Conversion, fraudulent transfer rulings vs. appellants vacated

Where a landlord obtained judgments for unpaid rent and sued the tenants and others for fraudulent and voluntary conveyances, the trial court’s rulings that defendants were jointly and severally liable for the unpaid rent, attorneys’ fees and sanctions are vacated. The trial court also erred by holding one defendant liable for conversion.

Buy-out

Grayson and Kubli practiced law together. Grayson owned the firm, G&K/AMG. Westwood leased G&K/AMG office space. When Grayson was elected to Congress, Kubli, operating as K&A, bought Grayson’s practice and became a sublessee. G&K/AMG retained liability for the lease payments.

K&A agreed to assume liability for the so-called Grayson debt; $2.8 million Grayson had advanced G&K/AMG over the years to keep the firm solvent.

The firm’s purchase price was $2 million. G&K/AMG acquired a security interest in K&A’s assets. G&K/AMG, in turn, assigned its assets to Grayson as payment for the Grayson debt.

Grayson later obtained an assignment from G&K/AMG, which gave him all of the firm’s “rights and interest in the Buy-Out Agreement and in the K&A Security Agreement.”

Default

Brown, Grayson’s attorney, notified G&K/AMG on Nov. 30, 2010, that it had defaulted on its security agreement with Grayson. Brown wrote that G&K/AMG took annual advances beginning in December 2002. Under the agreement, the advances would end in December 2009, and all advances, totaling $2,816,281, had become due.

Brown noted that “Grayson was exercising his rights under the G&K/AMG Security Agreement and the UCC and creating a lien on all of G&K/AMG’s assets.”

K&A borrowed money from GSA, one of Grayson’s entities. The agreement, executed on Jan. 12, 2009, provided that funds could be provided through GSA, G&K/AMG or GCI, another Grayson entity. The loan was secured by a lien on K&A’s assets. On Dec. 31, 2009, Brown, as K&A’s attorney-in-fact, confessed judgment on the loan for more than $1.1 million.

Meanwhile, K&A began defaulting on its lease payments. Westwood obtained a consent judgment against K&A for $91,000.

A new firm

When Grayson’s term in Congress ended, he formed a new law firm, GLC. GCI took several cases from K&A as the firm wound up its business. The Halldorson case settled. Brown instructed K&A to send the $120,000 attorney’s fee to G&K/AMG, citing the buy-out agreement and the K&A security agreement. Brown then transferred the payments to the GLC trust account.

GLC also received payments from another client, IDT. Coleman, Grayson and Kubli’s bookkeeper, initially stated that “she thought the IDT payments had been for work performed in 2006, 2007, and 2008.” But under oath, she “clarified … that she thought the payments had been for the new oral retainer agreement in 2011 between IDT and GLC.

“In 2012, Grayson was again elected to Congress, and Kubli formed another entity, the Law Office of Victor A. Kubli, P.C. (‘LOVAK’)[.] … In October 2013, K&A’s accountant amended K&A’s 2011 tax return to note a ‘[c]ancellation of [d]ebt’ in the amount of $2,802,966[.]” Grayson and Kubli denied any debt forgiveness.

Westwood filed a second action for unpaid rent and obtained a $238,000 judgment against G&K/AMG and K&A, along with attorney’s fees and interest.

Westwood’s suit

Westwood sued Grayson, Kubli, Coleman and Grayson’s and Kubli’s entities to satisfy the judgment. Westwood’s fraudulent and voluntary conveyance claims went forward, as did a conversion claim against Grayson.

The trial court found defendants liable, jointly and severally, for several transfers that the court ruled were fraudulent. “The court, however, did not ‘void’ any of the allegedly unlawful conveyances.”

Buy-out and loan

The trial court held that the buy-out and GSA loan agreements were unenforceable. However, these agreements reflect that in “return for K&A promising to pay a $2 million purchase price, to assume approximately $2.8 million in debt to Grayson, and to lend various items and services to G&K/AMG in its efforts to wind up its business, G&K/AMG turned over all of its assets, clients, and resources to K&A. …

“The GSA Loan Agreement also reflected adequate consideration. In exchange for loaned funds, K&A granted GSA a lien on all of K&A’s assets and the right to confess judgment against K&A, and the agreement granted this lien and power of attorney regardless of which entity GSA caused to loan the funds to K&A. …

“[T]he GSA Loan Agreement and the confessed judgment were simply the payment of a bona fide, preexisting debt and did not constitute a fraudulent or voluntary conveyance.”

Other transfers

“The second set of transfers … that the trial court found to be both fraudulent and voluntary was the transfers from G&K/AMG to GLC, GCI, and Grayson. … The transfers … occurred in 2011, after Westwood had begun to send notices of default, and some after Westwood had filed the first action to collect back rent from K&A. Grayson, a perfected, secured creditor of G&K/AMG, directed the payments to reduce G&K/AMG’s preexisting debt to him personally, to provide a loan to GLC, and to close down the G&K/AMG account. …

“[T]he payments were made for adequate consideration in payment of an antecedent debt to a creditor with a perfected security interest.”

‘Halldorson’ funds

The trial court ruled that the “transfer of the Halldorson settlement proceeds from the Halldorson defendants through Gene Brown to GLC and ultimately to Grayson … ‘were cloaked with multiple badges of fraud[.]’ …

“The trial court’s only specific finding regarding Coleman’s alleged involvement in this transaction was that Coleman had sent an email to the property manager expressing her belief that K&A would pay the back rent soon because it anticipated receiving the Halldorson settlement proceeds.

“None of the 18 events following the email that the trial court references involved Coleman specifically. … The court, therefore, plainly erred by finding that Kubli and Coleman had personally received the Halldorson settlement proceeds or participated in this conveyance.”

IDT funds

“Next, the trial court found that the payments from IDT to GLC between May 2011 and September 2012 ‘were really due’ to G&K/AMG, discrediting Grayson’s and Coleman’s directly contrary testimony. …

“Westwood’s original complaint never alleged that the IDT payments to GLC had been fraudulent or voluntary conveyances. … Westwood later filed an amended complaint solely against Coleman. … The amended complaint asserted that Coleman was personally liable because she ‘diverted’ the IDT payments to GLC. …

“The appellants made the trial court aware of this pleading issue both during closing arguments and in their post-trial briefs. … The court did not address the issue in its letter opinion, which imposed liability on all of the appellants, including Coleman. …

“‘It is well settled that when fraud is relied upon to set aside a conveyance it must be expressly charged[.]’ … [T]he trial court erred by imposing liability for the IDT funds on the appellants, who were not alleged in the complaints to be liable for diverting the IDT funds to GLC or to anyone else.”

Debt write-off

“The trial court found that the K&A asset take-back and debt write-off noted on K&A’s amended 2011 tax return had been ‘cloaked’ with the same badges of fraud as the other transfers. …

“However, the court found that the voluntary and fraudulent conveyance statutes did not reach this transfer because ‘the original loan agreement creating the “debt” was void, and as such therefore, there is arguably no valid debt to transfer by means of forgiveness.’”

However, the buy-out and GSA loan agreements were supported by consideration, so we examine the trial court’s “alternative finding that the asset take-back and debt write-off was nonetheless fraudulent and voluntary because ‘Grayson unilaterally forgave all claimed indebtedness of K&A to the Grayson entities[.]’ …

“Grayson and Kubli testified that Grayson had never forgiven K&A’s debt. … [T]he trial court arbitrarily disregarded Grayson’s and Kubli’s testimony concerning whether Grayson had forgiven K&A’s debt. Their testimony was not inherently incredible and was consistent with lawful commercial practices.”

Conversion

The trial court erred by holding Grayson liable for conversion of the “Halldorson settlement proceeds. … Westwood did not have an immediate right to possession of these proceeds, much less one that was ‘clear, definite, undisputed, and obvious[.]’ …

“Those proceeds were subject to a valid, preexisting, and superior security interest in favor of G&K/AMG, and ultimately in favor of Grayson.”

Judgment for Westwood is vacated. Final judgment is entered for appellants.

Grayson, et al. v. Westwood Buildings, Record No. 191413 (Kelsey) June 24, 2021, Fairfax Circuit Court (Bernhard). Alan M. Grayson, et al. v. Westwood Buildings L.P. Record No. 191413; Victor Kubli, et al. v. Westwood Buildings L.P. Record No. 191414, Bernard J. DiMuro for appellants. Mathew D. Ravencraft  for appellee. Carla G. Coleman v. Westwood Buildings Limited Partnership, Record No. 191475, Kevin E. Smith for appellant. Mathew D. Ravencraft  for appellee. VLW 021-6-046, 46 pp.