Adkisson's Voidable Transactions - previously known as - Fraudulent Transfers

Caution state

law variances!

Transferee's Defense of Good Faith and Set-Off

UVTA § 8. DEFENSES, LIABILITY, AND PROTECTION OF TRANSFEREE OR OBLIGEE.

Reporter's Comment: 8. The provisions of § 8 are integral elements of the rights created by this Act. Accordingly, they should apply if this Act is invoked in a bankruptcy proceeding pursuant to Bankruptcy Code § 544(b) (2014). That follows from the fundamental principle that property rights in bankruptcy should be the same as outside bankruptcy, unless a federal interest compels a different result. See Butner v. United States, 440 U.S. 48, 55 (1979). Section 8(b) limits damages under this Act to the amount of the plaintiff creditor’s claim, and that limitation is overridden in bankruptcy by the rule of Moore v. Bay, 284 U.S. 4 (1931), which Congress unmistakably maintained when it enacted the Bankruptcy Code. In the absence of a clear override by the Bankruptcy Code or other federal law, however, other aspects of § 8 should apply if this Act is invoked in bankruptcy. See, e.g., Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1110-16 (9th Cir. 2010) (holding that § 8(d) applies to a claim for relief brought under this Act in a bankruptcy proceeding pursuant to Bankruptcy Code § 544(b)).

 

Prefatory Note (UFTA 1984): Section 8 prescribes the measure of liability of a transferee or obligee under the new Act and enumerates defenses. Defenses against avoidance of a preferential transfer to an insider under § 5(b) include an adaptation of defenses available under § 547(c)(2) and (4) of the Bankruptcy Code when such a transfer is sought to be avoided as a preference by the trustee in bankruptcy. In addition, a preferential transfer may be justified when shown to be made pursuant to a good-faith effort to stave off forced liquidation and rehabilitate the debtor. Section 8 also precludes avoidance, as a constructively fraudulent transfer, of the termination of a lease on default or the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code.

 

Prefatory Note (UFTA 1984): The new Act omits any provision directed particularly at transfers or obligations of insolvent partnership debtors. Under § 8 of the Uniform Fraudulent Conveyance Act any transfer made or obligation incurred by an insolvent partnership to a partner is fraudulent without regard to intent or adequacy of consideration. So categorical a condemnation of a partnership transaction with a partner may unfairly prejudice the interests of a partner’s separate creditors. The new Act also omits as redundant a provision in the Uniform Fraudulent Conveyance Act that makes fraudulent a transfer made or obligation incurred by an insolvent partnership for less than a fair consideration to the partnership.

 

(a) A transfer or obligation is not voidable under Section 4(a)(1) against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee.

Reporter's Comment: 1. Subsection (a) sets forth a complete defense to an action for avoidance under § 4(a)(1). The subsection is an adaptation of the exception stated in § 9 of the Uniform Fraudulent Conveyance Act. Pursuant to subsection (g), the person invoking this defense carries the burden of establishing good faith and the reasonable equivalence of the consideration exchanged.

 

Prefatory Note (UVTA 2014): Defenses. The amendments refine in relatively minor respects several provisions relating to defenses available to a transferee or obligee, as follows: (1) As originally written, § 8(a) created a complete defense to an action under § 4(a)(1) (which renders voidable a transfer made or obligation incurred with actual intent to hinder, delay, or defraud any creditor of the debtor) if the transferee or obligee takes in good faith and for a reasonably equivalent value. The amendments add to § 8(a) the further requirement that the reasonably equivalent value must be given the debtor.

 

JayNote: This is generally known as the "Transferee's Good Faith Defense", and it applies only to the Intent Test claims under §4(a)(1). There are two elements:

 

(1) The Transferee was in good faith, i.e., did not knowingly assist the Debtor in an attempt to defeat the rights of the Creditor; and

 

(2) The Transferee gave the Debtor "reasonably equivalent value" for the asset.

 

The last clause "against any subsequent transferee or obligee" means that, if there are successor Transferees, the first one who can assert the defense will cut off liability for all who Transferees who follow, even if they are not in good faith or did not give reasonably equivalent value.

 

{Section 8(b) and (c) are considered in reference to Creditor's Remedies}

(d) Notwithstanding voidability of a transfer or an obligation under this [Act], a good-faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to:

(1) a lien on or a right to retain an interest in the asset transferred;

(2) enforcement of an obligation incurred; or

(3) a reduction in the amount of the liability on the judgment.

Reporter's Comment: 4. Subsection (d) is an adaptation of Bankruptcy Code § 548(c) (1984). An insider that receives property or an obligation from an insolvent debtor as security for or in satisfaction of an antecedent debt of the transferor or obligor is not a good-faith transferee or obligee if the insider has reasonable cause to believe that the debtor was insolvent at the time the transfer was made or the obligation was incurred. If a foreclosure sale is voidable and does not qualify for the benefit of § 3(b) or § 8(e)(2) because it was not conducted in accordance with the requirements of applicable law, the buyer, if in good faith, will still be entitled to the benefit of subsection (d) to the extent of the price paid by the buyer.

 

JayNote: Even if a good faith Transferee has not given reasonably equivalent value to the Debtor, the Transferee may:

 

(1) Maintain a lien on the asset;

 

(2) Enforce any obligation that the Transferee incurred; or

 

(3) Reduce the amount of the money judgment to be paid to the Creditor, if the Creditor has elected that option.

 

Section 8(d) only applies to a Transferee in good faith, i.e., a Transferee not in good faith is not entitled to credits, etc. (If a Transferee not in good faith has any remedy, it is against the Debtor under other law).

 

{Section 8(e) is considered in the sections to which it applies, being §§ 4(a)(2) and 5}

 

{Section 8(f) is considered in Section 5(b) which is the only section to which it applies.}

 

(g) The following rules determine the burden of proving matters referred to in this section:

(1) A party that seeks to invoke subsection (a), (d), (e), or (f) has the burden of proving the applicability of that subsection.

(2) Except as otherwise provided in paragraphs (3) and (4), the creditor has the burden of proving each applicable element of subsection (b) or (c).

(3) The transferee has the burden of proving the applicability to the transferee of subsection (b)(1)(ii)(A) or (B).

(4) A party that seeks adjustment under subsection (c) has the burden of proving the adjustment.

Reporter's Comment: 7. Subsections (g) and (h) were added in 2014. Sections 2(b), 4(c), 5(c), 8(g), and 8(h) together provide uniform rules on burdens and standards of proof relating to the operation of this Act. The principles stated in Comment 11 to § 4 apply to subsections (g) and (h).

 

The burden of proof on the Transferee's good faith defense, or an offset, is on the Transferee.

(h) The standard of proof required to establish matters referred to in this section is preponderance of the evidence.

 

Reporter's Comment: 7. Subsections (g) and (h) were added in 2014. Sections 2(b), 4(c), 5(c), 8(g), and 8(h) together provide uniform rules on burdens and standards of proof relating to the operation of this Act. The principles stated in Comment 11 to § 4 apply to subsections (g) and (h).

 

Prefatory Note (UVTA 2014): Evidentiary Matters. New §§ 4(c), 5(c), 8(g), and 8(h) add uniform rules allocating the burden of proof and defining the standard of proof with respect to claims for relief and defenses under the Act. Language in the former comments to § 2 relating to the presumption of insolvency created by § 2(b) has been moved to the text of that provision, the better to assure its uniform application.

 

Bankruptcy Code § 548 - FRAUDULENT TRANSFERS AND OBLIGATIONS

(a)

(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which—

(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

(c) Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.

(d)

(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution—

(A) is made by a natural person; and

(B) consists of—

(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

(ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means—

(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.

 

Bankruptcy Code § 550 - LIABILITY OF TRANSFEREE OF AVOIDED TRANSFER

(b) The trustee may not recover under section [1] (a)(2) of this section from—

(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or

(2) any immediate or mediate good faith transferee of such transferee.

(e)

(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of—

(A) the cost, to such transferee, of any improvement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property; and

(B) any increase in the value of such property as a result of such improvement, of the property transferred.

(2) In this subsection, “improvement” includes—

(A) physical additions or changes to the property transferred;

(B) repairs to such property;

(C) payment of any tax on such property;

(D) payment of any debt secured by a lien on such property that is superior or equal to the rights of the trustee; and

(E) preservation of such property.

 

UVTA - Logical Organization (Designed For Litigators)

Click here to go to the Voidable Transactions Decision Chart

Overview of UVTA -- The process and result

 

UVTA - Numerical Organization (Confusing & Difficult To Use)

The Uniform Law Commission's complete copy of the UVTA with comments in PDF format is available here. The webpage for the UVTA, showing states that have enacted and much other information regarding the Act is found here.

 

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

(a)(1) {Intent Test} -- (a)(2)(i) {Capitalization Test} -- (a)(2)(ii) Equity-Sense Insolvency Test

(b) {Badges of Fraud}

5 - Transfer or Obligation Voidable As To Present Creditor

(a) {Insolvency Test} -- (b) {Insider Preference Test}

6 - When Transfer Is Made Or Obligation Is Incurred

7 - Remedies Of Creditor

8 - Defenses, Liability, And Protection Of Transferee Or Obligee

{Main Provisions} -- (b) and (c) {Money Judgment}

9 - Extinguishment Of Claim For Relief

10 - Governing Law

11 - Application To Series Organization

12 - Supplementary Provisions

13 - Uniformity Of Application And Construction

14 - Relation To Electronic Signatures In Global And National Commerce

15 - Short Title

16 - Repeals; Conforming Amendment

 

Fraudulent Transfers In Bankruptcy

 

 

Other Websites By Jay Adkisson

© 2017 Jay D. Adkisson. All rights reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction.  This site http://www.voidabletransactions.com Contact: jay [at] jayadkisson.com or by phone to 949-200-7773 or by fax to 877-698-0678.