Tuesday, October 25, 2005

Case Law Development: Attorney Liability for Assisting Divorce Clients in Fraudulent Transfers

When an attorney assists a spouse in fraudulently transferring community property, what liability, if any, may the attorney have to the defrauded spouse? 

In addition to disciplinary sanction and civil actions for fraud or conversion, the Texas Court of Appeals has now added conspiracy to violate the Uniform Fraudulent Transfer Act to the list of possible consequences.  The case represents a significant extension of liability under both UFTA and divorce law. 

Chu v. Hong, 2005 Tex. App. LEXIS 8767 (October 20, 2005)
Opinion online at http://www.2ndcoa.courts.state.tx.us/opinions/HTMLOpinion.asp?OpinionID=17016 (last visited October 24, 2005 bgf)

The court upheld a verdict against an attorney who assisted his client in cheating his wife out of her share of the family business, a donut shop. The court affirmed that the attorney could be liable for this conduct under the Texas Uniform Fraudulent Transfer Act (TUFTA), treating Wife as a “creditor” and Attorney as an “insider” under the act.   Attorney was representing buyers of Husband and Wife’s donut shop.  When Wife refused to go through with the sale, Attorney assisted Husband in preparing documents to show that he alone owned the shop so that he could complete the sale.  Wife then filed for divorce from her husband and sued Attorney under TUFTA.  In the consolidated action, the trial court granted the divorced, voided the sale of the shop and granted title to Wife, and entered judgment against Attorney on a jury verdict that included $1.5 million in punitive damages.

Judge Gardner dissented, arguing that a claim of “fraud on the community” within the divorce was the proper cause of action to remedy the fraud and that Attorney could be liable under that theory.  The dissent objected to the extension of TUFTA to this case, however, arguing that “[Wife] could not become a "creditor" as a result of the fraudulent transfer because the donut shop was community property. The injury resulting from the fraudulent transfer was to the community estate, not to [Wife] personally.”  Since Wife had no cause of action against Husband under the act, the dissent found it impossible to create liability for conspiring with Husband.

http://lawprofessors.typepad.com/family_law/2005/10/case_law_develo_24.html

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