Oskin v. Johnson

735 S.E.2d 459, 400 S.C. 390, 2012 S.C. LEXIS 223

• Court: Supreme Court of South Carolina
• Decided: November 7, 2012
• Docket: No. 27187
• Status: Published

Opinions

Chief Justice TOAL.

Robert W. Oskin, Glenn Small, and Freddie Kanos (collectively “Appellants” or individually by last name) contest the Master-in-Equity’s ruling that the assignment of a note and mortgage on a Myrtle Beach property did not violate the South Carolina Fraudulent Conveyance Statute, S.C.Code Ann. § 27-23-10 (2007) (hereinafter the Statute of Elizabeth), and that a payment made to South Carolina Bank & Trust (SCB & T) did not result in a payoff of the amount due under the note and mortgage. We affirm.

Facts/Procedural Background

On April 27, 2005, Oskin entered into a contract to broker the sale of Wild Wing Plantation and Golf Course on behalf of Respondent Stephen Mark Johnson (Johnson). The contract obligated Johnson to pay Oskin a finder’s fee in the amount of $1 million upon closing. Oskin found a buyer for the property, and the deal was closed on December 15, 2005. Johnson, however, failed to pay the finder’s fee, and Oskin brought suit successfully obtaining a judgment against Johnson on December 8, 2008, for breach of contract.

While the breach of contract action was pending, Johnson approached his uncle, Respondent Michael D. Brown (M. Brown), about jointly purchasing an oceanfront lot and home located in Myrtle Beach, South Carolina. On November 30, 2006, Johnson and M. Brown co-signed a $3.5 million promissory note to jointly purchase the property. The term of the note was two years, and it provided for interest-only payments for the first twenty-three months, with a final balloon payment of the entire amount due on November 30, 2008. Title to the property was conveyed to M. Brown and Johnson as tenants in common. In addition to the SCB & T mortgage, the property was later encumbered in April 2007 by a second mortgage lien in favor of Ameris Bank in the amount of $500,000.¹

Initially, Johnson made the monthly interest-only payments on the SCB & T note until early 2008 when he could no longer afford to make the payments, at which time M. Brown paid the remaining monthly payments. With the due date on the balloon payment approaching, in October 2008, M. Brown contacted Wachovia Bank (Wachovia) to refinance the SCB & T loan. Because of the Myrtle Beach property’s low appraisal value, Wachovia refused to issue the loan unless it was secured with marketable securities worth $3.5 million. In early November 2008, M. Brown approached SCB & T in an attempt to reduce the note balance, but the effort ended in failure.

M. Brown was faced with the following dilemma. M. Brown’s nephew was financially unable to pay off the $3.5 million loan they had obtained to buy a house in Myrtle Beach. Because of the recession, the house was appraised at $2.5 to $2.6 million, about $1 million less than the debt. M. Brown was a co-owner and co-obligor on this note. If the note was declared in default and the bank foreclosed, the sale of the Myrtle Beach home would not be sufficient to satisfy the outstanding debt. M. Brown and his wife, Joan Conner Brown, each had extensive security holdings. However, the stock market was also depressed by the economic crisis, and a sale of securities would be at below-value prices.

On November 20, 2008, Joan Conner Brown formed J. Conner, LLC (J. Conner). She used this LLC to obtain the Wachovia loan, which would be used to pay off the debt owed to SCB & T without having to liquidate any of her and her husband’s assets. On December 18, 2009, Wachovia approved the loan to J. Conner in the amount of $3.5 million. J. Conner, whose only member was Joan Brown, used the loan proceeds it obtained from Wachovia to purchase the note and mortgage from SCB & T. Wachovia’s loan to J. Conner was personally guaranteed by Joan and M. Brown and secured by five investment accounts owned by M. Brown and one by Joan Brown. Joan Brown, on behalf of J. Conner, signed the Certificate of Resolution to Borrow and the Promissory Note. Both Joan and M. Brown jointly signed the Security Agreement. To complete the transaction, Wachovia wired $3.5 million to SCB & T, and M. Brown paid the remaining $44,303.31 due to SCB & T by writing a personal check. After receiving full payment for the purchase of the note, SCB & T assigned the note and mortgage to J. Conner on December 30, 2008.

The assignment of the SCB & T note and mortgage to J. Conner allowed J. Conner to assume SCB & T’s priority status as lien creditor. Ameris Bank’s $500,000 lien on the property and Oskin’s $1,036,000 judgments² against Johnson continued to be subordinate to the first lien for $3.5 million obtained by J. Conner.

The parties dispute the motive for the formation of J. Conner and the subsequent assignment of the note. Respondents maintain that they formed J. Conner to enable Joan Brown and her husband to obtain the Wachovia loan and avoid foreclosure without having to liquidate any assets since the SCB & T note was becoming due and the appraised value of the property was less than the amount borrowed. In contrast, Appellants assert that “[t]he only reason J. Conner existed was because [M. Brown] was obligated under the note and mortgage and wanted to avoid the Oskin judgment against Johnson.”³ Appellants claim the transfer between SCB & T and J. Conner was fraudulent under the Statute of Elizabeth. Additionally, Appellants attempt to pierce the corporate veil by asserting that M. Brown is the alter-ego of J. Conner.

After a bench trial, the Horry County Master ruled against Appellants on all claims, holding: (i) the Statute of Elizabeth did not apply to the assignment of the note and mortgage because M. Brown and J. Conner were never indebted to Appellants, and (ii) even if applicable, the assignment of the note and mortgage did not violate the Statute of Elizabeth because no injustice or fraud was perpetrated on Appellants as a result of the assignment. In addition, the Master held that (iii) the payments to SCB & T for the assignment did not result in a pay-off of the note nor the satisfaction of the mortgage because M. Brown was not the alter-ego of J. Conner and due to a future advances clause, (iv) and even if the payments to SCB & T resulted in a pay-off of the note, M. Brown was equitably subrogated to Johnson’s interest in the property to the extent of the monies paid by M. Brown in excess of his one-half share of the obligations on the note. After the Master denied Appellants’ Rule 59, SCRCP, motion, Appellants filed a timely appeal. This case is before this Court pursuant to Rule 204(b), SCACR.

Issues

I. Whether the assignment of the note was a fraudulent conveyance in violation of the Statute of Elizabeth.

II. Whether the payment to SCB & T resulted in a pay-off of the note and satisfaction of the mortgage.

Standard of Review

A clear and convincing evidentiary standard governs fraudulent conveyance claims brought under the Statute of Elizabeth.⁴ Windsor Props., Inc. v. Dolphin Head Constr. Co., 331 S.C. 466, 471, 498 S.E.2d 858, 860 (1998) (citations omitted). An action to set aside a conveyance under the Statute of Elizabeth is an equitable action, and a de novo standard of review applies. Future Group, II, 324 S.C. at 97 n. 6, 478 S.E.2d at 49 n. 6; S.C. Const. art. V, § 5.

An action to pierce the corporate veil under an alter-ego theory also lies in equity. Mid-South Mgmt. Co., Inc. v. Sherwood Dev. Corp., 374 S.C. 588, 596, 649 S.E.2d 135, 140 (Ct.App.2007) (citations omitted). Here, the appellate court has jurisdiction to find facts in accordance with its own view of the preponderance of the evidence. Pinckney v. Warren, 344 S.C. 382, 387, 544 S.E.2d 620, 623 (2001). However, an appellate court is not required to disregard the findings of fact by the trial court nor ignore the fact that the trial judge is in the better position to assess the credibility of the witnesses. Id.

Analysis

I. Statute of Elizabeth

Appellants claim the assignment of the note was a fraudulent conveyance in violation of the Statute of Elizabeth. We disagree.

The Statute of Elizabeth provides:

Every gift, grant, alienation, bargain, transfer, and conveyance of lands ... 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....

S.C.Code Ann. § 27-23-10(A) (2007).

In interpreting this statute, this Court has held conveyances shall be set aside under two conditions: First, where there was valuable consideration and the transfer is made by the grantor with the actual intent to defraud; and, second, where a transfer is made without actual intent to defraud but without valuable consideration. Future Group, II, 324 S.C. , 478 S.E.2d 45, 48-49 (citations omitted); McDaniel v. Allen, 265 S.C. 237, 242-43, 217 S.E.2d 773, 775-76 (1975) (citations omitted).

It is undisputed that valuable consideration was paid for the transfer of the note and mortgage in this case. Appellants contend that the purpose and the fraudulent intent of M. Brown was to “structure a transaction relating to the SCB & T note mortgage in order to protect [M. Brown’s] interest in the property from being affected by Oskin’s judgments against Johnson and to preclude Appellants from executing against the property.” We disagree.

The Statute of Elizabeth is concerned with the intent of the grantor who conveys an interest in land.⁵ McDaniel, 265 S.C. at 242-43, 217 S.E.2d at 775-76 (requiring that the grantor must have an intent to defraud). Here, the grantor who transferred an equitable interest in land to J. Conner was SCB & T, not M. Brown. There are no allegations that SCB & T intended to defraud appellants, and we see no basis for applying the Statute of Elizabeth.⁶

Thus, we hold Appellants failed to establish by clear and convincing evidence that the grantor, SCB & T, transferred the note and mortgage with intent to defraud Appellants.⁷ Windsor Props., 331 S.C. at 471, 498 S.E.2d at 860.

II. Pay-off of Principal Amount Due

The Master found the mortgage was not satisfied because (1) J. Conner is not the alter-ego of the mortgage guarantor, M. Brown; (2) that assuming arguendo that J. Conner is the alter-ego of M. Brown, a future advances clause still precludes a finding that the $3.5 million payment to SCB & T constitutes a pay-off of the note and satisfaction of the mortgage; (3) and even if the payments to SCB & T results in a “pay-off’ of the note, Brown’s rights and priority would be the same as that of SCB & T before the assignment under equitable subrogation. We agree that the mortgage is not satisfied. J. Conner is not the alter-ego of M. Brown because Appellants have failed to prove that J. Conner was created by fraud, injustice, or in contravention of public policy. Based on this finding, we deem it unnecessary to reach the issue of the future advances clause and equitable subrogation. See Futch v. McAllister Towing of Georgetown, Inc., 335 S.C. 598, 613, 518 S.E.2d 591, 598 (1999) (appellate court need not address remaining issues when disposition of prior issue is dispositive).⁸

Alter-Ego

Appellants attempt to pierce the corporate veil by contending that J. Conner is the alter-ego of M. Brown, and any payments made by J. Conner to SCB & T, in effect, were payments made by M. Brown resulting in the payoff of the note and satisfaction of the mortgage. We disagree.

An alter-ego theory requires a showing of (1) total domination and control of one entity by another and (2) inequitable consequences caused thereby. Colleton Cnty. Taxpayers Ass’n v. Sch. Dist. of Colleton Cnty., 371 S.C. 224, 237, 638 S.E.2d 685, 692 (2006). Control may be shown where the subservient entity manifests no separate interest of its own and functions solely to achieve the goals of the dominant entity. Id. (citation omitted). This theory does not apply, however, in the absence of fraud, injustice, or contravention of public policy. Id. (citations omitted).

We find that even under a preponderance of the evidence standard, the recognition of J. Conner as an entity would not promote fraud, injustice, or contravene public policy. Id. Appellants fail to satisfy the required elements of fraud. See First State Savings & Loan v. Phelps, 299 S.C. 441, 446-47, 385 S.E.2d 821, 824 (1989) (listing nine elements of fraud). The evidence does not demonstrate any false material representation on Respondents’ part, and Joan Brown and her husband have no legal or fiduciary relationship with Appellants. Id. In addition, no injustice or contravention of public policy resulted from Joan Brown’s control of J. Conner. Joan Brown’s purpose in creating J. Conner was to secure her and her husband’s bona fide claim rather than to defraud Appellants. In the face of collapsing property prices, below-value prices for securities, and an impending balloon payment, Joan Brown and her husband did what was natural to protect their bona fide interest in their property without having to liquidate assets.⁹ As with any other wise consumers or investors, they are free to utilize a legal mechanism to protect their own financial interests. There is no inequity or fraud in this instance where the priorities of Appellants do not change, and Appellants are left no worse off than had SCB & T foreclosed on the property.¹⁰ We are cognizant of the fact that entities can use legal mechanisms to achieve fraudulent ends,¹¹ but weighing the totality of the evidence, we find the preponderance of the evidence does not support Appellants’ allegations of fraud, injustice, or contravention of public policy in the face of the Browns’ action to protect their bona fide interest in their property.

Thus, we refuse to pierce the corporate veil, and Appellants’ alter-ego claim necessarily fails. See Baker v. Equitable Leasing Corp., 275 S.C. 359, 367, 271 S.E.2d 596, 600 (1980) (Rejecting the alter-ego theory because “ ‘piercing the corporate veil’ is not a doctrine to be applied without substantial reflection.”).

Conclusion

For the foregoing reasons, we affirm.

AFFIRMED.

PLEICONES and BEATTY, JJ., concur. HEARN, J., concurring in part and dissenting in part in a separate opinion. KITTREDGE, J., writing a separate opinion.

1 . The debt to Ameris Bank remained outstanding at the time of trial.

2 . In addition, to the $ 1 million judgment, Oskin also became the holder of a Confession of Judgment in the amount of $36,000 executed by Johnson in favor of David B. O’Connell. Oskin purchased the Confession of Judgment from O’Connell for $500 on November 4, 2009, approximately seven months after the Complaint was filed.

3 . Appellants allege that J. Conner was formed "as stated by Michael Brown, to protect his property asset from the Oskin judgment.” Going directly to the testimony cited, the Record is unclear whether M. Brown actually stated this. When M. Brown was asked whether the “SCB & T note [] prompted borrower to seek legal advice in dealing with the outstanding liens " to protect his asset, M. Brown answered, "yes.” However, "outstanding liens” might refer to the mortgage on the property owed to SCB & T rather than to the Oskin judgment as Appellants allege.

4 . Appellants and Respondents relied on dicta in Future Group, II v. Nationsbank, 324 S.C. 89, 97 n. 6, 478 S.E.2d 45, 49 n. 6 (1996), to conclude the evidentiary standard for a fraudulent conveyance under the Statute of Elizabeth is a preponderance of the evidence standard. Future Group stated in a footnote, “This cause of action is an equitable one and on appeal this Court will find facts in accordance with its own view of the preponderance of the evidence.” Id. Nevertheless, our decisions superseding and preceding Future Group have held that a clear and convincing evidentiary standard applies to fraudulent conveyances under the Statute of Elizabeth, and we reaffirm that standard here. Windsor Props., Inc. v. Dolphin Head Constr. Co., 331 S.C. 466, 471, 498 S.E.2d 858, 860 (1998) (citations omitted); Gardner v. Kirven, 184 S.C. 37, 41, 191 S.E. 814, 816 (1937) ("The law imposes the burden on the transferee to establish both a valuable consideration and the bona fides of the transaction by clear and convincing testimony.”).

5 . Even where it is shown that the grantor has fraudulent intent, to "annul for fraud a deed based upon value consideration [under the Statute of Elizabeth], it must not only be shown that the grantor intended to hinder, delay or defraud creditors, but it must also appear that the grantee participated in such fraudulent act.” McDaniel, 265 S.C. at 242-43, 217 S.E.2d at 775-76.

6 . Even assuming arguendo that we set aside the conveyance from SCB & T to J. Conner as fraudulent under the Statute of Elizabeth, Appellants’ priority would not change. If this Court were to set aside the conveyance as fraudulent, then the conveyance would be treated as if it never occurred. Thus, SCB & T would continue to hold the note, and Appellants would remain in their position of third priority, behind Ameris Bank. See generally Windsor Properties, 331 S.C. at 471, 498 S.E.2d at 860; Future Group, II, 324 S.C. at 98, 478 S.E.2d at 49; Gardner, 184 S.C. at 41, 191 S.E. at 816. At oral argument, Appellants urged that if this Court sets aside the conveyance, their priority would improve. Appellants reach that end by arguing the SCB & T note would be paid off by the Wachovia loan — the same loan that was lent solely for the purpose of the allegedly fraudulent conveyance. Appellants cite no authorities to support this Court rearranging the priorities of the parties in such a matter. We find Appellants' position is untenable because, in effect, Appellants want to set aside a conveyance as fraudulent, but also benefit from the alleged fraud.

7 . Because this is not an intra-family transfer, the burden of proof is on Appellants rather than Respondents. See n. 7, supra.

8 . We do not reach the issue of the future advances clause, and we do not decide whether the mortgage here is a valid open-ended mortgage. However, in cases dealing with valid open-ended mortgages, lest our silence be taken for agreement, we do not concur with the dissent's position that a future advances clause "has no practical effect” if “SCB & T has made no future advances____ and there is nothing for the future advances clause to secure.” Central Production's statements that "the mortgage did not die” and that it remained "dormant but viable” means plainly that the mortgage is not satisfied even if there is "no debt for it to secure.” Cent. Prod. Credit Ass'n v. Page, 268 S.C. 1, 8, 231 S.E.2d 210, 214 (1977). To hold otherwise would be contrary to section 29-3-50 of the South Carolina Code, legislative intent, and the express language of Central Production. Id.; S.C.Code Ann. § 29-3-50 (2007) ("There is nothing express or implied, in the statute to infer that it was the intent of the legislature that the mortgage be dead once there is no debt momentarily existing.... A holding that an open-end mortgage dies when there is currently no debt for it to secure, would severely limit its beneficial use and defeat the legislative intent.”) (emphasis added). Grounds available for lines of credit (future advances in modern parlance) are commonly secured by mortgages. Quite often, the line of credit will sit unused for a considerable period of time. The fact that there is no current credit balance does not discharge the mortgage or the right to draw on the line of credit. Consequently, if the mortgage does not die, then it is not satisfied and thus, has a "practical effect” when the issue of whether a mortgage is satisfied is at stake. Id. As to whether the rule stated in Central Production promotes "absurdity,” we note that the rule has been a bedrock and standard of the mortgage industry for decades. There is no evidence that it has undermined consumer protection or destabilized the industry. To the contrary:

Mortgages to secure future advances serve a socially and economically desirable purpose.... The mortgagor saves interest on the surplus until ready to use it. He also avoids the expense and inconvenience of refinancing the mortgage so as to include the additional needed sum, or, in the alternative, of executing a second and later mortgage for each new advance, with the attendant expenses.

Cent. Prod., 268 S.C. at 7, 231 S.E.2d at 213.

9 . The Record shows that M. Brown and his wife had other reasons beyond Oskin’s judgment to structure the transaction as they did. The term of the note was two years, and it provided for interest-only payments for the first twenty-three months, with a final balloon payment due on November 30, 2008. As this due date approached, the value of the property plummeted from $3.5 million to $2.5-2.6 million in the midst of the mortgage foreclosure crisis. Appellants claimed during oral argument that foreclosure is a "red herring,” noting that M. Brown never contemplated allowing the property to go into foreclosure. This misses the point. M. Brown had to pay the impending balloon payment somehow whether it was through liquidating assets he owned or through obtaining a loan from a financial institution, or he would face the prospect of foreclosure (whether he contemplated it or not). M. Brown chose not to liquidate any of his own assets and persuaded his wife to form J. Conner to obtain the Wachovia loan. As Jim Boyd and John Lee Scott, respectively bankers from SCB & T and Wachovia Bank, testified, rather than constituting fraud, it was "common business practice” to form an LLC for the purpose of purchasing, holding, and enforcing negotiable instruments.

10 . Prior to the assignment, Appellants’ judgments were subordinate to the $3.5 million SCB & T first mortgage and the $500,000 second mortgage to Ameris Bank. Due to the low appraisal value and the large mortgage owed, Brown’s property was "under water.” If the assignment had not occurred, the Browns chose not to liquidate any of their assets, and SCB & T had foreclosed on the note and mortgage, Appellants’ interest in the property would have been extinguished because SCB & T had priority. There is no inequity or fraud if the priorities of Appellants do not change. In seeking to set aside the conveyance, we believe Appellants seek a superior priority that they were never guaranteed or necessarily entitled to.

11 . Matthews v. Montgomery, 193 S.C. 118, 131, 7 S.E.2d 841, 847 (1940).