By Ryan C. Wood
The California Uniform Fraudulent Transfers Act (CUFTA) is codified in California Civil Code Sections 3439-3439.12. At the end of this article is every word of the CUFTA. Simply put, the purpose of the CUFTA is to deter and prevent the transfer of assets with the intent to make the asset out of reach of creditors or the asset was transferred for less than equivalent value when insolvent. So the CUFTA says you cannot transfer your house that is paid in full, worth $400,000, to your brother for nothing when you are about to get sued for $120,000. If you lose the lawsuit you may have an issue under the CUFTA. If you later file bankruptcy within 4 to 10 years you may have problems too. How does the CUFTA apply to filing for bankruptcy protection? Well, Section 544(b) of the Bankruptcy Code gives bankruptcy trustees the power to avoid, or undo, any transfer of an interest of the debtor in property that is voidable under nonbankruptcy law by a creditor holding an allowable unsecured claim. So the bankruptcy trustee can step into the shoes of an unsecured creditor and use their right to undo a transfer of property by the bankruptcy filer by using the CUFTA.
What is the statute of limitations for the CUFTA? Section 3439.09
Bankruptcy attorneys far and wide need to know the intricacies of their state fraudulent transfer acts and the look back periods for different types of creditors. Where things get very tricky is the types of claims that are involved in the actual bankruptcy case. This is the part you need to read and remember forever. Each state has their own version and there are some differences from state to state. In California the CUFTA provides that a cause of action is extinguished under the CUFTA as follows:
Actual intent to hinder, delay, or defraud any creditor: 3439.04(a)(1) within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant;
– The four years part is simple, but could reasonably have been discovered by the claimant is not. In theory a Chapter 7 trustee could argue 15 years after the transfer was made the claimant could not reasonably have discovered the transfer once the bankruptcy case is filed and then bring an action within one year of the filing of the bankruptcy case or discovery of the transfer in the bankruptcy case . . . . . . . .
Transfer was not for equivalent value while insolvent: 3439.04(a)(2) and 3439.05 within four years after the transfer was made or the obligation was incurred;
Max Seven Years: The catch here is 3439.09(c) says notwithstanding any other provision of law (other laws could trump this then) obligation is extinguished if no action is brought or levy made within seven years after the transfer was made or the obligation was incurred.
So you think you are home free after seven years no matter what? Nope, it will really depend upon who the bankruptcy filers creditors. The IRS has a look back period of 10 years under the Federal Unemployment Tax Act. There are many other look back periods for other types of claims a Chapter 7 trustee may step into the shoes of. Again, the theme of this article is do you or does your client have the funds to litigate these issues? I also pointed out how the look back period could be more than 7 or ten years in regards to the “within one year after the transfer or obligation was or could reasonably have been discovered by the claimant” is potentially treacherous.
Liability under the CUFTA
Cal. Civil Code § 3439.04 provides the basis for liability under the CUFTA. You can either be liable if actual intent to hinder, delay or defraud any creditor by the transfer of the asset can be proven or you transferred the asset for less than fair market value (equivalent value) while insolvent (balance sheet or cash flow?)
Under Cal. Civil Code § 3439.05, a transfer is constructively fraudulent if the debtor (person owing money) made the transfer without receiving reasonably equivalent value in exchange and the debtor was insolvent at that time or rendered insolvent as a result of the transfer. The chapter 7 trustee must prove both reasonably equivalent value and insolvency by a preponderance of evidence. In re GSM Wireless, Inc., 2013 WL 4017123, at *17 (Bankr. C.D. Cal. April 5, 2013) (citing Whitehouse v. Six Corp., 40 Cal. App. 4th 527, 533–34 (1995)). What is a preponderance of evidence. It is a lower standard than beyond reasonable doubt. Preponderance of evidence means the judge has to believe that the existence of a fact, or something you are trying to prove, is more probably than its nonexistence based upon the evidence presented. Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for So. Cal., 508 U.S. 602, 622 (1993).
What is the definition of insolvency? Balance Sheet Test vs. Cash Flow Test?
Cal. Civil Code § 3439.02(a) provides that “[a] debtor is insolvent if, at fair valuations, the sum of the debtor’s debts is greater than all of the debtor’s assets.” This is the balance sheet test for insolvency. Bay Plastics, Inc. v. BT Comm. Corp. (In re Bay Plastics, Inc.), 187 B.R. 315, 328 n.22 (Bankr. C.D. Cal. 1995). This should include retirement accounts that are completely exemptable under most state exemption laws.
Under Cal. Civil Code § 3439.02(c), “[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.” This is the cash flow test for insolvency. In re Bay Plastics, 187 B.R. at 328 n.22. As a general rule, solvency and not insolvency is presumed. Neumeyer v. Crown Funding Corp., 56 Cal. App. 3d 178, 186 (1976).
Actual intent to defeat, hinder or delay creditors must be proven.
Under the CUFTA, a transfer is intentionally fraudulent if it is made with the intent to defeat, hinder or delay creditors. Cal. Civil Code § 3439.04(a)(1) provides that transfers made with actual intent to delay, hinder, or defraud creditors are fraudulent and therefore voidable. Like many issues that involve the intent of the party actually proving intentional fraud with direct evidence is usually extremely difficult. Over time the courts have come up with badges of fraud that help to establish intent. The badges are listed in Cal. Civil Code Section 3439.04(b): (1) whether the transfer or obligation was to an insider; (2) whether the debtor retained possession or control of the property transferred after the transfer; (3) whether the transfer or obligation was disclosed or concealed; (4) whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit; (5) whether the transfer was of substantially all the debtor’s assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
The Chapter 7 Trustee has a duty to creditors.
Every jurisdiction has a panel of Chapter 7 trustees that are assigned to chapter 7 bankruptcy cases to administer the bankruptcy estate that is created when the petition is filed. First off let us get something straight right now. When you file Chapter 7 bankruptcy, or your file a Chapter 7 bankruptcy case for a client, you are choosing to put a plate in front of the Chapter 7 trustee to eat off of. So do not be displeased with the Chapter 7 trustee for fulfilling their obligation to creditors and doing their job properly. You invited them into your house, asked them to sit at the table and after that just because you do not like their behavior you think you have a right to kick them out of your house? No, you will most likely not be allowed to dismiss your Chapter 7 bankruptcy case. At best you will be allowed to convert to Chapter 13.
See 11 U.S.C. Section 704 Duties of Trustee: Chapter 7 trustees actually have broad discretion in how they administer a bankruptcy estate. The issue to focus on is do you, the bankruptcy filer, have the money to pay your bankruptcy attorney to litigate the statute of limitations, your intent, your solvency or whether you received equivalent value for the property you transferred prior to filing a chapter 7 bankruptcy case? I can tell you, and of course this is my opinion based upon being involved in well over 2,000+ bankruptcy cases in various capacities, you do not have stomach or the money to fight this battle. There absolutely could be a good faith question as to whether you made a fraudulent transfer and a bankruptcy judge needs to determine who is right and who is wrong. This will be an expensive process and there is no guarantee your attorney or you will get their attorneys’ fees and costs paid for by the over party even if they successfully defend you.
The moral to the story . . . . . . . . .
Just do yourself a favor if you are thinking about filing for bankruptcy protection and have transferred assets, or do your client a favor and just file a Chapter 13 case and not a Chapter 7 case.
You can thank me later.
Complete Text of the California Uniform Fraudulent Transfers Act
This chapter may be cited as the Uniform Fraudulent Transfers Act.
As used in this chapter the following definitions are applicable:
(a) “Asset” means property of a debtor, but the term does not include, the following:
(1) Property to the extent it is encumbered by a valid lien.
(2) Property to the extent it is generally exempt under nonbankruptcy law.
(3) An interest in property held in tenancy by the entireties to the extent it is not subject
to process by a creditor holding a claim against only one tenant.
(b) “Claim” means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.
(c) “Creditor” means a person who has a claim, and includes an assignee of a general assignment for the benefit of creditors, as defined in Section 493.010 of the Code of Civil Procedure, of a debtor.
(d) “Debt” means liability on a claim.
(e) “Debtor” means a person who is liable on a claim.
(f) “Lien” means a charge against or an interest in property to secure payment of a debt or performance of an obligation, and includes a security interest created by agreement, a judicial lien obtained by legal or equitable process or proceedings, a common-law lien, or a statutory lien.
(g) “Person” means an individual, partnership, corporation, limited liability company, association, organization, government or governmental subdivision or agency, business trust, estate, trust, or any other legal or commercial entity.
(h) “Property” means anything that may be the subject of ownership.
(i) “Transfer” means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.
(j) “Valid lien” means a lien that is effective against the holder of a judicial lien subsequently obtained by legal or equitable process or proceedings.
(a) A debtor is insolvent if, at fair valuations, the sum of the debtor’s debts is greater than all of the debtor’s assets.
(b) A debtor which is a partnership is insolvent if, at fair valuations, the sum of the partnership’s debts is greater than the aggregate of all of the partnership’s assets and the sum of the excess of the value of each general partner’s nonpartnership assets over the partner’s nonpartnership debts.
(c) A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.
(d) 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 chapter.
(e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.
Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
(b) In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:
(1) Whether the transfer or obligation was to an insider.
(2) Whether the debtor retained possession or control of the property transferred after the transfer.
(3) Whether the transfer or obligation was disclosed or concealed.
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
(c) The amendment to this section made during the 2004 portion of the 2003-04 Regular Session of the Legislature, set forth in subdivision (b), does not constitute a change in, but is declaratory of, existing law, and is not intended to affect any judicial decisions that have interpreted this chapter.
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
For the purposes of this chapter:
(a) A transfer is made:
(1) With respect to an asset that is real property other than a fixture, but including the interest of a seller or purchaser under a contract for the sale of the asset, when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against whom applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee; and
(2) With respect to an asset that is not real property or that is a fixture, when the transfer is so far perfected that a creditor on a simple contract cannot acquire a judicial lien otherwise than under this chapter that is superior to the interest of the transferee.
(b) If applicable law permits the transfer to be perfected as provided in subdivision (a) and the transfer is not so perfected before the commencement of an action for relief under this chapter, the transfer is deemed made immediately before the commencement of the action.
(c) If applicable law does not permit the transfer to be perfected as provided in subdivision (a), the transfer is made when it becomes effective between the debtor and the transferee.
(d) A transfer is not made until the debtor has acquired rights in the asset transferred.
(e) An obligation is incurred:
(1) If oral, when it becomes effective between the parties; or
(2) If evidenced by a writing, when the writing executed by the obligor is delivered to or for the benefit of the obligee.
(a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain:
(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.
(2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure.
(3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:
(A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds.
(B) Appointment of a receiver to take charge of the asset transferred or its proceeds.
(C) Any other relief the circumstances may require.
(b) If a creditor has commenced an action on a claim against the debtor, the creditor may attach the asset transferred or its proceeds if the remedy of attachment is available in the action under
applicable law and the property is subject to attachment in the hands of the transferee under applicable law.
(c) If a creditor has obtained a judgment on a claim against the debtor, the creditor may levy execution on the asset transferred or its proceeds.
(d) A creditor who is an assignee of a general assignment for the benefit of creditors, as defined in Section 493.010 of the Code of Civil Procedure, may exercise any and all of the rights and remedies specified in this section if they are available to any one or more creditors of the assignor who are beneficiaries of the assignment, and, in that event (1) only to the extent the rights or remedies are so available and (2) only for the benefit of those creditors whose rights are asserted by the assignee.
(a) A transfer or an obligation is not voidable under paragraph (1) of subdivision (a) of Section 3439.04, against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.
(b) Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under paragraph (1) of subdivision (a) of Section 3439.07, the creditor may recover judgment for the value of the asset transferred, as adjusted under subdivision (c), or the amount necessary to satisfy the creditor’s claim, whichever is less. The judgment may be entered against the following:
(1) The first transferee of the asset or the person for whose benefit the transfer was made.
(2) Any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee.
(c) If the judgment under subdivision (b) is based upon the value of the asset transferred, the judgment shall be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.
(d) Notwithstanding voidability of a transfer or an obligation under this chapter, a good faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to the following:
(1) A lien on or a right to retain any interest in the asset transferred.
(2) Enforcement of any obligation incurred.
(3) A reduction in the amount of the liability on the judgment.
(e) A transfer is not voidable under paragraph (2) of subdivision (a) of Section 3439.04 or Section 3439.05 if the transfer results from the following:
(1) Termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law.
(2) Enforcement of a lien in a noncollusive manner and in compliance with applicable law, including Division 9 (commencing with Section 9101) of the Commercial Code, other than a retention of collateral under Sections 9620 and 9621 of the Commercial Code and other than a voluntary transfer of the collateral by the debtor to the lien or in satisfaction of all or part of the secured obligation.
A cause of action with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought pursuant to subdivision (a) of Section 3439.07 or levy made as provided in subdivision (b) or (c) of Section 3439.07:
(a) Under paragraph (1) of subdivision (a) of Section 3439.04, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant.
(b) Under paragraph (2) of subdivision (a) of Section 3439.04 or Section 3439.05, within four years after the transfer was made or the obligation was incurred.
(c) Notwithstanding any other provision of law, a cause of action with respect to a fraudulent transfer or obligation is extinguished if no action is brought or levy made within seven years after the transfer was made or the obligation was incurred.
Unless displaced by the provisions of this chapter, the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions.
This chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.
This chapter, and the other changes in the law made by Chapter 383 of the Statutes of 1986, apply only to transfers made or obligations incurred on or after January 1, 1987; and, as to transfers made or obligations incurred prior to that date, the law in effect at the time the transfer was made or the obligation was incurred shall apply. The provisions of this chapter, insofar as they are substantially the same as the provisions of Chapter 1 (commencing with Section 3439) of Title 2 of Part 2 of Division 4, which was repealed by Chapter 383 of the Statutes of 1986, shall be construed as restatements and continuations, and not as new enactments.