History Of American Voidable Transaction Law

Historical Mainhistorical


The fraudulent transfer laws are truly ancient. According to later writings by the great Roman jurisconsultats [spelling correct], there were provisions for fraudulent transfers in the Twelve Tables, that first written Roman law completed circa. 450 B.C., but we'll never know what since no copies have been found. The point is that fraudulent transfer law has been around for nearly 2,500 years, created by the Romans, massaged by the Germanic tribes (including the Angles and Saxons) tinkered with by the Franks and others, and ultimately adopted and expanded by the English. The most important provisions have survived largely unchanged in concept into modern times.

Prior to the Nineteenth Century, American law generally was largely an amalgamation of English common law with a healthy salting of European civil law. English law on the subject was first codified in the Fraudulent Conveyances Act of 1571, often referred to as the Statute of 13 Elizabeth, Ch. 5. That Act reflects fraudulent transfer law at that time as being largely criminal, i.e., a fraudulent transfer was an action taken not just in derogation of the rights of creditors, but against the Crown itself. When a creditor recovered for a fraudulent conveyance, half of the recovery went to the creditor and half of the recovery went to the Crown. Thus, in the first landmark case in English fraudulent transfer jurisprudence, being Twyne's Case decided in 1601, the fraudulent transferee, Twyne, ends up being tried by the Star Chamber and subsequently imprisoned. Even today, in a number of states, such as California, the making, receipt, or assistance with a fraudulent transfer is still a statutory crime.

The core concepts of the Fraudulent Conveyances Act of 1571, and the English law opinions, including that in Twyne's case, ultimately served as the primary source of American law on the subject as adopted by the colonies and then by the states. This now brings us to 1914, when the Uniform Law Commission (ULC) began drafting a uniform act (indeed, one of the first uniform acts), which ultimately resulted in the Uniform Fraudulent Conveyances Act of 1918 (UFCA), which was widely adopted, and even persisted in New York through the date of this writing in 2014.

Over time, however, the UFCA was shown to have certain serious flaws, probably the most notorious being that it required that a creditor show that the transferee lacked "good faith" in making the transfer, which placed a very difficult evidentiary burden on creditors who were often not in a position to know all the facts. Another flaw was that "conveyance" is a term that is largely peculiar to the laws of real property, and so some courts from time to time would incorrectly deny relief to a creditor who was attempting to avoid a transfer of personal property.

The next significant change in fraudulent transfer law came not in the uniform acts, but in the Bankruptcy Code of 1978, with its bright, shiny, new §§ 548 and 550 which provided bankruptcy law with modern fraudulent transfer provisions. This lead to, just a few years later, to the Uniform Fraudulent Transfers Act of 1984 (UFTA), which made "good faith" an affirmative defense that the transferee would be required to prove up, and also booted the unfortunate word "conveyance".

But the UFTA did not mirror Bankruptcy Code §§ 548 and 550, nor should it. Bankruptcy law is primarily concerned with preferences, i.e., transfers by the debtor shortly before filing for bankruptcy, and the bankruptcy fraudulent transfer provisions are simply a luxury extra like leather bucket seats. By contrast, the state fraudulent transfer laws are meant to cast a much wider net to protect the rights of creditors. Thus, §§ 548 and 550 are relatively limited in their scope, and § 548 has an impractically short two-year limitations period -- so short that Bankruptcy Trustees rarely use § 548, but instead commonly opt to use state fraudulent transfers with their longer four-year limitations periods to set aside transfers.

The ULC's adoption of the UFTA in 1984 was widely adopted by nearly all the states. In 2012, the ULC constituted a Drafting Committee to revise the UFTA, and that lead to the adoption of the 2014 Revisions to the UFTA, now called the Uniform Voidable Transactions Act (UVTA) in 2014. Despite the change of name, the UVTA is actually just a slight revision of the UFTA, much more rounding off the rough edges and filling in gaps than making anything like dramatic substantive changes, i.e., it is not really anything like a "new" Act, but much more like UFTA 2.0. Yet, the UVTA is definitely shows improvement over the 1984 legislation in new rules that govern burdens of proof and conflicts of law.