Title: Hagan v. Adams Property Associates

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton, Lacy, Hassell, Keenan, 
Koontz, JJ., and Whiting, Senior Justice 
 
MAUREEN K. HAGAN, ET AL. 
 
v.   Record No. 961332 
OPINION BY JUSTICE ELIZABETH B. LACY 
                                    February 28, 1997 
ADAMS PROPERTY ASSOCIATES, INC. 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
 
Theodore J. Markow, Judge 
 
 
In this appeal, we consider whether a transfer of real 
property from its owner to a limited liability company in which 
the owner is a member constitutes the sale of the property, 
entitling a real estate broker to a commission authorized by a 
listing agreement between the owner and broker. 
 
Ralph E. and Maureen K. Hagan (collectively "Hagan") owned 
the Stuart Court Apartments (the property) in Richmond.  On 
April 30, 1994, Hagan executed an agreement with Adams Property 
Associates, Inc. (Adams), giving Adams the exclusive right to 
sell the property for $1,600,000.  The agreement provided that 
if the property was "sold or exchanged" within one year, with 
or without Adams' assistance, Hagan would pay Adams a fee of 
six percent of the "gross sales amount."  Before the year 
expired, Hagan, Roy T. Tepper, and Lynn Parsons formed a 
limited liability company, Hagan, Parsons, & Tepper, L.L.C. 
(HPT).  By deed dated April 23, 1995, Hagan transferred the 
property to HPT.  
 
Adams filed a motion for judgment seeking recovery of a 
commission from Hagan pursuant to the April 1994 agreement.  
The trial court held that Adams was entitled to a commission 
because the transfer of the property to HPT constituted a sale 
of the property.  Hagan appealed both the determination that a 
sale of the property occurred and the amount of the commission 
awarded. 
 
Hagan first contends that transfer of legal title to the 
property to HPT represented his contribution to the 
capitalization of a new company, and capitalization of a new 
venture should not be classified as the sale of property, 
citing Southpace Properties, Inc. v. Acquisition Group, 5 F.3d 
500, 504 (11th Cir. 1993); Cooley Investment Co. v. Jones, 780 
P.2d 29, 31 (Colo. App. 1989); Miller, Cowherd & Kerver, Inc. 
v. De Montejo, 406 So.2d 1196, 1198 (Fla. App. 1981); and 
McElhinney v. Belsky, 69 A.2d 178, 181 (Pa. Super. 1949).  
Hagan also asserts that the transfer did not constitute a sale 
because he did not receive any present valuable consideration 
for his contribution.  Hagan contends that, while his 
contribution determined what share of the ownership of the 
company he was entitled to receive, a new business such as HPT 
"involves an expectation of future profits and is always 
speculative."  We disagree. 
 
When Hagan transferred the property to HPT, he received 
more than an interest in the new company.  Under the terms of 
the operating agreement executed in conjunction with the 
formation of HPT, HPT agreed to assume all liabilities existing 
on the property, which included the $1,028,000 unpaid balance 
on a first deed of trust note on the property.  The record does 
not indicate whether the holder of the first deed of trust note 
released Hagan and substituted HPT as the obligor on the note. 
 Even assuming such substitution did not occur, Hagan 
nevertheless received substantial relief from his debt 
obligation because, upon assuming all liabilities on the 
property, HPT became liable to Hagan for any amount Hagan would 
have had to pay the holder of the first deed of trust note.  
Also as part of the property transfer transaction, HPT executed 
a second deed of trust on the property securing a note payable 
to Hagan for $323,000.  This note was due and payable when the 
property was subsequently sold, and it had priority over 
payments to anyone other than the beneficiary of the first deed 
of trust.  Thus, in exchange for transfer of title to the 
property, Hagan received relief from his debt on the first deed 
of trust note as well as the benefit of a second deed of trust 
note and an interest in HPT.  These benefits received by Hagan 
constituted valid consideration.  Brewer v. Bank of Danville, 
202 Va. 807, 815, 120 S.E.2d 273, 279 (1961). 
 
Furthermore, the cases relied on by Hagan for the 
proposition that the contribution of property to a limited 
liability company is not a sale but the capitalization of a new 
company are inapposite.  Those cases involved the 
capitalization of a partnership or entity governed by 
partnership law.  As noted in those cases, a partnership is not 
an entity separate from the partners themselves; thus, in such 
circumstances, there is no transfer of property from one person 
to another, but only a change in the form of ownership.  
Southpace, 5 F.3d at 504; Cooley, 780 P.2d at 31; De Montejo, 
406 So.2d at 1198; McElhinney, 69 A.2d at 181.  In this case, 
however, the new venture was a limited liability company, not a 
partnership.   
 
Under the Virginia Limited Liability Company Act, Code 
§§ 13.1-1002 through 13.1-1073, a limited liability company is 
an unincorporated association with a registered agent and 
office.  §§ 13.1-1002, -1015.  It is an independent entity 
which can sue and be sued and its members are not personally 
liable for the debt or actions of the company.  §§ 13.1-1009, -
1019.  In contrast to a partnership, a limited liability 
company in Virginia is an entity separate from its members and, 
thus, the transfer of property from a member to the limited 
liability company is more than a change in the form of 
ownership; it is a transfer from one entity or person to 
another.  Accordingly, we agree with the trial court's 
conclusion that Hagan transferred the title of the property in 
exchange for valuable consideration and that this transfer was 
a sale of the property.   
 
Hagan also complains that in calculating the commission 
due Adams, the trial court used the wrong components to 
determine the gross sales amount.  The trial court calculated 
the gross sales amount to be the sum of debt relief Hagan 
received from HPT, $1,028,000, plus the amount of the second 
deed of trust note which Hagan received from HPT, $323,000.
1  
                     
     
1 The parties agree that an arithmetic error occurred in 
the trial court's calculation of the commission and that the 
proper figures under the court's finding are a gross sales 
amount of $1,351,000 which results in a six percent commission 
of $81,060. 
Hagan first asserts that the gross sales amount should be the 
fair market value of the debt, which is $775,000, the amount 
Tepper and Parsons paid for the first deed of trust note when 
they purchased it in June, 1995.  We disagree.   
 
The status of Hagan's indebtedness was altered when he 
transferred the property to HPT under the terms of the 
operating agreement, not when Tepper and Parsons individually 
purchased the first deed of trust note.  The gross sales amount 
is the consideration which Hagan received from HPT, not an 
amount agreed upon between some other buyer and seller at 
another time.
2  
 
Finally, Hagan asserts that the second deed of trust note 
should not have been included as part of the gross sales amount 
because it was not due until the property was sold and was 
subordinate to the first deed of trust note and future 
development loans.  Under these circumstances, Hagan claims, 
the second deed of trust note had no present value.  Again we 
disagree.  Whether the second deed of trust note would 
ultimately result in a payment of $323,000 to Hagan is not 
relevant to the measure of the value ascribed to the 
transaction by the parties at the time of the transaction.  
There is nothing speculative about a second deed of trust note 
in the amount of $323,000.  It was part of the agreement 
                     
     
2Hagan also argues that his debt relief was only the 
difference between the original amount of the note, $1,028,000, 
and the $775,000 purchase price of the note.  This position is 
based on Hagan's contention that he had continuing liability 
for the first deed of trust note, a contention we addressed, 
supra. 
surrounding the transfer of ownership of the property and 
represented a portion of the amount Hagan was willing to accept 
for the property.  Thus, the trial court properly considered 
the second deed of trust note as consideration received by 
Hagan for the sale of the property and properly included it as 
part of the gross sales amount for purposes of calculating the 
amount of commission due Adams.   
 
Accordingly, we will affirm the judgment of the trial 
court holding that Hagan's transfer of title to the property to 
HPT was a sale of the property, that Adams was entitled to a 
commission on the gross sales amount, and that the gross sales 
amount is the debt relief plus the second deed of trust note 
Hagan received, $1,028,000 and $323,000, respectively, 
resulting in a commission of $81,060. 
 
Affirmed.