Supreme Court reverses the 5th Circuit in bankruptcy case

| May 19, 2016 | Bankruptcy |

The Supreme Court recently ruled in a bankruptcy case that might interest some Texans. The decision was handed down in May, reversing an earlier decision from the U.S. Court of Appeals for the Fifth Circuit.

The case involved a situation in which the director of a manufacturing company transferred money from that company to other entities that the director owned. At the same time, the manufacturing company owed an electronics company $163,000 in a business contract. After transferring the manufacturing company’s money, the electronics company filed a civil lawsuit against the director in order to try to hold him personally liable for the debts.

The director then filed for protection under Chapter 7 of the bankruptcy code. The electronics company objected to the debt owed to it being discharged. The lower courts ruled that because the director didn’t make a fraudulent representation to the electronics company. The lower courts believed the law required a fraudulent misrepresentation in order to pierce the corporate veil, which protects directors and other corporate actors from personal liability. The Supreme Court reversed those rulings, stating that fraudulent transfers amounted to actual fraud. This meant that the debt would not be dischargeable in the director’s Chapter 7 bankruptcy case.

Anyone who is seeking protection under the bankruptcy code should be aware that certain types of debts will not be dischargeable as a matter of public policy. If people have questions about whether or not their debts are dischargeable in bankruptcy, they may want to consult with bankruptcy attorneys. A lawyer may help by advising his or her client about the dischargeability of the debts that are owed. He or she may also be able to provide guidance about whether it is better for his or her client to file for protection under Chapter 7 or Chapter 13.