Repeal Of Kentucky’s Fraudulent Transfer Law In Favor Of UVTA Causes Headaches In Orchard

Article 2019 Kentucky Miscellaneous Art191029RepealKentuckysFraudulentTransferLawFavorUVTAHeadachesOrchard




Derek Orchard sued Western Energy Production, LP ("WEP") in two cases, and ultimately obtained judgments in California against WEP in both cases.

Western Energy Company ("WEC") was a general partner of WEP, and thus generally liable for WEP's debts. A little over a year after Orchard sued WEP, Steven Marshall as the president of WEC caused WEC to transfer its interests in Black Rock Farms, LLLP, and Black Rock Thoroughbreds, LLLP to himself (Marshall), and then Marshall transferred the interests in the two Black Rock entities to yet another company, called SM Capital Ventures, LLC.

About six months after Marshall made these transfers, a California court entered judgment in the amount of $607,604.77 against WEP and in favor of Orchard, the latter whom then domesticated the judgment in Kentucky and sought a charging order against WEP's interests in the Black Rock entities.

Orchard then sued Marshall, the Black Rock entities and SM Capital on a couple of theories, alleging that the Marshall had not complied with the requirements for a valid transfer of the interests in the Black Rock entities because the transfer documents had not been signed in the presence of a notary (and thus, presumably, the true date of the transfers could not be established), and that those interests had been fraudulently transferred under Kentucky law.

WEP moved to dismiss, arguing that the transfers were properly made despite the lack of a notary's acknowledgment, and that the transfers were not in defraud of creditors because they had been made in the ordinary course of business.

The trial court split the baby. First, the trial court found that the transfers had not been acknowledged by a notary, but did not go so far as to say that the transfers were void for that reason. Second, and this is the issue of most interest here, the trial judge held that Orchard lacked standing to bring the fraudulent transfer action because the statute that Orchard had sued under (Kentucky Revised Statute § 378.010) had been repealed before Orchard sued, and was thus no longer good law.

A digression is here necessary. Prior to 2016, Kentucky had its own non-uniform fraudulent transfer law as embodied in KRS § 378.010 et seq. Kentucky had not adopted the Uniform Fraudulent Conveyance Act ("UFCA") of 1918, nor had Kentucky adopted the Uniform Fraudulent Transfer Act ("UFTA") of 1984. However, as of January 1, 2016, Kentucky did adopt the Uniform Voidable Transactions Act ("UVTA") of 2014, by way of repealing § 378 (the old Kentucky fraudulent transfer statute) and replacing it with § 378A (the Kentucky Uniform Voidable Transactions Act or "KUVTA").

Orchard had brought his § 378.010 fraudulent transfer action on July 19, 2017 ⸺ a year-and-a-half after § 378 had been repealed and § 378A (KUVTA) had replaced it.

In appealing the trial court's decision, Orchard pointed out that he had other statutory basis to have standing to sue, and also complained that the trial court should have entered summary judgment in his favor on the basis that the transfers were not made with a notary's acknowledgment. This brings us to the opinion of the Kentucky Court of Appeals which I shall next relate.

The Court of Appeals first noted that KUVTA does not contain language that it is retroactive, and Kentucky law prevents a statute from being retroactive unless there is language in the statute which provides for a retroactive effect. Thus, because Marshall's transfers (which purportedly occurred on August 25, 2015), pre-dated the KUVTA, that statute did not provide Orchard with an avenue of relief. But, also, because § 378 had been repealed, that statute did not provide Orchard with possible relief either. Thus, Orchard was simply out-of-luck with regard to his Kentucky fraudulent transfer claim, with the implicit suggestion being that the Kentucky legislature royally screwed things up by repealing § 378 without adopting a retroactive provision for the KUVTA.

The opinion ends with the Court of Appeals rejecting Orchard's appeal that he should have obtained summary judgment on the transfers because they were not subject to a notary's acknowledgment, and remanding the case back to the trial court to further consider that issue (presumably, by a trial on the merits of whether the transfers were acknowledged or not).

ANALYSIS

The result in this case is harsh, but presumably the fault of the Kentucky legislature. The reading of this opinion leads to the conclusion that there is a gap in Kentucky law for fraudulent transfer actions which arose prior to January 1, 2016 and which were not sued upon by that date. How many litigants this gap might affect is subject to conjecture, but it certainly affected Orchard here.

Yet, this opinion also illustrates one of the reasons that fraudulent transfer actions brought under a statute are also frequently accompanied by claims of common law fraudulent transfer (which survive in many states), unjust enrichment, and similar theories of alternative relief ⸺ all of which are specifically allowed by UVTA's "Supplementary Law" provision.

To change gears, the requirement of notary acknowledgement for transfers of interests in partnerships, LLCs, and the like is for the very purpose of deterring fraud. Since these are private transactions, not publicly recorded, the back-dating of documents purporting to transfer interests is much too easy for financially-distressed debtors to do, and having a notary helps to deter such fraud.

CITE AS

Orchard v. Western Energy Production, LP, 2019 WL 5293489 (Ky.App., Unpublished, Oct. 18, 2019).









AI Synopsis


♦ Derek Orchard sued Western Energy Production, LP (WEP) and obtained judgments against them in California. WEP's general partner, Western Energy Company (WEC), transferred its interests in two entities to its president, Steven Marshall, who then transferred them to another company. Orchard sought a charging order against WEP's interests, claiming the transfers were fraudulent. The Kentucky trial court dismissed Orchard's fraudulent transfer claim, citing the repeal of the relevant statute and the lack of a retroactive provision in the new law. The court also acknowledged the transfers lacked notary acknowledgments but didn't declare them void. The Kentucky Court of Appeals upheld the dismissal, stating that neither the old nor the new statute provided Orchard with legal grounds for a fraudulent transfer claim. They attributed this to a gap in Kentucky law regarding transfers occurring before the new law's adoption. The court remanded the case back to the trial court to determine whether the transfers were properly acknowledged by a notary. Key Takeaways: (1) Legislative oversight: The repeal of Kentucky's fraudulent transfer statute without a retroactive provision for the new law left a gap in legal recourse for pre-2016 transfers. (2) Need for alternative theories: The case highlights the importance of pursuing alternative legal theories like common law fraudulent transfer or unjust enrichment in fraudulent transfer cases. (3) Notary acknowledgment: The lack of notary acknowledgment in the transfers raises concerns about potential fraud and emphasizes the importance of this requirement for validating private transactions. This case offers a cautionary tale about the potential consequences of legislative changes and the need for legal practitioners to consider multiple legal avenues to address fraudulent transfer issues. ♦