Do-It-Yourself Asset Protection Backfires in Recent Ohio Divorce: Soley v. Soley

In Soley v. Soley, 2017-Ohio-2817, Husband's asset protection scheme to thwart his creditors by placing title in his wife's name backfired when they later filed for divorce.

The initial facts are simple: husband, fearing creditors, deeds separate property (real estate later sold for $170,000) to his wife allegedly "with the specific understanding by both parties that the sole purpose of the transfer was to avoid creditors". They later divorce while living abroad. She sells the property before the local Ohio divorce court partitions the U.S. assets. He fights the sale.

The main question for the courts - how is the property treated? His separate property, her separate property, or marital property? Such a deed transfer is incredibly simple on its face, but the procedural history and law surrounding this case was not - it includes jurisdictional issues, Ohio's archaic dower law, constructive trusts, the law of gifts and marital property law (surprisingly, no discussion of the "clean hands" doctrine).

Not only did the strategy ultimately cost the husband half of what was previously his separate property, but there has been over seven years of litigation, including two appellate decisions. The litigation initially included outside buyers of the property as well. It must have conservatively cost the parties upwards of $50,000 of attorney fees, not to mention the stress and hassle of taking more than seven years to settle a divorce.

In 2016, 490,365 people filed Chapter 7 bankruptcy. The number of annual divorces is probably well over twice that number (CDC statistics omit data from some major states, see https://www.cdc.gov/nchs/nvss/marriage_divorce_tables.htm). So, the odds would tell you that any strategy involving gifting outright to a spouse, even if it legitimately thwarts a future creditor, is still a bad bet to make. Physician readers - take note!

Let's walk through the gist of the arguments: Husband's first claim was that the wife held the property as trustee for him under a constructive trust. This argument failed at the trial court level and later at the appellate court level - for good reason, a constructive trust is an equitable remedy against someone who wrongfully acquires legal title. The trial court rejected it due to the statute of frauds, which makes no sense, but ultimately the appellate court (1st decision) got that right. The wife did nothing wrong, there was no mistake of the husband's intent to transfer title - no constructive trust.

But the court remanded for determination of whether the property was separate or marital property. The trial court then determined that since it was the husband's property before marriage, and there was no gift because there was no donative intent, it was his separate property - the change in title meant nothing. The appellate court ultimately rejected this argument, however, and found that there was indeed a gift and that the property was indeed marital, citing several similar appellate decisions. Ohio law requires looking to the totality of the circumstances for such a determination, rather than bare legal title.

The court did not examine or discuss why it would not be the wife's separate property, since under most state laws, gifts or bequests are separate property. Ohio law provides that separate property includes "(vii) Any gift of any real or personal property or of an interest in real or personal property that is made after the date of the marriage and that is proven by clear and convincing evidence to have been given to only one spouse." Since the court determined the manifest weight of evidence was that the husband made a gift of the property during the marriage, it should have examined whether it should therefore have been the donee spouse's separate property.

However, after more than seven years of litigation, I suspect the wife was happy to have half and be done with it. There was no appeal filed to the Ohio Supreme Court.

Takeaways: This negative effect of Husband's do-it-yourself asset protection plan was horrible, and it could have been worse. If someone really wants to legitimately protect assets (and is solvent, etc), then using a trust is a much better solution. If you are a creditor of a donor and cannot prevail on fraudulent transfer allegations, examine whether the circumstances, evidence and state law might be sufficient to argue that there was no bona fide gift in the first place.