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.
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