Ellen G. Robinson, Esq. Robert B. King, Esq.
C. Philip Curley Stephanie D. Thacker, Esq.
ROBINSON CURLEY & CLAYTON, P.C. KING, ALLEN & ARNOLD
Chicago, IL Charleston, WV
and Attorneys for Carolyn Lamm
Rudolph L. DiTrapano, Esq.
Joshua I. Barrett, Esq. Joseph R. Goodwin, Esq.
Debra L. Hamilton, Esq. Richard D. Owens, Esq.
DITRAPANO & JACKSON GOODWIN & GOODWIN
Charleston, WV Charleston, WV
Attorneys for Plaintiff/Appellant Attorneys for Withers & Thompson
John H. Wilbur, Esq. Stephen M. Sacks, Esq.
Dudley D. Allen, Esq. Michael S. Solender, Esq.
George Washington Corporation ARNOLD & PORTER
Jacksonville, FL Washington, D.C.
Attorneys for Wilbur Attorneys for Withers & Thompson
John E. Jenkins, Jr., Esq.
Suzanne Oxley, Esq.
Anne M. McGee, Esq.
JENKINS, FENSTERMAKER, KREIGER,
KAYES & FARRELL
Attorneys for Arthur W. Milam
JUSTICE NEELY delivered the Opinion of the Court.
CHIEF JUSTICE BROTHERTON did not participate.
RETIRED JUSTICE MILLER sitting by temporary assignment.
1. In West Virginia the doctrine of adverse domination
tolls statutes of limitation for tort claims against officers and
directors who acted adversely to the interests of the company and
against lawyers and accountants, owing fiduciary duties to the
company, who took action contributing to the adverse domination of
2. The doctrine of adverse domination tolls statutes of
limitation for the West Virginia Insurance Commissioner
notwithstanding that claims similar to those of the Commissioner
could have been raised by the shareholders of the insurance
company's holding company when the shareholders of the parent
company had little interest in redressing the wrongs to the
subsidiary insurance company.
An action was brought in the United States District Court
for the Southern District of West Virginia by the statutory
receiver of the George Washington Life Insurance Company ("GW
Life"), an insolvent West Virginia insurance company, against
certain of the company's former officers, directors, accountants
and lawyers. The receiver alleges that: (1) the officers and
directors looted over $15 million from GW Life; (2) auditors hired
by the officers and directors assisted in the misconduct; and,
(3) outside counsel also hired by the officers and directors helped
the officers and directors control GW Life through acts of
professional negligence. The receiver seeks the amount of money
allegedly looted from the company in damages.
This case is before this Court on two certified questions
from the Honorable Charles H. Haden II, Chief Judge of the United
States District Court for the Southern District of West Virginia.
Both questions concern the "adverse domination" doctrine that has
been applied in other jurisdictions to toll statutes of limitations
in actions brought by receivers of insolvent insurance companies
and financial institutions. Judge Haden held that the doctrine of
adverse domination, if recognized by this Court, would toll the
limitations period on the receiver's claims.
The certified questions are:
(1) Does West Virginia recognize the doctrine of adverse domination to toll statute of limitations for tort claims asserted by the receiver of an insurance company, acting pursuant to W. Va. Code, § 33-10-1, et seq., against the officers and directors who acted adversely to the interests of the company and against lawyers and accountants, owing fiduciary duties to the company, who took some action contributing to the adverse domination of the company?
(2) If the answer to the first question is "yes," will the doctrine of adverse domination toll statute of limitations in favor of the West Virginia Insurance Commissioner as Receiver when similar claims could have been raised by the shareholders of the insurance company's holding company in a previously settled shareholder derivative action, but where the shareholders of the parent company had little interest in redressing the wrongs to the subsidiary insurance company?
Plaintiff Hanley C. Clark, Commissioner of Insurance for
the State of West Virginia, is the statutory receiver of GW Life.
(Commissioner Clark, in his capacity as receiver, is hereafter
referred to as "the Receiver.") GW Life is an insolvent West
Virginia life and health insurer. As a West Virginia domiciled
insurance company, GW Life was regulated by the West Virginia
Insurance Commissioner's office and was subject to the West
Virginia Insurance Code, W. Va. Code 33-1-1 , et seq. GW
Life was a wholly-owned subsidiary of George Washington Corporation
("GW Corp"), a publicly-traded Delaware corporation that is now defunct. GW Corp had no operations of any kind of its own. It
obtained virtually all of its operating revenues directly or
indirectly from GW Life.
Defendants John H. Wilbur, Arthur W. Milam, Michael J.
Davoli, Frank E. Clark, and Dudley D. Allen (collectively "the O&D
Defendants") served as directors of GW Corp and GW Life (as well as
certain other subsidiaries of GW Corp) during all or part of the
time relevant to plaintiff's claims. Mr. Wilbur, Mr. Clark and Mr.
Davoli also served as officers of the companies and paid themselves
salaries or directors' fees. Mr. Wilbur, Mr. Milam and Mr. Allen
also hired themselves as lawyers for GW Life, and GW Life paid them
substantial lawyers' fees. Furthermore, while these defendants
served as GW Life's officers and directors, they owned a
significant percentage of GW Corp stock. By the end of 1983, at
the latest, they had obtained a controlling interest in the stock
of GW Corp. From 1978 until 1981, Mr. Wilbur, Mr. Milam and Walter
Walden, another defendant in the case, comprised a majority of the
board of directors of GW Life. From 1981 until at least September
5, 1990 (the period during which most of the transactions on which
the receiver's complaint is based occurred), the defendants, who
were officers and directors, and Mr. Walden (in various
combinations) were the only directors of GW Life. At no time
relevant to this case were there any "independent" directors of GW
The O&D Defendants retained Coopers & Lybrand ("Coopers")
to audit GW Corp and GW Life and to provide other accounting
services throughout the time relevant to this case. Defendants
Donald F. Withers and Byron N. Thompson, Jr. (collectively, "the
Coopers Defendants") were the partners in charge of the engagement.
The O&D Defendants also hired the law firm of White & Case to
provide legal services to GW Corp and GW Life. Defendant Carolyn
B. Lamm is a partner in that firm. She personally acted as counsel
to GW Corp and GW Life and supervised others working on various
matters for the companies. White & Case and Ms. Lamm also
represented the O&D Defendants individually and at the same time
they were representing GW Life.
In 1990, the Insurance Commissioner's office began an
examination of GW Life for the two years ending December 31, 1989.
During the examination, the officers and directors of GW Life
allegedly refused to provide the examiners with certain financial
information as required under the Insurance Code, including
information about an affiliated company, the DWM Agency through
which the O&D Defendants allegedly misappropriated funds from GW
Life. In response to this and other allegedly illegal conduct by
the officers and directors, the Commissioner sought an order from
the Circuit Court of Kanawha County appointing him temporary
Receiver of GW Life. On 5 September 1990, the circuit court in
State v. George Washington Life Insurance Co., No. 90 C 3254, entered an order appointing the Commissioner as Receiver Pro Tem.
Pursuant to that order, the Receiver Pro Tem took possession of the
records and books of GW Life and completed his examination of the
The examiners concluded that GW Life was insolvent and
that its liabilities exceeded its assets by at least $12,742,159 as
of 31 December 1989. Thereafter, the Commissioner sought an order
from the circuit court for the liquidation of GW Life. Ultimately,
an agreed order of liquidation was entered on 3 June 1991, and the
Commissioner was appointed permanent Receiver and Liquidator of GW
Life. The Commissioner asserts that one of the responsibilities of
the Receiver under the Insurance Code is to marshall all assets
into the GW Life estate to be distributed to policyholders and
other creditors. Included among those assets are rights of action
belonging to GW Life, such as those the Receiver asserts here. The
Receiver has the authority and the duty to pursue such rights of
action under the Insurance Code, W. Va. Code 33-10-14 . All
actions of the Receiver, including the initiation and pursuit of
this case, are reviewed and must be approved by the circuit court
that supervises the ongoing liquidation proceeding. W. Va. Code
This action is brought by the Commissioner solely in his
capacity as Receiver to recover the monies allegedly misappropriated from GW Life by the O&D Defendants, and to recover
damages allegedly resulting from the misconduct of the lawyer and
accountant defendants in connection with the services they
performed for GW Life. The recovery in this lawsuit will be
included in the general assets of the estate and distributed to GW
Life's policyholders and creditors. W. Va. Code 33-10-19a .
The allegations in this suit are that the O&D Defendants,
aided by their handpicked lawyers and accountants, illegally
extracted millions of policyholder premium dollars from GW Life and
used those dollars for their own private purposes. The Receiver
alleges that the O&D Defendants' conduct violated RICO, 18 U.S.C.
§ 1961, et seq., constituted a civil RICO conspiracy and civil
fraud, and violated common law fiduciary duties.
Although the facts of this case are extraordinarily
complex, the issue before this Court is a pure, abstract question
of law, namely: Do we recognize the doctrine of "adverse
domination" as a logical extension of our "discovery rule" that has
long been applied in tort cases equitably to toll applicable
statutes of limitation. Although the defendants in this case have
supplied lengthy briefs, their arguments in this Court are
essentially that we should avail ourselves of our prerogative to
reformulate all certified questions and then, having reformulated
the questions, decide them in favor of the defendants on the facts. In a nutshell the defendants assert many facts from which they
encourage us to infer that notwithstanding that the doctrine of
adverse domination might exist in West Virginia law, it is
inequitable to apply the doctrine to the defendants in this case.
For obvious reasons, not the least of which is that we are not set
up for fact finding in federal cases, we decline the defendants'
Adverse domination is an equitable doctrine that tolls
statutes of limitations for claims by corporations against its
officers, directors, lawyers and accountants for so long as the
corporation is controlled by those acting against its interests.
Int'l Rys. of Central America v. United Fruit Co., 373 F.2d 408,
412 (2d Cir.), cert. denied, 387 U.S. 921 (1967). Indeed, the
adverse domination doctrine appears to be well settled law in many
states,See footnote 1 and it has been generally accepted by federal courts to be the law of states that have not yet explicitly ruled on the subject
themselves. See, e.g., Resolution Trust Corporation v. Farmer, ___
F.Supp. ___ (1994 WL 510532) (E.D. Pa. Sept. 16, 1994).
For over 70 years, this Court has recognized and applied
the discovery rule that tolls statutes of limitations for tort
claims. See, e.g., Petrelli v. West Virginia-Pittsburgh Coal Co.,
86 W. Va. 607, 104 S.E. 103 (1920). In West Virginia, the
applicable statute of limitations is tolled on all tort claims
"until the plaintiff knows or by reasonably diligence should know
that he has been injured and who is responsible." Cart v. Marcum,
188 W. Va. 241, 244, 423 S.E.2d 644, 647 (1992).
The discovery rule has been applied routinely to the
types of claims brought by the Receiver. We have applied the rule
to toll the statutes of limitations on claims of legal malpractice,
Family Saving and Loan, Inc. v. Ciccarello, 157 W. Va. 983, 207
S.E.2d 157 (1974), overruled on other grounds, Hall v. Nichols, 184
W. Va. 466, 400 S.E.2d 901 (1990); professional negligence, Harrison v. Seltzer, 165 W. Va. 366, 268 S.E.2d 312 (1980); and
general negligence, Sattler v. Bailey, 184 W. Va. 212, 400 S.E.2d
We agree with the Receiver that a corporate plaintiff
cannot "discover" injuries to the corporation caused by those who
control the corporation. Thus, and in accordance with our
overwhelming precedent, the discovery rule requires that the
limitation periods on tort claims by a corporate plaintiff or its
successor (here the Receiver) be tolled when the corporation has
been prevented from "knowing" those claims existed. Generally, a
corporation "knows," or "discovers," what its officers and
directors know. But when officers and directors act against the
interests of the corporation, their knowledge, like that of any
agent acting adversely to his principal, is not imputed to the
corporation. Citizens' Nat'l Bank of Parkersburg v. Blizzard, 80
W. Va. 511, 520, 93 S.E. 338, 341 (1917) (knowledge of
misappropriation of funds by controlling directors and officer not
imputed to bank); First Nat'l Bank of New Martinsville v. Lowther-
Kaufman Oil & Coal Co., 66 W. Va. 505, 66 S.E. 713 (1909) (bank
director's knowledge of contract between himself and bank which
favored director at bank's expense would not be imputed to bank and
its other directors); see also, 3 W. Fletcher, Fletcher Cyclopedia
of the Law of Private Corporations § 793, at 29 (1994).
Thus, as a matter of law, GW Life cannot be deemed to
have known of its claims against the O&D Defendants arising out of
the acts they allegedly committed adverse to GW Life's interests.
Because the company lacked that knowledge, GW Life's claims are
preserved under that subspecies of the discovery rule denominated
"the doctrine of adverse domination." Accordingly, the answer to
the United States District Court's first certified question is
The defendants assert that even if the doctrine of
adverse domination be recognized in West Virginia, it should be
applied only when defendants have committed intentional torts.
Yet, a corporation like GW Life is prevented from discovering its
claims against those in control both by the sheer fact of their
control, FDIC v. Hudson, 673 F.Supp. 1039, 1042 (D. Kan. 1987)
("control of the institution implies control of information"), and
by possible actions to conceal wrongdoing taken by the alleged
wrongdoers. Thus, regardless of whether the alleged wrongdoing was
intentional or merely negligent, the knowledge of officers' and
directors' wrongdoing cannot be imputed to the corporation because
those officers' and directors' control over the corporation
prevents it from learning of the misconduct that is injuring it. As the Court of Appeals in Maryland said in Hecht v. RTC, supra
note 1, 635 A.2d at 406:
Indeed, the directors and officers may be so disengaged from their responsibilities that they themselves are unaware of the breach of their duty to the corporation. Under these conditions, there is hardly greater likelihood that the corporation will be able to discover the cause of action.
The second certified question relates to a particular
shareholder derivative action filed in 1988 against GW Corp and the
O&D Defendants, known as the "SAFE Litigation."See footnote 2 The SAFE
Litigation was brought by shareholders of GW Corp (not shareholders
of GW Life, whose only shareholder was GW Corp), ostensibly for the
benefit of GW Corp. The Receiver asserts, and we accept as true
for the purposes of answering these certified questions, that only
a few of the wrongful transactions alleged in this case were
alleged by the SAFE shareholders and that many more transactions
uncovered by the Receiver and alleged in the first amended
complaint were not alleged in the SAFE suit. The Receiver asserts,
and we accept as true for the purposes of answering the second
certified question, that GW Corp and its shareholders were among
the principal beneficiaries of various allegedly improper transactions by GW Life that are the subject of the complaint in
the district court.
Judge Haden recognized, and we accept as true, that
shortly after the SAFE claims were asserted, the O&D Defendants
caused motions to be filed challenging the SAFE plaintiffs'
standing as representative plaintiffs. The O&D Defendants argued
that the SAFE plaintiffs were not proper class representatives
because of their earlier attempts to take over GW Corp. Judge
Haden recognized that the federal court in Florida that approved
settlement of the SAFE case stated that the plaintiffs had a
history of activities that GW Corp considered to be against its
interests. 28 June 1994 slip op. at 17 n. 18. In addition, it is
asserted, and we accept as true for the purpose of answering the
second certified question, that there was a "greenmail" settlement
of the case in which the SAFE plaintiffs sold their stock to
entities friendly to the O&D Defendants and were paid their
attorneys' fees (in part by GW Life).
Nonetheless, appellees argue that the SAFE Litigation
somehow triggered the statute of limitations on the Receiver's
claims. We agree with Judge Haden, who rejected this argument,
holding that there is, at the very least, a question of fact
whether the shareholders who sued derivatively in the SAFE
Litigation did so to benefit GW Life or simply to benefit themselves. Accordingly, the second certified question is also
answered in the affirmative.
Finally, we hold that the adverse domination doctrine
tolls the statute of limitations so long as there is no one who
knows of and is able and willing to redress the misconduct of those
who are committing the torts against the corporate plaintiff.
Farmers & Merchants Nat'l Bank v. Bryan, 902 F.2d 1520, 1523 (10th
Cir. 1990) (if informed director is unwilling to sue, adverse
domination continues); RTC v. Hecht, supra note 1, 635 A.2d at 352.
If, however, shareholders learn of misconduct that harms their
corporation, the discovery rule may no longer toll the limitations
period. Int'l Rys. of Central America v. United Fruit Co., supra,
383 F.2d at 414. But, we agree with Judge Haden that until there
are knowledgeable shareholders willing to redress the wrongs of
their corporation, the corporation cannot discover its claims.
Clark v. Milam, 847 F.Supp. 409, 422 (S.D.W.Va. 1994), citing Hunt
v. American Bank & Trust Co., 606 F.Supp. 1348, 1354-56 (N.D. Ala.
1984), aff'd, 783 F.2d 1011 (11th Cir. 1986).
The peculiar facts of the case now before us make this
case a particularly apt candidate for the application of the
adverse domination doctrine. When the Commissioner is appointed Receiver for an insolvent insurance company, he is charged with
marshalling the assets of the company for the benefit of its
policyholders and creditors. W. Va. Code 33-10-11 ; 33-10-14
. Those assets include claims against those who may have
looted the insurance company as well as their possible accomplices
who are either outside lawyers or accountants. W. Va. Code 33-10-
14(b) . After all, much more is at stake in this litigation
than simply a loss to shareholder investors: we have here an
insurance company that was allegedly victimized and that was
allegedly looted of monies that should have been available to pay
the claims of totally innocent policyholders. On this issue, we
can do no better ourselves than to cite with approval the ruling of
the learned district court judge who said:
Unlike the application of the discovery rule to a normal plaintiff, who clearly must be responsible for his own actions, when applied to the adversely dominated corporation, the rule must take into consideration shareholders are merely acting as the corporation pursuant to a legal fiction, and may have very limited interests or goals . . . . If the shareholders have no interest in redressing the wrongs, there will be no one to protect or advance the corporate causes of action. This consideration is especially significant where the Receiver is a governmental official charged with authority to protect not only the shareholders of the corporation, but also policyholders, creditors and the public.
28 June 1994 slip op. at 15 (emphasis in original).
Both certified questions having been answered in the
affirmative, this case shall now be dismissed from the docket of
Certified questions answered.
Footnote: 1 See, Greenleaf v. Profile Cotton Mills, 235 Ala. 530, 180 So. 582 (1938); San Leandro Canning Co. v. Perillo, 211 Cal. 482, 295 P. 1026 (1931); Robert P. Butts & Co. v. Butts; Estate, 119 Ill.App.2d 242, 255 N.E.2d 622 (1970); Bates Street Shirt Co. v. Waite, 130 Me. 352, 156 A. 293 (1931); Hecht v. Resolution Trust Corp., 333 Md. 324, 635 A.2d 394 (1994); Greenfield Sav. Bank v. Abercrombie, 211 Mass. 252, 97 N.E. 897 (1912); Ventress v. Wallace, 111 Miss. 357, 71 So. 636 (1916); Bilby v. Morton, 119 Okla. 15, 247 P. 384 (1925); Smith v. Lyle, 59 S.D. 534, 241 N.W. 512 (1932); Allen v. Wilkerson, 396 S.W.2d 493 (Tex. Ct. App. 1965); United Park City Mines Co. v. Greater Park City Co., 870
P.2d 880 (Utah 1993); see also, Kahn v. Seaboard Corp., 625 A.2d 269 (Del. Ch. 1993) (tolling limitations period on claims in shareholder derivative suit against self-dealing directors where shareholder was unaware of claims against directors); Dotlich v. Dotlich, 475 N.E.2d 331 (Ind. Ct. App. 1985) (limitations period tolled until director's misconduct discovered); cf. Warthman v. Manufacturers Trust Co., 37 N.Y.S.2d 129 (N.Y. Sup. Div. 1940) (allowing tolling where dominating directors personally profited from misconduct).
Footnote: 2 The colloquial name "SAFE" is an acronym for the plaintiff in that matter, Security American Financial Enterprises, Inc., or "SAFE." SAFE was a shareholder of GW Corp that, with others, sued the corporation and certain of its officers and directors derivatively in Jacksonville in 1988.