Provident Mutual v. Khasgiwala ( 1997 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
PROVIDENT MUTUAL LIFE INSURANCE
COMPANY,
Plaintiff-Appellee,
v.
CHANDRA K. KHASGIWALA,
No. 96-2011
Defendant-Appellant,
and
MUNNI CORPORATION; K-MART
CORPORATION,
Defendants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert E. Payne, District Judge.
(CA-95-729)
Argued: March 6, 1997
Decided: April 16, 1997
Before MICHAEL and MOTZ, Circuit Judges, and
GOODWIN, United States District Judge for the
Southern District of West Virginia, sitting by designation.
_________________________________________________________________
Reversed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Charles Manley Allen, Jr., WRIGHT, ROBINSON,
OSTHIMER & TATUM, Richmond, Virginia, for Appellant. William
Lynn Thurston, BEALE, BALFOUR, DAVIDSON & ETHERING-
TON, P.C., Richmond, Virginia, for Appellee. ON BRIEF: Lynn L.
Tavenner, WRIGHT, ROBINSON, OSTHIMER & TATUM, Rich-
mond, Virginia, for Appellant.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The question presented here is whether the district court erred in
holding Provident Life Insurance Company was entitled to recover
$553,683 from Chandra K. Khasgiwala under a theory of fraudulent
conveyance when Provident had received full repayment of the under-
lying debt. We believe it did and so must reverse.
I.
The district court masterfully set forth the complicated underlying
facts. See Provident Mut. Life Ins. Co. v. Munni Corp., Civ. No. 3:95
C.V. 729 (E.D. Va. June 21, 1996). Accordingly, we simply summa-
rize them here.
Munni Corporation owned a mall that Provident Life Insurance
Company had financed. In 1991 K-Mart Corporation, one of the prop-
erty's main tenants, abandoned the property and began negotiations
with Munni to terminate the remainder of its twenty-five year lease.
Munni's loan agreement with Provident did not allow any alteration
in lease terms without Provident's permission.
In August of 1994 Munni terminated its lease agreement with K-
Mart in return for a payment of $555,683. Soon thereafter Munni
transferred $555,000 of this payment to Dr. Khasgiwala, Munni's sole
shareholder, officer, and director. Munni stopped paying Provident on
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its loan in early 1995, and suggested that Provident foreclose on the
property. At the time of Munni's default, it owed Provident $892,674
on the loan.
Provident foreclosed, and on May 9, 1995 Provident purchased the
property at a public foreclosure sale for the sum of $938,084.73. After
expenses the trustee credited Munni's account in the amount of
$868,244.88, leaving $24,429.12 as the balance outstanding on Provi-
dent's loan to Munni.
Provident then filed this action against Munni, Dr. Khasgiwala, and
K-Mart. (The district court denied K-Mart's motion for summary
judgment, and that ruling is not before us.) Provident sued Munni for
the costs and fees involved in the default and foreclosure, and for the
fraudulent transfer. Munni and Provident settled these claims for
$25,000. Accordingly, Munni no longer owes Provident anything --
Munni has fully paid the loan and all fees owed Provident because of
the foreclosure.
Provident continued its suit against Dr. Khasgiwala for the fraudu-
lent conveyance. Provident and Khasgiwala cross-moved for sum-
mary judgment. The district court held that the payment from Munni
to Khasgiwala was a fraudulent conveyance, and awarded judgment
against Khasgiwala for the full amount of the payment. Khasgiwala
appealed to this court, and we now reverse.
II.
The first question is whether the district court correctly found that
the payment from Munni to Khasgiwala was a fraudulent conveyance.
Virginia law defines a fraudulent conveyance as:
Every gift, conveyance, assignment or transfer of, or charge
upon, any estate, real or personal, every suit commenced or
decree, judgment or execution suffered or obtained and
every bond or other writing given with intent to delay, hin-
der or defraud creditors, purchasers or other persons of or
from what they are or may be lawfully entitled to shall, as
to such creditors, purchasers or other persons, their repre-
sentatives or assigns, be void. . . .
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Va. Code Ann. § 55-80 (Michie 1995).
Munni's transfer to Khasgiwala was a fraudulent conveyance. The
district court found that Munni was "insolvent at the time of the trans-
fer" and "undercapitalized" with an "enormous debt." The transfer to
Khasgiwala left Munni with $2,000 in cash and over $1 million in
debt, with only the property as collateral. Munni accepted the pay-
ment and terminated the lease in clear violation of the loan agree-
ment: Munni was required to obtain Provident's permission to alter
the K-Mart lease in any way, let alone accept a $550,000 payment to
break the lease. Lastly, after transferring all of its liquid assets to
Khasgiwala, and devaluing Provident's collateral, Munni promptly
defaulted on its loan.
Under these circumstances there can be little question that the pay-
ment from Munni to Khasgiwala was, as the district court found, a
fraudulent conveyance. Given the size of the debt, the removal of vir-
tually all of Munni's cash, and Munni's failure to inform Provident
of K-Mart's lease termination, the transfer was intended to defraud
creditors of money they were "lawfully entitled to."
III.
Khasgiwala does not dispute that the Munni payment was a fraudu-
lent conveyance. Instead, he argues that because Munni has fully
repaid Provident for its loan Provident has suffered no loss because
of the conveyance. Indisputably, Munni has paid off its loan from
Provident, and therefore the question we must answer is whether
Provident is entitled to recover damages for the fraudulent transfer
when it has been fully repaid on its loan. We conclude that Provident
may not recover more than the amount owed on its loan under Virgin-
ia's law of fraudulent conveyance.
We begin with the language and history of Virginia's fraudulent
conveyance statute. Section 55-80 "is itself but declaratory of the
common law." Shufeldt v. Jenkins, 22 F. 359, 371 (E.D. Va. 1884);
see also Hyman v. Porter, 37 B.R. 56 (Bankr. E.D. Va. 1984). The
common law has prohibited fraudulent conveyances to prevent "debt-
ors from making transfers that hinder, delay, or defraud their creditors
. . . for over four centuries. A debtor cannot manipulate his affairs in
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order to shortchange his creditors and pocket the difference." Douglas
G. Baird & Thomas H. Jackson, Fraudulent Conveyance Law and its
Proper Domain, 38 Vand. L. Rev. 829, 829-30 (1985); see also
Joseph E. Ulrich, Fraudulent Conveyances and Preferences in
Virginia, 36 Wash. & Lee L. Rev. 51, 52 (1979) ("The purpose of the
law of fraudulent conveyances is to assist creditors, both individually
and collectively, in realizing on their debts from the assets of a
debtor.").
Virginia's codification of the common law of fraudulent convey-
ances similarly focuses upon protecting creditors from dishonest debt-
ors. The statute applies to transactions intended to"delay, hinder or
defraud creditors." Va. Code Ann. § 55-80. A creditor's recovery
under § 55-80 is limited, however, to "what they are or may be legally
entitled to." This is because the law of fraudulent conveyances is
meant to protect the amount owed to creditors.
Thus, Provident's fraudulent conveyance claim only entitles it to
recover the amount owed on the loan, and it would go well beyond
the rationale underlying Virginia's law of fraudulent conveyance to
allow Provident to receive more than it was owed. Furthermore, such
a result cannot be squared with the statute itself, which allows relief
only for "what [creditors] are or may be legally entitled to." Because
Provident has already been fully recompensed on the loan it has
received what it is "or may be entitled to."
Nevertheless, the district court held that Provident was still entitled
to recover damages from Khasgiwala. The court relied upon the loan
agreement between Munni and Provident, which provided that upon
default by Munni, Provident "became entitled to receive" all rent. The
court held that Munni's termination agreement with K-Mart consti-
tuted a default on the loan agreement and, therefore Provident became
entitled to receive all rent and payments on the property, including the
entire K-Mart rent payment that Munni had fraudulently conveyed to
Khasgiwala.
The essential problem with this rationale is Provident's contractual
right to rents was not absolute and unlimited. The loan agreement
between Provident and Munni clearly provides that Provident must:
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apply such rents, issues and profits to the payment of (a) the
cost of all such alterations, renovations, repairs and replace-
ments and expenses incident to taking and retaining posses-
sion of the Premises and the management and operation
thereof, and keeping the same property insured and (b) all
taxes, charges, claims assessments, water rents and any
other liens which may be prior in lien or payment to the
mortgage debt, and premiums for said insurance, with inter-
est on all such items, and (c) the indebtedness secured
hereby together with all costs and attorneys' fees, in such
order of priority as to any of such items as [Provident] in its
sole discretion may determine . . . .
In short, Provident had no right to rents and payments beyond the
amount of its loan to Munni and the cost of maintenance of the prop-
erty. When the loan was paid off, as it concededly was, the contract
entitled Provident to nothing more. As such, Munni's violation of the
contract does not create a right to any funds beyond the loan amount.
Provident argues that it grossly overbid for the property and that
the value of the property, as determined by its appraisers, should gov-
ern in determining the amount Khasgiwala owes. No Virginia author-
ity supports such a theory. In fact, the Virginia Supreme Court has
held that a court may "rely on the amount of[an auction] bid as . . .
evidence of actual market value." Jones v. Jones, 457 S.E.2d 365, 370
(Va. 1995).
Nevertheless, Provident urges us to follow Alliance Mortgage Co.
v. Rothwell, 34 Cal. Rptr. 2d 700 (Cal Ct. App. 1994), aff'd 900 P.2d
601 (Cal. 1995). Alliance permitted a lender who had been fully
repaid on its loan via a "full credit bid" (the lender used the entire
amount owed on the loan as a "credit" to purchase the property) to sue
a third party in fraud. Id. at 704-5. Provident argues that because it
made a similar "full credit bid," it should be allowed to sue Khasgi-
wala.
We reject this argument for several reasons. First, even if Alliance
provided direct and clear support for Provident's position here, we
would be loath to adopt the rationale of a California case in this diver-
sity case governed by Virginia law, absent some indication that a Vir-
6
ginia court would adopt such a rule. Provident cites no such Virginia
authority.
Moreover, on examination, Alliance provides little support for
Provident here. Alliance makes a strong distinction between actions
for waste, where recovery is limited to the amount of the loan, and
common law fraud actions, which allow damages beyond the amount
of the loan. Id. at 705-7. Actions for fraudulent conveyance, like
actions for waste, are limited to the amount the creditors "are or may
be lawfully entitled to," and therefore Alliance does not apply.
Furthermore, Alliance only allows a lender to sue for the "actual
damages" caused by the fraud, such as "losses from the sale of the
foreclosed properties for less than the amount due on the loans and
foreclosure expenses." Id. at 710. Provident has not alleged or proven
that the fraudulent conveyance caused any damages beyond the
amount of the loan, and Munni has fully recompensed Provident for
the costs of the foreclosure and the loan. Provident's only possible
"actual damages" arise from its own overpayment for the property.
But, Provident has not claimed (nor could it) that this overpayment
was a result of Khasgiwala's fraud. For these reasons, the judgment
of the district court is
REVERSED.
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