The Volokh Conspiracy - Fraudulent Transfer Question:

Here's a pretty narrow question to which I have never been able to figure out the precise answer, so I will ask our readers if any of you have ever seen this. Assume that the trustee avoids a transfer in bankruptcy under 544(b) of the Code, using the UFTA as applicable state law. Section 550 provides that the trsutee can always recover from the immediate transferee. UFTA section 8, however, provides that a transfer is not avoidable for actual fraud (UFTA 4(a)(1)) if the transferee takes the property in good faith and for reasonably equivalent value even as to the initial transferee (although it will likely be rare that the debtor commits actual fraud yet the transferee pays reasonably equivalent value and in good faith). Section 548 thus seems to avoid the transfer and 550 seems to allow the porperty to be recovered against the initial transferee and to give the transferee a lien (because of the good faith). But the UFTA--and thus seemingly by implication 544(b)--states that the transfer is unavoidable if taken in good faith.

The issue, then, does section 550 of the Bankruptcy Code trump UFTA section 8 when it comes to avoidance of the transfer to the initial transferee if the transfer is made with actual fraudulent intent by the debtor, but taken in good faith and for reasonably equivalent value by the transferee?

My inclination is to say yes, in that 544(b) derives the substantive standards for when avoidance is permissible from state law, but that the remedy upon avoidance is a matter of federal law. And UFTA section 8 is a remedy provision rather than a substantive provision, thus it yields to section 550. If the relevant provision were part of the substantive law in UFTA 4(a)(1), then I would say otherwise.

I have never been able to find a good discussion of this and I suspect that this issue rarely arises given the need for good faith in the context of an actually fraudulent transfer and that the substantive cause of action arises under 544(b) (the issue doesn't arise if the avoidance is under 548, of course). I've asked about a dozen bankruptcy friends in the past several years and none of them had ever noticed the issue before.

Has anyone out there ever thought about this issue?

	[Todd Zywicki, October 18, 2005 at 7:54am] Trackbacks Fraudulent Transfer Question: Here's a pretty narrow question to which I have never been able to figure out the precise answer, so I will ask our readers if any of you have ever seen this. Assume that the trustee avoids a transfer in bankruptcy under 544(b) of the Code, using the UFTA as applicable state law. Section 550 provides that the trsutee can always recover from the immediate transferee. UFTA section 8, however, provides that a transfer is not avoidable for actual fraud (UFTA 4(a)(1)) if the transferee takes the property in good faith and for reasonably equivalent value even as to the initial transferee (although it will likely be rare that the debtor commits actual fraud yet the transferee pays reasonably equivalent value and in good faith). Section 548 thus seems to avoid the transfer and 550 seems to allow the porperty to be recovered against the initial transferee and to give the transferee a lien (because of the good faith). But the UFTA--and thus seemingly by implication 544(b)--states that the transfer is unavoidable if taken in good faith. The issue, then, does section 550 of the Bankruptcy Code trump UFTA section 8 when it comes to avoidance of the transfer to the initial transferee if the transfer is made with actual fraudulent intent by the debtor, but taken in good faith and for reasonably equivalent value by the transferee? My inclination is to say yes, in that 544(b) derives the substantive standards for when avoidance is permissible from state law, but that the remedy upon avoidance is a matter of federal law. And UFTA section 8 is a remedy provision rather than a substantive provision, thus it yields to section 550. If the relevant provision were part of the substantive law in UFTA 4(a)(1), then I would say otherwise. I have never been able to find a good discussion of this and I suspect that this issue rarely arises given the need for good faith in the context of an actually fraudulent transfer and that the substantive cause of action arises under 544(b) (the issue doesn't arise if the avoidance is under 548, of course). I've asked about a dozen bankruptcy friends in the past several years and none of them had ever noticed the issue before. Has anyone out there ever thought about this issue?