Supreme Court Reverses Fifth Circuit and S.D. Texas Court’s Interpretation of “Actual Fraud”

“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.”

On appeal, this court did not address the state law issue but agreed with the district court’s conclusion that Husky could not succeed on its objection under § 523(a)(2)(A) because that provision requires that the debtor make a misrepresentation.

The Supreme Court reversed, holding that no misrepresentation was required to object successfully to a discharge under § 523(a)(2)(A).

We are therefore required to consider the issue that we pretermitted on Husky’s appeal to this court: whether Ritz owes a debt to Husky under Texas law.

VI. CONCLUSION

During trial, the Debtor once stated that “you begin your entrepreneurial career with your dreams in full bloom and your integrity intact. Be sure that you finish you career with your dreams realized and your integrity still intact.”

[Feb. 2, 2011 Tr. 73:22–74:4].

The Debtor further testified that he still lived his professional business life by this motto.

[Id. at 74:7–8].

The Debtor’s actions here are wholly inconsistent with his highly cherished “integrity”—indeed, he will be finishing this part of his life with little integrity at all.

The Debtor lost his integrity when he utilized Chrysalis as an entity to funnel money away from its creditors, such as Husky.

He will now bear the consequences of his actions. Because the Debtor committed actual fraud for his personal benefit when he made the transfers of $1,161,279.90 from Chrysalis to the Debtor–Controlled Entities, the Debtor became personally liable to Husky by virtue of the Texas veil-piercing statute, i.e., § 21.223(b).

And, because the Debtor’s personal obligation to Husky is non-dischargeable under § 523(a)(2)(A), he is now liable for the following non-dischargeable amounts:

(1) $163,999.38;

(2) pre-judgment interest on the $163,999.38 Debt, which totals $57,766.62;

(3) post-judgment interest of 1.05% per annum on the amount of $221,766.00 (representing the sum of $163,999.38 plus the pre-judgment interest amount of $57,766.62);

(4) reasonable attorneys’ fees incurred by Husky (with the specific amount to be subsequently determined);

and

(5) post-judgment interest of 1.05% per annum on the amount of the reasonable attorneys’ fees incurred by Husky.

A judgment consistent with this Memorandum Opinion will be entered on the docket as soon as this Court makes a determination regarding the amount of reasonable attorneys’ fees to be awarded to Husky.