CO Code § 38-8-109 (2021)
2021 Colorado Code|Title 38 - Property - Real and Personal|Article 8 - Fraudulent Transfers|§ 38-8-109. Defenses, Liability, and Protection of Transferee

  A transfer or obligation is not voidable under section 38-8-105 (1)(a) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.    Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under section 38-8-108 (1)(a), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (3) of this section, or the amount necessary to satisfy the creditor's claim, whichever is less. The judgment may be entered against:   The first transferee of the asset or the person for whose benefit the transfer was made; or    Any subsequent transferee other than a good-faith transferee or obligee who took for value or from any subsequent transferee or obligee.       If the judgment under subsection (2) of this section is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.    Notwithstanding voidability of a transfer or an obligation under this article, a good-faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to:   A lien on or a right to retain any interest in the asset transferred;    Enforcement of any obligation incurred; or    A reduction in the amount of the liability on the judgment.       A transfer is not voidable under section 38-8-105 (1)(b) or 38-8-106 if the transfer results from:   Termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law; or    Enforcement of a security interest in compliance with the provisions of the “Uniform Commercial Code - Secured Transactions”, article 9 of title 4, C.R.S.       A transfer is not voidable under section 38-8-106 (2):   To the extent the insider gave new value to or for the benefit of the debtor after the transfer was made unless the new value was secured by a valid lien;    If made in the ordinary course of business or financial affairs of the debtor and the insider; or    If made pursuant to a good-faith effort to rehabilitate the debtor and the transfer secured present value given for that purpose as well as an antecedent debt of the debtor.        History. Source: L. 91: Entire article added, p. 1687, § 1, effective July 1.    Editor's note - Colorado legislative change: This section was numbered as section 8 in the uniform act. In subsection (2) (b), the phrase “or obligee” has been added after “transferee” in both places where “transferee” appears.   OFFICIAL COMMENT    Subsection (a) (subsection (1) in C.R.S.) states the rule that applies when the transferee establishes a complete defense to the action for avoidance based on Section 4(a)(1) (section 38-8-105 (1)(a) in C.R.S.). The subsection is an adaptation of the exception stated in § 9 of the Uniform Fraudulent Conveyance Act. The person who invokes this defense carries the burden of establishing good faith and the reasonable equivalence of the consideration exchanged. Chorost v. Grand Rapids Factory Showrooms, Inc., 77 F. Supp. 276, 280 (D.N.J. 1948), aff'd, 172 F.2d 327, 329 (3d Cir. 1949).    Subsection (b) (subsection (2) in C.R.S.) is derived from § 550(a) of the Bankruptcy Code. The value of the asset transferred is limited to the value of the levyable interest on the transferor, exclusive of any interest encumbered by a valid lien. See § 1(2) supra (section 38-8-102 (2) in C.R.S.).    Subsection (c) (subsection (3) in C.R.S.) is new. The measure of the recovery of a defrauded creditor against a fraudulent transferee is usually limited to the value of the asset transferred at the time of the transfer. See, e.g., United States v. Fernon, 640 F.2d 609, 611 (5th Cir. 1981); Hamilton Nat'l Bank of Boston v. Halstead, 134 N.Y. 520, 31 N.E. 900 (1892); cf. Buffum v. Peter Barceloux Co., 289 U.S. 227 (1932) (transferee's objection to trial court's award of highest value of asset between the date of the transfer and the date of the decree of avoidance rejected because an award measured by value as of time of the transfer plus interest from that date would have been larger). The premise of § 8(c) is that changes in value of the asset transferred that occur after the transfer should ordinarily not affect the amount of the creditor's recovery. Circumstances may require a departure from that measure of the recovery, however, as the cases decided under the Uniform Fraudulent Conveyance Act and other laws derived from the Statute of 13 Elizabeth illustrate. Thus, if the value of the asset at the time of levy and sale to enforce the judgment of the creditor has been enhanced by improvements of the asset transferred or discharge of liens on the property, a good faith transferee should be reimbursed for the outlay for such a purpose to the extent the sale proceeds were increased thereby. See Bankruptcy Code § 550(d); Janson v. Schier, 375 A.2d 1159, 1160 (N.H. 1977); Anno., 8 A.L.R. 527 (1920). If the value of the asset has been diminished by severance and disposition of timber or minerals or fixtures, the transferee should be liable for the amount of the resulting reduction. See Damazo v. Wahby, 269 Md. 252, 257, 305 A.2d 138, 142 (1973). If the transferee has collected rents, harvested crops, or derived other income from the use or occupancy of the asset after the transfer, the liability of the transferee should be limited in any event to the net income after deduction of the expense incurred in earning the income. Anno., 60 A.L.R.2d 593 (1958). On the other hand, adjustment for the equities does not warrant an award to the creditor of consequential damages alleged to accrue from mismanagement of the asset after the transfer.    Subsection (d) (subsection (4) in C.R.S.) is an adaptation of § 548(c) of the Bankruptcy Code. An insider who receives property or an obligation from an insolvent debtor as security for or in satisfaction of an antecedent debt of the transferor or obligor is not a good faith transferee or obligee if the insider has reasonable cause to believe that the debtor was insolvent at the time the transfer was made or the obligation was incurred.    Subsection (e)(1) (subsection (5)(a) in C.R.S.) rejects the rule adopted in Darby v. Atkinson (In re Farris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on default in accordance with its terms and applicable law may constitute a fraudulent transfer. Subsection (e)(2) (subsection (5)(b) in C.R.S.) protects a transferee who acquires a debtor's interest in an asset as a result of the enforcement of a secured creditor's rights pursuant to and in compliance with the provisions of Part 5 of Article 9 of the Uniform Commercial Code. Cf. Calaiaro v. Pittsburgh Nat'l Bank (In re Ewing), 33 B.R. 288, 9 C.B.C.2d 526, CCH B.L.R. paragraph 69,460 (Bk.W.D.Pa. 1983) (sale of pledged stock held subject to avoidance as fraudulent transfer in § 548 of the Bankruptcy Code), rev'd, 36 B.R. 476 (W.D.Pa. 1984) (transfer held not voidable because deemed to have occurred more than one year before bankruptcy petition filed). Although a secured creditor may enforce rights in collateral without a sale under § 9-502 or § 9-505 of the Code, the creditor must proceed in good faith (U.C.C. § 9-103) and in a “commercially reasonable” manner. The “commercially reasonable” constraint is explicit in U.C.C. § 9-502(2) and is implicit in § 9-505. See 2 G. Gilmore, Security Interests in Personal Property 1224-27 (1965).    Subsection (f) (subsection (6) in C.R.S.) provides additional defenses against the avoidance of a preferential transfer to an insider under § 5(b) (section 38-8-106 (2) in C.R.S.).     Paragraph (1) (paragraph (a) in C.R.S.) is adapted from § 547(c)(4) of the Bankruptcy Code, 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.   Paragraph (2) (paragraph (b) in C.R.S.) is derived from § 546(c)(2) of the Bankruptcy Code, 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) (section 38-8-106 (2) in C.R.S.). 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 is relevant.   Paragraph (3) (paragraph (c) in C.R.S.) is new and 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.S. 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.   ANNOTATION   Whether “reasonably equivalent value” has been received is a question of fact. What constitutes “reasonably equivalent value” for the transfer requires an analysis of all of the facts and circumstances surrounding the transaction. The standard of reasonably equivalent value implies a rule of reasonableness in light of the particular circumstances. Reasonable equivalence is not synonymous with market value, even though market value is an important factor to be utilized in the assessment. For purposes of the Colorado Uniform Fraudulent Transfer Act, equity looks to the substance of the transaction rather than its form. Krol v. Unglaub, 332 B.R. 303 (Bankr. N.D. Ill. 2005).   The time value of money does not constitute reasonably equivalent value in an equity-type Ponzi scheme, so a transfer of profits or interest is voidable. When an innocent investor has no guarantee of profit or the payment of interest, the debtor's fraudulent transfer of profits to the investor from the scheme does not satisfy an antecedent debt and is not a transfer of reasonably equivalent value. Lewis v. Taylor, 2018 CO 76, 427 P.3d 796.   Subsection (2) of this section does not provide an additional remedy to creditors but instead limits the remedy provided under § 38-8-108 (1)(a) by limiting the creditor's recovery in an action to avoid a fraudulent transfer to the lesser of the adjusted value of the transferred asset or the amount of the creditor's claim. Because a bankruptcy trustee thus has the power to recover the same amount sought by the plaintiff creditor for the benefit of all creditors and because allowing individual creditors to file actions for recovery would interfere with the bankruptcy estate and the equitable distribution scheme dependent upon it, the plaintiff creditor lacked standing. Summers v. Perkins, 81 P.3d 1141 (Colo. App. 2003).   The ordinary course of business defense is available only to insiders. Sender v. Mann, 423 F. Supp. 2d 1155 (D. Colo. 2006 ).   Because ranch was encumbered by valid liens that exceeded its value, it was not an asset under this article. Because ranch did not constitute an asset under this article, jury's verdict in favor of plaintiff on his fraudulent conveyance claim must be reversed. Bd. of Cty. Comm'rs v. Sportsmen's Ranch, 271 P.3d 562 (Colo. App. 2011).