Businesses in the fashion industry should be aware that New York State has significantly changed its fraudulent conveyance law, which governs the rights and remedies of parties who have transacted with financially- distressed businesses. The law, the Uniform Voidable Transactions Act (UVTA), aims to harmonize New York’s fraudulent conveyance law with the U.S. Bankruptcy Code, the Uniform Commercial Code (UCC) and other state laws.
NY Law Governing Fraudulent Transfers
The UVTA represents the first major overhaul of New York’s fraudulent conveyance law in more than 90 years. The state’s prior law, the Uniform Fraudulent Conveyance Act (UFCA) of the New York Debtor and Creditor Law, was adopted in 1925.
While New York law remained relatively unchanged for decades, most U.S. states adopted the Uniform Fraudulent Transfer Act, first promulgated in 1984. The model legislation was amended in 2014 and renamed the Uniform Voidable Transactions Act. In 2019, New York adopted the UVTA, while also authorizing a successful party in an avoidance action to recover attorney’s fees for both actual and constructive fraud.
The goal of the Uniform Voidable Transactions Act is to provide legal remedies to creditors harmed by a transfer of property or an incurrence of an obligation that is intentionally fraudulent, because it was transferred or incurred with actual intent to hinder, delay or defraud creditors; or constructively fraudulent, because the transfer or incurrence was in exchange for less than reasonably-equivalent value, and was made by a financially-distressed debtor/transferor.
Actual Fraud
Unlike the prior law, the UVTA expressly lists several “badges of fraud” that can be used by creditors to prove “actual intent to hinder, delay or defraud creditors.”
They include: the transfer or obligation was to an insider; the debtor retained possession or control of the property transferred; the transfer or obligation was undisclosed or concealed; before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; the transfer was of substantially all the debtor’s assets; the debtor removed or concealed assets or the value of the consideration received by the debtor was equivalent to the value of the asset transferred or amount of the obligation incurred, among other badges of fraud.
Constructive Fraud
Any transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer or obligation. Also, a transfer made by a debtor is voidable as to a creditor whose claim arose before the transfer was made 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.
Voidable vs Fraudulent Transfers
“Fraudulent transfer” has been replaced by the more inclusive “voidable transfer.” “Transfer” is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license and creation of a lien or other encumbrance.”
Consideration of Intent
The “fair consideration” standard, which applied to constructive fraudulent conveyances, has been replaced with the “reasonably equivalent value” standard. Notably, good faith is no longer considered with regard to constructive fraud — however, good faith remains relevant when asserting an affirmative defense to a claim of voidable transfer.
Statute of Limitations
The general reach-back period for voidable transaction claims is four years, as opposed to six years under the prior law. The statute of limitation is also reduced from two years to one year from the discovery of an intentionally fraudulent transaction.
Choice of Law
A claim for relief is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred. A debtor that is an organization and has only one place of business is located at its place of business, while a debtor that is an organization with more than one place of business is located at its chief executive office.
Insider Preferences
A transfer made by a debtor is voidable for one year after the transfer is made as to a creditor whose claim arose before the transfer was made 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.
What’s Next?
The Uniform Voidable Transactions Act applies to transfers made or obligations incurred after April 4, 2020, while the old law applies to transfers that occurred before that date. Given the significance of the legal changes under the UVTA, businesses should consult with experienced counsel regarding the potential impact on their legal rights.
Howard D. Bader
hbader@sh-law.com
(212) 784-6926
sh-law.com
