March 1, 2016
WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE FIFTH CIRCUIT
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).
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
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.
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.
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.
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.
Dvoretzky argued the cause for petitioner.
Murphy and William D. Weber argued the cause for respondents
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.
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.
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.
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.
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. 
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.
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."
reverse. The term " actual fraud" in §
523(a)(2)(A) encompasses forms of fraud, like fraudulent
conveyance schemes, that can be ...