Divorce
This is about something that I see a couple of times a year in the trenches of litigation, but rarely seems to make it to an appellate opinion so that most folks are unaware that this goes on in the courtroom. Here, this issue and its outcome makes it to an appellate opinion, albeit an unpublished opinion, in the case of Gilbert v. Gilbert, 2024 WL 1472047 (Ky.App., Unpublished, April 5, 2024). So, what is it exactly that I'm talking about? It is about the realized negative ramifications of cheap asset protection.
This case involves a Kentucky neurosurgeon by the name of John Gilbert. who owned a house before he was married. In 2013, John married his wife, Morgan. Shortly thereafter, "because he was in 'a high-risk specialty and sometimes neurosurgeons get sued beyond malpractice limits and lose everything,' for 'asset protection' he gifted the title to Morgan with the understanding that she would return it if they separated."
Apparently, no creditor ever attempted to take John's interest in the house. But, by 2018, the marriage of John and Morgan was on the rocks and Morgan filed for divorce. The divorce court rejected that John had gifted the house to Morgan and instead to awarded the house to John as his premarital property. Morgan appealed to the Kentucky Court of Appeals and that brings us to the referenced opinion.
On appeal, the decision was reversed and Morgan was allowed to retain title to the house on the basis that John had made a gift that he meant to be binding. As for the understanding that John had with Morgan that she would return the house to John if they ever got divorced, the Court of Appeals held that understanding was not enforceable. Quoting a prior Kentucky Court of Appeals decision, the court wrote that, "[a] person who conveys property ... to avoid the reach of creditors is generally at his grantee's mercy as to whether he will ever get his property back; the 'clean hands' maxim bars either party to the conveyance from obtaining affirmative judicial relief to enforce the arrangement."
Interestingly, John attempted to claim that his gift to Morgan was a fraudulent transfer, which should have resulted in an avoidance of the gift. The glaring problem with this is that John did not have a creditor at the time of the transfer such that it could be a fraudulent transfer. So, this argument flopped and Morgan was allowed to keep the house.
ANALYSIS
Before we reach the larger issue, it should be noted that John's fraudulent transfer claim failed for two additional reasons not mentioned by the Court of Appeals. First, only a creditor can seek relief for a fraudulent transfer, not a transferee. Second, even if a fraudulent transfer is set aside for the benefit of a creditor, the transaction is still binding between the transferor and transferee. The latter is a very technical issue that hopefully can be addressed in some future article, but that general rule is all you need to know for now.
On to the larger issue, this goes on all the time. A person who has creditor concerns puts property into his or her spouse's name so that the property is no longer available to creditors. No creditor appears, but the couple get divorced. Then the spouse who made the transfer goes into court and testifies that the transfer was just a big sham in case he or she was ever sued. Surprisingly, the trial court in this case actually bought this representation — it is the first time that I have ever heard of this argument ever working at any court level. Most judges will simply dismiss the transferring spouse's argument, with often a smirk on the judge's face about the absurdity of it all.
This issue seems to always arise, anecdotally, with doctors. While this must assuredly happen with others, every one of these situations that I have personally seen (well over a dozen) over my long career always involved a doctor. The genesis of this phenomena seems to start with "a little bit of knowledge is a dangerous thing" and ends with the doctor engaging in a transaction with the flawed presumption that a court will respect the transaction with respect for creditors, but not respect the transaction for any other purposes.
There is also a certain cheapness and do-it-yourself aspect to all this. In so many of these opinions that we review, the outcome might have come out better for somebody had they engaged in proper planning but for whatever reason that person decided to cut corners instead. The thing about cutting corners is that one is apt to be cut by the corner, and indeed John found himself cut out of the house in this opinion.
With matters having legal consequences, it is almost always better to do nothing at all than to try to wing it on the cheap. The idea of giving property to a spouse to dodge creditors with the hope and prayer that the property will somehow come back in a divorce is just such planning. When one considers that it is probably much more likely that one will get a divorce than it is that some claimant will win a judgment in excess of insurance coverage, then it is difficult to see such planning as anything other than a really bad bet.
