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Jeffrey R. Barber

On March 13, 2006, Gov. Haley Barbour signed into law Senate Bill No. 2781, enacting Mississippi's version of the Uniform Fraudulent Transfer Act. The Act became effective on July 1, 2006, and establishes the legal grounds and procedures for setting aside fraudulent transfers.

Statutes prohibiting fraudulent transfers and providing for the recovery of property fraudulently transferred have existed for more than 500 years in English and (subsequently) American law. The essence of these statutes is to allow creditors to recover property that has been fraudulently conveyed to defeat the claims of creditors. Mississippi first passed a fraudulent conveyance statute in 1848 and the statute was amended only a few times thereafter, the last of which was in 1942. The language of the former statute was antiquated and cumbersome, including archaic terms such as "hereditaments" and "covinous."

The Act brings Mississippi into the 21st century with regard to fraudulent transfer law. The Act is similar (although not identical) to the fraudulent transfer provisions of Section 548 of the Bankruptcy Code and, indeed, the Act and the Bankruptcy Code will intersect. For example, Section 544 of the Bankruptcy Code, in certain instances, allows a bankruptcy trustee to use state law to set aside various kinds of pre-bankruptcy transfers. Accordingly, the Act will be one of the arrows in the quiver of Mississippi bankruptcy trustees seeking to recover pre-bankruptcy transfers just as the existing statutes have been. Now the state and federal law will simply be more uniform in application.

In its simplest terms, the Act allows recovery of assets transferred with the actual intent "to hinder, delay or defraud" any creditor of the debtor. Interestingly, the term "creditor" is not limited to existing creditors. It includes claims that arise after the transfer was made. Therefore, it is possible that transfers made to render oneself "judgment proof" even as to future creditors may be subject to being set aside under the Act.

The Act provides a non-exclusive list of 14 factors a court may consider in determining fraudulent intent, including: (1) whether the transfer was made to an "insider;" (2) whether the debtor continued to exercise control over the property after the transfer was made; (3) whether the value received by the transferor was reasonably equivalent to the value of the assets transferred; and (4) whether the debtor was insolvent prior to the transfer or whether the transfer rendered the debtor insolvent. As to the last mentioned factor, the Act provides two tests for "insolvency." The first is, essentially, a balance sheet test. A debtor is insolvent if the total debts (excluding debts secured by valid liens) exceed assets (excluding the assets transferred) "at a fair valuation." The second test for insolvency is whether the debtor is failing to pay debts as they come due. This second test merely creates a presumption that the debtor is insolvent.

Another "fraudulent intent" factor listed in the Act is a curious departure from the model Uniform Fraudulent Transfer Act and the Bankruptcy Code. Normally, fraudulent transfers are of two kinds. First, there is the "actual" fraud as described above. The second is known as "constructive" fraud, in which there is no subjective fraudulent intent, yet the transfer is deemed fraudulent in law if it meets certain objective criteria. An example of a "constructively" fraudulent transfer would be a transfer for less than reasonably equivalent value that leaves the debtor with unreasonably small capital. Normally, "actual" fraud and "constructive" fraud are distinct causes of action. Under the Act, however, where the facts demonstrate "constructive" fraud, a strong presumption of "actual" fraud is created that can only be rebutted by clear and convincing evidence.

The "constructive" fraud provision described above could, if read literally, adversely affect lenders or others who bid for less than fair market value at foreclosure. The Act, however, provides a "safe harbor" provision for bidders at foreclosure sales. The Act provides that a person gives reasonably equivalent if the person acquires an asset at a "regularly conducted, noncollusive foreclosure sale or execution of a power of sale…upon default under a mortgage, deed of trust or security agreement." This provision appears to protect bidders who meet this standard. It does not, however, appear to apply to sheriff sales in execution of judgment liens.

The Act also provides that a transfer is not voidable against someone who takes in good faith and for a reasonably equivalent value. Either bad faith or less than reasonably equivalent value nullifies this defense. However, a good faith transferee who gives less than reasonably equivalent value receives certain protection to the extent of value actually given.

The Act provides a number of remedies for creditors. For example, creditors can seek to avoid the transfer to the extent needed to pay the creditor's claim or obtain a judgment for the value of the assets transferred. Creditors can seek an injunction to prevent further disposition of the assets. If a creditor already has a judgment lien, the court can order a levy of execution on the asset transferred or the proceeds derived from the transfer. Under certain circumstances, relief can be awarded as against subsequent transferees of the initial transferee.

The limitations period for pursuing a fraudulent transfer under the Act varies depending upon the nature of the transfer. Generally, however, a suit involving a fraudulent transfer must be brought within three years after the transfer is made or, if the three years has passed, within one year after the transfer was or reasonably could have been discovered by the creditor. The chancery courts have exclusive jurisdiction over causes of action under the Act.

While the Act appears to be beneficial to creditors, it remains to be seen how the courts will interpret and apply it. Some provisions of the Act contain a measure of ambiguity, beyond the scope of this article, which will undoubtedly lead to litigation. Until then, the effect of the Act remains to be seen.



Jeffrey R. Barber is a shareholder with the Jackson office of Watkins Ludlam Winter & Stennis, P.A., where he practices in the firm's Bankruptcy and Creditors' Rights Practice Group.



"Transfer" is broadly defined under the Act, and includes the creation of a lien (whether the lien is consensual, statutory, judicial or equitable). The Act covers not only transfers, but also "obligations incurred." For the sake of simplicity, this article refers to "transfers."

The opinion and analysis contained in this article do not constitute legal advice, and are not substitutes for independent research and legal analysis in a particular matter. Independent, professional legal assistance should always be obtained before making a legal decision in a particular matter.

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