Husky International Electronics, Inc. v. Ritz

136 S.Ct. 1581 (2016)

Facts

Husky (P) is a supplier of components used in electronic devices. P sold its products to Chrysalis Manufacturing Corp. and the company incurred a debt of $163,999.38. Ritz (D) served as a director of Chrysalis and owned at least 30% of its common stock. D drained Chrysalis of assets it could have used to pay its debts to creditors by transferring large sums of Chrysalis’ funds to other entities D controlled. A few examples resulted in $52,600 to CapNet Risk Management, Inc., a company D owned in full; $121,831 to CapNet Securities Corp., a company in which D owned an 85% interest; and $99,386.90 to Dynalyst Manufacturing Corp., a company in which D owned a 25% interest. P filed a lawsuit against D seeking to hold him personally responsible for the $163,999.38 debt. P claimed the transfers were “actual fraud” for purposes of a Texas law that allows creditors to hold shareholders responsible for corporate debt. D filed for Chapter 7 and P initiated an adversarial proceeding seeking to hold D personally liable. The court held that D was personally liable for the debt under Texas law, but that the debt was not “obtained by . . . actual fraud” under §523(a)(2)(A) and could be discharged in his bankruptcy. The Fifth Circuit affirmed. The Fifth Circuit held that a necessary element of “actual fraud” is a misrepresentation from the debtor to the creditor, as when a person applying for credit adds an extra zero to her income or falsifies her employment history. The Fifth Circuit held that a debt is “obtained by . . . actual fraud” only if the debtor’s fraud involves a false representation to a creditor. The Supreme Court granted certiorari.