Fraudulent Conveyances and the Uniform Fraudulent Transfer Act (UFTA)
K. William Davidson
October 17, 2005
I. Introduction
While the law of fraudulent transfers is most relevant to and most often invoked in relation to bankruptcy proceedings, an understanding of the underlying principles is indispensable to the business transaction practice as well. “In the shadow of virtually every commercial transaction lies the specter of the fraudulent conveyance.”[1] Any transfer of interest in property may be subject to this area of law. To adequately represent a client’s interests the transactions practitioner must understand the implications such law has on any contemplated deal. A large body of updated literature is available for review on this area of law from the perspective of avoidance and recovery of such transactions in the bankruptcy context.[2] This article will provide a brief summary of the history and foundations of fraudulent conveyance law, key definitions and characteristics of fraudulent conveyances, a discussion of the current state of the law, and basic outline and practice guide-lines illustrating the application of the Uniform Fraudulent Transfer Act.
II. Fraudulent Transfer Generally
A fraudulent transfer or fraudulent conveyance, as referred to in our law, may be described as “an infringement of the creditor’s right to realize upon the assets of his debtor.” [3] A fraudulent transfer or conveyance is a transfer of an asset made by a debtor in order keep the asset from a creditor. That is to say that a transfer or conveyance is fraudulent when a debtor transfers assets or an interest in assets to a third party with intent to obstruct the creditors efforts to reach the assets to satisfy an indebtedness. Fraudulent transfer law prohibits the debtor from disposing of his property with the intent or the effect of placing it outside the reach of his creditors.[4] In determining whether a transfer is fraudulent, on must look to the effects of the transfer on the debtor’s estate. The most important determinative factor is whether the transfer or conveyance has resulted in a reduction or diminution of value in the estate of the debtor that would other wise be available to the creditor. In virtually every American jurisdiction such transfers or conveyances may be dealt with through the federal bankruptcy code, through specific state fraudulent conveyance statutes, or through the common law of fraudulent conveyance. If a court determines that a transfer was made in order to evade satisfaction of a creditor, the court will “avoid” the transfer and make the transferee turn the asset over to the creditor. “Avoidance and recovery” are terms of art describing the two steps in a successful fraudulent transfer challenge. We will return to a discussion of the specific statutory elements after briefly tracing the foundations of fraudulent transfer law.
III. Foundations of Fraudulent Transfer Law
Conveyances of assets intended or designed to place a debtor’s property beyond the reach of creditors have been prohibited by law at least since the sixteenth century by the English Parliament in An Act Against Fraudulent Deeds, Alienation, Statute of 13 Elizabeth Chapter 5 (1571). As originally promulgated in England, the Statute of 13 Elizabeth was a criminal statute which required forfeiture of the value of fraudulently conveyed property, half paid to the crown and half paid to the defrauded creditor. Along with the forfeiture, the penalty under Statute of 13 Elizabeth included six months imprisonment, as well.[5] Twyne’s Case, the most famous case involving Statute 13 of Elizabeth, produced five determinative factors labeled “badges of fraud.”[6] Twyne’s Case involved a debtor who conveyed ownership of goods but retained possession and enjoyment of the goods. The five factors as first articulated by Lord Coke in Twyne’s Case have been adopted within the common law of every state: (1) the conveyance was general, not accepting apparel or other necessities; (2) the transferor retained possession of the goods and treated them as his own; (3) the transfer was made in secret; (4) the transfer was made pendit a writ against the debtor; and (5) the transfer was made to create a trust for the benefit of the debtor.[7]
This ideation of the Statute 13 of Elizabeth became part of the common law of virtually every American jurisdictions and was subsequently codified with the promulgation of the Uniform Fraudulent Conveyance Act (U.F.C.A.) in 1918.[8] The essential substance of the U.F.C.A. was also incorporated by the Bankruptcy act of 1938. Among problems with the U.F.C.A. were lack of comity with other related statutory schemes, as well as reliance upon showing of actual intent through application of the badges of fraud analysis. In an effort to provide further consistency and predictability to fraudulent conveyance law, as well as to incorporate a constructive fraud element, the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted a revision of the U.F.C.A. The drafters created the Uniform Fraudulent Transfer Act (U.F.T.A.), which contemplated and integrated changes in the Bankruptcy Code, the Uniform Commercial Code, and forthcoming revisions of the Model Corporation Act. The U.F.T.A. supplanted the U.F.C.A. in 1984.[9] The Uniform Fraudulent Transfer Act “create[ed] a comprehensive statutory scheme that is designed to protects a debtor’s estate from being depleted to the prejudice of creditors.”[10] As of September 2005, the U.F.T.A. has been adopted by 42 states, including Wisconsin.[11] Wisconsin repealed its U.F.C.A. statutes and replaced them with the U.F.T.A. in 1988, Wis. Stats. Chapter 242 .
There are three primary purposes addressed by fraudulent transfer law. First, fraudulent transfer laws serve to preserve and retrieve assets of the debtor for the benefit of creditors.[12] Fraudulent transfer law therefore serves to maximize the available pool of assets for distribution to creditors. Second, fraudulent transfer laws are designed to promote creditor/debtor relations outside of bankruptcy and they help deter attempts by debtors to evade the claims of creditors. Third, fraudulent transfer laws protect creditors by deliberately allocating the risk of tainted transactions to the debtor’s transferees.[13] The provisions of the U.F.T.A. serve to increase a creditor’s ability to secure assets from insolvent creditors, decrease the ability of transferees to retain assets received from insolvent parties, decrease a debtor’s ability to rely on bad-faith transfers as complete, and increase the ability of good-faith transferees to retain assets. In so doing, the U.F.T.A. deters fraudulent transfers while protecting good-faith transactions made in the ordinary course of business by innocent parties.
IV. Key Elements to Fraudulent Transfer Under the U.F.T.A.
With the underlying purpose of the statutes in mind we will now turn to the specifics of determining whether or not a transaction constitutes a fraudulent transaction. Wisconsin’s Uniform Fraudulent Transfer Act statutes are found in Chapter 242, § 242.01 – § 242.11. Under Chapter 242 of the Wisconsin Statutes, § 242.01 provides key definitions as applied throughout the remainder of the statute.[14] § 242.04(1)(a) provides that transfer is actually fraudulent as to present or future creditors if the debtor made the transfer “with actual intent to hinder, delay or defraud a creditor.” § 242.04(1)(b) provides that a transfer is constructively fraudulent as to present or future creditors if the debtor made the transfer “without receiving a reasonably equivalent value in exchange…,” and the debtor would be left with unreasonably small assets in relation to the business or transaction, or the debtor intended to incur, or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they came due. § 242.04(2)(a) – (k) enumerates “badges of fraud” to be considered when determining intent under § 242.04(1)(a).[15] § 242.05(1) provides constructive fraud liability as to present creditors where a transfer is made without receiving reasonably equivalent value and the debtor was insolvent or became insolvent as a result of the transfer. Additionally, § 242.05(2), provides constructive fraud liability as to present creditors where a transfer is made to an insider for an antecedent debt, the debtor was insolvent at the time and the insider had reasonable cause to believe that the debtor was insolvent.
§ 242.08 specifies the liabilities and available defenses and protections of transferees. In essence the only protections afforded to transferees are for those who took in good faith and for reasonable equivalent value in an actually fraudulent transfer, or those who took in good faith and for reasonable value as a subsequent transferee. This means that if the transfer was fraudulent under § 242.04(1)(b), or § 242.05(1), the first transferee remains liable even if the transfer was taken in good faith.[16]
V. Application of the Uniform Fraudulent Transfer Act
Application of the statutory construction is of course more complicated than the foregoing discussion describes. Close scrutiny to each of the provisions is required to ensure accurate interpretation, some generalities, however, may be drawn.[17] It should be noted that conveyances may be challenged under 11 U.S.C § 548 and § 544(b), as well as under state common law actions. Under § 544(b) the action is governed by the state U.F.T.A. statutory scheme, whereas, in challenges brought under § 548 the action is governed by the bankruptcy code. While 11 U.S.C. § 548 closely comports with the language of the U.F.T.A., important differences should be noted. Recent changes to § 548, effective October 17, 2005, impact the reach of avoidance and recovery actions for fraudulent transfers. 11 U.S.C. 548(a)(1) has been revised to extend the reach for avoidance of fraudulent transfers to include any transfer made within two years of the bankruptcy filing, thereby extending the reach of the creditor and potentially exposing a greater pool of transferees to liability.[18] Under Wisconsin law, a challenge under § 242(1)(a), § 242(1)(b), or § 242.05(1) may be brought within four years after the transfer is made. However a challenge under § 242.05(2) is barred after one year from the date the transfer is made.[19] As 11 U.S.C. 548(a)(1) is inclusive of the insider transfer addressed under Wis. Stats. § 242.05(2), the new federal law extends the time available to avoid and recover on this type of claim.
VI. Practical Guide-lines
Under the U.F.T.A. there are three types of obligations or transfers that may be set aside: (1) actually fraudulent transfers or obligations, (2) constructively fraudulent transfers or obligations, and (3) insider preference transfers. The following selected excerpts from Causes of Action First Series, Cause of Action to Set Aside or Recover for Fraudulent Transfer or Obligation under Uniform Fraudulent Transfer Act, Steven Shareff, 26 COA 773 (2004), provide an outline and practical guide-lines under which a reasonable analysis of a potentially fraudulent transaction may be made:[20]
Prima Facie Case.
The elements the plaintiff will need to plead and prove in order to establish a prima facie case depend on the type of transfer or obligation involved. In order to establish a prima facie case in an action to set aside an actually fraudulent transfer or obligation, the plaintiff must plead and prove that:
(1) the debtor made a transfer or incurred an obligation;
(2) the plaintiff was a creditor of the debtor; and
(3) the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any creditor of the debtor.
In order to establish a prima facie case in an action to set aside a constructively fraudulent transfer or obligation, the plaintiff must plead and prove that:
(1) the debtor made a transfer or incurred an obligation;
(2) the plaintiff was a creditor of the debtor;
(3) the debtor did not receive reasonably equivalent value in exchange for the transfer or obligation; and either
(4A) the debtor was engaged or was about to engage in a business or in a transaction for which the debtor's remaining assets were unreasonably small; or
(4B) the debtor intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond the debtor's ability to pay as they matured; or
(4C) (i) the debtor was insolvent at the time the transfer was made or the obligation was incurred, or became insolvent as a result of the transfer or obligation, and (ii) the plaintiff's creditor status existed at the time of the transfer or obligation.
In order to establish a prima facie case in an action to set aside an insider preference transfer, the plaintiff must plead and prove that:
(1) the debtor made a transfer to an insider for an antecedent debt;
(2) the plaintiff was a creditor of the debtor at the time of the transfer;
(3) the debtor was insolvent at the time of the transfer; and
(4) the insider had reasonable cause to believe that the debtor was insolvent at the time
of the transfer.
Defenses Generally.
Certain claims in defense are applicable regardless of the status of the plaintiff's claim. Thus, there will be no liability, whether the challenged transaction allegedly constituted actual fraud, constructive fraud, or an insider preference, where:
• the challenged transaction involved neither a transfer nor an obligation.
• the plaintiff was not a creditor of the debtor.
• the defendant was a second transferee or obligee (i.e., the defendant received the transfer or obligation from the initial transferee or obligee) who received the asset or obligation in good faith and for value.
• the defendant was a third or subsequent transferee or obligee who received the asset or obligation in good faith.
Additionally, liability will be limited where the defendant was an initial transferee or obligee who acted in good faith and gave value in the transaction. Where a transfer of an asset was involved, the defendant's liability will be reduced by the amount of value given. Where the debtor incurred an obligation to the defendant, the obligation will be enforced to the extent of value given.
Certain claims in defense are specific to the nature of the plaintiff's claim. Thus, where actual fraud allegedly was involved, there will be no liability where:
• the debtor had no actual intent to hinder, delay, or defraud any creditor.
• the defendant was the initial transferee or obligee and received the asset or obligation in good faith and for reasonably equivalent value.
Where constructive fraud allegedly was involved, there will be no liability where:
• the initial transferee or obligee gave reasonably equivalent value in the transaction.
• the challenged transaction was the termination of a lease upon the debtor's default, as provided for in the lease.
• the challenged transaction was the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code.
• the plaintiff's claim is asserted under UFTA § 4(a)(2)(i), relating to the debtor's unreasonably small assets, and the debtor was neither engaged nor about to be engaged in a business or transaction for which the debtor's assets remaining after the challenged transaction were unreasonably small.
• the plaintiff's claim is asserted under UFTA § 4(a)(2)(ii), relating to the debtor's incurring of future debts, and the debtor neither intended to incur nor reasonably should have believed that he or she would incur debts beyond the debtor's ability to pay as they became due.
• the plaintiff's claim is asserted under UFTA § 5(a), relating to the debtor's insolvency, and the debtor neither was insolvent at the time of the transaction nor became insolvent as a result of the transaction.
• the plaintiff's claim is asserted under UFTA § 5(a), relating to the debtor's insolvency, and the plaintiff became a creditor of the debtor after the challenged transaction.
Where an insider preference transfer allegedly was involved, there will be no liability where:
• the transferee was not an insider.
• the transfer was not for an antecedent debt.
• the debtor was not insolvent at the time of the transfer.
• the transferee did not have reasonable cause to believe that the debtor was insolvent at the time of the transfer.
• the plaintiff was not a creditor of the debtor at the time of the transfer.
• the transfer was made in the ordinary course of business or financial affairs of the debtor and the transferee.
• the transfer was a good faith effort to rehabilitate the debtor and secured present value given for that purpose as well as the debtor's antecedent debt.
• the challenged transaction was the termination of a lease upon the debtor's default, as provided for in the lease.
• the challenged transaction was the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code.
Additionally, the transferee's liability will be limited to the extent that the transferee gave new value to or for the benefit of the debtor, so long as the new value was not secured by a valid lien.
Taking In Good Faith For Value.
The defendant's liability will be limited or eliminated where the defendant acted in good faith and gave value in the transaction. It appears that, where the defendant was a second transferee or obligee (i.e., the defendant received the transfer or obligation from the initial transferee or obligee), or a subsequent transferee or obligee, the defendant's receiving the asset or obligation in good faith and for value constitutes a complete defense. Where the defendant was the initial transferee or obligee, the defendant's receiving the asset or obligation in good faith and for value constitutes a partial defense, to the extent of the value given. Under these circumstances, where a transfer of an asset was involved, the defendant's liability will be reduced by the amount of value given. Where the debtor incurred an obligation to the defendant, the obligation will be enforced to the extent of value given.
It appears that, where the defendant was a third or subsequent transferee or obligee, the defendant's receiving the asset or obligation in good faith constitutes a complete defense, and the defendant is not required to establish that value was given in the transaction.
The defendant must establish that he or she gave value in the transaction. Value includes the transfer of property or the satisfaction or securing of an antecedent debt. Services probably also constitute value. The transferee also must establish that he or she acquired the property in good faith. Naturally, the transferee will need to show that he or she did not participate in or have knowledge of the fraud. Lack of knowledge often will be established most convincingly through circumstantial evidence.
The transferee also will need to show that he or she did not have inquiry notice of the debtor's fraud. A transferee who has notice of facts and circumstances that would incite the suspicion of a prudent person is charged with knowledge of all facts that a reasonable inquiry would reveal. However, a transferee's mere knowledge of the presence of claims against a debtor, or of the existence of the debtor's indebtedness, is generally insufficient to trigger a duty of inquiry. Knowledge of several factors indicating fraud, however, can trigger inquiry notice.
The bona fide transferee defense generally will not be available to an insider charged with receiving an insider preference. This is because an insider who receives property from an insolvent debtor with reasonable cause to believe that the debtor was insolvent is not a good faith transferee.
Transfers Made in the Ordinary Course of Business.
A transferee charged with receiving an insider preference can preclude liability by showing that the transfer was made in the ordinary course of the business or financial affairs of the debtor and the insider. This claim in defense is derived from § 547(c)(2) of the Bankruptcy Code. The transferee must establish that the transfer was made in the ordinary business of both parties. The cornerstone of the defense is consistency between the transfer and other transactions between the debtor and the transferee. The transferee must show that the challenged transfer was in accord with the parties' prior course of business. Where there was no prior course of dealing between the parties, the transferee should attempt to show that the transfer was consistent with custom in the parties' trade or industry.
Transfers for the Purpose of Rehabilitation of a Debtor.
A transferee charged with an insider preference transfer will not be liable where the transfer was made pursuant to a good faith effort to rehabilitate the debtor and secured present value given for that purpose as well as an antecedent debt of the debtor. This defense is new and has no analogue under either the UFCA, the Bankruptcy Code, or common law.
This provision of the UFTA is intended to encourage creditors to extend credit to troubled debtors in order to avoid bankruptcy or forced liquidation. To establish this claim in defense, the transferee must prove that (1) the transfer he or she received from the debtor was a security interest; (2) the transfer secured present value; and (3) the transfer was made in a good faith effort to rehabilitate the debtor.
A transfer is made for present value if the security interest obtained by the transferee and the consideration given to the debtor in exchange are intended by them to be contemporaneous and are in fact substantially contemporaneous. The totality of the circumstances may well be sufficient to show that the parties intended the transfer to be contemporaneous. The transferee also must establish that the two halves of the exchange were in fact substantially contemporaneous. Exchanges that are a few days apart generally will be substantially contemporaneous, while exchanges separated by more than a month generally will not be.
To establish the rehabilitation defense, the transferee also must show that the transfer was made in a good faith attempt to rehabilitate the debtor. The amount of the present value given by the transferee, the size of the antecedent debt secured, and the likelihood of success of the rehabilitative effort are relevant factors in determining whether the transfer was in good faith.
Transfers Made for New Value.
The liability of a transferee charged with an insider preference transfer will be limited to the extent that the transferee gave new value, not secured by a valid lien, to or for the benefit of a debtor. This defense is adapted from § 547(c) (4) of the Bankruptcy Code and is commonly known as the subsequent-advance rule. The purpose of allowing this claim in defense is to encourage creditors to deal with troubled businesses.
In order to establish the subsequent-advance defense, the transferee must show that the transferee extended new value to the debtor after receiving the preference. New value can include money, services, new credit, a release of a security interest, or any other property that enhances the debtor's financial position. However, the new value must be extended after the preference is received; value extended before the preference is made will not establish the claim in defense. See By way of illustration, where a creditor provides goods or services to a creditor on a running account, the value of goods and services provided can be set off only against payments received on the debtor's account before the goods and services were provided.
To establish the subsequent-advance defense, the transferee also must show that the new value was unsecured and the resulting debt was unpaid. This is because when a new advance is secured there is no return of the preference and the injury to other creditors is undiminished.
Parties Generally.
An action to set aside or recover for a fraudulent transfer or obligation under the Uniform Fraudulent Transfer Act will be brought by the defrauded creditor against the debtor and one or more transferees or obligees. Where an asset was transferred, all parties claiming an interest in the property should be joined as defendants.
Whether the creditor's claim arose prior to the challenged transfer or obligation may be important. Any creditor is permitted to challenge a transfer or obligation that is actually fraudulent or that is constructively fraudulent by virtue of the fact that the debtor's remaining assets were unreasonably small or the fact that the debtor intended to incur or knew or reasonably should have known that he or she would incur debts that could not be paid when due. Only a creditor whose claim existed at the time of the challenged transfer or obligation is permitted to challenge an insider preference transfer or a transfer or obligation that is constructively fraudulent due to the debtor's existing or resulting insolvency.
Where the asset transferred has been conveyed by the initial transferee to a subsequent transferee, who may have then conveyed the asset to another, all transferees in the chain are potentially liable. The same is true in the case of successive obligees. Where the initial transfer was made to one person for another's benefit, the person actually benefited is potentially liable under the act.
Procedure Generally.
An action to set aside or recover for a fraudulent transfer or obligation under the Uniform Fraudulent Transfer Act may be brought in a state court of general jurisdiction. In such a case, venue will be controlled by the statutes or rules of court of the state in which the action is commenced. Where the plaintiff and the defendant are not residents of the same state and the amount in controversy exceeds $50,000, the action may be brought in a federal district court. A corporate defendant is a resident of (1) the state in which the corporation's principal place of business is located and (2) all states in which the corporation has been incorporated. Venue in actions predicated on federal diversity jurisdiction is proper in the district in which all the plaintiffs or all the defendants reside, or the district in which the claim arose. Where the defendant is a corporation, venue also is proper in any district in which the corporation is subject to personal jurisdiction.
In pleading a UFTA claim, the plaintiff must comply with any rules of civil procedure that require fraud to be pleaded with particularity. Regardless of which species of fraud is at issue, i.e., preferences, constructive fraud, or actual fraud, the plaintiff's claim must be based on objective indicia, and these should be specifically set forth in the complaint
The UFTA contains a provision specifying the applicable statute of limitations. The limitations period applicable to insider preference transfers is one year from the date of the transfer. Where a constructively fraudulent transfer or obligation is involved, the limitations period is four years from the date of the transfer or obligation. Where an actually fraudulent transfer or obligation is involved, the limitations period is four years from the date of the transfer or obligation, or one year after the transfer or obligation reasonably could have been discovered, whichever is longer.
Proof.
There are numerous issues that may be central to an action under the Uniform Fraudulent Transfer Act, and each issue requires attention to approaches to proof appropriate for that issue.
Where the debtor's insolvency is at issue, whether the debtor was paying its debts as they became due typically will be contested. The debtor's financial statements will list the debtor's assets and liabilities and identify the debtor's creditors, amount of indebtedness as of the date of the transfer, and payment history regarding outstanding obligations for an interval preceding the transfer. This information can be verified by reviewing the debtor's checking account records, ledgers, and income tax returns; by obtaining credit reports; and by subpoenaing the records of the debtor's other creditors.
Where the balance-sheet test is applied in determining insolvency, information sufficient to construct a balance sheet must be obtained. Expert testimony from an appraiser may be required to determine the market value of certain assets. Admission of the debtor's books and records and testimony from the debtor and the debtor's accountant may be required to insure that all of the debtor's liabilities are included.
Where the transferee is an alleged insider, an insider relationship between the debtor and the transferee often may be easily established by stipulation or admission or from testimony of the debtor, the transferee, or the debtor's relatives, employees, or managers. To determine whether the insider had reason to know of the debtor's insolvency, witnesses should be interviewed and correspondence examined in order to assess whether the transferee was notified of the debtor's overdrafts, of threats of lawsuits against the debtor, or of the debtor's financial losses.
In determining whether a transfer or obligation was constructively fraudulent, an initial inquiry is whether the transaction was made for reasonably equivalent value. The value of the asset transfer and the value of the consideration received must be proven. In some circumstances, such as with cash transfers or where an indebtedness is released, the value is established by evidence of the circumstances of the transaction. At other times it will be necessary to introduce an appraiser's expert testimony. The appraiser's opinion may be supported by evidence of sales of similar property under similar market conditions, the cost of the property less depreciation, or of the capitalization of the debtor's net income. Witnesses privy to, and correspondence relating to, the debtor's negotiations with the transferee may demonstrate whether the transaction occurred at arm's length. Similarly, expert testimony may be introduced to establish whether the transaction deviated from the custom and usage in the trade or industry.
Where a transfer or obligation was allegedly constructively fraudulent, it will be necessary to determine whether the debtor was insolvent, had unreasonably small assets for his or her business or transaction, or had reason to believe that he or she had incurred debts beyond an ability to pay. With regard to the amount of the debtor's remaining assets, expert testimony concerning the typical amount of liquid assets maintained by similar businesses within the industry may be required. Business records establishing the debtor's contemplated future debt and expenses and the debtor's prior profitability will also be influential.
As to whether the debtor had reason to believe he or she would incur debts beyond an ability to pay, witnesses' testimony and the debtor's business records may reveal whether the debtor had notice of substantial claims, defaulted in prior loans, or notice of a worsening financial picture. The debtor's business records may be introduced to establish the financial consequences of the transfer or obligation, including whether it resulted in additional defaults or changes in the debtor's method of doing business.
Remedies.
Subject to a possible reduction in the case of a good faith transfer for value, a creditor may obtain avoidance of a transfer to the extent necessary to satisfy the creditor's claim. A judgment creditor may also disregard the transfer and directly attach or levy execution on the property transferred. As a practical matter, a creditor is unlikely to attach property before the transfer is set aside, since the creditor can be held liable for conversion if a court subsequently determines that the transfer was not fraudulent.
In the event the asset is no longer held by the transferee, the creditor may obtain a money judgment for the value of the asset at the time of the transfer, or the amount of the creditor's claim, whichever is less. However, the act permits the court to make equitable adjustments based on changes in circumstances. For example, the court may credit a good faith transferee for the value of improvements made or for the discharge of liens against the asset. Conversely, the court may allow an additional recovery against the transferee in the event that it severs minerals or fixtures or otherwise diminishes the value of the property.
In determining what parties to join as defendants, a plaintiff will need to balance the need to assure that judgments are obtained against financially able persons, on one hand, and the interest in keeping the litigation from becoming unwieldy and unnecessarily costly, on the other. As long as the asset has not diminished in value and has not been transferred to a bona fide purchaser for value, the simplest remedy is simply to set aside a transfer and secure a judgment against the debtor or the initial transferee.
In the event that there is more than one transferee, or in the event that the asset has been transferred to a bona fide purchaser for value, a personal judgment may also be sought against the initial or a subsequent transferee. Joining a large number of defendants may be unnecessarily costly and time-consuming, though, if satisfaction of the debt can be obtained from a lesser number of solvent defendants.
-26 Causes of Action 773 (2004). Emphasis added, citations omitted.
VII. Conclusion
The business transaction practitioner will want to ensure that avoidable fraudulent transfers do not result from any proposed deal involving their client. Ensuring that any and all transactions can be reasonably characterized as being “for value” is the safest way to avoid involvement in fraudulent transfers. Even though a for value transactions may still be set aside as a fraudulent transfer, it will present a substantial challenge to a creditor in providing adequate proof to prevail.[21] Likewise, to avoid a potential fraudulent transfer set aside, any and all transactions should have economic substance, i.e. the transaction should make reasonable economic sense. A transfer which does not make reasonable economic sense will likely be found fraudulent, whereas if the transaction makes good sense economically in the given circumstances, again, it will be very difficult for a creditor to defeat:[22]
Additional resources:
Cases:
Badger State Bank v. Taylor, 276 Wis. 2d 312; 688 N.W.2d 439 (Wis. 2004).
Beloit Liquidating Trust v. Grade, 270 Wis. 2d 356; 677 N.W.2d 298 (Wis. 2004).
Int’l Assoc. of Machinists & Aerospace Workers v. U.S. Can Co., 150 Wis. 2d 710; 441
N.W.2d 710 (Wis. 1989).
Tift v. Forage King Industries, Inc., 108 Wis. 2d 72; 322 N.W.2d 14 (Wis. 1982).
Articles/journals/treatises:
Alces, The Law of Fraudulent Transactions, Warren, Gorham & Lamont, New York, 1989.
Bump, Fraudulent Conveyances: a Treatise Upon Conveyances Made by Debtors to Defraud Creditors: Containing References to all the Cases Both English and American, Cushings & Bailey, Baltimore, 1882.
Grubb, Asset Protection Planning in Wisconsin, National Business Institute, Eau Claire, 1993.
McDonald Henry, ed., The New Bankruptcy Code: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, ABA, Chicago, 2005.
Mendales, Looking Under the Rock: Disclosure of Bankruptcy Issues Under the Securities Laws, 57 Ohio St. L.J. 731, 1996. (Bankruptcy estate liable for the full cost of toxic waste cleanup.)
Miguens, Liability of a Parent Corporation for the Obligations of an Insolvent Subsidiary Under American Case Law and Argentine Law, 10 Am. Bankr. Int. L. Rev. 217, 2002.
Williams, Fallacies of Contemporary Fraudulent Transfer Models as Applied to Intercorporate Guaranties: Fraudulent Transfer Law as a Fuzzy System, 15 Cardoza L. Rev. 1403, 1994.
Zinman, Under the Spreading Bankruptcy: Subordinations and the Codes, 2 Am. Bankr. Inst. L. Rev. 293, 1994. (Subordination does not represent the transfer of a property right.)
[1] Article: Michigan’s Adoption of the Uniform Fraudulent Transfer Act: An Examination of the Changes Effected to the State of Fraudulent Conveyance Law, Jeffrey LaBine, 45 Wayne L.Rev. 1479, 1480 (1999).
[2] For a thorough and up-to-date overview of the current status of this area of law see the following resources:
Preferences and Fraudulent Transfers, David B. Young, 876 PLI/Comm 667 (2005).
Fraudulent Transfers, Cook, Ranney-Marinelli, Marafoiti, 876 PLI/Comm 511 (2005).
Cause of Action to Set Aside or Recover Fraudulent Transfer or Obligation Under Uniform
Fraudulent Transfer Act, Steven Shareff, 26 Causes of Action 773 (2004).
Michigan’s Adoption of the Uniform Fraudulent Transfer Act: An Examination of the Changes
Effected to the State of Fraudulent Conveyance Law, LaBine, 45 Wayne L. Rev. 1749, (1999).
For updated analysis of recent cases involving UFTA actions see Fraudulent Transfers, Riser
Adkisson LLP at www.fraudulenttransfers.com.
I acknowledge these sources as the text from which the author derived the majority of this article.
Given the comprehensive coverage provided in the referenced works, paraphrasing and quotation
is inevitable. Direct quotation has been avoided to the extent possible.
[3] The Law of Fraudulent Conveyances § 1, Glenn (1931)
[4] Countryman, Cases and Materials on Debtor and Creditor 127 (2d ed. 1974).
[5] 45 Wayne L. Rev. 1479, 1527 n12.
[6] 76 Eng. Rep. 809, 812-13 (Star Chamber 1601).
[7] 45 Wayne L. Rev. 1479, supra n13; 76 Eng. Rep. 809, 812-13 (Star Chamber 1601).
[8] Uniform Fraudulent Conveyance Act, 7A ULA 427.
[9] Uniform Fraudulent Transfer Act, 7A ULA 639.
[10] Causes of Action First Series, 26 Causes of Action 773 (2004); U.F.T.A. § 3 Comment 2.
[11] See www.nccusl.org. The states that have are not currently under U.F.T.A. statutes include Alaska, Kentucky, Louisianna, Maryland, Mississippi, New York, South Carolina, and Virginia. For a general discussion of the history of fraudulent transfer law see also In re Abatement Environmental Resources, Inc. 102 Fed. Appx. 272 (4th Cir. 2004).
[12] In re Northern Merchandise, Inc. 371 F.3d 1056 (9th Cir. 2004); In re PWS Holding Corp., 303 F.3d 308 (3rd Cir. 2002), cert. Denied, 538 U.S. 924 (2003).
[13] In re W.R.Grace & Co., 281 B.R. 852 (Bankr. D. Del. 2002); In re Ohio Corrugating Co., 91 B.R. 430 (Bankr. N.D. Ohio 1988); see Marie T. Reilly, The Latent Efficiency of Fraudulent Transfer Law, 57 LA. L. Rev. 1213 (1997).
[14] Most notable of the definitions is § 242.01(3) “Claim”, and § 242.01(12) “transfer”, both of which are comprehensively inclusive.
[15] The badges of fraud as enumerated in the U.F.T.A. do not represent an exhaustive list, but rather, are suggestive of the factors to be weighed, i.e. the courts may consider additional factors which may not appear within the statute. § 242.04(2) specifies that “consideration may be given, among other factors, to…”
[16] See Badger State Bank v. Taylor, 2004 WI 128; 276 Wis. 2d 312; 688 N.W.2d 439 (Wis. 2004).
[17] A comprehensive and in depth treatment of detailed analysis of fraudulent transfer actions, including analyses of standing, jurisdiction, burden of proof, forum, and preventing fraudulent transaction liability, can be found in 876 PLI/Comm 511, supra.
[18] 11 USC 548(a)(1) as effective prior to October 17, 2005 allowed for avoidance of fraudulent transfers made within one year before the filing of the petition.
[19] Wis. Stats. § 242.09; Wis. Stats. § 893.425.
[20] COA sections omitted include the elements of fraudulent transfers discussed in this article’s section IV, though, a more in depth treatment of these items can be found in 26 COA 773, § 4 - § 11.
[21] See generally Three Step/Four Test Analysis of the Uniform Fraudulent Transfer Act, Jay D. Adkisson, www.risad.com/upta-3-4.pdf.
[22] Id. “While a conveyance for value will not guarantee that the transfer will stand up, see, e.g., 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 conveyance notwithstanding adequacy of consideration), if a transfer is for equal or near-equal consideration then you have a much, much higher chance that the transfer will not be deemed to be a fraudulent transfer, see, e.g., Bank of Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D.Ark. 1963); Lumpkin v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955); Weigel v. Wood, 355 Mo. 11, 194 S.W.2d 40 (1946); Wareheim v. Bayliss, 149 Md. 103, 131 A. 27 (1925)..
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