UFTA Three-Step/Four-Test Analysis by Jay Adkisson

Discussion of transfers made in defraud of creditors and the Uniform Fraudulent Transfers Act (UFTA)
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UFTA Three-Step/Four-Test Analysis by Jay Adkisson

Postby Riser Adkisson LLP » Sat Dec 25, 2010 8:01 am

Three-Step/Four-Test Analysis of the

Uniform Fraudulent Transfers Act

by Jay D. Adkisson

2003 Draft

A fraudulent transfer (a/k/a "fraudulent conveyance") is an asset transfer that a debtor makes to try to defeat a creditor's collection efforts to collect against the asset. This typically happens when, say, a debtor attempts to "sell" everything to his wife, cousin or business partner for $5 to keep his stuff out of the hands of his creditors. If the court figures out that the transaction is a sham to defeat the creditor, the court will set aside the transaction and make the person holding the assets (the "transferee") give them back to the creditor.

When you consider that the landmark case on fraudulent transfer law is Twyne's Case,[1] announced in the Star Chamber by Lord Coke in 1601, you know that the law of fraudulent transfers has been around a long, long time. In 1918, the Uniform Law Commissioners decided that the law relating to fraudulent transfers deserved codification, and thus came forth with the Uniform Fraudulent Conveyances Act ("UFCA"), which 25 eventually adopted.[2] Changes to other law — primarily to the Uniform Commerical Code and Bankruptcy Reform Act of 1978 — militated in favor of updating the UFCA, and in 1984 the Uniform Fraudulent Transfers Act ("UFTA" or "Act") was adopted by the Uniform Law Commissioners, and thus far 40 states have adopted UFTA.[3]

UFTA is a poorly organized and poorly drafted Act. The Committee on Uniform Laws apparently just took the outdated Uniform Fraudulent Conveyances Act and added language or edited where desired, instead of reorganizing and rewriting a new Act. At the same time, they attempted to coordinate the new Act with recent changes in commercial law and in the bankruptcy code, as well as with the myriad cases that interpreted the old Act.

In retrospect, the Committee should have thrown out the structure of the old Fraudulent Conveyances Act altogether and started anew, as the net effect of the Committee's changes is to impose an often stilted and sometimes indecipherable body of law that tends to lead practitioners and courts alike to tortured analysis, incorrect conclusions and undesired results.

OVERARCHING CONCEPTS

Creditor vs. Transferee

A claim under the UFTA is a claim by the creditor against a transferee of the asset. It is presumed that between the creditor and debtor, the creditor will be able to seek remedies in the underlying action, i.e., as to the debtor, the creditor can simply go to the judge that gave it relief in the first place. The UFTA governs the rights of the creditor against a transferee that was not originally a defendant in the underlying action wherein the judgment against the debtor was rendered.

The term "transfer" includes every means of parting with an asset, including allowing somebody to put a lien on the asset[4] or foreclosure of an interest in the property.[5] A transfer cannot be made until the debtor has first acquired rights in the assets to be transferred.[6]

A transfer of real property has been completed when the good-faith purchaser has perfected an interest in the property sufficiently that a creditor cannot get a judicial lien superior to that of the transferee.[7] A transfer of property other than real property is completed when a creditor cannot acquire a judicial lien superior to that of the transferee.[8] If the transfer is not perfected before the creditor seeks judicial relief from the transfer as fraudulent, the transfer is deemed to be made immediately before the creditor began his action.[9] If the transfer cannot be perfected, it is deemed to be made on the date that it becomes effective between the debtor and the transferee.[10]

The term "assets" means the debtor's property,[11] but does not include property encumbered by a valid lien, exempt property, and property held in a tenancy by the entireties (if not subject to process).[12] A "lien" is an interest in property which secures a debt,[13] is a "valid lien" if a judicial lien is ultimately obtained.[14]

UFTA Expands Creditors' Remedies

UFTA does not exist in the abstract, but often looks to other law, such as the Uniform Commercial Code. The purpose of UFTA is to add to creditors' remedies.[15] Where UFTA conflicts with other law that may give a result favorable to the debtor, usually the supplementary nature of UFTA will supercede the other law, and the conflict will be resolved in favor of UFTA and thus in favor of the creditor.[16]

Manipulating Certainty

An unspoken goal of UFTA is to manipulate the relative certainties between the parties where allegations of fraudulent transfer have been made. The effect of UFTA is to:

Increase a Creditor's certainty of having a transfer set aside

Decrease a bad-faith Transferee's or Insider's certainty of being able to keep the asset

Decrease the Debtor's certainty that the transaction is complete

Increase the certainty of a good-gaith Transferee of being able to keep the assets

By increasing the certainty of a Creditor, and decreasing the certainty of a bad-faith Transferee, Insider, as well as the Debtor, UFTA helps to deter fraudulent transfers from being made in the first place. At the same time, UFTA protects a good-faith Transferee so as to not discourage transactions between innocent parties in the ordinary course of business.

What Statute of Limitations?

The UFTA sets forth very specific limitations periods for attempting to set aside certain transfers.[17] The plain text of the Act makes clear that these claims under UFTA are extinguished unless they are brought within the provided time set forth in the Act "after the transfer was made or the obligation was incurred."[18] So, you would think this means that on the date of the transfer of the asset, the hourglass is flipped and the sand begins to fall.

As clear as this seems, some of the state courts have held that – this language notwithstanding – the limitations period under UFTA does not even being to run until the creditor has obtained the underlying judgment.[19] These holdings emasculate the limitations period of UFTA, since presumably a transfer could be made, a case later filed which takes four years to percolate through the legal system to judgment (which finally starts the limitations period running), and then the creditor has another four years (or whatever amount of time depending on which test is implicated) to attempt to set aside the transfer under UFTA – so a total of eight years in this example!

Here again the problem of Conflicts-of-Laws rears its ugly head, and invites law-shopping by both creditors and transferees. Creditors will obviously seek to file their UFTA claims in states that toll the limitations period until the underlying judgment is entered, while transferees will seek to keep the assets in states that strictly interpret these limitations provisions. Again, there is doubt as to which state's limitations period should apply, and this doubt tends to favor creditors.

No Judgment Required

Anybody who has a "claim" — meaning a right to payment, even if contingent or disputed[20] — is a "creditor".[21] Liability from a "claim" is called "debt"[22], and a person[23] having liability on a claim means "debtor".[24] With only one exception,[25] UFTA does not distinguish between claimants with as-yet unliquidated claims and creditors holding judgments.

Transactions With Insiders Are Suspect

UFTA provides a specific test for a transfer made to an insider after a claim arises,[26] and a transfer or obligation made to an insider is the first "Badge of Fraud".[27] Thus, transactions involving insiders can be expected to face greater scrutiny by the court.

An "insider" can include[28] relatives[29] and partners of the debtor, and if the debtor is a partnership or corporation, the term can include other general partners or officers and directors. The term does not include limited partners or shareholders (unless they have control of the corporation). The term is not exclusive, also includes "affiliates".[30] An "Affiliate" is a person who controls at least 20% of the debtor, unless they are holding the debtor's stock as security (so long as they have not voted). The term can also include a company in which the debtor invests, if the investment exceeds 20%, as well as a lessee or operator of the debtor's business, or somebody who controls the debtor's assets.[31]

Transfers by Insolvent Debtors Are Suspect

Insolvency is an element in two of the "bright line" tests under UFTA,[32] and the ninth "Badge of Fraud" is that the "debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred".[33] Thus, transactions involving insolvent debtors can be expected to face greater scrutiny by the court.

A debtor is insolvent if his debts exceed his non-exempt[34] assets, at a fair valuation.[35] Where the property of the debtor is not counted as an asset towards the valuation because it is secured, then the underlying secured debt shall not be counted as a liability for purposes of the solvency test.[36] The solvency test will not include those assets that the debtor has improperly tried to transfer, conceal or remove to avoid creditors.[37] If the debtor cannot pay his undisputed[38] debts as they ordinarily come due,[39] the debtor must rebut the presumption that he is insolvent.[40]

Transfers Lacking Value Are Suspect

Central to UFTA is the concept of "Reasonably Equivalent Value". This term appears in the First (Subsequent Creditor) and Third (No Consideration) Tests as elements, and in the Fourth Test (Circumstantial Evidence) as a "Badge of Fraud". The concept is easy enough and makes perfect sense: If you are going to transfer something away, you should get something back so that even if the asset you gave away isn't available to your creditors, the asset you got back is available to your creditors. As to the transferee of an asset, it shows good faith by the transferee is she gave the debtor back something of like value.

A transfer or obligation has "value" when property is received in return, or a previous debt is either satisfied or secured[41] in a contemporaneous transaction.[42] A transfer can have "value" if what is received in return has reasonably equivalent value, even if the consideration received did not match exactly the value of the transfer from the debtor, and can even include an unperformed promise that benefits the debtor so long as it is not a promise of future support.[43] However, the calculation of "value" does not include property that does not have value to a creditor, such as pledges of love and affection.[44]

Although "value" is defined in the Act, the term "reasonably equivalent value" is not uniformly defined. The term used in the predecessor Uniform Fraudulent Conveyances Act was "substantial value"; however, this term was problematic. Let's say that you transfer a piece of property and get $1 million back. This sounds pretty substantial, but what if the property was worth $10 million? Now, the $1 million obviously isn't anything like equal consideration, but $1 million is still substantial. So, UFTA drops "substantial value" and adopts "reasonably equivalent value".

Some courts have required that the consideration received has "utility to creditors".[45] Certainly, cash has utility to creditors, so no problem there. But how about privately traded securities? These may have equivalent value, but be of little utility to the creditor. An offer of services in exchange for the asset, such as by an attorney to defend a client in the future against claimants, may have tremendous value to the debtor but utterly no value to the creditor.

With the increasing use of "charging order protected entities" (usually limited partnerships or LLCs created in states with solid charging order protection), the "utility to creditors" definition may operate to set aside a transfer of an asset for the limited partnership interest because although the debtor gets back an asset of like value, because of the charging order protection the asset may be of little utility to the creditor.

Note that gifts will almost never be for reasonably equivalent value, since the transferor of a gift doesn't get anything back. A gift is, by definition, without consideration and (if the other elements are present) will ipso facto violate the First and Third tests, and be a "Badge of Fraud" towards the Fourth test also. For asset protection planning purposes, trusts are very poor planning tools because inter alia they are typically funded with gifts.

WHAT IS NOT COVERED BY UFTA

The UFTA expressly does not cover transfers involving three types of assets, effectively meaning that these types of assets cannot be fraudulently transferred.

Valid liens not defeated by UFTA

To the extend that a debtor's property is encumbered by a valid lien, it is not considered the debtor's assets under UFTA.[46] For example, if Debtor has a piece of real estate subject to a valid mortgage by Bank, a third-person could buy the property from the Debtor without concern about UFTA to the extent of the mortgage (however, the value not covered by the mortgage may still be susceptible to being set aside as a fraudulent transfer).

Exempt assets exempt from UFTA

Similarly, assets that are exempt under state law are not assets of the debtor under UFTA.[47] Thus, a third-person could purchase the homesteaded residence or cash value of a life insurance policy from a Florida resident without concern about UFTA.

Because state exemption laws widely differ, conflict-of-law issues often arise as to which state's exemption law applies for purposes of this test. Assume that a California debtor is successfully sued in California. During the pendency of the lawsuit, however, the debtor re-locates to Florida and purchases a large house. The debtor then gifts the house to an irrevocable Florida trust for his children. Under California law, the gift of the house to the trust would be a fraudulent transfer, since the house is not an exempt asset, but under the laws of Florida the house would be an exempt asset and UFTA would not apply. Because the action is against the Florida trust (the transferee), which has no connection to California, the action under UFTA would likely have to be brought in the Florida courts and under Florida law, and it is likely that the Florida court would deem the asset an exempt asset and therefore not subject to UFTA.

Tenancy by the Entireties assets exempt from UFTA if only one tenant subject to the claim

If a property interest is by in tenancy by the entireties, and if the creditor has a claim against only one of the tenants, then the property interest is not considered an asset of the debtor under UFTA.[48]

The Three-Step/Four-Text Analysis

The poor organization and structure of UFTA is unfortunate, because the path for a court to determine whether or not it should issue an order can be reduced to three steps:

Step One: Determine if a Fraudulent Transfer occurred.

Step Two: Determine if a Transferee can assert the Good Faith defense.

Step Three: Determine the Appropriate Remedies.

The following will examine each of these steps in detail.



STEP ONE

Determine if a Fraudulent Transfer Occurred

Under UFTA, whether or not a certain transaction[49] was fraudulent as to creditors is determined by reference to four tests. If the creditor can prove facts satisfying any of the four tests, the transaction will be deemed a fraudulent transfer.

Time as an Element

The timing of a transfer, i.e., whether the transfer was before or after the claim arose, is an element in the first two tests (Subsequent Creditor and Existing Creditor), but is not an element of the second two tests (No Consideration and Circumstantial Evidence). However, the timing of the transfer is certainly a relevant factor or "Badge of Fraud" to be considered in the Circumstantial Evidence test.

Intent as an Element

The first three tests (Subsequent Creditor, Existing Creditor and No Consideration) are "bright line" tests under which the facts are measured against specific criteria without regard to the intentions of any of the involved parties. The judge has no discretion in the matter; the facts either satisfy the test or they do not.

The fourth test (Circumstantial Evidence) has no specific criteria for determining what is a fraudulent transfer, but instead requires actual or constructive proof — by way of allowing the court to base the judgment on certain "Badges of Fraud" — that the transaction was affirmatively meant to defraud creditors. This is a "catch all" test, meant to allow a judge who believes that a transfer was fraudulent to declare it so even if the transfer was not technically a fraudulent transfer under the other three tests. By giving the judge a list of non-inclusive factors upon which to base his judgment, the judge has been given maximum discretion in deciding whether the transfer should be set aside or not.

Test #1: Subsequent Creditor Test

Before the creditor's claim arose, if the debtor entered into a transaction that was without reasonably equivalent value[50] and that left the debtor insolvent, the transaction was fraudulent.[51]

This test considers the situation where the debtor makes a transfer (usually a gift) that caused him to be insolvent, and then later a claim arises. The unspoken intention of this test is that people should keep some assets available to meet potential claims, i.e., it is wrong to give everything of your away because unforeseen claimants might want to get at it later.

Note that intent as to a particular creditor is not an issue, nor could it be since the claim arises after the transfer. Under this test, it simply doesn't matter whether the debtor anticipated any claims or not.

In the application of this test, the first question is timing: The transfer must occur before the claim arose or this test doesn't apply, and either Test #2 or Test #3 applies instead.

Next, the transaction must be "without reasonably equivalent value". As noted above, the definition of "reasonably equivalent value" is a moving target, and may require that the asset received in return have "utility" to the creditor.

Finally, the transaction must leave the debtor insolvent. In this context, insolvency is determined by a strict balance-sheet test, i.e., the debtor's total assets minus the debtor's total liabilities.[52] Note that insolvency is measured as of the time of the transfer, not the claim. If the debtor could make the transfer and remain solvent, then it matters not if a claim appears that renders the debtor insolvent.

The Statute of Limitations for this test is four years.[53] But, as noted above, four years from when?

The exception to this test is that the termination of a lease pursuant to the lease agreement is not a fraudulent transfer, nor is the enforcement of a security interest in compliance with UCC Article 9.[54]

Test #2: Existing Creditor Test

If after the creditor's claim arose, the debtor was insolvent and transferred the property to an insider (who should have known that the debtor was insolvent) to satisfy a previous debt, the transaction was fraudulent.[55]

This test considers a transfer made only after the claim arose. If the claim arose after the transfer, then Test #1 applies instead.

Note that it doesn't make a difference whether or not the debtor knew about the claim at the time of the transfer. Basically this test presumes that when a claim already exists, any transfers that an insolvent debtor makes to an insider to satisfy a previous debt is made to cheat the claimant.

This test only applies to a transfer to insiders. If the transfer is to a party other than an insider, this test is failed. The insider must also know or reasonably suspect that the debtor was insolvent when the transfer was made;[56] however, there is no affirmative duty of the insider to investigate.

Similarly, the transfer to the insider must be to satisfy a previous debt owed by the debtor to the insider. Otherwise, this test is failed and Test # 3 applies. This test is aimed at the debtor who will claim something like: "I owed my father (insider) for my college education (prior debt), and this seemed like a good time to give him my house to repay him."

The Statute of Limitations for this test is only one year.[57], presumably because the claimant should be looking out for his own interests in prosecuting the claim. But, again, one year from when?

The exception to this test is that a transaction is not voidable to the extent the insider gives new value to benefit the debtor after the transfer was made (unless the insider secured the new value with a lien),[58] or if the transaction was in the ordinary course of business affairs between the debtor and the insider,[59] or was made in good faith to rehabilitate the debtor and the transfer secured new value as well as prior debt.[60]

Test #3: No Consideration Test

A transaction can be fraudulent if the debtor entered into the transaction without receiving reasonably equivalent value in return,[61] and the Debtor either had unreasonably small assets to enter into the transaction or would not be able to pay debts as they came due.[62]

Under this test it makes no difference which came first, the transfer or the claim. Instead, this test focuses on what the debtor got back in return for the transfer and whether the transaction was either commercially unreasonably for the debtor to enter into because of lack of other assets, or whether the debtor had sufficient liquidity to pay ordinary debts as they came due.

Note that, again, intent is not an element of this test. It doesn't make any sense for a debtor to give away an asset while the debtor is having trouble paying bills; thus, intent to defraud creditors is presumed by this test.

Time is also not an element of this test. It doesn't matter whether the transfer took place before or after the claim arose.

The Statute of Limitations for this test is four years.[63] But again, four years from when?

The exception to this test is that the termination of a lease pursuant to the lease agreement is not a transfer, nor is the enforcement of a security interest in compliance with UCC Article 9.[64]

Test #4: Circumstantial Evidence Test

A transaction is fraudulent if the debtor made the transfer or obligation with actual intent[65] to subvert any creditor's rights.[66]

We've previously discussed the three "bright line" tests, which have clearly-defined elements and that require little more than a mechanical application by the court to determine whether the elements were met, and thus whether a fraudulent transfer occurred. In implicit recognition that debtors will strategize ways to move their assets out of harm's way without violating bright line tests, the drafters of UFTA have retained what amounts to an amorphous facts-and-circumstances test that gives the court the greatest possible latitude to determine whether a fraudulent transfer has been made.

This residual test is largely based on the principles and "badges of fraud" first catalogued by Lord Coke in Twyne's Case, decided by the Star Chamber in 1601. In determining whether a fraudulent transfer has been made, the court is given a level of discretion rarely seen in Anglo-American jurisprudence, and limited only by the need for the court to "hang" its decision on one or more non-exclusive factors that tend to indicate the presence of a fraudulent transfer.

A simplistic — but probably accurate — characterization of this test is that it is a "smell test". The court is basically invited to inquire whether under all the facts and circumstances of the case the transfer "smells bad", and the "Badges of Fraud" given below amount to specific odors for the court to base its ruling on.

Some of the factors, the "Badges of Fraud", to be taken into account in determining whether actual intent exists — but without creating a presumption of actual intent[67] — might include:[68]

Was the transaction was to an insider?[69]

After the transaction, did the debtor kept possession or control of the property supposedly transferred?[70]

Was the transaction disclosed or concealed?[71]

Before the transaction, was the debtor sued or threatened with suit?[72]

Did the transaction encompass most of the debtor's assets?[73]

Has the debtor absconded?[74]

Has the debtor removed or concealed assets?[75]

Was the transaction for reasonably equivalent value?[76]

Was the debtor insolvent, or did the transaction render the debtor insolvent?[77]

Did the transaction happen around the time that the debtor incurred a substantial debt?[78]

Did the debtor transfer the core business assets to somebody holding a lien on the business, who then transferred the assets to an insider?[79]

Several of these factors, such as lack of reasonably equivalent value, a transaction to an insider, a transaction made near in time to a claim, and insolvency, also are prominent issues in the bright line tests. Most of the additional factors are questions aimed at discerning the intent of the debtor in making the transfer, i.e., maintaining control, removing or concealing assets, etc.

The plain text of UFTA makes clear that these listed factors are to be given consideration "among other factors", which language essentially invites the court to identify other factors upon which it can base its decision.

The Statute of Limitations for this residual test is four years, or one year from when the transaction could reasonably have been discovered by the creditor.[80] Considering that some states effectively toll the running until the creditor obtains a judgment against the debtor, the inclusion of the "could reasonably have been discovered" language creates an amazingly long potential period for when the challenge to the transfer can finally be brought.



STEP TWO

Determine if the Transferee can assert the Good Faith Defense

A transferee who enters into a transaction with a debtor can avoid having the transaction set aside if there was reasonably equivalent value and the transferee can establish good faith.[81]

This defense may apply to subsequent transferees as well.[82] In practice, the greater the "distance" (number of transferees) between the debtor the transfer holding the asset at the time of the fraudulent transfer challenge, the greater the likelihood of the transferee proving establishing the Good Faith Defense.

Even if the transaction is voided, to the extent of the value given, a good-faith[83] transferee is entitled to a lien or right to retain an interest in the transferred asset, enforcement of any obligations incurred, or a reduction in liability to the creditor.[84] However, the judgment obtained by the creditor against the transferee will be for the value of the asset at the time of the transfer — not what the transferee paid for it — and subject to only such equitable adjustment the court decides proper.[85]



STEP THREE

Determine the Appropriate Remedies

Where the court finds that a fraudulent transfer has occurred, it has a broad range of remedies that it may impose to attempt to make the creditor whole.

If the creditor has already obtain judgment on the underlying claim, the court may order execution upon the transferred assets or the proceeds of the transfer.[86] This remedy is not available to creditors that have not yet obtained a judgment.

For both creditors who hold judgments and also claimants whose claims have not yet been reduced to judgment,[87] the court may give any or all of the following relief:[88] These remedies are in addition to the creditor's other available remedies.[89]

Void the transaction to the extent necessary to satisfy the creditor's claim.[90]

If the court grants this relief, the creditor may recover judgment for the adjusted[91] value of the asset transferred, against the transferee or any other later transferee who took for value from the transferee, except for a good-faith transferee.[92] The judgment must be for the adjusted value of the asset when it was transferred.[93]

Attach the assets.[94]

Enjoin the assets from further transfer.[95]

Appointment of a receiver to take charge of the assets.[96]

Any other relief the circumstances may require.[97]

It must be again remembered that UFTA is an overlay to existing law, and supplements existing law. UFTA does not substitute these limited (but not exclusive) remedies for those that exist by other law.

The language of the enforcement section is intended to give courts the greatest latitude to fashion relief that will make the creditor whole. The invitation for the court to grant "[a]ny other relief the circumstances may require" is particularly open-ended.

CONCLUSIONS

In a nutshell, UFTA says this: You can't do anything which would impair the rights of your unsecured creditors; and if you do, then the courts will simply ignore what you have done or impose more draconian remedies.

Transfers that have value are likely to survive challenge. If the debtor receives something in return for the transfer, the creditor can collect against that asset. As long as the asset received is similar in value to that received, the creditor's position has not been substantially lessened, so there is no reason to unwind the transfer.

Transfers where the debtor receives little or nothing in return (i.e., gifts or lopsided transactions) are likely to be set aside as fraudulent transfers. It doesn't make much difference if the transfer is made before or after a claim appears, especially if the gift rendered the debtor insolvent or near-insolvent (including in this calculation the liability created by the claim).

All gifts have a good chance of being set aside until the Statute of Limitations expires. Unfortunately, depending on which state's laws apply, the Statute of Limitations might not even begin to run until a claim appears and is reduced to judgment. Thus, if you don't want the transaction unwound, don't gift.

Transfers in the ordinary course of business are likely to survive challenge, but unusual transfers made near in time or after the appearance of a claim are likely to be deemed fraudulent.

A series of smaller transfers made periodically in the ordinary course of business have a better chance of withstanding challenge than singular large or unusual transactions. Similarly, the circumstances surrounding a transaction "smell funny", the transaction has a good chance of being set aside as a fraudulent transfer.




[1] Twyne's Case, 3 Coke 80b, 76 Eng.Rep. 809 (Star Chamber 1601).
[2] Prefatory Note to the Uniform Fraudulent Transfers Act (hereafter "Prefatory Note").
[3] Uniform Laws Commissioners webpage, "A Few Facts About The Uniform Fraudulent Transfers Act", http://www.nccusl.org/nccusl/uniformact ... s-ufta.asp
[4] UFTA § 1(12).
[5] Comment to UFTA § 1(12).
[6] UFTA § 6(4). "This provision makes clear that its purpose may not be circumvented by notice-filing or recordation of a document evidencing an interest in an asset to be acquired in the future." Comment.
An oral obligation is incurred when it becomes effective between the parties, UFTA § 6(5)(i), and a written obligation is incurred when the executed writing is delivered to the oblige. UFTA § 6(5)(ii).
[7] UFTA § 6(1)(i). See also Prefatory Note: "The new Act includes a new section specifying when a transfer is made or an obligation is incurred. * * * Its premise is that if the law prescribes a mode for making the transfer a matter of public record or notice, it is not deemed to be made for any purpose under the Act until it has become such a matter of record or notice."
[8] UFTA § 6(1)(ii).
[9] UFTA § 6(2).
[10] UFTA § 6(3).
[11] Property is anything that can be owned. UFTA § 1(10).
[12] UFTA § 1(2).
[13] UFTA § 1(8).
[14] UFTA § 1(13).
[15] UFTA § 10 provides: "Unless displaced by the provisions of this [Act], the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions."
[16] UFTA "trumps" Bulk Sales Act: Giving notice that you intend to defraud a creditor doesn't absolve you from liability under UFTA. Monastra v. Konica Business Machines (1996).
[17] UFTA § 9.
[18] Ibid.
[19] Under California law, the Statute of Limitations under UFTA does not begin to run until the creditor gets a judgment. Cortez v. Vogt, Macedo v. Bosio Revocable Trust
[20] UFTA § 1(3). See also Comment to UFTA §1 (4) ("the holder of an unliquidated tort claim or a contingent claim may be a creditor protected by this Act.").
[21] UFTA § 1(4).
[22] UFTA § 1(5).
[23] The term "person" includes partnerships, corporations, trusts, and other entities. UFTA § 1(9).
[24] UFTA § 1(6).
[25] UFTA § 7(b) allows a court to levy execution on the asset transferred or its proceeds if the creditor already holds a judgment.
[26] UFTA § 5(b) (herein referred to as "Test #2").
[27] UFTA § 4(b)(1).
[28] See Comment to UFTA § 1(7) ("[T]he word "includes" is not limiting, however. Thus, a court may find a person living with an individual for an extended time in the same household or as a permanent companion to have the kind of close relationship intended to be covered by the term "insider." Likewise, a trust may be found to be an insider of a beneficiary.").
[29] A "relative" is somebody related to the debtor or the debtor's spouse within the third degree. UFTA § 1(11).
[30] UFTA § 1(7).
[31] UFTA § 1(1).
[32] UFTA §5(a) and (b) (herein "Test 1" and "Test 2").
[33] UFTA §4(b)(9).
[34] Comment to UFTA § 2(A).
[35] UFTA § 2(A).
[36] UFTA § 2(E).
[37] UFTA § 2(D).
[38] The Comment to UFTA § 2(B) provides that "A presumption of insolvency does not arise from nonpayment of a debt as to which there is a genuine bona fide dispute, even though the debt is a substantial part of the debtor's indebtedness."
[39] The Comment to § 2(B) provides: "In determining whether a debtor is paying its debts generally as they become due, the court should look at more than the amount and due dates of the indebtedness. The court should also take into account such factors as the number of the debtor's debts, the proportion of those debts not being paid, the duration of the nonpayment, and the existence of bona fide disputes or other special circumstances alleged to constitute an explanation for the stoppage of payments. The court's determination may be affected by a consideration of the debtor's payment practices prior to the period of alleged nonpayment and the payment practices of the trade or industry in which the debtor is engaged."

[40] UFTA § 2(B). Partnerships are deemed insolvent if the partnership is insolvent, and the general partners are insolvent taking into account the excess liability from the partnership. UFTA § 2(C).
[41] UFTA § 3(A). However, for a promise to provide future support to constitute "value", the promisor must be in the business providing such support (Editor's note: Such as a commercial insurance company selling an annuity contract), and not merely promises of future support to the debtor's family members. Ibid.
[42] UFTA §3(C).
[43] Comment to UFTA § 3(A).
[44] Comment to UFTA § 3(A) ("The definition in Section 3 is not exclusive. "Value" is to be determined in light of the purpose of the Act to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors. Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition. The definition does not specify all the kinds of consideration that do not constitute value for the purposes of this Act – e.g., love and affection.").
[45] See also Go v. Smith ("Reasonably equivalent value" includes all business value, including that it is a going concern and all goodwill.) and Fisher v. Gibson (The burden is on the transferee to prove "reasonably equivalent value".).



[46] UFTA § 1(2)(i).
[47] UFTA § 1(2)(ii).
[48] UFTA § 1(2)(iii).
[49] Author's Note: The generic term "transaction" is sometimes used in place of the references in the Act to transfers and obligations.
[50] The acquisition of the debtor's property in an arm's length foreclosure sale of execution upon a secured interest shall be deemed to be "reasonably equivalent value," UFTA § 3(B), unless the sale was to an insider without a perfected security interest, or was made with actual intent to subvert any creditor's rights. Comment to UFTA § 3(B).
[51] UFTA § 5(a). See also Prefatory Note: "[A] transfer or obligation that is constructively fraudulent because insolvency concurs with or follows failure to receive adequate consideration is voidable only by a creditor in existence at the time the transfer occurs or the obligation is incurred."
[52]
[53] UFTA § 9(a). But see Prefatory Note: "The Act recognizes that laches and estoppel may operate to preclude a particular creditor from pursuing a remedy against a fraudulent transfer or obligation even though the statutory period of limitations has not run."
[54] UFTA § 8(e). See also Prefatory Note: "Section 8 also precludes avoidance, as a constructively fraudulent transfer, of the termination of a lease on default or the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code."
[55] UFTA § 5(b). The Comment refers to this as a "preferential transfer". See also Prefatory Note: "The new Act adds a new category of fraudulent transfer, namely, a preferential transfer by an insolvent insider to a creditor who had reasonable cause to believe the debtor to be insolvent. An insider is defined in much the same way as in the Bankruptcy Code and includes a relative, also defined as in the Bankruptcy Code, a director or officer of a corporate debtor, a partner, or a person in control of a debtor. This provision is available only to an existing creditor. Its premise is that an insolvent debtor is obliged to pay debts to creditors not related to him before paying those who are insiders."
[56] Martino v. First Bank of Beverly Hills
[57] UFTA § 9(c).
[58] UFTA § 8(f)(1). The Comment states: "The new value may consist not only of money, goods, or services delivered on unsecured credit but also of the release of a valid lien. * * * It does not include an obligation substituted for a prior obligation. If the insider receiving the preference thereafter extends new credit to the debtor but also takes security from the debtor, the injury to the other creditors resulting from the preference remains undiminished by the new credit. On the other hand, if a lien taken to secure the new credit is itself voidable by a judicial lien creditor of the debtor, the new value received by the debtor may appropriately be treated as unsecured and applied to reduce the liability of the insider for the preferential transfer."
[59] UFTA § 8(f)(2).
[60] UFTA § 8(f)(3). "In addition a preferential transfer may be justified when shown to be made pursuant to a good faith effort to stave off forced liquidation and rehabilitate the debtor." Prefatory Note.
[61] See Comment to UFTA § 4(a)(2) ("The premise of this Act is that when a transfer is for security only, the equity or value of the asset that exceeds the amount of the debt secured remains available to unsecured creditors and thus cannot be regarded as the subject of a fraudulent transfer merely because of the encumbrance resulting from an otherwise valid security transfer. Disproportion between the value of the asset securing the debt and the size of the debt secured does not, in the absence of circumstances indicating a purpose to hinder, delay, or defraud creditors, constitute an impermissible hindrance to the enforcement of other creditors' rights against the debtor-transferor.").
The acquisition of the debtor's property in an arm's length foreclosure sale of execution upon a secured interest shall be deemed to be "reasonably equivalent value," UFTA § 3(B), unless the sale was to an insider without a perfected security interest, or was made with actual intent to subvert any creditor's rights. Comment to UFTA § 3(B).
"The transferee's good faith is irrelevant to a determination of the adequacy of the consideration . . .." Comment to UFTA § 4(a)(2).
[62] UFTA § 4(a)(2). "Either an existing or subsequent creditor may avoid a transfer or obligation for inadequate consideration when accompanied by the financial condition specified in § 4(a)(2)(i) or the mental state specified in § 4(a)(2)(ii)." Prefatory Note.
[63] UFTA § 9(b).
[64] UFTA § 8(e). See also Prefatory Note: "Section 8 also precludes avoidance, as a constructively fraudulent transfer, of the termination of a lease on default or the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code."
[65] "In the absence of evidence of the existence of such facts, proof of a fraudulent transfer was to depend on evidence of actual intent." Prefatory Note.
[66] UFTA § 4(a)(1).
[67] Comment to UFTA § 4(b) ("Proof of the existence of any one or more of the factors enumerated in subsection (b) may be relevant evidence as to the debtor's actual intent but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation.").
[68] UFTA § 4(b). The Comment refers to this as "a nonexclusive catalogue of factors", and suggests that "a court should evaluate all the relevant circumstances involving a challenged transfer or obligation. Thus the court may appropriately take into account all indicia negativing as well as those suggesting fraud . . .."
[69] UFTA § 4(b)(1).
[70] UFTA § 4(b)(2).
[71] UFTA § 4(b)(3).
[72] UFTA § 4(b)(4).
[73] UFTA § 4(b)(5).
[74] UFTA § 4(b)(6).
[75] UFTA § 4(b)(7).
[76] UFTA § 4(b)(8).
[77] UFTA § 4(b)(9).
[78] UFTA § 4(b)(10).
[79] UFTA § 4(b)(11).
[80] UFTA § 9(a). But see Prefatory Note: "The Act recognizes that laches and estoppel may operate to preclude a particular creditor from pursuing a remedy against a fraudulent transfer or obligation even though the statutory period of limitations has not run."
[81] "The person who invokes this defense carries the burden of establishing good faith and the reasonable equivalence of the consideration exchanged." Comment to UFTA § 8(a). But see Prefatory Note, which seems to imply that a transferee need not have acted in good faith if reasonably equivalent value is present: "Reasonably equivalent value is required in order to constitute adequate consideration under the revised Act. The revision follows the Bankruptcy Code in eliminating good faith on the part of the transferee or obligee as an issue in the determination of whether adequate consideration is given by a transferee or obligee. The new Act, like the Bankruptcy Act, allows the transferee or obligee to show good faith in defense after a creditor establishes that a fraudulent transfer has been made or a fraudulent obligation has been incurred. Thus a showing by a defendant that a reasonable equivalent has been given in good faith for a transfer or obligation is a complete defense although the debtor is shown to have intended to hinder, delay, or defraud creditors."
[82] UFTA § 8(a).
[83] "An insider who receives property or an obligation from an insolvent debtor as security for or in satisfaction of an antecedent debt of the transferor or obligor is not a good faith transferee or obligee if the insider has reasonable cause to believe that the debtor was insolvent at the time the transfer was made or the obligation was incurred." Comment.
[84] UFTA § 8(d). See also Prefatory Note: "A good faith transferee or obligee who has given less than a reasonable equivalent is nevertheless allowed a reduction in liability to the extent of the value given. The new Act, like the Bankruptcy Code, eliminates the provision of the Uniform Fraudulent Conveyance Act that enables a creditor to attack a security transfer on the ground that the value of the property transferred is disproportionate to the debt secured. The premise of the new Act is that the value of the interest transferred for security is measured by and thus corresponds exactly to the debt secured. Foreclosure of a debtor's interest by a regularly conducted, noncollusive sale on default under a mortgage or other security agreement may not be avoided under the Act as a transfer for less than a reasonably equivalent value.
[85] UFTA § 8(c).
[86] UFTA § 7(b). The difference here is that the creditor has a judgment. "a creditor is not required to obtain a judgment against the debtor-transferor or to have a matured claim in order to proceed under subsection (a)." Comment.
[87] See Comment to § 6: "A creditor holding an unmatured claim may be denied the right to receive payment for the proceeds of a sale on execution until his claim has matured, but the proceeds may be deposited in court or in an interest-bearing account pending the maturity of the creditor's claim." See also Prefatory Note: "An important reform effected by the Uniform Act was the elimination of any requirement that a creditor have obtained a judgment or execution returned unsatisfied before bringing an action to avoid a transfer as fraudulent."
[88] UFTA § 7(a). "The remedies specified in this section are not exclusive." Comment.
[89] See Comment: "(6) The remedies specified in § 7 . . . are cumulative."
[90] UFTA § 7(a)(1).
[91] "[A]s adjusted under subsection (c), or the amount necessary to satisfy the creditor's claim, whichever is less." UFTA § 8(b).
[92] UFTA § 8(b).
[93] UFTA § 8(c). According to the Comment: "The premise of § 8(c) is that changes in value of the asset transferred that occur after the transfer should ordinarily not affect the amount of the creditor's recovery. Circumstances may require a departure from that measure of the recovery . . .. Thus, if the value of the asset at the time of levy and sale to enforce the judgment of the creditor has been enhanced by improvements of the asset transferred or discharge of liens on the property, a good faith transferee should be reimbursed for the outlay for such a purpose to the extent the sale proceeds were increased thereby. * * * If the value of the asset has been diminished by severance and disposition of timber or minerals or fixtures, the transferee should be liable for the amount of the resulting reduction. * * * If the transferee has collected rents, harvested crops, or derived other income from the use or occupancy of the asset after the transfer, the liability of the transferee should be limited in any event to the net income after deduction of the expense incurred in earning the income. * * * On the other hand, adjustment for the equities does not warrant an award to the creditor of consequential damages alleged to accrue from mismanagement of the asset after the transfer."
[94] UFTA § 7(a)(2). "Section 7(a)(2) continues the authorization for the use of attachment contained in § 9(b) of the Uniform Fraudulent Conveyance Act, or of a similar provisional remedy, when the state's procedure provides therefor, subject to the constraints imposed by the due process clauses of the United States and state constitutions." Comment.
[95] UFTA § 7(a)(3)(i).
[96] UFTA §7(a)(3)(ii).
[97] UFTA § 7 (a)(3)(iii).
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