Constructively Fraudulent Transfers Law Definition Elements Defense Lawyer
[California Civil Code §§ 3439.04(a)(2), 3439.05]
Definition
There are two forms of constructive fraud under the Uniform Voidable Transactions Act (formerly the Uniform Fraudulent Transfer Act). California Civil Code section 3439.04 provides that a transfer is fraudulent if the debtor did not receive reasonably equivalent consideration and either (1) was engaged or about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due. California Civil Code section 3439.05 provides that a transfer is fraudulent as to an existing creditor if the debtor does not receive reasonably equivalent value and “was insolvent at that time or became insolvent as a result of the transfer.” (Mejia v. Reed (2003) 31 Cal.4th 657, 669-670.)
Even without actual fraudulent intent, a transfer may be fraudulent as to present creditors if the debtor did not receive “a reasonably equivalent value in exchange for the transfer” and “the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” (PGA West Residential Assn., Inc. v. Hulven Int’l Inc. (2017) 14 Cal.App.5th 156, 169.)
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Element 1: Creditor
A “creditor” is a person or entity who has a claim against the debtor. (Cal. Civ. Code, § 3439.01, subd. (c).) A “claim” means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. (Cal. Civ. Code, § 3439.01, subd. (b).) Creditors whose claims arose after the allegedly fraudulent transaction have equal standing with existing creditors. (Cal. Civ. Code, § 3439.04, subd. (a).)
A creditor can be an individual, partnership, corporation, limited liability company, association, organization, government or governmental subdivision or agency, business trust, estate, trust, or any other legal or commercial entity. (Cal. Civ. Code, § 3439.01, subd. (g).)
A “creditor” includes an assignee of a general assignment for the benefit of creditors. (See Cal. Civ. Proc. Code, § 493.010; Cal. Civ. Code, § 3439.01, subd. (c).) An assignee of a general assignment for the benefit of creditors may exercise any and all of the rights and remedies available to the creditors of the assignor who are beneficiaries of the assignment, but only for the benefit of those creditors whose rights are asserted by the assignee. (Cal. Civ. Code, § 3439.07, subd. (d).)
The UVTA permits defrauded creditors to reach property in the hands of a transferee. (Mejia v. Reed (2003) 31. Cal.4th 657, 663.)
Element 2: Transfer or Obligation
A conveyance will not be considered fraudulent if the debtor merely transfers property which is otherwise exempt from liability for debts. That is, because the theory of the law is that it is fraudulent for a judgment debtor to divest himself of assets against which the creditor could execute, if execution by the creditor would be barred while the property is in the possession of the debtor, then the debtor’s conveyance of that exempt property to a third person is not fraudulent. (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.)
The UVTA is not the exclusive remedy by which fraudulent conveyances and transfers may be attacked. They may also be attacked by a common law action. (Wisden v. Superior Court (2004) 124 Cal.App.4th 750, 758.)
Element 3: Reasonably Equivalent Value/Insolvency
Under the Uniform Voidable Transactions Act (formerly the Uniform Fraudulent Transfer Act), a 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 that time or the debtor became insolvent as a result of the transfer or obligation. (Cal. Civ. Code, § 3439.05.)
Reasonably Equivalent Value
Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person. (Cal. Civ. Code, §3439.03; see also Cal. Civ. Code, § 3439.03, 1986 Leg. Comm. (4) [unperformed promise for value does not include individual’s promise to support parent; does include promise to make repairs on transferor’s homestead and promise to pay transferor’s debts].)
A transfer for security of a debt is ordinarily for a reasonably equivalent value, because the amount of the debt is the measure of the value of the interest in the asset that is transferred; if, however, a transfer for security purports to secure more than the debt actually incurred or to be incurred, it may be found to be for less than a reasonably equivalent value. (Cal. Civ. Code, § 3439.03, 1986 Leg. Comm. (3).)
In determining whether a debtor received reasonably equivalent value in incurring an obligation as a surety for another, weight should be given to the likelihood that that the principal debtor will satisfy the obligation in whole or in part. (Cal. Civ. Code, § 3439.02, 1986 Leg. Comm. (7).)
Insolvency
To determine solvency, the value of a debtor’s assets and debts are compared. By statutory definition, a debtor’s assists exclude property that is exempt from judgment enforcement. Retirement accounts are generally exempt. (Mejia v. Reed (2003) 31 Cal.4th 657, 670.)
A debtor is insolvent if, at fair valuations, the sum of the debtor’s debts is greater than all of the debtor’s assets. (Cal. Civ. Code, § 3439.02, subd. (a)(2).)
A partnership is insolvent if, at fair valuations, the sum of the partnership’s debts is greater than all of the partnership’s assets plus the amount by which each general partner’s nonpartnership assets exceeds such partner’s nonpartnership debts. (Cal. Civ. Code, § 3439.02, subd. (b).)
In determining insolvency, assets do not include property encumbered by a valid lien, exempt property, or an interest in property held in tenancy by the entireties that cannot be reached by a creditor holding a claim against only one tenant. (Cal. Civ. Code, § 3439.02, 1986 Leg. Comm. (1), (5).)
In determining insolvency, assets do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under the UVTA. (Cal. Civ. Code, § 3439.02(d).)
In determining insolvency, debts do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset. (Cal. Civ. Code, § 3439.02, subd. (e).)
A debtor that is generally not paying its debts as they become due is presumed to be insolvent. (Cal. Civ. Code, § 3439.02, subd. (c).) This presumption is rebuttable: the debtor has the burden of proving that solvency is more probable than insolvency. (Cal. Civ. Code, § 3439.02, 1986 Leg. Comm. (3); see also Bankruptcy Code §303(h)(1).)
Element 4: Causation and Harm
A well-established principle of the law of fraudulent transfers is, “A transfer in fraud of creditors may be attacked only by one who is injured thereby. Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1020.)
It cannot be said that a creditor has been injured unless the transfer puts beyond her reach property she otherwise would be able to subject to the payment of her debt. (Mehrtash v. Mehrtash (2001) 93 Cal.App.4th 75, 80.)
Remedies
Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim
To the extent a transfer is voidable, the creditor may recover judgment for the lesser of (a) the value of the asset transferred (valued at the time of the transfer, subject to adjustment as the equities may require), and (b) the amount necessary to satisfy the creditor’s claim. (Cal. Civ. Code, §§ 3439.08, subds. (b), (c).) The judgment may be entered against (1) the first transferee of the asset or the person for whose benefit the transfer was made; (2) any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee. (Cal. Civ. Code, §§ 3439.08, subd. (b).) Notwithstanding the foregoing, a transfer or an obligation is not voidable against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee. (Cal. Civ. Code, § 3439.08, subd. (a).)
Attachment or other provisional remedies
A creditor who has commenced an action on a claim against the debtor may attach the asset transferred or its proceeds if the remedy of attachment is available in the action under applicable law and the property is subject to attachment in the hands of the transferee under applicable law. (Cal. Civ. Code, § 3439.07, subd. (b); see also Cal. Civ. Proc. Code, § 481.010 et seq.)
Execution
A judgment creditor may levy execution on the transferred asset or its proceeds. (Cal. Civ. Code, § 3439.07, subd. (c).)
Injunction against further disposition by the debtor or a transferee, or both
A creditor may obtain an injunction against further disposition by the debtor or transferee, or both. (Cal. Civ. Code, § 3439.07, subd. (a)(3)(A).)
Constructive trust
Constructive trust plainly a proper remedy under § 3439.07, subd. (a)(3)(C). (Monastra v. Konica Business Machines, U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 1645.)
Consequential Damages
Certain cases, while not awarding consequential damages, have recognized the availability of such damages. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1021.)
Punitive damages
Punitive damages are appropriate in fraudulent transfer actions only where compensatory damages, or their equivalent, are awarded. (Cheung v. Daley (1995) 35 Cal.App.4th 1673, 1676-77.)
Note: Case law has established the remedies specified in the UVTA are cumulative and not the exclusive remedy for fraudulent conveyances.
“They may also be attached by, as it were, a common law action.” By its terms the UVTA was intended to supplement, not replace, common law principles related to fraud. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1019.)
Statute of Limitations
The limitations period is four years after the transfer was made or the obligation was incurred, or one year after the transfer or obligation was or could reasonably have been discovered by the claimant, whichever is later, but no later than seven years after the transfer was made or the obligation was incurred. (Cal. Civ. Code, §§ 3439.09, subds. (a), (c).) Where a fraudulent transfer is alleged to have been made during a pending lawsuit that will establish whether the complaining party is in fact a creditor, the limitations period does not begin to run until the judgment in the underlying action becomes final. (Cortez v. Vogt (1997) 52 Cal.App.4th 917, 929-37.)
Affirmative Defenses
Statute of Limitations (Constructive Fraud)
The UFTA is not the exclusive remedy by which fraudulent conveyances and transfers may be attacked. They may also be attacked by, as it were, a common law action. If and as such an action is brought, the applicable statute of limitations is section 333(d) and, more importantly, the cause of action accrues not when the fraudulent transfer occurs but when the judgment against the debtor is secured (or maybe even later, depending upon the belated discovery issue). (Macedo v. Bosio (2001) 86 Cal.App.4th 1044, 1051.) California Civil Code section 3439.09, subdivisions (a) and (b) are statutes of limitation requiring a plaintiff to file a fraudulent transfer action within four years of the transfer or, for an intentional fraud, within one year after the transfer was or could reasonably have been discovered. (PGA West Residential Assn., Inc. v. Hulven Int’l Inc. (2017) 14 Cal.App.5th 156, 179.)
Good Faith (Cal. Civ. Code, § 3439.08(a), (f)(1).)
Under section 3439.08, subdivision (b)(1)(A), judgment for a fraudulent transfer may be entered against the first transferee of the asset or the person for whose benefit the transfer was made. (Lo v. Lee (2018) 24 Cal.App.5th 1065, 1072.) If the transferee knew facts showing that the transferor had a fraudulent intent, there cannot be a finding of good faith regardless of any combination of facts; and one court has so held. (See Nautilus, Inc. v. Yang (2017) 11 Cal.App.5th 33, 46.)