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VOIDABLE TRANSACTIONS & FRAUDULENT TRANSFERS
DID A VOIDABLE TRANSACTION OCCUR?
Assuming that a UVTA action is still timely, the next step is to determine whether a fraudulent transfer has occurred. As set forth below, there are five tests (§§ 4(a)(1), (2)(i), (2)(ii), 5(a) and (b)) to determine if a fraudulent transfer has occurred. But the vast majority of cases will be decided by one of two tests:
- Insolvency Test: Was the Debtor insolvent (or rendered insolvent) at the time of the transfer, and did the Debtor receive "reasonably equivalent value" in exchange (§5(a), also known by the oxymoron "Constructive Fraudulent Transfer"); and
- Intent Test: Whether the Debtor intended to diminish the enforcement rights of creditors (§ 4(a)(1), also known by the poorly descriptive term "Actual Fraudulent Transfer").
The slang terms for these tests, Actual Fraudulent Transfer and Constructive Fraudulent Transfer, are anachronisms that are not at all descriptive of the analysis that is utilized by the UVTA. In fact the use of these terms is counterproductive and confusing, and the better practice is to simply drop their usage altogether.
The Insolvency Test of §5(a) by its nature is often resolved on summary judgment, and (rather uniquely as a matter of litigation practice) frequently in favor of creditors. By contrast, the Intent Test of §4(a)(1) is almost invariably disputed (what debtor would admit to cheating creditors unless he wanted the transaction unwound?), leading to significant factual questions of intent, and thus normally precluding the granting of summary judgment.
Thus, the Insolvency Test is the "more certain" test between the two, and promises creditors the prospect of an early judgment that avoids the costs of prolonged litigation and trial. Creditors, therefore, quite naturally will assert and vigorously prosecute the Insolvency Test when they believe the facts are in their favor, and for this reason between the two tests of §§ 4(a)(1) and 5(a), it is the Insolvency Test that will ordinarily be measured first.
One might observe that there are really three forms of insolvency tests found in the UVTA, since the Overextending Insolvency Test of § 4(a)(i) and the Sinking Insolvency Test of § 4(a)(ii) effectively amount to "near insolvency" tests.
The Insider Preference Test of § 5(b) is not really a fraudulent transfer test in the classic sense, but a preference test somewhat similar to that found in U.S. bankruptcy law. Recognizing this, some states, most notably California which has its own preferential transfer scheme, did not enact § 5(b) into their version of the UVTA.
IMPORTANT NOTE: For creditors the Intent Test is the least desirable test, to be used only as a fall-back alternative if none of the other tests can be satisfied. Creditors' counsel who are unfamiliar with this body of law will -- due to their inexperience in this area -- almost inevitably start with the Intent Test first, and start floundering around with the Badges of Fraud, which is more often than not the worst way to go about it.
Prefatory Note (UFTA 1984).
- The basic structure and approach of the Uniform Fraudulent Conveyance Act are preserved in the Uniform Fraudulent Transfer Act.
- There are two sections in the new Act delineating what transfers and obligations are fraudulent. Section 4(a) is an adaptation of three sections of the U.F.C.A.; § 5(a) is an adaptation of another section of the U.F.C.A.; and § 5(b) is new.
- One section of the U.F.C.A. (§ 8) is not carried forward into the new Act because deemed to be redundant in part and in part susceptible of inequitable application.
- Both Acts declare a transfer made or an obligation incurred with actual intent to hinder, delay, or defraud creditors to be fraudulent.
- Provisions of the new Act, carried forward with little change from the Uniform Fraudulent Conveyance Act, render a transfer made or obligation incurred without adequate consideration to be constructively fraudulent—i.e., without regard to the actual intent of the debtor—under one of the following conditions:
(1) the debtor was left by the transfer or obligation with unreasonably small assets for a transaction or business in which the debtor was engaged or was about to engage;
(2) the debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, more debts than the debtor would be able to pay as they become due; or
(3) the debtor was insolvent at the time or as a result of the transfer or obligation.
Avoidable Transaction Tests:
(Use these four tests first if you can, since a creditor can often win these on summary judgment)
(Use the Intent Test last, as summary judgment is difficult to obtain)
- Intent Test (as proven by the Badges of Fraud)
See Article: J. Adkisson, Understanding The Elements Of The UVTA Tests For A Voidable Transaction, Forbes.com, 30 May 2019
RECENT ARTICLES
2021.01.24 ... UVTA Held Not To Require A Third-Party Transferee In Nagel
2020.12.29 ... Debtor’s Transfers From Non-Debtor Limited Partnership Set Aside In Cole
2020.06.30 ... Attorney Fees Held Awardable Under Nevada Fraudulent Transfer Law In Morgan Stanley Opinion
2020.06.11 ... Bank That Was Financially Involved With Debtor Gets Caught Up In Fraudulent Transfer Case In Wilson
2020.05.21 ... Utah Supreme Court Rejects Mixed Motive Test For Intentional Fraudulent Transfers In Jones Case
2020.01.06 ... Twyne’s Case And The Most Infamous Flock Of Sheep In Anglo-American Law
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Many more articles on voidable transactions law found here
UVTA - LOGICAL ORGANIZATION
(Designed For Litigators)
Click here to go to the Voidable Transactions Decision Chart
Overview of UVTA -- The process and result
Learn The Vocabulary Of The Act (Main Page)
- Who are the parties? (Main Page)
- Creditor - Debtor - Insider & Affiliate - Relative - Organization & Person
- What is a Claim and Debt? - Establishes when the claim arose, and the amount of the claim
- What is an Asset and Property? - Not all property are assets because certain categories of property are excluded
- What is a Lien and a Valid Lien? - Liens also determine the value of assets
- What is a Transfer and when has it occurred? - Not all movement of property are transfers
- What is Value? - Value may have very different meanings to creditors and debtors
- What does Insolvency mean? - Sometimes very difficult to determine
Has A Voidable Transaction Occurred? (Main Page)
- Insolvency Test - The best test for creditors to use when available
- Insider Preference Test - Not really a voidable transaction test, but instead a preferential transfer test
- Overextending Insolvency Test - The debtor engaged in a transaction for which it did not have the necessary financial strength
- Sinking Insolvency Test - The debtor knew or should have known that insolvency was near
- Intent Test - The debtor intended to hinder, delay or defraud any creditor
- Badges of Fraud - One of the most misunderstood subjects and frequently misapplied
Does The Transferee Have A Defense? (Main Page)
- Extinguishment Periods a/k/a (incorrectly) Statute of Limitations - When UVTA actions cease to be viable
- Transferee's Good Faith - How a transferee can avoid liability
What Remedies Are Available? (Main Page)
- Non-Money Remedy (Avoidance, Injunction, Attachment, Levy, Receiver, Other) - The most common remedies which restore title to the asset in the debtor for purposes of the creditor's enforcement
- Money Judgment - When the remedy of avoidance is unattractive
Other Helpful Provisions (Main Page)
- Burdens of Proof - Who proves what and when
- Conflicts-Of-Laws - When multiple jurisdictions' laws may apply and they differ
- Applicability to Protected Series Organizations (Series LLCs) - Intra-series transfers may be voidable transactions
- Uniformity Between States - When the courts of one jurisdiction should look at UVTA rulings in another
- Supplementary Law - Resolving issues that are not covered by the UVTA
- Electronic Signatures - An utter waste of statutory drafting
- Title of the Act - Dumping fraudulent transfer for voidable transaction
- Conforming Amendments - Information for enacting legislatures
UVTA - NUMERICAL ORGANIZATION
(Confusing & Difficult To Use)
The Uniform Law Commission's complete copy of the UVTA with comments in PDF format is available here. The webpage for the UVTA, showing states that have enacted and much other information regarding the Act is found here.
1 - Definitions
(1) Affiliate -- (2) Asset -- (3) Claim -- (4) Creditor -- (5) Debt -- (6) Debtor -- (7) Electronic -- (8) Insider -- (9) Lien -- (10) Organization -- (11) Person -- (12) Property -- (13) Record -- (14) Relative -- (15) Sign -- (16) Transfer -- (17) Valid Lien
2 - Insolvency - How insolvency is calculated
3 - Value - Issues relating to calculating value
4 - Transfer Or Obligation Voidable As To Present Or Future Creditor
(a)(1) {Intent Test} - To hinder, delay or defraud any creditor
(a)(2)(i) {Overextending Insolvency Test} - The debtor engages in a transaction for which it does not have the financial strength
(a)(2)(ii) {Sinking Insolvency Test} - The debtor is not technically insolvent but headed for insolvency
(b) {Badges of Fraud} - Circumstances available to prove the debtor's intent
5 - Transfer or Obligation Voidable As To Present Creditor
(a) {Insolvency Test} - The test preferred by creditors
(b) {Insider Preference Test} - Not really a fraudulent transfer test at all
6 - When Transfer Is Made Or Obligation Is Incurred - Determines the time of the transfer
7 - Remedies Of Creditor
{Non-Money Judgment Remedies} - Avoidance, attachment, etc.
8 - Defenses, Liability, And Protection Of Transferee Or Obligee
{Main Provisions} -The transferee's good faith for-value defense
(b) and (c) {Money Judgment Remedy} - Alternative remedy for creditors when avoidance is not good enough
9 - Extinguishment Of Claim For Relief - Similar to Statutes of Limitation
10 - Governing Law - Conflicts of Laws provisions
11 - Application To Series Organization - Applies to intra-series transfers
12 - Supplementary Provisions - Allows application of other law to issues unresolved by the UVTA
13 - Uniformity Of Application And Construction - Court opinions from other states may be looked to for guidance
14 - Relation To Electronic Signatures In Global And National Commerce - Waste of statutory space
15 - Short Title - From fraudulent transfers to voidable transactions
16 - Repeals; Conforming Amendment - Information for enacting legislatures
OTHER SOURCES OF
FRAUDULENT TRANSFER LAW
Fraudulent Transfers In Bankruptcy - Main Page
- Bankruptcy Code Section 544 - Trustee as lien creditor and as successor to certain creditors and purchasers
- Bankruptcy Code Section 548 -- Fraudulent Transfers And Obligations
- Bankruptcy Code Section 550 -- Liability of Transferee of Fraudulent Transfer
28 U.S.C. § 3301, et seq. - Where United States is the creditor
Common Law Fraudulent Transfer - Still exists in most states
Criminal Statutes -- Jurisdictions that criminalize fraudulent transfers
Fraudulent Conveyances Act of 1571 a/k/a Statute of 13 Elizabeth - The medieval statute to which the modern American UVTA traces some of its roots.
Statutes Of The U.S. Jurisdictions -- State and Territorial Voidable Transaction and Fraudulent Transfer Laws
TOPICAL COURT OPINIONS
DEFINITIONS
Creditor Definition - Court opinions on the definition of creditor
Debtor Insider Affiliate Relative Organization Person Definitions - Court opinions on the definitions of debtor, insider, etc.
Claim And Debt Definitions - Court opinions on the definitions of claim and debt
Asset And Property Definitions - Court opinions on the definitions of assets and property
Lien And Valid Lien Definitions - Court opinions on the definitions of lien and valid lien
Transfer Definition - Court opinions on the definition of transfer
Value And Reasonably Equivalent Value (REV) Definition - Court opinions on the definitions of value and reasonably equivalent value
Insolvency Definition - Court opinions on the definition of insolvency
TESTS
Insolvency Test - Court opinions relating to the Insolvency Test
Insider Preference Test - Court opinions relating to the Insider Preference Test
Overextending Insolvency Test - Court opinions relating to the Overextending Insolvency Test
Sinking Insolvency Test - Court opinions relating to the Sinking Insolvency Test
Intent Test - Court opinions relating to the Intent Test
Badges Of Fraud - Court opinions relating to the Badges of Fraud
DEFENSES
Extinguishment Periods a/k/a (incorrectly) Statute Of Limitations - Court opinions relating to the extinguishment periods
Transferee Good Faith - Court opinions relating to the transferee good faith for-value defense
REMEDIES
Non-Money Remedies - Court opinions relating to avoidance and other non-money remedies
Money Judgment Remedies - Court opinions relating to money judgments
Attorney Fees -- Court opinions relating to awards of attorney fees
Punitive Damages - Court opinions relating to punitive and exemplary damages
OTHER
Burdens of Proof - Court opinions relating to the burdens of proof
Conflict Of Laws - Court opinions relating to conflict of laws
Uniformity - Court opinions relating to uniformity with the laws of other jurisdictions
Supplementary Law - Court opinions relating to the interplay of the UVTA with other law
Jurisdictional Issues - Court opinions relating to jurisdiction of UVTA actions.
BANKRUPTCY
Section 548 - Court opinions relating to 11 USC 548
OTHER RESOURCES
- Decision Chart - How to resolve UVTA cases
- Topical Court Opinions - Collection of interesting court opinions
- Useful Articles and References - Other articles of interest
- Jay Adkisson's Available Services - Stuff I do
OTHER INFORMATIONAL WEBSITES
by Jay Adkisson
- Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances.
- Captive Insurance - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business, by the author of the best-selling book on the topic: Adkisson's Captive Insurance Companies.
- Asset Protection - The all-time best-selling book on asset protection planning by Jay Adkisson and Chris Riser.
- Creditor-Debtor - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies.
- Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused.
- Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act.
- Protected Series - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017.
- California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues.
- Anti-SLAPP Laws - A collection of and commentary about Anti-SLAPP laws and significant court decisions on the subject within the United States, and special section on California Anti-SLAPP.
Voidable Transactions:
Fraudulent Transfers In American Law
by Jay D. Adkisson (Available 2021)
Contact Jay Adkisson:
Phone: 702-953-9617 Fax: 877-698-0678 jay [at] jayad.com
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© 2021 Jay D. Adkisson. All rights reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. This site https://voidabletransactions.com Contact: jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678.