Case over transfer of assets sent back to W.Va. federal court

By Jessica M. Karmasek | May 3, 2012


Judge Frederick P. Stamp Jr., for the Northern District of West Virginia

RICHMOND, Va. -- A federal appeals court has remanded a case over fraudulently transferred assets to a West Virginia district court.

The lawsuit stems from a loan that brothers and plaintiffs Joseph and Dominick LaRosa -- referred to as the creditors -- made in 1982 to their cousin Virgil B. LaRosa and his wife, Joan -- the debtors -- for $800,000.

Virgil B. LaRosa was the sole shareholder of defendant Cheyenne Sales Company Inc. until his death in 2006, at which time Joan LaRosa became the sole owner of Cheyenne.

The debtors never made a payment on the $800,000 loan, and in November 1994, the creditors obtained a judgment against them for $2,844,612.87 plus $10,000 in attorneys' fees.

In November 2003, the debtors filed for Chapter 11 bankruptcy.

Their three reorganization plans proposed that Cheyenne's operations would allow the debtors' estate to make payments of $7,000 per month for 60 months to repay their obligation to the creditors.

However, none of the plans were confirmed, and the bankruptcy case was converted to a Chapter 7 bankruptcy.

After a series of disputes about the finality of the creditors' judgment against the debtors, the creditors then tried to collect on the judgment by indexing it in counties in West Virginia where the debtors owned real property.

Around that time, the debtors initiated a series of transactions that fraudulently put their assets beyond the reach of the creditors.

More specifically, they used Cheyenne to funnel some of their assets toward Virgil D. LaRosa and Sandra LaRosa -- referred to as the transferees.

Virgil D. LaRosa is the son of the debtors and the sole shareholder of Regal Coal Company Inc. The company is not a party to the litigation because the claims against it have been severed due to a bankruptcy stay.

The creditors sued the transferees in the U.S. District Court for the Northern District of West Virginia in June 2007 to recover the alleged fraudulently transferred assets.

After extensive discovery, a bench trial took place in mid-2009. The parties filed proposed findings of law and fact and written closing arguments. At that time, the creditors settled with the non-party defendants, and the parties filed supplemental proposed findings of fact and law.

Then, in September 2010, the district court ruled that the transferees engaged in a series of intentionally fraudulent transfers designed to hinder, delay and defraud the creditors' efforts to collect on their judgment against the debtors -- violations of the West Virginia Uniform Fraudulent Transfer Act.

The court found that "Cheyenne (was) operated as a conduit through which a portion of debtor's wealth is passed on its way to defendants or others."

There were three types of transfers alleged to be violations of the WVUFTA, and the district court found all three types were violations.

The court ordered judgment against the transferees -- again, Virgil D. LaRosa and Sandra LaRosa -- for $1,191,609 but attached their property worth $6,799,161.42. The amount of the attachment was the amount owed to the creditors by the debtors after including interest.

The judgment in the amount of $1,191,609 is based on two categories of transfers.

The first is based on a $491,609 transfer from Virgil B. LaRosa to Cheyenne, which eventually found its way to the transferees. The transfer occurred a few weeks after the creditors began to execute judgment against the debtors. This transfer is not disputed on appeal.

The second transfer was Cheyenne's purchase of annuities, the accounts of which were used for the benefit of Virgil D. LaRosa and Regal, using $700,000 obtained from Cheyenne's line of credit that encumbered the debtors' securities.

The district court also found that the third category of transfers -- a series of business dealings between Cheyenne and Regal -- constituted violations of the WVUFTA. However, the court did not award an increased judgment consistent with that finding.

The court's failure to assign a value to the Cheyenne-Regal transfers is the basis of the creditors' appeal.

In addition, both parties filed Rule 59(e) motions, or motions to alter or amend a judgment.

The creditors requested a judgment worth $6,799,161.42, and the transferees requested a reduction of the attachment to the amount of the judgment -- $1,191,609.

The district court agreed with the transferees and reduced the amount of the attachment accordingly.

The creditors appealed and the transferees cross-appealed to the U.S. Court of Appeals for the Fourth Circuit.

The two issues presented were: whether the creditors' WVUFTA claim based on a corporation's drawdown on its line of credit and purchase of annuities was time-barred; and whether the district court's denial of the creditors' motion to increase the damage award was an abuse of discretion.

In its 21-page ruling filed Monday, the Fourth Circuit reversed the lower court's determination that the WVUFTA claim was not time-barred.

"Because the language and history of the statute of repose make clear that it runs from the date of the security pledge, we reverse the district court and hold that the creditors' WVUFTA claim on the line of credit was time-barred," Judge Roger L. Gregory wrote for the court.

Gregory explained that in January 2001, Cheyenne entered into a loan agreement with Huntington National Bank that permitted it to borrow up to $950,000 on a line of credit. Debtor Virgil B. LaRosa pledged a series of securities to secure the line of credit.

In June 2003, transferee Virgil D. LaRosa drew down $700,000 under Cheyenne's line of credit with the bank.

With this money Cheyenne purchased over a million dollars in annuities, which were owned and controlled by Cheyenne but whose accounts were used to transfer money to Virgil D. LaRosa and Regal.

The transferees argued that because Virgil B. LaRosa's pledge of securities, which served as guaranty of the line of credit, occurred more than four years before the creditors filed their lawsuit, the claim is time-barred by the WVUFTA.

The Fourth Circuit agreed.

"According to the WVUFTA, the securities were encumbered at the time they were pledged as collateral for the line of credit because the written credit-facility agreement created a security interest held by the bank on the pledged securities," Gregory wrote.

The Fourth Circuit also vacated and remanded the district court's denial of the creditors' Rule 59(e) motion.

"First, we hold that it was an abuse of discretion for the district court to find the transfers violated the WVUFTA but refuse to assign an award to the creditors in the amount fraudulently transferred. We remand so that the district court may engage in further fact-finding to determine the amount of the award owed to the creditors," Gregory wrote.

"Second, assuming the district court maintains its finding that the Cheyenne-Regal transfers violated the WVUFTA, we remand in order for the district court to make specific findings as to which property of the debtors was transferred that brought the Cheyenne-Regal transactions within the reach of the WVUFTA."

The Fourth Circuit said the district court failed to provide a "clear statement" as to why it did not award damages for the creditors' claim.

"The court apparently was under the impression that it did not need to resolve the dispute between the parties' experts as to the value of fraudulently transferred assets between Cheyenne and Regal," Gregory wrote.

Doing so was an abuse of discretion and now the court needs to resolve the discrepancy, the Fourth Circuit said.

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