Legislature(1995 - 1996)

02/20/1995 01:08 PM House JUD

Audio Topic
* first hearing in first committee of referral
+ 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                       
 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             
 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                 
 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            

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