The Dawning of a New Era Voidable Transactions

The Dawning of a New Era: Voidable Transactions Act of 2014 John A. Lapinski, Clark Trevithick Ashley Mc. Dow, Baker. Hostetler Monday, October 17, 2016 1

http: //www. uniformlaws. org/Act. aspx? title=Fraudulent%20 Transfer%20 Act%20%20 now%20 known%20 as%20 Voidable%20 Transactions%20 Act 2

http: //www. uniformlaws. org/Act. aspx? title=Voidable%20 Transactions%20 Act%20 Amendments%20(2014)%20%20 Formerly%20 Fraudulent%20 Transfer%20 Act 3

Iterations Of The Act • UNIFORM FRAUDULENT CONVEYANCE ACT (1918) • UNIFORM FRAUDULENT TRANSFER ACT (1984) • UNIFORM VOIDABLE TRANSACTIONS ACT (2015) 4

MAIN CHANGES IN UVTA • • • Definition Of Insolvency Choice Of Law Burdens of Proof Good Faith Transferee Defense(s) Safe Harbor Provisions Remedies of Creditors 5

Where Will We See The UVTA? • Generally arises in the context of a bankruptcy proceeding, but can also arise in the context of an assignment for the benefit of creditors, a state or federal court receivership proceeding, or simply by way of a lawsuit commenced by a creditor (although this is very rare for a myriad of reasons) 6

Catalyst For The UVTA • The term “fraudulent” was misleading, as fraud is not, and has never been, a necessary element of a claim for relief under the Act • The word “transfer” in the title of the act was underinclusive, as the Act applies to the incurrence of obligations as well as to the transfers of property • The words “voidable” and “fraudulent” were not used consistently throughout the Act 7

What Is Not Addressed By The UVTA? • CHARITABLE CONTRIBUTIONS o Drafting committee declined to include language analogous to 11 USC 548 based upon the belief that provisions to address special interests were not in the best interest of creditors q However, certain states have enacted non-uniform additions to the UFTA that provide protection for charitable contributions, so make sure you research the applicable law in the state that governs your action • CONFORMITY TO BANKRUPTCY CODE SECTION 548 o Drafting committee declined to conform the UVTA to 11 USC § 548 in a number of respects (including the applicable reach back period(s) for certain transfers, the applicable SOL, and the extent of the avoidance powers) • ATTORNEYS’ FEES AND PUNITIVE DAMAGES o Drafting committee declined to include an express provision indicating that attorneys’ fees and exemplary damages are available under the UVTA (primarily because the Act includes a “catch-all provision” and state law supplements the Act) • INSIDER PREFERENCE RULE/DEFINITION OF INSIDER o Drafting committee declined to expand the definition of “insider” to expressly include nonhuman entities other than corporations and partnerships because, among other reasons, several states have already adopted amendments expanding the definition and the definition is non-exclusive, which enables courts to apply the terms as appropriate on a case-by-case basis q Interesting to note: “Insider” is not defined in § 3439. 01 8

SO CALLED ACTUAL FRAUD • § 3439. 04(a)(1): A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with the actual intent to hinder, delay, or defraud any creditor of the debtor o § 3439. 04(b): In determining actual intent under subdivision (a), consideration may be given, among other factors, to any or all of the following: q Whether the transfer or obligation was to an insider. q Whether the debtor retained possession or control of the property transferred after the transfer q Whether the transfer or obligation was disclosed or concealed. q Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. q Whether the transfer was of substantially all the debtor's assets. q Whether the debtor absconded. q Whether the debtor removed or concealed assets. q 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. q Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. q Whether the transfer occurred shortly before or shortly after a substantial debt was incurred. q Whether the debtor transferred the essential assets of the business to a * * * lienor that transferred the assets to an insider of the debtor. 9

• Burden of Proof o A creditor making a claim for relief under § 3439. 04(a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence (§ 3439. 04(c)) – entirely new section q Official comments admonish courts not to apply non-statutory presumptions that would reverse the burden allocations contained in the amendments • Defenses o A transfer or ***obligation is not voidable under § 3439. 04(a)(1) against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee (§ 3439. 08(a)) q Provides a complete defense to good faith purchasers that provided reasonably equivalent value for the asset q Important change: UVTA revised 3439. 08(a) to include the words “given the debtor” so that the defense now applies only if the reasonably equivalent value is given to the debtor q Any person attempting to invoke this defense has the burden of establishing “good faith” and the “reasonable equivalence” of the consideration exchanged by a preponderance of the evidence (3439. 08(f)(1) and (g)) 10

SO CALLED CONSTRUCTIVE FRAUD • § 3439. 04(a)(2): A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either: o (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction OR o (B) Intended to incur, or believed or reasonably should have believed that * * * the debtor would incur, debts beyond * * * the debtor’s ability to pay as they became due. • § 3439. 05(a): A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. • Burden Of Proof: A creditor making a claim for relief under either of these sections has the burden of proving the elements of the claim for relief by a preponderance of the evidence (§ 3439. 04(c); § 3439. 05(b)) 11

• SAFE HARBOR PROVISIONS (DEFENSES TO CONSTRUCTIVE FRAUD) o A transfer is not avoidable under § 3439. 04(a)(2) or § 3439. 05 (the so called constructive fraud provisions) if the transfer results from either of the following: q Termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law (§ 3439. 08(e)(1)) OR q Enforcement of a lien in a noncollusive manner and in compliance with applicable law…other than a retention of collateral under…the Commercial Code and other than a voluntary transfer of the collateral by the debtor to the lienor in satisfaction of all or part of the secured obligation (§ 3439. 08(e)(1)) o Drafting committee did not believe that an exemption for strict foreclosure was necessary because the interests of the debtors other creditors might not be sufficiently protected if the debtor does not act to protect any equity it might have in the asset o Result of the amendment is that strict foreclosures are subject to review for reasonableness under 3439. 04(a)(2) and/or 3439. 05, which effectively provides a mechanism for creditors to challenge a foreclosure if the debtor received less than reasonably equivalent value o BURDEN OF PROOF q Any person asserting a defense under the safe harbor provisions has the burden of demonstrating that the transfer at issue resulted from either (1) the proper termination of a lease following the debtor’s default OR (2) the enforcement of a lien which was done in a non-collusive manner and in accordance with applicable law (§ 3439. 08(f)(1) 12

Definition Of Insolvency • A debtor is insolvent if, at a fair valuation, the sum of the debtor's debts is greater than * * * the sum of the debtor's assets (§ 3439. 02(a)) o Clarifies that the term “fair valuation” applies equally to both “assets” and “liabilities” q 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 chapter (§ 3439. 02(c)) q 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 (§ 3439. 02(c)) 13

Presumption of Insolvency (§ 3439. 02(b)) • A debtor that is generally not paying * * * the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent o Clarifies that general nonpayment of debts does not include any nonpayment resulting from a bona fide dispute (brings the definition of insolvency more in line with the UCC and the Bankruptcy Code) o The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence (this portion is entirely new in the UVTA) q Effect of presumption: Burden of persuasion on the issue of insolvency shifts to the defendant • The UVTA deletes what was § 3439. 02(c), which provided a special definition of “insolvency” for partnerships 14

CHOICE OF LAW • § 3439. 10 is entirely new o § 3439. 10(b) provides that a claim in the nature of a claim for relief under the Act is governed by the local law of the jurisdiction in which the debtor is “located” at the time the challenged transfer is made or the challenged obligation is incurred q “Local law” means the substantive law of the referenced jurisdiction – not its choice of law rules • § 3439. 10(a) defines a debtor’s “location” for purposes of this section o A debtor who is an individual is located at the individual’s principal residence § 3439. 10(a)(1) o A debtor that is an organization and has only one place of business is located at its place of business § 3439. 10(a)(2) o A debtor that is an organization and has more than one place of business is located at its chief executive office § 3439. 10(a)(3) o Analogous to the choice of law rules under Article 9 of the UCC regarding the priority of a security interest in intangible property • Although the primary purpose of these particular amendments was to create a uniform and reasonably predictable choice of law rule, the potential for abuse is a concern, the drafting committee attempted to address concerns of “asset tourism” by making it clear that the terms “principal residence, ” “place of business, ” and “chief executive office” should be determined on a basis of genuine and sustained activity, not on the basis of artificial manipulations 15

REMEDIES OF CREDITORS • § 3439. 07(a): In an action for relief under the Act, a creditor may obtain: o (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim; and o A host of provisional remedies against both the asset transferred and now other property of the transferee (see (a)(2) - (b)) § The UVTA was amended to enable a creditor to not only reach an asset that has been avoided under the Act, but any and all assets of the transferee that are necessary to satisfy his or her claim (see § 3439. 07(a)(2), (a)(3)(A), (a)(3)(B), and (b)) 16

LIMITATIONS ON RECOVERY ONCE TRANSFER HAS BEEN AVOIDED • Except as otherwise provided in this section, * * * the creditor may recover judgment for the value of the asset transferred (as adjusted under § 3439. 08(c)) OR the amount necessary to satisfy the creditor’s claim, whichever is less (§ 3439. 08(b)(1)) o Burden of Proof: The creditor has the burden of proving (1) the value of the asset transferred at the time of the transfer and (2) the amount necessary to satisfy their claim. o If the judgment is based upon the value of the asset transferred, the judgment shall 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 (§ 3439. 08(c)) § Any party who seeks to have the amount of the judgment adjusted under § 3439. 08(c) has the burden of demonstrating the existence of “equities” that warrant such an adjustment (§ 3439. 08(f)(4)) 17

JUDGMENT UNDER § 3439. 07 MAY BE ENTERED AGAINST THE FOLLOWING: • The first transferee of the asset or the person for whose benefit the transfer was made (§ 3439. 08(b)(1)(A)) • An immediate or mediate transferee of the first transferee, other than * * * either of the following: o A good faith transferee that took for value * * * (§ 3439. 08(b)(1)(B(i)) q Burden of Proof: The transferee has the burden of proving that they took the transfer in good faith and for value (note that the code does not specify reasonably equivalent value) (§ 3439. 08(f)(3)) o An immediate or mediate good faith transferee of a person described in clause (i) (§ 3439. 08(b)(1)(B(ii)) q Burden of Proof: Any person that received a transfer from a subsequent transferee that received the initial transfer in good faith and for value must prove (1) that they took the transfer in good faith; AND (2) that the party from whom they received the transfer took the transfer in good faith and for value (§ 3439. 08(f)(3)). 18

CREDITOR PROTECTIONS • § 3439. 08(d): Notwithstanding voidability of a transfer or an obligation under the Act, a good faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to the following: o (1) A lien on or a right to retain an interest in the asset transferred. o (2) Enforcement of an obligation incurred. o (3) A reduction in the amount of the liability on the judgment. – Burden of Proof: Any person attempting to avail his or herself of this section has the burden of demonstrating that they (1) took in good faith and (2) the extent of value given by a preponderance of the evidence (§ 3439. 08(f)(1) and (g)) 19

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