National City Bank v. Plechaty Companies

661 N.E.2d 227, 104 Ohio App. 3d 109

• Court: Ohio Court of Appeals
• Decided: May 24, 1995
• Docket: No. 67194.
• Status: Published

Opinions

Nahra, Judge.

Appellants, Ben Plechaty and The Plechaty Companies, Inc. (hereinafter “TPC”), are appealing the trial court’s denial of their motion for summary judgment and grant of summary judgment in favor of appellee, National City Bank. For the following reasons, we affirm.

Ben Plechaty’s wife owned a majority of the shares of TPC. Ben Plechaty was chairman of the board of directors of TPC. TPC owned over eighty percent of the Hamilton Cast Corporation. Hamilton was a New York corporation in the business of casting precious metals for fine jewelry.

National City Bank provided Hamilton with a five million dollar line of credit, and Hamilton executed a promissory note to the bank for five million dollars. The note was secured by a security agreement in the inventory, equipment and accounts receivable of Hamilton. TPC guaranteed the debt of Hamilton.

In evidence is a purported guarantee of Hamilton’s debt by Ben Plechaty personally. Plechaty contends that National City fraudulently procured this guarantee.

Hamilton defaulted on the note, with a balance due of approximately 1.6 million dollars. National City repossessed the accounts receivable of Hamilton. National City negotiated with Salvatore Esposito, president of Hamilton, to sell the accounts receivable of Hamilton to a new company owned by Esposito called Integrity Casting Corporation. The receivables were $854,768 as of January 1, 1993. Based on the activity of Hamilton, aging of receivables and fair value to collect, National City offered to sell the receivables for $300,000. National City accepted a counteroffer of $275,000 from Integrity. The attorney for TPC and Ben Plechaty received copies of the correspondence evidencing these negotiations.

The sales transaction was structured as follows: Integrity executed a promissory note to National City for $1,643,784.94 plus interest, secured by the subject accounts receivable. Demand could be made on the note only if the terms of “the Guarantee” were not complied with. If the amounts set forth in “the Guarantee” were fully paid, the promissory note would be deemed satisfied. “The Guarantee” was a guarantee by Salvatore Esposito of the promissory note, but only up to $275,000. If Integrity or Esposito paid $275,000 to National City, neither Integrity nor Esposito would be liable on the promissory note. A bill of sale stated the assets were sold to Integrity and “consideration is a promissory note in the amount of $1,643,704.94.” The affidavits of agents of National City stated that the intention of National City and Integrity was that the sales price was $275,000, subject to a 1.6 million dollar penalty for default.

TPC and Ben Plechaty signed acknowledgment letters agreeing to the sales transaction. The letters state:

“The undersigned expressly is not acknowledging the validity of any guarantee entered into by the undersigned, and in no way will the undersigned’s consent to this transaction affect or prejudice any claims or defenses which the undersigned may have in connection with any such documents.

“However, the undersigned waives the right to raise as a defense to any such lawsuit, and to any deficiency balance which may result on the Promissory Note, the price for which the assets were purchased and/or the overall structure of that transaction.”

The day before the sale, National City obtained a judgment by confession by Hamilton in a New York state court in the amount of $1,643,784.94 plus interest. National City obtained a cognovit judgment in the Cuyahoga County Court of Common Pleas against Hamilton Cast, but relief from judgment was granted pursuant to Civ.R. 60(B)(5).

Subsequently, Integrity paid the $275,000 as required by the guarantee, and National City released Integrity and Esposito from all obligations. National City sued appellants for the amount due on the Hamilton note, less $275,000.

After this appeal was filed, National City and another party filed an involuntary petition of bankruptcy against Ben Plechaty in the United States Bankruptcy Court, Northern District of Ohio. National City filed a suggestion of stay with this court, to stay the appeal of Ben Plechaty. At oral argument, appellee stated that appellant had obtained relief from the automatic stay in the bankruptcy court, so it is not necessary to stay this appeal.

I

Appellants’ first assignment of error states:

“The trial court erred in denying defendants-appellants’ motion for summary judgment because although the underlying debt to the appellee had been fully satisfied at a default sale by a promissory note from the new buyer. The trial court improperly found that the ‘proceeds’ from the sale, within the meaning of Ohio Revised Code § 1309.25(A) were limited to the cash portion of the transaction.”

If a secured party disposes of collateral in a commercially reasonable manner, the secured party is entitled to any deficiency. The amount of deficiency is the difference between the amount of indebtedness and the actual proceeds. R.C. 1309.47(B)(2)(b) and (c); 1309.45(B). “Proceeds” are defined as:

“ * * * whatever is received upon the sale, exchange, collection, or other disposition of collateral * *

Appellants argue that the proceeds included the promissory note in which Integrity promised to pay National City approximately 1.6 million dollars, the same amount as the Hamilton debt. Therefore, appellants assert there was no deficiency.

We agree that the proceeds include the promissory note and Esposito’s guarantee. See Gen. Elec. Capitol Corp. v. Deere Credit Serv. (S.D.Ohio 1992), 799 F.Supp. 832, 836 (a note constitutes proceeds). The combined value of the promissory note and the guarantee was only $275,000, however. The promissory note was only worth 1.6 million dollars contingent upon the failure to make payments as set forth in the guarantee. Integrity made the payments as required by the guarantee, and thus the contingency requiring Integrity to pay 1.6 million dollars never happened. There is no factual dispute as to whether the proceeds amounted to $275,000 or 1.6 million dollars because the promissory note clearly sets out the contingent nature of any payments over $275,000. See, generally, Davis v. Loopco Industries, Inc. (1993), 66 Ohio St.3d 64, 66, 609 N.E.2d 144, 145. The proceeds were $275,000 and there was a deficiency.

Appellants contend appellee did not act in a commercially reasonable manner, so appellee could not collect a deficiency judgment against appellants. See Horizon Savings v. Wootton (1991), 73 Ohio App.3d 501, 597 N.E.2d 1150; R.C. 1309.47(C); 1309.45(B). TPC asserts that a penalty of 1.6 million dollars and a price of $275,000 was unreasonable. Appellants failed to raise this argument at the trial court level. A party moving for summary judgment must state the basis of his motion and point out the absence of a material fact or issue of law. Celotex Corp. v. Catrett (1986), 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265; Dent v. Ford Motor Co. (1992), 83 Ohio App.3d 283, 285, 614 N.E.2d 1074, 1076. Appellants cannot be granted summary judgment based on commercial unreasonableness of the sale because appellants failed to make this argument at the trial level.

Furthermore, appellants waived their right to raise price and/or the structure of the sales transaction, as a defense to an action for the deficiency balance. The waiver was valid under R.C. 1309.44(C) because the terms of the sale were not manifestly unreasonable. Appellants were not entitled to summary judgment.

Accordingly, this assignment of error is overruled.

II

Appellants’ second assignment of error states:

“The trial court erred in granting plaintiff-appellee’s motion for summary judgment because appellee failed to establish notice or privity between a wholly owned subsidiary and either its parent corporation or the individual who purportedly guarantied [sic ] the debts of the subsidiary, sufficient for the doctrines of res judicata and collateral estoppel to apply to a confession of judgment from another state.”

A subsequent action is barred by res judicata if a prior final judgment on the merits exists, involving the identical cause of action and the same parties or their privies. Whitehead v. Gen. Tel. Co. (1969), 20 Ohio St.2d 108, 49 O.O.2d 435, 254 N.E.2d 10; Rogers v. Whitehall (1986), 25 Ohio St.3d 67, 25 OBR 89, 494 N.E.2d 1387. Collateral estoppel bars relitigation of an issue if the same issue was actually and necessarily litigated in a prior action involving the same parties or their privies. Goodson v. McDonough Power Equip., Inc. (1983), 2 Ohio St.3d 193, 2 OBR 732, 443 N.E.2d 978.

The New York confession of judgment by Hamilton and the present lawsuit do not involve the same cause of action. The right of action in each suit arose from different facts and different evidence is necessary to sustain each action. See Norwood v. McDonald (1943), 142 Ohio St. 299, 306, 27 O.O. 240, 243, 52 N.E.2d 67, 71; Jehovah’s Witnesses, Inc. v. Lakewood (1984), 20 Ohio App.3d 338, 340, 20 OBR 441, 443-444, 486 N.E.2d 194, 196-197. The only issue common to both suits is whether Hamilton was liable to National City. The New York confession of judgment does not reach the issue of whether TPC and/or Plechaty were liable as guarantors and whether a deficiency existed after the sale of assets. Additionally, the sale of Hamilton’s receivables after the judgment by confession raised new material issues, so res judicata and collateral estoppel cannot apply. Goodson, supra, at 201, 2 OBR at 739-740, 443 N.E.2d at 985-986; Couch v. Middletown (1993), 86 Ohio App.3d 128, 620 N.E.2d 177.

Although TPC owned eighty percent of Hamilton, TPC was not a real party in interest in the judgment by confession and was not in privity with Hamilton. See Whitehead, supra. A guarantor is not in privity with the debtor. Woodward v. Moore (1862), 13 Ohio St. 136. Collateral estoppel only operates where all parties to the present action are bound by the prior judgment. Goodson, supra. The judgment by confession was against Hamilton only and TPC was not bound by this prior judgment. A parent corporation is not liable for the debts of its subsidiaries, absent proof the parent exercised complete dominion and control over the subsidiary and such control was used to commit a fraud or injustice. Belvedere Condominium Unit Owner’s Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075. There was no proof of such domination and control here.

For similar reasons, Ben Plechaty was not in privity with Hamilton either. Plechaty’s position as chairman of the board of TPC did not by itself create liability for Hamilton’s debt. As stated above, a guarantor is not in privity with the debtor. Therefore, the trial court erred if it granted plaintiff-appellee’s motion for summary judgment on the basis of res judicata or collateral estoppel.

Plaintiff-appellee was entitled to summary judgment because there were no genuine issues of fact and, as a matter of law, appellee was entitled to a deficiency judgment against appellants in the amount of approximately 1.6 million dollars plus interest owed by Hamilton less $275,000. TPC admitted guaranteeing Hamilton’s note. We will address the validity of Ben Plechaty’s guarantee below. As discussed above, reasonable minds can only conclude that the proceeds of the sale of receivables was $275,000, and a deficiency balance was owed on the Hamilton note. See Civ.R. 56(C). Reasonable minds could only conclude that appellee sold the receivables in a commercially reasonable manner. There was some evidence the price was reasonable and no evidence it was not reasonable. The penalty of 1.6 million dollars was not prejudicial to the debtor or guarantor, and does not violate R.C. 1309.47(C) or 1309.45(B), which were designed to protect the debtor, not the buyer of collateral. Appellants were adequately informed that a deficiency balance might be due. Additionally, appellants waived the right to raise price or the structure of the transaction as a defense to an action for the deficiency balance.

III

Appellants’ third assignment of error states:

“The trial court erred in granting plaintiff-appellee’s motion for summary judgment because material issues of fact exist disputing the validity of Ben L. Plechaty’s purported guaranty to National City Bank.”

Plechaty deposed that Mr. Zang of National City Bank asked him to guarantee the Hamilton debt, and Plechaty refused. Plechaty said he would guarantee the future debts of TPC. TPC’s guarantee of Hamilton’s debt was already in existence at that time. National City sent Plechaty a guarantee form, leaving blank the name of the debtor. Plechaty signed the form, but did not fill in the name of the debtor. Plechaty did not read the boilerplate language on the form, which stated:

“ * * * the undersigned * * * absolutely and unconditionally guarantees the prompt and punctual payment when due, by acceleration or otherwise, of each obligation, direct, indirect or contingent, now existing or hereafter created or acquired * * * of the Debtor to the Bank * * (Emphasis added.)

When National City received the signed form from Plechaty, its agents filled in the name of the debtor as the Hamilton Cast Corporation. Plechaty notified National City that he never intended to guarantee Hamilton’s debt.

Fraud could not have occurred, because Plechaty suffered no detriment. See Russ v. TRW, Inc. (1991), 59 Ohio St.3d 42, 49, 570 N.E.2d 1076, 1083-1084. Plechaty would have been guaranteeing the Hamilton debt whether TPC or Hamilton was listed as the debtor on the guarantee form, because TPC had guaranteed Hamilton’s debt. The guarantee signed by Plechaty was clearly a guarantee of all present and future debts of the debtor. Plechaty cannot escape liability because he failed to read the guarantee. Campco Distributors, Inc. v. Fries (1987), 42 Ohio App.3d 200, 537 N.E.2d 661. If TPC was listed as the debtor, Plechaty would have guaranteed the present and future debts of TPC, which included TPC’s guarantee of the Hamilton debt. No genuine issues of fact exist, and the guarantee was not procured by fraud as a matter of law.

The decision of the trial court is affirmed.

Judgment affirmed.

Harper, P.J., concurs. O’Donnell, J., dissents.