Legal Definitions - Uniform Fraudulent Transfer Act

The Uniform Fraudulent Transfer Act (UFTA) is a standardized law that many U.S. states have adopted. Its primary purpose is to provide a consistent legal framework for identifying and addressing situations where a debtor transfers assets to another party with the intent to avoid paying their legitimate debts, or when they transfer assets for less than their true value while already in financial distress. The UFTA helps creditors recover assets that were improperly transferred, ensuring fairness in debt collection.

Here are some examples illustrating how the UFTA applies:

• Example 1: Intent to Defraud Creditors

  A small business owner, facing imminent bankruptcy and significant debts to suppliers, quickly transfers ownership of their valuable personal art collection to a close friend for a nominal fee of $100. The art collection is appraised at over $50,000. Shortly after, the business declares bankruptcy.

  How it illustrates UFTA: This scenario exemplifies a fraudulent transfer under UFTA because the owner transferred a valuable asset for almost no compensation, clearly intending to keep it out of reach of creditors who would otherwise claim it during bankruptcy proceedings. The UFTA would allow the creditors to challenge this transfer and potentially recover the art collection.

• Example 2: Transfer Without Fair Value While Insolvent

  A struggling construction company, deeply in debt and unable to pay its employees or suppliers, sells a high-value piece of heavy machinery to a new company owned by the original owner's spouse for 30% of its market value. The sale occurs just weeks before the construction company officially ceases operations, leaving many creditors unpaid.

  How it illustrates UFTA: Even if there wasn't explicit proof of intent to defraud, this could be considered a fraudulent transfer under UFTA. The construction company was insolvent (or became insolvent as a result of the transfer) and did not receive "reasonably equivalent value" for the machinery. This transfer unfairly diminished the assets available to pay legitimate creditors, and the UFTA would allow those creditors to challenge the sale.

• Example 3: Transfer to an Insider to Shield Assets

  An individual owes substantial amounts to various lenders and is aware that lawsuits for unpaid debts are imminent. To prevent creditors from seizing their assets, they "gift" their vacation property, which is fully paid off, to their adult child. At the time of the gift, the individual's liabilities significantly exceed their remaining assets.

  How it illustrates UFTA: This transfer to a close family member (an "insider") for no value, while the debtor is insolvent or becomes insolvent, is a classic example of a fraudulent transfer under UFTA. It's an attempt to shield assets from creditors by moving them to someone who is not an arm's-length party, thereby hindering the creditors' ability to collect what they are owed.