SB 161: Contracts with insolvent debtors

California's recently enacted Uniform Voidable Transactions Act (UVTA) (Senate Bill 161) makes it easier for creditors to recover assets that are transferred to third parties when a debtor is insolvent, even when there is no improper intent by the debtor or the transferee. The UVTA supersedes and makes some important changes to the Uniform Fraudulent Transfer Act (UFTA), codified at California Civil Code Sections 3439 et seq. The UVTA applies to transfers made or obligations incurred after Jan. 1, 2016, while the UFTA will continue to apply to prior transactions.

Key changes from the UFTA include refining the focus of transactions subject to voidability, easing the applicable burden of proof, expanding potential pre-judgment remedies for a UVTA claimant, and adopting new rules governing the choice of law for a UVTA claim.

Refined Focus of the UVTA

The name change itself - from Uniform Fraudulent Transfer Act to Uniform Voidable Transactions Act - emphasizes that the law is focused on avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value, regardless of actual fraud or improper intent. This is intended to reduce confusion by some courts who mistakenly required a higher standard of pleading or proof to a UFTA claim along the lines applicable to a "garden variety" fraud claim.

Burden of Proof Eased for UVTA Claims

Challenging a transfer will be easier for a creditor under the UVTA, who now will only need to establish their claim by a "preponderance" of the evidence, rather than the higher "clear and convincing" evidence standard applied by some courts under the UFTA. Moreover, a party defending a claim now clearly has the burden of: (i) rebutting the presumption that the debtor was insolvent at the time of the transfer based on failure to pay debts as they came due and (ii) asserting that property was transferred for a reasonably equivalent value and in good faith. Although these procedural changes are somewhat technical, they should tilt the scales in favor of the creditor pursuing a claim under the UVTA.

Expanded Remedies for UVTA Claimants

A creditor asserting a UVTA claim now has additional remedies, including obtaining pre-judgment attachment of a transferee's assets generally, rather than such attachment being limited to the asset transferred or its proceeds, as is the case under the UFTA. This presumably will put additional pressure on a transferee to settle.

New Choice of Law Rules

A claim under the UVTA is now governed by the law of the state where the debtor is "located" at the time the transfer is made or the obligation is incurred. For an individual, this is the individual's principal residence; for an organization, this is the organization's place of business, or its chief executive office if it has multiple places of business. This change is designed to reduce uncertainty regarding the law applicable to a claim, which can be critical because states have adopted non-uniform versions of the UFTA and UVTA. Courts have used different standards in determining which jurisdiction's law applies to a UFTA claim (with some finding the issue to be governed by the location of the parties and others ruling based on the location of the property or transaction). This, in turn, has increased parties' legal expenses in obtaining advice regarding a transaction, or litigating a UFTA claim.

Gary Kaplan is a partner in Farella Braun + Martel's San Francisco office and chairs the firm's Restructuring & Insolvency Group. You can reach him at gkaplan@fbm.com.