The U.S. Supreme Court on May 16 ruled (7-1) in the case of Husky International Electronics Inc. v. Ritz (No. 15-145) that the term “actual fraud” in §523(a)(2)(A) encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation to a creditor.
G. Eric Brunstad, Jr. is a partner in the Hartford, Conn., office of Dechert LLP and has argued 10 cases before the U.S. Supreme Court, including matters involving the First Amendment, bankruptcy, taxation, the Commerce Clause, statutory interpretation, jurisdiction and arbitration. He filed an amicus brief in support of the respondent in the case, Daniel Lee Ritz, Jr.
Prof. Anthony Casey of the University of Chicago Law School researches and teaches on topics including corporations, corporate bankruptcy and reorganization, finance, securities regulation, civil procedure, and law and economics. He signed on to an amicus brief in support of the petitioner, Husky International Electronics, Inc.
ABI Editor-at-Large Bill Rochelle provides his authoritative take on legal developments affecting bankruptcy practice in ABI's Rochelle’s Daily Wire. Rochelle published for Bloomberg every day from 2007-15, and prior to his second career in journalism, he practiced bankruptcy law for 35 years.
The U.S. Supreme Court on May 16 ruled (7-1) in the case of Husky International Electronics Inc. v. Ritz that the term “actual fraud” in §523(a)(2)(A) encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. Chrysalis Manufacturing Corp. incurred a debt to petitioner Husky International Electronics, Inc., of nearly $164,000. Respondent Daniel Lee Ritz, Jr., Chrysalis’ director and part owner at the time, drained Chrysalis of assets available to pay the debt by transferring large sums of money to other entities Ritz controlled. Husky sued Ritz to recover on the debt. Ritz then filed for chapter 7 bankruptcy, prompting Husky to file a complaint in Ritz’s bankruptcy case, seeking to hold him personally liable and contending that the debt was not dischargeable because Ritz’s intercompany-transfer scheme constituted “actual fraud” under the Bankruptcy Code’s discharge exceptions under §523(a)(2)(A). The district court held that Ritz was personally liable under state law but also held that the debt was not “obtained by…actual fraud” under § 523(a)(2)(A) and thus could be discharged in bankruptcy. The Fifth Circuit affirmed, holding that a misrepresentation from a debtor to a creditor is a necessary element of “actual fraud” and was lacking in this case, because Ritz made no false representations to Husky regarding the transfer of Chrysalis’ assets.
Reversing the Fifth Circuit, the Supreme Court held in Husky International Electronics Inc. v. Ritz that a debt can be nondischargeable for “actual fraud” under § 523(a)(2)(A) of the Bankruptcy Code in the absence of a fraudulent misrepresentation to the creditor. Writing the majority opinion on May 16, Justice Sonia Sotomayor held that “actual fraud” subsumes “forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.” A “fraudulent conveyance of property made to evade payments to creditors” is among the types of actual fraud that can result in a nondischargeable debt, she wrote.
ABI’s media webinar presents experts involved in the Husky case to discuss the effects of the Court’s ruling.