pageok
pageok
pageok
Fraudulent Transfer Question:

Here's a pretty narrow question to which I have never been able to figure out the precise answer, so I will ask our readers if any of you have ever seen this. Assume that the trustee avoids a transfer in bankruptcy under 544(b) of the Code, using the UFTA as applicable state law. Section 550 provides that the trsutee can always recover from the immediate transferee. UFTA section 8, however, provides that a transfer is not avoidable for actual fraud (UFTA 4(a)(1)) if the transferee takes the property in good faith and for reasonably equivalent value even as to the initial transferee (although it will likely be rare that the debtor commits actual fraud yet the transferee pays reasonably equivalent value and in good faith). Section 548 thus seems to avoid the transfer and 550 seems to allow the porperty to be recovered against the initial transferee and to give the transferee a lien (because of the good faith). But the UFTA--and thus seemingly by implication 544(b)--states that the transfer is unavoidable if taken in good faith.

The issue, then, does section 550 of the Bankruptcy Code trump UFTA section 8 when it comes to avoidance of the transfer to the initial transferee if the transfer is made with actual fraudulent intent by the debtor, but taken in good faith and for reasonably equivalent value by the transferee?

My inclination is to say yes, in that 544(b) derives the substantive standards for when avoidance is permissible from state law, but that the remedy upon avoidance is a matter of federal law. And UFTA section 8 is a remedy provision rather than a substantive provision, thus it yields to section 550. If the relevant provision were part of the substantive law in UFTA 4(a)(1), then I would say otherwise.

I have never been able to find a good discussion of this and I suspect that this issue rarely arises given the need for good faith in the context of an actually fraudulent transfer and that the substantive cause of action arises under 544(b) (the issue doesn't arise if the avoidance is under 548, of course). I've asked about a dozen bankruptcy friends in the past several years and none of them had ever noticed the issue before.

Has anyone out there ever thought about this issue?

speedwell (mail):
Forty-two.

Oh, sorry, wrong question. (heh)
10.18.2005 9:19am
Guest2 (mail):
I've never had occasion to deal with this issue, but I'm inclined to agree that sec. 550 would trump the UFTA (as adopted by a state, needless to say). As you say, the issue probably never arises in practice because who's going to bother avoiding a transfer where the debtor received reasonably equivalent value?
10.18.2005 10:26am
Dawg:
But sec. 550 begins "to the extent avoided under section 544", and since, as you note, 544(b) permits the trustee to avoid any transfer voidable under state law.

Why wouldn't 550 be providing a remedy (avoidance) to the extent that that remedy (avoidance) is available under state law?
10.18.2005 11:02am
Bag Man (mail):
Professor,

I agree with your conclusions of law. Your hypothetical transfer is one that you admit is not "... [a]voidable under applicable law by a creditor holding an unsecured claim...". The legislative history states that §544(b) is derived from §70e of the old Bankruptcy Act and, as such, it "gives the trustee the rights of actual unsecured creditors under applicable law to void transfers."

Section 550(a) permits recovery only "to the extent that a transfer is avoided under ... section 544...". Thus, if a transfer is not avoidable under applicable state law, then it's not avoided pursuant to §544(b) and, I would think, should not be recoverable under §550.

I believe that on your posed facts the transfer for "reasonable equivalent value" would not be avoidable or recoverable under §§548(a)(1)(B) and 550, but I agree that such a transfer could be avoided and recovered if other facts supported avoidance under §548(a)(1)(A).
10.18.2005 12:32pm
Steve:
The point is that "reasonably equivalent value" doesn't necessarily mean an asset that can be included in the debtor's estate. Cancellation of a pre-existing debt can also be reasonably equivalent value under the right circumstances. Obviously, the trustee would rather get the cash back and let the debt be reinstated, and that's why these transactions get avoided.

It's entirely possible for a debtor to pay a pre-existing debt in an arm's-length transaction, with the creditor taking in good faith, and yet the transaction still constitutes actual fraud as to the remaining creditors.
10.18.2005 12:41pm
Unnamed Co-Conspirator:
When did the allegedly fraudulent transfer occur? If within the limitations period under the BR Code, then I think the Trustee can proceed under either the BR Code or applicable state law; if outside the limitations period under the BR Code, then the Trustee has to use state law. Check it out to be sure, but I think that's the answer.
10.18.2005 1:54pm
Scipio (mail) (www):
This is one hypothetical question whose provenance is quite intriguing. The only situations I can come up with where it might occur are thoroughly outlandish.
10.18.2005 5:32pm
Haven (mail):
It seems to me quite clear that if a transferee of a transfer that is attacked under the UFTA actual fraud provision has a defense under UFTA 8(a), then the TIB cannot recover against the transferee on a 544(b) theory. BC 544(b) only gives the TIB the power to avoid a transfer that is voidable under nonbankruptcy law, and if the UFTA 8(a) defense applies then the transfer is not voidable under nonbankruptcy.

You said: "And UFTA section 8 is a remedy provision rather than a substantive provision,..." Two problems with that assertion.

First, that assertion isn't true under the better reading. UFTA 8 is captioned "Defenses, Liability, and Protection of Transferee"; UFTA 7 is devoted to "Remedies". Hence UFTA 8(a) should be read as a substantive defense, not merely a limitation on remedies. It is true that UFTA 8(a) literally says that a transfer is not "voidable" if the specified conditions are met; it doesn't say that the transfer is not "fraudulent under this act"; and so a literalist might argue that UFTA 8(a) merely precludes avoidance but not other remedies. But that reading doesn't make any substantive sense that I can discern. Moreover, the UFTA repeatedly uses the term "voidable" as a synonym for "fraudulent under this act", e.g., UFTA 8(e), (f). The Cardozo Law Review did a symposium on UFTA in the late 1980s, and Paul Shupack pointed out this and other blips in the drafting.

Second, even if UFTA 8(a) were read merely to preclude avoidance but not other remedies, so what? BC 544(b) gives a TIB rights against a transfer only if nonbankruptcy law renders that transfer avoidable. If UFTA provided that the transferee of a particular transfer is liable for money damages but the transfer isn't avoidable, BC 544(b) wouldn't give the TIB any rights with respect to that transfer.

Baird and Jackson pointed out in one of their early articles on avoidance that there's no evident bankruptcy policy for expanding nonbankruptcy fraudulent transfer entitlements merely because a bankruptcy case has been filed (by contrast with preferences). One may spit on the grave of Moore v. Bay, but why strain to make the problem worse.
10.20.2005 12:58am
Haven (mail):
P.S. I expect that you'd be likely to encounter more interested and knowledgeable eyes if you posted this on the UCCLAW-L or BANKR-UNLV mailing lists:

http://lists.washlaw.edu/mailman/listinfo/ucclaw-l

http://www.law.unlv.edu/mailman/listinfo/bankr-unlv
10.20.2005 1:10am
Mamuski (mail) (www):
Hello
I see pretty good a website, that`s the stuff !
Regards from napalone mamuski
11.11.2005 5:11pm