Attorney May Be Liable As Bad Faith Conduit For Client Fraudulent Transfer

Attorneys must not become agents or participants in their clients’ fraudulent transfers. Attorneys should not prepare transfer documents nor handle money to assist a conveyance which might reasonably be challenged as a fraudulent conveyance.

The Eleventh Circuit Court of Appeals issued a decision in December, 2010, in the Harwell case  which decisions  limits the extent to which an attorney can help clients effectuate fraudulent transfers. Naples, Florida attorney David Slenn provides an informative summary of the decision in Leimberg Services newsletter published on January 13, 2011.

Harwell gave his attorney money which the attorney deposited in his trust account. After a creditor got a civil judgment against Harwell the attorney disbursed Harwell’s money to third parties including the attorney to pay his legal fees. Harwell filed bankruptcy. The bankruptcy trustee claimed the attorney was liable for the amounts transferred out of his client’s trust account because the attorney was a transferee of the client’s fraudulent transfers. The bankruptcy court, and the U.S. District Court agreed, that the attorney was not liable because he was a mere conduit of the money without control over the money. The bankruptcy court found that whether the attorney knew the purpose of the transfers was not legally relevant under the law.

The Eleventh Circuit court reached a different conclusion and remanded the case back to the bankruptcy court. The appellate court held that the attorney is excused from liability as a mere conduit of money only if the attorney acted in good faith. The court pointed out that the attorney knew about the civil judgment and the creditors aggressive collection efforts at the time he disbursed money from the trust account. This attorney could be held liable for the money if the bankruptcy court finds his participation in this client’s money transfers was in bad faith.

Mr. Slenn’s analysis points out that the court did not anticipate attorney liability in the vast majority of cases involving the transfer of funds in and out of a trust account, but that it the attorney plays a major role in fraudulent conveyance plan the courts may hold the attorney liable. I think it clearly made a difference that the trust account money was disbursed shortly before the client filed bankruptcy.

This decision does not mean attorneys cannot give clients legal advice about fraudulent transfers and asset protection. In the future, if an attorney were in a similar situation  I suggest that the attorney return the trust money to his client.   Subsequent the client”s  money transfers, if any, would not involve the attorney, and the client will absorb the consequences of his own transfers done for his own benefit. The attorney’s return of the debtor’s money to the debtor is not a fraudulent transfer.

The other thing to remember regarding attorney’s trust account is that the trust money belongs to the client, and a creditor can garnish the client’s money held in trust with a writ of garnishment. In a bankruptcy context, the debtor’s money in his attorney’s trust account is part of the bankruptcy estate.

In re Harwell, Case No. 09-14997 (11 Cir Dec 29, 2010)

Jon Alper

About the Author

I’m a nationally recognized attorney specializing in asset protection planning. I graduated with honors from the University of Florida Law School and have practiced law for almost 50 years.

I have been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal. I have helped thousands of clients protect their assets from creditors.