Husky International Electronics, Inc. v. Ritz
Issues
Does the term "actual fraud" require that, to obtain an exemption from discharge of a debtor's bankruptcy debts under 11 U.S.C. § 523(a)(2)(A), a creditor show that a debtor made a fraudulent misrepresentation, or does it include a debtor's fraudulent transfer as an exception to discharge?
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.
Questions as Framed for the Court by the Parties
Does the “actual fraud” bar to discharge under § 523(a)(2)(A) of the Bankruptcy Code apply 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?
Between 2003 and 2007, Husky International Electronics, Inc., a supplier of electronic device components, sold and delivered electronic device components to Chrysalis Manufacturing Corp., an electronic circuit board manufacturer controlled, directed, and partially owned by Daniel Lee Ritz, Jr. See Husky Int'l Elecs., I
Edited by
Additional Resources
Katherine Doorley, Supreme Court Grants Cert to Consider Actual Fraud Bar in Section 523(a)(2)(A), Weil Gotshal & Manges LLP Bankruptcy Blog (Nov. 17, 2015).
Donna Higgins, 2 Petitions Ask Supreme Court to Resolve Bankruptcy Fraud Circuit Split, Thomson Reuters (Aug. 18, 2015).
Lauren Lipari, What Constitutes Fraud in Bankruptcy? SCOTUS to Resolve First and Fifth Circuit Split in 2016, Hughes Hubbard & Reed LLP Bankruptcy Report (Nov. 18, 2015).