Show Me the Money Collecting Judgments Against the Savvy Judgment Debtor, 0916 SCBJ, SC Lawyer, September 2016, #32
| Author | Bruce Wallace and Kyle Brannon, J. |
Bruce Wallace and Kyle Brannon, J.
So you have a money judgment that is not satisfied. With a savvy judgment debtor, the process of collecting that judgment can be challenging. My wife, children and I play Monopoly. Two of my sons like to hide the $500 bills in their pockets during the game. Just when we think they are bankrupt after landing on a hotel, they produce the cash to avoid bankruptcy and live for another roll of the dice. In real life, savvy debtors rarely produce cash to pay their debts. Instead, they have placed their wealth in investments that may be difficult to discover, attach and levy. But with careful investigation and planning, judgment creditors can reach assets that lay unseen.
This article assumes the creditor’s lawyer has taken the basic steps to record the judgment in each county where the debtor may own property, and the lawyer has received a nulla bona from the county sheriff.[1] This article also assumes the creditor’s lawyer has properly filed any foreign judgment.2 Finally, to the extent possible, this article will not address supplementary proceedings, except where they may be necessary in aid of collecting the assets discussed herein. Following these initial steps, this article addresses how to discover and “reach” some personal assets not readily available to satisfy a money judgment. Regardless of whether the assets are held by third parties, in trust, or constitute ownership in a limited liability company or professional corporation, there are procedures for attaching such assets as part of satisfying a money judgment.
Playing the shell game – recovering assets in the hands of third parties
South Carolina’s Statute of Elizabeth[3] can be used to unwind a fraudulent conveyance from a debtor to a third party under certain circumstances. The statute provides that every gift, grant, transfer or conveyance of property by a debtor with the “intent or purpose to delay, hinder, or defraud creditors” is void.[4]
If the debtor transferred assets to a third party for no consideration, the creditor must prove: (1) the grantor was indebted to the creditor at the time of the transfer; (2) the conveyance was voluntary (i.e. without consideration); and (3) the grantor failed to retain sufficient property to pay the debt owed to the creditor in full.5 The debtor must retain sufficient property to pay the debt at the time that the creditor seeks to collect its debt.6
If the transfer is supported by valuable consideration, the creditor’s proof becomes more difficult, and he must show: “(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.”7 The creditor must show the fraudulent conveyance by clear and convincing evidence. However, if the conveyance is an intra-family transfer, burden shifts to the transferee to establish, by clear and convincing evidence, the consideration and the bona fides of the transaction.8
The Statute of Elizabeth has a three-year statute of limitations that is governed by the “discovery rule,” which provides that “the statute of limitations does not begin to run until discovery of the fraud itself or of such facts that would have led to the knowledge thereof, if pursued with reasonable diligence.”[9]
With trust you have nothing – attaching trust assets
If a debtor has assets in trust, whether a creditor can levy and execute against trust assets turns in part on whether the debtor is the settlor or a beneficiary of the trust, and the kind of trust it is. South Carolina Title 62, Part 5, provides the rules for handling creditor’s claims against a trust beneficiary. For debtors who are settlors of a trust, the property that can be attached depends on whether the trust is revocable or irrevocable; in either event, the statute disregards spendthrift provisions.[10] If the assets are held in a revocable trust, during the lifetime of the settlor, the property of the revocable trust is simply “subject to the claims of the settlor’s creditors.”11 “With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.”[12] “If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution.”13
Except for interests in spendthrift trusts and discretionary trust interests, creditors can reach a trust beneficiary’s interest by attachment.14 Once attachment has been made, and assuming there are no challenges to the attachment order itself, “the trustee will then pay to the creditor instead of to the beneficiary any payments the trustee would otherwise be required to make to the beneficiary, as well as discretionary distributions the trustee decides to make.”15
Spendthrift trusts have specific clauses within them to prevent creditors attaching a beneficiary’s interest in the trust principal or interest. The South Carolina Trust Code preserves the protection of spendthrift provisions: “a trustee shall have no liability to any creditor of a beneficiary for any distributions made to or for the benefit of the beneficiary to the extent the beneficiary’s interest is … protected by a spendthrift provision.”16 This is a departure from common law, where a trustee of a spendthrift trust would have to pay the creditors of a beneficiary for spousal support.17
Protection similar to a spendthrift trust protects “a discretionary trust interest as referred to in S.C. Code Section 62-7-504.”18 In Collins v. Collins,19 the S.C. Supreme Court addressed this issue with regard to a claim for child support. The husband was the beneficiary of a trust that granted full discretion to the trustees whether to pay the husband any funds until he reached the age of 28. In ruling in favor of the trustees, the Court held the husband “cannot compel the trustees to pay any part of the trust fund; and his creditors, who are in no better position, cannot reach it.”20 By contrast, under the new Trust Code, a court now can compel a trustee to satisfy a judgment for child support if the trustee breached the standard of distribution or abused its discretion regarding distributions.21 Unfortunately, the right to challenge the trustee’s abuse of discretion rests solely with the beneficiary, not with the creditor.22
Regardless of whether held in a spendthrift trust or subject to a discretionary trust interest, when a trustee makes a distribution, the statute does not protect the funds once the beneficiary receives them.23 Assuming the funds are deposited into a bank account by or for the beneficiary, then the funds are attached like any other monies on deposit.24
Where the beneficiary/debtor is entitled to a mandatory distribution, and the trustee has failed or refused to make the distribution, the creditor is entitled to reach the mandatory distribution, regardless of whether it is a distribution of principal or interest, and regardless of a spendthrift provision.25 A “mandatory distribution” is one where the “trustee has no discretion in determining whether the distribution shall be made or the amount or timing of such distribution.”26 This provision prevents a trustee from “avoid[ing] creditor claims against a beneficiary by refusing to make a distribution.”27
In failing to make a mandatory distribution, the trustee becomes the “agent for the beneficiary,” and the withheld distribution “should be treated as part of the beneficiary’s personal assets.”[28]
Seeking domestic bliss – charging orders and domestic LLCs
The Uniform Limited Liability Company Act of 1996 (the “LLC Act”) provides the exclusive remedy by which a creditor of a member of an LLC may satisfy its judgment out of the debtor’s distributional interest in an LLC.29 The statute provides, in relevant part: (a) On application by a judgment creditor of a member of a limited liability company or of a member’s transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment. The Court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor …
(b) A charging order constitutes a lien on the judgment debtor’s distributional interest. The court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time. A purchaser at the foreclosure sale has the rights of a transferee.30
The LLC Act defines a “distributional interest” to mean “all of a member’s interest in distributions in the limited liability company,” and it defines “distributions” as “a transfer of money, property, or other benefit from a limited liability company to a member in the member’s capacity as a member or to a transferee...
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