Present: All the Justices
LUTHER BRUCE BUCHANAN, ET AL.
v. Record No. 022351 OPINION BY JUSTICE ELIZABETH B. LACY
September 12, 2003
BONNIE S. BUCHANAN
FROM THE CIRCUIT COURT OF MECKLENBURG COUNTY
Leslie M. Osborn, Judge
In this case, Luther Bruce Buchanan (Husband) seeks the
reversal of certain orders allowing Bonnie S. Buchanan (Wife)
to maintain an action for fraudulent conveyance under Code
§ 55-80, directing a special commissioner to hold the proceeds
of those conveyances and others pending disposition of a
divorce proceeding, and awarding Wife attorneys' fees.
Because, for the reasons stated below, we find that Wife was
an "other person" who "may be" entitled to payment from
Husband under the fraudulent conveyance statute, that the
directive to the special commissioner to hold certain funds
did not create constructive trusts, and that the issue
regarding attorneys' fees is moot, we will affirm the judgment
of the trial court.
MATERIAL FACTS AND PROCEEDINGS
Husband and Wife were married in September 1973 and
separated in February 2000. On January 5, 2001, eleven months
after the couple's separation, Husband sold construction
equipment to his father Harold B. Buchanan (Father), for
$30,500. Father paid Husband $8,000 in cash and signed a
promissory note in the amount of $22,500. A month later, on
February 26, 2001, Husband gave his mother, Bessie B. Buchanan
(Mother), and Father $12,250 and $5,750, respectively, in
repayment of loans they had allegedly made to Husband in the
past. The funds given to Husband's parents were proceeds from
a $40,000 line of credit and an additional $40,000 loan
Husband obtained in January 2001. The line of credit and loan
were secured by deeds of trust against the Buchanan home. The
home was built during the marriage on property owned by
Husband prior to the marriage and titled in his name.
On March 9, 2001, Husband filed a bill of complaint
seeking a divorce on the grounds of separation in excess of
one year. Wife filed an answer and cross-bill alleging
cruelty and constructive desertion. On July 2, 2001, Wife
filed a bill of complaint against Husband and his parents
asserting that Husband's conveyances to his parents were
fraudulent in violation of Code §§ 55-80 and –81.
At the request of the parties, the trial court
consolidated the fraudulent conveyance and the divorce
proceedings. The parties agreed that the claims would be
heard sequentially, with evidence on the fraudulent conveyance
claims presented first.
2
In the proceedings relating to the fraudulent conveyance
claims, the trial court sustained Husband's motion for summary
judgment regarding Wife's claim pursuant to Code § 55-81, but
denied Husband's motion for summary judgment in which he
asserted Wife could not maintain an action pursuant to Code
§ 55-80. Following an evidentiary hearing, the trial court
held that Husband's transfers of $5,750 and $12,250 to Father
and Mother, respectively, were void because each was done with
the intent to "delay, hinder, or defraud" Wife's ability to
recover property she may be entitled to from Husband in
violation of Code § 55-80. The court did not void Father's
title to the construction equipment, finding that the sale was
for valuable consideration.
The trial court appointed a Special Commissioner to take
possession of the $22,500 promissory note and hold in
"constructive trust" payments due to Husband by Father
pursuant to that note, the $12,250 paid to Mother, and the
$5,750 paid to Father pending the evidentiary hearing on the
divorce and equitable distribution determination.
Following the hearing in the divorce action, the trial
court entered an order requiring Husband to pay Wife $105,000
based upon its determination of equitable distribution. The
court also awarded Wife $27,000 for her attorneys' fees and
costs "incurred in this matter and the fraudulent conveyance
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action." Wife received partial satisfaction of these monetary
awards when, pursuant to the trial court's order, the Special
Commissioner paid Wife, from the funds held in "constructive
trust," the $12,250 that Husband originally paid to Mother and
an $11,250 payment made by Father on the promissory note.
In this appeal, Husband challenges the trial court's
failure to sustain his motion for summary judgment regarding
Wife's ability to maintain an action pursuant to Code § 55-80,
the imposition of a "constructive trust" on the promissory
note and various cash payments, and the award of attorneys'
fees for the fraudulent conveyance action. We consider these
issues in order. 1
CODE § 55-80
Husband's first assignment of error involves the
application of the fraudulent conveyance statute, Code § 55-
80, to the circumstances of this case. 2 Husband does not
1
We do not consider the $5,750 payment to Father here
because for reasons not relevant to this appeal, those funds
were returned to Father, rendering that issue moot.
2
Code § 55-80 provides in relevant part:
Every gift, conveyance, assignment or transfer of . . .
any estate, real or personal, . . . given with intent to
delay, hinder or defraud creditors, purchasers or other
persons of or from what they are or may be lawfully
entitled to shall, as to such creditors, purchasers or
other persons, their representatives or assigns, be void.
This section shall not affect the title of a purchaser
for valuable consideration, unless it appear that he had
notice of the fraudulent intent of his immediate grantor
or of the fraud rendering void the title of such grantor.
4
challenge the trial court's determination that he fraudulently
conveyed funds to Mother; rather, Husband asserts that Wife
could not maintain an action under Code § 55-80 because her
claim against him had not accrued at the time of the
conveyance. Husband argues that Wife's claim accrued only
upon an equitable distribution determination in the context of
their divorce proceeding and that the divorce proceeding was
not filed until after the conveyance at issue. Thus, Husband
asserts that, at the time of the conveyance, Wife was not an
"other person" who "may be lawfully entitled" to payment from
Husband for purposes of Code § 55-80. We disagree.
Code § 55-80 embodies the common law principle that
transfers of real or personal property made "with intent to
delay, hinder, or defraud creditors, purchasers, or other
persons of or from what they are or may be lawfully entitled
to" are void. The "essence of fraudulent conveyance . . . is
the diminution of the debtor's estate to the detriment of the
creditor's right of realization." 1 Garrard Glenn, Fraudulent
Conveyances and Preferences § 319, at 556 (rev. ed. 1940).
To 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. For example, in Crowder v. Crowder,
125 Va. 80, 99 S.E. 746 (1919), a wife prevailed in an action
5
under a predecessor to Code § 55-80 even though the fraudulent
conveyance occurred prior to any determination of the wife's
right to a divorce or alimony. Moreover, in Davis v. Davis,
239 Va. 657, 391 S.E.2d 255 (1990), we said that although the
spousal support award was not made until after the fraudulent
conveyance, the wife could pursue an action under Code § 55-80
because that section applies to both what one is entitled to,
and what one "may be entitled to." Id. at 661 n.3, 391 S.E.2d
at 257 n.3. And, in another context, we have held that a
"deed made with intent to defraud a recovery by a third person
of damages in an action of tort, even before trial and
judgment . . . is fraudulent and void to the same extent as a
conveyance to hinder, delay and defraud existing creditors."
Bruce v. Dean, 149 Va. 39, 46, 140 S.E. 277, 280 (1927).
Wife's claim here is based on that portion of Code § 20-
107.3 that gives a spouse a marital interest in property
acquired during marriage and in the improved value of the
property occurring during marriage. Wife's entitlement to
that marital interest was enforced in the divorce proceeding
through the application of the statutory principles of
equitable distribution. Like the claimants in Crowder, Davis,
and Bruce, Husband's liability to Wife in this case was not
established or quantified until after the conveyance at issue.
Nevertheless, like those claimants, at the time of the
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conveyance in question, Wife was an "other person" who "may
be" entitled to payment from Husband. Code § 55-80.
Husband, noting that independent actions for divorce,
alimony, and support were available to the spouses in Crowder
and Davis at the time of the fraudulent conveyances, asserts
that the fraudulent conveyance statute requires that the
spouse's claim be enforceable by an independent action at the
time of the conveyance. Husband contends that Wife had no
cognizable claim for purposes of the fraudulent conveyance
statute because at the time of the conveyance at issue no
divorce action had been filed and Wife could not file an
independent action for equitable distribution. We again
disagree with Husband.
Neither Crowder nor Davis held that the present
availability of an enforcement action was a prerequisite to
maintaining a fraudulent conveyance action under Code § 55-80.
In this case, the enforcement mechanism for the claim giving
rise to Husband's liability to Wife was the divorce
proceeding. The grounds for divorce in this case, separation
in excess of one year, prevented the filing of the divorce at
the time of the conveyance. 3 To hold that such limitations
3
Whether Wife could have prevailed in a divorce
proceeding filed on other grounds at the time of the
conveyances is not clear from this record. Nevertheless, the
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period for instituting procedures to enforce a claim defeats
Wife's fraudulent conveyance action is inconsistent with the
longstanding public policy against fraudulent conveyances. 4 A
transferor could circumvent the policy by transferring assets
just prior to the expiration of the limitations period even
though the transferor knew of the impending liability and made
the transfer precisely to shield the assets from the
liability.
In this case, the parties had been separated for eleven
months prior to the transfers in issue. Husband did not
challenge the trial court's finding that Husband conveyed the
property with the intent of defrauding or otherwise deterring
Wife from recovering amounts from him. It is inherent in this
finding that Husband believed that at the time he conveyed the
funds, eleven months after the separation and one month before
he filed a petition for divorce, a divorce proceeding would
ensue and that a judgment would or could be entered making him
liable to Wife. He was aware of Wife's rights or claims under
the provisions of Code § 20-107.3 and took action to defeat or
hinder the realization of these rights.
ultimate result of the divorce action is not determinative of
the fraudulent conveyance action.
4
See also Code § 55-82 (allowing a creditor to file an
action under Code § 55-80 before default by the
transferor/debtor).
8
Accordingly, under the facts of this case, we conclude
that the trial court did not err in holding that Wife was an
"other person" who "may be" entitled to payment from Husband
and therefore could maintain an action under Code § 55-80.
CONSTRUCTIVE TRUSTS
In the fraudulent conveyance proceedings, the trial court
ordered that a "constructive trust" be imposed on the $22,500
owed Husband under the promissory note executed for the
construction equipment and instructed the Special Commissioner
to "take possession of the promissory note and any payments
due thereunder pending further order of this court in the
divorce action." The trial court also imposed a "constructive
trust" on the $12,250 Husband paid to Mother and ordered
Mother to deposit that sum with the Special Commissioner
pending the divorce action.
In his second and third assignments of error, Husband
asserts that these "constructive trusts" were improperly
imposed by the trial court.
A constructive trust is a mechanism by which the person
holding title to property is subjected to an equitable duty to
convey the property to another because allowing the title
holder to retain the property would be unjust. Leonard v.
Counts, 221 Va. 582, 590, 272 S.E.2d 190, 195-96 (1980). The
constructive trust arises by operation of law and is
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independent of the intention of the parties. Id. at 588-89,
272 S.E.2d at 195. In an action in which a constructive trust
is imposed, the original transfer is not declared void; rather
the title holder is ordered to transfer title of the property
to or for the benefit of another. Id. at 591, 272 S.E.2d at
196.
The remedy for a fraudulent conveyance is generally to
declare the transfer void, or, under certain circumstances, to
enter a personal judgment against the transferee. See Price
v. Hawkins, 247 Va. 32, 35-36, 439 S.E.2d 382, 384 (1994).
Voiding the conveyance was the remedy adopted by the trial
court with regard to the funds Husband fraudulently
transferred to Mother, but, rather than returning the funds to
the Husband, the trial court placed the funds with the Special
Commissioner pending a final decree in the divorce action.
Although labeled a "constructive trust," placing the funds
with the Special Commissioner did not create the type of trust
contemplated by the jurisprudence of constructive trusts.
Accordingly, regardless of the terminology used, the
trial court did not impose a constructive trust on the funds
fraudulently conveyed to Mother. 5 Pursuant to Code § 20-103,
the trial court had the authority to transfer those funds to
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the Commissioner pending further proceedings in the divorce
actions.
Husband also complains that the trial court erred in
imposing a "constructive trust" on the promissory note
executed by Father in favor of Husband and on the cash
payments made under that note. 6 Once again, however, the
"constructive trust" imposed was not a true constructive
trust. The legal title holder of the note, the Husband, was
not required to transfer the note to, or hold the note for the
benefit of, another party. The trial court's order that the
note and its proceeds be placed in the custody of the Special
Commissioner pending divorce was no more than a mechanism to
preserve the Husband's estate authorized by Code § 20-103.
Because no true constructive trusts were placed on the note or
its proceeds, we reject Husband's second and third assignments
of error.
ATTORNEYS' FEES
In his final assignment of error, Husband asserts that
the trial court erred in awarding Wife attorneys' fees in the
fraudulent conveyance action. We will not address the merits
5
In light of our conclusion that no constructive trust
arose, we need not address Husband's assertion that an in
personam judgment against Mother was the appropriate remedy.
6
Although Husband asserts that the trial court imposed a
constructive trust on the promissory note itself, the order
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of this assignment of error, however, because the issue is
moot.
The decree entered in the divorce action on August 6,
2002, awarded Wife $27,000 attorneys' fees and costs "incurred
in this matter and the fraudulent conveyance action
consolidated with this matter which sum . . . shall be
docketed as a judgment against Husband." The Husband did not
appeal the attorneys' fees awarded in this decree, either to
this Court or the Court of Appeals. 7 The award of attorneys'
fees in the amount of $27,000 is, therefore, a final judgment.
For the above stated reasons, we will affirm the judgment
of the trial court.
Affirmed.
only imposed the "constructive trust" on the amounts owed to
Husband under the note.
7
Husband brought a separate appeal to the Court of
Appeals regarding the trial court's holdings on constructive
desertion, equitable distribution, payment requirements,
interest, disposition of separate property, and future spousal
support. Resolution of those issues does not affect the
matters before us.
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