August 27, 2024 - On December 6, 2019, the Uniform Voidable Transactions Act (UVTA) was signed into law in New York. This statute replaced New York’s prior fraudulent conveyance law, the Uniform Fraudulent Conveyance Act (UFCA) and clarifies the rights and remedies available to creditors who entered into transactions with financially distressed debtors. For example, amongst other remedies, the UVTA provides creditors with the right to seek the avoidance of certain transfers of property made or obligations incurred by debtors (“Voidable Transactions”) to the extent necessary to satisfy creditors’ claims.

The UVTA took effect on April 4, 2020, (the “Effective Date”) and applies to Voidable Transactions that occurred on or after the Effective Date. However, creditors’ rights to seek the remedies available under the UVTA are extinguished if a cause of action is not brought within four years after the Voidable Transaction was made, or in certain circumstances (when discovered after four years) no later than one year after the Voidable Transaction was or could reasonably have been discovered.

With the financial hardships experienced by many debtors resulting from the COVID-19 pandemic, and a post-pandemic surge in global insolvencies including forecasted increases in insolvencies in North America for 2024, coupled with the less onerous burden of proof required under the UVTA (the UVTA requires a preponderance of the evidence burden of proof as compared to the “clear and convincing evidence” standard applied by some courts under the UFCA), it stands to reason that there may be an increase in claims brought by creditors in New York under this statute. Given that the UVTA’s four-year statute of limitations may be close to running its course for potential Voidable Transactions that occurred in 2020, creditors and their legal counsel may want to consider this remedy as an alternative for seeking relief from unpaid debts.

This article will revisit: (i) the elements that creditors must plead and prove in order to prevail on a claim that a Voidable Transaction has occurred under the UVTA; and (ii) the defenses available to debtors under the statute. Many of the UVTA’s elements for proving or rebutting the existence of a Voidable Transaction turn on facts and data observable in debtors’ financial and operational books and records. Accordingly, the inspection, analysis and explanation of said books and records, as performed by a skilled and experienced forensic accountant, is often a critical component of creditors’ or debtors’ legal strategy for evaluating, prevailing on or defending against UVTA-related claims.

What is a Voidable Transaction under the UVTA?

Whether a Voidable Transaction has occurred under the UVTA will depend on when a creditor’s claim arose. Pursuant to UVTA §270(c), a “ ‘Claim’, except as used in ‘claim for relief’, 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.”

Transfer or obligation voidable as to a present creditor (UVTA §274 Claims)

When a creditor’s right to payment arose before the transaction(s) at issue (a “Present Creditor”), a Voidable Transaction may be demonstrated upon a showing that “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.” A Present Creditor may also succeed on their claim that a Voidable Transaction occurred by demonstrating that “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.”

Recent New York case law demonstrates that certain courts have dismissed creditors’ claims under UVTA §274 when said claims are solely based “on information and belief” without any additional supporting factual allegations. ¹With the exception of transfers that occurred “pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement” the UVTA does not provide a comprehensive definition of what reasonably equivalent value is.

With respect to insolvency, the UVTA states that a “debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets.” Insolvency may also be presumed when it can be shown that “a debtor … is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.”

Transfer or obligation voidable as to present or future creditor (UVTA §273 Claims)

For creditor’s whose right to payment arose before or after the transaction(s) at issue (a “Present or Future Creditor”), a Voidable Transaction may be demonstrated upon showing that “the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (i) was engaged or was 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 (ii) intended to incur, or believed or reasonably should have believed that the debtor would incur debts beyond the debtor’s ability to pay as they became due.” The UVTA codified certain factors to consider, previously known as common-law “badges of fraud”, that would provide indicia of actual intent.

For example, UVTA §273(b) identifies the following factors to consider as indicia of actual intent:

1. Whether the transfer or obligation was to an insider;
2. Whether the debtor retained possession or control of the property transferred after the transfer;
3. Whether the transfer or obligation was disclosed or concealed;
4. Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
5. Whether the transfer was substantially all the debtor’s assets;
6. Whether the debtor absconded;
7. Whether the debtor removed or concealed assets;
8. Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
9. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
10. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and
11. Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

Statutory defenses under UVTA §277

In addition to rebutting the elements that must be demonstrated by creditors, the UVTA codifies defenses available to debtors and subsequent transferees or obligees which, like the creditors’ burden of proof, must be proven via a preponderance of the evidence. The available defenses vary depending on whether the claim is asserted under UVTA §273 or §274.

For example, a “transfer or obligation is not voidable under [UVTA §273(a)] against a person that took in good faith and for reasonably equivalent value given the debtor or against any subsequent transferee or obligee.” The statute also provides that a “transfer is not voidable under [UVTA §273(a)(2) or UVTA §274] if the transfer results from: (1) termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law; or (2) enforcement of a security interest in compliance with article nine of the uniform commercial code, other than acceptance of collateral in full or partial satisfaction of the obligation it secures.”

Furthermore, a “transfer is not voidable under [UVTA §274(b)]: (1) to the extent the insider gave new value to or for the benefit of the debtor after the transfer was made, except to the extent the new value was secured by a valid lien; (2) if made in the ordinary course of business or financial affairs of the debtor and the insider; or (3) if made pursuant to a good-faith effort to rehabilitate the debtor and the transfer secured present value given for that purpose as well as an antecedent debt of the debtor.”

Conclusion

It is clear from the aforementioned provisions that the evaluation of claims brought under the UVTA is fact-intensive and the relevant factors or elements to be demonstrated will vary on a case-by-case basis. In this regard, a skilled and experienced forensic accountant is an invaluable consultant to legal counsel for either creditors or debtors. Whether in the pre-dispute, case evaluation phase, or throughout all stages of discovery and through trial, a forensic accountant can assist counsel in many ways, including but not limited to:

1. Evaluating the strengths and weaknesses of their clients’ position(s);
2. Identifying the relevant financial and operational books and records and other pertinent documents and information to be considered (which may vary depending on the types of parties involved, the transaction(s) at issue, and the nature of the parties’ business operations);
3. Identifying the best format to receive the aforementioned data to enhance the efficiency of the analysis of said data;
4. Analyzing the applicable books and records and pertinent documents and information for indicia, or lack thereof, of the elements required to prevail on or defend against a UVTA claim;
5. Interpreting and explaining the books and records and pertinent documents and information, the analyses performed thereon, and the resulting findings and conclusions reached from said analyses to the finder of fact whether via affidavit, expert report, or expert witness testimony; and
6. Assisting counsel with drafting or responding to pleadings and motions insofar as they relate to the applicable UVTA factors analyzed by the forensic accountant with respect to the claims at issue, as well as assisting counsel with preparing for examination of witnesses at deposition or trial with regard to the UVTA-related issues.

Citrin Cooperman’s Forensic and Litigation Advisory Services Practice has significant and on-point experience providing forensic accounting consulting services to counsel representing clients in matters where evaluation of claims under the UVTA is at issue. For more information, please contact Michael A. Garcia or your Citrin Cooperman advisor.

¹ See Board of Mgrs. of Petit Verdot Condominium v. 732-734 WEA, LLC, 2022 N.Y. Misc. LEXIS 10095 at *11-13 (Sup. Ct., NY County Oct. 6, 2022). See also 200/210 E. 65 LLC v. Bristol 65 Parking LLC, 2023 N.Y. Misc. LEXIS 5370 at *11-12 (Sup. Ct., NY County Aug. 29, 2023).