BILL ANALYSIS Ó
SB 161
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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