Husky International Electronics, Inc. v. Ritz

Between 2003 and 2007, Husky International Electronics, Inc. (Husky) (creditor) sold products to Chrysalis Manufacturing Corporation (Chrysalis). Chrysalis owed Husky nearly $164,000. Daniel Ritz, Jr. (debtor) served as Chrysalis’s director and owned 30 percent of Chrysalis’s stock. Between 2006 and 2007, Ritz transferred large amounts of Chrysalis’s money to other Ritz-controlled entities instead of using that money to pay Husky and Chrysalis’s other creditors. In May 2009, Husky sued Ritz, asserting that Ritz was personally responsible for Chrysalis’s $164,000 debt. Husky alleged that Ritz’s money-transfer scheme constituted actual fraud, which allowed a creditor to hold a company’s shareholder responsible for the company’s debt under Texas law. In December 2009, Ritz filed for Chapter 7 bankruptcy. Husky brought an adversary proceeding to hold Ritz personally responsible for Chrysalis’s debt and asserted under 11 U.S.C. § 523(a)(2)(A) that the debt could not be discharged in bankruptcy because it was a debt obtained by actual fraud. The district court held that Ritz was personally liable for Chrysalis’s debt under Texas law, but the court also held that the debt had not been obtained by actual fraud for purposes of § 523(a)(2)(A) and thus was dischargeable. The Fifth Circuit affirmed, agreeing with the district court that Ritz had not committed actual fraud for purposes of § 523(a)(2)(A). The Fifth Circuit held that actual fraud requires a false representation from the debtor to the creditor and reasoned that Ritz had not made any false representations to Husky regarding the money transfers. Because other federal appellate courts disagreed regarding whether actual fraud requires a false representation, the United States Supreme Court granted certiorari to resolve the circuit split.