Bank of Hampton Roads v. Powell , 292 Va. 10 ( 2016 )

PRESENT: All the Justices
THE BANK OF HAMPTON ROADS, ET AL., 1
OPINION BY
v. Record No. 151190 CHIEF JUSTICE DONALD W. LEMONS
June 2, 2016
ETHEL B. POWELL
FROM THE CIRCUIT COURT OF THE CITY OF CHESAPEAKE
Marjorie A. T. Taylor Arrington, Judge
In this appeal, we consider whether the trial court erred in imposing a constructive trust
upon a subdivision lot after a developer breached a contract to convey a different property.
I. Facts and Proceedings
Ethel B. Powell (“Powell”) owned a house and a parcel of land on Waters Road in the
City of Chesapeake, Virginia. In 2003, a subdivision development company, 3 MAC II, LLC (“3
MAC”) approached Powell with an offer to purchase her property. 3 MAC and its manager-
members 2 sought to develop a subdivision to be known as North Rollingwood Estates, and they
wanted to include Powell’s land in the subdivision. The Bank of Hampton Roads (“Bank”)
extended loans for 3 MAC to acquire the land and develop the subdivision.
On November 7, 2003, Powell signed a contract to convey her property to 3 MAC in
exchange for $265,000 and “one (1) lot to be mutually agreed upon by both Buyer and Seller in
writing.” Powell conveyed her land to 3 MAC on May 11, 2004. Thereafter, on January 28,
2005, Powell and 3 MAC prepared an addendum to the contract stipulating that Powell would
1
Appellants include Jack W. Gibson and Julie R. Anderson (“Trustees”) in their capacity
as Trustees under a Credit Line Deed of Trust encumbering the property at issue in this case.
2
3 MAC’s manager-members were Anthony Sancilio (“Sancilio”), Michael Hanley
(“Hanley”) and Charles Hostetler (“Hostetler”).
receive the lot designated as Lot 1 on the preliminary subdivision plat for North Rollingwood
Estates. 3
On several occasions over the next few years, Powell allegedly asked 3 MAC and its
member-managers to convey Lot 1 to her in accordance with the contract. In her complaint,
Powell claimed that Sancilio “repeatedly assured [her] that he was going to make the conveyance
but continually fabricated on[e] excuse after the other….” Instead of fulfilling its contractual
obligation to convey Lot 1 to Powell, 3 MAC negotiated to sell the same lot to Ashdon Builders,
Inc. (“Ashdon”). On February 15, 2012, Ashdon purchased Lot 1 for $110,000.
Upon learning that 3 MAC had sold Lot 1, Powell brought suit in the Circuit Court of the
City of Chesapeake (“trial court”) against 3 MAC, Ashdon, Hostetler, Hanley, and several
others. Although the Bank was not named in Powell’s first complaint, Powell later amended her
complaint to add the Bank as a co-defendant. Powell’s complaint alleged breach of contract and
fraudulent conveyance. Powell also sought the imposition of a constructive trust upon Lot 1. On
February 28, 2013, Powell settled her claim against Ashdon. 4 Upon request of both parties, the
trial court dismissed Powell’s claim against Ashdon with prejudice, thereby releasing Powell’s
claim to Lot 1.
Powell continued to pursue her claims against 3 MAC and the Bank. Since she could no
longer assert a claim against Lot 1, Powell asked the trial court to impose a constructive trust
upon the remaining land owned by 3 MAC and which had not yet been sold. This remaining
property, known as “Lot A,” was subject to the Bank’s recorded first-lien deed of trust, and
3
The final subdivision plat was recorded with the City of Chesapeake on July 22, 2008.
However, Powell never recorded her contract with 3 MAC or her designation of Lot 1.
4
Although the record contains no evidence of the Powell-Ashdon settlement, BHR
alleges that Powell released her claim against Lot No. 1 in exchange for a payment of $25,000
and Powell has not disputed that allegation.
2
Powell sought imposition of a constructive trust upon Lot A superior to the Bank’s deed of trust.
After a bench trial, the trial court held that the Bank had actual knowledge of Powell’s right to a
lot in the subdivision, and that the Bank’s “wrongdoing robbed [Powell] of possession of the
original lot specified in her contract” with 3 MAC. The trial court held that Powell had
established, by clear and convincing evidence, that she was entitled to a constructive trust upon
Lot A.
The Bank filed a motion to reconsider which was denied by the trial court, and the trial
court entered final judgment against the Bank, 3 MAC and its manager-members. In its Final
Judgment Order the trial court imposed a constructive trust upon Lot A and further decreed that,
3MAC II, LLC shall convey said property to Plaintiff free and clear of any liens or
encumbrances and Defendants Bank of Hampton Roads, Jack W. Gibson, Trustee and
Julie R. Anderson, Trustee shall release any lien, encumbrance or claim to said property
However, the trial court imposed an additional and unusual conditional form of relief that
provided,
if Plaintiff does not receive [Lot A] pursuant to the constructive trust then Plaintiff shall
have judgment against Defendants 3 MAC II, LLC, Charles V. Hostetler and Michael W.
Hanley, jointly and severally, in the amount of $110,000.
Only the Bank and the Trustees timely filed a petition for appeal and we granted the
appeal on the following seven assignments of error:
1. The trial court erred in creating a constructive trust in favor of Plaintiff upon Lot A, as
there was no basis for creating a constructive trust and Plaintiff’s contract only entitled
her to Lot No. 1.
2. The trial court erred in failing to treat [the Bank] as a bona fide purchaser under the law,
where the record demonstrated that [the Bank] had no actual or constructive notice of
Plaintiff’s rights in Lot No. 1.
3. The trial court erred in holding that Plaintiff had a right to Lot A, as she only contracted
to receive Lot No. 1 from the other defendants and each piece of property is treated as
unique under the law.
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4. The trial court’s ordering 3 MAC to convey lot A to Plaintiff free and clear of [the
Bank’s] First Lien Deed of Trust and ordering [the Bank], Gibson, and Anderson to
release [the Bank’s] Deed of Trust recorded against Lot A constituted an improper
remedy.
5. The trial court erred in imposing a constructive trust upon Lot A superior to [the Bank’s]
First Lien Deed of Trust where Plaintiff had an adequate remedy at law in the monetary
judgment she received against the other defendants.
6. The trial court erred in failing to consider or credit the $25,000 amount received by
Plaintiff as settlement from Ashdon Builders, Inc. for Plaintiff’s release of her claim
against Lot No. 1.
7. The trial court erred in failing to vacate the March 3, 2015 Opinion pursuant to the
request in [the Bank’s] Motion to Reconsider and Brief in Support.
II. Analysis
A. Standard of Review
A constructive trust is an equitable remedy which is created by operation of law to
prevent a fraud or injustice. See Leonard v. Counts, 221 Va. 582, 589, 272 S.E.2d 190, 195
(1980). Accordingly, a trial court’s decision to impose a constructive trust presents a mixed
question of law and fact which we review de novo. See Westgate at Williamsburg Condo. Ass’n
v. Philip Richardson Co., 270 Va. 566, 574, 621 S.E.2d 114, 118 (2005). However, we consider
all facts in the light most favorable to Powell, the prevailing party below. See Caplan v. Bogard,
264 Va. 219, 225, 563 S.E.2d 719, 722 (2002).
B. Constructive Trust
Assignments of error one, three, four, and five all concern the trial court’s creation of a
constructive trust upon Lot A in favor of Powell. The Bank argues that the trial court erred in
imposing a constructive trust because Powell had no contractual right to Lot A. The Bank
contends that Powell cannot “distinctly trace” her interest to Lot A because her contract with 3
MAC designated Lot 1, not Lot A, which is a unique and distinct property under the law. Powell
responds that 3 MAC contracted to convey “one (1) lot to be mutually agreed upon” in the North
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Rollingwood Estates subdivision. Since Lot 1 was no longer available, Powell argues that the
trial court correctly imposed a constructive trust so that she would receive Lot A, the only
remaining parcel of land in the subdivision still owned by the subdivision development company.
We have held that “[c]onstructive trusts arise, independently of the intention of the
parties, by construction of law; being fastened upon the conscience of him who has the legal
estate, in order to prevent what otherwise would be a fraud.” Faulknier v. Shafer, 264 Va. 210,
215, 563 S.E.2d 755, 758 (2002) (citations omitted). Furthermore, “in order to be entitled to the
benefit of a constructive trust, a claimant’s [interest] must be ‘distinctly traced’ into the chose in
action, fund, or other property which is to be made the subject of the trust.” Crestar Bank v.
Williams, 250 Va. 198, 204, 462 S.E.2d 333, 335 (1995).
Crestar involved multiple victims of an investment fraud who sought recovery against the
few remaining assets of the man who perpetrated what was essentially a Ponzi scheme. Id. at
201-04, 462 S.E. 2d at 334-35. We held that the trial court erroneously imposed a constructive
trust in favor of the defrauded investors because the investors failed to distinctly trace the funds
they had invested into the remaining assets. Id. at 204, 462 S.E.2d at 336.
Although the investors had undeniably suffered significant losses of nearly half a million
dollars, the trial court in Crestar erred by creating a constructive trust and granting the investors
priority over all record and judgment creditors. We held that:
[t]he 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.
Id.
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Likewise, in this case, Powell failed to distinctly trace her claim to the property that was
the subject of the constructive trust. As amended in 2005, Powell’s contract with 3 MAC
provided that she would receive a particular subdivision lot, designated as Lot 1. Yet ten years
later, the trial court imposed a constructive trust upon Lot A – a different lot within the
subdivision. We have held that “land always has, in the eye of the law, a peculiar value.” Hale
v. Wilkinson, 62 Va. (21 Gratt.) 75, 80 (1871). See also Ndeh v. Midtown Alexandria, L.L.C.,
300 Fed. Appx. 203, 207 (4th Cir. 2008) (“Under Virginia law, every piece of real estate is
unique.”). Unlike money, land is not fungible. Therefore, even if Lot 1 and Lot A were identical
in shape and size, Powell would have no equitable claim to Lot A.
After her choice of lot in 2005, Powell’s interest lay with Lot 1, not with Lot A. In 2012,
when it sold Lot 1 to Ashdon, 3 MAC breached its contract with Powell. Consequently, Powell
was entitled to damages. But a constructive trust is an equitable remedy available under specific
conditions and when legal remedies, such as monetary damages, would be insufficient.
Accordingly, we hold that the trial court erred when it imposed a constructive trust upon Lot A. 5
However, the trial court’s award of $110,000 in damages against 3 MAC, Hostetler, and Hanley
is proper.
C. Bona Fide Purchaser Status
Because the trial court erred in imposing a constructive trust upon Lot A, the issue
whether the Bank was a bona fide purchaser is no longer relevant. This case involved a breach
of contract to convey a specific parcel of land, known as Lot 1. The appropriate relief was an
5
Our approach is consistent with the Restatement (Third) of Restitution and Unjust
Enrichment § 55 (2011) which describes the “tracing requirement” necessary for a constructive
trust. Although we do not adopt the Restatement, we do embrace the reasoning that “[a]
claimant who can show unjust enrichment, but who cannot identify such property in the hands of
the defendant, is not entitled to the remedy of constructive trust.” Id. at cmt. g.
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award of money damages, an order of specific performance, or the imposition of a constructive
trust upon Lot 1, not a constructive trust upon Lot A, which was an entirely different parcel.
Therefore, it is unnecessary for us to address the Bank’s second assignment of error.
D. Setoff
In its sixth assignment of error the Bank challenges the trial court’s failure to reduce
Powell’s $110,000 judgment by the $25,000 which she allegedly received from Ashdon to settle
her claim against Lot 1. Powell’s $110,000 judgment is against 3 MAC, Hostetler, and Hanley –
not against the Bank. The Bank was never the subject of a monetary judgment against it. After
resolution of the constructive trust issue, the issue of setoff no longer affects the Bank. The
Bank is not aggrieved and lacks standing to challenge the trial court’s failure to reduce the
money judgment against 3 MAC, Hostetler, and Hanley. See generally Friends of the
Rappahannock v. Caroline Cnty. Bd. of Supervisors, 286 Va. 38, 45-49, 743 S.E.2d 132, 135-37
(2013); Braddock, L.C. v. Board of Supervisors of Loudoun Cnty., 268 Va. 420, 425-26, 601
S.E.2d 552, 554 (2004).
E. Motion for Reconsideration
Having resolved assignments of error one through six, we need not address the seventh
assignment of error which concerns the Bank’s motion for reconsideration in the trial court.
III. Conclusion
For the reasons stated, we will reverse the trial court’s judgment to impose a constructive
trust upon Lot A, and we will enter final judgment for Powell in the amount of $110,000 against
3 MAC, Hostetler, and Hanley.
Reversed and final judgment.
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