Luria v. BOARD OF DIRECTORS OF WESTBRIAR

PRESENT: Keenan, Koontz, Kinser, Lemons, Goodwyn, and
Millette, JJ., and Carrico, S.J.

JON LURIA, ET AL.
OPINION BY
v. Record No. 080515 JUSTICE LEROY F. MILLETTE, JR.
February 27, 2009
BOARD OF DIRECTORS
OF WESTBRIAR CONDOMINIUM
UNIT OWNERS ASSOCIATION

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Kathleen H. MacKay, Judge

In this appeal, we consider whether the circuit court

erred in finding that a managing member of a limited liability

company owed a fiduciary duty to a creditor. We focus our

inquiry on whether The Westbriar Condominium Unit Owners

Association (the Association), as a potential statutory

warranty claimant, qualified as a creditor to whom such a

fiduciary duty may be owed.

BACKGROUND

Jon Luria (Luria) is a real estate developer in Northern

Virginia. In 1996, Luria began construction of The Westbriar

Condominium (the Westbriar), a four building, 224-unit

condominium in Fairfax. 1 Throughout construction of the

Westbriar, Luria used a corporation and two limited liability

companies (LLCs) to successively hold title to and manage

1
The Westbriar attained its status as a condominium by the
May 12, 1998 recordation of a Declaration of The Westbriar
Condominium, as required by Code § 55-79.45.
development of the project. Each of these three entities (the

Declarants) also served as a declarant of the Westbriar.

The first entity to hold title was Jade Westbriar, Inc., a

Virginia corporation, which was formed in 1996. Jade

Westbriar, Inc. was 100% owned by Ellen Luria. In 1998, Jade

WFW, LLC was formed and was owned 50% each by Jon and Ellen

Luria. In 2001, The Westbriar, LLC was formed to manage the

completion of the Westbriar project and was also owned 50% each

by Jon and Ellen Luria. Luria was a member of and was the

manager of both Jade WFW, LLC and The Westbriar, LLC.

During construction of the project, Luria did not honor

general and administrative costs as provided in the agreements

with lenders and made a series of improper transfers and draws

of funds from the various entities. The circuit court adopted

the Association’s contention that the improper transfers Luria

made to himself took place from 1996 through the end of 2002.

On the exterior of the Westbriar buildings, Luria used an

alternative to stucco or siding, the Exterior Insulation and

Finish System (the EIFS). Luria hired a reputable, certified

contractor to install the EIFS, and the installation was

certified after its completion, in compliance with Fairfax

County building regulations.

On June 8, 1999, Christian J. Lessard, the Westbriar’s

project architect, sent Luria a letter identifying ten specific

2
categories of problems with the construction that Lessard

discovered during his substantial completion walk through. Two

of the problems related to the EIFS. Specifically, Lessard’s

letter stated that flashing and caulking were needed in certain

areas. The letter also suggested that a moisture meter be used

to verify that there were no moisture problems behind the EIFS.

On June 17, 1999, Luria and Lessard executed an indemnification

agreement, which provided that Luria would indemnify Lessard

from any liability that may arise from Luria’s failure to

perform the work necessary to correct the problems in Lessard’s

letter.

On October 23, 2000, Lessard provided Luria with a field

report that Lessard prepared pursuant to another substantial

completion review. The field report listed twenty-one specific

comments and itemized various problems with individual units.

Three of the twenty-one comments listed related to the EIFS.

Specifically, two of the comments referenced flashing and

caulking of the EIFS and one suggested that Luria hire a “water

proofing engineer” to verify all flashing applications. On

July 30, 2002, control of the Association passed to the unit

owners. Thereafter, the Association hired an engineering firm,

Engineering and Technical Consultants, Inc. (Engineering

Consultants), to conduct a warranty inspection “for the purpose

of identifying structure defects, as defined by the Condominium

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Act.” On December 23, 2002, Engineering Consultants submitted

a report to the Association’s counsel that detailed several

defects in the Westbriar. The report noted that the EIFS was

in “poor condition” and made recommendations to fix the various

problems associated with the EIFS. Engineering Consultants

estimated the cost to repair the EIFS defects could amount to

as much as $3,730,000.00. By a letter dated March 12, 2003,

the Association’s counsel advised Luria of defects in the EIFS

within the scope of the statutory warranty.

Engineering Consultants conducted a follow up inspection

specifically addressing the EIFS and prepared a supplemental

report. The supplemental report, submitted to the

Association’s counsel on May 5, 2003, noted that the defects in

the EIFS were “systematic and comprehensive” and recommended

that the EIFS be “completely removed and replaced.”

On May 9, 2003, the Association filed a motion for

judgment against the Declarants, Jon Luria, Ellen Luria, and

others. Subsequently, the Association amended its motion for

judgment, and alleged the defendants constructed the buildings

with major structural defects and the Lurias used the entities

they controlled to fraudulently avoid obligations owed to the

Association as a creditor. The amended motion for judgment

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contained six counts, which included counts III and V. 2 Count

III alleged that by making improper transfers and distributions

for his own benefit, Luria breached his fiduciary duty to the

Association as a creditor. Count V alleged that the improper

transfers to Luria constituted illegal distributions by the

Declarants.

The circuit court conducted a bench trial and issued a

letter opinion, awarding judgment against Luria on both counts

III and V. The circuit court based its finding of liability

for breach of fiduciary duty to the Association as a creditor

under count III on Marshall v. Fredericksburg Lumber Company,

162 Va. 136, 173 S.E. 553 (1934).

In Marshall, this Court held that “where there are

existing creditors of a corporation the stockholders will not

be permitted, as against those creditors, to withdraw the

assets of the corporation without consideration, whether it be

done through a purchase of stock by the corporation or

otherwise.” Id. at 147, 173 S.E. at 557. In its letter

opinion, the circuit court stated that “Luria’s conduct of

2
Under count I, the circuit court concluded that the
Declarants breached the statutory warranty under Code § 55-
79.79 and assessed damages against the Declarants in the amount
of $5,813,416.00. Under count VII (alter ego liability)
judgment was entered against both Jon and Ellen Luria in the
amount of $5,813,416.00. Counts II, IV, and VI were dismissed.

5
withdrawing the declarants’ assets falls within the conduct

contemplated and prohibited by the Court in Marshall.”

The circuit court determined that “[Luria’s] liability as

[a] fiduciar[y] to the Association is contingent upon a finding

that the Association was a creditor [of the Declarants] when

the improper preferences were made.” In making this

determination, the circuit court first addressed “whether a

potential statutory warranty claimant can be considered a

‘creditor.’ ” The circuit court analyzed cases regarding

claimants who had not yet reduced their demands to judgment,

including potential tort claimants. Finding no meaningful

distinction between potential tort claimants and potential

statutory warranty claimants, the circuit court concluded the

Association was a “creditor of the Declarants” based upon

notice to Luria of the Association’s potential statutory

warranty claim.

The circuit court stated that the “weight of the evidence

showed that by virtue [of] the information [he] received on

site and/or from [his] experience in the development and

construction industries [, Luria] knew that there were problems

regarding the EIFS installation.” In reaching this

determination, the circuit court stated that the evidence it

principally relied upon was Lessard’s letter, the

6
indemnification agreement between Luria and Lessard, and the

October 23, 2000 field report.

Based upon its determination that Luria was on notice of

“serious structural defects” from the use and installation of

the EIFS at the Westbriar, the circuit court found that the

Association was a creditor of the Declarants from the first

outsale of condominium units in June of 1998. The circuit

court then adopted the Association’s position that Luria, as

the Declarants’ controlling member, directed transfers and

distributions to his own benefit from 1996 through 2002. The

circuit court concluded that Luria’s withdrawal of the

Declarants’ assets constituted self-dealing and was a breach of

the fiduciary duty he owed to the Association as a creditor of

the Declarants. The circuit court ordered Luria to refund the

sum of $3,484,363.40. The circuit court used the same analysis

in awarding the Association identical relief against Luria

under count V for illegal distributions by the LLCs. We

granted Luria this appeal only as to the issue of the duty owed

to a potential statutory warranty claimant, addressed in counts

III and V. 3

3
We will only address the portions of Luria’s assignment
of error that are dispositive to the resolution of this appeal.
See Lynchburg Div. of Soc. Servs. v. Cook, 276 Va. 465, 477,
666 S.E.2d 361, 367 (2008).

7
 DISCUSSION

Luria contends the circuit court erred in finding in favor

of the Association for breach of fiduciary duty to a creditor

and illegal distributions under counts III and V. According to

Luria, this Court has never imposed upon the managing member of

an LLC a fiduciary duty to a third party creditor. Luria also

argues that the Association was not a creditor of the

Declarants because Luria did not have actual notice of any

potential statutory warranty claim. Luria contends the circuit

court erred as a matter of law in finding that the legal right

to potentially assert a claim in the future creates a fiduciary

duty.

In response, the Association argues that the circuit court

properly imposed liability upon Luria under the trust fund

doctrine as articulated in Marshall. The Association asserts

that it was a creditor because Luria had knowledge of defects

that would support a claim for breach of statutory warranty.

The Association also contends that notice of a statutory

warranty claim in this case was not possible because the

Declarants controlled the Association prior to the transfer of

control to the unit owners.

The resolution of the issue before us presents a mixed

question of law and fact, which we review de novo. In our

review of the circuit court’s application of the law to the

8
facts, we give deference to the circuit court’s factual

findings and view the facts in the light most favorable to the

Association, the prevailing party below. Virginia Baptist

Homes, Inc. v. Botetourt County, 276 Va. 656, 663, 668 S.E.2d

119, 122 (2008); The Daily Press, Inc. v. City of Newport News,

265 Va. 304, 309, 576 S.E.2d 430, 432-33 (2003); Caplan v.

Bogard, 264 Va. 219, 225, 563 S.E.2d 719, 722 (2002).

Whether the Association is a creditor is dispositive in

resolving this appeal because the Association’s creditor status

triggers both the creation of a fiduciary duty and imposition

of liability under Marshall. It is an issue of first

impression in Virginia whether a potential statutory warranty

claimant can be considered a creditor.

As an initial matter, this Court has held in addressing

the fraudulent conveyance statute, Code § 55-80, that “[t]o

maintain an action under this statute, the entitlement of one

alleging a fraudulent conveyance need not be judicially

established or reduced to judgment at the time of the

challenged conveyance.” Buchanan v. Buchanan, 266 Va. 207,

212, 585 S.E.2d 533, 535 (2003). Thus, obtaining a judgment

against a party is not a prerequisite to establishing creditor

status. See Bruce v. Dean, 149 Va. 39, 46, 140 S.E. 277, 280

(1927); Johnson v. Wagner & Sons, 76 Va. 587, 590 (1882).

9
 This Court has held that potential tort claimants can be

considered creditors if the putative debtor has adequate notice

of the claim. See Bruce, supra. In Bruce, this Court

addressed whether a convicted murderer’s transfer of assets

should be set aside as a fraudulent conveyance when the

transfer occurred two weeks after the victim’s surviving family

member filed a tort action. Id. at 42-44, 140 S.E. at 279.

For purposes of a fraudulent conveyance, the Court held that

the surviving family member, and potential tort claimant, was a

creditor. Id. at 46, 140 S.E. at 281.

Notwithstanding any functional differences between

potential tort claimants and potential statutory warranty

claimants, the key consideration in establishing creditor

status is whether there was actual notice of a specific

potential claim. The circuit court did not require a showing

of actual notice of the structural defects from the EIFS to

support its conclusion that the Association was a creditor of

the Declarants in 1998. The circuit court implicitly applied a

“should have known” standard when it based its determination of

notice upon “the information [Luria] received on site and/or

from [Luria’s] experience in the development and construction

industries.” In doing so, the circuit court applied an

erroneous legal standard. We hold that the notice required to

10
create creditor status is actual notice of a specific potential

statutory warranty claim.

The Condominium Act creates a statutory warranty against

structural defects for the benefit of condominium purchasers.

Code § 55-79.79(B), in pertinent part, provides: “the

declarant shall warrant or guarantee, against structural

defects, each of the units for two years from the date each is

conveyed.” Code § 55-79.79(B) further provides that

“structural defects shall be those defects in components

constituting any unit or common element which reduce the

stability or safety of the structure below accepted standards

or restrict the normal intended use of all or part of the

structure and which require repair, renovation, restoration, or

replacement.” Based on Lessard’s letter and the October 23,

2000 field report, Luria did not have notice of specific

structural defects with the EIFS. The letter and field report

did not notify Luria of any defect that reduced “stability” or

“safety” of the Westbriar. Rather, the documents contained a

series of “punch list” problems, only some of which addressed

the EIFS, and made a series of recommendations to address the

problems listed.

Assuming, without deciding, that a managing member of an

LLC may owe a fiduciary duty to a third party creditor under

certain circumstances, we hold that the evidence presented at

11
trial was insufficient to establish that the Association was a

creditor upon the first outsale in June of 1998. 4 As previously

stated, the June 8, 1999 letter and October 23, 2000 field

report from Lessard, as well as the indemnification agreement,

establish that Luria was on notice of problems with the EIFS

during construction of the Westbriar. However, these documents

do not establish that Luria had actual notice of a specific

potential statutory warranty claim because the problems noted

were not characterized as structural defects “which reduce[d]

the stability or safety of the structure below accepted

standards or restrict[ed] the normal intended use of all or

part of the structure.” Code § 55-79.79. The recommendations

were to remedy the problems by repairs such as caulking and

flashing. Unlike in Marshall, where the creditor advanced

funds to the debtor corporation, and unlike in Bruce where the

tort claimant had already filed suit when the putative debtor

made a transfer, the evidence in this case failed to

demonstrate that Luria had actual notice of a potential

statutory warranty claim when Luria directed the transfers and

distributions for his own benefit.

4
The arguments presented refer to Luria as a “member” of
the Declarants, however, the evidence presented at trial and
alleged in the pleadings established that Luria was the
managing member of the Declarants. This case was litigated on
the theory that Luria controlled and managed the Declarants,

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 After control of the Association passed to the unit owners

and Engineering Consultants identified structural defects,

actual notice of the specific structural defects was first

received by the Association’s counsel on December 23, 2002.

However, Luria did not have actual notice of the specific

structural defects until he received the March 12, 2003 letter

from the Association’s counsel. Specifically, the letter

stated that there were “widespread defects” with the EIFS as

well as other common elements in the Westbriar. Additionally,

the stated purpose of the letter addressed to Luria was “to

notify you of defects within the Condominium Common Elements

that are within the scope of your statutory warranty.” Upon

receiving this letter, Luria was on actual notice of facts that

would support a specific potential statutory warranty claim.

Thus, the Association became a creditor beginning in March of

2003. Again, assuming, without deciding, that Luria as the

managing member of the Declarants owed a fiduciary duty to the

Association as a creditor in March of 2003, Luria did not

breach that duty by making improper distributions because the

circuit court found that all of the improper distributions

occurred before 2003.

CONCLUSION

and we will not elevate form over substance by disregarding the
true nature of the Association’s claim.

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 The circuit court erred in finding that the Association,

as a potential statutory warranty claimant, was a creditor of

the Declarants at the time transfers were made to Luria because

Luria, as the managing member of the Declarants, did not have

actual notice of the structural defects caused by the EIFS.

Accordingly, the circuit court’s judgment on counts III and V

will be reversed.

Reversed and final judgment.

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