CF TRUST, INC. v. First Flight LP

• Decision Date: 06 June 2003
• Docket Number: Record No. 022212.
• Parties: C.F. TRUST, INC., et al. v. FIRST FLIGHT LIMITED PARTNERSHIP.
• Court: Virginia Supreme Court

580 S.E.2d 806

266 Va. 3

C.F. TRUST, INC., et al. v. FIRST FLIGHT LIMITED PARTNERSHIP.

Record No. 022212.

Supreme Court of Virginia.

June 6, 2003.

Russell J. Gaspar, (Cohen Mohr, on briefs), Washington, DC, for appellants. Harvey A. Levin (Allison M. Ellis; Gretchen L. Gaston, Harrisburg, PA; Birch, Horton, Bittner & Cherot, on brief), Washington, DC, for appellees.

Present: All the Justices.

OPINION BY Chief Justice LEROY R. HASSELL, SR.

I.

Pursuant to Rule 5:42, the United States Court of Appeals for the Fourth Circuit certified to this Court the following questions of law, which we agreed to consider:

"(1) Would Virginia recognize a claim for outsider reverse veil-piercing under the facts of this case?

"(2) If the answer to (1) is yes, what standards must be met before Virginia would allow reverse veil-piercing of the limited partnership here?"

II.

A.

C.F. Trust, Inc., a Florida corporation, and Atlantic Funding Corporation, a Nevada corporation, filed an action in the United States District Court for the Eastern District of Virginia and sought a declaration that First Flight Limited Partnership, a Virginia limited partnership, is the alter ego of Barrie M. Peterson, who had endorsed and guaranteed certain promissory notes. C.F. Trust and Atlantic Funding obtained judgments against Peterson for the principal and interest on the notes and sought to satisfy their judgments against Peterson with assets held by First Flight. The federal district court concluded that this Court would permit reverse veil piercing and that court entered a judgment requiring First Flight to use its assets to satisfy the judgments of C.F. Trust and Atlantic Funding.

B.

The United States Court of Appeals' certification order contained the following facts which are relevant to our disposition of this proceeding.

"C.F. Trust and Atlantic Funding each hold commercial promissory notes endorsed and guaranteed by Peterson. As the district court noted, this case constitutes just one chapter in a prolonged tale involving C.F. Trust's and Atlantic Funding's efforts to collect a combined total of more than $8 million on their notes, and Peterson's equally determined efforts to avoid paying anything to them.

"C.F. Trust . . . holds two notes, dated November 1, 1993, in the total principal amount of $6,064,903.57. Not only Barrie Peterson, individually and as trustee, but also his wife, Nancy Peterson, endorsed and guaranteed both notes. C.F. Trust formally notified the Petersons of their default on the notes on August 31, 1995. . . . On February 1, 1996, a [circuit court in Virginia] entered judgment in favor of C.F. Trust and against the Petersons, jointly and severally, for the amount of the notes, plus interest. . . . In September 1998, when the Petersons still had not paid on the judgment, C.F. Trust sought and obtained a charging order from the [circuit] court that charged the Peterson[s'] interests in various partnerships, including First Flight, with paying the judgment on the notes. Then, on March 18, 1999, the [federal] district court issued garnishment orders against various Peterson corporations, including Birchwood Holdings Group, Inc., to C.F. Trust.

"Atlantic Funding . . . holds a single note, endorsed and guaranteed by Peterson, individually and as trustee, in the principal amount of $1,000,000. Atlantic Funding purchased its note along with the right to enforce a corresponding and preexisting judgment, entered on November 15, 1991, against Peterson for the principal amount of that note, plus interest. On March 1, 1996, a Virginia [circuit] court granted Atlantic Funding a charging order charging Peterson's interest in First Flight with paying the judgment on the Atlantic Funding note, and, on March 15, 1996, issued a second charging order charging another Peterson entity with paying the same judgment.

"On November 18, 1999, having still received no payment on the judgments, C.F. Trust and Atlantic Funding initiated this diversity action against Peterson, Mrs. Peterson, and Peterson's son, Scott Peterson, as well as against various Peterson entities, including First Flight. . . . C.F. Trust and Atlantic Funding alleged that Peterson still owed on the judgments and sought a declaration that each of the other defendants was Peterson's alter ego and, therefore, liable on the judgments.

. . . .

"A four-day bench trial began on August 28, 2000. The evidence presented at trial showed that Peterson had engaged in two different practices in order to avoid paying C.F. Trust's and Atlantic Funding's judgments.

"First, Peterson directed transfers from various Peterson entities to Birchwood Holdings Group, Inc. (BHG), a corporation wholly owned by Peterson. BHG provided managerial and administrative support to other Peterson entities for a fee, which was calculated according to a cost allocation method. During the relevant period, however, Peterson directed transfers of approximately $1.9 million in overpayments to BHG — excess payments beyond those to which BHG was entitled based on the applicable cost allocation and then directed BHG to pay more than $2 million of Peterson's personal expenses.

"Through this method, Peterson maintained a lifestyle that, he estimated, cost `between 10 and 15 thousand dollars a month.' The expenses paid by BHG included: mortgage and repair payments on a Peterson residence in Fairfax, Virginia; mortgage payments on a Peterson residence in Nantucket, Massachusetts; Peterson's country club membership fees; car payments for Peterson's Mercedes [Benz]; the Petersons' credit card bills; Peterson's ATM fees; college tuition for Peterson's younger son, Christopher Peterson; and payments to Mrs. Peterson. BHG even paid the substantial legal fees incurred by Peterson and Mrs. Peterson, as well as by various Peterson entities, to defend the suits brought by C.F. Trust and Atlantic Funding to collect on their notes.

"Yet, Peterson contended that he derived no salary and had no income subject to the judgments entered in favor of C.F. Trust and Atlantic Funding. Peterson instead testified that the BHG payments toward his personal expenses constituted repayments of prior loans that he had made to his corporations before the dates of the judgments. However, BHG's accountant testified — and the ledgers reflected — that many of BHG's payments toward Peterson's personal expenses were `distributions,' not loan repayments. Moreover, no underlying documentation supported Peterson's explanation for the disbursements or the companies' asserted obligations to Peterson, other than the checks and distributions themselves. Only in 1999 did Peterson generate `promissory notes,' purportedly representing monies owed to him by his companies as repayment for the asserted loans.

"First Flight provided the bulk of the transfers to BHG during this time period. First Flight, the primary source of outside revenue for the Peterson entities, owned and operated a large commercial and industrial rental property called Top Flight Airpark. Beginning in 1992 and continuing through March 15, 1996, Barrie Peterson held a 98% limited partnership interest in First Flight, including a 2% interest held by Top Flight Airpark, Incorporated, a corporation wholly owned by him. Upland Group, an entity wholly owned by Peterson's elder son, Scott Peterson, held the remaining 2% general partnership interest.

"However, on March 15, 1996 — six weeks after C.F. Trust obtained a judgment against Peterson and two weeks after Atlantic Funding obtained its first charging order Top Flight withdrew as 2% partner of First Flight, and Peterson transferred half of his resulting 98% partnership interest in First Flight to Scott Peterson. Upland Group, however, retained its 2% general partnership interest. Through this transfer, Peterson purportedly surrendered legal control of First Flight to Scott Peterson, although Peterson himself continued to manage First Flight's day-to-day affairs.

"This transfer provided Peterson a second means of siphoning money from First Flight, other than through intercompany transfers to BHG, to pay his personal expenses. Peterson directed Scott Peterson to distribute First Flight's funds to himself, and then pay those distributions to Mrs. Peterson or to BHG, or use the distributions to pay the personal expenses of Peterson and Mrs. Peterson. Thus, between March 15, 1996, and December 31, 1999, although First Flight did not directly distribute funds to Barrie Peterson, [First Flight] distributed more than $4.3 million to Scott Peterson.

"To justify these distributions, Peterson and Scott Peterson amended First Flight's partnership agreement to allow Scott Peterson, as the general partner, `to approve any distributions to the limited partners' and `to determine whether any part of the profits of the Partnership should be distributed to the limited partners.' At trial, Peterson and Scott Peterson contended that this amendment to the partnership agreement extinguished the agreement's requirement of pro rata distributions to partners, although the amendment did not expressly alter its pro rata payout requirement. Peterson also argued that money used by his son to pay Peterson's own personal expenses were repayments of loans Peterson had made to his respective companies."

C.

The federal district court held that C.F. Trust and Atlantic Funding had "conclusively established the grounds necessary to support piercing the corporate veil in reverse." C.F. Trust, Inc. v. First Flight Ltd. P'ship, 140 F.Supp.2d 628, 645 (E.D.Va.2001)

. The federal district court applied this Court's precedent for traditional veil piercing and required that C.F. Trust and Atlantic Funding prove (i) a "unity of interest and ownership" between Peterson and First Flight, and (ii) that Peterson "used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage." Id. at 643 (quoti...