Ed Schory & Sons, Inc. v. Soc. Natl. Bank

• Citation: 662 N.E.2d 1074,75 Ohio St.3d 433
• Decision Date: 24 April 1996
• Docket Number: No. 94-2201,94-2201
• Court: United States State Supreme Court of Ohio
• Parties: ED SCHORY & SONS, INC. et al., Appellees, v. Francis et al., Appellees and Cross-Appellants; SOCIETY NATIONAL BANK et al., Appellants and Cross-Appellees.

Page 433

75 Ohio St.3d 433

662 N.E.2d 1074

ED SCHORY & SONS, INC. et al., Appellees, v. Francis et al., Appellees and Cross-Appellants; SOCIETY NATIONAL BANK et al., Appellants and Cross-Appellees.

No. 94-2201.

Supreme Court of Ohio.

Submitted Jan. 23, 1996.

Decided April 24, 1996.

SYLLABUS BY THE COURT

Advice given by a creditor to a debtor in a commercial context in which the parties deal at arm's length, each protecting his or her respective interests, is insufficient to create a fiduciary relationship. (Umbaugh Pole Bldg. Co. v. Scott [1979], 58 Ohio St.2d 282, 12 O.O.3d 279, 390 N.E.2d 320, followed.)

This appeal and cross-appeal arise from various defaults on certain obligations owed by appellees and cross-appellants, Frank P. Francis ("Francis") and Francis General Construction, Inc. ("FGC") to appellees Robert G. Schory, Jr. ("Schory") and Ed Schory & Sons, Inc. ("Schory & Sons") and obligations owed by Francis and FGC to appellant and cross-appellee, Society National Bank ("Society"). Francis is the president and owner of FGC, and Schory is the president of Schory & Sons.

North Whipple Avenue Mall Project

In 1988, Schory and Francis decided to construct a strip mall on North Whipple Avenue in North Canton, Ohio. Schory and Francis had previously entered into a partnership for the purpose of developing certain real estate in the Summit County area. The North Whipple Avenue mall was financed through the Central Trust Company ("Central Trust"). Francis was the general contractor for the project.

While working on the North Whipple Avenue mall, Francis was also involved in a multiphase condominium development referred to as the Sherbrook development ("Sherbrook"). Schory was not involved in Sherbrook. During the construction of the North Whipple Avenue mall, Francis took certain funds applicable to that project and applied them to the Sherbrook development. Francis falsified various lien releases to obtain the money.

As a result of the misappropriation of certain funds, Schory and Schory & Sons sued Francis and FGC in the Stark County Court of Common Pleas. Thereafter, the parties entered into a settlement agreement, and, pursuant to the agreement, Francis, individually and on behalf of FGC, signed a cognovit note in the amount of $130,000. The note was secured by certain mortgage deeds. Francis and FGC eventually defaulted on their obligations contained in the note, and a judgment was obtained against them. The parties then entered into an amended settlement agreement. In this agreement, Francis and FGC agreed to pay certain sums to Schory and Schory & Sons. In return, Schory and Schory & Sons agreed not to institute a foreclosure action against Francis and FGC. The amended agreement also included a letter, dated May 1, 1991, which was attached to the agreement as an exhibit. In the letter, Francis admitted that he had "fraudulently misappropriated" certain funds involving the partnership arrangement.

However, Francis and FGC failed to abide by the terms of this new agreement. They have again defaulted on certain payments owed to Schory and Schory & Sons.

Sherbrook Development

As stated above, while Francis was associated with Schory, Francis was also involved in the Sherbrook development. During the summer of 1988, Francis approached Society to obtain financing for his proposed multiphase development. Francis met with a commercial real estate loan officer for Society, H. Michael Crowl. Francis had dealt with Crowl on prior occasions involving other projects. They discussed various aspects of the development. Francis explained to Crowl that Sherbrook would involve approximately twelve separate buildings comprising thirty-six to forty-two units, that he would need "in the area of $2.5 to $3 million," and that the development would take two to three years to complete. Francis elected to divide Sherbrook into separate phases for purposes of financing and completion.

After discussing the project with Crowl, Francis submitted an application to Society's Loan Committee. In the application, Francis requested loans for the first phase of the development. Specifically, he requested an acquisition and development loan ("A & D loan"), a loan for the construction of a three-unit building, and a loan for the construction of a four-unit building. The two requested construction loans were separate from each other and from the A & D loan. The committee approved the loans, and Society sent Francis a commitment letter dated October 5, 1988. In the letter, Society indicated to Francis that future construction loans regarding additional phases of the development would not automatically be forthcoming. Society set forth various requirements for the approved loans, and it also described in the letter certain contingencies and requirements necessary for consideration of future construction loans. Francis signed the letter, agreeing to its terms and conditions.

Pursuant to the commitment, Francis and FGC, on November 4, 1988, entered into certain written agreements with Society. It appears that each construction loan approved by Society and received by Francis involved the execution of a promissory note, a construction loan agreement, and a mortgage deed or deeds to secure the indebtedness. ¹ Francis completed construction of the first phase (buildings one and two) of the development in 1989.

Francis also obtained loans from Society for the construction of other buildings. These buildings (three, four, five and six) involved different phases of the project. It appears that the procedure for obtaining the construction loans for these buildings was the same as that utilized in the initial phase of the project: Francis would apply for a construction loan, the committee would review the request, and, upon approval, Society would send Francis a commitment letter to sign; Francis would then enter into written agreements with Society, i.e., a construction loan agreement and a promissory note for each construction loan. The loan agreements and notes set forth the terms and conditions of each loan. Each loan was secured by a mortgage deed.

In June 1990, Francis requested financing from Society to construct another phase of the project (buildings seven and eight). Society sent Francis a commitment letter dated September 26, 1990, which he signed. On October 5, 1990, Francis, on behalf of FGC, entered into a construction loan agreement with Society. Francis signed a promissory note in connection with this loan individually and on behalf of FGC.

Francis ran out of money during this phase of the project. After discussing the situation with Society, a "Loan Modification Agreement" was prepared by the bank. However, because the agreement contained a provision releasing Society from certain potential liabilities, Francis did not sign the agreement.

In 1991, appellant and cross-appellee, Kurt L. Reiber, became involved in the financial dealings of Sherbrook. Reiber is employed by Society as a senior vice president and manager of the Commercial Banking Division. In August 1991, Reiber, Crowl, Francis and another individual met to discuss the possibility of completing the development. According to Reiber, at this meeting he explained to Francis that "the terms offered to FGC, Inc. for the prior loans would not be the terms and conditions for the loans for additional buildings or phases, that the presale requirements which were reduced to writing for the earlier loans were requirements only for those loans and that new and additional requirements would be made for phase V loans, and that the terms of the loan for phase V of the project would be set forth in a commitment letter which would be issued subsequent to this meeting."

Following the August 1991 meeting, Reiber sent Francis a letter dated August 14, 1991. In the letter, Society offered Francis a loan in the amount of $400,000. The terms and conditions of this loan were different from the terms of the other loans. Francis declined to accept the loan. Sherbrook was not completed, and Francis and FGC defaulted on various obligations owed to Society.

Legal Proceedings

On September 5, 1991, Schory & Sons filed a foreclosure action against Francis and FGC in the court of common pleas. In the complaint, Schory & Sons named as defendants Francis, FGC, Society, and others believed to have an interest in certain mortgage deeds held by Schory & Sons. Society filed an answer and a cross-claim against Francis and FGC, asserting its respective interests in the properties in question.

On December 4, 1991, Francis and FGC filed an answer and a counterclaim against Schory & Sons and a third-party complaint against Schory. In the counterclaim and third-party complaint, Francis and FGC alleged that "[u]nder threat of foreclosure and other serious economic consequences," Schory & Sons and Schory had compelled Francis to sign an apology letter "confessing to fraudulent misapplication of funds in connection with certain partnerships." Francis and FGC further alleged that the contents of the letter were false and that it had been improperly disseminated to various individuals. In this regard, Francis and FGC set forth claims for economic duress, defamation, malicious prosecution and intentional infliction of severe emotional distress.

Also on December 4, 1991, Francis and FGC filed an answer and a cross-claim against Society and a third-party complaint against Reiber. In this cross-claim and third-party complaint, Francis and FGC alleged, essentially, that Society had agreed to finance the entire development under specified terms and conditions, that these terms and conditions had been agreed upon prior to or around the time of the disbursements of the A & D loan and the initial two construction loans, and that Society had failed to abide by the agreed-upon "basic terms" and conditions when disbursing additional construction loans. Francis and FGC also averred that at the time Society...