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INSOLVENCY TEST
INSOLVENCY TEST § 5(a)
5(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Prefatory Note (UFTA 1984).
As under the Uniform Fraudulent Conveyance Act, a transfer or obligation that is constructively fraudulent because insolvency concurs with or follows failure to receive adequate consideration (clause (3) above) is voidable only by a creditor in existence at the time the transfer occurs or the obligation is incurred.
Either an existing or subsequent creditor may avoid a transfer or obligation for inadequate consideration when accompanied by a condition referred to in clause (1) or (2) above.
Reporter's Comment to § 5(a) cmt. 1.
Subsection (a) is derived from § 4 of the Uniform Fraudulent Conveyance Act.
It adheres to the limitation of the protection of that section to a creditor whose claim arose before the transfer or obligation described.
As pointed out in Comment 3 accompanying § 4, this Act substitutes “reasonably equivalent value” for “fair consideration.”
JayNote
This is the "insolvency test" of a fraudulent transfer a/k/a "constructive fraudulent transfer". There are only two elements:
1. The debtor was insolvent (or rendered insolvent); and
2. The debtor did not receive reasonably equivalent value.
However, note that a transfer that occurs before the claim is not actionable under this test, i.e., only so-called existing creditors (i.e., those creditors who already held a claim by the time of the transfer) can recover under this test.
Because both of these elements may be resolved on summary judgment in favor of the creditor if the evidence permits, the Insolvency Test is usually the "smart creditor's choice" for pursuing voidable transaction claims.
UVTA § 5(c)
5(c) Subject to Section 2(b), a creditor making a claim for relief under subsection (a) or (b) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.
Prefatory Note (UVTA 2014): Evidentiary Matters.
New §§ 4(c), 5(c), 8(g), and 8(h) add uniform rules allocating the burden of proof and defining the standard of proof with respect to claims for relief and defenses under the Act.
Language in the former comments to § 2 relating to the presumption of insolvency created by § 2(b) has been moved to the text of that provision, the better to assure its uniform application.
Reporter's Comment to § 5(c) cmt. 4.
Subsection (c) was added in 2014. Sections 2(b), 4(c), 5(c), 8(g), and 8(h) together provide uniform rules on burdens and standards of proof relating to the operation of this Act.
The principles stated in Comment 11 to § 4 apply to subsection (c).
JayNote
The creditor has the burden of proof. Nonethelesss, since this test is largely mathematical, the courts routinely grant summary judgment for the creditor under this test.
DEFENSES PECULIAR TO §§ 4(a)(2) AND 5
§ 8(e) A transfer is not voidable under Section 4(a)(2) or Section 5 if the transfer results from:
JayNote
A creditor cannot void all but an intent-based fraudulent transfer if it involves: (1) Termination of a lease; or (2) Enforcement of a UCC Article 9 security interest.
(1) termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law; or
Reporter's Comment to § 8(e) cmt. 5.
Subsection (e)(1) rejects the rule adopted in Darby v. Atkinson (In re Farris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on default in accordance with its terms and applicable law may constitute a voidable transfer.
(2) enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code, other than acceptance of collateral in full or partial satisfaction of the obligation it secures.
Prefatory Note (UVTA 2014): Defenses.
The amendments refine in relatively minor respects several provisions relating to defenses available to a transferee or obligee, as follows: (3) Section 8(e)(2) as originally written created a defense to an action under § 4(a)(2) or § 5 to avoid a transfer if the transfer results from enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code.
The amendments exclude from that defense acceptance of collateral in full or partial satisfaction of the obligation it secures (a remedy sometimes referred to as “strict foreclosure”).
Reporter's Comment to § 8(e)(2):
Subsection (e)(2) protects a transferee that acquires a debtor’s interest in an asset as a result of the enforcement by a secured party (which may but need not be the transferee) of rights pursuant to and in compliance with the provisions of Part 6 of Article 9 of the Uniform Commercial Code. Cf. Calaiaro v. Pittsburgh Nat’l Bank (In re Ewing), 33 B.R. 288, 9 C.B.C.2d 526, CCH B.L.R. ¶ 69,460 (Bankr. W.D.Pa. 1983) (sale of pledged stock held subject to avoidance under § 548 of the Bankruptcy Code), rev’d, 36 B.R. 476 (W.D.Pa. 1984) (transfer held not voidable because deemed to have occurred more than one year before bankruptcy petition filed).
The global requirement of Article 9 that the secured party enforce its rights in good faith, and the further requirement of Article 9 that certain remedies be conducted in a commercially reasonable manner, provide substantial protection to the other creditors of the debtor. See U.C.C. §§ 1-304, 9-607(b), 9 610(b) (2014).
The exemption afforded by subsection (e)(2) does not extend to acceptance of collateral in full or partial satisfaction of the obligations it secures. That remedy, contemplated by U.C.C. §§ 9-620–9-622 (2014), is sometimes referred to as “strict foreclosure.”
An exemption for strict foreclosure is inappropriate 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.
#testinsolvencybankruptcy548a1BI
BANKRUPTCY CODE § 548(a)(1)(B)(I)
(a)
(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(B)
(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)
(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.