Court Opinion

ID: 1016624
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:52:18.625419+00
Date Added: 2024-06-11T09:41:15.894809
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                              No. 04-2557

RICHARD C. FUISZ, Dr.; LORRAINE FUISZ,

                                            Plaintiffs - Appellees,

           versus

WALTER E. LYNCH, AIA, PLLC,

                                              Defendant - Appellant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.  Claude M. Hilton, Chief
District Judge. (CA-04-200)

Argued:   May 25, 2005                      Decided:   July 20, 2005

Before WILKINS, Chief Judge, and TRAXLER and KING, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: Frank Douglas Ross, III, ODIN, FELDMAN & PITTLEMAN, P.C.,
Fairfax, Virginia, for Appellant. Kathy Cuffage Potter, ALBO &
ORLON, L.L.P., Arlington, Virginia, for Appellees. ON BRIEF: Seth
C. Berenzweig, ALBO & ORLON, L.L.P., Arlington, Virginia, for
Appellees.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
PER CURIAM:

          Appellant Walter E. Lynch, AIA, PLLC (the “Lynch PLLC”)

challenges the district court’s declaration that it is liable for

a judgment secured by Dr. Richard C. and Lorraine Fuisz (the

“Fuiszes”), in Virginia state court.      The underlying judgment was

rendered in 2003 against the Lynch PLLC’s predecessor entities —

Walter E. Lynch & Company, Inc. (“WELCO”), Group Design Associates,

Inc. (“GDA”), and Design Foundry, Inc. (“DF”) — and against Walter

E. Lynch individually.    After conducting a bench trial in October

2004, the district court ruled that the Lynch PLLC is liable to the

Fuiszes as the successor in interest to WELCO, GDA, and DF.     Fuisz

v. Walter E. Lynch, AIA, PLLC, No. CA-04-200 (E.D. Va. Nov. 29,

2004) (the “Verdict”).1   As explained below, we affirm.

                                  I.

          At all times material to this dispute, Walter E. Lynch

was the sole owner of WELCO, GDA, and DF (collectively, the “Lynch

Defendants”), which conducted business as architectural design and

construction management firms.2       In 1999, the Fuiszes contracted

     1
      The Verdict is comprised of the district court’s Order of
November 29, 2004, and its separate “Findings of Fact” and
“Conclusions of Law” of that date.    The state court’s judgment
against Lynch individually is not relevant in this proceeding.
     2
      As a general proposition, the facts recited in this opinion
are drawn from the Verdict.

                                  2
with the Lynch Defendants for construction of a private dwelling,

at a total price of approximately $3 million.           When those entities

constructed only part of the dwelling (valued at approximately

$100,000), the Fuiszes initiated suit against them, and against

Lynch individually, in the Circuit Court for the County of Fairfax.

In disposing of the Fairfax County lawsuit, the state court awarded

judgment to the Fuiszes, in the sum of $3,161,000, plus costs,

against   the   Lynch   Defendants.       The   court   also   “pierced   the

corporate veil” and awarded judgment against Lynch individually.

Fuisz v. Walter E. Lynch & Co., No. 196146 (Va. Cir. Ct. Apr. 3,

2003) (the “Judgment”).

           In November 2002, prior to the Lynch PLLC being created,

Lynch entered into negotiations with the Maryland Jockey Club (the

“Jockey Club”) and its parent company, Magna Entertainment, to

provide architectural and design services for work at the Laurel

and Pimlico Racetracks in Maryland (the “Racetracks Project”).

According to Joseph A. DeFrancis of the Jockey Club, he contacted

Lynch concerning the Racetracks Project because he wanted to hire

Lynch “personally.”     WELCO and GDA ceased conducting business soon

thereafter in late 2002 or early 2003.            In January 2003, while

DeFrancis and Lynch were evaluating the feasibility of Lynch

undertaking the Project, the Lynch PLLC billed the Jockey Club for

approximately 120 hours of professional services on the Project,

performed by Lynch and two other employees of the PLLC in November

                                      3
and December 2002.    During that same month, the Lynch PLLC began

making rental payments to Johanna, LLC (in which Lynch has a fifty

percent ownership interest), for office space at 1058 Thomas

Jefferson Street, where the Lynch Defendants had their principal

places of business.     The Lynch PLLC obtained a Certificate of

Organization in the District of Columbia on February 7, 2003, after

it had rented office space and completed its initial work for the

Jockey Club.   In a series of transactions in late August and early

September 2003, GDA sold its office equipment, earlier appraised at

a value of approximately $5,000, to the Lynch PLLC for $65,500.

           Like WELCO, GDA, and DF, the Lynch PLLC is solely owned

by Lynch and conducts business as an architectural design and

construction management firm.    The Lynch PLLC has the same four

employees, including Lynch, as did WELCO and GDA.       Over fifty

percent of the Lynch PLLC’s clients are former WELCO and GDA

clients.

           On April 3, 2003, the Judgment was rendered in the

Circuit Court.     Thereafter, apparently unable to collect the

Judgment, the Fuiszes filed this diversity proceeding in the

Eastern District of Virginia, seeking, inter alia, a declaration

that the Lynch PLLC is the successor in interest to WELCO and GDA

and is thus liable for the Judgment. Although the Fuiszes asserted

that the Lynch PLLC is the successor in interest to WELCO and GDA

only, the Verdict found the Lynch PLLC to be the successor in

                                 4
interest to the Lynch Defendants, including DF, and that the Lynch

PLLC is liable for the Judgment, as well as interest and costs.

The Lynch PLLC has timely appealed, and we possess jurisdiction

pursuant to 28 U.S.C. § 1291.

                                  II.

           We review for clear error the findings of fact made by a

district court after a bench trial.        Yarmouth Sea Prods., Ltd. v.

Scully, 131 F.3d 389, 392 (4th Cir. 1997).      Under this standard, we

must accept a trial court’s findings of fact unless, upon review,

we are “left with the definite and firm conviction that a mistake

has been committed.”     Id. (internal quotation marks omitted).        On

the other hand, we review de novo a trial court’s legal rulings.

Kaiser Found. Health Plan of the Mid-Atl. States v. Clary & Moore,

P.C., 123 F.3d 201, 204 (4th Cir. 1997).

                                  III.

                                   A.

           The sole contention raised by the Lynch PLLC on appeal is

that the district court erred in ruling that, under Virginia law,

it is the successor in interest to the Lynch Defendants, and thus

liable   for   the   Judgment.3   In     Virginia,   a   corporation   that

     3
      The parties agree that Virginia law applies in this
proceeding. See Seabulk Offshore, Ltd. v. Am. Home Assurance Co.,
377 F.3d 408, 418 (4th Cir. 2004) (citing Erie v. Tomkins, 304 U.S.

                                   5
“purchases or otherwise receives the assets of another company is

generally    not    liable   for    the   debts    and    liabilities”       of    the

predecessor.       Kaiser Found. Health Plan of the Mid-Atl. States v.

Clary & Moore, P.C., 123 F.3d 201, 204 (4th Cir. 1997) (applying

Virginia law).       The Supreme Court of Virginia has enumerated four

limited situations, however, where a successor corporation may be

so   liable.       Those   exceptions     arise:    (1)    when     the    successor

corporation    has    expressly     or    impliedly      agreed   to      assume   the

liabilities of its predecessor; (2) when the circumstances warrant

a finding that a consolidation or de facto merger of the two

corporations occurred; (3) when the successor corporation is merely

a    continuation     of   its     predecessor     (the     “mere      continuation

exception”); or (4) when the disputed transaction is fraudulent in

fact.     Harris v. T.I., Inc., 413 S.E.2d 605, 609 (Va. 1992).4                    In

this dispute, only the mere continuation exception is relevant. In

that regard, the Lynch PLLC maintains that the district court

64, 78 (1938)).
      4
      Although the Lynch PLLC is a professional limited liability
company created in the District of Columbia, the principles
enunciated by the Virginia courts governing successor liability in
a corporate setting are applicable to it. See Graham v. James, 144
F.3d 229, 240 (2d Cir. 1998) (“‘The traditional rule of corporate
successor liability and the exceptions to the rule are generally
applied regardless of whether the predecessor or successor
organization was a corporation or some other form of business
organization.’”) (quoting 63 Am. Jur. 2d Products Liability § 117
(1984)).

                                          6
erroneously concluded that it is a mere continuation of the Lynch

Defendants, and as such, liable for the Judgment.

           Several      factors   have       been    identified     for     assessing

whether a business entity constitutes a mere continuation of a

predecessor entity.          The key element for such an assessment,

according to the Supreme Court of Virginia, is the “common identity

of the officers, directors, and stockholders” in the successor and

predecessor     corporations.      Harris,          413   S.E.2d   at     609.     Also

relevant is whether a successor entity “continues in the same

business   as    its    predecessor,”        although      this    factor    is    less

important than identity of ownership.                Clary & Moore, 123 F.3d at

205.   Other factors identified as pertinent to such an assessment

include “whether two corporations or only one remain,” and whether

the successor continues to operate at the same location with the

same telephone number as its predecessor.                 Id.   Additionally, when

a   predecessor   entity’s     assets    are        transferred     for     less   than

adequate consideration, the successor is “likely to be a mere

continuation.”         Id.    Finally,       notwithstanding        these    factors,

Virginia law provides that the mere continuation exception does not

apply when the “purchase of all the assets of a corporation is a

bona fide, arm’s-length transaction.”                Harris, 413 S.E.2d at 609;

see also Beck v. Va. Sash & Door, Inc., No. LL-1404, 2001 WL

1486159, at *4 (Va. Cir. Ct. 2001).

                                         7
                                    B.

          Our assessment of the foregoing factors compels the

conclusion that the district court did not err in ruling that the

mere continuation exception applies here.          First and foremost, the

ownership of the Lynch PLLC, WELCO, GDA, and DF was identical.               As

the district court found, Lynch was the sole owner of WELCO, GDA,

and DF, and he is now the sole owner of the Lynch PLLC.             Verdict at

1.   WELCO,   GDA,   and   the   Lynch   PLLC    also   had   the   same   four

employees.    Id. at 3.    And, as the Supreme Court of Virginia has

emphasized, an identity and commonality of officers, directors, and

stockholders in successor and predecessor entities is the “key

element” for determining successor liability.           Harris, 413 S.E.2d

at 609.

          Second, as the district court found, the Lynch PLLC

continued to operate the same business — architectural design and

construction management — as the Lynch Defendants.             Verdict at 2-

3. Indeed, the negotiations with the Jockey Club on the Racetracks

Project demonstrate the alignment of business objectives of the

Lynch PLLC and the Lynch Defendants.            According to DeFrancis, he

contacted Lynch on the Project because he wanted to hire Lynch

“personally,” because of Lynch’s prior work on similar projects.

DeFrancis was not aware of which business entity employed Lynch,

                                     8
nor did he know that the services Lynch had performed on similar

projects were accomplished while he was with the Lynch Defendants.

The   specific   business   entity   that   Lynch   represented   was   not

important to DeFrancis, and that fact — coupled with the other

factual underpinnings of the Verdict — establish that the Lynch

PLLC and the Lynch Defendants were in the same business.

           Two additional factors also weigh in favor of the trial

court’s conclusion that the Lynch PLLC is a mere continuation of

the Lynch Defendants.       First, neither WELCO nor GDA presently

exist, having ceased conducting business in late 2002 or early

2003, contemporaneous with the formation and initiation of the

Lynch PLLC as Lynch’s operative business entity.           Second, it is

significant that the Lynch PLLC has continued to operate from the

predecessor entities’ former offices, using the same telephone

number.   See Verdict at 6-7.

           Finally, we are comfortable in concluding that, even if

the Lynch PLLC paid adequate consideration for the assets it

received from the Lynch Defendants, the asset transfer was not a

bona fide, arm’s-length transaction.5       The Lynch PLLC contends, of

      5
      Although we agree that the asset transfer did not constitute
a bona fide, arm’s-length transaction, our reasoning in affirming
the trial court’s ruling does not fully adhere to the approach
utilized by it. See United States v. Smith, 395 F.3d 516, 519 (4th
Cir. 2005) (observing that appellate court is “not limited to
evaluation of the grounds offered by the district court to support
its decision, but may affirm on any grounds apparent from the
record”).

                                     9
course, that it paid adequately for those assets and that, as a

result, the transfer from GDA constituted a bona fide, arm’s-length

transaction. Contrary to this contention, in assessing whether the

mere continuation exception applies, we are obliged to conduct

separate     assessments      of,   on        one   hand,    whether     adequate

consideration was paid in an asset transfer and, on the other,

whether     the    transfer   constituted       a   bona    fide,    arm’s-length

transaction. See Beck, 2001 WL 1486159, at *4 (conducting separate

assessments).6       Even assuming that adequate consideration was paid

by the Lynch PLLC for the equipment it obtained from GDA, the

transfer was plainly not conducted as if the Lynch PLLC and GDA

were strangers.        First, the Lynch PLLC substantially overpaid for

the equipment — paying, according to the trial court, $65,500 to

GDA   for    equipment     appraised     at    approximately        $5,000   —   an

arrangement which would not have occurred had the entities been

unrelated.        See Verdict at 5.7     Second, there is no indication in

the record or in the Verdict that GDA sought other prospective

purchasers for its equipment, or that it sold any of its assets to

      6
      An “arm’s length transaction” is a “transaction between two
parties, however closely related they may be, conducted as if the
parties were strangers, so that no conflict of interest arises.”
Black’s Law Dictionary 1535 (8th ed. 2004).
      7
      In explaining to the trial court why the Lynch PLLC paid more
to GDA for the equipment than its appraisal value, Lynch testified
that the PLLC paid the “replacement value” of the equipment,
wanting to err on the side of paying too much.

                                       10
another purchaser.     See Clary & Moore, 123 F.3d at 208 (concluding

that sale of all items to one firm favored conclusion that transfer

was   not   bona   fide,   arm’s-length   transaction);   Beck,   2001   WL

1486159, at *4 (concluding that asset purchase was not bona fide,

arm’s-length transaction where foreclosure sale resulted in only

one bid).    And the fact that the asset transfer occurred only six

months after the Judgment was rendered is a compelling indication

that the Lynch PLLC was being used for the purpose of avoiding the

predecessor entities’ liability on the Judgment.            See Clary &

Moore, 123 F.3d at 208 (weighing factors pertinent to assessment of

successor liability and concluding that new firm was created with

“the express purpose of avoiding” predecessor’s debt).

            In sum, our assessment of the relevant factors on the

mere continuation exception, in the context of this record and the

applicable authorities, compellingly demonstrates that the Lynch

PLLC is a mere continuation of the Lynch Defendants.       And, in these

circumstances, the trial court did not err in so ruling.8

                                    IV.

      8
      Although the Judgment was entered against the Lynch
Defendants, the Fuiszes sought a declaration, in the court below,
that the Lynch PLLC is the successor in interest to only two of
those entities — WELCO and GDA.     On appeal, the Fuiszes urge
affirmance of the court’s ruling that the Lynch PLLC is the
successor in interest to all three Lynch Defendants.      In this
regard, the Verdict was amply supported by the evidence and the
district court did not err.

                                    11
          Pursuant to the foregoing, we affirm the Verdict of the

district court.

                                                         AFFIRMED

                               12