Insuranshares Corp. of Delaware v. Northern Fiscal Corp.

Insuranshares Corporation of Delaware (Insuranshares) (plaintiff) was an investment trust, and its sole assets were investment securities. Northern Fiscal Corporation and other banks (the management group) (defendants) owned 75,933 shares of Insuranshares’ 284,032 outstanding shares, which represented a controlling interest. Insuranshares’ board of directors was comprised solely of management group designees. The management group sold its shares of Insuranshares to a third-party group from Boston (the Boston group) (defendants) for approximately $310,000, which represented a high control premium. The Boston group financed the full stock-purchase price with an unsecured loan from Paine, Webber & Co. (Paine Webber). After the Boston group acquired control of the corporation, the investment securities of Insuranshares were then pledged to Paine Webber to fully secure the loan, and Paine Webber was permitted to sell those securities to satisfy the loan. Thus, the Boston group purchased a minority but controlling interest in Insuranshares by pledging (or effectively selling) most of the assets of Insuranshares itself. The management group knew Paine Webber was advancing the purchase price, but it did not investigate the terms of the arrangement or the Boston group’s financial capability to otherwise fund the purchase. Further, Insuranshares had been looted five years earlier by different buyers using similar tactics, which was how certain management-group banks unwillingly acquired their Insuranshares stock. Insuranshares alleged that the management group did not reasonably investigate the transaction and had enough knowledge to be suspicious of the Boston group’s intentions. Insuranshares further alleged that, prior to the purchase, the Boston group wanted the board of Insuranshares to pass a resolution that permitted certain valuable investment securities to be turned to cash. The board initially refused but ultimately passed the resolution. Insuranshares brought a lawsuit to recover damages from alleged looting that resulted from the transfer of control to the Boston group.