-
Currently under consideration by the State of New Jersey Legislature is a bill to revise the “Uniform Fraudulent Transfer Act” (“UFTA”) (A3384 McKeon).
-
If this legislation becomes law, it may directly affect the bankruptcy litigation pursued under 11 U.S.C. §§544 and 548. Section 548(a)(1) of the Bankruptcy Code provides for a two (2) year fraudulent avoidance “look-back” period.
-
Generally, trustees and debtors-in-possession may seek to avoid a fraudulent transfer under 11 U.S.C. §544(b) and state law by stepping into the shoes of a “triggering” creditor plaintiff. The longer look-back periods governing avoidance actions under state law significantly expands the universe of transactions that can be subject to a fraudulent conveyance action.
-
The bankruptcy court is routinely called upon to apply state law in an action filed under 11 U.S.C. §544(b)(1) to litigation claims for recovery of assets. (The four (4) year limitation under §544 would be unaffected).
-
Section 544(b)(1) provides that “… the trustee [and a debtor-in-possession pursuant to 11 U.S.C. §1107(a)] may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(3) of this title.” (emphasis added).
10 Significant Proposed Changes to the UFTA:
Many of the proposed changes to the UFTA address issues relating to technology and electronic communications, revisions to make the law gender neutral, and to include language to address defenses to the validity of the alleged debt. The following is a non-exhaustive list of significant proposed changes to the UFTA:
(1) Name change: UFTA would be renamed Uniform Voidable Transactions Act (“UVTA”). A3384, 2 ¶10 – 14.
(2) Definitions: Updated technology terms would include: (a) “electronic” would be added and mean “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities”; Id., 2 at l. 13-15. (b) “Record” would be added and mean “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form”; Id, 4 at l. 13-15. (c) “Sign” would be added and mean “with present intent to authenticate or adopt a record: (1) to execute or adopt a tangible symbol; or (2) to attach to or logically associate with the record an electronic symbol, sound, or process.” Id., 4 at l. 21-25.
(3) “Insolvency” redefined: Insolvency would require a determination that the debts used to deem a debtor insolvent cannot be the result of a bona fide dispute. “This 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.” Id., 2 at l. 13-15.
(4) Insolvency of a partnership: Partnerships would be deleted from the existing text of the UFTA. Id., 5 at l. 1-6.
(5) “Voidable” instead of “fraudulent” R.S.25:2-25 would read “Transfer or obligation voidable as to present or future creditor.” Section (b) provides for the necessary burden of proof by providing that “A creditor making a claim for relief under subsection a. of this section has the burden of proving the elements of the claim for relief by a preponderance of the evidence.” Id., 7 at l. 6-9.
(6) “Transfer or obligation voidable as to present creditor”: Id., 6 at l. 38-41. Additionally, an action pursuant to subsection (b) of R.S.25:2-23 would require the same burden of proof as would R.S.25-2-25.
(7) Defenses to “obligee”: This may result in a transfer or obligation to not be voidable against a person who took in good faith and for a reasonable equivalent value given to the debtor. The defense was silent as to whom would have been given reasonably equivalent value. Id., 8 at l. 24-27.
(8) Expanded Recovery: Creditor recovery would be expanded to include recovery of a judgment against “An immediate or mediate transferee of the first transferee other an: (i) a good-faith transferee who took for value; or (ii) an immediate or mediate good-faith transferee of a person [described therein] and can be by recovery of the asset itself, the proceeds of the asset, by levy “or otherwise”. Id., 9 at l. 1-5.
(9) Security Interests: Even if a transfer or an obligation could be avoided, a good-faith transferee or obligee is entitled to enforcement of a security interest under Article 9 of the UCC other than acceptance of collateral in full or partial satisfaction of the obligation it secures. Id., 9 at l. 25-26.
(10) Burden of Proof: Significantly, the proposed legislation sets forth the rule for the court to determine the respective burden of proof a party must meet. Id., 9 at l. 37 – 46; 10 at l. 1-4.
Limitations on Use of State Court Fraudulent Conveyance Claims:
While the pending legislation may impact certain fraudulent and avoidable transfers under New Jersey state law, it remains that the United States Supreme Court narrowed the scope of the authority of the bankruptcy courts to enter judgments on counterclaims against a debtor that are based on state law in the matter of Stern v. Marshall, 131 S.Ct. 2594 (2011). Since Stern, strong arguments emerged that fraudulent conveyance claims in bankruptcy do not fall within the “public rights” exception for a non-Article III court, such as the bankruptcy court, to adjudicate claims that must normally be heard by an Article III court. Although fraudulent conveyance claims were codified by the Bankruptcy Reform Act of 1978, fraudulent conveyance claims have been considered “quintessentially suits at common law that more nearly resemble state law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors’ hierarchically order claims to a pro rata share of the bankruptcy res.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989). Pursuant to 28 U.S.C. §1334, the bankruptcy court may not constitutionally hear fraudulent conveyance claims as core proceedings. By contrast, a non-core proceeding addresses an issue not related to Bankruptcy Code matters directly and does not negatively or positively affect a debtor’s rights and liabilities or the administration of the bankruptcy estate.
Melinda D. Middlebrooks, Esq.
Middlebrooks Shapiro, P.C.
Chair-Elect, NJSBA Bankruptcy Section