The Kansas Uniform Fraudulent Transfer Act
| Publication year | 1999 |
| Pages | 34 |
68 J. Kan. Bar Assn. June/July, 34 (1999). THE KANSAS UNIFORM FRAUDULENT TRANSFER ACT
June/July, 1999
Copyright (c) 1999 by the Kansas Bar Association; Leon B. Graves
I. Introduction
The Kansas version of the Uniform Fraudulent Transfer Act [UFTA] was passed by the 1998 session of the Legislature and signed by Gov. Bill Graves on Feb. 20, 1998, with an effective date of Jan. 1, 1999. The new statute has been codified at K.S.A. 1998 Supp. 33-201 through -312.
Kansas fraudulent conveyance legislation dates back to territorial days, [FN1] and the statutes, which have been in effect for 144 years were in turn based on a statute enacted in England more than 400 years ago. [FN2] The UFTA retains familiar concepts from these statutes, while adding concepts developed during the 20th century. This article provides a section by section comparison of the newly enacted UFTA with its pre-UFTA counterparts in Kansas statutory and case law and also in the Bankruptcy Code.
*35 II. Background of the UFTA
The UFTA was approved by the National Conference of Commissioners on Uniform State Laws in 1984. It replaces the Uniform Fraudulent Conveyance Act [UFCA], which was originally approved in 1918 and adopted in a number of states, not including Kansas. The UFTA was approved by the American Bar Association in 1985. [FN3] Its enactment in Kansas was supported by the Kansas Bar Association.
The UFTA has been adopted in approximately 37 states and the District of Columbia [FN4]. It has been enacted in all four states adjoining Kansas, [FN5] and all states within the Tenth Circuit, [FN6] except Wyoming, which at last report still retained the UFCA. [FN7]
After an interim study, [FN8] the proposed Kansas UFTA was prefiled Dec. 17, 1996, by the Special Committee on Judiciary as 1997 Senate Bill 8 and passed by the Senate on Feb. 12, 1997. After reposing in the House Committee on Judiciary between sessions, it was passed by the House of Representatives on Feb. 9, 1998. The Senate concurred in the House amendments the following day, and the bill was sent to the governor. [FN9]
III. Provisions of the Kansas UFTA
A. UFTA definitions (and bankruptcy code counterparts)
1. General definitions
Similar to many well-drafted statutes, the UFTA begins with a definitions section, [FN10] including the terms listed in the left column:
K.S.A. 1998 Supp. 33-201
Bankruptcy Code, 11 U.S.C.§
(a) Affiliate
101 (2)
(b) Asset
(c) Claim
101 (5)
(d) Creditor
101 (10)
(e) Debt
101 (12)
(f) Debtor
101 (13)
(g) Insider
101 (31)
(h) Lien
101 (37)
(i) Person
101 (41)
(j) Property
(k) Relative
101 (45)
(l) Transfer
101 (54)
(m) Valid lien
544 (a) ; K.S.A.
(UCC) 84-9-301 (1) (b) (1996)
Corresponding definitions in the Bankruptcy Code [FN11] are noted in the right column. Decisional law construing and applying the code definitions, when similar or identical, may be persuasive in litigation under the UFTA [FN12]. The definition of an "asset" does not include property to the extent that it is generally exempt under nonbankruptcy law. [FN13] Kansas has relatively liberal homestead and other exemption laws, [FN14] and debtors with significant non-exempt assets may engage in "exemption planning" or "pre-bankruptcy estate planning" in which non-exempt assets are converted into exempt assets in a fashion that will survive challenges by creditors or the bankruptcy trustee. [FN15] Exemption planning is generally permissible where there are no peculiar equities in favor of existing creditors. [FN16] But, transfers effected within one year of a Chapter 7 bankruptcy filing are subject to close scrutiny and constitute grounds for denial of discharge. [FN17] Often the distinction between acceptable exemption planning and abusive schemes to shield assets is a subtle one. [FN18] In a case involving the New Mexico UFTA, [FN19] a debtor liquidated a certificate of deposit and sold real estate to a relative and used the proceeds to purchase two annuity contracts that were exempt under state law. A creditor attempted to garnish the funds in the annuities. A trial court judgment in favor of the debtor was reversed and the case
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remanded for a fact hearing. [FN20] A dissenting opinion cited two bankruptcy cases from Kansas in support of its contention that, given the absence of liens or peculiar equities in favor of the creditor, the trial court should have been affirmed. [FN21] 2. Insolvency
The next section is devoted to the definition of insolvency, with alternatives based on a "balance sheet" test [FN22] or a presumption based on the debtor generally not paying its debts as they become due. [FN23] These terms are also found in the code. 3. Value
Concepts of value, reasonably equivalent value and present value are defined in the third section of the UFTA. [FN24] Some of these terms are also found in the code [FN25] or decisional law under the code. [FN26] For example, the U.S. Supreme Court has defined "reasonably equivalent value" for foreclosed property as "the price in fact received at a foreclosure sale, as long as all the requirements of the state's foreclosure law have been complied with." [FN27]
B. Fraudulent transfers
Two types of transfers are defined as fraudulent in the fourth section of the UFTA, [FN28] regardless of whether the creditor's claim arose before or after the transfer. One is a transfer made with actual intent to hinder, delay or defraud any creditor. [FN29] The other is a transfer made (a) without receipt of a reasonably equivalent value in exchange and (b) when the debtor (1) was engaged in a transaction for which the remaining assets of the debtor were unreasonably small or (2) intended to incur debts beyond its ability to pay as they came due. [FN30]
1. Intentionally fraudulent transfers and the "badges of fraud"
The intent required to establish actual fraud may be established by circumstantial evidence, or by inferences drawn from a course of conduct. [FN31] Knowledge that a transaction will operate to the detriment of creditors is sufficient for actual intent. [FN32] After the passage of the Statute of 13 Elizabeth in 1570, the English courts soon developed the doctrine of "badges of fraud": proof by a creditor of certain objective facts would raise a rebuttable presumption of actual fraudulent intent. [FN33] A nonexclusive list of factors to be considered in determining fraudulent intent under the actual fraud provision of the UFTA are summarized in the left column:
K.S.A. 1998 Supp. 33-204 (b)........
Kansas common law "badges of fraud"........
(1) The transfer was to an insider........
[(1) Relationship between grantor and grantee]........
(2) The debtor retained possession or control of the property after its transfer........
(3) The transfer was concealed........
(4) The debtor had been sued or threatened with suit before the transfer........
(5) The transfer was of substantially all of the debtor's assets........
(6) The debtor absconded........
(7) The debtor removed or concealed assets........
(8) The amount of the consideration received was not reasonably equivalent to the value of the asset transferred........
[(5) Inadequacy of consideration]........
(9) The debtor was insolvent or became insolvent........
[(3) Insolvency of the grantor]........
(10) Transfer occurred near in time to substantial debt being incurred........
(11) The debtor transferred the essential assets of a business to a lienor who transferred them to an insider........
[(2) Grantee's knowledge of litigation against the grantor]........
[(4) Grantee's belief that the asset was the grantor's last asset subject to a Kansas execution]........
[(6) Consummation of the transactions contrary to normal business procedures]........
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The factors listed in the right column are the "badges of fraud" identified in Kansas fraudulent conveyance cases [FN34] decided before the enactment of the UFTA. It can be seen that three of the UFTA factors overlap with three of the common law badges of fraud. Two of the other common law badges of fraud place emphasis on the state of mind of the grantee, which may be relevant to the good faith element of the UFTA defenses, discussed below. The sixth common law badge of fraud, consummation of the transaction contrary to normal business procedures, may overlap with several of the UFTA factors, and also bear on good faith or absence thereof. Decisions in bankruptcy cases of affiliated debtors illustrate trial court comparison of the badges of fraud in the Pennsylvania UFTA with the badges of fraud developed in case law in that jurisdiction, application of the badges of fraud to conclude, iner alia, that a foreclosure sale was a sham transaction, followed by the appellate court's rejection of this analysis. [FN35] An opinion authored by a federal appellate judge from Kansas has applied the badges of fraud in the Utah UFTA to a situation involving trade-in of a vehicle titled in the names of the debtor and his wife on a new vehicle titled only to the wife, and the bankruptcy trustee was permitted to recover. [FN36] Cases from other districts within the Tenth Circuit further illustrate application of the UFTA factors. [FN37] The Kansas Supreme Court has listed the common law badges of fraud in a number of decisions. [FN38] The badges of fraud have been applied in reaching the conclusion that trial court judgments in favor of debtors and transferees should be reversed. Federal courts sitting in Kansas have also discussed and applied these badges of fraud. [FN39] In practice, adequacy of consideration may outweigh all other badges combined. Badges of fraud are not limited to those...
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