The Journal of The DuPage County Bar Association

Back Issues > Vol. 30 (2017-18)

The Uniform Fraudulent Transfer Act: An Analysis of Its Broad Application

The Uniform Fraudulent Transfer Act (“UFTA”) was initially drafted by the National Conference of Commissioners on Uniform State laws in the mid-1980's1 as a successor to the 1918 Uniform Fraudulent Conveyance Act (“UFCA”)2 and more recently revised as the Uniform Voidable Transactions Act (“UVTA”) in 2014.3 Illinois adopted the 1984 version of the UFTA in 1989.4 The UFTA itself, at the intersection of state law and Federal civil, criminal and bankruptcy law has developed a robust caselaw, which in part, the 2014 amendments seek to address.5 With further revisions on the horizon, it is useful to examine the implementation of the UFTA in Illinois as well as the proposed revisions to the UFTA and potential effects on Illinois practitioners beyond its usual application.

Background.

The UFTA developed as a significant change to the UFCA necessitated, in part, by the revisions to the Bankruptcy Code enacted in 1978, as well as the effect of the near-universal implementation of the UCC.6 The core purpose of the law remained unchanged: to define actual and/or constructive fraud in transactions by debtors and, therefore, determine which transfers subsequent creditors could seek to void.7

The text of the UFTA states:

“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: (A) 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 (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”8

The text of the law goes into further detail in attempting to define “actual intent” by elucidating eleven factors to be considered when evaluating the intent of a debtor:

“(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 who transferred the assets to an insider of the debtor.”9

The 1984 UFTA changed the term “conveyance” to “transfer” in its title due to the common understanding that the term “conveyance” connotes a transfer of real property and not other kinds of property.10 The tentacles of the UFTA are in fact far-reaching and intersect with almost every area of legal practice. In addition to creating a direct cause of action, the UFTA is frequently implicated in bankruptcy proceedings and indeed has been integrated into the U.S. Bankruptcy Code.11 While the Bankruptcy Code has an independent version of the UFTA, it also explicitly authorizes trustees to use applicable state law to avoid a transfer12–which, under Illinois law, has the effect of lengthening the look-back period to four years.13 The extensive body of precedent in bankruptcy jurisprudence reflects that the analysis of individual transactions is highly fact specific and offers significant room to argue.14

Non-Traditional Uses.

The extensive litigation generated by future creditors should catch the attention of transactional practitioners in the areas of both estate planning and corporate law. The UFTA can be used to seek recovery from an individual after corporate assets have been transferred into individual control, as a parallel or alternate course of action to seeking the piercing of a corporate veil.15 Therefore, corporate practitioners should be familiar with the UFTA and should consider whether transactions–including distributions, accelerated loan repayments, or even leveraged buyouts16–might run afoul of the UFTA. Estate planners should also therefore be wary–since much of estate planning includes transfers to insiders for no or non-equitable value, an estate planner should be aware not only of the source of the funds in an individual’s estate (whether funds were potentially subject to a UFTA avoidance upon their transfer into the estate) but also of the individual’s overall net worth and the value of the planned transfers to trusts or other individuals in proportion to the same, in order to circumvent an argument that they caused insolvency with relation to existing or future creditors.

The UFTA has some application in more unusual fields. For example, family law practitioners may utilize the UFTA to attack transfers of allegedly marital property.17 While the elements of a fraudulent transfer somewhat overlap the concept of the dissipation of a marital estate as set forth under the Illinois Marriage and Dissolution of Marriage Act (“IMDMA”),18 the UFTA offers the advantage of the remedy of avoidance of the transfer where the marital estate has been largely or completely alienated. In addition, parties to a dissolution proceeding should be cautious regarding discovery in situations where the UFTA may be implicated, as it has been used to avoid transactions to a wife in partial satisfaction of obligations under a marital settlement agreement.19

New Amendments on the Horizon?

The 2014 Amendments suggested and approved by the Uniform Law Commission did not make substantive changes to either section of the law quoted above (except to update the term “fraudulent” to “voidable”).20 The committee explained that the 2014 revisions were not meant as a significant rewrite of the substance of the law, but rather contained minor updates to terminology.21 Indeed, the most significant revisions were made to the comments, in order to incorporate updates to definitions and explanations that reflected current application of the UFTA in caselaw.22 However, practitioners should keep in mind that the 2014 amendments (which have not been enacted in Illinois) change the special definition of “insolvency” for partnerships. In the Illinois Compiled Statutes, the exception reads as follows:

“A partnership is insolvent under subsection (a) if the sum of the partnership’s debts is greater than the aggregate, at a fair valuation, of all of the partnership’s assets and the sum of the excess of the value of each general partner’s nonpartnership assets over the partner’s nonpartnership debts.”23

This section is deleted in its entirety in the 2014 update in order to address two failings of this language: first, that “the general definition of insolvency . . . does not credit a non-partnership debtor with any part of the net worth of its guarantors.”24 This creates an inequity between partnership and non-partnership debtors that is otherwise inexplicable and therefore unjustified. Additionally, the credit to the partnership for the net worth of its individual members only makes sense if the members are also wholly liable for the debts of the partnership– and not if the partners’ net worth is not available to the partnership for use in debt satisfaction.25

Conclusion.

The UFTA remains a useful tool in the arsenal of civil litigators and an area of law with which transactional attorneys must familiarize themselves, as it has far reaching implications in many practice areas.

Attorneys must look to any available avenues to assist clients when they are victimized, as it can be difficult for the victim of criminal identity theft to recognize exactly what is going on and it can be exceedingly difficult to clear their marred criminal record, therefore leaving them feeling violated and helpless. Following are some examples of scenarios showcasing aspects of this increasing area of concern and this article outlines how to formulate a plan to assist clients that are victims of such deception.

Scenario I: One day you get a call from a Client or prospective Client. He or she was driving along some evening, possibly coming home with groceries, when all of a sudden the flashing lights of a squad car came up behind their car. It seemed that law enforcement was attempting what appeared to be a routine traffic stop. At the time Client thinks, “I wasn’t speeding, I stopped for that traffic light, I know I didn’t miss that stop sign, my plates are current, where’s that darn insurance card?!”

Client dutifully pulled over and waited for the officer to walk up to his window. However, what came next from the police was loud, verbal direction to show his hands, get out of the car slowly, place hands on the hood, etc. Thereafter Client spent the next hour or more, either right there in the street or otherwise down at the police station, trying to prove he is and that he does not have a warrant out for his arrest.

Worse than this scenario, consider a variation where Client receives a knock at his hotel room in the middle of the night. Seems that his license plate was “run” in the parking lot by local law enforcement and it showed a warrant for his arrest. Now the police are at his hotel room door and looking to take him into custody.

By the time the Client comes to see you he will likely have a pretty good idea who used his name as an alias name. That person will be the person who is the actual person that law enforcement seeks pursuant to that person’s conduct and for which there is an outstanding criminal warrant; unfortunately your Client’s name will be reflected as a known alias. That person that used your Client’s identity will likely be someone Client knows and it is likely a family member, a friend, an in-law, etc. If Client knows where that person is and has no reservation about reporting same to the authorities, he should do so and hopefully the properly served warrant will execute and your Client will be exonerated. However that may not occur.

The Steps to Take: If Client does not know the whereabouts of the warrant subject, short of directing your Client to change his name, you will need to take steps to try and get that warrant quashed. Firstly, find out the status, details and case number associated with the warrant(s) through whatever means you have at your disposal. Next, prepare a “Petition to Intervene and Motion to Quash” citing Illinois Code of Civil Procedure §5/2-408 (735 ILCS 5/2-408). Yes, the Code of Civil Procedure. While 735 ILCS 5/2-408 is ordinarily used for intervention within civil proceedings, such is also used as a proper method for intervention within criminal proceedings. 1

Said petition needs to establish a basis for intervention and relief. Identify that your Client is a resident of the State of Illinois, a resident of the relevant county, and as such a “person” of the State of Illinois. Next, further identify that on information and belief there is currently a warrant for arrest pending against the real subject of the warrant and that it is not proper against the movant / your Client. State the relationship between your Client and the real subject of the warrant.

Your petition should identify that on one or more occurrences, prior to issuance of said warrant, that the real subject of the warrant usurped Client’s identity resulting in Client’s name being identified as an alias of the real subject. This is an act of identity theft. As a direct result of the identity theft, the real subject’s use of Client’s name as an alias name causes Client to be the subject of investigation and inquiry by law enforcement whom believe they have apprehended the real subject when encountering Client.

Your Client has been deprived of his personal liberty. Such deprivations of Client’s personal liberty may include multiple incidents. You should identify them in affidavit form and which you will attach to the pleading. Identify how many times Client has been pulled over, how much time he has spent at the police station, how many times he has been temporarily detained by the police.

Further, each time your Client is detained by law enforcement, and each time his license plate is randomly checked, he is bound by the pending charges and warrant because your Client has suffered the criminal identity theft. Yet your Client’s rights as a “person” of the State of Illinois are not being properly represented by the state, notwithstanding efforts by Client both individually and through your office to resolve the situation informally (which will also be outlined in Affidavit form). Additionally, if you or your client has been able to determine the whereabouts of the real subject (for example that the real subject of the warrant is in custody outside the jurisdiction or that he is deceased) then certified copies of record in support thereof need to be included with your petition. The prayer for relief will request granting of the Petition to Intervene and further request quashing of the pending warrant.

At a hearing on your petition, the necessity of testimony from your Client is dependent on the circumstance. For example, if through original certified public records tendered to the court, you are able to show the real subject of the warrant is deceased it is unlikely that you will need testimony from the Client.

Remember, regardless of the status of the real subject (incarcerated elsewhere, deceased, etc.), you need to get this in front of the court at which time you will be able to argue on behalf of your Client. The ultimate result at hearing will depend on the facts of your particular case but your ultimate goal, regardless of how it looks on the court order, is having the warrant quashed.

Scenario II: You get call from another Client with another report of a different series of events. Client just received a “Notice to Appear” and a “Petition to Revoke Court Supervision” for failing to pay a traffic ticket fine as part of a guilty plea in a traffic case. On further inquiry with the local office of the Illinois Secretary of State, Client finds out he has a traffic ticket conviction in a different county on his driving record. However, perhaps your Client has never even been pulled over by the police of that county.

Unlike Scenario I, your Client is less likely to know who is passing themselves off as your Client at traffic stops. In this scenario, a police officer likely simply accepted the subject’s proffered identify when that subject said he did not have his driver’s license on his person. However, in that instance where a police officer accepted the excuse of the real subject for not producing a state issued identification, that officer would at minimum still require the subject operator to provide a driver’s license (DL) number and a description of the vehicle; that information will appear on the citation.

The first step in this scenario is for you or your Client to obtain a copy of Client’s driving record, the court version, which has to be requested specifically from your local Illinois Secretary of State driver’s license facility. It will show everything regarding the Client’s DL to date. Then obtain copies of all court records from the traffic cases listed. The records will show dates, times, counties and vehicles involved in the traffic stop. This information, along with whoever would be close enough to your Client to have memorized his DL number, will narrow down the possible identity of the person who perpetrated the fraud. Remember though, your goal is not prosecution of criminal action, your goal is to clear your Client’s driving record.

Thereafter prepare a “Motion to Vacate and Dismiss” citing Illinois Code of Civil Procedure §2-301 and 1-1401 (735 ILCS 5/2-301 & 735 ILCS 5/2-1401). Yes, just as in the scenario before: the Code of Civil Procedure. Although a section 2-1401 petition is usually characterized as a civil remedy, its remedial powers extend to criminal cases. 2 §2-301 requires that prior to the filing of any other pleading or motion, a party may object to the court's jurisdiction over the party's person on the ground of insufficiency of process or insufficiency of service of process. You are filing a motion to dismiss the entire proceeding or any cause of action involved in the proceeding by filing a motion to quash service of process. As it relates to your Client, he has never been served.

In addition to statutory and case citation, your motion should include a recitation of all details contained in the traffic citation highlighting the date, time and location of the citation. Also include an affidavit containing all information and documentary support necessary, if possible, to reflect that your Client was nowhere near the traffic stop and could not have been the person who committed the cited violation. Include in your argument that judgment was entered absent any jurisdiction over petitioner, coupled with said judgment having been fraudulently obtained, that said judgment is void as to your Client, the petitioner. At hearing thereon, your Client should be ready to appear and give testimony if needed.

Subsequent to filing your petition, notify the Secretary of State of Illinois Fraud Unit to request what is called a “protective stop” on your Client’s DL. Your request will include a copy of what you have filed with the court and request a “Law Enforcement Protective Stop” designation be applied to your Client’s DL. Once applied, in the event of a police stop wherein a person asserts your Client’s name, regardless of what the driver may tell the police officer, the driver will be required to produce the actual physical DL.

Criminal identity theft may be far from the most common type of identity theft, but while it is lesser known it causes significant damage. Victims of criminal identity theft find themselves in unique situations, and attorneys must look to any available avenues to assist clients by providing them the rights and remedies available under all available laws.

1 UNIFORM FRAUDULENT TRANSFER ACT (1984).
2 UNIFORM FRAUDULENT CONVEYANCE ACT (1918).
3 UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
4 740 ILCS 160 et seq. (2016).
5UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
6UNIFORM FRAUDULENT TRANSFER ACT, Prefatory Note (1984).
7 Id.
8 740 ILCS 160/5 (2016).
9 Id.
10 UNIFORM FRAUDULENT TRANSFER ACT, Prefatory Note (1984).
1111 U.S.C. §548.
1211 U.S.C. §544(b).
13740 ILCS 160/10 (2016).
14 See, e.g., In re SGK Ventures, LLC 2017 WL 2683686 (N.D. Ill. June 20, 2017); In re Zeigler, 320 B.R. 362 (N.D. Ill. Feb. 10, 2005); In re Mussa, 215 B.R. 158 (N.D. Ill. Dec. 5, 2007); In re Chicago Management Consulting Group, Inc., 569 B.R. 722 (N.D. Ill. June 2, 2017).
15 See, e.g., Apollo Real Estate Investment Fund, IV, L.P. v. Gelber, 403 Ill.App.3d 179, 935 N.E. 2d 963 (1st Dist. 2010), Panos Trading, LLC v. Forrer, 2017 IL App (1st) 161460-U (June 29, 2017).
16Boyer v. Crown Stock Distribution, Inc., 587 F.3d 787 (7th Cir. 2009). See also Blackwood, Raymond J. Applying Fraudulent Conveyance Law to Leveraged Buyouts, 42 Duke L.J. 340 (1992).
17 See, e.g., In Re Marriage of Romano, 2012 IL App (2d) 091339 (March 21, 2012); Wachowski v. Wachowski, 2017 Ill App (2d) 160416-U (March 17, 2017); In re Marriage of Shuff, 2015 IL App (2d) 140297-U (March 12, 2015); In re Marriage of Del Giudice, 287 Ill.App.3d 215 (1997).
18 750 ILCS 5/503 (d)(2) (2016).
19 Northwestern Memorial Hosp. v. Sharif, 2014 IL App (1st) 133008 (December 2, 2014).
20 UNIFORM VOIDABLE TRANSACTIONS ACT, §4 (2014).
21 UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
22 UNIFORM VOIDABLE TRANSACTIONS ACT (2014).
23 740 ILCS 160/3 (c)(2016).
24 UNIFORM VOIDABLE TRANSACTIONS ACT, Prefatory Note (2014 Amendments) (2014).
25 Id.

 
 
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