Tort/Negligence – Fraud – Real Property – Banks & Banking – Foreclosure

Cadence Bank, N.A. v. Horry Properties, LLC (Lawyers Weekly No. 002-067-12, 39 pp.) (R. Bryan Harwell, J.) 4:10-cv-02717; D.S.C.

Holding: After defendant Horry Properties learned that the plaintiff-bank was foreclosing on its Clay County, North Carolina property, Horry Properties transferred its only remaining assets to defendant M&M Builders for scant consideration, leaving Horry Properties insolvent. Given that defendant McLean – an experienced real estate investor who knew the N.C. property was worth less than Horry Properties’ debt and that Horry Properties was liable for any post-foreclosure deficiency – is the principal of both Horry Properties and M&M Builders, the bank has shown that the transfer was fraudulent.

The transfer is set aside. The bank’s request to pierce the corporate veils of Horry Properties and M&M Builders is denied.

Case law interpreting South Carolina’s fraudulent conveyance statute, S.C. Code Ann. § 27-32-10(A), indicates that a fraudulent conveyance may be found in several situations, including where the transfer is made by the grantor with the actual intent of defrauding his creditors, even though there is a valuable consideration. In these cases, the transfer will be set aside if the plaintiff can prove by clear and convincing evidence that (1) the transfer was made by the grantor with the actual intent of defrauding his creditors, (2) the grantor was indebted at the time of the transfer, and (3) the grantor’s intent is imputable to the grantee.

Defendants concede that Horry Properties received no funds when it conveyed its only remaining property (the KFC/Waffle House property) to M&M Builders.

However, M&M Builders did make a promise to pay Horry Properties $499,155.70, albeit on a date 10 years after the conveyance, and the record shows that M&M Builders also assumed pre-existing indebtedness. Although this consideration may have been inadequate, M&M Builders provided some benefit to Horry Properties in exchange for the KFC/Waffle House property – namely a promise to pay money in the future and assumption of an existing mortgage.

Where there is gross inadequacy of consideration, an actual intent to defraud must still be shown to set aside the conveyance as fraudulent.

To the extent the assignment of leases associated with the KFC/Waffle House property is treated as a separate transfer, this transfer also had some consideration by way of an assumption of the duties under the leases.

To set aside the conveyances on the basis of actual fraud, the bank must prove by clear and convincing evidence that (1) the transfers were made by Horry Properties with the actual intent of defrauding the bank, (2) Horry Properties was indebted at the time of the transfer, and (3) Horry Properties’ intent is imputable to M&M Builders.

A badge of fraud creates a rebuttable presumption of intent to defraud.

Horry Properties’ action of selling off its remaining viable asset, in the face of heavy debt and foreclosure, creates a strong badge of fraud.

Even if this court were to accept that Mr. McLean was unaware of the actual ongoing litigation, which it does not, Mr. McLean admitted that because he had made no payments to the bank, he was aware that foreclosure was a very real possibility. Accordingly, at a minimum, Mr. McLean would have been acutely aware of the threat of litigation, which is also a recognized badge of fraud under S.C. law.

Horry Properties received grossly inadequate consideration for its property.

By virtue of Mr. McLean’s relationship to, and control over, both Horry

Properties and M&M Builders, there was a close relationship between the entities, and Horry Properties effectively retained control of the KFC/Waffle

House property and associated leases.

Horry Properties effectively transferred its entire estate.

Furthermore, the timing of Horry Properties’ transfer of the KFC/Waffle House property and associated leases to M&M Builders – just after the foreclosure litigation commenced and just before the foreclosure sale – is highly suspicious.  Moreover, Mr. McLean’s testimony was not credible and was at times evasive.

The bank has thus proven by clear and convincing evidence that Horry Properties transferred the KFC/Waffle House property and assigned the associated leases to M&M Builders with the actual intent to defraud the bank.

In order to set aside the conveyance of the KFC/Waffle House property and associated leases, the bank must also prove by clear and convincing evidence that Horry Properties was indebted at the time of the transfer, and that Horry Properties’ intent is imputable to M&M Builders.

The bank has shown that Horry Properties was indebted to the bank at the time of the challenged transfers. Second, Horry Properties’ intent is plainly imputable to M&M Builders, as Mr. McLean was the sole member of Horry Properties, was at least the controlling agent of M&M Builders, and brokered the conveyances at issue.
Therefore, given that the overwhelming weight of evidence and testimony in this case shows that it is highly and substantially probable that Horry Properties transferred the KFC/Waffle House property and assigned the associated leases with the actual intent of defrauding the bank, the bank has proven by clear and convincing evidence that the transfer and assignments should be set aside under S.C. Code Ann. § 27-23-10(A).

However, the bank has failed to show that it is entitled to pierce M&M Builders’ corporate veil. Furthermore, since the transfer and assignments have been set aside, the bank cannot show that it will suffer fundamental unfairness if the veil is not pierced.

Also, it would be inequitable to pierce Horry Properties’ corporate veil. Without explanation, the bank dismissed an action it had filed against Mr. McLean and his wife based on their personal guaranties of the loan from the bank. Piercing the corporate veil would have the effect of providing the bank a back door through which to pursue such a claim (holding Mr. McLean personally liable for Horry Properties’ deficiency), which it chose to dismiss with prejudice.

Horry Properties’ and M&M Builders’ corporate forms will not be disregarded, but the transfer of property and assignment of leases between them are set aside.