BILL ANALYSIS                                                                                                                                                                                                    Ó



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          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  








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          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  








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            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  








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               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  








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            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).)  








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          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:













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               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.)








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          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  








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          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  








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          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  








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          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  








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          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











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          None on file


          Analysis Prepared by:Khadijah Hargett / JUD. / (916)  
          319-2334