Venables v. Smith, et al.
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IN THE SUPERIOR COURT OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY SARAH O. VENABLES Plaintiff v. GEORGE B. SMITH, ESQUIRE and SMITH O DONNELL PROCINO & BERL Defend ants ) ) ) ) ) ) ) ) ) CIVIL ACTION NUMBER 02C-09-126-JOH Submitted: December 6, 2002 Argued: December 12, 2002 Decided: March 14, 2003 MEMORANDUM OPINION Upon M otion of Defendan ts to Dismiss - DENIED Kevin W. Gibson, Esq., Gibson & Perkins P.C., Media, Pennsylvania, attorney for plaintiff Jeffrey M. Weiner, Esq., Wilmington, Delaware, attorney for defendants HERLIHY, Judge Defendants George B. Smith a nd his law firm mov e for sum mary judgm ent in this legal malpractice case. Plaintiff Sarah Venables has sued Smith for failing to timely record a deed transferring property into a Limited Liability Company before she declared bankrup tcy, thereby allowing creditors to threaten pa rtition and fo rce settlemen t. Smith argues that even if he had timely deeded the property, the transfer would have been voidable by the creditors as a fraudulent transfer. The Court holds that genuine issues of material fact exist such that summary disposition is inappropriate. Defendants' motion for summary judgment is DENIED. Facts In October, 1999, Plaintiff S arah Oliphant Venables ("Venables") and her two sisters, Lisa Oliph ant Roge rs and Sus an Olipha nt Phillips, ow ned as ge neral partners two beach front properties in South Bethany Beach and a commercial w arehouse in Laure l. In Novemb er, 1999, Venables and her sisters retained Defendant George B. Smith, an attorney with defenda nt law firm Smith, O Donne ll, Procino & Berl, to take steps to form a Limited Liability Comp any and transf er the prope rty to the contemplated LLC. Although the parties' descriptions of the events differ, for the purposes of this motion, Venables' factual allegations must be taken as true and are therefore provided. According to Venab les' affidavit, she and her h usband m et with Sm ith in early 1997 for estate planning purpose s. During this visit, Venables told S mith of the properties and that the propertie s were titled in the name of a gene ral partnersh ip. Since two of the 2 properties were frequently rented out by the partnership to vacationers, Smith suggested that the p artnersh ip be chan ged to an LLC . Tha t way, if a r ente r suf fere d any personal injury on a property, Venables and her sisters could not be sued individually. At the time, Smith was also representing Venables' husband's company, W.B. Vena bles an d Son s, Inc., a construction firm, which was undergoing ownership transfers. According to Venables, these ownership transfers took priority over the creation of the LLC, such that it was "placed on the back burner." About two years later, in October of 1999, Venables received new rental agreem ents for the propertie s, which she claims raised concerns for personal liability exposure and rekindled the issue of the need to have an LLC formed. Venables contacted Smith and instructed him to take whatever steps necessary to create such a company and to transfer to it the property from the partnership. In return for tran sferring he r partnership interest in the p rope rty, Venab les w as to rece ive a n equiva lent i nterest in the n ewly form ed en tity. Soon thereafter Smith successfully formed Oliphant Sisters, LLC, b ut failed to prepare a deed transferring the properties to the newly form ed entity. As of Novem ber, 1999, Venables states that she was current with respect to all of her financial obligations. Venables and her husband filed for Chapter 11 Bankruptcy on April 6, 2000. The bankruptcy came about because Venables' husband's construction business was experiencing severe financial difficulties and both she and her husband had guaranteed several of the company's loans. Venables' largest creditor, PNC Bank ("PNC"), sought 3 $200,000 from Venables for settlement purposes, which according to its estimation was the value of Ven ables' interest in th e property. It wa s only at this poin t that Venables learned of Smith's failure to transfer title to the properties from the p artnership to the LLC. After PNC threatened to partition the partnership property, a settlement was reached whereby PNC would settle the dispute in exchange for $75,000 which she has paid. Venables filed suit on S eptembe r 13, 2002 , making c laims again st Smith for professional neglige nce an d again st Smith 's law firm , Smith, O'Don nell, Procino & Berl, on the theory of respondeat superior. The defendants moved to dismiss, making two arguments. First, they argue that by December, 1999, the time at which Smith was engaged to transfer the property, Venables was already insolvent, such that any property transfer would have been voidable by her creditors as a fraud ulent transfe r. Second, d efendan ts maintain that Venables complaint fails to state a claim upon which relief can be granted because, accord ing to th e terms of the L LC ag reeme nt, her voluntary petition for bankruptcy would cause the LLC to be dissolved unless her sisters, the LLC's remaining members, took further steps to continue it. Because these steps were never taken, defenda nts maintain that e ven if Sm ith had prope rly deeded the p artnersh ip property, Venables' interest in the property would have been distributed to her bankruptcy estate, regard less. Applicable Standard 4 Defend ants filed a motion to dismiss and attached deposition testimony, various docume nts and other additional facts no t previo usly prese nted in th eir plead ings. A motion to dismiss relying upon factual assertions outside the pleadings is considered under Superior Court C ivil Rule 56 as a m otion for su mmary judg ment. 1 Therefore, the defenda nts' motion to dismiss has been co nverted into a motion f or summary judgm ent. A motion for summary judgment may only be granted where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law.2 If a material fact is in dispute, or if it seems desirable to inquire more thoroughly into the facts to clarify an application of law, summary judgment is improper. 3 If it appears that there is some reasonab le theory or position under which the opponent might recover, the motion must be denied.4 The Court must view the evidence in the light most favorable to the non-moving party.5 Discussion Defendants' first argument involves the voidability of fraudulent transfers. The thrust of their reasoning is that even if Smith had recorded the deed to the property to the newly created LLC , PNC w ould still have been able to void the tra nsaction be cause it Schultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del. Super. Ct. 1976); Rose v. Cadillac Fairview Shopping Ctr., 668 A.2d 782, 786 (Del. Super. 1995). 1 Schueler v. Martin, 674 A.2d 882, 885 (Del. Super. 1996); Pierce v. International Ins. Co. of Ill., 671 A.2d 1361, 1363 (Del. 1996). 2 Kysor Indus. Corp. v. Margaux, 674 A.2d 889, 894 (Del. Super. 1996). Vanaman v. Milford Memorial Hosp., Inc., 272 A.2d 718, 720 (Del. 1970). 5 Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995). 3 4 5 would constitu te a frau dulent tr ansfer . Thus, in order for this argument to be successful defenda nts must prove, among other things, that as a matter of law the proposed transfer would, indeed, have been fraudulent under Chapter 13 of Title 6. Section 1304 provides: (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incu rred, if the debtor made the transfer or incurred the obligation: (1) With actual inten t to hinder, de lay or defraud any creditor of the debtor; or (2) Without receiving a reasonably e quivalent v alue in exchange for the transfer or obligation, and the de btor: a. Was en gaged or was abo ut to engag e in a business or a transaction for which the remaining assets of the debtor were unreaso nably small in relation to the business or transaction; or b. Intended to in cur, or believ ed or reaso nably should have believed that the debtor w ould incur, debts beyond the debtor's ability to pay as they became due. (b) In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether: (1) The transfer or obligation was to an insider; (2) The debtor retained possession or control of the prop erty transferred after the transfer; (3) The transfer or obligation was disclosed or concealed; (4) Before the transfer was made or obligation was incurred, the debtor h ad been s ued or threa tened with suit; (5) The transfer was of substantially all the debtor's assets; (6) The debtor absconded; (7) The debtor removed or concealed assets; (8) The value of the consideration received by the debtor was reasonab le equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and 6 (11) The debtor transferred the essential assets of the business to a lienor who tran sferred the a ssets to an insider of the debtor. In other words, in order to prove th at the propo sed transfe r would h ave been fraudulen t, defenda nts must, at the very least, prove either that (1) Venables had the subjective intent to hinder, delay or defraud a cred itor, or (2) she made the transfer without receiving anything of reasonably equivalen t value in exchange f or the transfer. 6 With regard to the first, subjective pron g, defend ants have s pent muc h of their briefing and argument attempting to establish that Venables was insolvent in December of 1999, the time that Smith was to have accomplished the transfer the property. Howeve r, even if the defendants have established Venables' insolvency, an issue this Court need not decide, that insolvency alone is insufficient to make the property transfer fraudulent or voidable. Insolvenc y is but one factor to be considered while determining actual intent under 6 Del.C . § 1304(a)(1). Defendants have presented evidence of other factors as well, including that Venab les was be ing sued in late 1999 for debts owed and that she would have retained contro l over th e prope rty if the tran sfer w ent thro ugh. Howeve r, for the summary judgment purposes , all factual alleg ations and r easonab le inferences must be v iewed in favor of the non-moving party, in this case Venables. According to Venables, her subjective intent was to avoid personal injury liability, not to 6 In the latter case, defendants would also have to show either that (a) Venables was engaged in a transaction for which her remaining assets would be unreasonably small in relation to the transaction, or (b) Venables reasonably should have believed that she would incur debts beyond her ability to pay as they became due. 7 hinder, delay or defraud. In short, Venables' subjective intent is a genuine issue of material fact, such that summary judgment is inappropriate. Further, she arg ues at the tim e Smith was instructed to proceed with the LLC formation and property transfer (in 1999), he was aware of the financial circumstances of Venables husband s construction firm. Yet he procee ded. With regard to the second prong, defendants maintain that Venables was to receive no reasonably equivalent value in exchange for the transfer. Venables, on the other hand, maintains that she w as to receive an equiva lent interest in the LLC in exchange for her partnership interest. At argument, defendants discussed the differences between corporate ownership through stock and partnership membership. In particular, they discussed the more limited rights of judgment creditors as to LL C property. 7 This fact, the y seem to argue, diminishes the value of the LLC membership Venables was to receive in exchange for the transfer, making the value somehow inadequate. Title 6 Del.C . § 1303 provides: (a) Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person. (b) For the purposes of §§ 1304(a)(2) and 1305, a person gives a reasonab ly equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon de fault under the mortgage, de ed of trust o r security agreem ent. 7 See 6 Del.C. §18-703 (1999). 8 The Court finds imp ersuasive d efendan ts' argumen t that the value Venab les was to receive, LLC membership, is of legally inadequate value. The fact that the transfer of the property would make it more difficult for creditors to reach does not lessen the value of the LLC interest. If Ve nables w ere to receive a one-third interest in a LLC in exchange for her one-third interest in partnership property, that constitutes reasonably equivalent value. The Court says "if" because there appea rs to be a factual dispute as to whether that was indeed the parties intentio n. Put simp ly, upon cons idering the evidence in a light favo rable to Venables, defendants cannot meet their burden of showing the lack of genuine issues of material fact and that they are entitled to judgment as a matter of law. Defendants' second argument is no m ore fruitful than their first. Their re asoning is as follows. The L LC agreem ent that Smith setup for V enables defines an "inv oluntary withdraw al" as the occurrence of an y memb er fil ing a volu ntary petition f or ba nkru ptcy. That same agreement provides that the LLC would be dissolved upon the occurrence of any involuntary withdraw al, unless the re maining m embers u nanimou sly elect to continue the business of the c ompa ny. Ven ables' siste rs, the other members of the LLC, did not elect to continue. T herefore, e ven if Sm ith had carrie d out the de ed transfer o f the partne rship property to the new ly formed L LC, that co mpany w ould have dissolved once Venables declared b ankruptcy an d Vena bles' interest in the compan y would ha ve been d istributed to her ban kruptc y estate. This line of reasoning has at least one fatal flaw. Once Smith failed to transfer the 9 property and bankruptcy was declared, the LLC members had no reason to m aintain it, because its principal and sole purpose, to control the property, was moot. Defendants' argument is premised on the assertion that Venab les' sisters had a le gal duty to ma intain the LLC d espite its sole pu rpose bec oming m oot. The law puts no su ch duty on the members. Once bankrup tcy was declared with the property remaining with the partnership, the LLC becam e, for the most p art, usele ss. Acc ordingly, the LLC s dissolution8 has no bearing on the viability of Venables's claim. Conclusion For the foregoing reasons, defendants' motion for summary judgment is DENIED. J. 8 Interestingly, there remains some confusion as to the status of the Limited Liability Company. Even Smith apparently acted under the belief that the company was still a viable entity when he belatedly filed a deed in June of 2002, years after Venables filed for bankruptcy. 10
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