The Third Circuit wrote a treatise distinguishing among the burdens of proof, persuasion, and production with respect to constructively fraudulent transfers under Pennsylvania’s version of the Uniform Fraudulent Transfer Act adopted in 1993.
The opinion is notable because none of the three judges on the panel was from the Third Circuit. The Jan. 20 opinion was written by Circuit Judge David Sentelle from the District of Columbia. The other judges were from the Sixth and Eighth Circuits.
The case involved a bankrupt couple, both lawyers. The husband had automatically deposited all of his almost $1 million of income from his firm during the lookback period into an entireties account. Employing a theory of constructive fraudulent transfer under state law, the trustee sued and got a judgment for less than $500,000, having shown to the satisfaction of the bankruptcy court that the husband did not receive reasonably equivalent value for the transfers into the account. The district court affirmed.
Upholding the judgment, Judge Sentelle began with the proposition that the allocation of the burden of proof looks to state law when state law provides the rule of decision, even if jurisdiction is not based on diversity.
The debtors argued that there was no fraudulent transfer because the money was used for legitimate household expenses, and that there was error because the bankruptcy judge put the burden of “producing at least some useful evidence” on them with regard to the use of funds from the entireties account.
Under state law, Judge Sentelle said the “overwhelming weight of judicial authority” puts the burden of persuasion” on the defendant, who must show receipt of reasonably equivalent value by a preponderance of the evidence. Also persuasive, he said, was the Bankruptcy Code’s constructive fraudulent transfer provisions that similarly allocate the burden of persuasion.
The bankruptcy court created a “rebuttable presumption that funds transferred into an entireties account are not in exchange for reasonably equivalent value.” The rebuttable presumption shifted the burden of “producing sufficient evidence to rebut the presumed fact” to the debtor.
Whether the shifting burden of persuasion is a correct statement of law does not matter, Judge Sentelle said, because the debtor did not present “some evidence of reasonably equivalent value.”
The case was originally scheduled for argument in June but was adjourned until November. Third Circuit judges possibly recused themselves because the case involved so-called entireties bank accounts under state law that might be available to federal judges.