Shielding Funds in Spouse’s Bank Account

Posted by NCBRC - April 5, 2016

Depositing paychecks into a non-debtor spouse’s bank account in order to shield the money from creditors constitutes a fraudulent transfer. Pearson v. Suiter (In re Suiter), No. 15-83, Adv. Proc. No. 15-90020 (Bankr. Haw. Feb. 16, 2016).
Max Bradford Suiter was the owner of Canaan Construction. Thomas Pearson entered into a construction contract with Canaan. Litigation ensued.

When Mr. Suiter filed chapter 7 bankruptcy, Pearson filed a 171 count adversary complaint, alleging in pertinent part that Suiter was not entitled to discharge because he violated section 727(a)(2)(A) by transferring funds within one year of filing for bankruptcy with intent to defraud creditors. He also alleged that Suiter violated section 727(a)(4)(A) by uttering false oaths in bankruptcy. Pearson moved for partial summary judgment. At the hearing on the motion, Suiter admitted that to protect his income from potential IRS garnishment, he regularly signed his checks over to his wife who deposited them in her personal account.

With respect to the claim of fraudulent transfer, the court stated flatly, “Depositing paychecks into a bank account in the debtor’s wife’s name, and over which he has no control, in order to diminish the amount of money creditors would be able to obtain from a judgment against him, violates section 727(a)(2)(A).” (internal quotes omitted). That Mr. Suiter admitted the practice to the IRS did not change the fact that it was intended to, and did, make it more difficult for a creditor (the IRS) to garnish income. The court found Pearson was entitled to summary judgment on the issue of violation of section 727(a)(2)(A).

With respect to the claim under section 727(a)(4) alleging false oath in bankruptcy, the court found Pearson had the burden of proving four elements: “(1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently.” Courts have also included a materiality element under which the false statement or omission must relate to the debtor’s business dealings or estate, the discovery of assets, or the disposition or existence of property. The falsehood need not relate to a valuable asset or directly prejudice a creditor but must detrimentally impact the administration of the estate in some way. The misrepresentation must be made with fraudulent intent.

Pearson pointed to many statements made by Suiter as being in violation of section 727(a)(4), the majority of which the court found to be immaterial or lacking evidence of fraudulent intent (i.e. contradictory dates that Canaan Construction ceased operations; whether Suiter was self-employed or an employee of Canaan; discrepancies in spouse’s income). For other statements, the court found a genuine issue of fact as to the elements of section 727(a)(4) (whether funds Suiter gave his wife were gifts or payments for household expenses). Finally, for some statements Pearson failed to produce evidence that they were false (the value of Canaan Construction, the status of a trust). In short, the court denied summary judgment on all claims relating to false oaths.

The court held for a later day the issue of whether Pearson was an actual creditor of Suiter with standing to oppose discharge, finding that “Pearson’s motion seeks partial summary judgment only and does not ask me to decide the entire dispute between Pearson and Suiter.”

Suiter Bankr Haw opinion


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