Professional Documents
Culture Documents
Uniform Fradulent Transfer Act
Uniform Fradulent Transfer Act
Drafted by the
and by it
at its
ANNUAL CONFERENCE
MEETING IN ITS NINETY-THIRD YEAR
IN KEYSTONE, COLORADO
JULY 27 – AUGUST 3, 1984
MORRIS W. MACEY, Suite 900, 133 Carnegie Way, N.W., Atlanta, GA 30303,
Chairman
GERALD L. BEPKO, Indiana University, School of Law, 735 West New York Street,
Indianapolis, IN 46202
WILLIAM D. HAWKLAND, Louisiana State University Law Center, Baton Rouge,
LA 70803
GRANT S. NELSON, University of Missouri-Columbia, School of Law, Columbia,
MO 65211
NEAL OSSEN, Room 611, 410 Asylum Street, Hartford, CT 06103
GEORGE R. RICHTER, JR., Suite 500, 4000 MacArthur Boulevard, Newport Beach,
CA 92660
BRYCE E. ROE, 340 East 400 South, Salt Lake City, UT 84111
FRANK R. KENNEDY, University of Michigan, School of Law, Ann Arbor, MI 48109,
Reporter
CARLYLE C. RING, JR., 710 Ring Building, Washington, DC 20036,
President (Member Ex Officio)
PHILLIP CARROLL, 120 East Fourth Street, Little Rock, AR 72201,
Chairman, Executive Committee
WILLIAM J. PIERCE, University of Michigan, School of Law, Ann Arbor, MI 48109,
Executive Director
SIDNEY S. EAGLES, JR., P.O. Box 888, Raleigh, NC 27602, Chairman,
Division E (Member Ex Officio)
REVIEW COMMITTEE
PREFATORY NOTE
The Uniform Act was a codification of the “better” decisions applying the
Statute of 13 Elizabeth. See Analysis of H.R. 12339, 74th Cong., 2d Sess. 213
(1936). The English statute was enacted in some form in many states, but, whether
or not so enacted, the voidability of fraudulent transfer was part of the law of every
American jurisdiction. Since the intent to hinder, delay, or defraud creditors is
seldom susceptible of direct proof, courts have relied on badges of fraud. The
weight given these badges varied greatly from jurisdiction, and the Conference
sought to minimize or eliminate the diversity by providing that proof of certain fact
combinations would conclusively establish fraud. In the absence of evidence of the
existence of such facts, proof of a fraudulent transfer was to depend on evidence of
actual intent. 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. See
American Surety Co. v. Conner, 251 N.Y. 1, 166 N.E. 783, 67 A.L.R. 244 (1929)
(per C.J. Cardozo).
(1) The Bankruptcy Reform Act of 1978 has made numerous changes in the
section of that Act dealing with fraudulent transfers and obligations, thereby
substantially reducing the correspondence of the provisions of the federal
bankruptcy law on fraudulent transfers with the Uniform Act.
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(3) The Uniform Commercial Code, enacted at least in part by all 50 states,
had substantially modified related rules of law regulating transfers of personal
property, notably by facilitating the making and perfection of security transfers
against attack by unsecured creditors.
The Drafting Committee appointed by the Conference held its first meeting
in January of 1983. A first reading of a draft of the revision of the Uniform
Fraudulent Conveyance Act was had at the Conference’s meeting in Boca Raton,
Florida, on July 27, 1983. The Committee held four meetings in addition to a
meeting held in connection with the Conference meeting in Boca Raton. Meetings
were also attended by the following representatives of interested organizations:
Ernest E. Specks, Esq., of the Real Property, Probate and Trust Law Section
of the American Bar Association.
2
The basic structure and approach of the Uniform Fraudulent Conveyance
Act are preserved in the Uniform Fraudulent Transfer Act. There are two sections
in the new Act delineating what transfers and obligations are fraudulent. Section
4(a) is an adaptation of three sections of the U.F.C.A.; § 5(a) is an adaptation of
another section of the U.F.C.A.; and § 5(b) is new. One section of the U.F.C.A.
(§ 8) is not carried forward into the new Act because deemed to be redundant in
part and in part susceptible of inequitable application. Both Acts declare a transfer
made or an obligation incurred with actual intent to hinder, delay, or defraud
creditors to be fraudulent. Both Acts render a transfer made or obligation incurred
without adequate consideration to be constructively fraudulent – i.e., without regard
to the actual intent of the parties – under one of the following conditions:
(1) the debtor was left by the transfer or obligation with unreasonably small
assets for a transaction or the business in which he was engaged;
(2) the debtor intended to incur, or believed that he would incur, more debts
than he would be able to pay; or
(3) the debtor was insolvent at the time or as a result of the transfer or
obligation.
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
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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.
The definition of insolvency under the Act is adapted from the definition of
the term in the Bankruptcy Code. Insolvency is presumed from proof of a failure
generally to pay debts as they become due.
Section 7 lists the remedies available to creditors under the new Act. It
eliminates as unnecessary and confusing a differentiation made in the original Act
between the remedies available to holders of matured claims and those holding
unmatured claims. Since promulgation of the Uniform Fraudulent Conveyance Act
the Supreme Court has imposed restrictions on the availability and use of
prejudgment remedies. As a result many states have amended their statutes and
rules applicable to such remedies, and it is frequently unclear whether a state’s
procedures include a prejudgment remedy against a fraudulent transfer or
obligation. A bracketed paragraph is included in Section 7 for adoption by those
states that elect to make such a remedy available.
4
Section 8 prescribes the measure of liability of a transferee or obligee under
the Act and enumerates defenses. Defenses against avoidance of a preferential
transfer to an insider under § 5(b) include an adaptation of defenses available under
§ 547(c)(2) and (4) of the Bankruptcy Code when such a transfer is sought to be
avoided as a preference by the trustee in bankruptcy. 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. 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.
The new Act includes a new section specifying when a transfer is made or
an obligation is incurred. The section specifying the time when a transfer occurs is
adapted from Section 548(d) of the Bankruptcy Code. 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.
The new Act also includes a statute of limitations that bars the right rather
than the remedy on expiration of the statutory periods prescribed. The law
governing limitations on actions to avoid fraudulent transfers among the states is
unclear and full of diversity. 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.
5
UNIFORM FRAUDULENT TRANSFER ACT
(B) solely to secure a debt, if the person has not exercised the power
to vote;
(B) solely to secure a debt, if the person has not in fact exercised the
power to vote;
(iv) a person who operates the debtor’s business under a lease or other
agreement or controls substantially all of the debtor’s assets.
(2) “Asset” means property of a debtor, but the term does not include:
6
(iii) an interest in property held in tenancy by the entireties to the extent
it is not subject to process by a creditor holding a claim against only one tenant.
(3) “Claim” means a right to payment, whether or not the right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured.
7
(A) a general partner in the debtor;
(13) “Valid lien” means a lien that is effective against the holder of a
judicial lien subsequently obtained by legal or equitable process or proceedings.
8
Comment
Subparagraphs (i), (ii), and (iii) provide clarification by excluding from the
term not only generally exempt property but also an interest in a tenancy by the
entirety in many states and an interest that is generally beyond reach by unsecured
creditors because subject to a valid lien. This Act, like its predecessor and the
Statute of 13 Elizabeth, declares rights and provides remedies for unsecured
creditors against transfers that impede them in the collection of their claims. The
laws protecting valid liens against impairment by levying creditors, exemption
statutes, and the rules restricting levyability of interest in entireties property are
limitations on the rights and remedies of unsecured creditors, and it is therefore
appropriate to exclude property interests that are beyond the reach of unsecured
creditors from the definition of “asset” for the purposes of this Act.
9
Analysis of Estates by the Entirety in Bankruptcy, 48 Am.Bankr.L.J. 255, 258
(1974). The definition in this Act requires exclusion of interests in property held by
tenants by the entirety that are not subject to collection process by a creditor
without a right to proceed against both tenants by the entirety as joint debtors.
Since this Act is not an exclusive law on the subject of voidable transfers
and obligations (see Comment (8) to § 4 infra), it does not preclude the holder of a
claim that may be collected by process against property generally exempt as to
other creditors from obtaining relief from a transfer of such property that hinders,
delays, or defrauds the holder of such a claim. Likewise the holder of an unsecured
claim enforceable against tenants by the entirety is not precluded by the Act from
pursuing a remedy against a transfer of property held by the entirety that hinders,
delays, or defrauds the holder of such a claim.
Nonbankruptcy law is the law of a state or federal law that is not part of the
Bankruptcy Code, Title 11 of the United States Code. The definition of an “asset”
thus does not include property that would be subject to administration for the
benefit of creditors under the Bankruptcy Code unless it is subject under other
applicable law, state or federal, to process for the collection of a creditor’s claim
against a single debtor.
10
(5) The definition of “debt” is derived from § 101(11) of the Bankruptcy
Code.
(8) The definition of “lien” is derived from paragraphs (30), (31), (43), and
(45) of § 101 of the Bankruptcy Code, which define “judicial lien,” “lien,” “security
interest,” and “statutory lien” respectively.
(9) The definition of “person” is adapted from paragraphs (28) and (30) of
§ 1-201 of the Uniform Commercial Code, defining “organization” and “person”
respectively.
11
incumbrance” are derived from the Uniform Fraudulent Conveyance Act. While
the definition in the Uniform Fraudulent Conveyance Act did not explicitly refer to
an involuntary transfer, the decisions under that Act were generally consistent with
an interpretation that covered such a transfer. See, e.g., Hearn 45 St. Corp. v. Jano,
283 N.Y. 139, 27 N.E.2d 814, 128 A.L.R. 1285 (1940) (execution and foreclosure
sales); Lefkowitz v. Finkelstein Trading Corp., 14 F.Supp. 898, 899 (S.D.N.Y.
1936) (execution sale); Langan v. First Trust & Deposit Co., 277 App.Div. 1090,
101 N.Y.S.2d 36 (4th Dept. 1950), aff’d, 302 N.Y. 932, 100 N.E.2d 189 (1951)
(mortgage foreclosure); Catabene v. Wallner, 16 N.J.Super. 597, 602, 85 A.2d 300,
302 (1951) (mortgage foreclosure).
SECTION 2. INSOLVENCY.
(a) A debtor is insolvent if the sum of the debtor’s debts is greater than all
of the debtor’s assets, at a fair valuation.
(b) A debtor who is generally not paying his [or her] debts as they become
due is presumed to be insolvent.
(d) Assets under this section do not include property that has been
transferred, concealed, or removed with intent to hinder, delay, or defraud creditors
or that has been transferred in a manner making the transfer voidable under this
[Act].
(e) Debts under this section do not include an obligation to the extent it is
secured by a valid lien on property of the debtor not included as an asset.
Comment
12
valuation of the debts as well as the assets of the debtor. As under the definition of
the same term in § 2 of the Uniform Fraudulent Conveyance Act exempt property is
excluded from the computation of the value of the assets. See § 1(2) supra. For
similar reasons interests in valid spendthrift trusts and interests in tenancies by the
entireties that cannot be severed by a creditor of only one tenant are not included.
See the Comment to § 1(2) supra. Since a valid lien also precludes an unsecured
creditor from collecting the creditor’s claim from the encumbered interest in a
debtor’s property, both the encumbered interest and the debt secured thereby are
excluded from the computation of insolvency under this Act. See § 1(2) supra and
subsection (e) of this section.
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recognized by the laws of other countries and is now reflected in the Bankruptcy
Code. See Honsberger, Failure to Pay One’s Debts Generally as They Become
Due: The Experience of France and Canada, 54 Am.Bankr.L.J. 153 (1980); J.
MacLachlan, Bankruptcy 13, 63-64, 436 (1956). 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. The case law that has developed under § 303(h)(1) of the Bankruptcy
Code has not required a showing that a debtor has failed or refused to pay a
majority in number and amount of his or her debts in order to prove general
nonpayment of debts as they become due. See, e.g., Hill v. Cargill, Inc. (In re Hill),
8 B.R. 779, 3 C.B.C.2d 920 (Bk.D.Minn. 1981) (nonpayment of three largest debts
held to constitute general nonpayment, although small debts were being paid); In re
All Media Properties, Inc., 5 B.R. 126, 6 B.C.D. 586, 2 C.B.C.2d 449 (Bk.S.D.Tex.
1980) (missing significant number of payments or regularly missing payments
significant in amount said to constitute general nonpayment; missing payments on
more than 50% of aggregate of claims said not to be required to show general
nonpayment; nonpayment for more than 30 days after billing held to establish
nonpayment of a debt when it is due); In re Kreidler Import Corp., 4 B.R. 256, 6
B.C.D. 608, 2 C.B.C.2d 159 (Bk.D.Md. 1980) (nonpayment of one debt
constituting 97% of debtor’s total indebtedness held to constitute general
nonpayment). 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. Cf. 11 U.S.C. § 303(h)(1), as
amended by § 426(b) of Public Law No. 98-882, the Bankruptcy Amendments and
Federal Judgeship Act of 1984.
14
(5) Subsection (e) is new. It makes clear the purpose not to render a person
insolvent under this section by counting as a debt an obligation secured by property
of the debtor that is not counted as an asset. See also Comments to §§ 1(2) and 2(a)
supra.
SECTION 3. VALUE.
(a) Value is given for a transfer or an obligation if, in exchange for the
transfer or obligation, property is transferred or an antecedent debt is secured or
satisfied, but value does not include an unperformed promise made otherwise than
in the ordinary course of the promisor’s business to furnish support to the debtor or
another person.
(b) For the purposes of Sections 4(a)(2) and 5, a person gives a reasonably
equivalent value if the person acquires an interest of the debtor in an asset pursuant
to a regularly conducted, noncollusive foreclosure sale or execution of a power of
sale for the acquisition or disposition of the interest of the debtor upon default
under a mortgage, deed of trust, or security agreement.
(c) A transfer is made for present value if the exchange between the debtor
and the transferee is intended by them to be contemporaneous and is in fact
substantially contemporaneous.
Comment
(1) This section defines “value” as used in various contexts in this Act,
frequently with a qualifying adjective. The word appears in the following sections:
4(a)(2) (“reasonably equivalent value”);
4(b)(8) (“value ... reasonably equivalent);
5(a) (“reasonably equivalent value”);
5(b) (“present, reasonably equivalent value”);
8(a) (“reasonably equivalent value”);
8(b), (c), (d), and (e) (“value”);
8(f)(1) (“new value”); and
8(f)(3) (“present value”).
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all the kinds of consideration that do not constitute value for the purposes of this
Act – e.g., love and affection. See, e.g., United States v. West, 299 F.Supp. 661,
666 (D.Del. 1969).
(3) Section 3(a) does not indicate what is “reasonably equivalent value” for
a transfer or obligation. Under this Act, as under § 548(a)(2) of the Bankruptcy
Code, a transfer for security is ordinarily for a reasonably equivalent value
notwithstanding a discrepancy between the value of the asset transferred and the
debt secured, since the amount of the debt is the measure of the value of the interest
in the asset that is transferred. See, e.g., Peoples-Pittsburgh Trust Co. v. Holy
Family Polish Nat’l Catholic Church, Carnegie, Pa., 341 Pa. 390, 19 A.2d 360
(1941). If, however, a transfer purports to secure more than the debt actually
incurred or to be incurred, it may be found to be for less than a reasonably
equivalent value. See e.g., In re Peoria Braumeister Co., 138 F.2d 520, 523 (7th
Cir. 1943) (chattel mortgage securing a $3,000 note held to be fraudulent when the
debt secured was only $2,500); Hartford Acc. & Indemnity Co. v. Jirasek, 254
Mich. 131, 140, 235 N.W. 836, 839 (1931) (quitclaim deed given as mortgage held
to be fraudulent to the extent the value of the property transferred exceeded the
indebtedness secured). If the debt is a fraudulent obligation under this Act, a
transfer to secure it as well as the obligation would be vulnerable to attack as
fraudulent. A transfer to satisfy or secure an antecedent debt owed an insider is
also subject to avoidance under the conditions specified in Section 5(b).
(4) Section 3(a) of the Uniform Fraudulent Conveyance Act has been
thought not to recognize that an unperformed promise could constitute fair
consideration. See McLaughlin, Application of the Uniform Fraudulent
Conveyance Act, 46 Harv.L.Rev. 404, 414 (1933). Courts construing these
provisions of the prior law nevertheless have held unperformed promises to
constitute value in a variety of circumstances. See, e.g., Harper v. Lloyd’s Factors,
Inc., 214 F.2d 662 (2d Cir. 1954) (transfer of money for promise of factor to
discount transferor’s purchase-money notes given to fur dealer); Schlecht v.
Schlecht, 168 Minn. 168, 176-77, 209 N.W. 883, 886-87 (1926) (transfer for
promise to make repairs and improvements on transferor’s homestead); Farmer’s
Exchange Bank v. Oneida Motor Truck Co., 202 Wis. 266, 232 N.W. 536 (1930)
(transfer in consideration of assumption of certain of transferor’s liabilities); see
also Hummel v. Cernocky, 161 F.2d 685 (7th Cir. 1947) (transfer in consideration
of cash, assumption of a mortgage, payment of certain debts, and agreement to pay
other debts). Likewise a transfer in consideration of a negotiable note discountable
at a commercial bank, or the purchase from an established, solvent institution of an
insurance policy, annuity, or contract to provide care and accommodations clearly
appears to be for value. On the other hand, a transfer for an unperformed promise
by an individual to support a parent or other transferor has generally been held
voidable as a fraud on creditors of the transferor. See, e.g., Springfield Ins. Co. v.
16
Fry, 267 F.Supp. 693 (N.D.Okla. 1967); Sandler v. Parlapiano, 236 App.Div. 70,
258 N.Y.Supp. 88 (1st Dep’t 1932); Warwick Municipal Employees Credit Union v.
Higham, 106 R.E. 363, 259 A.2d 852 (1969); Hulsether v. Sanders, 54 S.D. 412,
223 N.W. 335 (1929); Cooper v. Cooper, 22 Tenn.App. 473, 477, 124 S.W.2d 264,
267 (1939); Note, Rights of Creditors in Property Conveyed in Consideration of
Future Support, 45 Iowa L.Rev. 546, 550-62 (1960). This Act adopts the view
taken in the cases cited in determining whether an unperformed promise is value.
(5) Subsection (b) rejects the rule of such cases as Durrett v. Washington
Nat. Ins. Co., 621 F.2d 201 (5th Cir. 1980) (nonjudicial foreclosure of a mortgage
avoided as a fraudulent transfer when the property of an insolvent mortgagor was
sold for less than 70% of its fair value); and Abramson v. Lakewood Bank & Trust
Co., 647 F.2d 547 (5th Cir. 1981), cert. denied, 454 U.S. 1164 (1982) (nonjudicial
foreclosure held to be fraudulent transfer if made without fair consideration).
Subsection (b) adopts the view taken in Lawyers Title Ins. Corp. v. Madrid (In re
Madrid), 21 B.R. 424 (B.A.P. 9th Cir. 1982), aff’d on another ground, 725 F.2d
1197 (9th Cir. 1984), that the price bid at a public foreclosure sale determines the
fair value of the property sold. Subsection (b) prescribes the effect of a sale
meeting its requirements, whether the asset sold is personal or real property. The
rule of this subsection applies to a foreclosure by sale of the interest of a vendee
under an installment land contract in accordance with applicable law that requires
or permits the foreclosure to be effected by a sale in the same manner as the
foreclosure of a mortgage. See G.Osborne, G.Nelson, & D.Whitman, Real Estate
Finance Law 83-84, 95-97 (1979). The premise of the subsection is that “a sale of
the collateral by the secured party as the normal consequence of default . . . [is] the
safest way of establishing the fair value of the collateral . . ..” 2 G.Gilmore,
Security Interests in Personal Property, 1227 (1965).
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SECTION 4. TRANSFERS FRAUDULENT AS TO PRESENT AND
FUTURE CREDITORS.
(1) with actual intent to hinder, delay, or defraud any creditor of the
debtor; or
(4) before the transfer was made or obligation was incurred, the debtor
had been sued or threatened with suit;
18
(8) the value of the consideration received by the debtor was reasonably
equivalent to the value of the asset transferred or the amount of the obligation
incurred;
(9) the debtor was insolvent or became insolvent shortly after the
transfer was made or the obligation was incurred;
(11) the debtor transferred the essential assets of the business to a lienor
who transferred the assets to an insider of the debtor.
Comment
19
(4) Subparagraph (i) of § 4(a)(2) is an adaptation of § 5 of the Uniform
Fraudulent Conveyance Act but substitutes “unreasonably small [assets] in relation
to the business or transaction” for “unreasonably small capital.” The reference to
“capital” in the Uniform Act is ambiguous in that it may refer to net worth or to the
par value of stock or to the consideration received for stock issued. The special
meanings of “capital” in corporation law have no relevance in the law of fraudulent
transfers. The subparagraph focuses attention on whether the amount of all the
assets retained by the debtor was inadequate, i.e., unreasonably small, in light of the
needs of the business or transaction in which the debtor was engaged or about to
engage.
(6) In considering the factors listed in § 4(b) 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, as illustrated in the following reported cases:
20
purchase of two residences in the name of his spouse and the creation of a
dummy corporation for the purpose of concealing assets held to evidence
fraudulent intent); Banner Construction Corp. v. Arnold, 128 So.2d 893
(Fla.Dist.App. 1961) (assignment by one corporation to another having identical
directors and stockholders constituted a badge of fraud); Travelers Indemnity
Co. v. Cormaney, 258 Iowa 237, 138 N.W.2d 50 (1965) (transfer between
spouses said to be a circumstance that shed suspicion on the transfer and that
with other circumstances warranted avoidance); Hatheway v. Hanson, 230 Iowa
386, 297 N.W. 824 (1941) (transfer from parent to child said to require a critical
examination of surrounding circumstances, which, together with other indicia of
fraud, warranted avoidance); Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299
(1955) (transfer from daughter to mother said to be indicative of fraud but
transfer held not to be fraudulent due to adequacy of consideration and delivery
of possession by transferor).
(d) Whether, before the transfer was made or obligation was incurred, a
creditor sued or threatened to sue the debtor: Harris v. Shaw, 224 Ark. 150, 272
S.W. 2d 53 (1954) (transfer held to be fraudulent when causally connected to
pendency of litigation and accompanied by other badges of fraud); Pergrem v.
Smith, 255 S.W.2d 42 (Ky.App. 1953) (transfer in anticipation of suit deemed
to be a badge of fraud; transfer held fraudulent when accompanied by
insolvency of transferor who was related to transferee); Bank of Sun Prairie v.
21
Hovig, 218 F.Supp. 769 (W.D.Ark. 1963) (although threat or pendency of
litigation said to be an indicator of fraud, transfer was held not to be fraudulent
when adequate consideration and good faith were shown).
(e) Whether the transfer was of substantially all the debtor’s assets:
Walbrun v. Babbitt, 83 U.S. (16 Wall.) 577 (1872) (sale by insolvent retail shop
owner of all of his inventory in a single transaction held to be fraudulent); Cole
v. Mercantile Trust Co., 133 N.Y. 164, 30 N.E. 847 (1892) (transfer of all
property before plaintiff could obtain a judgment held to be fraudulent);
Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955) (although transfer of
all assets said to indicate fraud, transfer held not to be fraudulent because full
consideration was paid and transferor surrendered possession).
(f) Whether the debtor had absconded: In re Thomas, 199 F. 214 (N.D.N.Y.
1912) (when debtor collected all of his money and property with the intent to
abscond, fraudulent intent was held to be shown).
(g) Whether the debtor had removed or concealed assets: Bentley v. Young,
210 F. 202 (S.D.N.Y 1914), aff’d, 223 F. 536 (2d Cir. 1915) (debtor’s removal
of goods from store to conceal their whereabouts and to sell them held to render
sale fraudulent); Cioli v. Kenourgios, 59 Cal.App. 690, 211 P. 838 (1922)
(debtor’s sale of all assets and shipment of proceeds out of the country held to
be fraudulent notwithstanding adequacy of consideration).
(h) Whether the value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or the amount of the
obligation incurred: Toomay v. Graham, 151 S.W.2d 119 (Mo.App. 1941)
(although mere inadequacy of consideration said not to be a badge of fraud,
transfer held to be fraudulent when accompanied by badges of fraud); Texas
Sand Co. v. Shield, 381 S.W.2d 48 (Tex. 1964) (inadequate consideration said
to be an indicator of fraud, and transfer held to be fraudulent because of
inadequate consideration, pendency of suit, family relationship of transferee,
and fact that all nonexempt property was transferred); Weigel v. Wood, 355 Mo.
11, 194 S.W.2d 40 (1946) (although inadequate consideration said to be a badge
of fraud, transfer held not to be fraudulent when inadequacy not gross and not
accompanied by any other badge; fact that transfer was from father to son held
not sufficient to establish fraud).
(i) Whether the debtor was insolvent or became insolvent shortly after the
transfer was made or obligation was incurred: Harris v. Shaw, 224 Ark. 150,
272 S.W. 2d 53 (1954) (insolvency of transferor said to be a badge of fraud and
transfer held fraudulent when accompanied by other badges of fraud); Bank of
Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D. Ark. 1963) (although the
22
insolvency of the debtor said to be a badge of fraud, transfer held not fraudulent
when debtor was shown to be solvent, adequate consideration was paid, and
good faith was shown, despite the pendency of suit); Wareheim v. Bayliss, 149
Md. 103, 131 A. 27 (1925) (although insolvency of debtor acknowledged to be
an indicator of fraud, transfer held not to be fraudulent when adequate
consideration was paid and whether debtor was insolvent in fact was doubtful).
(j) Whether the transfer occurred shortly before or shortly after a substantial
debt was incurred: Commerce Bank of Lebanon v. Halladale A Corp., 618 S.W.
2d 288, 292 (Mo.App. 1981) (when transferors incurred substantial debts near
in time to the transfer, transfer was held to be fraudulent due to inadequate
consideration, close family relationship, the debtor’s retention of possession,
and the fact that almost all the debtor’s property was transferred).
(7) The effect of the two transfers described in § 4(b)(11), if not avoided,
may be to permit a debtor and a lienor to deprive the debtor’s unsecured creditors of
access to the debtor’s assets for the purpose of collecting their claims while the
debtor, the debtor’s affiliate or insider, and the lienor arrange for the beneficial use
or disposition of the assets in accordance with their interests. The kind of
disposition sought to be reached here is exemplified by that found in Northern
Pacific Co. v. Boyd, 228 U.S. 482 (1913), the leading case in establishing the
absolute priority doctrine in reorganization law. There the Court held that a
reorganization whereby the secured creditors and the management-owners retained
their economic interests in a railroad through a foreclosure that cut off claims of
unsecured creditors against its assets was in effect a fraudulent disposition (id. at
502-05). See Frank, Some Realistic Reflections on Some Aspects of Corporate
Reorganization, 19 Va. L.Rev. 541, 693 (1933). For cases in which an analogous
injury to unsecured creditors was inflicted by a lienor and a debtor, see Jackson v.
Star Sprinkler Corp. of Florida, 575 F.2d 1223, 1231-34 (8th Cir. 1978); Heath v.
Helmick, 173 F.2d 157, 161-62 (9th Cir. 1949); Toner v. Nuss, 234 F.S. 457,
461-62 (E.D.Pa. 1964); and see In re Spotless Tavern Co., Inc., 4 F.Supp. 752, 753,
755 (D.Md. 1933).
23
pledgor. Moreover, the section does not mitigate the general requirement of
§ 9-301(1)(b) that a nonpossessory security interest in personal property must be
accompanied by notice-filing to be effective against a levying creditor. Finally, like
the Uniform Fraudulent Conveyance Act this Act does not pre-empt the statutes
governing bulk transfers, such as Article 6 of the Uniform Commercial Code.
Compliance with the cited sections of the Uniform Commercial Code does not,
however, insulate a transfer or obligation from avoidance. Thus a sale by an
insolvent debtor for less than a reasonably equivalent value would be voidable
under this Act notwithstanding compliance with the Uniform Commercial Code.
Comment
24
and directors had already voted for liquidation); Stuart v. Larson, 298 F. 223 (8th
Cir. 1924), noted 38 Harv.L.Rev. 521 (1925) (corporate preference to director held
voidable). See generally 2 G. Glenn, Fraudulent Conveyances and Preferences 386
(rev. ed. 1940). Subsection (b) overrules such cases as Epstein v. Goldstein, 107
F.2d 755, 757 (2d Cir. 1939) (transfer by insolvent husband to wife to secure his
debt to her sustained against attack by husband’s trustee); Hartford Accident &
Indemnity Co. v. Jirasek, 254 Mich. 131, 139, 235 N.W. 836, 389 (1931) (mortgage
given by debtor to his brother to secure an antecedent debt owed the brother
sustained as not fraudulent).
(3) Subsection (b) does not extend as far as § 8(a) of the Uniform
Fraudulent Conveyance Act and § 548(b) of the Bankruptcy Code in rendering
voidable a transfer or obligation incurred by an insolvent partnership to a partner,
who is an insider of the partnership. The transfer to the partner is not vulnerable to
avoidance under § 4(b) unless the transfer was for an antecedent debt and the
partner had reasonable cause to believe that the partnership was insolvent. The
cited provisions of the Uniform Fraudulent Conveyance Act and the Bankruptcy
Act make any transfer by an insolvent partnership to a partner voidable. Avoidance
of the partnership transfer without reference to the partner’s state of mind and the
nature of the consideration exchanged would be unduly harsh treatment of the
creditors of the partner and unduly favorable to the creditors of the partnership.
(i) with respect to an asset that is real property other than a fixture, but
including the interest of a seller or purchaser under a contract for the sale of the
asset, when the transfer is so far perfected that a good-faith purchaser of the asset
from the debtor against whom applicable law permits the transfer to be perfected
cannot acquire an interest in the asset that is superior to the interest of the
transferee; and
(ii) with respect to an asset that is not real property or that is a fixture,
when the transfer is so far perfected that a creditor on a simple contract cannot
acquire a judicial lien otherwise than under this [Act] that is superior to the interest
of the transferee;
25
action for relief under this [Act], the transfer is deemed made immediately before
the commencement of the action;
(3) if applicable law does not permit the transfer to be perfected as provided
in paragraph (1), the transfer is made when it becomes effective between the debtor
and the transferee;
(4) a transfer is not made until the debtor has acquired rights in the asset
transferred;
Comment
26
(2) Paragraph (4) requires the transferor to have rights in the asset
transferred before the transfer is made for the purpose of this section. 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. Cf. Bankruptcy Code § 547(e); U.C.C. § 9-203(1)(c).
(a) In an action for relief against a transfer or obligation under this [Act], a
creditor, subject to the limitations in Section 8, may obtain:
27
(iii) any other relief the circumstances may require.
(b) If a creditor has obtained a judgment on a claim against the debtor, the
creditor, if the court so orders, may levy execution on the asset transferred or its
proceeds.
Comment
28
and alimony arrearages; whether creditor’s claim was mature said to be
immaterial); Oliphant v. Moore, 155 Tenn. 359, 362-63, 293 S.W. 541, 542 (1927)
(tort creditor granted injunction restraining alleged tortfeasor’s disposition of
property).
29
(b) Except as otherwise provided in this section, to the extent a transfer is
voidable in an action by a creditor under Section 7(a)(1), the creditor may recover
judgment for the value of the asset transferred, as adjusted under subsection (c), or
the amount necessary to satisfy the creditor’s claim, whichever is less. The
judgment may be entered against:
(1) the first transferee of the asset or the person for whose benefit the
transfer was made; or
(c) If the judgment under subsection (b) is based upon the value of the asset
transferred, the judgment must be for an amount equal to the value of the asset at
the time of the transfer, subject to adjustment as the equities may require.
(1) to the extent the insider gave new value to or for the benefit of the
debtor after the transfer was made unless the new value was secured by a valid lien;
30
(3) if made pursuant to a good-faith effort to rehabilitate the debtor and
the transfer secured present value given for that purpose as well as an antecedent
debt of the debtor.
Comment
(1) Subsection (a) states the rule that applies when the transferee establishes
a complete defense to the action for avoidance based on Section 4(a)(1). The
subsection is an adaptation of the exception stated in § 9 of the Uniform Fraudulent
Conveyance Act. The person who invokes this defense carries the burden of
establishing good faith and the reasonable equivalence of the consideration
exchanged. Chorost v. Grand Rapids Factory Showrooms, Inc., 77 F. Supp. 276,
280 (D.N.J. 1948), aff’d, 172 F.2d 327, 329 (3d Cir. 1949).
(2) Subsection (b) is derived from § 550(a) of the Bankruptcy Code. The
value of the asset transferred is limited to the value of the levyable interest on the
transferor, exclusive of any interest encumbered by a valid lien. See § 1(2) supra.
31
A.L.R.2d 593 (1958). 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.
(5) Subsection (e)(1) rejects the rule adopted in Darby v. Atkinson (In re
Farris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on
default in accordance with its terms and applicable law may constitute a fraudulent
transfer. Subsection (e)(2) protects a transferee who acquires a debtor’s interest in
an asset as a result of the enforcement of a secured creditor’s rights pursuant to and
in compliance with the provisions of Part 5 of Article 9 of the Uniform Commercial
Code. Cf. Calaiaro v. Pittsburgh Nat’l Bank (In re Ewing), 33 B.R. 288, 9
C.B.C.2d 526, CCH B.L.R. ¶ 69,460 (Bk.W.D.Pa. 1983) (sale of pledged stock
held subject to avoidance as fraudulent transfer in § 548 of the Bankruptcy Code),
rev’d, 36 B.R. 476 (W.D.Pa. 1984) (transfer held not voidable because deemed to
have occurred more than one year before bankruptcy petition filed). Although a
secured creditor may enforce rights in collateral without a sale under § 9-502 or
§ 9-505 of the Code, the creditor must proceed in good faith (U.C.C. § 9-103) and
in a “commercially reasonable” manner. The “commercially reasonable” constraint
is explicit in U.C.C. § 9-502(2) and is implicit in § 9-505. See 2 G. Gilmore,
Security Interests in Personal Property 1224-27 (1965).
32
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.
Paragraph (3) is new and reflects a policy judgment that an insider who has
previously extended credit to a debtor should not be deterred from extending further
credit to the debtor in a good faith effort to save the debtor from a forced
liquidation in bankruptcy or otherwise. A similar rationale has sustained the taking
of security from an insolvent debtor for an advance to enable the debtor to stave off
bankruptcy and extricate itself from financial stringency. Blackman v. Bechtel, 80
F.2d 505, 508-09 (8th Cir. 1935); Olive v. Tyler (In re Chelan Land Co.), 257
F.497, 5 A.L.R. 561 (9th Cir. 1919); In re Robin Bros. Bakeries, Inc., 22 F.S. 662,
663-64 (N.D.Ill. 1937); see Dean v. Davis, 242 U.S. 438, 444 (1917). The amount
of the present value given, the size of the antecedent debt secured, and the
likelihood of success for the rehabilitative effort are relevant considerations in
determining whether the transfer was in good faith.
(a) under Section 4(a)(1), within 4 years after the transfer was made or the
obligation was incurred or, if later, within one year after the transfer or obligation
was or could reasonably have been discovered by the claimant;
(b) under Section 4(a)(2) or 5(a), within 4 years after the transfer was made
or the obligation was incurred; or
(c) under Section 5(b), within one year after the transfer was made or the
obligation was incurred.
33
Comment
(1) This section is new. Its purpose is to make clear that lapse of the
statutory periods prescribed by the section bars the right and not merely the remedy.
See Restatement of Conflict of Laws 2d § 143 Comments (b) and (c) (1971). The
section rejects the rule applied in United States v. Gleneagles Inv. Co., 565 F.S.
556, 583 (M.D.Pa. 1983) (state statute of limitations held not to apply to action by
United States based on Uniform Fraudulent Conveyance Act).
Comment
34
Fraudulent Conveyance Act held barred by laches when the creditor was chargeable
with inexcusable delay and the defendant was prejudiced by the delay).
SECTION 12. SHORT TITLE. This [Act] may be cited as the Uniform
Fraudulent Transfer Act.
SECTION 13. REPEAL. The following acts and all other acts and parts of
acts inconsistent herewith are hereby repealed:
Comment
35