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3C 1 00182
LDWTN G. MIDDLETON, JR., AS TRUSTEE
AND HUNTLEY LAMPTON MIDDLETON.
DCRIVA TJVEL Y, ON BEHALF OF HARDSCUFFLE, INC.
AND ITS SUBSIDIARY AMERICAN LIFE AND
ACCIDENT INSURANCE COIV!PANY OF KENTUCKY
V,
NANCY L;\MPTON C (1"--
4 7! W. Main Street. Suite 500
Ll;uisville. Kentucky 40202
r(lv
HOS\VORTll M. TODD '
I 0 I S. Fi llh Street Suite 3160
Louis\ illc. Kentucky 40202
ANDREW R. FELLON C/l'-
1 li200 Forest Green Boulevard, Suire 601
l.onisvil k. Kentucky 40223
(,ERi\LD W. GERICHS C)
1
'-
4 71 W Main Street, Suite 500
Lonislillc, Kentucky 40202
Slf.:I'J il'N R. REILY C/ ;.,.._
2110 York Strcd
Louisvilk. Kentucky 40203
WJS M;\lEUS
i 27
1
.' Central Pike
l!arrodshurg, Kentucky 4U330
Al\[1
!11\RDSCUFFLE. INC. AND ITS SUBSIDIARY.
AMERICAN I .!FE AND ACCll!ENT INSURANCE
COMP.\:\Y or KENTUCKY
47L W. 'vlain Street
Loui,vUic.{..:muci,y 40202
JEFFERSON ClRCUIT COURT
DIVISION
PLAINTIFFS
DEFEND/\N'l S
DFFF\D,.\!'<TS
SF.RVE: GERALD W. GERICHS
471 W. Main Street, Suite 500
Louisville, Kentucky 40202
VERIFIED DERIV A TTVE COMPLAINT
Plainti1T, Edwin G. Middleton, Jr. ("'F.d l'vfiddleton"). as Trustee. Derivatively, on behalf
ofHan.lscuJlle, Inc. and its subsidiary American Life and Accident Insurance Company or
Kentucky, and Huntley Lampton Middleton ("Hunt Middleton"), by their attorneys, llpon
personal knowledge as to their own acts and upon inforn1ation and belief as to all other matters,
based in part upon the investigation conducted by counsel, which included, inter alia, review of
state regulatory filings in the Commonwealth of Kentucky and the State of Ohio, news reports.
press releases and other publicly available documents. allege as follows:
N aturc of the Case
1. This is a derivative action brought on behalf of nominal defendants. Hardscuft1e,
lnc. ("Hardscuffle" or the "Company'') and its subsidiary, American Life and Accident Insurance
Company of Kentucky ("'American Life") (Hardscurne and American Life collectively the
'Companies") against certain <riTicers and directors who worked for Hardscut1le during the time
period in which the acts complained of occmTed, namely, Nancy "'Nana" Lampton (''Nana
Lampton'') and Gerald W. Gerichs ("Gerichs") (together "Otlicer Defendants" or
"'v1anagement") and certain directors, namely Bosworth M. Todd ("Todd"), Andrew Fellon
(''Fellon"), Stephen R. Reily ("Reily"), Lois Mateus ("MateLls") (together "Director
Defendants") (collectively "Defendants"), for waste. breach of fiduciary duty. due
care and inadequate disclosure.
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1. For the past several years, Defendant Nana Lampton has wrongfi.Jlly used the
Company s assets to provide herself with a lavish lifestyle and to support her charitable activities
and other social activities.
3. The Defendants, other than Nana Lampton, despite their fiduciary obligations.
had knowledge that Nana Lampton was misusing the Company assets and thus breached their
fiduciary duties to the Company and its shareholders, by, among other things, allowing Nana
Lampton s misuse of corporate funds and corporate property.
4. In addition, the Director Defendants intentionally allowed the 011icer Defendants
to make H1lse and materially misleading statements regarding the insurance operation of
l-lardscuftle's subsidiary, American Life, to both regulators and to Hardscuf11e directors and
shareholders. Officer Defendants and Director Delimdants failed to oversee, put in place any
appropriate business plan for the insurance operations. real estate operations and the investments
of the Companies.
5. As detailed below, such actions by the Otricer Defendants and the Director
Defendants were so inappropriate that no person of ordinary common sound business judgment
would deem them fiscally or fiducially responsible to Hardscuftle and its shareholders.
Financial Plummet
6. In the last several years, Hardscufflc has suffered severe financial decline because
ofthe poor management and wrongdoing by the Officer Defendants and Director Defendants.
a. Equity has declined over $75 million in six years.
1. At the end of2006 equity was $322,481,000
u. At the end of2011 equity was $243,704,000
b. Net eamings have declined over $12 million in six years.
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1. At the end of 2006 net earnings were $10.2 million
ii. At the end of20llnet earnings were $1.8 million loss
c. American Life has not sold a new insurance policy in over twenty (20)
years
d. The Companies have excessive and dangerous concentration in their
investment portfolios
e. The Companies have a large and unproductive real estate investment
por!lolio
7. Plaintiffs bring this action derivatively in the right and for the benefit of
Harclscuffle and American Life for injuries the Companies have suffered and will continue to
sutTer as a result of the breaches of fiduciary duly and mismanagement described herein.
8. Plaintiffs, who hold directly and indirectly large equity positions oiT!ardscuf!le,
have a strong interest in protecting the Companies from continued wrongdoing and
mismanagement by the Defendants and in obtaining redress Cor those actions which have already
occurred.
.Jul"isdiction nnd V cnue
9. This Comi has subject matter jurisdiction over this matter as the Plaintills seek
damages in an amount exceeding the Court's jurisdictional limits.
10. Venue is proper in Jefferson Circuit Comt pursuant to KRS 454.210(1)(2) since
Nana Lampton is a resident or Oldham County, Kentucky, who has and is transacting business in
this Commonwealth and has caused tortious i n t c r t ~ r e n c e by acts and omissions in this
Commonwealth, and because Hardscuffle and American Life have their corporate offices located
at 471 West Main Street, Louisville, Jefferson County, Kentucky.
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Parties
II. Ed Middleton, is a resident of Louisville, Jefferson County, Kentucky. Ed
Middleton is and was Co-Trustee of four trusts (which hold over 60% of the equity interest in
Hardscut1le), known as the "Big Four Trusts," and as Co-Trustee and potential remainderman
of such trust was a shareholder of Hardscuffle during much of the time of the tmnsactions and
events of which complaint is made. Ed Middleton continues to hold such Hardscuffle shares as
Co-Trustee and also holds equitable shareholder interest. Ed Middleton thus has standing to
bring this action derivatively on behalf of Hardscuflle to recover damages !(Jr all the conduct
described in this Complaint.
12. Hunt Middleton, is a resident of New York. He is and was a shareholder of
Hardscufl1e at the time of the transactions and events of which he complains. Hunt Middleton
continues to hold his Hardscuflle shares and thus has standing to bring this action derivatively on
belmlf ofllardscuft1e to recover damages fr>r all the conduct described in this Complaint.
13. Hardscuft1e is a Kentucky corporation with its corporate headquarters at 471 West
Main Street, Louisville, Jefferson County, Kentucky. Hardscuft1e owns 100% of the equity in
American Life. Hardscufflc has real estate operations and investments but no other business
operations, except for the life insurance business through its subsidiary, American Life.
14. Nana Lampton is and was at all relevant times herein, Chairman of the Board of
Directors and Chief Executive Officer of the Company, and a member of' the Company's Audit
Committee.
15. Gcrichs is and was at all relevant times herein, President and Chief Operating
OtTicer of the Company, and a member of the Company's Audit Committee.
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16. Todd is and was at all relevant times herein a director of Hardscuf!le and
Life. Todd has been a director since at least 2006 and is a member of the Special
Govemance Committee of Hardscut1le.
17. Fellon is and was at all relevant times herein a director ofHardscuftle and
American Life. Fell on has been a director since 2011 and is a member of the Special Govcmance
Committee of Hardscutlle ..
18. Reily is and was at all relevant times herein a director ofHardscuflle and
/l.merican Life. Reily has been a director since 2010 and is a member of the Special Governance
Committee ofi-lardscuffle.
19. Lois Mateus is and was at all relevant times herein a director of 1-Iardscui'lle and
American Life. Mateus has been a director since 2010 and is a member of the Special
Govemance Committee of I Iardscuflle.
Obligations of Officer J)efendants and J)irector Defendants
20. Each of the Defendants owed to 1-Iardscuftlc and Hardscul11e's shareholders the
duty to exercise due care and diligence in the management and administration of the of
the Company and in the usc and preservation of its prope1ty and assets, and owed the duty of t\Ii I
:md candid disclosure of all material facts related thereto. Further, Defendants owed a duty to
llardscuftle to ensure that:
1. Hardscul"lle operated in compliance with all federal and state laws. rules and
regulations;
11. Hardscuflle's subsidiary. American Life, operated in compliance with all
and state regulatory laws in the Commonwealth of Kentucky and States of Ohio,
Tennessee, lllinois and other states where it is licensed to do business:
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Ill. Hardscut11e or its subsidiary, American Life, not engage in any unsafe, unsound
or illegal business practices; and
IV. Hardscufflc or its subsidiary, American Life. did not waste their corporate assets.
21. To discharge these duties, Defendants were required to exercise reasonable and
prudent supervision over the management, policies. practices, controls and financial and
corporate affairs ofHardscut11c and its subsidiary, American Life.
22. By virtue of this obligation of ordinary care and diligence, Defendants were
required. among other things, to:
1. Manage, conduct, supervise, and direct the employees. businesses
and aiTairs ofHardscufi1e and its subsidiary, American Life, in
accordance with laws, rules and regulations and the charter and by-
laws of Hardscuf11e.
11. Neither violate nor knowingly or recklessly permit any officer,
director or employee of Hardscul11e and its subsidiary. American
Life, to violate applicable laws, rules and regulations and to
exercise reasonable control and supervision over such orticcrs and
employees;
iii. Ensure the prudence and soundness of policies and practices
undertaken or proposed to be undertaken by Hardscuflle or its
subsidiary. American Life.
iv. Remain infom1ed as to how I-Iardscuft1e and its subsidiary.
American Life, were, in fact. operating. and upon receiving notice
or information ofunsate, imprudent or unsound practices, to take
reasonable investigation in connection therewith and to take steps
to couect that condition or practice.
v. Supervise the preparation. filing and/or dissemination of any
regulatory tllings, audits, reports, or other information to the
regulatory agencies and applicable state departments of insurance,
and to oversee the practices. products or conduct of insurance
companies operating in the various states.
vi. Supervise the preparation and tiling of any audits, reports, or other
information disseminated by Hardscufllc, to examine and evaluate
any reports of examinations, audits or other information
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7'
.... J.
concerning the financial state of Hardscurtle and American Life.
and to make full and accurate disclosure of all material facts
concerning, inter alia, each of the subjects and duties set forth
above. to its directors and shareholders; and
vii. Preserve and enhance American Life's reputation as befits a
regulated life insurance coq1oration and to maintain public trust
and cont!dence in American Life as a prudently managed
institution fully capable of meeting its duties and obligations.
Defendants Breached Their Duty of Disclosure
Ed Middleton was elected to the board of directors ofHardscuffle in 2009. He
served as a director until he was removed hy vote of the controlling shareholder, Nana Lampton,
at a Special Shareholders Meeting held February I, 2012.
24. Prior to the Annual Meeting held in Arril. 2010, Ed Middleton began asking for
fundamental Company information, namely, all the committee minutes and audited financiasl of
the Company in order to fulfill his role as a member of the board of directors and as a
shareholder in his capacity as Co-Trustee ol"the Big Four Trusts.
25. l\1anagen1ent, acting through its Secretary and General CounseL Robert "V./.
Orifllth r'Ckncral Counsel"), systematically refused to provide, and has continually refused to
this day to provide, the fundamental Company information.
26. The General Counsel's refusals to provide the requested fundamental Company
information to Ed Middleton included a conversation with Ed Middleton's legal counsel wherein
the General Counsel acknowledged that Ed Middleton was entitled to the information by virtue
of his position as a shareholder and director, but further stated to Ed Middleton and his counsel
that Eel Middleton would "have to sue to get it."
27. In early 2010, after the Annual Meeting, Ed Middleton was selected by
"vlanagement to serve on the Company's Audit Committee.
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28. In connection with his role on the Audit Committee, Ed Middleton bei!an askino
~ "
Management and the Company's auditors questions regarding the Company's dividend policy,
tax information and potential tax ramifications regarding the Company's operations, and in
particulaL its insurance operations. The Company's IV!anagement rcf\.Jsed to provide the
information or to allow the Company's outside auditors, Deloitte Touche, to answer Ed
Middleton's questions. In fact, Management not only systematically refused to provide the
inf(mnation, but actually provided misleading information to Ed Middleton and to the non-
management directors ofHardscuffle. In particular. Ed Middleton was concerned with the
potential tax ramifications of the large financial reserves held by American Life. the
concentration of the Company's investments in J.P. Morgan Chase, and the potential
ramillcations if the Internal Revenue Service were to determine that Hardscuffle or its
subsidiary. American Life, were "personal holding companies" as detined by the Internal
Revenue Code (''IRC"').
29. Because ofthe large concentration a I' holdings of the Companies' equities in a
single security, J.P. i\
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1organ Chase (which single equity constituted in excess of 60'% oft he total
equity holdings of the Companies) Ed Middleton began asking Management for the Companies'
investment plan. investment objectives and an explanation as to how Management was
overseeing the Companies' large investment porttolio of publicly traded securities. tvlanagement
rel'used to provide an investment plan.
30. In response to these inquiries, Management brought in T. Rowe Price as an
investment advisor. It was announced at the board of directors meeting on January 26. 20 II that
the Executive Committee decided to use T. Rowe Price as the sole advisor for common stocks,
common mutual funds, and preferred stocks of Hardseufflc. The portfolio on which T. Rowe
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Price would be the investment advisor totaled. at that time, approximately $60 million. The
Company also maintained a portfolio of stocks and bonds for American Life which. at that point.
was in excess of$200 million. In response to Ed Middleton's inquiry regarding the management
of the American Life investment portfolio, Gerichs, as President and Treasurer of the Company,
stated in a letter dated March 9, 2011 to Ed Middleton:
Josh Slater ofT Rowe Price. our Portfolio Manager. presented to all of us at
the Board Meeting, their views on long-term investing, which mirror our
views as outlined in our Mission Statement We also talked at some length
about our concentration issues with J.P. Morgan and PNC Bank, and financial
entities in general. Both the Board and T. Rowe Price share this concern. We
talked about utilizing some of the existing loss positions to oiTsct stock gains
as we begin divestitme. Ours is not a simple case as we have tax
consequences that tlow to American Life when certain common stocks that
were transferred to Ilardscufflc arc sold. In addition, as you know. we are not
able to reinvest in common stocks at American l .i le due to our total stock
investments being well in excess of investment limitation percentages as
de lined by the Kentucky Department of Insurance.
(Despite requests, Defendant Gerichs efused to explain to the Directos why there
are issues with the Kentucky Department of Insurance.)
So this is not a quick and easy process of merely selecting stocks to sell
without regard to tax and cash flow consequences. We plan to take a
methodical approach, making sure that we know all of the tax ramifications in
order to maximize shareholder value. At this point in time, the assets are in
the pmcess of being moved from our two broker entities in Louisville, and T.
Rowe Price is evaluating the best avenues to proceed. You are up to date with
\vhat has been provided in terms of assessments and strategies thus far.
(Despite requests, T. Rowe Price's analysis, assessments or strategies
were never provided.)
I am g]ad that vou share our optimism in regards to hiring T. Rowe Price. The
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reshaping of our portfolio will take time as we divest of concentrated holdings
and manage our tax positions and cash flows of both Hardscuffle and
American Life. We arc all looking for the same objective in creating a well"
diversified porti(Jlio that will maximize shareholder value.
(At the time Ed Middleton was removed from the Board in 2012, there
was no such diversification nor a plan presented to the Directors for a
diversified portfolio.)
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(Exhibit A, Gerald W. Gerichs letter dated March 9, 2011 to Ed Middleton).
31. Despite Gerichs' March 9, 2011lettcr of explanation, Ed Middleton was still
concemed about the Companies' concentrated position in J.P. Morgan Chase. After repeated
requests. F.d Middleton had not received any analyses from T. Rowe Price, the investment
objective. or the investment plan for the Companies' holdings for both Hardscufflc and
American Life, Ed Middleton made a motion that Management be directed to immediately ask T.
Rowe Price to take appropriate steps to reduce the Companies' concentrated position timn
approximately 60% orthe equity holdings in J.P. Morgan Chase to 20%. (Exhibit B, letter dated
December 28, 20 II). This Motion received no second: therefore, it was not acted on by the
Company's directors.
Ed Middleton made repeated requests to Management to provide to him, as a
member of the Company's board of directors and the Company's Audit Committee, copies of the
Companies' investment analyses and investment plans. as created by T. Rowe Price.
Management refi.Jsed to provide Ed Middleton with this infom1ation. Ed Middleton pointed out
in his letter of June 3. 2011 some of the risks the Company faced and his concern since the
Company had previously lost over $30 million due to its concentrated holding in National City
Corporation. (Exhibit C, letter dated June 3, 2011.)
President Geriehs responded to Ed Middleton's June 3, 20 II letter request lor the
T. Rowe Price investment plans on June 10, 2011 (Exhibit D, letter dated June 10, 2011 ). Mr.
Gcrichs stated in part:
As you !mow, detailed reports regarding the Companies' investments.
including changes in valuations and composition of the Companies'
pol1folios. are presented at every meeting of the Boards. The Companies'
investment strategies and objectives arc developed by officers and stafi
members in consultation with qualified investment advisors. Those strategies
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and objectives take into consideration the riskiness of individual investments
within the Companies' portfolios, as well as the extent and risk-dampening
effect of the diversification of those pottfolios, the historical and anticipated
total returns of those investments, the liquidity of those investments, the tax
impacts of the proposed dispositions of anv investments, the insurance
regulatory impacts of the proposed dispositions of any investments, and
numerous other appropriate factors.
The detailed reports as outlined in Mr. Gerichs' letter were never presented to the Board verballv
or in writing. and Mr. Gerichs' statement to the contrary is both misleading and false.
34. In addition to information regarding the Companies' investments, in his capacity
as a director. Ed Middleton also asked at director meetings for !V!anagement to provide a detailed
breakdown of the Companies' expenses and the general administration costs for 20 I 0 ("'G&A
costs"). This information was never provided.
35. Specifically, Ed Middleton asked lor a breakdown of the charitable donations of
the Companies by organization and amount for 2010. A PowerPoint was presented of the
Companies' charitable gifts. but no written report was provided. Ed Middleton also asked f(Jr a
copy of the Companies' succession plans in the event of the health, illness or retirement ofNana
I ,amp ton or Gerald Gerichs. (See Exhibit letter of May 27, 20 II). No succession plan was
ever presented or given to the directors.
36. On June 10. 201 L President and Treasurer Gerichs responded to a number of Ed
Middleton's requests. (Exhibit F, Gcrichs' letter of June 10, 2011).
37. Gerichs' letter of June 10,2011 provided no such records relating to expenses and
G&i\ costs. No information with regard to charitable contributions was given to Ed Middleton.
No information with regard to organization charts or employee roles and duties was given to Ed
1vliddleton. No information with regard to executive succession plans was ever presented to Ed
Middleton. No inlormation with regard to tax ramifications and analyses as to whether or not the
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Companies constitute personal holding companies as defined by the Internal Revenue Service
was given to Mr. Middleton. No written memoranda, and no written information has ever been
distributed to the directors at any meeting attended by Ed Middleton regarding regulatory or tax
ramifications of the Company as a life insurance company, personal holding company or the
handling of the Companies' investments. To the extent information was offered by l'vlr. Gerichs
in his letter dated June I 0, 2011, such information was never made available.
38. On June 30, 20 II, Ed Middleton made a motion to the Board as follows:
Motion
I hereby move that Management be directed to ask T. Rowe Price to furnish
the Board. within 30 days. an interim analysis and recommendation regarding
the Companies' (both Hardscuftle. Inc. and American Life & Accident
Insurance Company of Kentucky) investment holdings in JP Morgan Chase
and my concerns as outlined hy this letter.
(Exhibit G, Ed Middleton letter dated June 30, 2011 ).
39. President Gerichs responded by letter of July 12, 20 II (Exhibit H) stating:
I consulted with our General Counsei[Robert W. Gritlithl regarding your
letter and motion. Unfortunately, in order to make a motion, it must be made
in a properly called meeting in which a quorum is present. That would allow
for the possibility of a second of your motion, a period of discussion, and
perhaps a vote. Absent that, your motion cannot be considered by the Board.
40. On July 15,2011, Ed Middleton responded in writing to Gerichs regarding his
requests for information. (Exhibit LEd Middleton letter dated July 15, 2011 ). This letter
explains in detail the basis for Ed :Vliddlcton's request for information and why it was important
to sec such information as a director, Audit Committee member. and a shareholder
representative. Ed Middleton's final paragraphs stated:
Thank you for reminding me of Mr. Griffin's recent discussion ofthe legal
rights of directors to rely on the work of others in satisfying their duties. ~ - 1 y
service as a director will not be based on minimum legal requirements. In
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order for me to exercise my business judgment. l need the additional
information set forth in this letter.
Your invitation for me to speak now or hold my peace about any reservations
I have about the competence of any report received or the persons preparing it
is inappropriate. Without any suggestion of competence or incompetence.
there arc four areas where l need more comfort:
!) 'T'he tax status of the corporations;
2) Diversification in the company's investment portfolio:
At this time, the Board docs not have a legal opinion of tax status (including
whether the company has personal holding company issues) or an opinion of
an investment advisor that the companies investments are prudently
divcrsilicd. l request both reports and opinions.
3) Status of the insurance business with the Kentucky Department of
Insurance; and
4) The Company's reinsurance business with analysis of its
cost/benefit.
I believe this information should be shared with all Board Members. so please
share all responses with them.
No response providing such infommtion was received from Management or the General
Counsel addressing these specific issues.
Faiime to Provide Financial Information
41. On December 30,2011 Ed Middleton followed up with the General Counsel and
requested the ll>llowing:
1. The complete linancials for the years 2009, 2010 and 2011 ~
11. The business plans for the Companies, insurance operations, real estate
operations and reinsurance business. if such are really businesses:
111. The budget l[w the Companies for 2009. 20 I 0 and 20 1!: and
1v. The T. Rowe Price's investment strategy for the Companies equity holdings.
(Exhibit J, December 30. 2011 letter).
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42. On the same day, the General Counsel responded to Ed Middleton's request
regarding J.P. Morgan Chase stock. (Exhibit K. December JO, 2011, Robct1 Griffith letter)
43. ln Exhibit K, the General Counsel asked f(Jr Ed Middleton's rationale for
prompting the special motion regarding T. Rowe Price and the reduction of its holdings in the
J.P. \-1organ Chase stock, made on December 28, 2011 (Exhibit 8). Ed Middleton responded to
the General Counsel directly by email on Wednesday, January 4, 2012. In his email. Eel
Middleton said:
I) Investment environments are dynamic, not static.
2) JPM's exposure to Euro debt is likely more extensive and potentially
damaging than has been generally assumed. It is not cetiain that JPM's
involvement in the MF Global debacle is totally innocent. I personally sec
upside as at the least no m o r ~ likely than downside. I certainly would not
buy or recommend anyone buy this stock nnw. Therefore, I tee! that
li.trther divestment is advisable.
Though 40% is better than 75%, note that the plan TRowePrice suggested and
that the board passed will not be complete until 09/14 and will still result in a
huge <:on<:entration in one stock.
3) Am. Life holdings an> ''regulated'' as you state in your letter to board
members and arc not handled by TRowePrice, which implies that these
stocks are completely off limits, please clarify? Certainly TRowePrice
can evaluate them, which seems important to me, since in effect if nothing
is done about these .JPM holdings in aggregate our holdings in same will
be considerably higher than the proposed 40%.
(Exhibit L January 5, 2012 email of Charles G. Middleton. including Ed Middleton's
January 4. 2012 email.)
Ed Middleton received no response to his request l'or clarification.
44. Ed Middleton also asked the General Counsel in that same email the following:
Bob, I will ask some questions: Does the board (the financial committee)
recommend a position of 40+% in JPM'? Docs TRowel'rice recommend a
position of 40% in JPM'' Do any of the board members or do you personally
have any advisers that would recommend this heavily weighted
concentration? 1-lm'e any of you acted on this advice? Would you?
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(Exhibit!)
No response to these specitic questions was ever received from Management or C!cneral
Counsel. It is believed that Management instmcted the General Counsel not to respond, as Nana
Lampton was taking steps to remove Ed Middleton as a director.
Special Corporate Governance Committee
45. In mid-summer 2011, Management of the Company created a "Special
Governance Committee'' with a select group of the board as members (all non-family and non-
equity holders ot' the board of directors) and Management. The Special Governance Committee
held a meeting on August 25, 2011. This Special Governance Committee was not created by any
motion or resolution occurring at a regular board of directors meeting. (Exhibit M. Report and
Recommendations of the Special Governance Committee of the Board of Directors of
Hardscutllc. Inc., August 25,2011 ).
46. Also, present at the August 25, 2011 meeting were Nana Lampton. the Chainmm
and controlling voting shareholder, the General Counsel, and Company attorney, Thomas
Halbcib. from the law firm of Stites & Harbison.
4 7. The Special Governance Committee was formed to discuss and formulate a plan
to respond to the requests for information Ed Middleton had made on several occasions.
48. The meeting shows the domination and control of Nana Lampton as the
controlling voting shareholder.
49. Among other things, the Special Govemancc Committee calculated a response
with regard to Ed Middleton's requests for a breakdown of all expenses and general
administrative costs for the Company for the prior calendar year.
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50. The Special Governance Committee's responses indicated that certain information
of that requested would be provided at subsequent board meetings. However, Management
never provided any written copies of any of the information requested regarding expenses. G&A
costs. or breakout of Company operations attributable by lines of business. Nor did the
Company provide a written copy of the charitable donations in amounts and by recipients made
by the Company in 2010.
51. Despite requests the Company has never provided a written copy of any
succession plan.
52. With regard to the Kentucky Department orinsurance, Management previously
had referenced an agreement." Ed Middleton asked for a copy of such "agreement.'' but none
was provided.
53. The Board at the March 20 II meeting was told by Management that the
Companies' outside accountants at an earlier meeting told Management it would no longer allow
the Company on its income tax filings to withhold at the insurance company withholding rates of
but required withholding at full corporate rates of J7g,;,. Further, President (ierichs
reported that the Company had been questioned by the KentLrcky Department of Insurance over
its reinsurance business and that there would be a meeting on July 11, 2011 with the Department
of Insurance. Ed Middleton asked f(u further information on both topics and was refused such
information.
54. \Vith regard to Ed Middleton's continued requests to see the T. Rowe Price
investment advisors' reports or analyses of the pmifolio and the strategy for fi.rture investments,
the Special Governance Committee noted that "detailed repo!iS regarding the Company's and
American Life's investments are presented in every Board meeting." (Exhibit M, '3(b))
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However. similar to Company linancials and expense reports, no written materials were ever
disseminated prior to or during the Board meetings regarding T. Rowe Price's analyses or
reports. Despite previous requests, this infonnation has never been furnished to Ed :vliddleton.
55. Minutes of the Special Governance Committee meeting also allude to the fact that
Ed tv!iddleton asserted "that Management has declined to provide a list of shareholders and share
ownership .... Upon inquiry from a member or the Committee, representatives or Management
indicated that the Company is unaware of any request for this inforn1ation.'' (Exhibit1vl. Report
and Recommendation of Special Governance Committee. ,15 (a)) The response of Company
Management is incorrect as Ed Middleton personally asked in writing for a shareholder list. and
not having received a response, he also made a request through his legal counsel for such list.
(Exhibit N, Ed Middleton July 29, 2011 letter)
56. In response to Ed Middleton's concerns about the erosion of net income and the
Company's financial future and the large concentrations in "Chase Bank Stock," the Special
Governance Committee recommended no additional reporting. (Exhibit M, Report and
Recommendation of Special Governance Committee, ,15 (b))
57. The Special Governance Committee Minutes of August 25, 2011 show that with
regard to the analysis of tax implications of a sale or liquidation of the life insurance business:
"If a vote of the shareholders Vi ere taken, there would be insufficient support for a ncar-term sale
to justify the cost of preparing the requested analyses.'' (Exhibit M, Repm1 and
Recommendation of Special Governance Committee,,l2(b)) Such a statement would only be true
if\'ana Lampton indicated she would not vote to consider such.
58. Instead of addressing Ed Middleton's concerns and requests about the linancial
and business operations of the Company, the Special Govemance Committee concluded that:
18
''the Company's regular Board meetings have addressed many of Mr. Middleton s requests.
noted that his numerous requests arc generating a distraction, and expressed concern regarding
whether his education and experience inadeq uatcly prepared him for the responsibilities of a
member of the Company's board." (Exhibit M, Report and Recommendation of Special
Governance This statement is peculiar since it is Management's refusal to
provide a director with basic information on the Company that has generated Ed Middleton's
repeated and numerous requests.
Defendants Rcilv and Fellon Ask for Ed Middleton's Resignation
59. The Special Gov<:rnance Committee met aficr the first ol'the year in2012 to
discuss the status ofFd Middleton as a Director. As a result of the January 6, 2012 Special
Governance Committee meeting, two members of the Special Governance Committee. Steve
Reily and Andrew Fellon, asked lor a meeting at Ed Middleton's house, which \Vas held on
January 13,2012. At that meeting, Mr. Reily and Mr. Fellon requested Ed Middleton's
resignation tlom the board of directors. Both Mr. Reily and Mr. Fell on informed Ed Middleton
they were acting at the direction of the Special CJovcrnancc Committee.
GO. During that meeting, Ed Middleton raised issues with Mr. Fcllon that he had been
trying to raise with the General Counsel regarding estate tax liabilities that are potentially
confronting the major equity shareholders. Mr. Fell on admitted to Ed Middleton he himself did
not know how the stock or the voting power of the Company is held.
\!Jr. Fell on admitted that he himself did not know oft he issue. nor did Mr. Fell on realize equity
shareholders were facing an estate tax problem in the future.
61. Mr. Reily indicated that he thought the Company's current stock redemption
program was more than adequate. When Ed Middleton responded that the redemption program
]l)
was woefully inadequate if two of the six major shareholders died atler 2012 as their estates
would be confronted with estate taxes of $40-50 million. neither Mr. Reily nor Mr. Fell on
expressed concern or a desire to have this major issue addressed.
62. Both !VIr. Fcllon and Mr. Reily informed Ed Middleton that he had "overstepped
his bounds" as an Audit Committee member in asking for the linancial and other information
regarding the Company's operations.
63. At the end of the meeting, Ed Middleton refused to resign from the board or
directors.
Special Board Meeting to ncmovc Ed Middleton
64. Following the January 13,2012 meeting with Mr. Felton and Mr. Reily, Eel
Middleton received notice that the Special Governance Committee was calling a special meeting
of the board or directors of Hardscuffle to call a special meeting of the shareholders to remove
Ed Middleton as a member of the board or directors. (Exhibit 0. January 15. 2012 letter and
a\\achmcnts)
65. The Minutes of the January 6. 2012mccting of the Special Governance
Committee altempt to justify Management's refusals to honor Ed Middleton's requests I(Jr
linancial information and other relevant Company information. stating:
[T]hc Commillce noted concerns about Mr. Middleton's
comprehension of the meetings of the Board. about the function of
a corporate board and the role of individual members. about the
increasingly hostile nature of his conummications, and about the
disruptiveness of the situation.
(Exhibit 0, January 6, 2012 tv'linutes).
20
66. As a member of the Audit Committee, Ed Middleton notified Deloitte l'ouche. the
Company's outside auditors, of the steps taken to remove him as a director and that his perceived
reason was he was seeking information which would be embarrassing to Management namely:
a. The tax status of the corporations:
b. Diversification in the company' R investment portfolio;
At this time, the Board does not have a legal opinion of tax status (including
whether the company has personal holding company issues) or an opinion of
an investment advisor that the companies' investments are prudently
diversi lied. I request both reports or opinions.
c. Status of the insurance business with the Kentucky Department of
Insurance: and
d. The Company's reinsurance business with analysis of its
cost/benefit.
(Exhibit 1', Ed Middleton's January 30,2012 letter to Deloitte Touche)
67. Because of Ed Middleton's repeated requests for such information, he was
rcmo\'cd as a director. Ed i\'licldlcton wrote to Deloitte Touche, the outside auditors, articulating
his concerns: "As a regulated insurance company, are we [the Companies] in compliance with
all the State regulators? Are we [the Companies[ in tax compliance with both the IRS and the
states as an insurance company which has not sold a single policy of insurance in 20 years
0
/Ire
we [the Companies] in danger of being a personal holding company? What do the ramifications
of that mean'? (See Exhibit P, lvliddleton letter to Deloitte Touche dated January 30, 2012).
These are all proper and legitimate questions by a director, especially a director that is on the
Company's Audit Committee.
Hardscuffle's Board of Directors
68. From 2000 to 2009, the board of directors of Hardscul11e consisted oC with the
exception of members Frank Hower (deceased) and Bos Todd, individuals who were Lampton
21
ifunily members and shareholders (directly or indirectly) or otlicers and employees or retired
employees of the Company. Prior to 2008. the directors were: Dinwiddie Lampton. Jr .. Nana
Lampton, Mary Jane Lampton Peabody, Mason lloagland Lampton, Gerald W. Gerichs. James .f.
Sampey. and the two outside directors, Bos Todd and Frank Hower (deceased). Hased on
various reports, Dinwiddie Lampton. Jr. no longer attended the board meetings and had not
actively participated lor several years. Mrs. Peabody regularly attended the meetings. but has
been suffering and been diagnosed with an Alzheimcr's-like dementia since at least 2002. l'drs.
Peabody is currently 92 years of age. Dinwiddie Lampton, Jr. died September 25,2008 at the
age of 94.
69. Jim Sampey is over 80 years old. Ros Todd is over 80 years old. Nana Lampton
is 70.
70. The position of Chairman of the Board at IIardscuffle is equivalent to the chief
executive oCJlccr ut other companies. The President. GciTY Gerichs, does not hold nor function
as a chief executive officer. Until his retirement in 2006. Dinwiddie Lampton. Jr. held the
position as President but was not involved in the Company's day-to-day operations and
according to Nana Lampton in 2009 had not been to the office for a number of years.
71. It is unknown to Plaintiffs who the chief operating officer is at this juncture or if
there is one. It is PlaintilTs' understanding that Dinwiddie l ,ampton. Jr., after his requested
retirement, no longer attended board meetings and did not function as an officer of the Company.
Consistent with this. toll owing Dinwiddie Lampton, Jr. s retirement, Nana Lampton. as
Chairman, dominated the hoard meetings. The board meetings followed a consistent format.
v. Board meetings had an agenda;
v1. There would be a series of presentations. generally done very quickly,
by Nana Lampton and Gerry Gerichs; and.
22
vrt. The and General CounseL Bob Griffith, would report legal
issues liom time to time.
After March oC2011, no meaningful written information was circulated to the
board members prior to meetings or at the meetings.
72. During Ed Middleton's tenure on the board, the board of directors were never
given detailed financial statements or detailed reports in advance or the board meetings. At best,
sketchy linancials were circulated at the Board meetings and after the March 2011 board meeting
all papers circulated were collected and not permitted to be removed from the boardroom at the
conclusion of the board meetings. Nana Lampton implemented a strict rule that no written
information was to be taken from the board meetings.
7
'
Financial discussions at board meetings were supposedly "high level." that is not
extremely detailed. nor presented with any degree of sophistication. There was virtually no
discussion of the Company's investment assets, its portfolio and investment plans. No business
plans J()r the Companies' business operations or budgets were ever reviewed or discussed. Since
Ed l\1iddleton has been on the Board. any pointed questions he asked were either avoided or
obviated in various ways.
74. After one board meeting where Mr. Middleton asked some of his questions, the
Chairman, Nana Lampton. took him aside and told him that she considered him a "bad" board
member and that he could be removed for the questions he had asked during the hoard meeting.
Standing Committees and Recent Board Appointments
75. lt is uncertain whether the Board has any standing committees other than the
i\udit Committee t(Jr the periud of2002 through 2010. There appears to be no Norninating
Committee for directors and no Compensation Committee lor determining officers' salaries and
bonus compensation. At the November 2009 board meeting, Nana Lampton announced that she
appointed, without prior discussion to the board, two new board members. namelv Defendants
L o i ~ Mateus and Stephen Reily. Therefore, if there was a Nominating Committee at that time,
it was inactive and was not consulted. At that time there was no known vacancy on the board as
board member. Jim Sampey, had not tendered his resignation as Trustee of the Dinwiddie
Lampton uig Four Trusts."
76. Plaintiffs cannot determine at this time whether the addition oft he two directors
wus in compliance and conformity with the l3y-laws of the Company.
Executive Compensation
77. Plaintiffs have not been made aware of any Compensation Committee and arc
unaware of any documentation, guidelines, or performance criteria of how the compensation of
the Chairman. the President and the Secretary arc set. Further, Plaintiffs have not been made
aware or whether there are bonus programs or stock option plans in which the ot11cers of
Harclscumc participate.
78. Although Ed Middleton asked for the previous three years' Minutes of' the board
meetings and financial information when he joined the board, such infom1ation was not
furnished. Therefore, Plaintiffs have no way of knowing how executive compensation prior to
his tenure ad been set or documented at the board level.
Audit Committee
79. The Audit Committee for 2009-2011 consisted ofNana Lampton, Chairman,
Gerry Gerichs, President and Treasurer, frank B. Hower, Jr., James Sampey and Edwin G.
Middleton. Jr. Ed Middleton joined the board in March of 2009. Since Eel Midclletonjoined the
24
board and 1vas appointed to the Audit Committee, the Audit Conunittee met only twice !(Jr a
brief time - each time less than one hour.
80. Ed Middleton did not receive a packet or materials, agenda, minutes of previous
i\udit Committee meetings or any other documents necessary to the performance of his duties.
Ed Middleton asked specifically for this information. The outside auditor for the Company is
Deloitte Touche. Ed Middleton was given a primer flom the General Counsel on duties of a
board member. (Exhibit Q)
81. Normally, an Audit Committee would be charged with the following duties:
( 1) Reviewing the Company's annual financial statements with
Management and the external auditor;
(2) Reviewing internal audit reports to Management and Management's
response to these reports;
(3) Recommending selection of external auditors to the Board;
( 4) Discussing the Company's accounting, financial reporting and intemal
controls with internal audit and the external auditors outside the
presence of Management; and
(5) Reviewing and concurring with Management's selection or termination
of the head of the internal audit.
;\t the two Audit Committee meetings Mr. Middleton attended, none of these items were
reviewed.
S2. The summary of a director's fiduciary duties (Exhibit Q) which was provided to
Ed Middleton by the General Counsel had been distributed previously to all of the herein named
defendants, who were then fully aware of their fiduciary duties as either officers or directors.
83. American Lite is regulated as a li!e insmance company by the Kentucky
Department of Insurance and several other states. As such, it must file regulatory reports on an
annual basis. At no meeting of the board since March of2009 has there been any detailed
25
discussion or written report about regulatory compliance, nor about Company responses to
regulators. There arc annual repmts filed with the regulators each year showing the Company's
investments. reserve accounts and outstanding liabilities for insurance obligations. This
information was not furnished to the board.
Role of General Counsel
84. Neither Hardscufl1e, nor its subsidiary, has a legal department. Currently. a
member of its outside counsel serves as Secretary and General Counsel to the Company. This
legal counsel function is performed by Robert W. Grit1ith. of Stites & Harbison. an outside law
linn.
85. It is unknown what legal authority the General Counsel has for both commercial
and regulatory actions of the Company. It is also not known whether General Counsel has an
active role in the Company's business operations.
86. It is unknown whether the Company's General Counsel oversees regulatory
compliance or reviews. It is also unknown whether General Counsel reviews significant
Company contracts in advance of signing. For example, Nana Lampton, without prior board
approval or knowledge, executed real estate contracts to purchase two office condominiums fiom
!leur de Lis on behalf of the Company in the fall of2009. It appears that she did so without
legal counsel review. nor prior board approval or discussion. At the time she executed the
contracts, this was an unauthorized expenditure of over $2 million for the purchase of the two
co nclo mini tuns.
87. It is unknown at this time to what extent the Chairman and the President seek
outside legal advice on corporate legal matters.
26
88. 'T"he board, and presumably the Audit Committee, were to be advised by the
General Counsel. The Chairman, Nana Lampton, has never defined Mr. Grirlith's role or
function clearly to the board. On information and belieL 1\fr. Gri11ith answers to only the
Chairman. Nana Lampton. He docs not report independently to the Audit Committee. He does
not regularly consult with the hoard members or provide them with corporate related documents
regarding legal advice. To the contrary, when requested by board members and shareholders for
certain legal documents, he has been directed by the Chairman. N ana Lampton, not ro provide
such documents. even though some of the documentation requested is clearly mandated by the
Kentucky Revised Statutes.
89. The Chairman. Nana Lampton, and the President. Gerald Gerichs, have created a
culture in which the legal function is less influential and less welcome than in a healthy corporate
environment.
Specific Actions Involving Private Usc of Corporate Assets
and Corporate Monies by the Chairman, Nana Lampton
90. Nan a I .amp ton, as Chairman and Chief Executive Officer of Hardscume and
American Life. is a highly compensated executive. Despite this substantial compensation. Nana
Lampton has abused the trust that is placed in her by the board of directors and shareholders by
improperly using corporate assets and monies to benefit only hers! f. Specitically, on information
and belie{ Nana Lampton concealed. and induced others to conceaL the following types of
activities from the Board and shareholders:
( 1) Charitable contributions made without discussion or prior approval of the
Board:
(2) Charitahle contributions approved by the Board which have no business
enhancement or business purpose, and are only for the pllllJOSe ol'
promoting the Chairman in her charitable endeavors;
27
(3) Purchase of assets and real estate with Company money without prior
discussion or approval by the Board;
(4) Continuation of holding certain real estate assets \Vhich have no business
purpose tor the Company;
(5) Failure to reasonably market and lease the tivc-story oflice building that
the Company owns as its headquarters at 4 71 West Main Street in
Louisvi lie, Kentucky:
(6) Personal beneficial use of a penthouse as a corporate perk and
entertainment venue;
(7) Personal use or Company assets and facilities for personal entertainment
without business purposes:
(8) Restoration of a log cabin in Westport. Kentucky with Company funds
with no bene lit to the Company or Company purpose;
(9) Installation of "Green" roof on American Life headquaners at 4 71 w ~ s t
Main Street, Louisville, Kentucky at an estimated 30% more in costs than
an ordinary roof No cost benefit analysis nor any corporate purpose or
benefit was presented to the Board, (See Exhibit R, September 23, 2009
article in The Courier Journal,) This substantial expenditure was done in
order to foster and support Nana Lampton's personal agenda to support
green technology,
(1 0) Commissioned composer, George Tsontatses, in 2009 or 2010 to compose
a "concert opener" symphony with the Louisville Orchestra at the expense
of American Life,
(11) Continued absence from ofilce and business affairs for extensive out-at:
the-country travel and non-business activities, It is believed from
observation that Chairman Nana Lampton docs not devote anywhere near
full-time to her ,iobs and responsibilities as Chairman and Chief Execmive
Orticer of Harclscurlle and American Life;
(12) Elmendorf farm purchased by American Life for $5 million '"to use the
picturesque properly as a place ftll' people li'om Louisville and Lexington
to meet and discuss common interests'' (Tristate Summary, November
28, 1997)
28
91. The tiJil extent of the benefits, compensation and corporate perks received by
Nana Lampton are unknown, as she and Management have failed to provide proper and adequate
linancial information to the Company' s board of tirectors. Audit Committee, and shareholders.
92. The total amount of damages proximately caused by Nana Lampton's misconduct
is not yet known, but such conduct has caused her to be unjustly enriched, and the Companico to
be financially harmed.
Hardscuftlc's Corporate Culture Under the Chairman
93. The Chairman, Nana Lampton, as controlling Shareholder, has created a culture
that controls senior management and the corporation's General Counsel. The Company has
railed to provide proper and adequate financial information to the board of directors. The
Company has failed to provide a business plan. The Company has failed to produce a budget.
The Company has J:1ilcd to provide details of the Company's status as an insurance company and
where it stands in the regulatory process. The Company has used insurance products. namely
reinsurance agreements, to create the illusion that it is still an operating insurance company when
American Life has not sold a policy in over 20 years. Any time that dissent or inquiring
questions were raised by the board members. the Chairman or General Counsel impeded snch
inquiries.
94. After joining the Board in 2009, Ed Middleton began making pointed inquiries as
to the tlnancials. budget and operations of the Company. The Company stopped disseminating
written materials to any members of the board of directors. The Audit Committee was rendered
meaningless by the creation of the Special Corporate Governance Committee, whose purpose
was to defuse and head off the numerous demands of Ed Middleton for financial information.
Nana Lampton tightly controlled all financial information with the result that the Company's
29
cost of operations: specifically, of its insurance business and the real estate holdings could be
hidden tlom the board.
liS. This concealment served to hide the fact that Nana Lampton, as controlling
shareholder, Look nunwrous personal benefits out of the Company. One example is the
penthouse and its usc at American Life, which serves no corporate Jlli11Jose. The Companies
own Tirbrackcn Farm, a farm of over 400 acres which suJTotmd Nan a Lampton's personal
residence. This is a corporate asset provided to Nana Lampton to assist in her prekrred lifestyle.
The llardscuftlc Farms in Oldham County, the General Store and the Church. all of which have
no corporate ptuvose. no business purpose. nor any business plan. are not used for develt>pment
or other business uses. Such assets arc held hy the company only as a personal perk to the
Chairman to enable her preferred lifestyle. ElmendorfFann in Lexington, Kentucky has been
held by the Company with no essential business purpose, no adequate return, and again is a
personal perk or personal item for Nana Lampton! at the expense of the Company, apparently to
enhance her lifestyle and reputation in the Lexington horse industry and in the art world.
96. The Company, through March of2011, provided to the board a brief financial
report known as '"The Morning Report," the contents of which demonstrate the minimal tlnuncial
details given to directors. (ExhibitS) After the March 20 II Board meeting, the Chairman, Nana
Lampton, stopped the dissemination of this report
97. On numerous occasions at the Board meetings, Management and the General
Counsel failed to adequately respond to legitimate questions from Ed Middleton about the
Company's businesses. its operations, its expenses, and its charitable giving by giving evasive or
confusing explanations and even creating excuses.
30
98. Because of inquiries and infmmation Ed Middleton was seeking. Nana Lampton
used her control of the Company to create a Special Corporate Governance Committee. which
sole purpose \vas to intimidate Mr. Midcllcton into resigning or to remove him from the board.
99. During Ed Middleton's three years on the board, the board was denied essential
information about the Company and the board played almost no role in the business opemtions,
direction and c;ulture of the Company, all to the detriment of the Company's shareholders.
I 00. T'he information provided to the board is less than adequate, and with the Special
Corporate Governance C ommittcc under the direc:tion and control of Nan a Lampton and the
General Counsel, the board has no real function other than to make sure that remaining members
of the Board do not see the true nature of the business operations (or lack thereof), its costs and
expenses and potential regulatory issues conti"onting the Companies.
I 01. The Audit Committee has virtually no interaction with the Company's operational
or 1\nancial employees. or even the auditors. Moremcr. the Audit Committee is not independent
as Management both controls the agenda and constitutes part of the Audit Committee
membership.
American Life Is Not An Active Insurance Companv
I 02. I Iardscutne owns I 00% or American Li \e. Based on the last extensive financial
statement available. for the period ending 12/3 1/2009. American Life had statutory assets of
approximately $220,600,000, with liabilities of$77.721.000 and thus a statutory surplus of
$144.879.000.
103. Although American Life is subject to regulation in several stales, including
Kentucky. Ohio, and Tennessee. it has not operated l(Jr many years as a life insurance company.
/\mcrican Lile ceased to write any new business in the late 1980's or early 1990's.
31
104. American Life has been in what is known as "runoff' status tor at least twenty
years and the premiums received on this insurance business have decreased steadily to the point
where the Jinaneial sheets circulated in advance of the 2012 Annual Meeting (ExhibitS) sltow
that l<1r 2011 the Company received only $150,837 in premiums.
105. With such a small direct premium leveL the Company is not a functioning life
insurance company. Such premium levels do not support the cost to administer the block of
business. such as billing, collection. claims and other policy maintenance. These costs arc
supported snldy by tht: investment income of American Life. The 2011 financial sheds (F,;;bibit
S) lf Hardswrlle and American Life show that general and administrative expenses of the
Comp<mie> exceeded $6.4 million.
I 06. The net income tor 2011 ofHardscuf'fle ,md American Life reflects a los' ofS 1.8
m i lillm.
Reinsurance Business
1()7. Prior to Eel Middleton becoming a member of the board. American Life had
ctl!crcd into a reinsurance transaction in 2007. At the \-larch 2010 board meeting, a
rq'resentallve of RGA 'v1ade a presentation on a $40 million reinsurance contract. The RCiA
rcprcscntall\c drculatcd a presentation which the board was required to turn into
No actual contracts or financial risks analysis was presented by lv!anagement. Despite repeated
requests lix full and open disclosures as to the full nature of the transaction, all inquiries were
denied.
I 08. Upon infom1ation and hclicf i\mcrican Life entered into a purported reinsurance
agrccmcm commonly referred to in (be industry as Surplus Relief' or -financial Reinsurance.
Part of the rationale for the reinsurance contracts to the Board was such contracts would
demonstrate to regulators that American Life is in the active insurance business.
1 09. In the insurance industry, these types of reinsurance contracts are normally used
to offset or eliminate a surplus decrease of an insurance company because of the statutory
accounting rules that its regulators impose. In essence. American Life is loaning its surplus
reserves to another insurance company liJr a fee for the transfer of certain statutory losses to
American Life for tax plllvoses.
I l 0. It is believed that American Life is using these types of reinsurance contracts to
create the appearance that American Life is operating as a true insurance company when in
reality. the reinsurance transactions are nothing more than a short-term accounting .. loan ...
Ill. In July of20 11, the Kentucky state regulators made inquiry to American Li!C as
to the nature of these reinsurance contracts. Management reported to the directors that there was
a meeting with the Kentucky state regulators, and that all went well. However, despite repeated
requests as to what the regulatory concern was, the board was never given such information by
the Chairman or the President, Geny Gcrichs. Jt is known that the seller of the reinsurance
contract(s) was present at that meeting with the regulators. Additionally, the Company's outside
auditors and CPA. Deloitte Touche, informed the Directors in 2011 that Deloitte Touche was no
longer permitting the Company, American Life, to withhold taxes at the lower insurance
company withholding rates, but was requiring it to withhold taxes at the higher C0111orate rates.
Despite requests on the nature or the reasons behind the Dcloitte Touche change of withholding,
no explanation has been given to the hoard.
112. It is believed that American Life has been using reinsurance contracts to create a
facade or an operating insurance company for state regulators.
The Company Has Suffered Substantial Economic Decline
113. The Company's assets have materially declined. It has tailed to produce adequate
return for the shareholders and in 2011 it suffered an operating loss of$1.8 million. The equity
decline is shown as follows:
Equitv
2006 $322,48 L931
2007 $296,656.445
2008 $234,749,566
2009 $249,851 '160
2010 $256,352.431
20 II $243.704,674
This is an equity decline or over $75 million.
114. Net income has declined over the same period.
Net Income
2006 S 10.2 million
2007 $13.3 million
2008 $6.4 million
2009 $3.5 million
2010 $2.8 million
2011 ($1.8 million- loss)
This is a decline of over $12 million in net income.
Lack of Management, Failure to Have Adequate and Discernable Business Plans
115. Nana Lampton and the Defendants, acting jointly and in active concert and
participation with one another, have allowed Hardscuftle and its subsidiary, American Life. to he
operated for the personal financial gain ofNana Lampton. The Company has had no formal or
operational business plans. The life insurance company has been in nmoff for decades and is no
longer an operating insurance company. The investments of both Hardscut1lc and American Life
have been virtually unmanaged and now have a large concentration in one equity. The risk of
34
such concentration is demonstrated by the Company's loss of over $30 million clue to the
collapse of another company in which it had concentrated holdings- National City Bank. The
Companies hold a large po11folio ofreal estate which produces minimal revenues, has no
discernible business purpose, and there is no business plan for the holdings and the future use of
its real estate.
Investments of The Companv
116. The bulk of the assets of the Company are financial investments. These consist of
publicly traded equities and bonds. Because there is no written investment plan and because of
the large concentration in one equity, these assets have substantially declined and are at risk.
117. In 2007, the equity and bond p01ifolio exceeded $334 million. As of the end oi'
the 20 II liscal year, the equity and bond portfolio clcclincd to a value of approximately $230
million. (The Company did redeem $15 million in stock from the stockholders which may
account for a part of the reduction.)
118. During Ed Middleton's time on the bard. there was no discernible investment
strategy or goal for the equity bond portfolio ol'the Companies. Instead, most of the portfolio
was by the Management or American Life. There was little investment activity
and the investment strategy was almost entirely passive. This changed in mid-2011 after Ed
tvliddleton voiced his concerns, as the Company then hired an investment advisor, T. Rowe
Price. to manage and oversee the Hardscufflc portfolio. Despite repeated requests for the
investment strategy plan, !Vlanagement never revealed or produced to the Directors a written
investment strategy plan ofT. Rowe Price.
35
119. At the September 20 II board meeting, aT. Rowe Price representative verbally
described the investment strategy for Hardscume and its $60 million pmtfolio, but presented no
plan for the investment portfolio of American Life. No written investment plan was circulated.
At the meeting, Dcfcnclanl Todd read from the minutes of a "Strategic Planning"
meeting, but did not circulate or provide a copy at the September 20 II Board meeting.
Post the board meeting, Todd sent per Mr. Middleton's request, the "Report and
Recommendations of the Special Govcmance Committee" dated August 25, 2011. (Exhibit ]VI)
This report docs not contain an analysis or summary of the T. Rowe Price Investment Plan.
During Ed rvliddleton's tenure as a Board member no copy of the T. Rowe Price plan or
report on Hardscut11e's investments was ever furnished.
The Company's Real Estate Holding
120. The Company is located in a strategic location overlooking the riverfiont on Main
Street in a four-story commercial building. The building is very marketable and is now
apparently fhlly leased (although for many years it had large vacancies) and produces substantial
rewnues, except for the spaces occupied by the Companies. In 2009, Nan a Lampton bought two
commercial oftice condominiums at Fleur de Lis on Main Street in Louisville. Kentucky. which
arc virtually unoccupied except that they are used tiom time to time as the 1-lardscurlk Gallery.
This usage as an art galkry is another indicator of corporate misuse, Nan a Lampton s personal
art interests, and produces no substantial revenue for the Companies.
121. The Companies hold large tracts of land in Oldham and Trimble Counties known
as Hardscuffle r:arms. These farms are unproductive and have no long-term business plan. On
information and belief. no development plan has ever been discussed or presented at the Board
36
leveL The large tracts of land contain a general store, a church and other assets that have no
corporate purpose, nor provide value to the shareholders.
122, The Companies likewise own an historic thoroughbred fann in the Lexington.
Kentucky area known as ''Elmendorf farm'' This farm has no purpose tor the Companies'
operations nor is there a business plan or development plan for the farm.
123. The Companies also o\vn a farm in Pennsylvania, but Management has not
disclosed the type and nature of the activities at that farm. It is believed that it has no business
purpose or connection with the Companies' operation.
124. The Companies own a farm known as Tirbracken Farm, which sunounds Nana
l.ampton's personal country residence. Its sole purpose is to provide her the appearance of a
country estate at the expense ofthe Company and its shareholders. There is no business plan or
development plan or long-term benefit to the shareholders for this tract.
Nana Lampton's Plan to Squeeze-Out Shareholders
125. Over sixty percent (60%) of the Company's equity is held by the Big Four
Trusts. of which Ed Middleton is Co-Trustee. These Trusts will terminate at the death of Mary
Jane Lampton Middleton Peabody, who is now 92 years of age.
126. At Mrs. Peabody's death, approximately one-sixth (1/6) of the equity of the
Company will be held by Ed Middleton and one-sixth (1/6) by Hunt Middleton. Both
Middletons are unmarried. Based on the book value should Mrs. Peabody, Ed Middleton and
Hunt Middleton die in 2013. their Estates would be obligated to pay the Internal Revenue
Service somewhere between $25-40 million in estate taxes.
37
127. Beginning in 2009 and throughout his Directorship, Ed Middleton repeatedly
requested a plan from the Companies to provide liquidity for all the shareholders in order to meet
estate tax and inheritance tax obligations that would be incurred by the shareholders in the future.
128. Ed Middleton met with the General Counsel who said that Nana Lampton and
Management were working on a plan to provide such liquidity. No plans have been formalized.
During the same period. the Estate oi'Nana Lampton's lather, Dinwiddie Lampton, Jr.. \vas faced
with liquidity issues on the Company's stock and its obligations lor estate taxes. After Ed
Middleton's inquiries, the two Co-Executors of the Estatt' of Dinwiddie Lampton, Jr. made a
presentation to Management on the need for a redemption plan for the shareholders. Beginning
in 2009 Hardscutlle instituted a redemption plan of $5 million per year to shareholders. This plan
is not obligatory and is discretionary. This plan is inadequate and insufficient to meet the
shareholders' estate tax needs.
129. Nana Lampton and the other individual Defendants have known of this estate tax
issue for several years. yet have refused to provide the shareholders with a plan for payment or
the large estate taxes that contiont any of the family members who will own Hardscuf1le stock
outright at the termination of the Big Four Trusts.
130. On December 6, 2012. given the impending capital gains and estate tax rate
increases scheduled to occur on January I. 201 J, Ed Middleton once again raised these issues
and requested the payment of a dividend to the shareholders and a stock redemption prior to the
end of2012. Because of the available lower tax rates and the need for shareholder liquidity this
would be of substantial bcnctlt to the shareholders. (See Exhibit T, December 6, 2012lcttcr
from Charles G. Middleton, III to Robert W. Griffith). Such dividends or stock redemptions
would have been consistent with the actions of numt'rous publicly held companies which had
38
recently declared special dividends to help shareholders minimize tax impacts, as well as the
actions of other local companies such as Republic BancoqJ. Inc., Stock Yards Bank. Churchill
Downs and Brown Forman. See id. This correspondence also reiterated the severely increased
tax exposure faced by the remaindcm1cn of the Big Four Trusts alter Mary Jane Lampton
Peabody's death if the special dividends or stock redemptions were not declared.
131. Despite this renewed request, and the lack or any articulated business purpose. the
Special Govemance Committee answered that the Company refused to declare a special dividend
or any redemption prior to year end. (Exhibit U, December I 8, 2012 letter 11om Rosworth Todd
to Charles 0. Middleton, Ill)
132. As a result of January 1, 2013 tax increases (which may he subject to timber
increase in the near future), the tax rates on dividends and on capital gains have both increased
by 8.8%. The estate tax rates increased for large estates tiom 35% to 40%. The magnitude oC the
estate tax issues is set out in the hypothetical estate tax analysis attached as Exhibit V.
133. Nana Lampton and the directors have purposely disregarded the potential estate
tax obligations that confiont the shareholders in order to leverage such shareholders into selling
their stock back to the Company at a deep discount at such time as the estate tax obligations will
be due.
Derivative Allegations
134. Plaintiffs bring this action derivatively in the right and for the benetlt of
llardscuff1e to redress injuries su11ered. and to be stttlered. by Hardscut11e as a direct result of
the breaches of iiduciary duty, abuse of control, gross mismanagement. waste of corporate assets
and unjust enriclunent as well as the aiding and abetting thereat: by the individual Defendants.
39
Hmdscuftle is named as a nominal defendant solely in a derivative capacity. This is not a
collusive action to confer jurisdiction on this Cmni that it would not otherwise have.
135. Plaintif[s will adequately and tairly represent the interests ofllardscuft1e in
enforcing and prosecuting its rights.
136. A demand on the hoard and the senior officers who have served during the
relevant period for their breaches oftlduciary duty in connection with the wrongdoing described
within the complaint would be futile.
137. This is a derivative civil action tor damages to the Company by Ed Middleton as a
shareholder of Hardscuftle and as Co-Trustee of the Big Four Trusts holding substantial shares in
llardscuHle. and Hunt Middleton, as a shareholder. Hardscuflle is a closely held corporation
under Kentucky law with a small number of shareholders. There is no ready market lor its stock
and it is controlled and dominated by one shareholder, Nana Lampton, and the individual
Dc!Cndants.
138. The individual Defendants are a controlling block of directors. personally
selected by Nana Lampton as the voting, controlling shareholder (although she holds only a
minority of the actual equity of the Company). Since 2007, and lrom the time of their rcspcetil'e
elections as directors of the Company, Nana Lampton and the individual Defendants have
breached their statutory and common law fiduciary duties in the oversight and management of
HardscuHle. the holding company, and its insurance subsidiary, American Life.
139. Throughout this period. Nana Lampton has used the Company for personal
pmvoses and put her own ahead of that of the Company and its shareholders in
numerous wavs. Moreover. the individual Defendants have not acted on an informed basis, in
. .
40
good faith and in honest belief that their actions were in the best interests of the Company and its
shareholders. and have consciously and willfully disregarded their fiduciary duties.
Futilitv of Demand
140. Based on Defendants' actions set forth above, a demand on the board and the
senior oftlcers who have served during the relevant period for their breaches of fiduciary duty in
connection with the wrongdoing described within the complaint would be futile.
141. i\ majority of the current Directors are not disinterested and independent such that
they would properly respond to or evaluate such a demand Cor legal action. as demonstrated by
the Board's continued refusal to take action to redress the ongoing breaches of fiduciary duties.
Due to Nana Lampton's domination and control over the board as detailed above.
a of the board would not be disinterested or independent in evaluating a demand tor
legal action based on the above outlined abuses and conduct.
143. In addition, numerous of the transactions challenged by Plaintiffs, which were
carried out without any legitimate business pmpose and were not the product of a valid exercise
of business judgment, were approved by a majority of the cunent directors, such that they cannot
now properly evaluate a demand for legal action or make an impartial decision regarding the
pursuit of litigation.
144. Furthen11ore, a majority of the Directors cannot exercise disinterested business
judgment in responding to a demand because they face a substantial likelihood of personal
liability as a result or this suit. Defendants' actions outlined above constitute a willful and
conscious disregard of their fiduciary duties and conduct that is so egregious on its face that it
cannot meet the test of business judgment and a substantial likelihood of director liability
theref\1re exists.
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145. Such conduct includes the Defendants' conscious and willful disregard and breach
of their icluciary duties through both their utter failure to implement any repm1ing or
infom1ation system or controls related to the management and operations of Hardscuft1e. as well
as their conscious refi.tsal to exercise any oversight over the actions of the ol'licers of
l-Iarclscunle, including Nana Lampton. which have severely damaged the Company and resulted
in potential violation oflaw.
146. This substantial likelihood of director liability exists lor all individual Defendants
and directors.
147. Such liability arising ont of Defendants' knowing disregard and breach of their
liduciary duties constitutes willful misconduct. failure to act in good faith, a breach oft he duty of
loyalty, and wanton or reckless disregard l(lr the best interests ofHardscuflle and its
shareholders.
COUNT I
BREACHES OF STATUTORY l"JDUCIARY DUTIES
AS CORI'ORATE DIRECTORS OF HARDSCU:FFLE, INC.
148. PlaintitTs reiterate the allegations contained in Paragraphs 1 through 147 as if
l'ully sd forth herein.
149. Pursuant to KRS 271B.8-300, Nana Lampton and the individual directors of
Hardscutllc arc required to discharge their duties in good faith, on an informed basis. and in a
manner each honestly believes to be in the best interests ol' the Company so as to maximize
shareholder wealth.
150. Each of the Defendants breached or failed to perform the foregoing duties with
regard to the business operations, the investments and the purpmted life insurance business of
Hardscul'lle and American Life. These breaches or failures to perl(lrm constitute in whole or in
42
part willful misconduct, wanton or reckless disregard for the best interests ofHardscut11c and its
shareholders, including PlaintilTs.
151. The Defendants' breaches or failures to perform the foregoing duties 11ith regard
to the business operations of Hardscuff1e in compliance with KRS 271 B.8-300 has caused
substantial monetary damage to Plaintiffs.
152. Plaintiffs have brought this action directly against the Defendants for their
breaches or failures to perform the foregoing duties, f[lilure to act in compliance with KRS
2718.8-300. and failure to act in compliance with KRS 446.070; 7.010(d) of the A\IIRICA'I
[ .. 1 W I'ISTITLITE's PRL\CIPLES Of CORPORATE GOVERNANCE: A'IAL YSIS AND RF.COMMENDATIOJ\S
(I 994): and, breach of common law and numerous judicial decisions regarding the duties and
obligations of directors and of1iccrs to the shareholders in the Company.
COUNT II
BREACHES OF COMMON LAW DUTY AS CONTROLLING SHAREHOLDER AND
CONTROLLED DIRECTORS OF CLOSELY-HELD COMPANY
I 53. Plaintiffs reiterate the allegations contained in Paragraphs 1 through !52 as if
fully set forth herein.
154. The Companies are closely-held entities and at all times relevant hereto had a
small number of shareholders, no active trading market for their ownership interests. with a
controlling shareholder dominating and selecting directors beholden and loyal to her.
155. Shareholders in a closely-held corporation bear a personal relationship to one
another similar to that of a partnership.
I 56. The standard of conduct reasonably owed tiom one co-shareholder to another in a
closely-held corporation requires the Defendants to discharge their management and oversight
43
responsibilities in conformity with a strict good-faith standard and to rctiain fimn acting out of
and direct delegation of their duty of loyalty to the other shareholders and their
prime duty to maximizes shareholder return and wealth. Defendants breached and tailed to
perform the foregoing duties with regard to their oversight and management of the Company.
This failure to per Conn constitutes. in whole or in part, willful misconduct or wanton and
reckless disregard f(lr the best interests ofthe Company and its shareholders, including Plaintiffs.
157. Plaintiffs may bring an action directly against the Defendants for their breaches or
failure::; to perform the foregoing duties with regard to the business operations and oversight or
the Companies pursuant to Section 7.01 (d) ol' the AMERICAN LAW INSTITUTE'S PRINCIPLES Of
CORPORATE GOVERNi\NC'F: AI\ALYSIS AND RFCOMMENDATJONS ( 1994), the common law and
numerous judicial decisions.
COUNT Ill
VIOLATION OF KRS 271B.8-420
158. Plaintiffs reiterate the allegations contained in Paragraphs I through 157 as if
fully set l"l1rth herein.
159. Nana Lampton and the individual Defendants owe Plaintiffs and Hardscul'lle
certain fiduciary obligations.
160. Specifically and among other things, Defendants were required to act in good
bit h. and with the loyalty. care and sound business judgment that ordinarily prudent persons
would exercise under similar circumstances in like positions.
161. Pursuant to KRS 271 B.8-420, Defendants have an obligation to discharge their
duties as Ot1icers of the Companies in good faith, on an informed basis and in a manner they
honestlv believe would be in the best interests of the Companies and their shareholders.
44
162. Hardscu111e has a small number of shareholders and is not publicly traded on any
securities exchange.
163. Defendants. accordingly, owe Plaintitls heightened duties to act in good faith and
in the best interests of the Companies
164. Through the above-described conduct, Defendants breached the fiduciary duties
they owed Plainti!Is by failing to act in good faith, and with the loyalty, care and sound business
judgment that ordinarily prudent persons would exercise under similar circumstances in like
positions.
165. Defendants' breach of their fiduciary duties caused injury to PlaintitTs for which
Plaintiffs seek the damages and injunctive relief described below.
166. Through the above-described conduct, Defendants violated 271B.8-420.
167. Defendants' conduct constitutes 1.villful and/or wanton and/or reckless disregard
for the best interests of Hardscuftle and its shareholders, including Plaintifls.
168. Defendants' violations of KRS 271B.8-420 have caused injury to Plaintiffs, for
which Plaintiiis seek damages and injunctive relief described below.
COUNT IV
DEMAND FOR AN ACCOUNTING
169. Plaintiffs reiterate the allegations contained in Paragraphs I through 168 as i r
fully set forth herein.
170. Plaintiffs have made numerous requests to review cmvorate records of the
Companies and Defendants have continuously refused to provide Plainti rrs access to the
requested cmvorate records.
45
171. As a result of the foregoing actions. Plaintiffs are entitled to an equitable
accounting, and to review the Companies' records including, but not limited to the Companies
operations of the purported life insurance business, financial investments, real estate holdings.
tax information. and dividend policies.
COUNTY
DEMAND FOR INJUNCTIVE RELIEF
172. Plaintiffs reiterate the allegations contained in Paragraphs I through 171 as if
fully set forth herein.
173. As a result of the foregoing actions, Plaintiffs are entitled to an Order from this
Court temporarily and pcnmmently enjoining Defendants tiom engaging in the conduct as set
forth above, requiring the Company to turn over the records and documents Ed Middleton has
requested, and restricting the Defendants from overseeing the management of the Companies'
operations.
174. PlaintiJTs and the Companies do not have an adequate alternative legal remedy.
175. Plaintiff\ have suffered, and will continue to suffer, ineparable harm if Plaintiffs
arc not enjoined t!om engaging in the conduct as set forth above.
COUNT VI
DEMAND FOR A COURT APPOINTED RECEIVER
PURSUANT TO KRS 271B.l4-320
176. Plaintiffs reiterate the allegations contained in Paragraphs I through 175 as if
fully set forth herein.
177. Based on the foregoing actions, Defendants have acted, and will continue to act in
breach of their fiduciary duties and are mismanaging the Companies
46
178. The Plaintiffs and the Companies are in imminent danger the Defendants will
continue to cause the Companies to be materially injured. impaired, and diminished in value.
I 79. Defendants are in exclusive control of the Companies and have excluded
Plaintiffs Ji0111 access to cmvorate records in an eili:nt to further conceal their mismanagement.
180. Plaintiffs and the Companies do not have an adequate alternative legal remedy.
18 I. It is in the best interests of the Companies and their shareholders for the Court to
appoint a Receiver.
182. Plaintitls will continue to suffer damages in an unknown amount if a Receiver is
not appointed.
COUNT VII
CORPORATE DISSOLUTION PURSUAlYf TO KRS 271B.14-300
183. Plaintiffs reiterate the allegations contained in Paragraphs I through 182 as if
fully set tbrth herein.
184. Flased on the foregoing actions. Defendants have acted illegally and oppressively.
185. Defendants have rdilsed to allow minority shareholders to see the corporate
books of the Companies; have used corporate assets for their own personal use; and have
attempted to improperly "squeeze out" minority shareholders.
186. Based on the foregoing. the Company should be dissolved by Order of this
Court.
187. Plaintiffs will continue to sutler damages in an unknown amount if the Company
is not dissolved.
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COUNT VIII
ACTIONS TO TRANSFER VOTING CONTROL UNDER
NANA ARE NULL AND VOID
I 88. Plaintiffs reiterate the allegations contained in Paragraphs I through I 87as if
li.illy set forth herein.
189. Beginning in the mid-1980's Nana Lampton ("Nana") engaged in a complex
scheme to transfer voting control of the Companies to herself and to deprive Mary Jane Lampton
Middleton Peabody"s ("'Mrs. Peabody") voting control in American l.ife in the event Dinwiddie
Lampton. Jr., predeceased Mrs. Peabody.
190. In 1985 Nan a received from American Life's counseL John R. Cummins a
detailed analysis of the Company's voting interests. In a January 14. 1985 Memorandum (''1985
Memorandum") fiom attorney Cummins to 'Nana Ray.'' aka Nana, Mr. Cummins stated that
voting control would be held hy Mrs. Peabody in the event Dinwiddie Lampton, Jr .. predeceased
her, which is what has occurred. (Exhibit W) The first paragraph of the Memorandum states:
You have asked me to analyze the ownership of 1\merican Life ...
in the event of successive deaths of your family members.
Attorney Cummins analyzed three scenarios:
(A) "Death of Dinwiddie Lampton. Jr., Survived by His Sister" (lv!rs. Peabody):
(B) ''Death of Dinwiddie Lampton, Jr., after His Sister:" and,
(C) "Death of Mary Jane Peabody Survived by Her Brother.
191. The 1985 Memorandum makes it clear, under scenario (A) \Vhere Dinwiddie
Lampton. Jr., dies before his sister. Mrs. Peabody. that voting control of American Life would
rest in the hands of lvlrs. Peabody. As shown on Exhibit A to the 1985 Memorandum. Mrs.
Peabody, at the death of her brother would have control of approximately 61% of the shares of
48
voting stock. Under scenmio (B) where Dinwiddie Lampton, Jr., dies following the death of his
s i s t ~ r , no single block would have had control. But, the Middleton !amity (Mrs. Peabody and her
descendants) would have had the largest independent block of approximately 36.68% which the
'\1iddlelons could combine with Nana or one ofNana's two brothers to have a voting majority.
Under scenario (C), if Mrs. Peabody predeceased her brother, Dinwiddie Lampton, .Jr., would
retain control.
192. In 1990. Nana actively began her plan to gain voting control of American Life.
On several occasions, attorney Cummins, acting l()r Nana Lampton, suggested diiTerent
proposals to Mrs. Peabody that would position Nana to have voting control of American L.it'c.
One such event occuncd on or about September 11, 1991. Iv!rs. Peabody met with attomey
Cummins, at the offices of American Lite. Mr. Cummins had prepared an agreement between
Nana and Mrs. Peabody wherein Mrs. Peabody would give her proxy to Nana to vote Mrs.
Peabody's shares in American Life to Nana for Nana's lifetime. Mrs. Peabody did not sign the
proposed proxy agreement.
193. On or about December 28, 1992, Nana. Dinwiddie Lampton, Jr., and .James .1.
Sampey, long-time treasurer of American Lite, entered into stock Option Agreements with
;\mcrican Life. The impact of the stock Option Agreements on voting rights were not disclosed
to :vlrs. Peabody or any other Middleton shareholders. These stock Option Agreements played an
important role in Nana's scheme to gain voting control ofHardscuftlc. These stock Option
Agreements were mentioned to shareholders in the 1999 Private Placement Memorandum
("Placement Memorandum''); however, their impact on voting rights was not disclosed. (Exhibit
X) Pursuant to the Placement Memorandum at p. 19, the stock Option Agreements granted Nana
and Dinwiddie Lampton. Jr., the option to purchase 15,000 shares each of American Life Class B
49
Common Stock and Mr. Sampey was granted the option to purchase 2,000 shares of Class 8
Common Stock, (Class B Common Stock is the voting stock,) Mr, Lampton assigned his options
to the "Lampton Option Trust" pursuant to his Option Agreement which provided that he could
assign his option to a trust or trusts as long as either Mr. Lampton or one of his descendants was
the initial trustee and the primary beneficiaries of the trust were one or more of his spouse,
children or grandchildren, Any such trust was prohibited from assigning or transfeiTing the
option, According to the Placement Memorandum, to the date or the Memorandum, 17,700
shares had been purchased under the Option Agreements, As of the date of the Placement
Memorandum the Lampton Option Trust owned 9000 shares and Nana was the sole trustee,
Nana had the right to vote 17,734 shares of Class B Common Stock of which she owned 8734
shares individually, and James Sampey owned 1,205 of Class B Common Stock, (Exhibit X pp,
1 R-19)
194, Pursuant to the Shareholder List provided by Hardscul11e to Plainti!Ts in 2011, the
Lampton Option Trust holds 15,000 Class B voting shares of Hardscuffle, an increase of 6000
shares from 1999: Nana owns 16,234 shares individually, an increase of7,500 shares from 1999:
and, James Sampey owns 2005 shares, an increase of goo shares tiom 1999, (Exhibit Y)
195, At the time of the Placement Memorandum Mrs. Peabody owned 615 shares or
Class B Common Stock (Exhibit X, p. 18), and pursuant to the 2011 Shareholder list she owns
615 shares of Class B Common Stock. (Exhibit Y) No stock options were made available to
Mrs, Peabody,
196, Nana, as part of her steps to keep control of American Life in her hands,
restructured Hardscuflle and American Life in 1999, In the 1999 restructuring, American Life
became a wholly owned subsidiary of Hardscurt1e through a share exchange. Prior to the
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restructuring, Hardscufl1e was the wholly owned subsidiary of American Life. (Placement
Memorandum, Exhibit X) According to the terms of the Placement Memorandum the shares
were exchanged share for share between Hardscuffle and American Life, so that ownership and
voting rights would remain the same. The Placement Memorandum at p. 19. states:
Following the consummation of the Share Exchange
Agreement, the above persons will own the same
number of shares of Hardscuffle Class A Common
Stock as they owned of American Life Class A
Common Stock and will own or have the power to
vote the same number of shares of Hardscuffle
Class B Common Stock as they owned or had the
power to vote of American Life Class B Common
Stock.
Therefore, any concern of the shareholders of having their ownership interest or voting
rights diminished were seemingly alleviated, but the real danger of the voting control change was
not disclosed.
[)le Sampev Voting Agreement Should Be Declared Null and Void
197. The voting control change was instituted by Nana's scheme with the use oi' stock
options granted to her, her father and J'v[r. Sampey in 1992, and was completed with the
restructuring and the execution of the "Voting Agreement of Shareholders between Nancy
Lampton and James Sampey" entered into January 1, 2000. ("Voting Agreement'') (Exhibit 7.)
198. With the execution of the Voting Agreement Mr. Sampey agreed to vote his
shares to elect only those persons directors as designated by Nana and to vote in all other matters
as designated by Nana as well. The Voting Agreement provides as follows:
1.1 Voting for Directors. At each election of the
Members of the Board of Directors of the Company
each of the Shareholders agrees to vote, or cause the
Shares owned by such Shareholder to be voted. to
elect those persons as Directors who are designated
by Lampton:
51
(Exhibit Z)
1.2 Irrevocable Proxy. In all other instances where
the Shares mav be voted bv shareholders of the
~ ~ .
Company, including, without limitation, votes
conceming a merger or consolidation of the
Company or share exchange involving the
Company, votes concerning a sale of all or
substantially all of the Company's assets, votes for
the removal of directors. or votes for the
amendment of mticles of incorporation or bylaws of
the Company, the Shareholders shall vote their
shares in the manner designated by Lampton;
199. The Voting Agreement fmther provides that Lampton and Sampey will exercise
any options to acquire Class B Stock as soon as possible after the death of Dinwiddie Lampton.
Jr. Specifically. the Voting Agreement provides:
4. F:xcrcisc of Option. The Shareholders each agree to exercise
any options to acquire Class B Stock which are then exercisable by
them as soon as reasonably possible after the death of Dinwiddie
Lampton, Jr. Lampton agrees to provide Sampey with the
necessary funds and/or common stock ofthc Company for
Sampey's exercise of all such Class l3 Stock options at or by
reason of the death of Dinwiddie Lampton, Jr.
(Exhibit Z, pp. 3-4)
200. The Voting Agreement is improper as Nana agreed to provide the funds to rvtr.
Sampery in order for him to exercise the stock options available to him.
201. Upon information and belief Plaintiffs state that neither Dinwiddie Lampton. Jr.
nor Mrs. Peabody had knowledge of this Voting Agreement.
202. In 2006 Nana asked the Board to remove her father as President and CEO of
Hardscuft1e and to appoint her in his place. Her scheme was not only to deprive Mrs. Peabody
of her voting interests in American Life, but also to deprive her father of his voting rights. In
52
order to remove Dimviddie Lampton. Jr., from those positions, Nana needed Mrs. Peabody's
vote. Mrs. Peabody refused to vote in favor ofNana, but supported her brother. Therefore,
Dinwiddie Lampton, Jr. remained in control ofllardscuflle until he became unable to perform
those duties.
203. Sometime following the restructuring in December 1999, Mr. Sampey came to
hold 2000 Class B voting shares ofllardscuffle. It is believed that Mr. Sampey's Irrevocable
Proxy gives Nana voting control of slightly over 51% of the voting stock of HardscuiT!e.
204. Nana Lampton's scheme to diminish Mrs. Peabody's O\vnership interests and
voting rights involved a combination of (I) the Placement Memorandum: (2) the Agreement and
Plan of Share Exchange Agreement Between Ilardscuffle, Inc., and American I ,ite (Exhibit LL):
(3) the Voting Agreement; and, (4) the Option Agreements. However, the potential change in
voting control was not disclosed to Mrs. Peabody or the other Middleton shareholders.
205. There was no full and frunk disclosme to Mrs, Peabody or any of the other
i\1idclleton shareholders of the agreements which altered Mrs. Peabody's and the Middleton
shareholders' voting rights as neither the Option Agreements nor the Voting Agreement \Vere
properly disclosed.
206, Pursuant to the Placement Memorandum, the Share Exchange Agreement
provided that on its effective date, ''all existing options to purchase American Life's Class B
Common Stock will automatically convert into options to purchase an equal number of shares of
Hardscuflle Class B Common Stock ... " (Exhibit X, p. 19) While the Placement Memorandum
touches on the Option Agreements, it is silent on the impact on voting rights or that there was to
be a change of voting control.
53
207. Mrs. Peabody's voting rights diminished following the restructuring as a result of
Dinwiddie Lampton, Jr .. Nana Lampton and/or James Sampey exercising the stock options that
they had been granted pursuant to the Option Agreements and the execution of the irrevocable
proxy by i\1r. Sampey to Nana.
208. The Voting Agreement between Nana and Mr. Sampey was not tor the protection
and promotion of the best interests of Hardscufflc. It was merely a private contract for the
persr>nal henelit oi'Nana so that she could gain voting control of the Company.
209. Pursuant to the terms of the Voting Agreement, Mr. Sampey agreed to vote his
shares only in accordance with Nana's agenda, including voting to elect those persons as director
as designated by Nana.
210. The Voting Agreement is against public policy as an improper delegation of
shareholder voting rights and is otherwise null and void. Because of the Voting Agreement, l\1rs.
Peabody and the other shareholders were denied their right to select directors and to demand oC
all ofticers the faithful performance of their obligations.
211. The complex scheme ofNana in 1999 restructming Ilardscuflle and American
Life was solely to benetlt Nana.
212. The restructuring was not achieved with full and open disclosure of all of the
transactions involved. Neither the Voting Agreement nor the 1992 Option Agreements were
disclosed. While the Option Agreements which had been in existence since 1992 were
mentioned lor the lirst time in the Placement Memorandum, the agreements were not provided
nor fully disclosed or explained.
54
213. The Voting Agreement and the Option Agreements were secret arrangements to
enrich Nana at the expense of Mrs. Peabody, the other shareholders, and Hardscuftlc.
214. As evidenced by the Voting Agreement all directors arc handpicked by Nana and
therefore, under her control. A director is a ilduciary for the shareholders and it is his duty to
conduct the business of the corporation in accordance with the law as relating to directors ~ n d
not in accordance with the wishes of only select shareholders. The Hardscuffle Board of
Directors is not independent and exercises no authority over corporate affairs as Nana has
absolute control.
215. The Voting Agreement efl"t;ctively denied Mrs. Peabody and the other
shardwldcrs the right to have the directors and officers of Hardscuffle exercise their discretion
with sole regard for the interests of Hardscuftle.
216. Pursuant to KRS 271B.300, the members of the board are to act in good faith. on
an informed basis, and in a manner honestly believed to be in the best interests of the
corporation. The members of the Board do not and cannot act in good faith or in a manner
honestly believed to be in the best interests of the corporation since all actions are ultimatdy
controlled by Nana.
217. Nana has exploited Hardscuflle to the detriment of the shareholders and the
corporation, using its assets to further her own personal benefit. including but not limited to her
political. and social agendas. and for her personal financial henetit.
218. Because of the improper actions ofNana to wrest controll1om Mrs. Peabody any
and all actions ofNana as ofilccr and director of Hardscuftle and American Life transt"t;rring
voting control Jlom the pre-1992 situation should be declared null and void.
55
RELIEF REQUESTED
WHEREFORE, Plaintiffs demand judgment as follows:
A. Against all of the individual Defendants and in favor of the Companies for the
amount of damages sustained by the Companies as a result of the individual Defendants'
breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets
and unjust enrichment;
!3. Extraordinary and equitable and/or injunctive relief as permitted by law. equity in
state statutory provisions sued hereunder, including attaching. impounding, imposing
constructive trusts on or otherwise restricting sak and disposition of assets of the individuals so
as to assme the Plaintiffs on behalf of the Companies there is an effective remedy:
C. Awarding to the Companies restitution from the individual Defendants, and each
of them. and ordering disgorgement of all profits, benefits or other compensation obtained by the
individual Defendants:
D. Awarding to Plaintiffs the costs and disbursements of this action, including
reasonable attorney fees, accountant ices and expert fees, costs and expenses:
E. Dissolution of the Companies and distribution appropriately to all Shareholders;
and
F. Granting such other and further relief as the Court deems just and proper.
G. Plaintiffs demand a trial hy jury on all issues so triable.
Dated: January 2013
56

Charlcs 0. Middleton Ill
Hiram Ely III
Nicole S. Elver
Daniel W. Redding
MIDDLETO:-J REUTLIJ\GER
401 South Fourth Street, Suite 2600
Louisville, Kentucky 40202
Telephone: (502) 584-1135
Facsimile: (502) 561-0442
Emai I:
tonltt w .com
clrc.g_d in g' ii>m i d d I eto nlaw. com
Allornevs for Plaint
- ' .,
57
VERIFICATION
I, Edwin G. Middleton. Jr., after being duly swom, state that I have read the foregoing
and that the statements contained therein are true, correct and complete to the best of my
knowledge and belief.
COMMONWEALTH OF KENTUCKY )
) ss
COUNTY OF JEFFERSON )
The foregoing Verilication was acknowledged, subscribed and swom to before me b;
Edwin G. Middleton, Jr., this _jJ_ day of January, 2013.
My Commission Expires:
L Huntley Lampton Middleton, after being duly sworn. state that l have read the
foregoing and that the statements contained therein arc true, correct and complete to the best of
my knowledge and belief.
/ J ~ - J . . ~ M ~
Huntley Lampton Middleton
COMMONWEALTH OF KENTUCKY )
) ss
COUNTY OF JEFFERSON )
The foregoing Verification was acknowledged, subscribed and swom to before me hy
Huntley Lampton Middleton., this .iL_ day of January, 2013.
My Commission Expires:
58