Judgment

Can Your Retirement Account Be Used to Settle Business Debts?

Let’s say you owe money in a judgment, yet you still want to continue contributing to your savings accounts. Can you do that, or can that money be used to settle your judgment?

First Citizens Bank v. Blue Ox

A case decided by the South Carolina Court of Appeals heard in late 2017 dealt with this exact issue. Here’s a little bit of the background.

J. Chris Lindgren was the sole member of Blue Ox, LLC. In 2013, he signed confessions of judgment totaling $113,000 on behalf of himself and Blue Ox after he defaulted on a loan from the Bank. Lindgren never paid the judgment, and in the meantime, Blue Ox went defunct. Since the time of the judgment, Lindgren made contributions to an IRA account and a 401(k) plan.

The Bank wanted the judgement settled and started supplemental proceedings against Lindgren. It argued that the contributions he made to those accounts were fraudulent and that money should be available to pay off the judgement.

Lindgren knew he owned money to the Bank. Yet he still made contributions to three separate savings accounts. Was that legal? Should the money have been or become available to pay off the judgment? Or are those accounts protected from such use?

The case was first heard and decided by the Master-In-Equity before the cross-appeal was heard by the Court of Appeals. The Master-In-Equity determined that the 401(k) contributions were exempt from execution but his IRA contributions were not. Here are some issues the Court considered when deciding the case, and what it means for you.

The Homestead Exemption Act: What’s Exempt Under the Law

The Bank argued that the 401(k) contributions Lindgren made were not subject to protection under the Homestead Exemption Act.

What is the Homestead Exemption Act? It’s probably best known to South Carolina homeowners because it exempts the first $50,000 in value in real property in from property taxes for homeowners over 65, totally and permanently disabled, or legally blind.

The Act goes much further than this, however, and spells out exactly how much property a debtor may have that is “exempt from attachment, levy, and sale.” That is, these particular assets are protected from being used to settle debts.

In addition to the $50,000 in real property that’s exempt, the Act also allows $5,000 of interest in one motor vehicle, $4,000 in personal property such as household goods and clothing, $1,000 in family jewelry, etc. It also protects income due to the debtor from things like social security benefits, veterans’ benefits, alimony, and pension plans.

In the case at hand, the Court of Appeals AFFIRMED the Master’s initial finding and DISAGREED with the Bank. It determined that that the contributions Lindgren made to his 401(k) accounts were clearly protected under Section 15-41-30(A)(14) of the Act as a matter of statute. The Court also noted that “the exemptions in the Homestead Act are to be construed in favor of the Debtor.”

The Statute of Elizabeth: What Constitutes Fraudulent Behavior

It is illegal under South Carolina law to intentionally transfer assets in order to avoid paying your debts. If you remember from a previous blog on this topic of fraudulent conveyances and the Statute of Elizabeth, Courts can look for “badges of fraud” to assess whether or not someone’s behavior was fraudulent in intent.

In this case, the Court stated that the Bank needed to demonstrate Lindgren’s “actual intent to defraud” in order to make his savings contributions available for settlement of the judgment. The Court determined that the following badges of fraud were present:

Lindgren did not possess enough assets to pay the debt
Lindgren reserved the benefit of the IRA contributions for himself
Lindgren was aware of the outstanding judgment against him at the time of the contributions

However, the Court found that many other badges were missing:

Contributions were limited in amount
Contributions were not secretive
Contributions were in line with his long-standing pattern of investing in retirement

This last point is important. Lindgren provided evidence that he had a pattern of contributing to his savings accounts for many years before he signed the confessions of judgment. The contributions he made after the judgment were a continuation of that pattern, which the Court said is “conduct that is encouraged by the very existence of the exemption.”

Based on all this, the Court did not find “clear and convincing” evidence of fraudulent intent. It REVERSED the Master’s finding that Lindgren’s IRA contributions were fraudulent conveyances.

Ownership and Consideration

The Court failed to find Lindgren’s behavior demonstrated clear intent to defraud under the Statute of Elizabeth. Yet it also acknowledged that analysis under the Statute of Elizabeth was not mandated in this case for two reasons.

First, one of the hallmarks of fraudulent conveyance is that the asset changes ownership. However, money contributed to an IRA still belongs to the debtor; while it has now been transferred into a protected asset, ownership has not changed. (The Court also noted that in bankruptcy, the “conversion of a non-exempt asset into an exempt asset is not in and of itself a fraudulent act.”)

Second, there is the issue of consideration, which refers to the exchange of one thing for another. Typically, in instances of fraudulent conveyance, no consideration is being given for the assets transferred. For example, someone may transfer land into someone else’s name, but receive no money for it. This is one of the badges of fraud.

In this case, the Court stated that “in the specific case of IRAs, the contribution is never made for valuable consideration” (emphasis theirs). Therefore, it is not appropriate to consider Lindgren’s contributions his IRA in terms of the Statute of Elizabeth.

Your Savings Accounts May Be Safe from Debts

The South Carolina Court of Appeals looked at state statute, the intent of the law, and the Debtor’s behavior to come to the conclusions it did. It ultimately protected Lindgren’s contributions to his savings accounts from execution for settlement of the judgment he owed. This is a positive outcome for individuals who may be in debt but want to continue saving for the future.

However, don’t assume that any contributions made to savings accounts are always safe from execution. A lot depends on the particular facts of the case. In addition, this is a Court of Appeals decision, and may not be the final word on the issue. As of March 2018, there is a petition for rehearing pending, meaning that the South Carolina Supreme Court could reverse the decision.

Get Business and Estate Planning Advice

For legal advice from an experienced business and estate planning attorney, call Gem McDowell Law Group in Mt. Pleasant today at 843-284-1021. Gem has over 25 years of experience in solving legal problems and helping people planning for the future, and he is ready to help you do the same.

Why a Judgment in Your Favor is Not as Great as You Think

If you’re awarded a judgment, don’t celebrate just yet – it may not be the windfall you think it is.

A judgment is a decision of the court that comes about after a lawsuit is settled or threatened. For example, let’s say Tony is driving and runs into Victoria’s house, causing a large amount of damage. She may end up with a judgment against Tony in the amount of $100,000 for the damage sustained to her property.

That’s great! $100,000 is a lot of money, right?

Yes, it is – if she can ever collect it.

A Judgment is Not a Guarantee of Payment

Unlike a settlement, which is money in the hand, a judgment is more like a mortgage, as it attaches to any real property of the person against whom the judgment is placed – in this case, Tony. Sometimes that money can be collected immediately, sometimes at a later date, and sometimes not at all.

The reason that money often can’t be collected is because of exemptions established in the law. If the judgment is against an individual (not a business), the law protects that individual’s property up to certain amounts, meaning the judgment can’t be taken from those assets up to those limits.

For example, the exemption amount for the primary residence for an unmarried person is $59,100, or $118,200 if married. If Tony is married and owns a $200,000 house, and has a $100,000 mortgage, Victoria can’t expect to collect her $100,000 even though it appears as though he has twice as much money as she’s trying to collect. It can’t be collected on because it’s protected.

Other assets are protected up to certain dollar limits. For the year 2016, these amounts are:

(Note that this list is not exhaustive.)

The dollar amounts for exemptions are updated in even-numbered years in South Carolina.

What Does it Really Mean to Have a Judgment in Your Favor?

Whether your judgment ends up being worth more than the paper it’s written on depends on the person you’re collecting against. Having a judgment in your favor means that the person it’s against does owe you that money, whether they end up having to pay it or not.

Also, judgments are mobile. A judgment is filed in the County where the incident or damage occurred, but the judgment can follow the debtor across county and state lines. A judgment can even follow someone to other countries, depending on the treatises the U.S. has with other countries. In short, if there’s a judgment against you, don’t think you can outrun it by moving to a different city, state, or country.

A judgment lasts for 10 years in South Carolina (each state has its own laws regarding judgments), so if in that time Tony sells or refinances his house, Victoria can collect the money she’s owed. Unfortunately, sometimes there’s never an occasion to collect. Maybe Tony never sells his house, or maybe his house is in his wife’s name only.

If the person you have a judgment against is very wealthy, and/or has a second residence, you can likely collect relatively easily. If not, you may have to work a little harder to get your money.

How Do You Collect a Judgment You Have Against Someone Else?

To “execute against the judgment,” you can have the sheriff try to collect. In the majority of these instances, the debtors say the same thing: “I have no money.” The sheriff returns with a nulla bona execution, which means “no good.”

After this, the next step you can take is to put the debtor on the stand and with the judge go through the debtor’s tax returns and other financial documents to see if they really do have the money to pay.

Need More Information on Judgments?

If you’re trying to collect on a judgment, or you’ve got a judgment against you and you want to know what your options are, contact Gem McDowell at Gem McDowell Law Group. You can reach Gem at their Mount Pleasant law office by calling (843) 284-1021 or by filling out this contact form online. Get in touch and schedule an appointment today.