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Cohen - Lawyer's Transfer Of Wages To Entireties Account Only Partially Protected From Creditor When Fraudulently Transferred

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Debtor was a general partner in a since-disbanded law firm, and was sued in his individual capacity by the firm's former landlord. Judgment was eventually entered against all the partners for over $3.2 million.

To recover on the Judgment, the landlord brought a fraudulent transfer action against the Debtor and his wife for transfers the Debtor made into various entireties accounts in Pennsylvania during his 35 years with the law firm and his long marriage with his wife.

The Trustee alleged both actual fraudulent transfer (i.e., the Debtor intended to defraud his creditors) and constructive fraudulent transfers (i.e., the transfers were without reasonably equivalent value and rendered the Debtor insolvent).

The Trustee's actual fraudulent transfer case failed, because the evidence showed that the Debtor had been depositing his wages into an entireties account for at least twenty years, and thus there was no evidence that his deposits were meant to defraud the landlord.

On the constructive fraudulent transfer, the Debtor's main defense was that he didn't make any transfer at all, but rather the transfers to the entireties account was automatically made by the law firm. The Court rejected this defense since the Debtor had control of his wages when they became due, and could direct the law firm to pay them wherever he wanted them paid.

Otherwise, the Court found that the transfers of the Debtor's wages to the entireties account constituted fraudulent transfers because no consideration exchanged for the transfers (although the Court allowed the Debtor to try to prove that a portion of the moneys were spent on necessities, which would have been consideration), and the transfers rendered the Debtor insolvent or he was insolvent when they were made.

As to the latter point regarding insolvency, the Court took into account the debt owed to the landlord and also that -- as an exempt asset -- the moneys in the entirety accounts would not be allowed to count towards the Debtor's solvency.

On the other hand, there is a four-year Statute of Limitations for a fraudulent transfer, which limited the Trustee's recovery to the past four years.

The Court also considered the Debtor's payment of their children's college educations, and concluded that those expenses were reasonable and necessary for the maintenance of the Debtor's family, at least for fraudulent transfer purposes. Similarly, the Court found that the purchase of certain life insurance policies by the Debtor to support his wife in case he died, were also reasonably and necessary expenses.

However, the Court found that $21,634 paid by the Debtor for vacation travel expenses, $2,601 for wines and liquor, and $804 for entertainment tickets, were all not reasonably necessary, and allowed the Bankruptcy Trustee to surcharge the entireties accounts for that amount. More painfully, the Court found that the Debtor could not account for $463,575 that were taken from the entireties account over the years, and allowed the Bankrutpcy Trustee to surcharge the entireties accounts for that much larger amount as well.

Some Analysis

I really don't deal with Tenancy by the Entireties (a/k/a TBE) very much, since I practice in Southwestern States that are mostly community property states. As such, I am reticent to comment more than to point out that while such property may be exempt by statute -- the transfers that change the character of the property from non-TBE to TBE property can often be challenged as a fraudulent transfer (as here) or as a "fraudulent conversion" in some states.

This Opinion also recalls the concept of "surcharge", which is the application of otherwise exempt assets to pay debts because of misconduct (liberally defined) by a debtor. Thus, if a debtor has $1 million in exempt property, but to spite his creditors variously burns $1 million off a bridge, or gives it to a charity in Africa, or gives it to his ex-wife, all for the purpose of keeping that $1 million from creditors, then the Court can order the debtor's exempt $1 million to be surcharged for the $1 million that the debtor lost.

The concept of "surcharge" is often overlooked in asset protection planning, and results in the planner and client presuming that something which is exempt stays exempt -- but exemptions have exceptions, and surcharge is one of them. Which is to say that is somebody is expecting exemption planning to provide a substantial part of their asset protection planning, they had better make sure that no other part of the planning results in a surcharge against those exempt assets.

Cite As

In re Cohen, 2012 WL 5360956 (Bkrtcy.W.D.Pa., Oct. 31, 2012). http://goo.gl/65E7m

This Article at http://onforb.es/130Kc0C and http://goo.gl/Co5sP