Opinion
Docket No.: CL16-6947
10-20-2016
Re: Bank of Hampton Roads v. DWH, LLC, Burns Equipment Co., Inc. and Percy C. Burns, III
John D. McIntyre, Esq.
Wilson & McIntyre, PLLC
101 West Main Street, Suite 920
Norfolk, Virginia 23510 Richard Beimiller, Esq.
Cullen D. Speckhart, Esq.
Wolcott Rivers Gates
Covergence Center IV
200 Bendix Road, Suite 300
Virginia Beach, Virginia 23452 Jason E. Ohana, Esq.
Wilcox & Savage, P.C.
440 Monticello Ave., Suite 2200
Norfolk, Virginia 23510 Dear Counsel,
This matter comes before the Court on demurrer of Defendant DWH, LLC ("DWH"). For the reasons stated herein, the Court sustains the demurrer as to all counts and grants Plaintiff leave to amend the Complaint.
Facts Alleged in Complaint
Plaintiff has a judgment against Burns Equipment Co., Inc. ("BEC") and its principal shareholder, Percy Burns, following their default on a promissory note and a commercial guaranty payable to Plaintiff. BEC performs work using heavy equipment for government and other contractors.
DWH is a Virginia limited liability company. Burns is a consultant for DWH and the fiancee of "Borum, with whom he cohabitates." (Complaint at ¶3). The Complaint does not further identify Borum or describe her connection to DWH. At oral argument, counsel advised that Borum is the sole member/owner of DWH. DWH pays all business expenses of BEC and Burns, including rent, utilities, cell phone service, and maintenance. DWH bids for contracts on behalf of BEC and provides equipment for the work. DWH receives all payment for work done by BEC employees and remits to BEC only enough money to pay employees. Both DWH and BEC conduct business from a trailer located at 1150 Harmony Road in Norfolk. The monies and assets of all three defendants have been comingled. Corporate formalities of DWH have been disregarded.
Plaintiff seeks a declaration that DWH is the alter ego of both BEC and Burns, such that DWH is liable for the judgment against those parties. Plaintiff seeks both a judgment against DWH for the balance due from BEC and Burns, as well as a declaration that it may levy on DWH's assets to satisfy the judgment.
Standard for Demurrer
On demurrer, the Court assumes the truth of all facts alleged in the Complaint and makes all reasonable inferences in favor of the plaintiff. Elliot v. Shore Stop, Inc., 238 Va. 237, 239-40 (1989). "The trial court is not permitted on demurrer to evaluate and decide the merits of the allegations set forth in a complaint, but only may determine whether the factual allegations of the complaint are sufficient to state a cause of action." Riverview Farm Assocs. Va. Gen. P'ship v. Bd. of Supervisors, 259 Va. 419, 427 (2000). "To survive a challenge by demurrer, a pleading must be made with 'sufficient definiteness to enable the court to find the existence of a legal basis for its judgment. In other words, despite the liberality of presentation which the court will indulge, the motion must state a cause of action.'" Hubbard v. Dresser, Inc., 271 Va. 117, 122-23 (2006) (internal quotation marks and citations omitted).
Legal Analysis
A. Alter Ego Liability
The parties have addressed legal issues relevant to corporate "veil-piercing" at length. Strictly speaking, the veil-piercing doctrine does not directly apply to the facts alleged in the Complaint. Corporate veil-piercing, an "extraordinary act" warranted only under "extraordinary circumstances," Dana v. 313 Freemason, 266 Va. 491, 500 (2003), can apply in order to: (1) hold an owner personally liable for the debts of his corporation; (2) hold a corporation liable for the debts of its owner (a so-called "reverse pierce"); or (3) hold a corporation liable for the debt of its parent, subsidiary, or affiliated entity. See C.F. Trust, Inc. v. First Flight Ltd. P'ship, 266 Va. 3, 10 (2003).
Defendant argues that there is no veil to be pierced between Burns and DWH because Burns has no interest in DWH. None of the three veil-piercing outcomes described above apply to these facts: Plaintiff does not seek to hold DWH liable for the debts of its owner, nor does it seek to hold DWH liable for the debt of a parent, subsidiary, or affiliate. It seeks to hold DWH liable for the debt of an entirely separate entity.
Defendant argues that Virginia law does not support Plaintiff's request to disregard the legal separateness of two different entities, owned by two different individuals, in order to determine that they are de facto the same entity. With little case authority approving the imposition of liability for a judgment from one corporation to another unrelated corporation, the Court looks to the legal principles of corporate veil-piercing for guidance.
"The decision to ignore the separate existence of a corporate entity and impose personal liability upon shareholders for debts of the corporation is an extraordinary act to be taken only when necessary to promote justice." C.F. Trust, Inc. v. First Flight Ltd. P'ship, 266 Va. 3, 10 (2003). While there are no dispositive criteria, a litigant seeking to veil pierce must show that the entity to be pierced "has been controlled or used by the debtor to evade a personal obligation, to perpetrate a fraud or a crime, to commit an injustice, or to gain an unfair advantage." Id. at 12. Additionally, "piercing of a veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and/or limited partnership and the individual no longer exist, and adherence to that separateness would create an injustice." Id.
Defendants assert that the Plaintiff has not adequately pleaded a claim by which DWH could be considered the alter ego of either BEC or Burns because the Complaint does not allege a unity of interest and ownership between those parties. Specifically, there is no allegation that Burns or BEC owns or has any legal interest in DWH. Although not alleged in the Complaint, counsel agreed that the sole owner of DWH is Ms. Borum, the fiancee of Percy Burns.
The Virginia Supreme Court has repeatedly held that "piercing the corporate veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work an injustice." Greenberg v. Comm., 255 Va. 594, 604 (1998); see also, First Flight, 266 Va. at 10 (collecting cases). Here, Plaintiff has not alleged that either Burns or BEC has any interest or ownership in DWH.
In AG. Dillard, Inc. v. Stonehaus Construction, LLC, the Virginia Supreme Court reversed the circuit court's decision to sustain a demurrer on the issue of corporate veil piercing. Stonehaus, No. 151182, 2016 Va. LEXIS 16, at *1 (Va. June 2, 2016). The plaintiff sought to collect a judgment against a corporate entity called Stonehaus by piercing the corporate veil to reach the assets of several other related corporate entities. Id. The link between Stonehaus and the entities sought to be held liable was the defendant, Robert Hauser. Id. The plaintiff alleged that "Robert Hauser (or an entity controlled by him ...) is a Member and/or Manager of each of Stonehaus and each of the Related Entity Defendants." Id. at *2 (internal citations omitted). The plaintiff further alleged that Robert Hauser, or an entity controlled by him, siphoned funds from Stonehaus to the other corporate entities in order to prevent the plaintiff from collecting on the judgment. Id. Stonehaus and the related entities also presented themselves to the public as a single entity and comingled all their assets. Id. at *3. Important to the Court's decision that the complaint survived demurrer were the allegations that Robert Hauser was the controlling member of Stonehaus and of the related entity defendants; and he exerted control over all of them, treating them as though they were a single entity. Id. at *9-10.
In contrast, the Complaint in this case alleges no similar overlap of ownership or interest between Burns/BEC and DWH. Plaintiff argues strenuously that Virginia law does not require common ownership between the judgment debtors and the corporation sought to be pierced: "All that is required is that DWH was used by the Debtors as an instrumentality by which to evade their creditors." (Brief in Opp. at 1). Plaintiff relies heavily on First Flight to support its contention that the controlling factor is how the Debtor used the corporation sought to be pierced and not whether he owns an interest in it.
In First Flight, Barrie Peterson owned a 98% limited partnership interest in First Flight Limited Partnership; the remaining interests were held by Peterson's son and by a corporation that Peterson controlled. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 140 F. Supp. 2d 628, 633 (E.D. Va. 2001). Shortly after the plaintiffs obtained a judgment against Peterson, he transferred to his son the controlling interest in the partnership. Id. at 633-34. The trial court did cite abundant evidence that Peterson "treated his corporate and personal affairs as if they were indistinguishable," used First Flight "as a device to pay his personal expenses," "maintained control over First Flight's operations," "retained decision making control over First Flight," "directed that [First Flight] make distributions of substantial funds to Scott Peterson and to BHG for the payment of Barrie Peterson's personal expenses," "commingled his personal funds with the funds of the entities that he controlled and owned," and "caused First Flight to ignore the requirements of its partnership agreement." Id. at 633-35, 644-45 (internal quotation marks and citations omitted). Because the individual debtor did have a significant ownership interest in the entity sought to be pierced, this case does not support Plaintiff's contention that overlapping interests are not required.
Further, if Plaintiff's characterization of Virginia law is correct that the debtor's use and control of the subject corporation matters more than his ownership interest, the Complaint still does not specifically plead such use and control by Burns or BEC. The Complaint alleges that DWH bids for jobs that BEC ultimately completes, that DWH collects payment for those jobs and remits an insufficient amount to BEC, and that DWH pays all of Burns' expenses. The Court could draw the conclusion that Borum, the owner of DWH, conducts her own business this way to benefit Burns because of her affection for him. It is also possible that Burns has prevailed upon his fiancee to put her company's name on contracts and accounts receivable that would otherwise belong to BEC, but the Complaint does not allege that he dominates or controls her corporation the way that Barrie Peterson dominated and controlled First Flight. If Burns does not control DWH but merely benefits from its largesse, the case law does not support the conclusion that DWH should be required to pay Burns' judgment to the Bank.
The Court has located no Virginia authority approving veil-piercing between individuals or entities that had no common ownership. Mindful of the Virginia Supreme Court's repeated characterization of the veil piercing standards as "very stringent," First Flight, 266 Va. at 12, the Court determines that this absent factor requires that the demurrer be sustained. Possibly Plaintiff can plead additional facts about the de facto ownership or control of DWH, and perhaps other theories are available to reach DWH, such as successor liability or imputation of income. The Court expresses no opinion as to such and grants leave to Plaintiff to amend Counts I and II of the Complaint to state facts to support common or overlapping ownership between DWH and Burns/BEC and/or some other theory by which DWH could be held liable for the debts of the other two defendants; but the facts alleged in the Complaint do not support the relief sought.
B. Common Law Conspiracy
Count 3, alleging common law conspiracy, recites that "Defendants have combined, associated, agreed and mutually undertaken for the unlawful purpose of denying [Plaintiff] its rights under the Note and Judgment, and with the purpose of hindering, delaying and defrauding [Plaintiff]." (Complaint at ¶ 18).
A common-law conspiracy is actionable when its object is to accomplish by concerted action some criminal or unlawful purpose or some lawful purpose by unlawful means. Commercial Bus. Sys. v. Bell South Servs., 249 Va. 39, 48 (1995). The Complaint does not clearly allege the unlawful purpose or unlawful means that would support a conspiracy claim. It does describe conduct that suggests Defendants are working together to keep BEC and Burns without liquidity or an income that Plaintiff could garnish; but counsel has cited no case law establishing that such activity is illegal. The Complaint could be interpreted to describe fraudulent conveyances between BEC/Burns and DWH: "[BEC/Burns] uses DWH for the wrongful purpose of secreting assets from legitimate creditors," (Complaint at ¶¶ 11, 15), but it fails to describe any actual transfers from the judgment debtors to DWH that were accomplished by means of a concerted action among Defendants. DWH perhaps should be transferring cash to BEC in an amount commensurate to the value of the services that BEC provides on DWH contracts, but counsel have not argued that the failure to make a conveyance is fraudulent.
Further, counsel at oral argument conceded that Plaintiff did not allege fraudulent transfers. The Complaint therefore alleges neither an unlawful purpose nor a lawful purpose by unlawful means to support the claimed conspiracy.
Conclusion
For these reasons, the Court SUSTAINS the demurrer. Leave is granted to Plaintiff to file an Amended Complaint within 21 days. An Order stating the Court's ruling is enclosed.
Sincerely,
/s/
Mary Jane Hall
Judge MJH/dyl
Enc.