CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2004 No.16
September 20, 2004

Vol 2004 No. 16 September 20, 2004

State Fraudulent Transfers Law Strengthened

A new California law, SB 1408, supported by the CBA, enhances creditors' ability to prove that a debtor had transferred property with the intent to defraud the creditor. SB 1408 amends the Uniform Fraudulent Transfers Act, codified in California Civil Code section 3439 et seq. ("UFTA"), by including a nonexclusive list of "badges of fraud" into the statute. When the UFTA was enacted in California in 1986, this list was included in the commentary to the law. In the uniform version passed in other states, the list was included in the UFTA itself.

Background on the California UFTA

When a debtor transfers assets or enters into an obligation for the purpose of defeating a creditor's collection efforts, the transfer or obligation is considered fraudulent and can be avoided by a court as necessary to protect affected creditors.

Without regard to intent, a transfer is also fraudulent if it was made after a creditor's claim where the debtor did not receive a reasonably equivalent value in exchange for the transfer or obligation, and the debtor was insolvent at that time or became insolvent as a result of the transfer.
In addition to avoiding the transaction or obligation, a creditor may request a court to grant: an order of attachment against the subject assets; an injunction against further transfers by the debtor or transferee of the assets; and an appointment of a receiver to take charge of the assets.

SB 1408

California courts construing the UFTA have not given due weight to the badges of fraud enumerated in the uniform version because of their absence in the statute. The fact that the factors are codified in the majority of other jurisdictions has given weight to debtors' arguments that the California legislature affirmatively intended to diminish the importance of these factors in this state.

SB 1408 incorporates these factors into Civil Code section 3439.04(b) as a non-exclusive list for courts to consider when the UFTA is at issue in a judicial case. This amendment does not affect any other part of the UFTA, which remains in effect without change, and is declaratory of existing law. It is not intended to affect any judicial decisions that have interpreted the UFTA.

The newly codified factors are:

• Whether the transfer or an obligation incurred by the debtor was to an insider;
  

• Whether the debtor retained possession or control of the property after the transfer;
  

• Whether the transfer or obligation was concealed;
  

• Whether before the transfer was made or obligation incurred, the debtor had been sued or threatened with suit;
  

• Whether the transfer was of substantially all the debtor's assets;
  

• Whether the debtor absconded;
  

• Whether the debtor removed or concealed assets;
  

• Whether the consideration was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
  

• Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
  

• Whether the transfer occurred shortly before or after a substantial debt was incurred; and
  

• Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.

The bill explicitly states that consideration may be given to other factors as well.

SB 1408 is effective January 1, 2005. If you have any questions, please contact Kevin Gould, CBA's lead lobbyist on this bill at kgould@calbankers.com.