November 12, 2014
Authored by: Keith Aurzada and Mark Duedall
In July 2014, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved the Uniform Voidable Transaction Act (UVTA), a long-awaited update to the Uniform Fraudulent Transactions Act (UFTA). As the new title suggests, the UVTA, like the UFTA before it, encompasses a broader range of transactions than those traditionally deemed fraudulent and therefore avoidable under the common law. The amended Act clarifies and expands the burden of proof as well as presenting new challenges and opportunities to creditors seeking to avoid transfers by debtors operating under insolvent conditions. This development also has importance for creditors with claims in bankruptcy due to the bankruptcy trustee’s power to bring avoidance actions based on state law under 11 U.S.C. § 544(b) and thereby increase the assets available to repay debts.
Under the amended Act as before, creditors bringing constructive fraudulent transfer claims have the ability to avoid transactions which deprive the debtor of assets that could otherwise satisfy debts to creditors when the debtor is or is presumed to be insolvent; however, several key updates affect which debtors are insolvent within the meaning of the amended Act. The UFTA specifies that a debtor is presumed to be insolvent when it is not generally paying its debts as they became due. The UVTA clarifies that, for this vital presumption to apply, the debts must not be the subject of a bona fide dispute. It also specifies that the party opposing the presumption (usually, the transferee of the debtor’s property) carries the burden of disproving the presumption and can avoid this presumption by a preponderance of the evidence standard. This burden-shifting provision is new and runs contrary to prior case law in some jurisdictions. See, e.g., Liebersohn v. Campus Crusade for Christ, Inc. (In re C.F. Foods, L.P.), 280 B.R. 103, 115 (E.D. Penn. 2002).
The amended Act also clarifies that creditors seeking to avoid certain transfers regardless of insolvency continue to hold the burden of proof as to all elements. Under both UFTA and UVTA, a present or future creditor could avoid a transaction if it was made while a debtor was insolvent and (i) with actual intent to hinder, delay, or defraud a creditor, as evidenced by the enumerated “badges of fraud”; (ii) without receiving reasonably equivalent value in exchange for the transfer, but only if the debtor retained assets unreasonably small in relation to the transaction or if the debtor incurred or should have believed would incur a debt beyond the debtor’s ability to pay. While under the UFTA, these actions were deemed “fraudulent,” the UVTA implements the more modern term “voidable.” Now as before, insolvency is irrelevant to these The UVTA clarifies that the creditor continues to hold the burden of proving these elements regardless of the debtor’s insolvency.
In certain other transactions, creditors holding claims at the time of the alleged transfer can avoid a transaction if the debtor was insolvent at the time the transfer was made. Under both UFTA and UVTA, a present creditor can avoid a transfer or obligation (i) entered into or incurred without receiving reasonably equivalent value if the debtor is insolvent at the time or became insolvent as a result of the transaction or (ii) a transfer made to an insider for a preexisting debt while the debtor was insolvent and if the insider had cause to believe the debtor was insolvent. Again, UVTA clarifies the burden of proof by establishing that, subject to the burden of proof regarding the debtor’s insolvency, the creditor must establish that a transfer is avoidable by a preponderance of the evidence.
Importantly for creditors, the UVTA also narrows slightly the range of transferees against whom a creditor can maintain an avoidance action. Whereas under UFTA, a creditor could avoid a transfer by the first transferee or any subsequent transferee who took property of the debtor other than in good faith for value, the new act specifies that subsequent transferees must be “immediate or mediate transferee of the first transferee,” implying that, even in a chain of transferees acting in bad faith, the creditor must act within a reasonable period of time or number of transfers. This language incorporates the current wording—and likely the current case law—of the federal Bankruptcy Code at 11 U.S.C. § 548.
Finally, the UVTA for the first time provides clear rules for determining the governing law with respect to actions seeking to void transfers or obligations of the debtor. Now, the law that applies is the local law of the jurisdiction where the debtor is located, which is determined according to straightforward rules. The UVTA also provides for its application to different series within a series organization (i.e., usually a series limited liability company, which is now available in many jurisdictions). Each series within a series organization is now considered to be legally separate for purposes of actions to void transfers. This provision will allow creditors to avoid a broader range of transfers occurring within series organizations, where each series was not previously considered a separate person or organization and could not, therefore, technically make voidable transfers of assets between series for purposes of the UFTA.
UFTA was one of NCCUSL’s success stories, having been adopted in every U.S. jurisdiction except for New York, Maryland, Virginia, Kentucky, South Carolina, Louisiana, Alaska, and Puerto Rico. The pace and geographic spread of UVTA will be important for creditors as well as a gauge of NCCUSL’s continued influence in the law of creditor’s rights.