Legal Memorandum: The Bankruptcy Code and the UFTA

Issue: Under federal bankruptcy law, how are fraudulent transfer acts applied?

The Bankruptcy Code and the Fraudulent Transfer Act have decidedly different purposes: the former to wipe out as much debt as possible in order to give the innocent but unfortunate debtor a fresh start and a clear field for the future, and the latter to prevent debtors from placing property that legitimately should be available to satisfy creditors’ demands out of the reach of those creditors.  See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (noting the purpose of the Bankruptcy Code); 37 C.J.S. Fraudulent Transfers § 3 (2012) (explaining the purpose of fraudulent-transfer statutes).

In Cohen v. De la Cruz, 523 U.S. 213, 218 (1998)) (expressly noting Congress’s purpose behind the Bankruptcy Code); Hullett v. Cousin, 63 P.3d 1029, 1034 (Ariz. 2003) (relying on a bankruptcy case, In re W.R. Grace & Co., 281 B.R. 852, 862 (Bankr. D. Del. 2002), for the cited proposition); In re Bellanca Aircraft Corp., 56 B.R. 339, 381 (Bankr. D. Minn. 1985) aff’d and remanded 850 F.2d 1275 (8^th Cir. 1988) (bankruptcy antecedent-debt case); Agricultural Stabilization & Conservation Serv. v. Gerth, 991 F.2d 1428, 1431-34 (8^th Cir. 1993) (bankruptcy setoff case)).  

In the Hullett case it was pointed out that, although the Uniform Fraudulent Transfers Act’s (“UFTA’s”) definition of claim is unquestionably broadly worded, a claim still must be an enforceable obligation.  63 P.3d at 1034.  “[T]his requirement ‘has […]