Husky Int’l Elecs., Inc. v. Ritz and the Problem of Intent in Receiving Fraudulent Transfers
In the case of Husky Int’l Electronics, Inc. v. Ritz, 136 S. Ct. 1581 (2016), the Supreme Court was asked to determine whether the term “actual fraud” in §523(a)(2)(A) of the Bankruptcy Code1 included fraudulent transfers. Section 523(a)(2)(A) bars the discharge of “any debt…for money, property, [or] services…to the extent obtained by…false pretenses, a false representation, or actual fraud.”2 Before 1978, the Bankruptcy Code barred debtors from discharging debts obtained by “false pretenses or false representations.”3 In the Bankruptcy Reform Act of 1978, Congress added “actual fraud” to that list, creating the modern §523(a)(2)(A).4 Did this addition of “actual fraud” mean that the transferee of a fraudulent transfer was barred from discharging the transferee’s obligation to the transferor’s creditor? If so, how do courts ensure that §523(a)(2)(A)’s discharge bar does not inhibit bankruptcy’s fresh start promise granted to the honest debtor?5 This article examines the state of the law prior to Husky, the reasoning of the majority and dissenting opinions, and its impact on bankruptcy debtors, creditors, and attorneys.
What is a Fraudulent Transfer?
Fraudulent transfers have a long history in English and American law, dating back to the Statute of 13 Elizabeth, enacted in 1571.6 The Statute of 13 Elizabeth was one of the first bankruptcy acts, and it defined fraud as any transfer made with the intent to delay, hinder, or defraud creditors.7 The modern iteration of fraudulent transfer law is embodied in the Uniform Fraudulent Transfers Act (UFTA), adopted in most states, including Florida.8 The UFTA defines fraudulent transfers against present and future creditors as “a transfer made or obligation incurred by a debtor if made with actual intent to hinder, delay or defraud any creditor of the debtor”9 or a transfer made “without receiving a reasonably equivalent value in exchange for the transfer or obligation.”10 As such, the UFTA mirrors the Statute of 13 Elizabeth, meaning it has its roots in English bankruptcy law. Transfers made with intent to defraud are deemed “actual” or intentional frauds, while transfers given without adequate consideration are considered constructive frauds.11
Section 727(a)(2) of the Bankruptcy Code, similar to the UFTA, denies discharge when the debtor has transferred property with the intent to hinder, delay, or defraud creditors within one year of filing for bankruptcy. This section, however, is both broader in scope than §523(a)(2)(A) in that it bars the debtor’s entire discharge (as opposed to discharge of specific claims), and narrower than §523(a)(2)(A) in that it only concerns transfers made within one year of filing. Nevertheless, the universal language used to define fraudulent transfers in the Statute of 13 Elizabeth, the UFTA, and the Bankruptcy Code illustrates the established principles used in debtor-creditor law to prevent asset concealment and facilitate collection.
The UFTA defines “debtor” broadly as any “person who is liable on a claim.”12 While the UFTA covers transferors of property, the broad definition of “debtor” means that the statute can reach the recipients of fraudulent transfers as well. The Bankruptcy Code likewise defines “debt” very broadly, as “liability on a claim.”13 Florida bankruptcy courts, such as in In re Tankersley, 305 B.R. 376 (Bankr. M.D. Fla. 2004), have held that the transferor’s judgment creditors have a legitimate claim against the bankrupt transferee for the transferee’s obligation to return the transferred money or property back to the creditor. Since a judgment creditor has a claim against the transferee in the transferee’s bankruptcy,14 the question posed in Husky was not only whether “actual fraud” included fraudulent transfers, but whether the transferee “obtained” such assets “by” the actual fraud, such that the claim could be barred from discharge.15
Is a Fraudulent Transfer “Actual Fraud”? Federal Jurisprudence Before Husky
The 11th Circuit, along with a majority of circuit courts of appeals,16 historically interpreted §523(a)(2)(A) to bar the discharge of debts obtained by traditional fraud — a material misrepresentation intended to deceive, and the creditor’s reliance on the misrepresentation.17 In Field v. Mans, 516 U.S. 59 (1995), the Supreme Court stated that §523(a)(2)(A) must be interpreted according to its common law definition when the modern Code was passed in 1978, and held that justifiable reliance was a necessary component of a §523(a)(2)(A) challenge.18 Thus, after Field, the question for the federal courts was whether the common law understanding of “actual fraud” in 1978 was limited to a material misrepresentation intended to deceive, or included something more, such as a fraudulent transfer.
The Seventh Circuit in McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), was the first circuit to hold that §523(a)(2)(A) bars the discharge of debts obtained by fraudulent transfers, reasoning: ‘“Fraud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.”’19 The court stated that the matter was one of first impression post- Field : “Plenty of cases, it is true, assume that fraud equals misrepresentation, but like Field, they are cases in which the only fraud charged was misrepresentation.”20 Thus, the Seventh Circuit expanded §523(a)(2)(A)’s definition of fraud to include any variety of nefarious schemes. The First Circuit later adopted McClellan ’s expanded reading of §523(a)(2)(A) in Sauer, Inc. v. Lawson, 791 F.3d 214, 219 (1st Cir. 2015).
The McClellan court also addressed the question of whether a transferee “obtains” assets “by” actual fraud: “The words ‘obtained by’ go with ‘money, property, [or] services,’ not with ‘debt.’ A debt is not something you obtain; it is something you incur as a consequence of having obtained [property]….”21 The court concluded, therefore, that it was possible that the transferee “obtained” the transferor’s property “by” actual fraud if the transfer was fraudulent and the transferee bore the requisite intent, thus incurring a nondischargeable debt to the transferor’s creditors.22
While Lawson followed McClellan in extending §523(a)(2)(A)’s discharge bar to fraudulent transfers, the Fifth Circuit in Husky declined to follow McClellan. The Fifth Circuit first recited McClellan ’s explanation of how a transferee “obtains” a debt in a fraudulent transfer: “The [ McClellan ] court further reasoned that the debt at issue ‘arose not when the [transferee’s] brother borrowed money from [the creditor] but when [the transferee] prevented [the creditor] from collecting from the brother the money the brother owed him.’ Accordingly, the debt was for ‘property…obtained by fraud.’”23
The court then explained why it would not follow McClellan ’s expanded definition of actual fraud:
“McClellan appears to be in tension with the Supreme Court’s opinion in [ Field ]…[where] the Court reasoned that the terms false pretenses, a false representation, or actual fraud, carry the acquired meaning of terms of [11] art and imply elements that the common law has defined them to include….Although not directly addressing the issue, the Court throughout its opinion in Field appeared to assume that a false representation is necessary to establish ‘actual fraud.’…The majority in McClellan asserted that Field was inapposite because ‘[t]he fraud there took the form of a misrepresentation’ and ‘[n]othing in the Supreme Court’s opinion suggests that misrepresentation is the only type of fraud that can give rise to a debt that is not dischargeable under section 523(a)(2)(A).’ Although it is true that the facts underlying Field involved a misrepresentation, we do not believe that the case [13] can be so easily disregarded. Nowhere in Field did the Court suggest that different definitions of ‘actual fraud’ apply depending on the type of fraud…alleged.…Moreover,…the Court in Field made clear that the meaning of ‘actual fraud’ depends on the 1978 common law meaning of the term….[W]e are not aware of any [authority] suggesting that the common law meaning of ‘actual [14] fraud’ at that time encompassed fraudulent transfers of the type at issue here. Indeed…fraudulent transfers are statutory constructs, and are not creatures of the common law.”24
The court also noted that McClellan contradicted the Fifth Circuit’s test for a discharge bar under §523(a)(2)(A), which required a creditor’s reliance on the debtor’s misrepresentation.25 The Fifth Circuit’s formulation of §523(a)(2)(A)’s discharge bar was, therefore, identical to the 11th Circuit’s test in Schweig.26
While the First, Seventh, and Fifth circuits made definitive statements regarding “actual fraud’s” application to fraudulent transfers, the law in the 11th Circuit was more muddled when Husky came up for review to the Supreme Court. The 11th Circuit twice reaffirmed Schweig ’s fraud formulation in post- McClellan decisions. In Hoffend v. Villa, 261 F.3d 1148 (11th Cir. 2001), an investor attempted to bar the discharge of his claim against the president of a brokerage firm whose employees fraudulently mismanaged the investor’s funds under §523(a)(2)(A).27 The court declined to bar the discharge since the president did not make any misrepresentations.28 Hoffend was decided shortly after McClellan, when the Seventh Circuit stated that fraud “includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.”29 In theory, the Hoffend court could have analyzed whether there was a fraudulent scheme between the brokerage firm’s executives and employees, yet the court never mentioned McClellan, focusing its fraud analysis on “misrepresentation” in Stewart Title Guar. Co. v. Roberts-Dude, 597 Fed. App’x 615 (11th Cir. 2015).30
More recently, the 11th Circuit, noting that §523(a)(2)(A)’s discharge bar prevents only the dishonest debtor from obtaining a discharge, held that the party seeking to bar the discharge must prove a false representation with the intent to deceive, justifiable reliance, and resulting damages.31 Although the central issue in Stewart Title was justifiable reliance, the 11th Circuit again made no reference to McClellan ’s expanded definition of actual fraud.32
Leading up to Husky, the 11th Circuit’s lack of guidance on McClellan ’s expanded reading of actual fraud caused a split among the bankruptcy courts in the 11th Circuit regarding the McClellan doctrine. The bankruptcy courts for the Middle District of Florida and the Northern District of Georgia have repeatedly applied McClellan ’s expanded definition of actual fraud going back to 2001.33 On the other hand, the Bankruptcy Court for the Middle District of Alabama declined to follow McClellan ’s expanded reading of §523(a)(2)(A) in the absence of controlling 11th Circuit precedent.34 These inconsistent decisions provided little guidance to Florida bankruptcy practitioners seeking to avoid the discharge of debts acquired by fraudulent transfers.
The Supreme Court’s Husky Decision
Husky, therefore, arose as a case of major significance to Florida practitioners, as it would deliver the answers that the 11th Circuit had not provided. In a 7-1 decision, the Supreme Court held that “actual fraud” in §523(a)(2)(A) includes fraudulent transfers made with wrongful intent.35 The Court held that fraudulent transfers are included in the common law definition of “actual fraud” since the English Statute of 13 Elizabeth’s definition of fraud has been “universally adopted” as codified in the “uniform state law.”36 The Court stated: “The degree to which [the Statute of 13 Elizabeth] remains embedded in laws related to fraud today clarifies that the common-law term ‘actual fraud’ is broad enough to incorporate a fraudulent conveyance.”37 The Court disagreed with the Fifth Circuit’s statement that fraudulent transfers are “statutory constructs, and are not creatures of the common law.”38
While Justice Thomas argued in dissent, citing Field, that the words “obtained by” in §523(a)(2)(A) created a reliance component incompatible with fraudulent transfers,39 the majority cited McClellan, stating: “[T]he recipient of the transfer — who with the requisite intent, also commits fraud — can ‘obtain’ assets ‘by’ his or her participation in the fraud.”40 Justice Thomas reasoned that Field ’s reliance requirement was born of the words “obtained by,” which required that the fraud cause the acquisition of the property or the incursion of the debt.41 Such a causation requirement is irreconcilable with the transferee ’s acquisition of the property since such acquisition is not caused by a fraud, but is rather deemed a fraud.42 Consequently, Justice Thomas stated that §523(a)(2)(A)’s “actual fraud” does not include fraudulent transfers.43
Justice Thomas justified his position on the grounds that “the ‘general rule that a common-law term of art should be given its established common-law meaning’ gives way ‘where that meaning does not fit.”’44 The majority countered that the debtor-transferee’s debts traceable to the fraudulent transfer scheme could be “obtained by” the fraudulent transfer, but acknowledged such circumstances would likely be rare due to the fact that most recipients of fraudulently transferred assets are not on the verge of bankruptcy, and that it was a matter for the Fifth Circuit on remand to determine if the transferee “obtained” assets “by” actual fraud.45 The Court also rejected the dissent’s Field -reliance argument, stating that Field ’s requirement was only discussed in the context of a fraud perpetrated through misrepresentation.46 Justice Thomas responded that Field ’s factual distinction was immaterial since the words “obtained by” in the statute modify all three forms of fraud articulated in the section: false pretenses, false representations, and actual fraud.47 Justice Thomas reasoned that this reliance component, by its nature, limited actual frauds to those frauds that induced the creditor to part with its money, property, or services at the inception of a credit transaction, which rarely occurs in a fraudulent transfer.48
Justice Thomas also took issue with the majority’s justification supporting its holding that “actual fraud” must include fraudulent transfers to avoid rendering the 1978 addition of “actual fraud” superfluous.49 While the majority’s position may be correct to the extent that the addition of “actual fraud” expands the statute beyond “misrepresentations,”50 Justice Thomas, using McClellan ’s own language, stated that other fraudulent schemes can be covered by “actual fraud,” thereby warranting the exclusion of fraudulent transfers from “actual fraud’s” ambit. Justice Thomas reasoned that:
“Actual fraud is broader than false pretenses or false representations, and consists of any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another. Unlike false pretenses or false representation, actual fraud, within the meaning of the dischargeability exception, can focus on a promise of future performance made with intent not to perform.”51
The majority opinion is, consequently, problematic in two respects. First, the majority never justifies its dogmatic adherence to the common law understanding of “actual fraud” in light of Justice Thomas’ reminder that the Court was interpreting the Bankruptcy statute.52 Justice Thomas also emphasized that §727(a)(2) is a very clear rendition of Congress’ intent to bar discharge in fraudulent transfer circumstances, since §727(a)(2) mirrors the UFTA’s language.53 Equating “actual fraud” with “fraudulent transfer” in §523(a)(2)(A) seems like an expansion of “actual fraud” contrary to Congressional intent since Congress could have used the same language as §727(a)(2) if it wanted §523(a)(2)(A) to cover fraudulent transfers, but chose to use the term “actual fraud” instead.
Second, the majority did not directly address Justice Thomas’ annotation regarding other forms of “actual fraud,” such as incurring debt without the intent to repay.54 Cases applying this interpretation were prevalent in the 11th Circuit before Husky.55 This interpretation gave meaning to Congress’ addition of “actual fraud” in 1978 while staying true to the “obtained by” reliance modifier and without implicating §523(a)(2)(A)’s textual contradiction with §727(a)(2). This interpretation would also achieve the practical outcome voiced by Judge Ripple’s concurring opinion in McClellan, which stated that §523(a)(6), which bars the discharge of debts “for willful or malicious injury,” would allow a discharge bar for intentional fraudulent transfers without requiring a strained interpretation of “obtained by” as occurs in §523(a)(2)(A) cases.56
The Impact of Husky and the Problem of Intent
In Husky, the Court was asked primarily to determine whether the word “fraud” in the phrase “ actual fraud” included fraudulent transfers. Indeed, the Court all but glossed over the analysis of the word “actual” in its analysis: “The word ‘actual’ has a simple meaning in the context of common-law fraud: It denotes any fraud that involves moral turpitude or intentional wrong….[A]nything that counts as ‘fraud’ and is done with wrongful intent is ‘actual fraud.”’57
While the term “actual” may have had a “simple” definition at common law as being any fraud perpetrated with “wrongful intent,”58 the meaning of “wrongful intent” in present jurisprudence is anything but simple. In fact, wrongful intent is so difficult to prove in fraudulent transfer cases59 that the UFTA codified the probative factors, known as “badges of fraud,” that can be admitted to prove intent.60 Those badges of fraud are a) the transfer or obligation was to an insider; b) the transferor retained possession or control of the property after the transfer; c) the transfer or obligation was disclosed or concealed; d) before the transfer was made or obligation was incurred, the transferor had been sued or threatened with suit; e) the transfer was of substantially all the transferor’s assets; f) the transferor absconded; g) the transferor removed or concealed assets; h) the value of the consideration received by the transferor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; i) the transferor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; j) the transfer occurred shortly before or shortly after a substantial debt was incurred; and k) the transferor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the transferor.61 Florida state and federal courts have stated that a single badge of fraud is insufficient in itself to prove intent, but that several badges, when considered together, may afford a basis from which intent can be inferred.62
In Husky -style cases, the courts must analyze the intent of the transferee since the transferor does not “obtain” anything in a fraudulent transfer,63 and it is the transferee who is attempting to discharge the debt. This will require a unique analysis of intent. It is obvious that the drafters of the UFTA’s “badges of fraud” intended primarily to punish the wrongful intent of the transferor, as opposed to the transferee. For example, factors b, c, d, e, f, g, i, and j all examine exclusively the conduct or circumstances of the transferor.64 Only factors a (transfer to an insider), h (reasonable consideration), and k (transfer to a lienor, who transfers to an insider) examine the conduct, knowledge, or circumstances of the transferee.65 Thus, it is incongruous to analyze whether factors b, c, d, e, f, g, i, and j apply to the bankruptcy debtor-transferee, unless such transferee is the same individual or entity as the fraudulent transferor, as was the case in Husky. Only factors a, h, and k should be analyzed as against the transferee.
How then, should bankruptcy courts determine the fraudulent intent of the bankruptcy debtor in receiving a fraudulent transfer, when one badge of fraud is insufficient to impute intent, and only three badges of fraud under F.S. §726.105(2) concern the transferee? If bankruptcy courts look only to UFTA badges of fraud, then a bankruptcy debtor’s debt incurred from his or her receipt of fraudulently transferred assets can only be excepted from discharge if the debtor was an insider to the transferor and furnished less than reasonable consideration.66
A Different Test for “Intent” in Husky -Style Cases
This dilemma brings us back to the dissent in Husky. Many of the cases in the bankruptcy courts of the 11th Circuit that have cited to McClellan did so in the context of debtors who filed bankruptcy shortly after obtaining credit, with no intention of ever repaying any of the debt, a fact pattern discussed by Justice Thomas in his Husky dissent.67 These schemes did not involve a misrepresentation by the debtor to the creditor, and yet were excepted from discharge by the bankruptcy courts under §523(a)(2)(A)’s “actual fraud” language, citing McClellan.68 Barring discharge in these nonfraudulent-transfer cases still required bankruptcy courts to make a finding of the debtor’s intent, which inquiry was distinct from the “badges of fraud” inquiry.
Perhaps the Husky majority confused the analysis by rigidly obeying Field ’s common-law interpretation requirement (which obedience, in itself was confusing, given the Court’s dismissal of Field ’s reliance requirement) and inapplicable principles of statutory interpretation. demanding that fraudulent transfers be brought within the scope of “actual fraud” in order to give that phrase meaning beyond “false pretenses” and “false representations” (a reasoning debunked by Justice Thomas in his citation of FDS Nat’l Bank v. Alam, 314 B.R. 834 (Bankr. N.D. Ga. 2004)),69 the Court placed a heavy burden on bankruptcy courts to decipher an inherently difficult question that the Supreme Court had the luxury to ignore and which the UFTA fails to address: whether a debtor’s receipt of a fraudulently transferred asset occurred with a fraudulent intent.70 Indeed, the fact that the Husky debtor was transferring assets to various companies that he owned or controlled as his alter ego may have forced an outcome-determinative opinion by the Court, while obviating the intent inquiry.71 No other explanation makes sense given the Court’s failure to rebut Justice Thomas’ argument regarding surplusage.72
To address this problem of intent, cases involving fact patterns such as Alam serve as a good starting point for determining intent in Husky -style cases, a test distinct from the UFTA’s “badges of fraud.” The 11th Circuit has adopted a “totality of the circumstances” test to infer the subjective intent of the debtor in fraud inquiries that do not pertain to fraudulent transfers.73 In a way, the totality of the circumstances mirrors the “badges of fraud” test since fraudulent intent in fraudulent transfer contexts can only be inferred after analyzing several badges of fraud together,74 but bankruptcy courts must analyze some different factors as against the transferee since the UFTA’s statutory rubric of intent does not adequately address the transferee’s knowledge or conduct.75 Therefore, bankruptcy courts in the 11th Circuit should, using Equitable Bank v. Miller, 39 F.3d 301 (11th Cir. 1994), and its progeny as a guide, apply the totality of the circumstances test in determining the bankruptcy debtor’s intent in §523(a)(2)(A) fraudulent transfer cases.
This makes sense for two reasons. First, the badges of fraud enumerated by the drafters of the UFTA were written with a mind toward limiting the transferor’s rights to deal with his property as against his creditors76; a purpose that does not adequately address the mental state of the transferee. Second, the totality of the circumstances test resolves the disconnect between the majority of the “badges of fraud” and the transferee.77 Applying two “badges of fraud” to a transferee-debtor simply seems like too little to bar a discharge, considering that the 11th Circuit “construe[s] the statutory exceptions to [12] discharge in bankruptcy liberally in favor of the debtor in order to ensure that the honest but unfortunate debtor is afforded a fresh start.”78
In fraud contexts, exclusive of fraudulent transfers, courts in the 11th Circuit have looked to such factors as the recklessness of the debtor,79 the impact ( i.e., magnitude) of the fraud,80 and the debtor’s willful silence or blindness in order to infer intent.81 In turn, signing documents without reading them or signing documents in blank, to be completed by a third party, constitutes recklessness for the purpose of inferring intent.82 Also, in Tankersley, the Bankruptcy Court for the Middle District of Florida held that a transferee-debtor’s knowledge of an unsatisfied judgment against her husband, combined with a lack of consideration for the transfers, evidenced the debtor’s intent to injure the creditor. The factors described herein, rather than the UFTA’s badges of fraud (except those found in F.S. §§726.105(a), (h), and (k)), should be used by the bankruptcy courts in evaluating whether the totality of the circumstances imply that the transferee-debtor intended to hinder, delay, or defraud creditors in Husky -style objections to discharge under §523(a)(2)(A).
The Expanded Reach of §523(a)(2)(A)’s Discharge Bar
Attorneys practicing in the areas of wealth management and estate planning should pay particular attention to the Husky decision and the potential bankruptcy implications should the client one day go bankrupt. For instance, family members are deemed “insiders” under the UFTA,83 so property transferred in intra-spousal conveyances, or from parent to child, may be subject to claims against an unwitting bankruptcy debtor-transferee, and, in turn, may be barred from discharge under §523(a)(2)(A) pursuant to the relative’s status as an insider.84 The recipient’s willful ignorance or blindness will not save him or her from §523(a)(2)(A)’s discharge bar since such “recklessness,”85 coupled with the recipient’s insider status,86 may be enough to infer intent under the totality of the circumstances.87
Practitioners should also counsel clients regarding the risk of becoming a “functional insider” of a fraudulent transferor.88 In Lamarca v. Jansen, 2014 U.S. Dist. LEXIS 8427 (M.D. Fla. 2014), the District Court for the Middle District of Florida, on appellate review from the bankruptcy court, affirmed the bankruptcy court’s finding that the transferee was a “functional insider” of the transferor since the transferee was a long-time friend and housemate of the transferor. The court held that transferring property to such a functional insider was equivalent to a badge of fraud to be considered in inferring fraudulent intent.89 Attorneys should inform clients that such transfers to functional insiders may be set aside or barred from discharge under the same fraudulent transfer principles that pertain to relatives.
When defending §523(a)(2)(A) proceedings, debtors’ attorneys should highlight the 11th Circuit’s policy that discharge bars are construed liberally in favor of the debtor.90 Emphasis should be placed on the creditor’s or trustee’s burden both as plaintiff and the party adopting a position disfavored by public policy. Creditors’ attorneys should devote substantial litigation resources to discovery, since the totality of the circumstances test is necessarily a fact-intensive inquiry that already favors the debtor.91 Creditors should also focus on eliciting admissions of intent from the transferee-debtor. If such admissions cannot be obtained, creditors should seek facts demonstrating the debtor’s recklessness and the significance of the debtor’s impact on the creditor’s loss.92
Creditors’ attorneys also have two unique options to avoid loss depending on the type of bankruptcy proceeding. In Chapter 7, creditors with claims against property fraudulently transferred to the debtor should work with the Chapter 7 trustee to bar the discharge of the debtor’s obligation under §523(a)(2)(A), citing Husky. In Chapter 11 and 13 cases, creditors with claims against property fraudulently transferred to the debtor should file an action to set aside the conveyance of the property to the debtor so that the fraudulently transferred property cannot be used by the debtor to pay other creditors in a reorganization or adjustment plan. Both strategies produce the same functional outcome for the creditor — ensuring that property rightfully belonging to the creditor finds its way back into the creditor’s hands.
Conclusion
Husky answered an unsettled question, particularly in Florida bankruptcy jurisprudence, where courts were split on McClellan ’s application. The Supreme Court’s holding presents bankruptcy courts with the unique and difficult task of determining the transferee’s intent when receiving property. The problem of intent also carries over to attorneys, who must advise clients so that clients do not unwittingly accept fraudulently transferred assets under circumstances that could be deemed “intentional” under the principles of inferred intent. Finally, in future cases, courts should look to factors other than the traditional “badges of fraud” in determining whether, under the totality of the circumstances, a transferee received a fraudulent transfer with actual intent to hinder, delay, or defraud creditors.
1 Title 11 of the United States Code is herein referred to as the Bankruptcy Code or “the Code.”
2 11 U.S.C. §523(a)(2)(A).
3 11 U.S.C. §35(a)(2) (1976).
4 See 11 U.S.C. §523(a)(2)(A).
5 See Grogan v. Garner, 498 U.S. 279, 286-87 (1991).
6 See 13 Eliz. Ch. 5 (1571).
7 Id.
8 See Fla. Stat. §§726.105 and 726.106.
9 Fla. Stat. §726.105(1)(a).
10 Fla. Stat. §726.105(1)(b).
11 See Cullifer v. Comm’r, 2016 U.S. App. LEXIS 9780, fn. 3 (11th Cir. 2016).
12 Fla. Stat. §726.102(7).
13 11 U.S.C. §101(12).
14 Tankersley, 305 B.R. at 380.
15 See 11 U.S.C. §523(a)(2)(A).
16 See In re Maurice, 21 F.3d 767, 773-74 (7th Cir. 1994); In re Ettell, 188 F.3d 1141, 1144 (9th Cir. 1999); In re Biondo, 180 F.3d 126, 133-34 (4th Cir. 1999); Sanford Institution for Savings v. Gallo, 156 F.3d 71, 74-76 (1st Cir. 1998); In re Young, 91 F.3d 1367, 1373 (10th Cir. 1996).
17 See Schweig v. Hunter, 780 F.3d 1577, 1579 (11th Cir. 1986).
18 Field, 516 U.S. at 70.
19 McClellan,
217 F.3d at 893-94 (quoting Stapleton v. Holt, 250 P.2d 451, 453-54 (Okla. 1952)).
20 Id. at 892 (emphasis in original).
21 Id. at 895.
22 Id.
23 Husky Int’l Elecs., Inc. v. Ritz, 787 F.3d 312, 317 (5th Cir. 2015) (internal citations omitted), overruled by 136 S. Ct. 1581 (2016).
24 Husky Int’l Elecs., Inc., 787 F.3d at 317-19 (internal citations and quotations omitted).
25 Id. at 319 (citing RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir. 1995)) (emphasis added).
26 See Schweig, 780 F.2d at 1579.
27 Hoffend, 261 F.3d at 1149.
28 Id. at 1152 (citing In re Walker, 48 F.3d 1161, 1164-65 (11th Cir. 1995)).
29 McClellan, 217 F.3d at 893.
30 Hoffend, 261 F.3d at 1150-54.
31 Stewart Title Guar. Co. v. Roberts-Dude, 597 Fed. App’x 615, 617 (11th Cir. 2015) ( per curiam ).
32 See generally, id.
33 In re Tankersley, 305 B.R at 379-80; Acme Sec., Inc. v. CLN Props., LLC, 484 B.R. 475, 485 (Bankr. N.D. Ga. 2012); see also Cloninger v. Cloninger, 548 B.R. 839 (Bankr. N.D. Ga. 2016); Am. Express Centurion Bank v. Allen, 528 B.R. 854 (Bankr. N.D. Ga. 2015); FIA Card Servs. NA v. Quinn, 492 B.R. 341 (Bankr. N.D. Ga. 2013); Robustelli Mktg. Servs. v. Robustelli, 430 B.R. 709 (Bankr. N.D. Ga. 2010); Leach Constr., Inc. v. Murphy, 369 B.R. 682 (Bankr. M.D. Fla. 2007); FDS Nat’l Bank v. Alam, 314 B.R. 834 (Bankr. N.D. Ga. 2004); Fleet Credit Card Servs., L.P. v. Kendrick, 314 B.R. 468 (Bankr. N.D. Ga. 2004) (all citing to McClellan ’s expanded definition of actual fraud outside of the fraudulent transfer context).
34 See Southtrust Bank v. Moore, 2004 Bankr. LEXIS 2221 fn. 18 (Bankr. M.D. Al. 2004).
35 Husky Int’l Elecs., Inc., 136 S. Ct. at 1586.
36 Id. at 1587 (quoting 13 Eliz. Ch. 5).
37 Id.
38 Husky Int’l Elecs., Inc., 787 F.3d at 319.
39 Husky Int’l Elecs., Inc., 136 S. Ct. at 1591 (Thomas, J., dissenting) (‘“[O]btained by’ is an important limitation on…Section 523(a)(2)(A) [which] applies only when the fraudulent conduct occurs at the inception of the debt, i.e., when the debtor commits a fraudulent act to induce the creditor to part with his money, property, services, or credit….‘[A]ctual fraud’ — as it is used in the statute — covers only those situations in which some sort of fraudulent conduct caused the creditor to enter into a transaction with the debtor.”).
40 Id. at 1589 (citing McClellan, 217 F.3d 890).
41 Id. at 1591 (Thomas, J., dissenting) (“I reach this conclusion based on the plain meaning of the phrase ‘obtained by,’ which has an ‘inherent’ ‘element of causation,’ and refers to those debts ‘resulting from’ or ‘traceable to’ fraud. [ Field, 516 U.S. at 61, 64, 66].”).
42 Id.
43 Id.
44 Id. (quoting United States v. Castleman, 134 S. Ct. 1405 (2014) (internal quotation marks omitted)).
45 Id. at fn. 3. On remand from the Supreme Court, the Fifth Circuit remanded the matter to the bankruptcy court to make findings as to whether a fraudulent transfer occurred, a question that the Fifth Circuit previously pretermitted in light of the absence of a misrepresentation. See Husky Int’l Elecs, Inc. v. Ritz, 2016 U.S. App. LEXIS 14750 (5th Cir. 2016).
46 Id. at 1589-90 (this was the same rationale used in McClellan for distinguishing Field ).
47 Id. at 1593 (Thomas, J., dissenting).
48 Id. at 1591 (Thomas, J., dissenting).
49 Id. at 1586 (“It is sensible to start with the presumption that Congress did not intend ‘actual fraud’ to mean the same thing as ‘a false representation,’ as the Fifth Circuit’s holding suggests.”).
50 Id.
51 Id. at 1593 (Thomas, J., dissenting) (internal citations and quotations omitted).
52 Id. (Thomas, J., dissenting) (“At bottom, the majority’s attempt to broaden §523(a)(2)(A) to cover fraudulent transfers impermissibly second-guesses Congress’ choices.”)
53 Id. (Thomas, J., dissenting).
54 See id. at 1589-90 (Thomas, J., dissenting).
55 See, e.g., In re Morrow, 488 B.R. 471, 479-80 (Bankr. N.D. Ga. 2012); In re Alam, 314 B.R. 834, 841 (Bankr. N.D. Ga. 2004).
56 McClellan, 217 F.3d at 896 (Ripple, J., concurring) (Section 523(a)(6) “provides a far more direct avenue for dealing with” fraudulent transfers).
57 Husky Int’l Elecs., Inc., 136 S. Ct. at 1586.
58 Id.
59 John E. Sullivan III, Article: Future Creditors and Fraudulent Transfers: When a Claimant Doesn’t Have a Claim, When a Transfer Isn’t a Transfer, When Fraud Doesn’t Stay Fraudulent, and Other Important Limits to Fraudulent Transfers Law for the Asset Protection Planner, 22 Del. J. Corp. L. 955, 970 (1997) (“[C]ourts are cognizant of the traditional difficulties associated with proving fraudulent intent. Absent a rare admission or declaration against interest by the defendant, a plaintiff is unlikely to discover any direct proof of bad motives because often only the defendant knows his own motivation at the time of the transfer.”)
60 See Fla. Stat. §726.105(2).
61 Id. (The word “transferor” was substituted here for the word “debtor” in the statute in order to avoid confusion between a fraudulent transferor, who is the debtor to his creditors, and the Husky -style transferee of fraudulently transferred assets, who is the bankruptcy debtor.).
62 In re Miami General Hosp., Inc., 124 B.R. 383, 392 (Bankr. S.D. Fla. 1991) (quoting Bay View Estates Corp. v. Southerland, 154 So. 894, 900 (Fla. 1934), overruled on other grounds, B.A. Lott, Inc. v. Padgett, 14 So. 2d 667, 669 (Fla. 1943)); General Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1498 (11th Cir. 1997).
63 This distinction was not an issue in Husky since the transferee and transferor were allegedly alter-egos of the same person, Daniel Lee Ritz ( Husky Int’l Elecs., Inc., 136 S. Ct. at 1585), but in most cases, it is illogical to automatically impute the mental state of the transferor to the transferee.
64 See Fla. Stat. §726.105(2) (factors a, h, and k still concern the conduct or knowledge of the transferor, but may also concern the knowledge or conduct of the transferee).
65 Id.
66 These two criteria were actually met in Husky, but only due to the critical fact that the transferor and transferee were the same person. See Husky Int’l Elecs., Inc., 136 S. Ct. at 1585.
67 Alam, 314 B.R. at 841 (A debtor commits actual fraud if the debtor uses a credit card without the subjective intent to repay the debt.); Quinn, 492 B.R. at 346-47; Kendrick, 314 B.R. at 470-73.
68 See, e.g., Alam, 314 B.R. at 841.
69 See Husky Int’l Elecs., Inc., 136 S. Ct. at 1593 (Thomas, J., dissenting).
70 The certified question to the court asked only whether “actual fraud” required a misrepresentation or could include fraudulent conveyance schemes, essentially turning the entire question to an analysis of the word “fraud” and downplaying the word “actual.” Husky Int’l Elecs., Inc., 136 S. Ct. at 1586.
71 Id. at 1585.
72 Id. at 1593 (Thomas, J., dissenting).
73 See Equitable Bank v. Miller, 39 F.3d 301, 305 (11th Cir. 1994).
74 See Yale Materials Handling Corp., 119 F.3d at 1498.
75 While Fla. Stat. §726.105(2) provides a nonexhaustive list of “badges of fraud,” it remains unclear, what, if any, additional factors courts will consider in inferring the intent of the recipient of a fraudulent transfer. See, e.g., Bakst v. Levenson, 229 B.R. 877, 885 (Bankr. S.D. Fla. 1998) (commenting that the UFTA’s badges of fraud are a nonexhaustive list, yet only analyzing factors that are enumerated in the UFTA).
76 See Edwin E. Smith & Kenneth C. Kettering, Memorandum on Amendments to the Uniform Fraudulent Transfer Act: 2013 Annual Meeting,
Uniform Law Commission, May 28, 2013, available at http://www.uniformlaws.org/shared/docs/Fraudulent%20Transfer/2013AM_AUFTA_IssuesMemo.pdf.
77 See Fla. Stat. §726.105(2).
78 Griffith v. United States, 206 F.3d 1389, 1394 (11th Cir. 2000) (internal citations and quotations omitted).
79 Thompson Invs., LLC. v. Soderstrom, 524 B.R. 835, 841 (Bankr. M.D. Fla. 2015).
80 Miller, 39 F.3d at 305.
81 Bracco v. Pollitt, 145 B.R. 353, 356 (Bankr. M.D. Fla. 1992).
82 Home Loan Corp. v. Hall, 342 B.R. 653, 656 (Bankr. M.D. Fla. 2006).
83 Fla. Stat. §726.102(8)(a)(1).
84 See In re Tankersley, 305 B.R. at 380 (While not involving a discharge bar, the court held that the creditor of the transferor had a valid claim against the bankruptcy debtor-transferee.).
85 Pollitt, 145 B.R. 353 at 356.
86 Fla. Stat. §726.102(8)(a)(1).
87 Miller, 39 F.3d at 305.
88 Jansen, 2014 U.S. Dist. LEXIS 8427 at 16-17 (citing Yale Materials Handling Corp., 119 F.3d at 1489).
89 Id.
90 Griffith, 206 F.3d at 1394.
91 Id.
92 See Soderstrom, 524 B.R. at 841; Miller, 39 F.3d at 305.
Brian M. Streicher is an associate attorney at Lazer, Aptheker, Rosella & Yedid, P.C., in its West Palm Beach office, where he focuses on banking litigation, loan workouts, and bankruptcies. He gives special thanks to Joseph C. Savino, partner and chair of the banking litigation group at Lazer, Aptheker, Rosella & Yedid, P.C., for his editorial assistance and insight in drafting this article.
