Term: 2015
Docket: 15-145
Husky International Electronics, Inc., v. Ritz
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15-145 HUSKY ELECTRONICS, INC. V. RITZ DECISION BELOW: 787 F.3d 312 CERT. GRANTED 11/6/2015 QUESTION PRESENTED: The Bankruptcy Code bars the discharge of "any debt ... for money ... obtained by ... [1] false pretenses, [2] a false representation, or [3] actual fraud." 11 U.S.C. § 523(a)(2)(A). The First and Seventh Circuits have held that the "actual fraud" bar applies where an individual debtor deliberately obtains money through a fraudulent-transfer scheme that is actually intended to cheat a creditor. But in an acknowledged circuit split, the Fifth Circuit held as a matter of law that there can be no "actual fraud" unless the debtor makes a false representation to the creditor. This decision creates a roadmap for dishonest debtors to cheat creditors through deliberate fraudulent-transfer schemes, and then to escape liability through discharge in bankruptcy. The question presented is: Whether the "actual fraud" bar to discharge under Section 523(a)(2)(A) of the Bankruptcy Code applies only when the debtor has made a false representation, or whether the bar also applies when the debtor has deliberately obtained money through a fraudulent- transfer scheme that was actually intended to cheat a creditor. LOWER COURT CASE NUMBER: 14-20526
The US Supreme Court case Husky International Electronics, Inc. v. Ritz (2015) centered around the issue of whether or not a debt obtained through fraudulent conveyance could be discharged in bankruptcy. The petitioner, Husky International Electronics, sold products to and was owed money by Chrysalis Manufacturing Corp., owned by respondent Daniel Lee Ritz Jr.. Instead of paying his debts to Husky, Ritz transferred funds from Chrysalis to other entities he controlled. When Husky sued him for the amount due, Ritz filed for Chapter 7 bankruptcy protection seeking discharge of the debt owed to Husky. Husky argued that because this debt was incurred fraudulently it should not be dischargeable under Section 523(a)(2)(A) of Bankruptcy Code which prevents discharging any liability resulting from "false pretenses, a false representation or actual fraud." The Supreme Court agreed with this interpretation and held that fraudulent conveyance does fall within 'actual fraud' as defined in Section 523(a)(2)(A). Therefore it ruled that such debts are non-dischargeable during bankruptcy proceedings.
In the dissenting opinion for Husky International Electronics, Inc. v. Ritz, Justice Thomas argued that "actual fraud" in Section 523(a)(2)(A) of the Bankruptcy Code requires a false representation and does not cover fraudulent conveyance schemes where no misrepresentation was made to the creditor-defrauded party. He contended that historically, actual fraud has been understood as involving some form of deceit or trickery - an intentional misrepresentation or concealment of information which causes injury to another who relies on it. In this case, he believed there was no evidence showing Ritz made any false representations to Husky about his asset transfers; thus they should not be considered “actual fraud”. Furthermore, he pointed out that other provisions in Section 523 specifically address fraudulent transfers without requiring any misrepresentations; hence Congress did not intend for all types of fraudulent conduct to fall under "actual fraud". Therefore, according to him, debts resulting from such transfer schemes are dischargeable unless falling within these specific provisions.
