C.F. Trust, Inc. v. First Flight Limited Partnership

Facts

Ps filed an action seeking a declaration that D, a Virginia limited partnership, is the alter ego of Barrie M. Peterson (D) who had endorsed and guaranteed certain promissory notes. Ps each hold commercial promissory notes endorsed and guaranteed by Peterson (D). Ps seek to collect a combined total of more than $ 8 million on their notes, and Peterson (D) has put an equal amount of effort to avoid paying anything to them. Peterson (D), individually and as trustee, and his wife, Nancy Peterson (D), endorsed and guaranteed both notes. A circuit court in Virginia entered judgment in favor of Ps against Ds jointly and severally, for the amount of the notes, plus interest. P sought and obtained a charging order that charged the Ds' interests in various partnerships, including First Flight (D), with paying the judgment on the notes. The federal district court issued garnishment orders against various D corporations, including Birchwood Holdings Group, Inc. Atlantic Funding (P) purchased one of the notes due. A Virginia circuit court granted Atlantic (P) a charging order charging Peterson's (D) interest in First Flight with paying the judgment. Without any payments being made, Ps initiated this diversity action against Ds and even their son, Scott Peterson, as well as against various Peterson entities, including First Flight (D). The evidence showed that Peterson (D) directed transfers from various Peterson (D) entities to Birchwood Holdings Group, Inc. (BHG), a corporation wholly owned by Peterson (D) BHG provided managerial and administrative support to other Peterson entities for a fee, which was calculated according to a cost allocation method. Peterson directed transfers of approximately $1.9 million in overpayments to BHG to pay more than $2 million of Peterson's (D) personal expenses. The payments included: mortgage and repair payments on a residence in Fairfax, Virginia; mortgage payments on a residence in Nantucket, Massachusetts, country club membership fees, car payments for a Mercedes Benz, credit card bills; ATM fees, college tuition for a younger son, and payments to Mrs. Peterson (D). BHG even paid the substantial legal fees incurred by Ds to defend the suits brought by Ps. Peterson (D) claimed those payments toward his personal expenses constituted repayments of prior loans that he had made to his corporations before the dates of the judgments. BHG's accountant testified that many of the payments were personal expenses. No documentation supported any loans. First Flight (D) owned and operated a large commercial and industrial rental property called Top Flight Airpark. Peterson (D) held a 98% limited partnership interest in First Flight (D), including a 2% interest held by Top Flight Airpark, Incorporated, a corporation wholly owned by him. Upland Group, an entity wholly owned by the elder son, Scott Peterson, (D) held the remaining 2% general partnership interest. After the first judgment and charging order, Top Flight withdrew as 2% partner of First Flight (D), and Peterson (D) transferred half of his resulting 98% partnership interest in First Flight to Scott Peterson (D). Upland Group retained its 2% general partnership interest. Peterson (D) purportedly surrendered legal control to Scott Peterson (D), although Peterson himself continued to manage First Flight's day-to-day affairs. Scott Peterson (D) was directed to distribute First Flight's (D) funds to himself, and then pay those distributions to Mrs. Peterson (D) or BHG, or use the distributions to pay the personal expenses of Peterson (D) and Mrs. Peterson (D). First Flight (D) distributed more than $ 4.3 million to Scott Peterson (D). Ds amended First Flight's partnership agreement to allow Scott Peterson (D), as the general partner, 'to approve any distributions to the limited partners' and 'to determine whether any part of the profits of the Partnership should be distributed to the limited partners.' A pro rata distribution to partners was supposed to have been extinguished and the son was directed to pay Peterson's (D) own personal expenses because they were repayments of loans Peterson (D) had made to his respective companies. The federal district court concluded that First Flight (D) was the alter ego of Peterson (D). Ds appealed. The court certified two questions. (1) Would Virginia recognize a claim for outsider reverse veil-piercing under the facts of this case? (2) If the answer to (1) is yes, what standards must be met before Virginia would allow reverse veil- piercing of the limited partnership here?' Ds argues that the Court should not permit outsider reverse piercing of a limited partnership by a creditor of a limited partner.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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