A recent decision in the Delaware Court of Chancery confirms a creditor has standing to bring a claim under the Delaware Uniform Fraudulent Transfer Act when the creditor faces a “material risk of harm,” even if the contractual right to payment is contingent and/or unmatured.
In Richard F. Burkhart, et al. v. Genworth Financial, Inc. et al.,1 the Delaware Court of Chancery recently held a creditor who faces a “material risk of harm,” but whose claims have not yet matured, nonetheless has standing to sue for fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act (DUFTA).2
DUFTA broadly defines a creditor as someone who has a “claim.”3 A “claim” is defined broadly to extend to persons who hold a “right to payment” even if that right is “contingent” or “unmatured.”4 The decision in Genworth Financial, Inc. opens the door for creditors to sue a debtor even where the debtor has not yet failed to honor any commitments or obligations to the creditor.5
The plaintiffs, a class of long-term care insurance policyholders and insurance agents, alleged that on the brink of its failure, Genworth Life Insurance Company’s (Genworth Life) owners and affiliates engaged in an intentional plan to syphon off Genworth Life’s assets and avoid a contractual obligation to pay the plaintiffs billions of dollars.6 The plaintiffs asked the Court of Chancery to restore to Genworth Life the value of the assets that were syphoned away.7 At the time the lawsuit was filed, Genworth Life had not failed to honor its commitments to the plaintiffs under the policies or missed any commission payments to the plaintiffs.8
The plaintiffs were required to show, inter alia, that they suffered an “injury in fact,” despite having received all they were due to date.9 The Court of Chancery, in Genworth Financial, Inc., held an injury in fact requires finding a “concrete injury,” but does not necessarily require a “tangible injury.”10 Indeed, the Court noted an “intangible injury” may be a concrete injury.11 Further, where, as here, a statutory violation presents a “material risk of harm,” that risk will confer standing even where the risk would not otherwise confer standing in the absence of the statute.12
The Court of Chancery granted the defendants’ motion to dismiss in part and denied it in part, holding (i) any challenge to the $395 million in dividends Genworth Life paid from 2012 to 2014 was untimely; and (ii) the plaintiffs had standing to bring this lawsuit.13 The Court found the defendants’ intentional transfer of substantial assets to avoid an obligation to pay the plaintiffs equated to a “material risk of harm.”14 Indeed, the Court explained this is the exact type of harm the General Assembly sought to mitigate when enacting DUFTA.15
The Court of Chancery’s decision in Genworth Financial, Inc. makes clear DUFTA was designed to protect creditors, regardless of whether their claims were contingent or unmatured.16 Indeed, the Court noted “[c]reditors are not required to stand by helplessly until a distant maturity date arrives while his debtor is fraudulently depleted of all assets.”17
DUFTA does not protect creditors who have alleged a mere harmless or “technical” violation.18 However, based on Genworth Financial, Inc., DUFTA does provide a right of action to creditors “threatened” by fraudulent transfers, even if the fraudulent transfers have not yet had the full effect of dissipating debtor assets.19 Any decision to the contrary would contradict the plain language of DUFTA.20
- DUFTA seeks to discourage debtors from intentionally hindering a creditor’s right to collect.
- Creditors with “contingent” or “unmatured” claims can sue to enforce their rights under the plain language of DUFTA.
- Even where a debtor has not yet failed to honor its commitments, creditors have standing to sue if they can allege a violation amounting to a “material risk of harm” (as opposed to a merely harmless or technical violation).
- Consistent with the intention of the General Assembly and the plain language of DUFTA, creditors should not suffer while their debtors intentionally move assets in a scheme to defraud them.