Federal Appeals Court Upholds Finding Of Fraudulent Transfer Into Married Couples’ Joint Account And Subjecting Spouse To Personal Liability
February 22, 2019
A recent case from the Third Circuit addressed whether the Pennsylvania fraudulent transfer laws in the context of a bankruptcy. The case involved a lawyer whose old firm dissolved and broke a commercial lease. When the firm broke the lease, attorney Paul Titus was liable, along with his other partners, for millions of dollars in unpaid commercial rent. The landlord tried to recover the rent by targeting the wages Mr. Titus was earning at his new law firm. However, Mr. Titus’s wages never passed through his hands alone; instead, they were deposited by his new firm directly into a bank account owned jointly by Mr. Titus and his wife as tenants by the entireties. Generally, property owned as tenants by the entireties, i.e. jointly by married individuals, is exempt from execution on a judgment against only one spouse.
Eventually Mr. Titus filed for bankruptcy and the bankruptcy trustee sought liability against Mr. and Mrs. Titus for transferring his wages into a joint account. The Court found that this was indeed a fraudulent transfer. The Court stated that “[w]hen the wages of an insolvent spouse are deposited into a couple’s entireties account, both spouses are fraudulent transferees.” This finding was made pursuant to Pennsylvania’s fraudulent transfer law.
More specifically, the Court found that the “direct deposit of wages into an entireties account is a ‘transfer’ of an ‘asset'” under the PA fraudulent transfer law and therefore subject to the law. The Court found that Mr. Titus’ wages were an asset of his and that they ceased to be his sole asset when they were deposited in a joint account. As Mr. Titus exercised control over where his wages were deposited, this amounted to a transfer. Mrs. Titus objected that depositing of wages into an entireties account cannot subject her to personal liability. However, the Court found that the case law on the subject holds that when “a spouse conveys individual property to a tenancy by the entireties in fraud of creditors, the creditor may nevertheless execute against the property so conveyed…[and n]umerous courts have applied this rule to hold an insolvent debtor’s spouse personally liable for a fraudulent transfer.” More plainly, when individual property is transferred to a joint account instead of to creditors owed money, the non-owing spouse can be subject to liability. In addition, the Court found that Mr. Titus was liable as a fraudulent transferee even though he was also the transferor.
The case also dealt with the extent of the Titus’ liability for the particular facts at hand in the case but the lesson of this case is that transferring items to jointly held accounts or assets with your spouse can be held to be a fraudulent transfer if it is made to the detriment of creditors. It is probably not unusual for most people to deposit their wages into an account that is jointly owned with their spouse, but in this case it subjected to the spouse to liability as a fraudulent transferee. Now Mr. Titus most likely would not have made out any better by depositing his wages into a non-joint account as they would have still been open to attack. However, the lesson here is that transferring items to into items held by husband and wife will not insulate them from attack when there is an existing liability for one spouse and can potentially subject the innocent spouse to liability. You should always consult with an experienced attorney before taking actions that could unexpectedly subject your spouse to personal liability. The lawyers at Conway Schadler have the experience and knowledge to counsel you in these areas and a lawyer that you can count on can make the difference in litigation.