Future Group, II v. Nationsbank

• Decision Date: 04 May 1995
• Docket Number: No. 24500,24500
• Citation: 478 S.E.2d 45,324 S.C. 89
• Court: South Carolina Supreme Court
• Parties: FUTURE GROUP, II; Heffron, Ingle, McDowell & Cooper, Inc.; Michael Runey; and The Five R's, a South Carolina Partnership, Respondents, v. NATIONSBANK, Appellant. . Heard

Page 45

478 S.E.2d 45

324 S.C. 89

FUTURE GROUP, II; Heffron, Ingle, McDowell & Cooper, Inc. Michael Runey; and The Five R's, a South Carolina Partnership, Respondents, v. NATIONSBANK, Appellant.

No. 24500.

Supreme Court of South Carolina.

Heard May 4, 1995.

Decided Oct. 7, 1996.

Rehearing Denied Nov. 7, 1996.

James H. Watson, Jack H. Tedards, Jr., and Steven E. Farrar, all of Leatherwood, Walker, Todd & Mann, P.C., Greenville, for appellant.

G. Trenholm Walker and Andrew K. Epting, both of Wise & Cole, P.A., Charleston, for respondents Future Group II, Heffron, Ingle, McDowell & Cooper, Inc., and Michael Runey.

George J. Kefalos, Charleston, for respondent The Five R's.

MOORE, Justice:

This appeal is from a judgment against appellant (Bank) on several causes of action resulting in a verdict of nearly $1.9 million. We affirm in part and reverse in part.

I. FACTS

Respondent Heffron, Ingle, McDowell & Cooper, Inc. (Agency) is an insurance agency that was wholly owned by respondent Future Group II (Future Group) during the events relevant to this case. Bob Heffron was a director and president of both corporations. This litigation followed the sale of Agency to St. Paul Fire and Marine Insurance Co. (St. Paul) in November 1990. The case involves several complex financial transactions as set forth below.

a. Runey Transactions

In 1985, Heffron purchased Agency in part ownership with Capital South, Inc. Two years later, in December 1987, Agency bought out Capital South's share for $7.8 million. To accomplish this buy out, Heffron incorporated Future Group as a holding company for Agency. Agency borrowed $3.8 million from St. Paul in exchange for a first lien on all of Agency's assets and stock and borrowed $800,000 from another source. In addition, Heffron borrowed $800,000 from Bank and gave his personal note in this amount. For the remaining $2.4 million, Heffron approached a friend, respondent Dr. Michael Runey.

In April 1988, at Heffron's request, Runey paid $500,000 in cash and signed a $2.4 million promissory note in exchange for 29,000 shares of preferred stock in Future Group. Runey subsequently borrowed $750,000 from Bank to pay down the $2.4 million note to $1.65 million. As a result, the $2.4 million note became "non-recourse" as to Runey, meaning he was no longer personally liable, and Runey's 29,000 preferred shares of Future Group were pledged as collateral to secure the $750,000 note. Runey paid more than $45,000 in interest and $50,000 in principal on the note.

When Agency was sold to St. Paul in November 1990, Runey negotiated for the balance of the $750,000 note to be paid out of the sale proceeds in exchange for his consent to the sale which was needed given his status as a preferred shareholder in Future Group. He also received an assignment of any cause of action maintainable by Agency or Future Group.

b. Transaction with 5R's

Respondent Five R's (5R's) is a business partnership. In March 1989, at Heffron's request, 5R's agreed to give Agency $80,000 as an investment. The return was to be either 12% interest on the $80,000 or stock in Agency. In exchange, 5R's received a note from Agency.

When 5R's learned of the pending sale of Agency to St. Paul, it notified Agency of the outstanding debt for $80,000. Agency contested the validity of the note and 5R's was not repaid at the time of the sale to St. Paul.

c. March 1990 Refinancing

In March 1990, Bank obtained Agency's corporate guarantee of two debts: one was the $800,000 Heffron originally borrowed to repurchase Agency from Capital South in 1987; the other was $500,000 borrowed by Future Group but used as a credit line by Agency. The notes on these debts were in default in the fall of 1989. Bank negotiated with Heffron for renewal of the notes if Agency would give its corporate guarantees secured by a lien on all Agency's assets. This lien would be second in priority to St. Paul's lien but would have priority over unsecured creditors.

Counsel for Agency and Future Group, Drayton Hastie, refused to give an opinion letter approving the transaction. He advised Bank that the transaction would be a conveyance in defraud of creditors unless all creditors consented. Significantly, Hastie's law firm was itself a creditor since it held promissory notes from Future Group for $594,000. Despite Hastie's protestations, Bank went ahead with the proposed refinancing on March 9, 1990. In exchange for St. Paul's consent, Future Group pledged all shares of Agency to St. Paul. The $500,000 credit line was given a maturity date of April 1, 1990, and the $800,000 Heffron debt was extended six years. Neither Runey nor 5R's was informed of this refinancing transaction.

d. November 1990 Sale to St. Paul

After the March 1990 transaction, a deal was negotiated with the senior lienholder, St. Paul, whereby St. Paul would purchase Agency. The sale was consummated on November 2, 1990. The terms of the purchase included an assumption of several liabilities including the $800,000 Heffron debt and the $500,000 credit line debt that had become corporate obligations of Agency under the March 1990 refinancing agreement. In addition, Future Group was to receive an amount sufficient to pay off the outstanding $750,000 Runey debt to Bank and the $594,000 in notes held by Hastie's law firm. Future Group was liquidated. The total purchase price for Agency was $1.5 million plus the assumption of liabilities totalling more than $10 million.

e. This Litigation

After the sale of Agency to St. Paul, Runey and 5R's commenced this action against Bank alleging wrongdoing in the March 1990 refinancing transaction. ¹ Runey brought suit as an individual and in his capacity as the assignee of all existing causes of action maintainable by Future Group or Agency. The complaint alleged Bank's liability for the March 1990 transaction based on (1) aiding and abetting Heffron's breach of fiduciary duty (2) conspiracy as to the transfer of Heffron's $800,000 debt to Agency and (3) fraudulent conveyance.

The trial judge ² found for 5R's and Runey on all causes of action ³ and rendered a verdict for Runey in the amount of $1,746,537.66 and for 5R's in the amount of $142,223.30. This appeal followed.

II. DISCUSSION

a. Fraudulent Conveyance

The trial judge found Agency's guarantees of the $800,000 Heffron debt and the $500,000 credit line debt were fraudulent conveyances and set them aside as provided in S.C.Code Ann. § 27-23-10 (1991). ⁴ Bank claims error on several grounds.

Under § 27-23-10, a transfer made without valuable consideration ⁵ will be set aside as a fraudulent conveyance if the grantor was indebted to the plaintiff at the time of the transfer and the grantor failed to retain sufficient property to pay his debt to plaintiff, not merely at the time of transfer, but at the time plaintiff seeks to collect. Gardner v. Kirven, 184 S.C. 37, 191 S.E. 814 (1937); Penning v. Reid, 167 S.C. 263, 166 S.E. 139 (1932); Dufresne v. Regency Realty, Inc., 295 S.C. 1, 366 S.E.2d 256 (Ct.App.1987). If there is valuable consideration, the transfer will be set aside only where the grantor was indebted at the time of the transfer and had an actual intent to defraud creditors imputable to the grantee. Coleman v. Daniel, 261 S.C. 198, 199 S.E.2d 74 (1973); Gardner, supra; Dufresne, supra.

First, Bank contends there was valuable consideration given for the corporate guarantees and therefore the transfers should not be set aside absent actual intent to defraud. We disagree. ⁶

Under the evidence presented, Agency's guarantee of the $800,000 Heffron debt was without valuable consideration since there is no evidence of any benefit received by Agency. Heffron obtained a benefit since the $800,000 note was extended six years as a result of the March 1990 transaction. Value given to a person other than the debtor in exchange for the debtor's assets does not constitute consideration sufficient to avoid the application of § 27-23-10. Dufresne, supra. The preponderance of the evidence supports the conclusion the $800,000 Heffron debt guarantee was without valuable consideration to Agency.

As to the $500,000 credit line debt guarantee, evidence in the record indicates the $500,000 credit line was used by Agency to run the business although Future Group was the named borrower. In exchange for the corporate guarantee of this debt given by Agency on March 9, 1990, Bank agreed to extend the loan to April 1, 1990, only a few weeks. There is no evidence this brief extension benefitted Agency. Further, the credit line had already been exhausted and no new funds were extended as a result of the guarantee. Consideration that is wholly past is not valuable consideration. Garrett v. Stuart, 6 S.C.Eq. (1 McCord Eq.) 514 (1821). Since no valuable consideration was given for either transfer, no actual intent to defraud need be shown. Coleman, supra.

Next, Bank contends Runey failed to establish he was entitled to recover pursuant to § 27-23-10 because Agency was not indebted to Runey. We agree. Runey relies solely on his status as a preferred shareholder of Agency's holding company, Future Group, to assert his right to recover as a creditor. In the absence of special statutory or contractual provisions, a preferred shareholder is not a creditor of a corporation by virtue of his ownership of stock. 18A Am.Jur.2d Corporations § 753 (1985). Accordingly, we hold Runey cannot recover on this cause of action.

We find without merit, however, Bank's contention that 5R's was not a creditor at the time of the March 1990 transaction. Five R's loaned Agency $80,000 in March 1989. Although Bank contests the validity of the note evidencing the debt, there is no evidence the debt was not valid.

Next, Bank claims Agency's giving of the corporate guarantees was not a conveyance within the scope of § 27-23-10 because Bank did not execute on the guarantees and therefore nothing was actually conveyed away from Agency. This...