BANKRUPTCY FRAUD

Issues

The Supreme Court will decide whether "actual fraud" under 11 U.S.C. § 523(a)(2)(A) ("section 523(a)(2)(A)") of the Bankruptcy Code includes fraudulent transfers as an exemption to the discharge of debts owed to a creditor, or whether it requires that the creditor show a fraudulent misrepresentation. Husky International Electronics, Inc., a component manufacturer, argues that a creditor has shown actual fraud by a debtor if that debtor was knowingly involved in a fraudulent transfer of funds, regardless of whether the debtor made a misrepresentation to the creditor. Husky argues that, given the longstanding common law use of "actual fraud" to include any kind of intentional fraud, including fraudulent transfers, Congress intended to expand the scope of section 523(a)(2)(A) beyond mere misrepresentations. David Lee Ritz, owner of Chrysalis Manufacturing Corp. and one of Husky’s customers, contends that the term "actual fraud" only adds a requirement of intention on behalf of the debtor. He maintains that Congress would have clearly stated that fraudulent transfers would bar a debtor's discharge if it had wanted to expand the Bankruptcy Code in that way. Instead, Ritz maintains that a creditor must show that the debtor intentionally made a fraudulent misrepresentation. The Court's decision could pose a concern to debtors who have made transfers of funds before filing for bankruptcy, and may restrict creditors’ remedies to recover debts. ​

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Issues

In this case, the Supreme Court will determine whether R. Scott Appling’s debt to Lamar, Archer & Cofrin, LLP is dischargeable in Appling’s bankruptcy proceedings. Between 2004 and 2005, Appling accumulated a debt of $60,000 to the law firm for legal services, evading collection attempts by saying that he soon expected a tax return of over $100,000. But Appling’s tax return was only $60,000, and he did not use it to pay down any of his debt to the law firm. Appling later filed for bankruptcy. Appling now asks the court to discharge his debt to the law firm, but discharge is not allowed if Appling’s verbal statements about his tax return were “respecting the debtor’s . . . financial condition.” The case will turn on interpretation of the relevant bankruptcy statutes. The outcome could affect the ways that lenders, especially small businesses, administer loans.

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