Inspiration Coal, Inc. v. Mullins, Civ. A. No. 87-0241-B.

• Decision Date: 23 June 1988
• Docket Number: Civ. A. No. 87-0241-B.
• Court: U.S. District Court — Western District of Virginia
• Parties: INSPIRATION COAL, INC., et al, Plaintiffs, v. James E. MULLINS, Sr., et al, Defendants.

690 F. Supp. 1502

INSPIRATION COAL, INC., et al, Plaintiffs, v. James E. MULLINS, Sr., et al, Defendants.

Civ. A. No. 87-0241-B.

United States District Court, W.D. Virginia, Big Stone Gap Division.

June 23, 1988.

Stephen M. Hodges, Mark L. Esposito, Abingdon, Va., for plaintiffs.

Carl E. McAfee, Norton, Va., Mary Jane Hall, Norfolk, Va., Buddy H. Wallen, Clintwood, Va., for defendants.

MEMORANDUM OPINION

GLEN M. WILLIAMS, District Judge.

The following are parties to this suit: Inspiration Coal, Inc. (Inspiration), a Delaware corporation with its principal place of business in Tennessee; Wheelright Mining Company, Inc. (Wheelright), a Kentucky corporation with its principal place of business in Kentucky; James E. Mullins, Sr. and Ada Marie Mullins, husband and wife, both of whom are Virginia residents; First Virginia Bank of the Cumberlands (First Virginia), a Virginia corporation with its principal place of business in Virginia; Sovran Bank, N.A. (Sovran), a banking association organized under the laws of the United States, with its principal place of business in Virginia, and Kenneth P. Asbury, Substitute Trustee for one of the deeds of trust in dispute.

Inspiration and Wheelright filed suit to have certain deeds of trust set aside as voluntary and fraudulent conveyances pursuant to Va. Code §§ 55-80 and 55-81 (1965). Sovran filed a counterclaim seeking a declaration that other deeds granted on Florida and Tennessee property are valid in order to settle the dispute over the entire transaction in one forum. The Mullinses granted these interests to Peoples Bank of Pound (PBP) and Sovran Banks. To date, the court has enjoined the trustee and First Virginia (successor to PBP under the deeds) from selling land subject to the deeds of trust pending adjudication of this dispute. Mullins has also impleaded other parties under theories of contribution/indemnification and "conspiracy to do damage" in violation of Va. Code § 18.2-499 (1984) (combination to injure others in their reputation, trade, business or profession). The court dismissed the contribution/indemnification count and only the § 18.2-499 count remains in the third party suit. Inspiration Coal, Inc. v. Mullins, ___ F.Supp. ___, (No. 87-0241-B) (W.D.Va. April 14, 1988) (unpublished).

This case is now before the court due to several motions for summary judgment pursuant to Fed.R.Civ.P. 56. Inspiration and Wheelright move for summary judgment on their claim that the deeds of trust are voluntary conveyances pursuant to § 55-81. Sovran Bank also moves for summary judgment on both the voluntary and fraudulent conveyance counts and its counterclaim. As there are neither disputed issues of material fact nor affidavits seeking further discovery pursuant to Fed.R. Civ.P. 56(f), the court sets forth its opinion on the merits of the motions.

FINDINGS OF FACT

The answers, interrogatories, depositions, exhibits, affidavits and briefs depict a complicated history to this dispute. For Inspiration and Wheelright, the relevant history begins with a suit entered in the United States District Court for the Eastern District of Kentucky they had filed against Jim Ed Mullins, Sr. under the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C.A. § 1962 (West 1984), 18 U.S.C.A. § 2314 (West 1970) (interstate transport of stolen goods) and common law fraud theories. The Kentucky court imposed sanctions pursuant to Fed.R. Civ.P. 37 resulting in a default judgment against Mullins, Sr. for $694,597.41 (the RICO trebled amount plus attorney's fees). Inspiration and Wheelright registered the judgment in this District and recorded it in the Judgment Lien Docket of the Circuit Court of Wise County, Virginia on October 24, 1986. This suit seeks to collect on the RICO judgment by setting aside as voluntary and fraudulent the deeds on Virginia property Mullins, Sr. granted to PBP and Sovran Bank.

From the banks' perspective the event leading to this suit was the collapse and discovery of a check kiting scheme. Mullins Coal Sales, Inc. (MCS), of which Mullins, Sr. and Mullins, Jr. are principals, had checking accounts at both PBP and Sovran. By simultaneously drawing on one account and depositing in the other, MCS artificially created funds through use of the float to cover checks which should have been dishonored. Once the scheme collapsed, the Sovran account was overdrawn by $590,000, the amount of the check drawn on the PBP account that Sovran dishonored. The PBP account was overdrawn by $653,000, the amount of a check drawn on the Sovran account which PBP dishonored.

Each bank scrambled to protect itself from loss. According to the affidavit of William B. Bell, III, a First Vice-President and Commercial Loan Officer of Sovran familiar with the credit relationship, he notified all accounts receivable debtors of Mullins Coal to make payments directly to Sovran, which reduced the overdraft to $229,327 by September 24, 1986. Next, Bell met with Mullins to discuss repayment of his personal and company's debts. Sovran made Mullins Coal, Mullins, Sr., Mullins, Jr. and their respective wives another loan for $600,000, ostensibly to give the firm another chance to prove the firm was a viable operation and could repay its debts. From this loan, $229,327 was used to cover the balance remaining on the overdraft while the remainder was used for operating expenses. As security for this loan and other outstanding indebtedness, Mullins, Sr., Mullins, Jr. and their respective wives executed a credit line deed of trust dated September 24, 1986, later supplemented by a supplemental credit line deed of trust dated October 6, 1986, on certain tracts in Wise County, Virginia. These two trusts are those Inspiration and Wheelright seek to have set aside as voluntary. Mullins, Sr. and his wife also granted a mortgage on some Florida property and a deed of trust on some Tennessee property, which are the subject of Sovran's declaratory judgment counterclaim.

PBP took similar action. Although Mullins, Sr. had executed an unconditional guarantee for all MCS overdrafts up to $700,000 in the PBP account, he granted PBP a deed of trust on September 9, 1986 in the same property subject to the Sovran deeds of trust. The PBP trust secured a single payment demand note for the amount of the PBP overdraft ($653,000) signed by Mullins, Sr., in his official and personal capacity, Mullins, Jr. and their respective wives. This note was never funded, the overdraft being technically carried on bank records in the "nonaccrual loans" account. These same parties executed a second deed of trust on September 18, 1986, which was identical to the September 9 deed of trust, except it secured all current and future indebtness of the Mullinses and MCS. This was done on the advice of counsel, according to Jim Hughes, formerly Executive Vice-President of PBP, who was familiar with the credit transactions. These two deeds of trust are those Inspiration and Wheelright seek to have declared voluntary.

CONCLUSIONS OF LAW

Va. Code § 55-81 provides that:

Every gift, conveyance, assignment, transfer or charge which is not upon consideration deemed valuable in law, or which is upon consideration of marriage, shall be void as to creditors whose debts shall have been contracted at the time it was made, but shall not, on that account merely, be void as to creditors whose debts shall have been contracted or as to purchasers who shall have purchased after it was made; and though it be decreed to be void as to a prior creditor, because voluntary or upon consideration of marriage, it shall not, for that cause, be decreed to be void as to subsequent creditors or purchasers.

To prove that this section applies, plaintiffs must show that they were existing creditors of James E. Mullins, Sr. when he granted the deeds in dispute and that the transfer was "not upon consideration deemed valuable in law." See Battle v. Rock, 144 Va. 1, 10-11, 131 S.E. 344, 346 (1926) (identical former provision). The parties dispute only the second element, not the first. The analysis must therefore focus on what Mullins surrendered in consideration for the deeds of trust he granted to the banks.

Plaintiffs emphasize application of the "balance sheet" test to determine whether Mullins, Sr. received "consideration deemed valuable in law" for the deeds of trust in question. Allegedly, he granted the interests and gained nothing in return. The debts secured by the deeds were those of MCS and not Mullins, Sr. himself. And, in the case of PBP, plaintiffs maintain that the note Mullins, Sr. executed was unfunded. The bank neither gave Mullins his share of the $653,000 nor credited the amount to the overdraft. Instead, PBP carried the overdraft in non-accrual status. Even if the note had been funded, there was no consideration because Mullins, Sr. was not relieved of a legal obligation. "Ultimately it is the receipt...