Case Title: Safecard Services, Inc. v. Halmos

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 1996-03-14T00:00:00Z

Document:
Safecard Services, Inc. v. Halmos1996 WY 36912 P.2d 1132Case Number: 95-159Decided: 03/14/1996Supreme Court of Wyoming
 

SAFECARD SERVICES, INC., a Delaware 
corporation, 

Appellant (Plaintiff), 

 

v. 

 

Peter A. HALMOS, a Florida resident, 

Appellee (Defendant).

 

Appeal 
from the District Court of Laramie County 

The 
Honorable Nicholas G. Kalokathis, Judge.

 

Representing 
Appellant: 

John B. "Jack" Speight and Rick A. Thompson of 
Hathaway, Speight & Kunz, Cheyenne, and David M. Wells and William W. Deem 
of Mahoney, Adams & Criser, P.A., Jacksonville, 
Florida.

Representing 
Appellee: 

Carl L. Lathrop, J. Kent Rutledge and Corinne E. 
Rutledge of Lathrop & Rutledge, Cheyenne, Jeffrey M. Wagner, Wilmette, 
Illinois; and James F. Neal, Aubrey B. Harwell, Jr. and James G. Thomas of Neal 
& Harwell, Nashville, Tennessee.

 

Before GOLDEN, C.J., and 
THOMAS, MACY, TAYLOR and LEHMAN, JJ.

TAYLOR, Justice. 

[¶1]      We are asked to 
review the grant of a motion for partial summary judgment in an insider trading 
case. The district court concluded there were no material issues of fact in 
dispute and appellant's claim was time barred. We find that material issues of 
fact remain in dispute and the moving party was not entitled to judgment as a 
matter of law.

 

[¶2]      Reversed and 
remanded.

 

I. 
ISSUES

 

[¶3]      Appellant states 
the issues:

 

1. Whether the District Court erred in applying the 
shorter, three year statute of limitations of the State of Delaware to bar 
SafeCard's claim rather than the four year statute of limitations of the State 
of Florida, under which SafeCard's claims would not be barred, despite 
determining that at all material times the parties were in Florida, that the 
conduct at issue occurred in Florida, and that the cause of action being sued 
upon arose in Florida. 

 

2. Whether the District Court erred in determining 
that SafeCard's cause of action accrued and the limitations period began to run 
on February 9, 1990, despite substantial evidence from which a jury could 
conclude that SafeCard did not then know of critical facts giving rise to its 
cause of action, and despite evidence that defendant/appellee Halmos had engaged 
in various subterfuges to conceal those facts.

 

3. Whether the District Court erred in refusing to 
apply the doctrine of adverse domination to toll the statute of limitations 
where the record is replete with evidence that Halmos routinely dominated 
SafeCard's Board of Directors and wholly controlled the company's affairs until 
well within the limitations period.

 

[¶4]      Appellee states 
the issues:

 

1. Whether the District Court was correct in ruling 
that although Plaintiff's cause of action arose in Florida within the meaning of 
Wyoming's borrowing statute, the Delaware statute of limitations governs because 
a Florida court would have chosen that limitations period, had this case been 
brought in Florida.

 

2. Whether SafeCard's cause of action accrued no 
later than February 9, 1990, when the Company's Board of Directors signed a 
public document disclosing the same core of insider trading allegations against 
Mr. Halmos that SafeCard is now pursuing here.

 

3. Whether the District Court correctly concluded 
that there is no genuine issue of material fact concerning the applicability of 
the "adverse domination" tolling doctrine when SafeCard failed to come forward 
with any evidence relating Mr. Halmos's alleged domination of the Board of 
Directors to the specific transaction at issue.

 

4. Whether this Court should pretermit deciding any 
of the preceding issues by holding that the lex loci delicti choice-of-law rule 
dictates the application of Florida substantive law, which could compel the 
dismissal of SafeCard's insider trading allegations for failure to state a claim 
for relief under that State's law.

 

II. 
FACTS

 

[¶5]      Peter Halmos 
(Halmos) founded SafeCard Services, Inc. (SafeCard) in 1969 and participated in 
the management of the company until late 1992. SafeCard's principal service is 
credit card loss notification through credit card registration. In 1983, 
SafeCard executed a contract with American Express Travel Related Service, Inc. 
(American Express) to provide its services to American Express. In 1985, Halmos 
became aware that the American Express account was in jeopardy since an American 
Express affiliate, First Data Resources, had begun its own credit card registry 
business. By April of 1986, Halmos learned that SafeCard would probably lose its 
American Express account. From November of 1985 until March of 1987, Halmos did 
not reveal that the American Express account was at risk.

 

[¶6]      However, Halmos 
did not let this valuable information go to waste. Between November of 1985 and 
March of 1987, while serving as SafeCard's Chairman of the Board, Chief 
Executive Officer, and Secretary, Halmos sold 1,560,000 shares of SafeCard stock 
for prices ranging from $22.00 per share to $52.00 per share. The proceeds from 
the sales netted Halmos over $48 million dollars. On September 24, 1987, 
SafeCard publicly revealed that it would lose the American Express account. 
Following that revelation, the price of the stock fell from $18.00 per share to 
$10.00 per share.

 

[¶7]      In March of 1989, 
Thomas Wolfe and others filed a class action lawsuit against SafeCard alleging 
insider trading on the part of Halmos and other executive officers. The 
complaint was amended in July of 1989 to include specific allegations detailing 
Halmos' role. On February 9, 1990, SafeCard's Board of Directors, which included 
Halmos, signed a Securities and Exchange Commission document known as a 10-K 
form in which the allegations contained in the Wolfe lawsuit were revealed. 
However, the 10-K form also indicated that if the Wolfe litigation survived 
SafeCard's and the executive officers' motion to dismiss, SafeCard and the 
executive officers would vigorously litigate the action. 

 

[¶8]      SafeCard filed 
suit against Halmos on May 26, 1993 in the United States District Court for the 
District of Wyoming. Ultimately, suit was filed in state district court. The 
controlling date for the statute of limitations is May 26, 1993. The state 
district court granted Halmos' motion for partial summary judgment when it 
concluded that SafeCard's insider trading claims were time barred. The state 
district court reasoned that the claim could not have been filed any later than 
February 9, 1990, the date the Board of Directors signed the 10-K form in which 
the allegations of insider trading were revealed. SafeCard appeals the decision 
granting the motion for partial summary judgment.

 

III. 
DISCUSSION

 

A. STANDARD OF REVIEW

 

[¶9]      Summary judgment 
is appropriate only if there are no material issues of fact in dispute and the 
movant is entitled to judgment as a matter of law. Kahrs v. Board of Trustees for Platte County 
School Dist. No. 1, 901 P.2d 404, 406 (Wyo. 1995). A fact is material if it 
establishes or refutes an essential element of a claim or defense. Adkins v. Lawson, 892 P.2d 128, 130 
(Wyo. 1995) (quoting Thunder Hawk by and 
through Jensen v. Union Pacific Railroad Co., 844 P.2d 1045, 1047 (Wyo. 
1992)).

 

B. BORROWING ANALYSIS

 

[¶10]   The district court correctly 
interpreted Wyoming's borrowing statute as requiring the district court to apply 
Florida law as if it were a Florida court. Duke v. Housen, 589 P.2d 334, 345 
(Wyo.), cert. denied, 444 U.S. 863, 
100 S. Ct. 132, 62 L. Ed. 2d 86 (1979). Further, the general rule is that the state 
of incorporation governs the existence and extent of corporate fiduciary 
obligations. Hausman v. Buckley, 299 F.2d 696, 703 (2nd Cir.), cert. 
denied, 369 U.S. 885, 82 S. Ct. 1157, 8 L. Ed. 2d 286 (1962). Since SafeCard 
was incorporated in Delaware, a Florida court would have applied Delaware law. 
Thus, Delaware law will be applied in determining the validity of these claims. 
Duke, 589 P.2d  at 345. Consequently, 
we must apply Delaware's three year statute of limitations, as did the district 
court. Id. However, we must "consider 
not only the borrowed limitation of action statute itself, but also any 
applicable tolling * * * as well as pertinent court cases." Id.

 

C. ISSUES OF MATERIAL FACT

 

[¶11]   In Delaware, a corporate fiduciary 
who engages in wrongful self-dealing will be denied the protection of the 
statute of limitations. Kahn v. Seaboard 
Corp., 625 A.2d 269, 276 (Del. Ch. 1993); Bovay v. H.M. Byllesby & Co., 27 
Del. Ch. 381, 38 A.2d 808, 820 (1944). Further, any profits gleaned from such 
improper self-dealing may be recovered by the corporation, and the corporation 
need not plead a loss of profits in its complaint. Brophy v. Cities Service Co., 31 Del. 
Ch. 241, 70 A.2d 5, 8 (1949). The modern version of the Bovay rule contains a discovery element. 
In re MAXXAM, Inc., 659 A.2d 760, 769 
(Del. Ch. 1995). Thus, in Delaware, the statute of limitations will be tolled in 
derivative actions charging actionable self-dealing until such time as 
shareholders knew or should have known of facts constituting a legal wrong. Id. We believe the same rule applies to 
a Brophy claim filed by the 
corporation in an attempt to recover ill gotten gains from a corporate 
fiduciary.

 

[¶12]   Application of the Bovay rule to the statute of limitations 
in a case such as this one, where the corporation files suit against a corporate 
fiduciary, requires an answer to the question of whether the corporation knew or 
had reason to know that a legal wrong had been committed against it, an inquiry 
which is a question of fact for a jury. Resolution Trust Corp. v. Grant, 901 P.2d 807, 813 (Okla. 1995) (discussing the discovery rule and the doctrine of 
adverse domination). Although Delaware has not yet confronted this issue, we 
believe that the best legal framework under which to analyze the question is the 
doctrine of adverse domination. Under that theory, the statute of limitations is 
tolled so long as there is no one who knows of and is able and willing to 
redress the misconduct of the corporate fiduciary who is committing the legal 
wrong against the corporate plaintiff. Clark v. Milam, 192 W. Va. 398, 452 S.E.2d 714, 720 (1994). The fact that the Board of Directors insisted SafeCard 
vigorously litigate the Wolfe case, rather than redress Halmos' misconduct, 
supports SafeCard's claim that Halmos was dominating the Board of Directors at 
that time. If no one on SafeCard's Board of Directors was able and willing to 
redress Halmos' misconduct as of February 9, 1990, then the statute of 
limitations was tolled at that time.

 

[¶13]   Thus, important questions of 
material fact remain. Whether Halmos engaged in wrongful self-dealing and 
whether SafeCard's Board of Directors was dominated by Halmos as of May 26, 1990 
are material questions of fact which must be resolved. Resolution Trust Corp., 901 P.2d  at 813. 
The facts are material because their resolution will establish or refute Halmos' 
statute of limitations defense. Adkins, 892 P.2d  at 130 (quoting Thunder Hawk by and through 
Jensen, 844 P.2d at 1047). The question of whether Halmos engaged in 
fraudulent self-dealing and the question of when and if he dominated SafeCard's 
Board of Directors are factual considerations most appropriately determined by a 
properly instructed jury.

 

IV. 
CONCLUSION

 

[¶14]   The district court correctly 
applied Wyoming's borrowing statute in concluding that Florida would in turn 
borrow the statute of limitations and the substantive law in this case from 
Delaware. However, the district court erred in concluding that the doctrine of 
adverse domination did not apply and in not applying Delaware's law which treats 
wrongful self-dealing as a tolling mechanism. Whether SafeCard's Board of 
Directors was dominated by Halmos and, if so, when and whether Halmos engaged in 
wrongful self-dealing in violation of his trust as a corporate fiduciary are 
disputed questions of material fact which must be submitted to a jury. This case 
is reversed and remanded for further proceedings consistent with this 
opinion.