UVTA. Washington’s version of the Uniform Voidable Transactions Act (UVTA) will become effective on July 23.  The Uniform Law Commission (ULC) adopted amendments and a new name for the Uniform Fraudulent Transfer Act (UFTA) in 2014, and Washington will become the 15th state to enact the new version.  As Professor Ken Kettering, the reporter for the ULC project, has written, while the name has changed,

the renaming should not be taken to imply that the UVTA is a new and different act, or that the amendments make major changes to the substance of the UFTA. Nothing could be further from the truth. The UVTA is not a new act; it is the UFTA, renamed and lightly amended.

The impetus behind the project was an article Professor Kettering wrote in 2011 suggesting that UFTA be amended to include a choice of law rule.  Most of the rest of the re-drafting project focused on small changes to UFTA, while retaining the basic intent of the statute.  It is likely that UVTA will have more effect on litigation involving what are now called “voidable transactions” than it will on the substance of what is voidable.  By clarifying the choice of law, standards of both pleading and proof, and the burden of proof—provisions not contained in UFTA or its predecessors—parties to litigation under UVTA should be afforded more certainty than they had before.

Choice of Law Rule. Under UVTA, the choice of law is the location of the debtor, i.e., the person whose transfers are being examined to determine if they are voidable.  The location of the debtor is determined as follows:

  • For individuals, their principal residence
  • For organizations, their place of business, and, if they have more than one, their chief executive office

This rule will be familiar to those who know the choice of law rules under the Uniform Commercial Code, except that there is no special rule for “registered organizations.” In other words, a corporation organized under Delaware law but whose headquarters are in Prosser, Washington will be, for UVTA purposes, subject to Washington law.

Washington Variants. Washington adopted three variants to the uniform version of UVTA.  One Washington variant in particular may lead to some interesting results when the choice of law rule is applied.  Under UVTA (as under UFTA and every fraudulent conveyance law going back to the Statute of 13 Elizabeth in 1571), a transfer is voidable if made with actual intent to “hinder, delay or defraud” any creditor of the debtor.  Section 8(a)(1) of UFTA granted  a defense to such a claim to a transferee who acted in good faith and paid reasonably equivalent value for the asset.  The defense was amended in UVTA to provide expressly that the reasonably equivalent value must be paid directly to the debtor.  In making that policy choice, the drafters had examples like this in mind:

Firm is a business corporation. At relevant times it may or may not be solvent. Boss holds a position of authority in Firm; perhaps Boss owns Firm. Boss wishes to procure property or services for his own benefit. Boss approaches Merchant to negotiate the acquisition of the desired property or services. Merchant is a professional in the relevant line of business, completely independent of Firm and Boss. Merchant sells to Boss the desired property or services at a fair price. Boss pays for the property or services with funds from Firm’s account. Merchant accepts the payment without knowledge of that fact, and without any other guilty knowledge. Later, a Creditor of Firm sues Merchant under the act to recover the payment that Firm made to Merchant. Creditor is able to establish that the payment was made by Firm with intent to hinder, delay, or defraud creditors. Is Merchant entitled to the section 8(a) defense?

The ULC decided that, no, Merchant should not be entitled to the defense, since the debtor (the Firm) had not received the value. In all these cases there will be one bad actor–the debtor who is insolvent–and two innocent parties, the creditors and the party who transacted with the debtor.

This was a policy decision as to which reasonable minds may differ. To prove the point, the Washington Legislature deviated from the ULC and took the exact opposite approach.  New RCW 19.40.081(1) provides that the defense is available to one who acts in good faith and pays reasonably equivalent value “whether or not given to the debtor”.  In adopting this provision, the Legislature considered this example, based on a real case in Washington:

An elderly couple put their house on the market and sold it. The buyer was exposed as a ponzi scheme fraudster. He was convicted and is serving 18 years in federal prison. His companies and personal assets were put into bankruptcy. The bankruptcy trustee found that one of the buyer’s LLCs had made the wire transfer for the down payment on the house sold by the elderly couple. The couple was sued by the bankruptcy trustee and the couple lost. Although they exchanged reasonably equivalent value (the house) in exchange for payment, in order to prevail under the UVTA they were required to give the house to the debtor (the third party LLC). The non-uniform amendment would be more fair and just if they took payment in good faith and exchanged a reasonably equivalent value in the property, it won’t matter whether the transfer was to the debtor or a third party.

The Legislature also considered the case of parents who paid college tuition not for themselves but for their child (and thus, not the “debtor”).

Because the choice of law is the location of the debtor, and not of the innocent person giving reasonably equivalent value, the Washington variant may lead to some unexpected results. If the LLC in the second example above had its principal place of business in a state like Utah, which adopted the uniform version of Section 8(a)(1), the Washington buyer would have no remedy.  But if Washington parents sent their kid to Harvey Mudd College (the most expensive college in America) located in California (which also has the uniform version of Section 8(a)(1)), California’s choice of law rules would point to Washington law and the school would not have to refund the tuition, notwithstanding that many of the parents’ unpaid creditors were likely Washington businesses.  Meanwhile, the University of Washington might have to refund the tuition paid by the California parents of one of its students because of Washington’s own choice of law rule.

Washington’s other two variants from the model uniform act are less substantive. One provides a definition of “reasonably equivalent value” which is not in the model uniform act, although the definition does not depart at all from the general understanding of the term.  The Washington definition, at RCW 19.40.011(13), is as follows:

“Reasonably equivalent value” includes, without limitation, a transfer or an obligation that is within the range of values for which the transferor would have sold the property or services to, or purchased the property or services from, the transferee in an arm’s length transaction at market rates.

The use of “includes, without limitation” suggests that this language will function as a safe harbor. Undoubtedly, there will be transactions so unique that the determination of an arms’ length price will likely turn into a battle of experts.

The model uniform act contained no transition rules, but the Washington version does. Essentially, the new statute applies to transactions made or obligations incurred after its effective date but doesn’t apply to those that made or incurred before its effective date, regardless of whether litigation is currently underway or filed after the effective date.

Effect on Partial or Strict Foreclosure Under the UCC. UVTA retains a safe harbor contained in UFTA for property obtained in a UCC foreclosure, but excludes from that safe harbor property obtained in full or partial strict foreclosure.  For example: imagine a debtor with significant equity in a piece of equipment that knows it will be forced to surrender that collateral (or its proceeds) to some creditor, and doesn’t care which one. The debtor decides to turn the collateral over to a secured creditor to whom it owes much less than the value of the equipment.  The procedure for a full or partial strict foreclosure gives notice of this transaction to other secured creditors, if any, but not to general creditors.  Thus, the drafters concluded, it is inappropriate to immunize such a transaction from UVTA. See RCW 19.40.081(5)(b).

Pleading and Proof. UVTA clarifies pleading, burden of proof and standard of proof, and specifically clarifies that in the context of UVTA, the usual standards for civil actions apply and not the heightened standards that apply to fraud.  A major justification for the change of name and the replacement of “fraudulent” with  “voidable” in most places in the statute was to make clear that an UVTA claim is an ordinary civil action, and thus not subject to requirements of pleading fraud with particularity or the heightened standard of proof for fraud.  Comment 10 to Section 5 of UVTA calls the application of fraud standards to UVTA “misguided” and notes that, unlike in a fraud case, a claim under UVTA “is unlikely to cause significant harm to the defendant’s reputation, for the defendant is the transferee or obligee, and the elements of the claim do not require the defendant to have committed even an arguable wrong.”

Special Rule for General Partnerships Deleted. A special rule for determining the solvency of general partners (essentially crediting them with the assets of their partners) has been deleted.  The drafting committee found no difference between the assets of general partners and those of guarantors, which were not credited to other entities.

Series LLC. UVTA contains a completely new section that effectively causes the series of series limited liability companies to be treated as separate entities for UVTA purposes.  Washington has not authorized series LLCs in its LLC statute and did not adopt Section 1-501(a)(3) of the Uniform Business Organizations Code (UBOC), which would have provided that the choice of law concerning the liability of a foreign series LLC was the law of its jurisdiction of organization. Compare RCW 23.95.500.  Discussions with persons involved in working on the LLC act, the UBOC and UVTA with the legislature did not reveal any coordination of the first two statutes and UVTA.  There are some series LLCs organized under other states’ laws that do business in Washington.  The effect of this statutory anomaly will presumably await litigation.  Note that because Washington does not recognize statutory amendment by implication, the inclusion of series LLCs in UVTA will not be deemed to amend either the Washington LLC statute or the Washington version of UBOC.

Differences in Section Numbering. Finally, the Washington Code Reviser has renumbered all the subsections of UVTA to conform to Washington practice.  It’s a short statute and it should not be that difficult to find which section corresponds, but practitioners should be aware that the numbers will not conform to the model uniform act.  An advantage is this will make it easier to tell the difference between UFTA and UVTA, since the sections have been renumbered even where the text was otherwise unaltered.