Complex Litigation Regarding Voidable and Fraudulent Transfers, and Alter Ego

Complex business transactions frequently require individuals and entities to loan and borrow money. But sometimes transactions involving a debt go south, and the parties to the transaction may be forced into litigation concerning the debt.

Creditors trying to enforce an obligation from an individual or entity may assert that the debtor tried to avoid a debt by transferring assets shortly before or after the debt arose. Such transfers are called “voidable transfers” or “fraudulent transfers.” A creditor may sue the debtor to try to undo such transfers.

Additionally, a creditor may allege that an entity is an “alter ego” of an individual and try to “pierce the corporate veil” and seize the assets of the individual(s) behind the entity to satisfy the debt.

This firm has substantial experience representing both creditors and debtors in relation to claims of voidable transfer and alter ego.

 

Fraudulent and Voidable Transfers

If a creditor believes that a debtor has transferred assets to avoid a debt, the creditor may find relief in the Utah Uniform Voidable Transactions Act, Utah Code § 25-6-101 et seq (the “UVTA”). The predecessor to this act was called the Utah Uniform Fraudulent Transfer Act (the “UFTA”).

The UVTA provides as follows:

A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

1. with actual intent to hinder, delay, or defraud any creditor of the debtor; or
2. without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
   1. 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
   2. 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.

Utah Code § 25-6-202(1).

To determine “actual intent,” consideration may be given to a number of factors, including whether the transfer was made to an insider or a family member, whether the debtor retained possession of the property transferred after the transfer, or whether the transfer was disclosed or concealed, among other things. See Utah Code § 25-6-202(2).

There is a substantial body of case law in Utah and in other jurisdictions interpreting the UVTA and UFTA, setting forth the circumstances in which a creditor can and cannot undo a debtor’s transfer. The lawyers at MCG are experts in this area of the law and stay apprised of new developments to best serve their clients.

Alter Ego

The owners and managers of a corporate entity are usually not responsible for the debts of the corporate entity. For example, if Company X incurs an obligation to Company Y, Company Y can only sue Company X to enforce the obligation, not the owners and managers of Company X. Similarly, a corporate entity is usually not responsible for the personal debts of its owners or managers.

The alter ego doctrine is an exception to this rule. If a court determines that a corporate entity is an “alter ego” of its managers or owners, then the court will allow a creditor of the corporate entity to “pierce the corporate veil” and seize the assets of the individuals behind the corporate entity. Similarly, if an individual is a debtor, a creditor may argue that a corporate entity is an “alter ego” of the individual and try to obtain the assets of the corporate entity to satisfy the individual’s debt.

In Norman v. Murray Thrift &Loan Co., 596 P.2d (Utah 1979), the Utah Supreme Court adopted a two-prong test to determine when a party may pierce the corporate veil:

1. there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, viz., the corporation is, in fact, the alter ego of one or a few individuals; and (2) the observance of the corporate form would sanction a fraud, promote injustice, or an inequitable result would follow.

In the case of Colman v. Colman, 743 P.2d 782 (Utah Ct. App. 1987), the Utah Court of Appeals articulated some factors that may be used to analyze the first prong of the Norman test: (1) undercapitalization of a one-man corporation; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder; (5) nonfunctioning of other officers or directors; (6) absence of corporate records; and (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders. This is a non-exhaustive list, and there may be multiple other factors that contribute to a court’s analysis.

With regard to the second prong of the Norman test, in Transamerica Cash Reserve, Inc. v. Dixie Power & Water, Inc., 789 P.2d 24 (Utah 1990), the Utah Supreme Court held that the second prong is not met simply because the corporate form “prevents a creditor of a controlling shareholder from quickly being made whole.” In other words, the creditor must show that “the corporation itself played a role in the inequitable conduct at issue.”

The firm has substantial experience in this area of the law, and provides aggressive representation for either plaintiffs or defendants faced with alter ego issues.