Source: https://www.voidabletransactions.com/uvta-5(b)-5(c)-insider-test.php
Timestamp: 2019-08-21 23:25:06
Document Index: 682737444

Matched Legal Cases: ['§ 5', '§ 8', '§ 548', '§ 5', '§ 5', '§ 8', '§ 5', '§ 547', '§ 547', '§ 5', '§ 547', '§ 548']

UVTA 5(b) 5(c) Insider Test
UVTA § 5(b)
Prefatory Note (UFTA 1984): The new Act adds a new category of fraudulent transfer, namely, a preferential transfer by an insolvent debtor to a creditor that is an insider of the debtor and that has reasonable cause to believe the debtor to be insolvent. An insider is defined in much the same way as in the Bankruptcy Code and includes a relative, also defined as in the Bankruptcy Code, a director or officer of a corporate debtor, a general partner, or a person in control of a debtor. This provision is available only to an existing creditor. Its premise is that an insolvent debtor is obliged to pay debts to creditors not related to the debtor before paying insiders that have reason to know of the debtor’s financial distress.
Reporter's Comment: Subsection (b) renders a preferential transfer—i.e., a transfer by an insolvent debtor for or on account of an antecedent debt—to an insider voidable when the insider had reasonable cause to believe that the debtor was insolvent. This subsection adopts for general application the rule of such cases as Jackson Sound Studios, Inc. v. Travis, 473 F.2d 503 (5th Cir. 1973) (security transfer of corporation’s equipment to corporate principal’s mother perfected on eve of bankruptcy of corporation held to be voidable); In re Lamie Chemical Co., 296 F. 24 (4th Cir. 1924) (corporate preference to corporate officers and directors held voidable by receiver when corporation was insolvent or nearly so and directors had already voted for liquidation); Stuart v. Larson, 298 F. 223 (8th Cir. 1924), noted 38 Harv.L.Rev. 521 (1925) (corporate preference to director held voidable). See generally 2 G. Glenn, Fraudulent Conveyances and Preferences 386 (Rev. ed. 1940). Subsection (b) overrules such cases as Epstein v. Goldstein, 107 F.2d 755, 757 (2d Cir. 1939) (transfer by insolvent husband to wife to secure his debt to her sustained against attack by husband’s trustee); Hartford Accident & Indemnity Co. v. Jirasek, 254 Mich. 131, 139, 235 N.W. 836, 839 (1931) (mortgage given by debtor to his brother to secure an antecedent debt owed the brother sustained as not voidable).
3. Subsection (b) does not extend as far as § 8(a) of the Uniform Fraudulent Conveyance Act and Bankruptcy Code § 548(b) (1984) in rendering voidable a transfer made by an insolvent partnership to a partner. A general partner is an insider of the partnership, but a transfer by the partnership to the partner nevertheless is not vulnerable to avoidance under § 5(b) unless the transfer is for an antecedent debt and the partner has reasonable cause to believe that the partnership is insolvent. By contrast, the cited provisions of the Uniform Fraudulent Conveyance Act and the Bankruptcy Code make any transfer by an insolvent partnership to a general partner voidable. Avoidance of the partnership transfer without reference to the partner’s state of mind and the nature of the consideration exchanged would be unduly harsh treatment of the creditors of the partner and unduly favorable to the creditors of the partnership.
JayNote: This is the insider/insolvency old debt test. The test has four elements:
(1) The debtor was insolvent;
(2) The transfer was to an insider;
(3) The transfer was in payment of an old debt; and
(4) The insider should have known that the debtor was insolvent.
A transfer that occurs before the claim is also not actionable, i.e., it cannot be used by future creditors.
Defense Peculiar To Insider Preference Test Of § 5(b)
§ 8(f) A transfer is not voidable under Section 5(b):
Reporter's Comment: 6. Subsection (f) provides additional defenses against the avoidance of a preferential transfer to an insider under § 5(b).
JayNote: With regard to the Insider Preference Test only, the Transferee can get a credit for new value, unless it was: (1) Secured by a lien; (2) Made in the ordinary course; or (3) Secured for the purpose of rehabilitating the debtor.
Reporter's Comment: Paragraph (1) is adapted from Bankruptcy Code § 547(c)(4) (1984), which permits a preferred creditor to set off the amount of new value subsequently advanced against the recovery of a voidable preference by a trustee in bankruptcy to the debtor without security. The new value may consist not only of money, goods, or services delivered on unsecured credit but also of the release of a valid lien. See, e.g., In re Ira Haupt & Co., 424 F.2d 722, 724 (2d Cir. 1970); Baranow v. Gibraltor Factors Corp. (In re Hygrade Envelope Co.), 393 F.2d 60, 65-67 (2d Cir.), cert. denied, 393 U.S. 837 (1968); In re John Morrow & Co., 134 F. 686, 688 (S.D.Ohio 1901). It does not include an obligation substituted for a prior obligation. If the insider receiving the preference thereafter extends new credit to the debtor but also takes security from the debtor, the injury to the other creditors resulting from the preference remains undiminished by the new credit. On the other hand, if a lien taken to secure the new credit is itself voidable by a judicial lien creditor of the debtor, the new value received by the debtor may appropriately be treated as unsecured and applied to reduce the liability of the insider for the preferential transfer.
Reporter's Comment: Paragraph (2) is derived from Bankruptcy Code § 547(c)(2) (1984), which excepts certain payments made in the ordinary course of business or financial affairs from avoidance by the trustee in bankruptcy as preferential transfers. Whether a transfer was in the “ordinary course” requires a consideration of the pattern of payments or secured transactions engaged in by the debtor and the insider prior to the transfer challenged under § 5(b). See Tait & Williams, Bankruptcy Preference Laws: The Scope of Section 547(c)(2), 99 Banking L.J. 55, 63-66 (1982). The defense provided by paragraph (2) is available, irrespective of whether the debtor or the insider or both are engaged in business, but the prior conduct or practice of both the debtor and the insider-transferee are relevant.
Reporter's Comment: Paragraph (3) has no analogue in Bankruptcy Code § 547 (1984). It reflects a policy judgment that an insider who has previously extended credit to a debtor should not be deterred from extending further credit to the debtor in a good-faith effort to save the debtor from a forced liquidation in bankruptcy or otherwise. A similar rationale has sustained the taking of security from an insolvent debtor for an advance to enable the debtor to stave off bankruptcy and extricate itself from financial stringency. Blackman v. Bechtel, 80 F.2d 505, 508-09 (8th Cir. 1935); Olive v. Tyler (In re Chelan Land Co.), 257 F. 497, 5 A.L.R. 561 (9th Cir. 1919); In re Robin Bros. Bakeries, Inc., 22 F.Supp. 662, 663-64 (N.D.Ill. 1937); see Dean v. Davis, 242 U.S. 438, 444 (1917). The amount of the present value given, the size of the antecedent debt secured, and the likelihood of success for the rehabilitative effort are relevant considerations in determining whether the transfer was in good faith.
Bankruptcy Code § 548(a)(1)(B)(IV)
COURT OPINIONS: INSIDER TEST