In the movie Urban Cowboy, Johnny Lee sang “looking for love in all the wrong places”. The North Carolina Supreme Court in Kinlaw vs. Harris recently heard a case which could be summarized “looking for assets in all the wrong places”. The issue before the Court was whether a debtor’s property was free from execution and thereby allowing the debtor to keep the property.
Pursuant to the law in North Carolina, when a creditor obtains a judgment against an individual debtor, the creditor can look to have the assets of the debtor taken and sold to satisfy the judgment. But, the debtor is allowed to keep certain property as “exempt from execution” which means that the creditor cannot take those protected assets to satisfy the judgment.
Exempt property is property owned by an individual debtor (not a corporation, business, LLC, etc) which is specifically allowed to be protected by the debtor from being used in satisfying a judgment against the debtor. Thus, exempt property can be saved by the debtor from being sold to satisfy a debt of the debtor.
What is an Execution? An Execution is a Court Order to the Sheriff of a particular County. This Execution gives the Sheriff the right to look for, collect and sale assets owned by the debtor in order to have the judgment paid to the creditor.
In this recent case, the creditor obtained a judgment against the debtor in the sum of $567,000! The debtor owned two individual retirement accounts (IRAs) solely in his name. The debtor was recently divorced and in the settlement agreement with his former spouse, the debtor received the IRAs and an airplane (yes a plane) and the former spouse received others assets. The debtor made several withdrawals from the IRA accounts in order to pay the federal government for a Medicare fraud claim and other penalties, hospital costs and extraordinary business and personal expenses. The creditor argued that because the debtor had made these types of withdrawals from the IRA accounts, the debtor could no longer claim the IRA accounts as exempt or protected.
Unfortunately for the creditor, the Court did not agree. The Court concluded that the IRA accounts retained their exempt status and in fact the debtor could keep the funds in the IRAs protected. However, the Court did indicate that there “may be some circumstances under which withdrawn funds are no longer exempt from execution”. As you can imagine, the Court did not go into detail of the circumstances whereby the withdrawn funds are allowed to be taken. The Court quoted from an earlier case when they said “Trial courts have broad discretion to fashion equitable remedies to protect innocent parties when injustice would otherwise result.” In doing so, Courts typically look to the conduct of both parties in weighing the factors.
We have seen similar circumstances when a debtor takes cash from an exempt account and moves them in a manner which allows the creditor to be able to take the funds for satisfaction of the judgment. For example, if the debtor in this case had moved funds from the IRAs to his checking account for general purposes or for living expenses, the creditor would much more likely to have won their argument. Likewise, had the debtor transferred a substantial portion of his funds to his IRAs around the time when the judgment was obtained, the Court might have come to a different conclusion.
What is the lesson to learn from this case? If you are a creditor, it is wise to review the debtor’s assets prior to issuing credit to the debtor. If the debtor has substantially all or a large portion of their assets in protected accounts such as IRAs, remember that such accounts are protected from creditors.
If you have questions about collecting judgments, exempt property or Executions, please feel free to call us.