This post is the second in a series in which I will discuss fraudulent transfers.  I have been told that my posts are too long.  Therefore, today I’ll briefly discuss the source of a bankruptcy trustee’s fraudulent transfer avoidance powers.

B.        The Trustee As Heir To Creditors’ Avoidance Power

One of the complications associated with fraudulent transfer jurisprudence in bankruptcy is found, not in 11 U.S.C. § 548 (the statutory section dealing with fraudulent transfers), but in 11 U.S.C. § 544(b)(1) (emphasis added):

Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502 (e) of this title.

This means that the trustee  can appeal to nonbankruptcy law to avoid a fraudulent transfer.  (This is a somewhat unusual use of the word “avoid.”  In this context it means, to render null and void, to undo.)  Thus, while the trustee can certainly use the avoidance powers found in 11 U.S.C. § 548, the trustee can also use the Uniform Fraudulent Transfer Act (“UFTA” Cal. Civ. Code §§ 3439-3439.12) to avoid the transfer, provided there is a creditor with an allowed unsecured claim who could have avoided the transfer using the UFTA.

The significance of the trustee’s inheritance of a creditor’s avoidance power lies primarily in the fact that the look-back period under the UFTA is two years longer than the look-back period found in § 548.  However, there are other differences between the UFTA and 11 U.S.C. § 548.

Next time I will look at the Bankruptcy Code’s fraudulent transfer section.


Image courtesy of Flickr (Licensed) by Davidd