Court Opinion

ID: 6763621
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:34:11.353153+00
Date Added: 2024-06-11T16:02:39.615645
License: Public Domain

Wright, J.,
dissenting. This case concerns the conversion of corporate funds generated through the issuance of industrial development bonds. The theft occurred in the open, at the bond closing, when the indenture trustee, BancOhio, fulfilled a request for an unlawful disbursement. I believe that BancOhio breached its contractual obligations to Master Consolidated Corporation (“Master”), thereby facilitating the theft. Therefore, I respectfully dissent from the judgment and opinion of the majority.
I
Some background on the various parties to this affair and the nature of the transaction is necessary to an understanding of BancOhio’s actions.
*581Prior to April 1983, what was to become the business of Master was a division of the Koehring Company, a publicly owned corporation. Curtis W. Roney, a business consultant then with Philips Industries, Inc., became aware that Koehring was interested in selling a portion of its business in Dayton. Roney presented this business opportunity to Philips; however, Philips was not interested. Roney remained interested, left Philips, and, with the assistance of BancOhio and a Dayton area business assistance program, worked out a financing package whereby Roney would purchase this division of Koehring.
By chance, Roney spoke with Jack Hereth about his desired purchase from Koehring. Hereth owned Futra Industries, a holding company for several businesses, including the investment banking company of Hereth, Orr & Jones, Inc. (“HOJ”). The proposed acquisition from Koehring interested Hereth and, instead of Roney making the purchase, Roney and Hereth arranged that Futra would make the purchase and Roney would run the new business. Roney believed Futra was the better purchaser because of its supposedly better resources and ability to infuse capital. Futra, however, was heavily leveraged.
To effectuate the purchase, Futra incorporated Master to create the corporate entity to purchase the necessary assets from Koehring; BancOhio remained in the transaction as the principal source of financing; and a closing date was set to consummate the purchase.
The purchase was to be financed in two parts. Master was to purchase the fixed assets through loans from BancOhio secured by the fixed assets with the difference between the loan amount and the fixed assets’ value to be made up by a capital infusion by Futra into Master, which was as of then without capital. The remaining amount of the purchase price was to consist of a subordinated note from Master to Koehring.
In late April 1983, the purchase of Master’s assets from Koehring closed. When the time came for Master to cover its share of the fixed assets purchase, the segment not intended to come from BancOhio, Futra balked. Futra’s representatives said it would be inconvenient for Futra to put any money into Master at that time. In order to save the deal, Master instead drew upon a line of credit extended by BancOhio to cover the remainder of the fixed assets purchase price. Thus it was that Master began its business, with one hundred percent debt financing. Shortly after Master purchased Koehring’s assets, BancOhio’s commercial loan department, the financier of the purchase, recommended Master to its trust department as a possible candidate for an industrial development bond offering. The proceeds from this offering were designed to pay off the loan from BancOhio, generate funds required for *582additional purchases of plant and equipment, and provide additional working capital to Master.
The bond issuer was Montgomery County, Ohio; however, under the provisions of R.C. Chapter 165 and the loan agreement, the county did not lend its credit to the offering. The. other parties to the issuance were BancOhio as indenture trustee (the keeper and disburser of the funds), Master as the recipient of the bond sales revenues through a loan from the issuer, Futra as guarantor of the bonds, and HOJ as the underwriter of the bonds.
The offering statement for these bonds clearly specified the expected uses for the revenue from the sale of the bonds. Out of the $2,250,000 issuance, $700,000 was to go to Master to reimburse it for the April purchase of plant and equipment from Koehring (originally funded by BancOhio), $500,000 was to go to Master to reimburse it for acquisition of new machinery (also part of the BancOhio loan), and $396,710 was to go to Master as additional working capital. The outstanding balance was to go as follows: $250,000 as bond reserves held by the trustee, $140,000 to Futra for expenses occurred in this project, and the balance in closing and underwriting expenses.
II
BancOhio’s obligations as indenture trustee were governed by the laws of the state of Ohio, by the trust indenture to which it was a party, and the loan agreement between Montgomery County and Master referenced in the indenture. The laws of Ohio found in R.C. Chapter 165 and referenced in relevant part in the loan agreement state generally that industrial development bonds are intended solely for the benefit of Ohio industry by supplying a source of capital to Ohio businesses, thereby providing jobs and economic development within the state. See R.C. 165.02 and 165.03.
The trust indenture and the loan agreement more specifically set forth BancOhio’s obligations. In relevant part, the loan agreement, binding on BancOhio by reference in the trust indenture, provided as follows:
“Section 4-4- Other Items Constituting Cost of the Project. The indenture shall require the Trustee to disburse funds from the Construction Fund and to pay for all items within the definition of ‘Cost of the Project’, other than those provided for in Section 4.3, upon receipt by the Trustee of (a) a certificate signed by a Designated Representative of Borrower requesting a specified sum of money, describing in reasonable detail such items which form the basis for said request, stating that said sum does not exceed the cost to Borrower of such items, that no part of such costs has previously been made the basis of any request for the withdrawal of such Construction Fund monies, that each element of such cost is included within the definition of *583‘Cost of the Project’ and is properly payable from the Construction Fund, and that the Project is subject to no lien or encumbrance other than the Permitted Encumbrances or any liens which have been bonded or which Borrower otherwise has a right to contest in accordance with the requirements of the Mortgage; (b) the certificate of the'Accountant required by Section 4.5 hereof.” (Emphasis added.)
Section 4.5, upon which the majority relies, provided protection to the trustee for failure to follow Section 4.4: “ * * * The Trustee may, in its reasonable discretion, excuse the inability of Borrower or the Supervising Engineer to make any representation or to express any opinion or to undertake any obligation required to be in such certificates or other instruments if the Trustee reasonably determines that Borrower or the Supervising Engineer, as the case may be, is acting in good faith and that insistence on the omitted representation, opinion, or obligation would not be in the best interests of the Bondholders. All requests for draws from the Construction Fund shall be submitted on the form attached hereto as Exhibit ‘C’, and shall have attached thereto the items specified therein.” (Emphasis added.)
Master’s designated representative at the bond closing was Richard F. Glueckert III, the President of Futra. He was also designated Executive Vice President of Master by a resolution of Master’s Board of Director[s] — that being Hereth sitting alone. Glueckert was the only representative of Master at the closing.
At the closing and armed with the board resolution empowering him to act on behalf of Master, Glueckert requested a draw on behalf of Master totalling $1,423,290.10, $850,467.32 of which was to be paid to BancOhio and $489,-532.68 to Futra. Glueckert attached an affidavit to the request stating that the funds to be paid to BancOhio and Futra covered money Master expended in the April 23, 1983 purchase of Master’s assets. However, BancOhio was shown no documentation as to why Futra should receive money beyond the $140,000 originally estimated for it to receive.
While much of the argument and discussion in this case has centered on whether BancOhio negligently disbursed funds, BancOhio’s duties were in contract. The first question then is whether BancOhio’s disbursement of funds to Futra without documentation breached the loan agreement.
The answer must be yes: in no way, under the facts of this case, could BancOhio “reasonably determine[]” that the draw was requested in good faith and was properly certified. BancOhio knew of Master’s financial circumstances and knew that Master had never borrowed any money from Futra to purchase its assets from Koehring. (BancOhio knew this, because it had financed that acquisition itself just four months previously.) BancOhio was *584fully aware of the estimated disbursement of funds, which, with the exception of the additional $349,532.68, went according to the offering statement. BancOhio was also aware of Futra’s financial condition and of Futra’s absolute control of Master’s board. Despite this knowledge and the lack of documentation supporting the disbursement request, BancOhio gave Futra $349,532.68 of Master’s funds. As a matter of law, BancOhio could not have reached the conclusion that the requested disbursement was made in good faith. Therefore, BancOhio breached its contract with Master.
Ill
In closing I am compelled to comment on the statutory scheme under which industrial development bonds are issued. These bonds exist in a realm with little regulation. They are issued under the intrastate offering exemption of Section 3(a)(2) of the Securities Act of 1933, as amended, Section 77c(a)(2), Title 15, U.S. Code, and are also exempted from regulation under Ohio’s securities laws found in R.C. Chapter 1707. R.C. 1707.02(K). Consequently, as R.C. Chapter 165 contains little to no regulation of the securities issuance, these bonds are issued almost devoid of regulation.
This case is a prime example of the danger of such a system. The company responsible for paying the principal and interest on these bonds and the underwriter of the bonds are wholly owned by the guarantor of the bonds. The company, Master, was one hundred percent debt financed and the guarantor-parent was heavily leveraged and cash poor. Without being presented with claims brought by bondholders to whom the trustee actually owes a fiduciary duty, we are not required to determine the extent of the indenture trustee’s duty to regulate these bond issues. I sincerely hope the General Assembly will take a long look at the lack of investor protection contained in R.C. Chapter 165 and accordingly respond by adding some investor protection to the Chapter.
Resnick, J., concurs in the foregoing dissenting opinion.