Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA
On July 16, 2014, the Uniform Law Commission (the "Commission") approved a series of amendments to the Uniform Fraudulent Transfer Act (the "UFTA"), which is currently in force in 43 states (all states except Alaska, Kentucky, Louisiana, Maryland, New York, South Carolina, and Virginia). The substance of the principal amendments is aptly described in the change of the name of the uniform law from the UFTA to the Uniform Voidable Transactions Act (the "UVTA"), which is intended to: (i) address judicial inconsistency in applying the law; (ii) better harmonize with the Bankruptcy Code and the Uniform Commercial Code (the "UCC"); and (iii) provide litigants with greater certainty in its application.
The driving force behind the change is the concept of "constructive fraud," which permits the avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value. Although denominated as "fraud," a constructively fraudulent transfer involves neither fraud nor improper intent, creating confusion among some courts that have issued rulings improperly limiting the scope of the avoidance remedy.
To address these concerns, the word "fraud" has been supplanted by the term "voidable" in nearly every portion of the UVTA and the Commission’s official comments. Moreover, the UVTA adopts the more aggressive view that even "actually fraudulent" transfers do not require fraud. In lieu of the traditional standard applied to transfers made with the intent to "hinder, delay or defraud" creditors, the comments to the UVTA shift the inquiry to "hinder or delay" and substitute the idea of "unacceptably contraven[ing] norms of creditors' rights" as the measure for when efforts to hinder or delay render a transaction voidable.
In addition, the UVTA makes other key changes, including the following:
- The UVTA explicitly states that a creditor challenging a transfer bears the burden of establishing the elements of its claim by a preponderance of the evidence, rather than the higher "clear and convincing evidence" standard applied by some courts under the UFTA. Furthermore, the official comments caution that courts should not alter the allocation of the burdens or apply any nonstatutory presumptions to avoid upsetting the uniformity of the UVTA.
- The UFTA provided a rebuttable presumption that a debtor is insolvent if it fails to pay debts as they mature. The UVTA refines this presumption by: (i) clarifying, consistent with section 303(h)(1) of the Bankruptcy Code, that any nonpayment of debts subject to "bona fide dispute" is not presumptive of insolvency; and (ii) expressly providing that the burden to rebut this presumption falls on the "party against whom the presumption is directed," conforming to the treatment of rebuttable presumptions in the Uniform Rules of Evidence.
- The UFTA shields from avoidance transfers that resulted from the enforcement of a security interest in accordance with Article 9 of the UCC. The UVTA, however, carves out "strict foreclosures"—in which a debtor consents to the secured creditor’s acceptance of collateral in full or partial satisfaction of the obligation, without a public sale or judicial foreclosure—from this defense to an avoidance action. Even so, the secured creditor may still ward off avoidance under the UVTA by demonstrating that a foreclosure sale was conducted in good faith and in a commercially reasonable manner.
- The UVTA defuses potential choice of law disputes by including a governing law rule consistent with that of Article 9 of the UCC. The UVTA provides that the law of a business debtor’s place of business or, if business is conducted in more than one state, the place in which the business had its chief executive office, at the time that a transfer was made, applies to claims under the UVTA. An important difference between the UVTA and the UCC, however, is that under the UCC, the location of a business that is a "registered organization" is always its state of organization, which may not be the state in which its business is conducted or the site of its chief executive office.
It is anticipated that the UVTA will be presented to individual states for approval, beginning in the fall of 2014. The full text of the final draft of the UVTA is available at http://www.uniformlaws.org/shared/docs/Fraudulent%20Transfer/2013AM_AUFTA_Draft.pdf.