Knowing When to Walk Away
Into The Void: Kentucky Adopts Uniform Fraudulent ... er, I Mean ... Voidable Transactions Act
by Guest Blogger
Until 2016, Kentucky was one of just a few states that had not adopted a model statute relating to fraudulent transfers. As mentioned in a prior post on Kentucky's statutory quirkiness, its statute descended neither from the Uniform Fraudulent Transfer Act ("UFTA") nor the Uniform Fraudulent Conveyance Act ("UFCA"). Effective this year, however, Kentucky is at the leading edge of uniform creditor avoidance statutes (KRS 378A), having become among the first 9 states (as of this writing) to adopt the new Uniform Voidable Transactions Act ("UVTA"). I have written on UVTA generally and will try to stay focused on how UVTA will likely change avoidance action practice for Kentucky practitioners. Here are some highlights:
The Commissioners Really Want Everyone To Stop Using The Phrase "Fraudulent Transfer."
According to the commentary, "the word 'fraudulent' in the original title, though sanctioned by historical usage, was a misleading description of the Act as it was originally written." This is a good point because constructively fraudulent transfers never required fraudulent intent on the part of either the transferor or transferee. Moreover, even intentionally fraudulent transfers did not require transferee intent, and transferor intent was typically proven circumstantially via "badges of fraud." The Commissioners further note that the use of the old phrase bred bad habits, including uses of "oxymoronic and confusing shorthand tags" like "constructive fraud." The change is not designed to be substantive, and the UVTA amendments are not a "comprehensive revision" of the predecessor UFTA. In Kentucky, of course, where we had no UFTA, UVTA is a comprehensive revision to our old statute. Either way, it's easy to see how a simple phrase change may have unintended substantive effect. If we're supposed to take the fraud out of fraudulent transfers, must a plaintiff plead with Rule 9(b) particularity when asserting a Section 4(1)(a) claim (which we all used to call an "intentionally fraudulent transfer")? That's currently the rule in many courts, especially when interpreting Section 548 of the Bankruptcy Code, which admittedly uses the phrase "fraudulent transfers" in the title. See this Skadden piece on the recent Lyondell II decision from the Southern District of New York.
What's Voidable In Kentucky Now:
Transfers made with actual intent to delay, hinder or defraud creditors are avoidable by existing and future creditors and UVTA has saved us all a bunch of research time by specifically delineating the "badges of fraud" we all know and love.
This appears to be a super-duper constructively fraudulent transfer action that, unlike garden-variety constructively fraudulent transfers, may be asserted by creditors whose claims arise after the transfer in question. To prevail, plaintiffs must show a lack of reasonably equivalent value, and either (1) transferor undercapitalization or (2) that the transferor should have known that it was incurring debts beyond its ability to repay.
: This is the old-school constructively fraudulent transfer action, available only to existing creditors, who must prove a lack of reasonably equivalent value and insolvency.
This is a new insider preference statute, available to existing creditors if "the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent." The prior state law preference statute has been repealed. The lookback on insider preferences under this section is 1 year.
The Lookback Period For Voidable Transfers In Kentucky Is Now 4-years.
Kentucky previously operated on a 5-year lookback for fraudulent transfers, but KRS 378A.090 "extinguishes" a creditor's claim if not asserted by the fourth year after the subject transfer (but 1 year for the insider preference, as noted above).
A New Basis In Kentucky to Request a Receiver! Section 7 of UVTA
is a remedy toolkit available to a creditor plaintiff, and it includes the ability to obtain: (i) attachment and/or other provisional remedies (query how nicely this will play with our still-existing prejudgment attachment statute, which has some tricky technical requirements discussed in "Goodbye UFTA, Hello UVTA"); (ii) an injunction against further property disposition by a debtor or transferee; and (iii) the "appointment of a receiver to take charge of the asset transferred or of the other property of the transferee." Historically, state law receiverships in Kentucky most often arise as a supplemental remedy to judicial foreclosure, and we have heretofore lacked anything akin to federal equity receivership. This new language could be very powerful. Expect judges to look to the federal receivership jurisprudence before applying this. If not approached carefully, plaintiffs may demand the appointment of a receiver over all of the property owned by an unlucky, unknowing garden-variety, constructively-fraudulent (er... I mean voidable) transfer defendant.