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The Pennsylvania Superior Court has ruled that a fraudulent transfer case against Schnader Harrison Segal & Lewis stemming from two of its lawyers' unpaid commercial rent must be reexamined.

A three-judge panel overturned an Allegheny County trial judge's ruling against plaintiff Trizechahn Gateway (referred to as Trizec in the court's opinion), who leased commercial real estate to Schnader lawyers Paul Titus and Thomas Arbogast for their now-defunct firm, Titus & McConomy.

Trizec was awarded $2.9 million after the lawyers violated a 10-year lease with five years remaining when they left to join Schnader in 2005, according to Superior Court Judge Paula Francisco Ott's Nov. 8 opinion. As part of an agreement with Titus and Arbogast, Schnader agreed to represent them in the appeal of the judgment in exchange for putting a lien on the capital accounts of their old firm.

Trizec argued that this measure was undertaken to block its attempts to collect the judgment, but the trial court ruled against the landlord and found in favor of Schnader.

On appeal, Trizec argued that the trial court erroneously accepted Schnader's "good faith" defense because it considered the intent of defendant Schnader rather than the intent of defendants Titus and Arbogast in applying 12 Pa.C.S.A. Section 5104(a)(1).

"We agree with Trizec that under 12 Pa.C.S.A. Section 5104(a)(1), the issue is the debtor's intent in making the transfer, not transferee's intent, which is irrelevant," Ott said, noting that the statute states, "( … in pertinent part, 'if the debtor made the transfer or incurred the obligation … with actual intent to hinder, delay or defraud any creditor of the debtor.'). Furthermore, under Section 5104(b), there are 11 factors that the trial court must consider in making a decision as to whether a fraudulent transfer occurred under Section 5104(a)(1). The trial court failed to discuss any of them. Instead, the trial court did not make any finding of whether a fraudulent transfer occurred, rather it immediately made a finding, presumably under Section 5108, that Schnader had a defense to the claim. This was error."

Ott said the Superior Court had no reason to question the lower court's reliance on Schnader's expert witnesses, who testified as to the firm's customs and practices in such matters.

"However, it is not sufficient under Section 5108(a) to only find Schnader acted with good faith; there must also be a determination that the lien on the capital accounts constituted a reasonably equivalent value," Ott said. "The trial court provides no explanation for its statement that Schnader 'met the statutory standard of "reasonably equivalent value,"' except to say that 'Schnader did indeed provide[] equivalent value and more in legal services.'"

Schnader is represented by Pittsburgh office managing attorney Keith Whitson.

"We respectfully disagree with the court's decision," Whitson said in an email. "The court seems to have focused on whether Schnader's appellate representation provided a benefit to plaintiff, the adverse party, rather than whether it had objective value, even from a creditor's perspective. If the court is saying that a person facing a significant adverse verdict can never hire and pay appellate counsel without committing a fraudulent transfer, we believe the decision is incorrect."

Titus is represented by Douglas Campbell of Campbell & Levine, who declined to comment.

Shira Isenberg of Freeborn & Peters in Chicago represents Trizec. Isenberg said in an email, "We are pleased that the court understood that the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA) does not require proof of actual fraud," Sh  The court below got caught up in not wanting to find that the law firm of Schnader Harrison participated in any fraud and so completely ignored the PUFTA in ruling in favor of Schnader Harrison and partners Titus and Arbogast.

Arbogast is represented by Nicholas Krawec of Bernstein-Burkley, who did not respond to a request for comment.