No false representation = Discharge.

Originally published by David Coale.

Husky, a seller of electronic components, sued Ritz, a director of a company that owed Husky $163,999.38.  Ritz was denied a bankruptcy discharge as to that debt based on 11 U.S.C. § 423(a)(2)(A), which excludes from discharge “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud[.]”   The Fifth Circuit reversed, finding that this statute did not apply “where, as here, the debtor made no false representation ot the creditor.”  Husky International Electronics v. Ritz, No. 14-20526 (May 22, 2015).

Specifically, the Court rejected the Seventh Circuit’s contrary reasoning in McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), both as inconsistent with Fifth Circuit precedent, and with the Supreme Court’s reasoning about the level of reliance required by this section in Field v. Mans, 516 U.S. 59 (1995).  The Court acknowledged the argument that “actual fraud” is one of three scenarios listed in the statute, but found that the canon of construction supporting this argument was a “guide[] that need[s] not be conclusive.”  The Court also noted that the fraudulent transfer provisions of the Code addressed situations where the debtor did not make a direct misrepresentation.

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