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Supreme Court rules in bankruptcy, fraud case

South Carolina residents interested in bankruptcy matters might like to know about the Supreme Court ruling on May 16 where the judges ruled 7-1 that fraudulent conveyance schemes constitute a fraud exception from bankruptcy discharge even if there is no false representation. They also decided that the term "actual fraud" from the federal bankruptcy code did apply in this circumstance.

During 2006-2007 Daniel Ritz, the director of Chrysalis Manufacturing Corp., transferred money from the company to assets under his name. A seller of electronic device components called Husky International Electronics claims that they are owed $163,000 after they followed a written contract and delivered goods to the manufacturing company. Husky wanted Ritz to be liable for Chrysalis's debt and said that his debt was not dischargeable after Ritz filed Chapter 7 bankruptcy in 2009.

A bankruptcy court ruled against Husky in 2011 and said that Ritz did not commit "actual fraud" as he did not falsely represent himself to Husky, and the Fifth Circuit court agreed that there was no exception for not discharging the debt. The U.S. Supreme Court found that fraudulent asset transfers count as an exception when the act is intentional, and Justice Sonia Sotomayor wrote the decision of the majority.

Judge Clarence Thomas dissented and said that a discharge exception applies if fraud occurs when first interacting with a creditor. He believed this did not merit a debt discharge exception as Husky was not tricked into selling to Chrysalis.

People and companies cannot protect themselves from paying debts by engaging in fraud, but one who has debt that he or she has trouble paying could seek relief from creditors by filing for bankruptcy. Under Chapter 7 bankruptcy, any non-exempt assets one owns are sold to pay creditors while many forms of debt like credit card debt or medical bills could be discharged.

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