Uniform Voidable Transactions Act Adopted in New York
On July 16, 2014, the Uniform Law Commission (the "Commission") approved a series of amendments to the Uniform Fraudulent Transfer Act (the "UFTA"), which at that time was in force in 43 states (all states except Alaska, Kentucky, Louisiana, Maryland, New York, South Carolina, and Virginia). The revised model legislation, which has been enacted by 21 states (and introduced in four others), is now called the "Uniform Voidable Transactions Act" (the "UVTA").
New York State, which for 95 years had refrained from adopting the UFTA in favor of the Uniform Fraudulent Conveyance Act (the "UFCA"), formally adopted the UVTA on December 6, 2019. See N.Y. Debt. & Cred. Law §§270–281 (2019) (the "NY-UVTA"). The effective date of the NY-UVTA is April 4, 2020. With respect to transfers made and obligations incurred on or after that date, New York's voidable transactions law will be substantially similar to the fraudulent transfer laws in force in many other states.
Amendments to the UFTA in the UVTA
The changes to New York's previous fraudulent transfers law (the "NY-UFCA") can be understood by examining how the UVTA amended the UFTA and how the NY-UVTA differs from the NY-UFCA.
The UVTA 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 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:
- Burden of Proof. 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 (and the UFCA). 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.
- Presumption of Insolvency. 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.
- Safe Harbor. 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.
- Choice of Law. 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.
Other Differences Between the NY-UFCA and the NY-UVTA
There are several other material differences between the NY-UFCA and the NY-UVTA, including:
- Reasonably Equivalent Value Standard for Constructive Fraudulent Transfers. The "fair consideration" standard applied under the NY-UFCA to constructive fraudulent conveyances has been replaced in the NY-UVTA by the "reasonably equivalent value" standard that applies to such transfers under the Bankruptcy Code and the UFTA. Thus, the good faith requirement that was a component of the "fair consideration" standard under the NY-UFCA will no longer apply.
- Reduction of Reach-Back Period. Consistent with the UFTA and the UVTA, the general reach-back period for voidable transaction claims under the NY-UVTA will be reduced to four years from six years. In addition, the "discovery rule" governing intentional fraudulent transfers extends the limitations period for no more than one year after a transfer or obligation was or could reasonably have been discovered by the party challenging the transfer. Any untimely claim for relief is "extinguished."
- Transfers to Insiders for Antecedent Debt. The NY-UVTA provides that a transfer made by a debtor to a pre-existing creditor is voidable if the transfer was made to an "insider" for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent. The reach-back period for such an avoidance claim is one year. Notably, although section 547(b)(4)(B) of the Bankruptcy Code also has a one-year reach-back period for insider preference claims, that provision does not require proof that the insider had reasonable cause to believe that the debtor was insolvent.
- Insider Avoidance Claim Defenses. The NY-UVTA creates certain defenses to insider avoidance claims, some of which are similar to preference defenses under section 547(c) of the Bankruptcy Code. For example, under the NY-UVTA, an insider is insulated from an avoidance claim: (i) to the extent it gave new value to the debtor after the transfer was made, except to the extent the new value was secured by a valid lien; or (ii) if the transfer was made in the ordinary course of business or financial affairs of the debtor and the insider. However, unlike the Bankruptcy Code's insider preference defenses, the NY-UVTA would appear to insulate from avoidance a lien granted to an insider to secure an antecedent debt, provided it also secures present value given by the insider to the debtor in a good faith effort to rehabilitate the debtor.
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