BILL ANALYSIS Ó SB 161 Page 1 Date of Hearing: June 16, 2015 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair SB 161 (Vidak) - As Amended April 14, 2015 PROPOSED CONSENT SENATE VOTE: 34-0 SUBJECT: UNIFORM FRAUDLUENT TRANSFER ACT KEY ISSUE: SHOULD CALIFORNIA AMEND ITS UNIFORM FRADULENT TRANSFER ACT TO CONFORM WITH THE UNIFORM VOIDABLE TRANSACTIONS ACT RECENTLY ADOPTED BY THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS? SYNOPSIS This non-controversial bill amends the state's Uniform Fraudulent Transfer Act (Act) to conform with the Uniform Voidable Transactions Act (Model Act), adopted in 2014 by the National Conference of Commissioners on Uniform State Laws (ULC). The Act establishes conditions under which a transfer made or an obligation incurred by a debtor is fraudulent. The Act also sets forth the remedies available to a creditor regarding a fraudulent transfer or an obligation, including but not limited to, having the transfer declared void. This bill SB 161 Page 2 incorporates most, but not all, provisions of the Model Act into state law. Some of the most noted changes included in this bill's provisions are: 1) renaming the Act to be the Uniform Voidable Transactions Act; 2) substituting the word "fraudulent" for the term "voidable" throughout the Act; 3) modifying existing definitions of terms such as "claim" and "person"; 4) adding new rules allocating the burden of proof and defining the standard of proof regarding claims and defenses; 5) defining various terms; 6) adding a new rule for claims that are "in the nature of" a claim governed by the Act; and 7) deleting the special definition of insolvency for partnerships. This bill does not seek to incorporate all of the provisions of the Model Act into the Act, but the omissions recommended by the State Bar Committee appear to be appropriate and justified. This bill is sponsored by the California Commission on Uniform State Laws and has no known opposition. SUMMARY: Adopts changes to the state's Uniform Fraudulent Transfer Act (Act) to conform with the Uniform Voidable Transactions Act (Model Act). Specifically, this bill: 1)Changes the name of the Act to the Uniform Voidable Transactions Act and replaces the word "fraudulent" with the term "voidable" throughout the Act. 2)Repeals the special insolvency test, for debtors that are partnerships (which gave a partnership full credit for the net worth of each of its general partners) and provides instead that a debtor that is not paying the debtor's debts as they become due, other than as a result of a genuine conflict is presumed to be insolvent. 3)Provides that the presumption of insolvency imposes on the party who is presumed to be insolvent the burden of proving solvency. Provides that a creditor making a claim for relief SB 161 Page 3 has the burden of proving the elements of the claim by a preponderance of the evidence. 4)Authorizes a creditor to obtain remedies with respect to the asset transferred or other property of the transferee, allows a creditor to obtain an attachment or other legally available remedies, and provides that a transfer or obligation is not voidable against a person who took the secured asset in good faith and for a reasonably equivalent value. 5)Allows a judgment to be entered against: (a) the first transferee of the asset or the person for whose benefit the transfer was made; or (b) a transferee who is down the chain of the transfer of the first transferee other than (i) a good faith transferee who took the secured asset for value or (ii) a good-faith transferee of a person described in (i) and limits recovery of claims. 6)Provides, regarding burdens of proof, the following: a) The party seeking to invoke an available defense has the burden of proving all of the elements of the defense. b) A creditor seeking recovery under the Act has the burden of proving each element of the recovery that the creditor is seeking. c) A transferee has the burden of proving that he or she is a transferee in good faith. d) A party seeking an adjustment to the amount of a judgment that exceeds value of the asset that was SB 161 Page 4 transferred has the burden of proving the adjusted amount. 7)Provides that the governing law of a claim under the Act is that of the state where the debtor is located at the time the transfer is made or the obligation is incurred. 8)Provides that the changes to the Act apply to a transfer made or obligation incurred, on or after January 1, 2016. 9)Repeals codified legislative intent language and makes other technical non-substantive changes to the Act. 10)Defines and adds various terms that are relevant to the Act. EXISTING LAW: 1)Establishes, under the Act, the conditions under which a transfer made or an obligation incurred by a debtor is fraudulent as to a creditor and sets forth the remedies available to a creditor regarding a fraudulent transfer or obligation, including, but not limited to, obtaining a court order to void a fraudulent transfer. (Civil Code Sections 3439-3439.12. All further statutory references are to the California Civil Code, unless otherwise indicated.) 2)Provides that a debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than the sum of all of the debtor's assets. (Section 3439.02(a).) 3) Provides that a debtor which is a partnership is insolvent if, at fair valuations, the sum of the partnership's debts is greater than the aggregate sum of all the partnership's assets, plus the sum of the excess of the value of each SB 161 Page 5 general partner's non-partnership assets that exceeds the partner's non-partnership debts. (Section 3439.02(b).) 4) Provides that a debtor who is not paying his or her debts as they become due is presumed to be insolvent. (Section 3439.02(c).) 5)Provides that a transfer made or an 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: (a) with actual intent to hinder, delay or defraud any creditor of the debtor; and (b) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor did one of the following: (i) 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. (ii) 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. (Section 3439.04(a).) 6)Provides that 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 the time or became insolvent as a result of the transfer or obligation. (Section 3439.05(a).) 7)Authorizes, subject to specified limitations, a creditor to bring an action to void a transfer or an obligation under the Act, to obtain certain remedies with respect to the asset transferred as well as its proceeds. (Section 3439.07(a)(2), (3)(A), (3)(B), (b).) SB 161 Page 6 8)Authorizes a creditor to seek relief by attachment or other provisional remedy against an asset that is transferred or the proceeds from the sale of an asset in accordance with certain attachment procedures specified in the Code of Civil Procedure. (Section 3439.07(a)(2).) 9)Provides that a transfer is voidable if it is made with actual intent to hinder, delay, or defraud any creditor of the debtor. (Section 3439.04(a).) 10)Provides that a transfer or an obligation is not voidable under the Act's provisions against a person who took the secured asset in good faith and for a reasonably equivalent value, or against any subsequent transferee or obligee. (Section 3439.08(a).) 11)Provides that, except as otherwise provided in the law, to the extent a transfer is voidable in an action by a creditor under the Act, as specified, the creditor may recover judgment for the value of the asset transferred, as adjusted as specified, or the amount necessary to satisfy the creditor's claim, whichever is less and that such a judgment may be entered against: (1) the first transferee of the asset or the person for whose benefit the transfer was made; or (2) any subsequent transferee, other than a good faith transferee who took for value, or from any subsequent transferee. (Section 3439.08(b).) FISCAL EFFECT: As currently in print this bill is keyed non-fiscal. COMMENTS: According to the author: SB 161 Page 7 Current law has not adopted the provisions proposed by the 2014 Uniform Voidable Transactions Act. This bill revises cross-references to the act that have already been approved by the National Conference of Commissioners on Uniform State Laws and makes conforming changes related to its provisions. Background of the National Conference of Commissioners on Uniform State Laws. The National Conference of Commissioners on Uniform State Laws (ULC), according to its website, was established in 1892 and provides states with model laws in areas where uniformity of law "brings clarity and stability to critical areas of state statutory law." ( http://www.uniformlawcommission.com ) The organization's commissioners draft and propose uniform statutes for state Legislatures to consider for adoption into state law. The Act was initially enacted by the California Legislature in 1986 (SB 2150 (Beverly), Ch. 383, Stats. 1986) and was based on a ULC-drafted model act. Changes Proposed by the ULC to the Model Uniform Fraudulent Transfer Act. In 2014, the ULC proposed amendments to the Model Act to strengthen available rights and remedies by addressing, what the ULC characterized on its website as "a small number of narrowly-defined issues." ( http://www.uniformlawcommission.com .) In addition to recommending various clarifying and technical changes to the Model Act, the ULC proposed the following changes: 1) specifying the appropriate burdens of proof required for making and defending a claim for relief; 2) repealing the insolvency test for partnerships and updating the test for insolvency for all purposes; and 3) creating a choice of law rule and specifying how the governing is to be determined when there is a conflict of laws. (ULC Voidable Transaction Act Amendments (2014) www.uniformlaws.org/Act.) SB 161 Page 8 Proposed Changes Recommended by the Commercial Transaction Committee of the Business Law Section of the State Bar. The Commercial Transactions Committee of the Business Law Section of the State Bar (the State Bar Committee) reviewed the changes to the Model Act that were made by the ULC in 2014 and made recommendations for how California's version of the Model Act should be amended in response to those changes. This bill reflects the recommendations of the State Bar Committee about which provisions of the Model Act should be incorporated into the Act. There are also several changes that were made by the ULC which, at the recommendation of the State Bar Committee, are not incorporated into the Act by this bill. Renaming the Model Act and the Act. The title of the Model Act has been changed from the Uniform Fraudulent Transfer Act to the Uniform Voidable Transactions Act. This bill changes the name of the Act to conform to the name of the ULC's Model Act. According to both the ULC and the State Bar Committee, the term "fraudulent" has been used for many years in the title and the name of the model and state laws, but is actually a misleading description of the purpose of those laws, which is to govern transfers of assets that defraud creditors. According to the ULC's official comment, fraud has never been a necessary element of a claim under the Model Act. The inclusion of the term has led to many misconceptions about the intent and purpose of the law, which has caused a great deal of confusion in court. Renaming the Act will help to dispel common misconceptions. (See ULC Voidable Transaction Act Amendments (2014) www.uniformlaws.org/Act.) Changes to the Insolvency Tests. The current Act has a test for insolvency of an individual debtor which provides that a debtor is insolvent if, the sum of the debtor's debts is greater than the sum of the debtor's assets. (Section 3439.02(a).) In addition, the Act provides a specific test for the insolvency of SB 161 Page 9 partnerships, which gives a partnership full credit for the net worth of each of its general partners. This bill deletes the specific test for partnerships that was based on the manner of how liability was formerly allocated in partnership entities. The partnership insolvency test was based on the fact that under common law, each partner in a partnership is liable for all of the debts of the partnership. However, under modern partnership statutes, this is no longer the case and current law should reflect this modern reality. This bill revises the insolvency test, making it applicable to both individuals and partnerships. If the debtor is not paying his, her, or its debts as they become due, there is a presumption of insolvency. This bill also creates an exception to that presumption where the nonpayment of debts results from a bona fide dispute. Burden of Proof for Creditor Claims. The Act currently provides that a transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arises before or after the transfer is made or the obligation is incurred, if the debtor makes the transfer or incurs the obligation with the intent to hinder, delay, or defraud any creditor and without receiving a reasonably equivalent value in exchange for the transfer or the obligation. (Section 3439.049(a).) The Act also provides, in Section 3439.05(a), that a transfer made or an obligation incurred by a debtor is fraudulent as to a creditor whose claim arises before the transfer is made or the obligation is incurred if the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor is either insolvent at that time of the transfer or obligation, or becomes insolvent as a result of the transfer or obligation. This bill adds a requirement that a creditor who makes a claim for relief under either of these two provisions must prove the elements of the claim for relief by a preponderance of the evidence. The State Bar Committee agrees with this SB 161 Page 10 recommendation, noting that the preponderance of the evidence standard of proof is consistent with existing California case law which has interpreted the Act. (See Whitehouse v. Six Corp. (1995) 40 Cal.App.4th 527, 530 [holding that when a creditor resists a claim by asserting the property has been transferred to a third party, the creditor must prove the allegation by a preponderance of the evidence].) Burden of Proof for Defenses and Liabilities of a Transferee. The bill requires the creditor to prove all of the elements of any defense, or any liability of a transferee. However, there are two exceptions to this rule, where the burden of proof shifts to the transferee. First, where the transferee claims to have taken the asset for a reasonably equivalent value and in good faith, the transferee has the burden to prove those facts. Second, where a party seeks an adjustment to the amount of a judgment beyond the value of the asset transferred, that party has the burden of proving the amount of the adjustment. Jurisdiction for a Claim. The bill specifies that when there is a conflict of laws (because the creditor and the debtor are in different states), the law of the state in which the debtor is located when the transfer is made or the obligation is incurred governs the dispute. The debtor's location depends on whether the debtor is an individual (in which case the debtor's location is the individual's principal residence), an organization with a single place of business (in which case the debtor's location is its place of business), or an organization with multiple places of business (in which case the debtor's location is its chief executive office). Miscellaneous Changes. This bill makes several additional minor changes that include allowing a creditor to seek an attachment or other provisional remedy that is legally available, and limiting the applicability of the changes in this bill to a right of action accrued, transfer made, or an obligation SB 161 Page 11 incurred on or after the effective date of this bill (January 1, 2016). Changes to the Model Act not Being Incorporated into the Act. Some of the changes made in the Model Act are not being incorporated into the Act because they are inconsistent with existing state law, or are not relevant to state law. One change that is not proposed to be incorporated allows individual creditors to sue "insiders" (those with a special relationship to the debtor, such as relatives, controlling shareholders, directors, and partners, when the debtor is a partnership) who receive "preferential transfers" (transfers of a debtor's property to another insider immediately before the debtor files for bankruptcy). These "insider preference" provisions make a transfer by a debtor to another insider voidable as to a creditor whose claim arises before the transfer, as long as certain conditions are met. The State Bar Committee recommended against adopting these provisions in the Act based upon the fact that the Legislature rejected the adoption of those provisions when it initially adopted the Model Act in 1986. Failure of the Legislature to adopt a provision 30 years ago is not sufficient justification for not adopting such provisions now. However, there is a better justification for not incorporating this provision into the Act: Section 1800 (b) of the Code of Civil Procedure allows an assignee to sue to recover preferential transfers. Therefore, state law already provides an avenue for creditors to seek recovery for such transfers and therefore does not need to be amended to incorporate this provision from the Model Act. Another change that is not being incorporated into the Act is a change specific to series organizations. The State Bar Committee recommended against adoption of this provision because "such adoption is premature and unnecessary." (Commercial Transaction Committee, Statement of Position on the Uniform Voidable Transfer Act (September 30, 2014) pp. 3, 24-25.) The State Bar Committee's rationale, included in its statement in SB 161 Page 12 support of this bill, is that series organizations cannot be formed in California as a matter of law and therefore the practice of foreign series organizations transacting business in California "doesn't appear to be commonplace." Accordingly, regulation of such organizations, at this time and based upon the information available to the Committee, is premature and there is no need to develop legislation in response to a problem that does not appear to exist. Furthermore, as the State Bar Committee points out, if a voidable transfer case involving a series organization came before a court in California, the court would be able to apply the Uniform Voidable Transactions Act whether this particular section of the Model Act were adopted into the Act, or not. (Commercial Transaction Committee, Statement of Position on the Uniform Voidable Transfer Act (September 30, 2014) pp. 4, 24-25.) REGISTERED SUPPORT / OPPOSITION: Support California Commission on Uniform State Laws (sponsor) Opposition SB 161 Page 13 None on file Analysis Prepared by:Khadijah Hargett / JUD. / (916) 319-2334