The Uniform Law Commission recently approved amendments to the Uniform Fraudulent Transfer Act that, upon adoption by a state’s legislature, would rename that state’s UFTA as the Uniform Voidable Transactions Act and implement changes designed to update the statute and resolve conflicting court interpretations of certain of its provisions.
The most obvious change is the word “voidable” replacing “fraudulent” throughout the statute to reflect the fact that fraud is not necessary to a claim under the statute and eliminate confusion demonstrated by some courts. While the word “transactions” is substituted for the word “transfer” in the statute’s name, the defined term “transfer” is still used in the amended statute.
From a loan structuring, underwriting and due diligence perspective, two of the more interesting changes would (i) exclude from the determination of whether a debtor “is generally not paying [its] debts as they become due” (and therefore statutorily presumed insolvent) those debts that are subject to “a bona fide dispute” (although the amendments would also shift to the lender or other transferee the burden of proving that the nonexistence of insolvency “is more probable than its existence”); and (ii) impose a “preponderance of the evidence” proof requirement upon a creditor claiming that a transfer made or obligation incurred by its debtor is not voidable because it was not made “with actual intent to hinder, delay or defraud any creditor of the debtor” or it was made in exchange for “a reasonably equivalent value.”
From a loan collection standpoint, one standout provision would exclude strict foreclosure under Article 9 of the Uniform Commercial Code from the safe harbor that under the existing statute has protected lenders from a voidable transaction claim when exercising Article 9 remedies pursuant to a valid security interest.
The recommended amendments also contain transition rules, which generally would make the amendments applicable to a transfer made or obligation incurred on or after the effective date of the legislation enacting the amended statute but not applicable to a right of action that has accrued before the effective date of the enacting legislation. Section 6 of the statute would continue to define when a transfer is deemed made or an obligation is deemed to occur.
Legislative activity at the state level for these proposed amendments will be worth following.