UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PROVIDENT MUTUAL LIFE INSURANCE

COMPANY,

Plaintiff-Appellee,

v.

CHANDRA K. KHASGIWALA,

No. 96-2011

Defendant-Appellant,

and

MUNNI CORPORATION; K-MART

CORPORATION,

Defendants.

Appeal from the United States District Court

for the Eastern District of Virginia, at Richmond.

Robert E. Payne, District Judge.

(CA-95-729)

Argued: March 6, 1997

Decided: April 16, 1997

Before MICHAEL and MOTZ, Circuit Judges, and

GOODWIN, United States District Judge for the

Southern District of West Virginia, sitting by designation.

_________________________________________________________________

Reversed by unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Charles Manley Allen, Jr., WRIGHT, ROBINSON,

OSTHIMER & TATUM, Richmond, Virginia, for Appellant. William
Lynn Thurston, BEALE, BALFOUR, DAVIDSON & ETHERINGTON, P.C., Richmond, Virginia, for Appellee. ON BRIEF: Lynn L.

Tavenner, WRIGHT, ROBINSON, OSTHIMER & TATUM, Richmond, Virginia, for Appellant.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

The question presented here is whether the district court erred in

holding Provident Life Insurance Company was entitled to recover

$553,683 from Chandra K. Khasgiwala under a theory of fraudulent

conveyance when Provident had received full repayment of the underlying debt. We believe it did and so must reverse.

I.

The district court masterfully set forth the complicated underlying

facts. See Provident Mut. Life Ins. Co. v. Munni Corp., Civ. No. 3:95

C.V. 729 (E.D. Va. June 21, 1996). Accordingly, we simply summarize them here.

Munni Corporation owned a mall that Provident Life Insurance

Company had financed. In 1991 K-Mart Corporation, one of the property's main tenants, abandoned the property and began negotiations

with Munni to terminate the remainder of its twenty-five year lease.

Munni's loan agreement with Provident did not allow any alteration

in lease terms without Provident's permission.

In August of 1994 Munni terminated its lease agreement with KMart in return for a payment of $555,683. Soon thereafter Munni

transferred $555,000 of this payment to Dr. Khasgiwala, Munni's sole

shareholder, officer, and director. Munni stopped paying Provident on

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its loan in early 1995, and suggested that Provident foreclose on the

property. At the time of Munni's default, it owed Provident $892,674

on the loan.

Provident foreclosed, and on May 9, 1995 Provident purchased the

property at a public foreclosure sale for the sum of $938,084.73. After

expenses the trustee credited Munni's account in the amount of

$868,244.88, leaving $24,429.12 as the balance outstanding on Provident's loan to Munni.

Provident then filed this action against Munni, Dr. Khasgiwala, and

K-Mart. (The district court denied K-Mart's motion for summary

judgment, and that ruling is not before us.) Provident sued Munni for

the costs and fees involved in the default and foreclosure, and for the

fraudulent transfer. Munni and Provident settled these claims for

$25,000. Accordingly, Munni no longer owes Provident anything --

Munni has fully paid the loan and all fees owed Provident because of

the foreclosure.

Provident continued its suit against Dr. Khasgiwala for the fraudulent conveyance. Provident and Khasgiwala cross-moved for summary judgment. The district court held that the payment from Munni

to Khasgiwala was a fraudulent conveyance, and awarded judgment

against Khasgiwala for the full amount of the payment. Khasgiwala

appealed to this court, and we now reverse.

II.

The first question is whether the district court correctly found that

the payment from Munni to Khasgiwala was a fraudulent conveyance.

Virginia law defines a fraudulent conveyance as:

Every gift, conveyance, assignment or transfer of, or charge

upon, any estate, real or personal, every suit commenced or

decree, judgment or execution suffered or obtained and

every bond or other writing given with intent to delay, hinder or defraud creditors, purchasers or other persons of or

from what they are or may be lawfully entitled to shall, as

to such creditors, purchasers or other persons, their representatives or assigns, be void. . . .

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Va. Code Ann. § 55-80 (Michie 1995).

Munni's transfer to Khasgiwala was a fraudulent conveyance. The

district court found that Munni was "insolvent at the time of the transfer" and "undercapitalized" with an "enormous debt." The transfer to

Khasgiwala left Munni with $2,000 in cash and over $1 million in

debt, with only the property as collateral. Munni accepted the payment and terminated the lease in clear violation of the loan agreement: Munni was required to obtain Provident's permission to alter

the K-Mart lease in any way, let alone accept a $550,000 payment to

break the lease. Lastly, after transferring all of its liquid assets to

Khasgiwala, and devaluing Provident's collateral, Munni promptly

defaulted on its loan.

Under these circumstances there can be little question that the payment from Munni to Khasgiwala was, as the district court found, a

fraudulent conveyance. Given the size of the debt, the removal of virtually all of Munni's cash, and Munni's failure to inform Provident

of K-Mart's lease termination, the transfer was intended to defraud

creditors of money they were "lawfully entitled to."

III.

Khasgiwala does not dispute that the Munni payment was a fraudulent conveyance. Instead, he argues that because Munni has fully

repaid Provident for its loan Provident has suffered no loss because

of the conveyance. Indisputably, Munni has paid off its loan from

Provident, and therefore the question we must answer is whether

Provident is entitled to recover damages for the fraudulent transfer

when it has been fully repaid on its loan. We conclude that Provident

may not recover more than the amount owed on its loan under Virginia's law of fraudulent conveyance.

We begin with the language and history of Virginia's fraudulent

conveyance statute. Section 55-80 "is itself but declaratory of the

common law." Shufeldt v. Jenkins, 22 F. 359, 371 (E.D. Va. 1884);

see also Hyman v. Porter, 37 B.R. 56 (Bankr. E.D. Va. 1984). The

common law has prohibited fraudulent conveyances to prevent "debtors from making transfers that hinder, delay, or defraud their creditors

. . . for over four centuries. A debtor cannot manipulate his affairs in

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order to shortchange his creditors and pocket the difference." Douglas

G. Baird & Thomas H. Jackson, Fraudulent Conveyance Law and its

Proper Domain, 38 Vand. L. Rev. 829, 829-30 (1985); see also

Joseph E. Ulrich, Fraudulent Conveyances and Preferences in

Virginia, 36 Wash. & Lee L. Rev. 51, 52 (1979) ("The purpose of the

law of fraudulent conveyances is to assist creditors, both individually

and collectively, in realizing on their debts from the assets of a

debtor.").

Virginia's codification of the common law of fraudulent conveyances similarly focuses upon protecting creditors from dishonest debtors. The statute applies to transactions intended to"delay, hinder or

defraud creditors." Va. Code Ann. § 55-80. A creditor's recovery

under § 55-80 is limited, however, to "what they are or may be legally

entitled to." This is because the law of fraudulent conveyances is

meant to protect the amount owed to creditors.

Thus, Provident's fraudulent conveyance claim only entitles it to

recover the amount owed on the loan, and it would go well beyond

the rationale underlying Virginia's law of fraudulent conveyance to

allow Provident to receive more than it was owed. Furthermore, such

a result cannot be squared with the statute itself, which allows relief

only for "what [creditors] are or may be legally entitled to." Because

Provident has already been fully recompensed on the loan it has

received what it is "or may be entitled to."

Nevertheless, the district court held that Provident was still entitled

to recover damages from Khasgiwala. The court relied upon the loan

agreement between Munni and Provident, which provided that upon

default by Munni, Provident "became entitled to receive" all rent. The

court held that Munni's termination agreement with K-Mart constituted a default on the loan agreement and, therefore Provident became

entitled to receive all rent and payments on the property, including the

entire K-Mart rent payment that Munni had fraudulently conveyed to

Khasgiwala.

The essential problem with this rationale is Provident's contractual

right to rents was not absolute and unlimited. The loan agreement

between Provident and Munni clearly provides that Provident must:

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apply such rents, issues and profits to the payment of (a) the

cost of all such alterations, renovations, repairs and replacements and expenses incident to taking and retaining possession of the Premises and the management and operation

thereof, and keeping the same property insured and (b) all

taxes, charges, claims assessments, water rents and any

other liens which may be prior in lien or payment to the

mortgage debt, and premiums for said insurance, with interest on all such items, and (c) the indebtedness secured

hereby together with all costs and attorneys' fees, in such

order of priority as to any of such items as [Provident] in its

sole discretion may determine . . . .

In short, Provident had no right to rents and payments beyond the

amount of its loan to Munni and the cost of maintenance of the property. When the loan was paid off, as it concededly was, the contract

entitled Provident to nothing more. As such, Munni's violation of the

contract does not create a right to any funds beyond the loan amount.

Provident argues that it grossly overbid for the property and that

the value of the property, as determined by its appraisers, should govern in determining the amount Khasgiwala owes. No Virginia authority supports such a theory. In fact, the Virginia Supreme Court has

held that a court may "rely on the amount of[an auction] bid as . . .

evidence of actual market value." Jones v. Jones, 457 S.E.2d 365, 370

(Va. 1995).

Nevertheless, Provident urges us to follow Alliance Mortgage Co.

v. Rothwell, 34 Cal. Rptr. 2d 700 (Cal Ct. App. 1994), aff'd 900 P.2d

601 (Cal. 1995). Alliance permitted a lender who had been fully

repaid on its loan via a "full credit bid" (the lender used the entire

amount owed on the loan as a "credit" to purchase the property) to sue

a third party in fraud. Id. at 704-5. Provident argues that because it

made a similar "full credit bid," it should be allowed to sue Khasgiwala.

We reject this argument for several reasons. First, even if Alliance

provided direct and clear support for Provident's position here, we

would be loath to adopt the rationale of a California case in this diversity case governed by Virginia law, absent some indication that a Vir-

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ginia court would adopt such a rule. Provident cites no such Virginia

authority.

Moreover, on examination, Alliance provides little support for

Provident here. Alliance makes a strong distinction between actions

for waste, where recovery is limited to the amount of the loan, and

common law fraud actions, which allow damages beyond the amount

of the loan. Id. at 705-7. Actions for fraudulent conveyance, like

actions for waste, are limited to the amount the creditors "are or may

be lawfully entitled to," and therefore Alliance does not apply.

Furthermore, Alliance only allows a lender to sue for the "actual

damages" caused by the fraud, such as "losses from the sale of the

foreclosed properties for less than the amount due on the loans and

foreclosure expenses." Id. at 710. Provident has not alleged or proven

that the fraudulent conveyance caused any damages beyond the

amount of the loan, and Munni has fully recompensed Provident for

the costs of the foreclosure and the loan. Provident's only possible

"actual damages" arise from its own overpayment for the property.

But, Provident has not claimed (nor could it) that this overpayment

was a result of Khasgiwala's fraud. For these reasons, the judgment

of the district court is

REVERSED.

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