Opinion
Case No. 98cv802
April 27, 2001
OPINION AND ORDER I. INTRODUCTION
This matter is before the Court on the U.S. Securities and Exchange Commission's Motion for an Order Releasing and Distributing Frozen Funds. Shannon Road Development, Ltd., filed a Response on March 8, 2001. The U.S. Securities and Exchange Commission ("SEC"), is requesting the enforcement of this Court's Preliminary Injunction which was entered against the Defendants, James M. Cogley and the Ohio Estate Group, on August 18, 1998. On March 22, 2001, the Court held a hearing on the SEC's Motion. For the following reasons, the SEC's Motion is GRANTED.
The SEC filed a Motion for Leave to file a Motion for an Order Releasing and Distributing Frozen Funds on March 7, 2001. The Court GRANTED this Motion at the Hearing on March 22, 2001.
II. FACTS AND PROCEDURAL HISTORY A. Procedural History
The SEC filed a complaint for injunctive and equitable relief on August 11, 1998. A temporary restraining order was entered that day. The order temporarily restrained and enjoined the Defendants from receiving funds for investment, On August 18, 1998, this Court entered an order of preliminary injunction against Cogley and OEG, which froze the funds, assets, accounts and other property belonging to the Defendants. The Defendants were also enjoined from receiving any funds for the purpose of investment.
At that time, the SEC alleged that, for approximately one year before filing its complaint, Cogley and OEG engaged in violations of various securities laws in connection with the sale of at least $2,400,000 worth of OEG promissory notes to approximately forty-four investors. The SEC claimed that the notes were represented as investments and were sold primarily to elderly and retired investors who attended seminars sponsored by, among others, OEG. The notes were personally guaranteed by Cogley. The SEC claims that Cogley made numerous misrepresentations and omissions in connection with the sales of the notes as part of a "scheme to defraud" investors. Specifically, the SEC alleged that, of the sums raised since August 1997, only $238,000 was invested and that the remainder was used to pay the ongoing business expenses of OEG, as well as Cogley's personal expenses. The SEC claimed that the investors were unaware of this use of funds.
On March 9, 1999, the Court held Cogley in civil contempt for violating its August 18, 1998 Preliminaxy Injunction Order. A civil contempt hearing was held on March 5, 1999. The Court concluded that Cogley violated paragraphs IV and VII of the Court's August 18th Order, and ordered that Cogley disclose the names and addresses of all persons who invested with him and with Shannon Road Development. The Court further ordered that Cogley return to investors the amount of the monies that they invested in Shannon Road and with him. Cogley was also required to disclose the location of any and all investments made on behalf of investors since the Court's August 18, 1998 Order, as well as the names and addresses of all persons that Cogley recommended invest with him or in Shannon Road Development. Following the Court's Order, Cogley filed an appeal with the Sixth Circuit, which was dismissed. This Court entered a Final Judgment and Order of Permanent Injunction against Cogley and the OEG on December 1, 1999.
Paragraph IV provided:
Defendant Cogley and his officers, agents, servants, employees, attorneys, and those persons in active concert or participation with him who receive actual notice of this Order by personal service or otherwise, and each of them, be and are hereby preliminarily restrained and enjoined from using the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of any security (other than an exempted security or commercial paper,
bankers' acceptances or commercial bills) unless registered with the Commission as a broker or dealer in accordance with Section 15(b) of the Exchange Act [ 15 U.S.C. § 780 (b)]:
Paragraph VII provided:
Defendant Cogley and his officers, agents, servants, employees, attorneys, and those persons in active concert or participation with him who receive actual notice of this Order by personal service or otherwise, and each of them, be and are hereby preliminarily restrained and enjoined from, by the use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, while acting as an investment adviser, engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
The Court, in its March 9, 1999 Order finding Cogley in Civil Contempt, ordered Cogley to disclose "all persons that Defendant recommended invest in the Shannon Road Development." The Court Order did not distinguish between Shannon Road LLC and Shannon Road Ltd.
On January 12, 2001, the SEC filed an Emergency Motion for a Temporary Ex Parte Order Freezing Assets. This Court granted this Motion and issued a Temporary Ex Parte Order Freezing Assets on the same day. In the January 12, 2001 Order, this Court temporarily restrained Dominion Homes, Inc. from disposing, in any manner, the funds belonging to Shannon Road Development, Ltd. Following this Court's Order approximately $670,340 in funds were frozen. The original Order was set to expire on January 22, 2001, but was extended until a hearing on this matter.
Following the January 12 Motion, the parties entered into an Agreed Order for Release and Partial Distribution of Frozen Funds on February 9, 2001. of the $670,340 in frozen funds, the Court ordered Lindberg Asset Management Co., Shannon Road Ltd.'s Agent, to issue checks to the following note holders:
(1) Helen Delatore $ 76,161.71
(2) Erik Smith $ 21,554.76
(3) Jon Kassner $ 318,713.86
(4) Marie Kirk $1,350,37, and
(5) Victor and Anna Peacock $ 734.20.
The remaining funds, $251,825.10, were deposited with the Clerk of Courts. On March 7, 2001, the SEC filed the present Motion that is the subject of this Opinion and Order. The matter was set for hearing on March 22, 2001.
B. Facts Elicited at the Hearing
During the March 22, 2001 hearing, the following additional facts were adduced through the testimony of Eugene Barney, Donald Ryba and Kenneth Kirk. The Court outlines the facts as follows.
Eugene Barney is the brother-in-law of the Defendant James Cogley. In September of 1998, Cogley approached Barney and asked him to open a checking account with him at Bank One, Wheeling/Steubenville ("Barney account"). The account number for the newly opened account was 621680875, and was an individual account with Barney being the sole signor. The account's original mailing address was listed as 432 Main Street, Wintersville, Ohio, the address of Barney's hobby shop. The mailing address was changed to 4836 Briar Grove Drive, Grove Port, Ohio, as of the October 24, 1998 through November 24, 1998 bank statement. The Briar Grove address was Cogley's home. According to Barney, after the account was opened, Cogley took into his possession the starter checks that were provided by Bank One.
On September 1, 1999, the date the account was opened, the bank records reflect an initial deposit of $122,784.01. The original $122,784.01 check that was deposited was made out to John A. Stutz and was issued by Modem Woodmen of America, A Fraternal Life Insurance Society. The back of the check was endorsed by John Stutz and stated: "I do hereby wholly assign and make this instrument payable to Eugene J. Barney." On October 25, 1998, there was an additional deposit made into the Barney account for $35,261.05. There were two checks in this deposit. The first check was made payable to Helen Stutz in the amount of $17,207.74, and the second was made payable to John Stutz in the amount of $18,046.75. Both checks were drafted by Modem Woodmen of America, and both checks were endorsed on the back: "I do hereby wholly assign this instrument and make payable to Eugene J. Barney, ADM." All three checks were endorsed by the purported signature of Eugene Barney, although Barney testified that he did not know who the Stutzes were, and that he did not receive checks from the Stutzes. Barney further testified that he does not recognize the signature on the back of the Stutzes' checks that was suppose to be his endorsement.
Numerous checks cleared the Barney account, numbered from 001 to 572, yet Barney testified that he never wrote a check from the account. Significant checks, in excess of $500, drawn on the Barney Bank One account included:
Check No. Amount Payee
002 $ 850 Charles Small 004 $ 7,000 Debbie Rose 007 $ 6,000 Patricia Cogley 544 $ 1660 Charles W. Small 501 $ 2,059.70 Advanta Mortgage 538 $ 798.60 Capital Club 560 $ 858.79 State of Ohio 551 $ 674.23 Ameritech 550 $ 536.70 Ameritech 556 $ 556.00 Countrywide Home Loan 545 $ 2,059.70 Advanta Mortgage 521 $ 2,059.70 Advanta Mortgage 524 $ 724.53 Ameritech Cellular 530 $ 556 Countywide Home Loans 532 $ 653.94 Capital One 538 $ 798.60 Capital Club 535 $ 800.00 Helen Delatore 562 $ 900.00 Patricia A. Cogley 542 $ 500 Patricia A. Cogley 561 $ 1000.00 Patricia A. Cogley 543 $ 7500.00 Patricia A. Cogley 518 $ 4400.00 Kenneth L. Kirk 519 $ 2950.00 Debbie Rose 517 $ 500.00 The Accounting Dept. 518 $ 1160.00 ChasSmall 520 $ 5000.00 Patricia Cogley 506 $ 556.00 Countrywide 511 $ 600.00 James M. Cogley 006 $ 10,000 J. Sykes 008 $ 30,000 Kenneth L. Kirk 005 $ 5000 Debbie Rose 003 $ 9000 Debbie Rose Counter Check $ 39,500 Bank One 001 $ 10,000 Phillip D. Lehmkuhl
This check was made out to Eugene Barney. Cogley gave Barney this check to cover another check that was deposited into Barney's personal checking account, but that bounced when this Court froze Cogley's assets.
Barney testified that although his name appears on the drawor's line of the above listed checks, he did not sign the checks, and he did not write out any of the cheeks. In addition to the Stutzes' deposits, two deposits were made from Patricia Cogley's account into Barney's Bank One account, totaling $8,700.
Patricia Cogley is James Cogley's wife.
Donald Ryba, an accountant employed by the SEC, testified that James Michael Cogley issued the Stutzcs a total of three promissory notes in the amounts of $122,000 and $17,000 to John Stutz, and in the amount of $18,000 to Helen Stutz.
Ryba further testified that he recognized the handwriting on the checks drawn on the Bank One Barney account to be that of Cogley's. Ryba specifically referenced checks numbered 543, 562, 535, 532, 524, 545, 556, 550, 551, 560, 538 and 004 as being drafted by Cogley.
Meanwhile, on October 23, 1998, Kenneth Kirk formed a corporation, Shannon Road Development Ltd. with Patricia Cogley, the Defendant's wife. The company was formed so that Kirk could "flip" Loften Phillips's farm, thereby turning it into a piece of land that was ready for residential development. The project itself which was started when Kirk worked for OEG, was called Shannon Road Development.
Bamey Thought that the owners of Shannon Road Development were going to be OEG, and/or Cogley. Barney invested $25,000 in Shantton Road. He gave the money to Cogley in April or May of 1998.
Ryba stated that his research shows that there are two companies registered in Ohio with the name of Shannon Road Development: one is Shannon Road Development LLC, and the other is Shannon Road Development Ltd. Shannon Road LLC was owned by James Michael Cogley and was created on or about February of 1998. Shannon Road Ltd. was created in October of 1998, and the incorporating partners are listed as Patricia Cogley and Kenneth Kirk. Cogley was listed as the vice president of Shannon Road Ltd., and Phillips Lehmkuhl was listed as its secretary.
III ANALYSIS
The sole issue in this case is whether the proceeds from the sale of Shannon Road Development to Dominion Homes should be used to pay the principal and accrued interest on three promissory notes issued by Cogley to John and Helen Stutz. Underlying this issue is the question of whether Cogley violated the Court's August 18, 1998 Preliminary Injunction Order. The SEC calculates that the principal and accrued interest owed to the Stutzes as of February 9, 2001 is $200,758.98. Shannon Road contends that its responsibility totals $41,744.53.
A. The Parties' Positions
The SEC argues that there is strong evidence that Cogley owns at least fifty percent of Shannon Road and that he has used Shannon Road as a vehicle to violate this Court's Preliminary Injunction Order. The SEC contends that the Stutzes' funds were used for Cogley's and Shannon Road's expenses. The SEC concludes that there is strong evidence that Shannon Road Ltd. was the continuation of OEG, and requests that $200,758.98 be returned to the Stutzes, with the remaining funds going to Shannon Road Development, Ltd.
Shannon Road responds that it is not a continuation of OEG. The promissory notes issued to the Stutzes differ from the other five issued by Shannon Road, Ltd. According to Shannon Road, the Promissory Notes given to the Stutzes do not provide that Shannon Road as the Maker, nor do they bear the signature of Kenneth Kirk as President. And, the notes are dated prior to the date of Shannon Road Ltd.'s legal existence.
Shannon Road Ltd. concedes that it benefitted from money that came from a limited number of checks drawn on the Barney account during the period from September 1, 1998 until the third week of November 1998 — the "pre-incorporation era" — totaling $41,744.53.
The Court will address whether the funds should be returned to the Stutzes from the proceeds of the sale of Shannon Road Development.
B. Following the Paper Trail
The following factors lead this Court to conclude that Shannon Road Development, Ltd. was a continuation of OEG, and/or Shannon Road LLC. The Court finds that the Barney and then the Diamond USD bank accounts were used to pay the debts and obligations of Shannon Road Development, Ltd. prior to, and following its incorporation. The Court therefore concludes that $200,758.98 should be returned to the Stutzes, through the SEC. and that the remaining funds should be returned to Shannon Road Development, Ltd.
1. The Court's Conclusions of Fact
Based on the filings of the pates and on the testimony provided at the March 22, 2001 hearing, the Court construes the facts as follows. The timeline begins with the formation of OEG by James Cogley. The employees of OEG were Patricia Cogley, Debbie Rose, Charles Small and Kenneth Kirk. Kirk testified that while at OEG, he worked on the Shannon Road Project, although it was not one of his assigned duties. During his employment, Cogley, through OEG, provided Kirk $20,000 to purchase an option contract on the Loften Phillips farm, which was also known as the Shannon Road Development Project. The $20,000 was used as a down payment for the purchase contract in the Spring of 1998. At that time, it was assumed by Kirk that Cogley and he would be co-owners of Shannon Road Development.
The purchase contract expired before the property could be flipped and sold.
Cogley first appeared before this Court on August 11, 1998, when a temporary restraining order was entered against him and OEG. It was most likely on this date that Cogley learned that the SEC was looking into his investments, and that he realized the Shannon Road Project could fall into this Court's jurisdiction if he continued to be involved with it. On August 18, 1998, this Court entered a Preliminary Injunction Order against Cogley and OEG preventing them from "directly or indirectly," "while acting as an investment advisor" engaging in any business which "operates as a fraud or deceit upon any client." Furthermore, Cogley, and his "agents, servants, employees [and] attorneys" were enjoined from using the mails or interstate commere "to effect any transaction in, or to induce or attempt to induce the purchase or sale of any security." At the time of the August 18 Order, Cogley and OEG had been enjoined, but not the Shannon Road Project, nor Shannon Road Development LLC.
Then, on September 1, 1998, despite the Court's Order, Cogley, through Barney, opened an account at Bank One and deposited the Stutzes' checks. At that time, the Court surmises that Cogley was continuing to pay the expenses of OEG and/or Shannon Road LLC through the Barney account, and that Cogley was attempting to continue with the Shannon Road Project despite this Court's Order.
In mid-October 1998, Cogley, Kirk and Lehmkuhl, counsel for Shannon Road, met and discussed the fact that Cogley's ownership Shannon Road Development, Ltd. Kirk testified that Cogley was the original intended co-owner of Shannon Road, but alter Kirk "learned" of Cogley's "difficulties" with this Court, Patricia Cogley became the new co-owner. Kirk stated that Cogley, Lehxnkiihl and he came to a consensus that Cogley should not be a co-owner. According to Kirk, Cogley asked that Patricia Cogley act "in his stead as a fifty percent owner."
Lehmkuhl was not questioned in the hearing and the Court does not have evidence before it at this time that would permit it to pierce the attorney-client privilege.
At the time, the three individuals, Lehmkuhl especially, as counsel for Cogley, were aware of Cogley's appearances before this Court.
The Court asked Kirk:
Q When you agreed to take Mrs. Cogley on as a fifty percent owner, was it your understanding that she was replacing Mr. Cogley?
A Jim asked her to. Yeah, I guess so.
Kirk stated that Patricia was not. at the meeting at the time the decision was made. Kirk considered the $20,000 that OEG provided for the investment contract in the Phillips's farm to be the consideration for Patricia's fifty-percent ownership in Shannon Road, Ltd. Patricia Cogley's duties with respect to Shannon Road Ltd., according to Kirk, were to "[s]tay out of the way and let [Kirk] do his work."
2. A Fraudulent Corporate Entity
The Court finds the transfer of ownership from James Cogley to Patricia Cogley significant. The Supreme Court of Ohio has articulated that one indication of fraud is where there is inadequate consideration provided for a corporate acquisition, coupled with a lack of good faith. Welco Indus., Inc. v. Applied Co., 617 N.E.2d 344, [ 617 N.E.2d 1129] 349 (Ohio 1993). Here, Patricia did not pay Cogley any monies for his one-half ownership of Shannon Road. Cogley asked that Patricia act in his place because she was not subject to this Court's order of preliminary injunction. Even if this Court were to take into consideration Patricia's check of $300, that amount hardly constitutes adequate consideration as Shannon Road, as Dominion Homes paid $3,300,001 for the property. Kirk, during the March 22 hearing, characterized the amount that Patricia paid as "the token amount of a couple hundred bucks." The Court finds the lack of consideration to be one indication that Shannon Road Ltd. was a corporate entity tainted by fraud.
Neither did Patricia Cogley contribute to the completion of the transaction as she was suppose to "stay out of the way."
In determining that the creation of Shannon Road Ltd. was fraudulent the Court also finds probative the parallel expenses first paid through Barney's account, and then through the Diamond USD following Shannon Road Ltd.'s incorporation. First, the transition of expenses can be seen in the payroll records of OEG and Shannon Road Ltd. The employees of ORG were Debbie Rose, Charles Small, Kenneth Kirk and Patricia Cogley. After this Court's August Orders, Cogley, OEG and its employees were prohibited from engaging in the investment business. On September 1, 1998, shortly after this Court entered its preliminary injunction order, Cogley opened the Barney account. The Court concludes that the Barney account and the Stutzes' money were used to pay the expenses of Shannon Road Project and the employees of OEG until Shannon Road Development, Ltd. could be formed.
Out of the Barney Bank One account, ORG's employees continued to receive theft salaries. A check was made payable to Debbie Rose on September 4, 1998 for $6,000; on September 8, 1998, two checks totaling $14,000; on October 28, 1998, a check for $2,950. From the Barney account, Charles Small was paid on September 4, 1998, in the amount of $850; on October 27, 1998, for $1,160; on November 27, 1998, for $1,160.00. Patricia Cogley received a check for $5,000 entitled "loan'1 on October 27, 1998, from the Barney account. On October 28, 1998, Kirk also received $4,400 from the Barney account so that as he testified, he could "eat." The Court finds that this to be no different than Cogley continuing to provide Kirk with a salary.
Once Shannon Road Ltd; was formed in late October, the responsibility for the payroll of OEG employees was transferred to the new company. Kirk testified that Shannon Road Development Ltd. was an affihate of Diamond USD, and that he is the signor on the Diamond USD and the Shannon Road bank accounts. The Diamond USD account was used to pay Shannon Road Ltd.'s expenses.
Shannon Road Ltd. transferred $2,000 to Diamond USD on November 19, 1998 and $100,000 to Diamond USD on November 23, 1998. Diamond USD continued to provided payroll checks to both Debbie Rose and Charles Small. Diamond USD paid Small on November 24, 1998, ("Dec Pay"); January 7, 1999 ("Pay Severance"). Diamond USD also may similar payroll payments to Rose on January 11, 1999 ("Jan `99 Payroll"); February 5, 1999, $3,183.71 ("Feb `99 Pay Expenses); February 24, 1999, $3,166.67 ("March Payroll"). Kirk verified that Rose worked for Shannon Road Ltd. from the beginning of December until March or April of 1999, and that she was paid out of the Diamond USD account. Small also worked for Shannon Road, Ltd., by moving furniture, and was paid out of the Diamond USD account.
Kirk testified that Rose was never an employee of Shannon Road Development, Ltd, but neither was Kirk himself or Cogley.
Kirk also received a check of $30,000 from the Barney account to "cover" Shannon Road Development Ltd. until he received money from Mr. Kassner at the end of November of 1998. The Court finds that the $30,000 is additional evidence that Shannon Road Ltd. was a continuation of OEG/Shannon Road LLC. The $30,000, according to Kirk, "tied Shannon Road over until it could get money from Mr. Kassner." Out of the $30,000 check, Kirk paid the City of Columbus, $12,000 for annexation fees involved with Shannon Road, and $4,500 to EMHT an engineering firm.
Out of the $160,000 Shannon Road received from Dominion Homes on August 31, 2000, as part of the transaction, James Cogley was paid $27,596.58. The funds were used to reimburse him for the payroll of Small, Kirk and Rose. The money also covered The Ameritech phone bill and the $12,000.00 annexation fee.
During the hearing, Kirk stated that "it's a little puzzling why it ended up in my account — but another $1500 or so went to some third party that Jim [Cogley] wanted a check sent to for something to do with the court records, and another $10,000 of it was written out for legal expenses." The puzzle has been solved by this Court. The Court finds that Shannon Road Development Ltd. was operating as a continuation of ORG in contravention of this Court's Order.
Lehmkuhl, who was originally Cogley's counsel and is now counsel for Shannon Road Ltd. and the registered agent for Shannon Road, received approximately $10,000 in funds raised by Cogley from the Stutzes for his services.
The paper trail continues linking ORG and Cogley to Shannon Road Ltd. Kirk testified that membership in the Capital Club was "part of the ORG package I guess as an employee there." Kirk testified that he never had a membership in the Capital Club of his own financial obligation. This Court concludes that Cogley continued to provide this Capital Club benefit to Kirk as an employee of ORG after this Court's August 18th Order. And, once Shannon Road Development, Ltd. was formed, the Diamond USD account was used to pay for Kirk's ORG health club membership. On October 30, 1998, from the Barney account, a check was made payable to the Capital Club in the amount of $798.60 for account #1 (0243, in the name of Kenneth Kirk. From the Diamond USD account, a check was made out to the Capital Club for account KLK K-243, for $1,074.53 on January 14, 1999. Kirk's ORG employee benefits, instead of being paid through an ORG or Cogley account, which had been frozen by this Court, were paid by the continuation of ORO, Shannon Road Ltd.
In addition, Ameritech cellular bills were paid for phone number 216-8585 from both the Barney account (November 4, 1998, $724.53, and December 1, 1998 for $674.23), and the Diamond USD account (February 18, 1999, for $1,485.19). For Ameritech phone number 208| 5794 from the Barney account (December 1, 1998 for $536.70), and from the Diamond USD account ($577.78 on February 18, 1999). This Court finds this to be additional evidence that the Stutzes' funds were used until the time that Kirk, an employee of Cogley's and ORG, could create Shannon Road Ltd. in circumvention of this Court's Order.
In addition, Diamond USD made checks payable to John an Helen Stutz on February 1, 1999 in the amounts of $893.25 and $906.00. Kirk does not remember drafting these checks, but he said that if he did he did it under Cogley's direction. Kirk verified that the signature on the checks made out to the Stutzes was his. The Court finds this to be further evidence that Shannon Road Ltd. was the continuation of Cogley's attempt to complete the Shannon Road Project.
On cross-examination, counsel for Shannon Road tried to make a point that a large portion of the checks that cleared the Barney account did so before Shannon Road Ltd. legally existed. The Court, however, finds this point of no consequence. The Court notes that on page eight of Shannon Road's Response, it indicates "Because it derived the benefit from some of these expenditures during this `preincorporation' era, Shannon Road Development, Ltd. acknowledges an obligation for the follow sums . . . totaling $41,744.53." Shannon Road, in essence, has responded to its own argument.
This Court concludes that Shannon Road LLC was originally intended to be the "Shannon Road Development" company, but that after this Court's Order holding Cogley in contempt, Kirk and Cogley, after meeting with Lehmkuhl, had to alter their plans. So, in October 1998, Kirk incorporated Shannon Road, Ltd. with fifty percent of ownership going to Patricia Cogley, James's wife.
The Court finds persuasive the analysis provided by Welco Industries, Inc. v. Applied Companies, 617 N.E.2d 1129 (Ohio 1993). In Welco Industries, the Supreme Court of Ohio examined the issue of "whether a stranger corporation that purchases the assets of another corporation may be held liable for the unassumed contractual obligations of the predecessor under a theory of successor liability." Id. at 1132. The general rule in Ohio is that the "purchaser of a corporation's assets is not liable for the debts and obligations of the seller corporation." Id. This rule, however, is subject to four exceptions, which also are applicable in the areas of product liability, tax liability, contracts and shareholder's fights. Id. at 347. These exceptions are: extending the Ohio Supreme Court's analysis to the facts of this case, the Court therefore finds these exceptions to be probative in determining whether Shannon Road Ltd. is liable for the civil violations of Cogley and OEG.
One of the exceptions outlined by the Weko is when the "transaction amounts to a de facto consolidation or merger." Id. A de facto merger has been defined as a "merger in fact without an official declaration of such." Id. A de facto merger includes:
In contrast, a continuation occurs when the corporate entity continues, but the "business operation" does not. Id. at 350. Here, the business operation, that is, the Shannon Road Project, continued, and therefore, the continuation theory does not apply to this case.
(1) the continuation of the previous business activity and corporate personnel, (2) a continuity of shareholders resulting from a sale of assets in exchange for stock, (3) the immediate or rapid dissolution of the predecessor corporation, and (4) the assumption by The purchasing corporation of all liabilities and obligations ordinarily necessary to continue the predecessofs business operations.Id. For a de facto merger, the transfer of assets for stock is the "sine qua non." Id. at 349.
The Court finds that applying the de facto merger exception leads to the conclusion that Shannon Road Ltd. was de facto merger of OEG and/or Shannon Road LLC. Here, there was a continuation of business activity: the flip of the Loften Phillips farm, otherwise known as the Shannon Road Project. The corporate personnel were almost identical and included Kirk, Cogley, Patricia Cogley, Rose and Small. Third, ORG and Shannon Road LLC were in essence, if not in fact, dissolved as of the Court's August Orders. Fourth, Shannon Road Ltd. assumed ORG/Shannon Road LLC's liabilities and obligations including, but not limited to, payment of the salaries of its employees, a health club membership, payment of the annexation fees and engineering costs related to the Shannon Road Project, payment of the company's cell phone expenses, the payment of Cogley's personal expenses, and, most notably, the obligation to the Stutzes as witnessed by the two checks drafted from the Diamond USD account.
As for the transfer of assets for stock, Patricia Cogley, standing in the shoes of Cogley, became a fifty percent owner of Shannon Road Ltd. and purchased "5 Units of Class X Membership Interest in Shannon Road Development Ltd." at a cost of $10 per Unit, or for $50. The asset that Shannon Road Ltd. received was the continuation of and investment in the Shannon Road Project Another asset Shannon Road Ltd. received was the business relationship developed with Loften Phillips, including good will. Based on Ohio law, this Court concludes that OEG/Shannon Road LLC and Shannon Road Ltd. were involved in de facto merger.
The facts of this case are similar to those of Harbison v. Harbison, 187 N.R.2d 60 (Ohio Ct.App. 1962), in that both defendants attempted to use their spouses's ownership in a corporate entity to perpetrate fraud. In Harbsion, Edward Harbison, in an attempt to avoid the payment of support and maintenance payment to his ex-wife, Gertrude, created a corporation, Air Technical Associates. The officers of Air Technical were Edward as president, his new wife's father as vice-president and Maureen, his new wife, as secretary-treasurer. Five shares of stock were issued by Air Technical; Maureen owned three shares and her father owned two. Id. at 65. Following incorporation, Maureen received a salary of $1,300 per month, but her prior salary as an executive secretary had been $65 per week. Edward, as an employee of Air Technical received a salary of $50 per week, but previously, as a manufacturer's representative, his salary was $1,875 per month. Id. at 65-66. In addition to her duties at Air Technical, Maureen took care of her four young children, Id. at 66. Based on the facts, the Harbison court concluded "we cannot discount the contention that defendant Air Technical Associates, Inc., as presently composed, is a sham and a fraud to defeat the legal claims of the plaintiff Gertrude Harbison." Id. Here, the Court concludes that the creation of Shannon Road Ltd. with Patricia as co-owner was, and is, a "sham and a fraud," just as in Harbison, intended to avoid the Court's August 18, 1998 Order.
IV. CONCLUSION
For the foregoing reasons, the SEC's Motion is GRANTED and $2l3,013.21 will be returned to the SEC to either be returned to the Stutzes or to be placed in Cogicy's bankruptcy estate. The remaining funds are to be returned to Shannon Road Development, Ltd.
The dollar amount is the amount due to the Stutzes as of April 27, 2001. The total award includes the amount due on the three notes as of their date of maturity, plus interest earned after the date of maturity until to the date of this Opinion and Order, April 27, 2001.
The interest earned post-due date was calculated using the 10% per annum rate of interest with the principal amount being the dollar amount due on maturity. See OHIO REV. CODE § 1343.03 (pre-Tort Reform version of the statute).
The time period used was from the due date of the three notes issued by Cogley to the Stutzes (October 23, 2000, September 1, 2000 and October 23, 2000) through the date of this Court's Opinion and Order, that is 186, 238 and 186 days respectively.
Helen Stutz therefore received post-maturity interest of $1,160.61, while John Stutz received $10,037.24 on the note due September 1, and $1,217.40 on the note due on October 23.