The Supreme Court’s Decision:

(U.S. Sup. Ct. May 16, 2016)

On May 16, 2016 the United States Supreme Court issued an opinion regarding the meaning of “actual fraud” under the Bankruptcy Code. Husky Int’l Electronics, Inc. v. Ritz represents a win for creditors by making it easier to show that a debtor committed fraud. A showing of a more general fraud, as opposed to a specific false representation by the debtor, will suffice to prevent certain debts from being discharged in bankruptcy.

Background

In its recently issued decision in Husky International Electronics, Inc. v. Ritz, a 7-1 majority of the Supreme Court has clarified that intentionally fraudulent transfers designed to hinder or defraud creditors can fall within the definition of “actual fraud” under Section 523(a)(2)(A) of the Bankruptcy Code and can sometimes result in corresponding liabilities being non-dischargeable in a personal bankruptcy proceeding.¹

On May 16, 2016, the U.S. Supreme Court decided Husky International Electronics, Inc. v. Ritz, No. 15-145, holding that the "actual fraud" bar to discharge under section 523(a)(2)(A) of the Bankruptcy Code encompasses an individual debtor's knowing receipt of fraudulently transferred property.

Statutory Background

On May 16, 2016, the Supreme Court of the United States handed down its opinion in Husky International Electronics, Inc. v. Ritz, Case No. 15-145.

Husky Int’l Electronics, Inc. v. Ritz, No. 15-145

Debtors seek the protections of the Bankruptcy Code to have their debts discharged, but there are exceptions. A creditor can prohibit discharge of a debt “obtained by … actual fraud.” 11 U.S.C. § 523(a)(2)(A). Today, in a 7-1 decision written by Justice Sotomayor, the Supreme Court ruled that a fraudulent conveyance qualifies as “actual fraud.”

A Supreme Court ruling this week should give creditors a powerful tool to collect their debts from debtors who try to transfer assets before seeking bankruptcy protection. The primary reason an individual may turn to personal bankruptcy is to protect assets from creditor collection while obtaining a “discharge” from debts. Such protection is increasingly necessary where an individual is being pursued by one or more creditors, particularly where those creditors may have obtained (or are about to obtain) judgments against the individual.

In a favorable ruling to creditors and bankruptcy trustees, SCOTUS issued its ruling yesterday in Husky Int'l Elecs., Inc. v. Ritz (In re Ritz) addressing a circuit split on whether “actual fraud” requires a debtor in bankruptcy to have made a false representation. The 7-1 majority found that “actual fraud” under §523(a)(2)(A) of the Bankruptcy Code to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation.

TGIF, right?! Before kick starting your weekend — here’s what you need to know about the recent decision from the United States Court of Appeals for the Third Circuit in the chapter 11 cases of SemCrude L.P. and its debtor affiliates.

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