UNIFORM FRAUDULENT TRANSFER ACT

Drafted by the

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

and by it

APPROVED AND RECOMMENDED FOR ENACTMENT

IN ALL THE STATES

at its

ANNUAL CONFERENCE
MEETING IN ITS NINETY-THIRD YEAR
IN KEYSTONE, COLORADO
JULY 27 – AUGUST 3, 1984

WITH PREFATORY NOTE AND COMMENTS

 DRAFTING COMMITTEE ON
UNIFORM FRAUDULENT TRANSFER ACT

MORRIS W. MACEY, Suite 900, 133 Carnegie Way, N.W., Atlanta, GA 30303,
Chairman
GERALD L. BEPKO, Indiana University, School of Law, 735 West New York Street,
Indianapolis, IN 46202
WILLIAM D. HAWKLAND, Louisiana State University Law Center, Baton Rouge,
LA 70803
GRANT S. NELSON, University of Missouri-Columbia, School of Law, Columbia,
MO 65211
NEAL OSSEN, Room 611, 410 Asylum Street, Hartford, CT 06103
GEORGE R. RICHTER, JR., Suite 500, 4000 MacArthur Boulevard, Newport Beach,
CA 92660
BRYCE E. ROE, 340 East 400 South, Salt Lake City, UT 84111
FRANK R. KENNEDY, University of Michigan, School of Law, Ann Arbor, MI 48109,
Reporter
CARLYLE C. RING, JR., 710 Ring Building, Washington, DC 20036,
President (Member Ex Officio)
PHILLIP CARROLL, 120 East Fourth Street, Little Rock, AR 72201,
Chairman, Executive Committee
WILLIAM J. PIERCE, University of Michigan, School of Law, Ann Arbor, MI 48109,
Executive Director
SIDNEY S. EAGLES, JR., P.O. Box 888, Raleigh, NC 27602, Chairman,
Division E (Member Ex Officio)

REVIEW COMMITTEE

RALPH A. COLE, 1224 Bannock Street, Denver, CO 80204, Chairman

FRANCISCO L. ACEVEDO NOGUERAS, GPO Box CH, San Juan, PR 00936
HARRY M. WALSH, 3 State Capitol, St. Paul, MN 55155

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS
645 North Michigan Avenue, Suite 510
Chicago, Illinois 60611
 UNIFORM FRAUDULENT TRANSFER ACT

PREFATORY NOTE

The Uniform Fraudulent Conveyance Act was promulgated by the

Conference of Commissioners on Uniform State Laws in 1918. The Act has been
adopted in 25 jurisdictions, including the Virgin Islands. it has also been adopted
in the sections of the Bankruptcy Act of 1938 and the Bankruptcy Reform Act of
1978 that deal with fraudulent transfers and obligations.

The Uniform Act was a codification of the “better” decisions applying the
Statute of 13 Elizabeth. See Analysis of H.R. 12339, 74th Cong., 2d Sess. 213
(1936). The English statute was enacted in some form in many states, but, whether
or not so enacted, the voidability of fraudulent transfer was part of the law of every
American jurisdiction. Since the intent to hinder, delay, or defraud creditors is
seldom susceptible of direct proof, courts have relied on badges of fraud. The
weight given these badges varied greatly from jurisdiction, and the Conference
sought to minimize or eliminate the diversity by providing that proof of certain fact
combinations would conclusively establish fraud. In the absence of evidence of the
existence of such facts, proof of a fraudulent transfer was to depend on evidence of
actual intent. An important reform effected by the Uniform Act was the elimination
of any requirement that a creditor have obtained a judgment or execution returned
unsatisfied before bringing an action to avoid a transfer as fraudulent. See
American Surety Co. v. Conner, 251 N.Y. 1, 166 N.E. 783, 67 A.L.R. 244 (1929)
(per C.J. Cardozo).

The Conference was persuaded in 1979 to appoint a committee to undertake

a study of the Uniform Act with a view to preparing the draft of a revision. The
Conference was influenced by the following considerations:

(1) The Bankruptcy Reform Act of 1978 has made numerous changes in the
section of that Act dealing with fraudulent transfers and obligations, thereby
substantially reducing the correspondence of the provisions of the federal
bankruptcy law on fraudulent transfers with the Uniform Act.

(2) The Committee on Corporate Laws of the Section of Corporations,

Banking & Business Law of the American Bar Association, engaged in revising the
Model Corporation Act, suggested that the Conference review provisions of the
Uniform Act with a view to determining whether the Acts are consistent in respect
to the treatment of dividend distributions.

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 (3) The Uniform Commercial Code, enacted at least in part by all 50 states,
had substantially modified related rules of law regulating transfers of personal
property, notably by facilitating the making and perfection of security transfers
against attack by unsecured creditors.

(4) Debtors and trustees in a number of cases have avoided foreclosure of

security interests by invoking the fraudulent transfer section of the Bankruptcy
Reform Act.

(5) The Model Rules of Professional Conduct adopted by the House of

Delegates of the American Bar Association on August 2, 1983, forbid a lawyer to
counsel or to assist a client in conduct that the lawyer knows is fraudulent.

The Drafting Committee appointed by the Conference held its first meeting
in January of 1983. A first reading of a draft of the revision of the Uniform
Fraudulent Conveyance Act was had at the Conference’s meeting in Boca Raton,
Florida, on July 27, 1983. The Committee held four meetings in addition to a
meeting held in connection with the Conference meeting in Boca Raton. Meetings
were also attended by the following representatives of interested organizations:

Robert Rosenberg, Esq., of the American Bar Association;

Richard Cherin, Esq., of the Commercial Financial Services Committee of

the Corporation, Banking and Business Law Section of the American Bar
Association;

Robert Zinman, Esq., of the American College of Real Estate Lawyers;

Bruce Bernstein, Esq., of the National Commercial Finance Association;

Ernest E. Specks, Esq., of the Real Property, Probate and Trust Law Section
of the American Bar Association.

The Committee determined to rename the Act the Uniform Fraudulent

Transfer Act in recognition of its applicability to transfers of personal property as
well as real property, “conveyance” having a connotation restricting it to a transfer
of personal property. As noted in Comment (2) accompanying § 1(2) and
Comment (8) accompanying § 4, however, this Act, like the original Uniform Act,
does not purport to cover the whole law of voidable transfers and obligations. The
limited scope of the original Act did not impair its effectiveness in achieving
uniformity in the areas covered. See McLaughlin, Application of the Uniform
Fraudulent Conveyance Act, 46 Harv.L.Rev. 404, 405 (1933).

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 The basic structure and approach of the Uniform Fraudulent Conveyance
Act are preserved in the Uniform Fraudulent Transfer Act. There are two sections
in the new Act delineating what transfers and obligations are fraudulent. Section
4(a) is an adaptation of three sections of the U.F.C.A.; § 5(a) is an adaptation of
another section of the U.F.C.A.; and § 5(b) is new. One section of the U.F.C.A.
(§ 8) is not carried forward into the new Act because deemed to be redundant in
part and in part susceptible of inequitable application. Both Acts declare a transfer
made or an obligation incurred with actual intent to hinder, delay, or defraud
creditors to be fraudulent. Both Acts render a transfer made or obligation incurred
without adequate consideration to be constructively fraudulent – i.e., without regard
to the actual intent of the parties – under one of the following conditions:

(1) the debtor was left by the transfer or obligation with unreasonably small
assets for a transaction or the business in which he was engaged;

(2) the debtor intended to incur, or believed that he would incur, more debts
than he would be able to pay; or

(3) the debtor was insolvent at the time or as a result of the transfer or
obligation.

As under the original Uniform Fraudulent Conveyance Act a transfer or obligation

that is constructively fraudulent because insolvency concurs with or follows failure
to receive adequate consideration is voidable only by a creditor in existence at the
time the transfer occurs or the obligation is incurred. Either an existing or
subsequent creditor may avoid a transfer or obligation for inadequate consideration
when accompanied by the financial condition specified in § 4(a)(2)(i) or the mental
state specified in § 4(a)(2)(ii).

Reasonably equivalent value is required in order to constitute adequate

consideration under the revised Act. The revision follows the Bankruptcy Code in
eliminating good faith on the part of the transferee or obligee as an issue in the
determination of whether adequate consideration is given by a transferee or obligee.
The new Act, like the Bankruptcy Act, allows the transferee or obligee to show
good faith in defense after a creditor establishes that a fraudulent transfer has been
made or a fraudulent obligation has been incurred. Thus a showing by a defendant
that a reasonable equivalent has been given in good faith for a transfer or obligation
is a complete defense although the debtor is shown to have intended to hinder,
delay, or defraud creditors.

A good faith transferee or obligee who has given less than a reasonable
equivalent is nevertheless allowed a reduction in liability to the extent of the value
given. The new Act, like the Bankruptcy Code, eliminates the provision of the

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Uniform Fraudulent Conveyance Act that enables a creditor to attack a security
transfer on the ground that the value of the property transferred is disproportionate
to the debt secured. The premise of the new Act is that the value of the interest
transferred for security is measured by and thus corresponds exactly to the debt
secured. Foreclosure of a debtor’s interest by a regularly conducted, noncollusive
sale on default under a mortgage or other security agreement may not be avoided
under the Act as a transfer for less than a reasonably equivalent value.

The definition of insolvency under the Act is adapted from the definition of
the term in the Bankruptcy Code. Insolvency is presumed from proof of a failure
generally to pay debts as they become due.

The new Act adds a new category of fraudulent transfer, namely, a

preferential transfer by an insolvent insider to a creditor who had reasonable cause
to believe the debtor to be insolvent. An insider is defined in much the same way
as in the Bankruptcy Code and includes a relative, also defined as in the Bankruptcy
Code, a director or officer of a corporate debtor, a partner, or a person in control of
a debtor. This provision is available only to an existing creditor. Its premise is that
an insolvent debtor is obliged to pay debts to creditors not related to him before
paying those who are insiders.

The new Act omits any provision directed particularly at transfers or

obligations of insolvent partnership debtors. Under § 8 of the Uniform Fraudulent
Conveyance Act any transfer made or obligation incurred by an insolvent
partnership to a partner is fraudulent without regard to intent or adequacy of
consideration. So categorical a condemnation of a partnership transaction with a
partner may unfairly prejudice the interests of a partner’s separate creditors. The
new Act also omits as redundant a provision in the original Act that makes
fraudulent a transfer made or obligation incurred by an insolvent partnership for
less than a fair consideration to the partnership.

Section 7 lists the remedies available to creditors under the new Act. It
eliminates as unnecessary and confusing a differentiation made in the original Act
between the remedies available to holders of matured claims and those holding
unmatured claims. Since promulgation of the Uniform Fraudulent Conveyance Act
the Supreme Court has imposed restrictions on the availability and use of
prejudgment remedies. As a result many states have amended their statutes and
rules applicable to such remedies, and it is frequently unclear whether a state’s
procedures include a prejudgment remedy against a fraudulent transfer or
obligation. A bracketed paragraph is included in Section 7 for adoption by those
states that elect to make such a remedy available.

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 Section 8 prescribes the measure of liability of a transferee or obligee under
the Act and enumerates defenses. Defenses against avoidance of a preferential
transfer to an insider under § 5(b) include an adaptation of defenses available under
§ 547(c)(2) and (4) of the Bankruptcy Code when such a transfer is sought to be
avoided as a preference by the trustee in bankruptcy. In addition a preferential
transfer may be justified when shown to be made pursuant to a good faith effort to
stave off forced liquidation and rehabilitate the debtor. Section 8 also precludes
avoidance, as a constructively fraudulent transfer, of the termination of a lease on
default or the enforcement of a security interest in compliance with Article 9 of the
Uniform Commercial Code.

The new Act includes a new section specifying when a transfer is made or
an obligation is incurred. The section specifying the time when a transfer occurs is
adapted from Section 548(d) of the Bankruptcy Code. Its premise is that if the law
prescribes a mode for making the transfer a matter of public record or notice, it is
not deemed to be made for any purpose under the Act until it has become such a
matter of record or notice.

The new Act also includes a statute of limitations that bars the right rather
than the remedy on expiration of the statutory periods prescribed. The law
governing limitations on actions to avoid fraudulent transfers among the states is
unclear and full of diversity. The Act recognizes that laches and estoppel may
operate to preclude a particular creditor from pursuing a remedy against a
fraudulent transfer or obligation even though the statutory period of limitations has
not run.

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 UNIFORM FRAUDULENT TRANSFER ACT

SECTION 1. DEFINITIONS. As used in this [Act]:

(1) “Affiliate” means:

(i) a person who directly or indirectly owns, controls, or holds with

power to vote, 20 percent or more of the outstanding voting securities of the debtor,
other than a person who holds the securities,

(A) as a fiduciary or agent without sole discretionary power to vote

the securities; or

(B) solely to secure a debt, if the person has not exercised the power
to vote;

(ii) a corporation 20 percent or more of whose outstanding voting

securities are directly or indirectly owned, controlled, or held with power to vote,
by the debtor or a person who directly or indirectly owns, controls, or holds with
power to vote, 20 percent or more of the outstanding voting securities of the debtor,
other than a person who holds the securities,

(A) as a fiduciary or agent without sole power to vote the securities;

or

(B) solely to secure a debt, if the person has not in fact exercised the
power to vote;

(iii) a person whose business is operated by the debtor under a lease or

other agreement, or a person substantially all of whose assets are controlled by the
debtor; or

(iv) a person who operates the debtor’s business under a lease or other
agreement or controls substantially all of the debtor’s assets.

(2) “Asset” means property of a debtor, but the term does not include:

(i) property to the extent it is encumbered by a valid lien;

(ii) property to the extent it is generally exempt under nonbankruptcy

law; or

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 (iii) an interest in property held in tenancy by the entireties to the extent
it is not subject to process by a creditor holding a claim against only one tenant.

(3) “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.

(4) “Creditor” means a person who has a claim.

(5) “Debt” means liability on a claim.

(6) “Debtor” means a person who is liable on a claim.

(7) “Insider” includes:

(i) if the debtor is an individual,

(A) a relative of the debtor or of a general partner of the debtor;

(B) a partnership in which the debtor is a general partner;

(C) a general partner in a partnership described in clause (B); or

(D) a corporation of which the debtor is a director, officer, or person

in control;

(ii) if the debtor is a corporation,

(A) a director of the debtor;

(B) an officer of the debtor;

(C) a person in control of the debtor;

(D) a partnership in which the debtor is a general partner;

(E) a general partner in a partnership described in clause (D); or

(F) a relative of a general partner, director, officer, or person in

control of the debtor;

(iii) if the debtor is a partnership,

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 (A) a general partner in the debtor;

(B) a relative of a general partner in, or a general partner of, or a

person in control of the debtor;

(C) another partnership in which the debtor is a general partner;

(D) a general partner in a partnership described in clause (C); or

(E) a person in control of the debtor;

(iv) an affiliate, or an insider of an affiliate as if the affiliate were the

debtor; and

(v) a managing agent of the debtor.

(8) “Lien” means a charge against or an interest in property to secure

payment of a debt or performance of an obligation, and includes a security interest
created by agreement, a judicial lien obtained by legal or equitable process or
proceedings, a common-law lien, or a statutory lien.

(9) “Person” means an individual, partnership, corporation, association,

organization, government or governmental subdivision or agency, business trust,
estate, trust, or any other legal or commercial entity.

(10) “Property” means anything that may be the subject of ownership.

(11) “Relative” means an individual related by consanguinity within the

third degree as determined by the common law, a spouse, or an individual related to
a spouse within the third degree as so determined, and includes an individual in an
adoptive relationship within the third degree.

(12) “Transfer” means every mode, direct or indirect, absolute or

conditional, voluntary or involuntary, of disposing of or parting with an asset or an
interest in an asset, and includes payment of money, release, lease, and creation of a
lien or other encumbrance.

(13) “Valid lien” means a lien that is effective against the holder of a
judicial lien subsequently obtained by legal or equitable process or proceedings.

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 Comment

(1) The definition of “affiliate” is derived from § 101(2) of the Bankruptcy

Code.

(2) The definition of “asset” is substantially to the same effect as the

definition of “assets” in § 1 of the Uniform Fraudulent Conveyance Act. The
definition in this Act, unlike that in the earlier Act, does not, however require a
determination that the property is liable for the debts of the debtor. Thus, an
unliquidated claim for damages resulting from personal injury or a contingent claim
of a surety for reimbursement, contribution, or subrogation may be counted as an
asset for the purpose of determining whether the holder of the claim is solvent as a
debtor under § 2 of this Act, although applicable law may not allow such an asset to
be levied on and sold by a creditor. Cf. Manufacturers & Traders Trust Co. v.
Goldman (In re Ollag Construction Equipment Corp.), 578 F.2d 904, 907-09 (2d
Cir. 1978).

Subparagraphs (i), (ii), and (iii) provide clarification by excluding from the
term not only generally exempt property but also an interest in a tenancy by the
entirety in many states and an interest that is generally beyond reach by unsecured
creditors because subject to a valid lien. This Act, like its predecessor and the
Statute of 13 Elizabeth, declares rights and provides remedies for unsecured
creditors against transfers that impede them in the collection of their claims. The
laws protecting valid liens against impairment by levying creditors, exemption
statutes, and the rules restricting levyability of interest in entireties property are
limitations on the rights and remedies of unsecured creditors, and it is therefore
appropriate to exclude property interests that are beyond the reach of unsecured
creditors from the definition of “asset” for the purposes of this Act.

A creditor of a joint tenant or tenant in common may ordinarily collect a

judgment by process against the tenant’s interest, and in some states a creditor of a
tenant by the entirety may likewise collect a judgment by process against the
tenant’s interest. See 2 American Law of Property 10, 22, 28-32 (1952); Craig, An
Analysis of Estates by the Entirety in Bankruptcy, 48 Am.Bankr.L.J. 255, 258-59
(1974). The levyable interest of such a tenant is included as an asset under this Act.

The definition of “assets” in the Uniform Fraudulent Conveyance Act

excluded property that is exempt from liability for debts. The definition did not,
however, exclude all property that cannot be reached by a creditor through judicial
proceedings to collect a debt. Thus, it included the interest of a tenant by the
entirety although in nearly half the states such an interest cannot be subjected to
liability for a debt unless it is an obligation owed jointly by the debtor with his or
her cotenant by the entirety. See 2 American Law of Property 29 (1952); Craig, An

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Analysis of Estates by the Entirety in Bankruptcy, 48 Am.Bankr.L.J. 255, 258
(1974). The definition in this Act requires exclusion of interests in property held by
tenants by the entirety that are not subject to collection process by a creditor
without a right to proceed against both tenants by the entirety as joint debtors.

The reference to “generally exempt” property in § 1(2)(ii) recognizes that all

exemptions are subject to exceptions. Creditors having special rights against
generally exempt property typically include claimants for alimony, taxes, wages, the
purchase price of the property, and labor or materials that improve the property.
See Uniform Exemptions Act § 10 and the accompanying Comment. The fact that
a particular creditor may reach generally exempt property by resorting to judicial
process does not warrant its inclusion as an asset in determining whether the debtor
is insolvent.

Since this Act is not an exclusive law on the subject of voidable transfers
and obligations (see Comment (8) to § 4 infra), it does not preclude the holder of a
claim that may be collected by process against property generally exempt as to
other creditors from obtaining relief from a transfer of such property that hinders,
delays, or defrauds the holder of such a claim. Likewise the holder of an unsecured
claim enforceable against tenants by the entirety is not precluded by the Act from
pursuing a remedy against a transfer of property held by the entirety that hinders,
delays, or defrauds the holder of such a claim.

Nonbankruptcy law is the law of a state or federal law that is not part of the
Bankruptcy Code, Title 11 of the United States Code. The definition of an “asset”
thus does not include property that would be subject to administration for the
benefit of creditors under the Bankruptcy Code unless it is subject under other
applicable law, state or federal, to process for the collection of a creditor’s claim
against a single debtor.

(3) The definition of “claim” is derived from § 101(4) of the Bankruptcy

Code. Since the purpose of this Act is primarily to protect unsecured creditors
against transfers and obligations injurious to their rights, the words “claim” and
“debt” as used in the Act generally have reference to an unsecured claim and debt.
As the context may indicate, however, usage of the terms is not so restricted. See,
e.g. §§ 1(1)(i)(B) and 1(8).

(4) The definition of “creditor” in combination with the definition of

“claim” has substantially the same effect as the definition of “creditor” under § 1 of
the Uniform Fraudulent Conveyance Act. As under that Act, the holder of an
unliquidated tort claim or a contingent claim may be a creditor protected by this
Act.

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 (5) The definition of “debt” is derived from § 101(11) of the Bankruptcy
Code.

(6) The definition of “debtor” is new.

(7) The definition of “insider” is derived from § 101(28) of the Bankruptcy

Code. The definition has been restricted in clauses (i)(C), (ii)(E), and (iii)(D) to
make clear that a partner is not an insider of an individual, corporation, or
partnership if any of these latter three persons is only a limited partner. The
definition of “insider” in the Bankruptcy Code does not purport to make a limited
partner an insider of the partners or of the partnership with which the limited
partner is associated, but it is susceptible of a contrary interpretation and one which
would extend unduly the scope of the defined relationship when the limited partner
is not a person in control of the partnership. The definition of “insider” in this Act
also differs from the definition in the Bankruptcy Code in omitting the reference in
11 U.S.C. § 101(28)(D) to an elected official or relative of such an official as an
insider of a municipality. As in the Bankruptcy Code (see 11 U.S.C. § 102(3)), the
word “includes” is not limiting, however. Thus, a court may find a person living
with an individual for an extended time in the same household or as a permanent
companion to have the kind of close relationship intended to be covered by the term
“insider.” Likewise, a trust may be found to be an insider of a beneficiary.

(8) The definition of “lien” is derived from paragraphs (30), (31), (43), and
(45) of § 101 of the Bankruptcy Code, which define “judicial lien,” “lien,” “security
interest,” and “statutory lien” respectively.

(9) The definition of “person” is adapted from paragraphs (28) and (30) of
§ 1-201 of the Uniform Commercial Code, defining “organization” and “person”
respectively.

(10) The definition of “property” is derived from § 1-201(33) of the

Uniform Probate Code. Property includes both real and personal property, whether
tangible or intangible, and any interest in property, whether legal or equitable.

(11) The definition of “relative” is derived from § 101(37) of the

Bankruptcy Code but is explicit in its references to the spouse of a debtor in view of
uncertainty as to whether the common law determines degrees of relationship by
affinity.

(12) The definition of “transfer” is derived principally from § 101(48) of

the Bankruptcy Code. The definition of “conveyance” in § 1 of the Uniform
Fraudulent Conveyance Act was similarly comprehensive, and the references in this
Act to “payment of money, release, lease, and the creation of a lien or

11
incumbrance” are derived from the Uniform Fraudulent Conveyance Act. While
the definition in the Uniform Fraudulent Conveyance Act did not explicitly refer to
an involuntary transfer, the decisions under that Act were generally consistent with
an interpretation that covered such a transfer. See, e.g., Hearn 45 St. Corp. v. Jano,
283 N.Y. 139, 27 N.E.2d 814, 128 A.L.R. 1285 (1940) (execution and foreclosure
sales); Lefkowitz v. Finkelstein Trading Corp., 14 F.Supp. 898, 899 (S.D.N.Y.
1936) (execution sale); Langan v. First Trust & Deposit Co., 277 App.Div. 1090,
101 N.Y.S.2d 36 (4th Dept. 1950), aff’d, 302 N.Y. 932, 100 N.E.2d 189 (1951)
(mortgage foreclosure); Catabene v. Wallner, 16 N.J.Super. 597, 602, 85 A.2d 300,
302 (1951) (mortgage foreclosure).

(13) The definition of “valid lien” is new. A valid lien includes an

equitable lien that may not be defeated by a judicial lien creditor. See, e.g.,
Pearlman v. Reliance Insurance Co., 371 U.S. 132, 136 (1962) (upholding a
surety’s equitable lien in respect to a fund owing a bankrupt contractor).

SECTION 2. INSOLVENCY.

(a) A debtor is insolvent if the sum of the debtor’s debts is greater than all
of the debtor’s assets, at a fair valuation.

(b) A debtor who is generally not paying his [or her] debts as they become
due is presumed to be insolvent.

(c) A partnership is insolvent under subsection (a) if the sum of the

partnership’s debts is greater than the aggregate of all of the partnership’s assets, at
a fair valuation, and the sum of the excess of the value of each general partner’s
nonpartnership assets over the partner’s nonpartnership debts.

(d) Assets under this section 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 this
[Act].

(e) Debts under this section 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.

Comment

(1) Subsection (a) is derived from the definition of “insolvent” in

§ 101(29)(A) of the Bankruptcy Code. The definition in subsection (a) and the
correlated definition of partnership insolvency in subsection (c) contemplate a fair

12
valuation of the debts as well as the assets of the debtor. As under the definition of
the same term in § 2 of the Uniform Fraudulent Conveyance Act exempt property is
excluded from the computation of the value of the assets. See § 1(2) supra. For
similar reasons interests in valid spendthrift trusts and interests in tenancies by the
entireties that cannot be severed by a creditor of only one tenant are not included.
See the Comment to § 1(2) supra. Since a valid lien also precludes an unsecured
creditor from collecting the creditor’s claim from the encumbered interest in a
debtor’s property, both the encumbered interest and the debt secured thereby are
excluded from the computation of insolvency under this Act. See § 1(2) supra and
subsection (e) of this section.

The requirement of § 550(b)(1) of the Bankruptcy Code that a transferee be

“without knowledge of the voidability of the transfer” in order to be protected has
been omitted as inappropriate. Knowledge of the facts rendering the transfer
voidable would be inconsistent with the good faith that is required of a protected
transferee. Knowledge of the voidability of a transfer would seem to involve a
legal conclusion. Determination of the voidability of the transfer ought not to
require the court to inquire into the legal sophistication of the transferee.

(2) Section 2(b) establishes a rebuttable presumption of insolvency from

the fact of general nonpayment of debts as they become due. Such general
nonpayment is a ground for the filing of an involuntary petition under § 303(h)(1)
of the Bankruptcy Code. See also U.C.C. § 1-201(23), which declares a person to
be “insolvent” who “has ceased to pay his debts in the ordinary course of business.”
The presumption imposes on the party against whom the presumption is directed
the burden of proving that the nonexistence of insolvency as defined in § 2(a) is
more probable than its existence. See Uniform Rules of Evidence (1974 Act), Rule
301(a). The 1974 Uniform Rule 301(a) conforms to the Final Draft of Federal Rule
301 as submitted to the United States Supreme Court by the Advisory Committee
on Federal Rules of Evidence. “The so-called ‘bursting bubble’ theory, under
which a presumption vanishes upon the introduction of evidence which would
support a finding of the nonexistence of the presumed fact, even though not
believed, is rejected as according presumptions too ‘slight and evanescent’ an
effect.” Advisory Committee’s Note to Rule 301. See also 1 J.Weinstein &
M.Berger, Evidence ¶ 301 [01] (1982).

The presumption is established in recognition of the difficulties typically

imposed on a creditor in proving insolvency in the bankruptcy sense, as provided in
subsection (a). See generally Levit, The Archaic Concept of Balance-Sheet
Insolvency, 47 Am.Bankr.L.J. 215 (1973). Not only is the relevant information in
the possession of a noncooperative debtor but the debtor’s records are more often
than not incomplete and inaccurate. As a practical matter, insolvency is most
cogently evidenced by a general cessation of payment of debts, as has long been

13
recognized by the laws of other countries and is now reflected in the Bankruptcy
Code. See Honsberger, Failure to Pay One’s Debts Generally as They Become
Due: The Experience of France and Canada, 54 Am.Bankr.L.J. 153 (1980); J.
MacLachlan, Bankruptcy 13, 63-64, 436 (1956). In determining whether a debtor is
paying its debts generally as they become due, the court should look at more than
the amount and due dates of the indebtedness. The court should also take into
account such factors as the number of the debtor’s debts, the proportion of those
debts not being paid, the duration of the nonpayment, and the existence of bona fide
disputes or other special circumstances alleged to constitute an explanation for the
stoppage of payments. The court’s determination may be affected by a
consideration of the debtor’s payment practices prior to the period of alleged
nonpayment and the payment practices of the trade or industry in which the debtor
is engaged. The case law that has developed under § 303(h)(1) of the Bankruptcy
Code has not required a showing that a debtor has failed or refused to pay a
majority in number and amount of his or her debts in order to prove general
nonpayment of debts as they become due. See, e.g., Hill v. Cargill, Inc. (In re Hill),
8 B.R. 779, 3 C.B.C.2d 920 (Bk.D.Minn. 1981) (nonpayment of three largest debts
held to constitute general nonpayment, although small debts were being paid); In re
All Media Properties, Inc., 5 B.R. 126, 6 B.C.D. 586, 2 C.B.C.2d 449 (Bk.S.D.Tex.
1980) (missing significant number of payments or regularly missing payments
significant in amount said to constitute general nonpayment; missing payments on
more than 50% of aggregate of claims said not to be required to show general
nonpayment; nonpayment for more than 30 days after billing held to establish
nonpayment of a debt when it is due); In re Kreidler Import Corp., 4 B.R. 256, 6
B.C.D. 608, 2 C.B.C.2d 159 (Bk.D.Md. 1980) (nonpayment of one debt
constituting 97% of debtor’s total indebtedness held to constitute general
nonpayment). A presumption of insolvency does not arise from nonpayment of a
debt as to which there is a genuine bona fide dispute, even though the debt is a
substantial part of the debtor’s indebtedness. Cf. 11 U.S.C. § 303(h)(1), as
amended by § 426(b) of Public Law No. 98-882, the Bankruptcy Amendments and
Federal Judgeship Act of 1984.

(3) Subsection (c) is derived from the definition of partnership insolvency

in § 101(29)(B) of the Bankruptcy Code. The definition conforms generally to the
definition of the same term in § 2(2) of the Uniform Fraudulent Conveyance Act.

(4) Subsection (d) follows the approach of the definition of “insolvency” in

§ 101(29) of the Bankruptcy Code by excluding from the computation of the value
of the debtor’s assets any value that can be realized only by avoiding a transfer of
an interest formerly held by the debtor or by discovery or pursuit of property that
has been fraudulently concealed or removed.

14
 (5) Subsection (e) is new. It makes clear the purpose not to render a person
insolvent under this section by counting as a debt an obligation secured by property
of the debtor that is not counted as an asset. See also Comments to §§ 1(2) and 2(a)
supra.

SECTION 3. VALUE.

(a) 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.

(b) For the purposes of Sections 4(a)(2) and 5, a person gives a reasonably
equivalent value if the person acquires an interest of the debtor in an asset 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.

(c) A transfer is made for present value if the exchange between the debtor
and the transferee is intended by them to be contemporaneous and is in fact
substantially contemporaneous.

Comment

(1) This section defines “value” as used in various contexts in this Act,
frequently with a qualifying adjective. The word appears in the following sections:
4(a)(2) (“reasonably equivalent value”);
4(b)(8) (“value ... reasonably equivalent);
5(a) (“reasonably equivalent value”);
5(b) (“present, reasonably equivalent value”);
8(a) (“reasonably equivalent value”);
8(b), (c), (d), and (e) (“value”);
8(f)(1) (“new value”); and
8(f)(3) (“present value”).

(2) Section 3(a) is adapted from § 548(d)(2)(A) of the Bankruptcy Code.

See also § 3(a) of the Uniform Fraudulent Conveyance Act. The definition in
Section 3 is not exclusive. “Value” is to be determined in light of the purpose of
the Act to protect a debtor’s estate from being depleted to the prejudice of the
debtor’s unsecured creditors. Consideration having no utility from a creditor’s
viewpoint does not satisfy the statutory definition. The definition does not specify

15
all the kinds of consideration that do not constitute value for the purposes of this
Act – e.g., love and affection. See, e.g., United States v. West, 299 F.Supp. 661,
666 (D.Del. 1969).

(3) Section 3(a) does not indicate what is “reasonably equivalent value” for
a transfer or obligation. Under this Act, as under § 548(a)(2) of the Bankruptcy
Code, a transfer for security is ordinarily for a reasonably equivalent value
notwithstanding a discrepancy between the value of the asset transferred and the
debt secured, since the amount of the debt is the measure of the value of the interest
in the asset that is transferred. See, e.g., Peoples-Pittsburgh Trust Co. v. Holy
Family Polish Nat’l Catholic Church, Carnegie, Pa., 341 Pa. 390, 19 A.2d 360
(1941). If, however, a transfer 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. See e.g., In re Peoria Braumeister Co., 138 F.2d 520, 523 (7th
Cir. 1943) (chattel mortgage securing a $3,000 note held to be fraudulent when the
debt secured was only $2,500); Hartford Acc. & Indemnity Co. v. Jirasek, 254
Mich. 131, 140, 235 N.W. 836, 839 (1931) (quitclaim deed given as mortgage held
to be fraudulent to the extent the value of the property transferred exceeded the
indebtedness secured). If the debt is a fraudulent obligation under this Act, a
transfer to secure it as well as the obligation would be vulnerable to attack as
fraudulent. A transfer to satisfy or secure an antecedent debt owed an insider is
also subject to avoidance under the conditions specified in Section 5(b).

(4) Section 3(a) of the Uniform Fraudulent Conveyance Act has been
thought not to recognize that an unperformed promise could constitute fair
consideration. See McLaughlin, Application of the Uniform Fraudulent
Conveyance Act, 46 Harv.L.Rev. 404, 414 (1933). Courts construing these
provisions of the prior law nevertheless have held unperformed promises to
constitute value in a variety of circumstances. See, e.g., Harper v. Lloyd’s Factors,
Inc., 214 F.2d 662 (2d Cir. 1954) (transfer of money for promise of factor to
discount transferor’s purchase-money notes given to fur dealer); Schlecht v.
Schlecht, 168 Minn. 168, 176-77, 209 N.W. 883, 886-87 (1926) (transfer for
promise to make repairs and improvements on transferor’s homestead); Farmer’s
Exchange Bank v. Oneida Motor Truck Co., 202 Wis. 266, 232 N.W. 536 (1930)
(transfer in consideration of assumption of certain of transferor’s liabilities); see
also Hummel v. Cernocky, 161 F.2d 685 (7th Cir. 1947) (transfer in consideration
of cash, assumption of a mortgage, payment of certain debts, and agreement to pay
other debts). Likewise a transfer in consideration of a negotiable note discountable
at a commercial bank, or the purchase from an established, solvent institution of an
insurance policy, annuity, or contract to provide care and accommodations clearly
appears to be for value. On the other hand, a transfer for an unperformed promise
by an individual to support a parent or other transferor has generally been held
voidable as a fraud on creditors of the transferor. See, e.g., Springfield Ins. Co. v.

16
Fry, 267 F.Supp. 693 (N.D.Okla. 1967); Sandler v. Parlapiano, 236 App.Div. 70,
258 N.Y.Supp. 88 (1st Dep’t 1932); Warwick Municipal Employees Credit Union v.
Higham, 106 R.E. 363, 259 A.2d 852 (1969); Hulsether v. Sanders, 54 S.D. 412,
223 N.W. 335 (1929); Cooper v. Cooper, 22 Tenn.App. 473, 477, 124 S.W.2d 264,
267 (1939); Note, Rights of Creditors in Property Conveyed in Consideration of
Future Support, 45 Iowa L.Rev. 546, 550-62 (1960). This Act adopts the view
taken in the cases cited in determining whether an unperformed promise is value.

(5) Subsection (b) rejects the rule of such cases as Durrett v. Washington
Nat. Ins. Co., 621 F.2d 201 (5th Cir. 1980) (nonjudicial foreclosure of a mortgage
avoided as a fraudulent transfer when the property of an insolvent mortgagor was
sold for less than 70% of its fair value); and Abramson v. Lakewood Bank & Trust
Co., 647 F.2d 547 (5th Cir. 1981), cert. denied, 454 U.S. 1164 (1982) (nonjudicial
foreclosure held to be fraudulent transfer if made without fair consideration).
Subsection (b) adopts the view taken in Lawyers Title Ins. Corp. v. Madrid (In re
Madrid), 21 B.R. 424 (B.A.P. 9th Cir. 1982), aff’d on another ground, 725 F.2d
1197 (9th Cir. 1984), that the price bid at a public foreclosure sale determines the
fair value of the property sold. Subsection (b) prescribes the effect of a sale
meeting its requirements, whether the asset sold is personal or real property. The
rule of this subsection applies to a foreclosure by sale of the interest of a vendee
under an installment land contract in accordance with applicable law that requires
or permits the foreclosure to be effected by a sale in the same manner as the
foreclosure of a mortgage. See G.Osborne, G.Nelson, & D.Whitman, Real Estate
Finance Law 83-84, 95-97 (1979). The premise of the subsection is that “a sale of
the collateral by the secured party as the normal consequence of default . . . [is] the
safest way of establishing the fair value of the collateral . . ..” 2 G.Gilmore,
Security Interests in Personal Property, 1227 (1965).

If a lien given an insider for a present consideration is not perfected as

against a subsequent bona fide purchaser or is so perfected after a delay following
an extension of credit secured by the lien, foreclosure of the lien may result in a
transfer for an antecedent debt that is voidable under Section 5(b) infra. Subsection
(b) does not apply to an action under Section 4(a)(1) to avoid a transfer or
obligation because made or incurred with actual intent to hinder, delay, or defraud
any creditor.

(6) Subsection (c) is an adaptation of § 547(c)(1) of the Bankruptcy Code.

A transfer to an insider for an antecedent debt may be voidable under § 5(b) infra.

17
 SECTION 4. TRANSFERS FRAUDULENT AS TO PRESENT AND
FUTURE CREDITORS.

(a) 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:

(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 he [or she] would incur, debts beyond his [or her] ability to pay as they became
due.

(b) In determining actual intent under subsection (a)(1), consideration may

be given, among other factors, to whether:

(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;

18
 (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.

Comment

(1) Section 4(a)(1) is derived from § 7 of the Uniform Fraudulent

Conveyance Act. Factors appropriate for consideration in determining actual intent
under paragraph (1) are specified in subsection (b).

(2) Section 4(a)(2) is derived from §§ 5 and 6 of the Uniform Fraudulent

Conveyance Act but substitutes “reasonably equivalent value” for “fair
consideration.” The transferee’s good faith was an element of “fair consideration”
as defined in § 3 of the Uniform Fraudulent Conveyance Act, and lack of fair
consideration was one of the elements of a fraudulent transfer as defined in four
sections of the Uniform Act. The transferee’s good faith is irrelevant to a
determination of the adequacy of the consideration under this Act, but lack of good
faith may be a basis for withholding protection of a transferee or obligee under § 8
infra.

(3) Unlike the Uniform Fraudulent Conveyance Act as originally

promulgated, this Act does not prescribe different tests when a transfer is made for
the purpose of security and when it is intended to be absolute. The premise of this
Act is that when a transfer is for security only, the equity or value of the asset that
exceeds the amount of the debt secured remains available to unsecured creditors
and thus cannot be regarded as the subject of a fraudulent transfer merely because
of the encumbrance resulting from an otherwise valid security transfer.
Disproportion between the value of the asset securing the debt and the size of the
debt secured does not, in the absence of circumstances indicating a purpose to
hinder, delay, or defraud creditors, constitute an impermissible hindrance to the
enforcement of other creditors’ rights against the debtor-transferor. Cf. U.C.C.
§ 9-311.

19
 (4) Subparagraph (i) of § 4(a)(2) is an adaptation of § 5 of the Uniform
Fraudulent Conveyance Act but substitutes “unreasonably small [assets] in relation
to the business or transaction” for “unreasonably small capital.” The reference to
“capital” in the Uniform Act is ambiguous in that it may refer to net worth or to the
par value of stock or to the consideration received for stock issued. The special
meanings of “capital” in corporation law have no relevance in the law of fraudulent
transfers. The subparagraph focuses attention on whether the amount of all the
assets retained by the debtor was inadequate, i.e., unreasonably small, in light of the
needs of the business or transaction in which the debtor was engaged or about to
engage.

(5) Subsection (b) is a nonexclusive catalogue of factors appropriate for

consideration by the court in determining whether the debtor had an actual intent to
hinder, delay, or defraud one or more creditors. Proof of the existence of any one
or more of the factors enumerated in subsection (b) may be relevant evidence as to
the debtor’s actual intent but does not create a presumption that the debtor has
made a fraudulent transfer or incurred a fraudulent obligation. The list of factors
includes most of the badges of fraud that have been recognized by the courts in
construing and applying the Statute of 13 Elizabeth and § 7 of the Uniform
Fraudulent Conveyance Act. Proof of the presence of certain badges in
combination establishes fraud conclusively – i.e., without regard to the actual intent
of the parties – when they concur as provided in § 4(a)(2) or in § 5. The fact that a
transfer has been made to a relative or to an affiliated corporation has not been
regarded as a badge of fraud sufficient to warrant avoidance when unaccompanied
by any other evidence of fraud. The courts have uniformly recognized, however,
that a transfer to a closely related person warrants close scrutiny of the other
circumstances, including the nature and extent of the consideration exchanged. See
1 G. Glenn, Fraudulent Conveyances and Preferences § 307 (Rev. ed. 1940). The
second, third, fourth, and fifth factors listed are all adapted from the classic
catalogue of badges of fraud provided by Lord Coke in Twyne’s Case, 3 Coke 80b,
76 Eng.Rep. 809 (Star Chamber 1601). Lord Coke also included the use of a trust
and the recitation in the instrument of transfer that it “was made honestly, truly, and
bona fide,” but the use of the trust is fraudulent only when accompanied by
elements or badges specified in this Act, and recitals of “good faith” can no longer
be regarded as significant evidence of a fraudulent intent.

(6) In considering the factors listed in § 4(b) a court should evaluate all the
relevant circumstances involving a challenged transfer or obligation. Thus the
court may appropriately take into account all indicia negativing as well as those
suggesting fraud, as illustrated in the following reported cases:

(a) Whether the transfer or obligation was to an insider: Salomon v. Kaiser

(In re Kaiser), 722 F.2d 1574, 1582-83 (2d Cir. 1983) (insolvent debtor’s

20
purchase of two residences in the name of his spouse and the creation of a
dummy corporation for the purpose of concealing assets held to evidence
fraudulent intent); Banner Construction Corp. v. Arnold, 128 So.2d 893
(Fla.Dist.App. 1961) (assignment by one corporation to another having identical
directors and stockholders constituted a badge of fraud); Travelers Indemnity
Co. v. Cormaney, 258 Iowa 237, 138 N.W.2d 50 (1965) (transfer between
spouses said to be a circumstance that shed suspicion on the transfer and that
with other circumstances warranted avoidance); Hatheway v. Hanson, 230 Iowa
386, 297 N.W. 824 (1941) (transfer from parent to child said to require a critical
examination of surrounding circumstances, which, together with other indicia of
fraud, warranted avoidance); Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299
(1955) (transfer from daughter to mother said to be indicative of fraud but
transfer held not to be fraudulent due to adequacy of consideration and delivery
of possession by transferor).

(b) Whether the transferor retained possession or control of the property

after the transfer: Harris v. Shaw, 224 Ark. 150, 272 S.W.2d 53 (1954)
(retention of property by transferor said to be a badge of fraud and, together
with other badges, to warrant avoidance of transfer); Stephens v. Reginstein, 89
Ala. 561, 8 So. 68 (1890) (transferor’s retention of control and management of
property and business after transfer held material in determining transfer to be
fraudulent); Allen v. Massey, 84 U.S. (17 Wall.) 351 (1872) (joint possession of
furniture by transferor and transferee considered in holding transfer to be
fraudulent); Warner v. Norton, 61 U.S. (20 How.) 448 (1857) (surrender of
possession by transferor deemed to negate allegations of fraud).

(c) Whether the transfer or obligation was concealed or disclosed: Walton v.

First National Bank, 13 Colo. 265, 22 P. 440 (1889) (agreement between
parties to conceal the transfer from the public said to be one of the strongest
badges of fraud); Warner v. Norton, 61 U.S. (20 How.) 448 (1857) (although
secrecy said to be a circumstance from which, when coupled with other badges,
fraud may be inferred, transfer was held not to be fraudulent when made in
good faith and transferor surrendered possession); W.T. Raleigh Co. v. Barnett,
253 Ala. 433, 44 So.2d 585 (1950) (failure to record a deed in itself said not to
evidence fraud, and transfer held not to be fraudulent).

(d) Whether, before the transfer was made or obligation was incurred, a
creditor sued or threatened to sue the debtor: Harris v. Shaw, 224 Ark. 150, 272
S.W. 2d 53 (1954) (transfer held to be fraudulent when causally connected to
pendency of litigation and accompanied by other badges of fraud); Pergrem v.
Smith, 255 S.W.2d 42 (Ky.App. 1953) (transfer in anticipation of suit deemed
to be a badge of fraud; transfer held fraudulent when accompanied by
insolvency of transferor who was related to transferee); Bank of Sun Prairie v.

21
Hovig, 218 F.Supp. 769 (W.D.Ark. 1963) (although threat or pendency of
litigation said to be an indicator of fraud, transfer was held not to be fraudulent
when adequate consideration and good faith were shown).

(e) Whether the transfer was of substantially all the debtor’s assets:
Walbrun v. Babbitt, 83 U.S. (16 Wall.) 577 (1872) (sale by insolvent retail shop
owner of all of his inventory in a single transaction held to be fraudulent); Cole
v. Mercantile Trust Co., 133 N.Y. 164, 30 N.E. 847 (1892) (transfer of all
property before plaintiff could obtain a judgment held to be fraudulent);
Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955) (although transfer of
all assets said to indicate fraud, transfer held not to be fraudulent because full
consideration was paid and transferor surrendered possession).

(f) Whether the debtor had absconded: In re Thomas, 199 F. 214 (N.D.N.Y.
1912) (when debtor collected all of his money and property with the intent to
abscond, fraudulent intent was held to be shown).

(g) Whether the debtor had removed or concealed assets: Bentley v. Young,
210 F. 202 (S.D.N.Y 1914), aff’d, 223 F. 536 (2d Cir. 1915) (debtor’s removal
of goods from store to conceal their whereabouts and to sell them held to render
sale fraudulent); Cioli v. Kenourgios, 59 Cal.App. 690, 211 P. 838 (1922)
(debtor’s sale of all assets and shipment of proceeds out of the country held to
be fraudulent notwithstanding adequacy of consideration).

(h) 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: Toomay v. Graham, 151 S.W.2d 119 (Mo.App. 1941)
(although mere inadequacy of consideration said not to be a badge of fraud,
transfer held to be fraudulent when accompanied by badges of fraud); Texas
Sand Co. v. Shield, 381 S.W.2d 48 (Tex. 1964) (inadequate consideration said
to be an indicator of fraud, and transfer held to be fraudulent because of
inadequate consideration, pendency of suit, family relationship of transferee,
and fact that all nonexempt property was transferred); Weigel v. Wood, 355 Mo.
11, 194 S.W.2d 40 (1946) (although inadequate consideration said to be a badge
of fraud, transfer held not to be fraudulent when inadequacy not gross and not
accompanied by any other badge; fact that transfer was from father to son held
not sufficient to establish fraud).

(i) Whether the debtor was insolvent or became insolvent shortly after the
transfer was made or obligation was incurred: Harris v. Shaw, 224 Ark. 150,
272 S.W. 2d 53 (1954) (insolvency of transferor said to be a badge of fraud and
transfer held fraudulent when accompanied by other badges of fraud); Bank of
Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D. Ark. 1963) (although the

22
 insolvency of the debtor said to be a badge of fraud, transfer held not fraudulent
when debtor was shown to be solvent, adequate consideration was paid, and
good faith was shown, despite the pendency of suit); Wareheim v. Bayliss, 149
Md. 103, 131 A. 27 (1925) (although insolvency of debtor acknowledged to be
an indicator of fraud, transfer held not to be fraudulent when adequate
consideration was paid and whether debtor was insolvent in fact was doubtful).

(j) Whether the transfer occurred shortly before or shortly after a substantial
debt was incurred: Commerce Bank of Lebanon v. Halladale A Corp., 618 S.W.
2d 288, 292 (Mo.App. 1981) (when transferors incurred substantial debts near
in time to the transfer, transfer was held to be fraudulent due to inadequate
consideration, close family relationship, the debtor’s retention of possession,
and the fact that almost all the debtor’s property was transferred).

(7) The effect of the two transfers described in § 4(b)(11), if not avoided,
may be to permit a debtor and a lienor to deprive the debtor’s unsecured creditors of
access to the debtor’s assets for the purpose of collecting their claims while the
debtor, the debtor’s affiliate or insider, and the lienor arrange for the beneficial use
or disposition of the assets in accordance with their interests. The kind of
disposition sought to be reached here is exemplified by that found in Northern
Pacific Co. v. Boyd, 228 U.S. 482 (1913), the leading case in establishing the
absolute priority doctrine in reorganization law. There the Court held that a
reorganization whereby the secured creditors and the management-owners retained
their economic interests in a railroad through a foreclosure that cut off claims of
unsecured creditors against its assets was in effect a fraudulent disposition (id. at
502-05). See Frank, Some Realistic Reflections on Some Aspects of Corporate
Reorganization, 19 Va. L.Rev. 541, 693 (1933). For cases in which an analogous
injury to unsecured creditors was inflicted by a lienor and a debtor, see Jackson v.
Star Sprinkler Corp. of Florida, 575 F.2d 1223, 1231-34 (8th Cir. 1978); Heath v.
Helmick, 173 F.2d 157, 161-62 (9th Cir. 1949); Toner v. Nuss, 234 F.S. 457,
461-62 (E.D.Pa. 1964); and see In re Spotless Tavern Co., Inc., 4 F.Supp. 752, 753,
755 (D.Md. 1933).

(8) Nothing in § 4(b) is intended to affect the application of § 2-402(2),

9-205, 9-301, or 6-105 of the Uniform Commercial Code. Section 2-402(2)
recognizes the generally prevailing rule that retention of possession of goods by a
seller may be fraudulent but limits the application of the rule by negating any
imputation of fraud from “retention of possession in good faith and current course
of trade by a merchant-seller for a commercially reasonable time after a sale or
identification.” Section 9-205 explicitly negates any imputation of fraud from the
grant of liberty by a secured creditor to a debtor to use, commingle, or dispose of
personal property collateral or to account for its proceeds. The section recognizes
that it does not relax prevailing requirements for delivery of possession by a

23
pledgor. Moreover, the section does not mitigate the general requirement of
§ 9-301(1)(b) that a nonpossessory security interest in personal property must be
accompanied by notice-filing to be effective against a levying creditor. Finally, like
the Uniform Fraudulent Conveyance Act this Act does not pre-empt the statutes
governing bulk transfers, such as Article 6 of the Uniform Commercial Code.
Compliance with the cited sections of the Uniform Commercial Code does not,
however, insulate a transfer or obligation from avoidance. Thus a sale by an
insolvent debtor for less than a reasonably equivalent value would be voidable
under this Act notwithstanding compliance with the Uniform Commercial Code.

SECTION 5. TRANSFERS FRAUDULENT AS TO PRESENT

CREDITORS.

(a) A transfer made or obligation incurred by a debtor is fraudulent 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.

(b) A transfer made by a debtor is fraudulent as to a creditor whose claim

arose before the transfer was made if 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.

Comment

(1) Subsection (a) is derived from § 4 of the Uniform Fraudulent

Conveyance Act. It adheres to the limitation of the protection of that section to a
creditor who extended credit before the transfer or obligation described. As pointed
out in Comment (2) accompanying § 4, this Act substitutes “reasonably equivalent
value” for “fair consideration.”

(2) Subsection (b) renders a preferential transfer – i.e., a transfer by an

insolvent debtor for or on account of an antecedent debt – to an insider vulnerable
as a fraudulent transfer when the insider had reasonable cause to believe that the
debtor was insolvent. This subsection adopts for general application the rule of
such cases as Jackson Sound Studios, Inc. v. Travis, 473 F.2d 503 (5th Cir. 1973)
(security transfer of corporation’s equipment to corporate principal’s mother
perfected on eve of bankruptcy of corporation held to be fraudulent); In re Lamie
Chemical Co., 296 F. 24 (4th Cir. 1924) (corporate preference to corporate officers
and directors held voidable by receiver when corporation was insolvent or nearly so

24
and directors had already voted for liquidation); Stuart v. Larson, 298 F. 223 (8th
Cir. 1924), noted 38 Harv.L.Rev. 521 (1925) (corporate preference to director held
voidable). See generally 2 G. Glenn, Fraudulent Conveyances and Preferences 386
(rev. ed. 1940). Subsection (b) overrules such cases as Epstein v. Goldstein, 107
F.2d 755, 757 (2d Cir. 1939) (transfer by insolvent husband to wife to secure his
debt to her sustained against attack by husband’s trustee); Hartford Accident &
Indemnity Co. v. Jirasek, 254 Mich. 131, 139, 235 N.W. 836, 389 (1931) (mortgage
given by debtor to his brother to secure an antecedent debt owed the brother
sustained as not fraudulent).

(3) Subsection (b) does not extend as far as § 8(a) of the Uniform
Fraudulent Conveyance Act and § 548(b) of the Bankruptcy Code in rendering
voidable a transfer or obligation incurred by an insolvent partnership to a partner,
who is an insider of the partnership. The transfer to the partner is not vulnerable to
avoidance under § 4(b) unless the transfer was for an antecedent debt and the
partner had reasonable cause to believe that the partnership was insolvent. The
cited provisions of the Uniform Fraudulent Conveyance Act and the Bankruptcy
Act make any transfer by an insolvent partnership to a partner voidable. Avoidance
of the partnership transfer without reference to the partner’s state of mind and the
nature of the consideration exchanged would be unduly harsh treatment of the
creditors of the partner and unduly favorable to the creditors of the partnership.

SECTION 6. WHEN TRANSFER IS MADE OR OBLIGATION IS

INCURRED. For the purposes of this [Act]:

(1) a transfer is made:

(i) with respect to an asset that is real property other than a fixture, but
including the interest of a seller or purchaser under a contract for the sale of the
asset, when the transfer is so far perfected that a good-faith purchaser of the asset
from the debtor against whom applicable law permits the transfer to be perfected
cannot acquire an interest in the asset that is superior to the interest of the
transferee; and

(ii) with respect to an asset that is not real property or that is a fixture,
when the transfer is so far perfected that a creditor on a simple contract cannot
acquire a judicial lien otherwise than under this [Act] that is superior to the interest
of the transferee;

(2) if applicable law permits the transfer to be perfected as provided in

paragraph (1) and the transfer is not so perfected before the commencement of an

25
action for relief under this [Act], the transfer is deemed made immediately before
the commencement of the action;

(3) if applicable law does not permit the transfer to be perfected as provided
in paragraph (1), the transfer is made when it becomes effective between the debtor
and the transferee;

(4) a transfer is not made until the debtor has acquired rights in the asset
transferred;

(5) an obligation is incurred:

(i) if oral, when it becomes effective between the parties; or

(ii) if evidenced by a writing, when the writing executed by the obligor

is delivered to or for the benefit of the obligee.

Comment

(1) One of the uncertainties in the law governing the avoidance of

fraudulent transfers and obligations is the difficulty of determining when the cause
of action arises. Subsection (b) clarifies this point in time. For transfers of real
estate Section 6(1) fixes the time as the date of perfection against a good faith
purchaser from the transferor and for transfers of fixtures and assets constituting
personalty, the time is fixed as the date of perfection against a judicial lien creditor
not asserting rights under this Act. Perfection typically is effected by notice-filing,
recordation, or delivery of unequivocal possession. See U.C.C. §§ 9-302, 9-304,
and 9-305 (security interest in personal property perfected by notice-filing or
delivery of possession to transferee); 4 American Law of Property § 17.10-17.12
(1952) (recordation of transfer or delivery of possession to grantee required for
perfection against bona fide purchaser from grantor). The provision for postponing
the time a transfer is made until its perfection is an adaptation of § 548(d)(1) of the
Bankruptcy Code. When no steps are taken to perfect a transfer that applicable law
permits to be perfected, the transfer is deemed by paragraph (2) to be perfected
immediately before the filing of an action to avoid it; without such a provision to
cover that eventuality, an unperfected transfer would arguably be immune to attack.
Some transfers – e.g., an assignment of a bank account, creation of a security
interest in money, or execution of a marital or premarital agreement for the
disposition of property owned by the parties to the agreement – may not be
amenable to perfection as against a bona fide purchaser or judicial lien creditor.
When a transfer is not perfectible as provided in paragraph (11), the transfer occurs
for the purpose of this Act when the transferor effectively parts with an interest in
the asset as provided in § 1(12) supra.

26
 (2) Paragraph (4) requires the transferor to have rights in the asset
transferred before the transfer is made for the purpose of this section. This
provision makes clear that its purpose may not be circumvented by notice-filing or
recordation of a document evidencing an interest in an asset to be acquired in the
future. Cf. Bankruptcy Code § 547(e); U.C.C. § 9-203(1)(c).

(3) Paragraph (5) is new. It is intended to resolve uncertainty arising from

Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, 989-91, 997 (2d Cir.
1981), insofar as that case holds that an obligation of guaranty may be deemed to be
incurred when advances covered by the guaranty are made rather than when the
guaranty first became effective between the parties. Compare Rosenberg,
Intercorporate Guaranties and the Law of Fraudulent Conveyances: Lender Beware,
125 U.Pa.L.Rev. 235, 256-57 (1976).

An obligation may be avoided as fraudulent under this Act if it is incurred

under the circumstances specified in § 4(a) or § 5(a). The debtor may receive
reasonably equivalent value in exchange for an obligation incurred even though the
benefit to the debtor is indirect. See Rubin v. Manufacturers Hanover Trust Co.,
661 F.2d at 991-92; Williams v. Twin City Co., 251 F.2d 678, 681 (9th Cir. 1958);
Rosenberg, supra at 243-46.

SECTION 7. REMEDIES OF CREDITORS.

(a) In an action for relief against a transfer or obligation under this [Act], a
creditor, subject to the limitations in Section 8, may obtain:

(1) avoidance of the transfer or obligation to the extent necessary to

satisfy the creditor’s claim;

[(2) an attachment or other provisional remedy against the asset

transferred or other property of the transferee in accordance with the procedure
prescribed by [ ];]

(3) subject to applicable principles of equity and in accordance with

applicable rules of civil procedure,

(i) an injunction against further disposition by the debtor or a

transferee, or both, of the asset transferred or of other property;

(ii) appointment of a receiver to take charge of the asset transferred

or of other property of the transferee; or

27
 (iii) any other relief the circumstances may require.

(b) If a creditor has obtained a judgment on a claim against the debtor, the
creditor, if the court so orders, may levy execution on the asset transferred or its
proceeds.

Comment

(1) This section is derived from §§ 9 and 10 of the Uniform Fraudulent

Conveyance Act. Section 9 of that Act specified the remedies of creditors whose
claims have matured, and § 10 enumerated the remedies available to creditors
whose claims have not matured. A creditor holding an unmatured claim may be
denied the right to receive payment for the proceeds of a sale on execution until his
claim has matured, but the proceeds may be deposited in court or in an interest-
bearing account pending the maturity of the creditor’s claim. The remedies
specified in this section are not exclusive.

(2) The availability of an attachment or other provisional remedy has been

restricted by amendments of statutes and rules of procedure to reflect views of the
Supreme Court expressed in Sniadach v. Family Finance Corp. of Bay View, 395
U.S. 337 (1969), and its progeny. This judicial development and the procedural
changes that followed in its wake do not preclude resort to attachment by a creditor
in seeking avoidance of a fraudulent transfer or obligation. See, e.g., Britton v.
Howard Sav. Bank, 727 F.2d 315, 317-20 (3d Cir. 1984); Computer Sciences Corp.
v. Sci-Tek Inc., 367 A.2d 658, 661 (Del. Super. 1976); Great Lakes Carbon Corp. v.
Fontana, 54 A.D.2d 548, 387 N.Y.S. 2d 115 (1st Dep’t 1976). Section 7(a)(2)
continues the authorization for the use of attachment contained in § 9(b) of the
Uniform Fraudulent Conveyance Act, or of a similar provisional remedy, when the
state’s procedure provides therefor, subject to the constraints imposed by the due
process clauses of the United States and state constitutions.

(3) Subsections (a) and (b) of § 10 of the Uniform Fraudulent Conveyance

Act authorized the court, in an action on a fraudulent transfer or obligation, to
restrain the defendant from disposing of his property, to appoint a receiver to take
charge of his property, or to make any order the circumstances may require.
Section 10, however, applied only to a creditor whose claim was unmatured. There
is no reason to restrict the availability of these remedies to such a creditor, and the
courts have not so restricted them. See, e.g., Lipskey v. Voloshen, 155 Md. 139,
143-45, 141 Atl. 402, 404-05 (1928) (judgment creditor granted injunction against
disposition of property by transferee, but appointment of receiver denied for lack of
sufficient showing of need for such relief); Matthews v. Schusheim, 36 Misc. 2d
918, 922-23, 235 N.Y.S.2d 973, 976-77, 991-92 (Sup.Ct. 1962) (injunction and
appointment of receiver granted to holder of claims for fraud, breach of contract,

28
and alimony arrearages; whether creditor’s claim was mature said to be
immaterial); Oliphant v. Moore, 155 Tenn. 359, 362-63, 293 S.W. 541, 542 (1927)
(tort creditor granted injunction restraining alleged tortfeasor’s disposition of
property).

(4) As under the Uniform Fraudulent Conveyance Act, a creditor is not

required to obtain a judgment against the debtor-transferor or to have a matured
claim in order to proceed under subsection (a). See § 1(3) and (4) supra; American
Surety Co. v. Conner, 251 N.Y. 1, 166 N.E. 783, 65 A.L.R. 244 (1929); 1 G. Glenn,
Fraudulent Conveyances and Preferences 129 (Rev.ed. 1940).

(5) The provision in subsection (b) for a creditor to levy execution on a

fraudulently transferred asset continues the availability of a remedy provided in
§ 9(b) of the Uniform Fraudulent Conveyance Act. See, e.g., Doland v. Burns Lbr.
Co., 156 Minn. 238, 194 N.W. 636 (1923); Montana Ass’n of Credit Management
v. Hergert, 181 Mont. 442, 449, 453, 593 P.2d 1059, 1063, 1065 (1979); Corbett v.
Hunter, 292 Pa.Super. 123, 128, 436 A.2d 1036, 1038 (1981); see also American
Surety Co. v. Conner, 251 N.Y. 1, 6, 166 N.E. 783, 784, 65 A.L.R. 244, 247 (1929)
(“In such circumstances he [the creditor] might find it necessary to indemnify the
sheriff and, when the seizure was erroneous, assumed the risk of error”);
McLaughlin, Application of the Uniform Fraudulent Conveyance Act, 46
Harv.L.Rev. 404, 441-42 (1933).

(6) The remedies specified in § 7, like those enumerated in §§ 9 and 10 of

the Uniform Fraudulent Conveyance Act, are cumulative. Lind v. O. N. Johnson
Co., 204 Minn. 30, 40, 282 N.W. 661, 667, 119 A.L.R. 940 (1939) (Uniform
Fraudulent Conveyance Act held not to impair or limit availability of the “old
practice” of obtaining judgment and execution returned unsatisfied before
proceeding in equity to set aside a transfer); Conemaugh Iron Works Co. v. Delano
Coal Co., Inc., 298 Pa. 182, 186, 148 A. 94, 95 (1929) (Uniform Fraudulent
Conveyance Act held to give an “additional optional remedy” and not to “deprive a
creditor of the right, as formerly, to work out his remedy at law”); 1 G. Glenn,
Fraudulent Conveyances and Preferences 120, 130, 150 (Rev.ed. 1940).

SECTION 8. DEFENSES, LIABILITY, AND PROTECTION OF

TRANSFEREE.

(a) A transfer or obligation is not voidable under Section 4(a)(1) against a

person who took in good faith and for a reasonably equivalent value or against any
subsequent transferee or obligee.

29
 (b) Except as otherwise provided in this section, to the extent a transfer is
voidable in an action by a creditor under Section 7(a)(1), the creditor may recover
judgment for the value of the asset transferred, as adjusted under subsection (c), or
the amount necessary to satisfy the creditor’s claim, whichever is less. The
judgment may be entered against:

(1) the first transferee of the asset or the person for whose benefit the
transfer was made; or

(2) any subsequent transferee other than a good-faith transferee or

obligee who took for value or from any subsequent transferee or obligee.

(c) If the judgment under subsection (b) is based upon the value of the asset
transferred, the judgment must be for an amount equal to the value of the asset at
the time of the transfer, subject to adjustment as the equities may require.

(d) Notwithstanding voidability of a transfer or an obligation under this

[Act], a good-faith transferee or obligee is entitled, to the extent of the value given
the debtor for the transfer or obligation, to

(1) a lien on or a right to retain any interest in the asset transferred;

(2) enforcement of any obligation incurred; or

(3) a reduction in the amount of the liability on the judgment.

(e) A transfer is not voidable under Section 4(a)(2) or Section 5 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 9 of the

Uniform Commercial Code.

(f) A transfer is not voidable under Section 5(b):

(1) to the extent the insider gave new value to or for the benefit of the
debtor after the transfer was made unless 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

30
 (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.

Comment

(1) Subsection (a) states the rule that applies when the transferee establishes
a complete defense to the action for avoidance based on Section 4(a)(1). The
subsection is an adaptation of the exception stated in § 9 of the Uniform Fraudulent
Conveyance Act. The person who invokes this defense carries the burden of
establishing good faith and the reasonable equivalence of the consideration
exchanged. Chorost v. Grand Rapids Factory Showrooms, Inc., 77 F. Supp. 276,
280 (D.N.J. 1948), aff’d, 172 F.2d 327, 329 (3d Cir. 1949).

(2) Subsection (b) is derived from § 550(a) of the Bankruptcy Code. The
value of the asset transferred is limited to the value of the levyable interest on the
transferor, exclusive of any interest encumbered by a valid lien. See § 1(2) supra.

(3) Subsection (c) is new. The measure of the recovery of a defrauded

creditor against a fraudulent transferee is usually limited to the value of the asset
transferred at the time of the transfer. See, e.g., United States v. Fernon, 640 F.2d
609, 611 (5th Cir. 1981); Hamilton Nat’l Bank of Boston v. Halstead, 134 N.Y.
520, 31 N.E. 900 (1892); cf. Buffum v. Peter Barceloux Co., 289 U.S. 227 (1932)
(transferee’s objection to trial court’s award of highest value of asset between the
date of the transfer and the date of the decree of avoidance rejected because an
award measured by value as of time of the transfer plus interest from that date
would have been larger). The premise of § 8(c) is that changes in value of the asset
transferred that occur after the transfer should ordinarily not affect the amount of
the creditor’s recovery. Circumstances may require a departure from that measure
of the recovery, however, as the cases decided under the Uniform Fraudulent
Conveyance Act and other laws derived from the Statute of 13 Elizabeth illustrate.
Thus, if the value of the asset at the time of levy and sale to enforce the judgment of
the creditor has been enhanced by improvements of the asset transferred or
discharge of liens on the property, a good faith transferee should be reimbursed for
the outlay for such a purpose to the extent the sale proceeds were increased thereby.
See Bankruptcy Code § 550(d); Janson v. Schier, 375 A.2d 1159, 1160 (N.H.
1977); Anno., 8 A.L.R. 527 (1920). If the value of the asset has been diminished
by severance and disposition of timber or minerals or fixtures, the transferee should
be liable for the amount of the resulting reduction. See Damazo v. Wahby, 269 Md.
252, 257, 305 A.2d 138, 142 (1973). If the transferee has collected rents, harvested
crops, or derived other income from the use or occupancy of the asset after the
transfer, the liability of the transferee should be limited in any event to the net
income after deduction of the expense incurred in earning the income. Anno., 60

31
A.L.R.2d 593 (1958). On the other hand, adjustment for the equities does not
warrant an award to the creditor of consequential damages alleged to accrue from
mismanagement of the asset after the transfer.

(4) Subsection (d) is an adaptation of § 548(c) of the Bankruptcy Code. An

insider who receives property or an obligation from an insolvent debtor as security
for or in satisfaction of an antecedent debt of the transferor or obligor is not a good
faith transferee or obligee if the insider has reasonable cause to believe that the
debtor was insolvent at the time the transfer was made or the obligation was
incurred.

(5) Subsection (e)(1) rejects the rule adopted in Darby v. Atkinson (In re
Farris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on
default in accordance with its terms and applicable law may constitute a fraudulent
transfer. Subsection (e)(2) protects a transferee who acquires a debtor’s interest in
an asset as a result of the enforcement of a secured creditor’s rights pursuant to and
in compliance with the provisions of Part 5 of Article 9 of the Uniform Commercial
Code. Cf. Calaiaro v. Pittsburgh Nat’l Bank (In re Ewing), 33 B.R. 288, 9
C.B.C.2d 526, CCH B.L.R. ¶ 69,460 (Bk.W.D.Pa. 1983) (sale of pledged stock
held subject to avoidance as fraudulent transfer in § 548 of the Bankruptcy Code),
rev’d, 36 B.R. 476 (W.D.Pa. 1984) (transfer held not voidable because deemed to
have occurred more than one year before bankruptcy petition filed). Although a
secured creditor may enforce rights in collateral without a sale under § 9-502 or
§ 9-505 of the Code, the creditor must proceed in good faith (U.C.C. § 9-103) and
in a “commercially reasonable” manner. The “commercially reasonable” constraint
is explicit in U.C.C. § 9-502(2) and is implicit in § 9-505. See 2 G. Gilmore,
Security Interests in Personal Property 1224-27 (1965).

(6) Subsection (f) provides additional defenses against the avoidance of a

preferential transfer to an insider under § 5(b).

Paragraph (1) is adapted from § 547(c)(4) of the Bankruptcy Code, which

permits a preferred creditor to set off the amount of new value subsequently
advanced against the recovery of a voidable preference by a trustee in bankruptcy to
the debtor without security. The new value may consist not only of money, goods,
or services delivered on unsecured credit but also of the release of a valid lien. See,
e.g., In re Ira Haupt & Co., 424 F.2d 722, 724 (2d Cir. 1970); Baranow v. Gibraltor
Factors Corp. (In re Hygrade Envelope Co.), 393 F.2d 60, 65-67 (2d Cir.), cert.
denied, 393 U.S. 837 (1968); In re John Morrow & Co., 134 F.686, 688 (S.D.Ohio
1901). It does not include an obligation substituted for a prior obligation. If the
insider receiving the preference thereafter extends new credit to the debtor but also
takes security from the debtor, the injury to the other creditors resulting from the
preference remains undiminished by the new credit. On the other hand, if a lien

32
taken to secure the new credit is itself voidable by a judicial lien creditor of the
debtor, the new value received by the debtor may appropriately be treated as
unsecured and applied to reduce the liability of the insider for the preferential
transfer.

Paragraph (2) is derived from § 546(c)(2) of the Bankruptcy Code, which

excepts certain payments made in the ordinary course of business or financial
affairs from avoidance by the trustee in bankruptcy as preferential transfers.
Whether a transfer was in the “ordinary course” requires a consideration of the
pattern of payments or secured transactions engaged in by the debtor and the insider
prior to the transfer challenged under § 5(b). See Tait & Williams, Bankruptcy
Preference Laws: The Scope of Section 547(c)(2), 99 Banking L.J. 55, 63-66
(1982). The defense provided by paragraph (2) is available, irrespective of whether
the debtor or the insider or both are engaged in business, but the prior conduct or
practice of both the debtor and the insider-transferee is relevant.

Paragraph (3) is new and reflects a policy judgment that an insider who has
previously extended credit to a debtor should not be deterred from extending further
credit to the debtor in a good faith effort to save the debtor from a forced
liquidation in bankruptcy or otherwise. A similar rationale has sustained the taking
of security from an insolvent debtor for an advance to enable the debtor to stave off
bankruptcy and extricate itself from financial stringency. Blackman v. Bechtel, 80
F.2d 505, 508-09 (8th Cir. 1935); Olive v. Tyler (In re Chelan Land Co.), 257
F.497, 5 A.L.R. 561 (9th Cir. 1919); In re Robin Bros. Bakeries, Inc., 22 F.S. 662,
663-64 (N.D.Ill. 1937); see Dean v. Davis, 242 U.S. 438, 444 (1917). The amount
of the present value given, the size of the antecedent debt secured, and the
likelihood of success for the rehabilitative effort are relevant considerations in
determining whether the transfer was in good faith.

SECTION 9. EXTINGUISHMENT OF [CLAIM FOR RELIEF] [CAUSE

OF ACTION]. A [claim for relief] [cause of action] with respect to a fraudulent
transfer or obligation under this [Act] is extinguished unless action is brought:

(a) under Section 4(a)(1), within 4 years after the transfer was made or the
obligation was incurred or, if later, within one year after the transfer or obligation
was or could reasonably have been discovered by the claimant;

(b) under Section 4(a)(2) or 5(a), within 4 years after the transfer was made
or the obligation was incurred; or

(c) under Section 5(b), within one year after the transfer was made or the
obligation was incurred.

33
 Comment

(1) This section is new. Its purpose is to make clear that lapse of the
statutory periods prescribed by the section bars the right and not merely the remedy.
See Restatement of Conflict of Laws 2d § 143 Comments (b) and (c) (1971). The
section rejects the rule applied in United States v. Gleneagles Inv. Co., 565 F.S.
556, 583 (M.D.Pa. 1983) (state statute of limitations held not to apply to action by
United States based on Uniform Fraudulent Conveyance Act).

(2) Statutes of limitations applicable to the avoidance of fraudulent

transfers and obligations vary widely from state to state and are frequently subject
to uncertainties in their application. See Hesson, The Statute of Limitations in
Actions to Set Aside Fraudulent Conveyances and in Actions Against Directors by
Creditors of Corporations, 32 Cornell L.Q. 222 (1946); Annos., 76 A.L.R. 864
(1932), 128 A.L.R. 1289 (1940), 133 A.L.R. 1311 (1941), 14 A.L.R.2d 598 (1950),
and 100 A.L.R.2d 1094 (1965). Together with § 6, this section should mitigate the
uncertainty and diversity that have characterized the decisions applying statutes of
limitations to actions to fraudulent transfers and obligations. The periods
prescribed apply, whether the action under this Act is brought by the creditor
defrauded or by a purchaser at a sale on execution levied pursuant to § 7(b) and
whether the action is brought against the original transferee or subsequent
transferee. The prescription of statutory periods of limitation does not preclude the
barring of an avoidance action for laches. See § 10 and the accompanying
Comment infra.

SECTION 10. SUPPLEMENTARY PROVISIONS. Unless displaced by

the provisions of this [Act], the principles of law and equity, including the law
merchant and the law relating to principal and agent, estoppel, laches, fraud,
misrepresentation, duress, coercion, mistake, insolvency, or other validating or
invalidating cause, supplement its provisions.

Comment

This section is derived from § 11 of the Uniform Fraudulent Conveyance

Act and § 1-103 of the Uniform Commercial Code. The section adds a reference to
“laches” in recognition of the particular appropriateness of the application of this
equitable doctrine to an untimely action to avoid a fraudulent transfer. See Louis
Dreyfus Corp. v. Butler, 496 F.2d 806, 808 (6th Cir. 1974) (action to avoid
transfers to debtor’s wife when debtor was engaged in speculative business held to
be barred by laches or applicable statutes of limitations); Cooch v. Grier, 30
Del.Ch. 255, 265-66, 59 A.2d 282, 287-88 (1948) (action under the Uniform

34
Fraudulent Conveyance Act held barred by laches when the creditor was chargeable
with inexcusable delay and the defendant was prejudiced by the delay).

SECTION 11. UNIFORMITY OF APPLICATION AND

CONSTRUCTION. This [Act] shall be applied and construed to effectuate its
general purpose to make uniform the law with respect to the subject of this [Act]
among states enacting it.

SECTION 12. SHORT TITLE. This [Act] may be cited as the Uniform
Fraudulent Transfer Act.

SECTION 13. REPEAL. The following acts and all other acts and parts of
acts inconsistent herewith are hereby repealed:

Comment

If enacted by this State, the Uniform Fraudulent Conveyance Act should be

listed among the statutes repealed.

35