Third Circuit Court of Appeals Predicts that Punitive Damages are Available under Pennsylvania Uniform Fraudulent Transfer Act

In Klein v. Weidner, 729 F.3d 280 (3d Cir. 2013), the Third Circuit Court of Appeals predicted that the Pennsylvania Supreme Court would allow a creditor to recover punitive damages for violations of the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA).

The facts of the case arise from a domestic dispute between Mr. Weidner & Ms. Klein, former spouses. In 1999, the parties divorced in California, and Weidner was directed by a California court to make spousal and child support payments to Klein. Although Weidner made some child support payments, no spousal support payments were made.

In 2006, Mr. Weidner married Ms. Weidner. Just before their marriage, Mr. Weidner acquired certain real estate in Pennsylvania. Immediately after the marriage, Mr. Weidner transferred the real estate and business interests in DMW Maine LLC from his individual name to himself and his wife as tenants by the entireties.

In 2008, Klein filed a fraudulent transfer action in the Eastern District of Pennsylvania based on diversity jurisdiction against Mr. Weidner, Ms. Weidner and DMW Marine. In that action, Klein sought, among other claims, avoidance of the transfers as fraudulent and punitive damages based on Weidner’s intentional and outrageous conduct.

Judge Sanchez of the Eastern District of Pennsylvania granted summary judgment in favor of Klein, holding that the transfers were actually and constructively fraudulent under 12 Pa.C.S.A. §§5014(a)(1), 5104(a)(2) and 5105 and directing that the property be transferred back to Mr. Weidner’s name only. The trial court also held that punitive damages were appropriate in the amount of over $500,000. Mr. Weidner appealed the decision to the Third Circuit Court of Appeals.

The Third Circuit affirmed the holding of the Eastern District, finding that the transfers of the real estate and business to Mr. Weidner and his wife were made with the intent to hinder, defraud and delay Klein’s collection efforts and were made without reasonably equivalent value.

With respect to the punitive damages claim, the Third Circuit noted that there was no controlling precedent under Pennsylvania law as to whether punitive damages are available under the PUFTA; therefore, it was required to predict how the Pennsylvania Supreme Court would hold on the issue.

Judge Cowen, writing for the Third Circuit, began his analysis with the general Pennsylvania principles that statutory remedies are preferred over common law remedies and uniform laws should be construed consistently with other states’ interpretations of the same laws.

On appeal, Mr. and Ms. Weidner argued that punitive damages were improper under the PUFTA because the PUFTA does not expressly provide for punitive damages as a remedy, citing the 1998 Pennsylvania Supreme Court case Hoy v. Angelone, 720 A.2d 745 (Pa. 1998) in support. In Hoy, the Pennsylvania Supreme Court held that punitive damages were not available under the Pennsylvania Human Relations Act (PHRA) because the statute did not expressly provide for the punitive damages remedy.

The Third Circuit rejected this argument, finding that the PHRA differed from the PUFTA in several significant respects in terms of the statutes’ language and purpose. First, the PHRA does not provide for a general “catch-all” remedy for any appropriate relief under equity or law, as is the case in 12 Pa.C.S.A. §5107. Although the PHRA includes a provision that a court may fashion any affirmative relief that is appropriate in the circumstances, the court interpreted this “catchall” to be limited to other forms of affirmative relief similar to those enumerated, i.e. reinstatement of a job position or back-pay.

Second, the PUFTA (and not the PHRA) includes a supplementary provision under which all principles of law and equity are incorporated to the extent they are not displaced by the PUFTA, which would include fraud and domestic relations principles, under which punitive damages are an available remedy. (12 Pa.C.S.A. §5110).

Finally, the Third Circuit found that the purpose of each statute differed sufficiently to support a contrary result under the PUFTA than the PHRA. While the PHRA was a human relations statute intended to provide for “make whole” remedies, the PUFTA provided for a much broader scope of purpose and remedy. In addition, the Third Circuit looked to laws of other jurisdictions, the majority of which have found that punitive damages are appropriate under their respective uniform fraudulent transfer acts.

The Third Circuit found that Mr. Weidner’s conduct, which included threats to Klein’s counsel and threats to Klein, as well as Mr. Weidner’s counsel’s involvement in informing Klein that Mr. Weidner had placed his assets wholly outside her reach, was sufficiently outrageous to warrant punitive damages against Mr. Weidner. Notably, the Circuit Court did not assess punitive damages against Ms. Weidner.

The holding of Klein v. Weidner is significant for creditors in Pennsylvania not only because the Third Circuit Court permitted a creditor to recover punitive damages against a transferor, but also because it opens the door for the possible recovery of punitive damages from transferees or other third parties such as attorneys who assist with the execution of transfers that could be considered fraudulent under the PUFTA.

The Third Circuit did not certify the question to the Pennsylvania Supreme Court, so it is yet to be determined if the Pennsylvania Supreme Court would endorse the view of Klein v. Weidner, or follow the lead of those jurisdictions which have declined to permit punitive damages as a remedy in fraudulent transfer actions.