New Year, New Fraudulent Transfer Law

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It’s a new year, and we have a new law affecting debtors and creditors in California.  Effective January 1, 2016, California’s Uniform Voidable Transactions Act (UVTA) has replaced California’s Uniform Fraudulent Transfer Act (UFTA). The full text of the new UVTA can be found here.  While the UVTA is similar to the UFTA in most respects, certain important changes and key aspects of the new law are discussed below.

Title of the Act

The title of the Act has been changed to the “Uniform Voidable Transactions Act.”  The use of the word “voidable” rather than “fraudulent” is intended to prevent confusion, since the UVTA (like with the UFTA before it) does not require fraud, in the normal sense of the word, for certain transactions to be voidable.  Also, the use of “transactions” rather than “transfers” is consistent with the law historically covering the incurrence of obligations in addition to transfers of property.

Medium Neutrality

References in the old UFTA to a “writing” have been replaced with “record” in the UVTA.  This change is intended to make it clear that the UVTA applies to electronic commerce and electronic data storage, both of which are now ubiquitous.

Determining “Insolvency”

The old UFTA’s special definition of partnership insolvency has been eliminated.  Partnerships are now subject to the general definition of insolvency.  Under the UVTA, insolvency is presumed if the debtor is not generally paying its debts when due (other than as a result of a bona fide dispute).  If the presumption of insolvency is triggered, its effect is to shift the burden of persuasion regarding solvency to the transferee.

Evidentiary Matters: Burdens of Proof and Standards of Proof

Generally, under the UVTA, the burden of proof with regard to asserting a voidable transaction claim is on the creditor, and the standard of proof is “preponderance of the evidence” (not the “clear and convincing evidence” standard typically associated with civil actions regarding fraud).

Choice of Law

Under the UVTA, the following rules determine a debtor’s location.  A debtor who is an individual is located at the individual’s principal residence.  A debtor that is an organization and has only one place of business is located at its place of business.  A debtor that is an organization and has more than one place of business is located at its chief executive office.

Defenses

While under the UFTA the defense for a subsequent transferee who took in good faith and for value, and for a subsequent transferee from that transferee, arguably applied only to an action for a money judgment, this is no longer the case.  The UVTA provides, consistent with §§ 550(a) and (b) of the Bankruptcy Code, that the defense also applies to recovery of or from the transferred property or its proceeds, by levy or otherwise.

Conclusion

Overall, the new UVTA appears to be substantially similar to the old UFTA.  The changes discussed above seem to be evolutionary rather than revolutionary.  It will be interesting to see whether these changes to the law will affect transactions and the practice of debtor and creditor law in California.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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