Crestar Bank v. Williams

Present: Carrico, C.J., Compton, Stephenson, Whiting, * Hassell
and Keenan, JJ., and Cochran, Retired Justice

CRESTAR BANK

v. Record No. 941300

GEOFFREY T. WILLIAMS, ET AL.

VIRGINIA S. SMITH
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 941563 September 15, 1995

GEOFFREY T. WILLIAMS, ET AL.

THE RELIANT GROUP, L.P., ETC.
v. Record No. 941574

JOSEPH P. BRACCO, ET AL.

FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
William T. Newman, Jr., Judge

These appeals stem from a trial court's decree in two

consolidated chancery suits that, inter alia, granted a

constructive trust in favor of 17 "investors" with reference to

seven assets of a defaulting debtor. The constructive trust

established priority of the investors' claims over those of

certain of the debtor's judgment creditors.

The dispositive question on appeal is whether the court

below erroneously declared a blanket constructive trust in favor

of the investors when they failed to trace "invested" funds to

the debtor's acquisition of any particular asset.

The pertinent facts are not in dispute. Generally between

*
Justice Whiting participated in the hearing and decision of
this case prior to the effective date of his retirement on
August 12, 1995.
1986 and 1990, at least 17 individuals, the investors, deposited

sums of money with Geoffrey T. Williams, an Arlington attorney.

Williams represented that his "net worth" was $5 million and that

he would invest the funds and provide high returns on the

investments, with little or no risk. He required a "minimum

investment" of $10,000. The separate agreements between Williams

and the individuals generally provided that the investment funds

would be used to acquire real estate, or other interests, that

the funds could be withdrawn upon demand, and that the return

would be at least 13.5%. Some investors received promissory

notes, others did not.
Williams "jumbled" the investors' deposits together with the

funds of his law practice and other real estate investments. He

issued periodic statements of account balances to his "family of

investors" and, in some cases, permitted withdrawals. During

this period, Williams borrowed millions of dollars from

commercial and private lenders, acquiring many assets.

By 1990, Williams did not allow withdrawals from the

investors' accounts. Thereafter, he rarely came to his Arlington

law office, instead communicating by courier and by mail from an

address in Maryland. In February 1992, he fled the Commonwealth

leaving many creditors, after a capias was issued in his divorce

case for his arrest. In July 1992, Williams arranged for the

removal of all his financial records from his bookkeeper's home.

The whereabouts of the records and Williams is unknown. Sums

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owed the investors range from approximately $15,000 to $100,000

each.

In 1992, the 17 disappointed investors filed the present

suits, labelled "creditors bills," seeking monetary and other

relief. They alleged that Williams breached his agreement to

invest their funds at a guaranteed return and sought, inter alia,

a constructive trust upon certain of Williams' property. The

seven assets involved in this appeal are four parcels of real

property titled in the name of Williams as trustee (or his

sister, Constance Rogers-Panos), two partnership interests held

by "Williams, Trustee," and one partnership interest titled in

the name of Williams individually. Named as defendants, either

initially or through amendment to the suits, were many of

Williams' judgment creditors.
Also named as a defendant was Williams individually and as

trustee. During the course of the litigation, Williams, who did

not personally appear, filed a stipulation stating that he had

been properly served with process and that the trial court had

personal jurisdiction over him. In the stipulation, the

investors withdrew a claim for punitive damages against Williams.

After consolidation of the suits below, the matter was

referred to a commissioner in chancery who held six hearings

during the period September 1992 to December 1993. In a March

1994 report, the commissioner recommended, inter alia, imposition

of a blanket constructive trust upon the seven properties with

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the 17 investors as beneficiaries. The commissioner found that

the constructive trust had priority over all record judgment

creditors and over a charging order entered against one of

Williams' partnership interests. See Code § 50-28 (upon

application by judgment creditor of a partner, court may charge

the interest of the debtor partner with payment of unsatisfied

amount of judgment). In addition, the commissioner recommended

that money judgments be entered in favor of the investors against

Williams individually and as trustee, and that charging orders be

entered against certain of Williams' partnership interests.

Exceptions were filed to the commissioner's report. A common

ground of the exceptions filed by each of the present appellants

was that the commissioner's recommendation regarding imposition

of a constructive trust was erroneous because the investors

failed to show by clear and convincing proof a tracing of funds

to particular assets.
In a June 1994 decree from which these appeals are

prosecuted, the trial court generally confirmed the

commissioner's report. The court found that Williams owed a

total of $449,789.83 to the investors from whom he had obtained

funds during the period in question. The court entered money

judgments in favor of each investor for the amount of their loss

against Williams individually and as trustee. The court "granted

a constructive trust" in the investors' favor against the seven

properties and interests. The court ordered that "these

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constructive trusts are held" by the investors "pro rata in

proportion to their judgments" against Williams and that the

trusts "are liens superior to judgments against Geoffrey T.

Williams, either individually and as trustee." The court also

ordered, as recommended by the commissioner, sale of the realty

subject to the priorities the court had established, and that the

proceeds be applied to the discharge of the judgments, pursuant

to Code § 8.01-462, finding that the rents and profits of the

realty subject to the judgment liens would not satisfy the

judgments in five years.
Three of the creditors appeal. Appellant Crestar Bank,

successor by merger to one of Williams' judgment creditors, had a

charging order against a partnership interest of Williams and its

judgments docketed against real estate displaced by the trial

court's imposition of the constructive trust.

Appellant Virginia Seekford Smith had her interest in a

condominium unit and a general partnership displaced by the

imposition of the constructive trust. Appellant The Reliant

Group is the successor in interest to the holder of a recorded

judgment lien in the principal amount of $277,475.51 displaced by

the trial court's ruling.

The investors have not appeared in these appeals beyond the

petition stage; they elected neither to file appellate briefs nor

to participate in oral argument. Instead, they filed in this

Court a suggestion of mootness with reference to a number of the

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appellants' assignments of error because, they assert, "most of

the assets subject to the constructive trust imposed by the

Circuit Court are no longer available to apply to the judgments

obtained" by them. The appellants have not joined in the

suggestion, and we shall disregard it. There is no proof in the

appellate record to sustain the claim of mootness.

A constructive trust arises by operation of law,

independently of the intention of the parties, in order to

prevent what otherwise would be a fraud. Leonard v. Counts, 221

Va. 582, 589, 272 S.E.2d 190, 195 (1980). Such a trust may be

established not only when property has been acquired by fraud or

improper means, but also when it has been properly acquired but

it is contrary to equitable principles that the property should

be retained, at least for the acquirer's own benefit. Id.

Accord Jones v. Harrison, 250 Va. 64, 70, 458 S.E.2d 766, 770

(1995). The evidence required to establish a constructive trust

must be clear and convincing. Cooper v. Cooper, 249 Va. 511,

517, 457 S.E.2d 88, 92 (1995).

Moreover, in order to be entitled to the benefit of a

constructive trust, a claimant's money must be "distinctly

traced" into the chose in action, fund, or other property which

is to be made the subject of the trust. Watts v. Newberry, 107

Va. 233, 240, 57 S.E. 657, 659 (1907). See Cooper, 249 Va. at

517-19, 457 S.E.2d at 92-93.

And, notwithstanding the weight ordinarily given a

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commissioner's report confirmed by the chancellor, and the

respect that is accorded to the findings, no judgment based

thereon will be affirmed on appeal when the findings are

unsupported by the record. Clevinger v. County School Board of

Buchanan County, 139 Va. 444, 447, 124 S.E. 440, 441 (1924).

This is such a case.

The record is devoid of proof, by clear and convincing

evidence, distinctly tracing the investors' money into any of the

properties that are the subject of the constructive trust. Thus,

the claim of each investor-beneficiary for breach of trust

becomes merely that of a general creditor.
For example, investor John Baird testified that Williams

"never told me that he was going to use my specific money to

invest in real estate." Williams presided over a meeting of some

of the investors in January 1989. There, he presented to those

in attendance a long list, heavily relied upon below by the

investors, of purported investments in local bank stocks,

publicly traded stocks, real estate, and pizza shops. But that

document fails to show which investment related to any particular

investor in any particular proportion.

Also, investor Joseph Bracco, who had been one of Williams'

clients and who innocently interested friends and relatives in

Williams' "enterprise," testified that he understood from the

January 1989 meeting that about $130,000 of his funds were

invested by Williams in real estate, but he did not identify

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specific sums used to purchase specific assets.

In addition, investor Rodger Hicks testified that Williams

made "no provision" to advise him what properties Hicks' funds

"would be invested in." Also, investor Patrick Glott, who

attended the 1989 meeting, testified he merely "drew the

assumption" that his "investment money was being directed to" the

properties on the list. The testimony of the remaining investors

was equally vague and nonspecific.
In sum, the record is clear that the investors' funds were

hopelessly commingled and not traceable. The funds were not

earmarked for the acquisition of specific property, and there is

no documentary evidence to identify the amount of each investor's

money that was used in the acquisition of any specific asset.

The record shows that Williams had the general authority to

invest and divest the pooled funds in a variety of ventures at

his sole discretion, and that the investors had no idea how their

funds were being used other than a general understanding that the

funds might be used to acquire real estate and other investments.

Because of the failure of the investors to satisfy the tracing

requirement for imposition of a constructive trust, the property

in question titled in the name of Williams or Williams as trustee

is subject to the lien of all valid record judgments against him.

Appellant Virginia Seekford Smith, while joining the other

appellants' argument on the tracing issue, raises two additional

issues in her appeal. She is interested in two of the properties

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in question: Unit 812 of The Representative condominium, located

in Arlington County; and Lee Stafford Associates partnership, an

investment trust.

Smith, co-owner of an Arlington real estate company, engaged

"in a number of business deals" with Williams from 1986 to 1992.

Although not a member of Williams' "family of investors," Smith

advanced funds to Williams during the period 1987 to 1991

totalling $327,904.29, plus interest, accepting unsecured notes

for some of the obligations. When Williams failed to repay the

loans, Smith threatened suit. In exchange for her forbearance to

sue, Williams executed several additional notes, one secured by a

deed of trust on Unit 812 in the amount of $50,000 in 1991.
The trial court implicitly confirmed the commissioner's

finding that the sum of $50,000 represented money "Smith had lent

Williams over a period of time and had nothing to do with" Unit

812. The commissioner merely found, however, "that the

constructive trust is superior to said deed of trust."

On appeal, Smith seems to argue that the trial court

expressly invalidated the $50,000 deed of trust on Unit 812. We

find no such specific ruling either in the commissioner's report

or in the decree confirming it. The commissioner only ruled that

the constructive trust was superior to "said deed of trust." Our

ruling on the tracing issue affords Smith all the relief to which

she is entitled regarding Unit 812 based on this record.

Regarding the Lee Stafford Associates partnership, the

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commissioner found that Williams as trustee had a 12% interest.

The interest originally had been 4%, but he purchased an

additional 8% with $75,000 Smith "gave" him. The partnership

agreement required consent of a majority of the voting partners

for a transfer of an interest in the entity. To avoid this

requirement, Smith entered into a side, joint venture agreement

with Williams whereby she would receive a 4% interest in the

partnership, representing $37,500 of the "loan" to Williams.

According to the commissioner, Williams agreed to repay Smith

"the balance he had borrowed, $37,500." The commissioner found,

and the trial court confirmed, that Smith was entitled to a 4%

interest in the entity and the remaining 8% interest was subject

to the constructive trust.
On appeal, Smith contends she should be awarded an

additional 4% interest in the Lee Stafford partnership. We

disagree. We cannot say that the commissioner's finding is

unsupported by the facts and reasonable inferences to be drawn

from those facts.

Finally, Smith assigns error to the failure of the

commissioner and the trial court to rule upon a statute of

limitations defense she raised at every stage of the proceedings.

She contends that "a substantial portion" of the investors'

claims are time barred. She argues that many of the investors

received demand notes from Williams in exchange for their money,

none of which stated a date for final payment of the note. She

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says that others sued upon agreements not reduced to writing.

Asserting that as a "co-creditor" she may rely on the bar of the

statute of limitations in a creditor's suit, Smith asks that the

trial court be ordered to determine the applicability of the

statute of limitations to each of the investor's claims. We

decline this request.

The investors' suits were not based upon demand notes but

upon the continuing relationship between themselves and Williams

as their fiduciary in the investment of their funds. The trial

court acknowledged this relationship in a colloquy during Smith's

oral argument on the exceptions in June 1994. This continuing

relationship did not end until Williams fled the Commonwealth and

ceased to render monthly statements of account in early 1992,

shortly before the first suit was filed in July 1992. Thus, no

purpose will be served by a remand on the statute of limitations

issue; the suits clearly were timely. See Keller v. Denny, 232

Va. 512, 516-19, 352 S.E.2d 327, 329-31 (1987).

Consequently, the decree from which the appeals are taken

will be affirmed in part, reversed in part, and remanded. The

money judgments entered in favor of the investors, set forth in

paragraphs 1 through 11 on the first three pages of the decree,

will be affirmed. The constructive trust against the subject

properties and interests set forth in paragraphs 1 through 7 on

the third and fourth pages of the decree will be reversed and

annulled.

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 The unappealed ruling voiding certain deeds to Constance

Rogers-Panos, the ruling on Smith's 4% interest in Lee Stafford

Associates, and the unappealed ruling awarding a charging order

against Williams' interest in certain of the properties, all set

forth on the fourth page of the decree, will be affirmed.

The finding that the rents and profits from the subject

properties will not satisfy the judgments in a five-year period

(and the order for sale of the properties, execution of the

charging orders, and appointment of special commissioners of

sale), set forth on the fifth page of the decree, will be set

aside and annulled because there is no evidence in the record to

support that finding.
The unappealed orders for reimbursement of costs, for award

of costs for title examination and photocopies, and quashing of a

lis pendens, set forth on the fifth page of the decree, will be

affirmed. Smith's request for an award of attorney's fees will

be denied.

Because the decree appealed from did not end the causes and

strike them from the docket, although it did adjudicate the

principles of the causes, the matters will be remanded for entry

of a decree, not inconsistent with this opinion, which ends the

causes.
Affirmed in part,
reversed in part,
and remanded.

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