On February 28, in Cohen v. Sikirica (In re Cohen), 478 B.R. 615 (W.D. Pa. 2013), the U.S. District Court for the Western District of Pennsylvania affirmed the decision of the U.S. Bankruptcy Court for the Western District of Pennsylvania, which held that direct deposits of a debtor’s paycheck into an entireties account held jointly by the debtor and his wife constituted fraudulent transfers under Pennsylvania law. The debtor and his wife appealed the bankruptcy court ruling, but the district court affirmed the decision of the bankruptcy court.

The Facts

David I. Cohen filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on October 14, 2005, after a verdict was entered against him and certain other defendants in a state-court action pending in the Allegheny County Court of Common Pleas. During the course of the debtor’s bankruptcy case, the Chapter 7 trustee, Jeffrey J. Sikirica, commenced an adversary proceeding against the debtor and his wife, Elaine Cohen, alleging that certain portions of the debtor’s deposits into an entireties account held jointly by the Cohens were fraudulent transfers under Pennsylvania law. Specifically, Sikirica asserted that those portions of the debtor’s paycheck that were directly deposited into the account, but that were subsequently spent on items other than necessary living expenses for the Cohens, constituted fraudulent transfers under the Uniform Fraudulent Transfer Act (UFTA). The UFTA has been adopted in Pennsylvania in all relevant respects.

During the couple’s marriage, it was the debtor’s practice to deposit his entire paycheck into an entireties account for his own benefit and for the benefit of his wife. While she was employed, Elaine Cohen also deposited her paycheck into the account. After her retirement, Cohen routinely deposited her retirement checks into the account. The account was used to fund necessary living expenses as well as the couple’s other expenses.

The Cohens appealed the decision of the bankruptcy court, which held that $488,615 of the debtor’s direct deposits into the account constituted fraudulent transfers and were therefore recoverable by the trustee. The Cohens raised a number of issues on appeal, including: (1) whether the deposit of Elaine Cohen’s paychecks and retirement checks into the account provided reasonably equivalent value for the debtor’s deposits into the account; and (2) whether the deposit of wages directly into an entireties account constituted the transfer of an asset for purposes of the UFTA.

Reasonably Equivalent Value

The Cohens asserted that the deposit of Elaine Cohen’s paychecks and retirement checks into the account provided reasonably equivalent value for David Cohen’s deposits of his paychecks into the account. Consequently, they argued that the debtor’s deposits into the account would not violate the UFTA, which provides in 12 Pa.C.S. §§ 5104(a), 5105, that a fraudulent transfer occurs when a debtor makes a transfer "without receiving a reasonably equivalent value in exchange for the transfer."

The district court analyzed whether, as a matter of law or fact, Elaine Cohen’s contributions to the account constituted reasonably equivalent value. As to whether her contributions to the account constituted reasonably equivalent value as a matter of law, the Cohens argued that Elaine Cohen’s deposits into the account, no matter their size, constituted reasonably equivalent value. They maintained that when both spouses deposit their earnings into an entireties account, one spouse’s deposits should constitute fair consideration and reasonably equivalent value for the other spouse’s contributions. The district court disagreed with the Cohens’ argument, and further noted that "intangible, non-economic benefits, such as preservation of marriage, do not constitute reasonably equivalent value." As a result, the court held that Elaine Cohen’s contributions to the account did not constitute reasonably equivalent value as a matter of law.

The court next turned to whether Cohen’s contributions to the account constituted reasonably equivalent value as a matter of fact under the specific circumstances of the case. The court noted that, in Pennsylvania, reasonably equivalent value under the UFTA is ascribed the same meaning as it is given in the Bankruptcy Code. Under U.S. Court of Appeals for the Third Circuit precedent in VFB LLC v. Campbell Soup, 482 F.3d 624, 631 (3d Cir. 2007), (quoting Pension Transfer v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Retirement Plan (In re Fruehauf Trailer), 444 F.3d 203, 213 (3d Cir. 2006)), "a party receives reasonably equivalent value for what it gives up if it gets ‘roughly the value it gave.’" Although a dollar-for-dollar equivalent is not necessary under this test, reasonably equivalent value will not be deemed to have been given where the value received was only a small portion of the value that was given. In this case, although the specific amounts of David Cohen’s and Elaine Cohen’s respective deposits were not discussed, the court noted that the debtor’s transfers to the account "dwarfed" those made by Elaine Cohen. Accordingly, the court held that the bankruptcy court was correct in holding that Cohen’s contribution of her paychecks and retirement checks to the account did not constitute reasonably equivalent value.

Transfer of Assets

The Cohens also argued that the direct deposit of the debtor’s paycheck into the account did not constitute a "transfer" of an asset under the UFTA, presumably because the debtor never had personal control over the funds before they were deposited into the account. The court rejected this argument as well, noting that the Cohens’ argument placed form over substance. Pointing out that David Cohen directed his employer to deposit his paychecks into the account, the court had little trouble in finding that he exercised sufficient control over the funds. The district court also noted that the Cohens had not been able to cite any case, from any of the 45 jurisdictions that have adopted the UFTA, in which it was held that a direct deposit into an entireties account is not a transfer for purposes of the UFTA. The district court therefore affirmed the holding of the bankruptcy court that the direct deposits were transfers within the meaning of the UFTA, and held that the Cohens were required to return to the trustee those transfers that were not spent on necessary living expenses.

Lessons Learned

In general, property held in Pennsylvania by husband and wife, as tenants by the entireties, is protected from recovery by a trustee where only one of the spouses is a debtor in bankruptcy. This case erodes that principle somewhat, providing that direct deposits of a debtor’s paycheck into an entireties account are susceptible to a "claw back." Even where the debtor has no fraudulent intent in depositing his or her paycheck into an entireties account, such a deposit constitutes a transfer for purposes of the UFTA. Also instructive is the fact that spouses who deposit their earnings into the same account are not necessarily protected from a UFTA attack: Unless their respective deposits are roughly equivalent, the money not used for common and necessary expenses may have to be disgorged. •

Rudolph J. Di Massa Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors’ rights.

Catherine E. Beideman is an associate with the firm and practices in the area of business reorganization and financial restructuring. She graduated in 2007 from Boston College Law School. She is admitted to practice in Pennsylvania and New Jersey.