FDIC v. Hish , 76 F.3d 620 ( 1996 )

Filed: March 20, 1996
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 94-2443
(CA-94-289-A)
Federal Deposit Insurance Corporation, etc.,
Plaintiff - Appellee,
versus
Joyce K. Hish, et al,
Defendants - Appellants.
O R D E R
The Court amends its opinion filed March 1, 1996, as follows:
On page 4, footnote 1, line 5 -- "See infra at 9" is corrected
to read "See infra at 7."
For the Court - By Direction
/s/ Bert M. Montague
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for
Madison National Bank of Virginia,
Plaintiff-Appellee,
v.
JOYCE K. HISH; JAMES E. KOONS;
JOSEPH R. KOONS; ELEANOR A.
KOONS; JOHN W. KOONS
TESTAMENTARY TRUST, c/o Joseph R. No. 94-2443
Koons, Trustee,
Defendants-Appellants,
v.
JOHN W. KOONS, JR.; JOHN W.
GUINEE, JR., Chapter 11 Trustee for
the Bankruptcy Estate of John W.
Koons, Jr.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-94-289-A)
Argued: September 25, 1995
Decided: March 1, 1996
Before WIDENER and LUTTIG, Circuit Judges, and BEATY,
United States District Judge for the Middle District
of North Carolina, sitting by designation.
Reversed and remanded by published opinion. Judge Luttig wrote the
opinion, in which Judge Widener and Judge Beaty joined. Judge
Beaty wrote a separate concurring opinion.
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COUNSEL
ARGUED: F. Douglas Ross, ODIN, FELDMAN & PITTLEMAN,
P.C., Fairfax, Virginia, for Appellants. Robert Scott Brennen, MILES
& STOCKBRIDGE, Baltimore, Maryland, for Appellees. ON
BRIEF: Michael A. Brown, MILES & STOCKBRIDGE, Baltimore,
Maryland; Eric J. Berghold, MILES & STOCKBRIDGE, Fairfax,
Virginia, for Appellees.
_________________________________________________________________
OPINION
LUTTIG, Circuit Judge:
Appellee FDIC, receiver for Madison National Bank of Virginia
("Madison Bank"), brought this declaratory judgment action seeking
to validate a Deed of Trust executed by John W. Koons, Jr. ("JWK")
in favor of Madison Bank on a 22.5% fee simple interest in certain
property in Falls Church, Virginia. The property was owned by Koons
Leasing Development Co. ("Koons Leasing"), a Virginia general part-
nership in which JWK and appellants were general partners. The
United States District Court for the Eastern District of Virginia
granted FDIC's motion for summary judgment on the ground that the
Koons Leasing property at issue had been distributed to the general
partners as tenants in common, and that JWK was therefore free to
encumber his undivided fee simple interest in the property. The
Koons Leasing partners other than JWK appeal, arguing that the Deed
of Trust is invalid because, absent a deed, legal title to the property
remained in the partnership, and thus JWK had no interest in the
property that he could convey for his personal use. We agree, and
therefore reverse.
I.
John W. Koons, Sr. built an empire of automobile dealerships in
the Washington, D.C. metropolitan area. Upon his death, his stock in
2
the several dealership corporations was distributed to his four chil-
dren. Title to the parcels of property on which the dealerships were
built was held by several family partnerships in which the Koons chil-
dren and the John W. Koons, Sr. Testamentary Trust were general
partners. The Koons children eventually decided to go their separate
ways, and redistributed their stock in the dealerships so that each had
a controlling interest in a dealership. A similar exchange of the part-
nership interests was not possible, however, without severe tax conse-
quences because partnership interests are explicitly excluded from the
Internal Revenue Code's tax-free exchange provisions, 26 U.S.C.
§ 1031(a)(2)(D). Accountants for the Koons therefore devised a two-
step plan by which the partnership properties would first be distrib-
uted to the partners as tenants in common, and then, after a suitable
waiting period, the undivided fee simple interests would be traded in
a series of section 1031 tax-free exchanges.
The partners agreed to place the partnerships in dissolution in
December 1988. Various steps were thereafter taken toward consum-
mation of the plan, including the filing of final partnership tax returns,
the conversion of partnership bank accounts to accounts held by the
partners as tenants in common, the filing of individual tax returns list-
ing rental income as tenants in common, and the acquisition of busi-
ness licenses identifying the property owner as a tenancy in common.
The tenants on the partnership properties (the various dealership cor-
porations) were instructed to make rental payments individually to the
partners as tenants in common. Significantly, however, no deeds were
ever executed or filed transferring the partnership properties to the
partners as tenants in common.
In the fall of 1989, one of the partners, JWK, and his dealership,
Koons Ford, began to experience financial difficulty. As a conse-
quence, JWK borrowed nearly $5 million from his mother, brother,
and sister. These notes were secured by his interests in the family
partnerships, and those security interests were perfected by the filing
of financing statements. JWK subsequently borrowed an additional
$1.8 million from Madison Bank, securing the loan (at Madison
Bank's request) by the property on which Koons Ford was located
rather than by his partnership interests. The bank obtained an opinion
letter from JWK's attorney representing that "[b]y virtue of the disso-
lution of the [Koons Leasing] Partnership by operation of law, [JWK]
3
holds legal and equitable title as tenant in common to an undivided
twenty-two and one-half percent (22-1/2%) interest in the Property."
A Deed of Trust on the property was executed in JWK's own name
and as "General Partner, as Trustee in Dissolution" of Koons Leasing.
Following JWK's execution of this Deed of Trust, the Koons fam-
ily members began to retreat from their efforts to dissolve the partner-
ships. Amended tax returns were filed recanting the"final" nature of
the previous partnership returns, the tenants in common bank
accounts were terminated, and partnership bank accounts were
reopened.
JWK subsequently assigned his interests in the family partnerships
to his mother, brother and sister as settlement of his loan obligations
to them.1 JWK eventually entered bankruptcy.
II.
Appellants claim that the Deed of Trust to Madison Bank is invalid
because JWK sought to encumber the Falls Church property for his
own use, without the consent of the remaining partners, in violation
of the Virginia Uniform Partnership Act. Va. Code Ann. § 50-
25(B)(1) (Michie 1950) ("A partner . . . has an equal right with his
partners to possess specific partnership property for partnership pur-
poses; but he has no right to possess such property for any other pur-
pose without the consent of his partners."). Appellants further argue
that the Uniform Partnership Act also prevents JWK from assigning
his individual interest in the partnership property. Va. Code Ann.
§ 50-25(B)(2) (Michie 1950) ("A partner's right in specific partner-
ship property is not assignable except in connection with the assign-
ment of the rights of all the partners in the same property."). Cf. In
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1 The assignment states that the property so conveyed was to be free of
all liens except for the Madison Bank Deed of Trust. Whether or not the
Deed of Trust imposed a lien against JWK's personalty interest in the
partnership itself is an issue that must be determined by the district court
on remand. See infra at 7. See generally In re Decker, 295 F. Supp. 501,
510 (W.D. Va. 1969), aff'd. sub nom., Woodson v. Gilmer, 420 F.2d 378(4th Cir.), cert. denied, 399 U.S. 928 (1970).
4
re Vannoy, 176 B.R. 758, 770-71 (Bankr. M.D. N.C. 1994) (applying
similar provisions of North Carolina Uniform Partnership Act).
The FDIC contends, on the other hand, that the Koons Leasing
partners distributed the Koons Leasing partnership property to them-
selves as tenants in common when they agreed to place the partner-
ship in dissolution. Because JWK had an undivided 22.5% fee simple
interest in the property when he executed the Deed of Trust in
December 1989, they argue, the Deed of Trust is valid against that
interest.
The district court, based upon the "overwhelming" evidence of the
partners' intent to treat the property as a tenancy in common, held that
the Deed of Trust validly conveyed a fee simple interest in the prop-
erty belonging to JWK. In so holding, the district court erred, because
no deed actually conveying the property to the partners as tenants in
common was ever executed. In Virginia, like in most states, legal title
to property can be conveyed only by deed or will. V A. CODE ANN.
§ 55-2 (Michie 1950) ("No estate of inheritance or freehold . . . in
lands shall be conveyed unless by deed or will . . .."); Southwest
Products Co., Inc. v. United States, 882 F.2d 113, 117 (4th Cir.
1989); Abdelhaq v. Pflug, 82 B.R. 807, 810 (Bankr. E.D. Va. 1988).2
Because no deed was executed conveying title from the partnership
to the individual partners as tenants in common, JWK did not have
a tenancy in common interest in the property and the Deed of Trust
purporting to encumber that interest was invalid to that extent.
Neither Klingstein v. Rockingham Nat. Bank, 182 S.E. 115, 116-17
(Va. 1935), nor Woodson v. Gilmer, 137 S.E.2d 891, 892 (Va. 1964),
upon which the FDIC relies for its claim that the Deed of Trust was
valid, is to the contrary. In both Klingstein and Woodson, the Virginia
Supreme Court held merely that although title to property was held
in the names of individual partners, it was still partnership property
if such was the intention of the parties at the time of the initial trans-
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2 Although the Virginia Uniform Partnership Act provides a statutory
exception to this rule where a partnership is dissolved and some of the
partners wish to continue the business of the partnership, see VA. CODE
ANN. § 50-37.1 (Michie 1950), this exception is not applicable here,
because no new partnership was created.
5
action. See VA. CODE ANN. § 50-10 (Michie 1950) (providing that title
to partnership property can be held in the name of the partnership
itself or in the name of one or more individual partners). Such a hold-
ing has no bearing on the legal issue with which we are confronted,
namely, whether property held in the name of a partnership itself can
be conveyed to the partners as tenants in common without a deed.
The FDIC's related argument that termination of the Koons Leas-
ing partnership automatically converted all remaining partnership
property to property held by the partners as tenants in common is like-
wise unavailing, because it does not appear that the Koons Partner-
ship was ever terminated. The Virginia Uniform Partnership Act
expressly distinguishes between a partnership in dissolution and one
that has been terminated. VA. CODE ANN. § 50-30 (Michie 1950) ("On
dissolution the partnership is not terminated, but continues until the
winding up of partnership affairs is completed."). Actual termination
of the partnership occurs only after the assets held in the partnership's
name are distributed and accounts between partners are settled.3 The
Virginia Supreme Court has even held that after a lapse of more than
twenty years, a partnership in dissolution was not terminated because
the partnership assets had not been distributed and its affairs had not
been settled. Hodge v. Kennedy, 94 S.E.2d 274, 279-80 (Va. 1956).
Because the Koons Leasing partnership was still record owner of the
Falls Church property and the property had not been conveyed by
deed, as required by Virginia law, it is clear that the Koons Leasing
partnership was only in dissolution and had yet to be terminated.
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3 See VA. CODE ANN. § 50-40 (Michie 1950) (specifying rules for distri-
bution of assets and settlement of accounts between partners after disso-
lution); see also In re Williamsburg Suites, Ltd., 117 B.R. 216, 217-18
(Bankr. E.D. Va. 1990) (finding that partnership had been dissolved,
necessitating the appointment of a receiver to take control and distribute
the partnership assets); In re 2111 Associates-Chicago, 580 F.2d 705,
708 (4th Cir. 1978) (finding that, despite resignations by all but one part-
ner, "we have a dissolved partnership which legally and factually contin-
ues to exist as there has been no `winding up' of partnership affairs");
Woodson, 137 S.E.2d at 896 (noting that partnership was dissolved
because of the bankruptcy of one of the partners, but remanding the case
"with direction to appoint a special receiv[er] to take over the assets and
wind up the affairs of the partnership").
6
Accordingly, the Deed of Trust purporting to convey JWK's inter-
est in the Falls Church property to Madison Bank was without legal
effect unless JWK's execution of the Deed of Trust can somehow be
deemed an act of the partnership, or unless the Deed of Trust can be
viewed as a lien against JWK's personalty interest in the partnership
itself, such issues to be considered by the district court on remand.
REVERSED AND REMANDED
BEATY, District Judge, concurring:
I write separately only to note that upon remand the district court
should consider the effect of the initial admission by partners of the
Koons Leasing Development Company in John W. Koons, Jr.'s bank-
ruptcy proceeding of the existence and perhaps priority of the Madi-
son Bank lien against the collateral, i.e. the 22.5 percent partnership
interest, which they received in exchange for their loans to John W.
Koons, Jr. J.A. vol. 4, p.1206.
7