The Uniform Fraudulent Transfer Act (“UFTA”) was initially drafted by the National Conference of Commissioners on Uniform State laws in the mid-1980's1 as a successor to the 1918 Uniform Fraudulent Conveyance Act (“UFCA”)2 and more recently revised as the Uniform Voidable Transactions Act (“UVTA”) in 2014.3 Illinois adopted the 1984 version of the UFTA in 1989.4 The UFTA itself, at the intersection of state law and Federal civil, criminal and bankruptcy law has developed a robust caselaw, which in part, the 2014 amendments seek to address.5 With further revisions on the horizon, it is useful to examine the implementation of the UFTA in Illinois as well as the proposed revisions to the UFTA and potential effects on Illinois practitioners beyond its usual application.
The UFTA developed as a significant change to the UFCA necessitated, in part, by the revisions to the Bankruptcy Code enacted in 1978, as well as the effect of the near-universal implementation of the UCC.6 The core purpose of the law remained unchanged: to define actual and/or constructive fraud in transactions by debtors and, therefore, determine which transfers subsequent creditors could seek to void.7
The text of the UFTA states:
“A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if 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 a reasonably equivalent value in exchange for the transfer or obligation and the debtor: (A) 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 (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”8
The text of the law goes into further detail in attempting to define “actual intent” by elucidating eleven factors to be considered when evaluating the intent of a debtor:
“(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) 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) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.”9
The 1984 UFTA changed the term “conveyance” to “transfer” in its title due to the common understanding that the term “conveyance” connotes a transfer of real property and not other kinds of property.10 The tentacles of the UFTA are in fact far-reaching and intersect with almost every area of legal practice. In addition to creating a direct cause of action, the UFTA is frequently implicated in bankruptcy proceedings and indeed has been integrated into the U.S. Bankruptcy Code.11 While the Bankruptcy Code has an independent version of the UFTA, it also explicitly authorizes trustees to use applicable state law to avoid a transfer12–which, under Illinois law, has the effect of lengthening the look-back period to four years.13 The extensive body of precedent in bankruptcy jurisprudence reflects that the analysis of individual transactions is highly fact specific and offers significant room to argue.14
The extensive litigation generated by future creditors should catch the attention of transactional practitioners in the areas of both estate planning and corporate law. The UFTA can be used to seek recovery from an individual after corporate assets have been transferred into individual control, as a parallel or alternate course of action to seeking the piercing of a corporate veil.15 Therefore, corporate practitioners should be familiar with the UFTA and should consider whether transactions–including distributions, accelerated loan repayments, or even leveraged buyouts16–might run afoul of the UFTA. Estate planners should also therefore be wary–since much of estate planning includes transfers to insiders for no or non-equitable value, an estate planner should be aware not only of the source of the funds in an individual’s estate (whether funds were potentially subject to a UFTA avoidance upon their transfer into the estate) but also of the individual’s overall net worth and the value of the planned transfers to trusts or other individuals in proportion to the same, in order to circumvent an argument that they caused insolvency with relation to existing or future creditors.
The UFTA has some application in more unusual fields. For example, family law practitioners may utilize the UFTA to attack transfers of allegedly marital property.17 While the elements of a fraudulent transfer somewhat overlap the concept of the dissipation of a marital estate as set forth under the Illinois Marriage and Dissolution of Marriage Act (“IMDMA”),18 the UFTA offers the advantage of the remedy of avoidance of the transfer where the marital estate has been largely or completely alienated. In addition, parties to a dissolution proceeding should be cautious regarding discovery in situations where the UFTA may be implicated, as it has been used to avoid transactions to a wife in partial satisfaction of obligations under a marital settlement agreement.19
The 2014 Amendments suggested and approved by the Uniform Law Commission did not make substantive changes to either section of the law quoted above (except to update the term “fraudulent” to “voidable”).20 The committee explained that the 2014 revisions were not meant as a significant rewrite of the substance of the law, but rather contained minor updates to terminology.21 Indeed, the most significant revisions were made to the comments, in order to incorporate updates to definitions and explanations that reflected current application of the UFTA in caselaw.22 However, practitioners should keep in mind that the 2014 amendments (which have not been enacted in Illinois) change the special definition of “insolvency” for partnerships. In the Illinois Compiled Statutes, the exception reads as follows:
“A partnership is insolvent under subsection (a) if the sum of the partnership’s debts is greater than the aggregate, at a fair valuation, of all of the partnership’s assets and the sum of the excess of the value of each general partner’s nonpartnership assets over the partner’s nonpartnership debts.”23
This section is deleted in its entirety in the 2014 update in order to address two failings of this language: first, that “the general definition of insolvency . . . does not credit a non-partnership debtor with any part of the net worth of its guarantors.”24 This creates an inequity between partnership and non-partnership debtors that is otherwise inexplicable and therefore unjustified. Additionally, the credit to the partnership for the net worth of its individual members only makes sense if the members are also wholly liable for the debts of the partnership– and not if the partners’ net worth is not available to the partnership for use in debt satisfaction.25
The UFTA remains a useful tool in the arsenal of civil litigators and an area of law with which transactional attorneys must familiarize themselves, as it has far reaching implications in many practice areas.
1. UNIFORM FRAUDULENT TRANSFER ACT (1984).
2. UNIFORM FRAUDULENT CONVEYANCE ACT (1918).
3. UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
4. 740 ILCS 160 et seq. (2016).
5. UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
6. UNIFORM FRAUDULENT TRANSFER ACT, Prefatory Note (1984).
8. 740 ILCS 160/5 (2016).
10. UNIFORM FRAUDULENT TRANSFER ACT, Prefatory Note (1984).
11. 11 U.S.C. §548.
12. 11 U.S.C. §544(b).
13. 740 ILCS 160/10 (2016).
14. See, e.g., In re SGK Ventures, LLC 2017 WL 2683686 (N.D. Ill. June 20, 2017); In re Zeigler, 320 B.R. 362 (N.D. Ill. Feb. 10, 2005); In re Mussa, 215 B.R. 158 (N.D. Ill. Dec. 5, 2007); In re Chicago Management Consulting Group, Inc., 569 B.R. 722 (N.D. Ill. June 2, 2017).
15. See, e.g., Apollo Real Estate Investment Fund, IV, L.P. v. Gelber, 403 Ill.App.3d 179, 935 N.E. 2d 963 (1st Dist. 2010), Panos Trading, LLC v. Forrer, 2017 IL App (1st) 161460-U (June 29, 2017).
16. Boyer v. Crown Stock Distribution, Inc., 587 F.3d 787 (7th Cir. 2009). See also Blackwood, Raymond J. Applying Fraudulent Conveyance Law to Leveraged Buyouts, 42 Duke L.J. 340 (1992).
17. See, e.g., In Re Marriage of Romano, 2012 IL App (2d) 091339 (March 21, 2012); Wachowski v. Wachowski, 2017 Ill App (2d) 160416-U (March 17, 2017); In re Marriage of Shuff, 2015 IL App (2d) 140297-U (March 12, 2015); In re Marriage of Del Giudice, 287 Ill.App.3d 215 (1997).
18. 750 ILCS 5/503 (d)(2) (2016).
19. Northwestern Memorial Hosp. v. Sharif, 2014 IL App (1st) 133008 (December 2, 2014).
20. UNIFORM VOIDABLE TRANSACTIONS ACT, §4 (2014).
21. UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
22. UNIFORM VOIDABLE TRANSACTIONS ACT (2014).
23. 740 ILCS 160/3 (c)(2016).
24. UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).