Bankruptcy Code—Fraudulent Conveyances Qualify As “Actual Fraud”
Debtors seek the protections of the Bankruptcy Code to have their debts discharged, but there are exceptions. A creditor can prohibit discharge of a debt “obtained by … actual fraud.” 11 U.S.C. § 523(a)(2)(A). Today, in a 7-1 decision written by Justice Sotomayor, the Supreme Court ruled that a fraudulent conveyance qualifies as “actual fraud.”
In so holding, the Court rejected the suggestion that a fraudulent conveyance could not constitute an “actual fraud” because it does not entail a misrepresentation, noting that frauds at common law did not necessarily include misrepresentations. The Court concluded that nothing in the Bankruptcy Code suggests that Congress intended for a different, narrower meaning of the term “actual fraud.”
Beyond addressing the question presented, today’s decision contains a notable discussion of the phrase “obtained by,” which appears in the same statutory provision. Justice Thomas, in dissent, contended that “[t]he statutory phrase ‘obtained by’ is an important limitation on the reach of the provision.” In his view, “Section 523(a)(2)(A) 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.” This theory would have significant implications; it would prohibit creditors from using later-in-time fraudulent conduct as a basis to exempt earlier-obtained debts from discharge. But the majority appears to have rejected this interpretation: “Nothing in the text of [Section] 523(a)(2)(A) supports that additional requirement.”
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