From the Top in Brief

From the Top in Brief

The U.S. Supreme Court has handed down two rulings thus far in 2016 (October 2015 Term) involving issues of bankruptcy law. In the first, Husky Int’l Elecs., Inc. v. Ritz, 194 L. Ed. 2d 655, 2016 BL 154812 (2016), the Court addressed the scope of section 523(a)(2)(A) of the Bankruptcy Code, which bars the discharge of any debt of an individual debtor for money, property, services, or credit to the extent obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition."

In a 7-1 decision, the Court ruled that the term "actual fraud" in section 523(a)(2)(A) encompasses a fraudulent transfer even if the transfer does not involve a false representation by the debtor transferor. Writing for the majority, Justice Sonia Sotomayor explained that "actual fraud" does not require a false representation; rather, "anything that counts as ‘fraud’ and is done with wrongful intent is ‘actual fraud.’ " Indeed, she wrote, "actual fraud" has "long encompassed . . . a transfer scheme designed to hinder the collection of debt."

Justice Clarence Thomas dissented. In his dissenting opinion, Justice Thomas wrote that the majority departed "from the plain language of §523(a)(2)(A), as interpreted by our precedents," and that a close reading of the statute indicates that Congress did not intend to include fraudulent transfers in section 523(a)(2)(A).

In so ruling, the Court reversed a decision by the U.S. Court of Appeals for the Fifth Circuit and resolved a circuit split on the issue. The Fifth Circuit ruled that the "actual fraud" exception to a bankruptcy discharge under section 523(a)(2)(A) requires the debtor to make some kind of false representation to the creditor. See Husky Int’l Elecs., Inc. v. Ritz (In re Ritz), 787 F.3d 312 (5th Cir. 2015). That ruling conflicted with a Seventh Circuit decision that actual fraud under 523(a)(2)(A) "is not limited to misrepresentations and misleading omissions." See McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000).

Jones Day successfully argued Husky before the Supreme Court on behalf of the prevailing party—Husky International Electronics. A more detailed discussion of the ruling can be accessed here.

In its second bankruptcy ruling of 2016, Commonwealth v. Franklin Cal. Tax-Free Tr., 2016 BL 187308 (U.S. June 13, 2016), the Court upheld a decision by the U.S. Court of Appeals for the First Circuit that legislation enacted by Puerto Rico in 2014 to provide debt relief to its public instrumentalities is unconstitutional. A detailed discussion of the ruling can be found elsewhere in this edition of the Business Restructuring Review.

On June 28, 2016, the Court granted a petition for a writ of certiorari in Czyzewski et al. v. Jevic Holding Corp., No. 15-649 (June 28, 2016), in which it will review a ruling by the U.S. Court of Appeals for the Third Circuit upholding the "structured dismissal" of a chapter 11 case. See Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 2015 BL 160363 (3d Cir. May 21, 2015). A detailed discussion of the Third Circuit’s ruling in Jevic is available here.

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