Opinions Wanted: Are Punitive Damages Available For Fraudulent Conveyance

I found an interesting issue in a California bankruptcy case concerning fraudulent conveyance. A bankruptcy corporation paid many expenses within one year of bankruptcy including salaries and other money due to corporate insiders who had provided services to the corporation. The Trustee filed a complaint alleging the payments to insiders were fraudulent transfers. Some corporate insiders were Florida residents. The bankruptcy trustee sued these Florida insiders under the fraudulent conveyance sections of the bankruptcy code and under Florida’s fraudulent conveyance statute.

A jury returned a verdict against the insiders, in favor of the bankruptcy trustee, finding that there were fraudulent transfers and that such transfers were made “with malice.” The court entered a verdict against the Florida insiders finding them jointly and severally liable for the total amount of fraudulent transfers by the debtor corporation and imposing $2 million punitive damages. The individuals are considering whether a fraudulent transfer judgment can include punitive damages.

I have not heard of any court decision that punitive damages are permitted for fraudulent conveyance under the bankruptcy code. I know one case from 1984 in Texas were a federal appellate court held there can be no punitive damages under the applicable bankruptcy code sections. I think some bankruptcy court have awarded punitive damages for fraudulent conveyance under applicable state fraudulent transfer statutes. Florida courts take a strict view of fraudulent conveyance remedies and have not allowed any damages other than the reversal of the transaction. Anyone’s informed thoughts would be appreciated. Is there a basis for punitive damages for fraudulent conveyance under the bankruptcy code?

Last updated on May 22, 2020

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