After attorney Paul Titus broke a building lease when his old firm, Titus & McConomy, dissolved, the landlord went after him for millions of dollars in unpaid rent by gunning for his wages from his new firm, Schnader Harrison Segal & Lewis.
The landlord’s claim persisted after Titus’ bankruptcy, and on Wednesday, the U.S. Court of Appeals for the Third Circuit held that Titus and his wife are liable for fraudulent transfer under the Pennsylvania Uniform Fraudulent Transfer Act for depositing his wages from Schnader in a joint bank account, effectively obscuring whose money was whose.
However, the Tituses lawyer, Douglas Campbell of Campbell & Levine in Pittsburgh, said the couple never acted with fraudulent intent and that they are the victims of what he calls the “marriage penalty.”
“I characterize this no-fault spousal liability as a ‘marriage penalty’ because there would have been no such liability if Mr. and Mrs. Titus had merely been unmarried co-owners of a joint bank account,” Campbell said. “Legally, as it now stands in the federal courts, marriage in Pennsylvania increases the risk of liability for the debts of others.”
Now, after two trials in Bankruptcy Court and two appeals, the circuit court panel summed up the legal debacle with three conclusions:
“First, Mr. and Mrs. Titus are liable for a fraudulent transfer. When the wages of an insolvent spouse are deposited into a couple’s entireties account, both spouses are fraudulent transferees,” said Third Circuit Judge Thomas Ambro wrote in the court’s opinion.
Secondly, the court clarified the way in which courts should measure such liability, even though in this case, the trustee could not challenge the method used.
“The bankruptcy trustee waived any challenge to the method used by previous courts to calculate fraudulent-transfer liability. Going forward, however, we clarify how future courts should measure liability when faced with an entireties account like the Tituses’—an account into which deposits consist of both (fraudulent) wages and (non-fraudulent) other sources, and from which cash is spent on both (permissible) household necessities and (impermissible) other expenditures,” Ambro said. “Until now, a trustee somehow had to show that wage deposits were impermissibly spent on non-necessary expenditures, even though wage and nonwage deposits had become commingled in the account. Rather than expect a trustee to trace the untraceable, future courts should generally presume that wage deposits were spent on non-necessary expenditures in proportion to the overall share of wages in the account as a whole.”
And lastly, despite argument to the contrary, Ambro said the Bankruptcy Court did err in its method of calculating fraudulent-transfer liability.
Trustee Robert Shearer is represented by Neal Levin of Freeborn & Peters in Chicago.
“We certainly applaud the ruling in terms of upholding 80 years of precedent in the jurisdiction,” Levin said.
Campbell said the court later denied a motion to certify the issue for review by the Pennsylvania Supreme Court.
“The notion that entireties ownership can be used by a debtor-spouse’s creditor as a sword to establish personal liability against a non-debtor spouse, rather than as a shield against such creditor’s claim, seems inconsistent with purpose of the doctrine as expressed over centuries in decisions of Pennsylvania’s courts,” Campbell said.
Titus is counsel in Schnader’s Pittsburgh office. His practice involves shareholder disputes, securities issues, contract disputes, governmental regulation and antitrust litigation. He represents governmental entities as well as public and private institutions, according to his firm biography. He is also a part of the firm’s pro bono committee and alternative dispute resolution practice group.