Justia.com Opinion Summary: Plaintiff Fox Rest Associates (Fox Rest) was formed to purchase Fox Rest Apartments. Defendants in this case were George Little, Fox Rest's legal counsel through his law firm, George B. Little and Associates (GBL&A), George Little's wife, and GBL&A. This action took place after Mr. Little sold the Apartments without knowledge of Fox Rest and transferred a portion of the proceeds from the sale in an account he held with Mrs. Little. Unable to satisfy a previous judgment finding Mr. Little and GLB&A liable to Fox Rest for, inter alia, malpractice and double billing, Fox Rest filed this action against Defendants, seeking to void various transactions by Mr. Little as fraudulent conveyances and voluntary conveyances. The court granted Defendants' motion to strike, finding that Fox Rest did not present sufficient evidence in its case in chief to establish a prima facie case for its claims. The Supreme Court affirmed in part and reversed in part, holding that, except for a portion of the claims relating to the sale of certain equipment, the circuit court erred in striking Fox Rest's fraudulent conveyance and voluntary conveyance claims. Remanded.
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PRESENT: Kinser, C.J., Lemons, Goodwyn, Millette, and Mims, JJ.
FOX REST ASSOCIATES, L.P.
v.
OPINION BY
JUSTICE LEROY F. MILLETTE, JR.
September 16, 2011
Record No. 100434
ANNE B. LITTLE, ET AL.
FROM THE CIRCUIT COURT OF HENRICO COUNTY
Gary A. Hicks, Judge
In this appeal, we consider whether Fox Rest Associates,
L.P. (Fox Rest) presented sufficient evidence in its case in
chief to establish a prima facie case for its claims of
fraudulent conveyance and voluntary conveyance under Code
§§ 55-80 and 55-81, respectively.
We hold that, except for a
portion of the claims relating to the sale of certain
equipment, Fox Rest did so and therefore reverse the circuit
court's judgment granting the defendants' motion to strike.
I.
BACKGROUND
Fox Rest was formed in 1981 to purchase Fox Rest
Apartments (the Apartments) as an investment.
George B. Little
(Mr. Little) served as trustee of Fox Rest's general partner,
and served as Fox Rest's legal counsel through his law firm,
George B. Little and Associates (GBL&A).
In 2002, a dispute
arose between Mr. Little and Fox Rest's limited partners, and
the limited partners asked Mr. Little to step down as general
partner.
Instead of stepping down, he sought a buyer for the
Apartments without the limited partners' knowledge.
Only after
he entered into an agreement to sell the Apartments did Mr.
Little inform the limited partners about the sale.
The
Apartments were sold on January 30, 2003, and the proceeds were
deposited into GBL&A's escrow account.
On February 4, 2003, after receiving complaints from the
limited partners concerning the sale, Mr. Little informed them
by letter that he was withholding a portion of the proceeds
from the sale in anticipation of litigation against him.
Mr.
Little transferred $358,750, his commission from the sale (the
Fox Rest Commission), from the GBL&A escrow account into an
existing joint account at SunTrust Bank (the SunTrust Account)
that he held with his wife, Anne B. Little (Mrs. Little).
In May 2003, the limited partners retained counsel and
told Mr. Little that they intended to pursue legal action
against him for his alleged mismanagement of Fox Rest.
In the
summer of 2003, Mr. Little sold Wilton Farm, a property that he
owned in his name alone, and transferred the proceeds from the
sale, which totaled $938,877.79 (the Wilton Farm Proceeds),
into the SunTrust Account.
In addition, between January 2004
and September 2006, Mr. Little deposited more than 60 wage
checks totaling $446,413.42 into the SunTrust Account from
GBL&A's account (the Wage Transfers).
On October 2, 2006, after receiving advice from her
counsel, Mrs. Little entered into an agreement with Mr. Little
2
to purchase GBL&A's office equipment at its appraised value
(the Equipment Sale).
The agreement also called for Mrs.
Little to lease the equipment back to the firm through the end
of 2006, when Mr. Little planned to close the firm.
Mrs.
Little understood the Equipment Sale would prevent Mr. Little's
creditors from taking the equipment and therefore would allow
the firm to close in an orderly manner.
Meanwhile, the limited partners filed a derivative action
against Fox Rest seeking damages for malpractice, double
billing, excess commission, and additional taxes that they were
forced to pay as a result of the sale of the Apartments.
On
September 11, 2006, the circuit court found Mr. Little and
GBL&A jointly and severally liable to Fox Rest in the
derivative action.
award on appeal.
(2007).
We overturned a portion of the damages
Little v. Cooke, 274 Va. 697, 652 S.E.2d 129
The parties ultimately settled the case, and
approximately $865,400 of the judgment remains uncollected.
Unable to satisfy the judgment, Fox Rest filed this action
against Mr. Little, Mrs. Little, and GBL&A (the defendants),
seeking to void various transactions by Mr. Little as
fraudulent conveyances and voluntary conveyances under Code
§§ 55-80 and 55-81.
Specifically, Fox Rest sought to void the
following transactions:
the transfers into the SunTrust
3
Account from the Fox Rest Commission, the Wilton Farm Proceeds,
the Wage Transfers, and the Equipment Sale.
At trial, Fox Rest presented expert testimony from Matthew
O. McDonald, a certified public accountant and fraud examiner.
McDonald testified about Mr. Little's solvency, the use of the
approximately $1.7 million in transferred funds, and whether
the Equipment Sale was a fair market value transaction.
McDonald opined that Mr. Little was insolvent from February
2003 through September 2006.
In assessing Mr. Little's assets,
McDonald stated that he credited Mr. Little with 100% ownership
of assets held in his name alone, 50% ownership of assets held
jointly with Mrs. Little, and no ownership credit for assets
held as tenants by the entirety.
On cross-examination,
however, McDonald stated that if Mr. Little had been credited
the assets held as tenants by the entirety, then he would have
been solvent.
McDonald opined that Mrs. Little received a "minimum
benefit" of $940,000 from the approximately $1.7 million in
transfers that were challenged by Fox Rest.
He concluded that
$940,000 was used by Mrs. Little for tax payments, charitable
giving, mortgage payments and expenses for various real estate
holdings, and the purchase of a $21,000 rug.
McDonald also
opined that the Equipment Sale was not a "fair-market-value
transaction," which he defined as an "arm's length," orderly
4
transaction, not hurried or forced, between unrelated parties.
But he did not contest the equipment's appraised value.
Portions of Mr. and Mrs. Little's depositions were read
into evidence.
Mrs. Little testified that she was not aware of
any specific deposits that were made into the SunTrust Account
from January 2003 until the end of 2008, and that Mr. Little
handled all of the couple's financial matters.
According to
Mrs. Little, Mr. Little and his firm managed the SunTrust
Account.
She stated that she would indicate how much money she
needed for household expenditures for the week, and funds that
she presumed came from the SunTrust Account would be deposited
into her personal account.
Although she had checks on the
SunTrust Account, she did not use them unless instructed to by
Mr. Little.
Mrs. Little admitted that she was aware of the problems
between Mr. Little and the limited partners, and that she knew
about the derivative action by early 2004.
She testified that
she agreed to the Equipment Sale on the advice of counsel to
allow Mr. Little to close his law practice in an orderly
manner.
In his deposition, Mr. Little said that the SunTrust
Account was a joint account, but he acknowledged that he had
"goofed" previously when he said that the account was held as
tenants by the entirety.
When asked whether Mrs. Little
5
provided valuable consideration for the challenged transfers,
Mr. Little stated that "[h]er presence" with him throughout
their marriage constituted valuable consideration.
At the close of Fox Rest's evidence, the defendants moved
to strike.
They argued that the evidence presented was not
sufficient to establish a prima facie case for fraudulent
conveyance or voluntary conveyance.
They noted that the
SunTrust Account was a joint account and was therefore
reachable by Mr. Little's creditors.
They contended that the
deposits made into that account were not made with the intent
to delay, hinder, or defraud Fox Rest from collecting its
judgment.
They also argued that the evidence did not establish
a prima facie case for a voluntary conveyance because the
transfers were supported by valuable consideration — Mrs.
Little's services as a wife and homemaker throughout the
couple's 50-year marriage.
Additionally, Mrs. Little asserted
that there was no evidence that she had notice of Mr. Little's
alleged fraudulent intent regarding the transfers.
The circuit court granted the defendants' motion to
strike.
The court stated that there was no evidence that Mr.
Little had any fraudulent intent or that Mrs. Little knew of
any alleged fraudulent intent.
It noted that the deposits were
made to a joint account that was reachable by creditors and in
existence prior to the transfers.
6
The court concluded that
"there was not a case of hiding assets in this matter" and that
"[t]here was nothing that changed."
We awarded Fox Rest this
appeal. ∗
II.
ANALYSIS
In reviewing a circuit court's judgment granting a
defendant's motion to strike, we apply the following standard:
When ruling on a motion to strike a plaintiff's
evidence, a trial court is required to accept as true
all evidence favorable to a plaintiff and any
reasonable inferences that may be drawn from such
evidence. The trial court is not to judge the weight
and credibility of the evidence, and may not reject
any inference from the evidence favorable to the
plaintiff unless it would defy logic and common
sense. On appeal, when this Court reviews a trial
court's decision to strike a plaintiff's evidence, we
likewise view the evidence in the light most
favorable to the plaintiff.
TB Venture, LLC v. Arlington County, 280 Va. 558, 562-63, 701
S.E.2d 791, 793 (2010) (internal quotation marks and citations
omitted).
A.
Fraudulent Conveyance
We first consider Fox Rest's contention that the circuit
court erred in striking its evidence in support of its
fraudulent conveyance claim.
Fox Rest argues that its
evidence, which must be viewed in the light most favorable to
it, establishes a prima facie case for fraudulent conveyance.
∗
Mr. Little died after the trial. Although counsel for
Mr. Little and GBL&A filed a brief in opposition to the
petition for appeal, he did not file a brief on the merits
because he withdrew as counsel after Mr. Little's death.
7
For this reason, Fox Rest asserts that the circuit court erred
in granting the defendants' motion to strike.
We agree with
Fox Rest.
Code § 55-80, which addresses fraudulent conveyances,
states:
Every gift, conveyance, assignment or transfer
of, or charge upon, any estate, real or personal,
every suit commenced or decree, judgment or execution
suffered or obtained and every bond or other writing
given with intent to delay, hinder or defraud
creditors, purchasers or other persons of or from
what they are or may be lawfully entitled to shall,
as to such creditors, purchasers or other persons,
their representatives or assigns, be void. This
section shall not affect the title of a purchaser for
valuable consideration, unless it appear that he had
notice of the fraudulent intent of his immediate
grantor or of the fraud rendering void the title of
such grantor.
In a suit to set aside a fraudulent conveyance, proof of
the fraudulent intent must be "clear, cogent and convincing."
Hutcheson v. Savings Bank of Richmond, 129 Va. 281, 289, 105
S.E. 677, 680 (1921).
Fraud may be proved not only by direct
evidence, but also by circumstantial evidence.
Id.
In fact,
"[b]ecause of the difficulty of establishing 'actual intent,'
evidence of fraud may be, and generally must be,
circumstantial."
In re: Porter, 37 B.R. 56, 63 (E.D. Va.
1984).
Virginia courts have consequently relied upon presumptions
of fraud, known as "badges of fraud," which consist of facts
8
and circumstances that establish a prima facie case of
fraudulent conveyance.
105 S.E. at 681.
See, e.g., Hutcheson, 129 Va. at 291,
The badges of fraud include:
(1) retention of an interest in the transferred
property by the transferor; (2) transfer between
family members for allegedly antecedent debt; (3)
pursuit of the transferor or threat of litigation by
his creditors at the time of the transfer; (4) lack
of or gross inadequacy of consideration for the
conveyance; (5) retention or possession of the
property by transferor; and (6) fraudulent incurrence
of indebtedness after the conveyance.
In re: Porter, 37 B.R. at 63 (citing Hutcheson, 129 Va. at 291,
105 S.E. at 681).
Once a party has introduced evidence to establish a badge
of fraud, a prima facie case of fraudulent conveyance is
established.
Temple v. Jones, Son & Co., 179 Va. 286, 298, 19
S.E.2d 57, 62 (1942).
Once this is done, "the burden shifts,
and the defendant must establish the bona fides of the
transaction."
First National Bank of Bluefield v. Pressley,
176 Va. 25, 28, 10 S.E.2d 526, 527 (1940).
Notably, a familial relationship between the transferor
and the transferee is not itself a badge of fraud.
Tucker, 164 Va. 507, 514, 180 S.E. 302, 305 (1935).
Fowlkes v.
But
"transactions between husband and wife must be closely
scrutinized, to see that they are fair and honest and not mere
contrivances resorted to for the purpose of placing the
husband's property beyond the reach of his creditors."
9
Id. at
511, 180 S.E. at 303 (emphasis added).
In such cases, "only
slight evidence is required to shift the burden of showing its
bona fides."
Id. at 514, 180 S.E. at 305 (emphasis added).
Finally, in Hutcheson, we stated:
In order to avoid a conveyance, it is not
necessary to prove that the grantee had positive
knowledge of the grantor's fraudulent intent. It is
sufficient to prove that the grantee had knowledge of
facts and circumstances which were naturally and
justly calculated to excite suspicion in the mind of
persons of ordinary care and prudence, and which
would naturally prompt him to pause and inquire
before consummating the transaction, and that such
inquiry would have necessarily led to a discovery of
the facts from which the law imputes fraud to the
grantor.
Id. at 291, 105 S.E. at 680-81.
In this case, Fox Rest's evidence established a prima
facie case of fraud against Mr. Little by demonstrating several
badges of fraud, which shifted the burden of proof to the
defendants.
First, Mr. Little retained an interest in the
funds that he deposited into the SunTrust Account because the
account was held jointly with Mrs. Little, giving each the
right to access the funds.
Second, all of the transfers were
made after Mr. Little was aware of the limited partners'
dissatisfaction with his management of Fox Rest, which led to
the derivative action.
Third, Mr. Little retained possession
of GBL&A's office equipment after the Equipment Sale.
10
Additionally, Fox Rest's evidence need not show that Mrs.
Little knew of Mr. Little's fraudulent intent.
As stated
above, to impute Mr. Little's fraudulent intent to Mrs. Little,
the evidence need only show that she " had knowledge of facts
and circumstances which were naturally and justly calculated to
excite suspicion in the mind of persons of ordinary care and
prudence."
Id.
Mrs. Little stated that she knew about the problems
between the limited partners and Mr. Little.
She also
testified that she knew about the derivative action.
Further,
it was during this time period that approximately $1.7 million
was deposited into the SunTrust Account, which Mrs. Little held
jointly with Mr. Little.
Despite Mrs. Little's testimony that
her primary benefit from the joint account was for household
expenses, McDonald opined that Mrs. Little received a "minimum
benefit" of $940,000 from the challenged transfers.
Viewing
these facts in the light most favorable to Fox Rest, Fox Rest's
evidence was sufficient to impute Mr. Little's fraudulent
intent to Mrs. Little.
In sum, Fox Rest's evidence was sufficient to establish a
prima facie case for fraudulent conveyance.
This shifted the
burden of proof to the defendants to establish the bona fides
of the transactions.
The circuit court therefore erred in
granting the defendants' motion to strike Fox Rest's fraudulent
11
conveyance claim with respect to the Fox Rest Commission,
Wilton Farm Proceeds, and Wage Transfers, all of which were
deposited into the SunTrust Account.
Because the circuit court granted the defendants' motion
to strike at the conclusion of Fox Rest's evidence, the
defendants did not have an opportunity to rebut the prima facie
case of fraud as to the alleged fraudulent conveyances.
But
Fox Rest's own evidence, including the cross-examination of its
expert, McDonald, established that the Equipment Sale was not
made with fraudulent intent, but rather was a bona fide
transaction.
Fox Rest does not dispute that the office
equipment was sold at fair market value or that the proceeds
from the sale went into GBL&A's operating account and were not
later transferred to the SunTrust Account.
Although the sale
of the equipment and subsequent lease back were accomplished to
hinder or prevent Mr. Little's creditors from seizing the
equipment prior to an orderly closure of the firm, the transfer
did not constitute a fraudulent conveyance because the sale was
at fair market value.
The circuit court accordingly did not
err in striking Fox Rest's fraudulent conveyance claim with
respect to the Equipment Sale.
B.
Voluntary Conveyance
We now consider Fox Rest's argument that the circuit court
erred in granting the defendants' motion to strike regarding
12
its voluntary conveyance claim.
Fox Rest asserts that the
circuit court erred by failing to address whether Mr. Little
was insolvent when he made the alleged voluntary conveyances or
whether he became insolvent upon making the conveyances.
According to Fox Rest, the evidence proved that Mr. Little was
insolvent when all of the challenged transfers were made.
For
this reason, Fox Rest asserts that the circuit court erred in
granting the defendants' motion to strike.
Code § 55-81, addressing voluntary conveyance, states:
Every gift, conveyance, assignment, transfer or
charge which is not upon consideration deemed
valuable in law, or which is upon consideration of
marriage, by an insolvent transferor, or by a
transferor who is thereby rendered insolvent, shall
be void as to creditors whose debts shall have been
contracted at the time it was made, but shall not, on
that account merely, be void as to creditors whose
debts shall have been contracted or as to purchasers
who shall have purchased after it was made. Even
though it is decreed to be void as to a prior
creditor, because voluntary or upon consideration of
marriage, it shall not, for that cause, be decreed to
be void as to subsequent creditors or purchasers.
Unlike Code § 55-80, § 55-81 does not require a finding that
the transferor acted with fraudulent intent.
B.R. at 65.
In re: Porter, 37
Rather, it provides that if a transferor is
insolvent at the time a transfer is made, without valuable
consideration, then the transfer shall be voidable by prior
creditors.
Id.
13
The circuit court's ruling did not address whether Mr.
Little was insolvent when the conveyances were made or whether
the conveyances were made for valuable consideration.
Aside
from the court's statement that it "looked at the standard[]"
under Code § 55-81, the court did not discuss the elements of
voluntary conveyance at all.
Instead, the court focused its
ruling on Fox Rest's fraudulent conveyance claim.
Considering the evidence presented in the light most
favorable to Fox Rest, it established a prima facie case for
Fox Rest's voluntary conveyance claim.
As previously stated,
McDonald opined that Mr. Little was insolvent from February
2003 through September 2006.
All of the challenged transfers
occurred during that period of time.
McDonald described the
method that he used in analyzing Mr. Little's solvency.
When
the defendants cross-examined McDonald regarding his method, he
admitted that if he had credited Mr. Little with ownership of
assets Mr. Little owned with Mrs. Little as tenants by the
entirety, he would have concluded that Mr. Little was solvent
in 2003.
But McDonald did not state whether the transfers -
approximately $1.7 million - would have rendered Mr. Little
insolvent if he had credited Mr. Little with the assets held as
tenants by the entirety.
Viewing this evidence in the light
most favorable to Fox Rest, we cannot conclude as a matter of
law that Mr. Little was solvent when the transfers were made.
14
The circuit court thus erred in granting the defendants' motion
to strike Fox Rest's voluntary conveyance claim.
III.
CONCLUSION
For the foregoing reasons, the judgment of the circuit
court granting the defendants' motion to strike is affirmed in
part and reversed in part, and the case is remanded for further
proceedings consistent with this opinion.
Affirmed in part,
reversed in part,
and remanded.
15
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