Uniform Fraudulent Transfer Act
Statewide Title, Inc.

Effective October 1, 1997, North Carolina has adopted the Uniform Fraudulent Transfer Act. The Act replaces the Fraudulent Conveyances statute in Article 3 of Chapter 9 of the General Statute. The Act provides remedies to creditors when debtors transfer property or incur obligations in an attempt to place assets beyond the reach of creditors.

The Act has made several changes to the prior law; it now includes the term "obligations" in addition to "transfers," gives separate treatment to creditors existing at the time the transfer or obligation was made and those who become creditors after, provides for setting aside transfers to insiders for antecedent debts, and provides new limitation periods.

The Act changes the old law by including obligations in the definition of transfers concerning fraudulent conveyances. Although the prior law did not include the term "obligations," case law expanded the definition of transfers to include obligations such as deeds of trust if made without adequate consideration. The legal principles with respect to fraudulent conveyances under prior law are set out in Aman v. Walker, 165 N.C. 224, 81 S.E. 162 (1914), as follows:

"(1) If the conveyance is voluntary and the grantor retains property fully sufficient and available to pay his debts then existing and there is no actual intent to defraud, the conveyance is valid.

(2) If the conveyance is voluntary and the grantor did not retain property fully sufficient and available to pay his debts then existing, it is invalid as to creditors, but it cannot be impeached by subsequent creditors without proof of the existence of a debt at the time of its execution which is unpaid, and when this is established and the conveyance avoided, subsequent creditors are let in and the property is subjected to the payment of creditors generally.

(3) If the conveyance is voluntary and made with the actual intent upon the part of the grantor to defraud creditors, [296 N.C. 377] it is void, although this fraudulent intent is not participated in by the grantee, and although property sufficient and available to pay existing debts is retained.

(4) If the conveyance is upon a valuable consideration and made with the actual intent to defraud creditors upon the part of the grantor alone, not participated in by the grantee, and of which intent he had no notice, it is valid.

(5) If the conveyance is upon a valuable consideration, but made with the actual intent to defraud creditors on the part of the grantor, participated in by the grantee, or of which he has notice, it is void."

The statute now codifies certain of these principles and broadly defines transfers as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset and include payment of money, release, lease, and creation of a lien or other encumbrance."

The Act also applies to both present and future creditors, although they are treated differently in some respects. Present creditors are those who have claims at the time of the transfer; future creditors are those whose claims arise after the transfer. Transfers are fraudulent as to both present and future creditors if they were "intended to hinder, delay or defraud a creditor or if reasonably equivalent value was not received in exchange" where the debtor is left with assets which are unreasonably small with respect to the business or transaction, or the debtor intended to incur debts beyond his ability to pay them when due.

Under the old law, there was no presumption of fraudulent conveyances; however the Act lists thirteen factors to consider in determining if a debtor acted with the intent to hinder, delay or defraud creditors, but the list is not exclusive nor conclusive. With present creditors, transfers are fraudulent if reasonably equivalent value was not received, and the debtor was insolvent or became insolvent as a result of the transfer. If a transfer is made when the creditor is insolvent, intent does not matter, and it is only fraudulent as to present creditors. A transfer is voidable if made to an insider for an antecedent debt if the debtor was insolvent at the time of the transfer and the insider had reasonable cause to believe that the debtor was insolvent. Insiders include relatives, partners, partnerships, corporations, directors, officers, person in control of the debtor, managing agents of the debtor, and affiliates.

The remedies available to creditors in the event of a fraudulent conveyance include avoiding the transfer to the extent necessary to satisfy the creditor's claim, attaching the asset and equitable relief, including injunctions, appointment of a receiver or any other relief required by the circumstances. Money damages are available when the transfer was made with the intent to hinder creditors. However, transfers cannot be set aside and money damages are not available from transferees who acted in good faith and gave reasonably equivalent value for the transfer. If a transfer is voidable, the creditor can recover the lesser of the value of the asset transferred or the amount necessary to satisfy the creditor's claim.

The good faith element may have an impact on title searching because civil actions may now have to be checked. If a transferor has a large claim alleged in a pending action which ultimately becomes liquidated, it could be argued that the good faith defense is unavailable due to constructive notice doctrines.

The statute of limitations has also been changed. Under the old law, a cause of action had to be brought within three years after the creditor knew or should have known of the transfer. Under the Act three statutes of limitation apply depending on the circumstances of the transfer: (1) four years after the transfer or obligation intended to hinder creditors and legal actions or if later, within one year after the transfer was or could have reasonably been discovered; (2) within four years after the transfer in other cases; (3) one year for actions to set aside transfers to insiders for antecedent debts.

The statute adopts the holding in BFP v. Resolution Trust Corp., 114 S. Ct 1757, 128 L. Ed 2d 556 (1994) by providing that a non-collusive foreclosure sale conducted in accordance with state law will not be deemed a fraudulent conveyance.

Treatment of Deferred Exchanges
Javier G. Vande Steeg, CEO of Asset Preservation, Inc.

    The following article is taken from "The 1031 Tax-Deferred Exchange" lecture materials that accompany lectures presented by Asset Preservation and Stewart Title Company concerning like kind exchanges. Future issues of our newsletter will contain additional information from the lecture materials.

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1. OVERVIEW. This section provides rules for the application of section 1031 and the regulations thereunder in the case of a "deferred exchange." For purposes of section 1031 and this section, a deferred exchange is defined as an exchange in which, pursuant to an agreement, the taxpayer transfers property held for productive use in a trade or business or for investment (the "relinquished property") and subsequently receives property to be held either for productive use in a trade or business or for investment (the "replacement property"). In the case of a deferred exchange, if the requirements set forth in paragraphs (b), (c), and (d) of this section (relating to identification and receipt of replacement property) are not satisfied, the replacement property received by the taxpayer will be treated as property which is not of a like kind to the relinquished property. In order to constitute a deferred exchange, the transaction must be an exchange (i.e., a transfer of property for property, as distinguished from a transfer of property for money). For example, a sale of property followed by a purchase of property of a like kind does not qualify for nonrecognition of gain or loss under section 1031 regardless of whether the identification and receipt requirements of section 1031(a)(3) and paragraphs (b), (c), and (d) of this section are satisfied. The transfer of relinquished property in a deferred exchange is not within the provisions of section 1031(a) if, as part of the consideration, the taxpayer receives money or property which does not meet the requirements of section 1031(a), but the transfer, if otherwise qualified, will be within the provisions of either section 1031(b) or (c). See section 1.1031(a)-1(a)(2). In addition, in the case of a transfer of relinquished property in a deferred exchange, gain or loss may be recognized if the taxpayer actually or constructively receives money or property which does not meet the requirements of section 1031(a) before the taxpayer actually receives like-kind replacement property. If the taxpayer actually or constructively receives money or property which does not meet the requirements of section 1031(a) in the full amount of the consideration for the relinquished property, the transaction will constitute a sale, and not a deferred exchange, even though the taxpayer may ultimately receive like-kind replacement property. For purposes of this section, property which does not meet the requirements of section 1031(a) (whether by being described in section 1031(a)(2) or otherwise) is referred to as "other property."
2. IDENTIFICATION AND RECEIPT REQUIREMENTS.

1. IN GENERAL. In the case of a deferred exchange, any replacement property received by the taxpayer will be treated as property which is not of a like kind to the relinquished property if –

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   1. The replacement property is not "identified" before the end of the "identification period," or
   2. The identified replacement property is not received before the end of the "exchange period."

1. IDENTIFICATION PERIOD AND EXCHANGE PERIOD.

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   1. The identification period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the 45^th day thereafter.
   2. The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180^th day thereafter or the due date (including extensions) for the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.
   3. If, as part of the same deferred exchange, the taxpayer transfers more than one relinquished property, and the relinquished properties are transferred on different dates, the identification period and the exchange period are determined by reference to the earliest date on which any of the properties are transferred.
   4. For purposes of this paragraph (b)(2), property is transferred when the property is disposed of within the meaning of section 1001(a).

1. IDENTIFICATION OF REPLACEMENT PROPERTY BEFORE THE END OF THE IDENTIFICATION PERIOD—

1. IN GENERAL. For purposes of paragraph (b)(1)(i) of this section (relating to the identification requirement), replacement property is identified before the end of the identification period only if the requirements of this paragraph (c) are satisfied with respect to the replacement property. However, any replacement property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period.
2. MANNER OF IDENTIFYING REPLACEMENT PROPERTY. Replacement property is identified only if it is designated as replacement property in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either—

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   1. The person obligated to transfer the replacement property to the taxpayer (regardless of whether that person is a disqualified person as defined in paragraph (k) of this section); or
   2. Any other person involved in the exchange other than the taxpayer or a disqualified persons (as defined in paragraph (k) of this section).

• • • • Examples of persons involved in the exchange include any of the parties to the exchange, an intermediary, an escrow agent, and a title company. An identification of the replacement property made in a written agreement for the exchange of the properties signed by all parties thereto before the end of the identification period will be treated as satisfying the requirements of this paragraph (c)(2).

1. DESCRIPTION OF REPLACEMENT PROPERTY. Replacement property is identified only if it is unambiguously described in the written document or agreement. Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building). Personal property generally is unambiguously described if it is described by a specific description of the particular type of property. For example, a truck generally is unambiguously described if it is described by a specific make, model, and year.

(f) RECEIPT OF MONEY OR OTHER PROPERTY—

1. IN GENERAL. A transfer of relinquished property in a deferred exchange is not within the provisions of section 1031(a) if, as part of the consideration, the taxpayer receives money or other property. However, such a transfer, if otherwise qualified, will be within the provisions of either section 1031(b) or (c). See section 1031(a)-1(a)(2). In addition, in the case of a transfer of relinquished property in a deferred exchange, gain or loss may be recognized if the taxpayer actually or constructively receives money or other property before the taxpayer actually receives like-kind replacement property. If the taxpayer actually or constructively receives money or other property in the full amount of the consideration for the relinquished property before the taxpayer actually receives like-kind replacement property, the transaction will constitute a sale and not a deferred exchange, even though the taxpayer may ultimately receive like-kind replacement property.
2. ACTUAL AND CONSTRUCTIVE RECEIPT. Except as provided in paragraph (g) of this section (relating to safe harbors), for purposes of section 1031 and this section, the determination of whether (or the extent to which) the taxpayer is in actual or constructive receipt of money or other property before the taxpayer actually receives like-kind replacement property is made under the general rules concerning actual and constructive receipt and without regard to the taxpayer’s method of accounting. The taxpayer is in actual receipt of money or property at the time the taxpayer actually receives the money or property or receives the economic benefit of the money or property. The taxpayer is in constructive receipt of money or property at the time the money or property is credited to the taxpayer’s account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time or so that the taxpayer can draw upon it if notice of intention to draw is given. Although the taxpayer is not in constructive receipt of money or property if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions, the taxpayer is in constructive receipt of the money or property at the time the limitations or restrictive lapse, expire, or are waived. In addition, actual or constructive receipt of money or property by an agent of the taxpayer (determined without regard to paragraph (k) of the section) is actual or constructive receipt by the taxpayer.