Indiana Law Review


Recent Developments in Indiana Business
AND Contract Law

Michael A. Dorelli*

During the survey period,^ Indiana's courts rendered a number of significant
decisions impacting businesses, as well as their owners, officers, directors and

shareholders. The Indiana legislature also passed into law a new state Securities
Act, providing clarification and uniformity regarding significant rules and

regulations. These and other developments of interest to business litigators, and

corporate transactional lawyers, as well as business owners and in-house counsel,

are discussed herein.

I. Securities Litigation and Regulation

A. Director's Derivative Liability Under Indiana 's Securities Law

In Lean v. Reed,^ the Indiana Supreme Court held that an outside director
failed to meet his burden of proving the statutory "reasonable care" defense to

personal liability for the corporation's securities registration and disclosure

violations under Indiana' s Securities Law (ISL).^ The plaintiffs in Lean were the
founders and shareholders of Abacus Computer Services, Inc. (Abacus)."^ In
"very late March" of 2000, Galaxy Online, Inc. (GOLI), an internet business,
entered into an agreement to acquire Abacus.^ Pursuant to the transaction, which

closed on March 31, 2000, Abacus shareholders were issued 600,000 shares of
GOLI common stock.^ The GOLI shares were not registered as "securities" in
Indiana.^

The plaintiffs sued GOLI, an affiliated company, and 10 individuals who
were officers, directors, or controlling persons of GOLI, alleging the "sale of
unregistered securities in violation of section 3 of the ISL^ and material

misrepresentations and omissions in violation of section 12(2)."^ The plaintiffs'

* Partner, Hoover Hull LLP, Indianapolis, Indiana. B.S., 1994, Indiana University

—

Bloomington; J.D., 1998, magna cum laude, Indiana University School ofLaw—Indianapolis. The
views expressed herein are solely those of the author.

1

.

This Article discusses select Indiana Supreme Court and Indiana Court of Appeals

decisions during the survey period—i.e., from October 1, 2007, through September 30, 2008,
except where otherwise indicated—as well as significant statutory developments during the survey
period.

2. 876 N.E.2dl 104 (Ind. 2007).

3. Id. at II 13-14. At the time of the Lean decision, the ISL was found at sections 23-2-1-1

to 25 of the Indiana Code.

4. /^. at 1105-06.

5. Mat 1106.
6. Id.

1. Id.

8. See iND. Code § 23-2- 1 -3 (2007) (providing that "[i]t is unlawful for any person to offer

or sell any security in Indiana unless it is registered [or it] is exempted [from registration]").

9. Lean, 876 N.E.2d at 1 106; see also iND. CODE § 23-2-1-12 (2007) (providing that "[i]t



848 INDIANA LAW REVIEW [Vol. 42: 847

claims against the individual defendants, including Lean, were based on the

"derivative liability" provisions found in section 19(d) of the ISL, which

provides, in relevant part:

[A] partner, officer or director of [a person liable under the ISL] [is] also

liable jointly and severally with and to the extent as the person, unless

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

ofthe existence ofthefacts by reason ofwhich the liability is alleged to

exist}^

The "net effect of [the above-cited provisions of the ISL] is that a director of a
selling corporation who cannot sustain the reasonable care defense is liable for
both registration and disclosure violations by the corporation."^^

The plaintiffs moved for summaryjudgment against Lean, arguing that Lean
was liable pursuant to section 19(d).^^ The trial court granted summaryjudgment
in favor of the plaintiffs, rejecting Lean's "reasonable care" defense. ^^ The
Indiana Court of Appeals affirmed the trial court's ruling,^"^ and the Indiana

Supreme Court granted transfer. ^^ On transfer. Lean argued "that, as a matter of
law, it is reasonable care for a director to assume that management and its
advisors have taken the appropriate steps to comply with legal requirements."^^

Lean argued "that this is particularly true of a director new to the board at the
time the securities transaction is approved." ^^ Lean conceded that he voted in

favor of the transaction at the March 28, 2000, meeting of GOLI's board of
directors, and that he "did not ask any questions that would have allowed him to
discover that the stock being sold by GOLI was not registered." ^^ Alternatively,
on transfer. Lean argued that "summaryjudgment is never appropriate to resolve
a question of 'reasonable care' because it is ultimately a question for the trier of

fact."^^

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

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

material fact necessary in order to make the statement made in light of the circumstances under

which they are made, not misleading").

10. IND. Code § 23-2-l-19(d) (2007) (emphasis added).

11. L^a«, 876N.E.2datll07.

12. /^. at 1106.

13. Id.

14. Id. at 1 107 (citing Lean v. Reed, 854 N.E.2d 79 (Ind. Ct. App. 2006)).

15. Id.

16. Mat 1108.
17. Id. Lean was elected to the GOLI board of directors on February 1 8, 2000, i.e., just over

a month before the Abacus transaction was approved and closed. Id. at 1111. Lean's first board

meeting, at which the transaction was approved, was on March 28, 2000—just thirty nine days after
Lean was elected a director and three days before the transaction closed. Id. at 1111-12,

18. Mat 1112.
19. Mat 1108.



2009] BUSEsnESS AND CONTRACT LAW 849

The court in Lean encapsulated the issue before it as follows: "[WJhether it
is sufficient for an outside director to assume compliance with all applicable laws

with no explicit assurance from anyone, no documentation, and in the face of a
number of facts that raise obvious points of inquiry."^^ The court explained that
"a director can reasonably rely on assertions from counsel and others with

expertise as to some legal conclusions."^^ However, the court found that, in this
case, "there was no evidence of assurance from counsel, whether made directly
by counsel or not, that the law applicable to the Abacus acquisition had been
examined and that the transaction conformed to all applicable law."^^ Further,

there was no "evidence that lawyers familiar with securities or financing issues
had reviewed the transaction."^^ Based on the "undisputed facts," the court in

Lean concluded, "Lean knew, or in the exercise of reasonable care could have
known, that the disputed transaction involved the unlawful issuance of
unregistered securities. Accordingly, we hold as a matter of law the defense of
reasonable care was not established."^"^

Finally, the court rejected Lean's argument that the issue of "reasonable

care" under section 19(d) is always a question of fact, i.e., that resolution of the

"reasonable care" defense is inappropriate for summary judgment disposition.^^
The court agreed that "summary judgment is rarely appropriate as to a director's
reasonable care."^^ However, the court explained, "in extreme cases conduct

may be reasonable or unreasonable as a matter of law just as negligence may be
established as a matter of law."^^ The court described its bases for finding
"legal" disposition appropriate in this case, as follows:

If Lean had been told by a respectable authority that his transaction
complied with legal requirements, it would create a factual issue as to
the reasonableness of his unquestioning acceptance. But the undisputed

facts of this case are that Lean assumed this transaction complied with
applicable law based on no assurance or documentation from anyone.

A director who makes this assumption does not meet the standard
required by the ISL that in the exercise of reasonable care he could not

have known of the facts constituting the violation.^^

"Reasonable inquiry, or receipt of reasonable assurance, is one thing," the court

explained.^^ "But blind assumption that all is well leaves the investing public in

20. Mat 1111.
21. Id.

22. Id.

23. Id.

24. Id.

25. Mat 1113-14,
26. Mat 1113.
27. Id.

28. M. at 11 13-14

29. M. at 1114.



850 INDIANA LAW REVIEW [Vol. 42:847

the same position as if there were no directors of the corporation."^° The ISL
"requires more of a director than a simple assumption that all is well."^^

B. Indiana 's New Uniform Securities Act

Effective July 1 , 2008, the Indiana General Assembly passed the new Indiana
Uniform Securities Act (the lUSA),^^ which is patterned, in large part, on the
Uniform Securities Act of 2002. The new lUSA is now found at Article 19 of
Title 23 of the Indiana Code, and is comprised of 6 chapters covering the

following subject matter:

Chapter 1 : General provisions,^^ including a more detailed and
thorough "definitions" section;^"^

Chapter 2: Exemptions from registration and disclosure
requirements of the lUSA;^^

Chapter 3: Registration of securities and notice filing of "federal

covered securities
;"^^

Chapter 4: Broker-dealers, agents, investment advisers, investment

adviser representatives, and federal covered investment

advisers ;^^

Chapter 5 : Fraud and liabilities, including provisions dictating both

criminal penalties and civil liability;^^ and

Chapter 6: Administration and judicial review.
39

Although a detailed evaluation of the lUSA, its differences from the prior
version of the Act and its impact on practitioners going forward is outside the

scope of this Article, a brief summary of just a few of the noteworthy changes
follows.

30. Id.

31. Id. The Indiana Supreme Court affirmed the trial court's grant of summary judgment

against Lean on the "reasonable care" defense. Id.

32. IND.CODE §§ 23-19-1-1 to -6-1 1 (2008). Thepredecessor version ofIndiana's Securities

Act, enacted in 1961 and based on the Uniform Securities Act of 1956, was found at Article 2 of

Title 23.

33. IND. Code §§23-19-1-1 to -5.

34. Id. § 23-19-1-2.

35. Id. §§23-19-2-1 to -4.

36. /^.§§ 23-19-3-1 to -7.

37. M§§ 23-19-4-1 to -12.
38. Id §§23-19-5-1 to -10.

39. Id §§23-19-6-1 to -11.



2009] BUSINESS AND CONTRACT LAW 85

1

1. ''Investment Contract'' Includes Interest in a Limited Liability

Company.—The "definitions" section of the lUSA is more detailed than that of
the predecessor Act. Significantly, the lUSA' s definition of a "security," which,
like the predecessor version of the Act, includes an "investment contract," now
includes five sub-sections describing specific categories of investment vehicles

that are "include[d]" or not "include[d]" within the definition."^^ One of those
sub-sections provides that the definition of a "security" specifically "includes as

an 'investment contract', among other contracts, an interest in a . . . limited
liability company.''"^^ The lUSA does not expressly clarify whether all "interests"
in limited liability companies will meet the definition of a "security.""^^ Prior to

enactment of the lUSA, whether or not an interest in an LLC was a "security"
depended on whether the interest met the definition of an "investment contract,"

as defined by applicable case law."^^ Arguably, the specification in the lUSA that
the definition of a security "includes as an 'investment contract'

""^"^ an interest in

an LLC indicates that the test for an "investment contract" must still be satisfied.
In other words, an LLC interest may have been included within the definitional
section to clarify that an LLC interest can, if the applicable test for an
"investment contract" is satisfied, constitute a "security" under the lUSA."^^

2. Private Placement Exemption Replaced with ''Self-Executing " Limited

Offering Exemption,—The detailed private placement exemption contained in the
predecessor Act"^^ has been replaced in the lUSA with a simplified "self-
executing" exemption for limited offerings."^^ The new exemption does not
require the filing of an offering statement or other written materials (as did the

predecessor private placement exemption, depending on the size of the offering

and characteristics of the offerees)—i.e., it is "self-executing"—as long as the
conditions dictated therein are satisfied."^^ Generally, the new limited offering
exemption applies to transactions meeting the following criteria: (1) the issue is

40. See id. § 23-19-l-2(28)(A)-(E).

41. M § 23-19- 1-1(28)(E) (emphasis added).
42. See id.

43. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946) (defining "investment

contract" as "a contract, transaction or scheme whereby a person invests his money in a common

enterprise and is led to expect profits solely from the efforts of the promoter or a third party").

44. See IND. CODE § 23-19-l-2(28)(E) (2008).

45. The test for an "investment contract," as described by Howey and its progeny, appears to

have been codified in section 2(28)(D) of the JUSA, which provides the following:

[The definition of a "security"] includes as an "investment contract" an investment in

a common enterprise with the expectation of profits to be derived primarily from the

efforts of a person other than the investor and a "common enterprise" means an

enterprise in which the fortunes of the investor are interwoven with those of either the

person offering the investment, a third party, or other investors ....

Id. § 23-19-l-2(28)(D).

46. iND. Code § 23-2-l-2(b)(10) (2007).

47. iND. Code § 23-19-2-2(14) (2008).

48. Id.



852 INDIANA LAW REVIEW [Vol. 42:847

made to "not more than twenty-five purchasers . . . other than ['institutional
investors']"; (2) a "general solicitation or general advertising is not made in
connection with the offer to sell or sale of the securities;" (3) no "commission or
other remuneration" is paid "or given, directly or indirectly," to an unregistered

broker or agent; and (4) "the issuer reasonably believes that all the purchasers .

. . are purchasing for investment.""^^

3. Registration of ''Finders.
"—Under the new lUSA, so-called "finders"

—

i.e., "agents" representing issuers with respect to an offer or sale of the issuer's

securities—must be registered under the lUSA if they are "compensated in
connection with the individual's participation by the payment ofcommissions or

other remuneration based, directly or indirectly, on transactions in those

securities."^^ Individuals representing issuers "in connection with \h& purchase

of the issuer's own securities"^* are exempt from registration.^^
4. Registration of ''Investment Advisers/'—The "investment adviser"

exemption now provides that investment advisers with "no more than five (5)
clients that are resident in [Indiana]" are exempt from registration only if the

investment adviser has no "place of business in this state."^^

5. Fraud and Liabilities, Including "Control Person" and Director
Liability.—The fraud and liability provisions of the lUSA remain substantially
unchanged from the predecessor Act's analogous provisions. It continues to be

"unlawful for a person, in connection with the offer, sale or purchase of a

security, directly or indirectly[,]"^'^ to do any of the following:

(1) to employ a device, scheme, or artifice to defraud; (2) to make an
untrue statement of a material fact or to omit to state a material fact

necessary in order to make the statement made, in the light of the
circumstances under which they were made, not misleading; or (3) to

engage in an act, practice, or course of business that operates or would
operate as a fraud or deceit upon another person.^^

The "knowing" violation of Article 5, with specified exceptions, constitutes a
Class C felony.^^ Civil liability is imposed on a "person" who sells a security in
violation of Article 5, unless "the person selling the security sustains the burden

of proof that either the person did not know, and in the exercise of reasonable

care could not have known, of the violation or the purchaser knowingly

participated in the violation."^^

Joint and several liability continues to be imposed on (1) a person that

49. Id.

50. Id. § 23-19-4-2(a), (b)(3).

51. /J. § 23-19-4-2(b)(7) (emphasis added).

52. Id.

53. Id. § 23-19-4-3(b)(2).

54. M §23-19-5-1.
55. Id. §23-19-5-1 to -1(3).

56. Id. § 23-19-5-8(a).

57. Id § 23-19-5-9(a).



2009] BUSINESS AND CONTRACT LAW 853

"directly or indirectly controls a person liable under [the civil liability provisions

of the lUSA]"^^ and (2) an individual "who is a managing partner, executive
officer, or director of a person liable under [the civil liability provisions],

"^^

unless the "controlling person" or the "individual" partner, officer or director

sustains the burden of proof that he or she "did not know, and in the exercise of

reasonable care could not have known, of the existence of conduct by reason of

which the liabihty is alleged to exist."^^ Other than minor changes, the "joint and

several" liability provisions, including the statement of the "reasonable care"

defense thereto, remain unchanged from the prior statute. As such, the analysis
of the "reasonable care" defense outlined by the Lidiana Supreme Court in Lean

V. Reed,^^ discussed above, remains good law.^^

n. Corporate and Shareholder Liability

A. Piercing the Corporate Veil—''Alter Ego'' Doctrine
In Massey v. Conseco Services, LLC,^^ the court ruled that a subsidiary

corporation that loaned money to a director of a parent corporation (in order to
purchase stock of the parent corporation) was not an "alter ego" of the parent

corporation, for purposes of the director's defenses against the parent.^"^ From
1996 to 2000, Conseco, Inc. (Conseco) had a program "known as the D&O Loan
Program" (the Program). Pursuant to the Program, Conseco made arrangements
with several banks to loan money to its directors and officers for the purchase of
Conseco stock.^^ "Conseco guaranteed the loans."^^ Conseco' s subsidiary,

Conseco Services, LLC (Conseco Services), also loaned money to the directors
and officers "to cover the interest owed on the loans from the banks."^^

The plaintiff participated in the Program from 1996 to 2000, borrowing
approximately $ 1 5 million to purchase Conseco stock.^^ The plaintiff also signed

a promissory note in favor ofConseco Services, to cover interest on his bank loan

in the amount of more than $4 million.^^ In April 2000, Conseco "acknowledged

that it had overstated its income on its quarterly financial statements in 1999 by

$376.6 million.^^ "The value of Conseco shares dropped as the maturity date on

58. Id. § 23-19-5-9(d)(l).

59. M§23-19-5-9(d)(2).

60. Id. § 23-19-5-9(d)(2).

61. 876 N.E.2d 1 104 (Ind. 2007).

62. Compare iND. CODE § 23-2-l-19(d) (2007), with iND. CODE § 23-19-5-9(d)(2) (2008).

63. 879 N.E.2d 605 (Ind. Ct. App. 2008).

64. Mat 609-10.
65. /J. at 607.

66. Id.

67. Id.

68. Id.

69. Id.

70. Id.



854 INDIANA LAW REVIEW [Vol. 42:847

[the plaintiffs] Note with Conseco Services approached."^
^

In December 2002, the plaintiffs stock lost all its value when Conseco filed
for bankruptcy.^^ Conseco Services sued the plaintiff on the note he executed to

cover interest on the bank loans, and the plaintiff asserted several affirmative

defenses and counterclaims, primarily based on the conduct of Conseco.^^ In

other words, the plaintiff asserted defenses and counterclaims seeking "to hold

Conseco Services liable by alleging Conseco Services is the alter ego of

Conseco."''

The court in Massey explained the "alter ego" theory as follows:

"The legal fiction of a corporation may be disregarded where one
corporation is so organized and controlled and its affairs so conducted

that it is a mere instrumentality or adjunct of another corporation.

Indiana courts refuse to recognize corporations as separate entities where

the facts establish that several corporations are acting as the same

entity."'^

The court continued, explaining that "[t]he party seeking to pierce the corporate
veil bears the burden of proving 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."'^

In affirming the trial court's summary judgment ruling, as a matter of law,
the court in Massey explained that the "alter ego" doctrine "may be invoked to
prevent fraud or unfairness to third parties."''^ The court concluded that the
plaintiff "was an outside director, but he was not a third party. He was a director
of Conseco and understood the corporate organization of Conseco and Conseco

Services."'^ The court also concluded that the plaintiff failed to designate any
evidence that the corporations "abused the corporate form or that such abuse

would result in a fraud or injustice to him."'^ The court held that the plaintiff
"could not treat Conseco Services as the alter ego of Conseco."^^

In French-Tex Cleaners, Inc. v. Cafaro Co.,^^ the court held that a

corporation that shared office space with a landlord was not liable for the
landlord's alleged breach of contract (or conversion) under "alter ego" or

71. /J. at 608.

72. Id.

73. Id. at 608-09.

74. Mat 609.
75. Id. (quoting Oliver V. Pinnacle Homes, Inc., 769N.E.2d 11 88, 1 191 (Ind. Ct. App. 2002))

(internal quotations omitted).

76. Id. (internal quotations omitted).

77. Id.

78. Id.

79. Id.

80. Id.

81. 893 N.E.2d 1156 (Ind. Ct. App. 2008).



2009] BUSINESS AND CONTRACT LAW 855

piercing the corporate veil theories. ^^ The landlord and tenant in French-Tex
became involved in a dispute regarding real estate taxes.^^ The dispute led to the
tenant, a dry cleaning business, filing a class action complaint, alleging that the

landlord and the second corporation, Cafaro, overcharged the tenant (and other

commercial tenants of various shopping centers) for their shares of property

taxes.^"^ The tenant alleged breach of contract, conversion, unjust enrichment,
and fraud.^^ Although Cafaro was not a party to the subject lease, the tenant

alleged that the two defendants shared office space, telephone and computer

systems, and some officers. Further, the tenant alleged that the landlord's

invoices were actually prepared by Cafaro' s employees, and other issues that

allegedly gave rise to liability.^^ The trial court granted summary judgment in
favor of Cafaro, and the tenant appealed.^^

The court recognized that although Cafaro was not a party to the lease,
"liability could be imputed ... if Cafaro was acting as [the landlord's] alter

ego."^^ The court explained that it was the tenant's burden to establish that the
landlord "was so ignored, controlled, or manipulated that it was merely the

instrumentality of Cafaro and that the misuse of the corporate form would

constitute a fraud or promote injustice."^^ The court enumerated the categories
of evidence required to satisfy the tenant's burden of proof on the tenant's "alter

ego" theory:

(1) [The landlord's] undercapitalization; (2) absence of corporate

records; (3) fraudulent representation by the 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.^^

The court of appeals concluded that "[l]ike the trial court, we find no genuine
issue of material fact regarding Cafaro' s liability for breach of contract under the

[lease between the landlord and tenant]."^^ The court summarized the respective
parties' arguments and "facts" relied upon in support, but did not analyze the

facts or specify which of them was persuasive or dispositive on the issue.^^

82. Mat 1169.
83. Mat 1159-60.
84. M. at 1160.

85. Id.

86. Id.

87. Id.

88. M. at 1168.

89. M. at 1168-69.

90. Id. at 1169.

91. Id.

92. Id.



856 INDIANA LAW REVIEW [Vol. 42:847

B. Corporate Liabilityfor Criminal Act ofEmployee

In Prime Mortgage USA, Inc. v. Nichols^^ the court held that a corporation
could be held liable for its employee-shareholder's forgery of a share

authorization form, allegedly causing damage to the other shareholder.^"^
Specifically, the plaintiff and defendant shareholders—Nichols and Law,
respectively—were, at one time, the sole shareholders of the corporation.^^ The
business relationship between the shareholders deteriorated, and Nichols decided

she wanted to sell her stock.^^ The parties were unable to negotiate a buyout; so,
Nichols filed a complaint seeking appointment of a receiver and dissolution,

arguing that she and Law each owned half of the company's shares.^^ Law
responded, claiming that he had previously issued company stock to his daughter
and another company employee, pursuant to a share authorization document
allegedly signed by Nichols.^^ Nichols later learned that Law had forged her
signature on the share authorization document and sought, among other things,
to hold both Law and the corporation liable for the forgery under Indiana' s crime
victims statute.

^^

Pursuant to section 35-41-2-3 of the Indiana Code

[A] corporation may be held liable for an employee's criminal acts as
long as the employee was acting within the scope of employment. The
company may be held liable, if the employee's purpose, was to an
appreciable extent, to further his employer' s business, even if the act was
predominantly motivated by an intention to benefit the employee

himself. Even if a particular act was not authorized by the corporation,
if there is a sufficient association between the authorized acts and the

unauthorized acts, the unauthorized acts may fall within the scope of
employment.

^^^

The court in Nichols stated that "[a]n elaborate discussion on this point is not
necessary to explain [its] conclusion that Law was acting within the scope of his
employment when he forged Nichols' name."^^^ According to the court, although
Law forged the share authorization document with the intent to benefit himself
to the detriment of Nichols, the act also furthered the corporation's business.

^^^

As such, the court concluded that the corporation could be held liable under

93. 885 N.E.2d 628 (Ind. Ct. App. 2008).

94. Id. 2X655.

95. Id. at 631.

96. Id.

97. Id.

98. Id.

99. Id. at 637-38; see also iND. CODE § 34-24-3-1 (2008).

100. Id. at 654-55 (internal quotations omitted).

101. /^. at 655

102. Id.



2009] BUSINESS AND CONTRACT LAW 857

Indiana's crime victims statute.
^^^

C. Doctrine of Contribution Applied to Shareholders ofFailed Business

In Balvich v. Spicer,^^"^ the Indiana Court of Appeals discussed the doctrine

of "contribution" in the context of shareholders of a failed Hardee's franchise

business. ^^^ The Balviches and the Spicers owned varying interests in the
corporate entities that owned the franchises. ^^^ The corporations had obtained
more than $700,000 in loans fromBankOne andAT&T Financial Corporation. '^^

When the franchises began to fail, the corporations defaulted on the loans and the
lenders foreclosed. ^^^ The shareholders had personally guarantied the loans and,
ultimately, judgments were entered against them.^^^ The Spicers paid
significantly more than the Balviches to release their obligations under the

judgments.
^^^ The corporations also owed past due amounts for state sales tax

and employee withholding taxes.^^^ The Spicers paid approximately $75,000 to
satisfy the corporations' tax obligations.

^^^

The Spicers filed an action against the Balviches for contribution regarding
the amounts paid in connection with the Bank One, AT&T and state tax
payments. ^^^ The trial court entered judgment in favor of the Spicers and the
Balviches appealed. ^

^"^

After finding that the Spicer's claims were not barred by the applicable

statute of limitations, the court in Spicer turned to the contribution claim,

explaining that "the doctrine of contribution rests on the principle that where

parties stand in equal right, equality of burden becomes equity."^ ^^ Further, the

court explained: "[T]he right of contribution is based upon natural Justice, and

it applies to any relation, including that of joint contractors, where equity

between the parties is equality of burden, and one of them discharges more than
his share of the common obligation."^ ^^ The court also noted that section 26-1-
3.1-1 16 of the Indiana Code provides, in relevant part, that "a party having joint
and several liability who pays the instrument is entitled to receive from anyparty

103. Id.

104. 894 N.E.2d 235 (Ind. Ct. App. 2008).

105. Id. at 237. The Hardee' s franchises were located throughout Indiana and were owned by

several separate corporations of which the parties in Spicer were shareholders. Id.

106. Id.

107. Id.

108. Id.

109. Id.

110. Id.

111. Id.

112. /J. at 238.

113. Id.

114. /J. at 238, 242.

115. /<i. at 245 (internal quotations omitted).

116. Id. (internal quotations omitted).



858 INDIANA LAW REVIEW [Vol. 42:847

having the same joint and several liability contribution in accordance with
applicable law.

"
'

^
^

The court in Spicer found that the evidence supported the trial court's ruling
in favor of contribution from the Balviches, because they were jointly and

severally liable under their personal guaranties.' ^^ The court also rejected the
Balviches' statutory argument that contribution could not be pursued because the

judgments had not been paid "in full" or "in their entirety."''^ Finally, the court

ruled that the trial court hadjurisdiction to award contribution regarding the state

tax liability. '^^ The court explained that the "propriety of imposition of a
tax"—which arguably would have been within the exclusive jurisdiction of the
Indiana Tax Court—was not at issue. '^' Rather, the issue was whether
contribution for the amount paid by the Spicers was proper.

'^^

in. "Authority" of Executive Director and "Removed" Director
TO File Action Against Board Members

In Martindale Brightwood CDC v. Gore}^^ the court held that a non-profit
corporation's executive director lacked standing to file suit against board

members, but that a "removed" director was authorized by statute to allege that
his removal was invalid and improper. ^^'^ The executive director and the recently
"removed" director filed suit against the corporation's board members, alleging

breach of contract, intentional interference with contract, misfeasance, breach of

fiduciary duty, and breach of the standard of care of directors. *^^ The board
members moved to dismiss, for failure to name the real party in interest, arguing
that neither the executive director nor the former director was authorized by
statute to file suit.^^^ The trial court granted the motion to dismiss. ^^^

Section 23-17-4-4(b) of the Indiana Code provides, "A corporation's power
to act may be challenged in a proceeding against the corporation for a declaratory
judgment or to enjoin an act where a third party has not acquired rights. The
proceeding may be brought by the Attorney General or a directorT^^^ A
"director" is defined in the statute as "an individual designated in articles of

incorporation or bylaws, elected by the incorporators or otherwise elected or

117. M (quoting IND. CODE § 26-1-3.1-1 16).
118. Id.

119. Id. at 247 (discussing iND. CODE § 34-22-1-6 (2006)).

120. /^. at 247-48.

121. /^. at 248.

122. /^. at 248-49.

123. 878 N.E.2d 1280 (Ind. Ct. App. 2008).

124. Id. at 1284, 1285.

125. Mat 1281.
126. /^. at 1281-82.

127. Id. at 1282.

128. Id. at 1283 (quoting iND. CODE § 23-17-4-4(b) (2007)).



2009] BUSINESS AND CONTRACT LAW 859

appointed, to act as a member ofa board ofdirectors.
""^^^

Regarding the executive director, the court in Martindale rejected the

executive director's argument that, pursuant to the corporation's by-laws, she

was a ''non-voting member" of the board.
'^^

Specifically, the court explained that

the by-laws merely provide that the executive director will attend meetings of the

board of directors, but they "in no way [designate] the Executive Director as a
person to act as a member of [the board of directors] ."^^^ Further, pursuant to the
executive director' s employment agreement with the corporation, the executive

director was required to "report to" the board, "advise" the board, and "see that

all orders and resolutions of the [board were] carried into effect."^^^ The court
concluded that the executive director "clearly was an employee of [the
corporation] and not a director as she argue[d]."^^^

Regarding the "removed" director, the director alleged in the complaint that

his removal from the board was "improper" and "invalid," in that it was not done
in compliance with the corporation' s by-laws. ^^"^ The court directed that in ruling
on a motion to dismiss, "it must accept as true the facts alleged in the

complaint." ^^^ As such, the court accepted as true the fact that the director-
plaintiff's removal was "improper and therefore void."^^^ If his removal was
void, the court explained, "he would have standing to bring a proceeding

pursuant to Indiana Code section 23-17-4-4(b)."^^^ Therefore, the court reversed
the trial court's dismissal of the director's complaint on standing grounds.

^^^

IV. Inspection of Corporate Books and Records

In Bacompt Systems, Inc. v. Peck,^^^ the court of appeals concluded that a
hearing on a petition to inspect corporate records "constituted a trial within the

meaning of [Indiana] Trial Rule ^SCA)."^"^^ As such, the court held, it was
improper for the trial court to base its findings and conclusions regarding

whether a "proper purpose" for the inspection existed on an affidavit.
^"^^

Rather,

129. Id. (quoting IND. CODE § 23-17-2-9 (2007)).

130. Id.

131. Id.

132. Id.

133. Id. The court in Martindale also noted that the corporation's articles of incorporation

provide that directors "shall be elected." Id. at 1284. The executive director was appointed—not
elected—further refuting her argument that she was a "director" within the meaning of the
corporation's articles. Id.

134. Id. at 1284.

135. Id. at 1285 (citing Trail v. Boys & Girls Clubs, 845 N.E.2d 130, 134 (Ind. 2006)).
136. Id.

137. Id.

138. Id.

139. 879 N.E.2d 1 (Ind. Ct. App. 2008).

140. Id. Sit 5.

141. Id.



860 INDIANA LAW REVIEW [Vol. 42: 847

live testimony was required, in open court.
'"^^

Section 23-1-52-2 of the Indiana Code provides, in relevant part: "A
shareholder of a corporation is entitled to inspect and copy, during regular

business hours at a reasonable location specified by the corporation, [various

categories of] records of the corporation ... if ... the shareholder's demand is
made in good faith and for a proper purpose."

^"^^

One of the parties seeking records in Bacompt filed an affidavit in support
of the petition, stating "that she needed access to [the requested] corporate

records in order to value her stock in her pending divorce proceeding."^"^"^ The
trial court concluded that a "proper purpose" had been demonstrated and granted

the petition.
^"^^

On appeal, the corporation argued, among other things, that the trial court's
reliance on the petitioner's affidavit violated Indiana Trial Rule 43(A), which

provides that "[i]n all trials the testimony of witnesses shall be taken in open

court."
^"^^ The court of appeals agreed, describing the nature of a hearing on a

petition to inspect corporate records as follows: "[T]he hearing . . . was for the

purpose of determining issues of fact concerning, in this case, the [petitioners']

purpose and entitlement to inspect [the corporation's] corporate records, which

was the very basis of their petition. The hearing therefore constituted a trial
within the meaning of Trial Rule 43(A)."*^^

Therefore, the court ruled, "testimony was required to be taken in open court

in order to preserve [the corporation' s] rights to cross-examination and the ability

of the fact-finder to observe demeanor and determine credibility." ^"^^ The court
proceeded to analyze the trial court's finding of a "proper purpose" and

concluded that the trial court improperly relied on the affidavit. ^"^^ In reversing

the trial court's ruling, the court of appeals explained "we are reluctant to
endorse the trial court's findings of fact and conclusions thereon as somehow
demonstrative of a proper purpose when there was no testimony or properly-
admitted evidence establishing it."^^°

V. Joint Ventures

In Lauth Indiana Resort & Casino, LLC v. Lost River Development, LLC,^^^
the Indiana Court of Appeals held, as a matter of first impression, as follows:

[I]f a joint venture is formed for the purpose of submitting a proposal or

142. Id.

143. Id. at 3 (quoting IND. CODE § 23-l-52-2(a), (c) (2007)).

144. Id.

145. Id.

146. Id. at 4 (quoting iND. TRIAL R. 43(A)).

147. Id. at 5 (citations omitted).

148. Id.

149. Id.

150. /^. at6.

151. 889 N.E.2d 915 (Ind. Ct. App. 2008).



2009] BUSINESS AND CONTRACT LAW 86

1

similar bid, and the joint venture agreement is silent as to when or under
what circumstances the joint venture will end, then the joint venture

ends, as a matter of law, when the proposal or bid is rejected. ^^^

In March 2004, the Indiana Gaming Commission (IGC) issued a request for
proposals (RFP), soliciting proposals from those wishing to develop a casino

project in Orange County. ^^^ Three groups submitted proposals: Trump Indiana,
Orange County Development, and Lost River Development. ^^'^ After Lost River

submitted its original proposal, it was contacted by Lauth Indiana Resort &
Casino, LLC (Lauth), which expressed a desire to become involved with the Lost
River proposal. ^^^ The Lost River members and Lauth entered into a "Letter
Agreement," providing for the parties' ownership interests in Lost River. The
parties agreed that the Letter Agreement created a "joint venture."^^^ "However,

the Letter Agreement was silent as to when, or under what circumstances, the
joint venture would end."^^^ Lost River submitted an amended proposal to the
IGC.^^^ Ultimately, however, the IGC selected the Trump Indiana proposal. ^^^

The parties were hopeful that Trump Indiana would be unable to meet the
financing or other conditions imposed by the IGC.^^° Meanwhile, Lauth began

contacting other gaming companies regarding the possibility of teaming up if the

IGC rescinded its award to Trump Indiana. ^^^ As expected. Trump Indiana was
unable to meet the IGC's conditions and the IGC issued a second RFP.^^^ Lauth
submitted a proposal with another company. Cook Group, under the name of
Blue Sky Casino, LLC (Blue Sky), in competition with Lost River. '^^ The IGC
awarded the development to Blue Sky.^^'^

Lost River filed suit against Lauth and others, alleging breach of the Letter

Agreement, in addition to breach of fiduciary duty claims. ^^^ Lauth moved for
summary judgment, arguing that the Letter Agreement formed a joint venture,
which terminated when the IGC chose Trump Indiana's proposal. '^^ The trial
court denied Lauth' s summary judgment motion, and Lauth appealed. '^^

152. /J. at 922-23.

153. Mat 916.
154. Id.

155. Id. at 911.

156. Id.

157. Id.

158. Id.

159. Id.

160. Id.

161. Id.

162. /J. at 917-18.

163. /J. at 918.

164. Id.

165. Id.

166. Id.

167. /J. at 919.



862 INDIANA LAW REVIEW [Vol. 42:847

As an initial matter, the court in Lauth ruled, as a matter of first impression
in Indiana, that "a joint venture without a termination date remains in force until

its purpose is accomplished or that purpose becomes impracticable." ^^^ The court
proceeded to evaluate the "purpose" of the Lost Riverjoint venture, starting with

the definition of joint venture: "[A] joint venture is an association of two or
more parties formed to carry out a single business enterprise for profit. A joint
venture is similar to a partnership except that a joint venture contemplates only

a single transaction ''^^^ The court then looked to the express language of the
"Letter Agreement," concluding that "the joint venture contemplated only one

proposal and [it] is silent with regard to what would happen if the Lost River
proposal was not chosen by the IGC."^^^ The court ruled that "once the IGC
rejected the Lost River proposal, the joint venture terminated, and the parties

were then free to pursue other opportunities, either with each other or with other

parties."^^^ As such, the court found, "Lauth did not breach the joint venture
agreement or violate any duty owed to the other parties to the joint venture." ^^^

The court emphasized that its "holding applies only in cases where, as here, the
joint venture agreement is silent as to when the joint venture terminates."^^^

VI. Business Torts and Statutory "Crimes"

A. Tortious Interference with Contract

In Allison v. Union Hospital, Inc.,^^^ the court evaluated the "justification"

element for a tortious interference with a contractual relationship claim. ^^^ The
plaintiffs in Allison—Certified Registered Nurse Anesthetists—worked for a
hospital providing obstetric anesthesia services. ^^^ The plaintiffs and hospital
were engaged in contract renegotiations while the hospital was attempting to
negotiate an agreement with a professional corporation to replace the plaintiffs

in providing obstetric anesthesia services for the hospital. ^^^ The original

168. Mat 920.
169. Id. (citations omitted); see also Walker v. Martin, 887 N.E.2d 125, 138 (Ind. Ct. App.

2008). The court in Walker explained that for a joint venture to exist, "the parties must be bound

by an express or implied contract providing for ( 1 ) a community of interests, and (2) joint or mutual

control, that is, an equal right to direct and govern the undertaking, that binds the parties to such

an agreement." Id. "A joint venture agreement must also provide for the sharing of profits." Id.

170. Lauth, 889 N.E.2d at 920. The court in Lauth recognized that its holding established a

"bright-line rule[,]" but believed that approach to be "particularly appropriate for dealing with joint

ventures, which by their very nature contemplate only a single transaction." Id. at 922.

171. Mat 921.
172. Id.

173. Mat 922.
174. 883 N.E.2d 113 (Ind. Ct. App. 2008).

175. Mat 118-22.
176. M. at 115.

177. M. at 116-17.



2009] BUSINESS AND CONTRACT LAW 863

agreement with the plaintiffs contained a provision for termination without

cause. '^^ Before the agreement with the professional corporation was finalized,
however, the hospital reached an agreement with the plaintiffs. ^^^ The new
agreement did not contain a termination without cause provision.

^^^

The hospital informed the professional corporation that the agreement with
plaintiffs could, in fact, be terminated without cause subject to ninety days

notice.'^* After terms were agreed upon with the professional corporation, the
hospital provided notice of termination to the plaintiffs. ^^^ When plaintiffs
demanded a copy of their contract, the hospital produced an altered version with
a new termination without cause provision. ^^^ The hospital and professional
corporation finalized their agreement, and plaintiffs sued both ofthem—alleging
breach of contract, tortious interference with a contractual relationship, and other

causes of action.
^^"^

To establish a claim of tortious interference with a contractual relationship,
a plaintiff must prove the following five elements: "(1) the existence of a valid

and enforceable contract; (2) the defendant's knowledge of the existence of the

contract; (3) the defendant' s intentional inducement of the breach ofcontract; (4)
the absence of justification; and (5) damages resulting from the defendant's
wrongful inducement of the breach."^^^ To determine whether a defendant's
conduct is "justified," the Indiana Supreme Court has suggested that courts look
to the factors enumerated in the Restatement (Second) of Torts, which are as
follows:

(a) the nature of the defendant's conduct;

(b) the defendant's motive;

(c) the interests of the plaintiff with which the defendant's conduct

interferes;

(d) the interests sought to be advanced by the defendant;

(e) the social interests in protecting the freedom of action of the

defendant and the contractual interests of the plaintiff;

(f) the proximity or remoteness of the defendant's conduct to the

interference; and

(g) the relations between the parties.
^^^

The court in Allison explained that "the weight to be given to each consideration
may differ from case to case depending on the factual circumstances, but the

178. /^. at 115.

179. Mat 116.
180. Id.

181. Matin.
182. M. at 116-17.

183. M. at 116.

184. Mat 117.
185. Id. at 118 (citing Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1235 (Ind.

1994)).

186. Id. (quoting Winkler, 638 N.E.2d at 1235).



864 INDIANA LAW REVIEW [Vol. 42:847

overriding question is whether the defendants' conduct has been fair and
reasonable under the circumstances

T^^^

Regarding the hospital, ^^^ the court found that there was ''at the least ... a
question of material fact as to whether [the hospital's] actions with respect to the

contents of the [agreement with plaintiffs] was justified."^^^ The court found it
significant that the hospital discovered that the contract did not contain a

termination without cause provision; the hospital failed to discuss that omission

with the plaintiffs; it terminated the contract pursuant to a nonexistent provision;

and then it inserted the provision into an altered version, which it delivered to the

plaintiffs following termination. '^^ The court proceeded to analyze the remaining
Restatement factors, concluding that the inquiry regarding "whether [the

hospital's] conduct has been fair and reasonable under the circumstances . . . [is]

so highly fact sensitive that ... it is best answered by a factfinder."
^^^

Regarding the professional corporation, the court found that its conduct was
justified. ^^^ The court explained that the professional corporation's conduct was
"limited to agreeing to be a replacement provider of [obstetric] anesthesia

services." ^^^ Further, the hospital told the professional corporation that the

plaintiffs' contract was terminable at will.^^^ After evaluating the remaining
factors enumerated by the Restatement, the court concluded that "[u]nder these

circumstances, [the professional corporation's] actions were justified."
^^^

B. Trade Secrets

In Bridgestone Americas Holding, Inc. v. Mayberry,^^^ the Indiana Supreme
Court held, as a matter of first impression, that the federal courts' long-standing

three-part balancing test was "the proper analysis for whether 'good cause' has
been shown and whether a protective order should be issued for a trade secret
during discovery." ^^^ Before analyzing and, ultimately, adopting the three-part

balancing test for analysis of the protective order issue, the court provided a

concise "history" of trade secret protection in Indiana, including the following

description:

187. Id.

188. The court explained that "[a]lthough it is true that a party to a contract is not subject to

liability for tortious interference with its own contract if it acts alone, it may be subject to liability

for conspiring with another party to tortiously interefere with the contract." Id. (quoting Winkler,

638N.E.2datl234n.7).

189. Id. at 120 (emphasis in original).

190. /J. at 119-20.

191. Id. Sit 121.

192. Id.

193. Id. at 122.

194. Id.

195. Id.

196. 878 N.E.2d 189 (Ind. 2007).

197. Id. Sit 194.



2009] BUSINESS AND CONTRACT LAW 865

Trade secrets are unique creatures of the law, not property in the

ordinary sense, but historically receiving protection as such. Unlike

other assets, the value of a trade secret hinges on its secrecy. As more
people or organizations learn the secret, the value quickly diminishes.

For this reason, owners or inventors go to great lengths to protect their

trade secrets from dissemination.

This Court has long recognized the importance of protecting trade

secrets from inappropriate disclosure. Most trade secret litigation in
Indiana has involved allegations of overt misappropriation. Of course,
trade secrets may be valuable during the course of litigation not
involving misappropriation claims, and there are moments when justice
requires disclosure. Still, courts must proceed with care when
supervising the discovery of trade secrets, lest the judiciary be used to

achieve misappropriation or mere leverage.
^^^

The court proceeded to adopt the three-part balancing test followed by
federal courts, *^^ and concluded that the parties seeking disclosure failed to meet

their burden for showing necessity.^^°

C Indiana 's Corrupt Business Influence Act
I. ''Direction " or ''Control " ofRacketeering Activities Not Required.—In

Keesling v. Beegle^^^ the Indiana Supreme Court concluded that Indiana's
Corrupt Business Influence Act—i.e., Indiana's version of the federal Racketeer
Influenced and Corrupt Organizations Act

—
"imposes RICO liability both on

persons at and below a racketeering enterprise's managerial or supervisory
level."^^^ The plaintiffs in Keesling purchased pay telephones and "entered into

198. Id. at 192-93 (citations omitted).

199. Id. at 193-94. The court described the three-part test as follows:

First, the party opposing discovery must show that the information sought is a "trade

secret or other confidential research, development, or commercial information" and that

disclosure would be harmful. . . . Then the burden shifts to the party seeking discovery

to show that the information is relevant and necessary to bring the matter to trial. If

both parties satisfy their burden, the court must weigh the potential harm of disclosure

against the need for the information in reaching a decision.

Id. at 193 (quoting FED. R. Crv. PRO. 26(c)(7)) (other citations omitted)).

200. Id. at 1 97. A more thorough discussion of the application of the three-part balancing test
as applied to the facts in Mayberry is included in this year's Indiana civil procedure survey. See

Daniel K. Burke, Recent Developments in Indiana Civil Procedure, 42 IND. L. REV. 879, 882-83

(2009).

201. 880 N.E.2d 1202 (Ind. 2008).

202. Id. at 1203 (emphasis added).



866 INDIANA LAW REVIEW [Vol. 42:847

service agreements to install, service and maintain the telephones."^°^ The
plaintiffs were passive investors in the program.^^"^ The promoters ofthe program
"violated federal securities laws by not registering the pay telephone investment

program with the Securities and Exchange Commission."^^^

The defendants in Keesling included not only the "promoters," but also the
recruited sales representatives and the individuals and entities that had entered

agreements with the promoters, "to recruit sales representatives and receive

commissions on the sales made by his recruits."^^^ The plaintiffs sued the
defendants for their respective roles in the pay telephone program, alleging

violations ofIndiana' s Securities Act, Indiana' s RICO Act, fraud, conversion and
theft.2^^

The plaintiffs contended that these "recruiters" and "recruits" violated the
Indiana RICO Act by "conduct[ing] or otherwise participat[ing] in the activities
of [an] enterprise through a pattern of racketeering activity."^^^ The trial court
rejected the contention and granted summary judgment in favor of the
defendants, based on the 2000 Indiana Court of Appeals' decision in Yoder
Grain, Inc. v. Antalis,^^^ in which the court of appeals held that "the plaintiff

must allege that the defendant 'participated in the operation or management of
the enterprise itself,' and that the defendant played 'some part in directing the

enterprise's affairs.
'"^^^ According to the court in Yoder Grain, "mere

participation in the activities of the enterprise is insufficient; the defendant must

participate in the operation or management of the enterprise."^* ^ The trial court
found that the plaintiffs failed to present evidence that the defendants "directed"

the activities of the enterprise and, as such, granted summary judgment in the
defendants' favor.^*^

On transfer, the Indiana Supreme Court abrogated the Yoder Grain decision
and reversed the trial court's summaryjudgment ruling, holding that a defendant
need not "direct" or "control" the racketeering activities in order to face liability

under Indiana's RICO Act.^*^ The Indiana Supreme court explained that '"the
Legislature intended for the Indiana Act to reach persons below the managerial
or supervisory level as well as those who exert control or direction over the
affairs of [a racketeering] enterprise, i.e., to reach a racketeering enterprises 'foot

203. Id.

204. Id.

205. Id.

206. Id. at 1204.

207. Id.

208. Id. at 1205-06 (quoting IND. Code § 35-45-6-2(3) (2008)).

209. 722 N.E.2d 840 (Ind. Ct. App. 2000).

210. Keesling, 880 N.E.2d at 1205 (quoting Yoder Grain, 722 N.E.2d at 846).

211. Yoder Grain, 722 N.E.2d at 846 (quoting Goren v. New Vision Int'l, Inc., 156 F.3d 721,
727(7thCir. 1998)).

212. Keesling, 880 N.E.2d at 1205.

213. Id.



2009] BUSINESS AND CONTRACT LAW 867

soldiers' as well as its 'generals.
'"^^"^

In reaching its holding, the court in

Keesling analyzed the language of the federal RICO statute compared to that of
the Indiana Act, finding that the Indiana Act was phrased more "broadly," and

it surveyed the laws of other states.^'^ The court stated that "[b]ecause we hold
that the level of participation necessary to implicate the Indiana Act need not rise

to the level of direction, such a showing was unnecessary and summaryjudgment
was not justified on that basis.

"^^^

2. Indiana 's RICO Act Not Preempted by lUTSA.—In AGS Capital Corp. v.
Product Action International, LLC,^^^ the court held, as a matter of first

impression in Indiana, that the Indiana Uniform Trade Secrets Act (lUTSA) does

not preempt Indiana's RICO Act.^^^ AGS involved claims by Product Action
against its former employees, a competing company, and that company' s "parent"

company (under "alter ego" theory),^^^ alleging, among other things,
misappropriation of trade secrets, violation of Indiana's RICO Act. The
defendants argued that the lUTSA preempts Product Action under Indiana's
RICO Act.220

In concluding that the lUTSA does not preempt the civil remedy provisions
of Indiana's RICO Act, the court in AGS explained as follows:

Because the RICO statute was designed to address the more sinister
forms of corruption and criminal activity, the preemption provision of

lUTSA should not prohibit RICO from fulfilling its purpose where the
form of corruption involves the systematic acquisition of economically

valuable information through the artifice of competitors' employees in

order to gain an unlawful economic advantage in the marketplace. RICO
is structured to reach and punish these diabolical operations that are a

greater threat to society than random theft.
^^^

The court continued, "In consideration of the purpose and goals of the entire
RICO framework, we conclude that the civil remedy portion providing for a
private action is a derivative of the criminal law. Thus, this type of action is not

preempted by lUTSA."^^^ The court was hopeful that its "conclusion will result

214. Id. at 1206 (internal quotations omitted).

215. Id. at 1205-08.

216. /^. at 1208.

217. 884 N.E.2d 294 (Ind. Ct. App. 2008).

218. Id. at 30S.

219. See id. at3l\-\2 (concluding that the parent and subsidiary companies were "alter egos,"

premised in large part on the parent's use of a "sister" company to pose as a potential customer of

Product Action in order to obtain a price quotation and then provide that information to the

subsidiary competitor).

220. Id. at 306. The lUTSA provides that it "displaces all conflicting law of this state

pertaining to the misappropriation of trade secrets, except contract law and criminal law." Id.

(quoting iND. CODE § 24-2-3- 1(c) (2007)).
221. Mat 308.
222. Id.



868 INDIANA LAW REVIEW [Vol. 42:847

in a greater disincentive for the commission of the strategic, repetitious theft of

trade secrets."^^^

D. Fraud on a Financial Institution

In American Heritage Banco, Inc. v. McNaughton,^^^ the court held that a
plaintiff alleging "fraud on a financial institution" need not prove the elements

of common law fraud.^^^ Fraud on a financial institution is defined as follows:

A person who knowingly executes, or attempts to execute, a scheme or
artifice ... to obtain any of the money, funds, credits, assets, securities,

or other property owned by or under the custody or control of a state or
federally chartered or federally insured financial institution by means of
false or fraudulent pretenses, representations, or promises commits a

Class C felony.226

The defendants in American Heritage argued that the plaintiff must prove "the
elements of common law fraud [including, specifically, "reliance"] in order to
prove a violation of this statute."^^^ The court disagreed, explaining that "[i]n
Indiana no common-law crimes exist, and the legislature fixes the elements
necessary for any statutory crime."^^^ According to the court, "[c]riminal statutes

cannot be enlarged by construction, implication, or intendment beyond the fair

meaning of the language used."^^^

vn. Non-Competition Covenants

A. Public Policy and Geographic Scope

In Central Indiana Podiatry, P.C. v. Krueger,^^^ a podiatrist had been

employed with the plaintiff pursuant to a series of written employment
agreements, which were "renewed" every year or two.^^^ Each agreement

223. Id.

224. 879 N.E.2d 1 1 10 (Ind. Ct. App. 2008).

225. Mat 1117-18.
226. M. at 1 1 17 (quoting iND. CODE § 35-43-5-8(a)(2) (2008)).

227. Id. at nil nA.
228. Id. at 1 1 17 (quoting Knotts v. State, 187 N.E.2d 571, 573 (Ind. 1963)).

229. Id. The court in American Heritage also addressed the plaintiffs common law fraud

claim, addressing the rule that fraud cannot be premised on "representations of ftiture conduct, on

broken premises, or on representations of existing intent that are not executed." Id. at 1115. The

plaintiff in American Heritage based its common law fraud claim, in part, on the defendant's loan

application, which included a statement regarding the "purpose" of the loan. The plaintiff alleged

that the stated purpose was not the "true" purpose. The court affirmed the trial court's dismissal

of the claim, explaining that the "stated purpose of the loan is not a statement of past or existing

fact." Mat 1116.
230. 882 N.E.2d 723 (Ind. 2008).

231. Mat 725.



2009] BUSINESS AND CONTRACT LAW 869

contained non-solicitation and non-competition provisions, with terms of two

years from the date of termination and geographic scopes "defined as fourteen

listed central Indiana counties, as well as any other county where [plaintiff]

maintained an office during the term of the Contract or in any county adjacent to

any of the foregoing counties."^^^ Significantly, the podiatrist had not practiced

in Hamilton County within 2 years of his termination.
^^^

In 2005, the podiatrist was accused of attempting to kiss an office employee

at the office.^^"^ The plaintiff terminated him on July 25, 2005.^^^ In September
2005, the podiatrist entered an employment agreement with a competing

company in Hamilton County, which was one of the counties specifically listed
in the employment agreement with the plaintiff.^^^ Further, the podiatrist sent a
letter to the plaintiffs patients, informing them of his new employment.^^^ The
plaintiff sued for injunctive relief and damages, the trial court found the

geographic restriction unenforceable, and denied the injunction.^^^ The court of
appeals reversed,^^^ and the Indiana Supreme Court granted transfer.^'^^

As an initial matter, the court in Krueger described the "public policy"
concerns implicated by non-competition agreements involving physicians, as

follows:

Noncompetition agreements are justified because they protect the

investment and goodwill of the employer. In many businesses, the
enforceability of a noncompetition agreement affects only the interests

of the employee and employer. A noncompetition agreement by a
physician involves other considerations as well. Unlike customers of

many businesses, patients typically come to the physician's office and
have direct contact with the physician. If an agreement forces a

physician to relocate outside the geographic area of the physician's

practice, the patients' legitimate interest in selecting the physician of

their choice is impaired. Moreover, the confidence of a patient in the

physician is typically an important factor in the relationship that

relocation would displace.^"^^

Nevertheless, after reviewing case law and legislation from other states, as

well as an ethics opinion from the American Medical Association, the Indiana

Supreme Court held that non-competition agreements involving physicians were

232. Id. at 725-26 (internal quotations omitted).

233. Mat 730.
234. Id. 2X125.

235. Id.

236. Id.

237. Id.

238. Id.

239. Id. (citing Cent. Ind. Podiatry, P.C. v. Krueger, 859 N.E.2d 686, 689 (Ind. Ct. App.

2007)).

240. Id.

241. /^. at 727.



870 INDIANA LAW REVIEW [Vol. 42:847

not unenforceable as a matter of public policy.^"^^ The court upheld its 1983
ruling in Raymundo v. Hammond Clinic Ass 'n,^^^ in which it rejected a claim that
such covenants were unenforceable on public policy grounds and "adopted a

reasonableness standard for physician noncompetition agreements.
"^'^'^ The court

concluded that "[a]ny decision to ban physician noncompetition agreements

altogether should be left to the legislature."^"^^

After finding that the plaintiff had demonstrated that the non-competition

agreement "served the legitimate interest of preserving patient relationships

developed with [plaintiffs] resources and to that extent served a legitimate

interest of [the plaintiff],
"^"^^

the court proceeded to evaluate the reasonableness

ofthe geographic restriction.^"^^ The court explained that "[w]hether a geographic
scope is reasonable depends on the interest of the employer that the restriction

serves."^"^^ According to the court, "[a]n employer has invested in creating its

physician's patient relationships only where the physician has practiced."^"^^

Further, "noncompetition agreements justified by the employer's development

of patient relationships must be limited to the area in which the physician has had

patient contact."^^^

Because the podiatrist had not used the plaintiffs resources to establish

patient relationships throughout all of the counties either identified by name or
description in the agreement, the court in Krueger found that the geographic

scope was "clearly overbroad."^^^ However, the court applied the "blue pencil"

doctrine in an effort to determine whether enforceable aspects of the non-

compete were being violated.^^^ The court started with the fact that the plaintiff
defined its geographic scope in terms of counties, rather than the radius from the

locations of the "workplace," and then considered that the duration of the non-

compete was two years.^^^ The court explained "when the [two year] period

242. Id. at 728.

243. 449 N.E.2d 276 (Ind. 1983).

244. Krueger, 882 N.E.2d at 728 (citing Raymundo, 449 N.E.2d at 280-81).

245. Id.

246. Id. 2X129.

247. Id. The parties had agreed that the two-year duration of the agreement was reasonable.

Id.

248. Id. at 730.

249. Id.

250. Id.

251. Id.

252. Id. at 730-3 1 . The court described the "blue pencil" doctrine as follows:

If a noncompetition agreement is overbroad and it is feasible to strike the unreasonable

portions and leave only reasonable portions, the court may apply the blue pencil

doctrine to permit enforcement of the reasonable portions. The blue pencil doctrine

permits excising language but not rewriting the agreement.

Id. (internal citations omitted).

253. Mat 730-31.



2009] BUSEsfESS AND CONTRACT LAW 87

1

begins to run varies with when [the podiatrist] left that location."^^"^ The court
found that the plaintiff established only that the podiatrist worked in "three
counties—Marion, Tippecanoe and Howard—within the 2-years preceding his
termination." ^^^ Because those counties were specifically identified in the non-

compete, the geographic scope was "sustainable as to them."^^^
However, the court concluded that the "geographic scope [was] unreasonable

to the extent it reache[d] contiguous counties."^^^ The court explained that parts
of the contiguous counties were too far from the locations at which the podiatrist
actually worked.^^^ In other words, the selection of entire counties as the basis

for the geographic restriction rendered the restriction unreasonable, because no

evidence was offered to suggest that a "significant contingent of patients"
traveled from more remote parts of even the adjacent counties.^^^ The court,
therefore, held that the "contiguous county restriction [was] unreasonable[,]"^^^

but that the restriction was enforceable as to Marion, Tippecanoe, and Howard
counties.^^^

B. ''Protectible Interest" in Customer Relationships

In Gleeson v. Preferred Sourcing, LLC,^^^ the court of appeals evaluated

whether a plaintiff-employer had a "protectible interest" in its "customer
relationships."^^^ In Gleeson, the plaintiff employed the defendant as the "sales
manager" at its Fort Wayne location.^^"^ The defendant and Preferred entered into
a non-competition and confidentiality agreement.^^^ The defendant was
"instrumental in growing [plaintiffs] Fort Wayne location from a new, start-up
facility ... to one of its more profitable facilities."^^^ According to the plaintiff,
"customer relationships are 'key' to [its] success."^^^ The defendant-employee
resigned in January 2005.^^^ In February 2005, the defendant began working for

254. /J. at 731.

255. Id.

256. Id.

257. Id.

258. Id.

259. Id.

260. Id.

261. Id. The court in Krueger affirmed the trial court's order denying plaintiffs request for

a preliminary injunction, except as to the three Indiana counties for which the non-compete was

found enforceable. Id. at 734.

262. 883 N.E.2d 164 (Ind. Ct. App. 2008).

263. Id. at 172-74.

264. Id. at 169.

265. Id.

266. Id. at 170.

267. Id.

268. Id.



872 INDIANA LAW REVIEW [Vol. 42:847

a competitor, soliciting sales and contacting customers of the plaintiff.^^^ The
plaintiff-employer filed its complaint, seeking damages and a permanent
injunction, followed by a motion for preliminary injunction.^^^ The trial court
granted the preliminary injunction and the defendant appealed.^^^

In connection with a dispute regarding the enforceability of a non-

competition agreement, the court must "first examine whether the employer has

asserted a legitimate interest that may be protected by a covenant."^^^ Indiana
courts "recognize[] a protectable interest in the good will generated between a
customer and a business."^^^ The court in Gleeson explained that "[g]ood will
includes secret or confidential information such as the names and addresses of
customers and the advantage acquired through representative contact."^^"^ The
court explained the rationale for finding a "protectible interest" in customer

relationships, as follows:

In industries where personal contact between the employee and the

customer is especially important due to the similarity in the product

offered by the competitors, the advantage acquired through the

employee's representative contact with the customer is part of the

employer's good will, regardless of whether the employee had access to
confidential information.^^^

The court in Gleeson continued, as follows:

If an employee is hired in order to generate such good will, she may be
enjoined from subsequently contacting those customers or using that

good will to her advantage. Indeed, Indiana courts have held that a
salesperson may be restrained from contacting former customers within
her previous sales area. There is a personal nature to the relationship

between a salesperson and customer, and many times the customer's
only contact with the company is through the salesperson.^^^

In Gleeson, the court concluded that the plaintiff's "customer relationships

and good will [could] be protected by a covenant not to compete[,]"^^^ because

"customer relationships are important in [the] business, which is a 'people

business,' and . . . [the defendant] 'was one of [plaintiffs] most successful sales

associates in creating those relationships with [plaintiff's] customers.
'"^^^

269. Id.

270. Id.

111. Id. at 110-71.

272. Id. at 172 (citing Cent. Ind. Podiatry, P.C. v. Krueger, 882 N.E.2d 723, 728 (Ind. 2008)).

273. Id. at 173 (quoting Norlund v. Faust, 675 N.E.2d 1 142, 1 154 (Ind. Ct. App. 1997)).

274. Id.

275. Id. (citing MacGill v. Reid, 850 N.E.2d 926, 930 (Ind. Ct. App. 2006)).

276. Id. (citations omitted).

277. Id. at 114.

278. /^. at 173-74.



2009] BUSINESS AND CONTRACT LAW 873

Vin. Contract Interpretation

A. ''Contemporaneous Document'' Rule

In Murat v. South Bend Lodge No. 235,^'^^ the court held that the
"contemporaneous document" rule did not apply to the construction of two

allegedly contemporaneously executed deeds—one ofwhich contained a specific
width to an easement and the other of which did not.^^^ In Murat, the dominant

estate brought an action for injunctive relief to prevent the servient estate owner

and billboard company from placing a billboard within an easement area.^^^ The
subject property had been conveyed subject to a retained easement ofunspecified

width. The same day as the original conveyance, the retained easement holders
conveyed the easement to their daughter and son-in-law, specifying a twenty-

three-foot width to the conveyed easement.^^^ Later, the property owner

attempted to place a billboard on a portion of the property.^^^ The easement
holders sought an injunction preventing placement of the billboard. The trial

court denied the injunction, concluding that placement of the billboard along the

side ofthe property would "afford necessary or reasonable ingress and egress.
"^^'^

The court declined to read the two deeds together to impose a twenty-three-foot
width to the original retained easement.^^^

In affirming the trial court's ruling, the court of appeals described the

"contemporaneous document" rule as follows: "'[I]n the absence of anything to

indicate a contrary intention, writings executed at the same time and relating to

the same transaction will be construed together in determining the contract. The
application of this rule depends on the facts of each particular case."^^^

The court in Murat explained that "the doctrine should be applied cautiously
when the documents involve different parties."^^^ The court held that the two
deeds should not be read together to impose a deed of specific width on the

property owner.^^^ The original deed conveying the property did not specify a
width to the retained easement and the current easement holders pointed to no

evidence indicating that the property owner "understood the transaction to
involve an easement of a specific width."^^^ The court of appeals, therefore,
affirmed the trial court's ruling denying the requested injunction.^^^

279. 893 N.E.2d 753 (Ind. Ct. App. 2008).

280. /J. at 757-58.

281. Id. at 155.

282. Id. at 754.

283. Id. at 755.

284. See id. at 756.

285. Id. at 757-58.

286. Id. (internal quotations omitted).

287. Id. at 757.

288. Id.

289. Id.

290. /J. at 757-58.



874 INDIANA LAW REVIEW [Vol. 42:847

B. Handwriting Controls Over Print or Typewriting

In Patel v. United Inns, Inc.,^^^ the court of appeals applied the rule that

"[w]hen construing a contract where there is apparent conflict, handwriting

prevails over typewriting."^^^ The court explained the rationale for this rule as
follows: "Handwritten terms are favored over typewritten terms because there is

a presumption that the handwritten terms were more actively negotiated between
the parties, and, therefore, that those terms best reflect the parties' intent."^^^ The
court in Patel relied on this rule in charging a party to a purchase agreement with

an escrow obligation of $530,000, which had been hand-written onto the

contract, as opposed to an escrow obligation of 10% of the purchase price.^^"^

The court recognized that $530,000 was closer to 25% of the purchase price, but
found dispositive that the $530,000, amount was hand-written into the contract.^^^

The court held that the party obligated to pay the escrow amount had breached
the contract, because he failed to pay the full $530,000 escrow amount.^^^

IX. Contract Performance and Breach

A. Standing to Allege Breach

1. Third-Party Standing to Argue ''First Material Breach. "—In Harold
McComb & Son, Inc. v. JPMorgan Chase Bank,^^^ the court held that a
mechanic' s lien holder lacked standing to sue on a mortgagee-bank' s alleged first

material breach of a contract between the bank and the mortgagor-borrower.^^^

The mechanic's lien holder and bank had filed separate foreclosure actions,
which were consolidated.^^^ The trial court ordered foreclosure of the bank's
mortgages and ordered the sale of the subject property.^^^ On appeal, the
mechanic's lien holder argued that the trial court erred in foreclosing on the

bank's mortgages, because the bank was in first material breach of the loan

agreement between the bank and the mortgagor-borrower.^^^

291. 887 N.E.2d 139 (Ind. Ct. App. 2008).

292. Id. at 148 (citing Scott v. Anderson Newspapers, Inc., 477 N.E.2d 553, 562 (Ind. Ct. App.

1985)).

293. /J. atl49n.3.

294. Id. at 148.

295. Id.

296. /^. at 148-49.

297. 892 N.E.2d 1255 (Ind. Ct. App. 2008).

298. /rf. at 1258.

299. Mat 1256-57.
300. Mat 1257.
301. Id. at 1258; see also Wilson v. Lincoln Fed. Sav. Bank, 790 N.E.2d 1042, 1048 (Ind. Ct.

App. 2003) (stating that "where a party is in material breach of a contract, he may not maintain an

action against the other party or seek to enforce the contract against the other party if that party later

breaches the contract").



2009] BUSINESS AND CONTRACT LAW 875

The court in JPMorgan rejected the Uen holder's argument, concluding that
the lien holder had "no legal standing to complain."^^^ Quoting the United States

Supreme Court's decision in Williams v. Eggleston,^^^ the court in JPMorgan
explained that "[t]he parties to a contract are the ones to complain of a breach,

and if they are satisfied with the disposition which has been made of it and of all
claims under it, a third party has no right to insist that it has been broken.''^^"^ The
court in JPMorgan continued, explaining that "only the parties to a contract,
those in privity with the parties, and intended third-party beneficiaries under the

contract may seek to enforce the contract."^^^ Concluding that the mechanic's
lien holder was none of those, the court affirmed the trial court's ruling that the
lien holder lacked standing to assert the bank's alleged breach in opposition to

its foreclosure action.^^^

2. Members ofLLCLackedStanding to SueforDamage to LLC.—In Vectren
Energy Marketing & Service v. Executive Risk Specialty Insurance Co.,^^^ the
court held that members of a limited liability company lacked standing to sue
their (and the LLC's) liability insurance carrier for breach of contract and
declaratory relief in connection with the insurer's alleged failure to pay a

judgment entered against the LLC and its employees.^^^ The court reviewed the
subject policy and concluded that the members were individual insureds covered
by the policy.^^^ However, the court noted that neither of the members were
named defendants in the underlying lawsuit, neither member attempted to
intervene in the lawsuit, no judgment was entered against the members, and
neither member incurred any defense costs in connection with the lawsuit.^ ^°

The court in Vectren explained that "[t]o establish standing, the plaintiff
must demonstrate a personal stake in the outcome of the lawsuit and must show
that he or she has sustained or was in immediate danger of sustaining, some
direct injury as a result of the conduct at issue."^^^ The court acknowledged that
the members were covered by the policy and that, as such, the insurer owed them
"contractual duties . . . that are separate and distinct from those duties owed to
[the LLC] ."^^^ However, the court found that the contractual duties at issue in the
case were owed only to the LLC. It stated that "[i]t may be that as the two
members of [the LLC], the [members] will lose money as an indirect
consequence of the judgment, defense expenses, and [the insurer's] refusal to

pay. That reality, however, does not mean that they have suffered a "Loss" under

302. JPMorgan, 892 N.E.2d at 1258.

303. 170 U.S. 304(1898).

304. JPMorgan, 892 N.E.2d at 1258.

305. Id.

306. Id.

307. 875 N.E.2d 774 (Ind. Ct. App. 2007).

308. Id. at 778-79.

309. Id at 775.

310. /J. at 776.

311. Id. at 111 (citing Shourek v. Stirling, 621 N.E.2d 1 107, 1 109 (Ind. 1993)).

312. Id.



876 INDIANA LAW REVIEW [Vol. 42:847

the Policy."^ ^^ The court concluded that the members were *'not entitled to
attempt to right a wrong allegedly done to a separate and distinct entity."^

^"^

B. Third-Party Beneficiaries

In City ofEast Chicago v. East Chicago Second Century, Inc.,^^^ the court

discussed third-party beneficiary theory and ruled that two non-profit foundations

and a for-profit corporation were intended third-party beneficiaries oftwo "letter

agreements" between the City ofEast Chicago and a marina partnership, relating

to a license to operate a riverboat casino that provided for the payment of a
percentage of gross receipts to the foundations and the corporation.^*^

Specifically, the award of a license to the marina partnership was conditioned on
the partnership's agreement to fund local economic development through

payment of 3.75% of its gross receipts to the foundations and the corporation.^*^

The license was transferred to Harrah's, then later, to "Resorts East Chicago."^*^
The letter agreements were not addressed in the documents transferring the
license from Harrah's to Resorts.

^*^

Subsequently, the East Chicago Common Counsel passed an ordinance
purporting to redirect the amounts being paid under the letter agreements to the

City of East Chicago.^^^ The corporation filed suit against Resorts, seeking a
declaration that it was a third-party beneficiary entitled to enforce the terms of
the letter agreements.^^* Resorts filed a third-party complaint against the

foundations and the City of East Chicago.
^^^

The court in East Chicago started with a description of third-party
beneficiary law in general:

One who is not a party to a contract may enforce the contract by
demonstrating it is a third-party beneficiary. A third-party beneficiary
contract exists when ( 1 ) the parties intend to benefit a third party; (2) the
contract imposes a duty on one of the parties in favor of the third party;

and (3) the performance of the terms of the contract renders a direct

benefit to the third party intended by the parties to the contract.
^^^

313. Id.atllS.

314. Id. The court in Vectren reasoned that if the LLC members had standing in this case,

every past, present or future member, officer, director, or employee of an LLC could have a separate
justiciable claim against an insurer anytime the LLC or any other insured was denied coverage. Id.

315. 878 N.E.2d 358 (Ind. Ct. App. 2007), trans, granted and rev'd in part and ajf'd in part,

908N.E.2d611 (Ind. 2009).

316. /J. at 375.

317. Id. at 366.

318. Mat 367.
319. Id.

320. Id.

321. Id.

322. Id.

323. Id. at 374 (internal citations omitted).



2009] BUSINESS AND CONTRACT LAW 877

The court noted that

[a]mong these three factors, the intent of the contracting parties to

benefit the third party is the controlling factor. Such intention may be
demonstrated by naming the third party, or by other evidence. The
necessary intent is not a desire or purpose to confer a particular benefit

upon the third party nor a desire to advance his interest or promote his

welfare, but an intent that the promising party or parties shall assume a

direct obligation to him.^^"^

The City of East Chicago argued that the foundations and the corporations
were "merely conduits for the citizens of East Chicago, the true intended

beneficiaries.
"^^^ hi other words, the City argued that the letters did not evidence

an intent to benefit the foundations and the corporation.
^^^

The court in East Chicago disagreed, stating that the "relevant intent" for
purposes of third-party beneficiary analysis is "an intent that the promising party

or parties shall assume a direct obligation to the third party, and not a desire or

purpose to confer a particular benefit on the third party."^^^ Based on this

statement, the court in City of East Chicago "declined" to hold that the

foundations or the corporation were "conduits."^^^ The court concluded that the
foundations and the corporations were third-party beneficiaries of the letter

agreements.
^^^

324. Id.

325. Id.

326. Id.

327. Id. (citing Nat'l Bd. ofExam'rs for Osteopathic Physicians & Surgeons, Inc. v. American
Osteopathic Physicians & Surgeons Ass'n, 645 N.E.2d 608, 618 (Ind. Ct. App. 1994)).

328. /J. at 375.

329. Id. The court in City ofEast Chicago also rejected the City's argument that third-party

beneficiaries should not be recognized in a "pubhc contract," because, according to the City, non-

parties should not be allowed to "control a government contract in opposition to the will of the

government." Id. (distinguishing Jenne v. Church & Tower, Inc., 814 So. 2d 522 (Fla. Dist. Ct.
App. 2002)).