Present: All the Justices
MILDRED H. ASHMORE
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 952137 September 13, 1996
HERBIE MOREWITZ, INC., ET AL.
HERBIE MOREWITZ, INC., ET AL.
v. Record No. 952155
MILDRED H. ASHMORE
FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS
Robert W. Curran, Judge
In this creditors' rights controversy arising from a real
estate sales transaction, the principal issues are whether fraud
has been established in connection with the execution of a
subordination agreement and, if so, whether application of the
third party beneficiary statute, Code § 55-22, affects the
priority of liens. A subsidiary issue deals with the nature of
the fraud.
In April 1994, plaintiff Mildred H. Ashmore filed a bill of
complaint against defendants Herbie Morewitz, Inc., Herbert
Morewitz, II, Statewide, Inc., Raymond H. Suttle, Jr., Trustee,
and Richard M. Macaluso, Trustee. The plaintiff alleged she is a
widow over 70 years of age living alone at the Newport News home
formerly owned jointly with her late husband. Plaintiff asserted
she had been living on a fixed income "barely adequate to meet
her needs" and, in 1992, decided to convert the subject property
into an income producing asset. The plaintiff alleged she
decided to find a purchaser for the property who would buy it "on
seller financed terms which would provide her with a stream of
income from note payments secured by a purchase money deed of
trust on the Property and at the same time allow her to remain in
the Property at a reasonable monthly rental for a period of
time."
Plaintiff further alleged that, based on prior contact with
defendant Herbert Morewitz, II, "she believed him to be an astute
and experienced real estate investor who regularly bought and
sold properties as part of his business." Plaintiff also alleged
that, responding to her request, Morewitz came to her home to
discuss the matter. He presented her with a real estate purchase
contract setting forth terms of a proposed sale of the property
to defendant Herbie Morewitz, Inc., "a corporation solely owned
and controlled by Morewitz."
The plaintiff alleged that, in accord with the contract, she
executed and delivered a deed of bargain and sale dated in
November 1992 conveying the property to Herbie Morewitz, Inc.
(hereinafter, the corporation). At the same time, the
corporation made and delivered a purchase money promissory note
in the sum of $82,000 payable to the plaintiff's order. This
note was secured by a first lien purchase money deed of trust
made by the corporation conveying the property in trust to
defendant Suttle and another as trustees to secure payment of the
note. The deed and deed of trust were duly recorded.
The plaintiff further alleged that Morewitz "assured" her
that she would always have a first lien deed of trust on the
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property as security for payment of the note. She also alleged
that Morewitz never asked her to subordinate the deed of trust to
a later deed of trust on the property.
The plaintiff further alleged that she "happened to be in
Morewitz's office" on March 24, 1993 when he said "he had `sold
the paper' related to the Property and needed for her to sign a
document connected with that activity." She asserted Morewitz
presented her with a single sheet of paper bearing a line for her
signature and containing two blank acknowledgement forms. She
alleged Morewitz did not tell her that the sheet, which she
signed, was actually the last page of a three-page document.
The plaintiff alleged she later learned, when the
corporation became delinquent in the payment of the note, that
the document was an agreement in which she consented to the
subordination of the lien of the purchase money deed of trust to
the lien of another deed of trust on the property from the
corporation to defendant Macaluso, Trustee, securing a note made
by the corporation in the principal sum of $52,500 payable to
defendant Statewide, Inc. Both the subordination agreement and
the other deed of trust had been recorded.
The plaintiff alleged the subordination agreement was void
due to fraud of Morewitz and the corporation. She further
alleged that Statewide was a third party beneficiary of the
purported agreement and, as such, takes its interest in the
property subject to any defenses which she may have against the
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corporation. She asserted that Statewide's rights under the
purported agreement can rise no higher than the rights of the
corporation under such instrument.
In the prayer to the bill of complaint, the plaintiff asked
that the subordination agreement be declared void and that she be
declared the holder of the first lien deed of trust on the
property.
In a responsive pleading, Morewitz, "individually and as
President & Agent of Herbie Morewitz, Inc.," denied the
allegations of fraud. He affirmatively asserted that he advised
the plaintiff "to seek counsel if she did not understand the
subordination agreement" and that trustee Suttle "verified" with
the plaintiff "that she had, in fact, signed [the] agreement and
understood its content." Morewitz asked the court to dismiss the
bill of complaint, issue an order allowing him access to the
property to facilitate its sale, and order the plaintiff to
vacate the property.
The trial court considered testimonial and documentary
evidence in an ore tenus hearing in January 1995. Subsequently,
in an October 1995 final decree, the court ruled that the
plaintiff's signature to the subordination agreement was obtained
by the fraud of Morewitz acting on behalf of the corporation,
that the fraud made the agreement voidable, that no evidence was
produced to establish any knowledge of the fraud by Statewide,
and that the plaintiff's request to be declared holder of a first
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lien deed of trust on the property was denied.
We awarded separate appeals to the plaintiff, on one hand,
and to the corporation and Morewitz, on the other, consolidating
them for argument. The plaintiff contends the trial court
erroneously determined that even though her execution of the
subordination agreement was induced by the fraudulent
misrepresentations of Morewitz, this rendered the agreement
voidable rather than void. The plaintiff also contends the trial
court erroneously found that the rights of Statewide under the
agreement were not affected by Morewitz's fraud and that
Statewide did not take its interest in the property subject to
the defense of fraud which plaintiff had against the corporation.
In the cross appeal, the corporation and Morewitz contend
the trial court erred in finding that fraud had been proved by
clear and convincing evidence.
The record on appeal does not include a verbatim transcript
of the testimony at trial, only a Rule 5:11(c) written statement
of facts in lieu of a transcript. Many of the relevant facts
were disputed but, applying settled appellate principles, we
accord the judgment of the trial court, including the court's
findings of fact that are supported by credible evidence, a
presumption of correctness. Thus, we shall recite such facts as
found by the chancellor.
First, we shall address the issue of law raised in the cross
appeal, that is, whether the plaintiff proved fraud by the
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requisite clear and convincing evidence.
The parties' evidence essentially supported the allegations
made in their pleadings. The plaintiff established that "on
several occasions" after the closing of the sale of the property
to the corporation, Morewitz told her "that he might want to
borrow against the Property, or `sell the paper,' but assured her
that her position would not be changed." In a letter dated March
18, 1993, Morewitz wrote plaintiff confirming "our conversation
in regards to your possible need to occupy the house beyond [a]
one year term," stating he was "agreeable" to extending her
occupancy "to whatever date you're comfortable with." In a
second paragraph, Morewitz wrote: "Also, from time to time, I
borrow against properties that I own to expand my investment
enterprise. I may borrow against [the subject property] but
please know this will not change your position at all." Morewitz
later testified this statement "was in reference to her continued
occupancy of the property and to verify that she would continue
to receive monthly payments."
Thereafter, in March 1993, Morewitz "sought a loan" for the
corporation from Statewide, which advised him that "such a loan"
would be made if he "could give Statewide a first lien deed of
trust on the Property as security for the loan." According to
the statement of facts, Morewitz then took a subordination
agreement, prepared by Statewide's attorney, to the plaintiff,
telling her "that the instrument was just a routine document
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which would enable him to `sell the paper' related to the
Property." The plaintiff, who was "unsophisticated in such
matters," relied on Morewitz and executed the subordination
agreement. She testified that the pages of the document "were
not attached to each other and she signed the signature page
without reading the document." During cross-examination, the
plaintiff, when asked, "Did you read the document at all before
signing it?" replied, "I read it, but not carefully."
Trustee Suttle, who testified Morewitz had written him a
memo suggesting he call the plaintiff "to ensure that she
understood the agreement," stated that when the document was
presented for his signature, he telephoned the plaintiff and
explained to her "that the effect of this subordination agreement
was that she would now be in a second lien position, not first."
Disputing this testimony, the plaintiff testified she never
spoke to Suttle about "subordinating her deed of trust to another
deed of trust." The chancellor found the telephone call took
place but that the plaintiff "failed to understand the legal
effect of the document because of the fraudulent
misrepresentations which Morewitz had previously made to her."
The plaintiff also established that she later found in her
files the draft of an unsigned subordination agreement like the
document she signed. The unsigned document, however, contained
"an extra sentence" stating, "Notice: The original agreement
between Herbie Morewitz, Inc. and Mildred H. Ashmore is not
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diminished or affected by this document." The plaintiff did not
know how or when the document came into her possession, stating
"it may have come from Mr. Morewitz's office." The plaintiff
admitted she did not rely on the extra sentence when she signed
the agreement.
Morewitz testified that the extra sentence appeared to be on
a "working" or "rough draft" copy of the agreement, and that he
did not recall making any alteration to the copy prepared by
Statewide's attorney. According to the statement of facts,
Morewitz "did not absolutely deny" making the alteration,
"because he could not recall this sentence at all."
A party seeking to establish fraud must prove by clear and
convincing evidence a false representation, of a material fact,
made intentionally and knowingly, with the intent to mislead,
reliance by the party misled, and resulting damage to such party.
Thompson v. Bacon, 245 Va. 107, 111, 425 S.E.2d 512, 514 (1993).
Clear and convincing evidence is that degree of proof which will
produce in the mind of the trier of facts a firm belief or
conviction concerning the allegations sought to be established.
Fred C. Walker Agency, Inc. v. Lucas, 215 Va. 535, 540-41, 211
S.E.2d 88, 92 (1975). Viewing the facts, as we must, in the
light most favorable to the plaintiff who prevailed below on this
issue, we hold that the plaintiff's proof burden has been carried
on the fraud question.
There was credible, clear and convincing evidence to support
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the trial court's finding that Morewitz, intentionally and
knowingly with the intent to mislead, falsely represented
material facts to the plaintiff, that is, her first lien
"position" would not be changed if he "sold the paper" and the
subordination agreement "was just a routine document" enabling
him to "sell the paper." Further, such evidence supports the
court's implicit findings that plaintiff relied on the false
representation and was relegated to a second lien position to her
detriment as the result of executing the subordination agreement.
Thus, we hold there is no merit in the cross appeal.
Turning next to the plaintiff's contention that the nature
of the fraud made the agreement void, and not voidable, we hold
the trial court correctly ruled the agreement was voidable.
When a promisor knows what is being signed but the
promisor's consent is induced by fraud, mutual consent is present
and a contract is formed, which, because of the fraud, is
voidable. In other words, "the act of the defrauded person is
operative though voidable." 12 Williston on Contracts § 1488, at
332 (3d ed. 1970).
On the other hand, if the fraud operates at the inception of
the agreement so that the promisor actually does not know what is
being signed, or does not intend to enter into a contract at all,
mutual assent is lacking and the act of the promisor is void; the
purported agreement may be disregarded without the necessity of
rescission. Id. See Elam v. Ford, 145 Va. 536, 545, 134 S.E.
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670, 672 (1926).
In the present case, the trial court found that the
plaintiff knew she was signing a subordination agreement, but
that she would not have so acted without Morewitz's
misrepresentations regarding its legal effect on her position of
priority. The court thus found, obviously with the foregoing
principles in mind, "that this is the case where the act of the
defrauded person is operative though voidable." There is
credible evidence to support such finding.
Finally, we address the plaintiff's alternative argument
that, even if the trial court correctly ruled the agreement is
voidable, the court nonetheless erred in refusing to apply Code
§ 55-22 and to rule Statewide took its interest in the property
subject to the defense of fraud that she had against the
corporation. We agree with the plaintiff.
Code § 55-22, the third-party beneficiary statute, provides:
"An immediate estate or interest in or the benefit of a
condition respecting any estate may be taken by a
person under an instrument, although he be not a party
thereto; and if a covenant or promise be made for the
benefit, in whole or in part, of a person with whom it
is not made, or with whom it is made jointly with
others, such person, whether named in the instrument or
not, may maintain in his own name any action thereon
which he might maintain in case it had been made with
him only and the consideration had moved from him to
the party making such covenant or promise. In such
action the covenantor or promisor shall be permitted to
make all defenses he may have, not only against the
covenantee or promisee, but against such beneficiary as
well."
This statute enables a third party to take an interest under an
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instrument, although not a party to it, if the promise is made
for the third party's benefit and the evidence shows that the
contracting parties clearly and definitely intended to confer a
benefit upon such third party. Kelley v. Griffin, 252 Va. 26,
29, 471 S.E.2d 475, 477 (1996).
In the present case, the evidence is clear that the
subordination agreement between the plaintiff and the corporation
is intended to confer a benefit upon Statewide, a nonparty.
Under that agreement, Suttle as trustee and plaintiff as
beneficiary of the November 1992 deed of trust agreed that the
lien of that deed of trust shall be subordinated to and in favor
of the other deed of trust, dated in March 1993, securing the
debt to Statewide, which actually is named in the body of the
subordination agreement. Thus, under Code § 55-22 Statewide
could enforce the subordination agreement against the plaintiff.
But the last sentence of Code § 55-22 further provides that
the plaintiff, as covenantor or promisor of the instrument, shall
be permitted to make all defenses she may have against Statewide,
the third-party beneficiary. In other words, the third-party
beneficiary's rights under the instrument, according to the
statute, can rise no higher than the rights of the corporation,
the covenantee or promisee under the instrument. Thus, we hold
that Statewide took its interests under the subordination
agreement subject to the plaintiff's right to rescind the
agreement because of Morewitz's fraud, even though Statewide had
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no knowledge of the fraud.
Accordingly, we will affirm so much of the final decree
which finds that the plaintiff's signature on the subordination
agreement was obtained by the fraud of Herbert Morewitz, II,
acting on behalf of Herbie Morewitz, Inc., and which finds that
the fraud made the agreement voidable. Parenthetically, we find
no merit in a contention made by the corporation and Morewitz
that the form of this portion of the decree is erroneous.
We will reverse the remainder of the final decree. We will
enter final judgment here setting aside the subordination
agreement and declaring the plaintiff to be the holder of a first
lien deed of trust on the subject property.
Record No. 952137 - Affirmed in part,
reversed in part, and
final judgment.
Record No. 952155 - Affirmed.
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