Court of Appeal Defines Good Faith Defense Under The UFTA

In 2015, the California legislature refurbished the Uniform Fraudulent Transfer Act and rechristened it as the Uniform Voidable Transactions Act.  2015 Cal. Stats. Ch. 44 (SB 161 (Vidak)).  The UFTA has not left the stage entirely as courts continue to address disputes arising under the former law.

In Nautilus, Inc. v. Yang, 2017 Cal. App. LEXIS 377 (2017), the Court of Appeal considered the question of what state of knowledge is required to perfect a good faith defense under former Civil Code Section 3439.08(a).  In an opinion by Justice Richard D. Fybel, the Court of Appeal held that a transferee will not benefit from the good faith defense if the transferee:

  • had fraudulent intent;
  • colluded with the person engaged in the "fraudulent conveyance";
  • actively participated in the fraudulent conveyance; or
  • had actual knowledge of facts showing the knowledge of the transferor's fraudulent intent.

In adopting this standard, the Court of Appeal rejected a line of federal cases that might be read to establish an inquiry notice standard (i.e., the transferee had actual knowledge of facts suggesting to a reasonable person that the transfer was fraudulent).

One might question the relevance of this opinion in light of the enactment of the UVTA.  The UVTA isn't really a new law, it is more more like an an aging star with substantial body work than a fresh face.

"The clock hath stricken three."

The Court curiously quotes the text of the current UVTA even while purporting to interpret and apply the erstwhile UFTA.  Below are the differences between the prior and current version of Section 3439.08(a):

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Granted, these are but minor changes, with the exception of the new requirement that value be "given the debtor".  The Court of Appeal also anachronistically refers to "fraudulent conveyance" which hearkens back to the Uniform Fraudulent Conveyance Act.  The UFTA referred to "fraudulent transfers" and the current UVTA refers to transactions that are "voidable".