United States: Code May Include Fraudulent Transfers That Occur Without False Representations

On May 16, 2016, the United States Supreme Court in Husky International Electronics v. Ritz held that the phrase "actual fraud" under section 523(a)(2)(A) of the Bankruptcy Code may include fraudulent transfer schemes that were effectuated without a false representation.  Section 523(a)(2)(A) provides that an individual debtor will not be discharged from certain debts to the extent that those debts were obtained by false pretenses, false representations or actual fraud.  The Court's decision in Husky resolved a conflict in the interpretation of actual fraud under section 523(a)(2)(A) between the Fifth and Seventh Circuits.

Case Background

The case arose when Chrysalis Manufacturing Corp. ("Chrysalis") could not satisfy approximately $164,000 in debt that it owed to Husky International Electronics, Inc. ("Husky").  Husky later discovered that Daniel Lee Ritz, Jr. ("Ritz"), a director and thirty percent owner of Chrysalis, transferred large sums of money to other entities that he controlled for several years.

When Ritz filed for bankruptcy protection under chapter 7, Husky commenced an adversary proceeding in the bankruptcy court.  Husky sought a determination that Ritz was personally liable for Chrysalis' debt under a Texas law that allows creditors to pursue shareholders for unpaid corporate debt and that the debt owed to Husky was non-dischargeable under section 523(a)(2)(A).

Following a trial on the issues, the district court determined that Ritz was personally liable under the Texas statute, but because the debt was not obtained by conduct that constituted actual fraud under section 523(a)(2)(A) the debt was dischargeable.  The case was appealed to the United States Court of Appeals for the Fifth Circuit, which affirmed the district court.  The Fifth Circuit determined that while Ritz may have hindered the ability of the Husky to collect its debt, Ritz did not make false representations and thus did not commit actual fraud as required by section 523(a)(2)(A).

The Majority Opinion

In a seven member majority opinion written by Justice Sonia Sotomayor, the Supreme Court reversed and remanded the Fifth Circuit decision.  Justice Sotomayor began the analysis of the majority by noting that when Congress enacted the Bankruptcy Code in 1978, it added the phrase "actual fraud" to the types of conduct that were non-dischargeable under the Bankruptcy Act of 1898.  Justice Sotomayor noted that the majority presumes that by amending the types of non-dischargeable conduct, Congress did not intend actual fraud to be the same type of conduct as false representation.

The majority opinion also reviewed the historical common law interpretation of the phrase "actual fraud."  The majority noted that as far back as the English Parliament's enactment of the Statute of 13 Elizabeth in 1571, fraud did not require a misrepresentation and simply occurred when a person hid assets from creditors.  Further, the majority observed that previous Court precedent, dating back to the nineteenth century, interpreted the phrase as involving any type of conduct done with "wrongful intent."   Based on this historical legacy, the majority concluded that false representations are not a required element of actual fraud.

Justice Sotomayor next examined the Ritz's arguments against interpreting actual fraud to include fraudulent transfers under section 523(a)(2)(A).   First, Ritz argued that doing so would render duplicative two other subsections of section 523(a) that address debts arising from fraud in a fiduciary capacity and from willful and malicious conduct.  While the Court observed that some types of non-dischargeable conduct may overlap among the various subsections of section 523(a), adopting Ritz's view would eliminate the meaningful distinctions between those subsections.   The Court also rejected Ritz's argument that including fraudulent conveyances into the type of non-dischargeable conduct at issue would render section 727(a)(2) of the Bankruptcy Code redundant.  Again, the Court noted that while there may be some overlap, the two statutes are meaningfully different.  Section 727(a)(2) makes non-dischargeable all debt if, in the one year prior to a bankruptcy, the debtor transferred, removed, destroyed, mutilated, or concealed property with the intent to hinder, delay, or defraud a creditor.  Unlike section 727(a)(2), the majority noted, section 523(a)(2)(A) does not have a timing element and only renders certain debts non-dischargeable.

Further, the majority rejected Ritz's argument, which was adopted by Justice Clarence Thomas in his dissent, that fraudulent transfers are not included under actual fraud because the debts were not "obtained by . . . actual fraud" as required by the language in section 523(a)(2)(A).  The majority acknowledged that in fraudulent transfer schemes the transferor does not obtain debts; however, in certain "rare" instances a debt may be traceable to the fraudulent transfer and thus may be non-dischargeable.  The Court declined to consider whether Ritz obtained his debts by fraudulent transfer and instead remanded that issue to the Fifth Circuit for further determination.


The majority's view that actual fraud under section 523(a)(2)(A) may occur due to fraudulent transfers without misrepresentations is a limited one.  The majority recognized that the instances where the debt was "obtained by" actual fraud are rare and usual.  Until the lower courts determine whether the debt incurred by Ritz was "obtained by" fraudulent transfers, it is not clear whether the debt at issue is non-dischargeable.

It is significant, however, that the majority noted that "there is no need to adopt a definition for all times and all circumstances" with respect to what constitutes "actual fraud."  This statement leaves open the possibility that the Court may expand the definition in the future and thereby broaden the type of conduct that is not dischargeable in bankruptcy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Seminar, San Francisco, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series.

28 Sep 2018, Other, Los Angeles, United States

Leaders today don't just have to worry about nefarious cybercriminals getting "inside" their firewalls; there's an entire ecosystem of SAAS partners, third party vendors and suppliers, and all the hardware from switches to POS terminals that need to be monitored.

9 Oct 2018, Other, Los Angeles, United States

Sheppard, Mullin, Richter & Hampton LLP has opened for business in Dallas to proudly serve the Texas business community.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions