Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...
Nov. 6 — The U.S. Supreme Court agreed to hear its first bankruptcy case of the October 2015 term and will decide whether or not “actual fraud” under the Bankruptcy Code requires a false representation.
The appeal comes out of the Fifth Circuit, where the circuit court held that barring the discharge of a debt for “actual fraud” requires a false representation by the debtor.
This ruling was at odds with a Seventh Circuit case from 2000 which held that fraudulent conduct can be enough to constitute “actual fraud” even if no false representation is made. Shortly after the Fifth Circuit's decision, the First Circuit also weighed in on this issue and adopted the Seventh Circuit's approach.
The debtor in this case transferred a substantial amount of funds from a manufacturing company to several other entities that he controlled for less than “reasonably equivalent value.” Creditor Husky International Electronics, Inc. sued to have the debt it was owed declared non-dischargeable.
Husky argued that its debt was non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code, which excepts debts from discharge for “false pretenses, a false representation, or actual fraud.” Husky argued that a misrepresentation wasn't necessary to trigger “actual fraud,” relying on McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000).
But the Fifth Circuit held that Husky's approach would conflict with Field v. Mans, 516 U.S. 59 (1995), which addressed the level of reliance a creditor must demonstrate to satisfy Section 523(a)(2)(A).
“Although not directly addressing the issue, the [Supreme Court] throughout its opinion in Field appeared to assume that a false representation is necessary to establish ‘actual fraud,'” the Fifth Circuit said. “.... Moreover, at bottom, the [c]ourt in Field made clear that the meaning of ‘actual fraud' depends on the 1978 common law meaning of the term. Husky has pointed to no authority, and we are not aware of any, suggesting that the common law meaning of ‘actual fraud' at that time encompassed fraudulent transfers of the type at issue here.”
The Fifth Circuit added that a different section of the Bankruptcy Code, Section 727(a)(2), covers fraudulent transfers and the court said that it would be “odd, at the very least, for Congress to have intended that the ‘actual fraud' provision cover fraudulent transfers, when there is another provision directly addressing such transfers.” Husky didn't raise the fraudulent transfer provision in the lower courts.
Less than two months after the Fifth Circuit handed down its decision, the First Circuit addressed the same issue but ended up siding with the Seventh Circuit's approach.
The First Circuit found that the “common law concept of fraud” requires looking “beyond fraudulent misrepresentation to at least include fraudulent conveyances.” The court concluded that “actual fraud” includes fraudulent transfers intended to hinder creditors.
Husky is being represented by Shay Dvoretzky of Jones Day, Washington.
The debtor is being represented by Erin E. Murphy of Bancroft PLLC, Washington.
To contact the reporter on this story: Stephanie Cumings in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at mailto:%email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)