Husky Int’l Electronics, Inc. v. Ritz

May 16, 2016 by Justia

Chrysalis incurred a debt of $164,000 to Husky. Ritz, Chrysalis’ director and then-part-owner, drained Chrysalis of assets available to pay the debt by transferring large sums to other entities Ritz controlled. Husky sued Ritz, who then filed for Chapter 7 bankruptcy. Husky filed a complaint in Ritz’ bankruptcy case, asserting “actual fraud” under the Code’s discharge exceptions, 11 U.S.C. 523(a)(2)(A). The district court held that Ritz was personally liable under state law but that the debt was not “obtained by . . . actual fraud” and could be discharged. The Fifth Circuit affirmed. The Supreme Court reversed. The term “actual fraud” encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. The term “fraud” has, since the beginnings of bankruptcy practice, been used to describe asset transfers that, like Ritz’ scheme, impair a creditor’s ability to collect a debt. This interpretation is not incompatible with Section 523(a)(2)(A)’s “obtained by” requirement. Even though the transferor of a fraudulent conveyance does not obtain assets or debts through the fraudulent conveyance, the transferee—who, with the requisite intent, also commits fraud—does. Reading the phrase “actual fraud” to restrict, rather than expand, the discharge exception’s reach would untenably require reading the disjunctive “or” in the phrase “false pretenses, a false representation, or actual fraud” to mean “by.” View "Husky Int’l Electronics, Inc. v. Ritz" on Justia Law