Attorneys for Appellant

Marvin Mitchell

Mitchell Hurst Jacobs & Dick

Indianapolis, IN

Steven K. Huffer

Huffer & Weathers, P.C

Indianapolis, IN

Attorneys for Appellee

Ronald E. Elberger

V. Samuel Laurin, III

George T. Patton, Jr.

Bose McKinney & Evans

Indianapolis, IN

	IN THE

	INDIANA SUPREME COURT

HERBERT MELROSE,

	Appellant (Cross-Claim Plaintiff

below),

	v.

CAPITOL CITY MOTOR LODGE, INC.,

	Appellee (Cross-Claim Defendant

below).

)

)	Supreme Court No.

)	49S00-9708-CV-444

)

)	

)	

)

)

)

	APPEAL FROM THE MARION SUPERIOR COURT

	The Honorable Gerald A. Zore, Judge

	Cause No.  49D07-9509-CP-1370

ON DIRECT APPEAL

[December

DecemberDecember 30, 1998INSERT HAND DOWN DATE]

SULLIVAN,  Justice.

	After a closely held corporation decided to liquidate, Smulyan, a director-share

holder, sought to purchase corporate-owned insurance policies on his life for their cash surrender value.  Melrose, another director-shareholder, objected on grounds that Smulyan’s

life expectancy made the policies far more valuable than their cash surrender value.  The

trial court held that Smulyan’s purchase did not violate his statutory or fiduciary duties to

the corporation.  We agree and affirm.	

Background

	Three shareholders, Smulyan, Melrose and Rowley, owned all of the issued and

outstanding shares of Capitol City Motor Lodge, Incorporated (“Capitol”).  The three were

also the sole directors of the corporation.1  In 1986, the directors authorized an “Agreement for Purchase of Shares on Death” (“Buy-Sell Agreement”) that required Capitol to purchase

all of the shares owned by a shareholder in the event of that shareholder’s death.2  To fund the purchase of the shares, the Buy-Sell Agreement required Capitol to purchase life

insurance on its shareholders, namely Smulyan, Melrose and Rowley.  Pursuant to this

requirement, Capitol procured five life insurance policies on Smulyan’s life.  Three of these

policies (the “Policies”) were issued by National Fidelity Life Insurance Company (“Na

tional”) and are the sole policies at issue in this appeal.

	After engaging in business for some years, a decision was made to liquidate Capitol. 

On June 15, 1994, the directors approved a Plan of Liquidation and Distribution of Assets

(“Liquidation Plan”).  The Liquidation Plan instructed the directors to sell all of Capitol’s

assets.  Further direction provided by the plan included: 

	After the effective date, the Board of Directors and the Officers of the Corpo

ration shall sell all of the assets of the Corporation. Any sale shall be made on

the terms and conditions and for consideration that the Board deems reason

able and in the best interest of the Corporation and of its shareholders.  The

Board of Directors and Officers of the Corporation may execute any instru

ments that are necessary to transfer title to the property and assets.

	Following adoption of the Liquidation Plan, steps were taken to wind up Capitol’s

business.  On January 9, 1995, a board of directors meeting was held at which all directors

were present.3  At the meeting, Smulyan proposed the transaction that is at the heart of this case with the following resolution:

	RESOLVED, Each shareholder is given the right to purchase the policies on

that shareholder’s life at net cash value from Capitol City Motor Lodge, Inc.

and given the right to name his preferred beneficiary.

(the “Resolution”) (R. at 310.)   After discussion of the proposal, Smulyan and Rowley

voted in favor of  the Resolution.  Melrose voted against it.  After the Resolution passed,

Smulyan exercised his right to purchase the Policies for cash surrender value.4  Capitol assigned all of its rights, title and interest in the Policies to Smulyan who in turn named his

wife the primary beneficiary on each of the Policies.

	Shortly thereafter, National received conflicting claims concerning the validity of  the

Resolution and the assignment of the Policies from Capitol to Smulyan.  As a result, on

September 19, 1995, National filed a “Complaint for Interpleader,” requesting court direc

tion as to its obligations with respect to the Policies. 

	On November 21, 1995, Melrose filed his answer and cross-claim maintaining,

among other counts, that Smulyan (1) violated the Liquidation Plan (Count I); (2) breached

a fiduciary duty owed to the shareholders (Count II); and, (3) relied upon an invalid corpo rate resolution when he acquired the Policies (Count III).  Smulyan moved for partial

summary judgment on these counts and on March 18, 1996, the trial court granted summary

judgment in favor of Smulyan.5

	Finding the Resolution valid, the court required National to honor the assignment of

the Policies to Smulyan.  The court further found that directors Smulyan and Rowley did not

breach a fiduciary duty owed to either Melrose or Capitol by voting in favor of the Resolu

tion nor, in so doing, had the board of directors breached the Liquidation Plan.  

	After the trial court made its partial summary judgment final, Melrose promptly

appealed to the Court of Appeals.  This Court granted transfer pursuant to Ind. Appellate

Rule 15(M). 

Discussion

	We are presented with the following issues: (1) whether Ind. Code § 27-1-12-17, a

provision of the Insurance Code, preempts provisions of general corporate law concerning

transactions involving insurance on the lives of corporate shareholders and directors; and (2)

whether the purchase of corporate-owned life insurance by the insured for its cash surrender value violates the corporate conflict of interest statute, Ind. Code § 23-1-35-2, or breaches

a shareholder’s fiduciary duty to fellow shareholders. 

I

	Melrose asserts that in granting summary judgment in favor of Smulyan, the court

implicitly held that “insurance policies are a unique type of asset, not subject to the usual

rules of corporate governance.”  Appellant Br. at 28.  Smulyan urges us to uphold the

Resolution passed by the board of directors pursuant to Ind. Code § 27-1-12-17.6  Smulyan contends that the last paragraph of Ind. Code § 27-1-12-17 validates the Resolution and

exempts him from any conflict of interest claims under the Indiana Business Corporation

Law:  “No person shall, by reason of interest in the subject matter, be disqualified from

acting as a director, or as a member of the executive committee of such corporation on any

corporate act touching such insurance.”  Ind. Code § 27-1-12-17 (1993).  Such a determina

tion would necessarily rest on the premise that this provision of the Insurance Code trumps

a director’s corporate obligations under Indiana’s Business  Corporation Law.7  We are not prepared to draw such a conclusion.  

	The Indiana Business Corporation Law applies to all domestic corporations —

closely held and public corporations alike.  See Ind. Code Ann. §§  23-1-17 (Introduction) & 23-1-17-3(a) (West 1989).  Title 23 sets forth corporate director duties, responsibilities,

and standard of conduct expected of corporate directors.  See Ind. Code §§ 23-1-35-1 to 23- 1-35-4.  Title 27, on the other hand, specifically applies to any organization operating,

representing or attempting to do insurance business in Indiana.  See Ind. Code § 27-1-2-2 (1993).  Chapter 12 thereof addresses life insurance policy requirements and confers certain

rights, powers and privileges on the life insurance company.  Ind. Code § 27-1-12-1 (1993). 

Nevertheless, our ultimate determination as to which statute governs in this instance rests on

principles of statutory construction.  Our main objective in statutory construction is to determine, effect and implement the intent of the legislature.  Sullivan v. Day, 681 N.E.2d  713, 717 (Ind. 1997); Freeman v. State, 658 N.E.2d  68, 70 (Ind. 1995); Matter of Lawrance, 579 N.E.2d  32, 38 (Ind. 1991); Superior Constr. Co. v. Carr, 564 N.E.2d  281, 284 (Ind. 1990).  Where two statutes presumably relate to the same subject matter, we attempt to

construe the statutes so that both can stand.  Kramer v. Beebe, 186 Ind. 349, 355, 115 N.E. 83, 85 (1917).   

	We find that the purpose of Ind.Code § 27-1-12-17 is to limit a life insurance com

pany’s duty of inquiry into the validity of corporate authority or the regularity of corporate

proceedings in a transaction involving insurance on the life of a general business corpora

tion’s directors, officers, agents or employees.  The life insurance company is entitled to

good faith reliance on a proper corporate certificate.

	It is true that the language of Ind. Code § 27-1-12-17 authorizes general corporations to purchase insurance on the lives of directors, officers, agents and employees (including

individuals who participate in the decision to purchase the insurance) and to maintain that

insurance even after the insured’s service to the corporation ceases.  But in light of the

overall purpose of this section, we believe this language simply makes clear that a life

insurance company need not inquire as to whether a corporate customer is acting ultra vires in purchasing or maintaining life insurance in any of the circumstances specified.  This

simply reinforces the limited extent of an insurance company’s duty of inquiry.  We find no justification to go beyond this point to hold that this language exempts such insurance

transactions from the conflict of interest provisions of the Business Corporation Law and the

fiduciary duty provisions of the common law.  In fact, we find it highly unlikely that the

legislature would have intended such an exemption without providing therefor in the

Business Corporation Law.

II

	Melrose contends that the Resolution approving the sale of corporate-owned life

insurance to shareholders was invalid under the conflict of interest laws governing the

behavior of directors of corporations organized in this state.  He further alleges that in voting

to approve the sale of corporate-owned life insurance to shareholders, Smulyan breached his

fiduciary duty of fair dealing owed to the corporation and fellow shareholders.

	Indiana Business Corporation Law defines a conflict of interest transaction as

follows:

	(a) A conflict of interest transaction is a transaction with the corporation in

which a director of the corporation has a direct or indirect interest.  A conflict

of interest transaction is not voidable by the corporation solely because of the

director’s interest in the transaction if any one (1) of the following is true:

		(1) The material facts of the transaction and the director’s interest were

disclosed or known to the board of directors or a committee of the board of

directors and the board of directors or committee authorized, approved, or

ratified the transaction.

		(2) The material facts of the transaction and the director’s interest were

disclosed or known to the shareholders entitled to vote and they authorized,

approved, or ratified the transaction.

		(3) The transaction was fair to the corporation.

Ind. Code § 23-1-35-2 (1993).

	Melrose argues that the Resolution was not approved by a majority of disinterested

directors nor by fully informed shareholders.  Transactions between an interested director

and the corporation are not automatically void or voidable merely because of a director’s

interest, as long as one of the conditions set forth in the subdivisions is met.8  See Ind. Code. 23-1-35-2(a), (b) & (c).  See also Hill v. Nisbet, 100 Ind. 341, 353-55 (1885); 3 William Meade Fletcher et. al., Cyclopedia of the Law of Private Corporations § 915.10 (1994 & Supp. 1998).  Subdivisions (1) and (2) provide that either the board of directors or share

holders entitled to vote may authorize a transaction where all material facts and the direc

tor’s interest are disclosed.  Ind. Code § 23-1-35-2(a)(1) & (2).  Subdivision (3) provides

that a conflict of interest transaction may stand if the transaction is fair to the corporation. 

Ind. Code § 23-1-35-2(a)(3).           

	Melrose also contends that Smulyan bore and breached a fiduciary duty owed to him

and other director-shareholders.  Melrose argues that Capitol is a close corporation, an

“incorporated partnership,” and therefore, he and Smulyan stood in a fiduciary relationship

to one another.  Appellant’s Br. at 32-33.    He further contends that Smulyan profited at the

expense of the corporation and to Melrose’s detriment when he voted to pass the Resolution

and then subsequently purchased the Policies.

	We have defined a close corporation as one that typically has relatively few share

holders and whose shares are not generally traded in the securities market.  See  Barth v. Barth, 659 N.E.2d 559, 561 n.5 (Ind. 1995).  At the time of the questioned transaction, Capitol had three shareholders who were also Capitol’s directors.9  Capitol’s shares were not traded in the securities market.  Given these characteristics, we agree with Melrose that

Capitol operated as a closely-held corporation. 

	Courts have traditionally interpreted fiduciary duties differently for closely-held

corporations as opposed to publicly held corporations for which most of the statutory norms

were established.   See Cressy v. Shannon Continental Corp., 177 Ind. App. 224, 228-29, 378 N.E.2d 941, 945 (1978)(citations omitted).  See also Helms v. Duckworth, 249 F.2d 482, 486-87 (D.C. Cir. 1957);10  1 O’Neal, supra note 2, § 1.20.  Indiana courts have characterized closely-held corporations as “incorporated partnerships” and as such have

imposed a fiduciary duty upon shareholding “partners” to deal fairly not only with the

corporation but with fellow shareholders as well.  See Krukemeier v. Krukemeier Mach. & Tool, Co., 551 N.E.2d 885, 888 (Ind. Ct. App. 1990); Ross v. Tavel, 418 N.E.2d 297, 304 (Ind. Ct. App. 1981); Motor Dispatch, Inc. v. Buggie, 177 Ind. App. 347, 353-54, 379 N.E.2d 543, 547 (1978);  Cressy, 177 Ind. App. at 228, 378 N.E.2d at 945;  Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 552, 301 N.E.2d 240, 243 (1973).  As a result, we have held that “shareholders in a close corporation stand in a fiduciary

relationship to each other, and as such, must deal fairly, honestly, and openly with the

corporation and with their fellow shareholders.”  Barth, 659 N.E.2d at 561.  Accord Fleming v. Int’l Pizza Supply, 676 N.E.2d 1051, 1056 (Ind. 1997)(citations omitted); Krukemeier, 551 N.E.2d at 888;  Dotlich v. Dotlich, 475 N.E.2d 331, 341 (Ind. Ct. App. 1985); Hartung, 157 Ind. App. at 552, 301 N.E.2d at 243. 

	The interrelationship between the conflict of interest statute and the common law of

fiduciary duty in close corporations has not been the subject of judicial attention in Indiana. 

And given the analysis to follow, extensive treatment is not required here.  We believe that

if (1) the material facts of the transaction and Smulyan’s interest were disclosed or known

to Melrose, (2) the requisite corporate formalities necessary to authorize, approve or ratify

the transaction were followed, and (3) the transaction was fair to the corporation, the

requirements of the Business Corporation Law and the common law of fiduciary duty were

satisfied and summary judgment in favor of Smulyan was properly granted.  

III

A

	Each director had notice of the meeting and came prepared to discuss his respective

plan for liquidating the corporate-owned life insurance.  Smulyan proposed in the Resolu

tion that each shareholder should have the opportunity to purchase the policies on their

respective lives for cash surrender values.  Melrose, through his attorney, countered with his

own proposal that the policies be kept in force (owned by a liquidating trust, if necessary)

and a “business decision” be made as to whether some of the policies be liquidated.11  Under the Melrose plan, any death benefits payable or proceeds from policy liquidation would be

distributed pro rata.  Rowley, through his attorney, recommended that each shareholder be given the opportunity to purchase the policies on his respective life. In the event a share

holder did not wish to purchase his policies, the policies would be cashed in at cash surren

der value and the proceeds distributed pro rata.12  Following this discussion, the directors approved Smulyan’s proposal by a vote of 2-1.

	Melrose argues that the director-shareholders were not fully informed of all material

facts because there was no “effort to determine the fair market value” of the Policies.13  Appellant Br. at 24.  This contention that the Policies carried a greater value than what

Smulyan tendered does not create a genuine issue of material fact as to whether the share

holders were not fully informed.  There is no question but that the director-shareholders

were aware that the value of the Policies to Smulyan was greater than the cash surrender

value.  But a majority of director-shareholders authorized a valuation of all life insurance

policies at cash surrender value.  And valuing the policy at cash surrender value has been

held to be an equitable method of division of corporate-owned life insurance.  See Miller v. Hall, 150 P.2d 287, 290 (Cal. Ct. App. 1944) (court awarded each partner the previously partnership-owned life insurance policy on his life for cash surrender value).  We decline to

mandate that the director-shareholders had an obligation to obtain precise actuarial valua tions of the Policies when they were under no obligation to so value the Policies.  See Krukemeier, 551 N.E.2d at 890 & n.7 (pursuant to a repurchase agreement, the court ordered the repurchase of stock at book value concluding that “it is for the parties, not the

court, to establish a valuation method. . . . ”).  

	We find as a matter of law that the material facts of the transaction and Smulyan’s

interest therein were disclosed or known to Melrose and that the requisite corporate formali

ties necessary to authorize, approve or ratify the transaction were followed.14 

B

	We also find that Smulyan’s purchase of the Policies was fair to the corporation

given that the business purpose for maintaining the Policies no longer existed.  In doing so,

we do not make any statement on the fairness of a corporate insider’s purchase of corporate

assets in different circumstances.  Our conclusion is limited to the purchase by a shareholder

of corporate-owned insurance on the shareholder’s life where (1) the insurance was origi nally purchased to fund a “buy-sell” agreement, (2) the corporation has decided to liquidate

or dissolve, and (3) the same opportunity is available to all shareholders. 

	Capitol was dissolving.  It is clear from the Buy-Sell Agreement that the purpose of

the Policies was to fund the purchase of a deceased shareholder’s interest in Capitol.15  Unfortunately, neither the Buy-Sell Agreement nor the Liquidation Plan described the

disposition of the Policies in case of corporate dissolution.

	The literature suggests that where parties enter into buy-sell agreements, they

routinely fail to include a contingency for the disposition of life insurance policies in the

event of a dissolution or sale of a shareholder’s stock during the shareholder’s lifetime.  See 1 O’Neal, supra note 2, § 7.44, at 194.  O’Neal proposes that “[a] well drafted agreement would provide for such contingencies, typically by giving the shareholders the right to

acquire any policy on his or her own life.”  Id. (citing Mitzner v. Lights 18, Inc., 660 A.2d 512 (N.J. Super. Ct. App. Div. 1994), aff’d 660 A.2d 480 (N.J. 1995) (Stein, J., dissenting)).  A few cases have, in some form, addressed the disposition of life insurance policies upon

dissolution of a partnership or corporation.  See Elliot v. Metropolitan Life Ins., 116 Ind. App. 404, 64 N.E.2d 911 (1946); Mitzner, 660 A.2d at 480 (Stein, J., dissenting); Miller, 150 P.2d at 287; Cheeves v. Anders, 28 S.W. 274 (Tex. 1894). 

	The Indiana Court of Appeals held that “two partners had the clear legal right to

make an oral agreement to the effect that, upon the dissolution of the partnership, each

partner should take and keep as his own personal property the policy of insurance issued

upon his own life.”  Elliott, 116 Ind. App. at 420-21, 64 N.E.2d at 917.  In Elliott, the partners executed a written agreement outlining the terms of the dissolution.  The policies

of insurance on each partners’ life were not mentioned in the agreement.  Because the

partners previously discussed maintaining control of their own life insurance policy, and

subsequently had possession of the policies, the court concluded that each partner was

entitled to keep the policy issued upon his own life as his own personal property.  Id. at 418- 21, 64 N.E.2d at 916-17.

	Similarly, a California court awarded each partner the insurance policy on his own

life for the cash surrender value of the policy.  Miller, 150 P.2d at 290.    In Miller, a partner ship paid the premiums on insurance policies for the partners.  When Miller suffered a

stroke, his partner, Hall, purchased the business from Miller and continued the business in

his own name.  Miller contended that each partner should receive the policies on his own

life while Hall, anticipating that Miller’s policy would mature first, argued that the policies

should be equally divided, with each partner owning not only an interest in the policy on his own life, but an interest in the other partner’s life insurance policy.  Id. at 290.  The trial court concluded, and the appellate court agreed, that

	it was the intent and purpose of the parties that said policies should be carried

for the mutual protection of the partners and their families; that it was not

intended that either partner should retain insurance upon the life of the other,

but that ultimately the proceeds of said policies should go to the family of

each insured, respectively; that said policies are and in equity should be the property in each instance of the partner upon whose life they are written. . . .

Id. at 288 (emphasis added).   The court further found that the buy and sell agreement “was designed to apply in the event of an interruption of the partnership business due to the death

of one of the partners.  Its provisions are inapplicable now since the partnership has been

dissolved.” Id. at 290. 

	The New Jersey Supreme Court, however, concluded that the sale of corporate assets

included the transfer of life insurance policies to the purchaser.  Mitzner, 660 A.2d at 481.  In Mitzner, two brothers owned and operated a retail lighting business as a closely-held corporation.  The company purchased and paid premiums on life insurance policies held on

the life of each brother to fund a buy-out upon the death of either brother.  After a family

dispute, one brother filed for involuntary dissolution which led to a settlement permitting

one of the brothers to purchase the other’s share of the corporation.  However, the purchaser

insisted that the settlement included the acquisition of all life insurance policies.16  Id. at 481.  The Court held that since there was no misunderstanding that the corporation owned

the insurance policies, the policies were corporate assets.  As such, the sale of corporate

assets included the transfer of the insurance policy to the purchaser.  Id.    

	In a lengthy dissenting opinion, Justice Stein argued: 

	In my view, that reimbursement would be manifestly inconsistent with the original purpose of the buy-sell agreement between the two brothers.  When the corporation purchased the policies, neither brother contemplated that the

corporation would retain ownership of the policies if the corporation were

sold or dissolved, or if either stockholder were to acquire the other’s shares. 

In those circumstances, the purpose for which the policies were taken out no longer would exist, and the brothers would doubtless have assumed that each

would receive his own policy.  

Id. at 483 (emphasis added).  

	We find it unnecessary to agree with Justice Stein as to whether such policies would

be held to be corporate assets in a corporate asset sale in Indiana.  But his analysis has

particular force in the dissolution context. And each of these cases makes clear that

corporate-owned insurance on shareholders’ lives purchased to fund buy-sell agreements has

a character distinct from normal capital or operating assets.  It exists for the dual purpose of

protecting the corporation and the shareholders’ respective estates.  And when the corpora

tion’s need for the insurance ceases, making it available to the shareholders for its cash

surrender value, at least where there is full information and adherence to corporate formali

ties, is imminently fair and reasonable.

	When Capitol purchased the Policies, a business purpose existed — the proceeds

from the Policies were to fund the purchase of a deceased shareholder’s interest in the

corporation.  When Capitol voted to liquidate, the original business purpose for the Policies

became obsolete.  Accord Miller, 150 P.2d at 290.  Pursuant to the Resolution, each share holder became entitled to acquire the policy on his own life by tendering the cash surrender

value of his policy.  When a close corporation has voted to liquidate, it is lawful for the

corporation, at least where there is full information and adherence to corporate formalities,

to sell to a shareholder corporate-owned insurance on the shareholder’s life for its cash

surrender value where the insurance was originally purchased to fund a buy-sell

agreement.17  

Conclusion

	Having previously granted transfer to this Court, we now affirm the judgment of the

trial court in granting summary judgment in favor of Smulyan.

SHEPARD, C.J., and DICKSON, and SELBY, J.J., concur.  BOEHM, J. not participating.