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What a Recent Supreme Court Decision Means for Creditors

creditors-rights.jpgOn May 16th, 2016, the Supreme Court of the United States issued an important opinion in the case of Husky International Electronics, Inc. v. Ritz. While this case may not have received as much media attention as many other high profile cases from that last year, it has critical implications for creditors and debtors. In the decision, the court broadened what debtor actions qualify as 'fraud' in a bankruptcy case. If you are a California creditor and you believe that your interests have been harmed by a bankruptcy debtor's fraud, please contact our experienced San Jose creditors' rights attorneys today for aggressive legal assistance.

The Background of the Case

Husky International Electronics is a distribution company based in Colorado. Over a multi-year period, the company sold component parts to Chrysalis Manufacturing Corp, a firm based in Texas. During this time, Chrysalis incurred approximately $165,000 in debts that were owed to Husky International. During this same period, one of Chrysalis's corporate directors and primary shareholders transferred money from Chrysalis accounts to that of other companies he owned and controlled. When Chrysalis filed for bankruptcy protection, the debts to Husky International went unpaid and Husky sought repayment directly from this individual corporate officer. Husky did this on the grounds that the financial transfers away from Chrysalis's company accounts to his personal accounts amounted to a fraudulent conveyance. However, the lower court, using a narrow reading what qualifies as 'fraud', rejected Husky's argument. The lower court determined that the bankruptcy code requires a 'false representation to a creditor' to have occurred for 'actual fraud' to have taken place.

Why the Supreme Court Disagreed

The Supreme Court, in a decision authored by Justice Sonia Sotomayor, reversed the lower court's decision. In doing so, the Supreme Court substantially expanded what constitutes a debtor fraud. In her reasoning, Sotomayor pointed to the fact that the U.S. Congress amended the bankruptcy code to remove the term 'false representations' and to replace it with the term 'actual fraud'. Based on this, she reasoned that Congress must have meant for 'actual fraud' to encompass actions beyond false representations. Otherwise, there would have been no reason to make the change in the code's language. Going forward, creditors may be able to take legal action in response to debtor schemes that hinder the collection of a debt, even if no false representations were actually made during the course of the scheme.

Contact Our Creditors' Rights Team Today

At Diemer, Whitman & Cardosi, LLP, our experienced San Jose creditors' rights lawyers always stay up to date with the latest cases and legal developments. If you are a creditor involved in any type of legal dispute, please contact us today to learn more about how we can help you. Initial case evaluations are always free of charge. We protect the rights of creditors' throughout Northern California, including in San Francisco, Oakland, Sunnyvale, Mountain View and Palo Alto.



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