After about ninety years, New York State has revised its fraudulent conveyance rules. Those who obtain and collect money judgments should be aware of the new, more uniform and clearer standards, reduced timelines, and changes in the burdens of proof. Here are some of the highlights of the new law.

1. What Law Applies?

New York’s new Uniform Voidable Transaction Act applies to transfers made or obligations incurred after April 4, 2020. The old law applies to transfers which occurred before April 4, 2020. Under the new law, New York law will apply if the individual defendant principally resides in New York at the time of the transfer, or in the case of a defendant which is an organization, such as a corporation, New York law will apply if the organization has its place of business in New York.

2. What transactions are covered?

The old law covered only “conveyances”, which meant “every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance.” The new law is broader and defines “voidable transfers”, as “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, license, and creation of a lien or other encumbrance.”

3. How Far Back Can the Creditor Look For Fraudulent Transfers?

The old law had a generous six year lookback period. Under the new law, there is only a four year lookback with respect to constructively fraudulent transfers or incurred obligations and the later of four years or one year from discovery in the case of intentionally fraudulent transfers. While this is a significant reduction in protection for creditors, it is still better than the lookback period in bankruptcy which is two years from the date of filing of the bankruptcy petition.

Because of the wording of the new law, it seems that the statute of limitations cannot be waived. This remains to be seen, but creditors should be mindful of this when formulating forbearance or other settlement plans.

4. What Does the Creditor Need to Prove?

The old statute did not assign the burden of proof, but pursuant to case law, the party seeking to set aside the transfer had the burden of proving that the challenged transfer was fraudulent and the defendant had the burden of establishing any defenses to the fraudulent transfer. These rules are now expressly laid out in the new statute. Case law construing the old law applied a preponderance of the evidence (more likely than not) standard for constructive fraudulent conveyance claims and the heightened standard of clear and convincing evidence for intentional fraudulent conveyances. The new law prescribes a preponderance of the evidence standard for both constructive and intentional fraud, which is beneficial to creditors.

The new law preserves the claims of constructive fraud and actual fraud, but changes what has to be proven for each. The new law also adds a provision for insider transactions and does away with the so called “Litigation Defendant Rule”.

(a) Removal of the Litigation Defendant Rule.

The new law removes a provision of the old law which was beneficial to creditors. Under the old law, “[e]very conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for  the plaintiff, the defendant fails to satisfy the judgment.” Under the new law, the debtor’s status as a defendant in pending litigation at the time of the transfer is merely a factor to be considered when determining whether the challenged transfer was made with actual intent to hinder, delay or defraud the creditor.

(b) The New Insider Rules.

The old law had no special statutory rules or defenses for insider transactions, although there was case law which interpreted insider transactions as more suspect than other transactions. Under the new law, a transfer is voidable for one year after the transfer is made when the transfer was made to an insider on account of an antecedent debt, the debtor was insolvent at the time, and the insider had reason to believe that the debtor was insolvent. Available defenses include: new value, ordinary course of business, and 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.

(c) Proving Actual Fraud.

To prove actual intent to hinder, delay or defraud creditors, old case law allowed creditors to prove badges of fraud such as 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;
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 that transferred the assets to an insider of the debtor.

Now these badges are expressly enumerated in the new law.

(d) Proving Constructive Fraud

Because proving the actual intent of fraudsters is so difficult, much of the old case law was devoted to construing the constructive fraud statute which stated:

“Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.” (emphasis supplied)

(i) insolvency

The old law regarded a person as insolvent “when the present fair salable value of his assets is less than the  amount that will     be required to pay his probable liability on his existing debts as they become absolute  and  matured.” There was no statutory test for insolvency under the old law.

Under the new law, “(a) A debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets. (b) A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.”

Under the new law, there are two tests for insolvency for purposes of constructive fraudulent transfer claims by a creditor:

1. Was the debtor engaged or 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
2. Did the debtor intend to incur, or believe or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due?

(ii) Consideration

Under the old law, “Fair consideration” has two components, namely “fair value” and “good faith”.

The new law imposes a “reasonably equivalent value” standard, thereby removing consideration of intent in the context of a constructive fraudulent transfer.

Also of note is that the new law curtails the grounds for attack of a properly executed foreclosure sale in that it provides that reasonably equivalent value is given “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.”

5. Attorneys’ Fees

Under the old law, attorney’s fees could be recovered for actual fraud; however, the case law required that both the transferee and transferor manifested fraudulent intent as a condition of an award of attorneys’ fees. Under the new law, attorneys’ fees can now be recovered for both constructive and actual fraud.

The new law has not been tested in New York State Courts yet because the state courts have been closed for all non-essential matters due to the Covid-19 pandemic. The Uniform Voidable Transactions Act has been adopted in many other states, so cases from other states can influence how the statute will be construed in New York. Whether the new law actually will benefit creditors or fraudsters remains to be seen.

If you have any questions about the new law or are considering bringing a fraudulent conveyance action, please contact Antonia Donohue at (516) 393-8217 or adonohue@jaspanllp.com.