Punitive damages not available under Wisconsin’s Uniform Fraudulent Transfers Act

By Joe Forward, Legal Writer, State Bar of Wisconsin

Oct. 20, 2010 – A claimant that obtains equitable relief under Wisconsin’s Uniform Fraudulent Transfers Act (UFTA) is not eligible to receive punitive damages, the District III Wisconsin appeals court recently held.

The UFTA provides a means of redress for transfers made to hinder, delay, or defraud any creditor of a debtor. But UFTA does not explicitly provide for punitive damages.

In C&A Investments v. Kelly, 2009AP2420 (Oct. 19, 2010), the appeals court reversed a circuit court judgment (in part) that rescinded certain deeds and mortgages and allowed C&A Investments (C&A) to collect a jury verdict for punitive damages totaling $275,000.

Noting the general rule in Wisconsin that “there can be no punitive damages without compensatory damages,” the appeals court rejected C&A’s argument that rescission of deeds and mortgages to make it “whole” essentially amounted to compensatory damages.

Fraudulent transfers 

In 2000, Brian Kelly defaulted on a land contract to purchase property. C&A subsequently foreclosed and obtained a $22,663 deficiency judgment against Kelly.

In 2002, Kelly conveyed a 156-acre plot of farmland to a trust account with his stepmother, Patricia Kelly, as named beneficiary of the trust and Teresa Hestekin, a family friend, as named trustee. On the same day as the transfer, the trust granted a mortgage to Red Cedar Bank.

As the appeals court explained, “[t]his document was essentially a mortgage and note from the Trust back to its own bank account.”

In that same year, the trust granted a second mortgage on the property to Kori Kelly, but she testified she never loaned money to the trust or had an interest in the property.

C&A commenced an action under UFTA, claiming Kelly “fraudulently transferred the farm and encumbered it with sham mortgages to deprive C&A Investments of an asset upon which to execute its deficiency judgment.” The jury agreed, and the he circuit court entered judgment setting aside the deed and mortgages.

In addition, the jury found that Brian Kelly, Patricia Kelly, and the trust acted with “intentional disregard of C&A Investments’ rights” and assessed punitive damages of $275,000. Kelly appealed the punitive damages assessment.

No punitive damages

C&A Investments argued that although punitive damages are not expressly listed among the enumerated remedies in UFTA, Wis. Stat. section 242.07(1) permits a creditor to obtain “any other relief the circumstances may require.”

The appeals court rejected this argument, explaining that “punitive damages are available only where the claimant recovers compensatory damages” and “[n]othing in the Uniform Fraudulent Transfers Act changes this principle of law.”

The appeals court also rejected C&A’s argument that rescission amounted to compensatory damages, noting that “[t]he supreme court’s recent decision in Groshek confirms that rescission is an equitable remedy and does not constitute compensatory damages.” Thus, the appeals court reversed the judgment awarding C&A punitive damages.