Fraudulent Transfers of Corporate Profits

One unresolved issue in common law of fraudulent conveyance concerns business profits or distributions from closely held corporations which are used to support the debtor’s family. For example, suppose a judgment debtor supports his spouse and children with earning from his business corporation of which he is the chief executive and sole stockholder. The business pays the debtor a salary and profit distributions. The debtor deposits all salary and profit distributions into a bank account owned jointly with his non-working wife. The money in the account is used solely to support his wife and children. The salary is exempt because the debtor is head of household. The question is whether the deposits of corporate distributions to the joint checking account are fraudulent transfers of the debtor’s corporate profits to the debtor and his wife.

I don’t know of any case that has addressed this issue in Florida. I do not think these transactions fall within the intent of fraudulent transfer law. My conclusion is based on, among other things, Florida marital law. All earnings of this debtor during the marriage are marital property, and therefore, the debtor’s wife would have a 50% interest in accrued corporate profits in the event of a divorce. Therefore, the profits are jointly owned when earned. The martial law is consistent with another argument that the deposit in the joint account is made for consideration- the working husband is providing financial support in exchange for his wife’s work at home in support of himself and his children. Transfers for reasonable consideration are generally not fraudulent as to creditors. To the extent corporate profits are deposited in regular amounts and at consistent intervals also supports arguments against their being fraudulent conveyances. I would arrive a different conclusion if the debtor historically accrued profits within the company and made a large, one-time transfer from the corporation to a joint account on the eve of a legal problem. I would be interested in anyone’s contrary opinion of this hypothetical because I am not sure how a courts would rule.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida