In the wake of this year’s 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.
Despite reversing the Fifth Circuit in Husky, the Supreme Court’s decision did not rule on whether an individual’s debt was nondischargeable under Section 523(a)(2)(A) for obtaining money or property by “actual fraud.” Concluding that a misrepresentation is not required for “actual fraud” in subsection (a)(2)(A), the Supreme Court remanded to the appeals court, and the Fifth Circuit in turn remanded the case to the bankruptcy court on Aug. 10 for further findings and conclusions.
The litigation arose because a man caused his company to transfer funds to other companies that he owned or controlled. The man later went bankrupt. Husky, owed $164,000 by the company, sued the man in bankruptcy court to hold him liable for the corporate debt on a veil-piercing theory and to bar discharge of the debt under Section 523(a)(2)(A).
The bankruptcy judge found that property transferred from the company to the bankrupt was a constructive fraudulent transfer because it was made without adequate consideration. The bankruptcy judge rejected the objection to discharging the $164,000 debt to Husky. Reversing the bankruptcy court in part, the district court held that Husky was entitled to pierce the corporate veil and make the man personally liable for the debt. Nevertheless, the district court agreed with the bankruptcy court by ruling that the debt was dischargeable because the man made no misrepresentation to Husky. In a May 2015 opinion, Judge Carolyn Dineen King upheld discharge of the debt because there was no misrepresentation to Husky.
The Supreme Court reversed this year, holding 7-1 that a misrepresentation is not required by subsection (a)(2)(A). To read ABI’s discussion of the opinion, click here.
On remand, the record did not enable the Fifth Circuit to decide whether the debt was dischargeable because the bankruptcy court had not ruled on whether the debtor made a fraudulent transfer with “actual intent.”
Although the bankruptcy judge only decided that there was a constructive fraudulent transfer, the district court had gone a step further by ruling that the badges of fraud found by the bankruptcy judge justified a conclusion that actual fraud had been committed.
On that score, Judge King set aside the district court’s conclusion. Because the bankruptcy court “never drew an inference of actual fraud,” she said the district court “erred in holding that [the debtor] was liable to Husky under Texas law,” even though the bankruptcy court’s factual findings are “consistent with [the] inference” of actual fraud.
If the bankruptcy court finds on remand that the debtor’s actions amounted to “actual fraud” under Texas fraudulent transfer law, and if the “actual fraud” was for the debtor’s “direct personal benefit,” then the debtor is liable to Husky under Texas veil-piercing law, Judge King said. Assuming the bankruptcy court reaches those conclusions, the Supreme Court’s decision at that juncture would seem to require a finding of nondischargeability, although Judge King’s opinion does not say so directly.