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.
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.
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.
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.
Facts
The respondents applied to set aside an order permitting the liquidators to serve the ‘Main Application’ on the respondents out of the jurisdiction (‘Set Aside Application’). Grounds of the application were: (i) the liquidators could not establish a serious issue to be tried/ reasonable prospect of success on the Main Application; and (ii) the initial without notice application had been procured by misrepresentation and/or material non-disclosure.