303-839-3861 303-839-3861

Fraudulent Transfer Risk in UCC Strict Foreclosures

Fraudulent Transfer Risk in UCC Strict Foreclosures

Fraudulent Transfer Risk in UCC Strict Foreclosures

Section 38-8-109(5), of the Colorado Fraudulent Transfer Act (based on the Uniform Act) provides in part as follows:

(5) A transfer is not voidable under section 38-8-105(1)(b) or 38-8-106 if the transfer results from:.…(b)                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.

The Prefatory Note to the Fraudulent Transfer Act states that Section 38-8-109(5) “precludes avoidance, as a constructively fraudulent transfer, of…the enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code.” As noted in the Official Comment, this particular section of the Fraudulent Act “protects a transferee who acquires 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.”

Because of the statutory defense in C.R.S. §38-8-109(5), a claim based on constructive fraudulent transfer should be precluded as a matter of law, if the transfer of assets to the secured creditor pursuant to a strict foreclosure complies with the enforcement provisions of Article 9 of the Uniform Commercial Code. This does not, however, prevent claims that are based on “actual intent to hinder, delay, or defraud.”  It also does not prevent fraudulent transfer claims based on the analogous fraudulent transfer statute in the Bankruptcy Code. Therefore, if a debtor were put into bankruptcy, then there is a chance a bankruptcy trustee would take a look at a potential claim.

To prevent this and to establish a good faith defense to any fraudulent transfer claim arising out of the strict foreclosure, it is beneficial to have an independent appraisal of the business assets as a going concern, which show that the value of the collateral received was less than or approximately equal to the debt forgiven. Of course, if the appraisal comes out with the opposite conclusion, then analysis and discussions would be necessary. I simply raise the idea of an appraisal as a potential backstop to mitigate the risk of any fraudulent transfer claims.

If a replevin action has been commenced against the debtor, another method of reducing the risk of fraudulent transfer and successor liability would be to have the court grant an order of possession prior to the effective date of the strict foreclosure.

Quick Contact Form

Quick Contact Form