The California Court of Appeals found last year that debtors can be liable for punitive damages where they fraudulently transfer funds to hide assets from creditors. In Aly v. Yousri, the Second Circuit affirmed an award of punitive damages – not to mention compensatory damages – where “the defendant is guilty of oppression, fraud, or malice.”
The defendant here went to a friend of his parents and told him he needed funds for a particular investment. The friend took out a loan on the equity in his home and tapped in to his retirement savings in order to give the defendant $200,000. Instead of applying it to the supposed investment opportunity, the defendant used it for improvements on his home. When he recognized that his family friend knew the investment was merely a pretext, he conveyed his home to his brother so as to hide the asset from potential attachment. He also transferred about $375,000 in funds out of his own bank account, set up a revocable trust and conveyed the house to the trust. The trust, under his control, then conveyed the home to his brother. The defendant also purportedly sold another home to his brother for $750,000 but the evidence showed the brother was unsure how much he paid him. Later it was established that the defendant put $260,000 in a Swiss bank account that came from the proceeds of the sales of each house plus funds received from the individual who was allegedly the investor.
The plaintiff successfully proved that the defendant had fraudulently transferred funds in violation of the Uniform Fraudulent Transfer Act because the “transfer made by a debtor when the creditor has an existing claim against him is fraudulent if the debtor did not receive a reasonably equivalent value in exchange for the transfer and the debtor became insolvent as a result of the transfer.” The court proceeded to find that this debtor’s conduct possessed all eleven “badges of fraud” revealing the insidious nature of his conduct. As a result, the debtor was held liable for unlawful conversion and conspiracy to commit fraud and required to pay economic damages of $379,566, plus interest.
But, as stated above, the appellate court also affirmed the award of punitive damages for $250,000. The specific purpose of this award differs from the award of economic damages. The former is intended to fully compensate the plaintiff for his loss. The latter is meant as a punishment to deter people from such egregious behavior. The plaintiff here lost a substantial portion of his retirement savings and his wife had to begin working for the first time in her life to make up for the losses the family suffered. This ruling confirms the notion that fraud – or fraudulent transfer- does not pay.
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