Wurlitzer Distributing Corp. v. Schofield

261 S.E.2d 688, 44 N.C. App. 520, 1980 N.C. App. LEXIS 2501

• Court: Court of Appeals of North Carolina
• Decided: January 15, 1980
• Docket: 7922SC12
• Status: Published

Opinion

MORRIS, Chief Judge.

Under G.S. 39-15, a conveyance made with the intent to defraud creditors is void. A claim seeking to set aside a deed as a fraudulent conveyance can be established in accordance with legal principles set out in the landmark case of Aman v. Walker, 165 N.C. 224, 81 S.E. 162 (1914), as applied in the recent case of North Carolina National Bank v. Evans, 296 N.C. 374, 250 S.E. 2d 231 (1979):

“(1) If the conveyance is voluntary, and the grantor retains property fully sufficient and available to pay his debts then existing, and there is no actual intent to defraud, the conveyance is valid.

(2) If the conveyance is voluntary, and the grantor did not retain property fully sufficient and available to pay his debts then existing, it is invalid as to creditors; but it cannot be impeached by subsequent creditors without proof of the existence of a debt at the time of its execution, which is unpaid, and when this is established and the conveyance avoided, subsequent creditors are let in and the property is subjected to the payment of creditors generally.

(3) If the conveyance is voluntary and made with the actual intent upon the part of the grantor to defraud creditors, it is void, although this fraudulent intent is not participated in by the grantee, and although property sufficient and available to pay existing debts is retained.

(4) If the conveyance is upon a valuable consideration and made with the actual intent to defraud creditors upon the part of the grantor alone, not participated in by the grantee and of which intent he had no notice, it is valid.

(5) If the conveyance is made upon a valuable consideration, but made with the actual intent to defraud creditors on the part of the grantor, participated in by the grantee or of which he has notice, it is void.” 296 N.C. at 376-77, 250 S.E. 2d at 233.

Those principles relating to the doctrine of fraudulent conveyances have been approved and applied in many recent decisions. See, e.g., North Carolina National Bank v. Evans, supra; Everett v. Gainer, 269 N.C. 528, 153 S.E. 2d 90 (1967); Nytco Leasing, Inc. v. Southeastern Motels, Inc., 40 N.C. App. 120, 252 S.E. 2d 826 (1979); Edwards v. Northwestern Bank, 39 N.C. App. 261, 250 S.E. 2d 651 (1979); Tuttle v. Tuttle, 38 N.C. App. 651, 248 S.E. 2d 896 (1978), cert. denied, 296 N.C. 589, 254 S.E. 2d 32 (1979). Under the foregoing, in order to have the deeds in question set aside, the following must be shown:

(1) that the transfers were voluntary, and defendants either (a) did not retain property sufficient to pay their debts then existing or (b) made the transfers with the intent to defraud creditors; or

(2) that although the transfers were upon valuable consideration, they were made with the intent to defraud creditors on the part of the grantor, which was participated in by the grantee or of which the grantee had notice.

Applying these principles to the case at bar, we now consider specifically the question of whether the evidence presented at trial is sufficient to sustain the findings of fact and conclusions of law made by the trial court.

The question of the sufficiency of the evidence to support findings of fact made by the trial court is a proper subject for review on appeal. G.S. 1A-1, Rule 52(c) of the North Carolina Rules of Civil Procedure; Brooks v. Brooks, 12 N.C. App. 626, 184 S.E. 2d 417 (1971). Nevertheless, “[i]n that setting, the court’s findings of fact have the force and effect of a verdict by a jury and are conclusive on appeal if there is evidence to support them, even though the evidence might sustain findings to the contrary.” Williams v. Pilot Life Insurance Co., 288 N.C. 338, 342, 218 S.E. 2d 368, 371 (1975); Immanuel Baptist Tabernacle Church of the Apostolic Faith v. Southern Emmanuel Tabernacle Church, Apostolic Faith, 27 N.C. App. 127, 218 S.E. 2d 223, cert. denied, 288 N.C. 730, 220 S.E. 2d 350 (1975); Worthington v. Worthington, 27 N.C. App. 340, 219 S.E. 2d 260 (1975), cert. denied, 289 N.C. 142, 220 S.E. 2d 801 (1976). A judgment based on such findings will not be disturbed on appeal, absent error of law appearing on the face of the record. Wall v. Timberlake, 272 N.C. 731, 158 S.E. 2d 780 (1968); Fletcher v. Fletcher, 23 N.C. App. 207, 208 S.E. 2d 524 (1974).

Defendants’ Appeal

As to the transfers on 6 April 1976, the trial judge found that the two conveyances were “voluntary, that is, without consideration”, and that “there was no valid, subsisting debt which was paid by these transfers of property occurring on April 6, 1976.” In North Carolina, a conveyance is deemed to be voluntary when it is without adequate consideration; i.e., “when the purchaser does not pay a reasonably fair price such as would indicate unfair dealing and be suggestive of fraud.” L & M Gas Co. v. Leggett, 273 N.C. 547, 549, 161 S.E. 2d 23, 25 (1968); Bank v. Evans, supra; Supply Corp. v. Scott, 267 N.C. 145, 148 S.E. 2d 1 (1966); Nytco Leasing, Inc. v. Southeastern Motels, Inc., supra. The evidence presented revealed that no money was passed from John S. Schofield and wife to John C. Schofield and wife at the time of the conveyances. Defendants argue that consideration did nevertheless exist in that the transfers served to satisfy a pre-existing debt owed by John C. Schofield to his father in the amount of approximately $83,000. On this point, the evidence shows that John S. Schofield could not recall how much money, if any, his son owed him at the time of the transfers; that the first time he ever attempted to determine the amount owed him by his son was in response to interrogatories served upon him by plaintiff; that John C. Schofield never signed a promissory note to reflect the monies owed to his father; that John C. Schofield’s wife, Victoria R. Schofield, never owed John S. Schofield any amount; that John S. Schofield never demanded any payment of the amount allegedly owed from his son. In his deposition, John S. Schofield stated that he had found a writing that reflected a $15,000 loan to his son, but such a document was never produced at trial. We view such evidence as sufficient to support the finding that a debt did not exist. Defendants rely on the case of Hafner v. Irwin, 23 N.C. 490 (1841), in which a conveyance to certain creditors was allowed to stand, the Court stating:

“Every conveyance of property by an insolvent or embarrassed man, to the exclusive satisfaction of the claims of some of his creditors, has necessarily a tendency to defeat or hinder his other creditors in the collection of their demands. But if the sole purpose of such a conveyance be the discharge of an honest debt, it does not fall under the operation of the statute against fraudulent conveyances.” 23 N.C. at 496.

In Hafner, the validity of the debt in question was not at issue. Indeed, it was admitted that the alleged debts were valid. In our case, however, the issue before the trial judge was specifically whether a debt existed sufficient to constitute consideration for the transfers in question. The trial judge considered the evidence and found facts accordingly. We conclude that there was sufficient evidence upon which the trial judge could have concluded that no honest debt existed.

Defendants argue in addition that there was consideration to support the 1976 conveyances in that John S. Schofield assumed the liens upon property when conveyed to him. It is generally held that the assumption of a mortgage by a grantee constitutes consideration for the conveyance of property from an insolvent grantor, and in the absence of fraudulent intent, such a conveyance is binding. See generally 37 Am. Jur. 2d, Fraudulent Conveyances, § 22 (1968). The evidence on this point is at best confusing and contradictory. In any event, even assuming arguen-do that the alleged assumption of mortgage constitutes consideration, we reject defendants’ argument in light of the following.

Although an assumption can in other respects be considered adequate consideration for a conveyance, the grantee’s inability to pay the mortgage debt assumed is generally sufficient to set aside the conveyance. See Citizens Bank & Trust Co. v. White, 12 Tenn. App. 583, --- S.W. --- (1930); see generally, Annot., 6 A.L.R. 2d 270 (1949). In this case, John S. Schofield’s inability to pay the debts assumed is evidenced by his testimony as to his financial condition:

“Well, the fact is: I’m all but practically busted myself. I had to spend a quarter of a million dollars myself in the last — let’s see —since 1962; and being 67 February 2 coming up and I had retired, got broke, had to go back to work, and when you start getting up on a little bit of age, it’s gotten to the point where you’ve got to get a little bit of protection on ourselves. The old bucket had run dry so to speak.”

John S. Schofield’s inability to assume the mortgages in question is supported also by the fact that John C. Schofield was the one actually making the payments on Davidson County property, as evidenced by this passage:

“Johnny is living there in the home. Yes, he’s paying me rent. He takes care of my payments and all. He takes care of the payments for me. I mean, he gives me enough to take care of the payments. Uh huh, he gives me enough so that I can pay the bank.”

There are other possible inferences which could be drawn from the evidence presented at trial. However, the duty of this Court upon review of the sufficiency of evidence is a limited one. We are of the opinion that the evidence was supportive of the court’s findings.

Defendants argue next that there was no evidence of fraudulent intent sufficient to set aside the conveyances. Under Aman, although a conveyance is made by a debtor for valuable consideration, it is fraudulent and may be set aside when the conveyance is (1) made with the intent to defraud creditors, and (2) the grantee either participated in the intent or had notice of it. Aman v. Walker, supra; Edwards v. Bank, supra. The trial court found as a fact that the two transfers were made with fraudulent intent, and that the grantees participated in this intent. We view the evidence supportive of this finding as to John C. Schofield in that the transfers were made at a time when he owed a $60,000 debt to Wurlitzer; the transfers were made while a suit by Wurlitzer to recover the debt was pending; and John C. Schofield continued to live in the home in Davidson County after the transfer of that property. This conclusion is bolstered by the fact that John C. Schofield was unable to show that he retained property sufficient to pay the debts to Wurlitzer, on which he certainly knew he was potentially liable. Intent to defraud creditors may be presumed when the debtor does not retain property sufficient to pay his then existing debts. Edwards v. Bank, supra. Moreover, we view the evidence supportive of a finding that John S. Schofield concurred in this fraudulent intent. The evidence showed that he had notice of his son’s financial difficulties. Given the close relationship between the grantor and grantee evidenced in the record, and the circumstances surrounding the transfers, it is impossible for us to conclude that no inference could be drawn that would indicate knowledge and participation on the part of John S. Schofield. In a closely analogous case, Morris v. Holland, --- Mo. ---, 529 S.W. 2d 948 (1975), judgment creditors sought to set aside as fraudulent certain conveyances of real property from the defendant and his wife to defendant’s father. The father testified that the consideration for the deed consisted of the cancellation of a pre-existing debt, the total of which represented a series of loans made to the son over a two-year period. After hearing the evidence, the trial court found that the property conveyed constituted virtually all of the son’s property; that before and after the property was conveyed, the son was insolvent; that the father knew of the son’s insolvency and accepted the deed in an attempt to “salvage” the property and to “get some of [the son’s] indebtedness off me.” The court, therefore, deemed the conveyance fraudulent and void. The Missouri Court of Appeals affirmed, holding that the record manifested several indicia of fraud:

“The conveyance was made from son to father; the supposed consideration was forgiveness of or security for a debt which was at best merely a moral obligation to repay, and supposed assumption of a mortgage debt upon which the grantor continued to make payment after the transfer; defendant . . . testified that the land conveyed represented all the property he owned except a ‘couple of thousand’ equity in a home . . .; and . . . defendants failed to produce available evidence tending to prove that the grantee was a bona fide creditor of the grantor. A strong inference of fraud arises from the concurrence of these circumstances.” 529 S.W. 2d at 953.

Upon the foregoing, we affirm the court’s ruling in the present case that the transfers on 6 December 1976 constituted fraudulent conveyances and that those transfers be set aside.

Plaintiff’s Appeal

Plaintiff Wurlitzer contends on appeal that the transfer of realty on 10 December 1974 was not based upon adequate consideration and should be deemed fraudulent. The trial court held that there was sufficient consideration for the transfers and that defendants John C. Schofield and his wife did not divest themselves of all their property at that time, there being a reasonable prospect of creditors being paid out of their remaining property.

The evidence presented at trial indicates that John S. Schofield and his son were jointly obligated on a note secured by the property in question; that John C. Schofield had made some of the mortgage payments out of the rental proceeds from the property; that during a period of 1974, six checks written by John C. Schofield in payment of that obligation were returned for lack of sufficient funds; that the mortgagee notified John S. Schofield that the property would be foreclosed unless full payment of the amount in arrears was made immediately; that John S. Schofield paid the amount in arrears; that thereafter the property was transferred to John S. Schofield and his wife in December, 1974; and that John S. Schofield made all payments thereafter.

There is conflicting testimony concerning the amount of equity in the property at the time it was transferred and as to the amount of consideration actually passing at the time of the conveyance. Nevertheless, we sustain the trial court’s finding with respect to this transfer in that there was evidence that at the time of the transfer on 10 December 1974, there was a reasonable prospect on the part of defendants John C. Schofield and wife that there was sufficient property available out of which other debts could have been paid. At that time, John C. Schofield and wife still owned their home in Davidson County and an one-half interest in the Rowan County property. Further, there is no evidence to indicate that, as of 10 December 1974, a default had occurred with respect to defendants’ obligation to Wurlitzer on the guaranty agreement entered into in 1973. Therefore, based on the authority cited herein, we view the evidence as sufficient to sustain the trial court’s findings of fact and conclusions of law as to the transfer on 10 December 1974.

Because there is competent evidence to support the trial court’s findings of fact, and the findings support the conclusions of law, the judgment is

Affirmed as to plaintiff’s appeal and

Affirmed as to defendants’ appeal.

Judges PARKER and MARTIN (Robert M.) concur.