Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Husky International Electronics, Inc. v. Ritz

United States Supreme Court

May 16, 2016

Husky International Electronics, Inc., Petitioner
v.
Daniel Lee Ritz, Jr.

         Argued: March 1, 2016

          ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

          SYLLABUS

          [194 L.Ed.2d 659] Chrysalis Manufacturing Corp. incurred a debt to petitioner Husky International Electronics, Inc., of nearly $164,000. Respondent Daniel Lee Ritz, Jr., Chrysalis' director and part owner at the time, drained Chrysalis of assets available to pay the debt by transferring large sums of money to other entities Ritz controlled. Husky sued Ritz to recover on the debt. Ritz then filed for Chapter 7 bankruptcy, prompting Husky to file a complaint in Ritz' bankruptcy case, seeking to hold him personally liable and contending that the debt was not dischargeable because Ritz' intercompany-transfer scheme constituted " actual fraud" under the Bankruptcy 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 also held that the debt was not " obtained by . . . actual fraud" under § 523(a)(2)(A) and thus could be discharged in bankruptcy. The Fifth Circuit affirmed, holding that a misrepresentation from a debtor to a creditor is a necessary element of " actual fraud" and was lacking in this case, because Ritz made no false representations to Husky regarding the transfer of Chrysalis' assets.

          Held :

          The term " actual fraud" in § 523(a)(2)(A) encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. Pp. 3-11.

         (a) It is sensible to presume that when Congress amended the Bankruptcy Code in 1978 and added to debts obtained by " false pretenses or false representations" an additional bankruptcy discharge exception for debts obtained by " actual fraud," it did not intend the term " actual fraud" to mean the same thing as the already-existing term " false representations." See United States v. Quality Stores, Inc., 572 U.S. ___, ___, 134 S.Ct. 1395, 188 L.Ed.2d 413. Even stronger evidence that " actual fraud" encompasses the kind of conduct alleged to have occurred here is found in the phrase's historical meaning. At common law, " actual fraud" meant fraud committed with wrongful intent, Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed. 586. And 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.

         One of the first bankruptcy Acts, the Fraudulent Conveyances Act of 1571, 13 Eliz., ch. 5, identified as " fraud" conveyances made with " [i]ntent to delay hynder or defraude [c]reditors." The degree to which that statute remains embedded in fraud-related laws today, see, e.g., BFP v. Resolution Trust Corporation, 511 U.S. 531, 540, 114 S.Ct. 1757, 128 L.Ed.2d 556, clarifies that the common-law term " actual fraud" is broad enough to incorporate fraudulent conveyances. The common law also indicates that fraudulent conveyances do not require a misrepresentation from a debtor to a creditor, see id., at 541, as they lie not in dishonestly inducing a creditor to extend a debt but in the acts of concealment and hindrance. Pp. 3-6.

         (b) Interpreting " actual fraud" in § 523(a)(2)(A) to encompass fraudulent conveyances would not, as Ritz [194 L.Ed.2d 660] contends, render duplicative two of § 523's other discharge exceptions, § § 523(a)(4), (6), given that " actual fraud" captures much conduct not covered by those other provisions. Nor does this interpretation create a redundancy in § 727(a)(2), which is meaningfully different from § 523(a)(2)(A). It is also not incompatible with § 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. At minimum, those debts would not be dischargeable under § 523(a)(2)(A). Finally, 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." Pp. 7-10.

787 F.3d 312, reversed and remanded.

         Shay Dvoretzky argued the cause for petitioner.

         Erin E. Murphy and William D. Weber argued the cause for respondents

         Sotomayor, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Ginsburg, Breyer, Alito, and Kagan, JJ., joined. Thomas, J., filed a dissenting opinion.

          OPINION

         Sotomayor, Justice

          The Bankruptcy Code prohibits debtors from discharging debts " obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). The Fifth Circuit held that a debt is " obtained by . . . actual fraud" only if the debtor's fraud involves a false representation to a creditor. That ruling deepened an existing split among the Circuits over whether " actual fraud" requires a false representation or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation, such as a fraudulent conveyance of property made to evade payment to creditors. We granted certiorari to resolve that split and now reverse.

         I

         Husky International Electronics, Inc., is a Colorado-based supplier of components used in electronic devices. Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp., and Chrysalis incurred a debt to Husky of $163,999.38. During the same period, respondent Daniel Lee Ritz, Jr., served as a director of Chrysalis and owned at least 30% of Chrysalis' common stock.

         All parties agree that between 2006 and 2007, Ritz drained Chrysalis of assets it could have used to pay its debts to creditors like Husky by transferring large sums of Chrysalis' funds to other entities Ritz controlled. For instance--and Ritz' actions were by no means limited to these examples--Ritz transferred $52,600 to CapNet Risk Management, Inc., a company he owned in full; $121,831 to CapNet Securities Corp., a company in which he owned an 85% interest; and $99,386.90 to Dynalyst Manufacturing Corp., a company in which he owned a 25% interest.

         In May 2009, Husky filed a lawsuit against Ritz seeking to hold him personally responsible for Chrysalis' [194 L.Ed.2d 661] $163,999.38 debt. Husky argued that Ritz' intercompany-transfer scheme was " actual fraud" for purposes of a Texas law that allows creditors to hold shareholders responsible for corporate debt. See Tex. Bus. Orgs. Code Ann. § 21.223(b) (West 2012). In December 2009, Ritz filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. Husky then initiated an adversarial proceeding in Ritz' bankruptcy case again seeking to hold Ritz personally liable for Chrysalis' debt. Husky also contended that Ritz could not discharge that debt in bankruptcy because the same intercompany-transfer scheme constituted " actual fraud" under 11 U.S.C. § 523(a)(2)(A)'s exemption to discharge. [1]

         The District Court held that Ritz was personally liable for the debt under Texas law, but that the debt was not " obtained by . . . actual fraud" under § 523(a)(2)(A) and could be discharged in his bankruptcy.

         The Fifth Circuit affirmed. It did not address whether Ritz was responsible for Chrysalis' debt under Texas law because it agreed with the District Court that Ritz did not commit " actual fraud" under § 523(a)(2)(A). Before the Fifth Circuit, Husky argued that Ritz' asset-transfer scheme was effectuated through a series of fraudulent conveyances--or transfers intended to obstruct the collection of debt. And, Husky said, such transfers are a recognizable form of " actual fraud." The Fifth Circuit dis-agreed, holding that a necessary element of " actual fraud" is a misrepresentation from the debtor to the creditor, as when a person applying for credit adds an extra zero to her income or falsifies her employment history. In re Ritz, 787 F.3d 312, 316 (2015). In transferring Chrysalis' assets, Ritz may have hindered Husky's ability to recover its debt, but the Fifth Circuit found that he did not make any false representations to Husky regarding those assets or the transfers and therefore did not commit " actual fraud."

         We reverse. The term " actual fraud" in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.