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Not Fraudulent, Voidable

posted by Bob Lawless

At its annual meeting, the National Conference of Commissioners on Uniform State Laws (NCCUSL) formally adopted the Uniform Voidable Transactions Act (UVTA). Under its provisions, I believe it says any service member in uniform will be able to avoid a transaction . . . . Hold on, let me give it a read.

Having now bothered to read it, I see it is actually an amendment to the Uniform Fraudulent Transfer Act (UFTA). If you are not familiar with the idea, let's say that you live in Tudor England and are some person named Pierce with a flock of sheep. You also happen to be insolvent. You give the sheep to your buddy, Twyne, because you much prefer you old pal to have the sheep than your creditors. Your creditors cry "baaa" because they could sell the sheep and get repaid. On these facts, Star Chamber will make Twyne give the sheep or their monetary equivalent to your creditors.  And, yes, we are talking about that "Star Chamber."

The body of law that grew out of Star Chamber's decision led to what is known as fraudulent transfer law. "Voidable" is a much better adjective because there is no requirement of actual fraud -- just ask anyone who has to had to explain the law to a client who acted in good faith that he has been sued for a "fraudulent" transfer. It is also not exactly the easiest idea to convey to students. Jay Adkisson, who has been blogging up a storm about the UVTA at Forbes.com (here and here) has a particularly insightful post blaming the English's poor Latin skills for the misnomer. 

As Susan Block-Lieb previewed in an earlier post, the changes to the old UFTA are light. There are some welcome clarifications of choice-of-law and burden-of-proof principles. Also, there is a new section dealing with series LLCs -- an entity that is creating all sorts of ambiguities in numerous areas. A helpful redline version is available from the NCCUSL web site. If you practice in the area, it is probably worth a quick read. Of course, UVTA is only a recommendation from NCCUSL and will not be law until adopted by the various states.  

Although I am not a big believer that terminology matters, this is one situation where the name change will help. The corresponding section of the Bankruptcy Code -- section 548 -- will still use the terminology "fraudulent transfer." If Congress will not amend the statute to provide substantive help for people, perhaps we can convince them to make one change for the sake of style.

Comments

1. Twyne's case isn't just about some sheep. If it were merely a matter of sheep, it wouldn't be in the Star Chamber. Instead, the case is a religious persecution case about recusancy. Pierce is a recusant, and Lord Coke wanted to establish that 13 Eliz. 5 could be used when someone was insolvent because of forfeiture to the state; all recusants' property was forfeit, but many simply gave it to their friends (who were at least nominally Church of England) and continued to use it. If you hammer through the full reporting (as well as the non-Coke reporting), there are hints about this scattered around. All of which is to say, Twyne isn't really a commercial law case.

2. That said, Twyne's case is an actual fraudulent transfer, not a constructive one. While the elements for it aren't the same as for common law fraud, it is definitely part of a fraud on creditors. The "fraudulent" term is really only a problem for constructive fraud and the possibility of recovery from an innocent transferee. Perhaps the terminology solution is to simply have two separate statutes, one from actual and one for constructive.

3. Given that the most important commercial jurisdiction in the US--New York--still uses the old Uniform Fraudulent Conveyance Act (which blissfully requires good faith plus solvency!), I'm skeptical that another uniform law will matter.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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