Recently, the 11th Circuit Court of Appeals decided a case (Key Equipment Finance, Inc. v. Overend) that causes us to revisit the question of spousal liability. We care because the 11th Circuit (a federal appeals court) covers Georgia, and the case involved a question of Georgia law.
George Overend borrowed money from KeyBank to finance the construction of a medical imaging center. After he borrowed money, he transferred a one-half interest in his home to his wife's revocable trust. Overend's business venture went bankrupt, and when KeyBank tried to collect it's money, KeyBank argued that it could set-aside the homeplace transfer as a fraudlent conveyance.
First, what is a fraudulent conveyance? It is an asset transfer made by a debtor for the purpose of defeating legitimate creditor claims. To fall under the fraudulent conveyance act, the transfer must be made after the creditor knows or should have known that a creditor has a claim against him or her (e.g., after money was borrowed or after a suit is filed), and is usually one that has the effect of rendering the debtor insolvent. If a conveyance is deemed fraudlent, then it is voidable, meaning it can be set aside.
The KeyBank versus Overend case went to trial and, at the end of the trial, the Judge gave the jury instructions concerning Georgia law. One of those instructions comes from O.C.G.A. § 19-3-10. There, Georgia law says "when a transaction between a husband and wife is attacked for fraud by the creditors, the onus shall be on the husband and wife to show that the transaction was fair." Apparently, the jury found it was not fair because it returned a verdict in favor of KeyBank.
On appeal, Overend argued that O.C.G.A. § 19-3-10 does not apply in fraudulent coneyance cases. He argued that the fraudlent conveyance statute is a comprehensive statute that displaced (essentially repealled) O.C.G.A. § 19-3-10. The 11th Circuit disagreed. It found that a special statute takes priority over a general statute, and it also found that the Georgia legislature specifically amended the fraudlent conveyance statute (in another context) to prevent a different in tort law from preventing the assignment of fraudulent conveyance claims. Since the Georgia legislature did not appear to agree with Overend's argument about the comprehensive nature of the statute, the court found no reason to accept his argument. The judgment against Overend was confirmed.
So what does this mean? Well, it does not alter the general rule discussed in our prior post. However, when spouses transfer assets between each other they might become liable, at least for the value of the transferred assets. How might that occur? Well, if a husband has a stroke and can no longer manage his assets, and his are subsequently transferred to his healthy wife, the wife might become liable for the husband's unpaid credit card debt even though the general rule is that a spouse isn't liable for the other spouse's debts. The reason she would be liable is not because they are married - she is liable because she took the assets her husband would have used to pay his own debts.
The law is a tangled web of rules and exceptions. If you sometimes feel confused, don't feel like you're alone. Lawyers spend years learning the in's and out's of the various rules so they can help you. If you have questions about issues like the ones raised in this post, give us a call.