A Fraud, by Any Other Name…the Uniform Fraudulent Transfer Act
A name matters a lot apparently, or at least that is the view behind the recent revision of the Uniform Fraudulent Transfer Act (UFTA) by the Uniform Law Commission. At its annual meeting in July, the Commission adopted a number of mostly minor changes to the UFTA, one of the most significant being a name change from the Uniform Fraudulent Transfer Act to the Uniform Voidable Transactions Act. I applaud the change and hope that it reduces at least some of the confusion in this area.
The major reason for the change is the concept of “constructive fraud” – a doctrine that permits avoidance of transactions where an insolvent debtor receives less than a reasonably equivalent value in exchange for what it gives up. The problem is that it isn’t “fraud” and requires no proof of an improper intent, much less a fraudulent one. Nonetheless, the name “constructive fraud” and its inclusion in a law on “fraudulent” transfers created a lot of confusion. Transactions involving parties with innocent motives are avoidable under the doctrine, but the name has misled a number of courts into issuing opinions that improperly limited its scope.
The revised law doesn’t stop there, however. It takes the more aggressive view that even “actual fraud” doesn’t require fraud. The drafters went to great lengths to remove the “F” word (the non-vulgar one) from almost every place it appeared in the Act and its comments. The comments emphasize that the ancient terminology “hinder, delay, or defraud” creditors and includes actions intended to hinder or delay creditors even if lacking in any fraudulent intent. In place of a concept of fraudulently hindering or delaying, the comments substitute the idea of “unacceptably contraven[ing] norms of creditors’ rights” as the measure for when efforts to hinder or delay render a transaction voidable. The references to “defraud” are about the only vestiges of fraud left in the Act.
In addition to refocusing the courts’ attention on the relevant factors that render transactions voidable, changing the terminology reverses those cases that applied the heighted “fraud” pleading and proof standards to actions brought under the UFTA and the earlier Uniform Fraudulent Conveyance Act (UFCA).
The UFTA is currently in force in 43 states, but not yet in New York. It remains to be seen whether the new UVTA will be as popular.