Landlord Proves Fraudulent Conveyance Against Lawyers and Defunct Law Firm

A partnership that owned the site of a defunct Fairfax County law practice is entitled to judgment against the former principals, including a former congressman, and other entities for $380,864.91 for both fraudulent conveyance and voluntary conveyance. The partnership also is entitled to judgment against the ex-congressman for conversion in the amount of $120,000.

The landlord partnership sued to set aside numerous conveyances made by two former law firms to their respective owners. The case followed a collection action based on judgments for unpaid rent. During collection efforts, the lawyers assigned or transferred most of the assets of their former law firms to themselves or to entities they controlled, leaving little for the landlord to collect.

An 11-day bench trial focused on five transfers the landlord contended were reachable through its conveyance claims. The defendants asserted the transfers were lawful preferences because the assets were objects of two perfected security interests, placing the assets beyond the landlord’s reach.

Claims against Grayson Consulting

Plaintiff served the wrong entity with its case against “Grayson Consulting Inc.” Plaintiff sought to amend its complaint, however substitution of the Florida entity for its identically named Virginia counterpart is not the correction of a misnomer.

Even with service on the director of both entities, it would be error to permit amendment after close of the evidence without affording the defendant at least a continuance and the right to prepare further to meet the amendment, including the reopening of discovery.

The court is compelled to dismiss the claim against Grayson Consulting Inc. for, although acting in good faith, the plaintiff either served the wrong entity or failed by timely amendment to bring the proper entity before the court.

Validity of underlying agreements

The essential buy-out agreement for Grayson & Kubli to transfer all assets to Kubli & Associates amounted to Grayson effectively retaining de facto ownership of all assets of K&A, with G&K receiving no payment from Kubli other than the promise to pay in the future. Kubli also insisted on being shielded from personal liability, which essentially insulated Kubli from having to pay any of the debts of K&A, including on the agreement for sale and loan.

From the beginning, K&A was insolvent in the sense it could only operate based on the largess of Grayson himself. Grayson and/or his entites transferred assets belong to G&K and K&A back to themselves from time to time, which placed those assets out of the immediate reach of creditors.

The agreements effectively allowed Grayson to pay only those creditors he chose to pay, by maintaining K&A in a perpetual state of insolvency which would shield it from creditors should it ultimately fail to succeed, even with the periodic infusions of operating capital.

The purported agreements of Grayson and Kubli masked the simplicity of the express and consummate failure of consideration in support of the agreements. In sum, there was nothing of value exchanged and any promises were illusory and of no binding significance.

The court finds from the facts that performance by the parties of the purported terms of the contract provided nothing other than the illusive suggestion of consideration, which the court finds lacking in whole. In addition, there is scant compelling evidence of the purported loans asserted. The transfers are largely reachable by the landlord to the extent of its proof of damage claims for fraudulent conveyance, voluntary conveyance and conversion.

Fraudulent conveyance claim

The court reaffirms a prior ruling of a motions judge that laches operated as the time limitation on the claim of fraudulent conveyance. It is clear from the absence of a specified statute of limitations for fraudulent conveyance that the General Assembly intended there be no set limitation on the period during which such claims could be advanced.

The defense of laches fails. Plaintiff did not sit on its hands but first pursued its remedies directly against G&K and K&A, and then as the murky relationship between the various entities and individuals came into focus, pursued the remedies advanced in this suit. The record is devoid of prejudice to the defendants. Grayson effectively controlled all the entities, directly as an employer and indirectly as their financial lifeline.

The record supports a finding of one or more “badges of fraud” against all of the defendants but two.

K&A’s continuing state of insolvency allowed Grayson to determine which creditors were to be paid, considering he effectively controlled the capital flow to and from K&A. The state of subservience to Grayson by the office bookkeeper and Kubli was on display at trial, as they testified evasively or in contradiction of prior statements in a clear effort to appease their employer and defer to his recitation of the evidence.

The plaintiff has proven its count of fraudulent conveyance and is entitled to an award of $380,864.91 in damages, together with interest, costs and reasonable attorneys’ fees against Grayson, Kubli, the bookkeeper and four corporate entities.

Attorneys’ fees are justified by the extensive efforts to which the landlord was put to collect rents due.

Voluntary conveyance claim

The standard of proof for voluntary conveyance claims is a preponderance of the evidence, since the central operative fact is primarily a determination of “insolvency,” which is generally of easy measurement.

The plaintiff has proven its count of voluntary conveyance. The transfers in question were unquestionably made at a time when the defendant law firms were insolvent. The agreements lacked mutuality and consideration ab initio, were thus not originally enforceable, and stand as invalid in this cause. Moreover, the individual transfer transactions applicable to the fraudulent conveyance claim lacked adequate consideration and were made at a time after G&K and K&A were already indebted to the landlord.

The plaintiff is entitled to an award of $380,864.91 in damages, together with interest, costs and reasonable attorneys’ fees against Grayson, Kubli, the bookkeeper and four corporate entities.

Conversion claim

Plaintiff alleged two payments totaling $120,000 in connection with a qui tam action were unlawfully diverted from reaching K&A and delivered to Grayson.

Grayson argues the amounts were in effect due to him under the agreement that created K&A and as such was a preexisting asset belonging to him or to entities he controlled. He is mistaken. The effect of a fieri facias was that any receivables due K&A at the time of garnishment were within the scope of the landlord’s lien on intangibles.

The assertion by Grayson of a claimed status of lien creditor in priority to the landlord’s claims is not of itself a basis to prematurely help himself to funds subject to the reach of the fieri facias. K&A’s “inchoate intangible rights” in receivables from outstanding cases were subject to the lien of the writ obtained pursuant to Va. Code § 8.01-501.

The landlord has proven its count of conversion and is entitled to an award against Grayson of $120,000 in damages, together with interest thereon, costs of suit and reasonable attorneys’ fees.

Punitives damages are not supported because Grayson’s conduct did not amount to malice of a conscious disregard of the rights of others.

Civil conversion claim and motion to amend

The landlord’s claim for civil conspiracy was not within the applicable statute of limitations for personal fraud, which is two years. Although an alternative conclusion might have allowed the advancement of the civil conspiracy claim, the court finds it would have been of undue prejudice to defendants to reinstate that claim in the midst of trial.

The court dismisses claims against defendants Law Office of Victor A. Kubli PC and Grayson Consulting Inc.

Westwood Buildings Ltd. Partnership v. Grayson (Bernhard) No. CL-2016-09728, Sept. 8, 2017; Fairfax County Cir.Ct.; Matthew D. Ravencraft, Daniel Schumack, Tucker H. Byrd, Kevin E. Smith for the parties (VLW 017-8-083).