14-Dec-21
Michigan’s Uniform Voidable Transaction Act
Take-Away: An effort is underway to amend Michigan’s version of the Uniform Voidable Transaction Act in order to preserve the effectiveness of the Michigan Qualified Dispositions in Trust Act, i.e. Michigan’s version of a self-settled domestic asset protection trust, or DAPT.
Background: Much of estate planning involves the efficient transfer of assets. One obvious transfer is the lifetime gift of cash or property to family members or to charities. Similarly, there is the transfer of assets to multiple trusts, running the gamut from QTIPs, ILITs, IDGTs, GRATs, QPRTs, CRUTs, and CLATs, to long-term dynasty-type trusts created by the settlor. If the donor or settlor later has a judgment entered against him or her, the judgment creditor will seek to enforce their judgment. If the transferor has no assets, or insufficient assets, the question then arises whether the donor, settlor, or transferor engaged in the transfer of their assets with the goal to defraud, delay, or hindered the judgement creditor’s efforts to collect their judgment. In that situation, the creditor will often turn to the Uniform Fraudulent Transfer Act, or the newest version, the Uniform Voidable Transaction Act, in an attempt to attempt to recover the previously transferred property now held in the name of another, i.e. the donee, or the trustee of a trust that the judgment debtor funded.
Qualified Dispositions in Trust Act: Michigan has adopted its own version of a self-settled domestic asset protection trust (DAPT) which is intended to reverse the common law that prohibits a settlor from transferring assets to an irrevocable trust while still potentially enjoying those assets. [MCL 700.1045.] A tension exists with the interplay between the settlor’s transfer of assets to such a trust, when the settlor later becomes insolvent or encounters creditor problems, and the settlor’s judgment creditor attempts to access the transferred assets now held in the DAPT by resort to Michigan’s creditor remedy statutes.
Uniform Fraudulent Transfer (Now Voidable Transactions) Act: Michigan has long had as part of its laws the Uniform Fraudulent Transfer Act (UFTA). This act is designed to protect creditors when the debtor transfers assets to avoid or to hinder or delay the creditor’s efforts to collect a judgment against the debtor. In 2014 the Uniform Law Commission updated the UFTA with the Uniform Voidable Transaction Act (UVTA). That update was in part motivated by the effort to remove the words fraud or fraudulent from the law. Apparently many courts were misled by those words, and required a creditor that sought relief under the Act to actually prove the debtor’s fraud when, in fact, the Act permits a transfer by a debtor to be set-aside upon a finding constructive fraud based upon the debtor’s actions or circumstances that are treated under the Act as ‘badges of fraud.’
In order to prove constructive fraud under the UVTA, an existing creditor must prove that the transfer was (i) made for less than a reasonably equivalent value and (ii) while the transferor was insolvent. Obviously, with lifetime gifts and funding irrevocable trusts, there is often no ‘equivalent value’ being returned to the transferor.
Accordingly, the UFTA became the UVTA, to get away from the notion that the creditor always had to prove fraud in order to gain a recovery of the transferred asset. In addition, the UVTA changed some of its terminology to be consistent with terminology used in other laws, such as the Uniform Commercial Code (UCC) and the U.S. Bankruptcy Code. In sum, the adoption of the UVTA did not result in a total rewrite of the UFTA, but was intended to bring that uniform law into the 21st Century and become consistent with other laws that are regularly followed throughout the country.
Only six states that have DAPT statutes have adopted the UVTA, Michigan being one of them.
Michigan Voidable Transactions Act: Once the UTFA was updated to become the UVTA, Michigan adopted the updated version of that uniform law. The Michigan version was adopted in January, 2017, and it became effective on April 10, 2017. [MCL 566.31-566.43.]
Substantive Changes in the Act: Some of the changes to Michigan’s creditor protection law with this adoption include:
(i) it clarifies the evidentiary standard that the creditor must meet to set aside a transfer of property by the debtor;
(ii) it identifies defenses to an avoidance of a transfer of property by the recipient of the property;
(iii) it formally adopts the concept of actions by the debtor that constitute constructive fraud on the debtor’s creditors;
(iv) it established the burden of proof that the creditor must meet in order to set aside a transfer by the debtor as being a preponderance of evidence (and not the civil law’s higher burden of proof, clear and convincing evidence used by some courts); and
(v) it adds a rebuttable presumption that the debtor was insolvent when the transfer was made if the debtor fails to pay his or her debts as they mature (but the nonpayment of debt that is subject to a bona fide dispute is not presumptive of the debtor’s insolvency), however the burden of proof to rebut that presumption is placed on the debtor.
Location: The lasts change implemented by the UVTA, and adopted in Michigan in 2017, was with respect to the choice of law when a creditor seeks to set-aside a prior transfer of property by the debtor. Both the UVTA and Michigan’s version of the UVTA refer to the law of the place where the debtor was located as controlling the choice of law with respect to the creditor’s rights and the creditor’s ability to set-aside the debtor’s transfer. This change creates some confusion with regard to an individual settlor’s transfers to his/her DAPT. The UVTA specifically provides that a claim for relief under the Act is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation, i.e. the debt, is incurred. The UVTA and Michigan’s version, does not address the ‘choice of law’ in the case of a DAPT.
Example: If the debtor resides part-time in Florida, and makes a transfer to a Michigan Qualified Dispositions in Trust while he was in Florida, under the UVTA the debtor was located in Florida at the time of the transfer to the trust, such that Florida law would control under the UVTA whether the qualified disposition transfer to that Michigan trust can be set aside, not Michigan’s law, even though the trust instrument recites that the trust is ‘governed by Michigan law.’
Proposed Statute Amendment: While Michigan’s adoption of the UVTA was only in 2017, there is already a bill before the state legislature re-introduced this year to amend Michigan’s version of the UVTA to address a couple of interpretive problems .
#1-Trustee’s Location: The bill proposes to provide that in the case of a transfer, or qualified disposition, of property to a Michigan DAPT the location of the DAPT trustee, as opposed to where the individual debtor who makes the qualified disposition is located, will govern the choice of law that controls the creditor’s recovery efforts. This is deemed important because many states have yet to adopt DAPT legislation, and those states that still follow the common law will find a self-settled DAPT to be contrary to its long-standing public policy, and probably find that funding a DAPT will be voidable by the settlor’s creditors.
#2-Eliminate Comments to Sections 4 and 10: The uniform Act also has companion Comments that are intended to assist courts with the interpretation and enforcement of that Act. Unfortunately, the companion Comments create more confusion than clarification:
Comments 2 to Section 4 of the UVTA, which is intended to provide guidance to courts that are required to implement the UVTA, implies that a transfer to a DAPT by the settlor is per se voidable. The import of that Comment is that any qualified disposition, i.e. a transfer to Michigan’s DAPT, is void from the get-go, whether or not that transfer of assets rendered the transferor insolvent. Some states that have adopted their version of the UVTA, like Indiana, have expressly stated in their adoption of the UVTA that the Act is adopted without its companion Comments, with the obvious intent that all of the UVTA’s companion Comments should be ignored by courts when called upon to implement its statute.
Comments to Section 10 of the UVTA creates another problem for DAPTs alluded to above. It declares that “ a claim for relief… is governed by the law of the jurisdiction in which the debtor is located, when the transfer is made or the obligation is incurred.” This statement is made without regard to whether a different jurisdiction or governing law is chosen in the DAPT. This statement is contrary to the common law which is that a trust settlor can pretty much choose which state’s trust laws is to apply, so long as there are a sufficient contacts with that chosen state. Consequently, transfers to a DAPT, even legitimate transfers when the transferor resides in a jurisdiction with a DAPT, like Michigan, are voidable. The UVTA’s Comments extend this creditor remedy to the transferor’s creditors who were “neither existing nor anticipated” by the transferor at the time of the transfer. This Comment to Section 10 of the UVTA seems to be contrary to the settled law of the country: In Schreyer v. Scott, U.S.134 U.S. 405, the U.S. Supreme Court held that individuals have a right to protect against future creditor claims, stating: “Under such circumstances, the presumption of any fraudulent intent is rebutted, and it is manifest that he [the transferor] had done no more than any businessman has a right to do, to provide against misfortune when he is abundantly able to do so.”
In sum, the UTVA’s provisions and Comments seek to reach further than fraudulent transfers by potentially undermining legitimate transfers to DAPTs by settlors who still reside in jurisdictions where DAPT laws have been adopted, like Michigan. This creates the risk that a qualified disposition to a Michigan DAPT may become ‘voidable.’ Consequently, the purpose of the proposed bill to amend the 2017 version of Michigan’s UVTA is to not include Section 10 of that Act nor any of the UVTA’s Comments.
Conclusion: The Michigan Bar’s Probate and Estate Planning Council has worked for several years to create a proposed amendment to ‘fix’ Michigan’s version of the UVTA to eliminate the confusion caused by Comments to Sections 4 and 10 of the UVTA. The purpose of the bill to amend the 2017 version of the UVTA is simply to assure that the sought-after creditor protection afforded by a Michigan DAPT is achieved but not to expand its protections.