VOIDABLE TRANSFER ACT

Simon PLC Attorneys & Counselors – April 2021 Memorandum

VOIDABLE TRANSFER ACT

Bloomfield Hills, Michigan – Michigan has become one of a number of states to adopt the Uniform Voidable Transactions Act (“UVTA”) which amends the Uniform Fraudulent Transfer Act (“UFTA”).   The UFTA is the most widely adopted statute in the United States addressing fraudulent conveyances.  In sum, it provides a creditor with the means to reach assets that a debtor has transferred to another person for the purpose of keeping them from being used to satisfy a debt.

Simon PLC has recently litigated multiple actions seeking the recovery and avoidance of voidable transfers under UVTA.  One case involved a debtor who used his domestic partner’s bank account to hide assets and avoid creditors.  The Court granted our creditor client’s relief and entered a judgment against the partner for the transferred funds.  Another case involved the intersection of corporate law, family law and the MUVTA.  A judgment of divorce transferred all assets of an LLC to the spouse of the member of the LLC.  However, the LLC received no value for this transfer.  The Court of Appeals found that the circuit court could not rely on vague notions of equity, but had to apply MUVTA as written.

The law permits creditors to void the transaction in two situations, (i.) when a debtor transfers assets with the intent to hinder, delay or defraud any creditor, or (ii.) when a debtor transfers assets without receiving reasonably equivalent value. Because intent to hinder, delay, or defraud creditors is seldom capable of direct proof, courts instead have relied on badges of fraud to prove intent.

The UVTA provides a number of significant changes to the UFTA.  First, it renames the act as the Uniform Voidable Transactions Act and change numerous references from “fraudulent” to “voidable”.  This provides a more accurate description of what the act does and shifts the focus away from whether a ‘transfer made or obligation incurred’ is fraudulent as to a creditor, or whether that transfer or obligation is “voidable.”  This also reflects the fact that fraud (in its common law sense) is not a requirement for setting aside a transfer, nor are the heightened requirements, usually associated with pleading fraud claims, any longer a requirement.

Next, it requires, for each party bearing the burden to prove a fact in a lawsuit, to use the “preponderance of the evidence” standard of proof.  This standard places the weight on the probable accuracy and/or whether a fact is more true than not true.  The UVTA clarifies that the creditor’s burden of proving intent is no longer one of “clear and convincing.”

Thirdly, it establishes a clear choice of law provision that specifies that a claim for relief under the act is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.  The following rules will determine a debtor’s location:

  • The principal residence—for a debtor who is an individual.
  • The place of business—for a debtor who is an organization having only one place of business.
  • The chief executive office—for a debtor who is an organization having more than one place of business.

The UVTA also features an updated “Official Comments” section which includes citations to updated case law.  This is helpful, as the prior official comments do not contain any case law beyond the early 1980’s.

Despite these revisions and updates, there are still a number of unresolved issues. The UVTA does not address the extent to which a person who facilitates the making of a transfer that is voidable may be subject to liability for that reason, whether under a theory of aiding and abetting, civil conspiracy, or otherwise.  UVTA leaves that to supplementary principles of law. Other law also governs such matters as (i) the circumstances in which a lawyer who assists a debtor in making a transfer or incurring an obligation that is voidable under UVTA violates rules of professional conduct applicable to lawyers, (ii) the circumstances in which communications between the debtor and the lawyer in respect of such a transfer or obligation are excepted from attorney-client privilege, and (iii) the extent to which criminal sanctions apply to a debtor, transferee, obligee, or person who facilitates the making of a transfer or the incurrence of an obligation that is voidable under UVTA.

N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.

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