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Uniform Voidable Transactions Act Becomes Law in California

Governor Brown signed the new Uniform Voidable Transactions Act into law on July 2, 2015. The bill received unanimous support in both the Senate and the Assembly and was recommended by the Commercial Transactions Committee. This law renames and amends the pre-existing Uniform Fraudulent Transfer Act. This new law will impact both debtors and creditors.

What is the Uniform Voidable Transfer Act?

California’s pre-existing Uniform Fraudulent Transfer Act is based in part on the model Uniform Fraudulent Transfer Act, which has been adopted at least in part by various states including Georgia, Idaho, Kentucky, Minnesota, New Mexico, North Carolina, and North Dakota. It establishes the conditions under which a transfer made or obligation incurred by a debtor is fraudulent as to the creditor. It also sets remedies a creditor can obtain with respect to a fraudulent transfer or obligation. One potential remedy is the voiding of the transfer. This new law renames the law the Uniform Voidable Transaction Act. It also adopts certain changes promulgated by the Uniform Law Commission. It specifies a burden of proof in making and defending a claim for relief under this law. It specifies the basis for determining the governing law for a claim for relief under the act. It modifies definitions applicable to the act. It removes a definition of insolvency and adds new definitions including definitions for “record” and “sign.” It replaces the term “fraudulent” with the term “voidable.” These modifications are only applicable if the right of action accrued, the transfer was made, or the obligation was incurred on or after the effective date of the bill. That date is January 1, 2016.

What do These Changes Mean?

These changes are relatively minor in the grand scheme of things, but they are important. This is not a massive overhaul of existing law but the changes do matter. Some of the more important changes are:

  • The law repeals the special insolvency test for debtors that are partnerships and provides that debtors that are not paying their debts as they come due are presumed to be insolvent.
  • The law provides that the presumption of insolvency imposes on the presumptively insolvent party a burden of proving solvency.
  • The law authorizes a creditor to obtain remedies with respect to the asset transferred, allows a creditor to obtain an attachment, 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.

Another key part of the law is the provisions regarding the burden of proof. These are:

  • The party seeking to invoke an available defense has the burden of proving all of the elements of that defense.
  • A creditor seeking recovery under the Act must prove each element of the recovery the creditor is seeking.
  • A transferee must prove that he or she is a transferee in good faith.
  • A party seeking an adjustment to the amount of a judgment that exceeds value of the asset that was transferred must prove the adjusted amount.