New opinion

In re: Titus — bankruptcy — affirmance — Ambro

The opening paragraph:

When his old law firm broke its lease, attorney Paul Titus was on the hook for millions of dollars in unpaid commercial rent. The landlord tried to recover the rent by targeting the wages Mr. Titus was earning at his new firm. But Mr. Titus’s wages never passed through his hands alone; instead, they were deposited by his new firm directly into a bank account owned by both Mr. Titus and his wife as tenants by the entireties.

Not the first paragraph Mr. Titus was hoping for, I suspect. It continues:

Eventually, Mr. Titus was forced into bankruptcy and the landlord’s claim became a claim of the bankruptcy trustee. Now, after two trials in the Bankruptcy Court and two appeals to the District Court, we reach 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. Second, as for the precise measure of the Tituses’ liability, 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.1 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. Third, in evaluating the Bankruptcy Court’s application of the method in play at the time of its decision, we perceive no clear error. Thus we affirm.

In the footnote, the opinion noted that Judge Shwartz did not join the opinion’s discussion of the pro rata approach because it was unnecessary given the court’s finding of waiver and that instead choosing the liability-calculation method should be left to trial judge.

This case is one of many that arose out of the 1999 dissolution of the Pittsburgh firm Titus & McConomy. Third Circuit Judge Hardiman was a partner there from 1996 to 1999 and was a party to at least one of those other cases. In 2016, another Titus & McConomy appeal was decided by three non-Third Circuit judges, presumably because the entire court had recused.

Joining Ambro were Shwartz (with the exception noted) and Fuentes. Arguing counsel were Douglas Campbell of Campbell & Levine for the lawyer and his wife and Neal Levin of Chicago for the bankruptcy trustee.