The opinion of the court was delivered by: Henley, District Judge.
On May 11, 1961, the Vernon Bank of Leesville, Louisiana, with
SBA participation, made a $250,000 loan to the Leesville
Industrial Development Association, LIDA, to finance the
construction of a large sawmill in the City, which mill was to be
built and operated by Johnston. As a condition to its
participation in the loan SBA required Johnston to execute an
unconditional personal guaranty that the loan would be repaid.
For reasons which will appear, the mill operation was a
failure, and the $250,000 loan, which was secured by a first
mortgage on the mill properties, was not repaid. The note and
mortgage were assigned by the Bank to SBA, and in 1963 the
Government filed a foreclosure suit against LIDA in the United
States District Court for the Western District of Louisiana. On
December 18, 1963, that Court rendered judgment against LIDA in
the principal sum of $250,000 plus interest and certain items of
expense. Foreclosure of the mortgage was decreed, and the mill
properties were sold. The sale produced only $135,000. Of that
sum $28,620.61 was credited to accrued interest and $98,288.37
was credited to principal leaving a deficiency of $151,711.63.
Johnston's guaranty was one of payment rather than of
collection and before the Louisiana case went to judgment, the
Government made demand on Johnston for the full amount of the
debt plus accrued interest. When payment from Johnston was not
forthcoming, this suit was filed in early December 1963.
Originally, Mr. Johnston was the only person named by the
Government as a defendant in this case, and he filed a motion to
dismiss the complaint or, in the alternative, for a transfer of
the cause to the Western District of Louisiana where the
Government's suit against LIDA was still pending. The Government
resisted that motion.
On January 7, 1964, the Court advised counsel informally that
Johnston's motion probably would have to be denied in its
entirety. On February 6, 1964, the Government filed a motion for
leave to file an amended and substituted complaint bringing in
new parties and seeking additional relief. On February 28, 1964,
the Court entered a formal order denying the motion of Johnston
and granting that of the Government.
On March 2, 1964, the Government filed its amended and
substituted complaint bringing Mr. Johnston's relatives into the
case and seeking to have cancelled as fraudulent the conveyances
executed in their favor by Johnston and his wife. In due course
the defendants answered denying that the Government was entitled
to any of the relief sought by it.
Two pre-trial conferences have been held in the case, and the
parties have made efforts, more or less diligent, to effect a
settlement. It appearing at length that the case would have to be
tried, the Court, after overruling a motion for a jury trial
filed by the defendants, heard the matter without a jury. The
cause was submitted upon the pleadings, discovery material,
voluminous documentary evidence, oral testimony, and memorandum
briefs. This opinion incorporates the Court's findings of fact
and conclusions of law.
The challenged conveyances are 15 in number. The first one
bears date of November 2, 1960, and was filed for record in
Calhoun County on November 9 of that year. The next twelve were
all filed for record on July 18, 1961. Of those twelve deeds
three are dated June 22, 1961, two are dated June 24 of that
year, one is dated June 27, two are dated June 29, two bear date
of July, and two are dated July 5. The remaining two deeds are
dated June 5, 1963, and both were filed for record on June 7 of
Before undertaking to define the issues or to state the
contentions of the parties relative to the validity of those
instruments as against the Government, the Court deems it well to
set out some background facts and to outline the events leading
up to, surrounding, and following the execution of the deeds.
For many years prior to the happening of the events which gave
rise to this lawsuit Mr. Johnston had been engaged extensively in
the sawmill business and in other revenue producing enterprises.
By 1960 he was known in Louisiana as a successful sawmill
operator and business man. As of the spring of that year he had
a net worth of more than $500,000, consisting of cash in banks,
notes receivable, motor vehicle equipment, and lands and town
lots in Calhoun County, Arkansas.
Early in 1960, or perhaps shortly before that year, Johnston
and his wife moved from Harrell to Leesville where Mr. Johnston
purchased a home. In 1960 he and other Leesville business men
formed LIDA for the purpose of promoting industry in that City
and in the area. Apparently, LIDA initiated two projects. One of
them was known as Reynolds Lumber Co., with which the Court is
only slightly concerned in this case; the other was the Johnston
Lumber Co. with which the Court is directly concerned.
In connection with the Johnston Lumber Co., which was formed as
a Louisiana corporation in June 1960, the plan of LIDA was that
Mr. Johnston would construct and subsequently operate a large
mill for the manufacture of pine lumber; it was contemplated that
pine chips would be produced as a by-product of the sawmill
operation, and that those chips would be sold profitably to
International Paper Company's mill at Springhill, Louisiana. The
mill, when constructed, would be the property of LIDA but was to
be sold by LIDA to Mr. Johnston or to the Johnston Lumber Co.
under a lease-purchase agreement.
The construction of the mill was to be financed by means of a
$250,000 loan in which SBA was to participate to the extent of 90
percent; five percent of the loan was to be carried by the Vernon
Bank, and the other five percent was to be carried by the
Merchants and Farmers Bank & Trust Co. of Leesville. This
$250,000 loan was to be evidenced by LIDA's note to the Vernon
Bank, and was to be secured by a first mortgage on the mill
Certain de-barking machinery was to be acquired on credit from
the Soderhamm Machine Manufacturing Co. at a cost of $92,731.09.
That indebtedness was to be secured by a second mortgage on the
A number of the members of LIDA, including Mr. Johnston, were
also to participate in the financing of the construction by
contributions amounting to something over $80,000, which were to
be repaid in due course by the mill. That obligation was to be
evidenced by the note of Johnston or his corporation to LIDA and
was to be secured by a third mortgage on the properties. It
appears that LIDA in turn was to give its own
notes to the respective contributors. Mr. Johnston's contribution
On March 25, 1960, application was made to SBA for 90 percent
participation in the $250,000 loan. In that connection Mr.
Johnston submitted to SBA a financial statement, and offered to
put up, in addition to his LIDA contribution which has ...