No false representation = Discharge.

huskyinternationalHusky, 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.

No discharge of community debt

Dean and Sherry Buescher filed for bankruptcy; First United Bank opposed their discharge, and won.  Sherry Buescher argued on appeal that the bank lacked standing, because she did not personally guarantee the loans at issue.  The Fifth Circuit disagreed, noting that because Texas is a community property state, the bank could sue in rem in Texas to collect her husband’s guaranty obligation from community property.  Buescher v. First United Bank & Trust, No. 14-40361 (April 15, 2015).

Debt dischargeable under Texas Construction Trust Fund Statute

Ratliff Ready-Mix, a creditor of Barry Pledger’s construction business, argued that its claim was not dischargeable in Pledger’s bankrupcty because it arose from a violation of the Texas Construction Trust Fund Statute.  Reviewing the case law about this statute and the defenses it provides, the Fifth Circuit affirmed judgment for the debtor.  To overcome Pledger’s statutory affirmative defense, “Ratliff had to establish that the payments made by Pledger were not ‘actual expenses directly related to the construction.’ Specifically, Ratliff must show that (a) these were not payments made on the project or overhead, or (b) they were made for Pledger’s own uses rather than to benefit the health of his failing business.”  Ratliff Ready-Mix v. Pledger, No. 14-50023 (Jan. 23, 2015, unpublished).  Here, “[i]t would be hard to argue that paying taxes, repairing vehicles and equipment, and compensating employees could be categorized as anything other than maintaining the business.”

Disbelief of the untruth

The bankruptcy debtor in McClendon v. Springfield had lost a defamation judgment for $341,000.  No. 13-41030 (Aug. 26, 2014, unpublished).  Because “the jury’s verdict could be sustained either on intentionality or recklessness,” the bankruptcy court held an evidentiary hearing to determine whether the claim resulted from a “wilful and malicious” injury.  Concluding that it did, the court denied discharge of that claim.  On appeal, the debtor argued that “a trial judge may not use his disbelief of a witness as affirmative support for the proposition that the opposite of the witness’s testimony is the truth.”  (citing Seymour v. Oceanic Navigating Co., 453 F.2d 1185, 1190-91 (5th Cir. 1972)) (Texas state practitioners are familiar with similar sufficiency principles from City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005)).  The Fifth Circuit rejected this argument, both in light of the entire record received by the bankruptcy court, and because:  “[H]here, the factual inquiry was binary, a question whether [the debtor] acted willfully and maliciously or not.  . . . [T]he bankruptcy court’s disbelief of [the debtor’s] statements that he did not know the statements were false leaves only the alternative that he did know . . . .”

“Financial condition” exception to fraud nondischargeability

The bankruptcy case of Bandi v. Becnel involved a dispute as to whether a debt was nondischargeable because it arose from fraud, or whether it fell within an exception for statements about “financial condition” in 11 U.S.C. § 523(a)(2)).  No. 11-30654 (June 12, 2012).  The Court found that the phrase “financial condition” should be construed “to connote the overall net worth” of the debtor, and thus did not include “[a] representation that one owns a particular residence or a particular commercial property” because the property could be subject to liens or other liabilities.  Op. at 8.  The Court reviewed a substantial body of law from its prior opinions, other Circuits, and the Supreme Court about the intricacies of this statute and other related provisions of the Bankruptcy Code.

Attorneys fee award about “malicious” claims not dischargeable in bankruptcy

In Shcolnik v. Rapid Settlements, bankruptcy creditors had obtained a $50,000 arbitration award of attorneys fees against the debtor, and appealed a summary judgment that the award was dischargeable.  No. 10-20800 (Feb. 8, 2012).  The Fifth Circuit reversed, finding an issue of fact as to whether the fee award arose from “willful and malicious injury by the debtor” in pursuing meritless claims, and was thus nondischargeable.  Op. at 5-6 (citing 11 U.S.C. § 523(a)(6)).  (The debtor’s threats included a “massive series of legal attacks . . . which will likely leave you disbarred, broke, professionally disgraced, and rotting in a prison cell.”  A thoughtful dissent questioned whether the majority’s ruling would deter legitimate litigation demands, and whether the Court was inserting itself into matters resolved by the arbitrator.  Op. at 9.