The U.S. Supreme Court has handed down two rulings thus far in 2016 (October 2015 Term) involving issues of bankruptcy law. In the first, Husky Int’l Elecs., Inc. v. Ritz, 194 L. Ed. 2d 655, 2016 BL 154812 (2016), the Court addressed the scope of section 523(a)(2)(A) of the Bankruptcy Code, which bars the discharge of any debt of an individual debtor for money, property, services, or credit to the extent obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition."
The United States Supreme Court recently held in Husky International Electronics, Inc., v. Ritz1 that the term actual fraud, as used in 11 U.S.C. § 523(a)(2)(A), encompasses all forms of fraud and does not require a false representation. Several commentators tout this holding as a good result for lenders, as it may except certain debts from discharge in bankruptcy when there is evidence of intentional misconduct by the individual debtor.
Until the recent U. S. Supreme Court’s decision in Husky International Electronics, Inc. v. Ritz, __ U.S. __, 136 S.Ct. 1581, 194 L.Ed.2d 655, 84 U.S. L.W. 4270 (2016), there was disagreement in the circuit courts regarding whether a debtor in bankruptcy could be denied a discharge under 11 U.S.C. § 523(a)(2)(A) where the evidence of wrongdoing proved the debtor committed actual fraud, but there was no evidence that the debtor made a misrepresentation to the creditor seeking to bar the discharge.
A decision from the United States Supreme Court penned by Justice Sonia Sotomayor adopted a broad reading of “actual fraud” in section 523(a)(2)(A) of the Bankruptcy Code, which excepts from discharge debts “obtained by . . .
HIGHLIGHTS:
The purpose of filing for Chapter 7 bankruptcy is to discharge debts. But even after obtaining a discharge, a debtor is not totally in the clear. A recent case in the United States Bankruptcy Court for the Western District of Michigan involves an adversary proceeding in which the United States Trustee sought to revoke a Chapter 7 debtor’s (the “Debtor”) discharge.[i]
In recent years, constructively fraudulent transfer claims asserted in bankruptcy cases, especially those arising from LBOs and similar shareholder transactions, have hit a major road block.
The U.S. Bankruptcy Court for the District of Delaware recently issued an opinion that addresses, among other issues, the question of whether section 546(e) of the Bankruptcy Code preempts certain fraudulent transfer avoidance actions brought under state law. In re Physiotherapy Holdings Inc., No. 15-51238 (Bankr. D. Del. June 20, 2016).
On May 16, 2016, the United States Supreme Court in Husky International Electronics v. Ritz held that the phrase “actual fraud” under section 523(a)(2)(A) of the Bankruptcy Code may include fraudulent transfer schemes that were effectuated without a false representation. Section 523(a)(2)(A) provides that an individual debtor will not be discharged from certain debts to the extent that those debts were obtained by false pretenses, false representations or actual fraud.
Section 523(a)(2)(A) of the Bankruptcy Code allows a creditor to obtain a judgment denying its debtor a discharge of debts incurred by false pretenses or actual fraud. However, if the debt itself was not incurred by actual fraud, but the debtor subsequently transfers his assets with the intent prevent its creditors from obtaining payment, may the creditor still obtain a judgment denying the debtor’s discharge under § 523(a)(2)(A)?
A debtor’s pre-bankruptcy repurchase of its stock for $150 million was not a fraudulent transfer because the debtor “could have sold off enough of its assets or alternatively obtained sufficient credit to continue its business for the foreseeable future,” held the U.S. Court of Appeals for the Second Circuit on June 15, 2016. In re Adelphia Communications Corp., 2016 WL3315847, *2 (2d Cir. June 15, 2016). Affirming the lower courts, the Second Circuit stressed that “the issue of adequate capitalization,” the “sole issue presented on appeal ...