Husky Int'l Elecs., Inc. v. Lee (In re Daniel Lee Ritz)

Decision Date14 July 2014
Docket NumberAdversary No. 10–03156.,Civil Action No. H–11–3020.,Bankruptcy Case No. 09–39895–H4–7.
PartiesIn re Daniel Lee RITZ, Jr., Debtor. Husky International Electronics, Inc., Appellant v. Daniel Lee, Ritz, Jr., Appellee.
CourtU.S. District Court — Southern District of Texas


Jeffrey Lee Dorrell, Hanzen LaPorte LLP, Houston, TX, for Appellant.

William David Weber, Weber Law Firm, P.C., Houston, TX, for Appellee.


MELINDA HARMON, District Judge.

Pending before the Court is the above referenced appeal by Appellant Husky International Electronics, Inc. (Husky), seeking a reversal of United States Bankruptcy Judge Jeff Bohm's August 4, 2011 memorandum opinion and judgment 1 in Adversary Proceeding 10–03156, discharging a $163,999.38 contractual debt owed by Chrysalis Manufacturing Corp. (“Chrysalis”) to Husky for goods Husky sold and delivered to Chrysalis from 2003 to 2007 under a contract and for which Husky has attempted to hold Appellee/Debtor Daniel Lee Ritz, Jr. (Ritz), a director and shareholder of Chrysalis,2 personally liable.3 In this appeal Husky contends that the debt should be excepted from discharge in bankruptcy on the grounds of fraud pursuant, to 11 U.S.C. § 523(a)(2), and of willful or malicious injury to Husky or its property, pursuant to 11 U.S.C. § 523(a)(6).

Husky does not challenge the bankruptcy judge's findings of fact or credibility determinations,4 but only his conclusions of law. Husky raises three issues of legal error:

(1) Did the bankruptcy court err when it ignored that fraudulent transfers pursuant to Tex. Bus. & Com.Code § 24.0055 are “actual fraud” within the meaning of Tex. Bus. Org.Code § 21.223(b)? 6

(2) Did the bankruptcy court err when it held that Husky could not prevail under 11 U.S.C. § 523(a)(2)(A) because Husky had failed to prove a fraudulent misrepresentation by Ritz that Husky relied upon?

(3) Did the bankruptcy court err when it held that Husky could not prevail under 11 U.S.C. § 523(a)(6) because Ritz's fraudulent transfers of Chrysalis's cash were not a willful or malicious injury to Husky?

# 9 at p. 7 (electronic numbering).

After careful review of the record, the briefs, and the applicable law, the Court affirms the bankruptcy court's memorandum and order for the reasons indicated below.

Standard of Review

This Court has jurisdiction over appeals from “final judgments, orders and decrees” of a bankruptcy court under 28 U.S.C. § 158(a)(1). See In re Berman–Smith, 737 F.3d 997, 1000 (5th Cir.2013). Under 28 U.S.C. § 157(b)(1), a bankruptcy court may hear and determine “core proceedings.” Actions to determine the dischargeability of a debt are core proceedings under 28 U.S.C. § 157(b)(2)(B),(I), and (O), and such determinations are exclusively within the jurisdiction of the bankruptcy court. 28 U.S.C. § 523(a)(2). In “reviewing a bankruptcy court's decision in a ‘core proceeding,’ a district court functions as a[n] appellate court.” Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103–04 (5th Cir.1992).

Conclusions of law of the bankruptcy court are reviewed de novo. In re Chesnut, 422 F.3d 298, 301 (5th Cir.2005). Mixed questions of law and fact are also reviewed de novo. In re San Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir.2009), citing In re Seven Seas Petroleum, Inc., 522 F.3d 575, 583 (5th Cir.2008).

This Court reviews findings of fact for clear error. In re Lothian Oil, Inc., 650 F.3d 539, 542 (5th Cir.2011). “A finding of fact is clearly erroneous when the appellate court, viewing the evidence in its entirety, ‘is left with a firm and definite conviction that a mistake has been committed.’ Bertucci Contracting Corp. v. M/V ANTWERPEN, 465 F.3d 254, 258–59 (5th Cir.2006). “If the district court's finding is plausible in light of the record viewed as a whole, the court of appeals cannot reverse even though, if sitting as the trier of fact, it would have weighed the evidence differently.” In re San Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir.2009), citing Anderson, 470 U.S. at 573–74, 105 S.Ct. 1504. “If there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.” Anderson, 470 U.S. at 574, 105 S.Ct. 1504. The appellant bears the burden of showing that a finding of fact by the bankruptcy court is clearly in error. In re Davis, No. 07–33986–H3–7, 2012 WL 2871662, at *3 (S.D.Tex. July 10, 2012) (citing Perry v. Dearing, 345 F.3d 303, 309 (5th Cir.2003)), aff'd,538 Fed.Appx. 440 (5th Cir.2013), cert. denied, ––– U.S. ––––, 134 S.Ct. 1002, 187 L.Ed.2d 851 (2014).

Relevant Law

A bankruptcy court has exclusive jurisdiction to decide whether a debt is nondischargeable as defined by the bankruptcy law. Matter of Dennis, 25 F.3d 274, 278 (5th Cir.1994). As a creditor claiming nondischargeability, Appellant bears the burden of proving by a preponderance of the evidence that the debt is exempt from discharge. In re Gauthier, 349 Fed.Appx. 943, 945 (5th Cir.2009), citing Gen. Elec.Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 372 (5th Cir.2005). “Intertwined with this burden is the basic principle of bankruptcy that exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start.” FNFS Ltd. v. Harwood (In re Harwood), 637 F.3d 615, 619 (5th Cir.2011), citing Hudson v. Raggio & Raggio (In re Hudson), 107 F.3d 355, 356 (5th Cir.1997). Unless the creditor proves that an exception to discharge applies, the creditor can only collect against the bankruptcy estate. In re Gauthier, 349 Fed.Appx. at 945.

11 U.S.C. § 523(a)(2)(A)

Section 523(a)(2)(A), exempting from discharge a debt obtained by false pretenses, a false representation or actual fraud, provides that

a discharge under § 727 of this title does not discharge an individual debtor from any debt—for money, property, or services, ... to the extent obtained by—false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insiders's financial condition.

Although other Courts of Appeals apply the same standard to all § 523(a)(2)(A) claims, the Fifth Circuit in the past has differentiated the elements of “actual fraud” and of “false pretenses and false representations” chronologically, based on whether the representation was made about a past or a future matter. RecoverEdge LP v. Pentecost, 44 F.3d 1284, 1291 (5th Cir.1995). A false representation or false pretense under § 523(a)(2) must depict current or past facts, and the creditor must show by a preponderance of the evidence (1) a knowing and fraudulent falsehood, (2) describing past or current facts, that (3) was relied upon by the other party. Id. at 1292–93, citing Allison v. Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir.1992). See also Bank of La. v. Bercier (In re Bercier), 934 F.2d 689, 692 (5th Cir.1991) (“ ‘A mere promise to be executed in the future is not sufficient to make a debt nondischargeable, even though there is no excuse for a subsequent breach.’ ”), citing 3 Collier on Bankruptcy 15th Ed. ... § 523.08 [4]. A false representation involves an express statement, while “false pretenses may be based on misleading conduct without an express statement.” Wallace v. Davis (In re Davis), 377 B.R. 827, 834 (E.D.Tex.2007). Both false pretenses and false representations entail intentional conduct intended to create and develop a false impression. Id., citing Still v. Patten (In re Patten),225 B.R. 211, 215 (Bankr.Or.1998).

‘Actual fraud, by definition, consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another—something done or omitted with the design of perpetrating what is known to be a cheat or deception.’ RecoverEdge, 44 F.3d at 1293, quoting 3 Collier on Bankruptcy ¶ 523.08[5], at 523–57 to 523–58. For actual fraud, the creditor must prove the debtor had the intent to deceive and that the fraud proximately caused the loss by the creditor. RecoverEdge, 44 F.3d at 1293. To prevail on a claim that a debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because of actual fraud, a creditor must show by a preponderance of the evidence that (1) the debtor made a misrepresentation, (2) the debtor knew the misrepresentation was false at the time he made it, (3) the representation was made with the intent to deceivethe creditor, (4) the creditor actually and justifiably relied 7 on the representation, and (5) the creditor suffered a loss as a proximate result of its reliance. In re Acosta, 406 F.3d at 372. Moreover unlike false pretenses or false representation, actual fraud can focus on a promise of a future performance made with the intent not to perform. Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983). “Debts that satisfy the third element, the scienter requirement, are debts obtained by frauds involving ‘moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.’ In re Acosta, 406 F.3d at 372, citing In re Martin, 963 F.2d 809, 813 (5th Cir.1992). The court may infer an intent to deceive from ‘reckless disregard for the truth or falsity of a statement, combined with the sheer magnitude of the resultant misrepresentation.’ Id., quoting In re Norris, 70 F.3d 27, 30 n. 12 (5th Cir.1995), citing In re Miller, 39 F.3d 301, 305 (11th Cir.1994). Where the speaker has an unreasonable but honest belief that a representation is true and has information justifying that it is, he does not have an intent to deceive, i.e., “a ‘dumb’ but honest” defendant does not have scienter. Id., citing Palmacci v. Umpierrez, 121 F.3d 781, 788 (1st Cir.1997). Exceptions to discharge under § 523 should be construed in favor of the debtor. Fezler v. Davis (In re Davis), 194 F.3d 570, 573 (5th Cir.1999).

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    ...when a corporation enters the zone of insolvency); see also In re Ritz, 459 B.R. 623, 634(Bankr. S.D. Tex. 2011), aff'd, 513 B.R. 510 (S.D. Tex. 2014), aff'd, 787 F.3d 312 (5th Cir. 2015) (same).77 Here, every instance of alleged misconduct identified in the Second Amended Complaint occurre......
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1 books & journal articles
  • Tuition as a Fraudulent Transfer
    • United States
    • Emory University School of Law Emory Bankruptcy Developments Journal No. 36-1, March 2020
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    ...D Corp., X did not injure any property of C. Id. at 635. 204. Id. at 632-33.205. Id. at 635.206. Husky Int'l Elecs. v. Ritz (In re Ritz), 513 B.R. 510, 537 (S.D. Tex. 2014). ("He drained [D Corp.] of funds and fraudulently transferred those funds to other entities under his control and/or o......

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