Michigan Court of Appeals Rules Against Prominent Lawyer in Fraudulent Transfer Suit

Asset protection planning attorneys need to be vigilant that strategies they are recommending do not violate the Michigan Fraudulent Transfer Act (“Act”). In Bentley Terrace Dillard Family Trust v. Schlussel, the Michigan Court of Appeals provided and detailed and well-reasoned opinion and concluded that a debtor lawyer’s transfer of assets to his wife for the ostensible purpose of paying ordinary household expenses was a fraudulent transfer.

As is common in many of these cases, the debtor’s actions were so egregious that he makes it easy for the court to find fraudulent intent. Here, the debtor was earning in excess of $350,000/year (one year as much as $850,000) and instead of depositing such monies into his own or a joint account with his wife endorsed his paycheck over to his wife. In this way the debtor was left with no assets from which the creditor could collect. The creditor claimed that such transfer was fraudulent under the Act. The Court of Appeals agreed with the creditor finding that (i) the debtor had actual intent to hinder, delay or defraud his creditors and (ii) the transfers constituted a constructive fraud.

The Court listed the factors to be considered in determining whether the debtor had actual intent and discussed how the debtor’s activities corresponded with a significant number of those factors. Additionally, the Court went through a constructive fraud analysis and focused on the concept of “reasonably equivalent value”. Specifically, the Court reviewed the debtor’s claim that the transfer of his law firm earnings to his wife was for reasonable equivalent value; namely, her promise to pay the couple’s ordinary household expenses in the future. The Court summarily dispensed with the debtor’s argument. The Court observed that reasonably equivalent value means the debtor received property in exchange for the transferred property. The mere promise of debtor’s spouse to pay future expenses is not property and therefore does not equate to the concept of reasonably equivalent value.

Since the purpose of the Act is to protect a debtor’s estate from being depleted to the prejudice of the debtor’s unsecured creditors, a transfer made in exchange for a promise to pay future household expenses cannot be considered equivalent value. This is especially so since “value” must be considered from the creditor’s viewpoint. Accordingly, while a debtor may legitimately feel that he is receiving value for his transferred property, the received property is not reasonably equivalent value if it is not of equivalent value from the creditor’s perspective. So while our lawyer friend does receive some value knowing his spouse will pay their future bills, this does nothing to help the creditor; indeed, the transfer rendered the debtor insolvent with nothing to show for it.

One of the interesting twists to this case is that the debtor could have invoked a strategy that would have allowed him to keep 75% of his earnings instead of making such earnings totally available to his creditor when the Court voided the transfer. Under federal law, a creditor can only garnish up to 25% of the debtor’s weekly disposable earnings. The debtor could have allowed his creditor to garnish his wages and then retain the net amount without fear of the creditor touching the money. Indeed, the lawyer would have been well advised to deposit the net, after garnishment amount, in a segregated bank account so that there would be no question that these specific funds are immune from further collection by the judgment creditor. Clearly the lawyer outsmarted himself…as many debtors do when they proceed blindly without the input and expertise of those knowledgeable in the field.