Case Title: Ashmore v. Herbie Morewitz Inc.

Citation: 

Docket Number: 952137

State: virginia

Court: Virginia Supreme Court

Date: 1996-09-13T00:00:00Z

Document:
Present:  All the Justices 
 
MILDRED H. ASHMORE 
 
OPINION BY JUSTICE A. CHRISTIAN COMPTON 
v.  Record No. 952137                 September 13, 1996 
 
HERBIE MOREWITZ, INC., ET AL. 
 
HERBIE MOREWITZ, INC., ET AL. 
 
v.  Record No. 952155 
 
MILDRED H. ASHMORE 
 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS 
 
Robert W. Curran, Judge 
 
 
In this creditors' rights controversy arising from a real 
estate sales transaction, the principal issues are whether fraud 
has been established in connection with the execution of a 
subordination agreement and, if so, whether application of the 
third party beneficiary statute, Code § 55-22, affects the 
priority of liens.  A subsidiary issue deals with the nature of 
the fraud. 
 
In April 1994, plaintiff Mildred H. Ashmore filed a bill of 
complaint against defendants Herbie Morewitz, Inc., Herbert 
Morewitz, II, Statewide, Inc., Raymond H. Suttle, Jr., Trustee, 
and Richard M. Macaluso, Trustee.  The plaintiff alleged she is a 
widow over 70 years of age living alone at the Newport News home 
formerly owned jointly with her late husband.  Plaintiff asserted 
she had been living on a fixed income "barely adequate to meet 
her needs" and, in 1992, decided to convert the subject property 
into an income producing asset.  The plaintiff alleged she 
decided to find a purchaser for the property who would buy it "on 
seller financed terms which would provide her with a stream of 
 
 
 
 
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income from note payments secured by a purchase money deed of 
trust on the Property and at the same time allow her to remain in 
the Property at a reasonable monthly rental for a period of 
time." 
 
Plaintiff further alleged that, based on prior contact with 
defendant Herbert Morewitz, II, "she believed him to be an astute 
and experienced real estate investor who regularly bought and 
sold properties as part of his business."  Plaintiff also alleged 
that, responding to her request, Morewitz came to her home to 
discuss the matter.  He presented her with a real estate purchase 
contract setting forth terms of a proposed sale of the property 
to defendant Herbie Morewitz, Inc., "a corporation solely owned 
and controlled by Morewitz." 
 
The plaintiff alleged that, in accord with the contract, she 
executed and delivered a deed of bargain and sale dated in 
November 1992 conveying the property to Herbie Morewitz, Inc. 
(hereinafter, the corporation).  At the same time, the 
corporation made and delivered a purchase money promissory note 
in the sum of $82,000 payable to the plaintiff's order.  This 
note was secured by a first lien purchase money deed of trust 
made by the corporation conveying the property in trust to 
defendant Suttle and another as trustees to secure payment of the 
note.  The deed and deed of trust were duly recorded. 
 
The plaintiff further alleged that Morewitz "assured" her 
that she would always have a first lien deed of trust on the 
 
 
 
 
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property as security for payment of the note.  She also alleged 
that Morewitz never asked her to subordinate the deed of trust to 
a later deed of trust on the property. 
 
The plaintiff further alleged that she "happened to be in 
Morewitz's office" on March 24, 1993 when he said "he had `sold 
the paper' related to the Property and needed for her to sign a 
document connected with that activity."  She asserted Morewitz 
presented her with a single sheet of paper bearing a line for her 
signature and containing two blank acknowledgement forms.  She 
alleged Morewitz did not tell her that the sheet, which she 
signed, was actually the last page of a three-page document. 
 
The plaintiff alleged she later learned, when the 
corporation became delinquent in the payment of the note, that 
the document was an agreement in which she consented to the 
subordination of the lien of the purchase money deed of trust to 
the lien of another deed of trust on the property from the 
corporation to defendant Macaluso, Trustee, securing a note made 
by the corporation in the principal sum of $52,500 payable to 
defendant Statewide, Inc.  Both the subordination agreement and 
the other deed of trust had been recorded. 
 
The plaintiff alleged the subordination agreement was void 
due to fraud of Morewitz and the corporation.  She further 
alleged that Statewide was a third party beneficiary of the 
purported agreement and, as such, takes its interest in the 
property subject to any defenses which she may have against the 
 
 
 
 
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corporation.  She asserted that Statewide's rights under the 
purported agreement can rise no higher than the rights of the 
corporation under such instrument. 
 
In the prayer to the bill of complaint, the plaintiff asked 
that the subordination agreement be declared void and that she be 
declared the holder of the first lien deed of trust on the 
property. 
 
In a responsive pleading, Morewitz, "individually and as 
President & Agent of Herbie Morewitz, Inc.," denied the 
allegations of fraud.  He affirmatively asserted that he advised 
the plaintiff "to seek counsel if she did not understand the 
subordination agreement" and that trustee Suttle "verified" with 
the plaintiff "that she had, in fact, signed [the] agreement and 
understood its content."  Morewitz asked the court to dismiss the 
bill of complaint, issue an order allowing him access to the 
property to facilitate its sale, and order the plaintiff to 
vacate the property. 
 
The trial court considered testimonial and documentary 
evidence in an ore tenus hearing in January 1995.  Subsequently, 
in an October 1995 final decree, the court ruled that the 
plaintiff's signature to the subordination agreement was obtained 
by the fraud of Morewitz acting on behalf of the corporation, 
that the fraud made the agreement voidable, that no evidence was 
produced to establish any knowledge of the fraud by Statewide, 
and that the plaintiff's request to be declared holder of a first 
 
 
 
 
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lien deed of trust on the property was denied. 
 
We awarded separate appeals to the plaintiff, on one hand, 
and to the corporation and Morewitz, on the other, consolidating 
them for argument.  The plaintiff contends the trial court 
erroneously determined that even though her execution of the 
subordination agreement was induced by the fraudulent 
misrepresentations of Morewitz, this rendered the agreement 
voidable rather than void.  The plaintiff also contends the trial 
court erroneously found that the rights of Statewide under the 
agreement were not affected by Morewitz's fraud and that 
Statewide did not take its interest in the property subject to 
the defense of fraud which plaintiff had against the corporation. 
 
In the cross appeal, the corporation and Morewitz contend 
the trial court erred in finding that fraud had been proved by 
clear and convincing evidence. 
 
The record on appeal does not include a verbatim transcript 
of the testimony at trial, only a Rule 5:11(c) written statement 
of facts in lieu of a transcript.  Many of the relevant facts 
were disputed but, applying settled appellate principles, we 
accord the judgment of the trial court, including the court's 
findings of fact that are supported by credible evidence, a 
presumption of correctness.  Thus, we shall recite such facts as 
found by the chancellor. 
 
First, we shall address the issue of law raised in the cross 
appeal, that is, whether the plaintiff proved fraud by the 
 
 
 
 
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requisite clear and convincing evidence. 
 
The parties' evidence essentially supported the allegations 
made in their pleadings.  The plaintiff established that "on 
several occasions" after the closing of the sale of the property 
to the corporation, Morewitz told her "that he might want to 
borrow against the Property, or `sell the paper,' but assured her 
that her position would not be changed."  In a letter dated March 
18, 1993, Morewitz wrote plaintiff confirming "our conversation 
in regards to your possible need to occupy the house beyond [a] 
one year term," stating he was "agreeable" to extending her 
occupancy "to whatever date you're comfortable with."  In a 
second paragraph, Morewitz wrote:  "Also, from time to time, I 
borrow against properties that I own to expand my investment 
enterprise.  I may borrow against [the subject property] but 
please know this will not change your position at all."  Morewitz 
later testified this statement "was in reference to her continued 
occupancy of the property and to verify that she would continue 
to receive monthly payments." 
 
Thereafter, in March 1993, Morewitz "sought a loan" for the 
corporation from Statewide, which advised him that "such a loan" 
would be made if he "could give Statewide a first lien deed of 
trust on the Property as security for the loan."  According to 
the statement of facts, Morewitz then took a subordination 
agreement, prepared by Statewide's attorney, to the plaintiff, 
telling her "that the instrument was just a routine document 
 
 
 
 
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which would enable him to `sell the paper' related to the 
Property."  The plaintiff, who was "unsophisticated in such 
matters," relied on Morewitz and executed the subordination 
agreement.  She testified that the pages of the document "were 
not attached to each other and she signed the signature page 
without reading the document."  During cross-examination, the 
plaintiff, when asked, "Did you read the document at all before 
signing it?" replied, "I read it, but not carefully." 
 
Trustee Suttle, who testified Morewitz had written him a 
memo suggesting he call the plaintiff "to ensure that she 
understood the agreement," stated that when the document was 
presented for his signature, he telephoned the plaintiff and 
explained to her "that the effect of this subordination agreement 
was that she would now be in a second lien position, not first." 
 Disputing this testimony, the plaintiff testified she never 
spoke to Suttle about "subordinating her deed of trust to another 
deed of trust."  The chancellor found the telephone call took 
place but that the plaintiff "failed to understand the legal 
effect of the document because of the fraudulent 
misrepresentations which Morewitz had previously made to her." 
 
The plaintiff also established that she later found in her 
files the draft of an unsigned subordination agreement like the 
document she signed.  The unsigned document, however, contained 
"an extra sentence" stating, "Notice:  The original agreement 
between Herbie Morewitz, Inc. and Mildred H. Ashmore is not 
 
 
 
 
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diminished or affected by this document."  The plaintiff did not 
know how or when the document came into her possession, stating 
"it may have come from Mr. Morewitz's office."  The plaintiff 
admitted she did not rely on the extra sentence when she signed 
the agreement. 
 
Morewitz testified that the extra sentence appeared to be on 
a "working" or "rough draft" copy of the agreement, and that he 
did not recall making any alteration to the copy prepared by 
Statewide's attorney.  According to the statement of facts, 
Morewitz "did not absolutely deny" making the alteration, 
"because he could not recall this sentence at all." 
 
A party seeking to establish fraud must prove by clear and 
convincing evidence a false representation, of a material fact, 
made intentionally and knowingly, with the intent to mislead, 
reliance by the party misled, and resulting damage to such party. 
 Thompson v. Bacon, 245 Va. 107, 111, 425 S.E.2d 512, 514 (1993). 
 Clear and convincing evidence is that degree of proof which will 
produce in the mind of the trier of facts a firm belief or 
conviction concerning the allegations sought to be established.  
Fred C. Walker Agency, Inc. v. Lucas, 215 Va. 535, 540-41, 211 
S.E.2d 88, 92 (1975).  Viewing the facts, as we must, in the 
light most favorable to the plaintiff who prevailed below on this 
issue, we hold that the plaintiff's proof burden has been carried 
on the fraud question. 
 
There was credible, clear and convincing evidence to support 
 
 
 
 
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the trial court's finding that Morewitz, intentionally and 
knowingly with the intent to mislead, falsely represented 
material facts to the plaintiff, that is, her first lien 
"position" would not be changed if he "sold the paper" and the 
subordination agreement "was just a routine document" enabling 
him to "sell the paper."  Further, such evidence supports the 
court's implicit findings that plaintiff relied on the false 
representation and was relegated to a second lien position to her 
detriment as the result of executing the subordination agreement. 
 Thus, we hold there is no merit in the cross appeal. 
 
Turning next to the plaintiff's contention that the nature 
of the fraud made the agreement void, and not voidable, we hold 
the trial court correctly ruled the agreement was voidable. 
 
When a promisor knows what is being signed but the 
promisor's consent is induced by fraud, mutual consent is present 
and a contract is formed, which, because of the fraud, is 
voidable.  In other words, "the act of the defrauded person is 
operative though voidable."  12 Williston on Contracts § 1488, at 
332 (3d ed. 1970). 
 
On the other hand, if the fraud operates at the inception of 
the agreement so that the promisor actually does not know what is 
being signed, or does not intend to enter into a contract at all, 
mutual assent is lacking and the act of the promisor is void; the 
purported agreement may be disregarded without the necessity of 
rescission.  Id. See Elam v. Ford, 145 Va. 536, 545, 134 S.E. 
 
 
 
 
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670, 672 (1926). 
 
In the present case, the trial court found that the 
plaintiff knew she was signing a subordination agreement, but 
that she would not have so acted without Morewitz's 
misrepresentations regarding its legal effect on her position of 
priority.  The court thus found, obviously with the foregoing 
principles in mind, "that this is the case where the act of the 
defrauded person is operative though voidable."  There is 
credible evidence to support such finding. 
 
Finally, we address the plaintiff's alternative argument 
that, even if the trial court correctly ruled the agreement is 
voidable, the court nonetheless erred in refusing to apply Code 
§ 55-22 and to rule Statewide took its interest in the property 
subject to the defense of fraud that she had against the 
corporation.  We agree with the plaintiff. 
 
Code § 55-22, the third-party beneficiary statute, provides: 
 
"An immediate estate or interest in or the benefit of a 
condition respecting any estate may be taken by a 
person under an instrument, although he be not a party 
thereto; and if a covenant or promise be made for the 
benefit, in whole or in part, of a person with whom it 
is not made, or with whom it is made jointly with 
others, such person, whether named in the instrument or 
not, may maintain in his own name any action thereon 
which he might maintain in case it had been made with 
him only and the consideration had moved from him to 
the party making such covenant or promise.  In such 
action the covenantor or promisor shall be permitted to 
make all defenses he may have, not only against the 
covenantee or promisee, but against such beneficiary as 
well." 
 
This statute enables a third party to take an interest under an 
 
 
 
 
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instrument, although not a party to it, if the promise is made 
for the third party's benefit and the evidence shows that the 
contracting parties clearly and definitely intended to confer a 
benefit upon such third party.  Kelley v. Griffin, 252 Va. 26, 
29, 471 S.E.2d 475, 477 (1996). 
 
In the present case, the evidence is clear that the 
subordination agreement between the plaintiff and the corporation 
is intended to confer a benefit upon Statewide, a nonparty.  
Under that agreement, Suttle as trustee and plaintiff as 
beneficiary of the November 1992 deed of trust agreed that the 
lien of that deed of trust shall be subordinated to and in favor 
of the other deed of trust, dated in March 1993, securing the 
debt to Statewide, which actually is named in the body of the 
subordination agreement.  Thus, under Code § 55-22 Statewide 
could enforce the subordination agreement against the plaintiff. 
 
But the last sentence of Code § 55-22 further provides that 
the plaintiff, as covenantor or promisor of the instrument, shall 
be permitted to make all defenses she may have against Statewide, 
the third-party beneficiary.  In other words, the third-party 
beneficiary's rights under the instrument, according to the 
statute, can rise no higher than the rights of the corporation, 
the covenantee or promisee under the instrument.  Thus, we hold 
that Statewide took its interests under the subordination 
agreement subject to the plaintiff's right to rescind the 
agreement because of Morewitz's fraud, even though Statewide had 
 
 
 
 
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no knowledge of the fraud. 
 
Accordingly, we will affirm so much of the final decree 
which finds that the plaintiff's signature on the subordination 
agreement was obtained by the fraud of Herbert Morewitz, II, 
acting on behalf of Herbie Morewitz, Inc., and which finds that 
the fraud made the agreement voidable.  Parenthetically, we find 
no merit in a contention made by the corporation and Morewitz 
that the form of this portion of the decree is erroneous. 
 
We will reverse the remainder of the final decree.  We will 
enter final judgment here setting aside the subordination 
agreement and declaring the plaintiff to be the holder of a first 
lien deed of trust on the subject property. 
 
                      Record No. 952137 - Affirmed in part,
                                          reversed in part, and
                                          final judgment. 
 
                      Record No. 952155 - Affirmed.