DUFRESNE v. REGENCY REALTY INC

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Docket Number

0981

Attorney(S)

A.R. Grant Morehouse, Hilton Head Island, for appellant. Curtis L. Coltrane of Herring Meyer, Hilton Head Island, for respondent.

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Smart Summary

Factual and Procedural Background

This is an equity action brought under Section 27-23-10 of the South Carolina Code (the Statute of Elizabeth) in which Mary Lou Dufresne sought to set aside a conveyance of assets from Regency Realty, Inc. ("Regency") to Mary Jane Zabinski. Prior to August 1982 Regency's stock was owned equally (50/50) by Dufresne and C.J. Odom. On August 31, 1982 Dufresne agreed to sell her interest in Regency to Leo A. Zabinski (Mrs. Zabinski's husband); the agreement recited that Regency was separately indebted to Dufresne in the amount of $23,000, a debt personally guaranteed by Mr. Zabinski and Odom.

On October 13, 1983 Regency, Mr. Zabinski and Odom agreed with Mrs. Zabinski to sell Regency's rental and property management division (including management contracts) to Mrs. Zabinski. Consideration included nominal cash payments to Regency and others ($25 to Regency and Mr. Zabinski, $5,000 to Odom) and "other good and valuable consideration." The trial court found the transferred division's value to be between $22,000 and $28,000, and later (on review) the appellate court accepted a valuation of $28,000.

On October 15, 1983 Mr. Zabinski and Odom sold their remaining interest in Regency to Kevin B. Raines, who paid $12,000 and expressly assumed Regency's debt to Dufresne. A default judgment for $27,766.27 was later entered against Regency on January 16, 1984. Dufresne's execution against Regency returned "Nulla Bona." Raines subsequently left town taking escrow monies and other Regency assets; Regency was closed by the South Carolina Real Estate Commission in late February 1984.

The circuit court set aside the transfer of the rental and property management assets to Mrs. Zabinski under the Statute of Elizabeth. Mrs. Zabinski appealed. The Court of Appeals affirmed the circuit court's decision on June 22, 1987.

Legal Issues Presented

Whether Regency's sale of its rental and property management division to Mrs. Zabinski violated the Statute of Elizabeth such that the transfer should be set aside.
Whether the transfer was made for "valuable consideration" (such that actual intent to defraud must be proved) or was a voluntary conveyance (so statutory relief may be granted without proof of actual intent).
Whether the consideration claimed by Mrs. Zabinski (including payments to third parties and forgiveness of debts) constituted consideration to Regency within the contemplation of the statute.
Whether Regency retained sufficient assets after the transfer to pay its indebtedness to Dufresne (i.e., solvency after the conveyance).

Arguments of the Parties

Appellant's (Mrs. Zabinski's) Arguments

She asserted the trial court erred in valuing the rental and property management assets; she placed their value on her financial statement at $28,000 and contended that evidence supported a valuation consistent with her figures.
She claimed she gave $27,621.46 in consideration for the assets, comprised of: $5,000 paid to Odom, forgiveness of a $10,000 personal debt to Mr. Zabinski, forgiveness of a lease (worth something under $9,000), payments of Regency's debts to other creditors (~$3,000), and forgiveness of a Regency debt to herself ($695).
She contended that Regency was solvent at the time of the transfer and therefore retained sufficient property to pay Dufresne's debt.

Respondent's (Dufresne's) Arguments

Dufresne maintained that Regency was indebted to her at the time of transfer (an uncontested point) and sought to set aside the conveyance under the Statute of Elizabeth.
Dufresne presented expert testimony (Gordon W. Gillet) that the rental and property management assets were worth more than $22,000.
She challenged the sufficiency and character of the consideration alleged by Mrs. Zabinski, arguing that amounts paid to or forgiven in favor of third parties (including shareholders) do not constitute consideration to the corporation within the meaning of the statute.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gardner v. Kirven, 184 S.C. 37, 191 S.E. 814 (1937)	Sets out elements to set aside transfers under the Statute of Elizabeth when transfer was made for valuable consideration: (1) grantor indebted to plaintiff at time of transfer; (2) grantor transferred property with intent to defraud creditors; (3) grantor's intent imputable to grantee. Also cited for general statutory principle.	The court relied on Gardner v. Kirven to frame the statutory test and to distinguish the elements required depending on whether the transfer was for valuable consideration.
Twyne's Case (1601) 3 Rep. 80b, 76 Eng. Rep. 809	Explains "valuable consideration" as the fair equivalent for the property conveyed; mere legal or nominal consideration is insufficient.	Quoted for the equity principle that a conveyance defeating creditors must be supported by a fair/valuable consideration; used to evaluate whether consideration was adequate.
Matthews v. Feaver (1786) 1 Cox 278, 29 Eng. Rep. 1165	Holds that conveyances without consideration, or with entirely inadequate consideration, are void under the statute.	Used to support the proposition that inadequate consideration cannot defeat a creditor's claim under the Statute of Elizabeth.
Penning v. Reid, 167 S.C. 263, 166 S.E. 139 (1932)	Addresses the equitable rule that when transfer is not for valuable consideration, the plaintiff must show grantor was indebted at time of transfer, the conveyance was voluntary, and the grantor failed to retain sufficient property to pay indebtedness when creditor seeks collection.	Cited to describe the test applicable where the transfer was not for valuable consideration and to clarify that sufficiency of assets is judged at the time creditor seeks to collect.
Matthews v. Montgomery, 193 S.C. 118, 7 S.E.2d 841 (1940)	Explains that a voluntary conveyance violating the statute will be set aside to the extent of the value of the property transferred less any consideration received.	Applied to justify setting aside the transfer to the extent of the value of the assets in excess of any valid consideration to the corporation.
First State Savings and Loan Assoc. v. Nodine, 291 S.C. 445, 354 S.E.2d 51 (Ct. App. 1987)	Defines a voluntary conveyance as a transfer made in good faith without consideration or for a mere nominal consideration.	Used to characterize the transfer (to the extent consideration was inadequate) as voluntary under the statute.
Holman v. Hudson, 188 Miss. 87, 193 So. 628 (1940)	When the value of property transferred is substantially in excess of the consideration paid, the conveyance is considered voluntary to the extent of the excess.	Supported the court's application of the voluntary-conveyance doctrine where asset value substantially exceeded valid consideration.
French v. French (1855) 6 De G.M. G. 95, 43 Eng. Rep. 1166; Bowery v. Vines, 178 Tenn. 98, 156 S.W.2d 395 (1941)	Value given to a person other than the debtor in exchange for the debtor's assets does not constitute consideration within the contemplation of the statute.	Used to support the exclusion of payments/forgiveness that went to shareholders or third parties when calculating consideration received by the corporation.
Hurd v. New York Commercial Steam Laundry Co., 167 N.Y. 89, 60 N.E. 327 (1901); Cf. Costas v. First Federal Savings & Loan Ass'n, 283 S.C. 94, 321 S.E.2d 51 (1984)	As a corollary: transfer by a corporation is invalid when the consideration goes to the shareholders instead of the corporation; corporations are separate legal entities distinct from shareholders.	Applied to justify disregarding payments to Odom and forgiveness of Mr. Zabinski's personal debt when determining what consideration the corporation actually received.

Court's Reasoning and Analysis

The court analyzed the case under the Statute of Elizabeth and its established South Carolina interpretations. It first recited the differing tests depending on whether the transfer was made for valuable consideration or was a voluntary conveyance:

If transfer was for valuable consideration: plaintiff must show (1) grantor indebted to plaintiff at time of transfer; (2) grantor transferred property with intent to defraud creditors; and (3) grantor's intent imputable to grantee (per Gardner v. Kirven).
If transfer was not for valuable consideration (i.e., was voluntary): plaintiff need only show (1) grantor indebted at time of transfer; (2) conveyance was voluntary; and (3) grantor failed to retain sufficient property to pay indebtedness at the time the creditor seeks to collect (per Gardner and Penning v. Reid).

Applying these principles, the court proceeded step-by-step:

First element (indebtedness): The court noted Mrs. Zabinski did not appeal the trial court's finding that Regency was indebted to Dufresne at the time of the sale; therefore the first element was satisfied.
Valuation of assets: The court evaluated competing evidence on the value of the rental and property management assets. It credited Dufresne's expert testimony that the assets were worth more than $22,000 and noted Mrs. Zabinski's own financial statement listing the assets at $28,000. Based on the evidence, the court found the assets were worth $28,000.
Character of consideration: The court examined the consideration Mrs. Zabinski claimed to have given (totaling $27,621.46 by her account). The trial judge had discounted amounts that were paid to or benefited individuals other than Regency (notably $5,000 paid to Odom and forgiveness of a $10,000 personal debt to Mr. Zabinski). The appellate court agreed that value given to third parties or shareholders does not constitute consideration to the debtor corporation under the statute, and that corporate separateness requires disregarding those items when computing consideration to Regency. The trial court assumed, for analysis, that certain items (lease forgiveness and payment/forgiveness of Regency debts totaling $12,000) were valuable consideration and reduced the asset value by that $12,000 to arrive at a deficit of $10,000 to $16,000 between asset value and consideration actually received by the corporation. The appellate court affirmed this approach and finding.
Voluntary conveyance: Because the valid consideration to the corporation was substantially less than the fair value of the assets, the court concluded the conveyance was voluntary to the extent of the excess value over consideration.
Sufficiency of remaining assets: The court addressed the third requirement (whether Regency retained sufficient assets to pay Dufresne after the transfer). It noted testimony that Regency historically "didn't make any money" and observed that, using Mrs. Zabinski's own valuations, Regency's liabilities exceeded assets after the transfer. The court concluded Regency did not have sufficient assets after the transfer to pay the debt to Dufresne.
Conclusion of analysis: Having found the grantor was indebted, the conveyance was voluntary (i.e., not supported by adequate consideration to the corporation), and the grantor failed to retain sufficient assets to pay the creditor when collection was sought, the court determined the transfer violated the Statute of Elizabeth and should be set aside.

Holding and Implications

Holding: The Court of Appeals affirmed the circuit court's determination that Regency's sale of the rental and property management assets to Mary Jane Zabinski violated the Statute of Elizabeth and should be set aside. The opinion states: "Affirmed."

Implications:

Direct effect: The conveyance of Regency's rental and property management division to Mrs. Zabinski was set aside, restoring the position of the creditor (Dufresne) to the extent of the statutory remedy as applied by the courts below.
Reasoning emphasized: The court's decision turned on (1) valuation of the transferred assets, (2) identification of what constituted valid consideration to the corporation (excluding payments or forgiveness that benefited shareholders/third parties), and (3) the insolvency of Regency after the transfer. The court applied established South Carolina and cited authorities to those ends.
Precedential effect: The opinion applied existing statutory tests and case law; it did not purport to establish new legal principles beyond applying the Statute of Elizabeth and related precedents to the facts at hand.

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Mary Lou DUFRESNE, Respondent v. REGENCY REALTY, INC. OF HILTON HEAD ISLANDand Mary Jane Zabinski, of whom Mary Jane Zabinski is Appellant. Appeal ofMary Jane ZABINSKI.

Heard Feb. 16, 1987.

Decided June 22, 1987.

Per Curiam:

This is an action in equity to set aside a transfer of corporate assets brought pursuant to Section 27-23-10, Code of Laws of South Carolina, 1976, commonly known as the Statute of Elizabeth. Mary Lou Dufresne seeks to have set aside a conveyance of assets by Regency Realty, Inc., to Mary Jane Zabinski. The circuit court set aside the transfer. Mrs. Zabinski appeals. We affirm.

Regency was a corporation engaged in the business of real estate brokerage. Prior to August, 1982, all of the stock in Regency was owned by Dufresne and C.J. Odom. Each owned 50%.

On August 31, 1982, Dufresne, Odom and Mrs. Zabinski's husband, Leo A. Zabinski, entered into a stock acquisition agreement whereby Dufresne agreed to sell her interest in Regency to Mr. Zabinski. Included in the agreement was a recital that Regency was separately indebted to Dufresne in the amount of $23,000.00, payment of which Mr. Zabinski and Odom personally guaranteed.

On October 13, 1983, Regency, Mr. Zabinski and Odom entered into an agreement with Mrs. Zabinski to sell the assets of Regency's rental and property management division, including its management contracts, to Mrs. Zabinski. In exchange for the assets Mrs. Zabinski agreed to pay Regency $25.00 and "other good and valuable consideration," Mr. Zabinski $25.00 and "other good and valuable consideration," and Odom $5,000.00. The trial judge found that, at the time of transfer, the rental and property management division had a value of between $22,000.00 and $28,000.00.

On October 15, 1983, Mr. Zabinski and Odom sold their remaining interest in Regency to Kevin B. Raines for $12,000.00 cash. In addition, Raines expressly assumed Regency's debt to Dufresne.

Shortly thereafter, Raines wrote Dufresne a letter repudiating Regency's debt to her, allegedly for violating the terms of the August 31, 1982 agreement. Dufresne responded by bringing an action against Regency, Mr. Zabinski and Odom to recover the debt. On January 16, 1984, the circuit judge entered a default judgment for $27,766.27 against Regency. Dufresne settled her claims against Mr. Zabinski and Odom for $15,000.00. Dufresne's execution against Regency was returned "Nulla Bona."

Sometime in early February, 1984, Raines left town taking escrow monies and other of Regency's assets. He is still the object of search by many. Regency was ultimately closed down by the South Carolina Real Estate Commission in late February, 1984.

The law applicable to this case is well settled. Under the Statute of Elizabeth, if the challenged transfer was made for a valuable consideration, it will only be set aside if the plaintiff establishes: (1) that the grantor was indebted to him at the time of the transfer; (2) that the grantor transferred the property with intent to defraud his creditors; and (3) that the grantor's intent is imputable to the grantee. Gardner v. Kirven, 184 S.C. 37, 191 S.E. 814, (1937).

In the contemplation of the statute, a valuable consideration is the fair equivalent for the property conveyed, "for equity requires, that such [a] gift, which defeats others, should be made on as high and good consideration as the things which are thereby defeated are. . . ." Twyne's Case, (1601) 3 Rep. 80b, 81b, 76 Eng. Rep. 809, 814. Although the statute itself does not use the words "valuable consideration," the courts early held that a mere legal consideration was not enough. See Matthews v. Feaver, (1786) 1 Cox 278, 29 Eng. Rep. 1165 ("If the conveyance had been made without any consideration, it would certainly have been void under the statute; and I am of the same opinion where the consideration is entirely inadequate." Id. at 280, 29 Eng. Rep. at 1166) (per Sir Lloyd Kenyon, M.R.).

If the transfer was not made on a valuable consideration, no actual intent to hinder or delay creditors must be proven. Instead, as a matter of equity, the transfer will be set aside if the plaintiff shows: (1) that the grantor was indebted to him at the time of the transfer; (2) that the conveyance was voluntary; and (3) that the grantor failed to retain sufficient property to pay his indebtedness to the plaintiff in full — not merely at the time of the transfer, but in the final analysis when the creditor seeks to collect his debt. Gardner v. Kirven, supra; Penning v. Reid, 167 S.C. 263, 166 S.E. 139 (1932). A voluntary conveyance which violates the statute will be set aside to the extent of the value of the property transferred less any consideration received in exchange therefor. See Matthews v. Montgomery, 193 S.C. 118, 7 S.E.2d 841 (1940).

A voluntary conveyance is a transfer made in good faith without consideration or for a mere nominal consideration. First State Savings and Loan Assoc. v. Nodine, 291 S.C. 445, 354 S.E.2d 51 (Ct.App. 1987). When the value of the property transferred is substantially in excess of the consideration paid therefore, the conveyance is considered voluntary to the extent of the excess. Holman v. Hudson, 188 Miss. 87, 193 So. 628 (1940); see also Matthews v. Montgomery, supra.

Mrs. Zabinski does not challenge the trial judge's finding that Regency was indebted to Dufresne when it sold the assets of its rental and property management division. Thus, the first condition for setting aside the transfer is met.

As to the requirement of a voluntary conveyance, Mrs. Zabinski asserts that the trial judge erred in valuing the rental and property management assets between $22,000.00 and $28,000.00. Gordon W. Gillet, Dufresne's expert, testified that the rental and property management assets were worth more than $22,000.00. Mrs. Zabinski testified that she carried the assets on her financial statement at $28,000.00, explaining that this reflected her investment in them. Based on the evidence, we find that the assets were worth $28,000.00.

Mrs. Zabinski also excepts to the trial judge's finding that she failed to give valuable consideration for the assets. She claims she gave $27,621.46 in exchange for the assets, including the $5,000.00 paid to Odom personally and the forgiveness of a $10,000.00 personal debt to Mr. Zabinski. The trial judge, disregarding the consideration given Mr. Zabinski and Odom, held that the consideration from Mrs. Zabinski to Regency was worth $10,000.00 to $16,000.00 less than the value of the assets she received. We affirm this finding.

In addition to the forgiveness of the $10,000.00 debt to Mr. Zabinski and the $5,000.00 payment to Odom, Mrs. Zabinski testified that she forgave a lease between herself and Regency worth something less than $9,000.00 and that she paid off debts of Regency to other creditors totalling approximately $3,000.00. She also claimed she forgave a debt of Regency to herself of $695.00. The sum of these five items is $27,621.46, the amount she testified she gave in consideration of the assets. The trial judge did not decide whether the lease forgiveness or the debt payment and forgiveness constituted valuable consideration, but assumed that they did for purposes of his analysis. He arrived at the $10,000.00 to $16,000.00 figure by reducing the $22,000.00 to $28,000.00 value of the assets by $12,000.00, the sum of the lease forgiveness and debt payment and forgiveness. We, like the trial judge, assume that the lease forgiveness and the debt payment and forgiveness are valuable consideration.

Value given to a person other than the debtor in exchange for the debtor's assets does not constitute consideration within the contemplation of the statute. Cf. French v. French, (1855) 6 De G.M. G. 95, 43 Eng. Rep. 1166; Bowery v. Vines, 178 Tenn. 98, 156 S.W.2d 395 (1941). As a corollary to this rule, a transfer by a corporation is invalid when the consideration goes to the shareholders instead of the corporation. See, Hurd v. New York Commercial Steam Laundry Co., 167 N.Y. 89, 60 N.E. 327 (1901); Cf. Costas v. First Federal Savings and Loan Association, 283 S.C. 94, 321 S.E.2d 51 (1984) (corporation a legal entity separate and distinct from shareholder). The rental and property management assets were owned by Regency, not Mr. Zabinski and Odom. Accordingly, the trial judge properly disregarded the $5,000.00 payment to Odom and the forgiveness of Mr. Zabinski's debt, when determining how much Mrs. Zabinski gave in exchange for the assets. With these sums removed from the calculation, we find the transfer was clearly a voluntary conveyance. Thus, the second condition for setting aside the transfer is met.

As to the third requirement, Mrs. Zabinski argues that Regency was solvent at the time of transfer and therefore retained sufficient property to pay Dufresne's debt. However, Mr. Zabinski testified that from its inception the corporation had "hit all the bad years" and "didn't make any money." Moreover, using the values that Mrs. Zabinski herself placed on Regency's assets and liabilities, its liabilities exceeded its assets after the transfer to Mrs. Zabinski. In other words, Regency did not have sufficient assets after the transfer to pay its debt to Dufresne. This met the final condition for setting aside the transfer under the statute.

For the reasons stated, we affirm the circuit court's determination that Regency's sale of the rental and property management assets to Mrs. Zabinski violated the Statute of Elizabeth and should be set aside.

Affirmed.