I previously wrote about the Kekona case in my article, Hawaiian Fraudulent Transferee Hangs Ten To Punitive Damages.
In Kekona, the creditors (Benjamin and Tamae Kekona) brought won a judgment against the primary debtors, and then brought an action against one Dr. Bornemann who had been the transferee-recipient of a fraudulent transfer of properties to him by the debtors.
The fraudulent transfer case was repeated tried and retried after numerous appeals and remands. In every case, the jury awarded against Dr. Bornemann both actual damages, for the value of the properties that were fraudulent, and punitive damages as follows:
- 1993 Trial: $250,000 in punitive damages, later reduced by the Court to $75,000.
- 2000 Trial: $594,000 in punitive damages.
- 2013 Trial: $1.6 million in punitive damages, later reduced by the Hawaii Court of Appeals in 2008 to $253,075.
And that's where my previous article left this case, with Dr. Bornemann owing $253,075 in punitive damages to the Kekonas, and the inescapable conclusion by any disinterested observer that the Hawaiian courts move slower than the tectonic plate upon which Hawaii rests.
The Kekonas, who by now must have learned patience if they didn't have any before this matter began, last century, were content to again appeal to the Hawaii Supreme Court, this time complaining of the reduction of their punitive damages award from $1.6 million to $253,075. That court which issued the Opinion which I shall now relate.
The Court began its discussion by noting that punitive damages are an "extraordinary remedy" and redress and deter conduct that is quasi-criminal in nature. Thus, punitive damages must be proven by the "clear and convincing" evidentiary standard, which is the highest standard of proof that is applied to civil litigation.
The jury in awarding punitive damages is not allowed to just pull a number out of the hat, but the award must bear some reasonable relationship to something. Here, the Court noted, the jury tied the punitive damages award to two decades of attorney's fees that had been incurred by the Kekonas, which was entirely proper under Hawaiian decisional law. Thus:
>>>In this case, the Kekonas presented sufficient evidence for the jury to conclude that they had accrued $600,000 in attorney's fees and expenses over fourteen years of litigation. Their attorney's fees reasonably corresponded to the extensive discovery required to expose the fraudulent transfer, three jury trials, the cost of hiring expert witnesses, voluminous pre-trial and post-trial motions, and several appeals to the ICA and to this court.<<<
Dr. Bornemann argued variously that the Kekonas' fees were "grossly exaggerated", were in substantial part for other litigation against others, and were to a not inconsiderable degree due to the courts making bad rulings and the appeals.
But the Court noted that the Kekonas' other litigation was required to protect their interests in relation to the property fraudulently transferred, and that the $600,000 was substantiated by the record evidence, and so the Court held that at least that amount was justified in punitive damages.
As to the other $1 million, the issue before the Court was whether a punitive damages award which was four times the size of the $253,000 compensatory award was justified. Here, the Court turned to the nature of the Kekonas' underlying claim, which was for fraudulent transfers, and stated:
Fraudulent transfers are a common method of shielding assets from creditors and other individuals with legitimate claims to property. There is a considerable incentive to defraud because fraudulent transfers are easy to promulgate but difficult to prove: a fraudulent debtor boasts an apparently valid deed while the defrauded creditor must confront the reality that "the intent to hinder, delay, or defraud creditors is seldom susceptible of direct proof." Uniform Fraudulent Transfer Act, Prefatory Note at 4 (1984). Further, HRS sec. 651C–8 (Supp.1985) limits a defrauded creditor's actual damages to "the value of the asset transferred ... or the amount necessary to satisfy the creditor's claim, whichever is less." In other words, at worst the fraudulent debtor is forced to pay what he or she already owed. Without the possibility of significant punitive damages, it would be difficult to deter this conduct.
Of course, the Due Process Clause of the U.S. Constitution comes into play at some point, which has been held to invalidate punitive damages awards that are out of line with awards under state law for "comparable misconduct".
Addressing the Due Process issue, the Court noted that treble damages (a 2:1 ratio of punitive to actual damages) appears in the Hawaii statutes in relation to several types of claims, such as for unfair, deceptive and fraudulent acts committed in commercial cases. Thus, at least treble damages were appropriate in this case, so another $506,000 of the punitive damages award was justified.
This now left the Court to consider the remaining balance, about which it began by noting that the Hawaii legislature had "repeatedly declined to cap punitive damages at treble damages", although proposals to that effect had been introduced at least seven times in recent years. But should these greater punitive damages be applied in his case? The Court looked at several aggravating factors:
First, Bornemann engaged in a pattern of repeated conduct with knowledge that his actions would cause substantial civil harm to the Kekonas. * * * Evidence at trial suggested that in addition to executing multiple fraudulent deeds to the Kâne'ohe property, Bornemann took a mortgage on a substantial portion of Abastillas and Smith's personal property, signed a blank promissory note, filed fraudulent tax returns, accepted "pass-through" rent payments, filed a "sham" lawsuit, and attempted to drain the Kâne'ohe property of equity by allowing it to fall into foreclosure, all so that the Kekonas would be unable to collect on their original judgment. Indeed, the majority of these actions occurred after Bornemann had received and read the Kekonas' fraudulent transfer lawsuit.
Second, Bornemann harmed an elderly and financially vulnerable couple. * ** Bornemann's misconduct occurred in the immediate wake of intense litigation wherein the Kekonas incurred substantial litigation fees and costs. The evidence suggests that the defendants saw the Kekonas' unique vulnerability and sought to exploit it. Because of Bornemann's participation in the fraudulent transfer of the Kâne'ohe property, the elderly Kekonas could not collect on their judgment and had to sign over their three-bedroom retirement home on the island of Hawai'i to their original attorney. Mr. Kekona died during the pendency of litigation without collecting anything on the original judgment and with his retirement plans greatly disrupted. The Kekonas were forced to consign years of their retirement to full-scale litigation in order to recover amounts that they were legitimately owed.
Thus, the balance of the punitive damages award was justified, and the Court reversed the Hawaii Court of Appeals and reinstated the $1.6 million punitive damages award against Dr. Bornemann.
ANALYSIS
The important thing here to note is that it was a transferee who was hit with a punitive damages award, i.e., suggestions that only the debtor is at risk of punitive damages in a fraudulent transfer case are demonstrably false.
But it is also important to note the Dr. Bornemann was nothing like an "innocent transferee", but instead repeatedly took actions to help the debtors defeat the collection of their judgment against the debtors -- this is the conduct that caused Dr. Bornemann to be tagged with punitive damages. Notably, the punitive damages award here was not Dr. Bornemann's only losses, as doubtless he spent a princely sum in defending himself through three trials and numerous appeals.
Knowingly assisting debtors with fraudulent transfers is an inherently bad idea. Not only is it likely that the transferee in such a case will find themselves on the bad end of a fraudulent transfer lawsuit, but they also potentially expose their own assets to the claims of the creditors. Yet, time and time again, we see in judgment enforcement cases some otherwise innocent party (usually a spouse) being hung out to dry as a transferee in a fraudulent transfer case.
In explaining why Great Britain would not be choosing sides in the U.S. Civil War, Lord Palmerston, who then was the Prime Minister, stated simply:
Those who in quarrels do interpose, are apt to get a bloody nose.
That goes for those who want to help the debtor in collection cases as well.
CITE AS
Kekona v. Bornemann, 2015 WL 1880727 (Haw., April 24, 2015). Full opinion at http://goo.gl/Cxw5Rp
This article at http://onforb.es/1KozBl1 and http://goo.gl/wwb7eq
