Justia Corporate Compliance Opinion SummariesArticles Posted in U.S. 7th Circuit Court of Appeals
Miller v. St. Paul Mercury Ins. Co.
The Directors & Officers Liability policy contains an insured vs. insured exclusion that removes the duty to defend or indemnify for “Loss on account of any Claim ... by or on behalf of any Insured or Company in any capacity.” The allocation clause provides: “If ... Insureds incur an amount consisting of both Loss covered by this Policy and loss not covered … because the Claim includes both covered and uncovered matters, such amount shall be allocated between covered Loss and uncovered loss based upon the relative legal exposures of the parties to covered and uncovered matters.” Five plaintiffs sued SCBI and directors and officers, asserting fraud, civil conspiracy, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The insurer declined to advance defense costs or otherwise indemnify SCBI, citing the exclusion. Two plaintiffs are former directors of SCBI who are insureds; a third is also included in the definition. The district court dismissed, finding no duty to defend or to indemnify. The Seventh Circuit held that the insurer has no duty to defend or indemnify the claims brought by the three insured plaintiffs, but must defend and indemnify with respect to the two non-insured plaintiffs. View "Miller v. St. Paul Mercury Ins. Co." on Justia Law
Frank v. Robert F. Booth Trust
When Sears, Roebuck & Co. merged with Kmart in 2005, the company formed as the parent (Sears) inherited directors from both. Crowley also serves on the boards of AutoNation and AutoZone; Reese is also on the board of Jones Apparel. In a derivative action, Sears shareholders claimed that the consolidated business competes with those other firms and that the Clayton Act, 15 U.S.C. 19 (section 8), forbids the interlocking directorships. Delaware usually allows investors to sue derivatively only if, after a demand for action, the board cannot make a disinterested decision. The investors filed suit without first making a demand. The district court refused to dismiss, accepting an assertion that a demand would have been futile and agreeing that section 8 can be enforced through derivative litigation, even though cooperation with a competitor should benefit the investors. The Seventh Circuit reversed, stating that the suit "serves no goal other than to move money from the corporate treasury to the attorneys' coffers," while depriving Sears of directors, freely elected and of benefit to the company. Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. The Antitrust Division and the FTC do not see a problem. View "Frank v. Robert F. Booth Trust" on Justia Law
Nation v. Am. Capital, Ltd.
Nation left his position as CEO of Spring Air in 2007 with a severance package of $1.2 million to be paid over 15 months provided he did not work for competitors through 2008. Spring Air paid Nation more than $836,000, but in August 2008 ceased making payments due to liquidity problems. Spring Air ultimately filed for bankruptcy. Nation sued defendant, Spring Air's majority shareholder and primary creditor, asserting tortious interference with contract: that defendant used its majority position on Spring Air's board of directors to induce the company to breach his severance agreement. The district court dismissed, finding that defendant was conditionally privileged based on its status as Spring Air's majority shareholder and that Nation had not presented sufficient evidence to overcome the privilege. The Seventh Circuit affirmed. Illinois law recognizes that a corporation's directors, officers, and shareholders are conditionally privileged to interfere with the corporation's contracts. The privilege is an aspect of the business-judgment rule. Nation failed to overcome the privilege with evidence that defendant induced breach for the specific purpose of injuring him or to further its own goals and that it acted against the best interests of the corporation. View "Nation v. Am. Capital, Ltd." on Justia Law
Albert Trostel & Sons Co. v. Notz
Trostel was founded in 1858. By 2007 the founder's relations still owned about 11 percent of its stock. Smith, which owned the rest, decided to acquire remaining shares by freezeout merger. Trostel became Smith's wholly owned subsidiary. Notz, one of the Trostel great-grandchildren, who owned 5.5 percent of the stock, rejected proffered compensation of $11,900 per share (about $7.7 million). The rest of the outside investors accepted. In an appraisal action (Wis. Stat. 180.1330(1)), the district court denied Nost's motion to dismiss for lack of subject matter jurisdiction and concluded that fair value of the stock on the merger date was $11,900 per share. The Seventh Circuit affirmed. Wisconsin's corporate is legislative, not contractual and does not block corporations from availing themselves of diversity jurisdiction. View "Albert Trostel & Sons Co. v. Notz" on Justia Law
Tara Gold Resources Corp. v. Sec. & Exch. Comm’n
A corporation that wants its shares to be traded on an exchange or through broker-dealers that make national markets must register the securities under the Securities Act of 1933, 15 U.S.C. 77j. Section 13(a) of the 1934 Act, 15 U.S.C. 8m(a), requires the issuer to file periodic reports. Plaintiff registered securities and persuaded broker-dealers to make markets in them, but fell behind with its filings. After eight years, during which plaintiff fell farther behind, the SEC opened a formal proceeding. After a hearing and disclosure that plaintiff could not pay an auditor to certify recent financial statements, the SEC revoked plaintiff's registration; trading in its shares came to a halt. While judicial review was pending, plaintiff filed a new registration, which has not been revoked despite plaintiff's failure to catch up on reports. The Seventh Circuit dismissed the case as moot. To commence trading in any newly registered stock, a broker-dealer needs approval from the Financial Industry Regulatory Authority. When a potential market-maker sought approval, it noted SEC comments on plaintiff's new registration. Setting aside the SEC revocation decision would not oblige FINRA to allow trading to resume. View "Tara Gold Resources Corp. v. Sec. & Exch. Comm'n" on Justia Law
Anderson v. AON Corp.
In 2010 the Seventh Circuit held that California law applied to plaintiff’s securities fraud claims and remanded because California, unlike federal securities law, permits a person who did not purchase or sell stock in reliance on a fraudulent representation to sue for damages. On remand the district court dismissed, ruling that the complaint did not adequately allege defendants' state of mind and plaintiff's reliance on particular false statements. The Seventh Circuit affirmed. Plaintiff never explained how he could have avoided loss on his shares, had there been earlier disclosure. Mismanagement, not fraud, caused the loss. Any fraud just delayed the inevitable and affected which investors bore the loss. Plaintiff cannot show that earlier disclosure would have enabled him to sell and shift the loss to others before the price dropped.View "Anderson v. AON Corp." on Justia Law
Wachovia Secs., LLC v. Banco Panamericano, Inc.
Three individuals (once known as the "Bad Boys' of Chicago Arbitrage") established "Loop" as a closely-held corporation for their real estate holdings in 1997. A family trust for Loop's corporate secretary (50% owner) owns Banco, which gave Loop a $9.9 million line of credit in 2000. On the same day, Loop subsidiaries entered into a participation agreement on the line of credit through which they advanced $3 million to Loop, giving the subsidiaries senior secured creditor status over Loop's assets. The now-creditor subsidiaries were also collateral for funds loaned Loop. In 2001 Loop received a margin call from Wachovia. The Banco-Loop line of credit matured and Loop defaulted. Banco extended and expanded the credit. Loop’s debt to Wachovia went unpaid. Loop invested $518,338 in an Internet golf reservation company; moved real estate assets to Loop Properties (essentially the same owners); and paid two owners $210,500 “compensation” but never issued W-2s. Wachovia obtained a $2,478,418 judgment. The district court pierced Loop’s corporate veil, found the owners personally liable, and voided as fraudulent Banco’s lien, the “compensation” payments, and payments to the golf company. The Seventh Circuit affirmed, except with respect to the golf company. View "Wachovia Secs., LLC v. Banco Panamericano, Inc." on Justia Law
Dixon v. Ladish Co. Inc.
In November 2010 Ladish agreed to be acquired by Allegheny for $24 cash plus .4556 shares of Allegheny stock per share. At the closing price after the announcement, the package was worth $46.75 per Ladish share, a premium of 59% relative to Ladish's trading price before the announcement. The transaction closed in May, 2011. Ladish became ATI. Investors' reactions implied that Allegheny bid too high: the price of its shares fell when the merger was announced. No Ladish shareholder dissented and demanded an appraisal. But one shareholder filed a suit seeking damages, claiming breach of federal securities law and Wisconsin corporate law by failing to disclose material facts. The district court granted judgment on the pleadings in defendants' favor. On appeal, the shareholder abandoned federal claims. The Seventh Circuit affirmed on the state law claims, citing the business judgment rule. View "Dixon v. Ladish Co. Inc." on Justia Law
Indep. Trust Corp. v. Stewart Info. Serv. Corp.
The title company provided real estate closing services. From 1984 through 1995, it served as exclusive agent for defendant and managed an escrow account that defendant contractually agreed to insure. The title company was not profitable and its managers used escrow funds in a "Ponzi" scheme. In 1989, there was a $26 million shortfall. To fill the hole, the managers began looting another business, Intrust, to pay defendant's policyholders ($40.9 million) and to pay defendant directly ($27 million), so that defendant was a direct and indirect beneficiary of the title company's arrangement with Intrust. In 2000 the state agency learned that the funds were missing, took control of Intrust and placed it in receivership. In July 2010, the Receiver filed suit for money had and received, unjust enrichment, vicarious liability), aiding and abetting breach of fiduciary duty, and conspiracy. The district court dismissed based on the statute of limitations. The Seventh Circuit affirmed. The Illinois doctrine of adverse domination does not apply. That doctrine tolls the statute of limitations for a claim by a corporation against a nonboard-member co-conspirator of the wrongdoing board members. View "Indep. Trust Corp. v. Stewart Info. Serv. Corp." on Justia Law
DeGuelle v. Camilli
A tax employee of defendant, terminated after reporting an alleged tax fraud scheme to the company and federal enforcement agencies, filed suit asserting claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1962(c) and 1962(d). The district court dismissed, finding that the predicate acts alleged were either unrelated or did not proximately cause plaintiff's injuries. The Seventh Circuit reversed. The retaliatory actions were related to the alleged tax fraud scheme, under the Supreme Court's "continuity plus relationship" test. Since enactment of the Sarbanes-Oxley Act, 18 U.S.C. 1513(e) retaliation against an employee constitutes racketeering. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower, even though they occur after the coverup is exposed. In this case, the retaliatory acts were not isolated events, separate from the tax fraud. Plaintiff properly alleged that his termination was proximately caused by a RICO predicate act of retaliation. View "DeGuelle v. Camilli" on Justia Law