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25026 - Royal Z Lanes, Inc. v. Collins Holding Corp.

Shearouse Adv. Sh. No.
S.E. 2d

THE STATE OF SOUTH CAROLINA

In The Supreme Court

Royal Z Lanes, Inc., Plaintiff-Appellee,

v.

Collins Holding

Corporation, Defendant-Appellant.

Opinion No. 25026

Heard September 22, 1999 - Filed December 6, 1999

CERTIFIED QUESTION ANSWERED

Anne M. Frayne, Jacob A. Myers and Sue Seeberger,

all of Myers & Frayne Co., L.P.A., and Katherine C.

McGuire, of McGuire & Hawk, all of Dayton, Ohio;

and Richard S. Rosen and Donald B. Clark, both of

Rosen, Goodstein & Hagood, L.L.C., of Charleston,

for plaintiff-appellee.

Lawrence T. Burick, of Thompson, Hine & Flory,

L.L.P., of Dayton, Ohio; and Timothy C. Youmans,

of Columbia, for defendant-appellant.





MOORE, A.J.: We agreed to answer the following question certified

by the Sixth Circuit Bankruptcy Appellate Panel:



Whether, in the absence of actual intent to defraud creditors,

S.C. Code Ann. § 27-23-10 sets aside as a fraudulent conveyance

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ROYAL Z LANES v. COLLINS HOLDING CORP.





the transfer of an interest in property worth $1,000,000 when

consideration of $195,389 was received by the transferor?





FACTS

The certification order indicates the following facts. In April

1994, Plaintiff-Appellee Royal Z Lanes, Inc. (Debtor) and Z3 Services, Inc., a

related corporation, became co-borrowers on a $1 million loan from

Defendant-Appellant Collins Holding Corporation (Creditor). As part of the

loan agreement, Debtor gave Creditor mortgages on three bowling centers in

South Carolina. Debtor received $195,389 as proceeds from the loan and Z3

received the remainder of the $1 million.







After Debtor filed for bankruptcy in January 1997, this

adversary proceeding was commenced against Creditor to set aside the

mortgages as fraudulent conveyances. Applying South Carolina law, the

bankruptcy court found no actual intent to defraud creditors but set aside

the amount of $804,611, the extent to which the mortgages exceeded the

value of the consideration Debtor received ($195,389).1 Creditor appealed to

the Bankruptcy Appellate Panel.





ISSUE

Is gross inadequacy of consideration a sufficient

ground to set aside a conveyance under § 27-23-10?





DISCUSSION

It is well-settled under S.C. Code Ann. § 27-23-10(A) (Supp. 1998) 2


1 The bankruptcy court refused to consider the benefit to Z3 as an

indirect benefit to Debtor.





2 This section is referred to as The Statute of Elizabeth and provides:

Every feoffment, gift, grant, alienation, bargain and conveyance

of land, tenements or hereditaments, goods and chattels, or of

any of them, or of any lease, rent, commons or other profit or

charge out of the same, by writing or otherwise, and every bond,

suit, judgment and execution which may be had or made to or for

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ROYAL Z LANES v. COLLINS HOLDING CORP.





that where there is valuable consideration, a transfer may be set aside as a

fraudulent conveyance only if there is an actual intent to defraud creditors

imputable to the grantee. Future Group II v. Nations Bank, 324 S.C. 89, 478

S.E.2d 45 (1996) (citing Gardner v. Kirven, 184 S.C. 37, 191 S.E. 814

(1937)).3 A transfer made without valuable consideration, however, may be

set aside even without an actual intent to defraud. Id.4





A transfer made without valuable consideration has been

referred to as a "voluntary conveyance." First State Say. & Loan Assn v.

Nodine, 291 S.C. 445, 354 S.E.2d 51 (Ct.App.1987). This term has caused

some confusion in our case law 5 and for clarity we refer here to such a

conveyance as a "gratuitous" conveyance. Essentially, a conveyance may be

set aside as fraudulent if (1) it is voluntary (gratuitous) or (2) there is actual

intent to defraud.





The bankruptcy court in this case relied on a Court of Appeals

decision, Dufresne v. Regency Realty, Inc., 295 S.C. 1, 366 S.E.2d 256 (Ct.

App. 1987), to find the conveyance to Creditor voluntary (gratuitous) to the

extent the value of the property exceeded the consideration received, and

concluded the conveyance could therefore be set aside to that extent even

absent an actual intent to defraud. We find Dufresne conflicts with

precedent of this Court.





In Jeffords v. Berry, 247 S.C. 347, 147 S.E.2d 415 (1966), we

found that "grossly inadequate" consideration is "a strong badge of fraud" but

we specifically rejected the argument that gross inadequacy of consideration

reduces the conveyance to the status of one made without consideration,


any intent or purpose to delay, hinder or defraud creditors and

others of their just and lawful actions, suits, debts accounts,

damages, penalties and forfeitures shall be deemed and taken...

to be clearly and utterly void, frustrate and of no effect, any

pretense, color, feigned consideration, expressing of use, or any

other matter or thing to the contrary notwithstanding.





3 The grantor must be indebted at the time of the transfer. Id.





4 The grantor must be indebted at the time of the transfer and failed to

retain sufficient property to repay his debt. Id.



5 See footnote 7, infra.

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ROYAL Z LANES v. COLLINS HOLDING CORP.





concluding "gross inadequacy of consideration and `without consideration'

are not synonymous in the law." 147 S.E.2d at 41. Under Jeffords, where

there is gross inadequacy of consideration, an actual intent to defraud must

still be shown to set aside the conveyance as fraudulent.





Following Jeffords, in Coleman v. Daniel, 261 S.C. 198, 199

S.E.2d 74 (1973), we found grossly inadequate consideration and again

treated it as a "badge of fraud" that, along with other indicia of fraud,

indicated an actual intent to defraud. 6





Despite this precedent, the Court of Appeals in Dufresne treated

the conveyance in question as voluntary (gratuitous) to the extent the fair

value of the property exceeded the consideration given. It held despite the

absence of an actual intent to defraud, such a conveyance "will be set aside to

the extent of the value of the property transferred less any consideration

received in exchange therefor." 366 S.E.2d at 258.7 Thus, under Dufresne,

grossly inadequate consideration would be sufficient to set aside part of the

conveyance even without an actual intent to defraud. We now overrule

Dufresne to the extent it conflicts with Jeffords and Coleman.


6 The dissent in Coleman would have found the conveyance voluntary

(gratuitous) to the extent the value conveyed exceeded the consideration

received which, the dissenter concluded, meant the conveyance could be set

aside to that extent even without an actual intent to defraud. The majority

declined to follow the dissent's position.





7 Dufresne cites Matthews v. Montgomery, 193 S.C. 118, 7 S.E.2d 841

(1940), as support for this holding. This reliance is misplaced and

apparently stems from language in Matthews taken out of context. In

Matthews, the conveyance sought to be set aside was not made directly by

the grantor. The property was sold at a tax sale for grossly inadequate

consideration to the grantor's son. The question was whether the

conveyance could be set aside as a fraudulent one where there was an

intervening tax sale. Apparently, the Court of Appeals in Dufresne

mistakenly relied on the term "voluntary" in Matthews, which in context was

used simply to distinguish the conveyance by tax sale from a direct

conveyance by the grantor. Matthews actually stands for the proposition

that a conveyance made with an actual intent to defraud will be set aside to

the extent the value of the conveyance exceeds the consideration received.

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ROYAL Z LANES v. COLLINS HOLDING CORP.





CONCLUSION



In answering the certified question now before us, we are asked

to consider whether a grossly inadequate consideration (here less than 20%

of the property's value) is sufficient to set aside the conveyance as

fraudulent. As noted above, grossly inadequate consideration is treated as a

"badge of fraud" under this Court's precedent. See also McGhee v. Wells, 57

S.C. 280, 35 S.E. 529, 531 (1900) (defining grossly inadequate consideration

as "a consideration so far short of the value of the property as to arouse a

presumption in the mind that the person who takes that property takes it

under some kind of secret trust."). A badge of fraud creates a rebuttable

presumption of intent to defraud. Dinkins v. Robbins, 200 S.C. 475, 21

S.E.2d 10 (1942); James v. Martin, 150 S.C. 75, 147 S.E. 752 (1929).

Because the certified question assumes no actual intent to defraud, we leave

to the certifying court to consider whether a remand to the fact-finder is

necessary to determine if, in light of this rebuttal presumption, actual intent

to defraud is established.8





CERTIFIED QUESTION ANSWERED.

Finney, C.J., Toal, Burnett, JJ., concur. Waller, AA, not

participating.


8 See Rule 301, SCRE, for the evidentiary effect of a presumption under

current South Carolina law.

p.23