What Is An “Asset” Under The Uniform Fraudulent Transfer Act?
Occasionally, a debtor will give away all of his assets in an attempt to make himself “judgment proof” thus thwarting the creditor’s recovery. These are called “fraudulent transfers” and they are illegal. In California, fraudulently transferring assets can even be prosecuted as a criminal offense.
The civil remedy against fraudulent transfers is found in each state’s version of the Uniform Fraudulent Transfer Act, aka “UFTA.” UFTA prohibits a debtor from giving away assets if he is insolvent or becomes insolvent as a result of the transfer. UFTA allows courts to “void” fraudulent transfers so creditors can use the transferred asset to satisfy their judgment.
In Hasso v. Hapke, (June 19, 2014), —Cal.App.4th—, the Court of Appeals considered what is an “asset” and when is it “transferred” for the purposes of UFTA. In Hasso, the plaintiff’s trust invested in a hedge fund (Rockwater) based on some dubious representations. Around the same time, Rockwater gave Charles Fish Investments a 15% stake in the company in exchange for all of CFI’s assets. The acquisition agreement also provided that if certain benchmarks were not met, CFI could “unwind” the deal and take back its assets. Shortly thereafter, the fund was devastated in the market crash in 2008. CFI then got it’s property back per the “unwind” agreement. Hasso sued Rockwater for its losses, and also sued CFI and Rockwater claiming that the return of assets under the “unwind” agreement was a fraudulent transfer under UFTA.
The Court of Appeal disagreed that the unwind agreement was an asset transfer subject to UFTA:
When CFI entered into the transaction with RMA, it contributed its assets in exchange for an ownership interest in RMA coupled with a right to a return of assets if the value of its ownership interest in RMA was compromised. It clearly had a documented right, supported by consideration, to seize those assets, a right that predated both the financial calamity that gave rise to this lawsuit and, indeed, the lawsuit itself. We construe CFI’s right as “an interest in property to secure . . . performance of an obligation,” or a “lien,” within the meaning of Civil Code section 3439.01, subdivision (f).
Because property subject to a valid lien does not constitute an “asset” within the meaning of Civil Code section 3439.01, subdivision (a)(1), and a “transfer” within the meaning of Civil Code section 3439.01, subdivision (i) means the transfer of an “asset,” there was no “transfer” to trigger the application of Civil Code sections 3439.04 and 3439.05. Consequently, there was no evidence to show either that RMA and Williams made a fraudulent transfer of assets within the meaning of the UFTA or that CFI received assets pursuant to such a fraudulent transfer.
Thus, because there was no transferred “asset,” the court threw out plaintiff’s claims of both actual and constructive fraudulent transfer under UFTA.
The court got this one correct. There is no transfer when a party enforces it’s lien, and takes possession of a security interest. It is worth noting, however, that under UFTA a transfer does occur at the time the security interest is created.