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July 26, 2019

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Fraudulent Transfers and 11 U.S.C. §523(a)(2)(A) of the Bankruptcy Code's discharge exceptions.

 

The term 'fraudulent transfer' is a very important term to those of us practicing in the field of bankruptcy law.  For the attorney representing the Debtor, to the trustee, or to the creditor(s), it can take on a different meaning with a very significant outcome.   Under 11 U.S.C. §548 of the U.S. Bankruptcy Code, the trustee has what is known as 'avoidance powers' to essentially avoid any transfer of an interest in property of a Debtor that can be proved to have been fraudulently transferred per the elements of that code section within a look back period of 2 years from the filing of that bankruptcy case.

 

The Supreme Court rendered a slip opinion in the case of Husky International Electronics, Inc. v. Ritz 578 U.S. ______(2016)  that took the notion of 'fraudulent transfer' and added a wrinkle in the Bankruptcy Code's exceptions to discharge under 11 U.S.C. §523(a)(2)(A).  This decision also added a tool for the creditor to use in seeking to avoid the debtor's discharge of a debt owed to that creditor in an adversary proceeding.  

 

The Court reached this point by looking at the legal meaning of 'actual fraud' as stated in section 523(a)(2)(A), and resolved 'a split among the Circuits'.   See Page  1.   Now instead of only looking to the false representations that a debtor makes to a creditor to prove 'actual fraud', a creditor can now look to other forms of fraud including 'fraudulent transfers' to determine whether the debt can be excepted from discharge.   See Page 3

 

By looking to the common law meaning of the term 'actual fraud' to search for the 'elements that the common law has defined them to include',  the Court stated that 'anything that counts as "fraud" and is done with wrongful intent is actual fraud'.  See page 4.   Declining to 'define more precisely the term fraud, the Court reasoned that 'fraudulent transfers' has a significant place in the English bankruptcy history in that the term 'fraud' was also used 'to describe a debtor's transfer of assets that . . . impairs a creditor's ability to collect the debt'.  See pages 4-5.  Thus. clarifying 'that the common-law term "actual fraud" is broad enough to incorporate a fraudulent conveyance'.  See page 5.

 

More importantly the Court reasoned, that under common-law, a fraudulent transfer never required a false representation from the debtor to induce the creditor to provide credit,  because it was 'typically' used as a way for a debtor to conceal his assets to hinder the creditor's attempts to collect on the debt as opposed to inducement.  See page 5-6.   Therefore, the Court held that a false representation is not 'a required element of actual fraud'.  See page 6. 

 

As a consumer bankruptcy attorney, this decision is significant,.  Understand your state's fraudulent transfer laws and the statue of limitations.   When conducting a client intake, it's always imperative that you leave no stone unturned.  If the facts indicate otherwise, advise your client to file a chapter 13 and give special unsecured treatment to the debt, if its your opinion the debt would be deemed non-dischargeable in an adversary proceeding.   In this way, you serve your client well, in that you save the client the emotional and monetary cost of litigation by avoiding the sure no-win outcome of an adversary proceeding.  

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