What is a Voidable Conveyance? (Part I)
In general, your San Diego business must honor its payment obligations to its creditors. Creditors are, of course, lenders and financial institutions, but also can be your landlord, suppliers, and others to whom payment is due. In general, if your business fails to pay its obligations, your creditors can, after due legal process, gain access to your assets and sell such assets to satisfy the debts due and owing.
As a consequence, under California law, your business cannot sell or convey any property or assets with the intent of or effect of preventing your creditors from seizing the assets to pay your debts. Such conveyance or transfers are what are now called “voidable conveyances.” For many years, the legal term was “fraudulent conveyance.” However, the need for “fraud” has been eliminated. Consulting with an experienced San Diego corporate attorney before making a significant asset transfer can help. Here is some basic information on voidable conveyances.
San Diego Corporate Law: California Law on “Voidable Conveyances”
Fraudulent conveyances in California are now governed by the Uniform Voidable Transactions Act (“UVTA”), Cal. Civ. Code § 3439 et seq. The UVTA replaced the older version as of 2016. As noted, under the new version of the Act, no actual “fraud” must be proven (although proof of fraud will certainly allow the conveyance to be voided).
San Diego Corporate Law: What is a “Fraudulent Conveyance” (Now “Voidable Conveyance”)?
The idea of a voidable conveyance is this: A debtor sells an asset for much less than the asset is worth with the intent or effect of depriving creditors of the asset which could be used to pay the debts. A key indication of a voidable conveyance is that the asset is sold at a significant discount.
Take this example: Your business owns a big red truck that is worth about $10,000 free and clear from any bank loan. Your business also owes its creditors about $10,000 for supplies and loans and rent and what not. As the creditors are knocking on your door demanding payment, you sell the big red truck to your best friend for $10,000.
Here, there is NO fraudulent or voidable conveyance of the big red truck because, in theory, you turn around and use the $10,000 to pay your creditors. In this example, your creditors are not outraged or cheated because you simply converted one $10,000 asset — a big red truck — into a different $10,000 asset — cash. This is the “reasonably-equivalent-value” rule. If you sell an asset for a reasonably-equivalent value, then there is no voidable conveyance.
However, let’s change the example. Now, you sell the big red truck to your friend for only $1,000. Now, your creditors feel cheated and the sale to your friend can be voided pursuant to the UVTA.
San Diego Corporate Law: What Facts Support a Claim for Voidable Conveyance?
Under the UVTA and case law, various facts will be used to determine if a conveyance is voidable. As noted, a key fact is whether the asset was sold at a significant discount. Other facts include:
- Evidence of actual intent to hinder, delay, or defraud any creditor
- Was the sale in the ordinary course of business?
- Percentage of assets sold — in other words, are there still sufficient assets to cover the debts
- Sale to a business insider, friend, family members, etc.
- Did debtor retain possession or control of the asset transferred?
- Secrecy of the transfer
- Pendency of creditor lawsuits and threatened collection actions
- Whether the transferor of the asset was insolvent or became insolvent shortly after the transfer
- And more
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses. Mr. Leonard can provide advice and counsel with respect to the sale of any asset or assets and can help you avoid any legal issue with respect to voidable conveyances. These issues arise often in the context of the sale/purchase of a business or during mergers and acquisitions. Mr. Leonard has extensive experience with such transactions. Mr. Leonard can be reached at (858) 483-9200 or via email.
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