Laying Down the Law – The Arizona Consumer Fraud Act
July 1, 2023
With Tim Watson, Provident Law®
TRYING TO HIDE THE BALL
ARIZONA’S FRAUDULENT TRANSFER ACT
In Arizona, certain transactions are voidable when they are made to evade creditors. The Arizona Fraudulent Transfer Act (the “Act”), found at A.R.S. § 44-1001 et seq., provides strict guidelines concerning transactions made by a debtor before or after incurring a debt with a creditor. The Act is intended to ensure the fair treatment of creditors and prohibit the evasion of creditors through “sham” transactions or creative accounting. Few statutes have caused as much confusion, and often times litigation, as the Act. Creditors with claims both large and small should be aware of the Act’s provisions to ensure that they know what transactions are permitted and which are voidable. The Act can be an important tool for creditors and an important consideration for debtors in a collection lawsuit.
The Act is based on the Uniform Fraudulent Transfer Act (now known as the Uniform Voidable Transactions Act or “UVTA”) promulgated by the National Conference of Commissioners on Uniform State Laws or “Commission.” Arizona adopted its version of the UVTA in 1990. Arizona has not yet adopted the 2014 changes to the Act, which included the introduction of the Act’s new name.
As with most points in the law, definitions are vital. Who is subject to the Act and what actions are permitted or prohibited often depend on definitions. The Act, at its most basic level, defines the terms debtor and creditor with their traditional legal meanings. A “Creditor” is a person who has a claim. A “Debt” means liability on a claim and a “Debtor” is a person who is liable on a claim. A.R.S. § 44-1001(3-5). What constitutes a transfer of assets can be complicated and is often litigated in court. When reduced to its essence however, a “transfer” is any manner of disposing of an asset, either directly or indirectly, and includes a payment of money, release, lease and creation of a lien or other encumbrance. Id. 44-1001(9). There are other definitions in the Act that one should carefully consider in any legal action.
The Act’s provisions concerning what constitutes a fraudulent or voidable transfer and whether assets that were the subject of that transfer can be “clawed back” are voluminous. Essentially, a court can, and often will, declare a debtor’s transfer of assets or an obligation the debtor incurs, to be fraudulent if: (1) it is accompanied by an actual intent to hinder, delay or defraud a creditor, or (2) in very specific circumstances described in the Act, the debtor engaged in the transfer without receiving a reasonably equivalent value in exchange for the transfer. See, A.R.S. § 44-004(A)(1-2). For example, a debtor quickly sells assets to a third party just before a creditor in a lawsuit obtains a judgment for the sole purpose of preventing the creditor from collecting on those assets. Or, in another example, a debtor sells an asset to a third party for a mere fraction of its value at a “fire sale” knowing that the asset could soon be the subject of a creditor’s claim in court.
The Act itself also provides specific guidance to courts on considerations related to whether a debtor transferred property “with actual intent to hinder, delay or defraud any creditor.” There are eleven specific considerations listed in the Act. A.R.S. § 44-1004(B)(1-11). One common consideration is whether the debtor retained possession or control of the asset after the transfer. A.R.S. § 44-1004(B)(2). A court may also consider whether a debtor “absconded” after a transfer. A.R.S. § 44-1004(B)(6). For example, a debtor transfers valuable assets to a buyer and then absconds or flees to another state, knowing that a creditor will file or has filed a collection action against him in court.
These are just a few of the basic considerations surrounding a debtor’s transfer of assets. The Act contains numerous other, often complex, provisions about debtor property, the time limitations for asserting a claim under the Act and remedies for a creditor who believes a debtor has run afoul of the Act. There are also time limits on how far back in time a creditor can go when contesting a debtor’s transfer of property, commonly known as the “look back period” for fraudulent transfers.
It should be noted that under the Act, a debtor’s transfer of assets is not voidable against a person who took the asset “in good faith and for a reasonably equivalent value or against any subsequent transferee.” A.R.S. § 44-1008. This means that a sale of assets or transfer by a debtor is generally protected as long as the conditions of a buyer purchasing in good faith and a buyer who paid a reasonably equivalent value for the asset are met. In determining the good faith of a purchaser, the courts look to whether a purchaser knew or should have known that the debtor “was not trading normally, but that on the contrary, the purpose of the trade, so far as the debtor was concerned, was the defrauding of his creditors.” Carey v. Soucy, 245 Ariz. 547, 553–54 (App. 2018). Finally, transfers of real estate give rise to a whole host of additional issues such as secured liens, the recording of property interests with the correct county recorder, proper documentation, mortgage interests and the accuracy of statements on loan applications.
There are at least 58 decisions from Arizona Courts of Appeal that relate to the Act and how it is applied. Issues surrounding a debtor’s transfer of assets are often highly disputed in the course of a lawsuit. Issues surrounding the Act should not be taken lightly and the advice of competent, knowledgeable legal counsel is crucial.
This article only touches on several facets of the Act which contains numerous provisions that should be carefully considered by anyone bringing or defending a collection action. Though the Arizona Fraudulent Transfer Act may seem complicated, it is a very important tool in any lawsuit concerning a debt and the collection of assets. There are also legal actions, separate and apart from the Act, that one can bring to avoid a debtor’s fraudulent transfer. These are often referred to as legal trust or constructive trust-types of actions. Highly experienced, capable commercial litigators can assist you in navigating these issues. In any consultation with an attorney, you should always ask about their experience in court generally with large commercial cases and specifically with the Act.
Timothy Watson is the Chair of the Commercial Litigation and Trial Practice Group at Provident Law®. He is a trial advocate with more than 24 years of experience in high profile, high value litigation. He has successfully tried numerous cases in state and federal courts including multi-million dollar claims in the areas of business litigation, real estate, high net worth probate, injury and insurance matters. He holds a Martindale Hubbell peer review rating of AV-Preeminent with high ethical standing. In addition to representing clients in large, complex litigation, Mr. Watson provides mediation and arbitration services. He can be reached at: Tim@ProvidentLawyers.com or at 480-388-3343.
Disclaimer: The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this article should be construed as legal advice from the individual author or the Firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this article should act or refrain from acting on the basis of any information included in, or accessible through, this article without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the reader’s state, country or other appropriate licensing jurisdiction.