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L.L.C. v. Harris

Court of Appeals of Ohio, Eighth District, Cuyahoga

May 24, 2018

SMS FINANCIAL 30, L.L.C. PLAINTIFF-APPELLEE
v.
FREDERICK D. HARRIS, M.D., INC., ET AL. DEFENDANTS-APPELLANTS

          Civil Appeal from the Cuyahoga County Court of Common Pleas Case No. CV-16-857614

          ATTORNEYS FOR APPELLANTS Samantha A. Vajskop Daniel J. Myers Myers Law, LLC.

          ATTORNEYS FOR APPELLEE David M. Cuppage Scott D. Simpkins Climaco, Wilcox, Peca & Garafoli Co., L.P.A. 55 Public Square, Suite 1950 Cleveland, Ohio 44113 KATHLEEN ANN KEOUGH, P.J.:

          BEFORE: Keough, P.J., Laster Mays, J., and Jones, J.

          JOURNAL ENTRY AND OPINION

          KATHLEEN ANN KEOUGH, PRESIDING JUDGE

         {¶1} Defendants-appellants, Frederick Harris, M.D., Inc. and Frederick Harris, M.D. (collectively "appellants") appeal the trial court's decision entering judgment against them and in favor of plaintiff-appellee, SMS Financial 30, L.L.C. ("SMS") in the amount of $46, 762.64, plus interest. For the reasons that follow, we affirm in part, reverse in part, and remand with instructions to the trial court.

         {¶2} On January 20, 2016, SMS filed a complaint against Frederick Harris, M.D., Inc. ("Harris M.D ") for breach of a Small Business Line of Credit Agreement with National City Bank ("LOC"), and against Frederick Harris, M.D., individually, ("Harris") for breach of Guaranty of Payment - Waiver of Rights in favor of National City Bank ("Guaranty"). Appellants admitted that the LOC was executed, but denied the material allegations of the complaint. Appellants also challenged the validity of the assignment of the LOC to SMS and whether SMS's action was (1) time-barred, (2) seeking to collect on the wrong account, and (3) barred pursuant to R.C. 1701.87.

         {¶3} Both parties moved for summary judgment, which the court denied in part. The court only granted summary judgment in favor of the appellants on SMS's request for attorney fees contained in the complaint. In denying appellants' request for summary judgment on the merits of the case, the trial court found that there were genuine issues of material fact regarding whether SMS's claim was barred pursuant to R.C. 1701.87, and whether the assignment of the LOC and personal guaranty to SMS was proper. The trial court found, however, that the LOC was a negotiable instrument and that the action was not time-barred under R.C. 1303.16 because the LOC was accelerated on May 1, 2012 - within the six-year statute of limitations of the complaint.

         {¶4} The matter proceeded to a bench trial where the trial court heard the following evidence.

         {¶5} On March 22, 2000, Harris, on behalf of Harris M.D., executed the LOC in the amount of $50, 000 and a security agreement with National City Bank ("National City"). Pursuant to the terms and conditions of the LOC, National City would issue various loans or advances to the borrower, Harris M.D., when requested - "from time to time." This LOC was personally guaranteed by Harris, individually, and secured by a financing statement listing Harris's property and inventory. The financing statement was filed with the Ohio Secretary of State and the Cuyahoga County Recorder. At trial, appellants admitted that Harris signed the LOC on behalf of his company and that advances were drawn on the LOC.

         {¶6} In 2013, Harris M.D. dissolved. Attorney Milton Jefferson testified that he represented appellants and assisted with the dissolution. On June 18, 2013, Attorney Jefferson sent correspondence to PNC, as successor by merger to National City, notifying it of the dissolution of the corporation and that there were no remaining assets in the corporation to be used to settle outstanding debts. Included with the correspondence were a notice of dissolution, a certificate of dissolution, and a PNC bank statement. Attorney Jefferson testified that he sent the notice by regular and certified mail. Although the certified mail return of service card was not presented at trial, he testified that PNC must have received the notice because he was contacted by PNC after the notice was sent.

         {¶7} On October 29, 2014, SMS acquired and purchased the LOC from PNC Bank, the successor by merger to National City Bank in November 2009. Pursuant to the Loan Sale Agreement, PNC sold, assigned, and transferred any and all rights in and to the LOC to SMS. As a result of the execution of the Allonge, the General Assignment, and Loan Sale Agreement, SMS became the owner and holder of the LOC, and all reports, records, payment histories, and related documents pertaining to the LOC.

         {¶8} Included in these records are six months of account statements issued by PNC to Harris M.D. from February 2012 to July 2012. These statements appear much like a credit card statement, depicting the previous balance, payments received, amounts advanced or "purchases, " if any, credits, cash advances, late and over-limit fees, finance charges, new balance, past due amount, minimum payment due, total amount due, and due date. Additionally, the statement provides the total credit limit, total available credit, and a calculation on how interest is accruing on the account.

         {¶9} The statements demonstrate that the last payment made by appellants was in April 2012. However, the statements do not provide when the last purchase or advance was made. Pursuant to the LOC, appellants were required to make payments on or before the due date of at least the minimum payment reflected on each periodic statement. As of May 1, 2012, appellants were in default of the terms and conditions set forth in the LOC, including the failure to pay principal, interest, and finance charges. As of the date of default and pursuant to the LOC, the interest rate changed from the contract rate of 3.25 percent to the default rate of 6.25 percent per annum.

         {¶10} On or about October 23, 2015, SMS notified appellants through a Demand Notice that the account was in default, and as a result, any "rights, powers, privileges, and other remedies" available to SMS under the LOC, in law, or in equity "may be exercised by SMS at any time whether or not any legal action is commenced." SMS further notified appellants that it was declaring all of the indebtedness evidenced by the LOC, including the Guaranty, to be immediately due and payable. As of October 16, 2015, the principal amount due was $46, 762.64 with $10, 633.30 in accrued interest, for a total amount due and payable of $57, 395.94. Despite being notified, appellants failed and refused to pay the default balance on the LOC.

         {¶11} Following a bench trial, the court issued a written decision entering judgment in favor of SMS and against the appellants, jointly and severally, in the principal amount of $45, 762.64, plus $10, 633.30 interest as of October 16, 2015, with interest accruing from that date at a rate of 6.25 percent per annum until paid in full.

         {¶12} Appellants appeal, raising as their sole assignment of error that the trial court erred when it entered judgment in favor of SMS because its claims were barred and otherwise unenforceable. Specifically, appellants raise four issues for this court to review: (1) whether a creditor who fails to make a claim before the R.C. Title XVII statutory deadline can later attempt to enforce that claim against a corporation that has been legally dissolved under R.C. Title XVII; (2) whether a cause of action based upon a negotiable instrument is time-barred when it is filed more than six years after the instrument is due, accelerated, and/or in default; (3) whether SMS may maintain an action to enforce a negotiable instrument when it cannot establish that the specific negotiable instrument is the same instrument that was assigned to it; and (4) whether a personal guaranty on a negotiable instrument is enforceable when the underlying debt has been, at some point, fully paid and when the guaranty's underlying debt has been released by operation of law.

         I. Statute of Limitations

         {¶13} The parties filed cross-motions for summary judgment. One basis upon which the appellants moved for summary judgment was that SMS's complaint was time-barred. They maintained that the LOC was a negotiable instrument and thus subject to the relevant six-year statute of limitations. See R.C. 1303.16(a). SMS opposed appellants' motion, contending that the LOC was not a negotiable instrument and thus was subject to the relevant statute of limitations for a written contract. See R.C. 2305.06. In its written decision denying appellants summary judgment, the trial court found that the LOC was a negotiable instrument and subject to a six-year statute of limitations, but that the LOC was accelerated on May 1, 2012, which was within the statute-of- limitations period.

         {¶14} Appellants contend on appeal that while the court was correct in determining that the LOC was a negotiable instrument subject to a six-year statute of limitations, the court was incorrect in its finding that the complaint was filed within that time period because PNC made an automatic demand for payment in 2009 when it terminated the LOC. SMS maintains on appeal, as it did in the trial court, that the LOC is not a negotiable instrument, but even if it were, the complaint was filed within the relevant six-year statutory period because acceleration of the LOC occurred at the earliest in May 2013, and at the latest in October 2015.

         A. Is the LOC a Negotiable Instrument?

         {¶15} R.C. 1303.03(A) defines a negotiable instrument.

[A] "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it meets all of the following requirements:
(1) It is payable to bearer or to order at the time it is issued or first comes into ...

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