One of the goals of the Bankruptcy Code is to provide a debtor with a fresh start. The discharge of prepetition debts at the conclusion of a bankruptcy case is one of the most important ways to attain this fresh start. On May 16, 2016, the Supreme Court made it harder for debtors to obtain a fresh start by broadening an exception to discharge.
On May 16, 2016, the United States Supreme Court decided the term “actual fraud” in Bankruptcy Code § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation by a debtor. Importantly, the Husky International Electronics, Inc. v. Ritz, No. 15-145, 2016 WL 2842452 (U.S. May 16, 2016) opinion clears up a split among the lower courts on the question of whether the phrase “actual fraud” requires a false representation to be made to a creditor.
An individual files a bankruptcy case to have his debts forgiven, or “discharged.” Where that individual is a principal shareholder or officer of a corporate borrower who has guaranteed payment of his company’s loans, those debts can be substantial. An individual guarantor in that dire situation may try to hide assets – his own or those of his company – and then file a bankruptcy case, in an effort to defeat a lender’s right to be repaid.
Last week, the U.S. Supreme Court in Husky International Electronics, Inc. v. Ritz held a chapter 7 debtor accountable for “actual fraud” despite the absence of a specific fraudulent misrepresentation. The Court’s expansive reading of section 523(a)(2)(A) of the Bankruptcy Code gives creditors a new weapon in their fight to attack the discharge of their debts.
In Husky Int’l Electronics, Inc. v. Ritz, No. 15-145 (U.S. May 16, 2016), a 7-1 majority of the Supreme Court held that a fraudulent conveyance scheme comported with the requirements of “actual fraud” to create a potential new debt dischargeability exception pursuant to section 523(a)(2)(A) of the Bankruptcy Code.
The Supreme Court’s Decision:
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.