Be Careful in How You Transfer Property to Minors

November 13, 2015

North Carolina has adopted the Uniform Transfers to Minors Act, N.C.G.S. §33A-1 et seq. Careful attention to its details in transferring property to a minor is required in order to avoid unnecessary legal expense or litigation over such a transfer. That is the take away from the recent case of Northen Blue, LLC, Chapter 7 Trustee v. Linda Lee Novara, adversary proceeding number 15-09005 decided November 2, 2015 by the United States Bankruptcy Court for the Middle District of North Carolina.

The facts of the case are simple. The individual debtors, a husband and wife, filed a voluntary chapter 7 case on September 30, 2014. In the debtors’ schedules, they listed two custodial savings accounts for their two minor children for which the female debtor served as custodian. On September 3, 2014, 27 days before the case was filed, the female debtor deposited a check dated July 11, 2014 in the amount of $10,000 into one of the two custodian savings accounts. The check was written by the female debtor’s mother and was payable to the order of the female debtor. The check was sent by mail to the female debtor by her mother with a note that stated the following:

“I’m 81½ years old and feel that it’s not likely I’ll be around for [redacted] and [redacted] H.S. and college graduations. So – I’m sending the money to put away for the future. Their cousins were given $2000 for each graduation (so that’s $4000 – for each little lady). The remainder is for Birthdays and Xmases. OK?”

The female debtor endorsed the check before depositing it one of the custodian accounts.

The trustee sued the female debtor, in her capacity as the custodian for her minor children, to disgorge and turnover the $10,000 as being a fraudulent transfer under the Bankruptcy Code. Essentially, the trustee contended that the female debtor had an interest in the check and transferred it to her minor children for no consideration when she was insolvent. The defendant raised as an affirmative defense the North Carolina Uniform Transfers to Minors Act, claiming that the female debtor’s mother had intended the check as a gift to the minor children and the female debtor never really had an interest in the check or the deposited funds. The trustee moved for summary judgment on its claims.

The Court noted that the only disputed issue is whether the female debtor had an interest in the deposited check. According to the Court, that depended on whether the check, made payable solely to the female debtor, can nonetheless be considered property of the minor children due to the female debtor’s role as their custodian. In answering that question, the Court looked for guidance in the North Carolina Uniform Transfers to Minors Act. That statute specifically provides that custodial property is created and a transfer is made whenever money is paid or delivered to an adult followed in substance by the words: “as custodian for ______________” (name of minor) under the North Carolina Uniform Transfers to Minors Act”. N.C.G.S.§33A-9(a)(2). The Court had little difficulty in determining that since the magic language “as custodian for [name of minor}” was not found on the payee line of the check or in any other document, the North Carolina Uniform Transfers to Minors Act did not apply to the transfer.

Having lost the battle that the North Carolina Uniform Transfers to Minors Act applied to the check, the defendant next argued that the check qualifies as a common law inter vivos gift from the grandmother to the minor children. Under North Carolina law, an inter vivos gift requires donative intent and actual or constructive delivery. But, donative intent is a question of fact. In this case, the Court found that the note was ambiguous on this issue. It did not recognize the female debtor as a custodian nor directs that the funds be deposited into a custodian account. Rather, it merely reflected a desire that the funds be used for the minor children. In doing that, the female debtor could have deposited the check into her own personal account and used the funds to pay for gifts and graduations. Finding a material issue of fact on donative intent, the Court denied the motion for summary judgment and set the matter for trial.

How that trial will eventually come out is uncertain. But what is certain is that a whole lot of time, money and expense has been incurred in the defense of the claim. All of that could easily avoided if the check contained the magic language of the statute and clearly stated that the check is payable to the female debtor, as custodian for the minor children.