What’s in a Name? Reviewed by Momizat on . Why the Change from “Fraudulent Transfer” to “Voidable Transaction” May be a Big Deal The Uniform Fraudulent Transfer Act (UFTA) was recently amended and rename Why the Change from “Fraudulent Transfer” to “Voidable Transaction” May be a Big Deal The Uniform Fraudulent Transfer Act (UFTA) was recently amended and rename Rating: 0
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What’s in a Name?

Why the Change from “Fraudulent Transfer” to “Voidable Transaction” May be a Big Deal

The Uniform Fraudulent Transfer Act (UFTA) was recently amended and renamed; it is now called the Uniform Voidable Transactions Act (UVTA). “The renaming has no substantive effect whatever. Yet, it reflects an important truth about the act that merits discussion.” This article shows how changes in semantics can potentially lead to changes in how so-called fraudulent transfer lawsuits are addressed by practitioners and the courts.

fraudulent_transferThe Uniform Fraudulent Transfer Act (UFTA) was recently amended and renamed; it is now called the Uniform Voidable Transactions Act (UVTA).  “The renaming has no substantive effect whatever.  Yet, it reflects an important truth about the act that merits discussion.”[i]  This article shows how changes in semantics can potentially lead to changes in how so-called fraudulent transfer lawsuits are addressed by practitioners and the courts.

Terms of Art

Practitioners frequently use terms of art that are specific to their field.  For example, journalists categorize certain off-the-record information as “deep background”.  A term of art such as “deep background” does not have a clear meaning to a lay person.


The problem with some terms of art is that they can be difficult to define.  What exactly does “deep background” mean?  An interview published on the American Journalism Review website reveals a divergent set of views on the definition of “deep background” that is perhaps best summarized as: “It means different things to different people.  I’ve never understood it.”[ii]

A term of art is “[a] word or phrase that has a precise, specialized meaning within a particular field or profession.”[iii]  As shown above, some terms of art are not very precise.  This lack of precision can lead to unintended consequences.

Fraudulent vs. Voidable

The UFTA used the terms fraudulent and voidable to describe the same activity, “about equally.”[iv]  The use of different terms to describe the same activity can lead to confusion.


The term voidable is more apt than fraudulent in the context of so-called fraudulent transfers because the term fraudulent is misleading.[v]  “The heart of the matter is that fraud, in the modern sense of that word, is not, and never has been, a necessary element of a claim for relief under the act.”[vi]  Said differently, a transaction can be voidable without being fraudulent.  As a practical matter, the remedy for a so-called fraudulent transfer lawsuit is voiding of the disputed transaction.[vii]

Terms of Art for So-Called Fraudulent Transfer Lawsuits

There are two avenues plaintiffs can pursue when trying to recover certain prepetition transfers that were made when the debtor was allegedly insolvent.  One avenue has been referred to as actual fraud.  The second avenue has been referred to as constructive fraud.  Both of these characterizations are terms of art.


Actual Fraud

What does actual fraud (sometimes referred to as actual intent) mean in the context of a fraudulent transfer lawsuit?  Some may reasonably think that actual fraud means what it says: somebody actually intended to fraudulently transfer assets.


However, as explained above, fraud is not a necessary element of a claim for relief.  More specifically, “[t]he statutory words are hinder, delay, or defraud.  As innumerable cases have observed, those words say that a transfer that ‘hinders’ or ‘delays’ creditors violates the rule, even if does not ‘defraud’ them.”[viii]  Said differently, fraud does not need to be established for the so-called actual fraud avenue of fraudulent transfer cases.

Why does the term of art matter?  It matters because use of the term ‘actual fraud’ can result in the wrong analysis:

“The nickname of the primordial rule, ‘actual fraud,’ invites the misconception that the rule’s intent requirement should be interpreted in a way similar to the intent requirement for a claim of common-law fraud.  The latter focuses upon the alleged fraudster’s mental state, and is generally thought to be satisfied only if the fraudster has something close to the conscious purpose of inducing his victim to rely upon his fraudulent misrepresentation.”[ix]

One substantive clarification (consistent with the name change) that arose from the UFTA to the UVTA change is the standard of proof.  The UFTA previously did not address the standard of proof.  Some states used the “clear and convincing evidence” standard for so-called actual fraud claims.[x]  The UVTA now addresses the standard of proof, which is the lower “preponderance of the evidence” standard.  This is the standard ordinarily required in civil actions.[xi]

Constructive Fraud  

What does constructive fraud mean in the context of a fraudulent transfer lawsuit?  This term of art is inapt because it is an oxymoron.[xii]  An oxymoron refers to “a combination of words that have opposite or very different meanings.”[xiii]


Financial analyses that address the constructive fraud avenue are often performed by valuation practitioners.  This avenue focuses on transfers in which the debtor allegedly received less than reasonably equivalent value when it was allegedly insolvent.  Insolvency is typically based on at least one of three tests: (a) assets vs. liabilities, (b) capital adequacy, or (c) ability to pay debts.[xiv]  Analyses performed for these financial tests often have nothing to do with fraud.[xv]

As a practical matter, it may be fair to say that analyses for the constructive fraud avenue are based on what the contemporaneous participants should have known.  Of course, what participants should have known can be different from what they actually knew at the time.

Why Does the Change in Terms of Art Matter?

As mentioned above, a misleading term of art can result in the wrong standard of proof.  The current change in the term of art (from fraudulent to voidable) and the clarification regarding the standard of proof, should rectify that problem to the extent that it exists.


However, the bigger result of this change may be its effect on safe harbors.  A safe harbor is a “provision in an agreement, law, or regulation that affords protection from liability or penalty under specified circumstances or if certain conditions are met.”[xvi]

There has been an increased use of safe harbors by defendants in fraudulent transfer cases.  For example, an author of an article on Law360 recently stated that, “[e]xisting safe harbors have shielded many investors from lawsuits over securities deals that could otherwise be clawed back to dig up money for creditors.”[xvii]  In contrast, “[t]en years ago, the defendants were not raising 546(e) [safe harbor] and saying that the money came through a financial institution and I have a get-out-of-jail free card.”[xviii]

Many safe harbors apply to so-called constructive fraud transactions but do not apply to so-called actual fraud transactions.  Thus, any change that makes it easier for plaintiffs to pursue the actual fraud avenue (e.g., focusing on the “preponderance of evidence” standard and/or focusing more on transactions that hinder or delay, but do not defraud) will also make it harder for defendants to use these safe harbors.

Perhaps the most relevant of the safe harbors is the so-called settlement payment (i.e., the 546(e) safe harbor referenced above).  A settlement payment is a term of art used in the federal bankruptcy code.[xix]  The settlement payment safe harbor was introduced by Congress to protect against systemic risk to financial markets.

Why are settlement payments relevant?  As mentioned above, they are a get-out-of-jail free card for defendants as otherwise fraudulent transfers are exempt from prosecution.[xx]  A discussion regarding the specifics of settlement payments is beyond the scope of this article.  However, it is sufficient to say that defendants want to refer to the disputed transaction as a settlement payment (to get the benefit of the safe harbor), whereas plaintiffs do not (to dismiss the safe harbor and keep the lawsuit alive).

The American Bankruptcy Institute recently proposed that the safe harbor for settlement payments should remain for certain instances under the so-called constructive fraud method but not at all under the so-called actual fraud standard.  More specifically, the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 recommended that the settlement payment safe harbor should:

  • be amended to remove protection when the defendant owned privately issued securities and the disputed transaction used some or all of the debtor’s assets to facilitate the transaction (e.g., a leveraged buyout);


  • continue the existing protection for: (1) securities industries participants who act as conduits in both public and private securities transactions, and (2) public securities holders; and
  • continue to exclude from the safe harbors transfers made with actual intent to hinder, delay, or defraud (federal and state law claims).[xxi]

What are the Implications of the Name (and Related) Changes?

The battleground for fraudulent transfers (which should be called voidable transactions) may be shifting because of the aforementioned reasons.  The pendulum has moved in favor of defendants in recent years due to the increased use of the settlement payment safe harbor.  The pendulum may move towards plaintiffs in the future.  This shift could occur in response to an increased ability to dismiss safe harbors as they focus on easier to prove (relative to the recent past) claims under the so-called actual fraud avenue.


Why should practitioners care?  Fraudulent transfer litigation has often focused on the three financial tests and some cases have not gotten very far due to safe harbors.  It seems reasonable to predict that more plaintiffs will focus on the statutory worlds “hinder, delay, or defraud” given the recent changes to the UFTA and their desire to mitigate the effectiveness of safe harbors invoked by defendants.  The end result will likely be investigations that are more fact-intensive than they have been in the recent past.

The author is not an attorney and is not offering legal advice.  This article is written from a business valuation practitioner’s perspective who works on, among other things, retrospective solvency-related matters.

[i] Kenneth C. Kettering, “The Uniform Voidable Transaction Act; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act,” Business Lawyer, 70 (2015): 777, 806.  The author of this paper “served as the Reporter for the Drafting Committee on Amendments to the Uniform Voidable Transactions Act (formerly the Uniform Fraudulent Transfer Act).”  Id. at 777.

[ii] “On Deep Background,” http://ajrarchive.org/article.asp?id=1621 (accessed 11/6/15).

[iii] http://www.oxforddictionaries.com/us/definition/english/term-of-art (accessed 11/6/15).

[iv] Kettering, op. cit: 806.

[v] Id.

[vi] Id.

[vii] The term “transaction” is more apt than “transfer” because some disputed transactions (e.g., incurrence of a debt guaranty) are not transfers.

[viii] Kettering, op. cit: 807.

[ix] Kettering, op. cit: 809.

[x] Kettering, op. cit: 810.

[xi] Id.

[xii] Kettering, op. cit: 806.

[xiii] http://www.merriam-webster.com/dictionary/oxymoron (accessed 11/8/15).

[xiv] See Vitti, Michael.  “Grounding Retrospective Solvency Analyses in Contemporaneous Information (3 of 3).  Business Valuation Review, 33, no. 3 (2014):50-80.

[xv] An exception can be a fraud-on-the-market argument used to dismiss the relevance of contemporaneous market prices that suggest the debtor was solvent.

[xvi] http://www.businessdictionary.com/definition/safe-harbor.html (accessed 11/9/15).

[xvii] http://www.law360.com/articles/604190/bankruptcy-cases-to-watch-in-2015 (accessed 11/12/15).

[xviii] http://www.law360.com/articles/600501/ch-11-pros-forsee-refurbishing-of-securities-safe-harbor (accessed 11/12/15).

[xix] One law firm states: “The term ‘settlement payment’ is defined in both sections 101 and 741 of the Bankruptcy Code, with only minor variations between the definitions.  A ‘settlement payment’ is defined in section 741(8), somewhat circularly, as ‘a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.’  The definition of the term in section 101 (51A) varies slightly by adding the phrase ‘net settlement payment’ and substituting ‘forward contract trade’ for ‘securities trade.’  Section 741(7) of the Bankruptcy Code defines a ‘securities contract’ as, among other things, ‘a contract for the purchase, sale, or loan of a security,’ and section 101(49) defines ‘security’ to include ‘stock.’”  [xix] http://www.jonesday.com/second-circuit-settles-the-meaning-of-settlement-payments-under-section-546e-of-the-bankruptcy-code-12-01-2011/ (accessed 11/9/15).

[xx] Of course, these are civil, not criminal actions; hence the term “get-out-of-jail-free” is a figure of speech.

[xxi] American Bankruptcy Institute Commission to Study the Reform of Chapter 11: 05-95-96.

Michael Vitti, CFA, joined Duff & Phelps in 2005. Mr. Vitti is a Managing Director in the Morristown office and is part of the Disputes and Investigations practice. He is also a member of the firm’s Complex Valuation and Bankruptcy Litigation group, focusing on issues related to valuation and solvency. Mr. Vitti has more than 19 years of valuation experience. Mr. Vitti can be reached at: (973) 775-8250 or by e-mail: Michael.Vitti@duffandphelps.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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