This is the second post in a series on the Uniform Fraudulent Transfer Act and its applicability to asset protection planning. To read the first post in the series, click here.
Now that we have reviewed the basics of UFTA, we can move on to defining “reasonably equivalent value” for purposes of UFTA. If you remember, not receiving reasonably equivalent value is one of the components of both actual and constructive fraud.
We get very little information on the definition of “value” from the statute itself. Only one section of the statute addresses it, N.J.S.A. 25:2-24:
a. Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.
b. For the purposes of subsection b. of R.S. 25:2-25 and R.S. 25:2-27, a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.
c. A transfer is made for present value if the exchange between the debtor and the transferee is intended by them to be contemporaneous and is in fact substantially contemporaneous.
As you can see, that section doesn’t help much. It tells us that someone who bought an asset in a foreclosure sale has given reasonably equivalent value despite the price he may have paid. It also tells us that the value received by the debtor in a transfer is the value of what was transferred to the debtor or the amount of debt discharged in the transfer. The latter would have been obvious even without this statutory provision.
We are then left to court decisions to further flesh out the definition of “value” received by a debtor. The definition was clarified somewhat by the court inIn re Chadwick, 2011 Google Scholar 12438110022790024933 (Bkrpt. E.D. Ten. 2011):
[T]he proper focus is on the net effect of the transfers on the debtor’s estate, the funds available to unsecured creditors. As long as the unsecured creditors are no worse off because the debtor… has received an amount reasonably equivalent to what it paid, no fraudulent transfer has occurred.
Quoting In re Congrove, No. 04-8049, 2005 WL 2089856, at*3, 330 B.R. 880 (B.A.P. 6th Cir. 2005).
In other words, when we’re trying to value what was received by a debtor in exchange for one of his assets, we use the value to a creditor of what was received, not its value to the debtor himself. For example, if a debtor transfers $100,000 to an IRA in exchange for a $100,000 interest in that IRA, despite the dollar values being the same the debtor has not received any value. This is because an IRA is protected from creditors under New Jersey law and therefore has a zero value to a creditor. For UFTA purposes, the debtor has transferred $100,000 for $0.
“Reasonably equivalent” is likewise not defined by UFTA. To stay on the safe side of UFTA, I therefore recommend assuming “reasonably equivalent value” means fair market value. Based on plain meaning, I can’t see any definition of reasonably equivalent value ever being greater than fair market value.
So what does all of this mean in practical terms? It means that when we are planning, if we make a transfer into a protected structure we almost certainly haven’t received reasonably equivalent value. This does NOT mean we can’t make the transfer. It simply means that we can’t make the transfer if the value of the transferred asset exceeds the degree to which the debtor is solvent. [We also, as with any transfer, must avoid violating the other provisions of UFTA not relating to solvency.] The mathematical calculation to determine “the degree to which a debtor is solvent” will be covered in my next post in a week or so.
To emphasize, this does not mean that we can’t make transfers to LLCs for asset protection purposes. It simply means that we need to do a solvency analysis before we do. Solvency will be addressed in my next post in a week or so.
UFTA sounds complicated, and it is. Staying on the right side of UFTA is one of the reasons engaging a competent attorney for asset protection planning is so important. If you’re interested in an asset protection plan that won’t violate the provisions of UFTA, contact me.
NOT LEGAL ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney. Nothing posted on Twitter or on any website shall be construed in any way as legal advice.