Supreme Court Must Decide What Fraud Is In Bankruptcy Case

Bankruptcy is not an option for those found to have defrauded their creditors, but now the Supreme Court must decide how to define fraud.

The Supreme Court has recently agreed to hear a new case in which it must decide whether a man should be allowed to clear his debts through bankruptcy, or whether he is guilty of fraud, writes Jacqueline Palank for The Wall Street Journal.

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Legal definition of “actual fraud” to be defined by Supreme Court

Debtors must pay back the money they owe if it was obtained by “false pretenses,” “false representation” or “actual fraud.” While it may appear that the law is well-written, appeals courts have been split on what defines “actual fraud.”

Two courts found that in order to be found guilty of “actual fraud,” the defendant need only to have obtained money through a scheme that was designed to cheat creditors out of their cash. However another court ruled that “actual fraud” has not been committed unless the debtor actually lied to their creditor.

Now it will be up to the Supreme Court to decide which definition of “actual fraud” will be used, and therefore whether debts will be erased. The case is related to Daniel Lee Ritz Jr. and his company Chrysalis Manufacturing Corp., which bought $164,000 of products from Husky International Electronics Inc. from 2003-2007.

Husky takes case all the way to high court after previous rulings

Chrysalis never paid for the goods in that 4 year period, and Mr. Ritz transferred more than $1 million from Chrysalis accounts to other companies that he controlled. Later on Husky filed a lawsuit to hold Ritz personally responsible for Chrysalis’ debt, but he filed for bankruptcy before a judge could rule.

Although Ritz attempted to escape repaying the debts, Husky sued him in bankruptcy court and claimed that he should pay because he defrauded the company by moving Chrysalis funds. The court found that because he didn’t lie to Husky, Ritz was not guilty of “actual fraud.”

Husky then appealed to the Supreme Court and on Friday the high court accepted to hear the case. No schedule for the hearing has been announced.