Husky International Electronics, Inc. v. Ritz

136 S.Ct. 1581 (2016)


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.