H.J. Baker & Bro., Inc. v. Orgonics, Inc.
| Decision Date | 06 February 1989 |
| Docket Number | No. 87-349-A,87-349-A |
| Citation | 554 A.2d 196 |
| Parties | 1989-1 Trade Cases P 68,442 H.J. BAKER & BRO., INC. v. ORGONICS, INC., et al. |
| Court | Rhode Island Supreme Court |
The plaintiff, H.J. Baker & Bro., Inc. (Baker), commenced this action in 1985 to recover $422,658.08 that the defendant Orgonics, Inc., owed to the company pursuant to a New York judgment obtained January 11, 1985. The complaint included a demand for interest, costs, and punitive damages. The plaintiff also named as defendants James M. O'Donnell, past president and major stockholder of Orgonics, and Fezido, Inc., a wholly-owned subsidiary of Orgonics, which held title to the real estate on which Orgonics was located. The plaintiff Baker asserts five separate claims against these defendants. First, the plaintiff alleges in count 2 that the defendants wrongfully conspired to hinder and defraud Baker in the collection of a debt owed to it pursuant to the New York court's judgment. Baker maintains that this conspiracy was accomplished by a scheme wherein the defendants transferred Orgonics's assets to defendant O'Donnell, who then resumed doing Orgonics's business under the new name of The Homestead. In count 3 the plaintiff alleges that the conveyance of real estate and other corporate assets to O'Donnell were fraudulent within the meaning of G.L.1956 (1985 Reenactment) § 6-16-1. The plaintiff asserts in counts 4 and 5 that O'Donnell, doing business as The Homestead, is liable as a successor for Orgonics's debt based upon fraud and because The Homestead is a "mere continuation of Orgonics." Finally, the plaintiff maintains in count 6 that O'Donnell is personally liable for the debt because he breached his fiduciary duty to Orgonics by obtaining payment for past wages in preference to Baker's judgment at a time when the corporation was insolvent.
Because of plaintiff's concern over depletion of Orgonics's assets, it sought a temporary restraining order enjoining defendants from transferring any of Orgonics's or Fezido's assets. The plaintiff obtained an order on February 27, 1985, which was later extended on March 6, 1985, when plaintiff learned that defendant O'Donnell had mortgaged the real estate in order to procure a $100,000 loan. Shortly thereafter the court also allowed an attachment of up to five hundred thousand dollars' worth of defendant's assets. This included an attachment of several of O'Donnell's personal bank accounts.
The matter went to trial in the Superior Court on October 14, 1986. At the close of trial and before the jury was charged, the trial justice directed a verdict for plaintiff on defendants' counterclaims and denied defendants' request for directed verdicts on plaintiff's five claims. The jury rendered a verdict for defendants on November 5, 1986, in the form of answers to five written interrogatories submitted by the trial justice. The jury did not return a general verdict. On November 13, 1986, Baker filed a motion for a new trial on all its claims. The court granted Baker's motion on counts 3 and 6, concluding that no verdict was reached on those issues because they were not addressed in the written interrogatories. The trial justice also allowed a new trial on count 2 despite the jury's verdict because the evidence overwhelmingly supported Baker's allegations of fraud. Baker's request for a new trial on count 5, alleging successor liability, was denied. The trial justice did not address count 4 in his opinion or order.
After a thorough examination of the expansive trial court record, we shall address only those facts pertinent to our decision. As of January 1, 1983, James M. O'Donnell was the president, director, and largest shareholder of Orgonics. The Orgonics plant was located in North Smithfield, Rhode Island, on land owned by Fezido, Inc., a real estate holding company that leased the realty to Orgonics. Originally Orgonics developed and manufactured a leather-tankage-based fertilizer called Organiform L.T., but it changed over in 1981 to manufacturing Homogenite 38, a 38-percent-nitrogen fertilizer. The relationship between Baker and Orgonics was such that Baker supplied Orgonics with its raw materials, Orgonics manufactured the fertilizer, and then Baker distributed the product.
Toward the end of 1982, Orgonics faced serious financial difficulties, and operations were halted for the first six months of 1983. At that time Orgonics owed Baker for materials supplied to it but was insolvent and had been unable to pay this debt for a number of years. Orgonics's remaining assets in 1983 were basically the real estate owned by Fezido and Orgonics's machinery and equipment. The plaintiff alleges defendants began a scheme at this time to transfer the remaining assets to O'Donnell, thus rendering plaintiff's judgment against Orgonics worthless.
The alleged scheme unfolded as follows. On February 15, 1983, O'Donnell proposed to Orgonics's directors that he, doing business as The Homestead, lease the real estate from Fezido and the equipment from Orgonics in order to keep the business running. In lieu of paying rent, he proposed to assume some of Orgonics's monthly debts. O'Donnell also suggested he resign from the board in order to avoid a conflict of interest. The lease commenced in March but was retroactive to February 1983. Coincidentally, at about this time Lawrence S. Gates, Orgonics's secretary, stopped taking minutes at the company board meetings. The last recorded minutes were taken on January 14, 1983.
Baker brought suit against Orgonics in a New York court on May 16, 1983, to recover the $422,658.08 owed to it by Orgonics. Just three days later O'Donnell commenced an action in Rhode Island Superior Court against Orgonics for $130,200 allegedly due as back wages. O'Donnell based his claim upon a board vote to pay him $1,250 above his salary on a monthly basis if there was sufficient cash available for the corporation to pay this sum. The corporation's treasurer, Herbert P. Nutting, had sole discretion to make this determination.
Nutting testified at trial that between 1972 and 1982 there were only a few months when he determined sufficient cash existed to pay O'Donnell. Normand R. Piette, treasurer from 1982 through 1984, testified that at no time during that period was there available cash. Despite the questionable nature of O'Donnell's claim, Orgonics failed to appear in Rhode Island Superior Court to defend against O'Donnell's suit. No answer was filed, and the court entered a default judgment in O'Donnell's favor for $138,000 plus interest and costs. To satisfy the judgment, the court granted O'Donnell's accompanying motion to attach the stock of Fezido, the record titleholder of the realty on which Orgonics stood. Regarding Baker's New York action, Orgonics did raise a defense, and the record indicates that O'Donnell personally agreed to pay the legal fees even though he had resigned from the Orgonics board.
In June 1984 O'Donnell offered to purchase Orgonics's plant and equipment in exchange for assuming some of its financial obligations. This offer included a promise to discharge the debt Orgonics now owed O'Donnell from the $138,000 judgment. Orgonics's stockholders rejected this offer. Then in July and August 1984, O'Donnell bought up all the mortgage interests on the property that Orgonics leased from Fezido. As holder of the mortgages he then declared all the mortgages on the Fezido realty to be in default. Initially O'Donnell advertised a foreclosure sale of the property. When Baker learned on its own of the foreclosure sale, O'Donnell's attorney informed Baker that the sale had been canceled but failed to mention that a default judgment had been entered or that a sheriff's execution sale of Fezido stock was scheduled to go forth shortly thereafter.
The sheriff's sale was held on December 3, 1984, without Baker's knowledge. O'Donnell, as sole bidder, purchased all Fezido's stock for $50. O'Donnell thus became the owner of Fezido Corporation, the real estate holding company, and therefore the owner of the Orgonics property.
These facts indicate that at the time Baker obtained its New York judgment against Orgonics, O'Donnell owned the real estate, was in possession of the plant and equipment, and was using virtually the same employees to manufacture the same, or a similar, product. As Baker states in its brief, nothing had changed "except the sign on the front door." O'Donnell had also encumbered the real estate with a mortgage and used the proceeds to pay off the debts of The Homestead. Orgonics was no longer functioning as an entity and was virtually devoid of assets with which to satisfy Baker's judgment. Baker then commenced this Rhode Island action, alleging that the various conveyances to O'Donnell were part of a fraudulent scheme.
The defendants appeal from the trial justice's grant of plaintiff's motion for a new trial on counts 3 and 6 of the complaint. The plaintiff asserts that the trial justice correctly granted the motion for a new trial as to count 3, fraudulent conveyance, and count 6, breach of fiduciary duty, because he failed to give the jury requested special interrogatories regarding the issues raised in those counts. 1 The plaintiff contends that as a result of the failure to submit both the requested interrogatories and a general verdict form to the jury, the jury had no opportunity to render a verdict concerning the above counts and did not do so. The defendants argue that plaintiff waived any right to object to the verdict on these counts because it failed to move for resubmission of interrogatories when the jury returned its verdict.
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In granting plaintiff's motion for a new...
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