On May 16, 2016, the U.S. Supreme Court rendered a decision in Husky International Electronics, Inc. v. Ritz, finding that the term “actual fraud” as used in Section 523(a)(2)(A) of the Bankruptcy Code is sufficiently broad to include fraudulent conveyances and does not require a false representation for the debt to be non-dischargeable in bankruptcy.
Husky is an electronics component supplier that sold products to Chrysalis Manufacturing Corp. Daniel Ritz was a director at Chrysalis and owned 30% of the company’s stock. Chrysalis incurred a debt of approximately $164,000 owed to Husky and rather than satisfy this debt, Ritz transferred substantial Chrysalis assets to other entities he controlled. Husky sued Ritz for the debt, alleging that the transfers constituted actual fraud, and Ritz subsequently filed for Chapter 7 bankruptcy relief.
Husky commenced an adversarial proceeding in Ritz’ bankruptcy case, asserting that the transfers of Chrysalis assets constituted actual fraud and the debt was non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code. The bankruptcy court found that Husky had not proven actual fraud. On appeal, a district court found that Ritz was personally liable under state law but that the debt itself was not obtained by actual fraud and count not be excepted from discharge under Section 523(a)(2)(A). The Fifth Circuit Court of Appeals affirmed the district court’s ruling, finding that the debtor had to make an actual misrepresentation to the creditor to prevail under Section 523(a)(2)(A).
In a 7-1 decision, the U.S. Supreme Court reversed the Fifth Circuit, hold that the term “actual fraud” in Section 523(a)(2)(A) “encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.”
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