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

• Decision Date: 22 May 2015
• Docket Number: No. 14–20526.,14–20526.
• Citation: 787 F.3d 312
• Parties: In the Matter of Daniel Lee RITZ, Jr., also known as Bo Ritz, Debtor. Husky International Electronics, Incorporated, Appellant v. Daniel Lee Ritz, Jr., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

787 F.3d 312

In the Matter of Daniel Lee RITZ, Jr., also known as Bo Ritz, Debtor.

Husky International Electronics, Incorporated, Appellant

v.Daniel Lee Ritz, Jr., Appellee.

No. 14–20526.

United States Court of Appeals, Fifth Circuit.

May 22, 2015.

Jeffrey Lee Dorrell (argued), Hanszen & Laporte, Houston, TX, for Appellant.

William D. Weber, Esq. (argued), Weber Law Firm, P.C., Houston, TX, for Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before STEWART, Chief Judge, and KING and ELROD, Circuit Judges.

Opinion

KING, Circuit Judge.

Appellant Husky International Electronics, Inc., brought this adversary proceeding against Appellee and debtor Daniel Lee Ritz, Jr., objecting to the discharge of a $163,999.38 contractual debt owed to Husky by Chrysalis Manufacturing Corp.—of which Ritz was a shareholder. Husky sought to except the debt from discharge under either 11 U.S.C. § 523(a)(2)(A) or 11 U.S.C. § 523(a)(6). The bankruptcy court denied all relief sought by Husky, determining that the debt was dischargeable. The district court affirmed on appeal. For the following reasons, we AFFIRM.

I. Factual and Procedural Background

The facts underlying this adversary proceeding are straightforward. Appellant Husky International Electronics, Inc. (“Husky”), is a Colorado-based seller of electronic device components. From 2003 to 2007, Husky sold and delivered goods to Chrysalis Manufacturing Corp. (“Chrysalis”) pursuant to a written contract. It is undisputed that Chrysalis failed to pay for all of the goods it purchased from Husky, and that Chrysalis owed a debt to Husky in the amount of $163,999.38. At all relevant times, Appellee Daniel Lee Ritz, Jr., the debtor, was in financial control of Chrysalis. Moreover, Ritz was a director of Chrysalis and owned at least 30% of Chrysalis's common stock.

Between November 2006 and May 2007, Ritz transferred a substantial amount of Chrysalis's funds to various entities controlled by Ritz. Specifically, Ritz transferred: (1) $677,622 to ComCon Manufacturing Services, Inc.; (2) $121,831 to CapNet Securities Corp. (of which Ritz held an 85% ownership interest); (3) $52,600 to CapNet Risk Management, Inc. (of which Ritz held a 100% ownership interest); (4) $172,100 to Institutional Capital Management, Inc., and Institutional Insurance Management, Inc. (of which Ritz held 40% and 100% ownership interests, respectively); (5) $99,386.90 to Dynalyst Manufacturing Corp. (of which Ritz held a 25% ownership interest); (6) $26,500 to Clean Fuel International Corp. (of which Ritz held a 20% ownership interest); and (7) $11,240 to CapNet Advisors, Inc. With respect to each of these transfers, the bankruptcy court concluded that Chrysalis did not receive reasonably equivalent value in exchange.¹ The bankruptcy court further determined that during this time, Chrysalis was operational, but was not paying its debts as they became due. The bankruptcy court found that at all relevant times, the sum of Chrysalis's debts was greater than that of Chrysalis's assets at a fair valuation.

In May 2009, Husky sued Ritz in federal district court, seeking to hold Ritz personally liable for Chrysalis's $163,999.38 debt.

In December 2009, Ritz filed a voluntary Chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. In March 2010, Husky filed a complaint in the bankruptcy court initiating the adversary proceeding underlying this appeal. In the complaint, Husky objected to the discharge of Ritz's alleged debt, relying on 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6).²

The bankruptcy court held a trial in February 2011. The court issued its Memorandum Opinion, including findings of fact and conclusions of law, in August 2011. As noted above, the court found that the transfers Ritz orchestrated were not made for reasonably equivalent value. The court also found that Husky suffered damages due to these transfers—specifically, “in the amount of $163,999.38—which represents the amount owed to Husky by Chrysalis for the goods which Husky delivered to Chrysalis.” In addition, the court determined that Ritz was “not a credible witness” due to his contradictory and evasive testimony, and due to his “selective” inability to recall certain information. In its conclusions of law, the bankruptcy court first addressed whether Ritz could be held liable for Chrysalis's debt under Texas veil-piercing laws. The court determined that, under Texas law, Husky had not established that Ritz perpetuated an “actual fraud” on Husky—a prerequisite for piercing the veil under Texas Business Organizations Code Section 21.223(b) —because Husky failed to show that Ritz made a false representation to Husky. The bankruptcy court found that the record was “wholly devoid of any such representation made by [Ritz].” For this same reason, the court determined that the “actual fraud” exception to discharge contained in 11 U.S.C. § 523(a)(2)(A) did not apply. Finally, the bankruptcy court rejected the applicability of the “willful and malicious injury” exception to discharge under 11 U.S.C. § 523(a)(6), concluding that Husky failed to sufficiently brief and adduce evidence on this provision, and stating that “[t]he record is wholly devoid of any proof that [Ritz] willfully and maliciously injured Husky or Husky's property.” Accordingly, the bankruptcy court denied all of Husky's requested relief.

On appeal, the district court relied on a Fifth Circuit case issued after the bankruptcy court's decision, Spring Street Partners–IV, L.P. v. Lam, 730 F.3d 427 (5th Cir.2013), in determining that Husky could pierce the corporate veil because there was sufficient circumstantial evidence suggesting that Ritz acted with the intent to hinder, delay, or defraud Husky. Nonetheless, the court held that Husky had not established actual fraud under 11 U.S.C. § 523(a)(2)(A), which requires a misrepresentation. Finally, the district court rejected the applicability of 11 U.S.C. § 523(a)(6), as Husky “fail[ed] to show by a preponderance of the evidence that Ritz acted willfully and maliciously.” Accordingly, the district court affirmed. Husky timely appealed.

II. Standard of Review

“When a court of appeals reviews the decision of a district court, sitting as an appellate court, it applies the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court.”Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 652 (5th Cir.2010) (internal quotation marks omitted). Accordingly, we review conclusions of law de novo and findings of fact for clear error. Bank of La. v. Bercier (In re Bercier),

934 F.2d 689, 691 (5th Cir.1991). “[W]e will affirm the bankruptcy court's findings unless on the entire evidence, this court is left with the definite and firm conviction that a mistake has been committed.” Id. (internal quotation marks and brackets omitted). Moreover, where, as here, “the district court has affirmed the bankruptcy court's findings, the clear error standard is strictly applied.” Frazin v. Haynes & Boone, L.L.P. (In re Frazin), 732 F.3d 313, 317 (5th Cir.2013) (internal quotation marks and brackets omitted).

III. Discussion

On appeal, Husky contends as a threshold matter that Ritz committed “actual fraud” under Texas Business Organizations Code Section 21.223(b) and thus can be held liable for Chrysalis's debt. Husky further argues that the debt is excepted from discharge in bankruptcy under either the “actual fraud” clause in 11 U.S.C. § 523(a)(2)(A), or as debt due to “willful and malicious injury” under 11 U.S.C. § 523(a)(6). Because we conclude—as did the bankruptcy and district courts—that neither of these exceptions to discharge applies, we need not reach the first issue.

A. “Actual Fraud” Under 11 U.S.C. § 523(a)(2)(A)

“The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an honest but unfortunate debtor.” Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (internal quotation marks omitted). In accordance with that policy, Section 523(a)(2)(A) excepts from discharge “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.” Husky asserts that the debt at issue is one for money obtained by “actual fraud.” The parties vigorously dispute the meaning of this term—particularly, whether “actual fraud” can be established where, as here, the debtor made no false representation to the creditor.³ Guided by Supreme Court and Fifth Circuit precedent, we conclude that it cannot.⁴

Husky's argument that a false representation is unnecessary to trigger the “actual fraud” clause of Section 523(a)(2)(A) rests almost exclusively on McClellan v. Cantrell, 217 F.3d 890 (7th Cir.2000). In McClellan, a divided panel of the Seventh Circuit held that “actual fraud” under that provision “is not limited to misrepresentations and misleading omissions.” 217 F.3d at 893. The court faced a situation in which the creditor sold machinery to the debtor's brother for $200,000, payable in installments. Id. at 892. The brother defaulted, owing the creditor more than $100,000. Id. The creditor sued the brother and, with the suit pending, the brother sold the machinery to his sister, the debtor, for $10; she later resold the machinery for $160,000. Id. The debtor was aware of the lawsuit and “was colluding with her brother to thwart [the creditor]'s collection of the debt that her brother owed him.” Id. The debtor ultimately filed for bankruptcy, and the creditor brought an adversary proceeding to recover the debt. Id. At issue in McClellan was whether that debt was barred from discharge under the “actual fraud” clause of Section 523(a)(2)(A) —despite the fact that the debtor made...