Case Title: Luria v. Board of Dir. of Westbriar

Citation: 

Docket Number: 080515

State: virginia

Court: Virginia Supreme Court

Date: 2009-02-27T00:00:00Z

Document:
PRESENT:  Keenan, Koontz, Kinser, Lemons, Goodwyn, and 
Millette, JJ., and Carrico, S.J. 
 
JON LURIA, ET AL. 
 
 
 
 
 
 
  
    OPINION BY 
v.  Record No. 080515 
 
JUSTICE LEROY F. MILLETTE, JR. 
 
 
 
 
 
 
 
 February 27, 2009 
BOARD OF DIRECTORS 
OF WESTBRIAR CONDOMINIUM 
UNIT OWNERS ASSOCIATION  
 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Kathleen H. MacKay, Judge 
 
In this appeal, we consider whether the circuit court 
erred in finding that a managing member of a limited liability 
company owed a fiduciary duty to a creditor.  We focus our 
inquiry on whether The Westbriar Condominium Unit Owners 
Association (the Association), as a potential statutory 
warranty claimant, qualified as a creditor to whom such a 
fiduciary duty may be owed. 
BACKGROUND 
Jon Luria (Luria) is a real estate developer in Northern 
Virginia.  In 1996, Luria began construction of The Westbriar 
Condominium (the Westbriar), a four building, 224-unit 
condominium in Fairfax.1  Throughout construction of the 
Westbriar, Luria used a corporation and two limited liability 
companies (LLCs) to successively hold title to and manage 
                                                 
1 The Westbriar attained its status as a condominium by the 
May 12, 1998 recordation of a Declaration of The Westbriar 
Condominium, as required by Code § 55-79.45. 
development of the project.  Each of these three entities (the 
Declarants) also served as a declarant of the Westbriar. 
The first entity to hold title was Jade Westbriar, Inc., a 
Virginia corporation, which was formed in 1996.  Jade 
Westbriar, Inc. was 100% owned by Ellen Luria.  In 1998, Jade 
WFW, LLC was formed and was owned 50% each by Jon and Ellen 
Luria.  In 2001, The Westbriar, LLC was formed to manage the 
completion of the Westbriar project and was also owned 50% each 
by Jon and Ellen Luria.   Luria was a member of and was the 
manager of both Jade WFW, LLC and The Westbriar, LLC. 
During construction of the project, Luria did not honor 
general and administrative costs as provided in the agreements 
with lenders and made a series of improper transfers and draws 
of funds from the various entities.  The circuit court adopted 
the Association’s contention that the improper transfers Luria 
made to himself took place from 1996 through the end of 2002. 
On the exterior of the Westbriar buildings, Luria used an 
alternative to stucco or siding, the Exterior Insulation and 
Finish System (the EIFS).  Luria hired a reputable, certified 
contractor to install the EIFS, and the installation was 
certified after its completion, in compliance with Fairfax 
County building regulations. 
On June 8, 1999, Christian J. Lessard, the Westbriar’s 
project architect, sent Luria a letter identifying ten specific 
 
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categories of problems with the construction that Lessard 
discovered during his substantial completion walk through.  Two 
of the problems related to the EIFS.  Specifically, Lessard’s 
letter stated that flashing and caulking were needed in certain 
areas.  The letter also suggested that a moisture meter be used 
to verify that there were no moisture problems behind the EIFS.  
On June 17, 1999, Luria and Lessard executed an indemnification 
agreement, which provided that Luria would indemnify Lessard 
from any liability that may arise from Luria’s failure to 
perform the work necessary to correct the problems in Lessard’s 
letter. 
On October 23, 2000, Lessard provided Luria with a field 
report that Lessard prepared pursuant to another substantial 
completion review.  The field report listed twenty-one specific 
comments and itemized various problems with individual units.  
Three of the twenty-one comments listed related to the EIFS.  
Specifically, two of the comments referenced flashing and 
caulking of the EIFS and one suggested that Luria hire a “water 
proofing engineer” to verify all flashing applications.  On 
July 30, 2002, control of the Association passed to the unit 
owners.  Thereafter, the Association hired an engineering firm, 
Engineering and Technical Consultants, Inc. (Engineering 
Consultants), to conduct a warranty inspection “for the purpose 
of identifying structure defects, as defined by the Condominium 
 
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Act.”  On December 23, 2002, Engineering Consultants submitted 
a report to the Association’s counsel that detailed several 
defects in the Westbriar.  The report noted that the EIFS was 
in “poor condition” and made recommendations to fix the various 
problems associated with the EIFS.  Engineering Consultants 
estimated the cost to repair the EIFS defects could amount to 
as much as $3,730,000.00.  By a letter dated March 12, 2003, 
the Association’s counsel advised Luria of defects in the EIFS 
within the scope of the statutory warranty. 
Engineering Consultants conducted a follow up inspection 
specifically addressing the EIFS and prepared a supplemental 
report.  The supplemental report, submitted to the 
Association’s counsel on May 5, 2003, noted that the defects in 
the EIFS were “systematic and comprehensive” and recommended 
that the EIFS be “completely removed and replaced.” 
On May 9, 2003, the Association filed a motion for 
judgment against the Declarants, Jon Luria, Ellen Luria, and 
others.  Subsequently, the Association amended its motion for 
judgment, and alleged the defendants constructed the buildings 
with major structural defects and the Lurias used the entities 
they controlled to fraudulently avoid obligations owed to the 
Association as a creditor.  The amended motion for judgment 
 
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contained six counts, which included counts III and V.2 Count 
III alleged that by making improper transfers and distributions 
for his own benefit, Luria breached his fiduciary duty to the 
Association as a creditor.  Count V alleged that the improper 
transfers to Luria constituted illegal distributions by the 
Declarants. 
The circuit court conducted a bench trial and issued a 
letter opinion, awarding judgment against Luria on both counts 
III and V.  The circuit court based its finding of liability 
for breach of fiduciary duty to the Association as a creditor 
under count III on Marshall v. Fredericksburg Lumber Company, 
162 Va. 136, 173 S.E. 553 (1934). 
In Marshall, this Court held that “where there are 
existing creditors of a corporation the stockholders will not 
be permitted, as against those creditors, to withdraw the 
assets of the corporation without consideration, whether it be 
done through a purchase of stock by the corporation or 
otherwise.”  Id. at 147, 173 S.E. at 557.  In its letter 
opinion, the circuit court stated that “Luria’s conduct of 
                                                 
2 Under count I, the circuit court concluded that the 
Declarants breached the statutory warranty under Code § 55-
79.79 and assessed damages against the Declarants in the amount 
of $5,813,416.00.  Under count VII (alter ego liability) 
judgment was entered against both Jon and Ellen Luria in the 
amount of $5,813,416.00.  Counts II, IV, and VI were dismissed. 
 
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withdrawing the declarants’ assets falls within the conduct 
contemplated and prohibited by the Court in Marshall.” 
The circuit court determined that “[Luria’s] liability as 
[a] fiduciar[y] to the Association is contingent upon a finding 
that the Association was a creditor [of the Declarants] when 
the improper preferences were made.”  In making this 
determination, the circuit court first addressed “whether a 
potential statutory warranty claimant can be considered a 
‘creditor.’ ”  The circuit court analyzed cases regarding 
claimants who had not yet reduced their demands to judgment, 
including potential tort claimants.  Finding no meaningful 
distinction between potential tort claimants and potential 
statutory warranty claimants, the circuit court concluded the 
Association was a “creditor of the Declarants” based upon 
notice to Luria of the Association’s potential statutory 
warranty claim. 
The circuit court stated that the “weight of the evidence 
showed that by virtue [of] the information [he] received on 
site and/or from [his] experience in the development and 
construction industries [, Luria] knew that there were problems 
regarding the EIFS installation.”  In reaching this 
determination, the circuit court stated that the evidence it 
principally relied upon was Lessard’s letter, the 
 
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indemnification agreement between Luria and Lessard, and the 
October 23, 2000 field report. 
Based upon its determination that Luria was on notice of 
“serious structural defects” from the use and installation of 
the EIFS at the Westbriar, the circuit court found that the 
Association was a creditor of the Declarants from the first 
outsale of condominium units in June of 1998.  The circuit 
court then adopted the Association’s position that Luria, as 
the Declarants’ controlling member, directed transfers and 
distributions to his own benefit from 1996 through 2002.  The 
circuit court concluded that Luria’s withdrawal of the 
Declarants’ assets constituted self-dealing and was a breach of 
the fiduciary duty he owed to the Association as a creditor of 
the Declarants.  The circuit court ordered Luria to refund the 
sum of $3,484,363.40.  The circuit court used the same analysis 
in awarding the Association identical relief against Luria 
under count V for illegal distributions by the LLCs.  We 
granted Luria this appeal only as to the issue of the duty owed 
to a potential statutory warranty claimant, addressed in counts 
III and V.3 
                                                 
3 We will only address the portions of Luria’s assignment 
of error that are dispositive to the resolution of this appeal.  
See Lynchburg Div. of Soc. Servs. v. Cook, 276 Va. 465, 477, 
666 S.E.2d 361, 367 (2008). 
 
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DISCUSSION 
Luria contends the circuit court erred in finding in favor 
of the Association for breach of fiduciary duty to a creditor 
and illegal distributions under counts III and V.  According to 
Luria, this Court has never imposed upon the managing member of 
an LLC a fiduciary duty to a third party creditor.  Luria also 
argues that the Association was not a creditor of the 
Declarants because Luria did not have actual notice of any 
potential statutory warranty claim.  Luria contends the circuit 
court erred as a matter of law in finding that the legal right 
to potentially assert a claim in the future creates a fiduciary 
duty. 
In response, the Association argues that the circuit court 
properly imposed liability upon Luria under the trust fund 
doctrine as articulated in Marshall.  The Association asserts 
that it was a creditor because Luria had knowledge of defects 
that would support a claim for breach of statutory warranty.  
The Association also contends that notice of a statutory 
warranty claim in this case was not possible because the 
Declarants controlled the Association prior to the transfer of 
control to the unit owners. 
The resolution of the issue before us presents a mixed 
question of law and fact, which we review de novo.  In our 
review of the circuit court’s application of the law to the 
 
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facts, we give deference to the circuit court’s factual 
findings and view the facts in the light most favorable to the 
Association, the prevailing party below.  Virginia Baptist 
Homes, Inc. v. Botetourt County, 276 Va. 656, 663, 668 S.E.2d 
119, 122 (2008); The Daily Press, Inc. v. City of Newport News, 
265 Va. 304, 309, 576 S.E.2d 430, 432-33 (2003); Caplan v. 
Bogard, 264 Va. 219, 225, 563 S.E.2d 719, 722 (2002). 
Whether the Association is a creditor is dispositive in 
resolving this appeal because the Association’s creditor status 
triggers both the creation of a fiduciary duty and imposition 
of liability under Marshall.  It is an issue of first 
impression in Virginia whether a potential statutory warranty 
claimant can be considered a creditor. 
As an initial matter, this Court has held in addressing 
the fraudulent conveyance statute, Code § 55-80, that “[t]o 
maintain an action under this statute, the entitlement of one 
alleging a fraudulent conveyance need not be judicially 
established or reduced to judgment at the time of the 
challenged conveyance.”  Buchanan v. Buchanan, 266 Va. 207, 
212, 585 S.E.2d 533, 535 (2003).  Thus, obtaining a judgment 
against a party is not a prerequisite to establishing creditor 
status.  See Bruce v. Dean, 149 Va. 39, 46, 140 S.E. 277, 280 
(1927); Johnson v. Wagner & Sons, 76 Va. 587, 590 (1882). 
 
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This Court has held that potential tort claimants can be 
considered creditors if the putative debtor has adequate notice 
of the claim.  See Bruce, supra.  In Bruce, this Court 
addressed whether a convicted murderer’s transfer of assets 
should be set aside as a fraudulent conveyance when the 
transfer occurred two weeks after the victim’s surviving family 
member filed a tort action.  Id. at 42-44, 140 S.E. at 279.  
For purposes of a fraudulent conveyance, the Court held that 
the surviving family member, and potential tort claimant, was a 
creditor.  Id. at 46, 140 S.E. at 281. 
Notwithstanding any functional differences between 
potential tort claimants and potential statutory warranty 
claimants, the key consideration in establishing creditor 
status is whether there was actual notice of a specific 
potential claim.  The circuit court did not require a showing 
of actual notice of the structural defects from the EIFS to 
support its conclusion that the Association was a creditor of 
the Declarants in 1998.  The circuit court implicitly applied a 
“should have known” standard when it based its determination of 
notice upon “the information [Luria] received on site and/or 
from [Luria’s] experience in the development and construction 
industries.”  In doing so, the circuit court applied an 
erroneous legal standard.  We hold that the notice required to 
 
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create creditor status is actual notice of a specific potential 
statutory warranty claim. 
The Condominium Act creates a statutory warranty against 
structural defects for the benefit of condominium purchasers.  
Code § 55-79.79(B), in pertinent part, provides:  “the 
declarant shall warrant or guarantee, against structural 
defects, each of the units for two years from the date each is 
conveyed.”  Code § 55-79.79(B) further provides that 
“structural defects shall be those defects in components 
constituting any unit or common element which reduce the 
stability or safety of the structure below accepted standards 
or restrict the normal intended use of all or part of the 
structure and which require repair, renovation, restoration, or 
replacement.”  Based on Lessard’s letter and the October 23, 
2000 field report, Luria did not have notice of specific 
structural defects with the EIFS.  The letter and field report 
did not notify Luria of any defect that reduced “stability” or 
“safety” of the Westbriar.  Rather, the documents contained a 
series of “punch list” problems, only some of which addressed 
the EIFS, and made a series of recommendations to address the 
problems listed. 
Assuming, without deciding, that a managing member of an 
LLC may owe a fiduciary duty to a third party creditor under 
certain circumstances, we hold that the evidence presented at 
 
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trial was insufficient to establish that the Association was a 
creditor upon the first outsale in June of 1998.4  As previously 
stated, the June 8, 1999 letter and October 23, 2000 field 
report from Lessard, as well as the indemnification agreement, 
establish that Luria was on notice of problems with the EIFS 
during construction of the Westbriar.  However, these documents 
do not establish that Luria had actual notice of a specific 
potential statutory warranty claim because the problems noted 
were not characterized as structural defects “which reduce[d] 
the stability or safety of the structure below accepted 
standards or restrict[ed] the normal intended use of all or 
part of the structure.”  Code § 55-79.79.  The recommendations 
were to remedy the problems by repairs such as caulking and 
flashing.  Unlike in Marshall, where the creditor advanced 
funds to the debtor corporation, and unlike in Bruce where the 
tort claimant had already filed suit when the putative debtor 
made a transfer, the evidence in this case failed to 
demonstrate that Luria had actual notice of a potential 
statutory warranty claim when Luria directed the transfers and 
distributions for his own benefit. 
                                                 
4 The arguments presented refer to Luria as a “member” of 
the Declarants, however, the evidence presented at trial and 
alleged in the pleadings established that Luria was the 
managing member of the Declarants.  This case was litigated on 
the theory that Luria controlled and managed the Declarants, 
 
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After control of the Association passed to the unit owners 
and Engineering Consultants identified structural defects, 
actual notice of the specific structural defects was first 
received by the Association’s counsel on December 23, 2002.  
However, Luria did not have actual notice of the specific 
structural defects until he received the March 12, 2003 letter 
from the Association’s counsel.  Specifically, the letter 
stated that there were “widespread defects” with the EIFS as 
well as other common elements in the Westbriar.  Additionally, 
the stated purpose of the letter addressed to Luria was “to 
notify you of defects within the Condominium Common Elements 
that are within the scope of your statutory warranty.”  Upon 
receiving this letter, Luria was on actual notice of facts that 
would support a specific potential statutory warranty claim.  
Thus, the Association became a creditor beginning in March of 
2003.  Again, assuming, without deciding, that Luria as the 
managing member of the Declarants owed a fiduciary duty to the 
Association as a creditor in March of 2003, Luria did not 
breach that duty by making improper distributions because the 
circuit court found that all of the improper distributions 
occurred before 2003. 
CONCLUSION 
                                                                                                                                                           
and we will not elevate form over substance by disregarding the 
true nature of the Association’s claim. 
 
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The circuit court erred in finding that the Association, 
as a potential statutory warranty claimant, was a creditor of 
the Declarants at the time transfers were made to Luria because 
Luria, as the managing member of the Declarants, did not have 
actual notice of the structural defects caused by the EIFS.  
Accordingly, the circuit court’s judgment on counts III and V 
will be reversed. 
Reversed and final judgment. 
 
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