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Lower v. Lanark Mutual Fire Insurance Co.





Appeal from the Circuit Court of Carroll County; the Hon. John W. Rapp, Judge, presiding.


Rehearing denied May 31, 1983.

This is a shareholders' derivative suit for recovery of certain service fees, which were allegedly misappropriated and converted by defendant secretary-treasurer (also a director) of the nominal defendant insurance company, plus interest and attorney fees, from the secretary-treasurer/director and from the other defendant directors. The trial court granted summary judgments in favor of all defendants. Plaintiff appeals.

The facts giving rise to this appeal may be summarized as follows. From January 1, 1973, and for some years prior thereto, Lanark Mutual Fire Insurance Company (hereinafter Lanark Mutual) had reinsurance agreements with two other insurance companies, whereby Lanark Mutual was to receive certain service fees based upon the amount of insurance reinsured. From 1973 through 1977 Lanark Mutual was to receive a total of $25,022.60 in amounts which were periodically paid by check payable to Lanark Mutual. Alma Dollinger, secretary-treasurer and a director of Lanark Mutual, endorsed the checks and deposited the funds in her own separate account for her own use.

The disposition of these service fees was apparently called into question in the fall of 1978 and was the subject of an investigation by a special committee appointed by the president of Lanark Mutual, Rex B. Lower, who was a director since 1963, president for seven years up to 1978, and the husband of Mary Jean Lower, the plaintiff. The investigation culminated in a special board meeting held December 16, 1978, in which Dollinger did not participate. At that meeting, the directors unanimously voted to have the 1978 service fees deposited in the Lanark Mutual bank account, and they voted to have Dollinger keep all service fees received prior to January 1, 1978, if she would return the service fees received after January 1, 1978. President Lower cast the only dissenting vote. Then Dollinger was invited to join the meeting and asked if she would agree to the settlement agreement proposed by the board in the motion, and she agreed to the settlement.

At the annual meeting in January 1979, which was the first meeting of the policyholders following the December 16 board meeting, the issue of service fees was discussed and, on the motion of the plaintiff in this case, a shareholder directive or mandate was passed which required the board of directors to ascertain the amount of service fees which Dollinger had received from 1973 to the date of the motion and, after ascertaining the amount, to recover it from Dollinger. At that time, the policyholders were not advised of any settlement or compromise. This lawsuit was filed on December 27, 1979.

The complaint alleged that plaintiff was a policyholder of Lanark Mutual, that defendant Lanark Mutual was an insurance company organized and operating pursuant to statute, and that the individual defendants were all directors of Lanark Mutual. The complaint further alleged that individual defendant Alma Dollinger was the secretary of Lanark Mutual with sole charge, control and management of all of the company's business at its principal office. As such, she had the duty to receive, safely keep, and accurately account for Lanark Mutual's money and property coming under her control and to furnish, whenever required, true and correct statements pertaining thereto, "and to accurately account for and pay over to Lanark Mutual all money received by her in the course of her employment or in the management or direction of Lanark Mutual's business."

The complaint went on to allege that Dollinger's endorsement of the service fee checks and deposit in her own account for her own use was "fully without the authority or knowledge of Lanark Mutual, its officers or directors." Further, the complaint alleged that Dollinger wilfully and fraudulently caused Lanark Mutual's books and accounts to be "kept in a careless and fraudulent manner, for the purpose of covering up her irregular transactions." Thereby, according to plaintiff, considerable sums of money had been lost to Lanark Mutual and had not been accounted for nor paid to the company.

The only allegation made against the directors was that they responded to plaintiff's demand upon them to seek full accounting for said service fees by seeking and receiving restitution for those fees for the year 1978, "but in total disregard of their fiduciary duties to members of Lanark Mutual, wilfully neglected and refused to seek an accounting and recovery of the service fees" for the years 1973 through 1977. As relief, plaintiff sought a complete accounting of the service fees by Dollinger; a money judgment against Dollinger for Lanark Mutual's benefit in the amount of the fees plus interest; a money judgment against the defendant directors, jointly and severally, for the same amount; an order directing defendant directors to discharge the secretary; and plaintiff's reasonable attorney fees and costs.

At the annual meeting on January 22, 1980, the matter was once again discussed, and a resolution was introduced that approved and ratified the settlement of the reinsurance service fees question according to the terms agreed upon at the December 16, 1978, board meeting. The resolution and a mutual release were approved by the policyholders attending with the only negative votes being cast by plaintiff and her husband. Thereafter, the resolution was passed at a board meeting on July 10, 1980, including a provision that the officers of the company were empowered to enter into a mutual release of all liability arising from the transactions in question.

Defendant directors had responded to plaintiff's complaint in two ways. First, it was and is their position that any funds retained by Dollinger as a result of the reinsurance agreements between Lanark Mutual and the two reinsurers were retained by Dollinger for services rendered to Lanark Mutual pursuant to a resolution of Lanark Mutual's board of directors as part of her reasonable compensation for services rendered. Second, the directors maintained that the entire controversy had been effectively settled and compromised by virtue of the December 16 agreement and that they had exercised their business judgment in good faith in settling and compromising the claim so that plaintiff's action was therefore barred under the business judgment rule.

On September 4, 1980, plaintiff filed a motion to disqualify defense counsel from representing both Lanark Mutual, the nominal defendant, and certain individual directors. She alleged that a potential and actual conflict existed between their respective interests. The motion was denied on September 22, 1980.

On February 23, 1981, all defendants except Dollinger, Lower and Haas moved for summary judgment on multiple grounds including the December 16 settlement agreement. Subsequently, the other defendants filed separate motions for summary judgment, also on multiple grounds including the December 16 settlement agreement. Plaintiff's memorandum in opposition to the motions for summary judgment stated inter alia that there were genuine issues of material fact as to whether any purported settlement or compromise was in good faith and that the defendant directors were seriously negligent in the manner in which they purportedly arrived at the December 16, 1978, compromise.

On March 23, 1982, the trial judge filed a memorandum opinion granting the motion for summary judgment filed by all defendants except Haas. Haas' motion for summary judgment was granted on May 25, 1982, for the same reasons set forth in the March 23 memorandum opinion. The principal question of law in this case, according to the trial judge, was the "`Business Judgment Rule' and the effects of the actions of the Board of Directors and Shareholders upon the viability of the Plaintiff's cause of action." He recited the undisputed facts regarding the service fees, the December 16 compromise, the January 1979 shareholders' directive to the board to pursue the matter and establish and collect the amount of fees received by Dollinger, and the shareholders' approval and subsequent board resolution in 1980 of the December 16 compromise. He observed that plaintiff did not allege that the directors personally gained from ...

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