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the funds could be withdrawn upon demand, and that the return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