In re Leeds Homes, Inc.

• Decision Date: 12 September 1963
• Docket Number: No. 19987.,19987.
• Citation: 222 F. Supp. 20
• Parties: In the Matter of LEEDS HOMES, INC., et al.
• Court: U.S. District Court — Eastern District of Tennessee

222 F. Supp. 20

In the Matter of LEEDS HOMES, INC., et al.

No. 19987.

United States District Court E. D. Tennessee, N. D.

July 3, 1963.

On Motion to Alter Judgment September 12, 1963.

COPYRIGHT MATERIAL OMITTED

Fowler, Rowntree & Fowler, Knoxville, Tenn., for trustee.

Schimberg, Greenberger, Krauss & Jacobs, Chicago, Ill., Frantz, McConnell & Seymour, Knoxville, Tenn., Waller, Lansden & Dortch, Nashville, Tenn., for National Acceptance Co. of America.

FRANK W. WILSON, District Judge.

National Acceptance Company of America has filed a proof of secured claim in this reorganization proceedings under Chapter X of the Bankruptcy Act. The Trustee disputes the validity of the claim upon the ground that the claimant has failed to comply with the foreign corporation laws of Tennessee and upon the ground of usury. The Trustee seeks to assert a counterclaim for both compensatory and punitive damages for the alleged wrongful seizure of property by National Acceptance Company of America.

The facts material to the issues here involved are largely undisputed. The Court finds them to be as follows. National Acceptance Company of America, herein referred to as "NAC," is a corporation organized under the laws of Delaware and qualified to do business in Illinois, Michigan, and Ohio. It has never qualified to do business in Tennessee. It maintains its principal office and place of business at Chicago, Illinois. NAC is in the finance business, its principal activity in this regard being the making of corporate factoring and inventory loans. It appears that it has maintained a volume of $300,000,000 to $400,000,000 in loans in recent years, these loans being made to borrowers located in 20 to 25 different states. NAC began making loans to borrowers outside of Illinois a few years back and within the past five or six years has extended its operations in this respect to the southeastern states, including Tennessee. Its business in the southeastern states is carried on both directly out of the Chicago Office and through the office of a subsidiary corporation in Atlanta, National Acceptance Company of Atlanta, as well as through agents resident in the various states. In the period from 1959 through 1962 NAC made a total of 78 loans to borrowers located in Tennessee. These loans ranged from $4,000 to $760,000 in size. In making its loans, NAC purports to operate under Section 4, Chapter 74, of the Illinois Revised Statutes which provides that there is no restriction on the interest that may be charged upon a loan to a corporation if the parties agree upon the same in writing. Of the 78 loans made to borrowers resident in Tennessee, all of the loans were made at interest rates in excess of 6%, and all but six of the loans were made at interest rates in excess of 12%. In addition to making loans, NAC establishes lines of credit and itself borrows from banks in the various states, including several banks in Tennessee. Although the president of NAC in his testimony was either somewhat vague and evasive, or otherwise uninformed as to the manner the company conducted its operation in Tennessee, it appears that during recent years NAC has maintained three or four agents, auditors (loan examiners), or salesmen resident in Tennessee, including one John Randolph, a loan examiner and auditor who resided in Chattanooga and who was active in the loan that is the basis of this lawsuit. It further appears that both loans to borrowers resident in Tennessee and credit from banks located in Tennessee are actively sought and solicited by advertisements, direct mail, telephone, and personal visits within Tennessee by officers and agents of NAC. For this purpose, in addition to the activity of resident agents, officers and agents of NAC appear to have been coming into Tennessee both from the Chicago Office and the Atlanta Office regularly and frequently during at least the three year period prior to the making of the loan here involved. A telephone listing in the name of NAC appeared in the 1962 Nashville, Tennessee telephone directory. When a prospective borrower was located, he was provided with forms and given assistance by a visiting agent or officer when necessary in the preparation of the loan instruments and was then instructed to mail the papers either to the Atlanta or Chicago Office of NAC. It appears that the policy or practice generally followed was to require the borrower to mail the loan papers to NAC, with final action upon the loan and, in event of approval of the loan, execution of the papers and disbursement of the loan by NAC at their Chicago Offices.

Leeds Homes, Inc., herein referred to as "Leeds," is a Tennessee corporation having its office and principal place of business in Knoxville, Tennessee. It has engaged in recent years in the construction and sale of shell homes, having made a very rapid rise in the field, until it was operating and maintaining sales offices in eight southern states by the latter part of 1961, including Tennessee, Louisiana, Mississippi, Alabama, Georgia, North Carolina, South Carolina and Virginia. In 1961 it had gross sales in excess of $11,000,000. Leeds organized some 50 or more wholly owned subsidiary corporations to carry out its operations in the shell home field. One such subsidiary was Builders Warehouse, Inc., herein referred to as "Builders," which operated a building and lumber supply business with its warehouse and offices located at Alcoa, Tennessee. Builders was used to supply building materials to Leeds for shell home construction within a radius of approximately 200 miles of Knoxville. Outside this area Leeds purchased materials from independent suppliers. Builders also sold to the general public, but 95% of its gross sales were to Leeds.

During the year 1961 and continuing into 1962 there appears to have been in the shell home industry a very large number of defaults by shell home purchasers, or at least this was the experience of Leeds. Approximately 95% of Leeds' home sales were on credit. This paper was in turn endorsed with recourse by Leeds and sold through another of its subsidiaries to outside financial institutions. With the large number of defaults in 1961 and 1962, Leeds was called upon to repurchase a large amount of this recourse paper. It repurchased over $1,400,000 of such paper in 1961 and an additional $1,770,000 in the first six months of 1962. The liquid assets of Leeds, including $2,700,000 received from stock sales in 1961, when the stock was first publicly sold, were largely expended for this purpose. As a result, in early 1962 Leeds and its subsidiaries, including Builders, were short of cash.

It does not appear what the first contact between Builders and NAC may have been, or who made such contact, but on February 4, 1962, NAC sent John Randolph, its auditor resident in Chattanooga, Tennessee, to Builders' office in Knoxville and Alcoa to investigate with regard to a business loan and to assist Builders in filling out the loan application and loan papers. His contact in this regard was with Miles Siegel, who was then an officer of both Leeds and Builders. The two men worked out the loan papers and after the papers were executed upon behalf of Builders, Siegel mailed them to NAC's office in Chicago. Upon review of the papers and Randolph's report, NAC declined to make the loan but determined to investigate the matter further.

At Siegel's request, the loan papers were returned to Builders. Thereafter, upon February 19, L. H. Tayne, a vice president of NAC, went to Knoxville from Chicago to further pursue the loan and to further investigate the status of the accounts receivable from Leeds to Builders. As a result of his visit, it was understood that Builders would resubmit the loan application and papers sometime in March, as the need for the loan proceeds might arise. Under date of March 16, the loan papers were again mailed to NAC by Siegel. Included in these papers were some of the papers formerly submitted, including a factor's lending agreement bearing date of February 5, and other papers bearing date of March 16, and including a note for $150,000 which purported on its face to be payable on demand. The factor's lending agreement specified interest at a rate of 1/24 of 1% per day. The note merely referred to the factor's lending agreement for the applicable interest. All instruments were expressly stated to be made subject to Illinois law. An ink notation was added to the bottom of the note by Mr. Siegel, acting on behalf of Builders, to the effect that the note was conditioned upon receipt by Leeds of $150,000 "per attached letter." The letter referred to Siegel's understanding that repayment of the note would start in May 1962 at the rate of $10,000 per month until the loan was reduced to $100,000, at which time "we can review the situation further." As security for the note, Builders executed a lender's lien agreement pledging its inventory under the Tennessee Factor's Lien Law (64-1801 to 64-1807, T.C.A.) and an assignment of its accounts receivable and a guaranty of payment by Leeds. Upon receipt by NAC at Chicago of the letter and loan papers enclosed, there appears to have been some further negotiation by telephone between Chicago and Knoxville over the note and method of repayment. No clear understanding was had upon this, however, it being contended by NAC that the understanding was that the loan would be paid off in full each month and thereupon a new loan for $10,000 less would be made, the purpose of this arrangement being to assure NAC of Leeds' ability to pay its accounts to Builders monthly. On the other hand, Builders contended that the understanding was that the parties were merely to swap checks each month with the consequence of reducing the loan $10,000 a month until $100,000 remained due, whereupon they would negotiate with reference to further payments. However this may have been, NAC disbursed the loan of $150,000 by check dated...