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

• Decision Date: 19 April 2017
• Docket Number: Case No. 09–39895,Adversary No. 10–03156
• Citation: 567 B.R. 715
• Parties: IN RE: Daniel Lee RITZ, Jr., Debtor. Husky International Electronics, Inc., Plaintiff v. Daniel Lee Ritz, Jr., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Texas

567 B.R. 715

IN RE: Daniel Lee RITZ, Jr., Debtor.Husky International Electronics, Inc., Plaintiff

v.Daniel Lee Ritz, Jr., Defendant.

Case No. 09–39895

Adversary No. 10–03156

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed April 19, 2017

Jeffrey Lee Dorrell, Hanszen Laporte, Houston, TX, for Plaintiff.

William David Weber, Weber Law Firm, Jeffrey S. Williams, JS Williams and Associates, Houston, TX, for Defendant.

MEMORANDUM OPINION ON PLAINTIFF'S ORIGINAL COMPLAINT TO DENY DISCHARGEABILITY OF DEBT PURSUANT TO 11 U.S.C. § 523

[Adv. Doc. No. 1]

Jeff Bohm, United States Bankruptcy Judge

I. INTRODUCTION

Prosecution of complaints to determine dischargeability under 11 U.S.C. § 523(a)(2)(A)¹ are quite common in the bankruptcy system. However, prosecution of the complaint to determine dischargeability in the case at bar has been quite uncommon. In 2011, this Court, after holding a trial, issued a memorandum opinion explaining why it denied the plaintiff's request for a judgment of non-dischargeability. In re Ritz , 459 B.R. 623 (Bankr. S.D. Tex. 2011), rev'd and remanded sub nom. Matter of Ritz , 832 F.3d 560 (5th Cir. 2016). The plaintiff appealed, and in 2014, the District Court issued a memorandum opinion explaining its affirmance of this Court's ruling. In re Ritz , 513 B.R. 510 (S.D. Tex. 2014), rev'd and remanded sub nom. Matter of Ritz , 832 F.3d 560 (5th Cir. 2016). The plaintiff then appealed to the Fifth Circuit, and in 2015, that Court issued a memorandum opinion explaining its affirmance of the District Court's ruling. In re Ritz , 787 F.3d 312 (5th Cir. 2015), rev'd and remanded sub nom. Husky Int'l. Elecs., Inc. v. Ritz , ––– U.S. ––––, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016). Undeterred, the plaintiff sought relief from the Supreme Court, and in 2016, the highest court in the land issued an opinion that reversed the Fifth Circuit's ruling and remanded the matter for further proceedings consistent with its decision. Husky Int'l. Elecs., Inc. v. Ritz , ––– U.S. ––––, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016). On remand, the Fifth Circuit issued another memorandum opinion and, in doing so, remanded the matter to this Court for further findings of fact and conclusions of law. Matter of Ritz , 832 F.3d 560 (5th Cir. 2016). This Court now issues this Memorandum Opinion—the sixth one overall for this dispute—explaining why it has now decided to grant the plaintiff's request for a judgment of non-dischargeability.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY OF THIS ADVERSARY PROCEEDING

Husky International Electronics, Inc. ("Husky ") is a supplier of components used in electronic devices. Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp. ("Chrysalis "), and Chrysalis accumulated a debt to Husky totaling $163,999.38. [Pl's Ex. No. 3, p. 25 of 25² ]. During this 4–year period, Daniel Lee Ritz, Jr. (the "Debtor ") served as a director of Chrysalis and owned at least 30% of the company's stock. [Feb. 2, 2011 Tr. 68:13–69:2, 78:17–22].

Between 2006 and 2007, the Debtor orchestrated transfers of cash out of Chrysalis's accounts into the accounts of several other entities in which the Debtor had an interest. [Pl's Ex. No. 5]. Meanwhile, Chrysalis did not pay the debt of $163,999.38 it owed to Husky (the "$163,999.38 Debt "). Indeed, Chrysalis filed a Chapter 7 petition in 2008. [Case No. 08–33793, Doc. No. 1]; [Def's Ex. No. 56³ ].

Following Chrysalis's lead, the Debtor filed his own Chapter 7 petition in this Court in 2009. [Main Case No. 09–39895, Doc. No. 1]. Husky thereafter timely filed a complaint to determine dischargeability against the Debtor, seeking a judgment that the $163,999.38 Debt is a personal obligation of the Debtor that is non-dischargeable under § 523(a)(2)(A) (the "Adversary Proceeding ").⁴ [Adv. Doc. No. 1]. Husky based its § 523(a)(2)(A) claim on § 21.223(b) of the Texas Business Organization Code⁵ (the "TBOC "). [Id. at p. 6, ¶ 13]. This section allows a creditor of a corporation to pierce the corporate veil and impose liability on an officer, director, or shareholder of the company if the creditor can prove that the individual "caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate." Tex. Bus. Org. Code Ann. § 21.223(b) (WestlawNext 2015). This Court held a trial and, on August 4, 2011, issued a memorandum opinion explaining why Husky could not prevail under its § 523(a)(2)(A) claim. See Ritz , 459 B.R. 623.

Specifically, this Court explained that the "actual fraud" element of § 21.223(b) requires that the defendant make a representation to the plaintiff; and since the Debtor made no representation to Husky, no actual fraud could be proven—which in turn meant that Chrysalis's corporate veil could not be pierced to allow Husky to impose personal liability on the Debtor for the $163,999.38 Debt. Id. at 633. Additionally, this Court held that the test for proving "actual fraud" under § 21.223 was the same for proving "actual fraud" under § 523(a)(2)(A) : namely, proof of a representation by the defendant to the plaintiff; and since the Debtor made no representation to Husky, there was no way that this Court could hold that the $163,999.38 Debt was a non-dischargeable personal obligation of the Debtor. Id.

Husky appealed to the District Court. [Adv. Doc. No. 97]. On July 14, 2014, the District Court issued a memorandum opinion affirming this Court's ruling. Ritz , 513 B.R. 510. However, in doing so, the District Court disagreed with this Court's view that the "actual fraud" element of § 21.223 requires a misrepresentation by the Debtor to Husky. Id. at 537. Citing a Fifth Circuit opinion on § 21.223 issued two years after this Court's original 2011 opinion—Spring Street Partners–IV L.P. v. Lam , 730 F.3d 427 (5th Cir. 2013) —the District Court held that the "actual fraud" element of § 21.223 does not require any representation.⁶ Ritz , 513 B.R. at 537. Rather, the District Court held that actual fraud under § 21.223 can be established by proving that the defendant (here, the Debtor) committed "actual fraud" under Texas Business and Commerce Code § 24.005.⁷ Id. at 537–38. In the context of this suit, the District Court held that the transfers of funds effectuated by the Debtor out of Chrysalis's account could constitute "actual fraud" if Husky could prove the existence of a sufficient number of so-called "badges of fraud." Id. at 538. The District Court then held that this Court, in its memorandum opinion, had found the existence of four badges of fraud. Id. Based on the presence of these badges of fraud, the District Court held that the Debtor had committed actual fraud under TUFTA and therefore had established the "actual fraud" component required by § 21.223. Id.

Despite this holding, the District Court affirmed this Court's ruling that Husky could not prevail because the District Court agreed with this Court that "actual fraud" under § 523(a)(2)(A) —unlike "actual fraud" under § 21.223—does require a misrepresentation from the defendant (here, the Debtor) to the plaintiff (here, Husky); and the District Court emphasized that the Debtor never made any representation to Husky. Id.

Husky appealed to the Fifth Circuit. [Adv. Doc. No. 115]. On May 22, 2015, the Fifth Circuit issued a memorandum opinion affirming the District Court's ruling. Ritz , 787 F.3d 312. In doing so, the Fifth Circuit did not address the District Court's holding about the ability to establish "actual fraud" under § 21.223 through badges of fraud and without a representation. Rather, the Fifth Circuit focused solely on the District Court's affirmance of this Court's ruling that "actual fraud" under § 523(a)(2)(A) requires a representation by the defendant and that Husky could not prevail because the Debtor made no representation. Id. at 316–17. Much of the Fifth Circuit's opinion was spent explaining why it disagreed with the Seventh Circuit's holding in McClellan v. Cantrell , 217 F.3d 890 (7th Cir. 2000), that "actual fraud" under § 523(a)(2)(A) does not require a representation. Id. at 317–19. By the end of its discussion, the Fifth Circuit slammed the door shut on Husky's § 523(a)(2)(A) claim:

For all of these reasons, we conclude that a representation is a necessary prerequisite for a showing of "actual fraud" under Section 523(a)(2)(A). Because the parties agree that the record contains no evidence of such a representation [by the Debtor to Husky], discharge of the debt at issue is not barred under this provision.

Id. at 321.

Husky thereafter filed a writ of certiorari with the Supreme Court. [Adv. Doc. No. 115]. Noting that there is a split among the circuit courts over whether "actual fraud" under § 523(a)(2)(A) requires a representation from the debtor "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," the Supreme Court granted certiorari to resolve the split. Ritz , 136 S.Ct. at 1585. On May 16, 2016, the Supreme Court issued an opinion that reversed the Fifth Circuit's judgment and remanded the matter for further proceedings consistent with the opinion. Id. The Supreme Court reviewed the history of the phrase "actual fraud" and concluded that no misrepresentation is required to successfully object to the discharge of a specific debt under § 523(a)(2)(A) :

Because we must give the phrase "actual fraud" in § 523(a)(2)(A) the meaning it has long held, we interpret "actual fraud" to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation. We therefore reverse the judgment of the Fifth Circuit and remand the case for further proceedings consistent with this opinion.

Id. at 1590.

In the wake of the Supreme Court's decision, on August 10,...