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.
In In re Ritz, the debtor was the director of a company, Chrysalis Manufacturing Corp. The debtor caused Chrysalis to transfer assets to other entities owned by him which could have been used to pay down the creditors of Chrysalis. A creditor of Chrysalis filed an adversary proceeding against the debtor arguing the scheme was “actual fraud.” The lower court ruled that the director was personally liable under applicable state law, but under §523(a)(2)(A), his actions did not meet the “actual fraud” requirements and could be discharged in his bankruptcy and the Fifth Circuit confirmed. SCOTUS rejected the reasoning put forth by the Fifth Circuit finding that the broader interpretation of actual fraud was consistent with the longstanding common-law that “a conveyance which hinders, delays or defrauds creditors shall be void as against recipient unless that party received it in good faith and for consideration.”