From time to time, you may be seeing references to the Uniform Voidable Transactions Act (UVTA). Indeed, since 2014, the law has already been enacted in nine states and introduced in another seven states. If you are wondering what this new law is all about, you should know that it is really a very old law with a new name. The crux of the law is to prevent debtors from escaping their creditors by making transfers of assets to avoid paying their debts. This law has been a key part of debtor-creditor law in the United States and England dating back to the time of the reign of Elizabeth I.
Earlier codifications of the law in the United States began in 1918, when the Uniform Fraudulent Conveyance Act (UFCA) was enacted in 26 states and later incorporated into the Federal Bankruptcy Act. In 1984, the UFCA was revised and renamed the Uniform Fraudulent Transfer Act (UFTA), which was enacted in nearly every state (Maryland and New York still retain the UFCA). In 2014, the Uniform Law Commission decided to update the 1984 law, changing its name again – to the UVTA – but not really changing much of substance.
As noted above, the main purpose of the law is to ensure that debtors cannot escape their debts to creditors by transferring or conveying assets that would otherwise be used to pay such debts. The UVTA creates a right of action for any creditor against any debtor or any other person who has received property from the debtor in a fraudulent conveyance, fraudulent transfer or a voidable transaction, which occurs when a debtor (i) intends to hinder, delay or defraud a creditor or (ii) transfers property under certain conditions to another person without receiving reasonably equivalent value in return.
The second basis of the claim does not require any intention or particular state of mind on the part of the debtor. Instead, if at the time of the questionable transfer the debtor (i) was engaged or was about to engage in a business or a transaction for which his or her remaining assets were unreasonably small in relation to such business or transaction or (ii) intended to incur, or believed (or reasonably should have believed) that he or she would incur, debts beyond his or her ability to pay as they became due. Of course, the creditor’s claim is stronger if actual intent to “hinder, delay or defraud” a creditor can be proven, and for that purpose, the law lays out several factors that should be considered in determining the debtor’s state of mind.
This cause of action can be especially important to unsecured creditors in the context of a bankruptcy – where laws tend to favor debtors – and where such creditors are often left with pennies on the dollar compared with the original debt owed them. In short, the UVTA allows creditors to claw back and undo certain transfers by the debtor “to the extent necessary to satisfy the creditor’s claim.”
Although the law is largely an old one, and one that addresses a concern that has been felt for centuries the world over, the UVTA did make some changes:
- Name change: As discussed, the name of the law was changed from the Uniform Fraudulent Transfer Act to the Uniform Voidable Transactions Act. Although there is no substantive change here, it was determined that the word “fraudulent” was misleading – as “fraud” has never been a necessary element of a claim under the act.
- Choice of law: The impetus for amending the law was that there was no choice-of-law rule in the previous statute, which made the courts’ application of common law principles messy and totally inconsistent. The UVTA now provides that a voidable transfer claim is governed by the law of the jurisdiction in which the debtor is “located” when the transfer was made. This rule is now also conveniently aligned with Article 9 of the Uniform Commercial Code’s choice-of-law rule governing liens.
- Standard of proof: The UVTA also makes clear that the standard of proof in a civil action is the ordinary “preponderance of the evidence” standard, which must be proven by the creditor.
Ultimately, the changes to the law are relatively minor and are intended to refine the law and to cement its place in our statutory canon even further. As noted before, the UVTA has been adopted in nine states and introduced in another seven states so far. Interestingly, New York, which still clings to the 1918 UFCA, has introduced the UVTA this year, so this may be a year of giant progress for New York on the voidable transaction/fraudulent conveyance front. Across the 50 states, though, there is no doubt you will see the UVTA referenced more and more in the years to come.