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California Uniform Voidable Transactions Act Provides Needed Updates to Fraudulent Transfers

California enacted its own version of the Uniform Voidable Transactions Act (UVTA) deviating slightly from the uniform version. Some archaic terminology that applied the label of “fraud” to certain perfectly innocent transactions will now fall under the less pejorative “voidable” category. The new state law also altered the burden of proof in making and defending a claim for relief under the act, as well as the choice of law governing a determination under the UVTA. The new law goes into effect on January 1, 2016.

Federal Counterpart

There is a Uniform Voidable Transactions Act (UVTA), formerly named the Uniform Fraudulent Transfer Act (UFTA), which is a federal law that strengthens creditor protections by providing remedies for certain transactions by a debtor that are unfair to the debtor’s creditors. With the passage of the state version, California lawyers will need to analyse fraudulent transfers under both statutory schemes, but will likely rely mainly on the state-based law.

California Charts its Own Path

California decided not to adopt numerous provisions of the proposed uniform act, namely provisions related to Series Organizations. This is not surprising since Series Organizations are a relatively new form of business structure that cannot yet be formed under California law.
The state legislature also decided not to include provisions that would allow a creditor to recover certain “insider preferences” (a.k.a. payments received by another creditor on a legitimate debt if the creditor is an insider of the debtor).

Lenders May Face New Legal Hurdles

There is a choice of law provision in the new UVTA which may expose a California lender to an insider preference lawsuit since it may be subject to the laws of the state where an out-of-state borrower is residing. The definitions contained in the UVTA create the scenario where lenders may be the target of an insider preference lawsuit. This is because the definition of “insider” includes “a person in control” of a debtor. So, if a lender is alleged to have exercised excessive control over a debtor’s operations, another creditor could argue that the lender has become a “person in control” of that debtor subject to the foreign state’s preference laws. Under the new choice of law provisions, a California lender could now be faced with a lawsuit in another state, seeking to recover loan payments that the lender received, according to an article published on Lexology.com.

An Experienced Litigator for Business Disputes

As you can see, with the passage of the new state-based UVTA, there is likely to be lender-debtor litigation. Kristina Reed is experienced representing businesses in civil litigation. She has the means and know-how to present your business in any type of dispute, including potential UVTA litigation.