109 F.3d 201 (4th Cir. 1997), 95-2575, Hager v. Gibson

Docket Nº:95-2575.
Citation:109 F.3d 201
Party Name:Harry G. HAGER, Plaintiff-Appellant, v. Ruth A. GIBSON, Trustee for Preference, Ltd., Defendant-Appellee.
Case Date:March 19, 1997
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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109 F.3d 201 (4th Cir. 1997)

Harry G. HAGER, Plaintiff-Appellant,


Ruth A. GIBSON, Trustee for Preference, Ltd., Defendant-Appellee.

No. 95-2575.

United States Court of Appeals, Fourth Circuit

March 19, 1997

Argued Sept. 25, 1996.

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ARGUED: Frank James Santoro, Marcus, Santoro & Kozak, P.C., Portsmouth, VA, for Appellant. Alvin Powers Anderson, Anderson, Franck & Davis, P.C., Williamsburg, VA, for Appellee. ON BRIEF: Karen M. Crowley, Marcus, Santoro & Kozak, P.C., Portsmouth, VA, for Appellant. Ruth A. Gibson, Norge, VA, for Appellee.

Before LUTTIG and MICHAEL, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

Affirmed in part and reversed in part by published opinion. Senior Judge PHILLIPS wrote the opinion, in which Judge LUTTIG and Judge MICHAEL joined.


PHILLIPS, Senior Circuit Judge:

In this corporate bankruptcy proceeding, the Trustee sought recovery from Dr. Harry Hager, a fifty percent shareholder in the corporate debtor, of certain sums allegedly recoverable under the preference-avoidance and turnover provisions of the Bankruptcy

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Code, or under state common law. The bankruptcy court granted summary judgment as to the entire amount claimed and the district court affirmed its judgment without any discussion. On Dr. Hager's appeal, we affirm in part and reverse in part.


In 1987, Donald J. Roop and his wife, Sandra Roop, incorporated Preference, Ltd. under Virginia law to operate an Orvis retail establishment in Colonial Williamsburg. Each owned fifty percent of the shares at incorporation. The Roops divorced after the incorporation, and Hager purchased Mrs. Roop's shares for $150,000. At all times relevant to this appeal, Hager has owned fifty percent of the Preference stock and Roop has owned the remaining fifty percent of stock and been Preference's president.

When the Roops formed the corporation, they obtained from Crestar Bank (Crestar) a running line of credit under a demand promissory note for $150,000 ("the note") which contained a security agreement pledging Preference's assets as collateral and which the Roops personally guaranteed. In usual line-of-credit terms, the note provided that the principal plus accrued interest would be due on demand, "but [Preference] shall be liable for only so much of the Loan Amount shown above as shall be equal to the total advanced to or for the undersigned ... less all payments made by or for the undersigned and applied by the Bank to principal...." JA at 115. When Hager purchased Mrs. Roop's shares, Crestar released Mrs. Roop from the guarantee but required Hager to guarantee the loan personally.

Over time, Preference's financial situation worsened and Roop and Hager's personal relationship deteriorated. By late 1992, Hager and Roop were only communicating through their attorneys. Crestar, having learned of Preference's difficulties, demanded immediate payment of the note and pressured Hager by threatening to invoke his personal guarantee.

When he purchased his shares in the company, Hager had not intended to be involved in the day-to-day operations of the retail establishment. In the months leading up to Crestar's demand for immediate payment, however, Hager had assumed control of the store under an October 1992 agreement with Roop that anticipated closing the business. A part of the agreement was that "Preference[ ] will be managed using a sole checking account that requires all checks drawn to be signed by both Dr. Hager and Mr. Roop." JA at 126. When, following the agreement, Hager accused Roop of taking money from the establishment for his own purposes, Hager changed the locks on the doors to prevent Roop's entry. On December 15, 1992, Hager gave written notice of his resignation as a director of Preference. On December 18, Hager's attorney wrote to Roop's attorney suggesting that the business might be restored to solvency without resorting to liquidation. JA at 128-29. On December 30, however, Hager's attorney advised Roop's attorney that because Crestar had demanded immediate payment on its loan and had threatened to invoke Hager's guarantee of the loan, Hager was unilaterally revoking the ground rules upon which the two principals had agreed, apparently including the requirement that Preference's checks have the signatures of both Hager and Roop. JA at 130.

On the same day, Hager purchased in his own name the Crestar note on which there was then an outstanding balance of $129,764.04. In payment, Hager gave Crestar two checks: one drawn on Preference's account in the amount of $40,000 and one on Hager's personal account for $89,764.04. Upon receipt of the checks, Crestar "assign[ed] and transfer[red] to [Hager] all rights conferred and duties imposed upon Crestar Bank under the terms of a certain promissory note...." JA at 133. The assignment made no express reference to the security agreement, which was located in a separate section of the note. Later, on February 1, 1993, at Hager's request, Crestar and Hager executed an "amendment" to their December 30, 1992 assignment which affirmed their intention that the assignment include the security interest. JA at 146-47.

Immediately following his purchase of the Crestar note, Hager closed the store to regular business and set about liquidating the

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corporation's assets, which apparently consisted only of the store's inventory. Though Roop's attorney had suggested to Hager that the inventory be sold back to Orvis, who would have credited the corporation for the value of the merchandise minus a ten percent restocking charge, Hager had declined to do so. Selling the inventory back to Orvis would have involved apportioning the proceeds to other creditors, a result at odds with his plan to use them in payment of the Crestar note he was to purchase. JA at 152-53. Instead, acting unilaterally on the claimed belief that "[once] I paid the note, ... [e]verything in the building belonged to me," and that he would then no longer owe any duty to the corporation or to Roop, Hager undertook to liquidate the assets on his own. JA at 153-54. To this end, he employed a liquidation firm to assist him and, in addition to selling some of the inventory in regular retail sales from the store premises, advertised a special liquidation sale of the remaining assets to be held on store premises on January 21-23, 1993. Noticing the advertisement, Preference's landlord, the Colonial Williamsburg Foundation (Foundation), filed a petition for Distress of Rent in Virginia state court, demanding $38,852.60 and seeking to enjoin the sale. In order to allow the sale to proceed, Hager and the Foundation entered into a written escrow agreement which provided, "All proceeds from the Sale are to be tendered to Troy Titus, Esq .... to be placed in his trust account ... pending further order of the General District Court of the City of Williamsburg." JA at 137. The state court then permitted the liquidation sale to proceed on the condition that the proceeds be deposited in accordance with the escrow agreement. The agreement also provided that it could "not be modified or amended and the observance of any term ... may not be waived without the prior written consent of all parties hereto," or it shall "terminate upon the discretion of the court." JA at 138. Though Hager later claimed in deposition testimony that the judge "thr[ew] out" the rent distress action, JA at 165, the record contains no indication that the court filed any orders after the sale was allowed to proceed.

The liquidation sale yielded $32,020.66 in cash sale proceeds and $43,423.66 in credit card sale proceeds. The cash sale proceeds of $32,020.66 were deposited in the Escrow Account, but the credit card sale proceeds of $43,423.66 were deposited in Preference's account. On February 28, 1993, Hager drew a check on the Preference account, payable to himself for $43,423.66, the amount of the credit card sale proceeds, and on April 17, 1993, Titus drew a check on the Escrow Account, payable to Hager, for $32,020.66, the amount of the cash sale proceeds. The Foundation has not received any of the liquidation sale proceeds and no further monies have been deposited in the Escrow Account. In all of these actions, Hager acted unilaterally, giving no formal notice either to the corporation or to Roop, still officially its president.

On April 26, 1993, Roop, acting as president and on the ostensible authority of a corporate resolution, filed a voluntary petition for bankruptcy on behalf of Preference. In December of 1993, Ruth Gibson, the trustee in bankruptcy ("the Trustee") made written demand on Hager that he turn over to her all proceeds from liquidation of the corporate assets and the $40,000 from Preference's bank account that he had used in purchasing the Crestar note. When by August 18, 1994, Hager had made no response to the demand, the Trustee brought this adversary proceeding against him. On December 20, 1994, Hager moved to dismiss the bankruptcy case and all related adversary proceedings.

From the outset, procedural confusion has plagued the Trustee's adversary proceeding against Hager. Because that confusion significantly affects our disposition of the appeal, we recite the procedural history in some detail.

The Trustee's complaint, essentially alleging the facts above recited, claimed a right to recover from Hager "all funds represented by checks drawn on [Preference] after October 9, 1992, without the signatures of both [Hager and...

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