Articles Posted in U.S. Court of Appeals for the Seventh Circuit

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Richard, Father, Mother, and sister (Kathryn) formed the family Corporation in 1990. Under its articles of incorporation and bylaws, each family member served as a lifetime director. Mother died in 2000. In 2010, the remaining family members elected Phyllis to a three-year term on the board. Father died in 2010. Phyllis’s term expired in 2013. Under Indiana Code 23-17-12-3, a nonprofit corporation must be governed at all times by at least three directors. Richard claimed that when Phyllis’s term expired, the Corporation was no longer lawfully constituted and the two remaining board members could not act on the Corporation’s behalf or exercise corporate powers. Indiana law provides that when a nonprofit director’s term expires without further action by the board: “the director continues to serve until … a successor is elected, designated, or appointed and qualifies.” That language is reflected in the Corporation’s bylaws and the 2010 resolution appointing Phyllis to the board. Kathryn and Phyllis voted in 2013 to elect Phyllis to a second term. The board then took several actions over Richard’s objections, including authorizing gifts to Saint Francis (on whose board Kathryn also serves) and electing Kathryn’s son as a fourth board member. Richard filed suit, as an individual and derivatively. The Seventh Circuit affirmed dismissal. Under Indiana law, only a shareholder or member of a corporation may bring a derivative action on the corporation’s behalf. Richard is neither a shareholder nor a member. The Corporation’s articles of incorporation provide that it “shall have no members.” Richard’s purported individual claims for money judgment belong to the Corporation and his other individual claims failed on their merits. View "Doermer v. Callen" on Justia Law

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Micrins Surgical went out of business in 2009, without paying all of its taxes. Eriem Surgical was incorporated the same day, purchased Micrins’ inventory, took over its office space, hired its employees, used its website and phone number, and pursued the same line of business, selling surgical instruments. Teitz, the president and 40% owner of Micrins, continued to play a leading role in Eriem, though its sole stockholder is Teitz’s wife. Eriem uses “Micrins” as a trademark. The IRS treated Eriem as a continuation of Micrins and collected almost $400,000 of Micrins’ taxes from Eriem’s bank accounts and receivables. Eriem filed wrongful levy suit, 26 U.S.C. 7426(a)(1). The Seventh Circuit affirmed judgment in favor of the IRS, concluding that Eriem is a continuation of Micrins. The Supreme Court has never decided whether state or federal law governs corporate successorship when the dispute concerns debts to the national government; the Internal Revenue Code says nothing about corporate successorship. Illinois law uses a multi‐factor balancing standard to determine successorship. Rejecting an argument that the change in ownership should be dispositive, the court upheld the district court’s conclusion that Mrs. Teitz serves is proxy for her husband, so that there has not been a complete change of ownership. View "Eriem Surgical, Inc. v. United States" on Justia Law

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HMC was a shipping and shipyard services company, whose president was Hannah. HMC had a collective bargaining agreement with the mechanics union that required it to make contributions to the union’s pension fund to finance pensions for HMC’s employees. Hannah’s son, Mark, formed FCG, which bought the assets of HMC. No significant liabilities of HMC were explicitly transferred to FCG, which tried to negotiate its own collective bargaining agreement with the union. When HMC employees voted to decertify the union in 2009. the pension fund assessed withdrawal liability under the Multiemployer Pension Plan Amendments Act, 29 U.S.C. 1381. HMC had become insolvent, so the fund sought to impose HMC’s liability to the fund on FCG as HMC’s successor. The district court entered summary judgment in favor of FCG. The Seventh Circuit reversed in part, stating that lack of evidence that Mark knew about the pension fund and the possibility of withdrawal liability cannot excuse that liability. The court stated that fraudulent intent, while a factor in deciding whether there is alter ego liability, is not necessarily an essential factor, so summary judgment on a theory of successor liability was premature. View "Bd. of Trs. of the Auto. Mechs' Local v. Full Circle Group, Inc." on Justia Law

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In 1998 IGF bought Continental’s crop-insurance business at a price to be determined at either side’s option by the exercise of a put or call. In 2001 Continental exercised its put option; under the contractual formula, IGF owed Continental $25.4 million. Around that same time, IGF sold its business to Acceptance for $40 million. The Symons, who controlled IGF, structured the purchase price: $16.5 million to IGF; $9 million to IGF's parent companies Symons International and Goran in exchange for noncompetition agreements; and $15 million to Granite, an affiliated Symons-controlled company, for a reinsurance treaty. Continental, still unpaid, sued for breach of contract and fraudulent transfer. The court found for Continental and pierced the corporate veil to impose liability on the controlling companies and individuals. The Seventh Circuit affirmed, finding Symons International liable for breach of the 1998 sale agreement; Symons International, Goran, Granite, and the Symons liable as transferees under the Indiana Uniform False Transfer Act; and the Symons liable under an alter-ego theory. The Symons businesses observed corporate formalities only in their most basic sense. The noncompetes only made sense as a fraudulent diversion of the purchase money, not as legitimate protection from competition. The reinsurance treaty. which was suggested bySymons and outside industry norms, was unjustified and overpriced. View "Cont'l Cas. Co. v. Symons" on Justia Law

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Two shareholders brought a shareholder derivative suit against the directors of an Indiana company, Biglari Holdings, that owns two restaurant chains, Western Sizzlin’ and Steak ‘n Shake, which operate some restaurants, and franchise others. They claimed that the board approved “entrenchment transactions,” intended to cement CEO Biglari’s control of the company and enrich him at the expense of other shareholders: the sale of an investment company to CEO Biglari and a stock offering. The plaintiffs characterized the board’s members as Biglari’s puppets and alleged demand futility: that it was a forgone conclusion that the board would not respond to their demands. The Seventh Circuit affirmed the district court's rejection of the claim. Given the stringency of the Indiana standard of demand futility and the lack of strong support for the plaintiffs’ claims to demonstrate that futility, the challenged transactions, individually or together, cannot be deemed so oppressive to shareholders as to create a substantial doubt that the transactions were the product of a valid exercise of business judgment by an unbiased and independent board. View "Taylor v. Biglari" on Justia Law

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Plaintiff, a stockholder in DeVry, which operates for-profit colleges and universities, filed a shareholders’ derivative suit against DeVry’s board of directors. A 2005 incentive plan authorized awards of stock options to key employees, including the CEO. The plan limited awards to 150,000 shares per employee per year. Nonetheless, the company granted Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. DeVry, discovering its mistake, reduced each grant under the 2005 plan to 150,000 shares, but allocated Hamburger 87,910 shares available under the company’s 2003 incentive plan, which held shares that had not been allocated. Only the company’s Plan Committee, not the Compensation Committee, was authorized to grant stock options under the 2003 plan; there was no Plan Committee in 2012. The grant of 87,910 stock options was approved by the Compensation Committee, and then by the independent directors as a whole. The Seventh Circuit affirmed dismissal. The directors who approved the Compensation Committee’s recommendation were disinterested: the recommendation was a valid exercise of business judgment. Administration of the 2003 plan by the Compensation Committee, given the nonexistence of the Plan Committee, was not “a clear or intentional violation of a compensation plan,” View "Donnawell v. Hamburger" on Justia Law