The Statute of Elizabeth: What You Need to Know About Transferring Assets

The Statute of Elizabeth: What You Need to Know About Transferring Assets

What if you owed someone a lot of money, but you didn’t want to pay them back? You might try to put your assets somewhere they couldn’t be touched; for example, you might gift them to a person you trust, or transfer them to an LLC.

Fortunately for your creditor, and unfortunately for you, you won’t get away with this scheme if your intention is to avoid paying your debts.

Moving assets in the way described above is referred to as “fraudulent conveyance,” after the Fraudulent Conveyances Act of 1571, aka the Statute of 13 Elizabeth.

The Statute of Elizabeth

The Fraudulent Conveyances Act, as it’s properly known, was an English act of 16th Century Parliament that many U.S. states adopted early on. Most states have since adopted the Uniform Fraudulent Conveyances Act (UFCA) or, more commonly, the Uniform Fraudulent Transfer Act (UFTA).

The purpose of the Statute of Elizabeth is to provide a way for creditors to “undo” asset transfers of their debtors when the transfers were done so fraudulently. According to South Carolina Code, “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…”

How does the court know whether the transfer was, indeed, done fraudulently? If the transferor denies fraud (as you’d expect), the court can look for these “badges of fraud”:

• Insolvency or indebtedness of transferor
• A lack of consideration for the conveyance
• A relationship between the transferor and transferee
• Pending litigation or threat of litigation
• Secrecy or concealment
• Departure from usual method of business
• Transfer of debtor’s entire estate
• Reservation of benefit to the transferor
• Retention by the debtor of possession of the property

The court will look for a number of badges of fraud; one alone does not create a presumption of fraud.

If the court does find that the conveyance was fraudulent, it can be “undone,” giving the creditor recourse for collecting on its debt.

A recent South Carolina case on the Statute of Elizabeth

The South Carolina Court of Appeals heard a case on this very subject and decided in the case in February. Here’s what happened.

Kenneth Clifton borrowed $3.873 million from First Citizens Bank

Kenneth Clifton was a successful real estate developer who frequently bought land as investment properties and transferred them to LLCs. He purchased one property with Linda Whiteman in 1995, a piece of land in Laurens County, SC of approximately 370 acres, which they said was for retirement.

Clifton also regularly borrowed money to finance his purchases. He took out three loans from First Citizens Bank to finance three separate investments, totaling an initial loan amount of $3.873 million, and renewed them several times.

Around the time that the housing bubble burst, Clifton requested extensions on the loans, which the bank granted after he provided a personal financial statement demonstrating his ability to pay them back. His personal financial statement put the value of the assets he held at around $50 million, including a 50% stake in the Laurens County property valued at $1.57 million.

Clifton transferred away his interest as the bank came for its money

Before receiving an extension on the third loan, Clifton didn’t tell the bank that both he and Whiteman transferred their interests in the Laurens County property to Park at Durbin Creek (PDC), an LLC that Clifton had an interest in.

When the bank asked Clifton to come current with interest payments and provide more collateral before extending the loans again, he didn’t, and the bank began foreclosing proceedings, getting a deficiency judgment of $745,317.86 plus interest.

Meanwhile, Clifton disassociated himself from PDC and transferred his membership in it to Streamline, a company that did not yet exist and was comprised of his two daughters and ex-wife.

When the bank tried to collect on the judgment, it couldn’t, as all the assets listed in Clifton’s personal financial statement had been foreclosed on, transferred away to cover other debts, or otherwise disposed of. The bank filed suit against Clifton, citing the Statute of Elizabeth.

Fraudulent or not?

After a one-day, nonjury trial, the Circuit Court issued an order to set aside the conveyance of the Laurens County property to PDC; the conveyance of his 50% interest in the property was null and void, pursuant to Statute of Elizabeth. (The Court found many other issues with the transfer of interests to Streamline, as well.)

Clifton denied having transferred the land fraudulently, but the Court found that sufficient badges of fraud existed – six out of the nine listed above, to be exact.

The Court of Appeals affirmed the Circuit Court’s findings.

Asset protection the right way

Let’s look again at the badges of fraud:

• *Insolvency or indebtedness of transferor
• A lack of consideration for the conveyance
• A relationship between the transferor and transferee
• *Pending litigation or threat of litigation
• Secrecy or concealment
• Departure from usual method of business
• Transfer of debtor’s entire estate
• Reservation of benefit to the transferor
• Retention by the debtor of possession of the property

The two marked with an * are key. If someone knows they owe money they must pay back soon but can’t, or even if they don’t owe any money but could reasonably expect a lawsuit coming their way, then transferring away assets can look suspicious.

However, asset protection is important, and there are ways to do it correctly. This is when it’s vital to talk to an attorney with experience in estate planning. Gem McDowell of the Law Offices of Gem McDowell is a corporate, tax, and estate planning lawyer with 25 years of experience helping people grow and protect their assets. Call him at their Mount Pleasant office at (843) 284-1021 or by filling out this contact form online.