Appeal by plaintiff from order entered 29 August 1996 by Judge Narley L. Cashwell in Wake County Superior Court. Heard in the Court of Appeals 21 May 1997.
The opinion of the court was delivered by: John, Judge.
Plaintiff State of North Carolina, on relation of Commissioner of Insurance James E. Long (Commissioner Long), acting as liquidator of the Investment Life Insurance Company of America (ILA), appeals the trial court's grant of defendants' motion to dismiss plaintiff's complaint for failure to state a claim. We affirm.
Background information as alleged in plaintiff's complaint is as follows: In 1985, four investors, including James E. Peterson (Peterson), a real estate developer and Winston-Salem resident, formed First Republic Financial Corporation (FRFC) as a holding company for purposes of procuring a South Carolina life insurance company, Investment Life and Trust Company (ILT). Peterson became the controlling shareholder of FRFC.
In 1989, Peterson and the other investors decided to purchase Triad Life Insurance Corporation (Triad), located in North Carolina, and to merge ILT into Triad. Acquisition of Triad required approval by the North Carolina Department of Insurance (the Department) pursuant to the "Insurance Holding Company System Regulatory Act" contained in Chapter 58, Article 19, of the North Carolina General Statutes.
The law firm of Petree Stockton & Robinson, counsel for Peterson in his personal and business matters since approximately 1983, was retained by FRFC and ILT to obtain the requisite approvals of the acquisition and merger. Defendant Petree Stockton, L.L.P. (Petree; the law firm), is the successor entity to Petree Stockton & Robinson and thus is a named defendant herein. Defendant James Iseman (Iseman), at that time a Petree partner, was the responsible attorney and billing attorney for the acquisition and merger account. Attorneys Beth Hedberg (Hedberg), a former associate with Petree, and Eileen Taylor (Taylor) performed work on the account. Following certain filings with the Department by the law firm, acquisition of Triad by ILT was approved by the Department 1 December 1989.
At the time Triad was acquired, FRFC owed $4 million to Trust Company Bank of Atlanta, Georgia (Trust Company). This debt was personally guaranteed by Peterson and two other individuals sitting on the Board of Directors of both FRFC and ILT, with stock of ILT and Triad pledged as security for the debt. As a condition of allowing ILT to acquire Triad, Trust Company required modification of its loan agreement with Triad such that the loan would become due in full 30 June 1990.
Under the supervision of Iseman and with Taylor and Hedberg responsible for much of the work, Petree represented ILT and Triad beginning in early 1990 in connection with the proposed merger of the two companies, the surviving company to be called the Investment Life Insurance Company of America (ILA). Plaintiff's complaint alleged that a required "Form A" was filed with the Department, indicating
that the shareholder, FRFC, was raising $10-12 million in capital with which it would pay off the debt to Trust Company, and [further representing] that ILA "will have no direct or indirect liability with respect to FRFC financing" if the Department approved the merger.
In analyzing the proposed merger, the Department determined that FRFC owed $2.25 million to ILA and raised this as an issue of concern. In the words of the complaint, the law firm
responded that this debt would be repaid along with the Trust Company debt in the near future, and that "neither FRFC nor ILA anticipates that future transactions of this type (i.e., loan to FRFC) between ILA and FRFC will occur."
Plaintiff's complaint further alleged that after approval of the merger by the Department, Petree was retained by ILA and FRFC "to work on"
(1) rais[ing] $7 million or more in new capital to be contributed to ILA; (2) [payment of] $4.0 million to Trust Company on June 30, 1990, or to restructure the payment terms of the loan; and (3) find[ing] a method to allow the new company, ILA, to operate profitably.
An extension to 2 January 1991 of repayment of the Trust Company loan was obtained upon payment of $600,000. In addition, a proposed service agreement between FRFC and ILA was drafted "under which FRFC was to bear the operating costs of ILA to assure operating profits at the ILA level." Finally, the law firm began work on a private placement of preferred stock to raise capital.
By October 1990, the private placement effort had failed, and FRFC owed ILA an additional $600,000 in connection with the unsuccessful offering. According to plaintiff's complaint, notwithstanding the service agreement between FRFC and ILA, ILA was required to spend "more than $2 million which should have been the responsibility of FRFC."
In addition, plaintiff alleged Peterson and Edward Shugart (Shugart), president of ILA, met with John Googe (Googe) in November 1990. Googe, a friend and former client of Shugart, was seeking permanent financing for a $2 million note coming due with First Union National Bank, a debt incurred by Googe's company Air Lift Associates (ALA) in connection with operation of a private aircraft facility at Raleigh Durham International Airport (RDU). The three agreed that Peterson and Shugart would cause ILA to loan ALA $1.9 million to refinance its loan on the RDU facility. Simultaneously, ILA would loan $2.5 million to Southeastern Employers Benefit Services (SEBS), a second company owned by Googe, which company would use the money to buy $2.5 million of preferred stock in FRFC. This investment would allow FRFC to pay Trust Company $1.7 million and arrange a further modification of its loan, and to repay the $600,000 due from FRFC to ILA for expenses of the failed stock offering. Finally, FRFC would make dividend payments on the preferred stock to SEBS, thereby allowing SEBS to repay ILA so that, asserted plaintiff's complaint, "the transaction would be virtually a `wash' for Googe."
In December 1990, N.C.G.S. § 58-7-85(b)(3) provided that no life insurance company doing business in North Carolina might negotiate any loan to a director or officer of such insurer, either directly or indirectly, nor could such insurer make any loan to any other corporation in which such officer or director was substantially interested. Nonetheless, plaintiff's complaint charged, the proposed loan by ILA of $2.5 million was designed to be made indirectly to FRFC, a corporation controlled by Peterson, the Chief Executive Officer and member of the Board of Directors of ILA.
In addition, N.C.G.S. § 58-19-30(b)(2) provided that a loan or extension of credit by a North Carolina life insurance company to a third party, if made with the understanding that proceeds thereof were to be used to make investments in any affiliate of the insurer, required advance written notice to, and prior approval by, the Department.
On 20 December 1990, the Department instituted an inquiry into FRFC's proposed issuance of preferred stock, expressing concern about "the extent to which ILA might be required to service debt" of FRFC. In responding, Taylor and Hedberg allegedly misrepresented details of the proposed offering.
The complaint alleged, for example, that it was not disclosed that ILA would lend Googe $2.5 million to purchase the Series E preferred stock, nor that the loan of $2.5 million was tied to an additional $1.9 million loan by ILA to the same investor. As stated in plaintiff's complaint,
[d]efendants knew, or in the exercise of proper care, should have known that the representations . . . were materially misleading
and that had the Department been aware of these facts, "it would not have allowed the transaction to go forward."
On 27 December 1990, the Department advanced additional questions regarding the loan. Taylor replied with a letter "purport[ing] to attach a summary of the terms of the Series E preferred stock." However, asserted plaintiff,
the summary did not disclose that ILA would lend the investor the money used to purchase the preferred stock, or that the investment would not take place unless an additional $1.9 million loan occurred.
On or about 31 December 1990, Petree is alleged to have prepared an investment letter to be signed by Googe with respect to the issuance of $2.5 million of preferred stock by FRFC to Googe. Plaintiff's complaint maintained the letter represented
that the purchaser of the preferred stock had no present or contemplated need to dispose of any portion of the stock to satisfy any existing or contemplated undertaking, need or indebtedness.
However, the complaint continued,
[i]n preparing the investment letter to be signed by John Googe, the Defendants knew, or in the exercise of due care should have known, that an integral part of the deal was the need of John Googe to dispose of the ...