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A “fraudulent,” or more accurately “voidable” transfer, is a transfer by a party (the “debtor”) of some interest in property with the goal or effect of preventing a creditor or creditors from reaching the transferred interest to satisfy their claim or claims.
What Law Governs “Fraudulent” or “Voidable” Conveyances/Transfers?
Fraudulent conveyances are governed primarily by the Uniform Voidable Transactions Act (UVTA), which replaced the Uniform Fraudulent Transfer Act (UFTA) in California as of January 1, 2016. The UVTA applies to transfers made or obligations incurred after January 1, 2016. The UFTA will continue to apply to transfers made or obligations incurred prior to January 1, 2016. One of the most noticeable changes made in the UVTA is the removal of the word “fraudulent” from the title and body of the act. This change emphasizes that a transfer may be, and often is, voidable even in the absence of any sort of improper intent by the debtor or the transferees.
When is a Transfer Voidable?
There are two types of “fraudulent” or “voidable” transfers, one that requires intent by the debtor to defraud a creditor, which is referred to as “actual fraud,” and the other which occurs when a transfer is made by the debtor for inadequate consideration, which is referred to as “constructive fraud.” While the word “fraud” appears in both, a “fraudulent” or “voidable” transfer may in both instances result absent traditional fraud.
“Actual Fraud.” A transfer is voidable and said to constitute “actual fraud” if the debtor made the transfer (or incurred the obligation) “with actual intent to hinder, delay, or defraud any creditor of the debtor.” Because direct evidence of a debtor’s actual intent is rarely available since a debtor will rarely, if ever, admit to acting for the purpose of defrauding a creditor, courts have developed a number of non-exclusive factors, referred to as the “badges of fraud,” that they consider in deciding whether “actual intent” existed. Eleven of these so-called “badges of fraud” are enumerated in the UVTA and include: whether the transfer or obligation was to an insider, whether the transfer or obligation was disclosed or concealed, whether before the transfer was made or obligation was incurred the debtor has been sued or threatened with a lawsuit, and whether the debtor retained possession or control of the property. The enumerated list is however not exclusive and does not set in stone the factors the court can or must consider when ascertaining the debtor’s intent. Further, no factor is necessarily determinative, and no minimum or maximum number of factors dictates a particular outcome. Instead, a court will consider all relevant circumstances around the transfer.
“Constructive Fraud.” A transfer is also voidable, irrespective of the debtor’s intent, if the debtor made the transfer (or incurred the obligation) without receiving “reasonably equivalent value” and the debtor: (i) was engaged or was about to engage in a transaction “for which the remaining assets of the debtor were unreasonably small in relation” to the transaction; (ii) 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;” or (iii) the debtor “was insolvent” at the time or “became insolvent” as a result of the transfer or obligation. 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.
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