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IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI NO. 95-CA-01248 COA SOUTHERN TIRE MART, INC. v. JAM, INC.; MSLEASECO, A MISSISSIPPI PARTNERSHIP; VERNON MOORE, INDIVIDUALLY; AND JIMMY N. JOHNSON, INDIVIDUALLY APPELLANT APPELLEES

THIS OPINION IS NOT DESIGNATED FOR PUBLICATION AND MAY NOT BE CITED, PURSUANT TO M.R.A.P. 35-B DATE OF JUDGMENT: TRIAL JUDGE: COURT FROM WHICH APPEALED: ATTORNEY FOR APPELLANT: ATTORNEY FOR APPELLEES: NATURE OF THE CASE: TRIAL COURT DISPOSITION: DISPOSITION: MOTION FOR REHEARING FILED: CERTIORARI FILED: MANDATE ISSUED: 08/07/95 HON. THOMAS L. ZEBERT RANKIN COUNTY CHANCERY COURT SCOTT PHILLIPS FRANK EDENS CIVIL - CONTRACT APPELLEE FOUND TO HAVE PRIORITY LIEN AFFIRMED - 9/23/97

10/14/97

BEFORE McMILLIN, P.J., HERRING, AND KING, JJ. HERRING, J., FOR THE COURT: This is an action where the Appellant, Southern Tire Mart, Inc. (STM) charges that JMS Trucklines, Inc. (JMS) fraudulently conveyed numerous tractors and trailers to the Appellees, JAM, Inc., MSLEASCO, a Mississippi Partnership, Jimmy N. Johnson, and Vernon Moore, thereby defrauding STM in its capacity as a creditor of JMS. The Chancery Court of Rankin County, Mississippi ruled generally that there was no fraudulent conveyance and in favor of JMS and the other defendants. STM contends that its claim against JMS and its assets was superior to the claims of

JAM, Johnson, and Moore, and that the trial court committed reversible error in its findings of fact and conclusions of law. I. ISSUES On appeal, STM raises the following issues: I. WHETHER THE LOWER COURT ERRED WHEN IT DECIDED THAT THE APPELLEES, JOHNSON, MOORE, MSLEASCO, ANDJAM, HAVE A PRIORITY LIEN ON THE PROPERTY OR ASSETS OF THE JUDGMENT DEBTOR, JMS. II. WHETHER THE LOWER COURT ERRED WHEN IT DECIDED THAT STM WAS NOT ENTITLED TO HAVE THE CONVEYANCE OR TRANSFER OF THE PROPERTY OR ASSETS OF JMS, SET ASIDE AS A FRAUDULENT CONVEYANCE, MADE WITH THE INTENTION OF HINDERING, DELAYING, OR DEFRAUDING CREDITORS OF JMS. III. WHETHER THE LOWER COURT ERRED WHEN IT DENIED STM'S MOTION FOR NEW TRIAL. Having fully considered the evidence presented and applicable law in regard to these issues, we affirm the judgment of the trial court. II. THE FACTS Jimmy N. Johnson and Vernon Moore created and were the sole owners and stockholders of JMS Trucklines, Inc., a Mississippi corporation doing business in Richland, Mississippi, as a trucking company. Johnson and Moore were also partners in a proprietorship called MSLEASCO, which owned the building and property on which JMS conducted its business. According to the evidence, Johnson and Moore successfully operated JMS until they sold out to TOPOFTHELINE, Inc. (TOP), a Delaware corporation, on November 18, 1993. Richard Frances of New York was the sole stockholder of TOP. In their sale to TOP, Johnson and Moore also conveyed their interests in JMS's corporate assets, which included 91 tractor trucks and 140 trailers. Some of these tractors and trailers were fully paid for, but 36 tractors and 44(1) trailers still were subject to purchase money indebtednesses to various lenders. Pretrial stipulations provide that Johnson and Moore personally guaranteed JMS's debt to lenders that financed the tractors and trailers conveyed to TOP by Johnson and Moore. The stipulations further provide that JAM repurchased only those vehicles on which Johnson and Moore had given personal guarantees of payment. In the buy-out agreement with TOP, Johnson and Moore retained security interests in thirty-two trailers because of personal guarantees of payment they had both given to the appropriate lenders. The corporate name of "JMS Trucklines, Inc." was retained by TOP for its newly acquired business. In addition, TOP entered into a new lease agreement with MSLEASCO to continue to use the building and grounds that JMS was already occupying. Through their partnership, MSLEASCO, Johnson and Moore retained a landlord's lien upon all of JMS's and TOP's assets located upon MSLEASCO property for security of the rental payments.

JMS was sold by Johnson and Moore to TOP for the sum of $2,500,000. The sum of $1,500,000 was paid directly to Johnson and Moore at the time of the sale, and the remaining $1,000,000 was financed through (1) a $500,000 promissory note executed by TOP in favor of Johnson and (2) a similar note in favor of Moore. These notes, as well as TOP's lease with MSLEASCO, were guaranteed by TOP's sister corporations, St. Lawrence Freightways, Inc. and Penguin Truck Leasing, Inc. Following its purchase of JMS, TOP sold JMS's accounts receivable for $1,000,000. The record is silent as to whether any of these funds were applied to its indebtedness to Johnson and Moore. Simultaneously with the sale of his shares of stock in JMS to TOP, Moore bought back forty shares of JMS, or twenty percent of the entire stock of the company. He also entered into a contract with TOP to work in Richland as its terminal manager for at least five years, at a salary of $12,500 per month. Johnson also entered into a contract with TOP to serve as a consultant at a salary of $6, 944.44 per month for a term of three years. Neither Johnson nor Moore served as either officers or members of the board of directors of TOP, JMS, or any other corporation related to TOP subsequent to the November 18, 1993, sale, and were not involved in management decisions. Prior to November 18, 1993, STM had an excellent working relationship with JMS and its owners, Johnson and Moore, and over the years had regularly provided services and sold tires to JMS. According to the testimony, STM had always been timely paid. Subsequent to the sale of JMS to TOP, however, the corporation immediately became delinquent in its payments to STM and to others. Johnson and Moore both testified that they met with representatives of STM and did what they could to assist STM in obtaining payments from JMS. Nevertheless, by April 11, 1994, JMS owed the sum of $47,085.46 to STM. Johnson and Moore became aware that JMS was defaulting in its obligations as early as January 1994, only two months after the sale to TOP. In addition to being contacted by STM concerning nonpayment of debt, Johnson and Moore were also contacted by a number of lenders in regard to the 36 tractors and 44 trailers to which Johnson and Moore had given personal guarantees of payment for their purchase money debts. In February 1994, these lenders began to take action to repossess the tractors and trailers because of nonpayment of the purchase money indebtednesses incurred when the vehicles and trailers were purchased. Johnson and Moore were given two choices by the lenders: (1) the vehicles and trailers would be repossessed by the lenders and transferred to Johnson and Moore, who would then pay the delinquencies on the indebtednesses and make regular payments thereafter, or (2) the lenders would repossess and sell the vehicles and trailers and call upon Johnson and Moore to pay the difference between the sales prices and the amount of the indebtednesses. Johnson and Moore took the first choice. Thus, the lenders went through the process of repossessing the tractors and trailers and then conveyed them to Johnson and Moore. Meanwhile, Johnson and Moore enforced their own security agreements against the trailers, terminated MSLEASCO's lease with JMS and seized the contents of the leased building pursuant to MSLEASCO's landlord's lien. The repossession of the tractors and trailers took several months in the spring and summer of 1994. Both Johnson and Moore testified that they assisted the financial institutions in repossessing the collateral because they knew that the expenses involved in the process would be charged to them. In March 1994, after consultation with the lenders, Johnson and Moore reentered the trucking business and created a new corporation, JAM, Inc., to engage in their trucking activities. Prior to obtaining the necessary permits to do so, they leased the repossessed trucks and trailers to other truckers, in

order to generate income. Johnson and Moore also expended approximately $150,000 from their personal funds in order to salvage their credit with various lenders. In addition, they repossessed and cashed in two certificates of deposit in the sum of $150,000, which they had been given as security for selling JMS to TOP, borrowed $300,000, and established a new line of credit with a local bank to pay the delinquent debts on the repossessed tractors and trailers. According to their testimony, neither Johnson nor Moore had intended to return to the trucking business. However, they had no choice since both of them were personally liable for the substantial indebtednesses for which they had given their personal guaranties. In other words, they reentered the trucking business to avoid being personally saddled with an enormous debt. It is noteworthy that there was little or no equity in any of the repossessed vehicles or trailers and that there was considerably more debt than value in regard to most of them. On or about March 3, 1994, the attorneys for STM wrote to Johnson by certified mail and informed him that STM had a claim against him for $47,085.46,(2) representing the indebtedness incurred by JMS and TOP for the purchase of tires and related materials subsequent to JMS's sale to TOP. The letter alleged that Johnson was personally liable for the debt because of his failure to comply with applicable bulk transfer statutes(3) when JMS was conveyed to TOP. This letter was received by Johnson on March 7, 1994, at a time when he and Moore were in the process of assisting the lenders to repossess the 36 tractors and 44 trailers mentioned above. STM filed suit on April 11, 1994, in the Circuit Court of Rankin County, Mississippi, to recover the indebtednesses due to STM against JMS and TOP, and also against Richard Frances, Johnson, and Moore, individually. On June 21, 1994, STM obtained a default judgment against JMS and Frances in the sum of $62,623.66, an amount which apparently included accrued interest on the indebtedness. The present action was filed in the Chancery Court of Rankin County, Mississippi, on July 27, 1994, against JMS, JAM, MSLEASCO, Moore, and Johnson. In the chancery proceeding, STM charges Johnson and Moore, as representatives and as creditors of JMS, with fraudulently reconveying to themselves the assets which they originally transferred to JMS on November 18, 1993. According to STM, this reconveyance was accomplished by Johnson and Moore through their creation of a new corporation, JAM, Inc., which was wholly owned by them. In essence, STM alleges that when the corporate assets of JMS were repossessed, they were transferred to JAM, which was created in anticipation of and when litigation was pending against JMS all without adequate consideration. As a result, STM argues JMS was rendered insolvent and unable to pay its debts to STM. Finally, STM charges that the transfer of assets described above was maliciously and fraudulently contrived with the intent to defraud STM, in violation of section 15-3-3 of the Mississippi Code of 1972, as amended, and to deprive it of any avenue to collect its just accounts receivable. In its request for relief, STM sought, inter alia, judgment against Johnson and Moore in the sum of $62,623.66, plus accrued interest, as well as punitive damages, costs, and attorney's fees. A motion to transfer the chancery action to the Circuit Court of Rankin County was denied on September 27, 1994. From the record before us, it appears that the original circuit court action was never pursued against Johnson and Moore. Following a trial on the merits, the chancellor found no evidence of fraudulent intent or fraudulent actions by Johnson or Moore, and that the ultimate transfer of the repossessed tractors and trailers to

JAM was valid. III. ANALYSIS In addressing the issues raised on appeal by STM, the Court will consider first what it considers to be the dispositive issue of the case, which is: WHETHER THE LOWER COURT ERRED WHEN IT DECIDED THAT STM WAS NOT ENTITLED TO HAVE THE CONVEYANCE OR TRANSFER OF THE PROPERTY OR ASSETS OF JMS SET ASIDE AS A FRAUDULENT CONVEYANCE, MADE WITH THE INTENTION OF HINDERING, DELAYING OR DEFRAUDING CREDITORS OF JMS. Upon reviewing the findings of fact of a chancery court, an appellate court will not reverse a chancellor's findings unless such findings are manifestly wrong or clearly erroneous. Denson v. George, 642 So. 2d 909, 913 (Miss. 1994). Additionally, "[w]henever there is substantial evidence in the record to support the chancellor's findings of fact, those findings must be affirmed . . . . For questions of law, our standard of review is de novo." Id. at 913 (citations omitted). STM argues on appeal that the lower court erred in failing to determine that there was a fraudulent conveyance in violation of Mississippi law. Pursuant to Mississippi law, a creditor may file suit in chancery court to have a conveyance set aside if that conveyance was "for the purpose of hindering, delaying or defrauding creditors." Miss. Code Ann.

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