-54, 379 N.E.2d 543, 547 (1978). '''See Lucas v. Frazee, 471 N.E.2d 1163 (Ind. Ct. App. 1984). 86 INDIANA LAW REVIEW [Vol. 19:67 the fiduciary to overcome the presumption and show the actions were honest and done in good faith. '^^ This approach is similar to the "two step" approach of the Minnesota courts in Miller v. Miller^^^ and A.C. Fetters Co. w St. Cloud Enterprises, Inc.^^^ These decisions adopt the flexible view that a corporate opportunity exists not only when the corporation has an actual interest in the property but also when the opportunity is closely associated with the existing or prospective activities of the corporation.'^*^ Once the threshold question of the opportunity is established by the corporation or a shareholder, the burden is shifted to the insider to show the questioned conduct was fair and equitable to the corporation. If this cannot be done, the corporation will prevail. This approach to the corporate opportunity doctrine protects the interests of the corporation and has the added benefit of protecting the interests of insiders who might be able to justify conduct which facially appears to usurp a corporate opportunity. '^° The Dotlich court did not expressly adopt this position, but it does fit the Dotlich result and is a logical continuation of cases like Hartung^^^ and Cressy.^^^ Another interesting issue in Dotlich was the liability of Mechel Dotlich, who sided with his brother, defendant Monnie.'^^ The court made it clear that normally a director is not liable for the misconduct of a co-director, ''' but a director who has participated in the wrong- doing,'^- or who learns of it and takes no action, or who acquiesces, is liable.'-^ Mechel was found to have breached his duty when he learned of but did not disclose Monnie's claim, thus aiding and abetting Monnie's "*M. See also Blaising v. Mills, 176 Ind. App. 141, 374 N.E.2d 1166 (1978); Schemmel V. Hill, 91 Ind. App. 373, 169 N.E. 678 (1930); Zaring v. Kelly, 74 Ind. App. 581, 128 N.E. 657 (1920). Of course, defendants had the additional problem of appealing from a negative judgment and could prevail only if the evidence was uncontradicted and led unerringly to a conclusion different from that of the trial court. Captain & Co. v. Town, 404 N.E. 2d 1159 (Ind. Ct. App. 1980). '"222 N.W.2d 71 (Minn. 1974). ">*222 N.W.2d 83 (Minn. 1974). ""222 N.W.2d at 79-80. '^"Compare Fetters, 111 N.W.2d 83 (Minn. 1974), mth Irving Trust Co. v. Deutsch, 73 F.2d 121 (2d Cir. 1934), cert, denied, 194 U.S. 708 (1935). See generally W. Cary & M. EiSENBERG, Corporations 594-600 (5th ed. 1980); H. Henn & J. Alexander, Laws OF Corporations § 237 (3rd ed. 1983). ' Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 301 N.E.2d 240 (1973). •^^Cressy v. Shannon Continental Corp., 177 Ind. App. 244, 378 N.E.2d 941 (1978). "'475 N.E.2d at 343. Of course, Mechel did wish to keep title to his residence. '''Id. '".See Rosenbloom v. Electric Motor Repair Co., 31 Md. App. 711, 358 A.2d 617 (1976); McDonough v. Jones, 48 Or. App. 785, 617 P. 2d 948 (1980). '^\See In re Illinois Acceptance Corp., 531 F. Supp. 737 (CD. 111. 1982); Reid v. Robinson, 64 Cal. App. 46, 220 P. 676 (1923). 1986] BUSINESS LAW 87 breach. '^^ This issue appears to be a close call, but what apparently tipped the case against Mechel was his failure to vote for the resolution to have all property titled in the corporate name.'^*^ Another corporate law issue decided in Dotlich was the appropri- ateness of appointing a receiver for the corporation. The court recognized that section 23-l-7-3(b)'^'^ of the General Corporation Act would not support the appointment because that section applies to involuntary dissolutions. '^° However, the court was satisfied that Indiana Code sec- tions 34-1-12-1(3) and (7) support the appointment of a receiver in extraordinary cases where, as here, there appears to be overreaching by a controlhng person.'^' Both defendants appealed from the award of punitive damages. "^^ The award was affirmed as to Monnie but reversed as to Mechel. '*^^ The court concluded that even under the clear and convincing standard of Traveler's Indemnity Co. v. Armstrong, ^^"^ Monnie's acts exceeded negligence and amounted to "willful, malicious and oppressive" conduct which is sufficient to support punitive damages. '^^ It is interesting to note that punitive damages were assessed despite the fact that no com- pensatory damages were awarded. •^^ Normally an award of compensatory damages is a prerequisite to punitive damages, '^^ but Dotlich clearly puts Indiana among those jurisdictions which hold that equitable reHef can support an award of punitive damages. '^^ The constructive trust imposed on Monnie satisfied this element. Mechel, however, had not been sub- '"475 N.E.2d at 343. ''''Id. at 343-44. '^^IND. Code § 23-l-7-3(b) (1982). '«'5ee Crippen Printing Corp. v. Abel, 441 N.E.2d 1002 (Ind. Ct. App. 1982), discussed in Galanti, Business Associations, 1983 Survey of Recent Developments in Indiana Law, 17 Ind. L. Rev, 31, 33-38 (1984). There was no showing of imminent irreparable injury that would have justified an involuntary dissolution. '«'lND. Code §§ 34-1-12-1(3), (7) (1982). See Tri-City Elec. Service Co. v. Jarvis, 206 Ind. 5, 185 N.E. 136 (1933). The Dotlich court was satisfied that appointing the receiver was not an abuse of discretion because defendant Monnie was the managing director treating corporate property as his own. 475 N.E.2d at 344-45. '«H75 N.E.2d at 345. '*'Id. at 345-47. "*M42 N.E.2d 349 (1982). "