(This article is the third in a series on the Uniform Voidable Transactions Act of 2014 (“UVTA”), as found at http://goo.gl/kS7MqZ and adopted by the Uniform Law Commission on July 16, 2014. Your author was an American Bar Association Advisor to the Drafting Committee to this Act.)
American law as we now know it is subject to many divisions. Sometimes these divisions do not affect their other half much, as in the division of civil law and criminal law -- rare is the circumstance where civil law will look to criminal law, or vice versa.
But sometimes these division do very much affect its better half, as with substantive law and procedural law. While substantive law sets out what the law is, such as that a person who breaches a contract may be liable to the other party, procedural law tells us how we must navigate that breach through the courts until we have a judgment.
The procedure to be followed in a particular case can have a dramatic effect on the result to be reached from the substantive law, and perhaps nowhere is this greater than in the area of who-must-prove-what, or what is known as the "burdens of proof".
Ancillary to the burdens of proof are presumptions -- if Neo can put on enough evidence of something, then Neo may be entitled to a presumption that the something is true. It then may pass to Neo's opponent, Morpheus, to persuade the Court that the something is not true. In such a case, we would say that Neo has the presumption in his favor, and that Morpheus has the burden of proof on the issue.
While the substantive law might be in Neo's favor, if for whatever technical evidentiary reason he cannot put on enough evidence to get the presumption to arise, then Neo may still lose. Likewise, for Morpheus in attempting to meeting his burden of proof -- the evidence might not be obtainable or admissible. Thus is procedural law said to affect the substantive rights of the parties in such cases.
Some laws represent an inherent mixture of substantive and procedural law. It is here that we can turn towards the fraudulent transfer laws, which present such an amalgamation.
At its core, the fraudulent transfer laws are a form of substantive law, in that they create substantive rights in favor of a creditor against the transferee of the fraudulent transfer, which is largely to allow the creditor to avoid what might otherwise be a valid transfer by the debtor to the transferee, or to allow the creditor to collect a money judgment from the transferee based on the value of the asset that was transferred.
But in a very significant sense, the fraudulent transfer laws are also a form of procedural law that is complimentary to the underlying judgment won by the creditor -- indeed, a fraudulent transfer action is a form of remedy (remedies being procedural law) that a creditor uses to enforce the judgment when an asset of the debtor has been transferred to a third party.
But of course the Uniform Voidable Transaction Act ("UVTA"), as did the Uniform Fraudulent Transfer Act of 1984 ("UFTA"), of which the former represents only slight amendments to the latter, gives its own remedies in Section 8. If one thinks of the UVTA as a whole as a creditor remedy, then one might think of the remedies given in Section 8 as essentially being "remedies within a remedy".
But before we fall off the edge of practical discussion and into the vast marsh of the esoteric, let us consider the practical problems that often arise in a fraudulent transfer case.
Fraudulent transfer actions are sometimes very difficult for the reason that the creditor is suing the transferee for something that the debtor did, but the debtor may either be uncooperative or untruthful in giving out information -- or, indeed, may have split the scene entirely by the time the fraudulent transfer action is filed, and cannot be found.
That debtors often tell outrageous lies, destroy key evidence, and disappear to parts unknown is simply a reality of debt collection. While often easy enough for the debtor, this leaves the creditor and transferee in the uncomfortable position of trying to discern critical things like the whether the debtor was solvent or not, or whether the debtor intended to cheat the creditor out of the latter's collection rights, without meaningful input from the debtor.
Thus, presumptions and burdens of proof often become very important in fraudulent transfer cases. The 1984 UFTA, while representing a dramatic improvement over the its predecessor, the Uniform Fraudulent Conveyance Act of 1914, was lacking in its guidance about which party, between the creditor and the transferee, had the burden of proof in some situation.
Critically, the courts have, to be blunt, occasionally screwed up the standard of proof to be used in fraudulent transfer cases. The standard of proof that should correctly apply is the "preponderance of evidence" standard that is typically used in most civil cases. But, after mischaracterizing a fraudulent transfer case to involve a "fraud" in the misrepresentational sense, when it doesn't (see my first article in this series), some courts have then compounded this first error by then quite wrongly requiring that creditors meet a heightened "clear and convincing evidence" standard in proving up their fraudulent transfer claims.
The 2014 UVTA sought to redress these shortcomings, and correct the errant courts, by specifying which party carries the burden of proof in what situations, and also making clear that the "preponderance of the evidence" standard applies throughout the Act.
One problematic area has always been in the area of whether the debtor was solvent or insolvent at the time of the transfer, as encapsulated in Section 2 of the UVTA. Section 2(b) reads that:
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.
This rule makes sense: As mentioned, the debtor and his accurate financial statements might not still be around when the time comes for the creditor and the transferee to duke it out in court. If the debtor wasn't paying his debts when he made the challenged transfer, then it is quite logical to conclude that the debtor's non-payment was because he was insolvent.
The transferee may challenge this presumption, and come forward with admissible evidence that the debtor was indeed solvent, even though he wasn't paying his debts, i.e., the debtor may have been a total deadbeat, but he wasn't an insolvent deadbeat. The creditor might then put on her own competing evidence that, no, the debtor really was broke. Who wins?
New language in Section 2(b) now resolves this issue:
The presumption [of insolvency] imposes on the party against which the presumption is directed the burden of proving that the non-existence of insolvency is more probably than its existence.
In English, the transferee now has the burden of proving that the debtor was more likely solvent than insolvent. If the transferee can meets this burden, the transferee wins; if not, the creditor wins. This is all summarized nicely in the official comments:
2. Subsection (b) establishes a rebuttable presumption of insolvency from the fact of general nonpayment of debts as they become due. Such general nonpayment is a ground for the filing of an involuntary petition under Bankruptcy Code § 303(h)(1) (1978). * * *
Subsection (b) defines the effect of the presumption to be (in paraphrase) that the burden of persuasion on the issue of insolvency shifts to the defendant. * * *
The presumption is established in recognition of the difficulties typically imposed on a creditor in proving insolvency in the bankruptcy sense, as provided in subsection (a). * * * Not only is the relevant information in the possession of a debtor that is apt to be noncooperative, but the debtor’s records are apt to be incomplete and inaccurate. As a practical matter, insolvency is most cogently evidenced by a general cessation of payment of debts, as has long been recognized by the laws of other countries and is now reflected in the Bankruptcy Code. * * *
The most important parts of the UVTA are found in Sections 4 and 5, known as the "actual fraudulent transfer" and "constructive fraudulent transfer" provisions, respectively. It is Sections 4 and 5 that tell us what a creditor must prove to establish a voidable transfer.
New Sections 4(c) and 5(c) now tell us that the creditor both has the burden of proving that the elements of the fraudulent transfer claim, and that the creditor must carry that burden only by a mere "preponderance of the evidence", i.e., the normal standard of proof in civil cases, which is that it is more likely than not that the creditor's version of the facts is true -- think of it as the "at least a 51% chance that the facts are true" standard.
Where all this gets tricky is when the transferee attempts to defend against the fraudulent transfer claim, or at least get a partial offset for what the transferee paid to the debtor, as set out in Section 8.
In general, if the transferee asserts that she was in good faith when she made the transfer, and she paid "reasonably equivalent value" to the debtor for what she as the transferee received, then the transferee may be able to establish a defense. However, the new additions of Sections 8(g) and 8(h), make clear that the transferee carries the burden of proof as to her defense, which she must meet by the preponderance of the evidence standard.
But Section 8(b)(1) also allows a creditor to obtain a money judgment against a debtor instead of avoiding the fraudulent transfer. In that event, the creditor has the burden of proving by a preponderance of the evidence that he is entitled to such a judgment.
The bottom line is that the new UVTA now gives better guidance to courts and litigants about how actions arising under the Act are to be handled, and that is a very good thing.
CITE AS
The Uniform Voidable Transactions Act of 2014 (“UVTA”), as found at http://goo.gl/kS7MqZ
This article at http://onforb.es/1xkOugz and http://goo.gl/BlyLhe
