Sections 4 and 5 of the UFTA determine whether a transfer is fraudulent. From these sections, we may derive 3 types of fraudulent transfers:

• Transfers that are constructively fraudulent as to present (already existing) creditors only;
• Transfers that are constructively fraudulent as to both present and future creditors;
• Transfers that are not fraudulent in and of themselves, but are fraudulent because they were made with intent to hinder, delay or defraud present and/or future creditors.

Items 1 and 2, above, are determined by bright-line tests. In other words, these tests consist of clearly defined standards with little room for interpretation. The bright-line tests do not consider intent; one may commit a fraudulent transfer under these rules, even if one had no intention of hindering, delaying, or defrauding a creditor.

There are two primary criteria used to determine if a fraudulent transfer occurred under the first bright-line test. The first criterion requires that the debtor be insolvent at the time of the transfer, or becomes insolvent as a result of the transfer, or becomes insolvent shortly after the transfer. Solvency, more or less, is defined as a person’s ability to pay their debts. If they are unable to pay their debts, or are currently not paying their debts even if able, then they are deemed insolvent. It is important to note that, for purposes of determining solvency, any claim to one’s assets could be considered a debt, even if the claim has not yet been reduced to judgment.36 Therefore, if someone threatens to sue you for $1 million, their “claim” on your assets may be considered a liability for the purposes of determining your solvency. In other words, if you have net assets worth $900,000, and are threatened with a $1 million lawsuit, you may be considered insolvent under the UFTA, even though you don’t actually owe the $1 million (yet). Fortunately, solvency is not the only criteria for determining whether a transfer is fraudulent under the bright-line tests; one must also transfer the asset for less than reasonably equivalent value in addition to being insolvent.

The second criterion examines whether the debtor received an asset of reasonably equivalent value in exchange for the transfer. Reasonably equivalent value is generally considered to be cash or an item of equivalent cash value that is equal to the fair market value of the asset being transferred. The term ‘reasonably’ does give us some wiggle room, however an exchange (except in the case of a non-collusive foreclosure) will usually not be considered to have reasonably equivalent value if the consideration for the transfer is worth less than 70% of the transferred asset’s fair market value. Furthermore, an unperformed promise may not be considered to have reasonably equivalent value. Therefore, if a promissory note is given in exchange for the transfer, it must be considered within the ordinary course of business of the lender (e.g. a bank giving a loan), or their should be at least a partial up front payment made, and ongoing cash payments should be made on the note so that it fits within the realm of a standard business transaction.

With the foregoing in mind, we can fully understand how the first bright-line test determines whether a transfer is fraudulent. This test stipulates that if a debtor is (or is about to be) insolvent, and he transfers an asset without receiving something of reasonably equivalent value in exchange, then the transfer is fraudulent. In this instance the transfer is fraudulent even if the creditor has no claim on the debtor’s assets at the time of the transfer. A creditor could actually have no claim until just before the statute of limitations under the UFTA (or other applicable law) expires, and yet they could then still file a claim and the transfer would be deemed fraudulent. This statute of limitations could be 4 years or longer after the transfer occurs, depending on the circumstances and local laws the matter is subject to.

For us to fully understand the 2nd bright-line test, we must define what an insider is. The full definition of ‘insider’ is found in §§1(1) and 1(7) of the UFTA. However, a simplified definition of an insider is anyone who is a relative of the debtor, any company the debtor has significant control or influence over, or, if the debtor is a company or trust, anyone who has significant control over the company or trust. The foregoing, however, is not an all-encompassing definition of what an insider is. A court could conceivably consider anyone over whom the debtor has significant influence or control to be an insider.

With the foregoing in mind, the 2nd bright-line test involves a much narrower set of circumstances. This test, which only applies if the creditor challenging the transfer has a claim before the transfer occurred, shows a transfer to be fraudulent if the transfer was made to an insider to pay a debt that existed prior to the transfer, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent. This, of course, does not mean payment of a debt to a non-insider is a fraudulent transfer. On the contrary, paying off such a debt, as long as the debt is valid, is a great way to reduce the exposure of one’s assets after the threat of litigation or other hostile creditor attack materializes.