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CONDON v. RICHARDSON

November 22, 1967

JOHN D. CONDON, A.H. HANDLEY, ALBERT BOWERS AND W.A. READ, PLAINTIFFS,
v.
COYN RICHARDSON AND THOMAS FALLER, INDIVIDUALLY AND AS OFFICERS AND DIRECTORS OF REGENCY LIFE INSURANCE COMPANY, AN ILLINOIS INSURANCE CORPORATION, JOHN A. SCHWANDNER, AS AN OFFICER OF REGENCY LIFE INSURANCE COMPANY, COYN MATEER, WALTER W. WINTER AND ROBERT E. SANDERS, AS DIRECTORS OF REGENCY LIFE INSURANCE COMPANY, AN ILLINOIS INSURANCE CORPORATION, AND REGENCY LIFE INSURANCE COMPANY, AN ILLINOIS INSURANCE CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Robert D. Morgan, District Judge.

OPINION AND ORDER

This cause is before the court upon the motions of the several defendants to dismiss the complaint. Because of evidence received on application for preliminary injunction and various affidavits which have been filed, these motions have been treated as for summary judgment under Rule 12(b) of the Federal Rules of Civil Procedure.

Plaintiffs are minority stockholders of the defendant, Regency Life Insurance Company, an Illinois Insurance Corporation. Coyn Richardson and Thomas Faller are sued individually and as officers and directors of Regency. Other individuals named as defendants in the suit are sued as directors of Regency.*fn1

The original complaint contained three counts, jurisdictionally based upon Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j (b), and Rule 10(b)-5 promulgated by the Securities Exchange Commission thereunder. 17 C.F.R. § 240.10b-5. A fourth count alleges a breach by Richardson and Faller of fiduciary duties owed to the corporation under the provisions of the Illinois Business Corporation Act, I.R.S. 1965, c. 32, § 157.86, and the Illinois Insurance Code, I.R.S. 1965, c. 73, §§ 736.1, 736.2.

The complaint prays injunctive relief, damages and the nullification of certain transactions therein alleged.

On September 25, 1967, by an amendment to the complaint, a fifth count, jurisdictionally based upon Section 10(b) of the federal act and Rule 10(b)-5, was added.

The defendants have moved to dismiss the complaint on the ground that it does not state a cause of action under Section 10(b) and Rule 10b-5. The court is now concerned only with that question, whether a cause of action cognizable by a federal court under the federal statute is stated in the complaint.*fn2

This suit is brought as a class action on behalf of the plaintiffs and all other Regency shareholders who are similarly situated, and as a derivative suit on behalf of the corporate defendant. In support of the derivative suit thereof, the complaint alleges that the individual defendants, Richardson and Faller, who are directors and the chief executive officers of Regency, completely control and dominate a majority of the board of directors of Regency. Under those circumstances, it is alleged that a suit by Regency for the protection of its own interests is impossible.

Allegations of the complaint which are material to all counts are as follows:

Regency Life Insurance Company is organized under Illinois law as an insurance corporation. In and prior to April, 1965, Richardson and Faller were directors and executive officers of the corporation. In about April, 1965, Richardson and Faller proposed to the board of Regency that a rights offering be extended to Regency shareholders whereby such shareholders could buy additional Regency stock at a price of $5.00 per share. That offer led to the subscription of about 50% of the offered shares within the time limited for such subscriptions. Shortly before the time expired, Richardson and Faller bought the approximately 45,000 unsubscribed shares included in the offer. It is alleged that the market value of Regency shares at that time was about $10.00 per share.

In August, 1965, a resolution was adopted by a majority of the Regency board of directors removing Richardson and Faller as officers of the corporation. They remained removed until December, 1965, at which time, at the annual meeting of Regency shareholders, they succeeded in electing their own slate of directors. They then resumed their positions as executive officers of Regency.

Shortly thereafter, Richardson and Faller purchased the some 32,000 shares of Regency held by six directors of the corporation at a price alleged to be less than the $5.00 price of original issue.

Richardson and Faller have maintained a dominant position in the control of the corporation since December, 1965.

Under date of August 8, 1967, the plaintiffs presented a written demand and request to the board of directors of Regency that the board take action to remove Richardson and Faller from their executive positions with the corporation. They also demanded that a special shareholders meeting be called to facilitate the action demanded of the board. Specific attention was directed to "matters involving this Company's relationship with Great Heritage Life Insurance Company, American Security Life Insurance Company and Investors Unlimited, which are the companies that "Richardson and Faller had been dealing with individually and against the best interest of Regency Life Insurance Company." The instrument further stated that failure of the board to take favorable action upon the demand within five days would be deemed a refusal by the board to comply with the demand.

On August 12, 1967, the demand was submitted to the regular meeting of the board by board chairman, Herman Dammerman. The board then took the following action, by majority vote: Removed Dammerman as chairman and elected defendant, Coyn Mateer, to replace him; rejected a motion by Dammerman to take immediate action upon plaintiffs' demands; and appointed a committee to investigate the charges contained in the demand and to report back to the board at its next "monthly" meeting.

Plaintiffs made no further effort to obtain action by the corporation, for the reason, as they allege, that Richardson and Faller completely control and dominate the board and ...


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