Husky Int’l Electronics, Inc. v. Ritz

"'Actual fraud' encompasses other traditional forms of fraud and can be accomplished without a false representation, such as a fraudulent conveyance of property made to evade payment to creditors."

Respondent was the director of a corporation that indebted itself to Petitioner, a supplier of electronic device components. In a transfer scheme, Respondent drained the corporation of assets, which could have been used to pay off the debt. Respondent filed for bankruptcy in the United States Bankruptcy Court for the Southern District Court of Texas. Petitioner then filed a claim in that court holding Respondent personally liable for its loss and arguing that Respondent could not discharge his debt because it constituted “actual fraud.” The District Court disagreed and held that because the debt was not obtained by actual fraud, the debt could be discharged in Respondent’s bankruptcy. The U.S. Court of Appeals for the Fifth Circuit affirmed the district court holding that a necessary element for “actual fraud” is an actual misrepresentation between the debtor and the creditor. The Court holds that “actual fraud” may be broadly construed to encompass those forms of fraud that do not require misrepresentation. The Court determined that because fraud has always been defined broadly to include fraudulent conveyances, which encompass those forms of fraud that lack the requirement of false or misrepresentation by the debtor, the term should remain that way because it would conform to legislative intent. REVERSED AND REMANDED.