Daniels v. Elks Club of Hartford

• Decision Date: 03 August 2012
• Docket Number: No. 10–181.,10–181.
• Citation: 58 A.3d 925,2012 VT 55
• Parties: Richard S. DANIELS v. The ELKS CLUB OF HARTFORD, Vermont and The Human Rights Commission, et al.
• Court: Vermont Supreme Court

58 A.3d 925

2012 VT 55

Richard S. DANIELS

v.The ELKS CLUB OF HARTFORD, Vermont and The Human Rights Commission, et al.

No. 10–181.

Supreme Court of Vermont.

Aug. 3, 2012.

C. Nicholas Burke of Burke & Hotchkiss, PLLC, Lebanon, New Hampshire, for Plaintiff–Appellee.

Gary F. Karnedy and Alexandra H. Clauss of Primmer Piper Eggleston & Cramer PC, Burlington, for Intervenor–Appellee Mascoma Savings Bank.

Edwin L. Hobson, Burlington, Robert Appel, Executive Director, Vermont Human Rights Commission, Montpelier, Norman Watts of Watts Law Firm, Woodstock, and Ethan Shaw (on the Brief), Montpelier, for Defendants–Appellants.

Present: REIBER, C.J., DOOLEY, SKOGLUND and BURGESS, JJ., and COHEN, Supr. J., Specially Assigned.

DOOLEY, J.

¶ 1. Plaintiff Richard Daniels is seeking foreclosure of a mortgage on two parcels of real property owned by defendant Elks Club of Hartford, Vermont (the Club). Defendant creditors, who include the Vermont Human Rights Commission (VHRC), four individual women, and the Watts Law Firm (Watts), all have junior security interests in the property at issue and oppose foreclosure. Creditors appeal from a trial court decision granting plaintiff's motions for summary judgment, concluding that plaintiff has standing to foreclose and is entitled to a judgment of foreclosure against all parties, and dismissing creditors' counterclaims. For the reasons stated below, we reverse and remand the decision to include certain advances in the mortgage amount and the dismissal of the counterclaims.

¶ 2. Creditors' involvement here is rooted in their participation in an earlier civil rights action against the Club, which took place while the Club's corporate status was terminated and which resulted in attachments on the property in question and judgments for the civil rights plaintiffs and eventually for Watts. At the time of the attachment and the judgments, the property was already mortgaged to Mascoma Savings Bank (the Bank). On appeal, creditors make five main arguments: (1) the Club's reinstatement of a dissolved corporation nineteen years after its dissolution does not alter its liability under a final judgment entered against it as an unincorporated association, and plaintiff is personally liable for the judgment as a member of the Club; (2) the Bank was on actual notice of creditors' interest, and, therefore money advanced thereafter is not part of the mortgage amount that has priority over creditors' interests ¹; (3) plaintiff does not hold the mortgage or legal title and therefore cannot bring a foreclosure action; (4) issue preclusion does not bar creditors' claim that plaintiff, the Bank and the Club entered into an improper collusive relationship, designed to escape the attachment; and (5) title to the property merged because plaintiff, as a member of the unincorporated Club, held both legal and equitable title.

¶ 3. We reject the last three of these arguments but agree with the first, and reverse and remand the trial court's decision on the second for reconsideration under the correct legal standard. We conclude that reinstatement of the Club's corporate status did not result in limiting liability on the Club's debts arising from the discrimination lawsuit. Because the Club was a voluntary association at the time it discriminated against the individual women and at the time it retained Watts to defend it in the discrimination litigation, certain members of the Club are liable for the judgments to the extent they cannot be collected from the Club. Accordingly, we affirm the trial court's decision that plaintiff is entitled to foreclose, reverse and remand the foreclosure judgment, and reverse and remand its dismissal of creditors' counterclaims.

¶ 4. The undisputed material facts are as follows. Creditors' involvement in this case began with an action for intentional gender discrimination filed in 1998 against the Club by the first group of creditors here, the VHRC and four individual women who were denied membership in the Club due to their gender (collectively “discrimination creditors”).² A jury found in favor of the plaintiffs in the discrimination case, resulting in a verdict that included: an injunction requiring the Club to admit the women, an award of $1 in compensatory damages and $5000 in punitive damages to each woman, and an award of $5000 in statutory penalties to the VHRC. This Court affirmed the verdict, monetary judgment, and permanent injunction on March 14, 2008. Vt. Human Rights Comm'n v. Benevolent & Protective Order of Elks, 2008 VT 34, 183 Vt. 606, 949 A.2d 1064 (mem.). On April 6, 2009, a separate final judgment was entered in favor of the discrimination creditors for approximately $446,000 in attorney's fees related to the discrimination case. Following these awards, the women and the VHRC modified an existing pretrial attachment on the Club's property, originally recorded in 2004, to secure payment of the jury verdict and attorney's fee award. The attachment was a junior lien—the Club having already mortgaged its property to the Bank in 1989.

¶ 5. Watts, the second creditor here, also holds a junior security interest in the Club's property. This firm represented the Club during part of the gender discrimination litigation and later obtained a $30,000 judgment against the Club for nonpayment of attorney's fees. That judgment is also secured by a judgment lien against the Club's property. The lien was filed in April 2008 and is junior to the interests of the Bank and the discrimination creditors.

¶ 6. The Club was first incorporated in 1940, but the Vermont Secretary of State revoked its corporate charter on June 23, 1989, for failure to file an annual report. The Club's corporate status remained terminated for almost nineteen years until its charter was reinstated on May 2, 2008. Plaintiff has been a member of the Club for more than forty years. He became a Club trustee for the first time in May 2008.

¶ 7. Just before its corporate charter was revoked in 1989, the Club borrowed $700,000 from the Bank, securing the loan with a mortgage deed on the Club's property. Years later, in July 2006, during the course of the discrimination lawsuit, the Bank advanced the Club an additional $25,000, purportedly secured by the original mortgage. In January and September 2007, the Bank also amended the terms of the promissory note to reduce the amount of the monthly payment from an amount covering repayment of both principal and interest to an amount representing interest only. The Bank was aware of the junior security interest held by the discrimination creditors when it made these deferrals and advanced the additional funds.

¶ 8. By June 2008, the Club had fallen behind on making payments on its mortgage to the Bank, and on June 19, 2008, the Bank assigned both its mortgage and promissory note to plaintiff. Although plaintiff is a longtime member of the Club, he completed this transaction in his individual capacity. The terms of the transaction required plaintiff to execute a promissory note to the Bank for approximately $493,000, deliver collateral assignment of the 1989 mortgage to the Bank, and post additional cash collateral.

¶ 9. In November 2008, plaintiff gave notice of a nonjudicial foreclosure of the mortgage. Creditors brought an action to enjoin the planned action. In December 2008, the Washington Superior Court denied creditors a preliminary injunction. The decision of the court did not end the controversy because it became clear in the course of that litigation that plaintiff would have to bring a judicial foreclosure.

¶ 10. In January 2009, plaintiff filed in Windsor Superior Court a foreclosure complaint against the Club and all creditors with an interest in the Club's property subordinate to plaintiff's security interest. Plaintiff's complaint alleged that at all times since the Bank's assignment of the promissory note and mortgage the Club was in default as a result of its failure to promptly pay all installments of principal and interest and its failure to pay real estate taxes.

¶ 11. In the trial court, creditors raised a number of defenses to the foreclosure action and counterclaims. The court addressed creditors' defenses and counterclaims in its September 2009 decision granting plaintiff's motion for default judgment and for summary judgment.

¶ 12. Creditors made three general classes of arguments. First, they argued that plaintiff could not foreclose the mortgage for three reasons: (1) because of a collateral assignment to the Bank, he did not hold title; (2) because he was a member of the Club and responsible for its debts, he held both legal and equitable title to the property and those interests merged, eliminating the mortgage; and (3) plaintiff and the Club colluded to eliminate creditors' interests in the property and could not go forward in equity. The trial court rejected each of these arguments. It held that plaintiff transferred only a security interest to the Bank and retained title that allowed it to foreclose. It held that even if plaintiff held both the equitable title and the legal title in the property, merger would occur only if he intended it, and there was no evidence of such an intent. Finally, it held that creditors' collusion argument was barred by issue preclusion because the Washington Superior Court had ruled against it in creditors' injunction action. Alternatively, it held that creditors were not harmed by plaintiff's purchase of the mortgage from the Bank.

¶ 13. Creditors' second type of argument sought to reduce the amount that plaintiff could claim was secured by the mortgage or made part of that amount senior to the interests of the creditors. Under this category, creditors argued that part of the unpaid mortgage amount, the $25,000 advanced in 2006, represented an interest junior to that of the creditors because the Bank advanced that money to the Club after discrimination creditors' attachment interests were...