Real Estate Capital Corp. v. Thunder Corp. - 31 Ohio Misc. 169, 287 N.E.2d 838 (Ct. Com. Pl. 1972)

Rule:

The directors or other officers of a corporation, have no right, under mere guise of official capacity, to convert corporate funds or property to the use of themselves or others by means of a gift, a loan or otherwise; so, ordinarily a policy by which an officer is insured by the corporation in its own behalf and at its own expense cannot be pledged by its directors or officers, acting by themselves, to secure the private indebtedness of one of its officers. Yet if the rights of creditors are not affected and all stockholders consent, such a pledge of the policy may be made in the absence of positive law forbidding it. The rational basis for this power to pledge corporate collateral is the well recognized principle of law that, subject to the rights of creditors, a corporation may give away its property or pay out money from its treasury if the stockholders consent and the act is not illegal. The consent of the stockholders, of itself, does not confer corporate power, but does make the pledge good as between the corporation and the creditor to whom the pledge is made.

Facts:

Since its incorporation on the 16th day of May, 1966, Thunder Corp. has had only two shareholders: Cohen, who has always owned 80% of the outstanding stock; and Berman, who has always owned 20% of the outstanding stock. On August 9, 1966, Thunder Corp. signed a first mortgage to Equitable in the principle amount $ 765,000.00, and this mortgage was recorded in the Montgomery County Recorder's office on October 8, 1966. On March 14, 1967, Thunder Corp. issued what purports to be a valid second mortgage on its property to R. E. C. C. and Weissman, in the principle amount of $ 105,000.00, but the $ 105,000.00 was not paid to Thunder Corp., rather it was paid to Winthrop Homes, Inc. (now named Amber Builders, Inc.). There was not, and is not now, any relationship between Thunder Corp. and Winthrop Homes, Inc., other than the fact that Cohen, who performed all of these transactions, was the sole shareholder of Winthrop Homes, Inc., in addition to being an 80% shareholder of Thunder Corp. Thunder Corp. failed to make timely payments on its note and mortgage to Equitable, and thereafter R. E. C. C. made the following three payments on behalf of Thunder Corp.: (1) Two payments of $ 5,482.00 each received by Equitable on March 11, 1969; (2) One payment of $ 5,482.00 received by Equitable on May 6, 1969; and (3) On May 20, 1969, R. E. C. C. paid the real estate taxes on Thunder Corp. property in the sum of $ 26,070.87. On May 23, 1969, R. E. C. C. and Weissman filed this action as plaintiffs to foreclose on the mortgage and to appoint a receiver. Also on May 23, 1969, without notice or a hearing, Paul Tipps was appointed receiver, and on June 14, 1969, Dennis L. Patterson, of the law firm of Goldman, Bogin and Fox, attorneys for the plaintiffs herein, was authorized to represent the receiver. The receiver also employed Flagel, Huber and Flagel to act as accountants for him in his capacity as receiver. For their services, prior to June 9, 1971, these individuals had been paid monies from the assets of Thunder Corp. On March 11, 1971, Equitable also filed an action to foreclose its mortgage.

Issue:

Is the mortgage issued by Thunder Corp. to R.E.C.C. and Weissman valid as between these parties?

Answer:

No.

Conclusion:

At the hearing of this matter some questions were asked about what happened to the $ 105,000.00 loan, and from that testimony and evidence, and the depositions, there is some inference that part of those funds may have been used to repay obligations of Thunder Corp.; but such evidence, if it can be called evidence, is purely speculative in nature and not of probative value. Therefore, the court must conclude that the evidence does not establish that Thunder Corp. received any benefit from the $ 105,000.00 loan. Thus, having found that there is no consideration for the mortgage it becomes exceedingly difficult for this court to conceive how the mortgage could further the corporate purpose. Further the record is clear that the $ 105,000.00 was paid directly for the benefit of Winthrop Homes, Inc., by R. E. C. C. and Weissman, and neither R. E. C. C. or Weissman produced any evidence that the mortgage and rent assignment was anything more than a gratuitous guarantee. The evidence in this case is clear that Berman, a 20% shareholder, objects to the mortgage given to the plaintiffs and to the assignment of rents and leases, and following the MacQueen case, the mortgage given to the plaintiffs by Thunder Corp., as well as the assignment of rents and leases, would be valid as between the corporation and the creditor only if they secured the approval of all stockholders.