Taylor v. AIA Services Corp.
261 P.3d 829
| Idaho | 2011Background
- Reed Taylor founded AIA Insurance and was the majority shareholder and leader of AIA Services.
- In 1995, AIA Services Redemption Plan Redeemed Reed Taylor’s stock for $7.5 million plus instruments; $1.5M down payment note and a $6M note with security.
- AIA Services failed to pay the notes when due; a Stock Redemption Restructure followed, extending payments and terms.
- Taylor sued in 2007 to recover amounts owed under the Stock Redemption Agreement and Restructure Agreement.
- The district court granted partial summary judgment (2009) holding the Stock Redemption Agreement illegal under I.C. § 30-1-6 due to lack of earned surplus and improper use of capital surplus.
- The Idaho Supreme Court affirmed, holding the 1995 redemption violated earned and capital surplus limits and was illegal and unenforceable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did AIA have earned surplus to fund the redemption? | Taylor contends earned surplus existed to cover the $7.5M; balance sheets are not conclusive. | Respondents argue AIA had no earned surplus; future projections and appraisals do not create earned surplus. | No earned surplus; stock redemption violated §30-1-6. |
| Was capital surplus authorization valid via shareholder vote? | Taylor argues implied authorization from votes approving reorganization and redemption. | Respondents contend explicit authorization required; votes did not designate use of capital surplus. | Explicit authorization required; votes did not authorize use of capital surplus. |
| Do some stock exchanges escape surplus limits when paid on credit or to satisfy debt? | Taylor claims certain exchanges (e.g., for debt) are exempt from surplus limits. | Respondents acknowledge credit purchase allowed but argue all shares must satisfy §30-1-6 unless explicitly exempted. | Exchanges to extinguish debt are exempt; exchanges for airplanes are not clearly exempt and must comply. |
| Is the Stock Redemption Agreement illegal and unenforceable; do exceptions apply? | Taylor argues illegality should be ignored due to standing, innocence, fraud claims, or public policy. | Respondents maintain illegality controls; exceptions do not apply here. | Agreement illegal and unenforceable; exceptions do not apply; public policy supports invalidation. |
Key Cases Cited
- Trees v. Kersey, 138 Idaho 3, 56 P.3d 765 (2002) (illegality of contracts assessed as a matter of law; public policy)
- Klang v. Smith's Food & Drug Centers, 702 A.2d 150 (Del. 1997) (balance sheets not conclusive on surplus; earned surplus concept analyzed)
- Minnelusa Co. v. A.G. Andrikopoulos, 929 P.2d 1321 (Colo. 1996) (public policy framework for contracts violating statutes)
- Wernecke v. St. Maries Joint School Dist. #401, 147 Idaho 277, 207 P.3d 1008 (2009) (exceptions to illegality; public policy considerations)
- Barry v. Pac. W. Constr., Inc., 140 Idaho 827, 103 P.3d 440 (2004) (public policy and relief when not in pari delicto)
- Miller v. Haller, 129 Idaho 345, 924 P.2d 607 (1996) (technical vs. substantive illegality; strictness of prohibition)
- La Voy Supply Co. v. Young, 84 Idaho 120, 369 P.2d 45 (1962) (standing and defenses in illegality contexts)
- Jones v. HealthSouth Treasure Valley Hospital, 147 Idaho 109, 206 P.3d 473 (2009) (standard of review for summary judgment)