Tauber v. Com. ex rel. Kilgore

• Decision Date: 19 April 2002
• Docket Number: Record No. 011150.
• Citation: 562 S.E.2d 118,263 Va. 520
• Parties: Laszlo N. TAUBER, et al. v. COMMONWEALTH of Virginia, ex rel. Jerry W. KILGORE, Attorney General of Virginia, et al.
• Court: Virginia Supreme Court

562 S.E.2d 118

263 Va. 520

Laszlo N. TAUBER, et al. v. COMMONWEALTH of Virginia, ex rel. Jerry W. KILGORE, Attorney General of Virginia, et al.

Record No. 011150.

Supreme Court of Virginia.

April 19, 2002.

Stephen D. Rosenthal, Richmond (Gaspare J. Bono, Adrian Mollo, Cameron Cohick, Washington, DC; Philip J. Hirschkop, Alexandria; Troutman, Sanders, Mays & Valentine, Richmond; Long, Aldridge & Norman, Washington, DC; Hirschkop & Associates, Alexandria, on briefs), for appellants

Marc E. Bettius (Debra Fitzgerald-O'Connell, Pulaski; Ina C. Charvet, Arlington; Jerry W. Kilgore, Atty. Gen.; David B. Ivin, Richard S. Schweiker, Jr., Senior Asst. Attys. Gen.; S. Randolph Sengel, Commonwealth's Atty.; Lawson & Frank, Arlington, on briefs), for appellees.

Present: All the Justices.

Opinion by Justice KEENAN.

In this appeal, we consider issues related to an accounting of the assets of a defunct charitable corporation. The chancellor awarded $20 million and certain real property to the Commonwealth for the public benefit after imposing a constructive trust on the assets of the corporation whose charter was revoked in 1973.

We initially considered issues arising from the diversion of assets of Jefferson Memorial Hospital, Inc. (JMHI) in Tauber v. Commonwealth, 255 Va. 445, 499 S.E.2d 839 (1998) (Tauber 1). There, we affirmed the chancellor's judgment imposing a constructive trust on the assets of the defunct charitable corporation and we remanded the case to the chancellor for further proceedings. Id. at 450-51, 456, 499 S.E.2d at 842, 845. We will recite the relevant facts in the proceedings to date, including the inferences fairly deducible from those facts, in the light most favorable to the Commonwealth, the prevailing party below. Id at 452, 499 S.E.2d at 843; Hoffman Family, L.L.C. v. Mill Two Assocs. P'ship, 259 Va. 685, 696, 529 S.E.2d 318, 325 (2000).

Our standard of review on appeal is well established. As the trier of fact, the chancellor evaluated the testimony and the credibility of the witnesses. Johnson v. Cauley, 262 Va. 40, 44, 546 S.E.2d 681, 684 (2001); Advanced Marine Enters., Inc. v. PRC Inc., 256 Va. 106, 120, 501 S.E.2d 148, 156 (1998). Therefore, we will not set aside his findings on appeal unless they are plainly wrong or without evidence to support them. Nelson v. Davis, 262 Va. 230, 234, 546 S.E.2d 712, 715 (2001); Hudson v. Pillow, 261 Va. 296, 302, 541 S.E.2d 556, 560 (2001).

I. BACKGROUND FROM TAUBER I

In the early 1960s, King Street Joint Venture (KSJV), through Laszlo N. Tauber, M.D., as trustee, acquired by deed and lease certain parcels of real estate located in the City of Alexandria. In 1963, JMHI obtained a charter in the state of Maryland as a "for-profit" corporation for the purpose of operating a hospital in Alexandria to be built on the acquired parcels of real estate. In 1964, JMHI amended its corporate charter to become a non-profit corporation and began operating the new hospital the following year. In 1966, KSJV was dissolved and its assets were transferred to Jefferson Memorial Hospital Associates (JMHA), a partnership conducted by Tauber as trustee. In 1971, Jefferson Memorial Hospital Corporation (JMHC), a Delaware "for-profit" corporation, was formed and acquired the assets and liabilities of JMHA. Soon thereafter, a purported merger was attempted between JMHC and JMHI. As we observed in Tauber I, while "[t]his merger was reported on tax returns filed in 1972, ... the record is devoid of documents to support such a transaction." Id. at 453, 499 S.E.2d at 843.

Also in 1972, the Internal Revenue Service issued a ruling revoking JMHI's tax-exempt status, retroactive to 1965, finding that JMHI engaged in transactions that resulted in "inurement of income to private individuals," in violation of Internal Revenue Code provisions allowing charitable corporations exemption from federal income taxation. In 1973, Maryland revoked JMHI's corporate charter.

In 1975, JMHC purportedly purchased the assets and assumed the liabilities of JMHI. The directors of JMHC thereafter authorized the transfer of all JMHC's assets to Tauber as trustee for Jefferson Memorial Hospital Joint Venture (JMHJV), "a partnership in which those assets apparently still reside." Id. at 449, 499 S.E.2d at 841. That same year, JMHJV "leased back" the transferred assets to JMHC.

In 1982, JMHC subleased Jefferson Memorial Hospital's operating license, liabilities, plant, equipment, and tangible and intangible assets to Health Group of Virginia, Inc. (HGV), a Tennessee corporation, for ten years in exchange for annual payments of about $1 million. A maximum of $240,000 of this amount was allocated toward payment of lease obligations owed to JMHJV, including payment of the $1.4 million mortgage that JMHJV had assumed from JMHI as part of the 1975 purported sale and "leaseback" transaction.

JMHJV amended its lease with JMHC to provide that JMHC would assign the proceeds from its sublease with HGV to JMHJV, except for the first $100,000 annually, in effect increasing JMHC's rental payments from $240,000 to $900,000 per year. Following the execution of this lease amendment, JMHJV built a new office building and garage complex (the Beauregard Building). JMHC later changed its name to Jefferson Corporation of Alexandria (JCA).

In 1985, Tauber alleged that HGV had breached the terms of its lease and negotiated a termination and buy-out of the 1982 agreement by Fairfax Hospital Systems (INOVA). INOVA acquired HGV's stock for $5.8 million. In a lease agreement with JCA, in exchange for the operating license rights of the hospital, INOVA agreed to pay annual rent of about $1,375,000 under provisions that escalated to about $2.2 million in the year 2005. On the same date the INOVA lease was executed, JCA assigned "all of its right, title and interest" in the INOVA lease to Tauber as trustee for JMHJV.

In 1992, INOVA discovered problems in the chain of title to the hospital, which ultimately resulted in litigation between INOVA and JMHJV. In 1994, INOVA and JMHJV reached a settlement agreement (the 1994 INOVA Agreement), in which INOVA purchased all rights to operate the hospital, including the right to terminate hospital operations. Under the 1994 INOVA Agreement, possession of the land and hospital building reverted to JMHJV. In exchange for the operating license rights of the hospital, INOVA agreed to pay JMHJV over $2 million per year, with a final payment of $10 million in 2005.

In 1996, the Commonwealth of Virginia, ex rel. the Attorney General of Virginia and the Commonwealth's Attorney for the City of Alexandria (collectively, the Commonwealth), filed an amended bill of complaint against Tauber and nine other physicians. Each was sued "individually and as former directors and/or trustees and/or trustees in liquidation of [JMHI] ... and/or its successors in interest, and/or as partners in [JMHA] ... or [JMHJV], ... and/or directors or shareholders of [JMHC] (a Delaware Corporation which changed its name to `Jefferson Corporation of Alexandria')" (collectively, the defendants). The defendants also included JMHA, JMHJV, and JCA, as well as Tauber in his capacity as trustee and agent for JMHA and JMHJV.

In its amended bill of complaint, the Commonwealth alleged that the 1971 purported merger between JMHI and JMHC never occurred. The Commonwealth asked that the chancellor declare, among other things, that the defendants usurped JMHI's corporate opportunities and, thus, that legal title to JMHI's assets remained in JMHI. The Commonwealth also requested that the chancellor impose a constructive trust on the hospital building, the underlying land, equipment, and assets, and on the proceeds from the 1994 INOVA Agreement.

The chancellor held that the Commonwealth was entitled to the relief sought in its bill of complaint. In a March 1997 order, the chancellor declared that "the assets and liabilities of [JMHI] be, reside and remain with [the defendants] as trustees and further that a constructive trust be ... imposed on such assets and liabilities." The chancellor also ordered the defendants to submit "a full and complete accounting of all assets and liabilities" that were subject to the chancellor's ruling.

In Tauber I, we affirmed the chancellor's judgment. Id. at 456, 499 S.E.2d at 845. We stated, in relevant part:

The record amply supports the following findings of the chancellor. "There are numerous transactions shown, some of-record and some not, dealing with the real estate, the equipment, the leases, and the use of tax benefits. The transactions show an entire course of self-dealing by the directors of the charity. They were able to acquire interests in the real estate, the equipment and lease, and were able to use tax benefits belonging to the former charity to enhance the gain of the for-profit corporation. The record is replete with discussions among [defendants] as to their personal profits and gains with no reference to the best interests of the beneficiaries nor of the charitable corporation. The result was the total obliteration of the nonprofit corporation."

Id. at 453-54, 499 S.E.2d at 843-44. We held that after the 1973 revocation of JMHI's corporate charter, by operation of law, JMHI's directors became trustees in dissolution of the charity. Id. at 455, 499 S.E.2d at 844. We stated that any actions thereafter taken by the defendants "as corporate officers, and not done to wind up or liquidate the business, were without effect because there was no corporation for which to act." Id., 499 S.E.2d at 844-45. We also concluded that the record clearly demonstrated that the defendants "failed and refused to execute the trust," and we remanded the case to the chancellor for further proceedings. Id. at 456, 499 S.E.2d at 845.

II. EVIDENCE ON REMAND

On remand, the chancellor considered evidence concerning the value of JMHI's assets that were subject to the constructive trust. The record...