In a consolidated appeal from an adversary proceeding in bankruptcy court (Bohm v. Titus (In re Titus), 467 B.R. 592 (Bankr. W.D. Pa. 2012)), the United States District Court for the Western District of Pennsylvania was recently called upon to interpret Pennsylvania’s Uniform Fraudulent Transfer Act (“PUFTA”). Titus v. Shearer, Nos. 12-1559, 12-1560, 2013 U.S. Dist. LEXIS 140269 (W.D. Pa. Sept. 30, 2013). At issue in the case was whether the bankruptcy court properly found a constructive fraudulent transfer had taken place under PUFTA after the debtor, who was separately determined to be personally liable under a commercial lease entered into on behalf of his former law firm, allegedly had his new law firm deposit his wages in a checking account he owned with his wife as tenants by the entireties. The landlord creditor originally commenced the fraudulent transfer action in state court, but it was subsequently prosecuted by a bankruptcy trustee after the debtor successfully removed the action to bankruptcy court following the creditor’s separate filing of an involuntary bankruptcy petition against the debtor under Chapter 7.
In the case, it was the trustee’s position that the bankruptcy court had improperly refused to allow it to recover fraudulent transfers made after the complaint was filed and had incorrectly required it to prove that the transfers were not spent on necessities as part of its prima facie case under PUFTA. The debtor, on the other hand, argued that the court: (1) should have followed the state court’s ruling before removal that recovery against debtor’s wife was limited to “luxury” expenses for her benefit; (2) should not have required them to carry the burden of production on account expenditures and deposits, and that they were prejudiced by the same; (3) should not have concluded that debtor and his wife were jointly and severally liable as “transferees” of “assets” under PUFTA; and (4) should have found that debtor’s liability was discharged in the bankruptcy proceedings. (AUTHOR’S NOTE: the debtor also challenged the trustee’s evidence proffered to support the amount of the fraudulent transfers, but it is not discussed here because it did not directly implicate PUFTA).
With respect to the trustee’s arguments, the court agreed with the trustee that the bankruptcy court had not properly determined the reach-back period for identifying fraudulent transfers, but affirmed the bankruptcy court’s conclusion regarding the burden of proof on necessities. As to the former issue, the court disagreed with the bankruptcy court that wages paid after the complaint was filed were not recoverable since the debtor had not yet “acquired rights in the asset transferred” within the meaning of PUFTA. According to the court, neither PUFTA nor the caselaw interpreting it established an outer limit on the date for recovering fraudulent transfers after, as opposed to before, a complaint has been filed. Accordingly, the court reversed and remanded this issue to the bankruptcy court, with the instruction to consider “applicable principles of equity” under PUFTA to determine whether such transfers should be recoverable under the particular facts of the case. Concerning the latter issue, however, it was the court’s opinion that the bankruptcy court properly construed PUFTA as requiring the creditor to prove that the transferred funds were not used for “reasonable and necessary household expenses” because such a showing was a prima facie element of the creditor’s case under PUFTA, rather than an affirmative defense that belonged to the debtor.
In regard to the debtor’s arguments, the court largely upheld the conclusions of the bankruptcy court. Beginning with the challenge to the bankruptcy court’s decision not to follow the state court’s ruling, the court held that the decision was proper because the state court ruling was clearly erroneous, particularly since PUFTA did not exempt only “luxury” expenses-i.e., every expense that is not a “luxury” is not necessarily a necessity and therefore exempt from PUFTA. Similarly, the court also held that the bankruptcy court correctly determined that the burden of production with respect to the necessary expenses should rest with the debtor since they were in control of the information. Nonetheless, the court held that the bankruptcy court’s delayed ruling on the issue deprived the debtor of the opportunity to present evidence, thus making it proper to remand the issue to the bankruptcy court for further proceedings.
Moving on to the third issue, the Court again upheld the bankruptcy court’s interpretation of PUFTA. Essentially, it was the debtor’s position that the wages paid directly from his employer into the entireties account were not “assets” because: (1) such wages are exempt for purposes of collecting a debt under Pennsylvania law, and (2) property held as tenants by the entireties is exempt if the creditor’s claim is against only one of the tenants. The court rejected these arguments. First, the court noted that it would work an incongruous result to allow a debtor to use direct deposit to avoid PUFTA when the debtor would be liable had the employer given him a check that he could have cashed and then deposited into the account. Second, the court declined to hold that the entireties account was exempt because the debtor’s wife owned and controlled the account and had not received reasonably equivalent value for the funds deposited in the same. The court also separately acknowledged that, with respect to the debtor, it was anomalous to treat him as both a “transferor” and a “transferee” but held that it was not aware of any authority that compelled a different conclusion.
Finally, concerning the fourth issue, the court rejected the debtor’s argument that the bankruptcy discharge precluded fraudulent transfer liability. According to the court, liability could still attach because the trustee was pursuing the fraudulent transfers under the bankruptcy code as a consequence of the debtor removing the state court action to bankruptcy court. Accordingly, because fraudulent transfers under the bankruptcy code were not discharged, the debtor remained liable for the transfers without regard to the discharge.
The full text of the court’s decision can be found here Titus v. Shearer – 10-3-13.pdf