Tauber v. Commonwealth Ex Rel. Kilgore

PRESENT: All the Justices

LASZLO N. TAUBER, ET AL.

v. Record No. 011150 OPINION BY JUSTICE BARBARA MILANO KEENAN
April 19, 2002
COMMONWEALTH OF VIRGINIA, EX REL.
JERRY W. KILGORE, ATTORNEY GENERAL
OF VIRGINIA, ET AL.

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

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charter was revoked in 1973.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 I).

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.

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 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

3
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.

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 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

5
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

6
 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."

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 included the testimony of Celeste B. Vella,

an attorney who testified in the original proceedings before the

chancellor and qualified as an expert witness in the field of

real estate transactions and title issues. Vella testified that

JMHI owned the beneficial interest in several parcels of realty,

including a portion of land that overlaps "Hopkins Parcel 1" and

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"Hopkins Parcel 2," a 65% undivided interest in the totality of

Hopkins Parcels 1 and 2, and the "Berman Parcel."

Vella stated that she used the term "improvements" to refer

to the buildings erected on the various properties, and that a

majority of the hospital improvements were constructed on

Hopkins Parcels 1 and 2. Vella observed that JMHA's financial

statement and tax return for 1971 indicated that JMHA

transferred ownership of the hospital improvements to JMHI on

June 30, 1971. She also stated that JMHC's financial statement

for 1971 indicated that JMHC acquired JMHA on July 1, 1971, one

day after the improvements were transferred to JMHI. Vella

testified that in her opinion, title to both the land and the

improvements JMHI owned in 1971 still remained in JMHI at the

time of trial.

Vella also concluded that JMHI owned the beneficial

interest in all the structures, including the hospital building,

which were located on Hopkins Parcels 1 and 2 and the Berman

Parcel. She stated that her opinion was based on an examination

of record deeds, "off-record" deeds, leases, purchase

agreements, corporate documents, federal tax returns, financial

statements, letters, and the defendants' answers to

interrogatories filed in the case.

Vella noted that, in 1975, JMHI purportedly conveyed its

interest in a smaller portion of the above properties to JMHC,

8
which in turn purportedly conveyed that portion to Tauber as

trustee. However, Vella concluded that this transaction was

void because JMHI no longer existed as a corporation after its

1973 charter revocation and "the appropriate parties were not

joined in the deed in order to effect conveyance." In

explaining her conclusion, Vella stated that "in order for the

directors to act pursuant to a forfeited corporate charter, they

would have to make this decision as trustees. And it appears

from the minutes that they were acting as if JMHI still

existed."

The Commonwealth also presented the testimony of Robert E.

Wilson, a certified public accountant employed by Arthur

Andersen LLP. Wilson stated that he conducted a fiduciary

accounting of JMHI's assets based on the requirements specified

in the chancellor's March 1997 decree, which directed disclosure

of "all rents, issues, profits, accretions, and benefits,

tangible and intangible, which have accrued therefrom." Wilson

also explained that in conducting the accounting, he used a

"conservative" approach that resolved any doubt in favor of the

defendants.

Wilson testified that the right to operate the hospital and

to generate income, which was secured by the hospital's

operating license, was an asset subject to the constructive

trust because JMHI never surrendered ownership of that license.

9
He explained that "[t]he operating license is the engine . . .

that runs this hospital. The bricks and mortar are simply the

chassis. The value is in the license."

Wilson concluded that "[t]he reorganizations of the

Hospital's operating entity appeared to be done with the primary

intent of creating financial gain for the original investor

group." He stated that the defendants' actions "stripped" JMHI

of much of its value and severely undercapitalized the operation

of the hospital. He explained that these actions required the

charity "to absorb the burden of being a tenant . . . at a cost

. . . in excess of what it would have been" had the charity

owned and operated its own infrastructure, which purportedly had

been transferred to the defendants' other "for-profit"

enterprises.

Wilson stated that the defendants made only a single

capital contribution to the charity, and that there were "many

instances" in which they had received a return on their original

investment "many times over." He also determined that the

defendants commingled their personal funds with the assets of

the charity, and that the activities of JMHJV "served to impair

the fiscal stability of JMHI."

Wilson calculated the income generated from the assets held

in trust by the defendants as trustees in dissolution, including

the proceeds from the HGV and INOVA transactions and the 1994

10
INOVA Agreement. Wilson's calculations showed that as of June

30, 1999, JMHI had realized assets in the amount of $26,372,438

that were subject to the constructive trust. Wilson further

determined that an additional $24,703,145 would accrue to the

benefit of the constructive trust from July 1, 1999 through

October 1, 2005, when INOVA is required to make final payment

under the terms of the 1994 INOVA Agreement.

Wilson also addressed the methodology used by the

defendants in the accounting they submitted to the chancellor.

He testified that the defendants' submission was not a fiduciary

accounting because it did not reflect what actually had

transpired with regard to JMHI's assets. Wilson stated that he

did not see evidence of "any recognition given to the accretion

of any of the charity's assets at any point in time," and that

the defendants did not account for the net operating losses of

the charity. He described the defendants' methodology as the

act of choosing four dates and attempting "to create a value

judgment or estimation of value based upon the creation of

balance sheets which have one foot in reality and one foot in

hypothesis."

Wilson explained that valuation is relevant only "if you

are winding up and liquidating a business, disposing of assets

and liabilities." He stated that because JMHI was never "wound-

11
up" or liquidated, "any valuation information at any point in

time is nothing more than a reflection of what might be."

The defendants' accounting, prepared by Arthur H. Cobb,

reported JMHI's assets only through 1973, when JMHI's corporate

charter was revoked. Cobb also prepared value calculations that

were based on certain assumptions, including the assumption that

JMHI was liquidated in the alternative years of 1975, 1982,

1992, and 2005.

Cobb testified that JMHI was "undercapitalized" and had

received only "one formal capital contribution," which was

repaid within two years. He also stated that the hospital was

merely a "white elephant" if its assets were considered apart

from its operating license.

Cobb's accounting indicated that a liquidation of JMHI in

April 1973 would not have yielded any net proceeds, because

total liabilities would have exceeded total assets. Cobb

reached a similar conclusion for the hypothetical liquidation of

JMHI on July 1, 1975, the date of the sale and "leaseback"

transaction with JMHJV. He also estimated that a hypothetical

liquidation of JMHI in 1982, at the time of the HGV transaction,

would have resulted in about $1,254,000 in net proceeds.

Cobb prepared calculations involving a hypothetical

liquidation year of 1992, "based on JMHI participating in

leasing or sub-leasing certain land, building and related

12
equipment, furniture and fixtures" to HGV and to INOVA. Under

this assumption, Cobb estimated that liquidation of JMHI's

business at the end of 1992 would have resulted in about

$5,462,000 in net proceeds.

Using a hypothetical liquidation year of 2005, Cobb

estimated the value of JMHI's assets including, among other

things, payments that JMHI would receive from INOVA pursuant to

the 1994 INOVA Agreement. Cobb estimated that a liquidation of

JMHI's business in September 2005 would result in net proceeds

of about $21,944,511. He estimated that the "present value" of

this amount in December 1999 was between $4,646,000 and

$10,347,000, depending on various annual rates of return.

However, Cobb did not include in his calculations the $10

million payment due from INOVA on October 1, 2005.

Tauber testified concerning the buildings and building

additions built by the partnerships KSJV, JMHA, and JMHJV. His

testimony primarily addressed the cost, rather than the source

of the funds used, for the improvements constructed. He stated

that construction of the original hospital building was

completed in 1965 at a cost of $1,055,000, and that a "nursing

wing" was built in 1968 at a cost of about $110,000.

Tauber testified that a foyer, corridor, and physical

therapy unit were added to the hospital in 1974 at a cost of

about $96,000, and that an intensive care unit was added in the

13
late 1970's at an approximate cost of $92,000. He also stated

that in 1979, a six-story office building was built on King

Street (the Medical Office Building) at a cost of about

$2,650,000.

Tauber testified that "the physicians" paid $1,600,000 of

the construction costs of the Medical Office Building, but he

did not identify more specifically who actually made these

contributions. He indicated that the remaining costs of that

building were financed from the $1,400,000 "new mortgage" that

was assumed by JMHC in 1978. He also testified that another

office building was constructed in 1982 on North Beauregard

Street (the Beauregard Building) at an approximate cost of

$722,000.

Tauber stated that as part of an effort to attract doctors

to the Beauregard Building, JMHJV leased two-thirds of the

building's office space to Irwin S. Freedman, one of the

defendants, and his medical practice group. Freedman's lease

was for a term of ten years and provided that at its

termination, Freedman could purchase the portion of the building

he occupied for $1, conditioned on his group practice having

admitted at least 90% of its patients to the hospital. Eight

and one-half years into the lease term, Freedman was permitted

to purchase this two-thirds ownership share of the Beauregard

Building for $1.

14
 Tauber further testified that in 1983 a fourth-floor

addition was built over the nursing wing of the hospital at a

cost of approximately $927,000. Finally, he agreed that the

hospital building would be a mere "white elephant" without the

license to operate the hospital because the building was "a

single-purpose building."

III. CHANCELLOR'S DECISION

In a letter opinion dated July 13, 2000, the chancellor

rejected the defendants' accounting. He observed that the

methodology used by the defendants did not afford "an

opportunity to calculate the receipts, disbursements, rents, and

profits that actually accrued to [the defendants]." The

chancellor also found, in relevant part:

[The defendants] obtained interests in real
property, were paid "dividends" in excess of their
capital contributions, and finally obtained a
settlement of a dispute with Inova directly arising
out of hospital operations.

Under accepted principles, [the defendants]
cannot profit from the wrong doing found by the Court
and must be called to account for the profit obtained.
In addition, where [the defendants], trustees in
dissolution, commingle their interests with those of
the charity, they bear the burden of proving the
separate nature of the assets. [The defendants] have
not met that burden. Hence, they are accountable for
all of the assets, rents, profits, and receipts they
obtained.

The chancellor determined that JMHI's interest in the real

property and improvements included a 70% interest in Hopkins

15
Parcels 1 and 2, a 100% interest in the Berman parcel, which he

referred to as "Beauregard Street," and a 100% interest in the

hospital improvements and the Beauregard Building. He concluded

that the Commonwealth's accounting established that the

defendants received net revenue through June 30, 1999 in the

amount of $26,372,438. The chancellor also determined from the

Commonwealth's accounting that the anticipated revenue from the

1994 INOVA Agreement through October 1, 2005, including the $10

million payment, was $24,703,145. These figures resulted in

total net and future revenue in the amount of $51,075,583.

The chancellor's ruling further provided, in relevant part:

Under strict accounting rules, [the defendants]
would be liable for the accrued revenues plus the
present value of the future payments due from Inova.
However, equitable principles require that a fairness
test be applied to any award in this case.

Since [the defendants] now hold valuable real
estates as trustees in dissolution, and since the
benefit to other charities will be substantial even if
[the defendants] are not required to account dollar-
for-dollar, and the purposes of this cause will be
served, this Court finds that an award of Twenty
Million Dollars ($20,000,000.00) in addition to the
real property is fair and just under all of the
circumstances.

The chancellor also stated that he would consider further

argument whether the defendants were entitled to a credit for

"costs of acquisition and improvements to the realty actually

incurred."

16
 On November 13, 2000, a hearing was held in which the

defendants presented evidence that Leslie P. Gondor, M.D., one

of the defendants, paid $150,000 in 1964 to purchase an interest

in certain real property from JMHI. Gondor made this purported

purchase in his own name by means of an "off-record" letter

transaction. At the same hearing, the defendants argued, among

other things, that they should be given a credit for the

construction costs of the hospital building, the Medical Office

Building, and the Beauregard Building.

In a letter opinion dated December 27, 2000, the chancellor

denied the defendants' motion for acquisition and construction

credits and their motion to release portions of the award to

certain charities controlled by Tauber. The chancellor also

denied the Commonwealth's motion for an award of attorneys' fees

and costs.

On February 21, 2001, the chancellor entered a decree

incorporating his previous letter opinions and awarding judgment

in favor of the Commonwealth as trustee against the defendants

"individually and as former directors and/or trustees and/or

trustees in liquidation," and against JMHA, JMHJV, JCA, and

Tauber as trustee and agent for JMHA and JMHJV. The chancellor

further decreed "that all of the assets referenced and described

herein are subject to [the] constructive trust," including the

anticipated revenue from the 1994 INOVA Agreement.

17
 The chancellor's decree directed that the assets subject to

the constructive trust be distributed according to the doctrine

of cy pres. In his decree, the chancellor also provided for

interest on his award at the statutory rate of nine percent from

July 13, 2000, the date the chancellor issued his opinion letter

deciding the case in favor of the Commonwealth.

The chancellor later held a hearing to set the amount of an

appeal bond. He ruled that under Code § 8.01-676.1(C), he was

obligated to "require the posting of an appeal bond . . . with

surety or an irrevocable letter of credit in an amount

sufficient to pay [the] judgment."

The defendants appealed from the chancellor's holdings.

The Commonwealth assigned cross-error to the amount of the

judgment and the chancellor's refusal to award the Commonwealth

its attorneys' fees and accounting costs.

IV. ISSUES RESOLVED BY TAUBER I

The defendants raise several arguments that we resolved in

Tauber I or are necessarily decided by our holdings in that

appeal. We will set forth these issues below.

Void Transactions and "Fairness"

The defendants argue that the chancellor erred in failing

to hold that the purported sale in 1975 of JMHI's assets to

JMHC, or in the alternative, the 1982 transactions with HGV,

constituted acts of trustees in dissolution of JMHI to "wind-up"

18
the non-profit corporation. The defendants also assert that the

chancellor erred when he held that the purported sale in 1975 of

JMHI's assets to JMHC was void, regardless of the fairness of

the sale from the perspective of JMHI. We disagree with the

defendants' arguments.

In Tauber I, we concluded that the law and the evidence

fully supported the chancellor's rulings that JMHI and JMHC did

not "merge" in 1971. Id. at 455, 499 S.E.2d at 844. We also

held that the transactions purportedly taken by the directors

after the 1973 charter revocation were void. We stated:

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 . . . .

The charter revocation terminated JMHI's corporate
existence and powers, and it could no longer function
as a corporation. . . . 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.

Id., 499 S.E.2d at 844-45.

In addition, as stated above, we concluded that the "record

clearly demonstrates that the directors of JMHI, now trustees in

dissolution, have failed and refused to execute the trust." Id.

at 456, 499 S.E.2d at 845. We held that the transactions at

issue showed "an entire course of self-dealing by the directors

19
of the charity" that resulted in "the total obliteration of the

non-profit corporation [JMHI]." Id. at 453-54, 499 S.E.2d at

844.

These holdings in Tauber I mandate our present conclusion

that the purported sale in 1975 of JMHI's assets to JMHC, and

the 1982 transactions with HGV, did not constitute acts of the

defendants as trustees in dissolution to "wind-up" the corporate

affairs of JMHI. This conclusion is amply supported by the

record, which contains no indication that the transactions in

1975 and 1982 were entered into by the defendants as trustees in

dissolution of JMHI, on behalf of the charity, rather than as

directors of JMHC who profited from the transactions.

In Tauber I, we also rejected the defendants' contention

that we should apply a "fairness" test to the 1971 failed

"merger" between JMHI and JMHC. Id. at 455-56, 499 S.E.2d at

845. Our conclusion was based on our holding that the

defendants were not entitled under any circumstances to property

rights or other assets belonging to JMHI, either during or after

the life span of the corporation. We stated that "[t]o hold

otherwise would convert the public nature and purpose of the

corporation into a vehicle for the personal pecuniary gain of

the members." Id. at 455, 499 S.E.2d at 845 (quoting Hanshaw v.

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

conclusion applies equally to the purported sale in 1975.

20
Moreover, a defense of "fairness" is inapplicable to the review

of a void transaction such as the 1975 purported sale, because

that transaction in effect never occurred.

Assets in Dissolution of JMHI

The defendants argue that the chancellor erred in

classifying the rents, profits, and other sums accruing to

entities controlled by the defendants, including revenues from

the leases with HGV and INOVA and proceeds from the 1994 INOVA

Agreement, as assets in dissolution of JMHI subject to the

constructive trust. However, as stated above, we concluded in

Tauber I that after JMHI's charter revocation, its corporate

assets were automatically transferred to the directors as

trustees in dissolution of the charity. Id. at 455, 499 S.E.2d

at 844-45. The evidence before the chancellor in the first

proceeding, and Wilson's accounting testimony in the proceeding

on remand, identified the leases with HGV and INOVA, and the

proceeds of the 1994 INOVA Agreement, as assets of JMHI that

were diverted by the defendants for their personal benefit to

JMHJV.

We also find no merit in the defendants' argument that the

chancellor erred in including in the constructive trust a parcel

of land that JMHI purportedly had transferred to Gondor in the

1964 "off-record" transaction. The chancellor's holding is

supported by Vella's testimony in the initial proceeding that

21
JMHI presently is the beneficial owner of certain real property

that includes the interest allegedly transferred to Gondor.

Therefore, we conclude that the chancellor properly placed the

above assets and property in the constructive trust.

"Sale" of Beauregard Building

The defendants contend that the chancellor erred when he

held that the Beauregard Building was an asset in dissolution of

JMHI. They contend that this building was sold to Freedman, one

of JMHI's trustees in dissolution, and other bona fide

purchasers for value who lacked notice of "any adverse claim"

regarding the property. The defendants further contend that the

imposition of a constructive trust on this property violated the

Due Process Clause of the United States Constitution. We

disagree with the defendants' arguments.

In Tauber I, we held that the trustees in dissolution of

JMHI were not entitled to any of the charity's assets after the

dissolution of the charity. Id. at 455, 499 S.E.2d at 845.

However, Freedman purportedly purchased his two-thirds interest

in the Beauregard Building for $1 in 1992, during his tenure as

a trustee in dissolution of JMHI. He entered into this

purported transaction about 19 years after JMHI's charter

revocation.

A purchaser of real property is bound by both constructive

and actual notice and "has no right to shut his eyes or his ears

22
to the inlet of information, and then say he is a bona fide

purchaser [for value] without notice." Richmond v. Hall, 251

Va. 151, 157, 466 S.E.2d 103, 106 (1996) (quoting Burwell v.

Fauber, 62 Va. (21 Gratt.) 446, 463 (1871)). Thus, we conclude

that Freedman was not a bona fide purchaser for value without

notice because at the time of his alleged purchase, he had

actual notice that the charity had been dissolved and

constructive notice that the Beauregard Building was one of the

charity's assets. 1

"Safe Harbor" Defenses

The defendants assert that the chancellor "failed to apply

the law in effect at the time [he] rendered [his] decision," and

that his "failure to apply Maryland law violated the Full Faith

and Credit, Due Process, and Commerce Clauses of the United

States Constitution." In support of these arguments, the

defendants note that Maryland law provides a "safe harbor" for

corporate directors who act in good faith in discharging their

corporate duties. 2 The defendants also argue that the chancellor

should have conducted a hearing concerning whether they took

their actions as corporate officers in good faith.

1
We do not address the status of the other purported
purchasers of the Beauregard Building because they are not
parties to this suit.
2
See Md. Code Ann., Corps. & Ass'ns § 2-405.1 (2001).

23
 These arguments are completely precluded by our holding in

Tauber I that the defendants were trustees in dissolution of

JMHI, rather than corporate directors, following JMHI's charter

revocation in 1973. Id. at 455, 499 S.E.2d at 844. Therefore,

any defenses of good faith in the exercise of business judgment

that may be asserted by corporate directors of a non-profit

corporation are inapposite here. See Code § 13.1-870; Lake

Monticello Owners' Ass'n v. Lake, 250 Va. 565, 571, 463 S.E.2d

652, 656 (1995). See also Md. Code Ann., Corps. & Ass'ns § 2-

405.1 (2001); Werbowsky v. Collomb, 766 A.2d 123, 138 (Md.

2001).

Doctrine of Cy Pres

The defendants assign error to the chancellor's decision to

apply the Virginia law of cy pres rather than Maryland law

governing the distribution of assets of a Maryland non-profit

corporation. The common law doctrine of cy pres permits a court

of equity to administer a charitable trust to conform as closely

as possible to the purpose for which the trust was created or,

if that purpose cannot be achieved, for some other charitable

purpose. 3 See Baliles v. Miller, 231 Va. 48, 56 n.7, 340 S.E.2d

805, 810 n.7 (1986); Campbell v. Board of Trustees, 220 Va. 516,

524, 260 S.E.2d 204, 209 (1979).

24
 In Tauber I, we held that the chancellor properly imposed a

constructive trust so that the assets of JMHI can be distributed

in accordance with appropriate charitable purposes. We stated

that

the [chancellor] properly exercised [his] 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).

Id. at 456, 499 S.E.2d at 845. Based on this holding in Tauber

I, we conclude that the chancellor properly invoked the doctrine

of cy pres in providing for the future distribution of JMHI's

assets.

Individual Liability

The defendants argue that the chancellor erred in holding

them individually liable for the amount of the assets diverted

from the charity. The defendants also assert that they were

entitled to notice and a hearing on the issue of individual

liability under Virginia Code § 13.1-870, Md. Code Ann., Corps.

& Ass'ns § 2-405 (2001), and the Due Process Clause of the

United States Constitution.

3
We note that Code § 55-31, the "cy pres" statute, is
inapplicable here because its provisions are confined to express
trusts.

25
 These arguments, however, are precluded by our decision in

Tauber I. In the amended bill of complaint in the original

proceedings, the Commonwealth asserted, among other things, that

the defendants were liable for the acts complained of "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')." Id. at 449, 499 S.E.2d at 841.

The chancellor held that the Commonwealth was entitled to

the relief requested in its amended bill of complaint, and we

upheld the chancellor's determination, without exception. Id.

at 450, 456, 499 S.E.2d at 842, 845. This disposition in Tauber

I resolved the issue of the defendants' individual liability,

and their liability for their actions on behalf of JMHI, JMHC,

JCA, JMHA, and JMHJV.

V. ISSUES NOT RESOLVED BY TAUBER I

We turn now to consider the defendants' assignments of

error that are not precluded by our decision in Tauber I. After

that discussion, we will examine the Commonwealth's assignments

of cross-error.

Burden of Proof on Remand

The defendants argue that the Commonwealth had the burden

of tracing JMHI's assets into an identifiable account or

26
property. They assert that as a claimant seeking recovery of

assets that may have been commingled with other assets, the

Commonwealth must identify the portion of the commingled

property to which it is entitled. In response, the Commonwealth

contends that when trustees have commingled personal assets with

those belonging to the trust, the entire commingled fund is

subject to the constructive trust unless the trustees can

distinguish the funds to which they personally are entitled.

In stating the burden of proof applicable to these

proceedings, we first observe that a constructive trust arises

by operation of law to prevent what otherwise would result in a

fraud. See Crestar Bank v. Williams, 250 Va. 198, 204, 462

S.E.2d 333, 335 (1995); Leonard v. Counts, 221 Va. 582, 589, 272

S.E.2d 190, 195 (1980). The chancellor's imposition of a

constructive trust, which we approved in Tauber I, reflected his

determination that the defendants had wrongfully diverted the

assets of JMHI into other entities and business opportunities

for their personal benefit.

On remand, the chancellor was required to fix the amount of

JMHI's assets held by the defendants as trustees in dissolution

of the charity. As the successful proponent of the constructive

trust, the Commonwealth bore the initial burden on remand of

tracing JMHI's assets and establishing the amount of its

intangible assets. See Crestar Bank, 250 Va. at 204, 462 S.E.2d

27
at 335-36; Watts v. Newbury, 107 Va. 233, 240, 57 S.E. 657, 659

(1907). However, to the extent that the defendants commingled

their own property with JMHI's assets and sought recovery of

such property, they had the burden of proving how much of the

commingled funds they owned personally. See Brown v. Coleman,

566 A.2d 1091, 1097 n.7 (Md. 1989); Bass v. Smith, 56 A.2d 800,

805 (Md. 1948); MacBryde v. Burnett, 132 F.2d 898, 900 (4th Cir.

1942); V Austin W. Scott & William F. Fratcher, The Law of

Trusts § 515, at 609 (4th ed. 1989). The defendants bore this

evidentiary burden because when trustees conduct their affairs

in a manner that prevents a precise accounting of trust assets,

the trustees, rather than the trust, must suffer the

consequences. Am. Nat'l Bank v. Ames, 169 Va. 711, 750, 194

S.E. 784, 798 (1938); see Royall v. Peters, 180 Va. 178, 189, 21

S.E.2d 782, 787 (1942); First Nat'l Bank v. Commercial Bank &

Trust Co., 163 Va. 162, 175, 175 S.E. 775, 779 (1934).

Evidence Tracing JMHI's Assets

The defendants argue that the Commonwealth's accounting, on

which the chancellor relied, was "flawed" and did not account

for the "separate income" attributable to JMHC and JMHJV. They

also contend that JMHI did not have an ownership interest in the

hospital or in its underlying land, and that the Commonwealth

failed to trace JMHI's assets into the Beauregard Building, the

HGV lease, and the INOVA transactions. The defendants also

28
assert that the chancellor erred in rejecting their accounting,

which they claim properly identified their separate personal

assets.

In response, the Commonwealth argues that its evidence was

sufficient to meet its burden of tracing JMHI's assets and of

establishing the amount of its intangible assets. We agree with

the Commonwealth.

We consider the parties' arguments in the context of the

chancellor's March 1997 order, which provided the framework for

his determination of the amount of JMHI's assets. As stated

above, in that order the chancellor directed the defendants to

submit "a full and complete accounting of all [JMHI's] assets

and liabilities that . . . shall disclose all rents, issues,

profits, accretions, and benefits, tangible and intangible,

which have accrued therefrom."

In response to the chancellor's directive, the defendants

submitted Cobb's accounting, which did not satisfy these

requirements identified by the chancellor. Instead, Cobb

attempted to place a value on the charity through the use of

hypothetical dissolution dates of 1975, 1982, 1992, and 2005.

This methodology was a complete departure from that used by the

Commonwealth's accountant, Wilson, who structured his accounting

of JMHI's assets in accordance with the requirements stated in

the chancellor's decree.

29
 The chancellor's decision to reject Cobb's approach was

supported by Wilson's testimony. Wilson explained that Cobb's

approach was not a fiduciary accounting because Cobb did not

attempt to determine what actually had occurred with regard to

JMHI's assets and liabilities, but merely made estimations

regarding JMHI's value on certain dates. Wilson indicated that

the use of this approach was unsound because JMHI was never

liquidated and, thus, any valuation information was merely

hypothetical in nature. Based on this evidence, we conclude

that the chancellor did not err in rejecting Cobb's valuation

approach.

We also hold that the chancellor did not err in accepting

the Commonwealth's evidence tracing JMHI's assets. First,

Vella's testimony supported the chancellor's award of the real

property, including the improvements, to the Commonwealth.

Vella, an expert in real property and title issues, stated that

JMHI owned the Berman Parcel, which was also known as the

Beauregard Street Parcel. In addition, she stated that JMHI

owned a 65% undivided interest in the entire portion of land

comprising Hopkins Parcels 1 and 2, as well as a parcel of land

that overlapped Hopkins Parcels 1 and 2. Vella also testified

that JMHI owned the beneficial interest in the hospital building

and also owned all structures and improvements built on Hopkins

Parcels 1 and 2 and the Berman Parcel. These buildings included

30
the Beauregard Building, which was built partly on the Berman

Parcel.

Second, Wilson's accounting testimony and supporting

documentary evidence satisfied the Commonwealth's burden of

tracing JMHI's other assets. This evidence established that the

primary value of the hospital derived from its operating

license, which Wilson described as the "engine" that propelled

the charity. Wilson testified that because the hospital

operated as a "going concern" until the time of the 1994 INOVA

Agreement, the hospital license generated many financial

opportunities that Wilson identified as belonging to JMHI,

rather than to the defendants and their "for-profit" entities.

These opportunities included the 1982 HGV lease and the INOVA

transactions.

As stated above, Wilson determined that the value of JMHI's

assets, excluding the real property and improvements, subject to

the constructive trust totaled $26,372,438 as of June 30, 1999.

He also concluded that an additional $24,703,145 will accrue to

the benefit of the constructive trust under the terms of the

1994 INOVA Agreement. Thus, we conclude that the evidence

accepted by the chancellor adequately traced JMHI's assets,

including the amount of its intangible assets.

Acquisition and Construction Costs

31
 The defendants argue that the chancellor erred in denying

them credit for acquisition and construction costs relating to

JMHI's assets that were subject to the constructive trust. They

assert that they are entitled to a credit for "sums advanced in

transactions declared void by the Commonwealth," and for the

purchase price paid by Gondor for the above-described interest

in property he purportedly purchased in his own name. We

disagree with the defendants' arguments.

In the chancellor's July 13, 2000 letter opinion awarding

judgment in favor of the Commonwealth, he directed the parties

to schedule a hearing for the determination, among other things,

of any credit due to the defendants for acquisition costs. The

chancellor also stated that he would consider whether the

defendants were entitled to a credit for "improvements to the

realty actually incurred." At a hearing in November 2000, the

defendants did not present any testimony but argued from the

evidence already presented that the costs expended in acquiring

the properties and in building the improvements should be

credited to them.

After considering the parties' arguments, the chancellor

denied the defendants' request for such credits. We hold that

the record supports the chancellor's decision. The defendants

did not meet their burden of proving that their personal funds,

rather than funds received from the operation of the hospital or

32
from some other source, were spent to acquire property in JMHI's

name or to construct improvements on property already owned by

JMHI.

We also observe that the balance of the record fails to

support the defendants' request for cost credits. Most notably,

as stated above, the evidence showed that they diverted about

$51 million of the charity's present and future assets into the

"for-profit" entities in which they participated. They also

received funds from the redemption of shares initially conveyed

to them by JMHC in 1971 at the time of the failed "merger." The

record shows that the defendants obtained at least $508,000 in

these redemption transactions. Finally, the defendants'

accountant, Cobb, acknowledged that the defendants made only one

capital contribution to JMHI, which was repaid to them within

two years.

Donations to Other Charities

We also find no merit in the defendants' argument that the

chancellor improperly included in his award assets purportedly

transferred by JMHJV to two charities, which are controlled by

Tauber as trustee. These alleged donations were made after

JMHI's dissolution, and the defendants failed to prove that the

"donations" were made from their own personal funds, rather than

from the assets of JMHI that were subject to the constructive

trust.

33
 Prejudgment Interest

The defendants argue that the chancellor erred in

calculating the award of interest from the date he issued his

July 13, 2000 letter opinion rather than from February 21, 2001,

the date of his decree awarding the $20 million judgment to the

Commonwealth. Citing Code § 8.01-382, the defendants assert

that interest may be awarded only from the date of entry of a

judgment or decree. We disagree with the defendants' argument.

We consider the language of Code § 8.01-382 in accordance

with its plain meaning. See Vaughn, Inc. v. Beck, 262 Va. 673,

677, 554 S.E.2d 88, 90 (2001); Cummings v. Fulghum, 261 Va. 73,

77, 540 S.E.2d 494, 496 (2001). This statute provides, in

relevant part, that when an action or a suit is heard by the

court without a jury, the court "may provide for interest on any

principal sum awarded, or any part thereof, and fix the period

at which the interest shall commence."

The plain language of Code § 8.01-382 gave the chancellor

discretionary authority to determine whether the Commonwealth

was entitled to prejudgment interest and to fix the date from

which such interest was due. The chancellor's decision awarding

interest on the monetary portion of the judgment from July 13,

2000 effectively provided prejudgment interest at the statutory

rate between July 13, 2000 and the date of the chancellor's

decree, February 21, 2001. We conclude that based on the

34
extended duration of this suit, and the overwhelming evidence in

the record against the defendants, the chancellor's decision to

award interest from July 13, 2000 was not an abuse of his

discretionary authority under the statute.

Appeal Bond

Finally, the defendants argue that the chancellor erred in

ruling that Code § 8.01-676.1(C) provides the sole method by

which a court may suspend execution of a decree pending appeal.

The defendants assert that this statute does not limit the

chancellor's "inherent authority" to set a bond in an amount

less than the judgment to stay execution of a decree. We

disagree with the defendants' arguments.

The plain language of the statute governs our analysis.

See Vaughn, 262 Va. at 677, 554 S.E.2d at 90; Cummings, 261 Va.

at 77, 540 S.E.2d at 496. In relevant part, Code § 8.01-

676.1(C) provides that an appealing party who requests a

suspension of execution of a judgment during an appeal "shall

. . . file an appeal bond or irrevocable letter of credit

conditioned upon the performance or satisfaction of the judgment

and payment of all damages incurred in consequence of such

suspension, and . . . execution shall be suspended upon the

filing of such security and the timely prosecution of such

appeal."

35
 This statutory language does not give the trial court

discretion to set an appeal bond in an amount less than the

judgment. The purpose of the statute is to secure payment of

the full judgment amount and all damages incurred as a result of

the suspension of execution of the court's decree. A lesser

amount would undermine the security of the judgment to which a

prevailing party is entitled in the event that an appellant does

not succeed on appeal. Thus, we hold that the chancellor did

not err in requiring the defendants to post an appeal bond in

conformance with the mandatory terms of the statute.

Amount of Judgment

Asserting cross-error, the Commonwealth contends that the

chancellor erred in failing to award the Commonwealth the full

amount of diverted assets identified by Wilson in the amount of

about $51 million. The Commonwealth contends that it is

entitled to that amount, rather than the $20 million amount

awarded by the chancellor, based on the evidence presented and

the defendants' failure to meet their burden of proving any

separate sums to which they were entitled. Thus, the

Commonwealth argues that the chancellor improperly reduced the

award from the total sum that he determined the defendants would

have been liable to pay under "strict accounting rules." In

response, the defendants ask us to reject the Commonwealth's

36
argument, asserting that the chancellor failed to make any

findings supporting such an award to the Commonwealth.

In resolving this issue, we first observe that the

chancellor accepted the Commonwealth's accounting but cited

general principles of "equity and fairness" in support of his

decision reducing the amount of the award. He also noted the

fact that JMHI's property included valuable real estate, and

that "the benefit to other charities will be substantial even if

[the defendants] are not required to account dollar-for-dollar,

and the purposes of this cause will be served." The chancellor

entered judgment in the reduced amount after finding that the

Commonwealth had proved that the defendants diverted from JMHI

the sum of $26,372,438 in present net revenues, and an

additional sum of $24,703,145 in future net revenues, for a

total lost revenue amount of $51,075,583.

We conclude that because the assets at issue were funds

belonging to a charity, the chancellor erred in reducing the

amount of the award from the sums established by the evidence he

had approved. In effect, the chancellor's award permitted the

defaulting trustees of JMHI to retain significant assets of the

charity that belong to the public. This result was erroneous.

The defendants, as fiduciaries, were precluded from retaining

any of these assets because they "acquired no property rights

in, nor were they equitably entitled to such assets, either

37
during the lifetime of the [non-profit] corporation or upon

dissolution." Tauber I, 255 Va. at 455, 499 S.E.2d at 845

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

(1961)).

Attorneys' Fees and Costs

The Commonwealth also assigns cross-error to the

chancellor's decision denying the Commonwealth attorneys' fees

and costs, asserting that the fees were incurred because the

defendants failed to execute their duties as trustees in

dissolution and evaded their accounting obligations under the

chancellor's March 1997 decree. The Commonwealth contends that

an award of attorneys' fees would have been appropriate under

our decision in Prospect Development Company v. Bershader, 258

Va. 75, 515 S.E.2d 291 (1999), and that an award of costs should

have been made under Code § 26-23.

Upon consideration of these arguments, we conclude that the

chancellor did not abuse his discretion in failing to award

attorneys' fees and costs. In Bershader, a fraud suit, we

approved a chancellor's award of attorneys' fees when the

evidence showed that the defendants engaged in "callous,

deliberate, deceitful acts," which caused the plaintiffs to

incur over $150,000 in attorneys' fees. Id. at 92, 515 S.E.2d

at 301. We acknowledged the discretionary nature of the

chancellor's authority and held that he did not abuse that

38
discretion based on the amount of effort required to protect the

defrauded parties' rights. Id. at 92-93, 515 S.E.2d at 301.

Unlike Bershader, this case does not involve a review of an

award of attorneys' fees, but concerns the chancellor's failure

to award such fees. Thus, the Commonwealth effectively asks us

to conclude that under the facts of this case, the chancellor

was required as a matter of law to award attorneys' fees to the

Commonwealth. We decline to restrict the chancellor's

discretion in this manner. Although the defendants engaged in a

longstanding course of self-dealing at the expense of JMHI,

which would have supported an award of attorneys' fees under the

evidence presented, we cannot say that the chancellor lacked the

discretion to deny attorneys' fees after considering the other

relief awarded.

We also disagree with the Commonwealth's contention that

the chancellor erred in failing to award the Commonwealth its

costs under Code § 26-23 for the preparation of its accounting.

Code § 26-23 provides:

The costs of all proceedings against fiduciaries
failing, without good cause, to make the returns and
exhibits required, shall be paid by them personally,
and they shall receive no allowance for the same in
the settlement of their accounts.

This statute is limited to an award of costs related to

proceedings instituted against fiduciaries who fail to make

returns required by statute in performance of their duties in a

39
chancery case. Thus, this provision has no application to the

present case and did not provide the trial court the authority

to award the Commonwealth its expert witness fees for its

accounting.

Finally, we have considered, and reject, the other

arguments presented by the defendants in this appeal.

VI. CONCLUSION

For these reasons, we will reverse the monetary portion of

the chancellor's award and enter final judgment for the

Commonwealth as trustee in the amount of $26,372,438, with

interest from July 13, 2000 at the judgment rate fixed by Code

§ 6.1-330.54. We will affirm the chancellor's judgment in all

other respects, including the real estate interests awarded to

the Commonwealth as trustee.

We will remand the case to the chancellor for execution on

the appeal bond, collection of the judgment, and for

distribution of JMHI's current assets in accord, as nearly as

possible, with the charitable purposes to which they should have

been devoted. The constructive trust imposed by the chancellor

on the proceeds due from the 1994 INOVA Agreement will continue

for the duration of that Agreement for receipt of future net

revenues due after June 30, 1999, in the amount of $24,703,145.

Such sums will be paid when due into the Circuit Court for the

City of Alexandria for distribution by the chancellor in

40
accordance, as nearly as possible, with the charitable purposes

to which they should have been devoted.

Affirmed in part and final judgment,
reversed in part, modified, and final judgment as modified,
and remanded.

41