In re Hartley
| Citation | 52 BR 679 |
| Decision Date | 10 September 1985 |
| Docket Number | Bankruptcy No. 81-01855,Adv. No. 83-0838. |
| Parties | In re James Ross HARTLEY, Individually and dba Hartley Trucking, and Sharon Hartley, Debtors. The TOLEDO TRUST COMPANY Successor-in-Interest to The Peoples Bank, Carey, Ohio, Plaintiff, v. The PEOPLES BANKING COMPANY, Quentin M. Derryberry, II, Trustee, and Paul A. Burson, Defendants. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio |
Reginald S. Jackson, Steven Smith, Toledo, Ohio, for The Toledo Trust Co.
William E. Clark, Thomas Drake, Findlay, Ohio, for Peoples Bank of McComb.
Mark Kreitman, Mark E. Thomas, Chicago, Ill., for Trustee.
Quentin M. Derryberry, II, Wapakoneta, Ohio, trustee.
Russell E. Rakestraw, Findlay, Ohio, for Paul Burson.
This matter came on to be heard upon the complaint of The Toledo Trust Company (Toledo Trust) for declaratory judgment to determine the competing claims of defendants Paul A. Burson (Burson), Quentin M. Derryberry, II (Trustee) and The Peoples Banking Company, McComb, Ohio (McComb Bank) to a fund of $480,000.00 plus accumulated interest which are the proceeds from the sale by the Trustee of 6,000 shares of common stock of the Peoples Bank, Carey, Ohio (Carey Bank). The Court finds that the McComb Bank is entitled to the proceeds by virtue of its perfected security interest in the stock.
In 1980 James Ross Hartley (Hartley), the Debtor in this bankruptcy case, entered into an oral agreement with Burson concerning the purchase of shares of stock in the Carey Bank. While all of the parties agree that both men contributed money to this venture, the purpose and the details of this agreement are in dispute. Burson claims the plan was for each man to contribute one half of the purchase price and in return receive one half of the stock in their name. According to Burson's version, once a buyer was found for the Bank each man was to share equally in the profits. Hartley claims the original agreement called for all of the stock being issued in his name with Burson providing all of the funds to purchase the stock. According to this story, Burson was to be reimbursed for his purchase price and was to receive one half of the profits. Hartley testified that at some point the arrangement changed so that he was required to pay for approximately one half of the stock but it was still to be issued in his name alone.
McComb Bank and the Trustee assert that Burson was part of a tax avoidance scheme which required him to advance all of the money for stock purchases with the stock being issued in Hartley's name. Then, when the stock was sold, Hartley would be able to write off his operating loss from the trucking business against the profit realized from the sale of the stock. According to this theory, Hartley would then return the purchase price along with one half of the profits, tax free, to Burson. Testimony at trial established that when this tax avoidance scheme was offered to other parties they refused to participate.
The first of the stock purchases made by Hartley and Burson occurred on September 6, 1980. The number of shares purchased was 1,360 for a total price of $79,000.00. Burson paid $75,000.00 while Hartley provided $4,000.00. The stock certificate was issued in Hartley's name.
The second stock purchase took place on September 23, 1980, and involved 1,230 shares. This purchase required a total of $86,100.00 with Burson paying $85,000.00 and Hartley paying $1,100.00. Again the stock certificate was issued in Hartley's name alone.
Burson and Hartley desired a third purchase of 3,270 shares of unissued stock of the Carey Bank at a price of $70.00 per share. However, this purchase would have made their ownership over 10% of the Bank's outstanding stock. According to the regulations of the Federal Deposit Insurance Corporation (FDIC), when an acquiring party or parties are to purchase more than ten percent of a bank's stock, the FDIC must be notified and approve such acquisition.
On September 17, 1980 Hartley and Burson completed the FDIC form for "Notice of Acquisition of Control" which was filed on the purchase of 3,370 shares and indicated that Hartley and Burson would each become owners of 1,168 shares to be acquired from the Carey Bank. Hartley mailed the form along with FDIC Form 6200/06, Supplement Financial Report and the required biographical information for both Hartley and Burson.
On November 5, 1980, FDIC approval of the acquisition was mailed to Burson's office (as per the instructions contained in the FDIC form) with the letter being addressed to Hartley as authorization to the acquiring parties to proceed with their purchase.
Upon Burson's inquiry on November 10, 1980, the President of Carey Bank, Calvin F. Thome (Thome) indicated the bank would sell the stock but not until after December 1, 1980 because it would be unfair to allow Burson and Hartley to receive a dividend due December 1, 1980 when they had held the stock for less than a month.
The third purchase consisting of 3,270 shares of unissued Carey Bank stock occurred on December 2, 1980 for a price of $228,000.00. Burson obtained a bank loan of $75,000.00 which he applied to the purchase price. Hartley paid the remaining $153,900.00 from a $300,000.00 cashier's check which he obtained from the McComb Bank. Hartley was given the $300,000.00 cashier's check in exchange for his personal check. Burson, upon his return from Florida discovered that the stock certificate was issued in Hartley's name only.
The fourth and final purchase of Carey Bank stock occurred on December 19, 1980 and was made by Burson alone. The shares numbering 480 were purchased for $35,040.00. Burson had the stock certificate issued in his name. Subsequently Burson transferred 130 of these shares into Hartley's name, for which Hartley paid $2,500.00.
Larry K. Miller (Miller), former President of the McComb Bank, testified that the personal check Hartley gave in return for the $300,000.00 cashier's check was returned because there were not sufficient funds in the account to cover it. Miller also stated Hartley delivered 6,000 shares of Carey Bank stock to the McComb Bank sometime in December of 1980.
On February 6, 1981, Hartley obtained a $550,000.00 loan from the McComb Bank. As part of the loan agreement Hartley pledged the 6,000 shares of Carey Bank stock.
In February, 1981, Burson received a $245,000.00 promissory note from Hartley, backdated to October 1, 1980, for the money advanced by Burson in conjunction with their stock purchase agreement plus other previous obligations. Burson later accepted payments from Hartley which he applied against the note.
Also, in February, Burson claims to have called Miller and told him of their arrangement. At trial a letter dated February 21, 1981, was introduced to acknowledge that phone call. The letter which was sent after the stock was pledged said, "He Hartley and I have a full understanding on the rights of each of us to these shares, and I know that you hold it all covering some current indebtedness." Thus Burson acknowledged that he knew the stock had been pledged to McComb Bank.
On June 2, 1981, Hartley repledged the shares of stock along with other property to cover a 1.2 million dollar overdraft in his checking account at the McComb Bank. This pledge was secondary to the February 6, 1981 pledge and was a joint pledge in conjunction with other lenders.
Hartley filed a Chapter 7 bankruptcy on September 7, 1981. By order of this Court, Quentin M. Derryberry, II was appointed Trustee.
On February 28, 1982, Burson filed a proof of claim for $245,000.00 based on the unsecured promissory note signed by Hartley in February, 1981.
In April, 1982, Carey Bank merged with The Toledo Trust Company. The Toledo Trust Company paid $480,000.00 for the 6,000 shares of Carey Bank stock which are the subject of this case. Then on December 2, 1983, Toledo Trust filed a complaint for declaratory judgment as to the ownership of stock and subsequent proceeds.
Burson claims that he is the equitable owner of one half of the proceeds of the sale of the stock by the Trustee to Toledo Trust. McComb Bank claims it is entitled to all of the proceeds by virtue of its perfected security interest. McComb Bank has filed a counterclaim against Toledo Trust alleging a right of indemnification should Burson be determined to be the owner of a portion of the shares. The Trustee asserts a right to the entire proceeds claiming both Burson and McComb Bank's claims are invalid.
Burson claims he is the equitable owner of 2,995 shares of the Carey Bank stock by virtue of a constructive trust and is thereby entitled to receive one half of the proceeds obtained by the sale of said stock to Toledo Trust. Burson bases his claim on the fact that he gave Hartley $237,245.00 to purchase the stock. None of the parties dispute Burson's monetary contributions for the stock.
The first task is to determine what the agreement between Hartley and Burson was. The Trustee and McComb Bank contend that Burson's claim to the proceeds, based on an oral agreement, is barred by the statute on frauds because no written document exists. O.R.C. § 1308.30 (1962) (U.C.C. § 8-319) (current version at O.R.C. § 1308.34 eff. 9-20-84) provided:
The undisputed fact that payment was made by Burson...
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