An Analysis of the Potential for Recovery of Punitive Damages in Pennsylvania in an Action Under the Pennsylvania Uniform Fraudulent Transfer Act

An Analysis of the Potential for Recovery of Punitive Damages in Pennsylvania in an Action Under the Pennsylvania Uniform Fraudulent Transfer Act.

By: Raymond P. Wendolowski Jr.

          In Pennsylvania there are statutory provisions in place that allow a creditor to pursue property or assets that were previously owned by a debtor, which have now been transferred to a third party. These statutory provisions also provide for action against the transferee. This statute is commonly referred to as the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”). See, 12 Pa.C.S.A. § 5101 et. seq. Many creditors are already aware of the relative benefits and remedies that the PUFTA permits a creditor to pursue, and this article will not explore the more well-known aspects of this statute, or the background regarding how the statute actually works. Instead, this article will focus on the potential for a creditor to seek punitive damages under the PUFTA.

A creditor who files a fraudulent transfer action under the PUFTA does so by initiating a lawsuit under the PUFTA against the debtor. The creditor may seek to avoid the transfer of property that was performed by the debtor, attach the asset or property that was transferred by the debtor, or seek another form of relief also permitted by the statute. See, 12 Pa.C.S.A. § 5107. These remedies can be quite powerful, but these remedies typically could only be asserted to allow a creditor to recover the original value of the debt that was owed from the debtor to the creditor. In other words, the PUFTA was often interpreted to be designed only to make a creditor whole, and not to convey additional recovery upon a creditor. That restriction makes the threat of a fraudulent transfer action a bit limited because debtors know that they can only be pursued up to the amount of the debt they originally owed.

A recent decision out of the Third Circuit appears to change, and actually add to, the rights and remedies a creditor now has under the PUFTA. Under certain circumstances, a creditor may now recover damages that do more than make the creditor whole. In Klein v. Weidner, 729 F.3d 280 (3rd Cir. 2013), the Third Circuit Court of Appeals, in interpreting Pennsylvania law, held that the Pennsylvania Supreme Court would interpret the PUFTA to allow a creditor who pursues a suit under the PUFTA to seek and recover punitive damages from a debtor who has violated the PUFTA. Id. at 286-87. The court in Klein made note of the fact that no appellate court in Pennsylvania, and no federal court interpreting Pennsylvania law, had addressed whether punitive damages would be available under the PUFTA. As a result of the lack of a decision on this issue, the Third Circuit is entitled to predict how the Pennsylvania Supreme Court would decide this issue. Id. at 283-84, 286-87.

The Third Circuit Court of Appeals interpreted the catch-all remedy provision found in 12 Pa.C.S.A. § 5107(a)(3)(iii), which states that a creditor may obtain “any other relief the circumstances require,” to be broad enough to mean that punitive damages would be permissible under the PUFTA. Klein, 729 F.3d at 290-91.

This decision will now allow creditors to seek a grant of punitive damages against a debtor in a lawsuit filed under the PUFTA. The addition of punitive damages may now cause debtors to think twice before seeking to transfer assets in a manner that could be construed as a fraudulent transfer. If the threat of punitive damages does not sufficiently deter a debtor from making a fraudulent transfer, a creditor can now seek to recover punitive damages from a debtor, which, if granted, could allow the creditor to recover far more than that which would simply make the creditor whole. For example, the Klein court awarded the creditor punitive damages in an amount identical to the amount owed to the creditor, which then doubled the amount actually owed to the creditor in the end. Id. at 282, 293.

A creditor seeking punitive damages under the PUFTA will still need to prove that the defendant’s conduct was sufficiently outrageous so as to meet the legal standard for granting punitive damages under Pennsylvania law. Id. at 291-92. This means that a creditor cannot simply request punitive damages and have them awarded as a matter of right, but there may be situations that arise that are so outrageous that a grant of punitive damages would be permissible.

As an example, the behavior of the debtor in Klein serves to show just what type of conduct a court is likely to view as outrageous in the context of a fraudulent transfer action. The debtor in Klein fraudulently transferred two assets with the intention of avoiding his support obligations to his ex-wife and his children. Id. at 293. The debtor took additional action to prevent his ex-wife and children from obtaining support by attempting to put all of his finances beyond their reach, and he also filed frivolous lawsuits against his ex-wife, threatened her counsel directly, and engaged in other behavior of this nature. Id. The Third Circuit specifically pointed out the debtor’s emails to his ex-wife stating that she “would never see a penny from [him] again” as conduct deserving an award of punitive damages. Klein v. Weidner, 729 F.3d 280, 285 (3rd Cir. 2013) This conduct certainly seems outrageous, and it is behavior of this similarly level that punitive damages are designed to deter.

Now that the PUFTA has been interpreted to allow the grant of punitive damages under the right circumstances, creditors can begin to take advantage of this new remedy in seeking to pursue debtors under the PUFTA. While this new remedy has the potential to be very powerful, it will not necessarily apply in each and every set of circumstances. Keep this potential remedy in mind in the future if you run across a debtor who takes outrageous actions to fraudulently transfer their property or assets to avoid their creditors.