Alexandria, Va. — A recent Supreme Court ruling on what constitutes “actual fraud” could lead to an influx of adversary proceedings in bankruptcy cases, according to an article in the July ABI Journal. The Supreme Court ruled on May 16 in Husky International Electronics, Inc. v. Ritz, No. 15-145, that the term “actual fraud” in § 523(a)(2)(A) encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. “Creditors will quickly respond to the Supreme Court's expansive reading of §523(a)(2)(A), and it will be up to the bankruptcy courts (absent further decisions from the courts of appeals) to respond to the increased use of the exception to discharge,” Bankruptcy Judge Deborah L. Thorne (N.D. Ill.; Chicago) and Brett Newman write in their article “What’s Next After Husky v. Ritz: Has Pandora’s Box Been Opened?”

While the Court’s ruling in Husky answers the question of whether "actual fraud" requires a misrepresentation, several other questions are left in Husky's wake, according to Judge Thorne and Newman. Some of these issues may be particularly troublesome for bankruptcy courts. “The Supreme Court's decision was a narrow one, limited to the finding that ‘actual fraud’ under § 523(a)(2)(A) does not require a misrepresentation,” they write. “The question of whether the debt owed to Husky was ‘obtained by’ Ritz's transfer scheme remains open.”

The Court’s ruling stopped short of determining whether Ritz's debt was "obtained by" the transfer scheme. “This might not stop creditors, however, from latching onto what appears to be the majority's dicta when trying to satisfy the ‘obtained by’ requirement,” Judge Thorne and Newman write.

“Bankruptcy courts will need to examine whether the nexus between the debtor and the offended creditor is sufficient to support a § 523(a)(2)(A) action,” according to Judge Thorne and Newman. “Despite the Court answering the question that ‘actual fraud’ in § 523(a)(2)(A) does not require a misrepresentation, the ‘obtained by’ issue is likely to leave lower courts split on what to do with Husky-type cases.”

To obtain a copy of “What’s Next After Husky v. Ritz: Has Pandora’s Box Been Opened?” from the August edition of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at 703-894-5935 or [email protected].

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