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United Bank v. Buckingham

Summarizing by Shane Ramsey

Bennett v Garner

Case Type:
Business
Case Status:
Reversed and Remanded
Citation:
No. 18-1531 (4th Circuit, Jan 16,2019) Published
Tag(s):
Ruling:
The 4th Circuit held that a state court judgment confirming an arbitration award did not preclude plaintiff’s fraudulent transfer claims and alter-ego claims under doctrine of res judicata. With respect to the fraudulent transfer claims, the court found that arbitration served only to establish parties' respective obligations and liability under agreement, employee's fraudulent transfer claims alleged that employer depleted its corporate assets. Similarly, the alter-ego claims were not precluded because employee could not pierce corporate veil before he obtained judgment against employer.
Procedural context:
Plaintiff appealed the district court’s award of summary judgment in favor of his former employer and its owner, in plaintiff’s action seeking to collect on a state court judgment entered against the defendants. The district court held that plaintiff’s claims were precluded under Virginia’s doctrine of res judicata. The 4th Circuit concluded that plaintiff’s claims were not precluded, because plaintiff could not have brought those claims at the time of his earlier litigation. Accordingly, the court vacates the district court’s judgment and remanded for further proceedings.
Facts:
Defendant Virtus is a company that provides consulting services to various financial institutions. Defendant Garner is the owner and sole member of Virtus. Plaintiff 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 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. 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. Thereafter, Bennett initiated an action in the district court seeking to collect on his judgment, asserting the following claims: (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.
Judge(s):
Keenan, Floyd, and Thacker.

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