Sease v. John Smith Grain Co., Inc., 1084

• Decision Date: 03 April 1984
• Docket Number: No. 1084,1084
• Citation: 479 N.E.2d 284,17 OBR 489,17 Ohio App.3d 223
• Parties: , 17 O.B.R. 489 SEASE; Hanes et al., Appellants, v. JOHN SMITH GRAIN CO., INC.; Arcanum National Bank, Appellee.
• Court: Ohio Court of Appeals

Page 223

17 Ohio App.3d 223

479 N.E.2d 284, 17 O.B.R. 489

SEASE; Hanes et al., Appellants, v. JOHN SMITH GRAIN CO., INC.; Arcanum National Bank, Appellee.

No. 1084.

Court of Appeals of Ohio, Second District, Darke County.

April 3, 1984.

Syllabus by the Court

1. In order to establish a fraudulent conveyance under either R.C. 1336.04 or 1336.05, a creditor must prove that the debtor was insolvent or would be made so by the transfer in issue and that the transfer was made without fair consideration. Neither the intent of the debtor nor the knowledge of the transferee need be proven.

2. In order to establish a fraudulent conveyance under R.C. 1313.56, a creditor must prove both that the debtor made the transfer with the intent to hinder, delay or defraud the creditor and that the transferee knew of the debtor's fraudulent intent. In addition, it must be shown that the debtor was insolvent or contemplating insolvency at the time of the transfer.

3. Corporate insolvency means that the corporation is unable to pay its obligations as they become due in the usual course of its affairs. (R.C. 1701.01[O], applied.)

4. Generally, to constitute a valid mortgage, the mortgage instrument must contain a description of the obligation it is intended to secure. A description of the indebtedness is sufficient if it clearly states that the mortgage was conveyed as security for the payment of money due from one party to the other. The instrument need not show the amount of the indebtedness as long as it points to the sources from which this amount may be ascertained.

John F. Marchal, Thomas C. Hanes and Hugh A. Staley, Greenville, for appellants.

Craig Dynes, Greenville, for appellee.

WEBER, Judge.

This is an appeal from the judgment of the Common Pleas Court of Darke County, Ohio, wherein the court found that a real estate mortgage executed by J & J Farms, Inc., an Ohio Corporation, was a good and valid mortgage and was ahead of the judgment lien of the creditors of John Smith Grain Company, Inc. The pertinent facts as to the case at bar are as follows.

On December 18, 1976, J & J Farms, Inc. executed a note to the Arcanum National Bank in the principal sum of $50,000. As security for said note, J & J Farms, Inc. executed a security agreement pledging 21,740 bushels of corn which were stored with the John Smith Grain Company, Inc.

During April 1977, the Ohio Department of Agriculture conducted an investigation of the John Smith Grain Company, Inc. and it was determined that the 21,740 bushels of corn pledged to Arcanum National Bank to secure the $50,000 note given by J & J Farms, Inc. were, in fact, not in existence. Upon learning that the corn was missing, Arcanum National Bank demanded new security for the $50,000 loan and was granted a security interest in 3,300 head of hogs by J & J Farms, Inc. Later, Arcanum National Bank discovered that the hogs pledged to them as security for the $50,000 loan had previously been pledged as security to another creditor and again Arcanum National Bank demanded additional security from J & J Farms. On April 26, 1977, J & J Farms, Inc. conveyed the real estate mortgage in issue to Arcanum National Bank to secure J & J's preexisting debt to the bank.

The John Smith Grain Company, Inc. was placed in receivership and the receiver, on behalf of the creditors of the John Smith Grain Company, recovered a judgment of $34,131.48 against J & J Farms, Inc. on May 15, 1980. The real estate of J & J Farms, Inc. was sold by the sheriff on foreclosure, and after payment of prior liens and costs, there remains the sum of $45,948.33 which is the subject of this litigation.

On March 8, 1983, the Common Pleas Court of Darke County determined that the real estate mortgage executed by J & J Farms, Inc. and filed for recording on April 25, 1977 was a good and valid mortgage and was prior to the judgment lien of the creditors of the John Smith Grain Company, Inc. filed in May 1980. Appellants, special commissioners appointed to conduct litigation on behalf of the creditors of the John Smith Grain Company, appealed this determination asserting that the mortgage in issue constituted a fraudulent conveyance under R.C. 1336.04 and 1336.05 and R.C. 1313.56 and 1313.57 and, as such, the trial court erred in not declaring it to be void.

The trial court entered final judgment on January 12, 1984, which judgment is duly appealed to this court.

Appellants bring before this court five assignments of error, the first of which states:

"The common pleas court, below, committed prejudicial error in holding that the knowledge of H.T. Smith as to the affairs of J & J Farms, Inc., cannot be constructively imputed to the Arcanum National Bank."

At the time the mortgage in issue was executed by J & J Farms, the directors and owners of J & J Farms were C. North, Jr. and J.M. Smith, both of whom were also directors of the John Smith Grain Company, Inc. The John Smith Grain Company also had a third director, H.T. Smith, who was on the board of directors at Arcanum National Bank. H.T. Smith was incapacited on April 12, 1977, and thereafter until his death.

Appellants allege that the relationship between the directors of Arcanum National Bank, J & J Farms and John Smith Grain Company required a finding that Arcanum National Bank had knowledge, actual or constructive, of the financial affairs and impending insolvency of J & J Farms at the time the mortgage in issue was pledged. Appellants base this contention upon the recent Supreme Court decision of Arcanum National Bank v. Hessler (1982), 69 Ohio St.2d 549, 433 N.E.2d 204 [23 O.O.3d 468].

In Hessler, the sole issue before the court was whether the plaintiff-appellee, Arcanum National Bank, was a holder in due course of the promissory note sold to appellee by the John Smith Grain Company, Inc. Appellant Hessler alleged that Arcanum National Bank had knowledge, actual or implied, that the John Smith Grain Company failed to give consideration for appellant's note, therefore Arcanum National Bank could not have acquired the note in good faith as a holder in due course.

The court, after examining the relationship between Arcanum National Bank and the John Smith Grain Company, concluded that the facts established that Arcanum National Bank had knowledge of the underlying infirmity in Hessler's note prior to acquiring it. The court based this conclusion upon the fact that C. North, Jr., a director of the John Smith Grain Company, had actual knowledge that there was no consideration given by the John Smith Grain Company for the note and therefore his knowledge was imputed to all the directors of the John Smith Grain Company. H.K. Smith, who was both a director for the John Smith Grain Company and Arcanum National Bank, was therefore found to have knowledge of the infirmity in the note, such knowledge also being imputed to Arcanum National Bank.

In the present case, J & J Farms and Arcanum National Bank have no interlocking directors; however, J & J Farms and the John Smith Grain Company do. The director who interlocked between the bank and John Smith Grain Company was completely incapacitated on April 12, 1977, and thereafter. Notwithstanding, because the John Smith Grain Company had this interlocking director with Arcanum National Bank, appellants contend that the relationship between the directors of J & J Farms, John Smith Grain Company and Arcanum National Bank required a finding that Arcanum had knowledge of J & J Farms' alleged fraudulent intent and financial difficulties at the time Arcanum accepted the mortgage in issue.

The trial court concluded that under other circumstances, the knowledge of the directors of the John Smith Grain Company could be imputed to Arcanum National Bank; however, in this case, the evidence presented did not establish any basis for determining that the bank had actual or constructive knowledge of any financial difficulties or fraudulent intent on the part of J & J Farms. Upon examining the record, we conclude the trial court was correct in this determination. There are sufficient facts presented in evidence to establish that J & J Farms was solvent on and before April 25, 1977, the date the mortgage in issue was conveyed to Arcanum National Bank. In addition, there was sufficient evidence presented to support a finding that J & J Farms had no fraudulent intentions on or before the time the mortgage in issue was executed, but, rather, it was fulfilling its responsibility of providing security to the bank. Unlike Hessler, where the bank had the burden of proof to establish its good faith, here the John Smith Grain Company had the burden of proof to prove the Arcanum National Bank had knowledge imputed to it of a fraudulent intent or financial difficulties on the part of J & J Farms.

Assignment of error number one is denied.

Appellants' second assignment of error states:

"The common pleas court, below, committed prejudicial error when it refused to follow and apply Ohio Revised...