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Supreme Court: concealment sufficient for bankruptcy fraud

[JURIST] The US Supreme Court [official website] ruled [opinion, PDF] Monday in Husky International Electronics, Inc. v. Ritz [SCOTUSblog materials] that "actual fraud," as it relates to the discharge of debt under the bankruptcy code, may be committed by purposeful concealment and does not require overt misrepresentation. Overturning a ruling [opinion, PDF] by the US Court of Appeals for the Fifth Circuit [official website], the court held that Daniel Lee Ritz, Jr. committed sufficient actual fraud when he transferred assets from a debt-encumbered business to other incorporations before filing for bankruptcy. By doing so, Ritz prevented Husky International Electronics, Inc. from being repaid on the nearly $164,000 debt he owed, prompting Husky to file suit invoking Section 523(a)(2)(A) [text] of the Bankruptcy Code. This section prohibits a debtor from discharging "any debt... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud," a bar the Supreme Court found satisfied by Ritz's concealment.

The case arose [Oyez summary] after Husky sold electronic equipment to Chrysalis Manufacturing Corp, which is headed by Ritz. Chrysalis owed Husky $163,999.38. In 2007 Ritz began transferring funds from Chrysalis to other accounts and ventures in which he owned stock. In 2009 Husky sued Ritz for the outstanding debt, and Ritz subsequently filed for bankruptcy. In 2011 Husky filed a complaint alleging that Ritz had fraudulently moved funds from Chrysalis to other accounts and ventures in order to be able to file for bankruptcy. The US District Court for the Southern District of Texas ruled in Ritz's favor on the issue of "actual fraud," and the Fifth Circuit affirmed. The Supreme Court granted certiorari [petition, PDF] in November, 2015, and heard argument [JURIST report] in March.

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