In re LA Clarke & Son, Inc.

• Decision Date: 18 April 1986
• Docket Number: Adv. No. 84-0151.,Bankruptcy No. 83-00166
• Citation: 59 BR 856
• Court: United States Bankruptcy Courts – District of Columbia Circuit
• Parties: In re L.A. CLARKE & SON, INC., Debtor. L.A. CLARKE & SON, INC., Plaintiff, v. Constance DONALD and Newton Asphalt Co., Inc. of Virginia, Defendants.

59 B.R. 856 (1986)

In re L.A. CLARKE & SON, INC., Debtor L.A. CLARKE & SON, INC., Plaintiff, v. Constance DONALD and Newton Asphalt Co., Inc. of Virginia, Defendants.

Bankruptcy No. 83-00166, Adv. No. 84-0151.

United States Bankruptcy Court, District of Columbia.

April 18, 1986.

Arnold B. Podgorsky, Cadwalader, Wickersham & Taft, Washington, D.C., for plaintiff.

Douglass Bywater, Tate & Bywater, Vienna, Va., for defendant Constance Donald.

OPINION AND ORDER

GEORGE FRANCIS BASON, Jr., Bankruptcy Judge.

Before the Court is a motion filed by defendant Constance Donald ("Donald") for summary judgment denying all relief sought by plaintiff/debtor L.A. Clarke & Son, Inc. ("Clarke"). The motion raises solely the defense that Clarke's complaint against Donald was filed too late—that it is barred by applicable statutes of limitations.

1. Clarke's claims against Donald.

Clarke filed a six-count complaint against Donald and against co-defendant Newton Asphalt Co., Inc. of Virginia ("Newton") on June 8, 1984. Since Clarke filed its voluntary Chapter 11 bankruptcy petition on March 11, 1983, the complaint was filed within the two-year grace period allowed by 11 U.S.C. § 108(a)(2).¹ Section 108(a)(2) extends the time for filing a complaint if under "applicable non-bankruptcy law . . . the limitations period has not expired before the date of the filing of the petition . . ." Thus, the question in this case is whether relevant limitations periods expired before March 11, 1983.

All six counts of the complaint rely upon 11 U.S.C. § 544(b), which empowers a bankruptcy trustee² to "avoid any transfer . . . that is voidable under applicable law by a creditor of Clarke holding an unsecured claim . . ." The "applicable nonbankruptcy law" upon which Clarke relies is that of Virginia.³

Count 1 asserts that the notes now held by Donald are voidable under Va.Code § 55-81,⁴ which declares "void as to prior creditors" any "transfer . . . which is not upon consideration deemed valuable in law . . ." Count 2 relies upon Va.Code § 55-80,⁵ which declares void transfers made "with intent to delay, hinder or defraud creditors . . ." Count 3 repeats the allegations of "voluntary conveyance" in violation of § 55-81 and "intent to defraud" in violation of § 55-80 and further alleges that Donald was unjustly enriched. Count 4 repeats all of the above allegations and demands an accounting for all payments received pursuant to the notes. Count 5 repeats the same allegations and demands equitable subordination of Donald's $219,353.04 claim against Clarke, pursuant to 11 U.S.C. § 510(c). Count 6 repeats the same allegations and goes on to allege duress, undue influence, breaches of fiduciary duty, and unjust enrichment, concluding that Clarke is entitled to recover on a constructive trust theory.

2. The undisputed facts.

The undisputed facts are as follows: On September 29, 1975, Constance Donald, her two stepsons Michael and Lucien Blaine Clarke, Jr., the Estate of Lucien Blaine Clarke, Sr. ("the Probate Estate") and the corporation L.A. Clarke & Son, Inc. ("Clarke") entered into (a) a Settlement Agreement and (b) a Sales Agreement. Under the Sales Agreement, the Probate Estate sold certain real estate (two quarries in Fairfax County, Virginia) to Clarke; in return Clarke, inter alia, made a $162,000 second deed of trust note payable to the Estate; and the Probate Estate transferred $157,500 of that note to Donald, "in return for which she gave up her claim to an interest in" the real estate.⁶ Under the 1975 Settlement Agreement, Clarke transferred directly to Donald corporate debentures of Clarke totalling $175,000, plus cash of approximately $20,000.

Clarke contends that "Donald gave up nothing" in return for these two transfers from Clarke, because "neither purported claim was against L.A. Clarke."⁷ Moreover, Clarke contends that "neither claim was genuine and the recital of them . . . was a sham."⁸ Solely for purposes of her motion for summary judgment, Donald does not dispute these contentions.

The $162,000 second deed of trust was recorded on October 14, 1975 among the land records of Fairfax County, and the Settlement Agreement was filed in the Probate Court proceedings of the Estate in the District of Columbia on July 21, 1976 (No. 287-72).

"Pursuant to a second Settlement Agreement dated May 13, 1980, Mrs. Donald refinanced the $175,000 debentures and $162,000 secured note . . .", receiving in exchange for them two unsecured notes of Clarke totaling approximately $190,000 plus a $250,000 note of Newton Asphalt Co., which purchased the two quarries from Clarke.⁹ Donald contends that "the 1980 notes were a dollar for dollar exchange for the 1975 notes . . .",¹⁰ taking into account payments made, interest accrued, and the lower interest rate on the new Newton note as compared to the interest rates on the prior 1975 obligations. Clarke disputes this contention and, citing Bankruptcy Rule 7056 and Fed.R.Civ.P. 56(f), states that additional discovery is needed and hence the Court should defer ruling.

3. Rejection of various contentions by Clarke in opposition to Donald's motion.

Clarke contends that Donald's attorney, John Davis, "orchestrated the scheme for a "voluntary" and fraudulent conveyance¹¹ in 1975" and "continued his scheme until Debtor's new owners took over on May 2, 1980."¹²

In addition, Clarke contends that the alleged fraud was not discovered or reasonably discoverable until creditors' "interests were represented by the Debtor acting as trustee in the bankruptcy proceeding."¹³ Attached as Exhibit 3 to Clarke's Brief is an affidavit of Clarke's current president stating: "I did not become aware that Debtor had voluntarily and fraudulently conveyed notes to Constance Donald . . . until June 25, 1982" (¶ 2, p. 1); and until then "I had no knowledge which could have given me reason" to sue (¶ 3, p. 2).

Donald correctly points out, and Clarke does not dispute, that the date when Clarke's current management discovered or should have discovered the pertinent facts is irrelevant. A corporation is bound by the knowledge of its owners and managers as of the date of the transaction at issue. The fact that new owners and managers have taken over does not erase the corporation's knowledge acquired through its former personnel. Thus, here, the Debtor corporation cannot and does not seek to recover in its own right.

Rather, under § 544(b), the Debtor-in-possession stands in the shoes of "an actual unsecured creditor or the successor in interest of an actual unsecured creditor against whom the transfer was . . . voidable under the controlling state . . . law."¹⁴ Thus, in order to prevail, there must be at least one unsecured creditor of Clarke whose claim was not barred by limitations or laches on March 11, 1983, the date Clarke filed its bankruptcy petition.¹⁵

This Court rejects Clarke's contention that, unless the 1980 transfer was precisely "dollar for dollar" for what was then due under the 1975 transfer, the starting date for computation of any limitations period should be in 1980. It is undisputed that the notes which Donald held as a result of the 1975 transfer had not been completely paid off at the time of the 1980 exchange. Hence, the 1980 transfer was not "voluntary"; there was not in 1980 a complete lack of "consideration deemed valuable in law," within the meaning of Va.Code § 55-81. Any transfer that lacked consideration occurred in 1975; by 1980 the notes which Donald had obtained in 1975 stood as consideration for the new notes she acquired in 1980. The lack of consideration, if any, occurred in 1975, not in 1980. Moreover, the 1980 transfer would be voidable as fraudulent under § 55-80 for inadequacy of consideration alone only if the inadequacy were "so gross as to shock the conscience . . ." Flook v. Armentrout's Admr., 100 Va. 638, 42 S.E. 686, 688 (1902). Absence of a dollar-for-dollar exchange is a far cry from gross, shock-the-conscience inadequacy.

This Court also rejects Clarke's contention that there was a continuing wrong because Donald's attorney "orchestrated the scheme in 1975" and "continued his scheme until . . . 1980."¹⁶ Clarke has cited two cases, but they both have to do with the "continuing treatment" rule in medical malpractice cases. That rule is based on the theory that "the duty with reference to an accurate diagnosis persisted throughout the entire treatment because upon each diagnosis rested the correctness of any future conduct . . ." Farley v. Goode, 219 Va. 969, 252 S.E.2d 594, 599 (1979), followed in Fenton v. Danaceau, 220 Va. 1, 255 S.E.2d 349 (1979). The court in Farley pointed out the distinction between that situation and cases in which the plaintiff's claim "stemmed from a single, isolated, non-continuing wrongful act." 252 S.E.2d at 599.

Here, the only "continuing wrong" alleged by Clarke is the failure to undo in 1980 (or at any time subsequent to 1975) that which had been done and completed in 1975.¹⁷ That is simply not a continuing wrong, either within the meaning of the two cases cited or by any reasonable analogy to or extension of the continuing treatment rule as enunciated in Farley.

In addition, this Court rejects Clarke's contentions that its "causes of action arose anew as each payment was made" and that "the 1980 transaction caused the limitations period on the 1975 debt to begin running anew because "acknowledgement of a prior promise to pay revives the promise to pay . . ."¹⁸ Payment, or a new promise to pay, demonstrates recognition of the validity and enforceability of the prior promise. Clarke seeks to turn the "payment" and "acknowledgement" rules on their heads; the payments, and the 1980 "acknowledgement" of the 1975 promises, tend to show that the 1975 promises were valid and binding—not, as Clarke would have it, that they were invalid.

Finally, this Court rejects Clarke's contention that the 15-year limitations period applicable to suits for...