3.2 The Maryland Law
The MUFCA provides that any conveyance made “with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.” MUFCA § 15-207. The MUFCA also provides that conveyance without “fair consideration” is fraudulent if (i) the conveyance is made by a person who is insolvent or becomes insolvent because of the transfer (MUFCA § 15-204), (ii) by a person engaged or about to be engaged in a transaction for which the conveyance leaves him or her with “unreasonably small capital” for that transaction (MUFCA § 15-205), or (iii) by a person who intends or believes that he or she will incur debts beyond his or her ability to pay as they mature (MUFCA § 15-206). The MUFCA also provides similar rules governing the conduct of partners and partnerships. MUFCA § 15-208.
MUFCA § 15-202 defines insolvency:
“(a) A person is insolvent if the present fair market value of his assets is less than the amount required to pay his probable liability on his existing debts as they become absolute and matured.
(b) In determining if a partnership is insolvent, there shall be added to the partnership property:
(1) The present fair market value of the separate assets of each general partner in excess of the amount probably sufficient to meet the claims of his separate creditors; and
(2) The amount of any unpaid subscription to the partnership of each limited partner, if the present fair market value of the assets of the limited partner is probably sufficient to pay his debts, including the unpaid subscription.”
The 1918 Uniform Act uses “fair salable value” instead of “present fair market value” in its definition of insolvency. The UFTA uses “fair valuation” as it standard. When applying this balance sheet test, assets do not include unreachable assets (such as Tenants by the Entirety property or trust assets subject to a valid spendthrift clause). MUFCA § 15-201(b).
The handling of contingent obligations, such as guarantees, presents some difficulty. In re Merry-Go-Round Enterprises, Inc., 229 B.R. 337 (Bankr. D. Md. 1999), the Court held that contingent debts are not determined under standard accounting rules (GAAP) which only lists debts that are probable and can be reasonably estimated. Instead, “the amount of a contingent claim, however, is determined in accordance with the probability that the contingency will occur and that this valuation after such discounting is made from the debtor’s perspective.” In other words, the debtor must measure, and adjust for, the likelihood of needing to cover all contingent debt. All of it should be scheduled and dealt with in the planning process using a reasonable judgment as to the probability such guaranty will be called.
As noted, fair consideration given for property or an obligation will defeat a constructive fraudulent conveyance claim. It is defined by MUFCA § 15-203:
“Fair consideration is given for property or an obligation, if:
(1) In exchange for the property or obligation, as a fair equivalent for it and in good faith, property is conveyed or an antecedent debt is satisfied; or
(2) The property or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared to the value of the property or obligation obtained.”