Opinion
Case No. 3:01-157-10.
June 1, 2004
AMENDED ORDER
In an Order filed and entered on April 13, 2004, this Court found that the United States of America was entitled to judgment against Frank O. McGuire, Jr. in the amount of $383,571.07, plus interest and statutory additions as allowed by law, but did not void the conveyance of real property from Frank O. McGuire, Jr. to Frank O. McGuire, Sr. On April 28, 2004, the Government pursuant to Rules 59(e) and 52(b) of the Federal Rules of Civil Procedure moved the Court to amend its Findings of Fact and Conclusions of Law, to make additional findings of fact, and to alter or amend its judgment in accordance with those findings and to enter judgment in favor of the United States. The Government, with the consent of both Defendants, also seeks to amend the judgment of this Court to reflect (1) that $1,060,069.84 is the outstanding amount of monies owed by Defendant McGuire, Jr. as of March 3, 2004, plus accrued interest and statutory additions from that date as allowed by law and (2) the existence of a stipulation that was entered between the parties at trial. This Amended Order is the Court's response to the Government's motion.
This matter is before the Court for a bench trial in the civil action filed by the United States of America seeking to reduce a judgment of the outstanding federal tax liabilities of Defendant Frank O. McGuire, Jr. (hereinafter "McGuire, Jr."), to set aside the transfer of real property from McGuire, Jr. to Defendant Frank O. McGuire, Sr. (hereinafter "McGuire, Sr.") and to foreclose federal tax liens on the property. The United States also seeks an order permitting the sale of the subject property and to apply the proceeds from the sale to the outstanding federal tax liability of McGuire, Jr.
A bench trial was conducted on March 22nd, 23rd, and 26th of 2004. The Defendants do not contest the outstanding federal tax liabilities of Defendant McGuire, Jr. The issue before this Court is whether the United States is entitled to set aside the conveyance of real property from McGuire, Jr. to McGuire, Sr. on the grounds that the transfer was fraudulent and in violation of S.C. Code § 47-23-10.
Based upon the following findings of fact and conclusions of law, this Court concludes that the United States is entitled to a judgment on Count I against the Defendant McGuire, Jr. in the amount of $1,060,069.84 as of March 3, 2004, plus interest and statutory additions from that date as allowed by law, that judgment shall be entered in favor of Defendant McGuire, Sr. on Counts II and III of the Complaint seeking to void the conveyance of real property from Defendant McGuire, Jr. to Defendant McGuire, Sr.
FINDINGS OF FACT
After carefully considering all testimony and arguments presented at the trial of this matter, and taking into account the credibility and accuracy of the evidence, the Court makes the following findings of fact by a preponderance of the evidence:
1. On January 17, 1984, McGuire, Jr. entered into a purchase agreement for the purchase of real property located at 1675 Aragon Beach Road, York County, South Carolina from R.W. and Brenda Young (hereinafter "the Youngs"). The original purchase price was $67,500.00. McGuire, Jr. paid the Youngs $5,000.00 in cash and executed a promissory note in the amount of $67,000.00. The $5,000.00 payment was treated as a payment under the promissory note. As part of this transaction, a deed was prepared conveying the property from the Youngs to McGuire, Jr.
2. By agreement dated November 2, 1984, McGuire, Jr. and the Youngs amended the purchase agreement to provide for a reduced purchase price of $45,000.00 if payment were made in one lump sum. McGuire, Sr. and McGuire, Jr. jointly agreed to purchase the subject property upon a lump sum payment of $45,000.00, with McGuire, Sr. and McGuire, Jr. contributing $22,500.00 each. McGuire, Sr.'s interest in the property was not documented at the time he contributed the payment of $22,500.00.
3. Beginning in 1984, McGuire, Jr. resided on the property with his first wife in a mobile home purchased by McGuire, Sr.
4. From 1986 through 1987, McGuire, Sr. and McGuire, Jr. constructed a home on this property. McGuire, Sr. and McGuire, Jr. contributed equally to the cost of construction, which totaled $160,000.00. McGuire, Sr.'s interest in this property is evidenced by the fact that the building permit was obtained by general contractor Mike Andrews in the name of McGuire, Sr. and Mr. Andrews further testified that he contracted with McGuire, Sr. to construct his house.
5. In December 1987, McGuire, Jr. moved into the newly constructed residence on the subject property with his second wife, who he married in late 1987.
6. By the spring of 1988, McGuire, Sr. had invested approximately $102,500.00 into this property ($22,500.00 for the purchase of the lot and $80,000.00 for one-half cost of the construction), yet his interest in the property was not reflected in any deed. Because of McGuire, Sr.'s significant investment in this property, along with the fact that McGuire, Jr. was once divorced and remarried, McGuire, Sr. requested that his interest in the property be documented. As a result, on April 5, 1998, Rock Hill attorney Bob Jones prepared a deed dated April 5, 1988 conveying one-half interest in the property to McGuire, Sr. Although this deed was not recorded, it was duly executed and witnessed by an attorney in good standing with the South Carolina Bar who testified in this Court regarding the authenticity of this conveyance.
7. In addition, there is absolutely no evidence to support any claim that this 1988 conveyance was intended to defraud the IRS and the Court further finds that this 1988 conveyance was given in consideration of Mr. McGuire, Sr.'s significant and equal financial contribution to the purchase of the lot and construction of the residence.
8. On or about July 1990, McGuire, Jr. obtained a divorce from his second wife. As part of this divorce, McGuire, Jr. was ordered to pay his second wife $62,500.00.
9. McGuire, Sr. loaned McGuire, Jr. at least $60,000.00 in order to allow McGuire, Jr. to satisfy his financial obligation to his second wife.
10. On September 14, 1990, in exchange for forgiveness of this loan, McGuire, Jr. conveyed his remaining interest in the subject property to McGuire, Sr. The deed was duly executed and was subsequently recorded on December 18, 1990.
11. The Court finds that McGuire, Sr. gave valuable consideration for the conveyance of McGuire, Jr.'s remaining interest in the property on or about September 14, 1990 and this transaction was not intended to defraud the IRS.
12. On January 18, 1991, McGuire, Jr. was assessed by the IRS for back taxes, penalties and interests for the tax years 1984, 1985, 1986 and 1987.
13. Beginning in 1991 and continuing until the present, McGuire, Sr. and his wife have paid property tax to York County, and since January 1992 have maintained property and casualty insurance on the subject property McGuire, Sr. being the named insured.
The previous policy lapsed in late 1991.
14. On January 17, 2001, the United States filed this action seeking to set aside the conveyance of property from McGuire, Jr. to McGuire, Sr. that took place in 1988 and 1990.
15. Defendant McGuire, Jr. does not contest that he is liable tax assessments, interest and penalties sought to be imposed by the United States because he failed to pursue an administrative appeal of the assessments.
CONCLUSIONS OF LAW
1. This Court has jurisdiction of this action pursuant to Sections 1340 and 1345 of Title 28, United States Code and Sections 7402 and 7403 of the Internal Revenue Code.
2. Count I seeks to reduce to judgment McGuire Jr.'s assessed income tax, penalties and interest for the years 1984, 1985, 1986, 1987, 1990, 1991, 1992, 1993, 1994, 1995, 1996, and 1997, in the amount of $1,060,069.84 as of March 3, 2004, plus accrued interest and statutory additions from that date as allowed by law. Since Defendant McGuire, Jr. does not contest liability for these, judgment shall be entered for the United States on Count I.
3. Counts II and III seek to void the conveyance of real property located at 1675 Aragon Beach Road, York County, South Carolina from McGuire, Jr. to McGuire, Sr. alleging that such conveyance was in violation of S.C. Code § 27-23-10.
Section 27-23-10 provides:
"Every gift, grant, alienation, bargain, transfer and conveyance of lands, tenements . . . lead to or for 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 must be deemed and taken . . . to be clearly and utterly void, frustrate and of no effect on any pretense, color, fame, consideration, expressing of use, or any other matter or thing to the contrary notwithstanding."
4. Under South Carolina law, fraudulent transfers may be set aside by existing as well as subsequent creditors, In Re J.R. Deans Co., Inc., 249 B.R. 121 (Bkrtcy. D.S.C. 2000); Mathis v. Burton, 319 S.C. 261, 460 S.E.2d 406, 408 (Ct.App. 1995). Existing creditors may avoid transfers under an actual fraudulent transfer theory or under a constructive fraud theory. Under an actual transfer theory, the transfer will be set aside if the Plaintiff can establish three things: (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.
5. Under the constructive theory, where a transfer was made without valuable consideration being exchanged, no actual intent to hinder or defraud creditors has to be proven. Instead, courts have held that in such situations, the transfer would be set aside if the creditor establishes that: (1) the grantor was indebted to him at the time of the transfer; (2) the conveyance was voluntarily; and (3) the grantor failed to retain sufficient property to pay the 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. Mathis, 460 S.E.2d at 408. In Royal Z Lanes v. Collins Holding Corp., 337 S.C. 592, 524 S.E.2d 621 (1999), the South Carolina Supreme Court rejected the argument that gross inadequacy of consideration reduces the conveyance to the status of one made without consideration, concluding "gross inadequacy of consideration and without consideration are not synonymous in the law." Where there is gross inadequacy of consideration, an actual intent to defraud must be shown to set aside the conveyance.
6. When subsequent creditors are trying to avoid a fraudulent conveyance, the analysis is slightly different. As Mathis v. Burton set forth: "subsequent creditors may have conveyances set aside when (1) the conveyance was voluntarily that is, without consideration and (2) it was made with a view to future indebtedness or with actual fraudulent intent on the part of the grantor to defraud creditors."
7. Where transfers at issue are made between family members, defendants have the burden to establish "both a valuable consideration and the bona fides of the transaction by clear and convincing testimony." Windsor Properties, Inc. v. Dalton Head Construction Co., 331 S.C. 466, 498 S.E.2d 858, 860 (1998).
8. Fraudulent intent in such instances can usually be shown only by a consideration of the attendant facts and circumstances, a resort to which must usually be had in order to distinguish between transactions which are bona fide, and those which are not. Coleman v. Daniel, 199 S.E.2d 74, 79 (S.C. 1973) (quotingDinkins v. Robbins, 21 S.E.2d 10 (S.C. 1942)). Certain circumstances so frequently attend conveyances to defraud creditors that they are recognized and referred to as "badges of fraud." Coleman, 199 S.E.2d at 79. Among the generally recognized badges of fraud are the insolvency or indebtedness of the transferor, lack of consideration for the conveyance, relationship between the transferor and the transferee, the pendency or threat of litigation, secrecy or concealment, departure from the usual method of business, the transfer of the debtor's entire estate, the reservation of benefit to the transferor, and the retention by the debtor of possession of the property. Id.
9. Under South Carolina law, an action to set aside a transfer asserting that the transfer is a fraudulent conveyance must be brought within three years from the date of discovery. See S.C. Code § 15-3-530(7). As to actions by the IRS to collect tax assessments the applicable statute of limitations is ten years from the date of assessment, 26 U.S.C. § 6502(a)(1).
10. The Court finds that Defendant McGuire, Sr. paid valuable consideration for the conveyance of one-half interest in the real property as of April 1998 and this transaction was not intended to defraud the IRS.
11. The conveyance of McGuire, Jr.'s remaining interest in the subject property by deed dated September 1990 was given for valuable consideration, and the Court finds that Defendants have met their burden by clear and convincing evidence. Furthermore, the Court finds that the conveyance of the remaining interest was not intended to defraud the IRS. Again, the clear and convincing evidence establishes that Defendant McGuire, Jr. needed money to satisfy his financial obligation from the divorce from his second wife.
12. The Court finds that the Defendants have shown the bona fides of the transaction by clear and convincing evidence.
13. Based upon the foregoing, the Court hereby enters judgment for the United States on Count I of the Complaint against Defendant McGuire, Jr. in the amount of $1,060,069.84 as of March 3, 2004, plus interest and statutory additions from that date as allowed by law, and enters judgment on behalf of Defendant McGuire, Sr. on Counts II and III of the Complaint.
IT IS SO ORDERED.