Court Opinion

ID: 4359323
Source: CourtListenerOpinion
Date Created: 2019-01-16 20:00:19.837458+00
Date Added: 2024-06-11T14:38:17.394667
License: Public Domain

PUBLISHED

                     UNITED STATES COURT OF APPEALS
                         FOR THE FOURTH CIRCUIT

                                     No. 18-1531

JOHN S. BENNETT,

                   Plaintiff - Appellant,

             v.

JAMES GARNER; VIRTUS CONSULTING, LLC,

                   Defendants - Appellees.

Appeal from the United States District Court for the Eastern District of Virginia, at
Alexandria. Claude M. Hilton, Senior District Judge. (1:17-cv-00574-CMH-TCB)

Argued: December 13, 2018                                  Decided: January 16, 2019

Before KEENAN, FLOYD, and THACKER, Circuit Judges.

Vacated and remanded by published opinion. Judge Keenan wrote the opinion, in which
Judge Floyd and Judge Thacker joined.

ARGUED: Kevin M. O’Donnell, HENRY & O’DONNELL, PC, Alexandria, Virginia,
for Appellant. Thomas Wayne Biggs II, DYCIO & BIGGS, Fairfax, Virginia, for
Appellees. ON BRIEF: Jeffery T. Martin, Jr., HENRY & O’DONNELL, PC,
Alexandria, Virginia, for Appellant. Daniel F. Izzo, DYCIO & BIGGS, Fairfax,
Virginia, for Appellees.
BARBARA MILANO KEENAN, Circuit Judge:

       John S. Bennett appeals from the district court’s award of summary judgment in

favor of his former employer, Virtus Consulting, LLC (Virtus), and its owner, James

Garner (collectively, the defendants), in Bennett’s action seeking to collect on a state

court judgment entered against the defendants. The district court held that Bennett’s

claims were precluded under Virginia’s doctrine of res judicata.

       Upon our review, we conclude that Bennett’s claims are not precluded, because

Bennett could not have brought those claims at the time of his earlier litigation.

Accordingly, we vacate the district court’s judgment and remand for further proceedings.

                                              I.

       We present the facts in the light most favorable to Bennett, the nonmoving party,

and draw all reasonable inferences in his favor. Rosetta Stone Ltd. v. Google, Inc., 676

F.3d 144, 150 (4th Cir. 2012) (citation omitted). Virtus is a Virginia limited liability

company that provides consulting services to various financial institutions. Garner is the

owner and sole member of Virtus. Bennett was employed by Virtus and worked as the

principal contact for one of Virtus’ largest clients.

       In 2012, Garner began negotiations to sell Virtus’ assets to the Solomon Edwards

Group (SEG). Around the same time, the defendants and Bennett signed an agreement,

in which Bennett agreed to assist in the sale in exchange for “sharing [in the] proceeds”

from the sale (the Bennett Agreement). Under the Bennett Agreement, once the sale to

SEG successfully closed, Bennett would receive a fixed cash payment made in quarterly

                                               2
installments. The parties also agreed that Bennett potentially could receive two annual

“earn out” payments, depending on whether SEG and Garner achieved certain revenue

targets in the two years following the sale.

       The sale of Virtus’ assets to SEG successfully closed around the end of September

2012. In accordance with the Bennett Agreement, Garner made the first two quarterly

installment payments to Bennett. But, in April 2013, the defendants ceased making any

further payments, claiming that Bennett had breached his obligations under the

agreement.    Bennett, however, maintained that he was entitled to the remaining

installment payments and the “earn out” payments.

       The parties submitted their dispute to an arbitrator as required by the arbitration

clause in the Bennett Agreement. During the arbitration proceedings, the defendants

provided Bennett documents describing the structure of the SEG sale but did not produce

any of Virtus’ financial records or bank statements. In response to a request seeking

those financial records, the defendants stipulated that the Bennett Agreement was

properly executed and that the performance metrics triggering the “earn out” payments

had been “met in full.”

       In September 2014, the arbitrator ordered Virtus to pay Bennett $387,500. Under

the terms of the Bennett Agreement, the arbitrator held Garner jointly and severally liable

for $125,000 of that award. The award was confirmed by a Virginia circuit court and

reduced to a judgment. Although Garner paid the portion of the award for which he

personally was liable, Virtus failed to pay the remaining $262,500.

                                               3
       After the arbitration award was confirmed, Bennett obtained Virtus’ bank

statements. These statements showed that shortly before the SEG sale closed, Garner had

transferred substantially all of Virtus’ cash reserves to himself. Further, Bennett learned

that the SEG sale had been structured to divert all cash and other consideration from the

sale to Garner personally. For instance, equity stock in SEG that was supposed to

transfer to Virtus as part of the sale was instead listed in Garner’s name and reported as

part of Garner’s personal tax returns. Thus, Virtus lacked sufficient assets to satisfy

Bennett’s judgment.

       In May 2017, Bennett initiated the present action in the district court seeking to

collect on his judgment. He asserted four claims against the defendants: (1) fraudulent

conveyance, in violation of Virginia Code § 55-80; (2) voluntary transfer, in violation of

Virginia Code § 55-81 (together, the fraudulent transfer claims); (3) a claim seeking to

“pierce the corporate veil” and recover the judgment amount directly from Garner (the

alter-ego claim); and (4) fraud in the inducement.        The district court granted the

defendants’ motion for summary judgment, concluding that Bennett’s fraudulent transfer

claims and alter-ego claim were precluded under Virginia’s doctrine of res judicata. 1

This appeal followed.

       1
         The district court also awarded the defendants summary judgment on Bennett’s
fraud in the inducement claim, concluding that it was barred by the two-year statute of
limitations governing fraud claims, Va. Code § 8.01-243(A). Bennett does not contest
the dismissal of the fraud in the inducement claim.

                                            4
                                             II.

       We review de novo the district court’s award of summary judgment. Rosetta

Stone Ltd., 676 F.3d at 150.

                                             A.

       Before addressing the parties’ arguments, we begin by reviewing the applicable

principles of res judicata. In considering the preclusive effect of an earlier state court

judgment on a new claim, we apply the “preclusion law of the State in which judgment

was rendered.” In re Genesys Data Techs., Inc., 204 F.3d 124, 127 (4th Cir. 2000)

(quoting Marrese v. Am. Acad. of Orthopedic Surgeons, 470 U.S. 373, 380 (1985)).

Here, the arbitration award was confirmed and reduced to a judgment by a Virginia court.

We therefore apply Virginia’s principles of res judicata.

       In Virginia, res judicata 2 is governed by Rule 1:6 of the Rules of the Supreme

Court of Virginia, which states in relevant part:

       A party whose claim for relief arising from identified conduct, a
       transaction, or an occurrence, is decided on the merits by a final judgment,
       shall be forever barred from prosecuting any second or subsequent civil
       action against the same opposing party or parties on any claim or cause of
       action that arises from that same conduct, transaction or occurrence,
       whether or not the legal theory or rights asserted in the second or
       subsequent action were raised in the prior lawsuit, and regardless of the
       legal elements or the evidence upon which any claims in the prior
       proceeding depended, or the particular remedies sought.

       2
        Although Virginia’s res judicata doctrine encompasses both claim preclusion and
issue preclusion, here we use the term “res judicata” to refer to claim preclusion only.
See Funny Guy, LLC v. Lecego, LLC, 795 S.E.2d 887, 890 (Va. 2017).

                                             5
Va. Sup. Ct. R. 1:6(a). Under this rule, “a final judgment forecloses ‘successive litigation

of the very same claim, whether or not relitigation of the claim raises the same issues as

the earlier suit.’” Lee v. Spoden, 776 S.E.2d 798, 803 (Va. 2015) (quoting Taylor v.

Sturgell, 553 U.S. 880, 892 (2008)). Parties, therefore, may not relitigate “the same

cause of action or any part thereof which could have been litigated in the previous

action.” D’Ambrosio v. Wolf, 809 S.E.2d 625, 628 (Va. 2018) (citation omitted). Stated

simply, res judicata operates to prevent a party from getting a “second bite of the apple”

with respect to wrongs arising from a single dispute. See Funny Guy, LLC v. Lecego,

LLC, 795 S.E.2d 887, 890 (Va. 2017) (“The law should afford one full, fair hearing

relating to a particular problem—but not two.” (citation omitted)).

       While ostensibly a broad proposition, res judicata nonetheless is limited by

longstanding principles. For instance, claims brought solely to execute on a judgment are

generally not precluded by prior litigation that resulted in that judgment. See State Farm

Mut. Auto. Ins. Co. v. Kelly, 380 S.E.2d 654, 655 n.2 (Va. 1989); see also Restatement 2d

Judgments § 18(c). Similarly, res judicata does “not bar a claim that does not accrue

prior to the litigation triggering the bar.” Funny Guy, 795 S.E.2d at 900 (emphasis

added). A party is not precluded from bringing a claim that he was unable to bring in the

initial litigation, regardless whether that claim constitutes part of the same “conduct,

transaction, or occurrence.” D’Ambrosio, 809 S.E.2d at 628; Funny Guy, 795 S.E.2d at

890 (“Determining which claims should have been brought in earlier litigation largely

depends on which claims could have been brought.” (citation omitted)); see also Lawlor

v. Nat’l Screen Serv. Corp., 349 U.S. 322, 328 (1955) (explaining that although an earlier

                                             6
judgment “precludes recovery on claims arising prior to its entry, it cannot be given the

effect of extinguishing claims which did not even then exist”). With these principles in

mind, we turn to consider the parties’ arguments.

                                           B.

      As the parties asserting res judicata, the defendants bear the burden of showing

that it is more likely than not that Bennett’s claims should be precluded by the prior

judgment. D’Ambrosio, 809 S.E.2d at 628.         The defendants argue, as they did in the

district court, that because Bennett had knowledge of the structure of the SEG sale at the

time of the arbitration, Bennett could have raised both his fraudulent transfer and alter-

ego claims during those proceedings. Accordingly, the defendants contend that under

Virginia’s doctrine of res judicata, Bennett must have brought those claims during the

arbitration proceedings.

      In response, Bennett generally maintains that his claims are brought solely in

execution of his state court judgment. That is, instead of seeking to “relitigate” the

defendants’ liability under the Bennett Agreement, Bennett argues that his fraudulent

transfer claims were an attempt to collect on the judgment he is owed and could not have

been brought before the judgment was entered. With respect to his alter-ego claim,

Bennett similarly argues that he could not have maintained that claim before obtaining

the judgment against Virtus. We agree with Bennett and address each argument in turn.

                                            1.

      We begin by considering the question whether Bennett could have raised his

fraudulent transfer claims during the arbitration proceedings. Actions brought under

                                            7
Virginia’s fraudulent conveyance statute, Va. Code § 55-80, and the state’s voluntary

transfer statute, Va. Code § 55-81, assist creditors in collecting on a judgment or other

debt. See La Bella Dona Skin Care, Inc. v. Belle Femme Enters., LLC, 805 S.E.2d 399,

406 (Va. 2017); Balzer & Assocs., Inc. v. The Lakes on 360, Inc., 463 S.E.2d 453, 455-56

(Va. 1995). Such actions do not impose liability on the participants in a fraudulent

conveyance, but merely unwind “transactions designed to place a debtor’s assets beyond

his creditors’ reach.” La Bella Dona, 805 S.E.2d at 404, 406; see also Mills v. Miller

Harness Co., 326 S.E.2d 665, 667 (Va. 1985) (concluding that Virginia Code § 55-80

does not authorize a court “to award an in personam judgment when a fraudulent

conveyance is set aside”). Indeed, Virginia law expressly permits actions under both

Sections 55-80 and 55-81 to be brought after the entry of a judgment. Va. Code § 55-

82.2 (“The court shall have the authority to set aside a fraudulent conveyance or

voluntary transfer pursuant to § 55-80 or § 55-81 during an action brought by a creditor

to execute on a judgment.” (emphasis added)). Thus, actions to void wrongful transfers

are remedies designed to “return[] the fraudulently conveyed assets to the transferor.” La

Bella Dona, 805 S.E.2d at 406.

      In the present case, the disputes that the parties submitted to arbitration focused on

the issue whether Bennett was entitled to receive the remaining payments under the

Bennett Agreement. Thus, the arbitration served only to establish the parties’ respective

obligations and liability under the Bennett Agreement.

      In contrast, Bennett’s fraudulent transfer claims allege that Virtus depleted its

corporate assets and made improper conveyances to Garner to prevent Bennett from

                                            8
collecting on the arbitration award and judgment. Bennett does not advance any new

legal “theories of recovery” on which either defendant could be held liable under the

Bennett Agreement. Cf. Funny Guy, 795 S.E.2d at 897-98 (holding that, under principles

of res judicata, “alternative theories of recovery” cannot be raised in consecutive

lawsuits). Nor does he seek damages beyond the outstanding $262,500 judgment, the

precise amount awarded in arbitration. Although the alleged wrongful transfers took

place around the same time as the SEG sale, those transfers were immaterial to the

question whether either Bennett or the defendants had breached the Bennett Agreement.

Thus, Bennett is not seeking a “second bite of the apple” with respect to the amount he is

owed. See id. Rather, he seeks only to unwind the allegedly improper transfers from

Virtus to Garner so that Virtus can satisfy the existing judgment. 3

       Furthermore, we observe that had Bennett claimed that the defendants were

attempting to defraud him by transferring assets, before he proved that he was entitled to

payments under the Bennett Agreement, those fraudulent transfer claims would have

been premature.     At the time of the arbitration proceedings, Bennett did not have

       3
          The defendants incorrectly rely on the Supreme Court of Virginia’s decision in
Price v. Hawkins, 439 S.E.2d 382 (Va. 1994), to argue that Bennett’s fraudulent
conveyance claim under Virginia Code § 55-80 is meant to impose liability on Garner. In
Price, the court allowed an in personam judgment to be awarded against recipients of
fraudulent transfers when the wrongfully transferred property was only cash. Id. at 385.
This narrowly crafted exception was designed to prevent a defrauded creditor from being
left without a remedy, because cash “cannot be easily located for attachment or levy.” La
Bella Dona, 805 S.E.2d at 406 (describing the exception in Price). However, the
Supreme Court of Virginia has since clarified that the Price exception does not “impose
liability upon the grantee[,]” but merely unwinds “the transfer of the cash in the grantee’s
pockets.” Id.

                                              9
sufficient information about Virtus’ financial condition to allege a fraudulent conveyance

or voluntary transfer.    Neither defendant disclosed any financial records or bank

statements to Bennett during the arbitration. Indeed, as noted above, rather than produce

such documents, the defendants stipulated that the financial benchmarks in the Bennett

Agreement had been “met in full.”

      It was not until Virtus failed to satisfy the judgment rendered against it, and

Bennett received Virtus’ relevant financial records, that he learned that Virtus had no

remaining assets from which it could pay the judgment. These financial documents also

disclosed the recipient of Virtus’ transferred assets and the nature of such transfers,

allowing Bennett to properly plead his fraudulent transfer claims. Thus, it was only after

the state court judgment was entered that Bennett would have had “actual notice” of any

potential fraudulent transfer claims. Cf. Luria v. Bd. of Dirs. of Westbriar Condo. Unit

Owners Ass’n, 672 S.E.2d 837, 840 (Va. 2009) (recognizing that, while a judgment is not

required to bring a fraudulent conveyance claim, a plaintiff must have “actual notice of a

specific potential claim” to be considered a “creditor” under Virginia Code § 55-80).

      On these facts, we hold that Bennett could not have brought his fraudulent transfer

claims in the arbitration proceedings. To conclude otherwise essentially would have

required Bennett to be clairvoyant. Under the defendants’ logic, a plaintiff in Bennett’s

position would have had to amend his original complaint, adding claims of fraudulent

conveyance whenever he suspected that the defendant was moving money to avoid

paying a potential judgment. Otherwise, the plaintiff would risk having those claims

barred in a later action to collect on that judgment. In other words, Bennett would have

                                           10
had to try to enforce his judgment before the judgment was awarded. We decline to

interpret Virginia’s res judicata law in a manner that would lead to such untenable results.

See State Water Control Bd. v. Smithfield Foods, Inc., 542 S.E.2d 766, 769 (Va. 2001)

(“The doctrine [of res judicata] protects litigants from multiple lawsuits, conserves

judicial resources, and fosters certainty and reliance in legal relationships.” (emphasis

added)). Therefore, we hold that Bennett’s fraudulent transfer claims are not precluded

under Virginia’s res judicata doctrine.

                                             2.

       With respect to Bennett’s alter-ego claim, we similarly conclude that the claim

could not have been brought before the state court judgment was entered against Virtus.

When an individual uses a corporate form to “disguise wrongs, obscure fraud, or conceal

crime,” Virginia law permits a plaintiff to pierce the corporate veil and to impose liability

directly on the individual as the “alter ego” of the corporation.        Cheatle v. Rudd’s

Swimming Pool Supply Co., 360 S.E.2d 828, 831 (Va. 1987). However, before bringing

an action to pierce the corporate veil, the plaintiff must “first obtain[] a judgment against

the corporation.” Dana v. 313 Freemason, 587 S.E.2d 548, 553 (Va. 2003). Because

Bennett was required to obtain a judgment against Virtus before bringing his alter-ego

claim, this claim had not yet accrued at the time of the arbitration proceedings.

Accordingly, we hold that Bennett’s alter-ego claim also is not precluded under

Virginia’s doctrine of res judicata. See D’Ambrosio, 809 S.E.2d at 628.

                                            III.

                                             11
       For these reasons, we hold that Bennett’s fraudulent transfer claims and his alter-

ego claim are not precluded under Virginia law by res judicata. 4 Accordingly, we vacate

the district court’s award of summary judgment in favor of the defendants and remand the

case to the district court for further proceedings.

                                                           VACATED AND REMANDED

       4
         Bennett also asks us to enter summary judgment in his favor on his fraudulent
transfer claims. Because the district court held that Bennett’s action was barred by res
judicata, the court did not rule on the merits of Bennett’s claims. We decline to consider
those issues in the first instance. See Graham v. Gagnon, 831 F.3d 176, 189 (4th Cir.
2016).

                                              12