Legislature(1995 - 1996)
02/20/1995 01:08 PM House JUD
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HJUD - 02/20/95 HB 72 - UNIFORM FRAUDULENT TRANSFER ACT CHAIRMAN BRIAN PORTER said this legislation passed the House last year, and also passed in 32 other states. This legislation would update our statutes. He then read the following sponsor statement: "The Uniform Fraudulent Transfer Act (UFTA) provides creditors with a remedy when debtors transfer or hide assets that would otherwise be available to satisfy legitimate debts. HB 72 is modeled after the uniform law adopted by the National Conference of Commissioners on Uniform State Laws. The Attorney General of the State of Alaska is in support of this needed legislation. "Alaska law in this area was adopted in 1949 from the state of Oregon and had received little legislative attention. Yet, many changes in both state and federal law, particularly in the area of bankruptcy, and relationships between creditors and debtors have become more complex. "At this time, Alaska law provides that a conveyance of real or personal property will be void if it was made `with the intent to hinder, delay or defraud creditors.' AS 34.40.010. The existence of this fraudulent intent is a question of fact and the burden of proof is upon the creditor (Summers v. Hagen_P.2d_, No.3961, May 28, 1993). This burden of proof can be extremely hard to prove. UFTA would eliminate the present Alaskan necessity of finding actual intent by a property transferor to hinder, delay or defraud a creditor in many situations where the transferor is obviously transferring assets solely to keep them out of the reach of transferor's creditors. UFTA sets out numerous non-exclusive factors to be considered by the court when determining if the debtor had `actual intent.' "Thirty-two (32) states have adopted UFTA into their laws. Uniformity has become not only a question of law between states, but also between state and federal law. Without uniformity, credit becomes less available, and the credit mechanism is less reliable. The Uniform Fraudulent Transfer Act takes into account the current development in both law and practice in creditor-debtor relationships." Number 080 DEBRA PERLMAN, Legislative Counsel, National Conference of Commissioners on Uniform State Law, Chicago Headquarters, explained that this conference is a 103-year-old organization. It is made up of practicing lawyers, judges, and law professors appointed by the Governors of every state. At Uniform Law Conferences, they come together to draft laws they feel should be adopted on a uniform basis. During the meetings, they have Uniform Law Commissioners sitting around the table, as well as advisors and observers from all over the spectrum; so that the end result is as balanced as possible, in order to achieve uniform adoption throughout the country. The Uniform Fraudulent Transfer Act is a modern version of the Uniform Fraudulent Conveyance Act (UFCA), originally promulgated by the National Conference in 1918. Alaska is not one of the states that had adopted this Act. Alaska probably has some type of Statute of Elizabeth law which was recognized in the 1500s. So Alaska clearly needs to be brought up to date in the area of fraudulent transfers. The intent of the UFTA is the same as the UFCA. It classifies the category of transfers as money owed to creditors. The UFTA would provide creditors with a remedy for the transfers. The Act declares a transfer made while obligations incurred was actual intent to hinder the payment of debt. Failure to notify creditors would be fraudulent. MS. PERLMAN explained, in addition, the transfer made before obligation occurred without adequate consideration, could be fraudulent; whether or not there was actual intent to defraud. You do not necessarily have to have actual intent to defraud or hinder, in order for the transfer to be considered fraudulent. If there is no actual intent, then in order to be considered fraudulent, certain conditions listed in the Act must be met. One example would be if the debtor made a transfer, and as a result of the transfer became insolvent, even before the transfer occurred, then that would be considered a fraudulent transfer. It is just a matter of it being very unfair to creditors for a transfer like this to take place, when the debtor has an obligation to handle the creditor's concerns as well. So there is actual intent, and there is also constructive intent. She said they hoped all 50 states would adopt this legislation. Number 190 REPRESENTATIVE AL VEZEY discussed with Ms. Perlman his concerns about having this type of language in the statutes. He said the language does not address fraudulent transfer that is not intentional. In liquidating hard assets, he would not want the worth of his property determined by someone else. MS. PERLMAN explained that fair market value would be the amount used in selling. She also said this would only become an issue if the creditors did not get paid. REPRESENTATIVE VEZEY argued that if you want to liquidate today, you have to sell for the best price right now, not what you may be able to get six months from now, or six months ago. In Juneau, those can be drastic differences. He had been to court on occasion to establish fair market value, and has no faith in someone else being able to tell him what his assets are worth. Number 310 MS. PERLMAN said the determination is made using the reasonable equivalent of fair market value, which is only one consideration. If the market is such that something cannot actually be sold for fair market value, then it probably would not be considered a fraudulent transfer if someone sold it for a lot less than they could have originally gotten for it. If someone sold a $20,000 car for $15 to their aunt, in order to avoid creditors, then that would most likely be considered a fraudulent transfer; because even for the sheet metal, you can get more than $15 for a car. It really depends on the situation. REPRESENTATIVE VEZEY expressed concerns over the fact that there is no definition of what reasonable equivalent value is. He would like to at least see a disclaimer, saying that if you have an arms length transaction, that would be considered prima facie evidence that there was no intent to defraud. MS. PERLMAN explained they do not want to define this reasonably equivalent value in statute, we want that to be a case-by-case determination. That can be best done by us not getting involved with specifics. Number 410 REPRESENTATIVE VEZEY did not understand why there was 20 lines of statute mitigating circumstances that would describe intent to defraud, but no expansive language on what reasonably equivalent value is. He did not trust the courts to understand his idea of commercial practice. MS. PERLMAN argued the courts do, and have handled reasonably equivalent determinations for 75 or 80 years. REPRESENTATIVE VEZEY asked which factors are used in proving or disproving intent. MS. PERLMAN agreed the language was possibly phrased a little awkwardly. They are saying if it is not reasonably equivalent to the value, then actual intent might be considered. Number 445 DEBRA RANDALL, Attorney, Law Firm of Davis and Goerig, testified via teleconference from Anchorage, and said her main areas were estate planning and probate. Their concerns were over the current actual intent language which goes a step further, including constructive intent, which says you can establish intent. They were worried this would apply not only to present creditors, but also to future creditors. Something they do frequently is establish trust fund accounts for children to go to college. She was concerned that a transfer such as this could be tapped into by a creditor in the future, 10 or 20 years down the road. Maybe future creditors would not be included, but they were worried about the possibility, and wanted the language to reflect that it applies only to present creditors. She said they would delete Section 2 completely. Including future creditors would increase litigation. Their law firm was in favor of this legislation, in general, but they were definitely concerned about future creditors. Number 520 MARY ELLEN BEARDSLEY, Assistant Attorney General, Department of Law, testified via teleconference from Anchorage, representing the Alaska Housing Authority. With regards to future creditors, she gave an example of why she did not think the law should be changed with regard to future creditors. In 1992, Alaska Housing merged with the Public Housing Authority. They have a person living in one of their apartments in Fairbanks who was receiving subsidy through the Housing and Urban Development (HUD) program. It turned out that person had property and other assets he had failed to disclose for 20 years. After they found out about it, they discontinued his subsidy, and are presently suing him for the subsidies he did receive, because his assets exceeded the monetary limit available to receive those subsidies. The lawsuit was filed. They are a future creditor, and have no judgment at this time. During the lawsuit, they obtained a prejudgment writ of attachment which attached a piece of real property in Fairbanks. The defendant then proceeded, after the attachment, after the lawsuit was filed, to deed that property to his brother who had been living out of the state for probably over 40 years. The defendant is claiming the property always belonged to his brother and that he was essentially taking care of the property over the last 40 years. The property was purchased in 1959 by the defendant. All of the property records have always been in his name, and he has always paid the taxes. MS. BEARDSLEY noted as you can see, we are definitely a future creditor, we do not have a judgment, and if we fell under this Act, we could have shown actual intent by using the considerations that are listed on page 3 of the Act, under subsection (b), under 34.41.030, the transfer occurred after the lawsuit was filed. If this Act had been in place, we would have been able to attach that property and get it back, doing whatever was necessary to satisfy the judgment. But now, we do not have the luxury to try to bring that property back in. We believe the transfer was fraudulent, and under the current law, we have to prove the intent. MS. BEARDSLEY continued, for the reason of this example, it is critical to include future creditors in this legislation. This statute sets out a statute of limitations of two to four years, or perhaps even one year, after the transfer is actually found out about. You need to take the whole bill, and not look at it just piecemeal, because right now, the proof of intent can only be determined through circumstantial evidence. She agreed with Ms. Perlman that the reasonable equivalent value should be decided by the court or by a jury. Number 665 TOM EVANS, Credit Manager and President of International Credit Association of Anchorage, testified via teleconference and explained the organization is made up of local credit managers who push for educational legislative reform, and things of that nature. They support HB 72. He said bankruptcies protect debtors' rights, but creditors also have the right to assets that are improperly or unlawfully being transferred in order to keep the assets out of the creditors' hands. This legislation will go a long way in making sure that happens. Number 690 JERRY WEAVER, Chamber Vice President and Manager of Commercial Lending, National Bank of Alaska, testified via teleconference from Anchorage, and stated he is also Secretary/Treasurer for the Alaska Bankers Association, and was speaking for that group. They encouraged passage of HB 72. He felt proving intent to transfer fraudulently was too costly. He felt it necessary for constructive intent to be in there. Number 765 REPRESENTATIVE VEZEY again expressed concerns about a court determining reasonableness of equivalent value. Number 785 MS. BEARDSLEY argued that the statute could not be made narrow, or that would create an arena of unfairness. Reasonableness must be determined by individual circumstances. TAPE 95-13, SIDE B Number 000 REPRESENTATIVE CYNTHIA TOOHEY made the motion to move HB 72 out of committee with the two zero fiscal notes. REPRESENTATIVE VEZEY objected. Number 030 CHAIRMAN PORTER clarified the bill, using the example of estate planning. There is a statute of limitations within the bill itself, which would preclude the 10 - 20 year example. But there has to be some relationship between the transfer and the unpaid debt. If someone set up an estate for their kids, and several years later was found in the position of having a malpractice suit brought against them, there is no way they could go back and say that original trust had been set up in violation of this Act. It could not happen. REPRESENTATIVE DAVID FINKELSTEIN added the sections making that clear are on page 2, (a) and (b). It is not just reasonably equivalent value, it has to be one of these two conditions, and if one of these two conditions is not met, it does not matter whether there is reasonably equivalent value. The first is the business dealings that involve the business undertaken at that time. It says, "... was engaged, or was about to engage...", so it has to be timing. Section (b) has to do with debts that one is able to foresee. REPRESENTATIVE VEZEY said, for the record, that does not address his concerns. Number 080 REPRESENTATIVE FINKELSTEIN said he shared the concerns Representative Vezey had, but the testimony heard seems to indicate the determination of fair value is something that occurs right now under law, and is not significantly changed by this. It is a problem we may not be able to solve, but it does exist under current law. REPRESENTATIVE TOOHEY assumed the court could go back on your record of reasonable transfer for many years and see that you are unreasonably transferring things, as a pattern. REPRESENTATIVE JOE GREEN thought in other tort actions, the court has for years used the average reasonable person. There is a degree of performance, of value that could be looked at as reasonable. While it may not suffice the person who was defrauded, it still should be a matter where the court could arrive at a value that would be "reasonable." CHAIRMAN PORTER requested a roll call vote be taken. Representatives Finkelstein, Toohey, Green, and Porter voted yes. Representative Vezey voted no. The bill passed with a four to one vote.
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