What is "Insolvency"?
UVTA § 2. INSOLVENCY.
Prefatory Note (UFTA 1984): The definition of insolvency under the new Act is adapted from the definition of the term in the Bankruptcy Code. Insolvency is presumed from proof of a failure generally to pay debts as they become due.
Prefatory Note (UVTA 2014): Deletion of the Special Definition of “Insolvency” for Partnerships. Section 2(c) of the Act as originally written set forth a special definition of “insolvency” applicable to partnerships. The amendments delete original § 2(c), with the result that the general definition of “insolvency” in § 2(a) now applies to partnerships. One reason for this change is that original § 2(c) gave a partnership full credit for the net worth of each of its general partners. That makes sense only if each general partner is liable for all debts of the partnership, but such is not necessarily the case under modern partnership statutes. A more fundamental reason is that the general definition of “insolvency” in § 2(a) does not credit a non-partnership debtor with any part of the net worth of its guarantors. To the extent that a general partner is liable for the debts of the partnership, that liability is analogous to that of a guarantor. There is no good reason to define “insolvency” differently for a partnership debtor than for a non-partnership debtor whose debts are guaranteed by contract.
Reporter's Comment: 1. Subsection (a) is derived from the definition of “insolvent” in Bankruptcy Code § 101(29)(A) (1984). The definition in subsection (a) contemplates a fair valuation of the debts as well as the assets of the debtor. The 2014 amendments reword subsection (a) in order to eliminate the elegant variation in the original text between “the sum of” debts and “all of” assets, and to make clearer that “fair valuation” applies to debts as well as to assets. No change in meaning is intended.
Financial accounting standards may permit or require fair value measurement of an asset or a debt. The fair value of an asset or a debt for financial accounting purposes may be based on standards that are not appropriate for use in subsection (a). For example, Fin. Accounting Standards Bd., Accounting Standards Codification ¶¶ 820-10-35-17 to -18 (2014) (formerly Statement of Financial Accounting Standards No. 157: Fair Value Measurement ¶ 15 (2006)) requires for financial accounting purposes that the “fair value” of a liability reflect nonperformance risk (i.e., the risk that the debtor will not pay the liability as and when due). By contrast, proper application of subsection (a) excludes any adjustment to the face amount of a liability on account of nonperformance risk. Such an adjustment would be contrary to the purpose of subsection (a), which is to assess the risk that the debtor will not be able to satisfy its liabilities. Only in unusual circumstances would the “fair valuation” for the purpose of subsection (a) of a liquidated debt be other than its face amount. Examples of such circumstances include discounting the face amount of a contingent debt to reflect the probability that the contingency will not occur, and discounting the face amount of a non-interest-bearing debt that is due in the future in order to reduce the debt to its present value.
As under the definition of the term “insolvent” in § 2 of the Uniform Fraudulent Conveyance Act, exempt property is excluded from the computation of the value of the assets. See § 1(2). For similar reasons interests in valid spendthrift trusts and interests in tenancies by the entireties that are not subject to process by a creditor of only one tenant are not included. See Comment 2 to § 1. Because a valid lien also precludes an unsecured creditor from collecting the creditor’s claim from the encumbered interest in a debtor’s property, both the encumbered interest and the debt secured thereby are excluded from the computation of insolvency under this Act. See § 1(2) and subsection (d) of this section.
JayNote: The definition of "insolvent" plays a major role in Section 5, which deals with the so-called "Constructive Fraudulent Transfer". This is a balance-sheet test, i.e., the debtor's assets are summed, and the debtor is either solvent or insolvent. Note that "assets" are defined in Section 1(2), and thus exclude exempt assets, TBE assets, and assets subject to a bona fide security lien, i.e., these three types of assets are expressly not to be included in favor of the debtor in a valuation.
(b) 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. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.
Reporter's Comment: 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). See also U.C.C. § 1 201(23) (1962) (defining a person to be “insolvent” who “has ceased to pay his debts in the ordinary course of business”). The 2014 amendments to this Act clarify that general nonpayment of debts does not count nonpayment as a result of a bona fide dispute. That was the intended meaning of the language before 2014, as stated in the official comments, and the cited provisions of the Bankruptcy Code and the Uniform Commercial Code have been similarly clarified. See Bankruptcy Code § 303(h)(1) (2014); U.C.C. § 1-203(b)(23) (2014) (defining “insolvent” to include “having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute”).
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. That conforms to the default definition of the effect of a presumption in civil cases set forth in Uniform Rules of Evidence (1974 Act), Rule 301(a) (later Rule 302(a) (1999 Act as amended 2005)). It also conforms to the Final Draft of Federal Rule 301 as submitted to the United States Supreme Court by the Advisory Committee on Federal Rules of Evidence in 1973. “The so-called ‘bursting bubble’ theory, under which a presumption vanishes upon the introduction of evidence which would support a finding of the nonexistence of the presumed fact, even though not believed, is rejected as according presumptions too ‘slight and evanescent’ an effect.” Advisory Committee’s Note to Rule 301, 56 F.R.D. 183, 208 (1973). See also 1 J. Weinstein & M. Berger, Evidence ¶ 301 (1982). It should be noted that the Federal Rule of Evidence as finally enacted gave by default a different effect to presumptions in civil cases, in effect adopting the “bursting bubble” definition. See Fed. R. Evid. 301 (1975) (carried forward in the 2011 revision). The statement of the effect of the presumption in subsection (b) was added by the 2014 amendments to this Act, but subsection (b) was intended to have the same meaning before 2014, as stated in the official comments.
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). See generally Levit, The Archaic Concept of Balance-Sheet Insolvency, 47 Am.Bankr.L.J. 215 (1973). 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. See Honsberger, Failure to Pay One’s Debts Generally as They Become Due: The Experience of France and Canada, 54 Am.Bankr.L.J. 153 (1980); J. MacLachlan, Bankruptcy 13, 63-64, 436 (1956). In determining whether a debtor is paying its debts generally as they become due, the court should look at more than the amount and due dates of the indebtedness. The court should also take into account such factors as the number of the debtor’s debts, the proportion of those debts not being paid, the duration of the nonpayment, and the existence of bona fide disputes or other special circumstances alleged to constitute an explanation for the stoppage of payments. The court’s determination may be affected by a consideration of the debtor’s payment practices prior to the period of alleged nonpayment and the payment practices of the trade or industry in which the debtor is engaged. The case law that has developed under Bankruptcy Code § 303(h)(1) (1984) has not required a showing that a debtor has failed or refused to pay a majority in number and amount of the debtor’s debts in order to prove general nonpayment of debts as they become due. See, e.g., Hill v. Cargill, Inc. (In re Hill), 8 B.R. 779, 3 C.B.C.2d 920 (Bankr. D.Minn. 1981) (nonpayment of three largest debts held to constitute general nonpayment, although small debts were being paid); In re All Media Properties, Inc., 5 B.R. 126, 6 B.C.D. 586, 2 C.B.C.2d 449 (Bankr. S.D.Tex. 1980) (missing significant number of payments or regularly missing payments significant in amount said to constitute general nonpayment; missing payments on more than 50% of aggregate of claims said not to be required to show general nonpayment; nonpayment for more than 30 days after billing held to establish nonpayment of a debt when it is due); In re Kreidler Import Corp., 4 B.R. 256, 6 B.C.D. 608, 2 C.B.C.2d 159 (Bankr. D.Md. 1980) (nonpayment of one debt constituting 97% of debtor’s total indebtedness held to constitute general nonpayment).
JayNote: A rebuttable presumption arises that the debtor is insolvent if the debtor is not paying his debts.
(c) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this [Act].
Reporter's Comment: 3. Subsection (c) follows the approach of the definition of “insolvency” in Bankruptcy Code § 101(29) (1984) by excluding from the computation of the value of the debtor’s assets any value that can be realized only by avoiding a transfer of an interest formerly held by the debtor or by discovery or pursuit of property that has been concealed or removed with intent to hinder, delay, or defraud creditors.
JayNote: When calculating solvency, the court will not take into account assets that the debtor has removed, concealed, or fraudulently transfer.
Reporter's Comment: 4. Subsection (d) has no analogue in Bankruptcy Code § 101(29) (1984). It makes clear that a person is not rendered insolvent under this section by counting as a debt an obligation secured by property of the debtor that is not counted as an asset. See also Comment 2 to § 1 and Comment 1 to § 2.
JayNote: An asset subject to a security lien is not an "asset", and the corresponding indebtedness is not a liability.
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Step 1: Has A Voidable Transaction Occurred?
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1 - Definitions
(1) Affiliate -- (2) Asset -- (3) Claim -- (4) Creditor -- (5) Debt -- (6) Debtor -- (7) Electronic -- (8) Insider -- (9) Lien -- (10) Organization -- (11) Person -- (12) Property -- (13) Record -- (14) Relative -- (15) Sign -- (16) Transfer -- (17) Valid Lien
2 - Insolvency
3 - Value
4 - Transfer Or Obligation Voidable As To Present Or Future Creditor
5 - Transfer or Obligation Voidable As To Present Creditor
8 - Defenses, Liability, And Protection Of Transferee Or Obligee
10 - Governing Law
15 - Short Title
Fraudulent Transfers In Bankruptcy
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