Alabama Adopts the Uniform Voidable Transactions Act
In the 2018 session, the Alabama Legislature adopted its version of the Uniform Voidable Transactions Act (the “VTA”) promulgated by the National Conference of Commissioners on Uniform State Laws (the “Commission”). Alabama joins approximately 17 other states in adopting the uniform act. The VTA will apply to transactions occurring on or after January 1, 2019. Transactions occurring before then will continue to be governed by Alabama’s version of the Uniform Fraudulent Transfer Act (Ala. Code § 8-9A-1 et seq.) (the “FTA”) currently in place. In many ways, the VTA is a “modernization” of the FTA. Below is a summary of the more significant changes brought by Alabama’s adoption of the VTA:
As indicated in its name, the FTA considers transfers avoidable when they are “fraudulent.” Though the FTA never intended a finding of fraud to be a requisite for avoidance, many courts did just that after associating the FTA with the common law meaning of words like “fraud” and “fraudulent.” Use of the word “fraud” also has led to courts applying the heightened pleading standard reserved for fraud claims. The VTA dissociates itself from the word fraud. Rather than identifying transfers as fraudulent as does the AL AFTA, the VTA refers to them as being voidable since a finding of fraud is not required to avoid a transfer. As noted by the Commission in its Official Comments to the VTA, “[f]raud is not a necessary element of a claim for relief.” VTA § 4, cmt. 8.
Burden of Proof
Some courts have applied the heightened “clear and convincing” evidence standards to actions under the FTA. This was not intended by the Commission and likely was the result of the terminology confusion discussed above. The VTA provides that the lesser “preponderance of the evidence” standard applies instead. Ala. Code § 8-9B-5(c) and -6(c).
The VTA also addresses the burden of proving insolvency. Similar to the FTA, a debtor is presumed insolvent under the VTA when it is generally not paying its debts as they become due. However, the VTA provides that the burden to overcome that presumption is proving “the nonexistence of insolvency is more probably than its existence.” Ala. Code § 8-9B-3(b).
The FTA included a special definition of “insolvency” for partnerships that gave a partnership full credit for the net worth of each of its general partners. The VTA deletes the special definition of insolvency for partnerships so that the same definition of insolvency that applies to other debtors also applies to partnerships.
Choice of Law
The question of which state’s law applied in an avoidance action can become more complicated than it may seem. Without a choice of law provision, confusion can abound when multiple states are in play or when the location of an asset is not exactly clear. The VTA simplifies this question by applying the law of the state of the debtor’s location at the time of the transfer. For individuals, that means the principal residence. For businesses, it means the debtor’s place of business or the “chief executive office” for businesses with more than one location. Ala. Code § 8-9B-11.
A series LLC is a form of a limited liability company that includes multiple cells or “series” each of which is intended to be viewed as a separate entity for liability and other purposes. A series LLC often is used in complex transactions in which an investor desires to have the benefit of having different assets held by individual entities without incurring the administrative burden and expense of forming individual companies for each group of assets. While the FTA does not speak directly to a series LLC, the VTA makes clear that each series of a series LLC will be treated as a separate entity for voidance purposes despite the fact the series LLC may be treated as a single entity for other purposes (e.g. tax reporting). Ala. Code § 8-9B-12.
The FTA provided a defense to an avoidance action if the transferee took the asset in good faith and for reasonably equivalent value, though the FTA did not specify who must have received this value. The VTA clarifies that the reasonably equivalent value must have been given to the debtor. Ala. Code § 8-9B-9(a). Both the FTA and the VTA provide that a transfer resulting from a secured creditor’s repossession or foreclosure under Article 9 of the Uniform Commercial Code generally is not avoidable. However, the VTA clarifies that a secured creditor’s acceptance of collateral in full or partial satisfaction of the secured obligation remains subject to avoidance. Ala. Code § 8-9B-9(e). The purpose is to protect against a transfer in which an asset with substantial equity is conveyed to satisfy a relatively small amount of debt.