Needham v. The Provident Bank

• Citation: 675 N.E.2d 514,110 Ohio App.3d 817
• Decision Date: 06 May 1996
• Docket Number: No. 68630,68630
• Parties: , 32 UCC Rep.Serv.2d 48 NEEDHAM et al. Appellants, v. THE PROVIDENT BANK, Appellee.
• Court: United States Court of Appeals (Ohio)

Page 817

110 Ohio App.3d 817

675 N.E.2d 514, 32 UCC Rep.Serv.2d 48

NEEDHAM et al. Appellants, v. THE PROVIDENT BANK, Appellee.

No. 68630.

Court of Appeals of Ohio Eighth District, Cuyahoga County.

Decided May 6, 1996.

Michael Westerhaus, Strongsville, for appellants.

Berick, Pearlman & Mills Co., L.P.A., Paul J. Singerman and Jennifer L. Soda, Cleveland, for appellee.

HARPER, Judge.

Plaintiffs-appellants, William J. Needham and Lucy M. Needham ("appellants," collectively, or "W. Needham" and "L. Needham," individually), appeal from the granting of summary judgment in favor of defendant-appellee, The Provident Bank, by the Court of Common Pleas of Cuyahoga County. Appellants submit that genuine issues of material fact remain for litigation regarding their lender liability claims against Provident. A careful review of the record compels affirmance.

I

W. Needham's uncle was the founder and original owner of Communication Systems and Services Company ("CSSC"), an Ohio corporation. CSSC sold, installed and maintained a variety of telephone, sound and voice communication systems. W. Needham became CSSC's president in 1983 when he purchased fifty percent of the corporation's shares of stock. He became the sole shareholder in 1990 upon the purchase of the remaining fifty percent shares of stock from Hank Dickey.

W. Needham formed Communication Financing Corporation ("CFC") in early 1989 to act as CSSC's financing arm. This structure enabled CSSC to offer lease financing and compete for customers seeking larger communication systems. CFC first purchased leases from CSSC in March 1989.

W. Needham first sought business financing from Provident in August 1988 when CSSC's then commercial lender, American National Bank, could not meet CSSC's financial needs. Provident granted CSSC three forms of financial assistance--a demand line of credit for CSSC, ¹ an installment loan for CSSC, and a line of credit for CFC.

A

W. Needham applied for CSSC's demand line of credit on or about October 19, 1988. The bank granted a $150,000 revolving line of credit for working capital. Advances, determined by monthly borrowing base reports, were limited to eighty percent of eligible accounts receivable and fifty percent of inventory. W. Needham, as CSSC's president, executed a revolving promissory note and signed a security agreement on October 19, 1988. Pursuant to the note, CSSC was required to pay principal on demand and make monthly interest payments beginning on November 30, 1988. The security agreement granted Provident a substantial security interest in CSSC's assets.

Appellants and CFC, after its formation, guaranteed CSSC's demand line of credit. Appellants' guaranty was secured by a mortgage on their personal residence. CFC guaranteed the line of credit by executing a secured unlimited guaranty on December 12, 1989. This guaranty was secured by granting Provident a substantial security interest in CFC's assets.

Provident increased CSSC's demand line of credit to $200,000 in late December 1989, subject to the same terms and conditions as the pre-existing line of credit. W. Needham, as CSSC's president, signed a revolving promissory note and security agreement for the increased line of credit on or about January 3, 1990. The payment terms of the note and the security interests granted by the agreement were the same as those contained in the October 1989 documents.

W. Needham signed a new guaranty agreement on January 3, 1990, and L. Needham signed one on August 27, 1990. Appellants also granted Provident a junior mortgage on their personal residence in the amount of the increased credit limit, $200,000. CFC likewise remained a guarantor on the $200,000 demand line of credit, the guaranty secured by CFC's assets.

Provident informed appellants through a letter dated December 28, 1989 of the increased credit limit. The bank also informed appellants through the letter that the credit was subject to review for continuation by October 31, 1990. Appellants were also advised therein to establish monthly borrowing reports and submit periodic financial reports. Both of these reports were to be in a format specified by Provident.

A few years later, in March 1992, W. Needham requested and received a loan advance under the demand line of credit. The loan advance increased the principal amount outstanding to the maximum available amount of $200,000. Since the outstanding principal balance of the demand line of credit thereafter remained at $200,000, no new advances were available under the line of credit after March 4, 1992.

Meanwhile, W. Needham closed CSSC on March 3, 1992 because of financial difficulties. CSSC's sales manager, Robert G. Snyder, convinced W. Needham to meet with Nikitas D. Makris to discuss a possible sale of CSSC. Makris was the principal of Makris Brothers Management Company, Inc. An agreement was reached during a meeting held at Makris's home on March 8, 1992. The agreement provided that W. Needham would sell all of CSSC's shares of stock to Snyder and Makris Brothers Management Company for $75,000. CSSC reopened for business on March 9, 1992. The stock sale transaction was completed on March 16, 1992. ²

Regarding the $200,000 owed to Provident under the CSSC demand line of credit, the obligation was restructured under a promissory note dated October 6, 1992. Makris and Snyder signed the note as CSSC's president and secretary respectively. This note required six installments of principal of $20,000, plus interest, payable monthly, commencing November 10, 1992. A final payment was required on May 10, 1992 in an amount sufficient to satisfy the note in full. Makris personally guaranteed the October 1992 note on October 6, 1992 and Snyder on August 4, 1992.

In December 1992, Provident enforced the terms of the October 1992 note following CSSC's failure to pay any of the monthly installments, both principal and interest. The bank obtained money judgments against CSSC, Makris and Snyder for $200,000, plus interest, in the Court of Common Pleas of Cuyahoga County, case No. CV-244730. The bank took no action against appellants under their guarantees to collect the sums owed it by CSSC.

B

W. Needham, on CSSC's behalf, applied for a $100,000 loan from Provident in August 1990. W. Needham wanted the $100,000 to satisfy CSSC's payment obligations under an agreement with Hank Dickey. The satisfaction would then permit W. Needham to purchase the shares of CSSC's stock owned by Dickey enabling W. Needham to become the sole shareholder of the company. Provident approved the loan request on August 21, 1990.

W. Needham signed a promissory note as CSSC's president on August 27, 1990. The terms of the note required CSSC to make thirty-five monthly installments of $2,780, plus interest, commencing September 30, 1990, and one final payment on August 27, 1993 in an amount sufficient to pay the note in full. The note was secured by the same CSSC personal property assets that secured the corporation's demand line of credit and by a mortgage against CSSC's business premises located at 4750 State Road, Cleveland, Ohio, and the adjacent property at 4746 State Road.

Appellants and CFC guaranteed the installment loan. CFC secured its guaranty of the loan by a second lien position (behind Provident's first lien position in respect of CFC's line of credit, discussed below) against CFC's personal property assets. Provident's security interest stemmed from a security agreement dated August 27, 1990, signed by W. Needham as CFC's president.

C

As discussed above, W. Needham formed CFC to act as a financing source for CSSC customers who wished to lease communication equipment. W. Needham applied to Provident for a line of credit to facilitate CFC's purchase of CSSC's equipment leases. The bank approved a $150,000 revolving line of credit on or about March 16, 1989. CFC's $150,000 line of credit was secured by a first priority blanket lien and security interest in substantially all of CFC's personal property assets.

W. Needham, as CFC's president, signed a revolving promissory note on March 6, 1989 that required CFC to pay interest monthly, commencing March 31, 1989, and the principal on October 31, 1989. The promissory note also required CFC to make principal reductions if the value of the collateral, as determined by the borrowing base reports, fell below the outstanding loan balance.

Appellants guaranteed CFC's line of credit. The guaranties were secured by a junior mortgage against their personal residence. Though CSSC also guaranteed the line of credit, Provident released the guaranty pursuant to W. Needham's request after Makris and Snyder purchased CSSC.

Provident renewed and extended CFC's line of credit to November 30, 1989 upon the promissory note's expiration on October 31, 1989. The thirty-day renewal occurred because CFC's initial financial statements for the seven-month period prior to September 30, 1989 were not yet available for Provident's review.

The line of credit was renewed and extended to April 30, 1991 under November 30, 1989, April 30, 1990 and May 31, 1990 revolving promissory notes. Appellants reaffirmed their guaranty for CFC's line of credit by executing a mortgage dated November 30, 1989.

CFC's line of credit was in default from mid-1991 to March 1992. The default resulted because the value of CFC's collateral, as reflected in the borrowing base reports, was less than the outstanding loan balance and CFC was unable to make the necessary principal reductions to bring the loan into compliance.

Provident, on or about February 20, 1991, requested that appellants find replacement financing as a result of CFC's default under its line of credit. The bank's position was that the request was premised solely on CFC's default. Appellants' position was that Provident required that they find replacement financing for CSSC as well. Specifically, W. Needham maintained that he was told "to find another bank;...