On July 16, 2014, the Uniform Law Commission (the “Commission”) approved a series of discrete amendments to the Uniform Fraudulent Transfer Act (the “UFTA”) and renamed it the Uniform Voidable Transactions Act (the “UVTA”). The UVTA is intended to address inconsistency in the courts, better harmonize with the Bankruptcy Code and the Uniform Commercial Code (the “UCC”), and provide litigants with greater certainty in its application to a fraudulent transfer action. While the amendments are not intended to completely overhaul the UFTA, there are three categories of noteworthy updates, each highlighted below.

Background

Under the UFTA, a “fraudulent transfer” exists when a debtor transfers property to a third party with the intent to hinder, delay or defraud its creditors, or, if the debtor was insolvent at the time of the transfer, the debtor received less than reasonably equivalent value for such property. The UFTA, as adopted by the individual states, provides a remedy for creditors against such third-party transferees by allowing a fraudulent transfer to be “voided” and treated as if it never happened. Consequently, the value of the property is returned to the debtor or its estate.

Evidentiary Matters

One difficulty in applying the UFTA has been how a creditor proves that a debtor undertook a fraudulent transfer. Absent an admission of wrongdoing by the debtor, a creditor must prove either that the debtor intended to defraud creditors by demonstrating one or more so-called “badges of fraud” (e.g., that the transfer was made to a family member, the debtor actually retained control and enjoyment of the property, or that the debtor transferred substantially all of its assets) or, in the alternative, that the debtor was insolvent and did not receive reasonably equivalent value for the property transferred or benefit for the obligation undertaken. In contrast to what the UVTA’s former name might suggest, a showing of actual fraud under either of these circumstances is not required at all, nor was it ever intended to be. Nonetheless, the misnomer led to confusion in the courts, some of which have applied the higher “clear and convincing” evidentiary burden typically associated with civil actions based in fraud.

The UVTA addresses this confusion by providing greater clarity with respect to the evidentiary requirements for a voidable transaction claim. In addition to replacing the word “fraudulent” with the word “voidable”, the UVTA clarifies the standard of proof for a voidable transaction and the burden of rebutting the presumption of a debtor’s insolvency.

The UVTA now explicitly states that the creditor-claimant has the burden to establish the elements of its claim by a preponderance of the evidence, and not the higher clear and convincing standard. Furthermore, the Commission’s official comments warn that courts should not alter the allocation of the burdens or apply any non-statutory presumptions to avoid upsetting the uniformity of the UVTA.

While the burden of proof remains with the creditor, the UFTA has historically provided a rebuttable presumption that a debtor is insolvent if it fails to pay to debts as they come due. The UVTA refines this presumption in two meaningful ways. First, the UVTA clarifies that any nonpayment of debts that are the subject of a “bona fide dispute” are not presumptive of insolvency. This qualification is consistent with the intent of the original meaning of the UFTA as well as the Bankruptcy Code (11 U.S.C. § 303(h)(l)). Second, the UVTA expressly states that the burden to rebut this presumption falls on the debtor, conforming to the treatment of rebuttable presumptions in the Uniform Rules of Evidence. The Commission’s official comments indicate that this clarification is also consistent with the original intent of the UFTA.

Defenses

The UFTA has historically protected transfers that resulted from the enforcement of a security interest in accordance with Article 9 of the UCC. However, the UVTA carves out “strict foreclosures” from this defense to a voidable transaction action. A “strict foreclosure” is one in which a debtor, post-default, consents to the secured party accepting collateral in full or partial satisfaction of the obligations secured by the collateral, without a public sale or judicial foreclosure. Strict foreclosures are attractive to secured creditors because of their lower transaction costs as compared to a judicial foreclosure or public sale.

Following the lead of California, Connecticut, and Pennsylvania versions of the UFTA, the drafters of the UVTA determined that, unlike other creditor remedies provided in Article 9 of the UCC, strict foreclosure operates as the functional equivalent of a voluntary transfer to a third party and should accordingly be voidable under the UVTA. Although strict foreclosures are no longer automatically protected under the UVTA, a creditor may still show that a foreclosure sale was conducted in good faith and in a commercially reasonable manner to shield its claim to the collateral from other creditors.

Choice of Law

The issue of which state’s law should apply is often an intensely litigated issue (even before the commencement of litigation of the substantive voidable transaction claim) because fraudulent transfer laws vary among the states in several respects. For example, California has a seven year statute of limitations for a fraudulent transfer claim (Cal. Civ. Code § 3439.09), while Delaware’s statute of limitations is four years (Del. Stat. Ann. § 1309), and Virginia has no statute of limitations whatsoever, instead relying only on the common law doctrine of laches to determine if claims are stale (See Bartl v. Ochsner (In re Ichiban, Inc.), No. 06-10316-SSM, 2007 WL 1075197 (Bankr. E.D. Va. 2007)). The UVTA dispenses with the choice of law issue by including a governing law rule that is largely consistent with that of Article 9 of the UCC, applying the law of the debtor’s residence at the time that the transfer was made (i.e., for individual debtors, the person’s state of residence, and for businesses, the state in which its business is conducted or, if business is conducted in more than one state, the place in which the business had its chief executive office) to claims under the UVTA. One important distinction between the UVTA and the UCC is that under the UCC, the location of a business that is a “registered organization” (as defined in the UCC) is always its state of organization, which may not be the state in which its business is conducted or the place of its chief executive office.

Implications

Overall, the UVTA harmonizes with the Bankruptcy Code, UCC, and the Uniform Rules of Evidence, should promote better uniformity across secured lending and bankruptcy practices, and provides better guidance to both the courts and litigants about how avoidance actions should be adjudicated. It is important to note, however, that the UVTA does not have an automatic effective date and each state’s legislature may (or may not) adopt the changes made by the UVTA, as desired. Currently, most states have adopted a version of the UFTA (including California, Delaware, the District of Columbia, and Pennsylvania), whereas some states (including New York and Maryland) still apply the Uniform Fraudulent Conveyances Act (the predecessor to the UFTA). While the UVTA’s revisions have the potential to meaningfully affect fraudulent transfer claims, the full impact of the UVTA will not be known until it is adopted and implemented.