La Bella Dona Skin Care, Inc. v. Belle Femme Enters., LLC

• Decision Date: 26 October 2017
• Docket Number: Record No. 161195.
• Parties: LA BELLA DONA SKIN CARE, INC. v. BELLE FEMME ENTERPRISES, LLC, et al.
• Court: Virginia Supreme Court

294 Va. 243

805 S.E.2d 399

LA BELLA DONA SKIN CARE, INC.

v.BELLE FEMME ENTERPRISES, LLC, et al.

Record No. 161195.

Supreme Court of Virginia.

October 26, 2017

Daniel D. Mauler, Alexandria (James S. Kurz, Tysons Corner; Redmon, Peyton & Braswell, on briefs), for appellant.

Benjamin S. Tyree; Joseph E. Blackburn, III (William D. Bayliss ; Taylor, Taylor & Taylor; Williams Mullen, Richmond, on briefs), for appellees.

PRESENT: All the Justices

OPINION BY CHIEF JUSTICE DONALD W. LEMONS

In this appeal of a civil action, we consider whether the Circuit Court of Chesterfield County ("circuit court") erred when it held, as a matter of law: 1) that a fraudulent conveyance under Code § 55–80 cannot serve as the predicate unlawful act needed to support a claim for statutory or common law conspiracy; 2) that a prima facie case of fraudulent conveyance cannot be established when the recipient is a third party creditor with a higher security interest; and 3) that successor liability claims must be proven by "clear and convincing" evidence. In addition, we consider whether the circuit court erred by concluding that the evidence was insufficient to impose successor liability.

I. Facts and Proceedings

On May 20, 2015, La Bella Dona Skin Care, Inc. ("LBD") filed a third amended complaint against eleven defendants, including three former LBD employees, as well as those former employees' counsel, certain of their family members, and two competing spa businesses. The complaint sought damages and injunctive relief from the defendants as a result of their involvement in a series of allegedly fraudulent conveyances designed to avoid an outstanding judgment in favor of LBD.

The Complaint

According to the complaint, on September 28, 2012, LBD obtained a judgment against three of its former employees, Brooke Miller ("Mrs. Miller"), Molly Smoot ("Mrs. Smoot"), and Betty Gail Boyd ("Ms. Boyd"), and their competing business, Bon Air Med Spa, LLC ("BAM") (collectively, the "Judgment Debtors"), for misappropriation of trade secrets.^* The Judgment Debtors were represented in the trade secret litigation by Mark Schmidt ("Schmidt"), an attorney with the law firm of Ayers & Stolte, P.C. ("Ayers & Stolte"). While the lawsuit was pending, the Judgment Debtors executed a $85,000 promissory note ("Note") in favor of Ayers & Stolte for past and future legal expenses. The Note was secured, in part, by an assignment of rights to BAM's assets.

According to LBD's complaint, Ayers & Stolte demanded payment on the Note shortly after final judgment was entered against the Judgment Debtors, and then "declared the Note in default" a week later.

On October 17, 2012, Ms. Boyd's adult son, Anthony Boyd ("Anthony"), formed Belle Femme Enterprises, LLC ("Belle Femme"). Schmidt assisted with the creation and incorporation of the new business, and BAM paid him $350 for his services. Mrs. Miller's husband, Jason Miller ("Mr. Miller"), and Mrs. Smoot's husband, Dan Smoot ("Mr. Smoot"), subsequently acquired ownership interests in Belle Femme.

According to the complaint, BAM "apparently ceased doing business" upon the formation of Belle Femme, but "the public face of [BAM] did not change." Both businesses operated from the same location, under the same lease, and with the same employees, including Ms. Boyd, Mrs. Miller, and Mrs. Smoot. Belle Femme also operated under BAM's tradename, "Bon Air Med Spa," using the same telephone number, domain name, and internet blog. LBD's complaint alleged that, in essence, Belle Femme "was and is the same business" as BAM.

The complaint further alleged that beginning on October 18, 2012, "the individuals running [BAM] and Belle Femme made no effort to separate the assets belonging to [BAM] versus Belle Femme." The businesses' assets were instead "comingled and lumped together," and some of BAM's assets were fraudulently conveyed directly to Belle Femme without compensation. These fraudulently conveyed assets included "the customer appointments, relationships, and products used to serve those appointments that [BAM] misappropriated from [LBD]."

On December 5, 2012, Ayers & Stolte conducted an auction to sell BAM's remaining assets. The auction notice specified that only cash bids would be considered and that an immediate deposit would be required from successful bidders. Moreover, the auction schedule did not list "the customer appointments, relationships, and products used to serve those appointments." No representatives from BAM or Belle Femme attended the auction; "Ayers & Stolte itself was the buyer." According to the complaint, Ayers & Stolte's winning bid "was a credit bid against the Note, not the required cash bid."

Following the auction, Ayers & Stolte's "President or Manager," Charles E. Ayers, Jr., signed a Bill of Sale, which "seemingly shows a December 10, 2012 sale of the [BAM] Assets to Belle Femme." At that time, the price of the sale "was an unknown" and "apparently was not even discussed until ... more than three months after the auction."

In March 2013, the individual Judgment Debtors, along with Anthony, Mr. Miller, and Mr. Smoot met at Ayers & Stolte's law offices, where a $40,000 promissory note payable to Ayers & Stolte was executed. Anthony, Mr. Miller, and Mr. Smoot signed the promissory note individually, and Anthony also signed the note on behalf of Belle Femme.

The complaint further alleged that, as of its filing, LBD had been "unable to collect more than a de minim [is ] amount of the 2012 judgments entered against the [Judgment Debtors]." As a result, LBD filed this civil action in the circuit court against the Judgment Debtors, Belle Femme, Anthony, Mr. Miller, and Mr. Smoot (collectively, the "Belle Femme Defendants") as well as Ayers & Stolte and Charles Ayers, Jr. (collectively, "Ayers & Stolte"). LBD advanced eight counts, four of which are relevant to this appeal:

• Count I: Successor Liability;

• Count II: Fraudulent Conveyance under Code § 55–80 ;

• Count VII: Common Law Civil Conspiracy; and

• Count VIII: Statutory Conspiracy under Code §§ 18.2–499 and –500.

Pre–Trial Proceedings

The Belle Femme Defendants and Ayers & Stolte demurred to counts II, VII, and VIII, and subsequently moved for summary judgment as to count II. The circuit court sustained the demurrers to counts VII and VIII, and granted summary judgment as to count II.

The circuit court sustained the demurrers to counts VII and VIII on the basis that the complaint failed to state a cause of action for common law or statutory conspiracy to fraudulently convey assets under Code § 55–80. The court stated that the fraudulent conveyance statute only provides for "sanctions," which are fundamentally distinct from damages. Therefore, because tort damages were not available for the predicate unlawful act of fraudulent conveyance, the circuit court concluded that tort damages could not be obtained through a claim of conspiracy to commit that predicate unlawful act.

The circuit court dismissed count II on summary judgment because there was no "genuine issue of material fact" that Ayers & Stolte "held a senior lien on [BAM's] assets and were thus entitled to have the proceeds of the public auction." The court explained that LBD conceded this fact in responses to the following pre-trial requests for admission:

• Admit that, since on or about May 21,2012, Ayers & Stolte has had a lien against [BAM's] personal property. [ADMIT ]

• Admit that the lien of Ayers & Stolte in [BAM's] personal property is a higher priority lien than any lien possessed by [LBD] in [BAM's] personal property. [ADMIT ]

In light of these admissions, the court concluded that "[c]hoosing to repay a debt to one creditor with a higher priority security interest over another is simply not a fraudulent conveyance as to the third party creditor."

The Bench Trial

LBD's claim against Belle Femme for successor liability (count I) proceeded to a two-day bench trial that began on December 7, 2015. There, the Belle Femme Defendants introduced a copy of the Note that the Judgment Debtors executed in favor of Ayers & Stolte during the initial lawsuit. The Note reflected that the Judgment Debtors granted Ayers & Stolte a security interest in BAM's assets as collateral for the $85,000 loan. The Note further specified that it was "payable ON DEMAND."

Charles Ayers, Jr. ("Ayers") testified at trial that Ayers & Stolte filed a UCC–1 financing statement for the lien against BAM's assets with the State Corporation Commission. Ayers further testified that he signed the demand letter that was ultimately sent to BAM, and that BAM failed to "make payment in full pursuant to [the] demand." As a result, Ayers & Stolte declared default and sent a second letter "saying we're taking possession of [the] collateral."

According to Ayers' testimony, the firm initially allowed BAM to continue using the assets "[b]ecause if they were continuing to operate the business [ ] profitably, they could make payments toward their obligations and satisfy it." It was later decided, however, "[t]hat the assets were going to be sold at public auction." In turn, "the firm referred [the matter] to a trustee to foreclose ... and he held a foreclose[ure] sale." Ayers testified that he did not personally attend the auction, but he sent Schmidt on behalf of Ayers & Stolte and "instructed him to open the bid at $10,000." Following the auction, Ayers' understanding was that, "because no one else bid more than $10,000," Ayers & Stolte "owned [BAM's assets] with the idea of disposing them." To that end, Ayers approved a sale of the assets for $40,000. In addition, Ayers signed the Bill of Sale, which he understood to "[t]ransfer the property [ ] purchased at auction to Belle Femme."

Anthony also testified at trial. According to his testimony, Belle Femme leased "the use of [ ] equipment ... and supplies from Ayers & Stolte" for $1,000 per month pursuant to an oral agreement. He testified that Belle Femme began leasing the equipment when it was formed in October of 201...