Turner Padget Insights

Court of Appeals Protects Recurrent Retirement Plan Contributions from Post-Judgment Attachment

Posted On Apr 23, 2018

A recent, very debtor-friendly decision of the South Carolina Court of Appeals essentially put most routine retirement account contributions beyond the reach of creditors seeking to satisfy past judgments. The court made clear its strong stance toward protecting individuals’ retirement accounts and, for one of the first times, explicitly said that funds deposited into retirement accounts generally can’t be undone as fraudulent transfers.

The debtor in the case, First Citizens Bank v. Blue Ox, signed a confession of judgment after his LLC had defaulted on loan payments owed to its bank. After failing to pay the judgment, the debtor contributed money to his retirement accounts as well as a 529 college savings account. The bank contended that it could attach these post-judgment contributions because they were fraudulent transfers and therefore not subject to protections otherwise provided to retirement accounts under Sections 5-41-30(A)(13) and (14) of the South Carolina Homestead Exemption Act. Rejecting the bank’s claims (and reversing the lower court), the Court of Appeals ruled that Statute of Elizabeth, which generally prohibits fraudulent conveyances, did not apply because the movement of money did not transfer ownership from the debtor but rather converted the funds into protected assets that still belonged to him.

The Court of Appeals further noted that while there were several “badges of fraud” present, on balance there was no fraudulent intent because the “contributions were limited in amount, were not secretive in nature, and most tellingly, were in line with [the debtor’s] long-standing pattern of investing in his retirement – conduct that is encouraged by the very existence of [protections typically afforded to IRAs and 401(k) accounts under the Homestead Exemption Act].”

Practical Impact

Although these remain case-by-case determinations, this ruling clarifies the criteria local judges should use in identifying what funds can be levied in similar situations. Like the other Homestead Exemptions, transfers of retirement monies are generally to be construed in favor of the debtor, while creditors must demonstrate fraudulent intent to be able to execute on such contributions.

For lenders, this means that it will be more difficult to protect themselves and collect some monies they are owed, though they may be able to recover funds if they can demonstrate “multiple badges of fraud” on the debtor’s part. But that only creates a rebuttable presumption of an intent to defraud, which the creditor may disprove with evidence. Coupled with their long-standing inability to garnish wages, creditors have lost another way to force a debtor’s hand under South Carolina law. This ruling fairly definitively establishes that lenders can’t touch the sums borrowers regularly contribute to retirement accounts unless there is clear and convincing evidence of fraudulent intent; it largely will take away a creditor’s argument that consistent contributions should have been going to the creditor instead of the retirement account.

We commonly see lenders who believe they are being defrauded by a debtor who is transferring personal assets they would like to levy in order to satisfy an outstanding judgment against the debtor’s business. Regardless of whether a debtor is a business owner or a manager of a corporate entity that otherwise might be “pierced,” they can protect themselves by regularly contributing to their retirement account.

Because these cases turn on their particular facts, anyone facing an issue like this – on either the creditor or debtor side – should consult with counsel to assess their legal rights and options.

Kristen Nichols is an attorney at Turner Padget, where she focuses on bankruptcy, commercial law and litigation, foreclosure, debtor / creditor law, landlord / tenant law, and creditors’ rights. She regularly represents local and regional banks, lenders, investors, and small businesses on matters involving loan resolution, asset recovery, contract modification and renegotiation, and bankruptcy. She may be reached at (843) 576-2836 or by email at knichols@turnerpadget.com.