In re Kennerly, Bankruptcy No. 79-345.
| Decision Date | 29 September 1987 |
| Docket Number | Bankruptcy No. 79-345. |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina |
| Parties | In re D.A. KENNERLY, Debtor. Robert F. ANDERSON, Trustee, Plaintiff, v. CHARLESTON CAPITAL CORPORATION, Augusta Roofing & Metal Works, Federal Deposit Insurance Corporation, Monsanto Corporation, and Southern Bell Telephone and Telegraph Company, Defendants. |
Robert F. Anderson, P.A., Columbia, S.C., for plaintiff.
A. Arthur Rosenblum, Charleston, S.C., for Charleston Capital Corp.
The plaintiff, as trustee of the bankruptcy estate, seeks in this adversary proceeding (1) a determination of the validity of certain liens on real property in Aiken County and (2) a determination of the validity of Charleston Capital Corporation's mortgage on said property.
The plaintiff alleges that Charleston Capital Corporation's mortgage is unenforceable against the plaintiff because it is an illegal contract in that the mortgage was obtained in violation of the regulations of the United States Department of Agriculture — Farmers Home Administration and in violation of the Small Business Investment Company Regulations of the United States Small Business Administration. Arguing that no regulations have been violated, Charleston Capital Corporation asserts that the mortgage is valid and enforceable. In the alternative, Charleston Capital Corporation maintains that even if certain regulations have been violated, such violations may be enforced only by the United States of America.
1. On August 16, 1979, D.A. Kennerly filed a petition for relief under chapter VII of the Bankruptcy Act of 1898 (the Act) and was adjudged a bankrupt.
2. The plaintiff is the trustee of the bankruptcy estate. He brings this adversary proceeding against Charleston Capital Corporation in his capacity as trustee under § 70(c) of the Act.
3. This adversary proceeding began on February 8, 1983. The complaint was amended pursuant to an order of this court dated November 18, 1983.
4. Pursuant to a consent order dated November 17, 1983, the plaintiff's causes of action against Charleston Capital Corporation were severed from and ordered for separate trial apart from the plaintiff's causes of action against the Federal Deposit Insurance Corporation. All other causes of action in this complaint against other named defendants had been resolved prior to the consent order of November 17, 1983.1
5. Charleston Capital Corporation, the remaining defendant in the present controversy, does business in the state of South Carolina and has its principal offices in Charleston, South Carolina.
6. Charleston Capital Corporation has been licensed as a Small Business Investment Company by the United States Small Business Administration since 1961.
7. Mr. Henry Yaschik has been the president and principal stockholder of Charleston Capital Corporation since its organization. At all times pertinent to this proceeding, Mr. Yaschik was also president of Yaschik Mortgage Company.
8. As of March 31, 1986, the shareholders of Charleston Capital Corporation were: Mr. Henry Yaschik (48,855 shares), Yaschik Mortgage Company (8,893 shares), Mr. Leonard Silver (1 share), and Mr. Howard Mitchell (1 share). As of March 31, 1977, the shareholders of Charleston Capital Corporation were: Mr. Henry Yaschik (53,889 shares), Yaschik Mortgage Company (9,809 shares), Mr. Leonard Silver (1 share) and Mr. Howard Mitchell (1 share).
9. On January 18, 1973, D.A. Kennerly — both individually and as president of Southeastern Chemical and Insecticide Company, Inc. (Southeastern Fairfax) — gave to Charleston Capital Corporation a $60,000. note secured by a mortgage on real property. The mortgage was recorded in the Office of Mesne Conveyances for Aiken County, South Carolina, on Mortgage Book 416 at page 295.
10. On or about January 18, 1973, Southeastern Fairfax issued 100 shares of preferred stock to Charleston Capital Corporation.
11. On November 20, 1975, Southeastern Fairfax borrowed an additional $25,000. from Charleston Capital Corporation. This loan was partially secured by a mortgage on the same property.
12. Prior to March 1, 1976, D.A. Kennerly, through Yaschik Mortgage Company, applied to the United States Department of Agriculture, Farmers Home Administration (Farmers Home Administration) for a loan, guaranteed by Farmers Home Administration, for Southeastern Chemical Corporation of Bishopville, South Carolina, Inc. (Southeastern Bishopville), and for Southeastern Fairfax. Prior to March 1, 1976, the Farmers Home Administration loan was approved as two separate loans, each in the amount of $350,000., for a total loan package of $700,000. The Farmers Home Administration loans were to be privately placed, with the Farmers Home Administration guaranteeing all but ten (10%) percent — $70,000. — of the two loans.
13. The Farmers Home Administration loans were secured by the real estate, production plants and inventories of the two corporations, and by the personal guaranty of D.A. Kennerly.
14. When the Farmers Home Administration loans were approved, the parties agreed that Yaschik Mortgage Company would assign the guaranteed portion of the two loans to the Hartford Life Insurance Company. In other words, $630,000. of the $700,000. in loans were to be assigned to the Hartford Life Insurance Company. Because Yaschik Mortgage Company retained an interest only in the unguaranteed portion of the two notes, the extent of Yaschik Mortgage Company's participation in the loans equaled $70,000.
15. On March 1, 1976 — before the closing of the Farmers Home Administration loans — the outstanding balances on the 1973 and 1975 loans from Charleston Capital Corporation to Southeastern Fairfax totalled approximately $68,000.
16. While negotiating the loan, Charleston Capital Corporation, Yaschik Mortgage Company and D.A. Kennerly agreed that Yaschik Mortgage Company would assign to Charleston Capital Corporation the unguaranteed portion of the two loans which totalled $70,000. By this agreement, the $70,000. for the unguaranteed portion of the two loans would never be advanced to Southeastern Bishopville and Southeastern Fairfax. Instead, the $70,000. would be applied to satisfy the pre-existing debt of approximately $68,000. which Southeastern Fairfax owed to Charleston Capital Corporation. In that Yaschik Mortgage Company's participation in the unguaranteed portion of the two loans was to be assigned to Charleston Capital Corporation, the $70,000. was to remain a bookkeeping transaction only; no funds were to be transferred. The Farmers Home Administration was not notified of this agreement.
17. On March 1, 1976, the two loans guaranteed by the Farmers Home Administration were effectuated. On that day, D.A. Kennerly as president of Southeastern Fairfax, by note promised to pay Yaschik Mortgage Company the sum of $350,000.; and, Mr. Kennerly, as president of Southeastern Bishopville, by note promised to pay $350,000. to Yaschik Mortgage Company. Yaschik Mortgage Company assigned to Hartford Life Insurance Company the guaranteed portion (ninety (90%) percent) of the two notes.
18. Thereafter, by verbal agreement, Yaschik Mortgage Company assigned its participation in the unguaranteed portion (ten (10%) percent) of the two notes to Charleston Capital Corporation; no written assignment was executed.
19. Despite an original intent to the contrary, Charleston Capital Corporation subsequently advanced $45,000. of the unguaranteed portion of the loans to the bankrupt and retained the remaining $25,000. As Charleston Capital Corporation applied the remaining $25,000. to satisfy the 1975 note, the outstanding balance owed by the bankrupt to Charleston Capital Corporation on the 1973 note was approximately $43,000. on or about April 26, 1976.
20. In return for the $45,000. advance, the bankrupt, on April 26, 1976, gave to Charleston Capital Corporation a new mortgage — securing $70,000. — on the Aiken County property and other property. The new mortgage secured not only the unpaid amount ($43,000.), but served as additional security on Charleston Capital Corporation's ten (10%) percent participation in the two loans which had been guaranteed by the Farmers Home Administration. Charleston Capital Corporation recorded the new mortgage in the office of the Register for Mesne Conveyances for Aiken County, South Carolina, in Mortgage Book 465 at page 647. In this adversary proceeding, the plaintiff alleges that the new mortgage is invalid.
21. Following the execution of the new mortgage on April 26, 1976, Charleston Capital Corporation held two mortgages on the Aiken County property — the 1976 mortgage recorded in Mortgage Book 465 at page 647, and the 1973 mortgage recorded in Mortgage Book 416 at page 295.
22. By agreement dated August 25, 1976, Southeastern Fairfax, Southeastern Bishopville, Yaschik Mortgage Company and Charleston Capital Corporation agreed to increase the interest rate on the unguaranteed portion of the two notes from the original rate of ten (10%) percent to a rate of fifteen (15%) percent per annum. The new interest rate of fifteen (15%) percent applied only to the unguaranteed portion of the debt which Yaschik Mortgage Company had assigned to Charleston Capital Corporation; the agreement did not modify the interest rate under the guaranteed portion of the loans which had been assigned to the Hartford Life Insurance Company.
23. In February of 1979, the balance of the monies owed by Southeastern Fairfax on the initial 1973 loan and the dividends on the preferred stock were paid (See Fact 10). The preferred stock was returned to Southeastern Fairfax; and the 1973 note and mortgage which covered the Aiken County property were marked satisfied. As a result, Charleston Capital Corporation retained the $70,000. mortgage, executed on April 26, 1976, to secure the unguaranteed portion of the two loans which...
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