Conroy v. Shott, 16489.

• Decision Date: 08 July 1966
• Docket Number: No. 16489.,16489.
• Citation: 363 F.2d 90
• Parties: Thomas A. CONROY, Trustee in Bankruptcy for Leslie D. Stickler, Bankrupt, Plaintiff-Appellee, v. Edgar I. SHOTT, Jr., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

363 F.2d 90 (1966)

Thomas A. CONROY, Trustee in Bankruptcy for Leslie D. Stickler, Bankrupt, Plaintiff-Appellee, v. Edgar I. SHOTT, Jr., Defendant-Appellant.

No. 16489.

United States Court of Appeals Sixth Circuit.

July 8, 1966.

James G. Andrews, Jr., Cincinnati, Ohio, for appellant.

S. Arthur Spiegel, Cincinnati, Ohio, J. Vincent Aug, Cincinnati, Ohio, on brief, for appellee.

Before WEICK, Chief Judge, and PHILLIPS and EDWARDS, Circuit Judges.

PHILLIPS, Circuit Judge.

This is an appeal from the judgment of the district court which granted the motion of plaintiff-appellee for summary judgment, overruled the motion of defendant-appellant for summary judgment, and entered judgment against defendant-appellant for $1,363,410.00 with interest and costs.

Plaintiff-appellee, Thomas A. Conroy, is the trustee in bankruptcy for Leslie D. Stickler, referred to herein as "bankrupt." The bankrupt inaugurated a scheme wherein he would borrow a sum of money from A, then borrow from B to repay A, borrow from C to repay B and so on. The inducement was a high rate of interest on a short term. This is referred to as a "Ponzi" type scheme. See Cunningham, Trustee of Ponzi v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873.

Defendant-appellant, Edgar I. Shott, Jr., referred to herein as "defendant," was a lender to the bankrupt. Both bankrupt and defendant were attorneys and had been friends since childhood. Millions of dollars were involved in the scheme and it appears that some 120 or more people made loans to the bankrupt in widely varying amounts, aggregating $3,309,462.05.

The trustee sued the defendant to recover a cumulative total of $1,343,410.00, representing some 600 transactions between the defendant and the bankrupt. The action was filed on March 20, 1963, more than two years after the January 18, 1961, adjudication of bankruptcy. The action is mantained under authority of 11 U.S.C. § 110(e) (1), (Section 70 (e) (1) of the Federal Bankruptcy Act.)¹

The memorandum opinion and order of the district judge states that the defendant received $342,900 more from the bankrupt than he loaned. The district judge concluded if the "repayments" to defendant were void or voidable under Ohio statutes, it must be under the provisions of Sections 1335.02, 1313.56 and 1313.57 of the Ohio Revised Code.

Section 1335.02 provided:²

"Every gift, grant, or conveyance of lands, tenements, hereditaments, rents, goods, or chattels, * * * made or obtained with intent to defraud creditors of their just and lawful debts or damages, or to defraud or to deceive the persons purchasing such lands, tenements, hereditaments, rents, goods, or chattels, is void."

The second of these statutes (O.R.C. § 1313.56) provides for voidability where there has been an intent to establish preference among or to defraud creditors. The third (O.R.C. § 1313.57) limits the application of the preceding section to situations where the transferee "knew of such fraudulent intent on the part of such debtor."

Defendant contends that § 1335.02 does not apply because it is directed only toward gifts; and that Sections 1313.56 and 1313.57 would not apply in the absence of knowledge on the part of the defendant of the fraudulent intent of the bankrupt and that such knowledge is not established in the present case.

On this question, the district judge said:

"In determining the applicability of the Ohio statutes, it becomes necessary to make an examination of several questions evolving about the knowledge and intention of the defendant in engaging in the subject transactions, and a parallel inquiry into Stickler\'s intentions is also pertinent. These questions may fairly be set forth as three statements of issues:

"(1) Did defendant have actual knowledge of Stickler\'s intent?

"(2) If defendant did not have such actual knowledge, should he have had knowledge of Stickler\'s intent?

"(3) Is either actual or constructive knowledge on the part of defendant of Stickler\'s intent a prerequisite to recovery?

"It will be immediately noted that an intent to defraud on the part of Stickler must first be presumed to have existed, but a quick review of the facts clearly establish that no doubt as to such intent can exist. Stickler\'s scheme was the essence of simplicity, not to say of stupidity. At its inception he borrowed from A, then borrowed from B to repay A. The inducement to B was a high rate of interest on a short term, whereupon it became necessary to borrow from C to repay B. This operation continued, with ever increasing rates of interest and shortening of the loan periods until hundreds of transactions involving millions of dollars had been entered into by Stickler. However, since he was insolvent from the moment of the making of the first loan, and since there has never been a suggestion that any source of income existed except new loans (if such may be considered `a source of income\'), the question of intent to defraud is not debatable.

"In making this determination, we are not unmindful of defendant\'s argument that from the facts `the opposite conclusion would seem indicated.\' Pursuing this argument, defendant states, `Apparently, Stickler got into financial difficulty and, like the checkkiting scheme employed by many, borrowed against the income he expected from his law practice.\' It would not seem to overstretch the doctrine of judicial notice to observe that a lawyer may not reasonably expect to repay loans extending into the millions `from his law practice,\' and the further argument based on the fact that Stickler made no attempt to flee when the scheme collapsed is similarly unimpressive. Parker v. Clary, 106 Ohio App. 295, 154 N.E.2d 641 (1958) and Damarin & Co. v. Huron Iron Co., et al., 47 Ohio St. 581, 26 N.E. 37 (1890), cited by defendant, are distinguishable on their facts.

"Passing, then, to a consideration of the three issues above enumerated, evidence is found which would support an affirmative answer to either of the first two. For obvious reasons, however, evidence of actual knowledge of Stickler\'s fraudulent scheme on the part of defendant is not overwhelming. This cannot be said of the evidence as to what he should have known. Defendant\'s loans to Stickler began in 1956 and extended into 1961. Over 600 transactions were entered into between the two, involving, as stated earlier, loans by defendant to Stickler in excess of $1,000,000, with exorbitant `profits\' to the lender. In some instances Stickler repaid loans by the simple expedient of endorsing to defendant the checks of other lenders, from which defendant clearly knew or should have known of the advances of at least the makers of such checks.

"While a minimum of reliance has been placed on this test, in considering Shott\'s actual or constructive knowledge it is proper to take into account his business and professional background as it appears in the record. A thumbnail view of that background is indicated by the fact that checks in the transactions

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