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UNITED STATES v. JOHNSTON

August 24, 1965

UNITED STATES OF AMERICA, PLAINTIFF,
v.
CLARENCE JOHNSTON ET AL., DEFENDANTS.



The opinion of the court was delivered by: Henley, District Judge.

This is an action brought in the name of the United States on behalf of the Small Business Administration, SBA, against Clarence Johnston of Harrell, Calhoun County, Arkansas, and certain close relatives of Johnston for the purpose of obtaining a money judgment against him and for the further purpose of setting aside as fraudulent 15 conveyances of Calhoun County real estate executed by Johnston and his wife in favor of the other defendants.*fn1

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 that year.

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 properties.

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 properties.

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 was $26,000.

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 ...


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