Virginia Business Litigation Lawyer Blog

Once a plaintiff has introduced evidence to establish a "badge of fraud," a prima facie case of fraudulent conveyance is established and the burden shifts to the defendant to establish that the transaction was not fraudulent. So held the Virginia Supreme Court, in reversing the Henrico County Circuit Court's decision to strike the plaintiff's evidence and enter judgment in favor of the defendant.

Fox Rest Associates, L.P. v. Anne B. Little involved a dispute between George B. Little, an attorney and the general partner of Fox Rest Apartments, and the limited partners of Fox Rest Apartments, arising out of an alleged sale of the apartments by the general partner without the consent or knowledge of the limited partners. After learning that the limited partners planned to sue him, Mr. Little made various transfers, including transfers into an account at SunTrust Bank held jointly with his wife. The limited partners filed a derivative action against Fox Rest for malpractice, double billing, and other claims. The limited partners obtained a judgment but were unable to collect approximately $856,400. They then proceeded to file a fraudulent conveyance action to attempt to set aside various transfers as fraudulent.

The trial court struck the limited partners' evidence, finding that they had produced insufficient evidence of fraudulent intent. The Supreme Court, however, reversed. Under Virginia law, it pointed out, to survive a motion to strike, a plaintiff need only introduce evidence of "badges of fraud." Badges (or presumptions) of fraud include:

(1) retention of an interest in the transferred property by the transferor; (2) transfer between family members for allegedly antecedent debt; (3) pursuit of the transferor or threat of litigation by his creditors at the time of the transfer; (4) lack of or gross inadequacy of consideration for the conveyance; (5) retention or possession of the property by transferor; and (6) fraudulent incurrence of indebtedness after the conveyance.

Here, the court found, the limited partners had proved the existence of several of these badges of fraud. First, Little maintained an interest in the funds deposited in the SunTrust account since it was a joint account. Second, the transfers were made after the dispute arose over his management of Fox Rest, the dispute that led to the derivative suit. Additionally, the Supreme Court found that it was fair to assume that Little's wife knew of his fraudulent intent since she was aware of the problems between her husband and the limited partners and of the lawsuit. An accountant testified at trial that Mrs. Little received a minimum benefit of $940,000 from the challenged transfers. This, the court said, established a prima facie case of fraudulent conveyance.

Toyota Motor Sales, Inc., will not be able to take advantage of a mandatory arbitration clause in an online agreement with a Los Angeles woman because the agreement was obtained by fraud and is therefore entirely void, a California state appeals court has held.

Amber Duick was targeted by Toyota as one of the people who would take on the role of "Player 2" in an interactive ad campaign entitled "Your Other You." She sued Toyota and its advertising company, Saatchi & Saatchi North America, Inc., in 2009, after Toyota involved her in 2008 in an advertising campaign for its Matrix automobile as an evidently unwitting participant.

Sometime in 2008, Duick clicked a box on a Toyota-sponsored website entitled "Personality Evaluation Terms and Conditions." The website indicated that by clicking, she was agreeing to participate in a five-day "digital experience through Your Other You," and that she might receive emails, phone calls, or text messages from Toyota during that period. Duick soon found that instead of a personality test, she received several disconcerting emails from someone identifying himself as "Sebastian Bowler," which implied that Bowler enjoyed drinking to excess, owned a pit bull, had been running from law enforcement, and had damaged a hotel room. Duick was told that she was liable for the hotel damage, even though she had never been there and had never met Bowler. Finally, at the end of the process, Toyota revealed that this was all made up. It was a prank on Duick that was part of the ad campaign for the Matrix.

Duick suited Toyota and Saatchi for $10 million in California state court for damages and other relief, claiming intentional infliction of emotional distress, negligence, and false advertising. Toyota moved to compel arbitration and take the case out of the court system. The trial court refused to compel arbitration, and the California Court of Appeal affirmed.

The appeals court reasoned that the contract with Duick, including the arbitration clause, was void and unenforceable because it was obtained by fraud "in the inception"; in other words, that Duick was deceived by Toyota and Saatchi as to the nature of the act she was performing when she clicked the box. Thus there was no valid and enforceable contract.

The defendants "led Duick to believe that she was going to participate in a personality evaluation and nothing more," the court wrote. "In particular, a reasonable reader in Duick's position would not have known that she was signing up to be the target of a prank. It might have been possible to draft the terms and conditions in such a way as to correct that a misimpression, but defendants did not do so." Accordingly, the contract, including the arbitration clause, was held void and unenforceable under California law.

Virginia courts will not necessarily rule on the enforceability of a restrictive covenant in an employment agreement without first examining the facts. In a recent federal-court decision from Roanoke, Judge Wilson denied a defendant's motion for judgment on the pleadings in a case involving an alleged assignment of patent rights in violation of various contractual restrictions, finding that the factual record wasn't sufficiently developed to permit a ruling.

Travis Mickle, President of KemPharm, Inc., a small early-phase biopharmaceutical company, was working as a senior research scientist for Lotus Biochemical Corporation (which became New River Pharmaceuticals ("NRP")) in 2001. At that time, he entered into an employment agreement with Lotus. In 2005, he left the company and entered into a settlement agreement governing various post-employment responsibilities.

Shire LLC, a subsidiary of NRP, sued Mickle for breach of both the original employment agreement and the settlement agreement. Shire pointed to paragraphs in the employment agreement that make all discoveries or inventions made by Mickle the property of the company; that prohibit Mickle from disclosing company confidential information for his own benefit; and that require that all patents and other intellectual property developed by Mickle be assigned to the company.

Shire asserted that Mickle breached all these provisions by developing new intellectual property based on the assigned patents after he left NRP and by assigning his interests in those new patents to KemPharm, his new company, rather than to NRP.

Mickle and KemPharm, which was also a defendant, moved for judgment on the pleadings, contending that the contract provisions in question were restrictive covenants which, on their face, were unenforceable under Virginia law. Their lawyers argued that restrictive covenants will be enforced in Virginia only if they are narrowly drawn to protect the employer's legitimate business interest, if they are not unduly burdensome on the employee's ability to earn a living, and if they are not against public policy.

Judge Wilson held, however, that ruling on the case at this early stage would be premature. He found that the determination of whether such an agreement should be enforced in equity depends on the specific facts of the case. He also noted that while courts have found broadly worded noncompete agreements without express geographic limitations facially invalid, the Virginia Supreme Court has not held that the absence of those express limitations renders confidentiality clauses or assignment agreements invalid per se.

Many contracts provide that in the event of litigation arising out of a breach, the prevailing party will be entitled to recover "reasonable" attorneys' fees from the losing party. Some attorneys, however, hoping to obviate the need for a mini-trial regarding the reasonableness of the fees, draft contracts setting the attorneys' fees as a fixed percentage of the underlying obligation (e.g., 15% of the total amount due). But what happens when the underlying obligation is so large that applying the fixed percentage stated in the contract would result in awarding the prevailing party far more than it actually incurred in legal fees?

Judge Leonie M. Brinkema recently faced that question and ruled that the percentage-based attorneys-fee provision was unenforceable as a matter of law. Considering a request for attorneys' fees and costs after the conclusion of a commercial case, she rejected a finance company's contention that a flat 15 percent of the amount it recovered in the case should be awarded to it as attorneys' fees, even though the loan document in question specified that fees not less than 15 percent of the amount in question should be awarded.

Automotive Finance Corp. (AFC), based in Indiana, provided financing for several automobile dealer showrooms in Virginia. Later, it filed suit against the dealers and against three companies that guaranteed the debt. After a trial, Judge Brinkema awarded AFC $3,156,149 in damages. AFC then applied to the court for attorneys' fees in the amount of $473,422.35 (precisely 15 percent of the recovery) which amount exceeded the fees and costs it actually incurred. While finding AFC's argument "appealing in its simplicity," Judge Brinkema said the problem with it is that it "flies in the face of the applicable case law." The fees awarded in any piece of litigation, according to both Virginia and Indiana law, must be reasonable.

Courts in the Eastern District of Virginia examine twelve factors when evaluating the reasonableness of a claim for reimbursement of attorneys fees: (1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorneys' opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attorneys' expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorneys' fees awards in similar cases.

Applying these factors, as well as Indiana law as required by the contract, the court found that 15 percent was unsupportable. She wrote, "To allow a party to recover more in an attorneys' fees award than it actually incurred in legal expenses would confer an unreasonable windfall on that party and would be fundamentally at odds with the basic principle that the party requesting fees bears the burden of proving that such fees are reasonable."

Instead, Judge Brinkema ruled, AFC is only entitled to "recoup the fees which it can prove that it actually and reasonably incurred." After making some deductions for duplicative time entries and deferring to the bankruptcy court on the reasonableness of fees incurred in that forum, Judge Brinkema awarded AFC the sum of $217,414.91 in fees and costs, less than half the amount requested.