Southwest Update - In re: Ritz

“Piercing the Corporate Veil” Supported Due to Fraudulent Activity

In In re: Ritz, 567 B.R. 715 (Bankr. S.D. TX 2017), Husky International Electronics, Inc. (“Husky”), a seller of electronic device components, brought suit against Daniel Ritz (“Ritz”), a Chapter 7 debtor, who controlled Chrysalis Manufacturing Corp. (“Chrysalis”), the company that had purchased components from Husky. 

In the suit, Husky alleged that Ritz had transferred funds from Chrysalis to other companies controlled by Ritz, and Husky sought to pierce the corporate veil, hold Ritz personally liable for debts owed by Chrysalis to Husky, and to except such debts from discharge in bankruptcy, on a “false pretenses, false representation, or actual fraud” theory. 

After the original trial, the United States Bankruptcy Court for the Southern District of Texas entered judgment in favor of Ritz. Husky appealed the case all the way to the Supreme Court, where the decision was subsequently reversed and remanded back down to the Bankruptcy Court.  The Bankruptcy Court then ruled in favor of Husky.  In its decision, the Bankruptcy Court outlined three hurdles that Husky would need to prove in order to win on its claim: (1) actual fraud by Ritz, (2) that such fraud was perpetrated for Ritz’s personal benefit and (3) that the resulting obligation owed by Ritz to Husky was of a type which is non-dischargeable under §523(a)(2)(A) of the Bankruptcy Code. 

With respect to the first hurdle, the Bankruptcy Court found that Ritz’s transfer of $1,161,279.90 out of Chrysalis and into the accounts of other companies controlled by Ritz evidenced eleven of thirteen “badges of fraud” set forth in the Texas Uniform Fraudulent Transfer Act (“TUFTA”). The Bankruptcy Court concluded that such transfers were made with the actual intent to hinder, delay or defraud a creditor under TUFTA, and therefore satisfied the “actual fraud” requirement of the Texas veil-piercing statute.

With respect to the second hurdle, the Bankruptcy Court concluded that, because the transfers were made to entities which were owned or controlled by Ritz, an analysis of the facts revealed that they were made for Ritz’s personal benefit. 

With respect to the third and final hurdle, the Bankruptcy Court noted that §523(a)(2)(A) of the Bankruptcy Code states that a debtor will not be discharged “from any debt for money... to the extent obtained by... actual fraud.” 

The Bankruptcy Court then concluded that because of Ritz’s fraudulent conduct, the Texas veil-piercing statute would impose personal liability on Ritz for debt owed by Chrysalis to Husky. Because of the previously-determined existence of fraudulent activity by Ritz, such debt would be of a type not dischargeable in bankruptcy. The Bankruptcy Court then concluded that Ritz remained liable for the full amount of Chrysalis’ debt to Husky, plus pre- and post-judgment interest and attorney’s fees.