Fraudulent transfer law governs a debtor's rights to transfer property vis-à-vis its creditors and provides a mechanism under which a transaction may be unwound if the debtor transfers its property or incurs obligations: (i) with the intent to hinder, delay or default its creditors; or (ii) without reasonably equivalent value. Elements of modern fraudulent transfer law can be traced to the 16th century Statute of XIII Elizabeth. In 1918, the principles of fraudulent transfer law were developed by the National Conference of Commissioners on Uniform State Laws into a uniform law called Uniform Fraudulent Conveyance Act (the UFCA), and in 1984 were revised and restyled as the Uniform Fraudulent Transfer Act (the UFTA).1 Pennsylvania adopted the UFCA in 1921 and the UFTA2 in 1993. A vast majority of the states have enacted some version of the UFTA.3
In 2014, the Uniform Law Commission presented amendments to the UFTA which renamed the act the Uniform Voidable Transactions Act (the UVTA or the Act). Despite the renaming of the Act, the amendments are relatively modest and are intended to create uniformity and predictability in certain areas of fraudulent transfer law that have otherwise become unwieldy due to various jurisdictional interpretations of the uniform law.
To date, the UVTA has been enacted in eight jurisdictions (California, Georgia, Idaho, Kentucky, Minnesota, New Mexico, North Carolina and North Dakota) and has been proposed in four more (Colorado, Indiana, Massachusetts and Nevada). 2016 will likely see the proposal and enactment of the revisions in many more jurisdictions. The Pennsylvania Bar Association’s Business Law Section established a Uniform Voidable Transactions Task Force to review the UVTA amendments in 2014/2015 and analyze whether those amendments would be appropriate in Pennsylvania. Ultimately, the Task Force recommended the adoption of the UVTA, which will likely be introduced to the Pennsylvania legislature in early 2016.
The primary revisions to the Act are as follows:
- Stylistic Changes: As previously noted, the Act has been renamed the Uniform Voidable Transactions Act, and the term "fraudulent" has been replaced with "voidable" throughout. This change was made primarily to clarify confusion about the Act’s requirements. Claims under the Act have become commonly referred to as those for "actual fraud" (i.e., transfers made or obligations incurred with the intent to hinder, delay or defraud creditors) and "constructive fraud" (i.e., transfers made or obligations incurred without reasonably equivalent value). However, a showing of "fraud" in the traditional sense has never been a requirement under the Act.
- Changes to the Definition of "Insolvency": The debtor's solvency, or rather, insolvency, is a critical component of a claim under the Act. Generally speaking, a debtor is insolvent if its liabilities exceed its assets. Two changes have been made to the concept of insolvency under Section 2 of the Act. First, debts that are subject to a bona fide dispute are no longer considered in the liability calculation. Second, the definition of insolvency with respect to partnerships was changed. Previously, the assets and liabilities of each partner were considered when determining whether a partnership is insolvent. Under the UVTA, those assets and liabilities are no longer considered when determining a partnership’s solvency.
- Standards and Burdens of Proof: Until now, there has been no uniform rule with respect to the standards and burdens of proof under the Act. It is now clear that a party making a claim or asserting a defense has the burden of proving those claims. Regardless of whether the party is asserting a claim or defense, the standard of proof is "preponderance of the evidence," which is typical in civil cases generally. This revision was made, in part, to set the record straight and reject any argument that a heightened standard such as "clear and convincing evidence" (traditionally associated with fraud claims) would be required under the Act.
- Choice of Law: Similarly, to date, there has been no codification or uniformity in the choice of law applied to claims for fraudulent transfers. In the absence of a uniform provision, the courts have applied various rules to determine which jurisdictions fraudulent transfer law should apply in any given case. This has led to great diversity and confusion of opinions, ranging from the law of the jurisdiction where property is located to the jurisdiction of the transferor and even the jurisdiction of the creditor. Choice of law principles have been applied under the First Restatement of Conflict of Laws, the Second Restatement of Conflicts of Laws and under a traditional tort test or contract test. While the state of the law has been complex and confusing, the Uniform Law Commission sought to provide a rule of law that was simple and predictable. The UVTA amendments provide that the local law of the jurisdiction of the debtor applies to claims of a nature under the Act. The Act defines the debtor’s location as: (1) the principal residence of an individual debtor; (2) the debtor’s place of business if the debtor is an organization with only one place of business; or (3) the "chief executive office" of a business organization with more than one place of business.
- Changes to Defenses under the Act: The defenses provided to voidable transfer claims under Section 8 have also been amended. First, the defense of taking in good faith and for reasonably equivalent value has been limited to circumstances in which fair value was given to the debtor. Second, under Section 8(b), an immediate or mediate transferee that takes from an initial transferee in good faith for value, and for any subsequent good faith transferee from an immediate or mediate transferee, must also take in good faith. This requirement has limited the defense available to those who take from an immediate or mediate transferee.
- Recognition of Series Organizations: The revisions to the Act also provide for a section recognizing series organizations, and how fraudulent transfer law would apply to those entities. A series organization is an entity that is permitted to establish certain protected "series." The assets and liabilities of the umbrella organization and each of its protected series are isolated. Although few states have enacted series organization statutes, series organizations may be subject to the fraudulent transfer laws of jurisdictions where series organizations statutes have not been enacted. Under the revisions to the Act, a series organization and its various protected series are considered to be separate persons, and therefore, transfers between them can be voidable if the requirements of the Act are otherwise met.
Given the relative modesty of the amendments to the Act, it is likely that these revisions will be adopted in many of the states in the upcoming year(s). These revisions will create increased predictability in some areas of fraudulent transfer law that have become increasingly unpredictable and complex.
1The Bankruptcy Code similarly includes a section relating to fraudulent transfers. 11 U.S.C. § 548. That federal Bankruptcy Code section will not be addressed herein, and will not be affected by the amendment of the uniform Act on the state-level.
2Pennsylvania’s existing version of the UFTA (12 Pa.C.S.A. § 5101 et. seq.) contains two nonuniformities, which will be retained in connection with the proposed amendments. First, the uniform Act and Pennsylvania law each provide that "reasonably equivalent value" is given the debtor when property is transferred to a creditor in connection with a regularly conducted, noncollusive foreclosure sale. (Id. at § 5103). The Pennsylvania UFTA also includes a safe harbor for regularly conducted execution sales. Id. The rationale behind this nonuniformity relates to the frequency of use of a confession of judgment action on an in personam obligation that is also secured by a mortgage. Under Pennsylvania law, the foreclosure of the judgment lien will relate back to the date of the mortgage and therefore have essentially the same effect as a mortgage foreclosure sale. See Bank of Pennsylvania v. G/N Enterprises, Inc., 316 Pa Super. 367, 371-372 (1983). Second, Pennsylvania’s version of the UVTA does not include the insider preference provision found in Section 5(b) of the Act. (Id. at § 5105). These nonuniformities will continue in Pennsylvania if the Uniform Voidable Transaction Act is otherwise enacted.
3The only states that have not adopted the UFTA are New York, Virginia, South Carolina and Louisiana.