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By Diane Davis
May 19 — The U.S. Supreme Court's recent decision in Husky Int'l Elecs., Inc. v. Ritz is “narrow” and leaves “a lot of work for the U.S. Court of Appeals for the Fifth Circuit on remand,” according to bankruptcy scholars speaking May 18 at an American Bankruptcy Institute webinar.
In Husky Int'l Elecs., Inc. v. Ritz, U.S., No. 15-145, 5/16/16, Justice Sonia Sotomayor held in a 7–1 opinion that “actual fraud” includes fraudulent conveyance schemes even when those schemes don't involve a false representation (28 BBLR 629, 5/19/16).
The court applied a “common sense” approach to defining “actual fraud” in Bankruptcy Code Section 523(a)(2)(A), reversed the U.S. Court of Appeals for the Fifth Circuit's decision, and remanded the case. Justice Clarence Thomas dissented, concluding that “actual fraud” doesn't encompass fraudulent transfer schemes.
On remand, the Fifth Circuit will have to determine whether the “debt to Husky was ‘obtained by' Ritz' asset-transfer scheme,” the opinion states in footnote 3.
“This case is a lot like Stern v. Marshall, 2011 BL 165774, 131 S. Ct. 2594 (2011)(23 BBLR 817, 6/30/11), that creates a lot more problems than it solves,” webinar moderator and ABI Editor-at-Large Bill Rochelle said. In Stern, the Supreme Court held that even though Congress designated certain state law counterclaims as “core” proceedings, Article III of the U.S. Constitution prohibits bankruptcy courts from finally adjudicating those claims.
“The Supreme Court's opinion in Husky is very narrow,” Prof. Anthony Casey of the University of Chicago Law School, Chicago, said, but they “probably got it right.”
Casey, who researches and teaches on corporations, corporate bankruptcy and reorganization, finance, securities regulation, civil procedure, and law and economics, signed on to an amicus curiae brief in support of the petitioner Husky International Electronics, Inc.
The debtor/respondent Daniel Lee Ritz, Jr. “obtained assets by fraudulent transfer,” Casey said.
The majority focused on “what actual fraud means and said that it is the common law meaning — a broad concept,” Casey said. According to the court, there are some redundancies and overlap in the statute, but not redundancies that don't make sense, he said.
The court “left open” the question whether the debt to Husky was “obtained by” Ritz' fraudulent transfers, Casey said, but remanded the case for a determination. The Fifth Circuit will have “a lot of work to do on remand,” he said.
The majority decided the case on the most “narrow grounds” that it could, according to G. Eric Brunstad, partner at Dechert LLP, Hartford, Conn., and adjunct professor of law at Georgetown University Law Center, Washington, D.C. Brunstad has argued 10 cases before the Supreme Court and filed an amicus curiae brief in support of the respondent Ritz.
Ritz was the beneficiary of the transfers at most, he said. The Supreme Court “brushed aside” any discussion of beneficiaries and “decided the decision very narrowly,” he said.
Brunstad said he liked Thomas' dissent, which concluded that “[s]tatutory language must be read in context and a phrase gathers meaning from the words around it.”
The dissent was more “textual,” Casey said.
“You just can't take the term ‘actual fraud' in a vacuum,” Brunstad said, about Thomas' dissent, but you must “take the term in context with other words.”
There has to be fraud “at the inception of the debt,” Brunstad said, and there was no allegation of that in this case.
Thomas said that there was “bad conduct” here on the part of the debtor, but “not what Section 523(a)(2)(A) speaks to,” Brunstad said, and acknowledged that he agreed with that analysis “completely.”
In the absence of Justice Antonin Scalia on the bench, Thomas' dissent was the one “very loud voice,” Rochelle said.
The Supreme Court seems to be saying that “this is a bad guy,” Rochelle said, noting that the court seems to be going back and forth on whether the bankruptcy court is a court of equity.
It is a “unique situation,” Casey said. The debtor “orchestrated the transactions and they are in bankruptcy.”
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