In an Alert published on Wednesday, Audrey Noll examines the U.S. Supreme Court’s recent ruling in Husky Int’l Elecs., Inc. v. Ritz:
Last month, the U.S. Supreme Court held that the “actual fraud” bar to discharge debts under Bankruptcy Code section 523(a)(2)(A) includes claims based on intentional fraudulent transfers, regardless of whether the debtor made a false representation to the creditor.
In Husky Int’l Elecs., Inc. v. Ritz, 2016 WL 2842452 (May 16, 2016), the justices reversed a Fifth Circuit ruling and resolved a split among the circuits on the issue of whether “actual fraud” under section 523(a)(2)(A) requires a false representation. (Compare In re Ritz, 787 F.3d 312 (5th Cir. 2015)(“actual fraud” requires false representation) with McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000)(“actual fraud” encompasses actual fraudulent transfer schemes that do not necessarily include false representation).)
The facts in Husky were fairly straightforward. Husky International Electronics, Inc. sold electronic device components to Chrysalis Manufacturing Corp., which failed to pay for about $164,000 worth of the goods. Chrysalis’s principal, Daniel Lee Ritz, drained Chrysalis of assets by transferring them to other entities that he controlled while Chrysalis was insolvent, and for less than reasonably equivalent value. Husky sued Ritz, seeking to hold him personally liable for the $164,000 debt based on fraudulent transfer and alter ego claims. Ritz then filed a Chapter 7 petition. Husky responded by filing a complaint in the bankruptcy court, objecting to the discharge of Ritz’s alleged debt under Bankruptcy Code Section 523(a)(2)(A) (making debt obtained by “false pretenses, a false representation, or actual fraud” nondischargeable).
To read Audrey’s full discussion of the court’s ruling, please visit the Fox Rothschild website.
Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.