## Facts

- Thunder Corp. was incorporated on May 16, 1966, as an Ohio corporation formed to own and operate apartment houses.
- Thunder had two shareholders: Julius Cohen (80% of the stock) and Lawrence Berman (20%).
- Cohen was also the sole shareholder of Winthrop Homes, Inc. (later renamed Amber Builders, Inc.).
- On March 14, 1967, Thunder executed what purported to be a valid second mortgage on its apartment property in favor of Real Estate Capital Corp. (REEC) and K. B. Weissman, as mortgagees, for a principal amount of $105,000.
- The mortgage included an assignment of rents and leases as additional security.
- Cohen executed the mortgage as a corporate officer of Thunder.
- The $105,000 loan proceeds were not paid to Thunder; instead, the funds were paid to Winthrop.
- Aside from Cohen’s ownership interests, Thunder and Winthrop had no corporate relationship.
- REEC and Weissman were never advised that Thunder would receive no consideration or benefit in exchange for granting the mortgage and assignment of rents and leases.
- Berman objected to mortgaging Thunder’s corporate property in connection with this transaction.
- After default, on May 23, 1969, REEC and Weissman filed an action against Thunder to foreclose the second mortgage and to obtain appointment of a receiver to collect rents under the assignment.

## Issues

1. Whether Thunder’s second mortgage and assignment of rents were enforceable when Thunder received no consideration or corporate benefit and the loan proceeds were paid to a separate corporation owned by Thunder’s controlling shareholder.
2. Whether a corporate officer acting for a closely held corporation can bind the corporation by mortgaging its property to secure value flowing to the officer’s other company, over the objection of a minority shareholder.
3. Whether a receiver may be appointed to collect rents based on an assignment of rents that was given as part of an unenforceable mortgage transaction.

## Decision

- The court held that the second mortgage was not a valid and enforceable obligation of Thunder under the circumstances presented.
- The court denied the mortgagees’ foreclosure relief against Thunder’s property.
- The court refused to enforce the assignment of rents and leases and denied the request to appoint a receiver.

## Legal Principles

- A corporation’s power to encumber its assets must be exercised for the corporation’s purposes and with a benefit or consideration flowing to the corporation whose property is pledged.
- A corporation generally is not bound by an encumbrance of its property that serves only to secure or fund another entity’s affairs when the corporation receives no benefit from the transaction.
- When a controlling shareholder/officer causes the corporation to pledge corporate assets for the benefit of the controller’s separate enterprise, and the corporation receives no consideration, a court may treat the encumbrance as outside the corporation’s proper authority and deny enforcement against the corporation.
- An assignment of rents and leases given as additional security stands or falls with the enforceability of the underlying mortgage in the foreclosure action; if the mortgage is not enforceable against the mortgagor, the rent assignment will not support receivership relief.

## Conclusion

Real Estate Capital Corp. v. Thunder Corp. refused foreclosure and receivership where Thunder’s controlling shareholder caused Thunder to grant a second mortgage and rent assignment but the $105,000 proceeds went to his separate corporation, Thunder received no consideration or benefit, and the minority shareholder objected, making the instruments unenforceable against Thunder’s property.


Real Estate Capital Corp v. Thunder Corp., 287 N.E.2d 838, 31 Ohio Misc. 169 (1972)