Husky Electronics v. Ritz

PETITIONER: Husky International Electronics, Inc.
RESPONDENT: Daniel Lee Ritz, Jr.
LOCATION: U.S. Bankruptcy Court, S.D. Texas, Houston Division

DOCKET NO.: 15-145
DECIDED BY: Roberts Court (2016- )
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 578 US (2016)
GRANTED: Nov 06, 2015
ARGUED: Mar 01, 2016
DECIDED: May 16, 2016

ADVOCATES:
Erin E. Murphy - for the respondent
Shay Dvoretzky - for the petitioner
Sarah E. Harrington - Assistant to the Solicitor General, for the United States as amicus curiae, for the petitioner

Facts of the case

Husky International Electronics, Inc. (Husky) sold and delivered electronic equipment to Chrysalis Manufacturing Corp. (Chrysalis), headed by Daniel Ritz. Chrysalis owed Husky $163,999.38 in purchases between 2003 and 2007. In 2007, Ritz started transferring funds from Chrysalis to various other ventures in which he owned stock. In 2009 Husky sued Ritz for payment of his outstanding debt, and Ritz then filed for Chapter 7 bankruptcy. In 2011, Husky filed a complaint against the discharge of Ritz’s debt and argued that Ritz had fraudulently moved funds from Chrysalis to other accounts in order to file for bankruptcy. The bankruptcy court found that Ritz had not fraudulently filed for bankruptcy and that it could not “pierce the veil” to go after Ritz’s personal finances for the debt Chrysalis owed.

Husky appealed to the district court, which affirmed the bankruptcy court’s determination and found that Ritz had not committed “actual fraud” by false representation and that Husky had not proven that Ritz acted “maliciously and willfully.” The United States Appeals Court for the Fifth Circuit affirmed the lower court’s decision to discharge Ritz’s debt.

Question

Is fraudulently transferring money to avoid repayment of a debt considered false representation under bankruptcy statute 11 U.S.C. §523(a)(2)(A) to prevent discharge of the debt?

Media for Husky Electronics v. Ritz

Audio Transcription for Oral Argument - March 01, 2016 in Husky Electronics v. Ritz

Audio Transcription for Opinion Announcement - May 16, 2016 in Husky Electronics v. Ritz

John G. Roberts, Jr.:

Justice Sotomayor has our opinion this morning in case 15-145, Husky International Electronics versus Ritz.

Sonia Sotomayor:

This case comes to us on a Writ of Certiorari to the Court of Appeals for the Fifth Circuit.

Respondent Daniel Lee Ritz, Jr. is the former director of Chrysalis Manufacturing Corp.

From 2006-2007, Chrysalis obtained but did not pay for nearly a $160,000 worth of electronic device components from petitioner Husky International Electronics.

During the same period, Ritz transferred large sums of money that could have been used to pay Husky away from Chrysalis to other companies Ritz control.

Husky sued Ritz in his personal capacity relying on a Texas Business Organizations Law that allows creditors to hold corporate officers responsible for certain corporate debts if the officer has committed fraud.

Husky then initiated an adversarial proceeding in Ritz's bankruptcy case when Ritz filed for Chapter 7 bankruptcy.

He there again argued that Ritz should be held responsible for Chrysalis' debt to Husky and further agreeing that Ritz should not be able to discharge that debt in his bankruptcy.

For the later proposition, Husky relied on §523(A)(2)(A) of the United States Bankruptcy Code which bars debtors from discharging any debt obtained by false pretenses, a false representation or actual fraud.

We granted certiorari to decide whether asset transfer schemes like those allegedly committed by Ritz can qualify as actual fraud under §523(A)(2)(A).

The Fifth Circuit held that they cannot.

It concluded that a necessary element of actual fraud is a false representation from the debtor to his creditor and it noted that asset transfer schemes intended to hinder the collection of debts do not entail such misrepresentations.

We now reverse.

Before 1978, the bankruptcy code made debt obtained by false pretenses or false representations non-dischargeable in bankruptcy.

In 1978, Congress amended the code to make debts obtained by actual fraud non-dischargeable as well.

When Congress amends a statute we presume that it intends the amendment to have real and substantial effect.

The Fifth Circuit failed to give effect to that amendment when it required actual fraud to involve a false representation.

If Congress sought to exempt from discharge only debts obtained by false representations, the pre-1978 language would have been sufficient to accomplish that objective and an amendment would not have been necessary.

That is a strong indication that when Congress added actual fraud to the code, it sought to encompass forms of fraud that did not involve false representations.

That indication is reinforced by the history of bankruptcy fraud.

This Court traditionally gives terms in the bankruptcy code their common-law meaning.

For over a 100 years we have recognized that at common-law the modifier actual is used to denote frauds that are committed with wrongful intent.

In short, anything that would otherwise count as fraud and is done with wrongful intent is actual fraud.

Trying to the kinds of deception that the common-law accounts as fraud it is clear that from the beginning of English bankruptcy, courts and legislators have understood asset transfers like those allegedly committed by Ritz; that is transfers that hinder the collection of debt to be acts of fraud even when they do not entail that kind of misrepresentation that the Fifth Circuit says actual fraud requires.

That such actions count as fraud was established as far back as 1571 in the Statute of 13 Elizabeth, one of the first British bankruptcy acts.

Under that statute when debtors transferred assets to family members or associates they committed fraud because they acted to prevent creditors from collecting assets to which they were rightly entitled.

We don't rely simply on the Statute of Elizabeth just because it is old.

That statute has had a wide and lasting impact on American law.

The Court noted in BFP versus Resolution Trust Corporation that the modern law of fraudulent transfers had its origins in the Statute of Elizabeth and Joseph Story observed in his commentaries on the law of equity that the Statute of Elizabeth has been universally adopted in America.

History thus strongly supports Husky's view that actual fraud encompasses forms of deception that seek to hinder the collection of debt in addition to those that seek to induce the extension of debt through false representations.