Construction Law Insights

Basham v. Jenks, 2018 U.S. Dist. LEXIS 79763 (W.D. Va. May 10, 2018)

Timothy Basham (“Basham”), a South Carolina resident, and Timothy L. Jenks (“Jenks”), a Virginia resident, formed Waterstone Development Company, LLC (“Waterstone”) in 2007 to develop homes in Roanoke County, Virginia. Basham and Jenks each owned 50 percent of Waterstone and both were required to make contributions to ensure liquidity and viability of the company. During its existence, Waterstone entered into multiple promissory note arrangements, at least one of which was with Franklin Community Bank (“Bank”). In December of 2013, Waterstone became insolvent, with outstanding obligations to Bank and other creditors in excess of $280,000.00. Basham alleged that he paid $274,000.00 to creditors, while Jenks only paid $6,000.00. Basham filed a breach of contract claim against Jenks, who removed the case to federal court.

On October 12, 2017, Basham asked the court for leave to amend his complaint to add a common law contribution claim. The proposed amended complaint added factual allegations about the debt Waterstone owed to Bank. In the amended complaint, Basham alleged that Waterstone obtained multiple loans from the Bank between 2007 and 2010, most of which were subject to a personal guarantee for repayment by the parties. In June of 2012, Bank notified Waterstone that it was in default on one of the loans with a deficiency of $517,008.05. Thereafter, Bank seized personal collateral of both parties in partial satisfaction of the outstanding loan balance. In the amended complaint, Basham alleged that Jenks’ share of the amount owed by Waterstone to its creditors totaled $140,000.00 and that Basham paid that amount plus approximately $134,000.00 owed by Jenks when Jenks failed to honor his obligation as required under Waterstone’s operating agreement.

The magistrate determined that a contribution claim under Virginia law requires a guarantor to fully satisfy the joint debt, or partially satisfy the debt and secure a complete release. Without allegations in the amended complaint that Basham fully satisfied the joint debt or partially satisfied the debt while securing a complete release, the magistrate recommended denying Basham’s motion for leave to amend the complaint as futile because his contribution claim was not ripe. The district court affirmed the magistrate’s denial of Basham’s motion for leave to amend, but rejected the magistrate’s reasoning. 

In Virginia, an equitable contribution claim arises in two ways. First, a co-guarantor may claim contribution from other co-guarantors when he pays more than his proportion of the debt owed to creditors. Second, a contribution claim arises when a co-guarantor pays less than his proportionate share of debt, but secures a release on behalf of himself and his co-guarantors. However, neither of these situations require payment of the entire debt in order to create an enforceable contribution claim. 

Although the district court determined that it may be possible for Basham to allege that he paid more than his proportionate share of Waterstone’s debts to Bank, the district court held that an amended contribution claim for the same disputed payment would be futile because the claim was time-barred. The statute of limitations period for contribution claims in Virginia is three years on any unwritten contract. Va. Code § 8.01-264(4). The statute of limitations begins to run for contribution claims when the right to recover arises, which is after payment of an unequal share of the common obligations. Basham’s most recent payment to Bank was in May of 2013. Therefore, the court denied Basham’s motion for leave to amend the complaint and dismissed his contribution claim with prejudice.

PLDR Law Mark Burgin 1 PLDR Law Scott Kowalski 1 Wolf Tom v2 Stout Kenneth 2016

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