A Transfer is Not Fraudulent If Only a Non-Filing Spouse’s Interest in Joint Property is Involved

By Karl Johnson posted 01-02-2019 12:39 PM

Karl Johnson, Briggs and Morgan, P.A.
Jeffrey Klobucar, Bassford Remele, P.A.

 Contributing Editor: Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.

In Seaver v. Noll, Adv. No. 17-4066, 2018 WL 4693813 (Bankr. D. Minn. Sept. 27, 2018), the bankruptcy court held that transfers “executed to prevent the defendant’s property from being caught up in the debtor’s bankruptcy case” were neither constructively nor actually fraudulent. The Court also analyzed each transaction to determine that, except for one miscalculation, the transfers were not otherwise voidable.

The debtor held a minority interest in a business. When the business defaulted on its mortgage, the bank obtained a judgment of over $2 million based on the debtor’s personal guarantee. The debtor subsequently filed a bankruptcy petition.

The debtor and the debtor’s non-filing spouse had conducted several pre-petition transactions including: (1) transfers from joint accounts to the non-filing spouse’s account; (2) deposits to 529 college-savings accounts; (3) tax payments; and (4) tax refunds deposited in the non-filing spouse’s individual account. The trustee alleged that these transfers were actual or constructive fraudulent transfers under 11 U.S.C. § 548 or, in the alternative, voidable under Minn. Stat. §§ 513.44, 513.45, or 513.47 (the Minnesota Uniform Voidable Transactions Act).

The Court, relying on Minn. Stat. § 524.6-203(a), which provides that the funds in a joint account belong to the parties in proportion to their net contributions, made findings of fact that the transfers from the joint account did not involve an interest of the debtor in property and therefore did not satisfy the elements for a fraudulent transfer. The Court applied the same principle to determine that the 529 college-savings account deposits also came from the non-filing spouse’s share of the joint account and were not voidable.

For the tax payments and tax refunds, the Court relied on In re Carlson, 394 B.R. 491, 493 (B.A.P. 8th Cir. 2008), for the principle that ownership interests in tax refunds are proportional to the spouses’ respective contributions to tax payments. Applying this principle, the Court calculated the respective ownership interests of the debtor and the non-filing spouse in the 2014 and 2015 income-tax refunds.

The Court found that the couple miscalculated the correct proportion of the 2014 tax refunds that belonged to the non-filing spouse and held that this difference, while not intentionally fraudulent, was voidable.

The couple’s 2015 federal income-tax refund was garnished for the debtor’s business liability and the entire state refund was held for distribution upon the Court’s direction. Because the entire federal refund, including the spouse’s share, was applied to an antecedent tax liability of the debtor, the garnishment was for reasonably equivalent value and not a constructive fraudulent transfer. See 11 U.S.C. § 548(d)(2)(A). The Court also calculated the spouse’s share of the state refund and applied it against the amount avoided for the 2014 refund.

In considering the trustee’s allegation of the couple’s actual fraudulent intent, the Court acknowledged the presence of numerous badges of fraud, Minn. Stat. § 513.44(b) (2017), and, for purposes of the preference analysis of Minn. Stat. 513.45(b), a presumption of fraud in transfers between spouses. Neubauer v. Cloutier, 122, N.W. 2d 863, 867 (Minn. 1981). However, the Court found that bank-statement memos evidencing the intent of the transactions and evidence of the couple’s reasonable reliance on their accountant’s advice overcame this presumption.

Out of $80,000 in fraudulent transfers alleged by the trustee, the Court held that the non-filing spouse owed a net $5,420.39, including costs, due to an unintentional miscalculation by the couple.