Husky International Electronics, Inc. v. Ritz, Jr. (In the Matter of Ritz, Jr.)

Citation:
IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 14-20526
Tag(s):
Ruling:
Following the Supreme Court decision in Husky International Electronics Inc. v. Ritz, the Fifth Circuit made a so-called Erie guess by holding that a transfer made with actual intent to defraud under the Texas Uniform Fraudulent Transfer Act satisfies the actual fraud requirement for piercing the corporate veil under state law. The opinion also stands for the proposition that an appellate court cannot take facts found by the trial court to draw an inference that the trial court did not actually make. VACATED the judgment of the district court, and REMANDED the case to Bankruptcy Court for further proceedings consistent with this opinion and the opinion of the Supreme Court.
Procedural context:
On appeal, the district court affirmed the judgment of the bankruptcy court but for different reasons than those given by the bankruptcy court. Specifically, the district court disagreed with the bankruptcy court that Husky could not pierce the corporate veil under Texas law to hold Ritz responsible for Chrysalis’s debt. Although the bankruptcy court held that actual fraud under Texas law required a misrepresentation, the district court disagreed based on both Texas and Fifth Circuit caselaw that held that a plaintiff was able to pierce the corporate veil absent any misrepresentation. The district court explained that a plaintiff may pierce the corporate veil, despite the absence of a misrepresentation, if a plaintiff can prove that the defendant committed “actual fraud” under TUFTA. The district court then, noting the factual findings of the bankruptcy court, explained that the Ritz’s transfers “met the requirements for fraudulent transfer[s] under [TUFTA].” Because Ritz’s conduct constituted actual fraud under TUFTA, the district court concluded that Husky had shown actual fraud so that the corporate veil of Chrysalis could be pierced, i.e., Ritz could be held responsible for Chrysalis’s debt under Texas law. Despite this conclusion, the district court held that “Husky still [could] not prevail” under § 523(a)(2)(A). The court explained that, “[w]hile the fraudulent transfer without a misrepresentation may qualify as actual fraud under § 22.223(b)(1) to pierce the corporate veil, it cannot meet the requirement under 11 U.S.C. § 523(a)(2)(A) to bar the discharge of the debt.” “[S]ince there [was] no representation involved in th[e] Adversary Proceeding, Husky fail[ed] to prevail under § 523(a)(2)(A) to overturn the discharge of Chrysalis’ debt to Husky.” Husky timely appealed the district court’s judgment to this court, arguing that “Ritz committed ‘actual fraud’ under Texas Business Organizations Code Section 21.223(b) and thus c[ould] be held liable for Chrysalis’s debt,” and “that the debt is excepted from discharge in bankruptcy under . . . the ‘actual fraud’ clause in 11 U.S.C. § 523(a)(2)(A).” In re Ritz, 787 F.3d at 316. This court agreed with the district court that, because Ritz had made no misrepresentation to Husky, his conduct did not amount to actual fraud under § 523(a)(2)(A). Id. Because this court concluded that § 523(a)(2)(A) did not apply, it did not reach the Texas state law issue. Id. The Supreme Court granted certiorari and addressed whether a misrepresentation is required to show “actual fraud” under § 523(a)(2)(A). Husky, 136 S. Ct. at 1585. The Court reversed the judgment of this court, holding that “[t]he term ‘actual fraud’ in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.” Id. at 1586. In reaching this conclusion, the Court relied on historical understandings of “actual fraud” in the bankruptcy context. Id. at 1586–87. The Court explained that, “[b]ecause [it] must give the phrase ‘actual fraud’ in § 523(a)(2)(A) the meaning it has long held, [the Court] interpret[ed] ‘actual fraud’ to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation.” Id. at 1590. While the Court clarified the meaning of actual fraud in § 523(a)(2)(A), it did not specifically hold that actual fraud had occurred here or determine whether Husky could ultimately prevail in its attempt to deny Ritz a discharge of the relevant debt. Id. Rather, following its holding as to actual fraud, it “remand[ed] the case for further proceedings consistent with [its] opinion.”
Facts:
Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp. (Chrysalis), and “Chrysalis incurred a debt to Husky of $163,999.38.” Id. Chrysalis, which was under the financial control of Daniel Ritz at the time, did not pay its debts as they became due. Id. “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.”1 Id. In May 2009, Husky filed a lawsuit against Ritz, seeking to hold him personally responsible for the debt Chrysalis owed to Husky pursuant to Texas Business Organizations Code § 21.223(b). Id. Ritz filed a voluntary Chapter 7 petition for bankruptcy, and Husky initiated the adversary proceeding underlying Husky’s appeal to this court, objecting to the discharge of Ritz’s debt under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). In re Ritz, 787 F.3d at 315. The bankruptcy court rejected Husky’s arguments, holding that the denial of a discharge was not warranted by any of the Bankruptcy Code provisions advanced by Husky.
Judge(s):
STEWART, Chief Judge, and KING and ELROD, Circuit Judges.

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