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THIRD CIRCUIT FINDS THAT PENNSYLVANIA’S FRAUDULENT TRANSFER STATUTE ALLOWS PUNITIVE DAMAGE AWARDS.

Posted in Divorce

In a case of first impression the United States Court of Appeals has ruled that claims for punitive damages are justiciable under Pennsylvania Uniform Fraudulent Transfer Act 12 Pa. C.S. 5104. In so holding, the Court has predicted Pennsylvania state courts would decide that a plaintiff could claim punitive damages under Section 5107 of the Act because the statute allows “any other relief the circumstances may require.” 

Although this was a civil action brought in federal court between diverse individuals, the case is actually a family law based claim.  In 1999 Plaintiff and Defendant secured a divorce in California.  The decree provided for payment of both spousal and child support.  While Defendant paid “some” child support over the course of the next nine years he never remitted any of the support due to Plaintiff in her own right.  In 2006 the Defendant re-married.  In 2008, the Plaintiff sued for the sums due her under the decree.  A judgment for just under $550,000 was entered by Plaintiff against Defendant in Pennsylvania state court in August, 2008.

Just prior to his re-marriage the Plaintiff acquired a property in Chester County from his Mother. Days after the marriage he conveyed the interest into a tenancy by the entireties with his new wife.  He also did the same with shares of his corporation.  The 2008 case by Plaintiff sought a re-conveyance of the real property to Defendant individually.  The District Court ordered that remedy in January 2010.  One month later it ruled that the corporate conveyance was also invalid.  Finally, in July 2010 the Court held that punitive damages were available and assessed them in an amount equal to the $550,000 arrearage.  An appeal to the Third Circuit was stayed for some time by Defendant’s Chapter 11 filing in the U.S. Bankruptcy Court.  That Court denied discharge of the Plaintiff’s claims.

The basics of the claim of fraudulent transfer were clear.  The Defendant’s new wife was an insider; she provided no consideration for her interest acquired.  The Court found that she knew of the claim at the time of marriage and the conveyance in her favor.  The conveyance of the business interest and real estate interests into the entireties effectively left the Defendant without any assets in his sole name.

As for the matter of punitive damages, the Court noted a 2001 email from Defendant to Plaintiff that he would never pay her again.  His California lawyer wrote in 2005 that his client had made his assets impenetrable from Plaintiff’s claims.  It was this conduct which prompted the Trial Court to find a specific intent to defraud.  It was compounded by litigation strategies that appear to have included threats to attorneys and groundless legal actions directed at the Plaintiff. (Opinion at p.29)

While it is an accepted principle of law that punitive damages typically require legislative authorization, the District Court and the Third Circuit found that the reference to “any other relief” in the remedies segment of the PUTA was sufficient to permit punitive damages.  At page 26 of the opinion the Court notes that punitive damages are an accepted equitable remedy, citing  Nebesho v. Brown, 846 A.2e 721, 728 (Pa. Super. 2004).  It is further noted that Section 5110 of PUTA embraces principles of law and equity related to fraud and misrepresentation.  Noting that Maine, Missouri, Ohio and Utah have all decided that the Uniform Act allows punitive damages, the appellate court held that Pennsylvania would adopt this interpretation of Section 5107.

While similar holdings have been made in prior district court cases decided in Pennsylvania (opinion at 32), the Court of Appeals has now added its endorsement to the mix.

It is not uncommon for clients to ask their counsel what can be done to insulate a spouse from collection of sums due in a domestic relations context.  For those, answering the question Klein v. Weidner et al. is a game changer.  U.S. Court of Appeals for the Third Circuit. 10-3218. Published 9/3/13.