In re Decker

• Citation: 295 F. Supp. 501
• Decision Date: 06 January 1969
• Docket Number: 707.,No. 706,706
• Court: U.S. District Court — Western District of Virginia
• Parties: In the Matter of Sterling R. DECKER and Sterling R. Decker & Mary Jane Decker, Partners, t/a Berkeley Community Builders, Bankrupt.

295 F. Supp. 501

In the Matter of Sterling R. DECKER and Sterling R. Decker & Mary Jane Decker, Partners, t/a Berkeley Community Builders, Bankrupt.

Nos. 706, 707.

United States District Court W. D. Virginia, Charlottesville Division.

January 6, 1969.

COPYRIGHT MATERIAL OMITTED

B. B. Woodson and Robert M. Musselman, Charlottesville, Va., for Bankrupt.

Carl E. Hennrich, Charlottesville, Va., for George Gilmer.

Philip Hickson, Lynchburg, Va., Referee in Bankruptcy.

OPINION and JUDGMENT

DALTON, Chief Judge.

The questions presented in this proceeding arise out of petitions for review of two orders of the referee in bankruptcy concerning Sterling R. Decker and Mary Jane Decker, his wife and partner, trading as Berkeley Community Builders.

The first order dated September 11, 1968, reaffirms the referee's conclusions contained in a previous order of June 26, 1967, which had been reconsidered in the light of additional pleadings and oral argument. The order of September 11, 1968, concerns issues upon remand from a decision of the Court of Appeals for the Fourth Circuit, Gilmer v. Woodson, 332 F.2d 541 (4th Cir. 1964), which upheld the validity of a deed of trust, dated March 27, 1961, securing a bond of the same date in the amount of $260,000. Upon remand the trustee in bankruptcy, B. B. Woodson, renewed his attacks on the validity of this deed of trust under the provisions of sections 67(d) and 70 of the Bankruptcy Act, 11 U.S.C. §§ 107(d) and 110. The referee reaffirmed the validity of this deed of trust by the order dated September 11, 1968, and the trustee now petitions for review of such order.

The other order herein reviewed is dated August 23, 1968, and deals with the validity, under section 67(d) (2) of the Bankruptcy Act, of two supplemental deeds of trust executed by the bankrupt as additional security for the $260,000 bond mentioned above. The order of August 23, 1967, held these two supplemental deeds to be fraudulent transfers, and from this order George Gilmer, a creditor of the bankrupt, petitions this court for review.

The facts, as gleaned from the voluminous records of these proceedings and as found by the referees, the Court of Appeals for the Fourth Circuit in Gilmer v. Woodson, 332 F.2d 541 (4th Cir. 1964), and the Supreme Court of Appeals of Virginia in Woodson v. Gilmer, 205 Va. 487, 137 S.E.2d 891 (1964), are as follows.

In December, 1956, Sterling R. Decker and Charles Hurt purchased a tract of 110.68 acres of land in Albemarle County, Virginia, for the purpose of developing and selling the land as residential lots. On April 26, 1957, Hurt conveyed a two-sixths interest in the property to George Gilmer, Sr., and George Gilmer, Jr., pursuant to an agreement executed the same day by the Gilmers, Decker and Hurt. A few days thereafter Hurt conveyed his remaining one-sixth interest in the property to David J. Wood, Jr., and Joseph M. Wood, II. By an addendum to the April 26th agreement, signed by the Gilmers, the Woods, and Decker, the parties agreed that the two Woods were accepted as partners by the other parties in place of Hurt.

The agreement of April 26, 1957, provided that Decker would manage the development of the subdivision of the 110.68 acres of land, known as "Berkeley." Assessments for roads and other improvements were to be made by Decker and were to be borne by all the partners. Decker was given the option to purchase the one-half interest of his co-owners in the first fifty-three lots at the rate of $1,000 per lot, and in additional lots at the rate of $1,250 per lot, provided that he purchase at least three lots per month beginning in 1958. Questions of policy were to be decided by vote of the owners, who would vote according to their respective shares of the property. Although there is no provision in the agreement expressly dealing with the manner in which profits were to be shared, it appears that Decker was to derive his own profits, if any, from the resale of lots after he had exercised his option in purchasing the outstanding interests of the co-owners. This agreement, together with the subsequent business transactions and conduct of the parties, was sufficient to convince the Supreme Court of Appeals of Virginia that a partnership existed between Decker, the Gilmers and the Woods, "to pool their land and money, and in some instances talent and labor, for the improvement of the property." Woodson v. Gilmer, 205 Va. at 493, 137 S.E.2d at 895.

In 1957 Decker began the development of the Berkeley property in partnership with his wife under the name of Berkeley Community Builders. In the development of Berkeley subdivision, entailing the purchase of his partners' outstanding interests in the lots, the furnishing of utilities, the resale of the lots and building houses thereon for the ultimate purchasers, Decker required large amounts of capital which he could not provide. He therefore arranged with Mr. Adams, an officer at the Peoples National Bank (now the Virginia National Bank), to obtain funds from the bank upon the personal credit of George Gilmer, Sr., who was a close friend of Decker and was his attorney throughout the period here discussed. Under this arrangement, Decker would secure the necessary funds by executing unsecured promissory notes, obtaining the endorsement of Gilmer thereon for a fee.

This credit arrangement with Gilmer and the bank continued for approximately two years, during which time it clearly appeared that when Decker devoted his time and attention to the Berkeley project it could be made a highly profitable operation. A large number of lots, said to be ninety, were sold by Decker prior to the early months of 1961. However, Decker began to neglect the Berkeley project, apparently because of involvement in unrelated ventures which attracted his interest and, as it turned out, depleted his resources. Without the knowledge or consent of Gilmer or the bank, Decker had been diverting funds borrowed through Gilmer's credit to his other business ventures. Several of Decker's creditors began pressing him for payment, and on several occasions the Deckers' checking account was overdrawn.

Both Mr. Adams at the bank and Gilmer became aware of the unsatisfactory condition of Decker's financial affairs in early 1961. As of March 27, 1961, the bank was holding promissory notes made by Decker and endorsed by Gilmer totaling $249,199.31. In view of this heavy financing of Decker, both Gilmer and Adams decided that some sort of control over Decker's financial affairs would be necessary in order to keep track of his activities and get him to concentrate his efforts on the Berkeley project. In the discussions between Gilmer and Adams in the weeks preceding March 27, 1961, it was suggested by Adams, and agreed to by Gilmer, that Decker should put up some security for his notes with the bank.

On March 27, 1961, Decker and his wife executed a deed of trust, covering virtually all of their real estate, together with a bond payable to bearer on demand in the amount of $260,000, with interest at the rate of 6%, secured by the deed of trust. The bond and the deed of trust were held by the bank as collateral security for the payment of the promissory notes executed by Decker and endorsed by Gilmer. The testimony of Adams, Gilmer and Decker concerning this transaction is not in conflict. Gilmer explained that the purpose of the deed of trust was, first, to secure the indebtedness, second, to have a base upon which Decker could continue to be financed, and third, to restrict Decker's activities to Berkeley.

Contemporaneously with this plan, an "escrow" account, under the control of Gilmer, and a "reserve" account under the control of the bank and Gilmer, were set up to handle the income and expenses attributable to the Berkeley project. Proceeds from the sales of lots by Decker were to be deposited in the "reserve" account. With the approval of Gilmer, Adams would draw checks on the "reserve" account for payment of the various expenses of the Berkeley project, for payment of Decker's personal obligations, and for purchases by Decker of the outstanding interest of the other partners in Berkeley lots. Funds deposited in the "escrow" account would arise from the proceeds of the construction of houses by Decker for purchasers of Berkeley lots.

The $260,000 bond was drawn in an amount in excess of the then aggregate amount of Decker's notes endorsed by Gilmer to enable the bank to subsequently lend more money to Decker and bring these loans under the security thus afforded. However, there was no definite understanding among the bank, Gilmer and Decker as to the extent of future credit to be afforded Decker, other than that the amount of Decker's debt would first be reduced.

In the spring and summer of 1961, the Berkeley project took an upturn under Decker's management. According to Decker's testimony, approximately thirty lots were sold and the construction of houses on several of these lots was undertaken. However, it does not appear that these sales were primarily due to the new financing plan. Decker testified that the sales occurred because it was the spring of the year, the usual time for such sales. The chief contribution of the bank and Gilmer seems to have been the bank's extension of credit to purchasers under the security of the blanket deed of trust, Gilmer's management of the reserve and escrow accounts, and deferment of collection of the overdue notes of the bankrupt. As stated by the referee:

This deferment was undoubtedly due to the fact that through the new financing plan the services of Decker were retained to promote and conduct the continued development of properties in the Berkeley project. Decker alone sold the lots and sold the contracts for construction of dwellings. These sales by Decker introduced new lines of credit offered by the purchasers. This permitted a liquidation of Berkeley lots and the prospect of construction profits

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