Husky Int’l Electronics, Inc. v. Ritz, 578 U.S. ___ (2016)


Issues:

Intro

Contents

NOTE:?Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.See United States v. Detroit Timber & Lumber Co., 200 U.?S. 321 .

SUPREME COURT OF THE UNITED STATES

HUSKY INTERNATIONAL ELECTRONICS, INC. v. RITZ

certiorari to the united states court of appeals for the fifth circuit

No. 15?145.?Argued March 1, 2016?Decided May 16, 2016

Syllabus

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).

The 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 Chrysalis? assets.

Held:?The 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.

(a)?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. ___, ___. 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 . 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.

One 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 , 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.

(b)?Interpreting ?actual fraud? in ?523(a)(2)(A) to encompass fraudulent conveyances would not, as Ritz 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.

Sotomayor, 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.