Case Title: Tauber v. Commonwealth

Citation: 

Docket Number: 971155

State: virginia

Court: Virginia Supreme Court

Date: 1998-04-17T00:00:00Z

Document:
Present:  All the Justices 
 
 
LASZLO N. TAUBER, ET AL. 
OPINION BY JUSTICE A. CHRISTIAN COMPTON 
v.  Record No. 971155 
April 17, 1998 
 
COMMONWEALTH OF VIRGINIA, 
ETC., ET AL. 
 
FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA 
Alfred D. Swersky, Judge 
 
 
In this chancery suit, the Attorney General of Virginia and 
a commonwealth’s attorney jointly assert jurisdiction in the 
name of the Commonwealth over assets located in Virginia held by 
trustees in dissolution of a foreign charitable corporation.  
The trustees had been directors of the corporation, which 
operated a hospital in this State. 
 
A brief summary of the relevant business activities of the 
hospital directors will set the stage for this discussion.  
Jefferson Memorial Hospital, Inc. (JMHI), was chartered 
originally as a for-profit, stock corporation in Maryland in 
1963.  In 1964, the corporation amended its charter to become a 
nonprofit, nonstock charitable entity; it began operations as an 
acute-care hospital in Alexandria on March 15, 1965. 
 
In April 1969, the federal Internal Revenue Service began 
an investigation leading to revocation of JMHI’s tax-exempt 
status, retroactive to November 1, 1965.  In 1971, the 
corporation’s directors attempted to “merge” JMHI into a for-
profit Delaware corporation, Jefferson Memorial Hospital 
Corporation (JMHC).  There was an effort to dissolve JMHI and to 
transfer its assets and liabilities to JMHC, of which JMHI’s 
directors would serve as directors.   
 
In April 1973, Maryland ordered JMHI’s corporate charter 
forfeited “for failure to file the necessary corporate personal 
property report or failure to pay any late filing penalties 
due.” 
 
In 1974, the directors retained counsel “to represent the 
Hospital in looking after and insuring that the Hospital 
Corporate structure for the past, present, and for the immediate 
future, be handled so as to insure that everything is legally 
correct and in keeping with the best interest of the investors 
of the Hospital,” according to JMHC’s minutes.  Counsel 
testified that he was “asked to rectify the problem that had 
arisen because a supposed merger in ’71 had not been done.”  
 
Unaware that Maryland had revoked JMHI’s charter, counsel 
had the directors declare JMHI insolvent and approve transfer of 
JMHI’s assets to JMHC.  In January 1975, JMHC’s directors 
authorized purchase of the assets and assumption of the 
liabilities.  The directors of JMHC, believing they had 
assembled all the assets of the former charity into the for-
profit corporation, agreed to transfer all JMHC’s “assets” to 
appellant Laszlo N. Tauber as trustee for appellant Jefferson 
 
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Memorial Hospital Joint Venture (JMHJV), a partnership in which 
those assets apparently still reside.  The directors also agreed 
to lease back from the partnership the transferred assets. 
 
In July 1996, the present suit was instituted by the 
Commonwealth of Virginia, ex rel. the Attorney General of 
Virginia and the Commonwealth’s Attorney for the City of 
Alexandria.  The defendants are Tauber and nine other named 
physicians, “each individually and as a former director of 
[JMHI] . . . and/or as partners in Jefferson Memorial Hospital 
Associates, or [JMHJV], and/or directors or shareholders of 
[JMHC] (a Delaware Corporation now known as ‘Jefferson 
Corporation of Alexandria’)”; Jefferson Memorial Hospital 
Associates; JMHJV; and Jefferson Corporation of Alexandria.  A 
prior suit had been commenced by the Attorney General against 
the same defendants in April 1995, but was nonsuited during 
trial. 
 
In the present suit, the plaintiffs filed a 112-paragraph, 
40-page, three-count bill of complaint.  They alleged that funds 
and assets received by the defendants as directors and trustees 
of a charitable corporation “were misappropriated and diverted” 
contrary to law that requires such funds to be used only for 
charitable purposes, “and not for private inurement.”  The 
plaintiffs then recited in detail the defendants’ alleged 
business activities in connection with the hospital. 
 
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In count one, the plaintiffs alleged the “purported merger 
between JMHI and JMHC in 1971 never took place,” and the 
“subsequent purported transfers of the property of JMHI were 
likewise null and void.”  Asserting “JMHI was and is a non-stock 
foreign corporation whose assets are located in the 
Commonwealth” and are subject to the trial court’s jurisdiction, 
the plaintiffs asked the court:  to declare “that the purposes 
for which JMHI was created have been frustrated and are no 
longer capable of being accomplished by virtue of” the 
defendants’ conduct; to declare that legal title to JMHI’s 
assets remain in JMHI; to order that an appropriate custodian 
gather the assets of the former JMHI and administer them under 
the court’s supervision; to require that defendants account for 
the money or other value received in the transactions and that 
defendants be surcharged for the charitable assets they usurped 
in the amount of at least $40 million; and to enter judgment 
against defendants as a result of “their conversion, 
misappropriation, or appropriation of the charitable assets” 
described. 
 
In count two, the plaintiffs sought similar relief and also 
asked the court “to impose a constructive trust upon the 
Hospital, its land, equipment and any other assets,” as well as 
upon settlement proceeds being paid by an entity which, in 1985, 
 
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negotiated with JMHJV to buy the right to operate the hospital 
and its assets as a going concern. 
 
In count three, the plaintiffs asked the court to declare 
that “the corporate opportunities of JMHI have been usurped” by 
the defendants; that the defendants be required “to account for 
and disgorge all sums usurped;” that the court impress upon any 
future sums defendants may receive “an appropriate judgement or 
trust to secure the interests of the beneficiaries of JMHI, and, 
if necessary, to refer the matter to a Commissioner in Chancery 
for an appropriate accounting and charging order against JMHJV.” 
 
After the chancellor overruled their demurrer and plea in 
bar, defendants answered the bill of complaint.  They generally 
denied the allegations, asserting the plaintiffs are not 
entitled to the relief prayed for, or to any other relief. 
 
The cause was heard ore tenus in January 1997.  The parties 
had stipulated that the trial in the present suit was to 
commence where the prior trial terminated, and that the record 
of all proceedings in the prior suit is to be a part of the 
present record. 
 
Following the trial, the chancellor filed a memorandum 
opinion ruling that the plaintiffs are entitled to relief sought 
in the bill of complaint.  In a March 1997 decree, from which we 
awarded defendants this appeal, the court declared that the 
assets and liabilities of JMHI “be, reside and remain with 
 
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[defendants] as trustees and further that a constructive trust 
be . . . imposed on such assets and liabilities.” 
 
The court also ordered that a custodian “be appointed with 
exclusive jurisdiction to hold and administer the said assets 
and liabilities.”  Additionally, the court ordered defendants to 
submit “a full and complete accounting of all assets and 
liabilities that are the subject of this Decree.”  Finally, the 
court denied the plaintiffs’ “claim for monetary damages.” 
 
On appeal, defendants contend the trial court erred “when 
it concluded that the Attorney General has authority to bring 
this suit.”  The chancellor ruled “that the Attorney General has 
standing and authority to bring this action both at common law 
and pursuant to” Code § 13.1-909(B).  The trial court is 
correct. 
 
We need address only the common law.  This Court long ago 
recognized the common law authority of the Attorney General to 
act on behalf of the public in matters involving charitable 
assets.  Clark v. Oliver, 91 Va. 421, 427-28, 22 S.E. 175, 177 
(1895).  Indeed, this authority has received legislative 
recognition as recently as last year.  During its 1997 session, 
the General Assembly granted the Attorney General additional 
specific powers with respect to the disposition of assets by 
nonprofit health care entities.  Acts 1997, ch. 615.  These 
powers were granted “in order that the Attorney General may 
 
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exercise his common law and statutory authority over the 
activities of these organizations.”  Code § 55-532. 
 
Next, defendants argue the chancellor erred in ruling that 
Code § 55-29 provides authority for the Commonwealth’s Attorney 
of the City of Alexandria to be a proper party to the claims 
asserted.  We disagree. 
 
Code § 55-29 (1995 Repl. Vol.) provides, as pertinent: 
   “When any such gift, grant or will is recorded and 
no trustee has been appointed, or the trustee dies or 
refuses to act, the circuit court . . . of the city in 
which the trust subject or any part thereof is, in the 
case of a gift or grant, or in which the will is 
recorded, may, on motion of the attorney for the 
Commonwealth in such court (whose duty it shall be to 
make such motion), appoint one or more trustees to 
carry the same into execution. . . . In enforcing the 
execution of any such trust a suit may be maintained 
against the trustees in the name of the Commonwealth 
when there is no other party capable of prosecuting 
such suit.  The term ‘trustees’ as herein used shall 
be construed to mean the persons, or governing body, 
charged with the execution of the trust, whether 
designated as ‘trustees,’ ‘directors’ or 
otherwise. . . .” 
 
 
The phrase “any such gift, grant or will” refers to Code 
§ 55-26.1, which provides, “Every gift . . . made hereafter for 
charitable purposes, whether made in any case to a body 
corporate or unincorporated . . . shall be as valid as if made 
to or for the benefit of a certain natural person. . . .” 
 
The foregoing provisions are not limited to express trusts 
arising by virtue of written instruments, as defendants argue, 
but apply, as here, when the assets of JMHI passed automatically 
 
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to its directors as formal trustees of the charitable 
organization in liquidation.  Thus, the Commonwealth’s Attorney 
is a proper party to this litigation. 
 
Parenthetically, because the defendants seem to raise this 
issue on brief, we note that use of the word “recorded” in the 
first clause of the first sentence of § 55-29 refers to recorded 
wills, and not to any requirement that gifts or grants also be 
recorded.  This is made clear later in the same sentence where 
there is specific reference to “in which the will is recorded.”   
 
Next, we shall turn to the merits.  A detailed recitation 
of the evidence gleaned from this record would serve no useful 
purpose.  On appeal, the defendants primarily seek to have us 
annul factual findings of the chancellor.  The evidence, except 
for opinions of experts, was not in dispute; defendants urge us 
to invalidate the legitimate inferences drawn by the trial court 
from those proven facts.  This tactic will not succeed upon 
appellate review. 
 
The findings of a chancellor, hearing evidence ore tenus, 
carry the weight of a jury verdict.  Giannotti v. Hamway, 239 
Va. 14, 23, 387 S.E.2d 725, 730 (1990).  A judgment based upon 
such findings will not be annulled on appeal “unless it appears 
from the evidence that such judgment is plainly wrong or without 
evidence to support it.”  Code § 8.01-680.  And, the plaintiffs’ 
burden is to prove these allegations by a preponderance of the 
 
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evidence.  Baylor v. Beverly Book Co., 216 Va. 22, 24, 216 
S.E.2d 18, 19 (1975). 
 
Upon review we shall recite the facts, including the 
legitimate inferences flowing from those facts, in the light 
most favorable to the plaintiffs, who prevailed below.  In the 
early 1960s, following acquisition of real estate by deed and 
lease by King Street Joint Venture, held by defendant Tauber as 
trustee, JMHI was formed to transact the business of operating a 
hospital.  This Maryland corporation was authorized to do 
business in Virginia in 1963.  Following the March 1965 opening, 
the hospital experienced “problem[s] all the time,” although an 
expansion allowing addition of 24 beds occurred in 1968. 
 
In 1970, during the Internal Revenue Service investigation, 
an attorney was retained to review “the current corporate status 
of the hospital.”  Counsel recommended “a complete 
reorganization of the hospital and its affiliates,” 
establishment of “a new profit corporation with the same name,” 
and “that the old non-profit corporation be merged into it.” 
 
The Delaware for-profit corporation, JMHC, was formed in 
1971 and a supposed merger was arranged.  This merger was 
reported on tax returns filed in 1972, but the record is devoid 
of documents to support such a transaction.  However, Dr. 
Tauber, who mainly orchestrated the myriad transactions involved 
in this case, testified, “In my own mind, [the merger] was 
 
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completed.”  The chancellor said no evidence had been presented 
to show due diligence was used at that time to protect the 
interests of the beneficiaries of the charitable hospital. 
 
The basis of the 1972 Internal Revenue Service ruling 
revoking JMHI’s tax-exempt status was:  “The hospital sold 8% 
bonds to various doctors and individuals in exchange for their 
6% demand notes and did not enforce collection of such demand 
notes.  Other hospital bonds were sold to the general public at 
8% for cash.  Some of the doctors receiving the 8% bonds in 
exchange for their 6% demand notes were officers, directors, and 
staff members of the hospital.  Issuance of 8% bonds to these 
doctors and failure to enforce collection of the demand notes 
received in exchange resulted in inurement of income to private 
individuals.”  This was a violation of the applicable provision 
of the Internal Revenue Code allowing exemption of charities 
from federal income taxation. 
 
In 1974, after another attorney had been retained “to 
rectify the problem that had arisen” because of the putative 
merger, documents indicate that JMHC assumed the charity’s 
liabilities in return for receipt of JMHI’s assets.  The charity 
was to receive 5,000 shares of JMHC stock, but no such transfer 
was made. 
 
The record amply supports the following findings of the 
chancellor.  “There are numerous transactions shown, some of-
 
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record and some not, dealing with the real estate, the 
equipment, the leases, and the use of tax benefits.  The 
transactions show an entire course of self-dealing by the 
directors of the charity.  They were able to acquire interests 
in the real estate, the equipment and lease, and were able to 
use tax benefits belonging to the former charity to enhance the 
gain of the for-profit corporation.  The record is replete with 
discussions among [defendants] as to their personal profits and 
gains with no reference to the best interests of the 
beneficiaries nor of the charitable corporation.  The result was 
the total obliteration of the non-profit corporation.”  
 
A transaction illustrative of the foregoing conclusions 
involves a subdivision of the hospital’s real estate in 1970.  
The charity’s 65% undivided interest was lost and, in its place, 
the charity obtained a 20% interest consisting of an allocated 
parcel.  Also, after the nonprofit corporation was dissolved by 
Maryland authorities in 1973, defendants caused the filing of an 
annual report with the State Corporation Commission of Virginia 
that JMHI remained in good standing. 
 
As the chancellor found, deals were “convoluted and complex 
with off-record real estate transactions conflicting with the 
state of the title as shown on-record.  Net operating losses 
were used as tax deductions by JMHC that had become deductions 
[as] a result of the revocation of JMHI’s tax exempt status.  
 
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When [defendants] had exhausted these deductions, they began 
seeking ways to benefit their own tax status through a 
complicated series of notes and bonds, and while some personal 
risk was taken, the [defendants] and others were participating 
in the venture in basically a risk-free manner.” 
 
Defendants claimed in the trial court that JMHI had no 
value in 1971 and, thus, the transactions by which they assumed 
control of its corporate assets by the assumption of its 
liabilities were “fair.”  Responding, the chancellor determined 
that JMHI “had value as a ‘going concern’” when the effort was 
made to change to a for-profit corporation.  But the court 
concluded that defendants’ expert testimony was more persuasive 
than plaintiffs’ and that “the value of the corporation did not 
exceed its liabilities.”  “However,” the chancellor ruled, “this 
does not constitute a defense to the claims made here.” 
 
The defendants’ contentions regarding the merits of the 
suit, including the arguments advanced by amici curiae 
supporting defendants, are premised upon several erroneous 
conclusions.  For example, defendants believe the trial court 
recognized that a legally valid “transaction” of some sort 
occurred in 1971.   
 
Defendants’ description of the nature of this binding 
“transaction” has evolved from “merger,” to “reorganization,” 
and finally, during oral argument of the appeal, to 
 
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“acquisition.”  Also, defendants and their supporters think this 
case involves the improper meddling by the Commonwealth into the 
internal affairs of a Maryland corporation, contrary to settled 
law and violative of the Full Faith and Credit, Due Process, and 
Commerce Clauses of the United States Constitution.  This case 
involves none of the above. 
 
The trial court determined that no transaction in the 
nature of a merger or reorganization took place in 1971.  The 
chancellor ruled that “no merger of JMHI and JMHC has occurred 
and that the transactions by directors of JMHI are void, the 
assets remained in JMHI until its dissolution.  At the time of 
dissolution, these assets passed into and remain in the hands of 
[defendants] as trustees.”  This ruling is fully supported by 
the applicable law and the uncontradicted evidence, most of 
which was created by defendants. 
 
Because the 1971 “transaction” never occurred, the 1973 
revocation of JMHI’s corporate charter converted its directors 
by operation of law to trustees in dissolution under Maryland 
law.  Md. Code Ann., Corporations Art. 23, § 78(a) (1957); 
Cloverfields Improvement Ass’n v. Seabreeze Properties, Inc., 
373 A.2d 935, 939-40 (Md. 1977).  Virginia law was and is the 
same.  See former Code § 13.1-254 (1973 Repl. Vol.); present 
Code § 13.1-915 (1993 Repl. Vol.). 
 
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The charter revocation terminated JMHI’s corporate 
existence and powers, and it could no longer function as a 
corporation.  Cloverfields Improvement Ass’n v. Seabreeze 
Properties, Inc., 362 A.2d 675, 679 (Md. App. 1976).  From that 
day forward, the defendants’ actions purportedly taken as 
corporate officers, and not done to wind up or liquidate the 
business, were without effect because there was no corporation 
for which to act.  The corporate assets had automatically 
transferred to the directors as trustees.  Cloverfields, 362 
A.2d at 679. 
 
Under Maryland law, property of a charitable corporation is 
held in trust for the public.  Inasmuch Gospel Mission, Inc. v. 
Mercantile Trust Co. of Baltimore, 40 A.2d 506, 510 (Md. 1945).  
Virginia law is the same.  “The corporation was organized for 
charitable or benevolent or literary purposes.  Contributions 
made to it and the assets realized therefrom were dedicated to 
those purposes and stamped with a public interest by the 
charter, the laws of this State, sound reason and public policy.  
The members acquired no property rights in, nor were they 
equitably entitled to such assets, either during the lifetime of 
the corporation or upon dissolution.  To hold otherwise would 
convert the public nature and purpose of the corporation into a 
vehicle for the personal pecuniary gain of the members.”  
Hanshaw v. Day, 202 Va. 818, 824, 120 S.E.2d 460, 464 (1961).  
 
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Thus, the defendants’ contentions that this litigation, dealing 
with appropriation of charitable assets by directors for their 
personal gain, involves impermissible interference by Virginia 
with the internal affairs of a foreign corporation, or that a 
“fairness” doctrine should be applied to the 1971 activities, 
are without merit. 
 
Accordingly, the circuit court properly exercised its 
authority to insure that these assets, now held by the 
defendants as trustees in liquidation, are distributed in accord 
with the charitable purposes to which they should have been 
devoted.  This power to liquidate the assets and business of a 
nonstock corporation may be exercised over the property within 
the court’s jurisdiction “of a foreign corporation that has 
ceased to exist.”  Code § 13.1-909(B).  See former Code § 13.1-
257(e) (1973 Repl. Vol.).  The corporate facilities were located 
solely within this State in Alexandria. 
 
Thus, we hold the trial court did not err in taking charge 
of the liquidation of the assets of this dissolved foreign 
corporation, and in providing the relief outlined in the order 
from which this appeal was taken.  This record clearly 
demonstrates that the directors of JMHI, now trustees in 
dissolution, have failed and refused to execute the trust. 
 
Finally, we have considered, and reject, defendants’ other 
arguments.  Only one of those contentions merits discussion.  
 
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Defendants argue the trial court erred in not sustaining its 
plea based on the doctrine of laches.  
 
Laches may not be pled successfully as a defense in an 
equitable proceeding to bar the State from asserting a claim on 
behalf of the public.  Board of Supervisors of Tazewell County 
v. Norfolk and W. Ry. Co., 119 Va. 763, 790, 91 S.E. 124, 133 
(1916).  Accord City of Manassas v. Board of Supervisors of 
Prince William County, 250 Va. 126, 132, 458 S.E.2d 568, 571 
(1995).  See Dick Kelly Enter. v. City of Norfolk, 243 Va. 373, 
381, 416 S.E.2d 680, 685 (1992).  As we already have said, this 
cause is brought by the Commonwealth on behalf of the public to 
hold and administer charitable assets.  Hence, laches does not 
apply. 
 
Consequently, we will affirm the judgment appealed from, an 
interlocutory decree adjudicating the principles of the cause, 
and we will remand the cause to the trial court for further 
proceedings. 
 
Affirmed and remanded. 
 
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