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State v. Stockton5/19/1998
(1) rais $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 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,
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