Through its decision in in Husky International Electronics Inc. v. Ritz, the US Supreme Court has declined to establish a narrow interpretation of “actual fraud” in determining whether debts can be discharged through bankruptcy, overturning the Fifth Circuit and endorsing a broader view of a provision that bars parties from shedding debts obtained under false pretenses.
Bankruptcy & Restructuring partner and managing partner of the firm’s Chicago office, Tyler Nurnberg, commented on the significance of the High Court’s ruling for Law360:
"It’s a good result. While the issue decided was a narrow one, the case averted a serious threat to creditors, especially in the lending community, had the lower court decision been allowed to stand. The Bankruptcy Code’s discharge provisions strike a delicate balance between giving individuals who cannot pay their debts a 'fresh start,' while preventing them from using the process to escape liability for intentional misconduct. It is already difficult, some argue too difficult, for a creditor to establish that its debt was procured as a ... result of actual fraud. If the exception were narrowed to require a false representation, it would exclude other forms of intentional misconduct commonly believed to constitute fraud. Also, there is a concern in bankruptcy circles that limiting the exception to cases involving a misrepresentation would create a 'safe harbor' for unscrupulous debtors looking to evade liability for an endless variety of fraudulent schemes."
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