Chrysalis incurred a debt of $164,000 to Husky. Ritz, Chrysalis's director and then-part-owner, drained Chrysalis of assets available to pay the debt by transferring large sums to other entities Ritz controlled. Husky sued Ritz, who then filed for Chapter 7 bankruptcy. Husky filed a complaint in Ritz's bankruptcy case, asserting “actual fraud” under the Code's discharge exceptions, 11 U.S.C. 523(a)(2)(A). The district court held that Ritz was personally liable under state law but that the debt was not “obtained by…actual fraud” and could be discharged. The Fifth Circuit affirmed, and the case was appealed to the U.S. Supreme Court.

OPINION by JUSTICE SOTOMAYOR:

The Bankruptcy Code prohibits debtors from discharging debts “obtained by … false pretenses, a false representation, or actual fraud.” 11 U. S. C. §523(a) (2)(A). The Fifth Circuit held that a debt is “obtained by . . . actual fraud” only if the debtor's fraud involves a false representation to a creditor. That ruling deepened an existing split among the Circuits over whether “actual fraud” requires a false representation or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation, such as a fraudulent conveyance of property made to evade payment to creditors. We granted certiorari to resolve that split and now reverse . . . The term “actual fraud” in §523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.

Before 1978, the Bankruptcy Code prohibited debtors from discharging debts obtained by “false pretenses or false representations.” §35(a)(2) (1976 ed.). In the Bankruptcy Reform Act of 1978, Congress added “actual fraud” to that list. The prohibition now reads: “A discharge under [Chapters 7, 11, 12, or 13] of this title does not discharge an individual debtor from 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.” §523(a)(2)(A).

When “ ‘Congress acts to amend a statute, we presume it intends its amendment to have real and substantial effect.’ ” United States v. Quality Stores, Inc., 572 U. S. ___, ___ (2014) (slip op., at 7). It is therefore 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. But the historical meaning of “actual fraud” provides even stronger evidence that the phrase has long encompassed the kind of conduct alleged to have occurred here: a transfer scheme designed to hinder the collection of debt.

[F]rom the beginning of English bankruptcy practice, courts and legislatures have used the term “fraud” to describe a debtor's transfer of assets that, like Ritz’ scheme, impairs a creditor's ability to collect the debt.

One of the first bankruptcy acts, the Statute of 13 Elizabeth, has long been relied upon as a restatement of the law of so-called fraudulent conveyances (also known as “fraudulent transfers” or “fraudulent alienations”). See generally G. Glenn, The Law of Fraudulent Conveyances 89–92 (1931). That statute, also called the Fraudulent Conveyances Act of 1571, identified as fraud “feigned covenous and fraudulent Feoffmentes Gyftes Grauntes Alienations [and] Conveyaunces” made with “Intent to delaye hynder or defraude Creditors.” 13 Eliz. ch. 5. In modern terms, Parliament made it fraudulent to hide assets from creditors by giving them to one's family, friends, or associates. The principles of the Statute of 13 Elizabeth—and even some of its language—continue to be in wide use today. See BFP v. Resolution Trust Corporation, 511 U. S. 531, 540 (1994) (“The modern law of fraudulent transfers had its origin in the Statute of 13 Elizabeth”); id., at 541 (“Every American bankruptcy law has incorporated a fraudulent transfer provision”); Story §353, at 393 (“[T]he statute of 13 Elizabeth . . . has been universally adopted in America, as the basis of our jurisprudence on the same subject”); Boston Trading Group, Inc. v. Burnazos, 835 F. 2d 1504, 1505–1506 (CA1 1987) (Breyer, J.) (“Mass. Gen. Laws ch. 109A, §§1–13 . . . is a uniform state law that codifies both common and statutory law stretching back at least to 1571 and the Statute of Elizabeth”). The degree to which this statute remains embedded in laws related to fraud today clarifies that the common-law term “actual fraud” is broad enough to incorporate a fraudulent conveyance.

Equally important, the common law also indicates that fraudulent conveyances, although a “fraud,” do not require a misrepresentation from a debtor to a creditor. As a basic point, fraudulent conveyances are not an inducement-based fraud. Fraudulent conveyances typically involve “a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration.” BFP, 511 U. S., at 540–541 (citing Twyne's Case, 3 Co. Rep. 80b, 76 Eng. Rep. 809 (K. B. 1601)); O. Bump, Fraudulent Conveyances: A Treatise Upon Conveyances Made by Debtors To Defraud Creditors 31–60 (3d ed. 1882)). In such cases, the fraudulent conduct is not in dishonestly inducing a creditor to extend a debt. It is in the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a false representation from the debtor to the creditor are limited. The debtor may have the opportunity to put forward a false representation if the creditor inquires into the where abouts of the debtor's assets, but that could hardly be considered a defining feature of this kind of fraud.

Relatedly, under the Statute of 13 Elizabeth and the laws that followed, both the debtor and the recipient of the conveyed assets were liable for fraud even though the recipient of a fraudulent conveyance of course made no representation, true or false, to the debtor's creditor. The famous Twyne's Case, which this Court relied upon in BFP, illustrates this point. See Twyne's Case, 76 Eng.Rep., at 823 (convicting Twyne of fraud under the Statute of 13 Elizabeth, even though he was the recipient of a debtor's conveyance). That principle underlies the now-common understanding a “conveyance which hinders, delays or defrauds creditors shall be void as against [the recipient] unless . . . th[at] party . . . received it in good faith and for consideration.” Glenn, Law of Fraudulent Conveyances §233, at 312. That principle also underscores the point that a false representation has never been a required element of “actual fraud,” and we decline to adopt it as one today….

It is of course true that the transferor does not “obtai[n] ”debts in a fraudulent conveyance. But the recipient of the transfer—who, with the requisite intent, also commits fraud—can “obtai[n]” assets “by” his or her participation in the fraud. See, e.g., McClellan v. Cantrell, 217 F. 3d 890 (CA 7 2000); see also supra, at 6. If that recipient later files for bankruptcy, any debts “traceable to” the fraudulent conveyance, see Field, 516 U. S., at 61; post, at 3, will be nondischargable under §523(a)(2)(A). Thus, at least sometimes a debt “obtained by” a fraudulent conveyance scheme could be nondischargeable under §523(a)(2) (A). Such circumstances may be rare because a person who receives fraudulently conveyed assets is not necessarily (or even likely to be) a debtor on the verge of bankruptcy, but they make clear that fraudulent conveyances are not wholly incompatible with the “obtained by” requirement, . . .

We, therefore, reverse the judgment of the Fifth Circuit and remand the case for further proceedings consistent with this opinion.

Topic Questions:

1. Terry borrows money from Alice. There is no fraud involved in the transaction. Before Terry repays Alice, Terry conveys his property available to pay Alice to Frank for less than its ordinary value in order to deprive Alice of payment. Terry then files for bankruptcy under Chapter 7 and seeks to discharge the obligation to Alice. Alice contends the debt owed to her by Terry is nondischargeable under §523(a)(2)(A). Under the rule of Husky, did Terry obtain the loan from Alice using actual fraud within the meaning of §523(a)(2)(A)? If Alice makes a claim against Frank for liability to her for fraudulent transfer and Frank responds by filing under Chapter 7, is Alice's claim against Frank dischargeable?
2. Assume the same facts as in #1 except that Frank is unaware actually or constructively that the property Terry conveys to him is undervalued and has no idea that Terry is conveying the property to him in order to defraud Alice. Under the rule of Husky, is the debt that Terry owes to Alice nondischargeable in Terry's bankruptcy per §523(a)(2)(A)?

Answer rating: 100% (QA)

1 Under the rule of Husky Terry obtained the loan from Alice using actual fraud within the meaning o... View the full answer