When we speak of someone “owning” money or property, we usually presume that ownership is an all-or-nothing proposition. A wallet or a toothbrush, for example, is either yours or it isn’t. But some kinds of property – homes and cars, for example – may be the basis of a creditor-debtor relationship that legally changes an owner’s rights and control over his or her property. A home mortgage, for example, plainly legally limits what an owner may and may not do with a mortgaged property.
A “fraudulent conveyance” is the legal term for a debtor’s attempt to avoid paying an unsecured debt by transferring property or assets to another person or company when the property or assets are at risk to a creditor. Outside of the law, most of us would simply call this “hiding the money.” Maybe the debtor foresees insolvency and tries to conceal property or assets that a creditor might use to satisfy the debt. Maybe the debtor never intends to pay the debt and transfers property or assets in an effort to become judgment-proof.
To be clear at the start, the law considers a “fraudulent conveyance” or a “fraudulent transfer” to be a civil rather than a criminal matter. Fraudulent conveyance often emerges as an allegation in debtor/creditor matters and in bankruptcy proceedings. Any legal action typically is brought by the creditors or by bankruptcy trustees. In the state of Georgia, when a fraudulent conveyance happens, banks and other lenders may need the legal insights and services of an experienced Atlanta banking attorney.
HOW DID THE UFTA DEFINE FRAUDULENT TRANSFERS?
Under the Uniform Fraudulent Transfer Act (UFTA), a fraudulent transfer may be either “intentional” or “constructive.” An intentional fraudulent transfer is a transfer of property made by a debtor to delay, defraud, or hinder creditors. While intent must be determined on a case-by-case basis under the UFTA, a transfer of all of the debtor’s assets to a newly formed company or to a family member to avoid the reach of creditors or litigation is generally considered evidence of intent.
Federal bankruptcy laws give a trustee the right under state laws to challenge allegedly fraudulent transfers. Many state’s laws are based on the Uniform Fraudulent Transfer Act, which provides that an allegedly fraudulent conveyance may be challenged if there is evidence that it is either actually fraudulent or “constructively” fraudulent. In establishing constructive fraud, the debtor’s intent to defraud or harm creditors is immaterial. Instead, the issue is whether the debtor obtained more-or-less equivalent value in exchange for the transfer.
In 2014, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Voidable Transactions Act (UVTA), which amends and is intended to replace the Uniform Fraudulent Transfer Act (UFTA), which had been the law in 43 states. Several states – including the state of Georgia – have now adopted the UVTA, and several others are considering it. While the UVTA clarifies the law to keep debtors from intentionally dodging legitimate debts, it also provides a creditor with a legal way to reach properties and assets a debtor has transferred to another person in order to keep those properties and assets from being used to pay off a debt.
HOW DOES THE UVTA DIFFER FROM THE UFTA?
The UVTA’s amendments to the UFTA are designed to eliminate the divergent interpretations of the Uniform Fraudulent Transfer Act that have led to different outcomes in different courts for similar claims. The changes also bring the Act into compliance with the Uniform Commercial Code (UCC) and with the U.S. Bankruptcy Code. The UVTA offers some welcome clarity to what has been for far too long an all-too-often-misunderstood area of the law.
Most of the UVTA resembles the UFCA. What are the differences? The most important revision included in the UVTA is the absence of the word “fraudulent.” In the UFTA, “fraudulent” and “voidable” are used inconsistently, so the UVTA replaces “fraudulent” with “voidable.” Another change discourages the use of terms such as “constructive fraud” and “actual fraud,” because “constructive fraud” is confusing, and what is deemed “actual fraud” under the UVTA does not actually require proof of fraudulent intent. However, these revisions in terminology should not have any substantial effect on the statute’s application.
As a result of the 2007 ruling in the case Bell Atlantic Corp. v. Twombly, the U.S. Supreme Court now requires the plaintiffs who file fraudulent conveyance claims to include enough facts in their complaint to make it plausible – and not merely possible or conceivable – that they will be able to produce the facts necessary to prove their claims. An experienced Atlanta banking attorney can help banks and other lenders determine what evidence is sufficient for filing a fraudulent conveyance claim in any specific case.
WHO HAS LEGAL STANDING TO FILE A FRAUDULENT TRANSFER ACTION?
Standing to bring fraudulent transfer actions varies, depending on the circumstances. Under the Bankruptcy Code, a trustee always has the right to initiate a legal action alleging a fraudulent transfer. Under the UFVA, both present and future creditors may also bring a claim asserting a fraudulent conveyance. A future creditor is defined as a creditor whose claim arises after the transfer in question, but which had a foreseeable connection to the debtor at the time of the transfer.
The Uniform Voidable Transactions Act establishes the right of a creditor to sue a debtor for fraudulent conveyance and also to take legal action against any person or company who has received the fraudulently transferred assets or property from the debtor. A creditor’s claim prevails when there is a recovery of the property or assets from the company or person to whom the property or assets has been fraudulently transferred.
The UVTA makes several key improvements to Uniform Fraudulent Transfer Act. The clarifications regarding burdens of proof and legal standing to bring a claim, along with the revision of “fraudulent” to “voidable,” will reduce the confusion among judges, attorneys, and the principals in fraudulent conveyance cases. The other minor changes to the UFTA made by the Uniform Voidable Transactions Act modernize the act and bring it in into compliance with other uniform laws and the U.S. Bankruptcy Code. Overall, for the banks and the other lenders who are victimized by fraudulent conveyance, the changes are helpful and positive.