California’s New Voidable Transactions Act
California’s recently enacted Uniform Voidable Transactions Act (UVTA), makes it easier for creditors to recover assets that are transferred to third parties when a debtor is insolvent, even when there is no improper intent by the debtor or the transferee.
The UVTA supersedes the Uniform Fraudulent Transfer Act (California Civil Code Sections 3439 et seq.) (UFTA). The UVTA applies to transfers made or obligations incurred after January 1, 2016 (the UFTA will continue to apply to prior transactions). Key changes from the UFTA include:
- Challenging a transfer will be easier for a creditor: the creditor only needs to establish its claim by a “preponderance” of the evidence, rather than the higher “clear and convincing” evidence standard applied by some courts under the UFTA. Moreover, a party defending a claim now clearly has the burden of: (i) rebutting the presumption that the debtor was insolvent at the time of the transfer based on failure to pay debts as they came due and (ii) asserting that property was transferred for a reasonably equivalent value and in good faith. These procedural changes may sound technical, but they tilt the scales in favor of the creditor.
- A creditor asserting a UVTA claim now has additional remedies, including obtaining pre-judgment “attachment” of a transferee’s assets generally, rather than such attachment being limited to the asset transferred or its proceeds, as is the case under the UFTA. This will put additional pressure on a transferee to settle.
The name change itself (from Uniform Fraudulent Transfer Act to Uniform Voidable Transactions Act) emphasizes that the law is focused on avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value, regardless of actual fraud or improper intent.
A claim under the UVTA is now governed by the law of the state where the debtor is “located” at the time the transfer is made or the obligation is incurred. For an individual, this is the individual's principal residence; for an organization, this is the organization's place of business, or its chief executive office if it has multiple places of business. This change is designed to reduce uncertainty regarding the law applicable to a claim, which can be critical because states have adopted non-uniform versions of the UFTA and UVTA. Defendants have often used uncertainty regarding which version of the UFTA to apply as a tool to hinder creditor claims.
Navigating a claim under UFTA and the new UVTA can be tricky, the more so now as the law evolves to focus on technical rules that might not appear obviously. The advice of legal counsel with appropriate experience will be critical to pursuing or defending such litigation.