Indiana Law Review


Corporate Law: A Year in the Life
OF Indiana Corporate Law

Leah M. Chan*

Introduction

The area ofcorporate law is a broad area, as it can expansively be defined as
the law that affects incorporated businesses. Within this definition, other areas

of law such as contract, agency and tort law are included because corporations

are affected by these laws in one form or other. However, this Article will

address only a narrow slice of corporate law, including issues of shareholder

lawsuits, the well-established corporate doctrine of piercing the corporate veil,

sections of the Indiana Business Corporation Law and sections of the Indiana
Securities Act.

I. Shareholder ACTIONS

One ofthe more dynamic issues in corporate law is the area of shareholder
actions. In 1995 and again in 1998, Congress passed legislation intending to

reform the area of securities litigation, with the goal of protecting defendant-

corporations from their overly litigious shareholders (and their equally overly-

eager lawyers).' These reforms, although they apply to both public and closed

corporations, were aimed at curbing frivolous lawsuits brought against public

corporations.^ The focus in Indiana for the past few years, however, has been on

closed corporations and defining the ways in which the shareholders of such
corporations may bring suit.

In general, a shareholder is required to file a derivative action when actions
taken by the corporation itself, or taken by the officers or directors on behalf of
the corporation, resulted in harm to the corporation. The reasoning behind the
derivative action is that the cause ofaction the shareholder is alleging is one that

belongs to the corporation, not to the shareholder individually.^ This separation

of rights can become confusing, especially if the rights seemingly arise from
violations of both shareholders' rights and corporation rights.

There are special procedural steps a shareholder must take to perfect the

derivative action.* One ofthese steps requires the shareholder to make a demand
on the board ofdirectors to bring suit. The shareholder must allege that she has

Judicial Clerk to the Honorable Frank Sullivan, Jr., Indiana Supreme Court. B.A., 1998,

The George Washington University; J.D., 2001, New York University School of Law. The
opinions expressed are those of the author. The author wishes to thank Alison Chestovich for her

help with the preparation of this Article.

1. See 15 U.S.C. § 78u-4 (2001); see also Dominic Bencivenga, Appeal Reveals Reform

Act's Tortured History, N.Y.L.J., June 11, 1998, at 5; Elizabeth Strong, How the Courts &
Congress Are Changing Securities Litigation, N.Y.L.J., Mar. 4, 1999, at 1.

2. Bencivenga, supra note 1, at 5.

3. G&NAircraft, Inc. v.Boehm, 743 N.E.2d 227, 234 (Ind. 2001).

4. S'eelND.R. Trial P. 23.1.



1322 INDIANA LAW REVIEW [Vol. 35:1321

made this demand in her complaint.^ In addition, should the corporation establish
a committee ofdisinterested directors or persons to investigate the corporation's

rights and remedies,^ the court may suspend proceedings on the underlying
derivative action until the investigation is completed.^ Ifthe committee finds that

there have been no violations, or finds that the lawsuit is not in the best interest

ofthe corporation, the court "shall" presume these findings conclusive as to the

suing shareholders.^ Unless the shareholder can prove that the committee

members were either not disinterested or the investigation was not conducted in
good faith, the shareholder will find herself without recourse.^

Compliance with these procedures is appropriate when the corporation is a
public company, with its shares traded on a national market. After all, if the
shareholder is dissatisfied at any point in the process, the shareholder can simply

sell her shares on the market. However, withdrawal is not so easy for an unhappy
shareholder in a closed corporation. The Indiana Supreme Court gave
recognition to this aspect of closed corporations in its 1995 decision, Barth v.

Barth}''

The court in Barth held that there are certain situations when a shareholder
of a closed corporation should be allowed to bring a direct action, instead of a

derivative one.'' In deciding to do this, the court followed a nationwide trend

and a path also suggested by the American Law Institute.'^ Barth stated that in
a closed corporation, shareholders are "more realistically viewed as partners, and

the formalities of corporate litigation may be bypassed."'^ There are three
situations in which a direct action can proceed, instead of a derivative one. A
direct action will be allowed when ( 1 ) such an action will not unfairly expose the
corporation or other defendants to several lawsuits; (2) the direct action will not

"materially prejudice the interests" of the corporation's creditors; or (3) the

action will not interfere with a "fair distribution" of any recovery "among all
interested persons.'"'* It appears from the case law applying the rule ofBarth that

a finding of any one of these situations can preclude a direct action.'^ In this

survey period, there have been three cases that have dealt with this issue and

5. Id.\ see also IND. CODE § 23-1-32-2 (1998).

6. iND. CODE §23-1-32-4 (1998).

7. Id. § l-iA-^l-l.

8. Id. § 23-l-32-4(c).

9. Id. The official comments cite the businessjudgment rule as the underlying rationale for

presuming the disinterested committee's findings as conclusive, analogizing the decision to pursue

legal claims to "other questions of corporate policy and management." Id. at official cmt.

10. 659 N.E.2d 559 (Ind. 1995).

11. /t/. at 561.

12. Id at 562; see also G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 236 (Ind. 2001).
13. 5flr//2,659N.E.2dat561.

14. Mat 562.
15. See, e.g., Riggin v. Rea Riggin & Sons, Inc., 738 N.E.2d 292, 308 (Ind. Ct. App. 2000)

(applying the multiplicity of lawsuits situation).



2002] CORPORATE LAW 1323

Barth}^

A. A Reaffirmation o/Barth and Available Remedies:
G & N Aircraft, Inc. v. Boehm

In the early 1990s, G & N Aircraft was a closely held Indiana corporation
with five shareholders.'^ Paul Goldsmith, the founder, and his son, owned about
thirty-two percent; Eric Boehm owned thirty-four percent and Richard Gilliland
and James McCoy each owned 16 2/3%.'^ The five shareholders served as the
board of directors for G & N, and Goldsmith, Boehm and Gilliland served as
officers, with Goldsmith and Boehm as employees of G & N.'^ Goldsmith was
also the sole-owner of other corporations that dealt with G & N, in addition to
being G&N'slandlord.'°

In the mid 1990s, Goldsmith's other corporations, and himself personally,
were in fmancial difficulty.^' Goldsmith attempted to consolidate his
corporations with G & N as a way to lighten his financial burden.^^ Goldsmith
had G & N appraised, and its value was approximated at $961 , 000.^^ His initial
attempt to consolidate failed because a bank rejected his application for a loan

to buy out the other shareholders.^"* A year later. Goldsmith again initiated a
consolidation effort.^^ In 1 995, Goldsmith took coercive steps to force Gilliland,

McCoy and Boehm to sell their shares to Goldsmith.^^ One of these tactics
included an eviction threat from Goldsmith, as landlord ofG & N, to evict them
from this hangar.^^ This persuaded Gilliland and McCoy to sell their shares to
Goldsmith, but they remained on the board.^*

Goldsmith had become the majority shareholder ofG & N, but he could not
get Boehm to sell his shares. Goldsmith then tried other methods to force Boehm
to sell his shares by threatening Boehm with the fact that when G & N
consolidated with Goldsmith's other companies, G &N would suffer a financial
loss.^^ Goldsmith also cut offcash distributions from G &N and ultimately fired

1 6. G <fe NAircraft. Inc., 743 N.E.2d at 227; Hubbard v. Tomlinson, 747 N.E.2d 69 (Ind. Ct.
App. 2001); /?<ggm, 738 N.E.2d at 292.

17. G&NAircraft. Inc., lAZ'H.E2^2Am.
18. Id

19. Id.

20. Id at 232.

21. See zfl?. at 232-33.

22. Id

23. Id 2X222.

24. Mat 232-33.
25. Mat 233.
26. Id

27. Id

28. Mat 232-33.
29. Id



1324 INDIANA LAW REVIEW [Vol. 35:1321

Boehm and changed Boehm's office locks.^^
Boehm filed an action against Goldsmith and G & N for both direct and

shareholder derivative claims.^' The trial court found for Boehm in a four-day
bench trial and awarded Boehm a variety of remedies, including a forced sale of
Boehm's shares to Goldsmith, interest on back dividends, punitive damages, and
attorney's fees.^^ In a unanimous decision, the supreme court affirmed in part
and reversed in part.^^

As an initial matter, the court clarified the rights held by the corporation and
those held by an individual shareholder in the contexts of direct and derivative
actions. The court, adopting a New York-type definition, found that the rights
held by each dictate the type ofaction to bring.^"* A direct action should be based
on the rights the shareholder finds in the corporation's articles of incorporation,
bylaws or in state corporate law.^^ In contrast, a derivative action should be
brought by the shareholder on behalf of the corporation for a right that the
corporation has failed to act upon.^^ The court then reaffirmed Barthy restating
the three situations where a direct action was not appropriate in a closed
corporation.^^

The court divided Boehm's claims into three categories,^* the division of
which center around Goldsmith in his different capacities at G <& N and the
alleged breach in his fiduciary duties to G & N and/or Boehm. The first of the
three are Boehm's claims that Goldsmith as an officer and director breached his
fiduciary duties to G & N.^^ These claims are derivative because G & N itself
could have brought action against Goldsmith."*^ Goldsmith argued that the trial

court erred by allowing Boehm to proceed on a direct action that was based on
derivative claims."*' However, because G & N was a closed corporation
controlled by Goldsmith, such a lawsuit would be unrealistic.^^ But Goldsmith

argued that each ofthe situations outlined in Barth apply so that Boehm's direct
action should be dismissed."*^ The court analyzed each ofthese, finding that none
of the situations were present and the Barth exception applied to Boehm's

30. Id. at 233.

31. Id

32. Id at 234.

33. Id at 246.

34. Id at 235 (citing Schreiber v. Butte Copper & Zinc Co., 98 F. Supp. 106, 1 12 (S.D.N.Y.
1951)).

35. Id

36. Id

37. Id at 236.

38. Id

39. Id

40. Id at 237.

41. Id

42. Id

43. Id



2002] CORPORATE LAW 1325

lawsuit."^ The second and third categories of Boehm's claims alleged that
Goldsmith breached his fiduciary duty to Boehm as an officer and director and
also as a majority shareholder/^

The court found no merit in Boehm's allegation that Goldsmith breached his
duties to G &N as an officer and director/^ Although his transactions taken with
respect to G & N were self-interested transactions, these actions were not
concealed and there was no evidence to suggest that these actions harmed G &
N."*^ This finding comports with Indiana's highly deferential businessjudgment

rule/'

The second and third categories alleged breaches of fiduciary duty by
Goldsmith, in his capacities of officer, director, and majority shareholder, to

Boehm as a minority shareholder/^ The court recognized that Goldsmith's
actions were taken wearing his different hats—as landlord, majority shareholder,
and officer and director/^ But the court clumped together Goldsmith's roles and

addressed his actions in two parts—^the first, before Goldsmith became a
controlling shareholder and the second, actions taken as a majority shareholder/^

Prior to gaining control of G & N, Goldsmith made an offer for Boehm's
shares, and Boehm alleged that this price was significantly less than the
appraised value of Boehm's shares and less than what Boehm originally paid to
purchase the shares/^ In and of itself, the court found that there is no duty to

purchase shares at a fair price/^ If, on the other hand, there were nondisclosure,

fraud or oppression, then Boehm would have a claim based on the low price
Goldsmith offered for Boehm's shares/'* Even though Goldsmith did not actually
succeed in forcing Boehm out of G & N, Goldsmith did succeed in gaining
control of the corporation, and the actions taken to force Gilliland and McCoy
to sell their shares were wrongs to Boehm/^

The court agreed with the trial court that the eviction notice after Goldsmith
resigned as president of G & N was a sham/^ This eviction threat and
Goldsmith's entire plan to gain total ownership of G & N was an abuse of
Goldsmith's office/^ The actions taken by Goldsmith as an officer and director

44. Mat 237-38.
45. Mat 236.
46. See id. at 238-40.

47. Mat 239.
48. Id. at 240. As discussed in Part IV, infra, directors can be held liable in very limited

situations.

49. G*A^.4/rcrq/?. /«c.,743N.E.2dat236.

50. Id^XlAX.

51. Mat 241-44.
52. IddHilAX.

53. M
54. M
55. Mat 242.
56. M
57. M



1326 INDIANA LAW REVIEW [Vol. 35:1321

were not for any "proper business purpose" designed to benefit the corporation,
but rather to force Boehm out so that Goldsmith could finalize his consolidation
plans.^* As a result, Boehm had a valid claim with respect to these actions.
Goldsmith's actions taken after he became a majority shareholder were to render
Boehm's shares worthless.^' Therefore, Goldsmith had breached his fiduciary
duty by subordinating the corporation's interests to his own.^

Finally, the court discussed the remedies available to Boehm. As the
"shareholder derivative action is a creature ofequity"^' in Indiana, the court saw
no reason why trial courts cannot be flexible when fashioning remedies for close
corporation wrong-doings.^^ Therefore, the court upheld the forced sale of
Boehm's shares to Goldsmith that the trial court ordered.^^ But the court
cautioned future application of this remedy, as "[t]his remedy should be
exercised only after careful thought. It amounts to a forced withdrawal ofcapital
from the enterprise if the enterprise itself is the only realistic source of funding
the buyout."^'*

Judicially ordered dissolution is a drastic remedy, and one commentator

describes this holding as "sweeping change to established law regarding

shareholder disputes."^^ Prior to G d^ NAircraft, Inc., the proper remedy was
damages, and in cases ofmergers and take-overs, the only remedy was under the
dissenters' rights statute.^^ This same commentator predicts that this decision
might have a "drastic impact" on future dealings between shareholders in a
closed corporation.^'

The court also upheld the punitive damages awarded because ofGoldsmith's
deliberate actions which were also found to be malicious and oppressive.^* In

addition, Boehm was awarded attorney's fees but only as to the frivolous
counterclaim asserted by Goldsmith.^^ However, Boehm was not entitled to
attorney's fees for the derivative claims because the court upheld Boehm's

58. Id.

59. Id at 242-43.

60. Id

61. Mat 243-44.
62. Id ax 244.

63. Mat 243.
64. Mat 244.
65. Leanne Garbers, One BadApple: How One EvilActor Can Rewrite Corporate Law, IND.

Law., Aug. 29, 2001, at 25.

66. Id

67. Id. This prognosis seems a bit pessimistic. Situations analogous to the facts of this case

are few and far between. It is rare to see a corporate officer, director and shareholder act in such

a coercive manner and with a disregard for corporate formality liice Goldsmith did in this case. For

other situations where there is no malicious intent, the businessjudgment rule will generally apply

to deny a remedy to unhappy shareholders.

68. G&N Aircraft, Inc., 743 N.E.2d at 245.
69. Id



2002] CORPORATE LAW 1327

actions as direct claims, not derivative ones.^°

B. When Barth Does Not Apply: Hubbard v. Tomlinson^'

This is a straight-forward case involving the appl ication ofBarth and G&N
Aircraft, Inc. Eli Tomlinson was a shareholder of Multimedia, a closely-held
bankrupt corporation, consisting of five shareholders.^^ Tomlinson filed suit

against Joseph Hubbard, another shareholder, and S & A, an accounting firm that
had provided the corporation services.'^ Tomlinson alleged that Hubbard had
breached fiduciary duties, and had conspired with S & A to "'loot' the
corporation."^'* The trial court denied S & A's motion for summary judgment,
and the court ofappeals accepted jurisdiction of S & A's interlocutory appeal of
this denial.

The court ofappeals reversed, holding that Tomlinson had to bring his claims
as a derivative action, as he was alleging harms to the corporation from an
outside party, namely S & A.^^ Furthermore, the court conducted a Barth
analysis and found that all three situations existed in Tomlinson' s case—( 1 ) there
were three other shareholders who could conceivably bring suit against
Multimedia, subjecting it to several lawsuits; (2) Multimedia had more than fifty

creditors, and their interests would be harmed by a direct action since Multimedia

was insolvent; and (3) Tomlinson requested that the recovery be directly awarded
to him, and not the corporation or shareholders.^^

C. When Does a Class Action Plaintiffin a Derivative Suit Fairly
andAdequately Represent Similarly Situated Shareholders?

:

Riggin V. Rea Riggin & Sons, Inc.^^
Riggin addressed several issues, many procedural, in the context of a

shareholder derivative and direct action. Although a procedural matter, one of

the important parts of this case was the discussion of when a shareholder,
bringing a derivative action on behalf of the corporation and all other similarly

situated shareholders, can be deemed to fairly and adequately represent the
class.^* This was a matter of first impression for the Indiana Court of Appeals
and is fairly relevant to corporate litigation.^^

70. The court briefly discusses Boehm's vicarious liability claims against G & N for
Goldsmith's actions. The court did not hold G&N liable under this theory, finding that the logic
behind it became circular. Id. at 245-46.

71. 747 N.E.2d 69 (Ind. Ct. App. 200
1
).

72. /^. at70.

73. Id

74. Id

75. Id at 72.

76. Id

77. 738 N.E.2d 292 (Ind. Ct. App. 2000).

78. See id at 302-04.

79. The other procedural issues raised in the case, such as contempt, paying witness fees, and



1328 INDIANA LAW REVIEW [Vol. 35:1321

Rea Riggin & Sons, Inc. was formed in 1927 by Rea and Nellie Riggin.*®
Since that time, the board of directors has always consisted of Riggin family

members.^' In 1997, there were twenty-nine shareholders, including Richard
Riggin.*^ Richard, unhappy with the actions ofthe board and other shareholders,
filed both a derivative action and a direct action against Rea Riggin & Sons, Inc.
and the board members individually.*^ After Richard suffered a series ofmishaps
involving attorneys wishing to withdraw from representation, the trial court

finally granted summaryjudgment in favor ofthe corporation. Richard was also
found in contempt of court for not paying deposition fees of the corporation's
accountant and was in the custody of the Delaware County Sheriff until he paid
the fee.*'^ On appeal, Richard contended that the grant of summaryjudgment in
favor of the corporation was improper.*'

As a preliminary matter, the court ofappeals considered the burden ofproof
required of Trial Rule 23.1, which governs derivative shareholder actions, as

opposed to Trial Rule 23, which governs class actions.*^ Relying on an
interpretation of the Federal Rules ofCivil Procedure by the Fifth Circuit,*^ the

court of appeals held that in a derivative shareholder action, the burden ofproof

was on the defendants to show that the plaintiff-shareholder did not fairly and
adequately address the interests of similarly situated shareholders.**

Next, the court divided its inquiry ofthis issue into two parts—^first, the court
defined what constituted similarly situated shareholders, and second, the court

set out factors to consider whether the plaintiff fairly and adequately represented

the class. As to the first prong of the inquiry, the court rejected both the
corporation's suggested meaning (all the shareholders of the corporation should
be similarly situated in order to have a proper class) as well as Richard's
proposed meaning (those shareholders who support the lawsuit).*^ The court
instead adopted several factors used by federal courts in similar situations.^

The court instructed trial court judges, when defining the class of similarly
situated plaintiffs, to exclude two types of shareholders: those named as

motions for continuance will not be discussed in this Article.

80. Riggin, 738 N.E.2d at 299

81. Id.

82. Id.

83. Id

84. Id

85. Id

86. /^. at 299-301.

87. The court ofappeals, explaining its reason for relying heavily on the interpretation ofthe

Federal Rules of Civil Procedure, stated that "[djue to the similarity between T.R. 23.1 and the

corresponding Federal Rule, we will utilize federal law in interpreting T.R. 23.1." Id. at 300.

88. Mat 301.
89. Id at 302.

90. Id. at 303. In his analysis, Judge Sullivan relies heavily on a 1 995 article, Mary Elizabeth

Matthews, Derivative Suits and the Similarly Situated Shareholder Requirement, 8 DePaul BUS.

L.J. 1 (1995).



2002] CORPORATE LAW 1329

defendants in the suit, and those in financial or personal conflict with the

corporation.^' In considering the opposition to the plaintiff-shareholder, the trial

courtjudge should merely look at that as a factor in determining the adequacy of

the representation, not in defining the class itself'^ The shareholders not
excluded were then considered the class of similarly situated shareholders.

After defming the class, the court instructed trial court judges to then look

at the adequacy ofthe plaintiff-shareholder representation.^^ As set forth by Trial
Rule 23.1, the plaintiff-shareholder must "fairly and adequately represent the

interests ofthe shareholders or members similarly situated in enforcing the right
of the corporation or association."^"* The court elected to adopt the eight factor

test set forth by the Ninth Circuit in Larson v. Dumke!^^ However, the court

cautioned that, as with any multi-factor test, the trial courtjudge should not focus

in on one factor to the exclusion of others.^^ The overall goal ofthe inquiry was
to determine adequacy of the representation so that the plaintiff-shareholder's

suit may proceed.^^
The eight factors that the trial courtjudge should consider were: ( 1 ) whether

the plaintiff is the true party in interest; (2) whether the plaintiff is familiar with

the lawsuit or exhibits unwillingness to become familiar; (3) the degree of
control the plaintiffs attorney exercises over the lawsuit; (4) the degree of

support the plaintiff receives from the other shareholders; (5) whether the

plaintiff is personally committed to the lawsuit; (6) the remedy sought by the

plaintiff; (7) the "relative magnitude ofthe plaintiffs personal interest in the suit

as compared to his interest in the derivative action;" and (8) whether there is any

vindictiveness on the part ofthe plaintifftoward defendants. As with any multi-
factor test, several factors overlap.^*

The court applied this test, in light ofthe evidence presented by both parties
in the summaryjudgment motion. The court eventually concluded that summary
judgment was inappropriate because the corporation did not meet its burden of

proof in showing that there were no material issues in dispute.^^ The court found

that there was an unresolved question ofwhether Richard was a fair and adequate
representative of the putative class of Rea Riggin & Sons' shareholders. ^°°
Although the corporation had presented evidence that there were some
shareholders in the court-defined class who opposed Richard's claims, the court

91. /?/ggm, 738 N.E.2d at 304.

92. Id.

93. Id.

94. Ind.T.RuleP. 23.1.

95. Riggin, 738 N.E.2d at 304 (referencing Larson v. Dumke, 900 F.2d 1 363, 1 367 (9th Cir.

1990)).

96. /^. at 305.

97. Id

98. Id. For example, factors ( 1 ) and (3) go to the same point—is this the plaintiffs action
or another person's action? Factors (2) and (5) are essentially the same questions.

99. /^. at 312.

100. /t/. at 307.



1330 INDIANA LAW REVIEW [Vol. 35:1321

found that this was not sufficient evidence to satisfy whether Richard should
proceed as the class representative.

'°'

As to Richard's direct claims, the court applied the Earth factors after
concluding that Rea Riggin & Sons was a closed corporation. •^^ The court held
that to allow Richard to proceed with his direct claims would unfairly expose the
corporation to more than several lawsuits.'^^ There were seven named
defendants, all of whom were shareholders. '^'^ Aside from Richard, that left
twenty-one shareholders as potential plaintiffs in suits against the corporation.

Therefore, the court held that the trial court's grant ofsummaryjudgment on this
issue was appropriate.'^^

II. Dissenters' Rights and Control Share Acquisition Statutes

The Indiana Business Corporation Law ("IBCL") includes several provisions
that limit the liability of directors for their transactions taken on behalf of the
corporation.'*^ These same provisions limit the ability of a shareholder in a
publicly traded corporation to object to certain actions taken by their corporation.

Two such provisions of the IBCL that have generally been the subject of
litigation are the Dissenters' Rights Statute ("DRS"), Indiana Code sections 23- 1 -

44- 1 to -20, and the Control Share Acquisitions statute ("CSAS"), Indiana Code
sections 23-1-42-1 to -11.

The DRS, and in particular, Indiana Code section 23-1-44-8, is the sole
remedy for shareholders in a closed corporation who are unhappy with the
corporation's merger, share exchange, a substantial sale of all the corporation's

assets, or a control share acquisition under section 23- 1 -42 (as discussed below).

The remedy available to the unhappy shareholder is the right to demand the
corporation buy back her shares and to demand an appraisal proceeding if the
shareholder does not agree with the valuation of her shares made by the
corporation.'®^

Subsection (c) of section 23-1-44-8, the heart of the DRS, makes patently
clear that the remedy provided for in the statute is an exclusive one. The
shareholder cannot protest the merger or other action in a separate proceeding,

and should the shareholder bring such a separate suit, the suit will be barred by

operation ofthe DRS.'°* In addition, any allegations ofwrong-doing during the

101. Id.

102. Id. at 308

103. Id

104. Id

105. Id

106. The IBCL, passed by the legislature in 1986, was a wholesale revision of the former

General Corporation Act. The official comments, recognized as authoritative, reflect an overall

desire to limit director liability. See Fleming v. Int'l Pizza Supply Corp., 676 N.E.2d 1051, 1054

(Ind. 1997).

1 07. Ind. Code §23-1 -44- 19(1 998).

108. See Young v. Gen. Acceptance Corp., 738 N.E.2d 1079 (Ind. Ct. App. 2000).



2002] CORPORATE LAW 1331

execution of the corporation's plan, such as breach of fiduciary duty, must be

brought up in the appraisal proceeding. '^^ If the shareholder does not bring up

these issues in the appraisal proceeding, there will be no other venue for them.
^'°

Moreover, shareholders in a publicly traded corporation are not entitled to

this remedy. As the official comments state, "the policy reason for this exception
is that the market itselfestablishes both a fair price for the shares and a means by
which a 'dissenting' shareholder can sell his shares for that price."'" An
interesting consequence of this preclusion is that since allegations of wrong-

doing during the merger must be brought up in the appraisal proceeding, these

shareholders might not get their day in court at all on these claims."^

The CSAS's purpose is to provide shareholders of a corporation with more
than 100 shareholders (and other "substantial ties" to Indiana) a right to vote on

an acquisition of stock that would give an entity a controlling portion of the

corporation."^ Control shares are defined in Indiana Code section 23-1-42-1 as
shares that would give the acquirer certain voting power in the election of the

board of directors in three percentage ranges.""* The idea behind this right to
vote is premised on the traditional right of shareholders to vote on fundamental

corporate changes. '
'^

However, this statute applies only to just that—a fundamental change. The
statute does not apply to shifts in ownership blocks, rather it applies to shifts

from a multi-shareholder control of a corporation to a single-shareholder

domination."^ The disinterested shareholders (those not involved in the
controlling share acquisition) are permitted to vote on whether the new
controlling shareholder will be given those voting rights, that but for the statute,

the new controlling shareholder would have. This statute was upheld by the
United States Supreme Court in CTSCorp. v. Dynamics Corp. ofAmericaV^

A. Failing to Follow DRS Procedures: Galligan v. Galligan 118

In late 1996, Irish Park, a family-owned Indiana construction business, was
having financial difficulties."^ To solve these financial troubles, the majority
shareholder, Thomas Galligan, who had previously been a director and president

1 09. See id ; Fleming, 676 N.E.2d at 1 058; Settles v. Leslie, 70 1 N.E.2d 849, 853-54 (Ind. Ct

App. 1998).

no. F/emmg,676N.E.2datl058.

111. iND. Code §23-M4-8(c) official cmt. (1998).

1 12. See Am. Union Ins. v. Meridian Ins. Group, 137 F. Supp. 2d 1096, 1 102-03 (S.D. Ind.

2001).

113. iND. CODE §23-1-42, official cmt. (1998).

114. M §23-1-42-1.
115. Id.

1 16. See id; see also Galligan v. Galligan, 741 N.E.2d 1217 (Ind. 2001).

117. 481 U.S. 69, 94 (1987).

118. 741 N.E.2d 1217 (Ind. 2001).

119. Id at 1220.



1332 INDIANA LAW REVIEW [Vol. 35:1321

of Irish Park, decided to sell all of Irish Park's assets to Golden Shamrock, a
corporation owned by Larry Rice.'^° Although the court was not entirely sure of
Rice's role in Irish Park at the time ofthe lawsuit, it appeared that Rice had been

a long-time employee and member of Irish Park board of directors and possibly
the president at the time ofthe sale. In conducting its sale to Golden Shamrock,

Irish Park did not comply with any of Indiana's statutory requirements for a
corporation's sale of substantially of all its assets.'^'

Four of Galligan's children were minority shareholders in Irish Park, and
three objected to the sale based on a variety ofclaims, including fraud and breach

of fiduciary duty.'^^ In response, Galligan sent a notice to all the shareholders

indicating that a meeting would be held on March 11,1 998, at which time a new
board was to be elected and the sale discussed. '^^ On March 1 1 , Galligan was the
only shareholder present at this meeting, although the three dissenting minority

shareholders had served a "Shareholders' Notice Asserting Dissenters' Right" on

all the potential members ofthe board ofdirectors, including Galligan. '^^ At this
meeting, Galligan elected himself the sole director of Irish Park, acting as the

majority shareholder. Galligan subsequently elected himself as president and

secretary of Irish Park, acting as a director. '^^ Finally, as the majority

shareholder, Galligan voted to ratify the sale ofIrish Park to Golden Shamrock.'^^

The court found that although Irish Park's initial actions with respect to the
sale of its assets were defective, the ratification of the sale by Galligan as

majority shareholder in the March 1 1 meeting was sufficient to render the sale
proper. '^^ However, the court went on to find that Irish Park had subsequently

failed to follow any of the procedures with respect to its dissenting

shareholders.'^* More specifically, Irish Park had failed to send out a notice
detailing the steps that the dissenting shareholders needed to take in order to

receive payment for their shares, as befitted their only remedy under Indiana's

DRS.*29

This situation was a novel one for the court to consider. The DRS outlines
specifically the remedy when dissenters fail to follow procedures: they forfeit
their right to receive payment for their shares. However, the statute is silent on

remedies when a corporation fails to follow the procedures. '^° The court found
that it would be inequitable to keep the dissenters from being paid for their shares

as "[tjhey cannot be held to have forfeited their rights by reason of the

120. Id.

121. Id.

122. Id

123. Id

124. Id

125. Id

126. Id

127. Mat 1222.
128. /^. at 1224.

129. Id

1 30. Id at 1 225; IND. Code §23-1 -44- 1 3(c) ( 1 998).



2002] CORPORATE LAW 1333

corporation's ineptitude."'^'

However, the court was concerned that a consequence of holding that the

remedy for the corporation's failure to follow DRS was to allow dissenters to
bring an action to compel the corporation to follow DRS procedures. First, this
remedy could create a disincentive for the corporation to follow DRS procedures
initially. And, as bringing an action to compel the corporation to act incurs legal

expenses and fees, the remedy might even be a possible barrier for dissenters to

ever receive payment. In order to stop such a fallout from this decision, the court

held that should a corporation breach the statutory duty to follow procedures

under DRS, like Irish Park did in this case, another cause of action arises from
that failure because it is "an independent wrong that is not itself subject to the
dissenters' rights provisions."'^^

This cause ofaction, the court was quick to point out, was not a "new" cause
of action, but "[r]ather, we simply apply the commonly accepted principle that
the directors may be liable for disregarding a statutory mandate to these unusual
facts, where the directors failed to take the steps necessary to enjoy the safe

harbor provided by the dissenters' rights statute."'" In further explanation of its

holding, the court stated that the dissenting shareholders in this case could bring

an action to force Irish Park to comply with the DRS.'^'* As to other remedies the
plaintiffs could recover against Irish Park, the court found that if the plaintiffs

could show that Irish Park's failure to comply with the DRS caused attorney's
fees and other expenses, these could be recovered, including interest. '^^ And in
the appraisal proceeding, the shareholders could bring up the alleged wrong-

doings of Irish Park, but those claims were bound to only the appraisal

proceeding, as per Fleming}^^ "Finally, if damages can be shown to have been
caused by a breach of a statutory duty with respect to the dissenters' rights

proceedings, the plaintiffs may bring a separate claim against the persons
responsible."'^^

This final suggestion provoked a concurrence by Justice Sullivan who wrote
merely to state that majority's recognition of a private cause of action for a

breach of statutory duty was not necessary.'^* Instead, Justice Sullivan pointed
to common law agency and contract principles cited by the official comments to
Indiana Code section 23- 1 -36-2, which shou Id be sufficient to remedy any breach
of a statutory duty in situations such as these.'^^

131. Gfl///ga«,741N.E.2datl225.

132. Id. at 1226-27.

133. Id. at 1226.

134. Id at 1227.

135. Id

136. Id

137. Id

138. Id. at 1228 (Sullivan, J., concurring)

139. Id



1334 INDIANA LAW REVIEW [Vol. 35:1321

B. CSAS andDRSApplicability: Young v. General Acceptance Corp.^"*^

The plaintiffs in Young brought their action under the CSAS and the DRS. '"*'

General Acceptance Corp. ("GAC") was a publicly traded corporation, with
thirty percent of its outstanding stock publicly held.'*^ The rest ofthe stock was
held by the two founding members, Malvin and Russell Algood, and six other
Algood family members.''*^ In April 1997, GAC and the Algoods entered into a
Stockholders' Agreement and Securities Purchase Agreement with Conseco and
Capital American Life Insurance Company.''*'* The primary purpose ofthe two
agreements was to provide a financing arrangement, and as long as there were
debentures outstanding, Conseco would be guaranteed two positions on the GAC
board of directors.

'^^

Thisplan was carried out in July 1997. In September 1997 and March 1998,
GAC entered into additional financing agreements with Conseco. '^^ Sometime
after March 1998, Conseco presented a merger proposal to GAC's board,
proposing a merger between GAC and a wholly-owned subsidiary of Conseco,
CIHC.'*^ Shareholders, other than Conseco, would be bought out for thirty cents

per share.*'** The common shareholders filed for a preliminary injunction, which
was denied, and also filed actions under the CSAS and DRS."*^ The merger was
consummated and plaintiffs continued with this suit.'^°

The trial court granted defendant's summaryjudgment motion on plaintiffs'
claims based on breach of fiduciary duty, finding them barred by the DRS.'^'

The trial court also granted defendant's motion to dismiss plaintiffs' claims based
on the CSAS.'" The court of appeals affirmed the trial court on all grounds. '^^

The first issue dealt with was the CSAS claim. After reviewing the purposes
behind the statute, the court of appeals discussed its applicability. Through a
reading of the official comments, and CTSCorp.^ the court of Ippeals held that

the CSAS was meant to apply in hostile takeover situations.'^'* The court found
that the transactions between GAC and Conseco were not hostile. '^^

140. 738N.E.2d 1 079 (Ind.Ct.App. 2000).

141. /flf. atl082.

142. Mat 1083.
143. Id.

144. Id.

145. Id. at 1083-84. CALI was a wholly-owned subsidiary of Conseco. Id.

146. Id

147. Mat 1084.
148. Id. The stock had been trading at $3.25 per share on April 10, 1997. Id. at 1083.

149. Id at 1084.

150. Id

151. Mat 1085.
152. Id

153. Mat 1083.
154. Mat 1087.
155. Mat 1088.



2002] CORPORATE LAW 1335

Alternatively, the court found that even assuming hostility, there was no
fundamental change in GAC's shareholder make-upJ^^ The common
shareholders had always been a minority in the corporation, whether the majority

shareholders were the Algoods or Conseco.'^' In addition, the court reasoned

that the acquisition ofshares by Conseco did not harm the common shareholders,
because the common shareholders were always at a disadvantage in the decision
making process ofGAC, as the Algoods had been majority shareholders until the
1997 and 1998 transactions.'^*

Interestingly, the court of appeals did not look to the language ofthe statute

to support its holding that the CSAS did not apply. The CSAS provides several
exceptions to the applicability of the statute in section 23-1-42-2. Arguably,

several of the exceptions could apply to the Conseco-GAC securities purchase
agreement, depending on a reading ofthe agreement and the statute.

'^^

The second issue the court ofappeals reviewed was the trial court's grant of
summaryjudgment in favor of defendant on plaintiffs' breach of fiduciary duty
claims. The trial court found that all ten of plaintiff s contentions were barred

by the DRS.'^° Summaryjudgment was also granted on the basis that plaintiffs'
claims were derivative and their direct actions against GAC could not proceed.'^'

Plaintiffs alleged that the DRS should not apply to them for three reasons:
the violation of the CSAS voided the merger; the merger was void because of
fraudulent statements in the proxy statement; and application ofthe DRS violated
public policy considerations.'^^ The court of appeals upheld the application of
the DRS to bar plaintiffs' breach of fiduciary duty claims, notwithstanding
plaintiffs' three reasons to the contrary.'" Since the CSAS was addressed in part
one of the opinion and was found to have not been violated, the court did not
further discuss it in part two.'^ As to fraudulent statements in the proxy
statement, the court held that even assuming the statements were fraudulent (as

the court could fmd no support for plaintiffs' contentions that the statements
were, in fact, fraudulent or misleading), fraud did not necessarily void a merger,

but provided an additional matter to litigate within the DRS proceedings.'^^
Lastly, the court discussed plaintiffs' public policy argument as a basis for

the decision not to apply the DRS in plaintiffs' situation.'^ Plaintiffs argued that
the actions ofGAC and Conseco were so "heinous" that by applying the DRS,

156. Id.

157. Id.

158. Id

1 59. The securities purchase agreement was apparently not made part of the record. Id. at

1083.

160. Mat 1089-93.
161. /rf. at 1089.

162. /(/.at 1090.

163. Mat 1091-93.
164. Mat 1091.
165. Mat 1091-92.
166. Mat 1092-93.



1336 INDIANA LAW REVIEW [Vol. 35:1321

the court would be sanctioning such heinous behavior. '^^ In dismissing this
argument, the court provided a lengthy discussion ofthe public policy behind the
statute, the discussion of which did not really reach plaintiffs' contention.'^*

The court correctly acknowledged that the corporation, as the party that must
initiate an appraisal proceeding under the statute, was also the party most
interested in not paying dissenters anything for their shares. '^^ Although this
works as a disincentive to hold up the corporation's responsibilities under the
statute, the court pointed out that the penalty for not complying with the appraisal

proceedings was for the corporation to pay the amount the dissenters demand. *^°

This was all very interesting, but the court seemed to have missed the point
of plaintiffs' argument, which was that the statute should not apply at all, and
their claims of breach of fiduciary duty by GAC should not be barred. The
appraisal portion of the DRS that the court spent time talking about did not
answer plaintiffs' argument because the plaintiffs were shareholders in a publicly
traded corporation.'^' The right ofappraisal is available only for shareholders in
a closed corporation, because the ability to withdraw from a close corporation is

more difficult to do than in a public company. '^^

In addition, the Indiana General Assembly amended the statute to extend
coverage of the sole remedy of dissenting and demanding payment to
shareholders ofa publicly traded corporation. The official comments to section
23-l-44-8(c) state that the publicly traded company's shareholders were added

because the public market was an available outlet for their shares. Therefore,

plaintiffs had no right to a direct action at all, only a derivative one, a conclusion

that the court fmally reached and properly affirmed the trial court's dismissal of

plaintiffs' claims.
'^^

III. Piercing THE Corporate Veil

One ofthe basic premises of business law is that by forming a corporation,
it has limited liability for actions taken in furtherance of the corporation's

business. The concept of limited liability in the corporate entity has been a part
ofthe United States for over a century.'^"* Even if there is only one shareholder,

that one person will generally be immune from liability that the corporation may
incur during its normal course of business. In Indiana, this rule is codified in the

167. /^. at 1092.

168. Mat 1092-93.
169. See id ai\092.

170. /flf.;^eelND. Code §23-l-44-19(a) (1998).

171. Unless there is another, undisclosed reason that dissenters' rights would be available to

plaintiffs.

172. IND. CODE § 23-l-44-8(b) (1998); Am. Union Ins. v. Meridian Ins. Group, 137 F. Supp.

2d 1096, 1101 (S.D.Ind. 2001).

173. Young, 738 N.E.2d at 1093.

174. William J. Rands, Domination ofa Subsidiary by a Parent, 32 iND. L. REV. 421, 423

(1999).

nk



2002] CORPORATE LAW 1337

IBCL.*^^ This rule also holds true when a corporation is a wholly-owned
subsidiary of another corporation.

The IBCL, unlike the Revised Model Business Code upon which it was
based, limits liability of a corporation's directors to situations where directors

have willfully or recklessly breached their duties to their corporation.'^^ And,

officers and employees are subject to common law agency and contract doctrines
and do not have a separate standard of conduct to which to conform.

'^^

However, there are situations where the corporate entity is used wrongfully

as a shield by parent corporations or shareholders against prosecutions from third

parties or even its own shareholders. In these situations, courts will pierce the
corporate veil and hold the individual shareholder or corporation liable for

actions taken by them in furtherance of the corporation's business.'^* Indiana

courts, unlike otherjurisdictions that generally apply a two or three factor "alter

ego test,"'^^ apply an eight factor test'^^ which was articulated by the Indiana
Supreme Court in Aronson v. Price.

^^^
These factors focus on whether "the

corporate form was so ignored, controlled or manipulated that it was merely the
instrumentality of another and that the misuse of the corporate form would
constitute a fraud or promote injustice."'*^

Since September 2000, one supreme court case and two court of appeals
cases dealt with piercing the corporate veil ("PCV"). Although the supreme

court case, Commissioner v. RLG, Inc.^^^^ is not really a PCV case because it
handles individual liability under environmental statutory law, it is still relevant

to corporate law. The two court ofappeals cases. Smith v. McLeodDistributing,

175. IND. Code § 23- l-26-2(d) (1998).

176. Id. §23-1-36-2.

177. Id at official cmt.

1 78. For a more in-depth analysis of this issue, see Rands, supra note 1 74.

1 79. See Cynthia Nance, Ajjiliated Corporation Liability Under the WARNAct, 52 RUTGERS
L. Rev. 495, 507 (2000).

1 80. The eight factors are:

(1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation

by corporation shareholders or directors; (4) use of the corporation to promote fraud,

injustice or illegal activities; (5) payment by the corporation of individual obligations;

(6) commingling of assets and affairs; (7) failure to observe required corporate

formalities; or (8) other shareholder acts or conduct ignoring, controlling, or

manipulating the corporate form.

Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994). These eight factors are a combination of the

two-factor and three-factor tests used in other jurisdictions. See Nance, supra note 179, at 507

(noting that the two-factor test focusing on "unity ofownership and interest*' and fraud or inequity

would be a fallout of holding the corporations as separate entities; the three-factor test consists of

(1) exercise of excessive control; (2) inequitable or wrongful conduct; and (3) causation).

181. 644 N.E.2d 864, 867 (Ind. 1994).

182. Id

183. 755 N.E.2d 556 (Ind. 2001).



1338 INDIANA LAW REVIEW [Vol. 35:1321

Inc., andApollo Plaza Ltd v. Antietam Corp., are more run-of-the-mill PCV
cases.

A. Responsible Corporate Officer Doctrine v. Veil-Piercing:

Commissioner v. RLG, Inc.

RLG, Inc. was a corporation in the business of operating a landfill in
Wabash, Indiana.'*^ Lawrence Roseman was RLG's sole shareholder, director,
president, secretary, and treasurer.'*^ In 1993, the Indiana Department of
Environmental Management ("IDEM") brought suit against both RLG and
Roseman for violations at the landfill.'** RLG negotiated agreements whereby
RLG would remedy the wrong done at the landfill, and in return IDEM would
drop the lawsuit.'*^ Remedial steps were not taken and in 1 994, IDEM reinitiated
its proceedings. RLG failed to answer the complaint so the court entered a
default judgment against RLG for three million dollars.'^ RLG was insolvent
at this point. '^' In 1999, Roseman was found to not be personally liable for
RLG's debt to IDEM by the trial court, and the court of appeals affirmed this
judgment.

'^^

The supreme court granted transfer, '^^ and Justice Boehm wrote for the
unanimous court, holding that Roseman was indeed personally liable for RLG's
default judgment award under the doctrine of responsible corporate officer.*^"*

This doctrine, which is substantively different from the piercing the corporate

veil doctrine, has the same effect as veil-piercing in that an individual
shareholder is held liable for the actions ofthe corporation.'^^

The responsible corporate officer doctrine arose out ofa 1 943 U.S. Supreme
Court case and the Court's interpretation ofa section ofthe Federal Food, Drug
and Cosmetic Act.'^^ The doctrine was upheld and expanded upon by another
U.S. Supreme Court case in 1975.'^^ The thrust of the responsible corporate
officer doctrine was to hold a corporate officer liable, ifthat officer directed the

actions of the corporation, and those actions constituted a public welfare

184. 744 N.E.2d 459 (Ind.Ct.App. 2000).

185. 751 N.E.2d 336 (Ind. Ct. App. 2001).

186. /?IG, 755 N.E.2d at 558.

187. /^. at 561.

188. Mat 558.
189. Id.

190. Id.

191. Id

192. Mat 558-59.
193. Commissioner v. RLG, Inc., 753 N.E.2d 5 (Ind. 2001).

194. /2Z,G, 755 N.E.2d at 561-62.

195. Mat 558.
196. Id. (citing United States v. Dotterweich, 320 U.S. 277 (1943)).

197. Id (citing United States v. Park, 421 U.S. 658 (1975)).



2002] CORPORATE LAW 1 339

offense.*^* The RLG court adopted this doctrine, as well as the three factors
forming the standard to find a corporate officer responsible for the corporation's

actions.
*^^ The court found Roseman liable, in both his capacities as corporate

officer and in an individual capacity under the Indiana environmental

management laws, finding that Roseman acted in a direct capacity to violate the
landfill laws.'"^

RLG mainly deals with a type of corporate liability where public welfare
offenses are at issue, whereas PCV cases are not "dependent on the nature ofthe
liability."^°' Therefore, this case will probably not have major consequences for

corporations who are not in lines of business similar to RLG. The court draws
a distinction between public welfare offense cases where a corporate officer

would be held individually responsible and PCV cases, noting that the
responsible corporate officer doctrine was more expansive in holding the
corporate officer liable.^"^ If this were not the case, it would be rare that an

officer could be held liable for public welfare offenses, where, as here, there was
no wrongful use of the corporate entity.^°^

B. Two Corporations in One: Smith v. McLeod Distributing, Inc.^^*

McLeod Distributing was a corporation in the business of wholesale
distribution of carpets and other floor coverings.^^^ Michael Smith was the
president of Colonial Industrial and Colonial Mat Corporations.^^ Colonial
Industrial was incorporated in 1981, and Colonial Mat was incorporated in
l^gy 207 Colonial Mat and McLeod began doing business a few months after
Colonial Mat was incorporated. In order to obtain a line of credit for Colonial
Mat with McLeod, Smith signed a personal guarantee that he would be liable for
any debts Colonial Mat would incur.^°*

In 1989, Smith sent McLeod a letter indicating that it would be doing its
carpeting business under a different name. Colonial Carpets.^^ McLeod changed
Colonial Mat's account name to Colonial Carpets in its internal invoice system,
but the original account opened by Smith under the Colonial Mat name was never
closed by either Smith or McLeod.^'° Business between the two companies

198. Mat 560-61.
199. /of. at 561.

200. Id. at 559-60.

201. Id. at 563.

202. Id

203. Id

204. 744 N.E.2d 459 (Ind. Ct. App. 2000).

205. Mat 461.
206. Id

207. Id

208. Id

209. Id

210. Id



1340 INDIANA LAW REVIEW [Vol. 35:1321

remained smooth until 1990, when McLeod stopped deliveries to Colonial
Carpets because several invoices sent to Colonial Carpets had not been paid, the
total amount coming to over $6000.^' ' After several demands for payment went
unanswered, McLeod filed a lawsuit against Colonial Mat and Smith in
September 1990.^'^ In November 1990, Colonial Mat was administratively
dissolved by the Secretary of State because Colonial Mat had failed to file an
annual report.^

*^

The case between McLeod and Smith remained pending in the trial court for
ten years, and, finally, McLeod was awarded a judgment for the debt, plus
interest of eighteen percent before the judgment and eight percent for after the
judgment.^'"* Smith and Colonial Mat appealed to the court of appeals on two
issues: that Colonial Mat was not the corporation to which McLeod's invoices
were addressed and therefore not liable for thejudgment, and that Smith himself
should not be held personally liable for Colonial Mat's debt because the

guarantee agreement was invalid.^'^
As to the first issue, the court ofappeals affirmed the long-held principle that

piercing the corporate veil is a "fact-sensitive inquiry."^'^ As such, the reviewing
court should give great deference to the trial court's determination to hold one

corporation liable for the debt of a related corporation.^'^ Here, the court of

appeals took into account several factors, other than the ones listed in Aronson

by the Indiana Supreme Court,^'* as the court of appeals stated, "[w]e do not
believe the eight Aronson factors were intended to be exclusive . . . ."^'^ The
court of appeals distinguished Aronson from McLeod because in Aronson, the
court was asked to hold a shareholder liable for the debts of a corporation,
whereas in McLeod, the court here was being asked to hold a corporation
accountable for another corporation's debts.^^°

The additional factors considered by the court of appeals were (1) whether
similar names were used by the two corporations; (2) whether the two
corporations had similar management personnel (i.e., officers, directors and
employees); (3) whether the two corporations were pursuing similar lines of
business; and (4) whether the internal office structure and premises were

identical (i.e., office phone numbers, business cards, etc.).^^' The court of
appeals then applied these additional factors, finding that although McLeod (who
as plaintiff had the burden to prove the Aronson factors) had not produced much

211. Id.

212. Id.

213. Id at 462.

214. Id

215. Id

216. Id (quoting Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1232 (Ind. 1994)).
217. Id

218. See supra note 1 80.

219. McLeod, 744 N.E.2d at 463.

220. Id ai 464.

221. Id ai 463.



2002] CORPORATE LAW 1341

evidence, there was sufficient evidence in the record to find that holding Colonial
Mat liable for the debts owed to McLeod was equitable.^^^ Most notable to the
court ofappeals was that the Colonial corporations (Colonial Mat and Colonial
Industrial) were run from the same office, had the same office manager as the
sole employee of both corporations, and had comingled fmancial accounts.^^^

The second issue on appeal concerned the validity of Smith's personal
guarantee to McLeod and dealt with the protocol needed to create an enforceable
continuing guarantee agreement in Indiana.^^"^ This issue is beyond the scope of

this Article, as it is better discussed as a contracts issue.

C *'Outside Reverse Piercing": Apollo Plaza Ltd. v. Antietam Corp.^^^
This was not the first time the parties to this dispute had been before the

court of appeals. On their first occasion, the court, in a memorandum opinion,
affirmed thejudgment ofthe trial court in the litigation matter between Antietam

and Alex Shiriaev.^^^ In the present matter, the court was called upon to analyze
whether Apollo, a corporation wholly owned by Shiriaev, should be pierced to
have Antietam 's judgment satisfied.^^^

Although not necessarily relevant to the issue of PCV, the background
litigation provides an amusing story. Antietam Corporation was a construction

business and had borrowed money from Alex Shiriaev, giving as collateral a
security interest in a Bobcat that the corporation owned.^^^ The Bobcat was

ostensibly "stolen" from Antietam in October 1 994 and Shiriaev locked Antietam

out of its offices and demanded Antietam assign the insurance proceeds from the
stolen Bobcatto him.^^^ Antietam filed suit against Shiriaev, alleging conversion,

and Shiriaev countered with a negligence action with respect to the lost

Bobcat.^^^ Surprisingly, once the Bobcat was found at the residence ofShiriaev'

s

brother by a private detective, Shiriaev dropped his claims regarding the Bobcat.

However, Antietam proceeded to trial with its claims against Shiriaev and was
awarded over $130,000, plus legal fees.^^'

Antietam attempted to enforce thisjudgment and obtain payment by freezing

a bank account titled, "Alex Shiriaev d/b/a Apollo Plaza Limited."^^^ The trial

222. /flf. at464.

223. Id.

224. /^. at 465-66.

225. 75 1 N.E.2d 336 (Ind. Ct. App. 200
1
).

226. Shiriaev v. Antietam Corp., 733 N.E.2d 542 (Ind. Ct. App. 2000), trans, denied.

227. Apollo Plaza, 751 N.E.2d at 337.

228. Actually, the corporation was formed a few months after the loan and security interest

were given, but after the corporation was formed, all assets of the former sole proprietorship were

conveyed to the corporation. Id.

229. Id

230. Id

23 1

.

Id. The court of appeals affirmed this award. Shiriaev, 733 N.E.2d at 542.

232. >4;7o//o/'/aza, 751N.E.2dat338.



1342 INDIANA LAW REVIEW [Vol. 35:1321

court conducted a hearing to decide whether Apollo's corporate veil should be

pierced to satisfy Antietam's judgment against Shiriaev. The trial court found
for Antietam.^" Apollo appealed, arguing that the trial court conducted an

"outside reverse piercing" of Apollo's corporate identity because Apollo never

had any dealings with Antietam.^^"^ In addition, Apollo claimed that Shiriaev was
just a minority shareholder.^^^ Shiriaev also unsuccessfully tried to convince the

judge that he was not involved in Apollo, having recently resigned as president
of Apollo in favor of his brother.^^^ The court of appeals affirmed the trial
court's findings, holding that "a contrary decision by the trial court would have
allowed Shiriaev to further a fraud by using Apollo as the means to hide assets
in order to avoid paying the legal judgment rendered against him."^^^

IV. Indiana Securities Act—Fraudulent or Deceitful Acts
Most securities cases are litigated under the numerous federal securities

statutes dealing with fraudulent sales and the like. It is surprising, therefore, to

see a case like Carroll v. J.J.B. Hilliard,^^^ brought solely under Indiana

securities law. One of the claims in Carroll was premised on Indiana Code
section 23-2-1-12,^^^ which is almost identical in wording to the Securities

Exchange and Commission Rule 10b-5.^''° However, Gertrude Carroll filed a
lawsuit against R. Dale Cassiday and his brokerage firm. Milliard Lyons, under

the Indiana Securities Act and not premised on any violations of federal

233. Id

234. Id

235. Id

236. /^. at 339.

237. Mat 340.
238. 738 N.E.2d 1069 (Ind. Ct. App. 2000).

239. Section 12 reads,

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

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

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

material fact necessary in order to make the statements made in the light of

circumstances under which they are made, not misleading, or (3) to engage in any act,

practice or course ofbusiness which operates or would operate as a fraud or deceit upon

any person.

iND. Code § 23-2-1-12 (2001).
240. It is identical except for the federal jurisdiction requirement in Rule lOb-5: "use ofany

means or instrumentality of interstate commerce, or of the mails or of any facility of any national

securities exchange " 15 U.S.C. § 78j ( 1 998). As will be discussed below, although Cassiday's

presentation to Gertrude was done in person, and therefore the "instrumentality of interstate

commerce" requirement might have been in question, there were subsequent phone calls made

between Cassiday and Gertrude concerning the investments that might have qualified. But as

Gertrude brought her lawsuit solely under Indiana law, this is mere speculation.



2002] CORPORATE LAW 1343

securities law.^*'

Carroll was a seventy-five year old woman with the goal of increasing her
annual income by changing her stock portfolio.^'*^ She contacted Cassiday in July

1986 on the recommendation ofa friend. Cassiday met with Carroll at her home
in August 1986 and discussed her options. After the meeting, Cassiday prepared

a detailed memo which summarized his conversations with Carrol 1.^"*^ Cassiday
met with Carroll on another occasion in late August 1986, and at this meeting,
Cassiday proposed a plan to Carroll to meet her goal of increased income.^"^

Cassiday suggested she invest in two mutual funds which had histories ofhaving

fairly high yearly yields, and each month Carroll would make withdrawals.^"*^
The overall plan was for the mutual funds to yield a yearly percentage higher
than that of Carroll's yearly withdrawals.^"*^

Carroll decided to take Cassiday's suggestion.^"*^ In order to raise the money
needed to invest in these mutual funds, Cassiday suggested Carroll sell eight of

the stocks in her existing portfolio.^"** Cassiday warned Carroll that she would
incur tax liability from the sale ofher stocks, but also warned her that he was not
an expert on taxes.^"*^ Carroll gave her authorization to sell on September 2,
1986. All went according to plan. Cassiday sold the eight stocks, which netted

Carroll approximately $127,000."^ Carroll purchased a new portfolio with the
two mutual funds suggested by Cassiday and seven common stocks. However,
in December 1986, one of Carroll's sons told Carroll that she should no longer
conduct business with Cassiday.^^' Carroll terminated Cassiday's and his

brokerage firm's services. It was not until Carroll discovered that her tax liability

was going to be fifty percent higher than Cassiday had estimated did Carroll look
into filing a lawsuit for fraud and violation ofsecurities laws.^^^ Carroll filed her

lawsuit on February 2, 1 990, and died on February 9, 1 998. Her sons proceeded

with the lawsuit as representatives of Carroll's estate."^

Carroll sold her shares in one ofthe mutual funds that Cassiday suggested in

1 99 1 and, ironically, had Carroll retained these shares, the total return ofthe fund

would have covered Carroll's withdrawals and her investment would have
appreciated in value.^^"* Carroll retained her shares in the second mutual fund

24 1

.

Carroll, 738 N.E.2d at 1 07

1

242. Mat 1071-72.
243. /i/. at 1072.

244. Id.

245. Id.

246. Id

247. /flf. atl073.

248. Mat 1072.
249. Id

250. Mat 1073.
251. Id

252. Id

253. Mat 1072-73.
254. Mat 1074.



1344 INDIANA LAW REVIEW [Vol. 35:1321

suggested by Cassiday and that fund, as well, had a total return that covered
Carroll's withdrawals in addition to appreciating in value.^" Both mutual funds
were appropriate vehicles for Carroll to meet her stated goals of increasing her
monthly cash flow.^^^

In her lawsuit, Carroll alleged that Cassiday committed fraud and violated the

Securities Act with respect to his presentation to her and the sale and purchases

of her portfolios.^^^ The trial court made several specific fmdings of fact, and
concluded that neither Cassiday nor his brokerage firm were liable to Carroll
(now her estate) under any theory al leged.^^* The court ofappeals, through Judge
Friedlander, affirmed.^^^

The first issue was Carroll's allegations that Cassiday's recommendations
and presentation at their second meeting violated 710 Indiana Administrative
Code section 1-1 7-1 (d), which defines the unethical practices ofbroker-dealers
or investment advisors in Indiana Code section 23-2- 1 1 (a)(6). More specifically,
Carroll contended that Cassiday did not sufficiently inform her that the

withdrawals from the two mutual funds might consist ofprincipal and interest.^^
This failure, Carroll further contended, violates 7 1 Indiana Administrative Code
section l-17-l(d), which prohibits an investment advisor from presenting an

investment scheme, the return on which would consist of "income and

distributions from capital, or any other source."^^' The court found that Cassiday
did not violate this section, and furthermore, that this section did not even apply

to Cassiday's presentation.^^^

The court pointed to Cassiday's testimony at trial where he described his
conversation with Carroll at their second meeting.^^^ Cassiday testified that he

warned Carroll that should the mutual funds not give a yearly return higher than
ten percent, Carroll's withdrawals might include both interest and principal,

thereby dwindling the amount left in the fund.^^^ However, had Cassiday not
given this warning, subsection (d) did not reach Cassiday's actions.^^^ The court
limits subsection (d) to "Ponzi schemes."^^^ As the court described, "the primary
purpose of subsection (d) is to prohibit brokers from representing a return on an

investment that includes an infusion of capital supplied by later investors in the

program in question."^^^ And if subsection (d) were to apply to the type of

255. Mat 1075.
256. Id. at 1074-75.

257. /f/. at 1073.

258. Mat 1075.
259. Mat 1071.
260. Mat 1076.
261. iND.ADMIN.CODEtit. 710 r, 1-1 7-1 (d)( 1998).

262. Carroll, 738 N.E.2d at 1076.

263. Id.

264. Mat 1073.
265. M at 1076 (referencing IND. Admin. Code tit. 70 r. 1-17-I(d) (1998)).
266. Mat 1077.
267. Id. Or in other words, subsection (d) prohibited a pyramid scheme, where one investor



2002] CORPORATE LAW 1345

investment vehicle Cassiday suggested, the court added, subsection (e) of the

same section would be nullified.^^* Subsection (e) clearly states that an
investment advisor must point out to the client that distributions from

investments might reduce the value of that investment, the very thing Cassiday

had warned Carroll about.^^^

Carroll's second contention was that Cassiday violated section 23-2-1-12

because he failed to inform her of the time period needed to recover her

transactional costs.^^° Due to Carroll's age, the time to recover her costs would
have been approximately her remaining life expectancy at age seventy-five.^^'

Under this section, Cassiday was required to inform Carroll of all material facts
about the investment portfolio that he was suggesting so as to not make his
presentation misleading.^^^ Had Cassiday omitted a fact which would have been
"relevant to the investment decision," then Cassiday would have violated the

Securities Act.^^^

However, the court found that no material fact was omitted and upheld the
trial court's determination by looking at two pieces of evidence.^^'* First, the

court pointed to Carroll's undisputed goal of meeting with Cassiday and

obtaining his advice—^to increase her monthly income.^^^ Second, the court
noted the expert testimony given by a president of a local broker dealer. This

expert witness testified that had he been presented with Carroll's stated goal of

increase in income, and not investment growth, he would not have made a time-
to-recover-costs analysis.^^^ The witness also pointed out the fact that there was
no regulation, either state or federal, or any industry custom to give such an

analysis at all, regardless of the client's stated purpose for her investments.^^'

Based on these two factors, the court declined to include within the duties ofthe

broker-dealer a requirement to provide such an analysis.^'*

Lastly, Carroll contended that Cassiday violated subsection (x) of 710

Indiana Administrative Code section 1-17-1 by not conducting a reasonable
inquiry into her tax liability.^'^ Carroll alleged that Cassiday indicated to her that

her tax liability would be approximately $10,000, when she actually had to pay

brings in two investors, and then those two investors bring in three investors. The creator of the

scheme uses the later investors' money to pay "dividends" or distributions on the investment, but

there has not really been any investing or growth.

268. /^. at 1076.

269. M at 1076-77.
270. Mat 1077.
271. Id.

272. Id. (referencing IND. CODE § 23-2-1-12(2) (1998)).

273. W. at 1077.

274. Mat 1077-78.
275. Mat 1077.
276. Id

111. Id &i ion.

278. Id

279. Id (citing iND. ADMIN. CODE tit. 710 r. 1-14-1 (x) (1998)).



1346 INDIANA LAW REVIEW [Vol. 35:1321

approximately $17,000.^*^ The court held that subsection (x) "requires brokers
to conduct a reasonable inquiry into a customer's individual circumstances."^*'

The court looked to the testimony of Cassiday and Carroll's accountant, Jim
Winemiller. Cassiday testified that during his presentation, he informed Carroll

that she would incur tax liability on her sales of stock, but that he was not an
accountant and could not be sure whether $10,000 was an accurate figure.
Carroll authorized the sale nonetheless.^*^ On the tfay after the sale, she called
Winemiller to inform him of the sales and to ask about her tax liability. The
court found it to be telling that Carroll continued to sell additional stocks even

after her phone call with Winemiller.^*^ In short, the court determined that
Cassiday conducted a reasonable investigation into Carroll's situation in order

to consider all relevant information before suggesting an investment vehicle to

Carroll.'**

Looking at the opinion as a whole, it seems that the court was taken with the
fact that Carroll was not an elderly woman who had fallen prey to Cassiday.
Throughout the opinion, the court mentions the fact that prior to her dealings

with Cassiday, Carroll had contact with other brokers.'*^ She had managed her
portfolio and although she was not on the level of a stockbroker, Carroll had
more than an average understanding of her investments.'*^ It was just an
unfortunate happenstance that she felt she had been defrauded, although one

wonders how she could have felt that way, looking at the returns her investments
eventually did yield. But perhaps this is the benefit of hindsight.

Conclusion

One survey article cannot come close to discussing all the changes to Indiana
corporate law in the past year. This Article has attempted to discuss case law in

four different areas of corporate law in an attempt to provide a partial analysis

of any shifts in the landscape. The two major shifts this year have been in the

area ofshareholder suits in closed corporations and suits brought under the DRS.
Both G & NAircraft, Inc. and Galligan outline remedies to which shareholders
can be entitled, which was a slight expansion ofthe statutory remedies provided

for by the IBCL. However, as the majority of the cases discussed in this article

were court ofappeals cases, the supreme court might decide to grant transfer and

change the landscape even further.

280. Id.

281. Id. at 1078.

282. Id at 1079.

283. Id

284. Id at 1077.

285. Id at 1072, 1075

286. Mat 1071-72.