Opinion
Case No. 95-11946-SSM, Adversary Proceeding No. 96-1110
February 24, 1997
MEMORANDUM OPINION
This is an action by DB Countryside, L.L.C., the debtor in possession, to set aside a $3 million note, deed of trust, and confessed judgment in favor of S. P. "Chip" Newell. The debtor additionally seeks an award of damages for slander of title to its real estate arising from the recording of the deed of trust and the docketing of the confessed judgment. A trial was held on December 9 and 10, 1996. At the conclusion of the trial the court reserved ruling and invited the parties to submit briefs in lieu of final argument. The parties have done so, and the matter is now ripe for determination. For the reasons set forth in this opinion, the court determines that the deeds of trust, the note, and the confessed judgment are void for lack of actual or apparent authority on the part of the agent signing them, but that the debtor in possession is not entitled to an award of damages. This opinion constitutes the court's findings of fact and conclusions of law under F.R.Bankr.P. 7052.
Named as defendants, in addition to Newell, were Newell's attorney, Henry F. Brandenstein, and well as Jack L. Wuerker and Efthalia Triarhos, the substitute trustees under the challenged deed of trust. The plaintiff voluntarily dismissed Mr. Brandenstein as a defendant. No answer or appearance was filed by the trustees.
Statement of Facts
The debtor, DB Countryside, L.L.C. ("D B Countryside" or "the debtor") is a Virginia limited liability company formed on April 12, 1994 to develop a parcel of land in Sterling, Loudoun County, Virginia, known as Pare City Center. The project originally consisted of approximately 12 acres. In the course of the events giving rise to this action, approximately 8 acres were sold to a theater chain for a multiplex theater. At the present time there remain 3.766 acres which are divided into four retail "pad sites."
The original members of the company were Joel T. Broyhill ("Broyhill"), who held a 50% interest, and Robert and Marilyn DeLuca ("the DeLucas"), who owned the other 50% interest. The organization of the company was set forth in an Operating Agreement dated April 12, 1994 ("the operating agreement"). The operating agreement designated the DeLucas as the managing members of the company and gave them "full, exclusive and complete discretion in the management and control of the affairs of the Company and the Company's business." In July 1994, the DeLucas solicited Theodore Boinis ("Boinis"), the president of Northern Virginia Realty, Inc. ("NVRI"), and trustee of its profit sharing plan, to become a 15% member in exchange for a $600,000 investment. The NVRI profit sharing plan made the investment and was thereafter treated as a 15% member, although the amended operating agreement recognizing its admission was never fully executed.
It was signed by the DeLucas on their own behalf and by Boinis as trustee of the profit sharing plan. It was not signed by Broyhill, who did not even learn of its existence until many months later. In a prior adversary proceeding to which the DeLucas, Broyhill, and NVRI were parties, this court found that Broyhill assented to the substantive provisions of the amended operating agreement and objected only to a recital that he had received all sums to which he was entitled as a result of NVRI's purchase of a 7.5% equity interest from him. Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996).
The DeLucas owned or had controlling interests in a number of other real estate partnerships, limited partnerships, and limited liability companies located in Northern Virginia, the District of Columbia, and the Williamsburg-Newport News area of Virginia. These, together with D B Countryside, constituted the DeLuca "portfolio."
The DeLucas were personally liable to Crestar Bank on approximately $12 million in loans taken out for various real estate projects. Neither D B Countryside nor its property was liable for any of this amount, but Crestar did have a deed of trust against the adjacent Countryside Commercial and Professional Center, owned by Countryside Commercial and Professional Center, L.P. The DeLucas had reached a settlement agreement with Crestar Bank for a discounted payoff in the amount of $5.75 million. In order to raise the needed cash, the DeLucas negotiated with the Donohoe Companies ("Donohoe"), a real estate development company, to sell a substantial portion of their portfolio. Newell, who is president of Donohoe's development division, represented it in the negotiations. When Donohoe decided not to pursue the opportunity, Newell advised the DeLucas on October 24, 1994 that he was interested in purchasing the portfolio himself. Robert DeLuca prepared, and Newell signed, a letter of intent that same date for the purchase of the DeLucas' interest in ten of their entities for $25 million. D B Countryside was not one of the entities to be purchased.
Under the letter of intent, Newell was to post a $2 million deposit at the time a formal purchase contract was signed. An Agreement of Purchase and Sale was subsequently prepared dated November 15, 1994. The sellers were the DeLucas, and the purchaser was Donohoe/New Height, L.L.C., a limited liability company "to be formed." The agreement provided for the sale, over time, of the DeLucas' interests in the ten entities listed in the letter of intent as well as the "Pare City Theater Site" (which consisted of the land for the theater proper — which was then under contract — and the four pad sites) for $27 million. The agreement required a $250,000 deposit at the time the agreement was signed, an additional $750,000 on or before December 1, 1994, and another $1 million on or before December 15, 1994. The agreement stated that the deposit "shall be available for use by the Seller, and Seller shall execute a note payable to Purchaser that will bear interest at ten percent (10%) per annum and will be due at Closing." At closing, "the interest shall be paid, and the principal shall be applied as part of the Purchase Price." As "collateral for the use of the deposit," the DeLucas pledged 30% of their 88% interest in Countryside Commercial and Professional Center, L.P. and agreed to pledge "sixty percent (60%) of D B CountrySide, L.L.C." at such time as D B Countryside obtained an acquisition and development loan.
Newell signed for Donohoe/New Height.
At that time, the DeLucas owned only a 42.5% interest in D B Countryside.
Apparently in anticipation that some form of contract would be forthcoming, the DeLucas had — approximately two weeks before the letter of intent was signed — executed on October 7, 1994, a promissory note payable to Newell in the amount of $2 million. Between that date and November 22, 1994, Newell wrote from his personal account a total of eight checks payable to Robert DeLuca in the aggregate amount of $2,070,000. All of these were deposited into the DeLucas' personal checking account, with the exception of $225,000 deposited into the operating account of R M Villas, L.C.
The extent to which any of the funds Newell loaned to the DeLucas subsequently found their way into D B Countryside is disputed. Newell relied at trial on a schedule prepared in approximately July 1995 by Samuel Skinner, the DeLucas' chief financial officer, showing the uses of the Newell funding. The schedule reflects a total of $250,500 being paid to D B Countryside. The underlying bank statements, however, do not support the summary, and it appears that, at least with respect to a $235,000 payment to D B Countryside on December 15, 1995, and a $5,000 payment on November 22, 1994, the funds to cover those checks actually came from the discounted payoff of three promissory notes held by Kiln Creek Golf Country Club, L.P., another DeLuca entity. From the evidence, the court cannot find that any more than $5,000 of the funds received by Robert DeLuca from Newell were in turn paid into D B Countryside. It does appear that $859,849 of the funds loaned by Newell were used to repay Broyhill for a personal loan Broyhill made to the DeLucas.
In mid-February 1995, DeLuca came to Newell and sought to borrow funds needed to keep his settlement agreement with Crestar Bank alive. The $5.75 million payment to Crestar Bank had originally been due on January 15, 1995. The date had been extended to February 15, 1995, and Crestar was requiring, as a condition of further extending that date, a payment of $500,000. Newell agreed to loan that amount, but he and his attorney, Henry F. Brandenstein, wanted adequate security. By this time Newell had learned that the DeLucas, prior to the pledge to him of 30% of their ownership interest in D B Countryside Commercial and Professional Center, L.P., had already pledged 100% of their distribution rights from the partnership to Crestar Bank. At that point, the 8.6836 acres of D B Countryside's property under contract with Regal Cinemas, Inc. was about to go to settlement, which would have paid off an existing deed of trust in the amount of approximately $1.2 million, leaving the four pad sites unencumbered. Accordingly, Newell demanded, and the DeLucas agreed to furnish, a deed of trust against the pad sites to secure the $500,000 loan.
A $500,000 promissory note payable to Newell was prepared dated February 15, 1995, and was signed by the DeLucas the following day. On that day (February 16, 1995), Newell wire transferred $500,000 to Crestar Bank. D B Countryside was not a party to the $500,000 note. Robert DeLuca did, however, execute in its name a deed of trust, also dated February 15, 1995, against the four pad sites to secure the note. The deed of trust was signed by "Robert R. DeLuca, Manager," and was recorded by Newell — without benefit of a title examination — in the Clerk's Office of the Loudoun County Circuit Court on February 21, 1995.
At the same time as the note and deed of trust were signed, the DeLucas and Donohoe/New Height, L.L.C. (by Newell) executed an Amended and Restated Agreement of Purchase and Sale. The purchase was now to take place in three phases. "Phase I" consisted of the four pad sites owned by D B Countryside plus two projects belonging to other DeLuca entities. The total purchase price for the Phase I properties was to be $8.5 million and was not further allocated among the parcels. The agreement further recited,
The Countryside Retail Center, owned by Countryside Commercial and Professional Center, L.P., and the Villas at Country Side, owned by R M Villas, L.C.
Deposit. On the date hereof, Purchaser shall make a non-refundable deposit . . . in the amount of Five Hundred Thousand Dollars ($500,000.00) (the "Phase I Deposit") by delivering a check payable to Crestar Bank in the amount of the Phase I Deposit (on behalf and for the benefit of Seller). Seller has executed a note payable to Purchaser for the amount of the Phase I Deposit . . .
At closing the principal amount of the note would be credited against the purchase price and the note would be canceled and returned to the seller.
In the interim, the relationship between Broyhill and the DeLucas had grown increasingly strained. In addition to D B Countryside, Broyhill was a major investor with the DeLucas in several other projects, including Kiln Creek Golf Country Club, L.P. and D B Venture, L.C., and had also made the DeLucas a $850,000 personal loan. Beginning in October 1994, Broyhill became concerned that the DeLucas were not providing him with the financial information he requested concerning the various projects. In January 1995, he learned of NVRI's $600,000 investment, almost all of which had been immediately siphoned out of D B Countryside. Around this time, Broyhill also learned that some sort of sale was in prospect to Newell. On January 16, 1995, Broyhill's attorneys wrote Newell requesting information and also advising that Broyhill would be away on an extended vacation in the near future. The letter stated, "Since we anticipate that our client's signature will be required as a part of settlement, we would ask to receive both advance notice of the settlement and/or copies of any documents or instruments." Newell faxed the letter to Brandenstein, who on January 30, 1995, replied to Broyhill that "[a] final contract has not been entered into with the DeLucas regarding the overall portfolio," but that it was now "contemplated that the properties owned by Harmon Building Associates, L.P., D B CountrySide, L.L.C. and Lakeside Associates, L.P. will be purchased outright," with a projected closing date of February 15, 1995. The letter also stated, "The DeLucas have indicated that they will provide your clients with copies of the contract documentation relating to this transaction when it is finalized."
On February 15, 1995, Broyhill filed a chancery suit in the Circuit Court of Loudoun County against the DeLucas and six of the entities, including D B Countryside, in which he was an investor with the DeLucas. The bill of complaint sought, among other relief, an accounting and a judicial winding-up. A memorandum of lis pendens was recorded among the Loudoun County land records that same day reciting that the general purpose of the suit was "to request an accounting, enter injunctions, prohibit conveyances and encumbrances, dissolve and wind-up the entities . . . and for other equitable relief." Attached as an exhibit to the memorandum of lis pendens was a legal description of D B Countryside's real estate.
The next day, February 16, 1996, the sale of the 8.6836 acre theater parcel to Regal Cinemas, Inc., took place. Broyhill, who received his proportionate share of the net sales proceeds, released the lis pendens as to that parcel in order to allow the closing to occur.
After the February 16, 1996 closing on the $500,000 loan, the DeLucas requested additional funds. On February 27, 1995, Newell loaned the DeLucas another $100,000, for which they signed a promissory note. As with the $500,000 note, Robert DeLuca, purporting to act in his capacity as manager of D B Countryside, executed a deed of trust encumbering the four pad sites to secure repayment of the note. The deed of trust was recorded on March 2, 1995. The recording was done, at the request of Newell's attorney, by Mark Albanese, an attorney who was the owner of a title company called Estate Title Escrow. The recording instructions from Newell's attorney had requested "a last owner bringdown," and directed, "If you find something, please call before recording." In doing the title bringdown, Albanese discovered the lis pendens and telephoned Michelle ("Mike") Hurley, a real estate paralegal at the law firm. He advised her of the lis pendens but was instructed to proceed with the recording. He mailed a copy of the lis pendens to the law firm that same evening and followed up on March 6, 1995 with three pages that had been omitted.
Only $70,000 was actually disbursed. The remaining $30,000 was treated as evidencing the overdisbursement on account of the $2 million note. (Of the $2,070,000 that had been disbursed by Newell to DeLuca, apparently $40,000 had been repaid.)
In the interim, Newell had agreed to loan the DeLucas another $100,000 and requested Brandenstein to prepare another note and deed of trust. Brandenstein did so, but also prepared a separate $2.7 million note and deed of trust which he urged Newell to attempt to have signed. Brandenstein explained:
In our continuing efforts to try and improve your position with regard to the $2,000,000.00 advance from last year, I have also enclosed an Amended, Consolidated and Restated Promissory Note, and an Amended and Restated Deed of Trust, by which the total advances in the amount of $2.7 million are secured by the Pare City PAD sites. As I have advised you, there are some problems with regard to attempting to secure the antecedent debt with the enclosed Deed of Trust. However, it does not impair your position with regard to the secured advances to attempt to now secure the $2,000,000.00 advance. In fact, I believe it substantially improves your position, and gives you an argument that you are secured as to the whole amount. If is worth a try if you can get Mr. and Mrs. DeLuca to sign the enclosed. Use me as the bad guy if you must. . . . A bankruptcy judge may set aside the $2,000,000.00 lien, but there is no lien without the Deed of Trust.
Newell, however, rejected Brandenstein's suggestion and did not broach the $2.7 million deed of trust with the DeLucas. Instead, the DeLucas signed a $100,000 promissory note to Newell dated March 2, 1994, and Robert DeLuca signed for D B Countryside a deed of trust encumbering the four pads to secure that note. The deed of trust was recorded on March 6, 1995.
On March 9, 1995, Brandenstein sent Newell a copy of the March 2, 1995 deed of trust as well as a copy of the memorandum of lis pendens. With respect to the lis pendens, Brandenstein observed:
The Lis Pendens constitutes a cloud on the title to the PAD [sic] sites. . . . You will note that the purpose of this suit is to obtain an injunction, request an accounting, and prohibit conveyances or encumbrances of property during the period of winding up several partnerships. Obviously, Mr. Broyhill continues to be concerned about his ability to fully understand or control Mr. DeLuca's activities with regard to all of these various business enterprises.
After the second $100,000 loan, DeLuca approached Newell with two requests. First, he told Newell he needed an additional $300,000 in order to finish the pads. Second, he informed Newell that he had an opportunity to refinance the pad sites and felt he could do better selling the pads himself. He requested that Newell agree to cancel the purchase contract for the pads if DeLuca was able to obtain the refinancing he was seeking. Newell did not have another $300,000 but approached Kevin Donohoe about investing in the pads. Donohoe was willing to do so, but wanted the $300,000 to be secured. Newell agreed with the DeLucas to a "walkaway" fee of $250,000 if the DeLucas were successful in refinancing the pad sites.
Brandenstein prepared the documentation for the $300,000 loan. Still concerned over the lack of meaningful collateral for the $2 million note, he drew up a Renewed, Extended, Amended, Consolidated and Restated Promissory Note and an Amended, Restated and Consolidated Deed of Trust, both in the amount of $3 million. These instruments not only encumbered the four pad sites for the $2 million in prior loans to the DeLucas — in addition to the $700,000 already secured and the $300,000 in new money — but for the first time made D B Countryside a co-maker and liable for the underlying debt. Brandenstein also drafted, among other documents, a "Declaration of Limited Liability Company — Borrowing Authorization." The drafts were sent to the DeLucas prior to a scheduled March 17, 1995 meeting. Marilyn DeLuca, who had been faxed copies of the documents for review, marked up the draft deed of trust to delete the $3 million amount and wrote on her copy, which was faxed back to Brandenstein, that the amount could not exceed $1.3 million because that was the maximum amount of the DeLucas' interest in the property.
Nevertheless, at closing on March 17, 1995, the DeLucas were presented with a $3 million note and deed of trust and were told that D B Countryside would have to sign them as a condition of the $300,000 loan. Marilyn DeLuca was enraged and stormed out. Newell candidly testified that he never fully understood or agreed with the $3 million deed of trust and was never fully comfortable with increasing the note to $3 million. In effect, he stated that he was simply following his counsel's advice. He acknowledged at trial that he looked at his relationship with D B Countryside as involving only the last $1 million loaned. He testified that he became comfortable with the $3 million only when a provision was added to the deed of trust that required its release upon the payment of $1,000,000 plus the $250,000 breakup fee. No comparable provision was inserted into the note, however, which remained an absolute obligation on the part of D B Countryside to pay $3 million. Brandenstein testified that the reason he insisted on the $3 million note and deed of trust was because he saw it as the only way to force the DeLucas to go to closing on the various properties. In any event, after the release provision was inserted in the deed of trust, the DeLucas signed the $3 million consolidation note, and Robert DeLuca signed the note and deed of trust in the name of D B Countryside.
Contemporaneously with the $3 million note Newell (for Donohoe/New Height L.L.C.) signed a First Amendment and an Amendment to the February 15, 1995, amended purchase agreement. The effect of the March 17, 1995 amendments was to withdraw the pad sites and R M Villas from "Phase 1" of the purchase. The sale of the pad sites was now made a separate transaction, with the purchase price set at $2,525,000 (subject to adjustment). The amendment further recited,
4.1.1 Deposit. The Purchaser has previously paid a deposit, in the amount of Three Million Dollars ($3,000,000.00) that is evidenced by a certain Amended and restated Promissory Note executed by the Seller and D B Countryside, L.L.C. . . . At the Closing associated with the purchase and sale of the Parc City Pads . . . One Million Dollars ($1,000,000.00) of the foregoing deposit shall be applied and credited as partial payment of the Pare City Pads Purchase Price. . . .
At the closing, the DeLucas also signed the borrowing authorization for D B Countryside prepared by Brandenstein. The authorization listed Robert R. DeLuca and Marilyn S. DeLuca as the managing members, and then stated, "At a meeting of the above-named Limited Liability Company duly called and attended," certain resolutions were adopted, including the following:
1. RESOLVED, that the following individuals are hereby authorized, on behalf of, in the name of, and for the account of this Limited Liability Company, upon such terms and conditions as they deem desirable, to borrow money and obtain or continue credit (with or without security) from S. P. Newell (hereinafter termed the "Lender"), in such amounts as they deem desirable, to guarantee and/or collateralize the obligations of others to the Lender, to engage in business transactions of all nature and kind and/or to enter into all manner and kinds of contractual relationship with said lender.
In addition, the following curious and self-serving language was inserted into what was otherwise a form document:
5. RESOLVED FURTHER, that the Lender has acknowledged that at least One Million dollars ($1,000,000.00) of the amount loaned to the Borrower and the Company has been or shall hereafter be used and expended for the purpose of the development and/or construction of the Pare City Pad Sites. However, because of certain Notice of Lis Pendens dated February 16, 1995, the Lender had demanded, and the Borrowers and the Company have consented, to securing the Three Million dollars ($3,000,000.00) advanced to the Borrowers and the Company by the Parc City Pad Sites.
Finally, the authorization concluded, "The signers hereto declare that they are, or have the authority of, all Members in the designated Limited Liability Company. . . ." The authorization is signed by Robert R. DeLuca and Marilyn S. DeLuca on signature lines that do not state the capacity in which they are signing, merely their names, and by "Robert R. DeLuca, Manager" for D B Countryside.
Of the $300,000 in new money represented by the $3 million note and deed of trust, $258,000 was wire transferred by Newell to the DeLucas' personal checking account at Columbia First Bank on March 18, 1995. Newell withheld $42,000 to insure that interest payments were made on the DeLucas' debt to Crestar Bank. Of this amount, $19,500 was subsequently paid by check to Robert DeLuca on March 29, 1995 and another $19,500 on April 12, 1995. How the remaining $3,000 was disbursed is unexplained.
It is undisputed that neither Broyhill nor NVRI had any prior knowledge whatsoever of the four deeds of trust or the $3 million consolidation note. Newell and Brandenstein knew at all times that Broyhill had an interest in D B Countryside, although Newell, not knowing of NVRI's investment, believed Broyhill and the DeLucas were the only members. Newell also knew at the time the borrowing authorization was signed that no "meeting" of D B Countryside had taken place at which Broyhill had been present.
Brandenstein, without telling Broyhill's attorney about any of the deeds of trust, demanded that Broyhill release the lis pendens. Broyhill refused to do so, and the DeLucas brought a motion in the Circuit Court of Loudoun County to release the lis pendens. That motion was denied on April 26, 1995.
In the meantime, Broyhill had learned of the existence of the four deeds of trust, and on April 7, 1995, he moved for the appointment of a receiver for D B Countryside. The hearing on that motion was set for May 10, 1995. On May 3, 1995, Newell confessed judgment against the DeLucas and D B Countryside in the clerk's office of the Circuit Court of Loudoun County in the amount of $4,023,816.50 based on a confession of judgment provision in the $3 million consolidation note. On May 9, 1995 — the day prior to the hearing on appointment of a receiver — the DeLucas caused D B Countryside to file a voluntary chapter 11 petition in this court in order to block the hearing. The DeLucas themselves had filed a voluntary chapter 11 petition a few days earlier (May 5, 1995).
In addition to the $3 million principal, the judgment amount included $124,843.90 in interest, a 5% late charge ($150,000) and 25% attorneys fees ($750,000).
Two of the DeLuca entities — Baronwood Associates, L.P. and R M Villas, L.L.C. — had already filed chapter 11 petitions in late April. By May 16, 1995, a total of thirteen of the DeLuca entities had filed chapter 11 petitions. Several of these have resulted in confirmed plans, while in others the secured lender has been granted relief from the automatic stay.
The DeLucas have filed a proposed plan of reorganization, but confirmation has been continued pending resolution of the present adversary proceeding. Under a settlement agreement reached by Broyhill and the DeLucas after this case was filed, if Newell is determined to have a valid lien against the D B Countryside property, Broyhill will have a corresponding claim in the DeLuca individual case that the plan proposes to pay ahead of other unsecured creditors.
Initially, D B Countryside operated as a debtor in possession. As a result, however, of vocal creditor complaints concerning the DeLucas' management of the various entities, the court directed the appointment of a chapter 11 trustee in ten of the cases, including D B Countryside. Broyhill then brought an adversary proceeding in this court to determine who had the right to manage the company. After a decision in his favor, Broyhill and the DeLucas entered into a "global" settlement of all disputes which was approved by this court. As a result of that settlement, Broyhill became the manager of the company, and DeLuca transferred his membership interest to Broyhill. On Broyhill's motion, the appointment of the chapter 11 trustee was then terminated and D B Countryside is again a debtor in possession. It is in that capacity that it has brought the action that is now before the court.
Broyhill v. DeLuca (In reDe Luca), 194 B.R. 65 (Bankr. E.D. Va. 1996).
Newell objected to the settlement and appealed the order approving it. That appeal was dismissed by the United States District Court, and the order is now final.
Under the settlement, Broyhill also gained control of D B Venture, L.L.C. and Kiln Creek Golf Country Club, L.P.
The debtor has also filed an objection to the two proofs of claim filed by Newell in this case. Claim No. 2 asserts an unsecured claim in the amount of $2,000,000.00. Claim No. 3 asserts a secured claim in the amount of $1,000,000. Since the objection raises the same issue of lack of authority as the present adversary proceeding, this decision will necessarily be dispositive on the objection to claim.
Other relevant facts will be discussed in connection with the issues to which they relate.
Conclusions of Law and Discussion
This court has subject matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(B), (C), (H), and (K), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge. Venue is proper in this District under 28 U.S.C. § 1409(a). The defendants have been properly served, and Newell, who has submitted himself to the jurisdiction of this court by filing a proof of claim, has appeared generally in this action.
The issues before the court are (1) whether any of the four deeds of trust (the $500,000 deed of trust, the two $100,000 deeds of trust, and the $3,000,000 consolidation deed of trust) constitute valid liens against the debtor's real estate; (2) whether the $3,000,000 consolidation note is a valid obligation of the debtor; (3) whether the consolidation note and deed of trust, even if otherwise valid, must be set aside as a fraudulent transfer; (4) and whether the recording of the deeds of trust and the docketing of the confessed judgment constitute a slander of title resulting in damage to the debtor. These issues will be each discussed in turn.
The complaint also asserted causes of action grounded in common-law conspiracy to commit fraud (Count 2) and statutory conspiracy to injure another in his trade or business (Count 8). At the conclusion of the plaintiffs case, the court granted Newell's motion under Federal Rule of Civil Procedure 52(c), as incorporated by Federal Rule of Bankruptcy Procedure 7052, for judgment as a matter of law as to those counts. The basis of the court's ruling was that the only parties to the alleged conspiracy were Newell and Brandenstein; that Brandenstein acted at all times as Newell's agent; and that there can be no conspiracy where the only parties to the conspiracy stand in the relationship of principal and agent. Charles Brauer Co., Inc. v. NationsBank of Virginia, 251 Va. 28, 466 S.E.2d 382 (1996); Fox v. Deese, 234 Va. 412, 362 S.E.2d 699 (1987). Additionally, with respect to Count 8, the court found that there was no evidence to support a finding that the purpose of the conspiracy, if one existed, was to injure D B Countryside in its trade or business. To the extent there was a conspiracy, its obvious goal was to assure repayment of the loans made by Newell, and the resulting injury to D B Countryside was the consequence rather than the goal of the conspiracy.
I. The validity of the note and deeds of trust
The debtor vigorously argues that since all of the loans were made to the DeLucas personally, Robert DeLuca did not have either actual or apparent authority to sign the four deeds of trust encumbering D B Countryside's property to secure those loans or to obligate D B Countryside for their repayment. Newell just as vigorously contends that at least $1,000,000 of the loans to the DeLucas were understood and intended as a deposit on the purchase of the four pad sites from D B Countryside or were otherwise loaned for its benefit, and that DeLuca had both actual and apparent authority to encumber D B Countryside's property to secure those loans.
As a threshold matter, Newell now concedes that the liability of D B Countryside under the consolidated note and deed of trust does not exceed $1 million and that both VA. CODE ANN. § 55-81 and § 548, Bankruptcy Code, "allow the [$3 million] trust and obligation to be reduced to the amount of the actual consideration paid." Post-Trial Brief of S. P. Newell at 32. Accordingly, the court focuses solely on the $1 million claim as represented by the $500,000 loan, the two $100,000 loans, and the $300,000 loan.
Although Newell's brief does not discuss the confessed judgment (except in the context of the slander of title claim), since the judgment was confessed solely on the basis of the note, it is necessarily subject to the same limitation.
A. Broyhill's capital contribution
Before doing so, however, it is necessary to address briefly Newell's argument — first advanced in his post-trial brief — that "Broyhill cannot complain concerning Mr. DeLuca's authority since in February, 1995 he was not even a member of DB Countryside," because, it is argued, "[t]rial testimony proved that Broyhill never made his capital contribution." Post-Trial Brief at 15. This assertion reflects a fundamental misunderstanding of who the parties to this litigation are. Although Broyhill is now the manager of the company, this adversary proceeding is not an action by Broyhill but rather by the company itself in its capacity as debtor in possession. In that capacity, it has the rights and duties of a chapter 11 trustee. § 1107, Bankruptcy Code. These include the duty to object to improper claims and to bring actions for the avoidance of improper transfers. Avoidance actions by a trustee or debtor in possession are for the collective benefit of creditors and equity security holders, and there is no question that a chapter 11 trustee would have standing to assert the avoidance claims currently before the court. Simply because Broyhill, now the owner of an 85% equity interest in the company, will be the major beneficiary if the avoidance action is successful, does not transform the litigation into one brought by him in his personal capacity.
There is no dispute that NVRI fully paid its $600,000 capital contribution. Those funds were deposited into the DB Countryside checking account, but within a week almost all of them had been transferred to other DeLuca-related entities or Robert DeLuca personally without the knowledge or consent of Broyhill, who did not learn of the transaction until approximately January 1994. Broyhill v. DeLuca, 194 B.R. at 69-70.
Conversely, Newell has no standing in this litigation to assert the company's claim, assuming it has one, against Broyhill for failing to fund his full $1 million capital contribution as required by the original operating agreement. Newell is not a member of the company, and only the company has standing to advance that claim. No issue of capital contributions was raised by the pleadings in this case, and only minimal evidence was presented in passing at trial. That evidence was essentially limited to the conclusory testimony of Marilyn DeLuca — unsupported by any records — that Broyhill had not fully paid his capital contribution and Broyhill's testimony that he had. Even if the court were to determine, therefore, that Newell had standing to litigate the issue of Broyhill's membership status, the court could not find from the scant evidence presented in this adversary proceeding that Broyhill had not funded his required capital contribution and was therefore not a member of D B Countryside.
The issue of capital contributions was raised and litigated in a prior adversary proceeding to which the DeLucas, Broyhill, and NVRI — all of whom unquestionably did have standing — were parties. Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996). In that adversary proceeding, this court determined that the DeLucas, Broyhill, and NVRI were the members of the company, with ownership interests of 42.5%, 42.5%, and 15%, respectively, and that Broyhill and NVRI, who together owned a majority membership interest, had the right under the operating agreement to remove the DeLucas as managers. Extensive evidence was presented with respect to the original capitalization of the company and the respective capital accounts of the various members after the NVRI capital infusion and the sale of the movie theater parcel to Regal Cinema. As the court observed in its opinion, the evidence concerning the original capitalization was at best murky. Id. at 69 n. 8. The original operating agreement required the DeLucas and Broyhill to each contribute $1 million as capital. Broyhill's understanding was that this requirement had been satisfied from the proceeds of a $1,500,000 loan made to the DeLucas and Broyhill by NationsBank and by the pledge to NationsBank of a $500,000 certificate of deposit jointly owned by Broyhill and the DeLucas. Marilyn DeLuca testified in that case that the initial capital contribution was $400,000 ($200,000 each for the DeLucas and Broyhill). Id. A forensic accountant who reconstructed the capital accounts at Broyhill's request determined that Broyhill and the DeLucas had each initially contributed $500,000 out of the NationsBank loan, for a $1 million total initial capitalization, but that the DeLucas had immediately withdrawn $800,000. Id. The books of D B Countryside also reflected, as part of the capital investment for both the DeLucas and Broyhill, the pledge of a $1 million investment account titled in the name of another real estate development entity jointly owned by the DeLucas and Broyhill. Id. Ultimately, the court found it unnecessary to determine the exact amount of each member's capital account, since regardless of whether the court accepted the figures shown on the company's books or the figures as reconstructed by the forensic accountant, NVRI and Broyhill together had a majority capital interest. Id.
B. Actual Authority
An inquiry into the scope of Robert DeLuca's actual authority to execute deeds of trust against D B Countryside's real estate and to obligate it to the repayment of the Newell loans necessarily requires an examination both of the Virginia statutes relating to limited liability companies and of the provisions of the company's operating agreement. Limited liability companies, although a relatively recent innovation, have become increasingly popular as a form of business organization. Broyhill v. DeLuca, 194 B.R. at 71. A limited liability company is a conceptual hybrid having attributes of both a corporation and a partnership, in that it offers all of its members, including any member-manager, limited liability as if they were shareholders of a corporation but treats the entity and its members as a partnership for tax purposes. Id.
In Virginia, limited liability companies are governed by the Virginia Limited Liability Company Act, VA. CODE ANN. §§ 13.1-1000 et seq. The articles of organization or operating agreement of a limited liability company may provide either for management by the members (a member-managed company) or by one or more managers (a manager-managed company). VA. CODE ANN. § 13.1-1024. In a manager-managed company, "[e]ach manager is an agent of the limited liability company for the purpose of its business." VA. CODE ANN. § 13.1-1021.1(B)(2). The manager is required to discharge his or her duties "in accordance with the manager's good faith business judgment of the best interests of the limited liability company." VA. CODE ANN. § 13.1-1024.1(A) (emphasis added).
The original operating agreement for D B Countryside provided for its management by Robert and Marilyn DeLuca as the company's managers and granted them "full, exclusive and complete discretion in the management and control of the affairs of the Company and the Company's business." Def. Ex. C, ¶ 6.1. The company's "business," as set forth in the agreement, was, in pertinent part,
to (a) acquire, own, develop and hold title to, sell and otherwise deal with that certain parcel of land described on [Exhibit A attached to the agreement] . . . and (d) conduct such other activities as may be necessary, advisable or convenient to the promotion or conduct of the business of the Company.
Def. Ex. C, Art. III. The original operating agreement set forth no restrictions on the authority of the managers to sign instruments affecting the company's real property. However, the amended operating agreement drawn up at the time NVRI was admitted as a member, while expressly permitting the manager to "sell, mortgage, exchange, transfer or otherwise dispose of all or any portion" of the company's property, also expressly limited the manager's right to "borrow money . . . which affects the assets of the Company" or "confess a judgment against the Company" except with the consent of the members. Def. Ex. D, ¶¶ 6.1(h) and 6.2(f) and (h).
As a general proposition, it can hardly be doubted that under Virginia law a manager of a limited liability company — even a manager who is also a member — has no inherent authority to pledge the company's assets, or to make the company liable, for a loan made to the manager personally. Under the Virginia Limited Liability Company Act, title to property acquired in the company's name "vests in the . . . company." VA. CODE ANN. § 13.1-1021. A member's interest in a limited liability company is in the nature of personal property and entitles the member only to share in the company's profits, losses, and distributions. VA. CODE ANN. §§ 13.1-1038, 1029, and 1030. Thus, the members do not have a direct ownership interest in the company's assets. The manager of a limited liability company is the company's "agent." VA. CODE ANN. § 13.1-1021.1 It has been well-settled in Virginia for more than a hundred years that an agent has no authority to pledge his principal's assets for a loan to him personally. Fleming v. Bank of Va., 231 Va. 299, 343 S.E.2d 341 (1986). See, Fox Hill Office Investors, Ltd. v. Mercanfile Bank, N.A. (In re Fox Hill Office Investors, Ltd.), 101 B.R. 1007 (Bankr. W.D. Mo. 1989) (general partner of limited partnership did not have actual or apparent authority to execute recourse note and mortgage where loan proceeds were not used to maintain or operate the partnership's property but to provide cash flow to general partner's parent corporation); Allen v. Steinberg, 244 Md. 119, 223 A.2d 240 (1966) (managing general partners of limited partnership had no authority to mortgage partnership lands without partnership receiving proceeds of mortgage). Accordingly, the court concludes that the DeLucas lacked actual authority to obligate D B Countryside, or to encumber its assets as security for, the Newell loans.
C. Apparent Authority
Even in the absence of actual authority, however, an agent may have apparent authority sufficient to bind his or her principal. As explained by the Supreme Court of Virginia:
The general rule is that as between the principal and agent and third persons, the mutual rights and liabilities are governed by the apparent scope of the agent's authority, which is that authority which the principal has held the agent out as possessing, or which he has permitted the agent to represent that he possesses, in which event the principal is estopped to deny that the agent possessed the authority which he exercised. In such cases the apparent authority, so far as third persons are concerned, is the real authority; and when the third person has ascertained the apparent authority with which the principal has clothed the agent, he has a right to rely thereon. . . . An act is within the apparent scope of an agent's authority if, in view of the character of his actual and known duties, an ordinarily prudent person, having a reasonable knowledge of the usages of the business in which the agent is engaged, would be justified in believing that he is authorized to perform the act in question.
Neff Trailer Sales, Inc. v. Dellinger, 221 Va. 367, 370, 269 S.E.2d 386, 388 (1980), citing Wright v. Shortridge, 194 Va. 346, 352-53, 73 S.E.2d 360, 364-65 (1952). A similar formulation was recently articulated by the Fourth Circuit:
Apparent authority results from a principal's manifestation of an agent's authority to a third party, regardless of the actual understanding between the principal and agent. See Crothers v. Commodity Futures Trading Comm'n, 33 F.3d 405, 410 (4th Cir. 1994); Restatement (Second) of Agency § 8 (1957); see also General Elec. Credit Corp. v. Fields, 148 W. Va. 176, 133 S.E.2d 780, 783-84 (1963). Indeed, apparent authority is "entirely distinct" from-and sometimes conflicts with-both express and implied authority. Restatement (Second) of Agency § 8 cmt. a. When a principal, through his acts or omissions, causes a third party, in good faith and in the exercise of reasonable prudence, to rely on the agent's authority to act on the principal's behalf, the agent can bind the principal. See Crothers, 33 F.3d at 410; General Elec. Credit Corp., 133 S.E.2d at 783-84.
Auvil v. Grafton Homes, Inc., 92 F.3d 226, 230 (4th Cir. 1996). A crucial limitation, however, is that apparent authority cannot arise solely from the agent's own acts and representations:
From the well-established tenet that an agent cannot create his own authority to represent a principal, see NLRB v. Local Union 1058, UMW, 957 F.2d 149, 153 (4th Cir. 1992), it follows that an agent's statements that he has such authority cannot, without more, entitle a third party to rely on his agency, see Fennell v. TLB Kent Co., 865 F.2d 498, 502 (2d Cir. 1989); D G Equip. Co. v. First Nat'l Bank of Greencastle, 764 F.2d 950, 954 (3d Cir. 1985); see also Restatement (Second) of Agency §§ 7, 285 (1957). An agent's authority must be conferred by some manifestation by the principal that the agent is authorized to act on the principal's behalf. Id. §§ 7-8.
Id.
The requirement that apparent authority "must be conferred by some manifestation of the principal" presents obvious difficulties when the principal is not a natural person and therefore ordinarily must act through agents. Perhaps in recognition of the practical problems that would otherwise arise, the Virginia Limited Liability Company Act provides a statutory safe harbor for third parties dealing with the company:
3. An act of a manager, including the signing of an instrument in the limited liability company name, for apparently carrying on in the ordinary course the limited liability company business or business of the kind carried on by the limited liability company, binds the limited liability company, unless the manager had no authority to act for the limited liability company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority, and
4. An act of a manager which is not apparently for carrying on in the ordinary course the limited liability company business or business of the kind carried on by the limited liability company binds the company only if the act was authorized in accordance with § 13.1-1024.
VA. CODE ANN. § 13.1-1021.1(B)(3) and (4) (emphasis added). Additionally:
C. Unless the articles of organization limit their authority, any . . . manager in a manager-managed limited liability company, may sign and deliver any instrument transferring or affecting the limited liability company's interest in real property, which instrument shall be conclusive in favor of a person who gives value without knowledge of the lack of authority of the person signing and delivering the instrument.
VA. CODE ANN § 13.1-1021.1(C) (emphasis added).
It is with these principles in mind that the court examines each of the four challenged transactions.
D. The $500.000 deed of trust
At the time the $500,000 loan was made on February 16, 1995, Newell had already loaned $2,070,000 to the DeLucas, secured by a pledge of their ownership interest in D B Countryside Commercial and Professional Center, L.P. The purpose of the $500,000 loan was to keep alive a settlement agreement between the DeLucas and Crestar Bank. Although Crestar Bank had a deed of trust against the adjacent Commercial and Professional Center and a pledge of the DeLuca's ownership interest in all of their entities, Crestar had no lien against D B Countryside's real estate, and D B Countryside was not otherwise obligated to Crestar Bank. The $500,000 loan was made, not by Donohoe/New Height, L.L.C. — the purchaser under the November 15, 1994, Agreement of Purchase and Sale — but by Newell personally. The note was payable to him, not to Donohoe/New Height, L.L.C. The loan proceeds were directly wired by Newell to Crestar Bank to pay an obligation of the DeLucas. At the time the $500,000 loan was made, the DeLucas collectively owned less than 50% of D B Countryside. While the original operating agreement for D B Countryside clearly gave Robert DeLuca, as managing member, exclusive authority and broad discretion to deal with the company's property for the company's benefit, it bestowed no express authority on him to encumber the company's property for loans unrelated to the company's business. Moreover, the Amended and Restated Operating Agreement dated July 22, 1994, which was drawn up and signed by the DeLucas at the time of NVRI's entry as a member, specifically limited the manager's right to engage in loan transactions that affected the assets of the company without the consent of the members, with certain stated exceptions not relevant here. Even though Newell was not aware of the specific limitations in the amended operating agreement, he would not have been justified in assuming actual authority on the part of the DeLucas to encumber D B Countryside's property for a loan to them personally. As the debtor correctly points out, Virginia law does not recognize any apparent authority on the part of an agent to pledge the credit of his principal for the agent's debts:
Neither side called Robert DeLuca as a witness. Marilyn DeLuca did testify that she believed she had authority to encumber the company's property up to the amount of her and her husband's equity interest in the company, which she believed to be approximately $1.3 million. Her justification was thus essentially pragmatic, not legal: as long as the encumbrance did not adversely affect the other members, there was no harm, and hence no foul.
6.2 Limitations on Authority. Notwithstanding anything to the contrary in this Agreement, without the consent of the Members, the Manager shall not have the right or power to do any of the following ("Major Decisions"):
(h) borrow money, whether on a secured or unsecured [sic] or refinance any loan to the Company which affects the assets of the Company, except that the Manager shall have the right, power and authority, without any consent or approval of Broyhill or NVRI to:
(I) cause the Acquisition Loan and the Development Loan to remain outstanding;
(ii) incur trade obligations on behalf of the Company, provided such obligations are incurred in the ordinary course of business of the Company and in accordance with the Annul [sic] Budget; and
(iii) borrow money on behalf of the Company on an unsecured basis [where funds are needed by the Company in excess of the mandatory capital contributions of the members].
The DeLucas did not disclose the existence of the Amended and Restated Operating Agreement to Newell or Newell's attorney at the time the loans were made.
A prudent lender must be cognizant . . . that agency cannot ordinarily be proved solely by the utterances of the purported agent. If he wishes to rely on an agency, he must look further.
Here, the circumstances would show the lender only that the purported agent had agreed to . . . [pledge] his principal's assets as security for the agent's debt. It has been well settled in Virginia for over a century that an agent has no such power, and that all who deal with him are charged with notice of that fact. "Such a transaction furnishes inherent evidence of obliquity and necessarily carries notice to one knowingly dealing with an agent." Thus, if the bank wished to bind Mrs. Elliott to a pledge of her funds to answer for the debt or default of her agent, more was required than the signature of her purported agent.
Fleming v. Bank of Virginia, 231 Va. 299, 343 S.E.2d 341 (1986) (emphasis added; internal citations omitted).
Newell places great stress on his own and his attorney's conclusory testimony that the DeLucas habitually ignored the separate existence of the various entities constituting their portfolio and routinely shuffled money among them as needed. However, the fact that a manager routinely exceeds his or her authority does not in itself operate to expand the manager's authority in the absence of any evidence that the other members of the company were aware of what the manager was doing and by their silence consented to the manager's unauthorized actions. In this case, the court cannot find that either Broyhill or NVRI were aware of or acquiesced in the DeLucas' unauthorized use of D B Countryside's funds or the unauthorized mortgaging of its property.
Newell asserts, however, that under the particular facts of this case, the loan to the DeLucas, by keeping alive the settlement with Crestar Bank, conferred an actual benefit on D B Countryside, and was therefore within the scope of the DeLucas' actual authority. See, Pavetti and Freeman v. Autoworld Enterprises (In re Autoworld Enterprises), 131 B.R. 1, 3 (Bankr. D. Conn. 1991) ("[I]t is not outside the scope of a partnership business to guarantee debts of another when `the nature of the partnership business and the circumstances of the guarantee may be such that . . . the partnership has a business interest in the person guaranteed or may otherwise benefit from the guarantee'"). The pad sites and theater parcel are part of the larger "Countryside" complex that included the Lakeside Building and the Commercial and Professional Center. The pad sites and the movie theater parcel share a common parking area. Although the number of available parking spaces minimally met zoning requirements, it did not meet the needs of Regal Cinema, which had purchased the theater parcel. In order to provide sufficient parking spaces, the debtor needed to enter into cross-parking easements that would allow the sharing of parking spaces with the adjacent property of Lakeside Associates, L.P. and Countryside Commercial Professional Center, L.P. To the extent that the DeLucas lost control over the Lakeside parcel — because they had pledged their limited partnership interest to Crestar Bank — or the Countryside Commercial Professional Center property — because Crestar Bank held a deed of trust against it — the development plans of D B Countryside would have been adversely affected.
The chief difficulty with this justification is that the evidence does not show that it was articulated at the time the $500,000 deed of trust was signed. Nor does the evidence show in any event that the supposed benefit to D B Countryside from keeping the Crestar deal alive was ever a significant reason for the loan as opposed to a rationalization thought up after the question of authority surfaced. The DeLucas' motive in borrowing the money was simply to preserve their portfolio until they could find a buyer; any benefit to D B Countryside was incidental. The testimony of Henry F. Brandenstein, Newell's attorney, in connection with the $500,000 loan reflects simply that Newell was insistent on being secured — Newell's testimony was that he wanted the loan to be "bullet-proof" — and that in terms of available collateral D B Countryside's property was, as Brandenstein characterized it, "the easiest to identify as having value," because it would be free and clear after the existing deed of trust was paid off in connection with the sale of the theater parcel to Regal Cinemas.
It is clear that at some point — certainly by the time of the final $300,000 advance — Robert DeLuca had suggested this justification in response to concerns raised by Newell or Newell's attorney as to the DeLucas' authority to encumber the pad sites. The DeLucas' attorney, James Carroll, however, flatly declined Newell's request to provide an opinion of counsel affirming the manager's authority to sign the deed of trust and simply furnished Newell's attorney with the original operating agreement and told him to reach his own conclusion.
It is true that, contemporaneously with the loan, an Amended and Restated Agreement of Purchase and Sale was signed reciting that Donohoe/New Height, L.L.C. had made a $500,000 non-refundable deposit for Phase I of the purchase, which included two other properties in addition to the D B Countryside pad sites, and that "Seller" had executed a note "for the amount of the Phase I Deposit." It is also undeniably true that the DeLucas, as the managing members of D B Countryside, had actual authority both under the original and the amended operating agreement to sign contracts for the sale of the company's real estate. In connection with a contract of sale, there is no reason why the DeLucas could not also have executed on behalf of the company a promissory note and deed of trust to secure the return of the purchaser's deposit.
The $500,000 "deposit," however, covered other property in addition to the four D B Countryside pad sites. Furthermore, the $500,000 "deposit" came not from the contract purchaser, Donohoe/New Height, L.L.C., but from Newell personally. Additionally, the funds were paid, not to D B Countryside or to an entity to which D B Countryside was indebted, but rather to Crestar Bank in partial payment of the DeLucas' personal liability. It seems clear that, had Newell paid the $500,000 to D B Countryside for the purchase of the pad sites, the execution of a deed of trust to secure the return of the deposit would have been "for apparently carrying on in the ordinary course the limited liability company business" and therefore binding so long as Newell had no actual knowledge that the deed of trust was unauthorized. VA. CODE ANN. § 13.1-1021.1(B)(3). But payment of a deposit to the manager rather than the company that owned the property is clearly not "in the ordinary course." It is outside the ordinary course and therefore not binding unless it was actually authorized. Since the purpose of the loan was not to benefit D B Countryside but solely to preserve the economic interest of the managers, the court can only conclude that the DeLucas had no actual or apparent authority to execute the $500,000 deed of trust.
E. The two $100.000 deeds of trust
Newell testified that approximately 8 days after the $500,000 loan was made, Robert DeLuca approached him requesting additional funds. DeLuca told Newell that, in connection with the sale of the theater parcel to Regal Cinema, Broyhill had insisted on the distribution of all available cash, leaving D B Countryside without the funds needed to complete the engineering and site work for the pad sites. On February 27, 1995, Newell loaned DeLuca an additional $70,000. A check for that amount was made payable to Robert DeLuca, and the DeLucas signed a promissory note for $100,000. The $30,000 excess represented a prior over-disbursement under the $2,000,000 note. The DeLucas also executed, in D B Countryside's name, a deed of trust against the pad site to secure the $100,000 note. The $70,000 check was deposited by Robert DeLuca into his personal checking account, and there is no evidence that any portion was expended on the engineering and site work for the pad sites.
By early March 1995, Newell had come up with an additional $100,000. He wrote two checks, each for $50,000, to Robert DeLuca. The DeLucas executed a $100,000 promissory note payable to Newell. They also executed, in D B Countryside's name, a deed of trust securing the note. One of the $50,000 checks was deposited in Robert DeLuca's personal checking account. The other was deposited in an account in the name of D B Venture, L.C. Again, there is no evidence that any portion was expended on the engineering and site work for the pad sites.
D B Venture, L.C. was developing a project near Newport News, Virginia, known as the Villages of Kiln Creek. The members of D B Venture were limited liability companies controlled by the DeLucas and Broyhill. See, JTB Enterprises, L.C. v. D B Venture, L.C. (In re DeLuca), 194 B.R. 79 (Bankr. E.D. Va. 1996).
There can be little question that the $30,000 excess incorporated into the first $100,000 deed of trust did not even purport to be for the benefit of D B Countryside but simply represented a prior loan made to the DeLucas personally. There can therefore be no doubt that the DeLucas lacked actual authority to encumber D B Countryside's property for the $30,000 excess. Additionally, it is clear that the $170,000 that was actually advanced was not used for D B Countryside's benefit. It is a much closer question whether the granting of the two $100,000 deeds of trust were (at least to the extent of the $170,000 actually advanced) "for apparently carrying on in the ordinary course the limited liability company business," notwithstanding the restrictions on the managers' borrowing authority in the amended operating agreement. VA. CODE ANN. § 13.1-1021.1(B)(3). On its face, the borrowing of money to improve property that a limited liability company is developing for sale would "apparently" be for "carrying on in the ordinary course" the company's business. But, as with the prior loans, the checks were written to Robert DeLuca personally, not to D B Countryside or even to Robert DeLuca, manager. Put simply, disbursement of loan proceeds to a manager personally rather than to the company is not in the "ordinary course" of a limited liability company's business. Accordingly, the court concludes that the two $100,000 deeds of trust were executed without either actual or apparent authority.
F. The $3 million note and deed of trust
Newell testified that at the time of the second $100,000 loan, DeLuca had told him he needed another $300,000 to finish the pads. Newell did not have any further money to loan but was able to borrow $300,000 from Kevin Donohoe. The $300,000 was added to the $2,700,000 the DeLucas had already borrowed, and a restated note was drawn up for $3 million, representing the aggregate of the borrowings to date. The note was signed not only by the DeLucas individually, but, for the first time, by Robert DeLuca on behalf of D B Countryside. The DeLucas also signed, in the name of D B Countryside, a deed of trust against the four pad sites to secure the $3 million note. The deed of trust contained a release provision that effectively limited the lien to $1 million if the pads were sold to Newell and $1,250,000 if the pads were sold to someone else. The note had no equivalent limitation.
The note contained a confession of judgment provision. As noted above, the amended operating agreement specifically restricted the managers' right to confess judgment against the company.
Although D B Countryside had no assets other than the pads, the additional $2 million due under the note would technically have remained a liability of the company and arguably could have been enforced against the net proceeds of sale received by D B Countryside after payment of the release price.
By this time, Newell had actual knowledge of the suit filed by Broyhill against DeLuca. The memorandum of lis pendens recorded in connection with the suit included a legal description of the D B Countryside property, named D B Countryside as an "entity" whose property was affected by the suit, and recited that the object of the suit was "to request an accounting, enter injunctions, prohibit conveyances and encumbrances, dissolve and wind-up the entities . . . and for other equitable relief" (emphasis added). According to Newell, however, Robert DeLuca assured him that all Broyhill wanted was an accounting and that they were working on a resolution. Newell further testified that his relationship with Robert DeLuca "was built on trust" and that Robert DeLuca convinced him "that he was working everything through." Incredibly, neither Newell nor his attorney telephoned or otherwise communicated with Broyhill or his attorney. Indeed, it seems clear that Newell and his attorney viewed Broyhill as, at the very least, a nuisance who was best kept in the dark.
Newell's attorney, unable to persuade the DeLucas' attorney to provide an opinion of counsel, decided to rely on a self-serving borrowing authorization in which the DeLucas, as the managers, certified that they had authority to bind the company. That resolution included a recital, which both Newell and his attorney knew not to be true, that a "meeting" had been held to authorize the borrowing. In any event, a resolution purporting to confer authority to act outside the ordinary course of business signed only by the persons being granted such authority is clearly insufficient to confer apparent authority, since, as noted above, "agency cannot ordinarily be proved solely by the utterances of the purported agent." Fleming v. Bank of Virginia, supra.
In testimony, Newell's attorney lamely suggested that there had been a "meeting" of the managers, i.e., Robert and Marilyn DeLuca. The court finds this explanation disingenuous. In context, the term "meeting" as used in the borrowing authorization could only have reasonably been understood as a meeting of the members. Both Newell and his attorney knew that no meeting of the members had occurred.
Contemporaneously with the $300,000 advance and $3 million deed of trust, the purchase agreement was further modified by carving out the pad sites as a separate transaction. The sales price for the pads was set at $2,525,000, with $1 million of the $3 million total deposit to be applied at settlement as a credit against the purchase price. As with the previous transactions, however, no portion of the new money advanced was paid to D B Countryside. The disbursement check was written to Robert DeLuca personally, and Robert DeLuca did not pay them over to D B Countryside or use them for its benefit. Compare, Holloway v. Smith, 197 Va. 334, 88 S.E.2d 909 (1955) (partnership bound by note executed by general partner without authority from other partners where lender intended to make loan to partnership, lender wrote loan proceeds check to partnership, and note was signed in partnership's name; such note was given for "apparently carrying on in the usual way the business of the partnership.") Particularly in light of Newell's actual awareness by this time of the Broyhill suit and of the memorandum of lis pendens specifically seeking to prohibit "unauthorized conveyances and encumbrances" by DeLuca, the court simply cannot find that the $3 million note and deed of trust were "in the ordinary course" or that value was given "without knowledge of the lack of authority." VA. CODE ANN. § 13.1-1021.1(B)(3) and (C). Accordingly, the court concludes that the DeLucas had neither actual nor apparent authority to execute the $3 million note and deed of trust. Since the DeLucas had no actual or apparent authority to execute the note, it follows that the power of attorney contained in the note to confess judgment in favor of the holder was also legally ineffective.
Ironically, had the transaction gone to settlement, the $1 million could have been repaid without injury to the equity interests of Broyhill and NVRI. The DeLucas' 42.5% share of the $2,525,000 purchase price would have been $1,073,125 — sufficient to repay the $1 million loan, even with interest.
The court construes "value" in VA. CODE ANN. § 13.1-1021.1(C) to mean value given to the limited liability company, not simply value to a third party.
G. The Lis Pendens
As noted above, Broyhill recorded a memorandum of lis pendens in the Loudoun County clerk's office prior to the time that any of the four deeds of trust were recorded. The effect of the memorandum was to furnish notice to anyone searching the land records of a dispute concerning the DeLucas' management of D B Countryside. Such notice would of course be relevant in connection with any inquiry into the DeLucas' apparent authority to encumber D B Countryside's real estate. But does the lis pendens have any other effect? Put another way, does the lis pendens independently invalidate the deeds of trust?
The term "lis pendens" is Latin for "pending litigation" and refers to the common-law doctrine that one who purchases property, title to which is the subject of pending litigation, acquires no greater rights than his or her vendor had. Virginia Iron, Coal Coke Co. v. Roberts, 103 Va. 661, 49 S.E. 984, 986 (1905); Hart v. United Virginia Bank (In re Hart), 24 B.R. 821, 823 (Bankr. E.D. Va. 1982) (Bostetter, C.J.). The effect of this rule is that one who purchases property that is the subject of litigation takes subject to the final decree that is entered in the matter. Kincheloe v. Strayer, 123 Va. 178, 96 S.E. 167, 168 (1918); Nixdorf v. Blount, 111 Va. 127, 68 S.E. 258, 259 (1910). The goal of this rule was to prevent a party from conveying the property during litigation and to allow the court, once the litigation involving the property is complete, to enter an effective decree in the case. See Newman v. Chapman, 23 Va. 239, 243 (2 Rand. 93, 102) (1823).
The rule at common law was that the simple filing of the lawsuit itself put the world on notice that the title to the property was being litigated. This rule, however, has been supplanted by statute in many jurisdictions, Virginia being one of them. VA. CODE ANN. § 8.01-268 (Michie 1996). Under the Virginia statute, a pending lawsuit does not
bind or affect a subsequent bona fide purchaser of real or personal estate for valuable consideration and without actual notice of [the litigation] until and except from the time a memorandum setting forth the title of the cause or attachment, the general object thereof, the court wherein it is pending, the amount of the claim asserted by the plaintiff, a description of the property, and the name of the person whose estate is intended to be affected thereby, shall be admitted to record in the clerk's office of the circuit court of the county or the city wherein the property is located[.]
Id. The effect of this statute is to "freeze" the land records for the property subject to litigation, preventing any subsequent filing of a deed of trust or a conveyance of the property from affecting the plaintiff in the pending lawsuit. Bryan v. Jackson, 178 Va. 123, 16 S.E.2d 366, 369 (1941). Specifically, the purchaser pendente lite takes whatever interest he or she purchased subject to the final decree that may be entered in the case against the party from whom he or she bought. Bray v. Landergren, 161 Va. 699, 172 S.E. 252, 256-57 (1934); Steinman v. Clinchfield Coal Corp., 121 Va. 611, 93 S.E. 684, 693-94 (1917); Sharitz v. Moyers, 99 Va. 519, 39 S.E. 166, 168 (1901); Davis v. Christian, 54-56 Va. 728, 739 (15 Gratt. 11, 41) (Va. 1859). A person deemed with notice of the pending suit is charged with knowledge of all the underlying facts of record in the lawsuit that could be discovered by a diligent inquiry. Roberts, 103 Va. At 679-81, 49 S.E. at 986; see also Green Hill Corp. v. Kim, 842 F.2d 742, 744 (4th Cir. 1988) (a lis pendens is a warning that a purchaser should examine the title to the property to determine if title has been affected).
It is important to bear in mind, however, that zpendente lite purchaser takes subject only to the final decree rendered in the underlying suit. The problem here is that no final decree was ever entered in the litigation with respect to which the lis pendens was filed. As discussed above, Broyhill's suit primarily sought an accounting of the affairs of the debtor and a judicial winding-up of the company. Subsequent to the filing of the suit, and prior to any dispositive rulings, the DeLucas caused the debtor to file for bankruptcy on May 9, 1995. The automatic stay arising under § 362, Bankruptcy Code, stayed further litigation of that proceeding. Broyhill then commenced a declaratory judgment action in this court to obtain a ruling that the DeLucas had been properly removed as the managers of D B Countryside prior to the filing of the chapter 11 petition. After a ruling in his favor, and while that ruling was on appeal, the DeLucas and Broyhill entered into a global settlement, approved by this court, that, among other provisions, gave management control of D B Countryside to Broyhill. The result of the settlement was to moot the Loudoun County litigation to which the memorandum of lis pendens was tied.
Although it is true that the declaratory judgment action brought by Broyhill in this court was the outgrowth of the Loudoun County litigation, the formal issues were not the same. The essential ruling made by this court was that the DeLucas had been properly removed as the managers of D B Countryside on April 28, 1995. Broyhill v. DeLuca, 194 B.R. at 71-73. Since the $3 million note and all four deeds of trust were executed well prior to that date, the ruling did not in any sense constitute a determination that the DeLucas acted in excess of their authority when the signed the note and deeds of trust. Accordingly, even if the declaratory judgment action were viewed as a continuation of the Loudoun County action, the judgment entered did not resolve the issue of the DeLucas' authority for actions taken prior to April 28, 1995. Therefore, the existence of the recorded lis pendens is not an independent basis for setting aside the deeds of trust.
Because the judgment entered by this court did not in any formal sense impugn the DeLucas' authority to sign the note and deeds of trust, it is not necessary to consider whether the memorandum of lis pendens filed in connection with the Loudoun County suit "carried over" to the separate litigation commenced in this court.
H. Rescission
The complaint seeks in separate counts rescission of the deeds of trust, note and judgment as the product of "fraudulent actions and conspiracy" (Count 1) and a declaratory judgment that the deeds of trust, note, and judgment are void based on the DeLucas' lack of actual or apparent authority to bind the company (Count 4). In practical terms, the relief obtained would be the same regardless of whether it was decreed under Count 1 or Count 4. Conceptually, however, lack of authority seems to describe the facts of the present case more naturally than does fraud, at least as fraud is usually defined:
To secure avoidance and rescission of a contract [based on fraud], it is incumbent on the party asserting fraud to establish by clear, cogent and convincing proof that he was induced to entered into a contract as a result of a misrepresentation or concealment of a material fact, and that, but for such misrepresentation, the defrauded party would not otherwise have agreed to enter into the transaction.
Hewitt v. Hutter, 432 F. Supp. 795 (W.D. Va. 1977) (applying Virginia law). See Cheatle v. Rudd's Swimming Pool Co., Inc., 234 Va. 207, 360 S.E.2d 828 (1987) ("The wrong of fraud and deceit requires an intentional, knowing misrepresentation by the defendant of a material fact upon which the plaintiff has relied to his detriment.") The problem here, as Newell points out, is that no representations, as such, were made to D B Countryside, nor did D B Countryside consciously rely to its detriment on anything the DeLucas or Newell did or did not say. While in everyday parlance an agent's unauthorized act may constitute a "fraud" on the principal, it does not neatly fit within the analytical framework of a common-law action of fraud and deceit. But see, Lloyd v. Smith, 150 Va. 132, 142 S.E. 363 (1928) ("It would be rash to attempt to give a perfect definition of fraud. . . . Of all the attempted definitions to be found, it seems that none are more satisfactory or instructive than merely to say that fraud is unfair dealing[.]"); Nuckols v. Nuckols, 228 Va. 25, 320 S.E.2d 734 (1984) ("Constructive fraud consists of the `[b]reach of legal or equitable duty which, irrespective of moral guilt, is declared by law to be fraudulent because of its tendency to deceive others or violate confidence.'"); Maginniss v. McKenzie (In re Loudoun Plumbing Heating, Inc.), 13 B.R. 232, 237 (Bankr. E.D. Va. 1981) ("The law relating to fraud in Virginia has been said to include `all acts, omissions, and concealments which involve a breach of legal duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue or unconscientious advantage is taken of another.")
In its post-trial submission, D B Countryside attempts to shoehorn the facts into a fraud action by arguing that "Newell and DeLuca defrauded D B when they failed to disclose to it . . . that DeLuca was obligating D B as surety for DeLucas' personal debts." That may be a little like arguing that a thief in the night who does not disclose — and hence "misrepresents" — what he or she is doing thereby commits fraud in addition to larceny. Be that as it may, it is clear that the DeLucas, as managers, stood in a fiduciary relationship to the company. That they violated that duty and injured D B Countryside by pledging its credit and encumbering its property for loans made to them personally is also clear. Consequently, the court has little difficulty in concluding that the DeLucas' conduct constituted at least a constructive fraud upon D B Countryside.
D B Countryside L.L.C.'s Brief in Opposition to Newell's Post-Trial Memorandum at 18-19.
However, even if the court is mistaken on this point, the court's power to decree rescission is not thereby affected. Under Fed.R.Civ.P. 54(c), made applicable to adversary proceedings by F.R.Bankr.P. 7054, "[E]very final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in the party's pleadings." Consequently, even if actions of the DeLucas and Newell do not constitute fraud, the court may decree rescission for any other reason raised by the pleadings and supported by the evidence. In this case, the fact that the managers purporting to act on D B Countryside's behalf had no actual or apparent authority to pledge its credit or encumber its property amply supports equitable relief in the form of rescission.
II. Fraudulent Conveyance
As an alternative basis for setting aside the deeds of trust and the confessed judgment, D B Countryside argues that the recording of the deeds of trust, and the incurrence of liability under the $3 million note, constitute voidable transactions under the fraudulent conveyance provisions of the Bankruptcy Code and Virginia law. Since the court has determined that the transactions at issue are void for lack of actual or apparent authority, only brief discussion is required.
As noted above, Newell concedes that the note, and the deed of trust securing it, are avoidable under § 548, Bankruptcy Code, and VA. CODE ANN. § 55-81 for lack of consideration to the extent the principal sum exceeds $1 million. The question before the court, therefore, is whether the remaining $1 million liability and encumbrance, or any portion of it, is avoidable as a fraudulent conveyance.
Under § 548(a), Bankruptcy Code, a trustee or debtor in possession may avoid
any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation[.]
Thus, the statute permits the avoidance of two conceptually distinct kinds of transactions: those entered into with actual intent to hinder, delay or defraud creditors (regardless of the debtor's solvency), and those entered into without such intent but which nevertheless prejudice creditors because the debtor was, or thereby became, insolvent.
As to the former, the evidence before the court is insufficient to support a finding that the deeds of trust were placed on the debtor's property, or the $3 million note was signed, in order to place the debtor's property beyond the reach of creditors in general, or any particular creditor. Accordingly, no basis has been shown for avoiding either the deeds of trust or the note under § 548(a)(1), Bankruptcy Code.
With respect to the second prong of § 548(a), there is no assertion that D B Countryside was insolvent on the date the deeds of trust were recorded or the $3 million note was signed. Although D B Countryside presented evidence that it became insolvent when the $3 million note was signed, the evidence does not support a similar finding of insolvency if the obligation is limited, as Newell concedes it must be, to $1 million. Testimony was presented that the four pad sites had a fair market value on March 17, 1995, of $1,440,000. Liabilities other than the Newell note totaled $139,715. At least, therefore, to the extent that the Newell obligation is limited to $1 million, its incurrence did not render the debtor insolvent. Thus an essential element for avoidance of the deeds of trust and the note as a fraudulent conveyance is lacking with respect to the $1 million secured claim.
This value would certainly appear to be on the low side, considering that Newell was willing to purchase the parcels for $2,525,000 (assuming site work completion), and that Robert DeLuca was willing to pay Newell $250,000 (in addition to repayment of the $1 million "deposit") to keep the property himself. Accordingly, the court finds that the $1,440,000 figure is the minimum the property would have brought at that time.
The same result follows applying Virginia law. Under § 544(b), Bankruptcy Code, a trustee or debtor in possession may avoid, in addition to those transactions that may be avoided under § 548, Bankruptcy Code, "any transfer of an interest of the debtor in property or any obligation incurred by the debtor" that could have been avoided under state law by a creditor holding an allowed unsecured claim. In this connection, Virginia law allows creditors to attack transactions entered into with actual intent to hinder delay and defraud creditors as well as transactions not supported by "consideration deemed valuable in law" by a debtor insolvent at the time of the transaction or who was made insolvent thereby.
VA. CODE ANN. § 55-80 states in relevant part:
Every gift, conveyance, assignment or transfer of, or charge upon, any estate, real or personal, . . . 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 . . . be void.
VA. CODE ANN. § 55-81 states in relevant part:
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.
As with the cause of action under § 548, Bankruptcy Code, the derivative cause of action under § 544(b), Bankruptcy Code, and VA. CODE ANN. §§ 55-80 and 55-81 must fail, at least as to sums not in excess of $1 million: first, because the evidence does not show that the deeds of trust were given, or the note signed, for the purpose of hindering or defrauding creditors; and, second, that the evidence does not show that the debtor was insolvent at the time the obligation was incurred or that the debtor was rendered insolvent as a result of incurring a $1 million secured obligation.
III. Slander of title
In addition to declaratory relief, D B Countryside seeks an award of damages for slander of title to its real estate arising from the recording of the four deeds of trust and from the confession of judgment on the $3 million note.
No reported decision of a Virginia state court has ever explicitly recognized a cause of action for slander of title. The Virginia Supreme Court, however, has clearly implied that such a cause of action exists. See, Wright v. Castles, 232 Va. 218, 349 S.E.2d 125, 129 (1986) (dicta that "[t]o prove slander of title, [the plaintiff] must show that the defendants acted with malice or in reckless disregard of the truth of the falsity of the statement on the sign."); Donohoe Construction Co. v. Mount Vernon Assocs., 235 Va. 531, 369 S.E.2d 857 (1988) (holding, in a suit for slander of title, that the filing of a mechanic's lien is absolutely privileged). The Fourth Circuit and both district courts for Virginia have expressly found that Virginia would recognize a cause of action for slander of title. Lomah Elec. Targetry, Inc. v. ATA Training Aids AU, 828 F.2d 1021, 1022-23 (4th Cir. 1987); Levine v. McLesky, 881 F. Supp. 1030, 1050 (E.D. Va. 1995); Warren v. Bank of Marion, 618 F. Supp. 317, 320-21 (W.D. Va. 1985); see also General Products Co. v. Meredith Corp., 526 F. Supp. 546, 553 n. 9 (E.D. Va. 1981) (concerning product disparagement). The court also notes that a cause of action for slander of title dates back over 400 years to the common law of England. See TXO Production Corp. v. Alliance Resources Corp., 419 S.E.2d 870, 877-79 (W.Va. 1992), affd 509 U.S. 443, 113 S.Ct. 2711, 125 L.Ed.2d 366 (1993), and PROSSER KEETON ON TORTS, § 128, at 962 n. 3 (1984) and the English cases cited therein. As Virginia has expressly adopted the English common law as its own to the extent not overruled by the General Assembly or found "repugnant" to the Bill of Rights or the state Constitution, a cause of action for slander of title exists through this incorporation of English common law, notwithstanding the dearth of Virginia case law on the subject. See VA. CODE ANN. § 1-10 (Michie 1996). Given this weight of authority, this court finds that a cause of action does exist under Virginia state law for slander of title.
There is no statute in Virginia abolishing a common law slander of title action nor does this court find the action repugnant to the Bill of Rights or the Virginia Constitution.
The elements generally recognized as establishing a cause of action for slander of title are as follows:
(1) that the defendant maliciously published false words;
(2) that the false words disparaged plaintiffs property; and
(3) that the publication caused plaintiff to suffer special damages.
Levine, 881 F. Supp. at 1050; Warren, 618 F. Supp. at 320. It seems clear that the recording of a false deed of trust can give rise to a claim for slander of title. Fischer v. Bar Harbor Banking Trust Co., 673 F. Supp. 622, 626 n. 6 (D. Me. 1987) (stating in addition that a false publication can occur when the putative lienholder does not have a valid lien on the collateral and refuses to release the lien); Walley v. Hunt, 54 So.2d 393, 396 (Miss. 1951); Euge v. Golden, 551 S.W.2d 928, 932 (Mo.Ct.App. 1977); Home Investments Fund v. Robertson, 295 N.E.2d 85, 87-88 (111. App. Ct. 1973); Wright v. Rogers, 342 P.2d 447, (Cal.Ct.App. 1959); Frega v. Northern N.J. Mortgage Assoc., 143 A.2d 885, 889 (N.J. App. Div. 1958) (mortgage); RESTATEMENT (SECOND) OF TORTS, §§ 629, comment (d); 630, comment (b) (1979) (stating that the wrongful assertion and recording of a lien is sufficient); PROSSER KEETON, supra, § 128, at 965 n. 38, 967 n. 61 (stating that this tort frequently arises out of assertion of a lien against the land); cf. Lomah Electronic Targetry, 828 F.2d at 1023 ("Slander of title is committed by the recordation of a false or fraudulent assignment"); Moore v. Rolin, 89 Va. 107, 15 S.E. 520 (Va. 1892) (recognizing that the premature filing of a mechanic's lien can libel a person in his trade or business).
This test, with some minor variations, is used throughout most, if not all jurisdictions. See, e.g., Lime Tree Village Community Club Association, Inc. v. State Farm General Insurance Co., 980 F.2d 1402, 1406 n. 3 (11th Cir. 1993) (applying Florida law); Mueller v. Abdnor 972 F.2d 931, 934 n. 2 (8th Cir. 1992) (applying Missouri law); Markowitz v. Republic Nat'l Bank of NY, 651 F.2d 825, 827-28 (2d Cir. 1981) (applying New Jersey law); Prudential Ins. Co. of Am. v. Bonney, 299 F. Supp. 790, 792-93 (W.D. Ok. 1969) (applying Oklahoma law); Colquhoun v. Webber, 684 A.2d 405, 409 (Me. 1996); Montecalvo v. Mandarelli, 682 A.2d 918, 923 (R.I. 1996); TXO Production Corp. V. Alliance Resources Corp, 419 S.E.2d 870, 879-81 (W.VA. 1992), aff'd 509 U.S. 443, 113 S.Ct. 2711, 125 L.Ed.2d 366 (1993) (affirming an award of $10 million in punitive damages as not violating the Due Process clause); First Security Bk. Of Utah v. Banberry Crossing, 780 P.2d 1253, 1256-57 (Utah 1989); Merchants Nat'1 Bk. of Mobile v. Steiner, 404 So.2d 14, 21 (Ala. 1981); Summa Corp. v. Greenspun, 607 P.2d 569, 573 (Nev. 1980); aff'd on reh'g, 655 P.2d 513 (1982); Menefee v. Columbia Broadcasting System, Inc., 329 A.2d 216, 219-21 (Pa. 1974); Old Plantation Corp. v. Maule Industries, Inc., 68 So.2d 180, 181 (Fla. 1953); Walley v. Hunt, 54 So.2d 393, 396 (Miss. 1951); Copeland v. Carpenter, 45 S.E.2d 197, 198 (Ga. 1947); Peters Well Drilling Co. v. Hanzula, 575 A.2d 1375, 1379 (N.J.Super.Ct. 1990); see also RESTATEMENT (SECOND) OF TORTS, § 624 (1977) (incorporating the test of injurious falsehood as set forth in § 623 A).
The essence of an action for slander of title is the element of malice. Mueller v. Abdnor, 972 F.2d 931, 934-35 (8th Cir. 1992); Markowitz v. Republic Nafl Bank of NY, 651 F.2d 825, 828 (2d Cir. 1981); see also PROSSER KEETON, supra, § 128, at 968. While numerous formulations of the requisite malice have evolved, they generally fall into three basic categories. See 2 FOWLER V. HARPER ET AL., THE LAW OF TORTS § 6.1 A, at 275-86 (1986). Without definitive Virginia precedent, the court looks to the law from other jurisdictions and other sources for guidance.
One major formulation of the malice required was set forth by Jeremiah Smith. His formulation was that "[m]alice is said to be `presumed' if the disparagement is false, if it caused damage, and if it is not privileged, provided only that the likelihood that the statement would cause pecuniary harm is also foreseeable." HARPER ET AL., supra, § 6.1 A at 277 (crediting Smith with this line of reasoning) (footnote omitted). A second position comes from Dean Prosser who proposed that malice should be found when
Jeremiah Smith, Disparagement of Property, 13 COLUM. L. REV. 13 (1913).
[1.] the publisher "is motivated by ill will toward the other [or intends to cause him harm]," or
[2.] "intends to interfere with the interest of the other in a manner which is not privileged", or
[3]. "knows the matter to be otherwise than as stated or that he has not the basis for knowledge or belief proffered by his assertion."
Id. § 6.1 A at 279 (citing Prosser, Injurious Falsehood: The Basis of Liability, 59 COLUM. L. REV. 425 (1959)) (footnotes omitted) (second alteration in original). Still another view is set forth by the Restatement (Second) of Torts, which sets perhaps the highest level of malice. It states that malice is established when
[1. The defendant] intends for publication of the statement to result in harm to interests of the other having a pecuniary value, or either recognizes or should recognize that it is likely to do so, and
[2. The defendant] knows that the statement is false or acts in reckless disregard of its truth or falsity.
RESTATEMENT (SECOND) OF TORTS, § 623(A) (1977) (cited in HARPER ETAL., supra, § 6.1 A, at 280); see also Mueller v. Abdnor, 972 F.2d 931, 935 (8th Cir. 1992) (stating that malice consists of an inference that must be drawn that the representation was not just innocently or mistakenly made, but that there was a knowledge of the falsity of what was being published); Montecalvo v. Mandarelli, 682 A.2d 918, 923 (R.I. 1996) (stating that malice exists when there is "an intent to deceive or injure") (internal quotation omitted). In General Products Co. v. Meredith Corp., 526 F. Supp. 546 (E.D. Va. 1981), the court, without elaborating on the reason for its choice, adopted the Restatement definition of malice. As no compelling reason exists to apply a different standard, this court will follow General Products and apply the Restatement standard of malice.
In addition to the malice element, proof of special damages is required. Colquhoun v. Webber, 684 A.2d 405, 410-11 (Me. 1996). Prosser and Keeton suggest that damages that may be recoverable include loss on an existing contract and costs to remove or counteract the disparagement. PROSSER KEETON, supra, § 128, at 972-73. Courts, however, have divided as to whether special damages include solely the impairment of the value of the property, or in addition, the costs of clearing the title, along with any other consequential and incidental damages. See id. The majority position is that special damages include recovery for attorneys' fees incurred in clearing the title. E.g., TXO Production Corp., 419 S.E.2d at 881; RESTATEMENT (SECOND) OF TORTS, § 633(1)(b) (1977). The Restatement sums up the pecuniary loss that is recoverable as:
Prosser and Keeton note that special damages is often expressed as "impaired vendibility." See PROSSER KEETON, supra, § 128, at 971 n. 3. They suggest that in order to prove special damages, a plaintiff must show that he sold the property at a lower price due to the falsehood, or the plaintiff sold the property at a greater effort, expense, or time. Id. This is what they termed as a "realized loss" and is necessary to show special damages. Id. What is not sufficient is to show merely that the property's value has dropped; this would be general, not special damages. See id.
Note, however, what may be recovered is the costs in "cleaning" the title, not the costs incurred in bringing the suit for slander of title. See Colquhoun, 684 A.2d at 611. Additionally, since the slander has injured the property, and is not directed at the person, the measure of damages is generally limited to restoring the title of the property to its previous condition. See Prudential Ins. Co. of Am. v. Bonney, 299 F. Supp. at 793.
(1) The pecuniary loss for which a publisher of injurious falsehood is subject to liability is restricted to
(a) the pecuniary loss that results directly and immediately from the effect of the conduct of third persons, including impairment of vendibility or value caused by disparagement, and
(b) the expense of measures reasonably necessary to counteract the publication, including litigation to remove the doubt cast upon vendibility or value by disparagement.
RESTATEMENT (SECOND) OF TORTS, § 633, at 355 (1977). This court concludes that, after careful examination of the available case law and other sources, the special damages that are potentially recoverable include "impaired vendibility" flowing directly from the disparagement, and the costs of removing it, which includes the attorney's fees incurred in bringing an action to remedy the defect.
Having carefully reviewed the evidence presented in this case in light of the foregoing principles, the court determines that the debtor has not proven a cause of action based on slander of title. Since somewhat different considerations apply with respect to the deeds of trust and the confession of judgment, the court will address them separately.
With regard to the filing of the deeds of trust, the evidence simply does not show that Newell acted with the requisite malice. Newell's testimony — which the court found to be candid and credible — was that he genuinely believed the DeLucas had the authority to pledge the D B Countryside property. That he was mistaken in that belief does not constitute malice. Although he recognized at the time the $3 million deed of trust was recorded that, in his mind, D B Countryside was chargeable with no more than $1 million of that sum, the deed of trust contained a provision allowing its release upon the payment of either $1 million or $1,250,000 (depending on whether the property was sold to Donohoe/New Height, L.L.C. or to another purchaser). Thus, Newell never caused D B Countryside's property to be encumbered for more than he actually believed related to the contract for its purchase. Additionally, in causing the deeds of trust to be recorded, Newell acted at all times on the advice of counsel. Although his reliance, after the memorandum of lis pendens came to light, on Robert DeLuca's unilateral assurances that the dispute with Broyhill was in the process of being resolved may not have been entirely reasonable, the court finds that Newell's belief in those assurances was honestly held and did not rise to the level of recklessness. Accordingly, because the evidence does not support a finding of malice, the plaintiff cannot recover damages caused by the recordation of the deeds of trust notwithstanding the DeLucas' lack of actual or apparent authority.
The confession of judgment raises a somewhat different issue. Here, the question of malice is much closer. Newell, although he believed that no more than $1 million of the sums he loaned to the DeLucas was related to D B Countryside, confessed judgment against D B Countryside in the amount of $4,023,816.50. Under Virginia law, such judgment, once docketed, became a lien against D B Countryside's real estate. The note, unlike the deed of trust, contained no express provision releasing D B Countryside from liability after $1 million was paid, although it may be true, as Newell argues in his post-trial brief, that such a release would be implied. On the other hand, Newell's subsequent action in filing proofs of claim in the debtor's bankruptcy case for the full $3 million principal amount is strong evidence that he intended, at the time the judgment was confessed, to charge D B Countryside — and to encumber its property with a judgment lien for — the full amount due under the $3 million note. Moreover, prior to the confession of judgment, Newell had met with Broyhill's attorney and had actual knowledge that a serious and on-going dispute existed as to the DeLucas' authority to obligate the debtor.
Although this court is unable to locate precedent from any jurisdiction expressly recognizing a cause of action for slander of title arising from a confession of judgment, there appears to be no reason in theory — aside from the judicial privilege issue discussed further in this opinion — why such an action could not be maintained. Under VA. CODE. ANN. § 8.01-434, the filing of a confessed judgment is recorded on the judgment lien docket and attaches as a lien against property owned by the judgment debtor in that city or county. Such a lien would have exactly the same adverse effect on the marketability of title as the lien arising from a deed of trust.
Nevertheless, even if the court were to find that the evidentiary scale tipped in favor of a finding of malice, an action for slander of title arising from the confession of judgment would be barred under the doctrine of judicial privilege. Virginia law recognizes an absolute privilege to conduct and statements that are part of a judicial proceeding. Donohoe Constr. Co. v. Mount Vernon Assocs., 235 Va. 531, 369 S.E.2d 857, 860 (1988). While what constitutes a "judicial proceeding" may be difficult to define, the privilege is not limited merely to trials. Id. (citing Pennick v. Ratcliffe, 149 Va. 618, 140 S.E. 664 (1927)). Indeed, the Donohoe court stated that "`[t]he rule is broad and comprehensive, including within its scope all proceedings of a judicial nature' and includes `any proceeding for the purpose of obtaining such remedy as the law allows.'" Id. (quoting Pennick, 140 S.E. at 667).
In Donohoe, a contractor employed to build a nursing home had filed a mechanic's lien against the property. In a subsequent suit to enforce the lien, the trial court found that the owner had paid all the amounts that were due under the contract and the court not only dismissed the contractor's bill of complaint but awarded the owner damages on its cross-claim for delay in the completion of the project. The owner subsequently brought an action against the contractor for slander of title and abuse of process. The evidence amply proved that the contractor "filed its mechanic's lien with the ulterior purpose of avoiding imposition of liquidated damages for delay or of forcing a settlement without arbitration or litigation." Id. at 541, 369 S.E.2d 862. In nevertheless reversing a jury award in favor of the owner, the Virginia Supreme Court, after analyzing the mechanics of filing for and enforcing a mechanic's lien, held that the filing of a memorandum of mechanic's lien constituted a judicial proceeding. Id. at 538-39, 369 S.E.2d at 861. In particular, the Court emphasized that under Virginia law, the recording of a memorandum of mechanic's lien "is a prerequisite to a suit to enforce. For a claimant to obtain the remedy provided by statute, he must perfect his lien and, thereafter, sue to enforce it. The two proceedings are inseparable." Id. But see Gregory's, Inc. v. Haan , 545 N.W.2d 488, 493-94 (S.D. 1996) (coming to the opposite conclusion with regard to a mechanic's lien); Peters Well Drilling Co. v. Hanzula, 575 A.2d 1375, (App.Div. N.J. 1990) (distinguishing Donohoe Construction and finding that the filing of a memorandum of a mechanic's lien in not absolutely privileged, principally on the basis that the requirements of the states' statutes are different). Finally, the Virginia Supreme Court noted that in order for a statement in a judicial proceeding to be afforded an absolute privilege, the words used must be "relevant and pertinent to the case." Id. This is an undemanding standard, as the privilege is lost only when "`no reasonable man [could] doubt [the] irrelevancy and impropriety [of the language used].'" Id. (quoting Massey v. Jones, 182 Va. 200, 28 S.E.2d 623, 627 (1944)). The court found this standard easily met as the language used when Donohoe filed its memorandum were both relevant and pertinent, although incorrect, in asserting a mechanic's lien. Id.
Although this court has been unable to locate any case expressly holding that a confession of judgment constitutes a "judicial proceeding" for the purpose of the judicial privilege defense to an action of slander, it seems abundantly clear, under the analysis set forth in the Donohoe Construction case, that the procedure in Virginia for confession of judgment, as set forth in VA. CODE ANN. §§ 8.01-431 to 441, is inherently judicial in nature, notwithstanding the lack of direct participation by a judge. In relevant part, the statute provides as follows:
Any person being indebted to another person . . . may at any time confess judgment in the clerk's office of any circuit court in this Commonwealth, whether a suit, motion or action be pending therefor or not, for only such principal and interest as his creditor may be willing to accept a judgment for, which judgment, when so confessed, shall be forthwith entered of record by the clerk in whose office it is confessed, in the proper order book of his court. Such judgment shall be as final and as binding as though confessed in open court or rendered by the court[.]
VA. CODE ANN. § 8.01-432 (emphasis added). Such judgment may be confessed not only by the debtor himself, but by the creditor acting in the debtor's name under a power of attorney, subject to certain restrictions. VA. CODE ANN. §§ 8.01-433.1 and 435. Section 8.01-439 requires the clerk to file the judgment with the records of the office while § 8.01-440 requires judgment to be docketed and permits the judgment to be executed. Finally, § 8.01-433 provides an aggrieved party with immediate judicial review of a confessed judgment, with the judgment debtor having the benefit of any defenses to the underlying action. Given the broad definition in both the Donohoe Construction and Pennick cases as to what constitutes a "judicial proceeding," and since under § 8.01-432 a confessed judgment is as binding as "though confessed in open court," and is subject to judicial review, it is difficult to see how a confession of judgment would not be characterized as a judicial proceeding. Indeed, inits immediate legal effect, a confession of judgment is more closely analogous to a traditional court proceeding than the mere recording of a memorandum of mechanic's lien, which was held to be part of a judicial proceeding in Donohoe Construction. Accordingly, the court concludes that Newell's confession of judgment against D B Countryside on May 2, 1995 was absolutely privileged and cannot serve as the basis of a cause of action for slander of title.
IV.
In summary, the court will enter judgment for the debtor in possession declaring and determining that the four deeds of trust and (with respect to D B Countryside only) the $3 million note and confessed judgment are void. Alternate judgment will be entered in favor of the debtor in possession under § 548, Bankruptcy Code, and VA. CODE ANN. 55-81 that the deeds of trust and note are void, but only to the extent the secured debt exceeds $1 million. Judgment will be entered in favor of the defendants on the fraudulent conveyance cause of action under VA. CODE ANN. 55-80 and on the slander of title claim. Judgment as a matter of law under F.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(c) has previously been entered in favor of the defendants on the conspiracy claims.