Opinion
Case No. 95-14438-SSM, Adversary Proceeding No. 97-1017
October 31, 1997
Harvey A. Levin, Esquire, Birch, Horton, Bittner and Cherot, Washington, DC, of Counsel for plaintiff
Robert Rae Gordon, Esquire, Gordon Pesner, L.C., McLean, VA, of Counsel for defendant J.P. Development, Inc.
Thomas P. Gorman, Esquire, Tyler, Bartl, Burke Albert, P.L.C., Alexandria, VA, of Counsel for Gordon Peyton, Chapter 7 Trustee
James R. Schroll, Esquire, Bean, Kinney Korman, P.C., Arlington, VA, of Counsel for defendant Atlantic Funding Corporation
Paul D. Pearlstein, Esquire, Pearlstein Jacques, Washington, of Counsel for defendant Brent Jacques, Substitute Trustee
MEMORANDUM OPINION
A hearing was held in open court on September 10, 1997, on the plaintiff's motion for summary judgment in this action to determine the priority and extent of liens against certain real property owned by the debtor. At the conclusion of the hearing the court took the motion under advisement in order to review the evidence and the applicable law. Having done so, the court concludes that a challenged first-lien deed of trust has not been extinguished but that a challenged judgment lien has.
Subsequent to the hearing, J.P. Development filed on September 24, 1997, in opposition to the summary judgment motion, an affidavit of Barrie M. Peterson. On October 8, 1997, C.F. Trust filed a motion to strike the affidavit. At a hearing held on October 28, 1997, the court granted the motion to strike the affidavit.
Background
This is an action to determine the priority and extent of a judgment lien, purchased by J.P. Development, Inc. ("J.P. Development") vis-a-vis a deed of trust purchased by C.F. Trust, Inc. ("C.F. Trust"). Both liens are claimed to encumber twenty-two office condominium units, owned by the debtor, known as the Dominion Professional Center.
The debtor, DEP, Inc. ("DEP" or "the debtor"), is a Virginia corporation, the stock of which is now entirely owned by Barrie M. Peterson. At all times during the events giving rise to the present controversy, however, the president of DEP was Scott Peterson, his son, who is also the president and sole shareholder of J.P. Development. DEP, Inc. filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on October 10, 1995, and operated for some 17 months as a debtor in possession. On its original schedules, DEP did not list the judgment lien now at issue, nor did it recognize or provide for the judgment lien in the first proposed chapter 11 plan it filed. Pltf. Exh. 26 and 27. On March 11, 1997, the debtor's case was converted to a case under chapter 7, and Gordon P. Peyton has qualified as trustee.
At the time the debtor filed its petition, it owned three pieces of real estate. One consists of an undeveloped 61.25 acre parcel known as the "Pick-A-Pair" tract. The second consists of a mobile home park and three adjacent parcels known collectively as the Elm Farm mobile home park. The third, which is the subject of the present adversary proceeding, consists of 22 office condominium units in a complex known as the Dominion Professional Center.
The Dominion Professional Center actually consists of a total of 23 units. One was sold to an unrelated party before the market for office condominiums dried up, and the remaining 22 are currently being rented. At a hearing held on July 2, 3, and 10, 1996, on a motion for relief from the automatic stay brought by C.F. Trust and Atlantic Funding Corporation, this court determined that the fair market value of the Dominion Professional Center was $2,100,000.00.
The property upon which the Dominion Professional Center stands was purchased by Barrie M. Peterson, Trustee on July 13, 1983. Pltf. Exh. 6. The construction of the Dominion Professional Center was financed by a $1.6 million loan made on or about December 21, 1984, by Dominion Federal Savings and Loan Association and was backed by an industrial development revenue bond issued by the Industrial Development Authority of Prince William County, Virginia. Pltf. Exh. 7. A deed of trust against the property to secure the note and the bond was recorded on December 23, 1984. Pltf. Exh. 8. Subsequently, a second-lien deed of trust in the amount of $1 million was recorded against the property in November 1986 to secure a loan made by Dominion Federal Savings and Loan Association.
The note secured by the second deed of trust was subsequently transferred to Trastbank Savings Bank, FSB. Trastbank was later taken over by the Resolution Trust Corporation, which sold the note as part of a portfolio of nonperforming loans to Superior Financial Services, Inc., which in turn sold it to Atlantic Funding Corporation, the current noteholder. At the relief from stay hearing, the court determined that the amount then due on Atlantic's note was $1,719,923.00.
In November 1991, Barrie M. Peterson, Trustee, conveyed the property to an entity known as Dominion Professional Center, L.P. For reasons that are unexplained, the conveyance was done in two stages. A quitclaim deed was executed first conveying the property from Barrie M. Peterson, Trustee, to Barrie M. Peterson and Nancy A. Peterson, his wife, as tenants in common (he as to an undivided 99% interest and she as to an undivided 1% interest). Pltf. Exh. 12. A second quitclaim deed was then executed from Barrie M. Peterson and Nancy A. Peterson to Dominion Professional Center, L.P. Pltf. Exh. 13. Both deeds are dated, and appear to have been signed, on November 13, 1991. Both deeds were recorded the next day, November 14, 1991, at 1:52 p.m.; were given successive instrument numbers by the clerk; and appear in the deed books one immediately after the other.
C.F. Trust asserts in its memorandum that the purpose of the two-step transfer was to save recording taxes. See Va. Code Ann. § 58.1-811(A) (exempting certain deeds from recording taxes). This conclusion is consistent with the notations placed on both deeds claiming exemption from recording taxes. Subsequent to the summary judgment hearing, however, J.P. Development filed an affidavit of Barrie M. Peterson asserting that the purpose of passing title through him and his wife, "was not to save recordation taxes but, according to Wendy Fields [the attorney handling the transaction], was the way the title company wanted it done." By separate order, this court has struck the affidavit from the record. But even if the affidavit were part of the record, this court, based on its assessment of Mr. Peterson's credibility in prior litigation in this case, would not be inclined to give the affidavit any credence — particularly as Mr. Peterson invoked the attorney-client privilege during his deposition to block further inquiry into the reasons for the two deeds. For the purpose of this opinion, however, the actual reason the conveyance was structured the way it was is immaterial.
Barrie Peterson was the general partner, and he and his wife the sole limited partners, of Dominion Professional Center, L.P.
The controversy before the court arises from the fact that some eight months prior to this transaction, a judgment against Barrie M. Peterson, individually, had been docketed among the land records of Prince William County, Virginia, where the Dominion Professional Center is located. The judgment, in the amount of $1,003,850.00, had been obtained in the United States District Court for the Central District of California on January 30, 1990 by Grant K. MacCoon and others ("the MacCoon judgment"). It was domesticated in Virginia by a judgment of the Circuit Court of Fairfax County dated December 12, 1990 and was docketed in Prince William County on March 4, 1991. The judgment was purchased for $200,000 on December 28, 1994, by J.P. Development, Inc., a corporation wholly owned by Scott Peterson, in a transaction orchestrated by Barrie M. Peterson using funds that came from the sale of two properties titled in his name as trustee. Pltf. Exh. 30-42, 45-46, and 49.
At some point in 1992, the $1.6 million first-trust note, then held by Signet Bank ("Signet"), went into default, and in August, Signet began foreclosure proceedings. Pltf. Exh. 19. Barrie Peterson sought to borrow money from Central Fidelity Bank ("Central Fidelity"), which at that point held deeds of trust against the Pick-A-Pair tract and the Elm Farm mobile home park, to purchase the Signet note, which Signet was apparently willing to sell for $900,000. Central Fidelity, apparently concerned because of the existence of the $1 million second deed of trust against the property and an inability to otherwise acquire a first-lien position, decided to purchase the Signet note directly rather than loan Barrie Peterson the money to acquire it. Pltf. Exh. 25.
Central Fidelity purchased the Signet note for $900,000 on or about September 23, 1992. Pltf. Exh. 10. At that time, the principal balance due on the note was $1,170,355.88, and accrued unpaid interest was due in the amount of $1,404.36. Contemporaneously with the assignment of Signet's deed of trust, the Dominion Professional Center was conveyed to DEP, Inc., by a deed of assumption dated September 18, 1992, under which the debtor expressly assumed and agreed to pay the Signet note. Pltf. Exh. 20. By a separate amended and restated note of that same date, signed by DEP as the maker and by Barrie M. Peterson, Trustee, Barrie M. Peterson, individually, and Nancy A. Peterson as guarantors, the principal amount of the note was reduced to $1 million. Pltf. Exh. 21. Also dated September 18, 1992, is a second promissory note in the amount of $6,167,999.82 signed by the same parties and an "amended and restated" deed of trust against the Dominion Professional Center in the amount of $6,167,999.82. Pltf. Exh. 3 and 22. That amount represents the aggregate of all the indebtedness then due on the Pick-A-Pair, Elm Farm, and Dominion Professional Center loans, including the sums represented by the $1 million note. The deed of trust recites that "the liens and security interests represented by [the existing deed of trust against the Pick-a-Pair and Elm Farm parcels] are each hereby merged and consolidated into this deed of trust." It further recites that the modified Signet note and the Pick-a-Pair and Elm Farm note "and all debts and obligations represented by each are hereby merged and consolidated into a single promissory note." On November 1, 1993, as part of a workout attempt, the total debt then owed Central Fidelity was split into two promissory notes (each with a different interest rate), one in the amount of $4,414,903.57 and the other in the amount of $1,650,000, both of which continued to be secured by the 1992 "amended and restated" deed of trust. Pltf. Exh. 1 and 2. On August 29, 1995, Central Fidelity sold the notes — which were in default — and the deed of trust to C.F. Trust, an entity that had been formed for the express purpose of acquiring them.
With the exception of the assignment from Signet, which is both dated and acknowledged on September 23, 1992, all the remaining documents are dated September 18, 1992, but were acknowledged on September 21, 1992. All the documents, including the assignment, were recorded September 24, 1992.
These are the figures recited in an estoppel certificate prepared by Central Fidelity at the time of the loan purchase and signed by Scott Peterson and Barrie M. Peterson, as the debtor's president and vice-president, respectively, on September 18, 1997. See Pltf. Exh. 11. Other (higher) interest figures are shown on various other exhibits, but the record is far from clear as to how those figures were calculated. For that reason, the court adopts the figures shown on the estoppel certificate.
Briefly, Atlantic Funding had already purchased the second trust note and was afraid that Central Fidelity would foreclose under its deed of trust, thereby wiping out Atlantic's position. Atlantic's president and sole shareholder, William Cooley, then recruited additional investors and formed C.F. Trust to purchase the Central Fidelity deed of trust. The purchase was made with borrowed funds, and the Central Fidelity note and deed of trust have been assigned to the lender as security.
Discussion
Under Fed.R.Civ.P. 56(c), made applicable to bankruptcy proceedings by F.R.Bankr.P. 7056, summary judgment may be entered in favor of a party on that party's motion "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." When a motion for summary judgment is made and supported as provided in Rule 56, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or otherwise as permitted by Rule 56, must set forth specific facts showing that there is a genuine issue for trial. Fed.R.Civ.P. 56(e).
Four issues are raised by the motion for summary judgment and the opposition filed by J.P. Development. The first is whether the lien securing the $1.6 million note formerly held by Signet was extinguished when Central Fidelity purchased and refinanced it. The second is whether the MacCoon judgment lien attached to the property during the short instant that title was vested in Barrie M. Peterson individually. The third is whether the judgment lien was extinguished when it was purchased by J.P. Development with money that is said to have been Mr. Peterson's own. And the fourth, finally, is whether — assuming J.P. Development has a lien — that lien ought to be equitably subordinated to the claims of other creditors secured by the property. These issues will each be discussed in turn.
A. Has Central Fidelity's First Trust Position Been Extinguished?
J.P. Development argues that, notwithstanding the express intention of Central Fidelity and DEP to preserve the first-lien position of the $1.6 million Signet note, that position was nevertheless lost when the note was "restated" in September 1992 and then "merged" into the $6,167,999.82 note and deed of trust. The only authority cited for this proposition is a passing reference to Virginia's doctrine of merger in Fox v. Templeton, 229 Va. 380, 386, 329 S.E.2d 6, 9 (1985) ("The acceptance of title in satisfaction of a preexisting security interest is presumed, in the absence of a contrary intention, to constitute a merger of the original secured interest into the legal title acquired. . . . [S]uch a merger carries with it all liens, securities, and remedies which were incidental to the original secured interest"). The facts in Fox v. Templeton, however, are wholly unlike those in the present case. In Fox, an existing noteholder secured by an equitable mortgage against real estate accepted a conveyance of the property in satisfaction of the debt. At the time the mortgage had been recorded, there was an existing judgment lien against the property. That judgment lien was erroneously released the following day. Some time after the judgment was released, the noteholder accepted a deed to the property in satisfaction of the note. The noteholder had not done a title search either at the time the original mortgage was recorded or when she subsequently accepted the deed in satisfaction of the indebtedness. The judgment lien was then reinstated, and the issue was whether the property, now titled in the name of the former noteholder, was subject to the judgment lien.
It is important to emphasize that C.F. Trust is not arguing that the recording of the amended and restated deed of trust gave Central Fidelity any greater lien than it already enjoyed. That is, C.F. Trust expressly recognizes in its motion that its first-lien position is limited to the amount due on the Signet note at the time the note was purchased by Central Fidelity, and that the roughly $5 million in additional indebtedness for which the property was made subject as a result of the amended and restated deed of trust is subordinate to any then-existing legitimate liens of record against the property. Pltf's Mot. for Summary Judgment 23-24. See, Pltf. Exh. 28 (opinion letter of counsel to Central Fidelity that consolidated deed of trust had first priority only to the extent of principal balance plus accrued and unpaid interest on the industrial revenue bond.)
The Court in Fox held that the noteholder was charged with constructive knowledge of the judgment lien at the time the original mortgage was recorded and that, as a necessary corollary of the doctrine of merger, there was a rebuttable presumption that such knowledge still existed when she accepted the deed in satisfaction of the debt. Because she could not show any detrimental reliance on the mistaken release — not having examined the land records before accepting the conveyance of the property — she was in no position to complain when the judgment was restored. Accordingly, her ownership interest in the property was subject to the judgment lien.
In the present case, unlike Fox, there is no issue of Central Fidelity, as mortgagee, accepting title to the property in satisfaction of the debt. Even in such a circumstance, it by no means follows that the mortgage lien will necessarily merge into the fee simple title. As noted in Fox, merger is "presumed" only "in the absence of evidence of a contrary intent." See Rorer v. Ferguson, 96 Va. 411, 31 S.E. 817 (1898). In Rorer, the holder of a second deed of trust accepted a deed to real estate that was subject to both a senior deed of trust and a junior judgment lien. In a suit to sell the land to satisfy the judgment, the junior judgment lien holder argued that the second deed of trust had been extinguished when the noteholder acquired the property. Addressing this argument, the then-Supreme Court of Appeals of Virginia reasoned:
Equity will, in the absence of any declaration of intention, destroy [the lien]; but if there is any reason for keeping it alive — such as the existence of another incumbrance, — equity will not destroy [the lien].
31 S.E. at 818 (emphasis added). The court held that since a junior lien was in place, it was in the best interest of the deed of trust holder (now the owner) to have his lien kept intact. Id. at 819.
In the present case, there has been no joinder of legal title with a beneficial interest, as in Fox and Rorer. Rather, the court understands the "merger" argument to be that the original deed of trust securing the $1.6 million Signet note, although never formally released of record, was merged into, and extinguished by, the "amended and restated" $6,167,999.82 deed of trust executed by DEP after Central Fidelity purchased the Signet note. However, the decision of the Virginia Supreme Court in Sackadorf v. JLM Group L.P., 250 Va. 321, 462 S.E.2d 64 (1995) makes it clear that a note can be purchased and modified without losing the lien position securing the note. In Sackadorf, American Security Bank, as part of a loan transaction intended to "refinance" or "retire" an existing secured loan, received from the existing lender an "assignment" of two notes and the deeds of trust securing them. At the time the transaction occurred, there were two junior deeds of trust against the property. Following the assignment of the original note, the borrower executed a "replacement" promissory note in the same amount as the aggregate of the two original notes, but at a lower rate of interest, a longer amortization, and a lower payment amount. The borrower also executed an instrument entitled "Amendment, Restatement and Consolidation of Deeds of Trust" reciting "the existence and validity" of the original notes and providing for the amended deed of trust to have "the same lien and priority" as the original deed of trust.
As in the present case, the junior lien holders in Sackadorf argued that the first lien was extinguished when the original notes were assigned to the new lender, and that the funds advanced by the new lender for the purchase constituted a "new loan" that was subordinate to all existing encumbrances against the property. The Court observed, as a general principle, that if the "sole obligor" on a note was the "payor" of funds received by the original secured noteholder for the surrender of the note, the sole obligor's liability on the note was discharged, and the lien securing the note was discharged. Sackadorf, 250 Va. at 330, 462 S.E.2d at 69; see also Bank of Russell Co. v. Griffith, 176 Va. 1, 10 S.E.2d 481 (1940) (where attorney gave fees earned in his practice to his daughter to purchase a deed of trust securing the attorney's own property, the lien of the deed of trust was extinguished). The Court held, however, that "if the person or entity supplying the funds is not a party to the instrument alleged to have been paid, and is not obligated in any way for its payment, then the question whether the transaction `is a payment or a purchase is a question of intention. . . .'" Sackadorf, 250 Va. at 330, 462 S.E.2d at 69. In Sackadorf, the trial court had found that the funds paid to the first noteholder came from the successor lender and were not under the control of the borrower. The Virginia Supreme Court held:
[T]he evidence presented was not only consistent with an assignment: it was inconsistent with payment. There was no evidence that [the former lender] recorded a certificate of satisfaction to release its deeds of trust, or that [the borrower] demanded that it do so. Similarly, the evidence showed that [the former lender] neither canceled the notes nor returned them to [the borrower], but instead endorsed and delivered the notes to [the new lender]. Thus, we conclude that the trial court did not err in holding that [the original lender's] lien was not extinguished by its receipt of funds [from the loan proceeds escrow account], and that [the new lender] acquired a valid first lien on the property.
250 Va. at 331, 462 S.E.2d at 70.
J.P. Development argues that Sackadorf is distinguishable on its facts, because in Sackadorf the party that signed the "replacement" note and the amended deed of trust was the same party that signed the original note and deed of trust. This contrasts with the present case, where, it is argued, the amended and restated note and deed of trust were signed by an entirely different entity (DEP, Inc.) from the party (Barrie Peterson, Trustee) who signed the original note and deed of trust. However, while Barrie Peterson, Trustee, was not the maker of the amended and restated note, he did sign as guarantor. Nothing in Sackadorf, moreover, even remotely suggests that the Virginia Supreme Court was hanging its analytical hat on the obligor's continuity of interest: the issue was simply whether the funds paid to the first noteholder came from some party other than the "sole obligor" on the note and whether the intention of the party who supplied the funds was to pay the note or to purchase it.
In the present case, there is no factual dispute that the funds paid to Signet Bank on account of the note came from Central Fidelity Bank, and that Central Fidelity Bank was not otherwise obligated on the note. Nor is there any dispute that Central Fidelity's intention was to purchase the note, not to pay it. There is no evidence that the original note was ever marked "paid" or that a certificate of satisfaction was ever recorded with respect to the original deed of trust. Additionally, the language used in all the instruments executed at the time of the transaction clearly expresses an intent to purchase, not to pay, the note. Thus, under Sackadorf, the lien of the Signet deed of trust was not extinguished unless, as argued by J.P. Development, the subsequent "restatement" of the note and deed of trust somehow created a "new" obligation.
Although it has not used the term in its memorandum, J.P. Development is essentially arguing that the "restated" note constituted a novation, that is, "a mutual agreement among all parties concerned for discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another." Honeywell, Inc. v. Elliott, 213 Va. 86, 189 S.E.2d 331 (1972). Three types of novation are recognized: "(1) Where the debtor and the creditor remain the same, but a new debt takes the place of the old one; (2) where the debt remains the same, but a new debtor is substituted; [and] (3), where the debt and debtor remain, but a new creditor is substituted." Wheeler v. Wardwell, 173 Va. 168, 3 S.E.2d 377 (1939) (series of renewal notes endorsed by the defendant were "a continuance of the transaction between the parties" and not a novation.) However, a novation is never presumed; rather, in the absence of satisfactory proof to the contrary, the presumption is that the debt has not been extinguished by taking the evidence of indebtedness. Gullette v. F.D.I.C., 231 Va. 486, 344 S.E.2d 920 (1986).
The evidence overwhelmingly supports an intent to modify the terms of an existing indebtedness and not to create a new one. Having acquired for $900,000 a note with a outstanding principal balance of $1,170,355.88, Central Fidelity agreed with the debtor and Mr. and Mrs. Peterson to reduce the principal balance to $1,000,000. It is true that the modified obligation was evidenced by a newly-drawn form of promissory note, but the mere drawing-up of a new instrument does not necessarily constitute a novation. See, F.D.I.C v. Wald, 630 F.2d 239 (4th Cir. 1980) (liability of guarantors under written guarantee of first note not discharged when note was paid by renewal note guaranteed by only one of the original guarantors).
There is no evidence that the original $1.6 million note was ever surrendered by Central Fidelity. But even if it had been, such surrender would not necessarily have discharged the indebtedness evidenced by that note. Hubbard Realty Co., Inc. v. First Nat'l Bank of Pikeville, 704 F.2d 733 (4th Cir. 1983) (deed of trust securing earlier note that was paid by renewal and had been surrendered could be enforced even though the renewal note was invalid because it was executed after the bank received actual notice that the former president who signed it had been removed from office).
A more difficult issue, factually, is presented by the language in the 1992 amended and restated deed of trust that the Signet note (now written down to $1 million) was being "merged and consolidated" with the other outstanding obligations of DEP "into a single promissory note." The $1 million "amended and restated" note, successor to the $1.6 million note purchased from Signet, appears to have been treated as a mere formality by Central Fidelity, since it was immediately subsumed, before the ink on it had even dried, into the $6,167,999.82 note. Certainly, it appears that the parties thereafter treated the debt on all three parcels as a unitary obligation. Nevertheless, nothing in the documents executed or recorded in connection with the purchase of the Signet note in 1992 evidences any intent to relinquish or extinguish the lien securing the indebtedness represented by that note. There is no language in the 1992 amended and restated deed of trust releasing the 1984 deed of trust, or even "merging" it into the deed of trust against the Pick-A-Pair and Elm Farm tracts. Rather, the merger language runs the other way: the Pick-A-Pair and Elm Farm deed of trust is merged into the Dominion Professional Center deed of trust. Thus, while the sum secured by the Dominion Professional Center deed of trust is increased, the continuity of the original lien is clearly and expressly maintained.
Given the clear language in the 1992 instruments preserving the lien of the 1984 deed of trust, and since Central Fidelity, as the party purchasing the note secured by the 1984 deed of trust, was not "the sole obligor" — or, indeed, an obligor at all — on the note, the court concludes that the lien created by the 1984 deed of trust remains intact without alteration of priority as to the amount due on the Signet note at the time it was purchased by Central Fidelity and any accrued interest on that sum. Accordingly, summary judgment will be entered in favor of C.F. Trust determining that it has a first-lien position as to that amount, subject only to any valid real estate tax liens and mechanic's liens.
The calculation of the accrued interest is not without its difficulties, in light of the subsequent splitting of the $6,167,999.82 note into two separate notes, each of which has a separate rate of interest.
B. Did the MacCoon judgment attach to the property?
There is no dispute that the lien securing the Atlantic Funding note is superior to any amount owed C.F. Trust over and above the amount that was due on the Signet note at the time it was acquired by Central Fidelity. That leaves the question of the priority to be accorded the remaining amount due C.F. Trust under its notes. As discussed above, the amended and restated deed of trust was recorded on September 24, 1992, some 18 months after the MacCoon judgment against Barrie M. Peterson was docketed and some ten months after title to an undivided 99% interest in the Dominion Professional Center vested in Barrie M. Peterson individually. If the MacCoon judgment became a lien against the property on November 14, 1991, when the deed to Barrie Peterson was recorded, it is clearly in third order of priority, and the balance owed C.F. Trust under the 1992 deed of trust is in fourth position. On the other hand, if the MacCoon judgment did not attach to the property, C.F. Trust is in third position.
To be sure, this wrangling over who is in third position is largely academic. As noted above, this court has previously determined that the fair market value of the Dominion Professional Center is $2.1 million. Since the court has determined that C.F. Trust is in first position to the extent of $1,170,355.88 and accrued interest, and since the court has also determined that $1,719,923.00 was due on the second-trust note held by Atlantic Funding, it seems clear that in any foreclosure or judicial sale, nothing is likely to be paid on account of whatever lien is in third position. Nevertheless, since the court's holding as to the priority of C.F. Trust's lien may be appealed, the court finds it appropriate to reach the question of whether J.P. Development has any lien at all against the Dominion Professional Center.
Under Virginia law, a judgment, once docketed in the clerk's office of the circuit court for a city or county, becomes a lien against all real estate owned by or thereafter acquired by the judgment debtor in that jurisdiction. Va. Code Ann. § 8.01-458. Thus, there can be no question that the MacCoon judgment, which was docketed in Prince William County on March 4, 1991, became a lien against the Dominion Professional Center when title to the real estate became vested in Barrie M. Peterson individually on November 14, 1991, unless, as argued by C.F. Trust, the doctrine of "transitory seisin" applies to prevent the judgment from attaching. That doctrine, simply stated, is that, as a general rule, transitory seisin is not such an interest as becomes subject to a lien of a judgment, and that where land is conveyed to a judgment debtor, and eo instanti reconveyed by him to a trustee to secure the purchase money, the judgment debtor has no interest that is subject to a judgment lien or a wife's dower as against the deed of trust. Straus v. Bodeker's Ex'x, 86 Va. 543, 10 S.E. 570 (1889) (judgment lien); Hurst v. Dulaney, 87 Va. 444 (1891) (dower); see also Charlottesville Hardware Co. v. Perkins, 118 Va. 34, 86 S.E. 869 (1915) (judgment lien was subordinate to the deed of trust securing the purchase price even though the deed of trust was not recorded until almost a year after the sale, where recitals in the deed stated that a deed of trust had been executed.) As explained in an early case, the doctrine of transitory seisin is grounded in the principal that a judgment creditor takes the property or applies it to the satisfaction of his lien "in subordination to all the equities which exist at the time in favor of third persons." Summers v. Darne, 72 Va. (31 Graft. 791) 567 (1879). The Court explained:
Va. Code Ann. § 8.01-458 provides in relevant part as follows:
Every judgment for money rendered in this Commonwealth by any state or federal court or by confession of judgment, as provided by law, shall be a lien on all the real estate of or to which the defendant in the judgment is or becomes possessed or entitled, from the time such judgment is recorded on the judgment lien docket of the clerk's office of the county or city where such land is situated[.]
When, therefore, land is conveyed and the purchaser at the same time gives back a mortgage or other incumbrance to secure the purchase-money, he does not thereby acquire any such seisin or interest as will entitle his wife to dower, or his creditor to subject the land to his debts discharged of the mortgage. In such cases the deed and mortgage are regarded as parts of the same contract, and constitute but a single transaction, investing the purchaser with seisin for a transitory instant only.
Id. at 570 (31 Graft, at 801).
There can hardly be a stronger case, factually, for arguing that the vesting of title in Barrie Peterson individually was a purely instantaneous or transitory event. The deed from himself as trustee to himself and his wife individually was apparently executed at the same time as the deed from him and his wife to Dominion Professional Center, L.P. Both deeds were recorded at the same time, down to the very minute; they were given successive instrument numbers by the clerk; and they appear, one immediately following the other, in the same deed book. Whatever the motivation for the two-stage conveyance — whether to avoid recording taxes or to solve some title problem or perhaps to confer some income tax benefit — the two deeds were clearly intended to be part of a single transaction by which the property, titled up to that point in the name of Barrie M. Peterson, Trustee, would be transferred to Dominion Professional Center, L.P.
J.P. Development, however, urges that the Virginia courts have never applied the rule of transitory seisin except to protect deeds of trust taken back to secure the purchase price of the property and that, as a legal fiction, the doctrine ought to be limited to that type of factual situation. Upon a review of the cases, the court is constrained to agree. The underpinning of the cases articulating the transitory seisin analysis is that, as the deed and the mortgage taken back are parts of the same contract, "justice and policy equally require that no prior judgment against the mortgagor should intervene and attach upon the land during the transitory seisin, to the prejudice of the mortgagee." Straus, 86 Va. at 548. As an alternative approach to achieving the same result, the Virginia courts have also analyzed the vendee's interest as being held in a resulting or implied trust for the unpaid vendor. Borst v. Nalle, 69 Va. (28 Gratt. 423) 139 (1877). In short, it appears that in Virginia, the application of the doctrine of transitory seisin requires not only that the period of vesting be brief, but that it be subject to superior equities arising as part of an integrated transaction.
It is not quite true, however, that the doctrine of transitory seisin has been applied only in the context of protecting a purchase-money lien. In Devers v. Chateau Corp., 792 F.2d 1278 (4th Cir. 1986), the Fourth Circuit, applying Virginia law, held that a lessee's cancellation of a 99-year lease, followed immediately by the lessor's absolute conveyance of the property to the former lessee, did not result in a wife's dower interest attaching to the freehold during the fleeting period between the cancellation of the lease and the recording of the deed.
There is nothing in the summary judgment record to suggest that, when the undivided 99 percent interest in the property vested, however briefly, in Barrie M. Peterson, there were superior equities in favor of Dominion Professional Center, L.P., or that Barrie Peterson and his wife held title to the property merely as the partnership's agent. Nor does the record disclose that the partnership advanced any funds for the purchase. In short, notwithstanding the extreme brevity of Mr. and Mrs. Peterson's ownership, it does not appear that they were under any legal duty or compulsion at the time they acquired title to further convey the property, or that the second conveyance was other than for their own personal benefit or convenience, they being the sole partners of the limited partnership. The court concludes, therefore, that there is no equitable basis upon which to hold that the lien of the MacCoon judgment did not attach to the property on November 14, 1991. Accordingly, unless the judgment lien has been otherwise extinguished or is subject to equitable subordination, it stands in third position, behind the Atlantic Funding deed of trust and ahead of the amounts owed to C.F. Trust over and above the $1,170,355.88 principal plus accrued interest thereon that the court has determined are entitled to first priority.
C. Has the MacCoon judgment lien been extinguished?
C.F. Trust asserts that, even if the MacCoon judgment attached to the property, the judgment lien was extinguished when Barrie M. Peterson arranged for the judgment to be purchased by J.P. Development and supplied the funds for its purchase. It is on this issue that J.P. Development most strenuously argues that summary judgment is not appropriate because, it is urged, there is a genuine factual dispute as to whether Barrie M. Peterson supplied the funds to purchase the judgment.
There can be little doubt that under Virginia law, "[t]he payment of a judgment by any one of the judgment debtors extinguishes the judgment at law." Grizzle v. Fletcher, 127 Va. 663, 105 S.E. 457 (1920) (surety who paid judgment that had been entered against him and his principal and took an assignment of the judgment could not have execution issued on the judgment against his principal but had to proceed separately against his principal on the implied contract of indemnity). As explained by the Court in Grizzle, the payment of the judgment by one of the judgment debtors
is a union of debtor and creditor in the same person and this operates to discharge the debt. A person cannot buy his own debt without extinguishing it. Of course, the creditor may sell the judgment to a third person, but not to one of the judgment debtors, so as to keep it alive at law.
Id. The Grizzle court did recognize that an exception existed when payment was made by a surety: "[A] judgment paid by a surety thereon will be kept alive by a court of equity for the benefit of the surety, but this arises out of the doctrine of subrogation[.]" Id; see also Lillie v. Dennert, 232 F.104 (6th Cir. 1916) (where one of two joint tort-feasors satisfied a judgment against both, the judgment was discharged, even though the judgment debtor had induced a third person to pay the judgment for him and to take an assignment of it); Parker v. Mauldin, 353 So.2d 1375 (Ala. 1977) (judgment not extinguished where evidence supported finding that bank that purchased judgment against one of its customers was acting independently and in a regular businesslike manner); Hart v. Harrell, 17 S.W.2d 1093 (Tex.Civ.App. 1929) (purchase of judgment by judgment debtor's agent constituted payment thereof, precluding further execution).
In the present case, there can be no serious dispute that Barrie M. Peterson orchestrated the purchase by J.P. Development of the MacCoon judgment. On February 1, 1994, Barrie Peterson wrote to counsel for Grant MacCoon confirming the agreement that had been reached for "settlement of all outstanding matters." Pltf. Exh. 30. The terms relevant to the present issue were as follows:
1. I will pay $100,000 to Mr. MacCoon, by certified or cashier's check, within 60 days . . . .
* * * 3. I, or at my option a purchaser reasonably acceptable to both Mr. MacCoon and me (the "Purchaser"), will pay another $100,000 to Mr. MacCoon, by certified or cashier's check, within 6 months after the date of the first payment.
4. At the time of the second payment, Mr MacCoon will cause all parties having interests in the Judgment to execute one of the following types of documents, in accordance with my request . . .:
a. Appropriate documents, as indicated by the Purchaser's attorneys, to assign all interests in the Judgment to the Purchaser; or
b. Appropriate documents, as indicated by my attorneys to be filed in California and every other jurisdiction where the Judgment has been filed, indicating that the Judgment has been fully paid and satisfied.
Id. (emphasis added). The letter bears Mr. MacCoon's signature dated February 4, 1994, agreeing to the terms. Id. On April 8, 1994, Barrie Peterson sent Mr. MacCoon's attorney a proposed modification of the settlement agreement extending the time for the first payment upon delivering to an escrow agent a deed to a condominium unit Barrie Peterson owned as trustee in Keystone, Colorado. Pltf. Exh. 31. Throughout the extension agreement, Barrie Peterson consistently refers to himself ("I") as the party who would make the first $100,000.00 payment. Mr. MacCoon agreed to the proposed terms on April 12, 1994. Id. On April 26, 1994, Barrie Peterson transmitted to Mr. MacCoon's attorney a $100,000.00 cashier's check with a cover letter over his own signature stating, "In accordance with our settlement agreement in the above-referenced case, enclosed herewith is a cashier's check in the amount of $100,000.00 as timely first payment." Pltf. Exh. 32. The check, drawn on Central Fidelity Bank, contained the notation, "PURCHASER: JUBAL CORPORATION." Id. Scott Peterson is the president of "Jubal Corporation" (or more properly, it appears, Jubal, Inc.), which shares offices with a number of other corporations and entities owned by Scott Peterson and Barrie Peterson.
The funds used to purchase the cashier's check appear to have come from a $230,000.00 loan made to Jubal, Inc. on April 15, 1994, by Dr. James G. McClure. Pltf. Exh. 34. That same date, Barrie Peterson, as trustee, had entered into a written contract to sell a 44.3960 acre tract known as the "Fortuna property" to Dr. McClure and Scott Peterson for $1,750,000.00, with Dr. McClure to pay $875,000.00 in cash at settlement, and Scott Peterson to pay $875,000 to Jubal, Inc., described in the contract as the holder of the first deed of trust against the parcel. Pltf. Exh. 35. That transaction closed on May 3, 1994, at which time Dr. McClure paid the $875,000.00 in cash, and Jubal, Inc. repaid the $230,000.00 loan to Dr. McClure. Pltf. Exh. 39. Scott Peterson's share of the purchase price is shown on the settlement statement as having been made by an unsecured promissory note, which was then assigned to Jubal, Inc. The settlement statement also shows a payment to Jubal, Inc., purportedly on account of its deed of trust, directly out of the sales proceeds in the precise amount ($230,680.58) necessary to pay off Jubal's note to Dr. McClure. The $875,000 note given by Scott Peterson at settlement, and assigned to Jubal, Inc., is not only unsecured, it is by its express terms non-recourse:
Notwithstanding anything contained in this Note to the contrary, the Borrower shall have no personal liability to pay any amounts required to be paid hereunder and the noteholder shall not take any action against the Borrower to collect or enforce this Note. The loan evidenced hereby is a non-recourse loan to the Borrower. . . . This Note is an unsecured note representing the deferred purchase price owned by the Borrower to Barrie M. Peterson, Trustee. . . . .
(emphasis added). Pltf. Exh. 43. Of course, there is only one way to describe a note that is simultaneously unsecured and non-recourse: a sham.
The second $100,000.00 payment required under the settlement agreement was made to Mr. MacCoon on September 23, 1994, directly out of the proceeds of sale of a condominium unit in Dillon, Colorado, owned by Barrie M. Peterson, Trustee. Pltf. Exh. 46. On December 28, 1994, a written assignment of judgment was executed by Mr. MacCoon in favor of J.P. Development. Pltf. Exh. 49. J.P. Development, as noted above, is wholly owned by Scott Peterson, Barrie Peterson's son, and shares office space with various entities owned and controlled by Barrie Peterson. On April 15, 1996, J.P. Development obtained from the Circuit Court of Prince William County, Virginia, a charging order against the interests of Barrie M. Peterson and Barrie M. Peterson, Trustee, in four limited partnerships. Pltf. Exh. 50. That charging order, which was drafted by counsel for J.P. Development, recited, as a credit against the judgment, "The Two Hundred Thousand and NO/100 ($200,000.00) payment made on December 28, 1994, by Barrie M. Peterson . . . in partial satisfaction of the Judgment[.]" (emphasis added).
Barrie Peterson purported to hold title to the condominium unit as trustee for the benefit of his two minor children under a 1985 trust agreement. Pltf. Exh. 47.
Against this mass of evidence, direct and circumstantial, the only evidence offered by J.P. Development to refute the contention that the funds to purchase the judgment came from Barrie M. Peterson is an affidavit of Barrie Peterson, which the court has ordered stricken from the record, containing a bare denial that he supplied the funds. Even if the affidavit had not been struck, it would not have been sufficient to raise a genuine issue of material fact. The affidavit does not address any of the details of the transaction. It only says, in effect, "I didn't do it." Such a general denial is insufficient to create a genuine issue of material fact. The objective evidence, on the other hand, is overwhelming that Barrie Peterson arranged all the terms of the sale, orchestrated the financing, and directed to whom the judgment would be assigned. The first $100,000.00 to purchase the judgment came indirectly, and the second $100,000 directly, from the sale of property Barrie Peterson owned as trustee. The conclusion is inescapable that J.P. Development was nothing but Barrie Peterson's straw in the transaction and holds the assignment of judgment for his benefit. Accordingly, since the payment of a judgment by any one of the judgment debtors extinguishes the judgment at law, Grizzle v. Fletcher, supra, and since there are no circumstances that would justify keeping the judgment alive in equity by application of the doctrine of equitable subrogation, the court concludes that the judgment lien against the Dominion Professional Center has been extinguished.
In addition, the court has already had an opportunity to assess the credibility of Barrie Peterson during the three-day hearing on relief from the automatic stay. To put the matter charitably, truth is not the brightest star in Mr. Peterson's constellation, and the court would not be inclined to give any credence to Mr. Peterson's denials that he supplied the funds to purchase the judgment. Nor, it might be added, does the deposition testimony of Scott Peterson assist J.P. Development's position. The younger Mr. Peterson's testimony as to the source of the funds used to purchase the judgment is an astonishing mass of evasion. It is not often that a trier of fact can make a credibility determination based on a cold transcript, but in this particular case there can be no doubt, based on the deposition transcript, that the younger Mr. Peterson had no intention of giving straight answers to straight questions or of supplying relevant information concerning the transaction.
In particular, it would appear that a primary purpose of having J.P. Development hold the judgment was in order to obtain friendly liens against Barrie Peterson's assets that could be used to shield those assets from his creditors. See Pltf. Exh. 51, Memorandum Opinion in C.F. Trust, Inc. v. Peterson, No. 96-1128-A (E.D. Va., Dec. 9, 1996) (Cacheris, C.J.) (determining that alleged $450,000 second deed of trust against Barrie and Nancy Peterson's home in favor of Jubal, Inc. was a fraudulent conveyance).
D. Should the judgment lien be equitably subordinated?
The final issue is whether, assuming the court is wrong and there is a valid judgment lien against the Dominion Professional Center, it should be subordinated under § 510, Bankruptcy Code, to the claims of C.F. Trust.
Under § 510(c), Bankruptcy Code,
[A]fter notice and a hearing the court may —
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or
(2) order that any lien securing such a subordinated claim be transferred to the estate.
In United States v. Noland, — U.S. —, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996), the Supreme Court explained that, although Congress, in enacting § 510(c), "included no explicit criteria for equitable subordination," the language of the statute "clearly indicates congressional intent at least to start with existing doctrine." That existing doctrine, as the Court observed, was judge-made and was generally triggered by a showing that the creditor had engaged in "some type of inequitable conduct" that "resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant." In an often-cited opinion decided under the former Bankruptcy Act of 1898, the Fifth Circuit in Benjamin v. Diamond (In re Mobile Steel Corp.), 563 F.2d 692 (5th Cir. 1977) set forth a number of principles to be considered in determining whether or not a particular claim should be equitably subordinated, among them that claims arising from the dealings between the debtor and its fiduciaries must be subjected to rigorous scrutiny. Id. at 701. See also Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed.281 (1939). However, simply because a creditor is an insider does not warrant subordination of an otherwise valid secured claim. EEE Comm'l Corp. v. Holmes (In re ASI Reactivation, Inc.), 934 F.2d 1315, 1320-1321 (4th Cir. 1991) (purchase by president with his own funds of note secured by assets of corporation).
C.F. Trust's equitable subordination argument focuses, not on the original character of the claim, but on the inequitable use to which J.P. Development has attempted to put the judgment. As noted above, J.P. Development is wholly owned by Scott Peterson, who, until very shortly prior to the chapter 11 filing, was the president of DEP. Notwithstanding that J.P. Development had purchased the MacCoon judgment over 9 months earlier, neither J.P. Development's alleged claim nor its alleged lien was shown on the schedule of liabilities filed by the debtor, nor was such claim acknowledged or treated in the original plan of reorganization filed by the debtor. It was only after the "drop dead" date approached at which C.F. Trust would have relief from the automatic stay that the debtor, for the first time, asserted the existence of the MacCoon judgment lien and sought to treat J.P. Development as a creditor. The debtor has provided no explanation as to why the lien was not previously disclosed. As discussed above, it appears that Barrie Peterson arranged for the MacCoon judgment to be acquired by J.P. Development, rather than paid off, so that he could have the benefit of a friendly lien to shield his assets from collection efforts by C.F. Trust and other creditors.
On July 10, 1996, the court entered an order that, among other conditions for continuing the automatic stay, required the debtor to obtain confirmation of a plan not later than October 25, 1996. The amended plan that, for the first time, listed J.P. Development as a creditor was filed on October 18, 1996. It would have treated Atlantic Funding's claim as being in first position, but limited to the $250,000.00 that Atlantic Funding paid for it. Then it would have treated the J.P. Development claim as being in second position to be paid in full at its face amount (notwithstanding that it, like the Atlantic Funding claim, had been purchased at a substantial discount). Then the plan would have treated C.F. Trust as being in third position. The plan, in short, would simply have siphoned out to the Petersons essentially all the value of the Dominion Professional Center.
In short, C.F. Trust has made out at least a prima facie case for equitable subordination of the judgment lien, and J.P. Development has offered no evidence sufficient to rebut that showing. The concern the court has, however, is that § 510(c) by its very terms allows a court to subordinate claims "for the purposes of distribution." In the present case, C.F. Trust has already been granted relief from the automatic stay and is apparently prepared to foreclose. While the Dominion Professional Center has not been abandoned by the trustee and remains technically property of the bankruptcy estate, in light of the court's previous determination as to fair market value, there is no realistic possibility that the foreclosure sale will result in a surplus that would be subject to "distribution" by the trustee. Consequently, any order subordinating the MacCoon judgment lien for the purposes of distribution would be essentially meaningless. Were the Dominion Professional Center to be sold by the chapter 7 trustee free and clear of liens under § 363(f), Bankruptcy Code, the court's duty to decide the equitable subordination issue would be clear, but where a foreclosure sale is being conducted in accordance with state law, and where there is no realistic likelihood of excess proceeds for distribution by the trustee, this court does not believe that § 510(c), Bankruptcy Code, may be employed to alter the distribution priorities under state law. Accordingly the court will deny summary judgment on the equitable subordination issue at this time, without prejudice to the plaintiff's right to renew the motion for summary judgment on that issue if the chapter 7 trustee moves to sell the property under § 363(f), Bankruptcy Code.
The court has been advised that foreclosure sales of the Pick-A-Pair tract and the Elm Farm mobile home park have already been held.
Va. Code Ann. § 55-59.4(A)(3) directs distribution of the proceeds of a foreclosure sale to be made as follows:
The trustee shall receive and receipt for the proceeds of sale, no purchaser being required to see to the application of the proceeds, and apply the same, first, to discharge the expenses of executing the trust, including a commission to the trustee of five per centum of the gross proceeds of sale; secondly, to discharge all taxes, levies, and assessment, with costs and interest if they have priority over the lien of the deed of trust, including the due pro rata thereof for the current year; thirdly, to discharge in the order of their priority, if any, the remaining debts and obligations secured by the deed, and any liens of record inferior to the deed of trust under which sale is made, with lawful interest; and, fourthly, the residue of the proceeds shall be paid to the grantor or his assigns; provided, however, that the trustee as to such residue shall not be bound by any inheritance, devise, conveyance, assignment or lien of or upon the grantor's equity, without actual notice thereof prior to distribution; provided further that such order of priorities shall not be changed or varied by the deed of trust.
A separate order will be entered consistent with this opinion.