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TAUBER, ET AL. v. COMMONWEALTH OF VA, ET AL.


TAUBER, ET AL. v.
COMMONWEALTH OF VA, ET AL.


April 17, 1998
Record No. 971155

LASZLO N. TAUBER, ET AL.

v.

COMMONWEALTH OF VIRGINIA,
ETC., ET AL.

OPINION BY JUSTICE A. CHRISTIAN COMPTON
FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA

Alfred D. Swersky, Judge
Present: All the Justices


In this chancery suit, the Attorney General of Virginia and a
commonwealth’s attorney jointly assert jurisdiction in the name
of the Commonwealth over assets located in Virginia held by
trustees in dissolution of a foreign charitable corporation. The
trustees had been directors of the corporation, which operated a
hospital in this State.

A brief summary of the relevant business activities of the
hospital directors will set the stage for this discussion.
Jefferson Memorial Hospital, Inc. (JMHI), was chartered
originally as a for-profit, stock corporation in Maryland in
1963. In 1964, the corporation amended its charter to become a
nonprofit, nonstock charitable entity; it began operations as an
acute-care hospital in Alexandria on March 15, 1965.

In April 1969, the federal Internal Revenue Service began an
investigation leading to revocation of JMHI’s tax-exempt status,
retroactive to November 1, 1965. In 1971, the corporation’s
directors attempted to "merge" JMHI into a for-profit
Delaware corporation, Jefferson Memorial Hospital Corporation
(JMHC). There was an effort to dissolve JMHI and to transfer its
assets and liabilities to JMHC, of which JMHI’s directors would
serve as directors.

In April 1973, Maryland ordered JMHI’s corporate charter
forfeited "for failure to file the necessary corporate
personal property report or failure to pay any late filing
penalties due."

In 1974, the directors retained counsel "to represent the
Hospital in looking after and insuring that the Hospital
Corporate structure for the past, present, and for the immediate
future, be handled so as to insure that everything is legally
correct and in keeping with the best interest of the investors of
the Hospital," according to JMHC’s minutes. Counsel
testified that he was "asked to rectify the problem that had
arisen because a supposed merger in ’71 had not been done."

Unaware that Maryland had revoked JMHI’s charter, counsel had
the directors declare JMHI insolvent and approve transfer of
JMHI’s assets to JMHC. In January 1975, JMHC’s directors
authorized purchase of the assets and assumption of the
liabilities. The directors of JMHC, believing they had assembled
all the assets of the former charity into the for-profit
corporation, agreed to transfer all JMHC’s "assets" to
appellant Laszlo N. Tauber as trustee for appellant Jefferson
Memorial Hospital Joint Venture (JMHJV), a partnership in which
those assets apparently still reside. The directors also agreed
to lease back from the partnership the transferred assets.

In July 1996, the present suit was instituted by the
Commonwealth of Virginia, ex rel. the Attorney
General of Virginia and the Commonwealth’s Attorney for the City
of Alexandria. The defendants are Tauber and nine other named
physicians, "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’)"; Jefferson Memorial Hospital
Associates; JMHJV; and Jefferson Corporation of Alexandria. A
prior suit had been commenced by the Attorney General against the
same defendants in April 1995, but was nonsuited during trial.

In the present suit, the plaintiffs filed a 112-paragraph,
40-page, three-count bill of complaint. They alleged that funds
and assets received by the defendants as directors and trustees
of a charitable corporation "were misappropriated and
diverted" contrary to law that requires such funds to be
used only for charitable purposes, "and not for private
inurement." The plaintiffs then recited in detail the
defendants’ alleged business activities in connection with the
hospital.

In count one, the plaintiffs alleged the "purported
merger between JMHI and JMHC in 1971 never took place," and
the "subsequent purported transfers of the property of JMHI
were likewise null and void." Asserting "JMHI was and
is a non-stock foreign corporation whose assets are located in
the Commonwealth" and are subject to the trial court’s
jurisdiction, the plaintiffs asked the court: to declare
"that the purposes for which JMHI was created have been
frustrated and are no longer capable of being accomplished by
virtue of" the defendants’ conduct; to declare that legal
title to JMHI’s assets remain in JMHI; to order that an
appropriate custodian gather the assets of the former JMHI and
administer them under the court’s supervision; to require that
defendants account for the money or other value received in the
transactions and that defendants be surcharged for the charitable
assets they usurped in the amount of at least $40 million; and to
enter judgment against defendants as a result of "their
conversion, misappropriation, or appropriation of the charitable
assets" described.

In count two, the plaintiffs sought similar relief and also
asked the court "to impose a constructive trust upon the
Hospital, its land, equipment and any other assets," as well
as upon settlement proceeds being paid by an entity which, in
1985, negotiated with JMHJV to buy the right to operate the
hospital and its assets as a going concern.

In count three, the plaintiffs asked the court to declare that
"the corporate opportunities of JMHI have been usurped"
by the defendants; that the defendants be required "to
account for and disgorge all sums usurped;" that the court
impress upon any future sums defendants may receive "an
appropriate judgement or trust to secure the interests of the
beneficiaries of JMHI, and, if necessary, to refer the matter to
a Commissioner in Chancery for an appropriate accounting and
charging order against JMHJV."

After the chancellor overruled their demurrer and plea in bar,
defendants answered the bill of complaint. They generally denied
the allegations, asserting the plaintiffs are not entitled to the
relief prayed for, or to any other relief.

The cause was heard ore tenus in January 1997. The parties had
stipulated that the trial in the present suit was to commence
where the prior trial terminated, and that the record of all
proceedings in the prior suit is to be a part of the present
record.

Following the trial, the chancellor filed a memorandum opinion
ruling that the plaintiffs are entitled to relief sought in the
bill of complaint. In a March 1997 decree, from which we awarded
defendants this appeal, the court declared that the assets and
liabilities of JMHI "be, reside and remain with [defendants] as trustees and further that a constructive trust be
. . . imposed on such assets and liabilities."

The court also ordered that a custodian "be appointed
with exclusive jurisdiction to hold and administer the said
assets and liabilities." Additionally, the court ordered
defendants to submit "a full and complete accounting of all
assets and liabilities that are the subject of this Decree."
Finally, the court denied the plaintiffs’ "claim for
monetary damages."

On appeal, defendants contend the trial court erred "when
it concluded that the Attorney General has authority to bring
this suit." The chancellor ruled "that the Attorney
General has standing and authority to bring this action both at
common law and pursuant to" Code ? 13.1-909(B). The
trial court is correct.

We need address only the common law. This Court long ago
recognized the common law authority of the Attorney General to
act on behalf of the public in matters involving charitable
assets. Clark v. Oliver, 91 Va. 421, 427-28, 22
S.E. 175, 177 (1895). Indeed, this authority has received
legislative recognition as recently as last year. During its 1997
session, the General Assembly granted the Attorney General
additional specific powers with respect to the disposition of
assets by nonprofit health care entities. Acts 1997, ch. 615.
These powers were granted "in order that the Attorney
General may exercise his common law and statutory authority over
the activities of these organizations." Code ? 55-532.

Next, defendants argue the chancellor erred in ruling that
Code ? 55-29 provides authority for the Commonwealth’s
Attorney of the City of Alexandria to be a proper party to the
claims asserted. We disagree.

Code ? 55-29 (1995 Repl. Vol.) provides, as pertinent:

"When any such gift, grant or will is recorded and no
trustee has been appointed, or the trustee dies or refuses to
act, the circuit court . . . of the city in which the
trust subject or any part thereof is, in the case of a gift or
grant, or in which the will is recorded, may, on motion of the
attorney for the Commonwealth in such court (whose duty it shall
be to make such motion), appoint one or more trustees to carry
the same into execution. . . . In enforcing the
execution of any such trust a suit may be maintained against the
trustees in the name of the Commonwealth when there is no other
party capable of prosecuting such suit. The term ‘trustees
as herein used shall be construed to mean the persons, or
governing body, charged with the execution of the trust, whether
designated as ‘trustees,’ ‘directors’ or
otherwise. . . ."

The phrase "any such gift, grant or will" refers to
Code ? 55-26.1, which provides, "Every gift
. . . made hereafter for charitable purposes, whether
made in any case to a body corporate or unincorporated
. . . shall be as valid as if made to or for the
benefit of a certain natural person. . . ."

The foregoing provisions are not limited to express trusts
arising by virtue of written instruments, as defendants argue,
but apply, as here, when the assets of JMHI passed automatically
to its directors as formal trustees of the charitable
organization in liquidation. Thus, the Commonwealth’s Attorney is
a proper party to this litigation.

Parenthetically, because the defendants seem to raise this
issue on brief, we note that use of the word "recorded"
in the first clause of the first sentence of ? 55-29 refers
to recorded wills, and not to any requirement that gifts or
grants also be recorded. This is made clear later in the same
sentence where there is specific reference to "in which the
will is recorded."

Next, we shall turn to the merits. A detailed recitation of
the evidence gleaned from this record would serve no useful
purpose. On appeal, the defendants primarily seek to have us
annul factual findings of the chancellor. The evidence, except
for opinions of experts, was not in dispute; defendants urge us
to invalidate the legitimate inferences drawn by the trial court
from those proven facts. This tactic will not succeed upon
appellate review.

The findings of a chancellor, hearing evidence ore tenus,
carry the weight of a jury verdict. Giannotti v. Hamway,
239 Va. 14, 23, 387 S.E.2d 725, 730 (1990). A judgment based upon
such findings will not be annulled on appeal "unless it
appears from the evidence that such judgment is plainly wrong or
without evidence to support it." Code ? 8.01-680. And,
the plaintiffs’ burden is to prove these allegations by a
preponderance of the evidence. Baylor v. Beverly Book
Co.
, 216 Va. 22, 24, 216 S.E.2d 18, 19 (1975).

Upon review we shall recite the facts, including the
legitimate inferences flowing from those facts, in the light most
favorable to the plaintiffs, who prevailed below. In the early
1960s, following acquisition of real estate by deed and lease by
King Street Joint Venture, held by defendant Tauber as trustee,
JMHI was formed to transact the business of operating a hospital.
This Maryland corporation was authorized to do business in
Virginia in 1963. Following the March 1965 opening, the hospital
experienced "problem[s] all the time," although an
expansion allowing addition of 24 beds occurred in 1968.

In 1970, during the Internal Revenue Service investigation, an
attorney was retained to review "the current corporate
status of the hospital." Counsel recommended "a
complete reorganization of the hospital and its affiliates,"
establishment of "a new profit corporation with the same
name," and "that the old non-profit corporation be
merged into it."

The Delaware for-profit corporation, JMHC, was formed in 1971
and a supposed merger was arranged. This merger was reported on
tax returns filed in 1972, but the record is devoid of documents
to support such a transaction. However, Dr. Tauber, who mainly
orchestrated the myriad transactions involved in this case,
testified, "In my own mind, [the merger] was
completed." The chancellor said no evidence had been
presented to show due diligence was used at that time to protect
the interests of the beneficiaries of the charitable hospital.

The basis of the 1972 Internal Revenue Service ruling revoking
JMHI’s tax-exempt status was: "The hospital sold 8% bonds to
various doctors and individuals in exchange for their 6% demand
notes and did not enforce collection of such demand notes. Other
hospital bonds were sold to the general public at 8% for cash.
Some of the doctors receiving the 8% bonds in exchange for their
6% demand notes were officers, directors, and staff members of
the hospital. Issuance of 8% bonds to these doctors and failure
to enforce collection of the demand notes received in exchange
resulted in inurement of income to private individuals."
This was a violation of the applicable provision of the Internal
Revenue Code allowing exemption of charities from federal income
taxation.

In 1974, after another attorney had been retained "to
rectify the problem that had arisen" because of the putative
merger, documents indicate that JMHC assumed the charity’s
liabilities in return for receipt of JMHI’s assets. The charity
was to receive 5,000 shares of JMHC stock, but no such transfer
was made.

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 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."

A transaction illustrative of the foregoing conclusions
involves a subdivision of the hospital’s real estate in 1970. The
charity’s 65% undivided interest was lost and, in its place, the
charity obtained a 20% interest consisting of an allocated
parcel. Also, after the nonprofit corporation was dissolved by
Maryland authorities in 1973, defendants caused the filing of an
annual report with the State Corporation Commission of Virginia
that JMHI remained in good standing.

As the chancellor found, deals were "convoluted and
complex with off-record real estate transactions conflicting with
the state of the title as shown on-record. Net operating losses
were used as tax deductions by JMHC that had become deductions
[as] a result of the revocation of JMHI’s tax exempt status. When
[defendants] had exhausted these deductions, they began seeking
ways to benefit their own tax status through a complicated series
of notes and bonds, and while some personal risk was taken, the
[defendants] and others were participating in the venture in
basically a risk-free manner."

Defendants claimed in the trial court that JMHI had no value
in 1971 and, thus, the transactions by which they assumed control
of its corporate assets by the assumption of its liabilities were
"fair." Responding, the chancellor determined that JMHI
"had value as a ‘going concern’" when the effort was
made to change to a for-profit corporation. But the court
concluded that defendants’ expert testimony was more persuasive
than plaintiffs’ and that "the value of the corporation did
not exceed its liabilities." "However," the
chancellor ruled, "this does not constitute a defense to the
claims made here."

The defendants’ contentions regarding the merits of the suit,
including the arguments advanced by amici curiae supporting
defendants, are premised upon several erroneous conclusions. For
example, defendants believe the trial court recognized that a
legally valid "transaction" of some sort occurred in
1971.

Defendants’ description of the nature of this binding
"transaction" has evolved from "merger," to
"reorganization," and finally, during oral argument of
the appeal, to "acquisition." Also, defendants and
their supporters think this case involves the improper meddling
by the Commonwealth into the internal affairs of a Maryland
corporation, contrary to settled law and violative of the Full
Faith and Credit, Due Process, and Commerce Clauses of the United
States Constitution. This case involves none of the above.

The trial court determined that no transaction in the nature
of a merger or reorganization took place in 1971. The chancellor
ruled that "no merger of JMHI and JMHC has occurred and that
the transactions by directors of JMHI are void, the assets
remained in JMHI until its dissolution. At the time of
dissolution, these assets passed into and remain in the hands of
[defendants] as trustees." This ruling is fully supported by
the applicable law and the uncontradicted evidence, most of which
was created by defendants.

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 under
Maryland law. Md. Code Ann., Corporations Art. 23, ? 78(a)
(1957); Cloverfields Improvement Ass’n v. Seabreeze
Properties, Inc.
, 373 A.2d 935, 939-40 (Md. 1977). Virginia
law was and is the same. See former Code ? 13.1-254
(1973 Repl. Vol.); present Code ? 13.1-915 (1993 Repl.
Vol.).

The charter revocation terminated JMHI’s corporate existence
and powers, and it could no longer function as a corporation. Cloverfields
Improvement Ass’n
v. Seabreeze Properties, Inc., 362
A.2d 675, 679 (Md. App. 1976). 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. Cloverfields, 362 A.2d at 679.

Under Maryland law, property of a charitable corporation is
held in trust for the public. Inasmuch Gospel Mission, Inc.
v. Mercantile Trust Co. of Baltimore, 40 A.2d 506, 510
(Md. 1945). Virginia law is the same. "The corporation was
organized for charitable or benevolent or literary purposes.
Contributions made to it and the assets realized therefrom were
dedicated to those purposes and stamped with a public interest by
the charter, the laws of this State, sound reason and public
policy. The members acquired no property rights in, nor were they
equitably entitled to such assets, either during the lifetime of
the corporation or upon dissolution. To hold otherwise would
convert the public nature and purpose of the corporation into a
vehicle for the personal pecuniary gain of the members." Hanshaw
v. Day, 202 Va. 818, 824, 120 S.E.2d 460, 464 (1961).
Thus, the defendants’ contentions that this litigation, dealing
with appropriation of charitable assets by directors for their
personal gain, involves impermissible interference by Virginia
with the internal affairs of a foreign corporation, or that a
"fairness" doctrine should be applied to the 1971
activities, are without merit.

Accordingly, the circuit court properly exercised its
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). See former Code
? 13.1-257(e) (1973 Repl. Vol.). The corporate facilities
were located solely within this State in Alexandria.

Thus, we hold the trial court did not err in taking charge of
the liquidation of the assets of this dissolved foreign
corporation, and in providing the relief outlined in the order
from which this appeal was taken. This record clearly
demonstrates that the directors of JMHI, now trustees in
dissolution, have failed and refused to execute the trust.

Finally, we have considered, and reject, defendants’ other
arguments. Only one of those contentions merits discussion.
Defendants argue the trial court erred in not sustaining its plea
based on the doctrine of laches.

Laches may not be pled successfully as a defense in an
equitable proceeding to bar the State from asserting a claim on
behalf of the public. Board of Supervisors of Tazewell County
v. Norfolk and W. Ry. Co., 119 Va. 763, 790, 91 S.E. 124,
133 (1916). Accord City of Manassas v. Board of
Supervisors of Prince William County
, 250 Va. 126, 132, 458
S.E.2d 568, 571 (1995). See Dick Kelly Enter. v. City
of Norfolk
, 243 Va. 373, 381, 416 S.E.2d 680, 685 (1992). As
we already have said, this cause is brought by the Commonwealth
on behalf of the public to hold and administer charitable assets.
Hence, laches does not apply.

Consequently, we will affirm the judgment appealed from, an
interlocutory decree adjudicating the principles of the cause,
and we will remand the cause to the trial court for further
proceedings.

Affirmed and remanded.

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

FOOTNOTES:

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

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