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In re Titus

United States Court of Appeals, Third Circuit

February 20, 2019

In re: PAUL H. TITUS, Alleged Debtor

          Argued January 7, 2019

          Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil Action No. 2-17-cv-00479/548) District Judge: Honorable Joy Flowers Conti

          Douglas A. Campbell (Argued) Kathryn L. Harrison Campbell & Levine Counsel for Appellants/Cross-Appellees

          Neal H. Levin (Argued) Freeborn & Peters Counsel for Appellee/Cross-Appellant

          Before: AMBRO, SHWARTZ, and FUENTES, Circuit Judges


          AMBRO, Circuit Judge

         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.

         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.

         I. Background

         A. Facts

         In 1999, the Pittsburgh law firm of Titus & McConomy dissolved. One of the firm's named partners, Paul Titus, joined another firm, Schnader Harrison Segal & Lewis LLP. The Schnader firm began depositing Mr. Titus's wages into a bank account he owned jointly with his wife.

         Evidently the dissolved Titus firm had walked away from its commercial lease. To recover rent that had gone unpaid since the dissolution, the landlord brought a breach-of-contract suit against the former partners of the Titus firm and ultimately secured a multimillion dollar judgment against the partners, including Mr. Titus.

         Armed with the breach-of-contract judgment, the landlord set its sights on the wages that Mr. Titus's new employer, the Schnader firm, was depositing into the Tituses' bank account. It brought a fraudulent-transfer action in Pennsylvania state court against Mr. and Mrs. Titus. This triggered an involuntary bankruptcy against Mr. Titus. Thus the landlord's fraudulent-transfer claim became a claim of the bankruptcy trustee in the Bankruptcy Court.[2]

         B. Procedural History in Bankruptcy

         After a first trial, the Bankruptcy Court concluded that the direct deposit of wages into the Tituses' bank account was a fraudulent transfer that the trustee could recover from either Mr. or Mrs. Titus, who jointly owned the account as tenants by the entireties. As for the measure of liability, Mr. and Mrs. Titus were liable for the amount of Mr. Titus's wages that were "not spent on necessities." In re Titus (Titus I), 467 B.R. 592, 620 (Bankr. W.D. Pa. 2012).

         On appeal, the District Court affirmed that the wage deposits were a fraudulent transfer. It remanded for a new trial, however, to give the Tituses a second chance to identify both the source of certain "unexplained deposits" into the bank account and the destination of certain "unknown expenditures" from the account. Titus v. Shearer (Titus II), 498 B.R. 508, 520, 525 (W.D. Pa. 2013).

         After a second trial, the Bankruptcy Court made the following findings as to deposits into, and expenditures from, the bank account:

         (Image Omitted)

         See In re Titus (Titus III), 566 B.R. 755, 797 (Bankr. W.D. Pa. 2017). A note on terminology: The Bankruptcy Court divided the spending from the account into "necessity expenditures" and "non-necessity expenditures," which it sometimes called "Non-Objectionable Expenditures" and "Objectionable Expenditures," respectively. See, e.g., id.; see also id. at 765, 768, 777-78. For simplicity, we use the necessity/nonnecessity nomenclature. To give some content to these terms, "necessities" included items such as a lawnmower and batteries, id. at 792-93, while the Tituses' "non-necessities" included, among other things, their grandson's application fee to Notre Dame, id. at 797.

         Using the figures set out above, the Bankruptcy Court went about calculating the Tituses' liability. But the Court immediately hit a roadblock: Because money is fungible and wage and nonwage deposits commingled in the account, it was impossible to determine whether a dollar of wages was eventually spent on a permissible "necessity" or an impermissible "non-necessity." As a result, the Court had to calculate liability indirectly.

         It did so using what it could measure: nonwage deposits and non-necessity spending, which are represented below the dotted line in the chart. The Court's underlying assumption was that all explained, nonwage sources of cash in the account (both explained nonwage deposits and cash already in the account) were spent on non-necessities before any wage deposits were impermissibly spent on whatever non-necessities remained. Thus the Tituses' total liability was:

(Non-Necessities) - (Explained Nonwages) - (Initial Balance)
= $1, 000, 133.51 - $634, 998.83 - $91, 272.00
= $273, 862.68.

Id. at 799. Over the Tituses' objection, the Court did not offset their non-necessity spending even further by the amount of unexplained nonwage deposits. Had it done so, an additional $268, 167.09 would have been shaved off the remaining nonnecessity spending, leaving a judgment against the Tituses of only $5, 695.59.

         The District Court affirmed. Neither side is fully satisfied with various rulings of the Bankruptcy and District Courts, and both have appealed.

         II. Jurisdiction and Standard of Review

         The District Court had jurisdiction to review the final order of the Bankruptcy Court under 28 U.S.C. § 158(a). We have jurisdiction to review the final order of the District Court per 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. Because the District Court acted as an appellate court, we review its determinations de novo. In re Bocchino, 794 F.3d 376, 379 (3d Cir. 2015). We review the legal conclusions of the Bankruptcy Court de novo and its factual determinations for clear error. Id. at 380.

         III. Discussion

         After two trials in the Bankruptcy Court, two appeals to the District Court, and four rounds of briefing in our Court, ...

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