A. v. Laurins & Co. v. Prince George's County

Couch, J., delivered the opinion of the Court. On November 30, 1979 the Circuit Court for Prince George’s County, Maryland declared fraudulent a conveyance made between the appellants, A. V. Laurins & Company, Inc. and LAV Shell Company, Inc., in 1975. The Circuit Court imposed a lien upon the real property involved and appointed a trustee to sell the property. The Court also adjudged the appellants Laurins and Norman to be in contempt for their failure to appear at trial on July 31,1979, pursuant to subpoenas.

Each of the appellants was fined $2,000.00. At a subsequent hearing the Circuit Court assessed attorney’s fees of $1,500.00 against the appellants. ⁵⁵⁰ From these decisions of the Circuit Court the appellants appeal and present three questions: "1. Did the Court below err in reaching conclusions not supported by the evidence of record; in ruling that the circumstances of this case shifted the burden of proof to the defendants; in ruling that defendants could not produce any evidence of any nominee agreement or any credible evidence of an antecedent debt; and in concluding that the conveyance of certain condominium units was fraudulent? 2. Did the Court below err in finding defendant Laurins and defendant Norman guilty of direct contempt of court when the evidence of record shows that defendants, if contemptuous, should have been charged with constructive criminal contempt requiring compliance with the procedures specified by Rule P4? 3.

Was the assessment of $1,500.00 against defendants for attorney’s fees for the entire case arbitrary, unreasonable, and capricious when the record shows that the County’s motion for costs related only to discovery and that defendants did comply with the Court order for discovery?” We find that the Circuit Court did not err in determining that the conveyance was fraudulent. The Court did err, however, in finding Laurins and Norman guilty of direct criminal contempt. Furthermore, the Court improperly determined the assessment of attorney’s fees against the appellants. The reasons for our findings and additional facts concerning this case will be presented in the discussion of the issues.

I. — FRAUDULENT CONVEYANCE The appellants request that we reverse the decision of the Circuit Court for Prince George’s County which set aside the ⁵⁵¹ conveyance of certain condominium units. We decline to follow this request and instead we affirm the finding that the conveyance was fraudulent as defined by Md. Com. Law Code Ann. § 15-207. This provision states: "Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.” A. V. Laurins & Company, Inc. (AVL Co.) was a Delaware corporation authorized to do business in the State of Maryland with offices at 8401 Connecticut Avenue, Suite 700, in Chevy Chase.

Its corporate officers and directors were Aleksandrs V. Laurins, James G. Norman, and Charlene Baden. All of the stock of AVL Co. was owned by LAV Shell Company, Inc., a Maryland corporation with offices in the same Suite 700 and with the same corporate officers and directors as AVL Co. As a management and real estate development corporation AVL Co. was the general partner in several limited partnerships. These partnerships included the Co-Op Development Limited Partnership (Development), formed in 1972 by AVL Co., and the National Mortgage Corporation (NMC). Development was formed to acquire, renovate, convert to condominium and sell a housing project known as Coronado Apartments in Adelphi, Maryland.

In 1973 Development obtained legal title to the apartments and sold them as condominium units. Shortly thereafter ten of the individual purchasers involved in the condominium conversion filed complaints with the Prince George’s County Landlord-Tenant Commission. They contended that certain sums paid to AVL Co. exceeded the amount permitted by the County Rent Control Law which became effective June 22, 1973. Following hearings on the complaints the Executive Director of the Landlord-Tenant Commission issued an order directing AVL Co. to reimburse the ten complainants ⁵⁵² various amounts totaling $2,065.44.

The Executive Order was issued March 11, 1975. Two days later, on March 13, 1975, AVL Co., as general partner of Development, conveyed Coronado condominium units 703A and 704A to LAV Shell Company, Inc. On March 14,1975, Laurins and Norman, as officers of AVL Co., dated a document purporting to dissolve the limited partnership between AVL Co. and NMC. This document was notarized on May 29,1975 by Charlene Baden. There was no signature on the document on behalf of the limited partner, NMC, nor was any certificate of cancellation recorded.

The document itself purported to commit $13,350.00 of the cash assets of the limited partnership "as a reserve for its liabilities and transferred to Metropolitan Mortgage Bankers, Inc., for the purpose of payment of Accounts Payable, Warranties, the Noble lawsuit, the Rent Control Suit and other potential law suits.” Laurins and Norman were also corporate officers of Metropolitan Mortgage Bankers, Inc. On April 1, 1975, the deed conveying condominium units 703A and 704A was recorded and transfer taxes paid. The deed bears the notation for mailing of 8401 Connecticut Avenue, Chevy Chase, Maryland. That same month, management of the Coronado units was taken over by Shannon & Luchs. This company, however, continued to make receipts and disbursements for the account of "A.V.Laurins” having received no notice of change of ownership.

LAV Shell Co., Inc. did inform the Landlord-Tenant Commission in October, 1975 that AVL Co. had no assets with which to satisfy the rent reimbursement order. The Commission was also informed by LAV Shell that AVL Co. was no longer in business. More accurately the authorization for AVL Co. to do business in Maryland had been cancelled on December 16, 1974 by the State Department of Assessments and Taxation. AVL Co. had failed to file the required 1974 foreign ordinary business corporation personal property return. ⁵⁵³ Prince George’s County filed a Bill of Complaint on January 5, 1976 to enforce the Executive Order against AVL Co., Laurins and Norman. 1 Ten days later Laurins moved to San Francisco.

On September 13,1977, the Circuit Court for Prince George’s County entered judgment in favor of the County and against only the appellant AVL Co. in the amount of $2,065.34. No appeal was taken from this judgment. The County returned to the Circuit Court on March 10, 1978, filing a Bill of Complaint against AVL Co., LAV Shell Co., Inc., Laurins, and Norman, to establish a fraudulent conveyance and impress a lien on real estate. At the hearing on July 31, 1979, the County contended that the conveyance of March 13,1975 was made with actual fraudulent intent to hinder, delay or defraud the County from satisfying the award of $2,065.34.

The County presented evidence that the condominiums were assessed to LAV Shell Co., Inc., but that during a four year period from 1975 to 1979 the benefits of the property went to Laurins. Charlene Baden testified for the defendants. She said that LAV Shell Co., Inc. never owned any units in Coronado, but that LAV Shell acted as "nominee” for Co-Op Mortgage Investment Associates (Co-Op), a corporation formed by AVL Co. and Wyoming Associates in 1973. Defense testimony indicated that Co-Op, acting through AVL Co., had borrowed $231,758.00 from NMC.

This purported loan was documented by copies of sheets from Co-Op’s record books, dated 1973. AVL Co. loaned this $231,758.00 to Pleasant Hill Associates, a limited partnership of which AVL Co. was the general partner. As general partner in Pleasant Hill Associates, AVL Co. agreed to repay the loan by assigning to Co-Op the AVL Co. interest in Development. At the time of the repayment agreement between AVL Co. and Co-Op, $90,000.00 was still due on the loan.

Co-Op’s interest in Development (the Coronado project) was valued by the defendants at $120,000.00. No notes or other evidence ⁵⁵⁴ of bona fide debts incurred with valid consideration were introduced by the defendants. No nominee agreement was presented to indicate the proper relationship between Co-Op and LAV Shell Co., Inc. Prince George’s County asserted that a fraudulent conveyance occurred when the condominium units were transferred from Development to LAV Shell Co., Inc. in an arrangement with Co-Op. This conveyance did render AVL Co. insolvent and unable to reimburse the Coronado tenants.

The defendants at the hearing and the appellants in this appeal have argued that no fraud occurred in the transfer, but rather that the $90,000.00 antecedent debt was paid'off by Co-Op’s receiving assets from the dissolution of Development. Payment of Co-Op’s loan took the form of $61,678.00 in notes receivable, cash of $3,600.00, and the condominiums which the appellants value at $26,200.00. After assessing the evidence presented at the hearing, the chancellor ruled in favor of the County. Based on the continued disbursements from Shannon & Luchs to Laurins following the transfer of the deed from AVL Co. to LAV Shell Co., Inc., she determined: "[T]here was no real delivery even intended in this situation as no rights or duties with respect to the property were really changed, as the debtor retained the rents and possession of the property.” No evidence was found of any actual consideration passing from LAV Shell Co., Inc., the named grantee/nominee, to the grantor corporation.

The chancellor did find in the interlocking relationship of the parties such circumstances that shift the burden to the defendants of establishing the bona tides of the transaction. Berger v. Hi-Gear Tire & Auto, 257 Md. 470 , 263 A.2d 507 (1969). Based on the presented evidence the chancellor determined that the defendants did not meet their burden of proving either the validity of the conveyance or the formation of a resulting trust for the benefit of Co-Op. From the lack of adequate evidence that Co-Op paid the purchase price for the property and from the assumption that the property had risen in value from the ⁵⁵⁵ $26,200.00 prior to conversion, the chancellor found that "the consideration in this case was a mere bookkeeping fiction.” In view of all the facts and circumstances surrounding the transfer of the condominium units, the court found the conveyance was fraudulent.

Viewing the evidence in a light most favorable to the prevailing party, we find no indication that the chancellor’s decision was clearly erroneous. Md. Rule 1086. A finding of fact concerning the adequacy of consideration in an action to set aside a conveyance will not be disturbed when there was evidence to support the chancellor’s conclusions. Beccio v. Tawnmoore Apts., 265 Md. 297 , 289 A.2d 311 (1972).

Thus, the conveyance of the condominium units from AVL Co. to LAV Shell Co., Inc./Co-Op must be set aside as violative of Md. Com. Law Code Ann. § 15-207. The party alleging that a conveyance is fraudulent bears the burden of proving the fraud. Berger v. Hi-Gear, supra; Sullivan v. Dixon, 280 Md. 444 , 373 A.2d 1245 (1977).

Evidence of certain circumstances, however, may shift the burden to the grantee of a conveyance to prove that he is a bona fide purchaser for value. Kline v. Inland Rubber Corp., 194 Md. 122 , 69 A.2d 774, 780 (1949); Berger v. Hi-Gear, supra at 475. This procedure has long been recognized by the Maryland courts. In McCauley v. Shockey, 105 Md. 641 , 66 A. 627 (1907), the Court of Appeals stated: "From the nature of the case, a creditor attempting to set aside a conveyance as fraudulent can seldom prove as an independent fact the knowledge of or particpation in the fraud of the grantor by the grantee.

That knowledge or participation must be gathered from the various facts and incidents composing the transactions and its environment. The primary presumption here as elsewhere is in favor of innocence and good faith, but a state of facts may be shown which will negative that presumption and cast upon the grantee the burden of proving his good faith and non-participation in the fraudulent purpose of the grantor.” Id. at 646 . ⁵⁵⁶ In the previous cases the burden of proof was shifted to the grantee because the individual defendant-grantee chose not to appear at the hearing (Berger), and because of concealment of the ownership of property and the purpose of a mortgage (Kline). In the present case the chancellor shifted the burden of proof after she found "suspicious circumstances” in the relationship between the grantor and the grantee. By our examination of the record, with its description of the business of the parties and their corporations, we find sufficient evidence to sustain the chancellor’s decision to place the burden of proof on the defendants.

Moreover, we agree with the chancellor that the defendants failed to meet their burden and prove the validity of the conveyance. Where an antecedent debt is asserted as consideration for a transfer and as a defense to a charge of fraud, the party bearing the burden of proof must demonstrate the adequacy of the consideration and the good faith of the party. Drury v. State Capital Bank, 163 Md. 84, 88 , 171 A. 176 (1932). Generally an antecedent debt constitutes valid consideration so as to avoid liability under § 15-207.

Sullivan v. Dixon, 280 Md. 444 , 373 A.2d 1245 (1977). The Court of Appeals, however, has further stated: "On the other hand, where a transfer has been made for a valuable consideration the Court may possibly still find fraudulent intent from other circumstances, such as insolvency or heavy indebtedness of the grantor, litigation pending or anticipated, relationship between the parties, concealment or secrecy, and transfer of the debtor’s entire estate. None of these indicia of fraud alone necessarily proved fraud; but they do warrant an inference of fraud, especially where several of the indicia concur.” Savings Bank v. Sauble, 183 Md. 628, 631 , 39 A.2d 862 (1944). See also Johanna Farms v. Elliott Equip.

Co., 278 Md. 137, 148 , 360 A.2d 436 (1976). ⁵⁵⁷ In the present case the chancellor had sufficient evidence reasonably to infer the existence of a fraudulent conveyance. The defendants did not explain AVL Co.’s insolvency, their interlocking business relationships and the loose bookkeeping system to the satisfaction of the chancellor, and thus the validity of the conveyance remained questionable. The chancellor could then reasonably make her conclusion. The Court of Appeals traditionally has sustained the voiding of questionable transfers between businesses owned by the same parties.

Sakelos v. Hutchinson Bros., 129 Md. 300 , 99 A. 357 (1916). More recently we have been willing to disregard the corporate facades used by a party to avoid payment to creditors. Colandrea v. Colandrea, 42 Md. App. 421 , 401 A.2d 480 (1979). Thus, the decision of the Circuit Court for Prince George’s County to set aside the conveyance of the condominium units must be affirmed.

II— CONTEMPT (A) SERVICE OF SUBPOENAS The individual appellant Laurins moved to San Francisco on January 15, 1976. Norman was also living in California by 1979. A protective order was granted in favor of Laurins and Norman which permitted them to remain in California during the discovery phase of the litigation. On July 26, 1979, however, subpoenas duces tecum were issued for Laurins and Norman, requiring their appearance at the trial scheduled for July 31, 1979.

Laurins and Norman were directed by the subpoenas to bring with them various documents relating to their businesses including records revealing the assets of AVL Co. and LAV Shell Co., Inc., and concerning the dissolution of Development. These subpoenas duces tecum were served upon the defendants’ counsel of record on July 27, 1979. Laurins and Norman did not appear at the trial on July 31, 1979. Prince George’s County moved at the beginning of the trial that Laurins and Norman be held in contempt of court and that ⁵⁵⁸ a writ of attachment be issued for them.

Responding to defense counsel’s questioning of the sufficiency of the subpoenas’ service, the chancellor ruled that Laurins and Norman had been served. We agree with the chancellor that under Maryland Rules of Procedure the service of a subpoena duces tecum upon counsel for parties is sufficient service to require their presence at trial and their production of the required documents. Md. Rule 306 a. 1. provides in part: "A pleading, notice or other paper requiring service shall be served upon the parties to the action or upon their attorneys . . . .” Md. Rule 306 c. states in part: "When service of a pleading, notice or other paper requiring service is to be made upon a party represented by an attorney, the service shall be made upon such attorney unless actual service is ordered by the court....” The appellants submit that a subpoena duces tecum is not within the meaning of the phrase "pleading, notice or other papers requiring service.” They do not, however, offer any Maryland authority on this point. The appellees extend Tvardek v. Tvardek, 257 Md. 88 , 261 A.2d 762 (1970), to support their proposition that "where service of process is effected upon counsel in a case still in active litigation, due process is satisfied.” In Tvardek the Court of Appeals held that procedural due process was satisfied when a party’s attorney of record was served with a petition and order to show cause in a child support case.

The Court considered the decision in McSherry v. McSherry, 113 Md. 395 , 77 A. 653 (1910) to be dispositive of this issue. As in Tvardek , the McSherry case involved the continuation of domestic relations litigation in which personal service upon the defendant was not required. The defendant in Tvardek , however, did receive actual knowl ⁵⁵⁹ edge of the modification proceeding, but the Court of Appeals did not indicate that actual knowledge was essential for due process. Although Tvardek and McSherry were domestic relations cases they are similar to the present case in which the Circuit Court for Prince George’s County acquired jurisdiction over Laurins and Norman, and served the subpoenas on their counsel.

As the Court of Appeals stated in McSherry, supra at 401: "[T]he defendant could not deprive the Court of its jurisdiction by leaving the State.” The McSherry decision relied on the authority of McKim v. Odom, 3 Bland 407 , 429 (1828), in which Chancellor Bland said: "The Court has substituted service, in several cases, where the defendant may have notice of the proceedings, and where, in case he goes out of the way, there is a person who he has named in Court as his agent, and who the Court can look upon as such. * * * As in case of an injunction to stay proceedings at law, the attorney-at-law is such an agent, who the Court can regard as one charged with the whole defense of the matter in equity; and so too, where a defendant, who lives abroad, refuses to answer, after having appeared as required by the subpoena with which he has been served, the Court will order service of his