A decision from the Tenth Circuit Bankruptcy Appellate Panel demonstrates how much this year’s Supreme Court decision in Husky International Electronics Inc. v. Ritz expands the universe of nondischargeable debts beyond claims held by creditors who were themselves defrauded.
Now, the challenge for lower courts is to decide whether there are limits to the Husky doctrine, and if so, where they are.
Section 523(a)(2)(A) makes a debt nondischargeable if it was obtained by “actual fraud.” In Husky, the Supreme Court held that a debt can be nondischargeable even if the debtor made no misrepresentation to the creditor. To read ABI’s discussion of Husky, click here.
In the case before the Tenth Circuit B.A.P., a man had applied for an Oklahoma nursing home license. In the application, he represented that he would be actively involved in operations and physically present at least eight hours a month.
A patient died in the nursing home, allegedly as a result of substandard care. The surviving spouse sued the nursing home and its owner, who made the representations in obtaining the license. On the eve of trial, the owner filed personal bankruptcy. The trial went ahead only against the nursing home, which defaulted and was saddled with a $1 million judgment.
In bankruptcy court, the spouse filed a nondischargeability complaint against the owner, alleging that he was liable for the judgment under Oklahoma law that permits veil piercing “under the legal doctrine of fraud.” The spouse alleged that numerous representations made to the state in the license application were false. The owner responded by filing a motion for summary judgment, relying on the fact that the judgment was based on negligence, not fraud.
Before the Supreme Court handed down Husky, the bankruptcy court granted the summary judgment motion and dismissed the nondischargeability complaint, because the judgment was for nothing that the owner obtained from the spouse.
The surviving spouse appealed and won in an Aug. 19 opinion authored by Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., that relies heavily on Husky. He said “there is no requirement that the debt be for something the debtor obtains from the creditor.”
As long as the debtor obtains money by “actual fraud,” the B.A.P. held that “any liability of the debtor arising from the false pretenses, fraud, representations, or actual fraud is excepted from discharge.” Furthermore, nondischargeable liability is not limited by the value of the property obtained by fraud.
In addition, the opinion says “there is no requirement” under subsection (a)(2)(A) “that the debtor obtain the debt by actual fraud or that the debt is for something the debtor obtained by actual fraud.”
The decision does not necessarily mean that the debt is nondischargeable. The B.A.P. remanded the case because, among other things, there were disputed issues of fact in the surviving spouse’s complaint, and the bankruptcy court needed to decide whether the debtor obtained property by “actual fraud.”
Having originally held that the judgment was based on negligence, not fraud, the bankruptcy court did not reach the veil-piercing issue that turned on allegations of fraud. In that respect, the B.A.P. distinguished the basis for the debt from the grounds for finding nondischargeability. Although the debt itself may not be based on fraud, a creditor still can prevail by showing the fraud required by subsection (a)(2)(A) in its veil-piercing theory, the B.A.P. said.
Like in Husky, where the creditor needed to pierce the veil, the nondischargeability complaint ultimately will fail if the creditor cannot pierce the corporate veil under the “fraud-based corporate veil piercing claim under Oklahoma law.”
At this juncture, the law after Husky may be pointed toward holding that anyone who commits fraud against or on behalf of a corporation can end up with nondischargeable liability for debts owing by the corporation.
In this case, like Husky, the alleged fraud was not peculiar to the creditor who that raised the claim. In other words, any creditor successfully raising nondischargeability will have a debt that survives, while creditors that don’t will see their claims barred after bankruptcy. In effect, Husky-style nondischargeability is a species of loss of discharge that does not apply to all creditors.
On remand from the Supreme Court in Husky, the Fifth Circuit in turn remanded the case for further findings by the bankruptcy court. To read the ABI analysis of the Fifth Circuit’s remand, click here.