Contributed by Katherine Doorley
After a busy term last Spring that saw the United States Supreme Court issue decisions in Bank of America, N.A. v. Caulkett and Baker Botts v. ASARCO, the Supreme Court has continued its bankruptcy streak, granting the petition for a writ of certiorari in Husky International Electronics, Inc. v. Daniel Lee Ritz, Jr. to resolve a split between the United States Courts of Appeals for the First and Seventh Circuits and the United States Court of Appeals for the Fifth Circuit over whether the discharge exception in section 523(a)(2)(A) of the Bankruptcy Code for “actual fraud” only applies in situations where the debtor has made a false representation to creditors, or whether a more general fraud without a specific false representation is sufficient.
In brief, section 523(a)(2)(A) exempts from discharge “any debt . . . for money . . . obtained by . . . [i] false pretenses, [ii] a false representation, or [iii] actual fraud.” 11 U.S.C. § 523(a)(2)(A). Debts of this type pass through the bankruptcy and creditors continue to be able to seek and enforce judgments arising from those claims. The First and Seventh Circuits have held that this so-called “actual fraud” bar applies when an individual debtor has deliberately obtained money through a scheme actually intended to cheat creditors. The Fifth Circuit, however, held that as a matter of law there can be no “actual fraud” unless the debtor made a false representation to the creditor.
Petitioner, Husky International Electronics, Inc., asserts that the Fifth Circuit’s decision creates “a roadmap for a dishonest debtor to cheat creditors through deliberate fraudulent-transfer schemes, and then to escape liability through discharge in bankruptcy.” Husky urged the Supreme Court to hear this case to resolve the clear and acknowledged split between the First and Seventh Circuits and the Fifth Circuit. Husky further asserts that applying section 523(a)(2)(A) to deliberate fraudulent-transfer schemes serves the statutory purpose of barring discharge in cases of intentional wrongdoing. While the Respondent urged the Supreme Court not to take the case, asserting that the question at bar did not arise with sufficient frequency to warrant resolution by the Supreme Court, the Supreme Court granted the petition.
The Supreme Court has yet to schedule oral argument in this case, but we will continue to monitor this case and update our readers when the Supreme Court renders a decision.
Kate Doorley is an Associate at Weil Gotshal & Manges, LLP in New York.