Why it matters

With the enactment of the Uniform Voidable Transaction Act (UVTA) to supersede the Uniform Fraudulent Transfer Act (UFTA), California has put a fresh spin on the law of fraudulent transfers in the state. California's version of the statute departs somewhat from the proposed uniform version and will result in some significant changes. Gone is the archaic terminology that applied the pejorative label of "fraud" to certain perfectly innocent transactions; instead, the more neutral term "voidable" was adopted. The bill also tweaked the burden of proof in making and defending a claim for relief under the act as well as the choice of law governing a determination under the statute. Signed by Governor Jerry Brown earlier this month, the UVTA will take effect January 1, 2016.

Detailed discussion

The Uniform Fraudulent Transfer Act (UFTA) has governed most states, including California, in actions relating to fraudulent transfers for decades. But in an effort to modernize the statute, the Uniform Law Commission drafted the Uniform Voidable Transaction Act (UVTA).

Passed overwhelmingly by the state legislature, the new act was signed into law by Governor Jerry Brown in July and will take effect January 1, 2016.

Most notably, the UVTA dispenses with the "fraudulent" label in favor of the more neutral term "voidable." Beyond the moral significance, this amendment dovetails with another change: the lowering of the burden of proof in a lawsuit under the new act. Going forward, the previous standard of "clear and convincing" evidence used in some states has been replaced with a uniform "preponderance of the evidence" burden of proof. This change will be a mixed blessing for lenders: good news when trying to pursue fraudulent transfer actions but bad news when a lender is on the receiving end.

Practitioners must also adjust to a change in the choice of law. Previously, the UFTA did not specify which state's law would apply to a particular fraudulent transfer lawsuit. But the UVTA establishes that the law of the state where the debtor was located at the time of the transfer will govern the lawsuit. This tweak has major significance for California lenders with regard to other provisions of the UVTA that the legislature refused to adopt, potentially bringing them into lawsuits they never counted on.

California declined to adopt multiple provisions of the proposed uniform act, including those related to Series Organizations, a relatively new form of business organization that cannot yet be formed under California law. The legislature also elected not to include provisions that would allow a creditor to recover certain so-called insider preferences, or payments received by another creditor on a legitimate debt if the creditor is an "insider" of the debtor.

However, when combined with the choice of law provision, a California lender might find itself subject to the laws of the state where its out-of-state borrower is located—and then face a lawsuit in that state to recover an insider preference even though California does not authorize that kind of a claim.

The definitional provisions in the UVTA contribute to the situation of lenders being the target of an insider preference lawsuit. While the term "insider" may evoke images of close relatives and corporate officers and directors of a borrower, the definition of the term in the UVTA (and the UFTA) is far broader than that.

With regard to debtors who are corporations and partnerships, the definition of "insider" includes "a person in control" of a debtor. So if a lender, perhaps in a workout situation, is alleged to have exercised excessive control over a debtor's operations, another creditor could argue that the lender has become a "person in control" of that debtor subject to the foreign state's preference laws. Under the new choice of law provisions, a California lender could now be faced with a lawsuit in another state, seeking to recover loan payments that the lender received.

To read the Uniform Voidable Transactions Act, click here.