HL&C - 02/01/95 HB 72 - UNIFORM FRAUDULENT TRANSFER ACT Number 035 REPRESENTATIVE BRIAN PORTER, prime sponsor of HB 72, 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 legislation. "Alaska law in this area was adopted in 1949 from the state of Oregon and has 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 reach of transferor's creditors. UFTA sets out numerous nonexclusive factors to be considered by the court when determining if the debtor had `actual intent.' "Thirty-two 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." CHAIRMAN KOTT said this bill is a complex matter and draws on the Federal Conveyance Act as well as drawing in the Bankruptcy Act of 1918. He then called for teleconference witnesses. DEBORAH PERELMAN, Legislative Counsel, National Conference of Commissioners on Uniform State Laws, testified via teleconference from Chicago. She explained that this organization is a national statutory drafting committee made up of lawyers, judges, and law professors who draft laws that the organization feels are needed, on a uniform basis, throughout the country. They did work such as the Uniform Commercial Code (UCC), and numerous family law acts. She stated the bottom line is that the acts that come out of the National Conference are as unbiased and as unpartisan as can be in order to achieve a noncontroversial adoption throughout the country. The UFTA from 1984, is a revision of the Uniform Fraudulent Conveyance Act (UFCA) which was drafted by the conference in 1918. The latter was adopted by over half the states. Alaska did not adopt the UFCA, but instead adopted the law of the state of Oregon. The purpose of the UFTA is basically the same as the earlier Act in that it's a category of transfers as fraudulent to creditors and it provides creditors with a remedy for such transfers. The basic premise is that a person who has acquired debt should not be able to manipulate his or her assets so that the creditors will be deprived of their value if the debtor defaults on his or her debt. The Act provides creditors with a remedy when debtors hide or transfer their assets. The conference decided to revise the UFCA because the terminology was archaic and because the Bankruptcy Reform Act of 1978 had dramatically changed the federal law. Ms. Perelman stated that the relationship between the debtor and creditor had become a great deal more complicated. The UFTA has been adopted by 33 states so far, and a number have indicated an interest in passing the Act this year or next. She urged Alaska to adopt the Act in order to be in agreement with most of these other states. Number 169 CHAIRMAN KOTT stated for the record that Representative Kubina arrived at 3:02 p.m. REPRESENTATIVE KIM ELTON asked Ms. Perelman if Oregon had adopted the UFTA. MS. PERELMAN stated that Oregon had adopted the Act. CHAIRMAN KOTT asked if there are any circumstances by which a transferee of a good faith transfer for value would be subject to judgment? MS. PERELMAN answered that the Act sets out badges of fraud which allow that even if there was a good faith transfer for value, it can still be considered a fraudulent transfer under the Act, if certain components of the Act are met. She restated that her answer was "yes" there are transfers that can still be considered a fraudulent transfer, even if done in good faith. Number 196 JERRY WEAVER, Senior Vice President and Manager of Commercial Loans, National Bank of Alaska and Secretary, Alaska Bankers Association, stated that the Bankers Association supports HB 72. He agreed with Ms. Perelman's reasons. He stated that fraudulent transfer of bank collateral has been a growing problem since the late 1980s. He explained that because it is so difficult to prove the intent fraudulent transfer, few creditors would even begin an action. Mr. Weaver thinks it is time to bring this code up to par with other states, and this bill would have some bearing on the outside credit that is made available within the state as well as affecting creditors within the state. He also stated his organization supports updating most of the uniform state statutes and this works well in making uniform credit available throughout the country. He also pointed out that this Act is endorsed by the American Bar Association, most of the state banking associations, and several other creditor groups. TOM EVANS, President, International Credit Association, testified via teleconference from Anchorage. He stated his organization supports HB 72. He said the creditors have the right to know that the debtor is not using fraudulent or illegal means to enhance his position. He stated he is not asking that the debtor lose any of his rights, but is asking that the creditor also gets their rights. He informed the committee that recent surveys show that certain creditors only receive an average of 20 cents on the dollar. Number 262 MARY ELLEN BEARDSLEY, Assistant Attorney General, Department of Law, State of Alaska. She stated she was speaking on behalf of the Attorney General's Office in support of passing HB 72. She agreed with Ms. Perelman's arguments and gave an example of where this Act would be very important. She explained the following: In a current civil lawsuit of Alaska Housing Finance Corporation the plaintiff, Alaska Housing, sued the defendant for money owed to them and attached some of his property. After this attachment, the defendant proceeded to transfer the property to his brother, and then claimed that the property was always owned by his brother. Ms. Beardsley stated current law requires that Alaska Housing must show that the defendant had the actual intent to fraudulently transfer this property to his brother. She explained this is extremely difficult because this is all done through circumstantial evidence. If the UFTA had been in existence prior to this transfer, then Alaska Housing could have used factors set out in that Act to show that the defendant had the intent to fraudulently transfer the property. She further explained that part of the badges of fraud are that the transfer is to an insider, and certainly the brother is an insider. She further stated the badges include that the debtor has retained control of the property and the transfer occurred after the lawsuit. She said the burden of proof then would be transferred over to the defendant, and he would have to show good cause for the transfer. Ms. Beardsley stated she thought this case would be a good example of how the two laws differ. Number 317 CHAIRMAN KOTT asked Ms. Perelman what the justification of combining treatment of past and present creditors might be. MS. PERELMAN replied that the debtor would know he would be owing this money, he then makes a fraudulent transfer. That future creditor should have recourse as well. Number 339 CHAIRMAN KOTT opened public testimony in Juneau for HB 72. There being no public testimony, it was then opened for discussion by the committee. REPRESENTATIVE PORTER closed the sponsor's comment by saying that Alaska laws on this case are way behind the power curve. He further stated that HB 72 passed the House last year and got all the way through the Senate, but died there in the last moments of activities. Number 351 CHAIRMAN KOTT commented that Ms. Beardsley indicated that our existing law isn't working. There being no further comments, Chairman Kott said he would entertain a motion. Number 360 REPRESENTATIVE KUBINA moved to pass HB 72, with individual recommendations out of committee. CHAIRMAN KOTT moved HB 72 with individual recommendations and accompanying fiscal notes out of committee. CHAIRMAN KOTT called for a brief recess at 3:21 p.m.