Estate Const. Co. v. Miller & Smith Holding Co., Inc., 93-1110

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Writing for the CourtBefore NIEMEYER and HAMILTON; HAMILTON
Citation14 F.3d 213
Parties1994-1 Trade Cases P 70,511, 25 Bankr.Ct.Dec. 233 The ESTATE CONSTRUCTION COMPANY; Maureen Dowd Patterson; Robert Brown Patterson, Plaintiffs-Appellants, v. MILLER & SMITH HOLDING COMPANY, INCORPORATED; Providence Savings & Loan Association, S.A.; Keystone Financial Services Corporation, Incorporated; Gordon V. Smith; Bruce Smith; Miller & Smith Homes, Incorporated; Miller & Smith Homes of Maryland, Incorporated; Miller & Smith Land, Incorporated; Miller & Smith Industrial, Incorporated; Miller & Smith Construction Company, Incorporated; Everett M. Calloway; Fagelson, Schonberger, Payne and Dichmeister; Robert A. Payne; Eugene Schonberger; Richard North; Robert Jacobi; Stuart J. Bell; Ronald S. Faett; Henry A. Thomas; Dallas O. Berry; Jack Tarquini; Linda Guild; Jack B. Conner; Jack B. Conner & Associates, Incorporated; N. Vernon Cockrell; David G. Speck, Defendants-Appellees.
Docket NumberNo. 93-1110,93-1110
Decision Date13 January 1994

Arnold Bruce Podgorsky, Wright & Talisman, P.C., Washington, DC, argued, (Carrie L. Bumgarner, Wright & Talisman, P.C., on brief), for plaintiffs-appellants.

Allen Scott Rugg, Kutak, Rock, John Tremain May, Washington, DC, argued, for defendants-appellees.

Before NIEMEYER and HAMILTON, Circuit Judges, and KAUFMAN, Senior United States District Judge for the District of Maryland, sitting by designation.


HAMILTON, Circuit Judge:

Estate Construction Company, Inc. (the Company) and its sole stockholders Maureen Dowd Patterson and Robert Brown Patterson (collectively the Pattersons) appeal the (October 30, 1992 and December 18, 1992) orders of the district court dismissing their claims for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6). The Pattersons appeal only the dismissal of their state law fraudulent conveyance claim, Va.Code Ann. Sec. 55-80, and their Sherman Act claim, 15 U.S.C. Sec. 1. For the reasons stated herein, we affirm the district court's dismissal of the claims.


In 1986, the Pattersons, who were real estate developers, purchased seventy-six acres of land in Delaplane, Fauquier County, Virginia. In 1988, they purchased an adjacent 371 acre tract. We refer to both parcels jointly as "the Property." Through their wholly owned company, Estate Construction Company, Inc., the Pattersons intended to renovate a Revolutionary War era residence 1

and construct five other homes on the Property

Defendant Providence Savings and Loan Association, F.A. (Providence) is a chartered savings association under the Home Owners' Loan Act, 12 U.S.C. Sec. 1461 et seq. Providence is wholly owned by defendant Miller & Smith Holding Company (MS Holding), a holding company which also owns numerous other companies engaged in real estate acquisitions, financing, development, and sales. MS Holding is principally owned and managed by the individual defendant Gordon v. Smith. 2

In August 1988, Providence made an acquisition and construction loan to the Pattersons in the amount of $7,557,600 (the Loan). The Loan was secured by the Property pursuant to a deed of trust and a security agreement. 3

By July 1989, the Pattersons defaulted on the Loan. Notifying them by letter dated July 25, 1989 that the Loan was in default, Providence set forth the several events of default as defined in the loan documents. 4 The letter also informed the Pattersons that they could avoid acceleration of the debt by curing the events of default within thirty days, pursuant to the terms of the loan agreement. After failing to cure the events of default, the Pattersons filed for bankruptcy on October 12, 1989, in the United States Bankruptcy Court for the Eastern District of Virginia seeking to reorganize their affairs under Chapter 11 of the United States Bankruptcy Code.

In December 1990, Providence moved for relief from the automatic stay which had attached upon the Pattersons' declaration of bankruptcy. On September 26, 1991, the bankruptcy court conducted a hearing on Providence's motion seeking an order granting it relief from the automatic stay. By order dated September 27, 1991, the bankruptcy court granted Providence's motion and lifted the stay with respect to Providence's secured claim. 5 In granting Providence's motion, the bankruptcy court determined that the Pattersons had no equity in the Property. The bankruptcy judge valued the Property at $6.3 million. 6 He then determined that the amount of debt was $6.3 million 7 with a cost of completion of $500,000. Thus, according to the bankruptcy court, the total debt was $6.8 million.

After receiving approval from the bankruptcy court to sell the Property, Providence directed Calloway, the substitute trustee under

the deed of trust, to proceed with a foreclosure sale of the Property. Calloway advertised the sale of the Property by auction in strict accordance with the deed of trust and applicable law. Attempting to prevent the sale, the Pattersons filed suit on November 5, 1991, in the Circuit Court for Fauquier County, Virginia (state court), seeking a preliminary injunction barring the foreclosure. The state court refused to enjoin the foreclosure sale

On November 7, 1991, Calloway conducted the foreclosure sale. Providence purchased the Property for $3.3 million cash, plus the assumption of a first deed of trust in favor of Continental securing debt in the original principal amount of $650,000 and which bore a total balance due in November 1991 of greater than $850,000. Therefore, the total purchase price paid by Providence was $4.15 million.

On October 6, 1992, the Pattersons filed a twenty-count complaint in the United States District Court for the Eastern District of Virginia and named as defendants Providence and some twenty-six other entities and individuals, including its officers, directors, employees, attorneys, appraisers, shareholders and corporate affiliates of its shareholders. Subject matter jurisdiction was predicated upon claims against all defendants under Sec. 1 of the Sherman Act, 15 U.S.C. Sec. 1, and claims against certain defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1962. The complaint included state law claims over which the district court had supplemental jurisdiction pursuant to 28 U.S.C. Sec. 1367. One of the state law claims alleged fraudulent conveyance under Va.Code Ann. Sec. 55-80. 8

On October 20, 1992, Providence filed a motion to dismiss count one of the complaint, the state law fraudulent conveyance claim. By order dated October 30, 1992, the district court dismissed that claim. The district court reasoned that the bankruptcy court, in lifting the stay, had concluded that the Pattersons had no equity in the Property; this matter, the district court stated, had been fully litigated in the bankruptcy court. The district court also held that Sec. 55-80 did not apply to procedurally conforming foreclosure sales. Finally, it determined that no fraud had been adequately pleaded or shown to sustain a cause of action under Sec. 55-80 against Providence.

On December 7, 1992, the district court denied the Pattersons' motion for reconsideration of its order of October 30, 1992.

On November 16, 1992, the defendants filed a motion to dismiss all remaining counts of the complaint. By order dated December 18, 1992, the district court granted the motion and dismissed the two federal claims, Fed.R.Civ.P. 12(b)(6). Because this dismissal extinguished the district court's supplemental jurisdiction over the remaining state claims, they were dismissed without prejudice. Although the district court granted the Pattersons ten days in which to file an amended complaint, no amended complaint was filed.

The Pattersons appeal the district court's dismissal of their Sec. 55-80 fraudulent conveyance claim for failure to state a claim upon which relief can be granted. The Pattersons also appeal the district court's Rule 12(b)(6) dismissal of the claim which was based upon Sec. 1 of the Sherman Act. 9

On December 18, 1992, the Pattersons refiled in the Circuit Court for Fairfax County, Virginia, the same complaint, minus only the Sherman Act and RICO claims, that had been dismissed by the district court. That action was dismissed.


The standard of review of a Rule 12(b)(6) dismissal is de novo. Schatz v. Rosenberg, 943 F.2d 485, 489 (4th Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992). This court will construe factual allegations in the nonmoving party's

favor and will treat them as true, but is not so bound with respect to the complaint's legal conclusions. Martin Marietta Corp. v. International Telecommunications Satellite Org., 978 F.2d 140, 142 (4th Cir.1992). We will affirm a dismissal for failure to state a claim only if it appears that "the plaintiffs would not be entitled to relief under any facts which could be proved in support of their claim." Schatz, 943 F.2d at 489.

Section 55-80 of the Virginia Code provides:

Void Fraudulent Acts; Bona fide Purchasers Not Affected.--

Every gift, conveyance, assignment or transfer of, or charge upon, any estate, real or personal, every suit commenced or decree, judgment or execution suffered or obtained and every bond or other writing given with intent to delay, hinder or defraud creditors, purchasers or other persons of or from what they are or may be lawfully entitled to shall, as to such creditors, purchasers or other persons, their representatives or assigns, be void. This section shall not affect the title of a purchaser for valuable consideration, unless it appears that he had notice of the fraudulent intent of his immediate grantor or of the fraud rendering void the title of such grantor.

Historically, this section of the Code has provided protection to creditors fraudulently deprived of their interest in property. Christian v. Gray Endowment, 33 F.2d 759, 760 (4th Cir.1929) (hold...

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