C.F. Trust, Inc. v. First Flight Ltd. Partnership

306 F.3d 126

C.F. TRUST, INCORPORATED; Atlantic Funding Corporation, Plaintiffs-Appellees, v. FIRST FLIGHT LIMITED PARTNERSHIP, Defendant-Appellant, and Birchwood Organization, Incorporated; Birchwood Holdings Group, Incorporated; Maryland Air Industries, Incorporated; PVD Limited Partnership; Occoquan Limited Partnership; Carnett Commercial Investors, Incorporated; Barrie M. Peterson; Barrie M. Peterson, Trustee; Nancy A. Peterson; Scott Peterson; Doe Entities 1-10, Defendants.

No. 01-1753.

United States Court of Appeals, Fourth Circuit.

Argued June 4, 2002.

Decided August 20, 2002.

Amended Opinion Filed September 23, 2002.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Russell James Gaspar, Cohen Mohr, L.L.P., Washington, D.C., for Appellant. Harvey Alan Levin, Birch, Horton, Bittner & Cherot, Washington, D.C., for Appellees.

ON BRIEF:

Barbara A. Miller, Birch, Horton, Bittner & Cherot, Washington, D.C.; James R. Schroll, Bean, Kinney & Korman, P.C., Arlington, Virginia, for Appellees.

Before WIDENER, WILLIAMS, and DIANA GRIBBON MOTZ, Circuit Judges.

Questions certified by published opinion. Judge DIANA GRIBBON MOTZ wrote the opinion, in which Judge WIDENER and Judge WILLIAMS joined.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge.

In this diversity action, First Flight Limited Partnership appeals from the district court's order declaring First Flight the alter ego of Barrie Peterson and, therefore, making its assets subject to judgments entered against Peterson in favor of C.F. Trust, Incorporated, and Atlantic Funding Corporation. Because we find Virginia law on the issues presented in this case uncertain, we respectfully certify two questions to the Supreme Court of Virginia.

I.

C.F. Trust and Atlantic Funding each hold commercial promissory notes endorsed and guaranteed by Peterson.¹ As the district court noted, this case constitutes just one chapter in a prolonged tale involving C.F. Trust's and Atlantic Funding's efforts to collect a combined total of more than $8 million on their notes, and Peterson's equally determined efforts to avoid paying anything to them.

C.F. Trust, a Florida corporation, holds two notes, dated November 1, 1993, in the total principal amount of $6,064,903.57. Not only Barrie Peterson, individually and as trustee, but also his wife, Nancy Peterson, endorsed and guaranteed both notes. C.F. Trust formally notified the Petersons of their default on the notes on August 31, 1995. See C.F. Trust, Inc. v. Peterson, No. 96-1128-A, 1996 WL 33165192 (E.D.Va. Dec.9, 1996). On February 1, 1996, a Virginia state court entered judgment in favor of C.F. Trust and against the Petersons, jointly and severally, for the amount of the notes, plus interest. C.F. Trust, Inc. v. Peterson, No. 39433 (Va. Cir. Ct. Feb 1, 1996). In September 1998, when the Petersons still had not paid on the judgment, C.F. Trust sought and obtained a charging order from the state court that charged the Peterson interests in various partnerships, including First Flight, with paying the judgment on the notes. Then, on March 18, 1999, the district court issued garnishment orders against various Peterson corporations, including Birchwood Holdings Group, Inc., to C.F. Trust.²

Atlantic Funding, a Nevada corporation, holds a single note, endorsed and guaranteed by Peterson, individually and as trustee, in the principal amount of $1,000,000. Atlantic Funding purchased its note along with the right to enforce a corresponding and preexisting judgment, entered on November 15, 1991, against Peterson for the principal amount of that note, plus interest. On March 1, 1996, a Virginia state court granted Atlantic Funding a charging order charging Peterson's interest in First Flight with paying the judgment on the Atlantic Funding note, and, on March 15, 1996, issued a second charging order charging another Peterson entity with paying the same judgment.

On November 18, 1999, having still received no payment on the judgments, C.F. Trust and Atlantic Funding initiated this diversity action against Peterson, Mrs. Peterson, and Peterson's son, Scott Peterson, as well as against various Peterson entities, including First Flight. In Count I, C.F. Trust and Atlantic Funding alleged that Peterson still owed on the judgments and sought a declaration that each of the other defendants was Peterson's alter ego and, therefore, liable on the judgments. In Counts II and III, C.F. Trust and Atlantic Funding further sought an injunction and the appointment of a receiver to prevent the defendants from transferring assets "to and for the benefit of Barrie Peterson and Nancy Peterson for the purposes and with the effects of secreting their assets from legitimate creditors, of delaying, hindering and defrauding [C.F. Trust] and [Atlantic Funding] and of evading compliance with lawful federal court judgments, federal and state court charging orders and a federal court garnishment summons." Finally, C.F. Trust and Atlantic Funding advanced seven other claims, including violation of the charging orders and garnishment summons, statutory and common law conspiracy, and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.A. § 1961 et seq. (West 2000).

Prior to trial, the district court dismissed all but Counts I, II, and III, and dismissed many of the Peterson entities as defendants. The district court also entered summary judgment in favor of Mrs. Peterson and Scott Peterson. However, the court refused to grant summary judgment to the remaining parties—Peterson, First Flight, and Maryland Air Industries, Incorporated—on the remaining claims, reasoning that "material facts [we]re indeed genuinely disputed" as to whether Peterson abused the corporate form of his "captive" business entities "with the intent to defraud creditors or to evade a personal obligation." See C.F. Trust, Inc. v. First Flight Ltd. P'ship, 111 F.Supp.2d 734, 743 (E.D.Va.2000).

The court also determined that it would allow C.F. Trust and Atlantic Funding to pursue an alter ego claim against First Flight; if successful, this would permit C.F. Trust and Atlantic Funding to pierce the corporate veil in reverse, i.e., "to reach the assets of a corporation to satisfy claims against a corporate insider." Id. at 740, 111 F.Supp.2d 734. The court ruled that although the Supreme Court of Virginia had not previously recognized outsider reverse veil-piercing, the Commonwealth likely would recognize the doctrine. Id. at 739-41. The court reasoned that outsider reverse veil-piercing, like traditional veil-piercing, aimed to prevent misuse of the corporate form "to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage." Id. at 742 (internal quotation marks, emphasis, and citation omitted). Accordingly, because the Supreme Court of Virginia had permitted traditional veil-piercing as a means of obtaining these ends in the appropriate case, and the Court of Appeals of Virginia had permitted outsider reverse veil-piercing to advance the same goals, the court concluded that C.F. Trust and Atlantic Funding could pursue their alter ego claim under Virginia law. Id. at 741.

A four-day bench trial began on August 28, 2000. The evidence presented at trial showed that Peterson had engaged in two different practices in order to avoid paying C.F. Trust's and Atlantic Funding's judgments.

First, Peterson directed transfers from various Peterson entities to Birchwood Holdings Group, Inc. (BHG), a corporation wholly owned by Peterson. BHG provided managerial and administrative support to other Peterson entities for a fee, which was calculated according to a cost allocation method. During the relevant period, however, Peterson directed transfers of approximately $1.9 million in overpayments to BHG—excess payments beyond those to which BHG was entitled based on the applicable cost allocation—and then directed BHG to pay more than $2 million of Peterson's personal expenses.

Through this method, Peterson maintained a lifestyle that, he estimated, cost "between 10 and 15 thousand dollars a month." The expenses paid by BHG included: mortgage and repair payments on a Peterson residence in Fairfax, Virginia; mortgage payments on a Peterson residence in Nantucket, Massachusetts; Peterson's country club membership fees; car payments for Peterson's Mercedes; the Petersons' credit card bills; Peterson's ATM fees; college tuition for Peterson's younger son, Christopher Peterson; and payments to Mrs. Peterson. BHG even paid the substantial legal fees incurred by Peterson and Mrs. Peterson, as well as by various Peterson entities, to defend the suits brought by C.F. Trust and Atlantic Funding to collect on their notes.

Yet, Peterson contended that he derived no salary and had no income subject to the judgments entered in favor of C.F. Trust and Atlantic Funding. Peterson instead testified that the BHG payments toward his personal expenses constituted repayments of prior loans that he had made to his corporations before the dates of the judgments. However, BHG's accountant testified—and the ledgers reflected—that many of BHG's payments toward Peterson's personal expenses were "distributions," not loan repayments. Moreover, no underlying documentation supported Peterson's explanation for the disbursements or the companies' asserted obligations to Peterson, other than the checks and distributions themselves. Only in 1999 did Peterson generate "promissory notes," purportedly representing monies owed to him by his companies as repayment for the asserted loans.

First Flight provided the bulk of the transfers to BHG during this time period. First Flight, the primary source of outside revenue for the Peterson entities, owned and operated a large commercial and industrial rental property called Top Flight Airpark. Beginning in 1992 and continuing through March 15, 1996, Barrie Peterson held a 98% limited partnership interest in First Flight,...