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SUPREME COURT OF THE UNITED STATES
_________________
No. 15–145
_________________
HUSKY INTERNATIONAL ELECTRONICS, INC.,
PETITIONER
v. DANIEL LEE RITZ, Jr.
on writ of certiorari to the united states
court of appeals for the fifth circuit
[May 16, 2016]
Justice Sotomayor delivered the opinion of the
Court.
The Bankruptcy Code prohibits debtors from
discharging debts “obtained by . . . false pretenses, a
false representation, or actual fraud.” 11 U. S. C.
§523(a)(2)(A). 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. That ruling deepened an
existing split among the Circuits over whether “actual fraud”
requires a false representation or whether it encompasses other
traditional forms of fraud that can be accomplished without a false
representation, such as a fraudulent conveyance of property made to
evade payment to creditors. We granted certiorari to resolve that
split and now reverse.
I
Husky International Electronics, Inc., is a
Colorado-based supplier of components used in electronic devices.
Between 2003 and 2007, Husky sold its products to Chrysalis
Manufacturing Corp., and Chrysalis incurred a debt to Husky of
$163,999.38. During the same period, respondent Daniel Lee Ritz,
Jr., served as a director of Chrysalis and owned at least 30% of
Chrysalis’ common stock.
All parties agree that between 2006 and 2007,
Ritz drained Chrysalis of assets it could have used to pay its
debts to creditors like Husky by transferring large sums of
Chrysalis’ funds to other entities Ritz controlled. For
instance—and Ritz’ actions were by no means limited to these
examples—Ritz transferred $52,600 to CapNet Risk Management, Inc.,
a company he owned in full; $121,831 to CapNet Securities Corp., a
company in which he owned an 85% interest; and $99,386.90 to
Dynalyst Manufacturing Corp., a company in which he owned a 25%
interest.
In May 2009, Husky filed a lawsuit against Ritz
seek-ing to hold him personally responsible for Chrysalis’
$163,999.38 debt. Husky argued that Ritz’ intercompany-transfer
scheme was “actual fraud” for purposes of a Texas law that allows
creditors to hold shareholders responsible for corporate debt. See
Tex. Bus. Orgs. Code Ann. §21.223(b) (West 2012). In December 2009,
Ritz filed for Chapter 7 bankruptcy in the United States Bankruptcy
Court for the Southern District of Texas. Husky then initiated an
adversarial proceeding in Ritz’ bankruptcy case again seeking to
hold Ritz personally liable for Chrysalis’ debt. Husky also
contended that Ritz could not discharge that debt in bankruptcy
because the same intercompany-transfer scheme constituted “actual
fraud” under 11 U. S. C. §523(a)(2)(A)’s exemption to
discharge.[
1]
The District Court held that Ritz 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. It did not address
whether Ritz was responsible for Chrysalis’ debt under Texas law
because it agreed with the District Court that Ritz did not commit
“actual fraud” under §523(a)(2)(A). Before the Fifth Circuit, Husky
argued that Ritz’ asset-transfer scheme was effectuated through a
series of fraudulent conveyances—or transfers intended to obstruct
the collection of debt. And, Husky said, such transfers are a
recognizable form of “actual fraud.” The Fifth Circuit dis-agreed,
holding 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.
In re Ritz, 787 F. 3d 312,
316 (2015). In transferring Chrysalis’ assets, Ritz may have
hindered Husky’s ability to recover its debt, but the Fifth Circuit
found that he did not make any false representations to Husky
regarding those assets or the transfers and therefore did not
commit “actual fraud.”
We reverse. The term “actual fraud” in
§523(a)(2)(A) encompasses forms of fraud, like fraudulent
conveyance schemes, that can be effected without a false
representation.
II
A
Before 1978, the Bankruptcy Code prohibited
debtors from discharging debts obtained by “false pretenses or
false representations.” §35(a)(2) (1976 ed.). In the Bankruptcy
Reform Act of 1978, Congress added “actual fraud” to that list.
92Stat. 2590. The prohibition now reads: “A discharge under
[Chapters 7, 11, 12, or 13] of this title does not discharge an
individual debtor from 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.” §523(a)(2)(A) (2012
ed.).
When “ ‘Congress acts to amend a statute,
we presume it intends its amendment to have real and substantial
effect.’ ”
United States v.
Quality Stores,
Inc., 572 U. S. ___, ___ (2014) (slip op., at 7). It is
therefore sensible to start with the presumption that Congress did
not intend “actual fraud” to mean the same thing as “a false
representation,” as the Fifth Circuit’s holding suggests. But the
historical meaning of “actual fraud” provides even stronger
evidence that the phrase has long encompassed the kind of conduct
alleged to have occurred here: a transfer scheme designed to hinder
the collection of debt.
This Court has historically construed the terms
in §523(a)(2)(A) to contain the “elements that the common law has
defined them to include.”
Field v.
Mans, 516
U. S. 59, 69 (1995) . “Actual fraud” has two parts: actual and
fraud. The word “actual” has a simple meaning in the context of
common-law fraud: It denotes any fraud that “involv[es] moral
turpitude or intentional wrong.”
Neal v.
Clark, 95
U. S. 704, 709 (1878) . “Actual” fraud stands in contrast to
“implied” fraud or fraud “in law,” which describe acts of deception
that “may exist without the imputation of bad faith or immorality.”
Ibid. Thus, anything that counts as “fraud” and is done with
wrongful intent is “actual fraud.”
Although “fraud” connotes deception or trickery
gener-ally, the term is difficult to define more precisely. See 1
J. Story, Commentaries on Equity Jurisprudence §189, p. 221 (6th
ed. 1853) (Story) (“Fraud . . . being so various in its
nature, and so extensive in its application to human concerns, it
would be difficult to enumerate all the instances in which Courts
of Equity will grant relief under this head”). There is no need to
adopt a definition for all times and all circumstances here
because, from the beginning of English bankruptcy practice, courts
and legislatures have used the term “fraud” to describe a debtor’s
transfer of assets that, like Ritz’ scheme, impairs a creditor’s
ability to collect the debt.
One of the first bankruptcy acts, the Statute of
13 Elizabeth, has long been relied upon as a restatement of the law
of so-called fraudulent conveyances (also known as “fraudulent
transfers” or “fraudulent alienations”). See generally G. Glenn,
The Law of Fraudulent Conveyances 89–92 (1931). That statute, also
called the Fraudulent Conveyances Act of 1571, identified as fraud
“faigned covenous and fraudulent Feoffmentes Gyftes Grauntes
Alienations [and] Conveyaunces” made with “Intent to delaye hynder
or defraude Creditors.” 13 Eliz. ch. 5. In modern terms, Parliament
made it fraudulent to hide assets from creditors by giving them to
one’s family, friends, or associates. The principles of the Statute
of 13 Elizabeth—and even some of its language—continue to be in
wide use today. See
BFP v.
Resolution Trust
Corporation, 511 U. S. 531, 540 (1994) (“The modern law of
fraudulent transfers had its origin in the Statute of 13
Elizabeth”);
id., at 541 (“Every American bankruptcy law has
incorporated a fraudulent transfer provision”); Story §353, at 393
(“[T]he statute of 13 Elizabeth . . . has been
universally adopted in America, as the basis of our jurisprudence
on the same subject”);
Boston Trading Group, Inc. v.
Burnazos, 835 F. 2d 1504, 1505–1506 (CA1 1987) (Breyer,
J.) (“Mass. Gen. Laws ch. 109A, §§1–13 . . . is a uniform
state law that codifies both common and statutory law stretching
back at least to 1571 and the Statute of Elizabeth”). The degree to
which this statute remains embedded in laws related to fraud today
clarifies that thecommon-law term “actual fraud” is broad enough
toincorporate a fraudulent conveyance.
Equally important, the common law also indicates
that fraudulent conveyances, although a “fraud,” do not require a
misrepresentation from a debtor to a creditor. As a basic point,
fraudulent conveyances are not an inducement-based fraud.
Fraudulent conveyances typically involve “a transfer to a close
relative, a secret transfer, a transfer of title without transfer
of possession, or grossly inadequate consideration.”
BFP,
511 U. S., at 540–541 (citing
Twyne’s Case, 3 Co. Rep.
80b, 76 Eng. Rep. 809 (K. B. 1601)); O. Bump, Fraudulent
Conveyances: A Treatise Upon Conveyances Made by Debtors To Defraud
Creditors 31–60 (3d ed. 1882)). In such cases, the fraudulent
conduct is not in dishonestly inducing a creditor to extend a debt.
It is in the acts of concealment and hindrance. In the
fraudulent-conveyance context, therefore, the opportunities for a
false representation from the debtor to the creditor are limited.
The debtor may have the opportunity to put forward a false
representation if the creditor inquires into the whereabouts of the
debtor’s assets, but that could hardly be considered a defining
feature of this kind of fraud.
Relatedly, under the Statute of 13 Elizabeth and
the laws that followed, both the debtor and the recipient of the
conveyed assets were liable for fraud even though the recipient of
a fraudulent conveyance of course made no representation, true or
false, to the debtor’s creditor. The famous
Twyne’s Case,
which this Court relied upon in
BFP, illustrates this point.
See
Twyne’s Case, 76 Eng. Rep., at 823 (convicting Twyne of
fraud under the Statute of 13 Elizabeth, even though he was the
recipient of a debtor’s conveyance). That principle underlies the
now-common understanding that a “conveyance which hinders, delays
or defrauds creditors shall be void as against [the recipient]
unless . . . th[at] party . . . received it in
good faith and for consideration.” Glenn, Law of Fraudulent
Conveyances §233, at 312. That principle also underscores the point
that a false representation has never been a required element of
“actual fraud,” and we decline to adopt it as one today.
B
Ritz concedes that fraudulent conveyances are
a formof “actual fraud,”[
2] but
contends that 11 U. S. C. §523(a)(2)(A)’s particular use
of the phrase means something else. Ritz’ strained reading of the
provision finds little support.
First, Ritz contends that interpreting “actual
fraud” in §523(a)(2)(A) to encompass fraudulent conveyances would
render duplicative two other exceptions to discharge in §523.
Section 523(a)(4) exempts from discharge “any debt . . .
for fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny.” And §523(a)(6) exempts “any debt
. . . for willful and malicious injury by the debtor to
another entity or to the property of another entity.”
Ritz makes the unremarkable point that the
traditional definition of “actual fraud” will cover some of the
same conduct as those exceptions: for example, a trustee who
fraudulently conveys away his trust’s assets. But Ritz’
interpretation does not avoid duplication, nor does our
interpretation fail to preserve a meaningful difference between
§523(a)(2)(A) and §§523(a)(4), (6). Just as a fiduciary who engages
in a fraudulent conveyance may find his debt exempted from
discharge under either §523(a)(2)(A) or §523(a)(4), so too would a
fiduciary who engages in one of the fraudulent misrepresentations
that form the core of Ritz’ preferred interpretation of
§523(a)(2)(A). The same is true for §523(a)(6). The debtors who
commit fraudulent conveyances
and the debtors who make false
representations under §523(a)(2)(A) could likewise also inflict
“willful and malicious injury” under §523(a)(6). There is, in
short, overlap, but that overlap appears inevitable.
And, of course, our interpretation of “actual
fraud” in §523(a)(2)(A) also preserves meaningful distinctions
between that provision and §§523(a)(4), (a)(6). Section 523(a)(4),
for instance, covers only debts for fraud while acting as a
fiduciary, whereas §523(a)(2)(A) has no similar limitation. Nothing
in our interpretation alters that distinction. And §523(a)(6)
covers debts “for willful and malicious injury,” whether or not
that injury is the result of fraud, see
Kawaauhau v.
Geiger, 523 U. S. 57, 61 (1998) (discussing injuries
resulting from “ ‘intentional torts’ ”), whereas
§523(a)(2)(A) covers only fraudulent acts. Nothing in our
interpretation alters that distinction either. Thus, given the
clear differences between these provisions, we see no reason to
craft an artificial definition of “actual fraud” merely to avoid
narrow redundancies in §523 that appear unavoidable.
Ritz also says that our interpretation creates
redun-dancy with a separate section of the Bankruptcy Code,
§727(a)(2), which prevents a debtor from discharging all of his
debts if, within the year preceding the bankruptcy petition, he
“transferred, removed, destroyed, mutilated, or concealed” property
“with intent to hinder, delay, or defraud a creditor or an officer
of the estate charged with custody of property.” Although the two
provisions could cover some of the same conduct, they are
meaningfully different. Section 727(a)(2) is broader than
§523(a)(2)(A) in scope—preventing an offending debtor from
discharging all debt in bankruptcy. But it is narrower than
§523(a)(2)(A) in timing—applying only if the debtor fraudulently
conveys assets in the year preceding the bank-ruptcy filing. In
short, while §727(a)(2) is a blunt remedy for actions that hinder
the entire bankruptcy process, §523(a)(2)(A) is a tailored remedy
for behavior connected to specific debts.
Ritz’ next point of resistance rests on
§523(a)(2)(A)’s requirement that the relevant debt be “for money,
prop-erty, services, or . . . credit . . .
obtained by . . . actual fraud.” (Emphasis added.)
The argument, which the dissent also emphasizes, has two parts:
First, it posits that fraudulent conveyances (unlike other forms of
actual fraud) cannot be used to “obtai[n]” debt because they
function instead to hide valuables that a debtor already possesses.
Brief for Respondent 20, 31. There is, the dissent says, no debt at
the end of a fraudulent conveyance that could be said to
“ ‘resul[t] from’ ” or be “ ‘traceable to’ ”
the fraud.
Post, at 3 (quoting
Field, 516 U. S.,
at 61, 64). Second, it urges that “actual fraud” not be interpreted
to encompass forms of fraud that are incompatible with the
provision’s “obtained by” requirement.
It is of course true that the transferor does
not “obtai[n]” debts in a fraudulent conveyance. But the recipient
of the transfer—who, with the requisite intent, also commits
fraud—can “obtai[n]” assets “by” his or her participation in the
fraud. See,
e.g.,
McClellan v
. Cantrell, 217
F. 3d 890 (CA 7 2000); see also
supra, at 6. If that
recipient later files for bankruptcy, any debts “traceable to” the
fraudulent conveyance, see
Field, 516 U. S., at 61;
post, at 3, will be nondischargable under §523(a)(2)(A).
Thus, at least sometimes a debt “obtained by” a fraudulent
conveyance scheme could be nondischargeable under §523(a)(2)(A).
Such circumstances may be rare because a person who receives
fraudulently conveyed assets is not necessarily (or even likely to
be) a debtor on the verge of bankruptcy,[
3] but they make clear that fraudulent conveyances are
not wholly incompatible with the “obtained by” requirement.
The dissent presses further still, contending
that the phrase “obtained by . . . actual fraud” requires
not only that the relevant debts “resul[t] from” or be “traceable
to” fraud but also that they “result from fraud
at the inception
of a credit transaction.”
Post, at 3 (emphasis added).
Nothing in the text of §523(a)(2)(A) supports that additional
requirement. The dissent bases its conclusion on this Court’s
opinion in
Field, in which the Court noted that certain
forms of bankruptcy fraud require a degreeof direct reliance by a
creditor on an action taken by a debtor. But
Field discussed
such “reliance” only in setting forth the requirements of the form
of fraud alleged in that case—namely, fraud perpetrated through a
misrepresentation to a creditor. See 516 U. S., at 61. The
Court was not establishing a “reliance” requirement for frauds that
are not premised on such a misrepresentation.
Finally, Ritz argues that Congress added the
phrase “actual fraud” to §523(a)(2)(A) not to expand the
exception’s reach, but to restrict it. In Ritz’ view, “actual
fraud” was inserted as the last item in a disjunctive list—“false
pretenses, a false representation,
or actual fraud”—in order
to make clear that the “false pretenses” and “false
representation[s]” covered by the provision needed to be
intentional. Brief for Respondent 29–31. Ritz asks us, in other
words, to ignore what he believes is Congress’ “imprudent use of
the word ‘or,’ ”
id., at 32, and read the final item in
the list to modify and limit the others. In essence, he asks us to
change the word “or” to “by.” That is an argument that defeats
itself. We can think of no other example, nor could petitioner
point to any at oral argument, in which this Court has attempted
such an unusual statutory modification.
* * *
Because we must give the phrase “actual fraud”
in §523(a)(2)(A) the meaning it has long held, we interpret “actual
fraud” to encompass fraudulent conveyance schemes, even when those
schemes do not involve a false representation. We therefore reverse
the judgment of the Fifth Circuit and remand the case for further
proceedings consistent with this opinion.
So ordered.