September 2015

Uniform Voidable Transactions Act — Coming to Your State Soon?

Lesley Anne Hawes examines the Uniform Voidable Transactions Act — the proposed new name for the Uniform Fraudulent Transfer Act — and outlines the Uniform Law Commission’s proposed amendments as well as implications posed for creditors.



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Lesley Anne Hawes, Counsel, Dentons US

In July 2014, the National Conference of Commissioners on Uniform State Laws (ULC) proposed several targeted but significant amendments to the Uniform Fraudulent Transfer Act (UFTA), including a proposal to change the name of the UFTA. The key changes in the new Uniform Voidable Transactions Act (the act) are aimed primarily at (1) clarifying the language and bringing the terms used in the statutory scheme into conformity with other related statutes or statutory schemes, (2) addressing choice of law issues to make the law governing a particular transaction more clear and predictable for the parties involved in the transaction and consistent with choice of law principles under certain provisions of the Uniform Commercial Code (UCC) and (3) providing clear evidentiary standards for litigation under the act. The proposed amendments are not a comprehensive revision of the statutory scheme.

As of May 12, 2015, twelve states had introduced legislation to amend the UFTA to include the proposed amendments embodied in the act. Six of those states (Georgia, Idaho, Kentucky, Minnesota, New Mexico and North Dakota) have already passed the legislation. This article highlights some of the most significant proposed amendments to the UFTA that may affect creditors.

Use of “Voidable”

The change in name of the act to the “Uniform Voidable Transactions Act” is not intended to make a substantive change in the law. Rather, the new name is intended to more accurately reflect the nature and purpose of the statutory scheme and to conform the act to the language used under the Bankruptcy Code, which generally refers to “voidable” transactions rather than “fraudulent transfers.”1 The removal of the term “fraudulent” from the title of the act is also intended to eliminate the confusion that has sometimes resulted from the use of that term to describe transactions that may be voided under the act. Under the UFTA and the act, “fraudulent” intent is not a prerequisite to voidability of a transaction even in the case of what some courts referred to as an “actual fraudulent” transfer. Instead, intent to either hinder or delay creditors is sufficient to render the transaction “voidable,” subject to applicable defenses. As to “constructive fraudulent transfers,” no intent element exists at all. The act also changes the term “fraudulent” to “voidable” in the two key substantive avoidance provisions (sections 4 and 5) so that those sections refer to a transfer being “voidable as to a creditor” rather than “fraudulent as to a creditor.”

Choice of Law

The ULC found there was significant litigation under the UFTA regarding which state’s law should be applied to determine the voidability of a particular transaction. New section 10(b) of the act provides, “A claim for relief in the nature of a claim for relief under this [act] is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.” Section 10(a) defines the location of the debtor consistent with the Uniform Commercial Code’s determination of the location of a debtor for the purposes of the priority of security interests in intangible property (UCC section 9-301): (1) an individual debtor is located at his/her principal residence, (2) an entity debtor which has only one place of business is located at that place of business and (3) an entity debtor with multiple business locations is located at its chief executive offices/headquarters.

The official comments supporting the new provision explain that determination of the location of the debtor is to be based on “authentic and sustained activity, not on the basis of manipulations employed to establish a location artificially.” The “claim for relief in the nature of a claim for relief under this [act]” language of section 10(b) is deliberately broader than merely “a claim for relief under this act.” What constitutes a claim similar enough to a claim under the act so as to warrant application of the same choice of law principles is left to court determination.

Evidentiary Standards

The ULC also sought to create uniformity and clarity in the law regarding the burden of proof applicable to claims for avoidance of transfers and defenses under the act.

Insolvency

A sentence has been added to section 2(b) in the act explaining the meaning and evidentiary effect of the presumption of insolvency where the debtor is generally not paying its debts as they come due.2 “The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.” The new sentence clearly directs that the presumption shifts the burden of proof to the other party and that the other party must then demonstrate the nonexistence of insolvency under a preponderance of the evidence standard.

Voidability of Transfers and Defenses

With respect to transfers made with intent to hinder, delay or defraud creditors that are voidable under Section 4(a)(1) of the UFTA, there was a lack of uniformity in decisions by courts as to whether a higher burden of proof, generally a “clear and convincing evidence” standard, applies in determining whether to avoid such a transfer, in part perhaps because of the characterization of the voidable transfer as “fraudulent” under the UFTA and because of the “fraud” element of that claim, even though proof of fraud is not necessary to grant relief.

Revisions to various sections of the UFTA made by the act create a consistent and clear “preponderance of the evidence” standard of proof, regardless of the section of the statute under which the transaction is sought to be voided, including transactions made with intent to hinder, delay or defraud creditors. Similarly, other sections of the act make the same preponderance of the evidence standard applicable to proof of defenses to the avoidance of the transaction. The proposed changes in the act generally also make it clear that the party seeking to avoid the transfer has the burden of proof of voidability of the transaction, subject to the insolvency presumption, and the party defending against the voidability has the burden of proving its defenses. The creditor seeking to avoid a transfer also has the burden of proving the value of the asset transferred as of the time of the transfer under subsection (c).

Other Important Changes

The act includes several other small but significant changes, three of which may be of particular interest to commercial creditors. Defenses: Value to the Debtor

Section 8 of the act sets forth defenses to the avoidance of a voidable transfer. Section 8(a) provides a defense to a section 4(a)(1) transfer made with intent to hinder, delay or defraud creditors where the transferee took the transfer in good faith and gave value “to the debtor.” The act adds the language “to the debtor” to confirm that the debtor, rather than a third party, must be the recipient of the value given by the transferee to protect the transfer from avoidance under section 4(a)(1).

Strict Foreclosure Not Exempted

Section 8(e) of the act provides a defense to avoidance of a transfer under section 4(a)(2) or section 5 — formerly referred to as “constructive fraudulent” transfers — when the transfer results from enforcement of a security interest under UCC article 9. The act, however, amends the defense in Section 8(e) to carve out from its scope “acceptance of collateral in full or partial satisfaction of the obligation it secures” which is sometimes referred to as “strict foreclosure.” Official comment 5 to section 8 explains the reason strict foreclosures should not be exempted from avoidance is “because compliance with the rules of article 9 relating to strict foreclosure may not sufficiently protect the interests of the debtor’s other creditors if the debtor does not act to protect equity the debtor may have in the asset.”

Partnerships Treated as Other Persons in Insolvency Test

Section 2(c) of the UFTA included special provisions defining insolvency with respect to partnerships. The ULC finds “there is no good reason to define ‘insolvency’ differently for a partnership debtor than for a non-partnership debtor whose debts are guaranteed by contract” and eliminated the special definition of insolvency for partnerships. Instead, insolvency with respect to a partnership is governed by the same insolvency definition applicable to all other persons under the act.3

The ULC website has a legislative tracking section listing the states that have proposed legislation based on the act, including information regarding the bill number, the name of the bill’s sponsor, and its status. The six states that have introduced but not yet passed legislation based on the act include California, Colorado, Indiana, Massachusetts, Nevada and North Carolina. This list should increase as more states begin to introduce legislation to revise this important statutory scheme.

Footnotes

  1. See e.g. 11 U.S.C. section 548(c).
  2. The insolvency standard has also been clarified so that debts that are subject to a bona fide dispute are not considered in determining whether the debtor is not generally paying its debts as they come due, similar to the clarification made under the Bankruptcy Code regarding a similar standard in involuntary bankruptcy cases.
  3. See Section 2(a) of the act.