Supremes to Tackle Debt Discharge Question

(CN) - The U.S. Supreme Court agreed Friday to review whether an "actual fraud" exception to bankruptcy debt discharge applies when a debtor fraudulently transferred money to avoid paying a creditor.

Husky International Electronics says Chrysalis Manufacturing Corp. owed the electronic device components seller $163,000 for goods delivered under a written contract. Daniel Ritz was Chrysalis' director and controlled the company's finances, court records show.

Between 2006 and 2007, Ritz transferred money from Chrysalis to other entities he owned, according to a Fifth Circuit ruling. A bankruptcy court then found that Chrysalis' debts were greater than its assets.

Husky sued Ritz in 2009, trying to hold him personally liable for the $163,000 debt, but Ritz filed for Chapter 7 bankruptcy later that year.

In a separate action, the Colorado-based electronics company claimed in bankruptcy court that Ritz's alleged debt was not dischargeable.

The bankruptcy court ruled against Husky in 2011, finding that Ritz did not make a false representation to the electronic components dealer - meaning he did not perpetrate "actual fraud" against the company, a requirement for piercing the corporate veil under Texas law.

A Southern Texas district court upheld the bankruptcy court's decision, ruling that Husky did not establish actual fraud on the part of Ritz because it did not show that he made a misrepresentation.

The Fifth Circuit affirmed the district court in May of this year. The New Orleans-based appeals court ruled that no exceptions apply that would prevent the alleged debt from being discharged by bankruptcy.

Judge Carolyn King also noted that Husky did not raise a fraudulent transfer argument that could have helped its case.

"The statutory exceptions to discharge raised by Husky are inapplicable, and Husky cannot rely on general principles of equity to expand those exceptions," King wrote for a three-judge panel in the May ruling. "Another provision of the bankruptcy code...may have applied to redress the conduct of which Husky complains - but Husky failed to raise that provision."

Husky filed a petition for writ of certiorari with the high court on July 30.

Per its custom, the Supreme Court did not issue any comment on its decision to consider the electronic company's case.

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