Minnesota Uniform Voidable Transactions Act

What Does the Minnesota Uniform Voidable Transactions Act Cover?

The act covers nearly any way a debtor parts with property, and it protects any creditor with a right to payment, whether or not that right has become a judgment. It does not reach property to the extent it is exempt from creditors or encumbered by a valid lien. A Minnesota corporation’s distributions to its shareholders fall under a different statute.

The definitions in Minn. Stat. § 513.41 set the act’s reach:

• A “claim” is “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
• A creditor is “a person that has a claim.”
• A transfer is “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.”

That definition reaches a sale, a gift, a payment, a new lien, and a license of intellectual property. The limit is in the word “asset,” which excludes “property to the extent it is encumbered by a valid lien” and “property to the extent it is generally exempt under nonbankruptcy law.” In Citizens State Bank Norwood Young America v. Brown, 849 N.W.2d 55 (Minn. 2014), the Minnesota Supreme Court applied that exclusion under the act’s pre-2015 text. To decide whether the debtor gave away substantially all of his assets, the court said “we do not consider exempt property,” and it left his 401(k) and the exempt part of his homestead out of the count. Whether a particular account is exempt is covered in retirement accounts and creditors.

One carve-out matters to creditors of Minnesota corporations. Under Minn. Stat. § 302A.551, subd. 3(d), “the provisions of sections 513.41 to 513.51 do not apply to distributions made by a corporation governed by this chapter.” Those distributions are tested under the corporate statute instead, a topic covered in creditor rights when a corporation pays its owners.

When Can a Creditor Undo a Debtor’s Transfer?

A Minnesota creditor can undo a transfer on four grounds: the debtor’s actual intent to defraud creditors, two forms of constructive fraud based on value and financial distress, and a rule for repaying insiders while insolvent. The creditor must prove its ground by a preponderance of the evidence.

1. Actual fraud. Under Minn. Stat. § 513.44(a)(1), a transfer is voidable if the debtor made it “with actual intent to hinder, delay, or defraud any creditor of the debtor.” This ground protects a creditor “whether the creditor’s claim arose before or after the transfer was made.”
2. Constructive fraud, any creditor. Under § 513.44(a)(2), a transfer is voidable if the debtor made it “without receiving a reasonably equivalent value in exchange for the transfer or obligation,” and the debtor either “was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction,” or “intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.”
3. Constructive fraud, earlier creditors. Under Minn. Stat. § 513.45(a), a creditor whose claim arose before the transfer can void a transfer made without reasonably equivalent value when “the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”
4. Insider repayment. Under § 513.45(b), “A transfer made by a debtor is voidable as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.”

The constructive-fraud grounds need no proof of the debtor’s motive. In Brown, the court described them as provisions that “allow a creditor to void a transfer without proving that the debtor intended to defraud a creditor.” The burden rule is the same for every ground: § 513.44(c) and § 513.45(c) put “the burden of proving the elements of the claim by a preponderance of the evidence” on the creditor. I suggest pleading every ground the facts support, because each ground has different elements and the person who received the asset has different defenses to each.

How Do Badges of Fraud Prove a Debtor’s Intent?

Badges of fraud are circumstances a court may weigh to infer a debtor’s actual intent to hinder, delay, or defraud creditors. Minnesota lists eleven in Minn. Stat. § 513.44(b), and the list is open-ended: “consideration may be given, among other factors, to whether.”

Courts rely on these factors because debtors rarely admit their purpose. In Brown, the court explained that “the intent to defraud creditors is rarely susceptible of direct proof.” The statutory list asks whether:

1. “the transfer or obligation was to an insider”;
2. “the debtor retained possession or control of the property transferred after the transfer”;
3. “the transfer or obligation was disclosed or concealed”;
4. “before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit”;
5. “the transfer was of substantially all the debtor’s assets”;
6. “the debtor absconded”;
7. “the debtor removed or concealed assets”;
8. “the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred”;
9. “the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred”;
10. “the transfer occurred shortly before or shortly after a substantial debt was incurred”; and
11. “the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.”

The count matters. In Brown, the court said “The presence of a single badge of fraud may, but does not necessarily, prove fraudulent intent,” while “The presence of several badges of fraud, however, creates an inference of fraud that requires clear evidence of a legitimate purpose to rebut.” The debtor there had been sued on his personal guarantees, then divorced and transferred substantially all of his nonexempt assets to his former wife, who kept living with him. The court held that “the Browns were not spouses when they transferred the assets,” but because they kept living together, “the district court properly concluded that Gordon Brown’s transfers to Judy Brown were to an insider.” The court found six badges established and affirmed setting aside those transfers made in a divorce. A concurring justice wrote that “caution should be the watchword when evaluating summary judgment motions in spousal transfer cases where fraud is alleged,” and the majority noted that fraudulent intent “is ordinarily a question of fact.”

The proof runs transfer by transfer. In Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015), decided under the pre-2015 text, the Minnesota Supreme Court refused to presume fraud from the existence of a Ponzi scheme. It held that the act “requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer.” I suggest building a timeline that places each transfer beside the debtor’s lawsuits, defaults, and new debts, because badges 4, 9, and 10 turn on timing.

What Counts as Insolvency and Reasonably Equivalent Value?

Under Minnesota’s act, a debtor is insolvent when its debts exceed its assets at a fair valuation, and a debtor that is generally not paying its debts is presumed insolvent. Reasonably equivalent value compares what the debtor gave up with what it received, including the payment of a debt it already owed.

The insolvency rules are in Minn. Stat. § 513.42. A debtor is insolvent “if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets.” The presumption helps a creditor that lacks the debtor’s books: “A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent.” That presumption shifts the burden, because it “imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.” Hidden assets do not help the debtor either. Assets for this test “do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors.”

The act defines value in Minn. Stat. § 513.43(a), and the definition counts both property and debt payments. It reads: “Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.” In Finn, the court held that “any legally enforceable right to payment against the debtor is sufficient to qualify as an antecedent debt under MUFTA.” Outside the statute’s foreclosure rule, it said whether value was reasonably equivalent “depends on the facts and circumstances of each case.” In Brown, the debtor gave up roughly $1.5 million in assets and received a home that was mostly exempt, and the court held he “did not receive reasonably equivalent value in exchange for assets worth approximately $1.5 million.”

A foreclosure sale gets a fixed answer for the constructive-fraud grounds only. Under § 513.43(b), a person who acquires the debtor’s interest “pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale” after a default under a mortgage, deed of trust, security agreement, or agricultural lien gives reasonably equivalent value “For the purposes of section 513.44, paragraph (a), clause (2), and section 513.45.”

When Is Paying Another Creditor First a Voidable Transfer?

Under Minnesota’s act, a debtor’s payment of a legitimate debt to one creditor ahead of another is not, by itself, a voidable transfer. The exception is a payment to an insider on an existing debt while the debtor was insolvent and the insider had reasonable cause to believe it, which § 513.45(b) makes “voidable as to a creditor whose claim arose before the transfer was made.”

In Finn, the court put it directly: “MUFTA does not prohibit a debtor from making a preferential transfer in favor of one bona fide creditor over another, so long as the transfer is not fraudulent.” The court identified § 513.45(b) as the lone exception. It also quoted an older Minnesota decision that a preference by an insolvent debtor “can be avoided only by appropriate proceedings under the bankruptcy law.” A creditor passed over for another outside creditor may need to look to federal bankruptcy rules, including the bankruptcy preference period.

A payment to an insider has its own defenses. Under Minn. Stat. § 513.48(f), a transfer is not voidable under § 513.45(b):

• “to the extent the insider gave new value to or for the benefit of the debtor after the transfer was made, except to the extent the new value was secured by a valid lien”;
• “if made in the ordinary course of business or financial affairs of the debtor and the insider”; or
• “if made pursuant to a good faith effort to rehabilitate the debtor and the transfer secured present value given for that purpose as well as an antecedent debt of the debtor.”

The insider carries the burden on each one, because “A party that seeks to invoke paragraph (a), (d), (e), or (f) has the burden of proving the applicability of that subsection.” Under § 513.41, an insider of a corporate debtor includes a director, an officer, and a person in control, and an insider of an individual debtor includes a relative, a term the statute defines to include a spouse.

What Defenses Can the Person Who Received the Asset Raise?

The main defense under Minnesota’s act belongs to the person who took the asset “in good faith and for a reasonably equivalent value given the debtor.” That defense defeats only the actual-fraud ground, and the recipient must plead and prove it.

The defense is in Minn. Stat. § 513.48(a), and it reaches only the actual-fraud ground. It reads: “A transfer or obligation is not voidable under section 513.44, paragraph (a), clause (1), against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee.” In Finn, the court explained that once a creditor proves fraudulent intent, “the transferee may still defeat liability by establishing the affirmative defense in Minn. Stat. § 513.48.” Transferees “carry the burden to plead and prove the affirmative defense,” so a creditor alleging actual fraud “did not also have to plead a lack of reasonably equivalent value.” In Finn, the court directed judgment for a bank that had received payments from a debtor running a fraud. The bank held a real loan participation and showed that “the rate of return on the loan it purchased was commercially reasonable.”

Three other protections narrow what a creditor can take:

1. A good-faith credit. Under § 513.48(d), even when a transfer is voidable, “a good faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation,” to a lien on or right to keep an interest in the asset, enforcement of an obligation, or a reduction in the judgment.
2. Lease terminations. Under § 513.48(e), “A transfer is not voidable under section 513.44, paragraph (a), clause (2), or 513.45 if the transfer results from” a “termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law.”
3. Secured-lender enforcement. The same § 513.48(e) protection, which reaches the § 513.44(a)(2) and § 513.45 grounds, covers “enforcement of a security interest in compliance with article 9 of the Uniform Commercial Code, other than acceptance of collateral in full or partial satisfaction of the obligation it secures.”

The act’s definitions section does not define good faith. Because the recipient carries that burden, I suggest asking in discovery what the recipient knew about the debtor’s finances and lawsuits when it took the asset. The recipient’s side of these claims is covered in fraudulent transfer claims against business buyers.

What Can a Creditor Recover, and From Whom?

A Minnesota creditor that wins can have the transfer undone “to the extent necessary to satisfy the creditor’s claim,” or take a money judgment for the lesser of the asset’s value or the claim. The judgment runs against the first recipient, the person the transfer benefited, and some later recipients.

The remedies in Minn. Stat. § 513.47 start with “avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.” Taking the asset itself requires a judgment and a court order: “If a creditor has obtained a judgment on a claim against the debtor, the creditor, if the court so orders, may levy execution on the asset transferred or its proceeds.” In Brown, the court allowed the bank to levy on the brokerage account and partnership interest the debtor transferred. It reversed as to a savings account his former wife already owned, because “it is not a fraudulent transfer to be voided.”

A money judgment has its own rules in Minn. Stat. § 513.48(b). The creditor “may recover judgment for the value of the asset transferred, as adjusted under paragraph (c), or the amount necessary to satisfy the creditor’s claim, whichever is less.” The judgment may be entered against “the first transferee of the asset or the person for whose benefit the transfer was made,” or against “an immediate or mediate transferee of the first transferee, other than” a protected good-faith transferee. Recovery from the asset or its proceeds “is available only against a person described in clause (1), item (i) or (ii).” Under § 513.48(c), a value-based judgment “must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.”

I suggest tracing each asset from the debtor to whoever holds it now before filing, because recovery runs transfer by transfer and the court in Brown refused to reach property the debtor never transferred.

How Can a Creditor Freeze Transferred Assets Before Judgment?

A Minnesota creditor can ask for an injunction, a prejudgment attachment, or a receiver while the case is pending. The act allows attachment “if available under applicable law” and the other remedies “in accordance with applicable Rules of Civil Procedure,” so Minnesota’s attachment and receivership statutes set the requirements.

Under Minn. Stat. § 513.47(a), a creditor may obtain “an attachment or other provisional remedy against the asset transferred or other property of the transferee if available under applicable law.” Subject to principles of equity, it may also obtain “an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property,” “appointment of a receiver to take charge of the asset transferred or of other property of the transferee,” or “any other relief the circumstances may require.”

Attachment has its own grounds in Minn. Stat. § 570.02, subd. 1. The respondent is the party whose property is attached: under Minn. Stat. § 570.01, the claimant “may have the property of the respondent attached.” Two grounds fit a transfer case: “when the respondent has assigned, secreted, or disposed of, or is about to assign, secrete, or dispose of, any of the respondent’s nonexempt property, with intent to delay or defraud the respondent’s creditors,” and “when the respondent has converted or is about to convert any of the respondent’s nonexempt property into money or credits, for the purpose of placing the property beyond the reach of the respondent’s creditors.” The procedure runs as follows:

1. Motion and affidavit. Under Minn. Stat. § 570.026, subd. 1, “A claimant seeking to obtain an order of attachment in other than extraordinary circumstances shall proceed by motion,” with “an affidavit setting forth in detail” the claim and the facts supporting a ground.
2. The standard. Under subdivision 3, “An order for attachment may be issued only if the claimant has demonstrated the probability of success on the merits, and the claimant has demonstrated facts that show the existence of at least one of the grounds stated in section 570.02.” “However, even if those standards are met, the order may not be issued if” either of two conditions holds. One is that “the circumstances do not constitute a risk to collectibility of any judgment that may be entered.” The other requires all three of these: the “respondent has raised a defense to the merits of the claimant’s claim or has raised a counterclaim in an amount equal to or greater than the claim and the defense or counterclaim is not frivolous”; “the interests of the respondent cannot be adequately protected by a bond filed by the claimant”; and “the harm suffered by the respondent as a result of seizure would be greater than the harm which would be suffered by the claimant if property is not attached.”
3. Before a hearing. A creditor may seek a preliminary order before the hearing by written application, and the order requires, among other conditions in Minn. Stat. § 570.025, subd. 2, that “due to extraordinary circumstances, the claimant’s interests cannot be protected pending a hearing by an appropriate order of the court, other than by directing a prehearing seizure of property.”
4. A bond. Under Minn. Stat. § 570.041, subd. 1, “Before issuing any order of attachment, the court shall require the claimant to post a bond in the penal sum of at least $500,” which covers costs and damages if the creditor loses or the order is vacated.

A receiver is the other option. Under Minn. Stat. § 576.25, subd. 2, “Except where judgment for failure to answer may be had without application to the court, a limited receiver may be appointed before judgment to protect any party to an action who demonstrates an apparent right to property that is the subject of the action and is in the possession of an adverse party, and that the property or its rents and profits are in danger of loss or material impairment.” In an emergency, subdivision 7 allows appointment “ex parte or on shortened notice on a temporary basis if it is clearly shown that an emergency exists requiring the immediate appointment of a receiver.” I suggest assembling the bank records, deeds, and filings that show each transfer before the motion, because the attachment affidavit must set out the facts in detail. The ways to find those records are covered in learning what the debtor owns.

When Does the Time to Sue Start Running?

A Minnesota claim that the debtor actually intended to defraud creditors is a claim “for relief on the ground of fraud,” so it accrues when the facts constituting the fraud “were discovered or, by reasonable diligence, should have been discovered.” In Finn, the Minnesota Supreme Court left open which limitations rule governs the constructive-fraud grounds.

The accrual rule is in Minn. Stat. § 541.05, subd. 1(6): for claims “for relief on the ground of fraud,” “the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” Finn applied that provision to actual-fraud claims under the act and said, “We express no opinion on the statute of limitations applicable to constructive-fraud claims.” The court of appeals in Finn had treated constructive-fraud claims as claims “upon a liability created by statute” under § 541.05, subd. 1(2). In that court’s view, those claims “accrued on the date when First United made the allegedly fraudulent payments to each financial institution.” Discovery is not limited to actual knowledge. In a trust dispute, Toombs v. Daniels, 361 N.W.2d 801 (Minn. 1985), the Minnesota Supreme Court said the period under that provision begins “when the facts constituting fraud were discovered or, by reasonable diligence, should have been discovered.” The length of the period is set in § 541.05, and its current text controls any date calculation.

The date of the transfer can also move. Under Minn. Stat. § 513.46, if the law lets a transfer be perfected and “the transfer is not so perfected before the commencement of an action for relief under sections 513.41 to 513.51, the transfer is deemed made immediately before the commencement of the action.” An unrecorded deed, for example, may be treated as a transfer made just before the creditor sued. For an actual-fraud claim, I suggest calendaring from the earliest date the creditor had facts pointing to a transfer, because that claim’s period may run from when those facts should have been discovered.

How Does a Debtor’s Bankruptcy Change the Claim?

A bankruptcy filing stops the creditor’s lawsuit against the debtor, and the bankruptcy trustee may then pursue the transfer under state law or the federal Bankruptcy Code. Anything the trustee recovers comes back “for the benefit of the estate.”

Under 11 U.S.C. § 362(a)(1), the petition operates as a stay of “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title.” Under 11 U.S.C. § 362(a)(3), the stay also reaches “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” The trustee has two routes to the transfer. Under 11 U.S.C. § 544(b), “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.” Under 11 U.S.C. § 548(a)(1), the trustee may also avoid a transfer made within a set period before the filing on grounds that track Minnesota’s, including actual intent to “hinder, delay, or defraud.”

Recovery runs against the first recipient and, with limits, later ones. Under 11 U.S.C. § 550(a), “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from” “the initial transferee of such transfer or the entity for whose benefit such transfer was made” or a later transferee. A later transferee is protected under § 550(b) if it took “for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided.” I suggest giving the trustee the transfer evidence gathered before the filing, because the trustee recovers “for the benefit of the estate.”

Next Steps for a Creditor Whose Debtor Moved Assets

I suggest starting with a list of every transfer, each with its date, the recipient, the recipient’s relationship to the debtor, and what the debtor received in return. Those facts decide which of the four grounds applies, how many badges of fraud are present, and whether the recipient can claim good faith and reasonably equivalent value. If the asset could move again before trial, the attachment and receivership statutes are the tools for holding it in place.

More on creditor and collection matters is on the practice page. If you would like to know whether a debtor’s transfer can be undone, email [email protected] with a short description of the debt, the transfer, and when you learned of it. I will run a conflict check before you send any confidential documents.