Joint Liability of Spouses for Fraudulent Transfer of Wages of One Spouse into Joint Bank Account
It is common for a married couple to maintain a bank account owned jointly into which wages paid to one or both of the spouses are deposited. Normally, a creditor of one spouse will not be permitted under the law to impose liability on the non-debtor spouse. The exception to this rule was the subject of a recent decision by the United States Court of Appeals for the Third Circuit. The Third Circuit considered an appeal of a judgment for fraudulent transfers entered in favor of a bankruptcy trustee against an attorney and his wife under the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA), which is similar to Maryland’s fraudulent conveyance law.
A “multimillion” dollar judgment was entered against the attorney by a landlord. The attorney joined another law firm which thereafter deposited his wages into a bank account owned jointly by the attorney with his wife. The account, which also contained non-wage deposits, was used to pay necessary living expenses and expenses found not to be necessary. The judgment creditor sued the attorney and his wife claiming that the wages deposited into the joint account were fraudulent transfers under the PUFTA. After the attorney was forced into bankruptcy, the trustee took over the prosecution of the action. Under the PUFTA, a transfer made by an insolvent debtor without having received reasonably equivalent value may be avoided. The Bankruptcy Court entered judgment against the attorney and his wife.
The Third Circuit affirmed the judgment. First, the court concluded that the wages deposited into the joint bank account were a “transfer” of the attorney’s property under the PUFTA even though the deposits were made by his employer. Second, the court concluded that the attorney’s wife was personally liable as one of the two owners of the account. Third, the court found that the attorney was liable as both the transferor and transferee of the funds, though the court added that there could only be one recovery.
Having reached these conclusions the court next decided how the fraudulent transfer liability should be calculated. It initially noted that under the PUFTA wages that are deposited into an account owned jointly by spouses and used to pay reasonable and necessary household expenses are not fraudulent transfers. Thus, the amount of wages used for necessary expenses should be deducted from the amount to be awarded. However, the court noted that where funds in a joint account are commingled and used for necessary and non-necessary expenses, then the calculation of liability is uncertain. Although it affirmed the judgment, which was calculated under a different formula, the court stated that in future cases a “pro rata approach” should be used to calculate liability where there are commingled funds in the account and a tracing of deposited funds is not possible. Under the pro rata approach, the percentage of wage deposits to the total amount deposited in the joint account, multiplied by the amount of non-necessary expenses, should be the liability. For example, if total deposits amount to $2,000,000 and wages deposited by the insolvent debtor were $1,000,000 of that amount, and non-necessary expenditures were $1,000,000, then the amount of liability would be $500,000 (50% x $1,000,000).
Maryland’s fraudulent conveyance law is similar to Pennsylvania’s. The Third Circuit’s decision clarified the non-debtor spouse’s liability, and its pro rata approach to the calculation of liability should assist courts and parties in future cases involving similar facts. Please contact Lawrence Coppel for more information on this topic.