Tauber v. Commonwealth

Present: All the Justices

LASZLO N. TAUBER, ET AL.
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 971155 April 17, 1998

COMMONWEALTH OF VIRGINIA,
ETC., ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA
Alfred D. Swersky, Judge

In this chancery suit, the Attorney General of Virginia and

a commonwealth’s attorney jointly assert jurisdiction in the

name of the Commonwealth over assets located in Virginia held by

trustees in dissolution of a foreign charitable corporation.

The trustees had been directors of the corporation, which

operated a hospital in this State.

A brief summary of the relevant business activities of the

hospital directors will set the stage for this discussion.

Jefferson Memorial Hospital, Inc. (JMHI), was chartered

originally as a for-profit, stock corporation in Maryland in

1963. In 1964, the corporation amended its charter to become a

nonprofit, nonstock charitable entity; it began operations as an

acute-care hospital in Alexandria on March 15, 1965.

In April 1969, the federal Internal Revenue Service began

an investigation leading to revocation of JMHI’s tax-exempt

status, retroactive to November 1, 1965. In 1971, the

corporation’s directors attempted to “merge” JMHI into a for-
profit Delaware corporation, Jefferson Memorial Hospital

Corporation (JMHC). There was an effort to dissolve JMHI and to

transfer its assets and liabilities to JMHC, of which JMHI’s

directors would serve as directors.

In April 1973, Maryland ordered JMHI’s corporate charter

forfeited “for failure to file the necessary corporate personal

property report or failure to pay any late filing penalties

due.”

In 1974, the directors retained counsel “to represent the

Hospital in looking after and insuring that the Hospital

Corporate structure for the past, present, and for the immediate

future, be handled so as to insure that everything is legally

correct and in keeping with the best interest of the investors

of the Hospital,” according to JMHC’s minutes. Counsel

testified that he was “asked to rectify the problem that had

arisen because a supposed merger in ’71 had not been done.”

Unaware that Maryland had revoked JMHI’s charter, counsel

had the directors declare JMHI insolvent and approve transfer of

JMHI’s assets to JMHC. In January 1975, JMHC’s directors

authorized purchase of the assets and assumption of the

liabilities. The directors of JMHC, believing they had

assembled all the assets of the former charity into the for-

profit corporation, agreed to transfer all JMHC’s “assets” to

appellant Laszlo N. Tauber as trustee for appellant Jefferson

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Memorial Hospital Joint Venture (JMHJV), a partnership in which

those assets apparently still reside. The directors also agreed

to lease back from the partnership the transferred assets.

In July 1996, the present suit was instituted by the

Commonwealth of Virginia, ex rel. the Attorney General of

Virginia and the Commonwealth’s Attorney for the City of

Alexandria. The defendants are Tauber and nine other named

physicians, “each individually and as a former director of

[JMHI] . . . and/or as partners in Jefferson Memorial Hospital

Associates, or [JMHJV], and/or directors or shareholders of

[JMHC] (a Delaware Corporation now known as ‘Jefferson

Corporation of Alexandria’)”; Jefferson Memorial Hospital

Associates; JMHJV; and Jefferson Corporation of Alexandria. A

prior suit had been commenced by the Attorney General against

the same defendants in April 1995, but was nonsuited during

trial.

In the present suit, the plaintiffs filed a 112-paragraph,

40-page, three-count bill of complaint. They alleged that funds

and assets received by the defendants as directors and trustees

of a charitable corporation “were misappropriated and diverted”

contrary to law that requires such funds to be used only for

charitable purposes, “and not for private inurement.” The

plaintiffs then recited in detail the defendants’ alleged

business activities in connection with the hospital.

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 In count one, the plaintiffs alleged the “purported merger

between JMHI and JMHC in 1971 never took place,” and the

“subsequent purported transfers of the property of JMHI were

likewise null and void.” Asserting “JMHI was and is a non-stock

foreign corporation whose assets are located in the

Commonwealth” and are subject to the trial court’s jurisdiction,

the plaintiffs asked the court: to declare “that the purposes

for which JMHI was created have been frustrated and are no

longer capable of being accomplished by virtue of” the

defendants’ conduct; to declare that legal title to JMHI’s

assets remain in JMHI; to order that an appropriate custodian

gather the assets of the former JMHI and administer them under

the court’s supervision; to require that defendants account for

the money or other value received in the transactions and that

defendants be surcharged for the charitable assets they usurped

in the amount of at least $40 million; and to enter judgment

against defendants as a result of “their conversion,

misappropriation, or appropriation of the charitable assets”

described.

In count two, the plaintiffs sought similar relief and also

asked the court “to impose a constructive trust upon the

Hospital, its land, equipment and any other assets,” as well as

upon settlement proceeds being paid by an entity which, in 1985,

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negotiated with JMHJV to buy the right to operate the hospital

and its assets as a going concern.

In count three, the plaintiffs asked the court to declare

that “the corporate opportunities of JMHI have been usurped” by

the defendants; that the defendants be required “to account for

and disgorge all sums usurped;” that the court impress upon any

future sums defendants may receive “an appropriate judgement or

trust to secure the interests of the beneficiaries of JMHI, and,

if necessary, to refer the matter to a Commissioner in Chancery

for an appropriate accounting and charging order against JMHJV.”

After the chancellor overruled their demurrer and plea in

bar, defendants answered the bill of complaint. They generally

denied the allegations, asserting the plaintiffs are not

entitled to the relief prayed for, or to any other relief.

The cause was heard ore tenus in January 1997. The parties

had stipulated that the trial in the present suit was to

commence where the prior trial terminated, and that the record

of all proceedings in the prior suit is to be a part of the

present record.

Following the trial, the chancellor filed a memorandum

opinion ruling that the plaintiffs are entitled to relief sought

in the bill of complaint. In a March 1997 decree, from which we

awarded defendants this appeal, the court declared that the

assets and liabilities of JMHI “be, reside and remain with

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[defendants] as trustees and further that a constructive trust

be . . . imposed on such assets and liabilities.”

The court also ordered that a custodian “be appointed with

exclusive jurisdiction to hold and administer the said assets

and liabilities.” Additionally, the court ordered defendants to

submit “a full and complete accounting of all assets and

liabilities that are the subject of this Decree.” Finally, the

court denied the plaintiffs’ “claim for monetary damages.”

On appeal, defendants contend the trial court erred “when

it concluded that the Attorney General has authority to bring

this suit.” The chancellor ruled “that the Attorney General has

standing and authority to bring this action both at common law

and pursuant to” Code § 13.1-909(B). The trial court is

correct.

We need address only the common law. This Court long ago

recognized the common law authority of the Attorney General to

act on behalf of the public in matters involving charitable

assets. Clark v. Oliver, 91 Va. 421, 427-28, 22 S.E. 175, 177

(1895). Indeed, this authority has received legislative

recognition as recently as last year. During its 1997 session,

the General Assembly granted the Attorney General additional

specific powers with respect to the disposition of assets by

nonprofit health care entities. Acts 1997, ch. 615. These

powers were granted “in order that the Attorney General may

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exercise his common law and statutory authority over the

activities of these organizations.” Code § 55-532.

Next, defendants argue the chancellor erred in ruling that

Code § 55-29 provides authority for the Commonwealth’s Attorney

of the City of Alexandria to be a proper party to the claims

asserted. We disagree.

Code § 55-29 (1995 Repl. Vol.) provides, as pertinent:

“When any such gift, grant or will is recorded and
no trustee has been appointed, or the trustee dies or
refuses to act, the circuit court . . . of the city in
which the trust subject or any part thereof is, in the
case of a gift or grant, or in which the will is
recorded, may, on motion of the attorney for the
Commonwealth in such court (whose duty it shall be to
make such motion), appoint one or more trustees to
carry the same into execution. . . . In enforcing the
execution of any such trust a suit may be maintained
against the trustees in the name of the Commonwealth
when there is no other party capable of prosecuting
such suit. The term ‘trustees’ as herein used shall
be construed to mean the persons, or governing body,
charged with the execution of the trust, whether
designated as ‘trustees,’ ‘directors’ or
otherwise. . . .”

The phrase “any such gift, grant or will” refers to Code

§ 55-26.1, which provides, “Every gift . . . made hereafter for

charitable purposes, whether made in any case to a body

corporate or unincorporated . . . shall be as valid as if made

to or for the benefit of a certain natural person. . . .”

The foregoing provisions are not limited to express trusts

arising by virtue of written instruments, as defendants argue,

but apply, as here, when the assets of JMHI passed automatically

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to its directors as formal trustees of the charitable

organization in liquidation. Thus, the Commonwealth’s Attorney

is a proper party to this litigation.

Parenthetically, because the defendants seem to raise this

issue on brief, we note that use of the word “recorded” in the

first clause of the first sentence of § 55-29 refers to recorded

wills, and not to any requirement that gifts or grants also be

recorded. This is made clear later in the same sentence where

there is specific reference to “in which the will is recorded.”

Next, we shall turn to the merits. A detailed recitation

of the evidence gleaned from this record would serve no useful

purpose. On appeal, the defendants primarily seek to have us

annul factual findings of the chancellor. The evidence, except

for opinions of experts, was not in dispute; defendants urge us

to invalidate the legitimate inferences drawn by the trial court

from those proven facts. This tactic will not succeed upon

appellate review.

The findings of a chancellor, hearing evidence ore tenus,

carry the weight of a jury verdict. Giannotti v. Hamway, 239

Va. 14, 23, 387 S.E.2d 725, 730 (1990). A judgment based upon

such findings will not be annulled on appeal “unless it appears

from the evidence that such judgment is plainly wrong or without

evidence to support it.” Code § 8.01-680. And, the plaintiffs’

burden is to prove these allegations by a preponderance of the

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evidence. Baylor v. Beverly Book Co., 216 Va. 22, 24, 216

S.E.2d 18, 19 (1975).

Upon review we shall recite the facts, including the

legitimate inferences flowing from those facts, in the light

most favorable to the plaintiffs, who prevailed below. In the

early 1960s, following acquisition of real estate by deed and

lease by King Street Joint Venture, held by defendant Tauber as

trustee, JMHI was formed to transact the business of operating a

hospital. This Maryland corporation was authorized to do

business in Virginia in 1963. Following the March 1965 opening,

the hospital experienced “problem[s] all the time,” although an

expansion allowing addition of 24 beds occurred in 1968.

In 1970, during the Internal Revenue Service investigation,

an attorney was retained to review “the current corporate status

of the hospital.” Counsel recommended “a complete

reorganization of the hospital and its affiliates,”

establishment of “a new profit corporation with the same name,”

and “that the old non-profit corporation be merged into it.”

The Delaware for-profit corporation, JMHC, was formed in

1971 and a supposed merger was arranged. This merger was

reported on tax returns filed in 1972, but the record is devoid

of documents to support such a transaction. However, Dr.

Tauber, who mainly orchestrated the myriad transactions involved

in this case, testified, “In my own mind, [the merger] was

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completed.” The chancellor said no evidence had been presented

to show due diligence was used at that time to protect the

interests of the beneficiaries of the charitable hospital.

The basis of the 1972 Internal Revenue Service ruling

revoking JMHI’s tax-exempt status was: “The hospital sold 8%

bonds to various doctors and individuals in exchange for their

6% demand notes and did not enforce collection of such demand

notes. Other hospital bonds were sold to the general public at

8% for cash. Some of the doctors receiving the 8% bonds in

exchange for their 6% demand notes were officers, directors, and

staff members of the hospital. Issuance of 8% bonds to these

doctors and failure to enforce collection of the demand notes

received in exchange resulted in inurement of income to private

individuals.” This was a violation of the applicable provision

of the Internal Revenue Code allowing exemption of charities

from federal income taxation.

In 1974, after another attorney had been retained “to

rectify the problem that had arisen” because of the putative

merger, documents indicate that JMHC assumed the charity’s

liabilities in return for receipt of JMHI’s assets. The charity

was to receive 5,000 shares of JMHC stock, but no such transfer

was made.

The record amply supports the following findings of the

chancellor. “There are numerous transactions shown, some of-

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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 non-profit corporation.”

A transaction illustrative of the foregoing conclusions

involves a subdivision of the hospital’s real estate in 1970.

The charity’s 65% undivided interest was lost and, in its place,

the charity obtained a 20% interest consisting of an allocated

parcel. Also, after the nonprofit corporation was dissolved by

Maryland authorities in 1973, defendants caused the filing of an

annual report with the State Corporation Commission of Virginia

that JMHI remained in good standing.

As the chancellor found, deals were “convoluted and complex

with off-record real estate transactions conflicting with the

state of the title as shown on-record. Net operating losses

were used as tax deductions by JMHC that had become deductions

[as] a result of the revocation of JMHI’s tax exempt status.

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When [defendants] had exhausted these deductions, they began

seeking ways to benefit their own tax status through a

complicated series of notes and bonds, and while some personal

risk was taken, the [defendants] and others were participating

in the venture in basically a risk-free manner.”

Defendants claimed in the trial court that JMHI had no

value in 1971 and, thus, the transactions by which they assumed

control of its corporate assets by the assumption of its

liabilities were “fair.” Responding, the chancellor determined

that JMHI “had value as a ‘going concern’” when the effort was

made to change to a for-profit corporation. But the court

concluded that defendants’ expert testimony was more persuasive

than plaintiffs’ and that “the value of the corporation did not

exceed its liabilities.” “However,” the chancellor ruled, “this

does not constitute a defense to the claims made here.”

The defendants’ contentions regarding the merits of the

suit, including the arguments advanced by amici curiae

supporting defendants, are premised upon several erroneous

conclusions. For example, defendants believe the trial court

recognized that a legally valid “transaction” of some sort

occurred in 1971.

Defendants’ description of the nature of this binding

“transaction” has evolved from “merger,” to “reorganization,”

and finally, during oral argument of the appeal, to

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“acquisition.” Also, defendants and their supporters think this

case involves the improper meddling by the Commonwealth into the

internal affairs of a Maryland corporation, contrary to settled

law and violative of the Full Faith and Credit, Due Process, and

Commerce Clauses of the United States Constitution. This case

involves none of the above.

The trial court determined that no transaction in the

nature of a merger or reorganization took place in 1971. The

chancellor ruled that “no merger of JMHI and JMHC has occurred

and that the transactions by directors of JMHI are void, the

assets remained in JMHI until its dissolution. At the time of

dissolution, these assets passed into and remain in the hands of

[defendants] as trustees.” This ruling is fully supported by

the applicable law and the uncontradicted evidence, most of

which was created by defendants.

Because the 1971 “transaction” never occurred, the 1973

revocation of JMHI’s corporate charter converted its directors

by operation of law to trustees in dissolution under Maryland

law. Md. Code Ann., Corporations Art. 23, § 78(a) (1957);

Cloverfields Improvement Ass’n v. Seabreeze Properties, Inc.,

373 A.2d 935, 939-40 (Md. 1977). Virginia law was and is the

same. See former Code § 13.1-254 (1973 Repl. Vol.); present

Code § 13.1-915 (1993 Repl. Vol.).

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 The charter revocation terminated JMHI’s corporate

existence and powers, and it could no longer function as a

corporation. Cloverfields Improvement Ass’n v. Seabreeze

Properties, Inc., 362 A.2d 675, 679 (Md. App. 1976). From that

day forward, the defendants’ actions purportedly taken 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. The corporate assets had automatically

transferred to the directors as trustees. Cloverfields, 362

A.2d at 679.

Under Maryland law, property of a charitable corporation is

held in trust for the public. Inasmuch Gospel Mission, Inc. v.

Mercantile Trust Co. of Baltimore, 40 A.2d 506, 510 (Md. 1945).

Virginia law is the same. “The corporation was organized for

charitable or benevolent or literary purposes. Contributions

made to it and the assets realized therefrom were dedicated to

those purposes and stamped with a public interest by the

charter, the laws of this State, sound reason and public policy.

The members acquired no property rights in, nor were they

equitably entitled to such assets, either during the lifetime of

the corporation or upon dissolution. To hold otherwise would

convert the public nature and purpose of the corporation into a

vehicle for the personal pecuniary gain of the members.”

Hanshaw v. Day, 202 Va. 818, 824, 120 S.E.2d 460, 464 (1961).

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Thus, the defendants’ contentions that this litigation, dealing

with appropriation of charitable assets by directors for their

personal gain, involves impermissible interference by Virginia

with the internal affairs of a foreign corporation, or that a

“fairness” doctrine should be applied to the 1971 activities,

are without merit.

Accordingly, the circuit court properly exercised its

authority to insure that these assets, now held by the

defendants as trustees in liquidation, are distributed in accord

with the charitable purposes to which they should have been

devoted. This power to liquidate the assets and business of a

nonstock corporation may be exercised over the property within

the court’s jurisdiction “of a foreign corporation that has

ceased to exist.” Code § 13.1-909(B). See former Code § 13.1-

257(e) (1973 Repl. Vol.). The corporate facilities were located

solely within this State in Alexandria.

Thus, we hold the trial court did not err in taking charge

of the liquidation of the assets of this dissolved foreign

corporation, and in providing the relief outlined in the order

from which this appeal was taken. This record clearly

demonstrates that the directors of JMHI, now trustees in

dissolution, have failed and refused to execute the trust.

Finally, we have considered, and reject, defendants’ other

arguments. Only one of those contentions merits discussion.

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Defendants argue the trial court erred in not sustaining its

plea based on the doctrine of laches.

Laches may not be pled successfully as a defense in an

equitable proceeding to bar the State from asserting a claim on

behalf of the public. Board of Supervisors of Tazewell County

v. Norfolk and W. Ry. Co., 119 Va. 763, 790, 91 S.E. 124, 133

(1916). Accord City of Manassas v. Board of Supervisors of

Prince William County, 250 Va. 126, 132, 458 S.E.2d 568, 571

(1995). See Dick Kelly Enter. v. City of Norfolk, 243 Va. 373,

381, 416 S.E.2d 680, 685 (1992). As we already have said, this

cause is brought by the Commonwealth on behalf of the public to

hold and administer charitable assets. Hence, laches does not

apply.

Consequently, we will affirm the judgment appealed from, an

interlocutory decree adjudicating the principles of the cause,

and we will remand the cause to the trial court for further

proceedings.

Affirmed and remanded.

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