A Primer on the Uniform Fraudulent Transfer Act
| Publication year | 2014 |
| Author | By Henry S. David and Dana J. Meepos |
By Henry S. David and Dana J. Meepos
Henry S. David is the proprietor of The David Firm®, which he founded after 33 years in Big Law. He is a commercial litigator, with a focus on creditors' rights.
Dana Meepos is an associate at The David Firm®. Her practice focuses on contract disputes, post-judgment remedies and commercial litigation. She received her undergraduate degree in English and Medieval Studies from Cornell University and her law degree from UCLA School of Law, where she served on the Women's Law Journal.
A client comes to you with a substantial claim, with clear liability, maybe even already reduced to judgment. But when you investigate the debtor and his ability to pay, you find out that although he once owned substantial assets, he appears no longer to have them—or even the proceeds from their sale. What are you to do? There are a number of legal theories to pursue third parties to collect on a debt or a judgment, such as alter ego or piercing the corporate veil,1 successor liability,2 aiding and abetting a tort,3 and conspiring to commit a tort.4 In this Article, we set forth the basics of claims under California's Uniform Fraudulent Transfer Act (the "CUFTA").5
Key to understanding the CUFTA is to understand the underlying policy and purpose of the CUFTA: The CUFTA is intended to allow a creditor to reach assets, or former assets, of her debtor to satisfy her claim against the debtor. Hence, the CUFTA focuses on the acts and the intent of the debtor in transferring his assets (the "transferor"),6 not, for the most part, the acts and the intent the person to whom the debtor transferred his assets (the "transferee"). For example, in determining whether a transfer was made with the intent to defraud, hinder, or delay creditors, one examines the intent of the transferor, not the intent of the transferee.7
There are two major types of fraudulent transfers:8 (1) the constructive fraudulent transfer,9 and (2) the actual fraudulent transfer.10
A constructive fraudulent transfer is a transfer made by an insolvent11 debtor for less than reasonably equivalent value.12 The debtor need not have any wrongful intent. He may simply be desperate for cash, and he therefore sells a $1 million piece of real estate for $600,000. Even if the transferee is innocent, the creditor may reach the $400,000 windfall.13 (If the transferee is not innocent, it may find itself with neither the $600,000 nor the real estate.)
An actual fraudulent transfer is a transfer made by a debtor with the intent to hinder, delay, or defraud his creditors.14 An intent to defraud does not necessarily require a desire to cause harm.15 Further, the debtor need not be insolvent, and he need not have transferred the asset for less than its value. If the debtor converts $1 million of real estate—an easily identifiable, difficult-to-hide assets—by selling it for $1 million with the intent to hinder, delay, or defraud his creditors, and sends the $1 million overseas, that is an actual fraudulent transfer (although there may be no effective remedy because the transferee (the grantee of the real estate) will have a defense if it is innocent). Similarly, if the debtor takes $1 million sitting in a bank account in Los Angeles and moves it abroad, with the requisite intent to hinder, delay, or defraud his creditors, that too is an actual fraudulent transfer.16 Again, assuming the banks are innocent, the creditor may have no effective remedy, although one, there may be co-conspirators whom the creditor can sue, and two, even unrecoverable transfers can be used to be as evidence of the intent to hinder, delay, or defraud with respect to transfers of other assets that can be reached.
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Another common example of actual fraudulent transfer includes putting assets into a wholly owned entity or a trust.17 Conversion of non-exempt assets into exempt assets may or may not constitute a fraudulent transfer.18
One of the key issues in attacking transfers as an actual fraudulent transfer, of course, is proving the debtor's intent. The California Legislature originally omitted a provision that the Uniform Law Commission included in the Uniform Fraudulent Transfer Act, which provided a non-exclusive list of so-called "badges of fraud," but in 2004, the California Legislature added the list back in.19
In considering the issues discussed below, or seeking to avoid a fraudulent transfer, keep the distinction between these types of fraudulent transfers in mind.
Only a creditor and those who stand in the shoes of creditors (such as bankruptcy trustees and assignees for the benefit of creditors) may bring a claim to avoid a fraudulent transfer.20 A creditor is anyone who has a "claim," which is defined as "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."21 The key is that the creditor need not—and in many instances, must not—wait until she had a judgment before she takes steps to avoid fraudulent transfers. Indeed, the statute of limitations to bring an action under the CUFTA is measured from when the transfer is made, not when the creditor obtains her claim or obtains a judgment.22
Before a creditor can determine whether she can avoid (undo) her debtor's transfer of an asset, the creditor must determine whether the subject asset is an "asset" within the CUFTA. The CUFTA's definition is more limited than one might think.
"Asset" means property of a debtor, but the term does not include the following:
- Property to the extent it is encumbered by a valid lien.
- Property to the extent it is generally exempt under nonbankruptcy law.
- 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.23
Hence, if the property has no equity, no "asset" was transferred, and the CUFTA does not apply to that transfer.24 Why would a creditor care about the transfer of asset with no value anyway? Because the value is generally measured as of the transfer,25 and the asset may appreciate in the future. Have we already forgotten the lessons of the Great Recession? How many people had substantial equity in their real estate in 2007, lost it all in 2008 through 2010, and got it all (or mostly) back by now?26 Any debtor who was thinking ahead during the bottom of the market would have transferred the asset into friendly hands before the market bounced back—and his creditors could not attack the transfer under the CUFTA.27
Likewise, one would think that a creditor would have no interest in the transfer of an exempt asset, such as a residence that had no equity over the existing mortgages and the homestead exemption. Yet, it is a common strategy to record an abstract of judgment now, in the hope that ten years from now (or longer), the homestead will have appreciated enough to pay the creditor.28 That strategy may still work—if the creditor records before the transfer, and renews the abstract, with notice to the transferee.29 But if the transfer of an underwater residence to, say, a non-debtor spouse (as her separate property) occurs before the abstract is recorded, the creditor cannot attack that transfer, no matter how much or how soon the market bounces back.
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As indicated above, under the CUFTA, a creditor may "avoid" the transfer—that is, set aside the transfer, such that the asset is again property of the debtor on which the creditor can levy or against which the creditor may otherwise enforce her judgment.30 The in rem remedy of avoidance, however, often will be unavailable as a practical matter, because the asset is nowhere to be found or is in the hands of an a party against whom setting aside the transfer is not an available remedy (an issue discussed below). The creditor therefore may recover monetary damages against responsible parties, other than the debtor himself.31 The creditor, however, may not recover monetary damages against the debtor.32 Why not? Because the creditor already has the underlying claim—and often a judgment on the underlying...
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