Can we sue a corporation that no longer exists?
Full Question:
Answer:
In some cases, it is possible to sue a person individually under an alter ego theory, in which the court will "pierce the corporate veil" to find that person liable when there is really no separate identity of the individual and corporation. Whether the alter ego theory applies will be a determination for the court, based on the facts and circumstances in each case.
In the case below, the court found that a fraudulent conveyance may be set aside as part of a garnishment proceeding to collect a jugment. Therefore, it may be possible to raise the claim in a garnishment proceeding rather than a separate action, but the courts are divided on this issue. Please read the information below to determine applicablility.
HOLSTON INTERNATIONAL v. COULTHARD, 241 Va. 219 (1991)
401 S.E.2d 865
HOLSTON INTERNATIONAL, INC. v. DONALD COULTHARD, ET AL.
46827
Record No. 901137
In the Supreme Court of Virginia.
March 1, 1991
Present: All the Justices
The trial court did not err in allowing the question of a
fraudulent conveyance to be tried and determined in a
garnishment proceeding. The trial court correctly added
plaintiff as a party and properly proceeded to adjudicate the
validity of its claims to the fund that was the subject of the
garnishment. The funds held by the garnishee represented the
amount it had agreed to pay to settle the claims of judgment
debtors. It was wholly appropriate, when the facts of the
escrow arrangement and the release agreement were discovered,
to join the plaintiff so that its claim to the fund could be
adjudicated and so that complete relief could be afforded to
all the parties and that decision is affirmed.
Creditors' Rights — Garnishment — Fraud — Third Party
Claimants — Practice and Procedure — Proper Parties — Escrow
Funds — Settlement of Claims — Fraud — Equity
Appellees obtained a judgment in the Virginia courts against
a corporation and an individual, and that judgment was
unsatisfied. At the time, an action brought by the judgment
debtors against Goodyear Tire & Rubber Company was pending in
the United States District Court for the Western District of
Virginia. Late in the same year, the federal action was settled
and was dismissed with prejudice. The next day, the present
garnishment proceeding was instituted by the judgment creditors
against the judgment debtors and Goodyear as garnishee.
Goodyear filed an answer stating that it did not hold money or
other property of either judgment debtor and that the federal
litigation had been settled by payment of $100,000 in escrow to
attorneys for appellant, pending final determination by the
courts of the judgment creditors' entitlement, if any, to the
fund. Appellant, a corporation wholly owned by the judgment
debtor's wife, was a party to the federal settlement. In the
garnishment proceedings below, the judgment creditors asked
that the court join appellant and the escrow attorneys as
necessary parties, asserting that claims to the fund could not
be adjudicated in their absence and that the transfer to
appellant was without consideration and constituted an attempt
to defraud. The court added the parties and appellant filed an
answer denying the allegations of fraud and contending that it
was not a proper party and that the proceeding was an invalid
method of questioning its right to receive the money held in
escrow. The trial court
Page 220
further ruled that the claim of the appellant to the sum was
not supported by the evidence and denied that claim. Later, a
settlement was reached to divide the fund between the judgment
creditors and another claimant. The trial court noted the
settlement and dismissed the garnishment proceedings. The
appellant appeals and distribution of the funds has been stayed
pending the appeal.
1. The trial court committed no procedural error in this
case, based on the principles set forth in Jetco, Inc. v. Bank
of Virginia, 209 Va. 482, 165 S.E.2d 276 (1969), which noted
that in a garnishment proceeding it is generally held that the
rights of a third party claimant to the fund sought to be
garnisheed cannot be adjudicated unless he is a party to that
proceeding.
2. There, the Court pointed out that an assignee could have
been made a party pursuant to statute and that, had this course
been followed, the validity of the assignment could have been
determined in the garnishment proceeding, for it has long been
the rule in this jurisdiction that courts of law and courts of
equity have concurrent jurisdiction over alienations made in
fraud of creditors.
3. In the present case, the trial court correctly added the
appellant as a party and properly proceeded to adjudicate the
validity of its claim to the fund that was the subject of the
garnishment.
4. The evidence showed that, in settling the federal lawsuit,
the judgment debtor directed that the fund be paid to the
appellant, which was not a party to the federal action and
which was wholly controlled by the judgment debtor, although
owned by his wife. It was entirely appropriate, when the facts
of the escrow arrangement and the release agreement were
discovered, to join the appellant so that its claim to the fund
could be adjudicated and so that complete relief could be
afforded to all the parties.
Appeal from a judgment of the Circuit Court of Washington
County. Hon. Charles B. Flannagan, II, judge presiding.
Affirmed.
James P. Jones (Penn, Stuart, Eskridge & Jones, on briefs),
for appellant.
George M. Warren, Jr. (Robert B. Dickert; Warren & Dickert,
on brief), for appellees Donald Coulthard and Anne K. Couthard.
(J. Scott Sexton; Gentry, Locke, Rakes & Moore, on brief),
for appellee Transamerica Commercial Finance Corporation.
JUSTICE COMPTON delivered the opinion of the Court.
Page 221
This is a creditor's rights controversy involving a matter of
procedure. We consider whether the trial court erred in a
garnishment proceeding by joining a third-party claimant and by
adjudicating in that proceeding the validity of the third
party's claim to the fund which was the subject of the
garnishment.
The facts are not in dispute. In January 1988, appellees
Donald Coulthard and Anne K. Coulthard obtained a judgment in
the court below against Thomas E. Dotson and Hubs & Wheels,
Inc., in the principal sum of $425,481.37. At the time, an
action brought by the judgment debtors against the Goodyear
Tire & Rubber Company seeking various relief, including money
damages, was pending in the United States District Court for
the Western District of Virginia. On November 28, 1988, the
federal action was settled and was dismissed with prejudice.
On November 29, 1988, the present garnishment proceeding was
instituted by the judgment creditors against the judgment
debtors and Goodyear as garnishee. The summons in garnishment
was returnable on February 27, 1989.
On February 22, 1989, Goodyear filed an answer and asserted
that it did not "hold money or other property of either
Judgment Debtor." Goodyear further stated that the federal
litigation had been settled but that "no sums were due and
payable" by it to either judgment debtor. Goodyear asserted,
however, that "certain sums were payable to a third party,
[appellant] Holston International, Inc., by Garnishee."
Goodyear stated that the sums had been paid in escrow to
attorneys for Holston "pending the outcome of this proceeding."
Neither judgment debtor filed any response or otherwise
appeared.
In March 1989, the trial court continued the garnishment
proceeding generally in order to permit the judgment creditors
to conduct discovery. During discovery, Goodyear produced
documents dated in February 1989 which set forth the terms of
settlement of the federal litigation instituted by the judgment
debtors.
According to the documents, which recited the pendency of the
garnishment proceeding, Goodyear agreed to deposit with Fox,
Wooten & Hart, as attorneys for Holston, the sum of $100,000 in
escrow pending the final determination by the courts of the
judgment creditors' entitlement, if any, to the fund held in
escrow. As part of the agreement, the judgment debtors, as well
as other entities controlled by judgment debtor Dotson,
released Goodyear
Page 222
from all claims raised in the federal litigation. Holston,
which was wholly owned by Dotson's wife, was a party to the
release.
In May 1989, the judgment creditors filed a motion asking the
court to join Holston and Fox, Wooten & Hart as necessary
parties to the garnishment proceeding. Asserting that Holston's
claim to the fund could not be adjudicated in its absence, the
judgment creditors alleged that the transfer to Holston was
without consideration and constituted an attempt to hinder,
delay, and defraud them.
In June 1989, the court added the parties and Holston filed
an answer denying the allegations of fraud. Asserting that it
was entitled to the fund held in escrow, Holston contended that
the "present proceeding is an improper and invalid method to
try the question of Holston's right to receive said sum of
money being held in escrow." Also, Holston asserted that it was
not a proper party to the proceeding. Fox, Wooten & Hart
answered and acknowledged it was holding the fund subject to
the court's order. In July 1989, Goodyear was dismissed from
the proceeding.
In August 1989, the trial court, sitting without a jury,
conducted an evidentiary hearing. The court ruled that the "sum
of $100,000.00 presently held by the law firm of Fox, Wooten &
Hart is the property of the judgment debtors, and was the
property of or owed to the judgment debtors and subject to the
garnishment herein at the time it was paid over to said law
firm by the original garnishee, Goodyear Tire & Rubber
Company." The court further ruled "that the claim of Holston
International, Incorporated to said sum is not supported by the
evidence and is hereby accordingly denied."
Subsequently, Transamerica Commercial Finance Corporation was
made a party to the proceeding because it asserted a superior
lien on the assets of one of the judgment debtors. Later, a
settlement was reached which provided for a division of the
fund between the judgment creditors and Transamerica. In a May
1990 final order, from which we awarded Holston this appeal,
the trial court noted the settlement and dismissed the
garnishment proceeding. Distribution of the funds has been
stayed pending this appeal.
The trial court's substantive rulings made following the
August 1989 hearing are not challenged on appeal. Holston's
sole assignment of error is, "The trial court erred in allowing
the question of
Page 223
a fraudulent conveyance to be tried and determined in a
garnishment proceeding."
On appeal, Holston notes that garnishment is a statutory
proceeding and that the issues ordinarily are adjudicated in a
summary fashion. See Code Sections 8.01-511 to -525. Asserting
that garnishment should not be enforced beyond the scope of the
statutory scheme "in order to fit the exigencies of a
particular case," Holston contends that "garnishment was not
the proper procedure to determine whether the property in
question, to which it was otherwise entitled, had been
fraudulently conveyed from the judgment debtors to the
garnishee." Stating there is "no doubt . . . that fraudulent
conveyances are the subject of jurisdiction in both law and
equity," Holston argues that "good policy reasons" support the
idea that fraudulent conveyances, which "involve difficult
factual questions," should be "the subject of a full-blown
chancery suit or action at law, and not a summary proceeding
like garnishment." Holston observes, "It 'is better judicial
policy to require issues generally as complex as a fraudulent
conveyance to be determined in a procedure which maximizes the
chances that justice will be done to all parties." According to
Holston, "Garnishment is not such a procedure." We do not
agree.
[1] We hold that the trial court committed no procedural
error in this case. In reaching this conclusion, we are guided
by the principles set forth in Jetco, Inc. v. Bank of Virginia,
209 Va. 482, 165 S.E.2d 276 (1969)
In that case, a bank had recovered a money judgment against
William N. Barton. A summons in garnishment was issued at the
bank's request against Jetco and Pomponio for money believed to
be due to Barton because of a promissory note executed by
Jetco, endorsed by Pomponio, and payable to Barton. Process was
issued and Jetco, Pomponio, and Barton were served. Jetco
answered and contended it was not indebted to Barton on the
note because the note had been assigned by Barton to his wife.
At trial, the bank argued that Barton's assignment was
"presumptively fraudulent" and void as to it, and that the wife
was not a necessary party to the litigation. Jetco contended
that since the assignee was not a party to the proceeding, the
court had no right to adjudicate the assignment's validity. The
trial court sustained the bank's position, and entered judgment
against Jetco and Pomponio for the amount of the bank's claim.
Page 224
Reversing the trial court's decision, we held that the court
erred because the wife's rights were adjudicated when she was
not a party to the litigation. This Court said: "Consequently,
in a garnishment proceeding it is generally held that the
rights of a third party claimant to the fund sought to be
garnisheed cannot be adjudicated unless he is a party to that
proceeding." Id. at 486, 165 S.E.2d at 279.
[2] The Court pointed out that the assignee could have been
made a party pursuant to statute. See Code Sections 8.01-5(A)
and -7 (to prevent abatement of action for nonjoinder of
parties, new parties may be added at any time). See also Rule
3:9A. The Court said: "Had this course been followed the
validity of the assignment could have been determined in the
garnishment proceeding, for it has long been the rule in this
jurisdiction that courts of law and courts of equity have
concurrent jurisdiction over alienations made in fraud of
creditors." Id. at 487, 165 S.E.2d at 279-80.
In Jetco, the Court relied on Chesapeake & Ohio R.R. Co. v.
Paine & Co., 70 Va. (29 Gratt.) 502 (1877). There, the Court
held that the trial court erred in failing to order a
third-party claimant to appear and state the nature of his
claim to certain stock in controversy when the answer of a
garnishee in an attachment proceeding disclosed that the stock,
which was the subject of the attachment, had been transferred
to the third party. Id. at 509-10.
Holston relies heavily on Freitas v. Griffith, 112 Va. 343,
71 S.E. 531 (1911), asserting that the case stands for the
narrow proposition, in Holston's words, "that a certain kind of
law action, the statutory garnishment proceeding, cannot
determine a fraudulent conveyance where such alleged fraudulent
conveyance is the basis of the garnishee's title or possession
to the property." Freitas is not controlling here.
In that case, Griffith and Boyd, execution creditors of
Freitas, issued a summons in garnishment against Freitas' wife
in which they suggested that there was liability on her for the
amount of their judgment. The wife answered, denying she was
indebted to her husband or had any effects belonging to him in
her possession. Upon suggestion by the plaintiffs that the wife
had not fully disclosed her liability, the trial court held an
evidentiary hearing. The court found that certain personal
property had been transferred by the husband to the wife in
fraud on the rights of the plaintiffs. The court rendered
judgment against her for the estimated
Page 225
value of the property and directed that it be applied on the
plaintiffs' judgment.
Reversing the trial court, this Court said, "the controlling
question involves the power of the circuit court, in a summons
on suggestion by an execution creditor of a husband, to set
aside an alleged fraudulent transfer of personal property from
him to the wife." Id. at 344, 71 S.E. at 531. The Court noted
that the judgment creditors made no claim that the wife was
indebted to the husband or that she had any of his estate in
her hands. On the contrary, the Court said, the wife asserted
absolute title to the property, which she claimed had been in
her possession for years. Id.
Assuming for the purposes of the case that the property
originally belonged to the husband, and was transferred to the
wife, the Court said that "the transfer, nevertheless, would
have been binding upon the husband, and he could not have
maintained a suit against the wife for its recovery."
Id. at 345, 71 S.E. at 531. The Court stated that the
garnishment statute "does not contemplate or operate upon
estate in possession of the garnishee to which he has title,
but only estate of the execution debtor for the recovery of
which he may maintain an action in his own behalf against the
holder." Id., 71 S.E. at 531-32. Noting that the law provides,
through other proceedings, for the recovery and subjection of
the debtor's personal estate, the Court stated that the
"special" garnishment procedure is available only in the
foregoing two instances, that is, where the garnishee is
indebted to the judgment debtor or where the garnishee has any
of the debtor's estate in her hands. Id., 71 S.E. at 532. See
Code Sec. 8.01-511.
Freitas involved a direct attack on the wife to set aside a
fraudulent conveyance under the guise of garnishment. There was
no claim that the wife was indebted to the husband or that she
held any of his estate. Thus, there was no true "garnishee."
And, answering the issue framed, this Court ruled that the
trial court had no power, under those circumstances, to set
aside, in a garnishment proceeding, the alleged fraudulent
conveyance. Those facts distinguish Freitas from Jetco and,
contrary to Holston's contention, create no conflict between
the two decisions.
[3-4] In the present case, the trial court correctly added
Holston as a party and properly proceeded to adjudicate the
validity of Holston's claim to the fund that was the subject of
the garnishment. The funds held by Goodyear, as garnishee,
represented the
Page 226
amount it had agreed to pay to settle the claims of the
judgment debtors. The evidence showed that in settling the
federal lawsuit, judgment debtor Dotson directed that the
$100,000 be paid to Holston, which was not a party to the
federal action and which was wholly controlled by Dotson,
although owned by his wife. It was entirely appropriate, when
the facts of the escrow arrangement and the release agreement
were discovered, to join Holston so that its claim to the fund
could be adjudicated and so that complete relief could be
afforded all the parties.
Consequently, the judgment of the trial court will be
Affirmed.
CURLEY v. DAHLGREN CHRYSLER-PLYMOUTH DODGE, 245 Va. 429 (1993)
429 S.E.2d 221
EDWARD R. CURLEY, JR., ET AL. v. DAHLGREN CHRYSLER-PLYMOUTH, DODGE, INC.,
ET AL.
48454
Record No. 921288
In the Supreme Court of Virginia.
April 16, 1993
Present: All the Justices
The trial court erred in dismissing a plaintiff shareholder's
claim of unlawful distribution of corporate assets because,
although the defendant shareholders were not duly elected
directors of the enterprise, they had assumed and exercised the
duties of directors without benefit of formal election and,
consequently, they were directors for the purposes of Code
Sections 13.1-653, -690, and -692.
Corporations — Shareholders' Rights — Distribution of
Corporate Assets — Corporate Debt — Shareholder Liability —
Limitation of Actions — Statutes of Limitation
Three individuals incorporated and purchased a business whose
inventory was financed by another corporation. As part of the
financing arrangements, the three and their spouses signed an
agreement to pay the business's indebtedness. Another company
purchased a majority of the stock in the business and that
corporation's owners began participating in the operation of
the business. Within a few months the original owners had sold
all their stock in the business corporation to the new group.
Although the new shareholders completely controlled the
dealership and its operations, they did not hold corporate
meetings or elect corporate directors as required by statute.
The financing corporation repossessed collateral from the
business and obtained a judgment against the original
shareholders for the businesses unsatisfied indebtedness to it.
The original shareholders filed this action against the
business and its new owners, alleging breach of contract,
unlawful distribution of corporate assets, and shareholder
liability for the debts of the business. The new shareholders
were granted a motion to dismiss on one count based on the
statute of limitations' for fraud actions. They were also
granted a motion to dismiss another count on the ground that
they were not directors of the business. The evidence showed
that no directors had been elected following the transfer of
ownership of the business and, since the defendants were not
directors, the trial court concluded that the count had to be
dismissed. The jury granted a money judgment against the
defendants on the breach of contract counts. The original
shareholders appeal the dismissal of the other counts.
1. The statutes provide that a board of directors may
authorize the corporation to make distributions to shareholders
unless the corporation is rendered unable to pay its debts as
they come due in the usual course of business.
Page 430
2. If corporate assets are distributed in violation of that
section, a director may be liable to the corporation and to its
creditors under certain circumstances.
3. If a director has complied with the standards of conduct
for directors set out in the code, he cannot be held personally
liable for a distribution that violates the section.
4. The statutes also are designed to prevent corporations
from defeating claims of creditors by improperly distributing
assets and to provide the corporation and creditors a remedy in
the event such improper distribution occurs.
5. While small, closely held corporations often do not follow
every requirement imposed on corporations generally, acts of
closely held corporations are not invalid simply because
certain corporate formalities were not observed.
6. Shareholders who compromise all the shareholders in the
corporation cannot escape liability by failing to observe the
formality of electing directors when they exercise all the
powers and undertake all the activities of directors.
7. Under the circumstances of this case, the new shareholders
assumed not only the authority and fiduciary responsibilities
of directors, but also the liabilities resulting from the
exercise of those roles and, consequently, they were directors
for the purposes of Code Sections 13.1-653, -690, and -692.
8. Since the claim in a particular count seeks to pierce the
corporate veil of the business corporation and impose personal
liability on the defendant shareholders for the fraudulent
conveyance of the business's assets, the trial court erred in
determining that it was a claim for fraud.
9. Even if it were a fraud claim, the record is insufficient
to show when the former shareholder discovered or should have
discovered the fraud, and thus to establish the accrual date of
the cause of action which must precede application of the
statutory limitation for claims based on fraud. Code Sec.
8.01-243.
Appeal from a judgment of the Circuit Court of King George
County. Hon. Carleton Penn, judge designate presiding.
Reversed and remanded.
William B. Cave (Felton & Cave, on briefs), for appellants.
Irvin Hannis Catlett (Ted R. Dean, on brief), for appellees
Irvin Hannis Catlett and Ted R. Dean.
No brief or argument for appellees Dahlgren
Chrysler-Plymouth, Dodge, Inc. and Robert L. Hamilton.
JUSTICE LACY delivered the opinion of the Court.
In this appeal involving a closely held corporation, we
consider whether the trial court properly dismissed (1) a claim
of unlawful
Page 431
distribution of corporate assets because it was filed against
shareholders rather than against duly elected directors and (2)
a claim to impose shareholder liability for corporate debts as
barred by the statute of limitations.
In 1987, Edward R. Curley, Jr., John Harry Hadjy, and Thalia
Stevenson incorporated Dahlgren Chrysler-Plymouth, Dodge, Inc.
(the dealership) and through it purchased an automobile dealer
franchise. Chrysler Credit Corporation (Chrysler Credit)
financed the dealership's purchase of new and used automotive
inventory, parts, and equipment. As part of the financing
arrangements, Curley, Hadjy, Stevenson, and their respective
spouses signed a "Continuing Guaranty" agreeing to pay the
dealership's indebtedness to Chrysler Credit.
In March 1989, Motors Holding Company, Inc. purchased
Curley's 52% stock interest in the dealership. Following the
purchase, Irvin H. Catlett, the president of Motors Holding
Company, Inc., Ted R. Dean, and Robert L. Hamilton began
participating in the operation of the dealership. The stock
purchase subsequently was renegotiated and, on May 10, 1989,
Curley's stock was purchased jointly by Motors Holding Company,
Inc., Jerry M. Dean, Ted R. Dean, Lloyd Pate, Robert L.
Hamilton, and Irvin H. Catlett. Hadjy and Stevenson sold the
remaining 48% of the stock in the dealership to the group that
same day. On May 10, 1989, the new shareholders completely
controlled the dealership and its operations. At no time,
however, did they hold corporate meetings or elect corporate
directors as required by statute.
On May 31, 1989, the dealership sent Chrysler Credit three
checks that were returned for insufficient funds. On June 22,
1989, pursuant to a court order, Chrysler Credit repossessed
its collateral from the dealership. Chrysler Credit also
obtained a judgment against Curley, Hadjy, Stevenson, and their
spouses (collectively Curley) for the dealership's unsatisfied
indebtedness to Chrysler Credit. As a result of that
litigation, Curley's liability to Chrysler Credit totaled
$356,109 plus interest.
On May 9, 1991, Curley filed this action against the
dealership, Jerry M. Dean, Lloyd Pate, Robert L. Hamilton, Ted
R. Dean, Irvin H. Catlett, and Motors Holding Company, Inc.,
alleging inter alia three breach of contract counts, a count
labeled "Unlawful Distribution of Corporate Assets" (Count V),
and one entitled "Shareholder Liability for the Debts of
Dahlgren Chrysler-Plymouth, Dodge, Inc." (Count VI).
Page 432
At the close of Curley's evidence, the trial court granted
defendants' motion to dismiss Count VI, finding that it
"appears to the Court to be based on fraud" and was barred by
the statute of limitations. The following morning, after the
defendants began to present their evidence, the trial court
granted their motion to dismiss Count V on the ground that they
were not directors of the dealership. The jury entered a
verdict of $275,000 against the defendants on the breach of
contract counts. Curley appeals the dismissal of Counts V and
VI.[fn1]
In support of Count V, "Unlawful Distribution of Corporate
Assets," Curley alleged that the defendants distributed
automotive and related assets of the dealership exceeding
$300,000 in value to themselves, at a time when the defendants
knew the dealership could not pay its debts. At trial, Curley
introduced evidence showing that the dealership failed to remit
to Chrysler Credit the amounts required under the financing
agreement for new car sales and that the defendants transferred
a number of cars to Motors Holding Company, without receiving
payment. The inventory value of these transactions as shown on
the dealership's books amounted to over $200,000. This process,
Curley argued, depleted the dealership's assets to a point at
which it could no longer pay its debts as evidenced by the
checks returned to Chrysler Credit for insufficient funds.
Curley asserted that this scheme was a distribution of the
dealership's assets in violation of Code Sections 13.1-653,
-690 and — 692. Curley alleged that the defendants operated
the dealership on a day-to-day basis after the transfer and
were the officers, directors, and shareholders of the
corporation.[fn2] Curley sought to recover from them $356,109 plus
interest, the amount of the dealerships's
Page 433
remaining indebtedness that Curley was required to pay Chrysler
Credit.
The trial court characterized Count V, "Unlawful Distribution
of Corporate Assets," as a cause of action wholly statutory in
nature and, based on the language of the Code, held that it
could be brought only against the duly elected directors of the
corporation. The evidence showed that no directors had been
elected following the transfer of ownership of the dealership
and, since these defendants were not directors, the trial court
concluded that the count had to be dismissed.
[1-2] The statutes in issue provide that "a board of
directors" may authorize the corporation to make distributions
to its shareholders unless, after such distribution, the
corporation "would not be able to pay its debts as they become
due in the usual course of business." Code Sec. 13.1-653. If
corporate assets are distributed in violation of Code Sec.
13.1-653, a director may be liable to the corporation and to
its creditors under certain circumstances. Code Sec.
13.1-692(A). A director found liable is entitled to seek
contribution from the shareholders receiving the improperly
distributed assets. Code Sec. 13.1-692(B).
[3] These provisions establish a "safe harbor" for directors
who participate in the distribution of corporate assets. If a
director has complied with the standards of conduct for
directors set out in Sec. 13.1-690, he cannot be held
personally liable for a distribution that violates Sec.
13.1-653.
[4] These statutes also are designed to prevent corporations
from defeating claims of creditors by improperly distributing
assets and to provide the corporation and creditors a remedy in
the event such improper distribution occurs. Relying solely on
the statutory reference to "directors," the defendant
shareholders here seek to avoid application of these statutes
to them because they are not duly elected directors of the
corporation, a circumstance arising from their own failure to
elect corporate directors.
Small, closely held corporations, like the dealership here,
often do not follow every statutory requirement imposed on
corporations generally. Even so, we repeatedly have refused to
invalidate acts of closely held corporations simply because
certain corporate formalities were not observed. Lake Motel,
Inc. v. Lowery, 224 Va. 553, 560, 299 S.E.2d 496, 500 (1983).
The converse is equally true. Shareholders, such as these, who
comprise all the shareholders in
Page 434
the corporation, cannot escape liability by failing to observe
the formality of electing directors when they exercise all the
powers and undertake all the activities of directors.
Coastal Pharmaceutical Co. v. Goldman, 213 Va. 831, 836,
195 S.E.2d 848, 852 (1973) (citing Moore v. Aetna Casualty & Sur.
Co., 155 Va. 556, 570, 155 S.E. 707, 711 (1930)).
[7] The evidence in this case is that the defendant
shareholders effectively were the corporation. They ran the
dealership on a daily basis; they made acquisition and sale
decisions; they encumbered the corporation with debt. These
facts show that the defendant shareholders assumed the roles of
directors and officers of the dealership. Under these
circumstances, the shareholders assumed not only the authority
and fiduciary responsibilities of directors, but also the
liabilities resulting from the exercise of those roles.
Pepper v. Litton, 308 U.S. 295, 306, 309 (1939).
We conclude that the trial court erred in dismissing Curley's
claim of unlawful distribution of corporate assets because,
although the defendant shareholders were not duly elected
directors of the dealership, they had assumed and exercised the
duties of directors without benefit of formal election.
Consequently, they were "directors" for purposes of Sections
13.1-653, -690, and -692.
Next, Curley assigns error to the dismissal of Count VI,
asserting that it is not a fraud count, but "an action to
charge the defendants personally for the fraudulent conveyance
of the Dealership's assets," subject to the limitation period
in Code Sec. 8.01-253. The trial court held that Count VI was
"based on fraud" and, citing Code Sec. 8.01-248, dismissed the
count as untimely filed. The pleadings resolve this issue.
Count VI, labeled "Shareholder Liability for the Debts of
Dahlgren Chrysler-Plymouth, Dodge, Inc.," alleges that the
defendants "treated the corporate existence of Dahlgren
Chrysler-Plymouth, Dodge, Inc. as a mere instrumentality and
the alter ego of the shareholders," and that the defendants
"may not use [the dealership's] corporate veil to shield
themselves from personal liability for the debts of the
Dealership." While Count VI contains allegations that the
defendants engaged in fraudulent and illegal acts, there are no
allegations of reliance on fraudulent acts or of damages
sustained as a result of any fraudulent act.
[8-9] The claim in Count VI seeks to pierce the corporate
veil of the dealership and impose personal liability on the
defendant shareholders for the fraudulent conveyance of the
dealership's assets.
Page 435
Consequently, the trial court erred in determining that Count
VI was a claim for fraud. Furthermore, even if Count VI were a
fraud claim, the record simply is insufficient to show when
Curley discovered or should have discovered the fraud and thus
establish the accrual date of the cause of action, Code Sec.
8.01-249, which must precede application of the statutory
limitation for claims based on fraud, Code Sec. 8.01-243.
For the foregoing reasons we will reverse the judgment of the
trial court dismissing Counts V and VI of the motion for
judgment and will remand the case for further proceedings.
Reversed and remanded.
[fn1] During the pendency of the appeal, settlements were reached with appellees Jerry M. Dean, Lloyd Pate, Motors Holding Company, Inc., and Ted R. Dean, and they were dismissed as parties to this appeal.
[fn2] Curley does not invoke the doctrine of de facto corporate directors, Farmer's Foods, Inc. v. Industrial Dev. Auth., 221 Va. 880, 882, 275 S.E.2d 891, 893 (1981); 2 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations Sections 372 et seq. (perm. ed. rev. vol. 1990) (hereinafter Fletcher); or assert a common law cause of action for creditors against a shareholder. Robar Dev. Corp. v. Minutello, 268 Pa. Super. 406, 408 A.2d 851 (1979); Peters v. Crochet Homes, Inc., 370 So.2d 651 (La. Ct. App. 1979); Reilly v. Segert, 31 Ill.2d 297, 201 N.E.2d 444 (1964); 3 Fletcher Sec. 993 (perm. ed. rev. vol. 1986); 3A Fletcher Sec. 1185 (perm. ed. rev. vol. 1986).
PRICE v. HAWKINS, 247 Va. 32 (1994)
439 S.E.2d 382
HENRIETTA PRICE, ET AL. v. JOSEPH L. HAWKINS
49203
Record No. 930364
In the Supreme Court of Virginia.
January 7, 1994
Present: All the Justices
The trial court did not err by entering in personam judgments
against transferees who participated in a fraudulent scheme to
delay and hinder a creditor by concealing the debtor's assets,
and those judgments are affirmed.
Fraudulent Conveyances — Suits to Set Aside — Code Sec.
55-80
The plaintiff in this suit filed an action seeking to recover
damages resulting from defamation and other wrongs. A jury
verdict of $200,000 was entered in his favor. He then filed the
present suit against the debtor, along with the debtor's two
sons and the debtor's girlfriend. The suit was brought under
Code Sec. 55-80 to set aside transfers of cash in the total
amount of $135,500 from the debtor to the other defendants. As
the result of an ore tenus hearing, the chancellor made
findings that the debtor had transferred a total of $115,500 to
one of his sons and $10,000 each to his girlfriend and to his
other son. The debtor had withdrawn large sums from his
retirement account and had liquidated corporate stock. Much of
the money which had been transferred to the other parties was
used to pay debts of the debtor. The trial court concluded that
there had been a scheme to defraud the creditor and the
chancellor set aside the conveyances as void and entered in
personam judgments against each of the three defendants other
than the debtor for the amounts which had been transferred to
them. Two of the defendants appeal.
1. There is a Virginia rule that, at common law and under
Code Sec. 55-80, an insolvent debtor may generally make a valid
transfer of a portion or the whole of his assets to a bona fide
creditor on account of an existing indebtedness if that is the
sole purpose of the debtor and the transfer is for fall value.
2. However, the trial court explicitly found, and the finding
was not challenged on appeal, that the son and the girlfriend
had participated in a scheme to defraud the creditor.
3. Where a creditor's property is indistinguishably mingled
with that of a third person, as when money is placed in a
transferee's checking account, the grantee should respond
personally for the value of the property which he has put it
out of his power to apply properly. Not being able to produce
the property, he must surrender the substitute to the creditor.
4. Receiving the property fraudulently, as against a creditor
who takes steps, the grantee is liable to the extent of the
value of the property.
Page 33
5. The transferees embarked on their scheme, detrimental to
the creditor's interest, after the creditor's collection
efforts began and, thus, they did not surrender the funds prior
to those efforts.
6. The statement in another case that the Court found nothing
in the statute authorizing a court to award an in personam
judgment when a fraudulent conveyance is set aside, should be
read in the context of that case and should not be interpreted
so broadly as to preclude personal judgments under all
circumstances in every case when a fraudulent conveyance is
declared void.
7. Here, neither of these individuals was a legitimate
creditor of the debtor but they joined in assisting him in
hiding assets that the creditor otherwise would have reached in
his judgment collection efforts and, under these circumstances,
an in personam judgment against the transferees in the full
amount of the fraudulent conveyances is appropriate.
8. The defrauded creditor in this case is without any
effective remedy under 55-80 unless personal judgments are
entered against the defrauders.
9. It is not to be presumed that the General Assembly
intended to provide a Sec. 55-80 cause of action without a
remedy and equity will not suffer a wrong to be without a
remedy.
Appeal from a judgment of the Circuit Court of the City of
Newport News. Hon. Randolph T. West, judge presiding.
Affirmed.
David N. Montague for appellants.
David M. Zobel (Huff, Poole & Mahoney, on brief), for
appellee.
JUSTICE COMPTON delivered the opinion of the Court.
In this suit brought under Code Sec. 55-80 to set aside
fraudulent conveyances of cash, the only question properly
preserved for appellate review is whether the trial court erred
by entering in personam judgments against transferees who
participated in a fraudulent scheme to delay and hinder a
creditor by concealing the debtor's assets. As pertinent, Sec.
55-80 provides: "Every gift, conveyance, . . . transfer of, or
charge upon, any estate, real or personal, . . . given with
intent to delay, hinder or defraud creditors . . . of or from
what they are or may be lawfully entitled to shall, as to such
creditors, . . . be void."
The present controversy stems from an action at law filed in
November 1986 in the Circuit Court of the City of Hampton by
appellee Joseph L. Hawkins against Floyd M. Gibbs, Sr., for
recovery in damages resulting from defamation and other wrongs.
In September 1988, a judgment confirming a jury's verdict in
the
Page 34
amount of $200,000 was entered in favor of Hawkins. That
judgment became final after unsuccessful appeals by Gibbs.
In November 1990, Hawkins, the creditor, filed the present
suit naming Gibbs, the debtor, as a defendant along with the
debtor's two sons, David A. Gibbs and appellant Steven A.
Gibbs, and the debtor's girlfriend, appellant Henrietta Price.
The suit was brought under Sec. 55-80 to set aside transfers of
cash in the total amount of $135,500 from the debtor to Price
and the sons.
As the result of a February 1992 ore tenus hearing, the
chancellor made the following findings. Beginning in February
1988 and ending in May 1988, the debtor made withdrawals
totalling $112,800 from his retirement account. Between March
and May 1988, the debtor caused to be transferred to the
account of David A. Gibbs the sum of $90,500. In December 1988,
the debtor liquidated corporate stock, receiving the sum of
approximately $60,220. The debtor transferred additional
amounts to David A. Gibbs so that he received a total of
$115,500. The debtor then transferred the amount of $10,000
each to Steven A. Gibbs and to Price.
At trial, David A. Gibbs admitted he knew of the original
suit and the judgment, but said he accepted the funds from his
father as a gift and had no intent to participate in a
fraudulent scheme. Steven A. Gibbs said he learned of the
original action only after it was concluded. He stated he spent
some of the $10,000 for his own purposes, paid some of his
father's bills, and returned the remainder to his father. Price
testified that she knew of the original action, that she was
aware some of the debtor's bank accounts had been attached, and
that she accepted the $10,000 in order to place the funds in an
account in her own name for the sole purpose of writing checks
to pay the debtor's bills. The evidence was uncontradicted that
she did not use any of the funds for her own purposes.
After stating at the conclusion of the hearing, "If there was
ever a scheme to defraud a creditor, this is it," the
chancellor set aside the conveyances as void and entered in
personam judgments against David A. Gibbs for $115,500, against
Steven A. Gibbs for $10,000, and against Price for $10,000. We
awarded Price and Steven A. Gibbs this appeal from the December
1992 final decree. David A. Gibbs did not file a petition for
appeal.
On appeal, Price and Gibbs contend that the trial court erred
in awarding personal judgments against them. They rely on
Mills v. Miller Harness Co., 229 Va. 155, 158, 326 S.E.2d 665,
667 (1985), in which we said that "nothing" in Sec. 55-80
authorizes "a court to award an in personam judgment when a
fraudulent conveyance is set aside."
Page 35
In Mills, we reversed that part of the final decree granting
one creditor an in personam judgment against a transferee and
remanded the case with direction that the transferee return the
funds to court for ratable distribution to all the creditors.
Price and Gibbs argue, in effect, that the creditor under the
circumstances of this case has no remedy under Sec. 55-80
against the fraudulent transferees. They contend the personal
judgments are invalid and, distinguishing Mills on its facts,
argue that ratable distribution is improper.
[1] Price argues that the sum "given" to her "was done to
utilize her as a bank account after Floyd Gibbs' own had been
seized, and Price merely acted as his agent to disburse his
funds. This cannot have been fraud because Floyd Gibbs could
have made the preferential payments directly himself." In this
branch of her argument, Price is drawing on the Virginia rule
that at common law and under Sec. 55-80, "an insolvent debtor
may generally make a valid transfer of a portion or the whole
of his assets to a bona fide creditor on account of an existing
indebtedness, if that is the sole purpose of the debtor and the
transfer is for full value." Bank of Commerce v. Rosemary and
Thyme, Inc., 218 Va. 781, 784, 239 S.E.2d 909, 912 (1978).
Gibbs argues that "approximately $5,941.23 was used to pay
his own bills. The rest was paid to his father's credit card
debt or returned to his father in cash."
[2] Thus, they contend that no "judgment should have been
rendered against Price because she was utilized merely as a
conduit for Floyd Gibbs' funds to prefer other creditors, which
he had a perfect right to do. Price received not one penny of
personal benefit." They contend it "was likewise error to enter
judgment against" Gibbs, and, because "key elements" of
Mills are not present, ratable distribution "cannot apply."
Gibbs argues that, in any event, he is liable for only the
$5,941.23 he used for his own benefit.
We do not agree with either Price or Gibbs. Their argument
completely disregards the trial court's explicit finding, not
properly challenged on appeal, that the pair participated in a
scheme to defraud the creditor.
[3] Professor Glenn, in his treatise on fraudulent
conveyances, discusses the accountability of a transferee or
grantee for proceeds of property fraudulently conveyed.
Relating the situation "to confusion of goods," the doctrine he
discusses "governs the case where a debtor's property is
indistinguishably mingled with that of a third person." 1
Garrard Glenn, Fraudulent Conveyances and Preferences Sec. 239,
at 415 (rev. ed. 1940). When the property "cannot be identified
Page 36
in any form," such as money placed in a transferee's checking
account, Glenn states, "The grantee should respond personally
for the value of the property which he has put it out of his
power to apply properly." Id. According to Glenn, the grantee
is placed, as the result of the creditor's proceeding attacking
the fraudulent conveyance, "in the position of one holding for
account of the debtor, because, the creditor having taken
action under the statute, the grantee's title is avoided. Not
being able to produce the property, he must surrender the
substitute to the creditor." Id.
[4] "The same reasoning makes the grantee personally liable,
on his account, for the value of the original property in case
he cannot produce it or a substitute. Receiving the property
fraudulently, as against a creditor who takes steps, the
grantee is liable to the extent of its value." Id.
[5] Price and Gibbs argue, however, that the foregoing rule
has no application here. As an alternative argument, they rely
upon the following exception, discussed by Glenn, to the
foregoing rule. "The grievance asserted under the theory of
fraudulent conveyance is that property has been put beyond the
reach of process normally available to creditors; hence all
persons involved in the wrongdoing are responsible for the
property, and its proceeds or value. It follows, then, that if
a transferee should surrender the property to the debtor,
together with its interim earnings, prior to institution of an
attack by creditors, he will be relieved of all liability.
Such, indeed, is the rule; the transferee being treated as
having done nothing but serve as custodian for the debtor,
without detriment to the interest of his creditors." 1
id. Sec. 57, at 77-78. Price and Gibbs argue that, because
funds they received were used for the debtor's obligations or
returned to him, they were mere custodians of the $10,000 and
the remaining $4,058.77, respectively, and should be relieved
of liability in those amounts.
The facts of this case make the exception inapposite. Here,
transferees Price and Gibbs did not surrender the cash to the
debtor prior to the institution of the creditor's efforts to
collect on the judgment. The record shows that the judgment
confirming the verdict was entered in September 1988. The
creditor's efforts to collect on the judgment began prior to
the time when the $10,000 transfers to Price and Gibbs were
made on December 23, 1988. Indeed, counsel for Price stated
during the trial: "The garnishment and tying up of all Mr.
Gibbs' bank accounts started in December of '88 after judgment
in September." The transferees embarked on their scheme,
detrimental to the creditor's interest, after the creditor's
collection efforts began and thus they did not surrender the
funds prior to those efforts.
Page 37
[6] Finally, our statement in Mills that we "find nothing in
the statute authorizing a court to award an in personam
judgment when a fraudulent conveyance is set aside," should be
read in the context of that case and should not be interpreted
so broadly as to preclude personal judgments under all
circumstances in every case when a fraudulent conveyance is
declared void. Mills, cited with approval in Cheatle v. Rudd's
Swimming Pool Supply Co., 234 Va. 207, 212, 360 S.E.2d 828, 830
(1987), applied a remedy fashioned in Darden v. George G. Lee
Co., 204 Va. 108, 113-14, 129 S.E.2d 897, 900-01 (1963). But
Mills and Darden are distinguishable on their facts; in
Cheatle, the creditor agreed to the applicability of Mills.
In Darden and Mills, the respective debtors had improperly
preferred legitimate creditors to the detriment of another
creditor. In those cases, ratable distribution, likewise a
remedy not explicitly authorized by Sec. 55-80, was appropriate
under the circumstances.
[7] In the present case, neither Price nor Gibbs was a
legitimate creditor of Gibbs, Sr. Instead, they joined in
assisting him in hiding assets that the creditor otherwise
would have reached in his judgment collection efforts. Here, an
in personam judgment against these transferees in the full
amount of the fraudulent conveyances is appropriate under the
circumstances.
[8] A mere declaration under Sec. 55-80 that the cash
transfers are "void" is meaningless in terms of relief to the
defrauded creditor in this case. This is not a situation where
the property fraudulently conveyed is realty, when a
declaration that the conveyance is void allows restoration of
title in the name of the grantor to which the lien of the
judgment could attach. This is not a situation where the
fraudulent grantor conveys personal property that requires
title records for proof of ownership, like motor vehicles, and
the property is still in existence and can be located for
attachment or levy when the fraudulent transfer is declared
void. Here, cash money has been transferred and, if merely
ordered to return money to court, the transferees may refuse to
do so, or claim that the money transferred has been spent and
is no longer available. In effect, the defrauded creditor in
this case is without any effective remedy under Sec. 55-80
unless personal judgments are entered against the defrauders.
[9] We will not presume that the General Assembly intended to
provide a Sec. 55-80 cause of action without a remedy.
Moreover, equity will not suffer a wrong to be without a
remedy. Drummond v. Rowe, 155 Va. 725, 730-31, 156 S.E. 442,
444 (1931). Indeed, remedies were fashioned under the statute
in both Darden and Mills.
Page 38
Consequently, we hold that the trial court did not err by
entering in personam judgments. Thus, the order appealed from
will be
Affirmed.
JUSTICE WHITING, with whom JUSTICE KEENAN joins, concurring
in part and dissenting in part.
In this case, the majority requires the transferees of two
fraudulent money transfers to repay an attacking creditor
personally. This requirement is imposed even though the
transferees had restored the money over 22 months before the
suit was filed. I do not believe that Code Sec. 55-80
authorizes the imposition of this penalty.
The evidence indicates that on or about December 23, 1988,
Floyd M. Gibbs, Sr. (the debtor), endorsed over two $10,000
checks payable to him, one to Henrietta Price and one to Steven
A. Gibbs (Gibbs). Shortly thereafter, Price deposited her check
in a newly created bank account, and returned $6,750 of that
amount in cash to the debtor, as evidenced by three canceled
checks drawn on that account and payable to cash on January 3,
11, and 13, 1989.
Within a month of Price's receipt of the check, at the
debtor's request and in payment of his debts, she issued the
following checks on that account: $36.95 for health insurance
on December 27, 1988; $3,000 for attorney's fees on January 3,
1989; and $17 for cable service on January 10, 1989. Although
Price testified that all of the $10,000 was either returned to
the debtor or used to pay his debts, she did not show how the
balance of $196.05 was expended.
Gibbs deposited the check endorsed to him in a bank account
he shared with his wife. Shortly thereafter, Gibbs testified
that he returned $1,630 in cash to the debtor, as evidenced by
two checks payable to cash dated December 30, 1988, and January
4, 1989. Gibbs also produced a canceled check for $2,428.75
dated January 3, 1989, issued at the debtor's request to pay
the debtor's credit card bill. Gibbs admitted that he used the
remaining $5,971.25 for his own purpose.
Hawkins filed this suit to set aside both $10,000 transfers
on November 30, 1990, over 22 months after the transferees had
made the above payments. A suit to set aside a fraudulent
conveyance seeks to subject what was formerly the debtor's
property to the claims of his creditors. 1 Garrard Glenn,
Fraudulent Conveyances and Preferences Sec. 54, at 75-76 (rev.
ed. 1940). If the property transferred is no longer
Page 39
available to be subjected to those claims, the fraudulent
grantee may be required to pay its value to the plaintiff. 1
id. Sec. 239, at 415.
However, if the transferee restores the property to the
debtor prior to the creditor's "attack," the transferee is not
liable for having participated in the fraudulent conveyance. 1
id. Sec. 57, at 77-78. As Glenn notes in a later section of his
treatise, if the transferee "had returned [the property] to the
debtor before the creditor's attack, that would have been a
complete defense, as we have seen." 1 id. Sec. 239, at 415
(emphasis added).
The majority holds that the defense is inapplicable here
because the transferees returned the property after Hawkins
began his "attack." According to the majority, Hawkins's
"attack" began when he filed his garnishment proceedings
against the debtor's bank accounts, a few weeks before the
transfers.
I believe the majority misinterprets the meaning of the
creditor's "attack" in this context. In my view, the word
"attack" describes the creditor's suit to set aside the
transfer and subject the property, or its proceeds, to his
judgment. This is quite evidently Glenn's concept of the
"attack" as revealed clearly in the section title leading to
his explication of the rationale for this defense: "There Must
be a Transfer, Which the Creditor Attacks as Such," 1
id. Sec. 55, at 76.
Thus, unlike the majority, I conclude that this defense is
available to transferees who surrender the property to the
debtor at any time before the creditor files suit to set aside
the transfer. This conclusion is consistent with Glenn's use of
the word "attack" in the context of this defense. It is also
consistent with Glenn's observation that a fraudulent
conveyance is a voidable, not a void, transaction, and that a
creditor "can get the benefit of his right [to attack the
conveyance] only by asserting it in the proper manner," 1
id. Sec. 111, at 220.
The remaining question is whether Price and Gibbs should be
required to pay Hawkins the amounts they paid the debtor's
other creditors before this suit was filed. These payments
reduced those creditors' claims, thereby increasing Hawkins's
potential recovery from the debtor's remaining assets. In my
judgment, these payments have an effect on the debtor's estate
similar to a return of the property to the debtor; in each
instance, the net value of the estate is increased by the
restorations of those sums that had been fraudulently
transferred from the estate. Thus, I believe that the
transferees should not be required to apply their own funds in
a second payment of the debtor's debts.
For these reasons, I would reverse that part of the judgment
requiring Price and Gibbs to pay Hawkins those sums that they
(1)
Page 40
had returned to the debtor, or (2) used in payment of his other
debts before this suit was filed. I would affirm the judgment
for those sums that were not shown to have been so applied.
Page 41
§ 55-80. Void fraudulent acts; bona fide purchasers not
affected.
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
