By Wade R. Iverstine *

* This article originally appeared in the July 8, 2013 edition of Around the Bar

Act No. 88 makes an important change to a creditor’s right to collect a debt from property that the debtor has transferred to someone else. Unlike alternative approaches to transfer avoidance, the right of action in Louisiana – the “Revocatory Action” – makes a transferor’s intent to defraud creditors irrelevant. The proof is simple. The creditor may seize and sell the transferred property if the transfer of that property caused or increased the debtor’s insolvency.

Act No. 88 does not change the elements of the Revocatory Action;[1] it changes the limitations period in “cases of fraud.” Here is the relevant language from Act No. 88:

Civil Code Article 2041 is hereby amended and reenacted . . . to read as follows:

Art. 2041. Action must be brought within one year

The action of the obligee must be brought within one year from the time he learned or should have learned of the act, or the result of the failure to act, of the obligor that the obligee seeks to annul, but never after three years from the date of that act or result.

The three year period provided in this Article shall not apply in cases of fraud.

2013 La. Legis. Acts, No. 88 (newly added language underlined).[2]

In these undefined “cases of fraud” the creditor may look back to transfers passed in the last ten years, compared to three years in normal cases. In the world of transfer avoidance laws, the look-back period is everything. By more than tripling that period based on the transferor’s intent, Act No. 88 invites every plaintiff to plead fraud generally and take discovery into the transferor’s mind.

The 1984 revisions to the Civil Code eliminated the debtor’s fraudulent intent as an element of proof for a Revocatory Action in favor of the objective insolvency test. If Act No. 88 means anything, it must mean that we have returned to the old search for the debtor’s bad thoughts.

Act No. 88 Changes a Key Feature of this State’s Transfer Avoidance Policy

Each jurisdiction in the U.S. provides a system for creditors to collect from property that a debtor transfers to someone else. The basic policy goal is to protect the value of unsecured debt from deceitful transactions while balancing the opposing need for security of title. As time passes from the transaction date, the particular transferee’s property rights overshadow the generalized concern for the value of debt instruments. To strike a balance, each available system, including our own, provides creditors with limitations periods proportionate to a suspected level of deceit. As a result, creditors have more time to intercept deceitful transactions and less time for honest ones.

Louisiana’s solution is the Revocatory Action, derived from the “Paulian Action” under Roman law. The present Revocatory Action makes a creditor’s proof simple: the transfer is annulled if it 1) occurred after the debt was incurred and 2) increased the transferor’s insolvency. The creditor is protected from the detrimental effects of deceit by starting the one-year prescription period from the date when the creditor knew or should have known of the transaction. Transferee is protected by a three-year peremptive period beginning on the date of the transaction, regardless of the debtor’s intent to deceive.

By comparison, the debtor’s deceitfulness is the main focus of common law “fraudulent conveyance” doctrines, which, for 43 states, have been codified in the Uniform Fraudulent Transfer Act (the “UFTA”).

The UFTA establishes three types of fraudulent transfers, subject to the following limitations periods. For the worst kind of deceit – where the transferor has the “actual intent” to defraud creditors – a UFTA cause of action extinguishes after the later of 4 years from the transfer date or 1 year from the date the creditor either learned or reasonably should have learned of the transfer.[3] For the second worst kind of deceit – where actual intent is missing but the debtor should have known what it was doing, given the value it received for the transfer and the amount of its debts – the cause of action extinguishes after 4 years from the transfer date, regardless of whether the creditor discovered or should have discovered the transfer.[4] For the lowest level transfers – where the transferor received less than “reasonably equivalent value” at a time of insolvency – the cause of action extinguishes after one year from the transfer date regardless of what the creditor was able to know.[5]

Louisiana’s concise approach to transfer avoidance law was a major innovation of the 1984 Obligations Revisions to the Louisiana Civil Code of 1870. The pre-1985 Revocatory Action required proof of 1) insolvency of the debtor, 2) injury to the creditor, 3) intent to defraud the creditors, and 4) pre-existing and accrued indebtedness.[6] The evidence that established the debtor’s intent to defraud under transfer avoidance law was difficult to target.

The modern Revocatory Action provides the most direct solution to the main problem by shifting the focus away from the debtor’s bad faith and, instead, upon the damage to creditors. A seizing creditor cares only about preserving the debtor’s collectible net worth, not what the debtor was thinking in attempting to avoid collection. Much deliberation and explanation was expended in retracing the origins of the Paulian Action to bring us to our State’s modern-day objective insolvency test. The objective approach appropriately focuses on the restitution owed to unsecured creditors while balancing the rights of transferees, without the needless complexity of proving the debtor’s intent.

The Revocatory Action has Always Targeted “Cases of Fraud”

Act No. 88 in search of a problem replaces the three-year peremptive period with a special ten-year prescriptive period[7] reserved for “cases of fraud.” In the context of the Revocatory Action, however, the term “cases of fraud” is redundant. Every Revocatory Action targets a case of fraud.

The purpose of the objective insolvency test – the hallmark of the modern Revocatory Action – is to target transactions made “in fraud of creditors” in the way that Roman Paulian Action applied that concept.[8] That is, to ensure that a creditor’s process of execution is not prejudiced by transactions that deplete the debtor’s net worth, regardless of the debtor’s intent.

The debtor’s intent to defraud creditors was the primary cause for a Revocatory Action before 1985. However, the focus on the debtor’s deceitful intent was the result of a confusion in the meaning of the Latin phrase “in fraudem creditorum,” (“in fraud of creditors”), found in the source articles.[9] In Latin, fraus means “prejudice” or “disadvantage”; it does not mean deceit in the modern sense of the word “fraud.”[10] By missing the distinction, over time, the jurisprudence focused on the deceitfulness of the transaction. As a result, a formula was created for distinguishing between “actual” and “constructive” fraud.[11] That formula led to inconsistent applications.

The objective insolvency test introduced by the 1984 Obligations Revisions, eliminated that inconsistency and confusion. By eliminating the debtor’s intent as an element of proof, the modern Revocatory Action focuses on the prejudice the transaction has upon the creditor’s collection process, as opposed to the deceitful qualities of the transaction. Nevertheless, “fraud” in the sense of the Paulian Action remains the target of the modern Louisiana Revocatory Action.

Legislative History Notwithstanding, Act No. 88 Creates an Intent-Based Revocatory Action

Unfortunately, the legislative history of the Revocatory Action and importance of the objective insolvency test was lost on this year’s Legislature. It is unfortunate because had the Legislature retained a memory of its work in 1984 it would have recognized the redundancy and thus confusion created by (again) interjecting the concept of “fraud” into the Revocatory Action.

Legislation trumps history (and logic) as a source of law. We are not allowed to interpret legislation in a way that renders the words meaningless or superfluous.[12] We must search for a meaning, even if the Legislature gave us a poor, however “solemn[,] expression of legislative will.”[13]

Bound by these rules, creditors obviously cannot argue that the ten-year prescriptive period always expires after the three-year preemptive period on the basis that all Revocatory Actions are “cases of fraud.” If all Revocatory Actions are “cases of fraud” (as in fact they are in the Paulian Action sense of the word), then either the ten-year or three–year limitations period applies, but not both. That interpretation renders Act No. 88 superfluous. Instead, the ten-year Revocatory Action must be interpreted to guard against a type of transaction or protect a type of creditor that is different than the type targeted by three-year version.

Act No. 88 provides no way to distinguish the ten- from the three-year right. Unlike the other intent-based approaches to transfer avoidance law that we have seen in Louisiana, Act No. 88 is an incomplete thought. Nothing in the Civil Code can be read in pari materia to define the kind[14] of fraud that distinguishes between intent-based and objective Revocatory Actions. Nothing allows us to define against whom the fraud must be committed, and what must be the object of the fraud. The pre-1985 Revocatory Action and the UFTA were clear on these points.

At least under the pre-1985 Revocatory Action, we had a complete system for determining when the right of action prescribed and what triggered the right of action. Unlike Act No. 88, we had a way to define what the Legislature meant by “in fraud of a creditor’s rights.” Even our Legislature’s flirtation with the UFTA back in the early 2000’s[15] was better than Act No. 88. It was at least a complete thought.

Conclusion

Act No. 88 is a move backward in the area of transfer avoidance law. The new ten-year right of action in “cases of fraud” uses outdated, redundant terminology to define the limitations period, which is one of the most important aspects of the Revocatory Action. The terminology resurrects needless uncertainty in an otherwise artfully crafted, objective, easy-to-use law. That uncertainty will require judges to “proceed according to equity”[16] far too quickly than the primary source of Louisiana law (i.e., legislation[17]) should allow.

The Legislature should either repeal Act No. 88 or complete its thought, in that order of preference.

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[1] La. Civ. C. art. 2036 (“An oblige has a right to annul an act of the obligor, or the result of a failure to act of the obligor, made or effected after the right of the oblige arose, that causes or increases the obligor’s insolvency.”)

[2] The original bill was sponsored by the Louisiana State Law Institute and introduced by Representative Abramson. It only dealt with tolling agreements which had previously not worked in Louisiana. After passing the House (with a technical amendment), it was amended in the Senate by Senator Martiny to include the revisions to Article 2041.

[3] Uniform Fraudulent Transfer Act § 9(a).

[4] Uniform Fraudulent Transfer Act § 9(b).

[5] Uniform Fraudulent Transfer Act § 9(c).

[6] Thomassie v. Savoie, 581 So.2d 1031, 1035 (La. App. 1 Cir. 1991).

[7] Now that the three-year period “shall not apply in cases of fraud,” no limitations period is “otherwise provided by legislation[; therefore, the] personal action is subject to a liberative prescription of ten years.” La. Civ. C. art. 3499.

[8] See Murray v. Mae M. Stacy Trust, et al. (In re Goldberg), 277 B.R. 251, 270-285 (Bankr. M.D. La. 2002), for a concise summary of scholarship following the origins of the modern Revocatory Action.

[9] Id. at 273

[10] Id. at 279.

[11] E.g., Gast v. Gast, 19 So. 2d 138, 141 (La. 1944).

[12] Credit v. Richland Parish Sch. Bd., 2011-1003 (La. 3/13/12); 85 So. 3d 669, 678 (“It is a cardinal rule of statutory interpretation that it will not be presumed that the Legislature inserted idle, meaningless or superfluous language in the statute or that it intended for any part or provision of the statute to be meaningless, redundant or useless.”).

[13] La. Civ. C. arts. 9-13.

[14] “As used in [the] source articles, the word ‘fraud’ has a meaning which is difficult to determine but which appears different from its meaning in other contexts.” La. Civ. C. art. 2036, cmt. b.

[15] The Legislature passed the UFTA in 2003 and then repealed it in 2004.

[16] La. Civ. C. art. 4.

[17] La. Civ. C. art. 1.