Amicus Curiae Brief — Husky International Electronics, Inc. v. Ritz, 136 S. Ct. 445 (2015) (No. 15-145)

No. 15-145

IN THE

Supreme Court of the United States

HUSKY INTERNATIONAL ELECTRONICS, INC.,

Petitioner,

—V.—

DANIEL LEE RITZ, JR.,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF OF AMICI CURIAE PROFESSORS

RICHARD AARON, JAGDEEP S. BHANDARI,

SUSAN BLOCK-LIEB, JESSICA GABEL CINO,

LINDA E. COCO, BRUCE GROHSGAL, EDWARD JANGER,

GEORGE W. KUNEY, C. SCOTT PRYOR,

THERESA J. PULLEY RADWAN, MICHAEL D. SOUSA

AND LAURA M. SPITZ IN SUPPORT OF RESPONDENT

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR OF LAW

ST. JOHN’S UNIVERSITY SCHOOL

OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

Of Counsel, (718) 990-1923

JOHN COLLEN LLM@stjohns.edu

Attorney for Amici Curiae

January 25, 2016 Professors

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES.......... ... iV

INTEREST OF AMICI CURIAE . ...... _ 1

SUMMARY OF ARGUMENT ................. 2

ERECT SEN AOE ee Oe Tae mre 6

POINT I—

DISCHARGE OF DEBT ARISING

FROM A FRAUDULENT TRANSFER

IS GOVERNED EXCLUSIVELY BY

Ne sc ccceuecunn waves 6

A. The scope and plain meaning of Code

Ee, ce kweee 6

1. Section 727(a) provides for the

discharge of fraudulent transfer

debt unless incurred within one

year of bankruptcy............ 6

2. Read together, the plain meaning

of sections 727(a) and 727(b)

demonstrates that section

523(a)(2)(A) does not cover

fraudulent transfer debt.... . . 7

B. Because section 523(a)(2)(A), unlike

sections 548 and 727, does not address

debts arising from transfers to “hinder,

delay, or defraud” a creditor, it is

presumed that Congress acted

intentionally to exclude such debt

from section 523(a)(2)(A)............. 8

]

PAGE

C. Petitioner’s reading of section

523(a)(2)(A) renders it either

contradictory with, or redundant

ec uumaekas 9

D. The specific provisions of section 727(a)

prevail over the “actual fraud” general

provision in section 523(a)(2)(A) ...... 11

E. “Actual Fraud” as used in section 523

does not apply to fraudulent

transfers Se OE eee ed 13

1. Section 523(a)(2)(A) applies only

where property is “obtained” from

RG hind cuaks ice cnceobnden 13

a. The plain meaning of the

statute is that property be

“obtained” from a creditor .. 13

b. The historical understanding

of fraudulent transfers has

always been that they involve

transfers of property of the

debtor, not obtaining property

from a creditor............... 16

2. Congress did not intend for

transferors and transferees to

have different discharge

Sn otnccccacees essvece 17

1]

POINT II—

IT IS ESTABLISHED CONGRESSIONAL

POLICY TO DISCHARGE FRAUDULENT

TRANSFER DEBTS OUTSIDE THE ONE

YEAR REACH-BACK PERIOD OF

DEMS TPP ccsvccacees sesustaeurnen

A. The discharge provisions of section

727(a) represent a long-standing

policy choice by Congress... .....

B. The Congressional policy regarding

the discharge of fraudulent transfer

debt makes sense because section 727(a)

implements the central policy of

equality of distribution to all

COD 6nccsécstvcesiusiseeeee

C. Congress’ policy determination must

re

D. Neal v. Clark did not involve a

fraudulent transfer of property, and

by codifying the rule in Neal v. Clark

when enacting section 523(a)(2)(A),

Congress did not intend to allow

fraudulent transfer debt to be excepted

from a debtor’s discharge ..........

POINT II—

THE McCLELLAN AND LAWSON

CASES WERE WRONGLY DECIDED...

CERES 60 votsuecccnceuneesseuseeaennen

PAGE

20

20

23

25

29

32

35

iv

TABLE OF AUTHORITIES

Cases:

Baker Botts L.L.P. v. Asarco LLC,

See ls GBD cccccccccccccccces

Bank of America, N.A. v. Caulkett,

BED eee BOOO GOOED) 2 nc cccccccccccces

Begier v. L.R.S.,

PED codocecevocecescooess

BFP v. Resolution Trust Corp.,

Se EE ED CE ccdeccce ceccececces

Bullock v. BankChampaign,

133 S.Ct. 1764 (2013). . . ......

Curtis v. United States,

Be WS GED ceccee ccccccccccs

D. Ginsberg & Sons, Inc. v. Popkin,

Be es PE CED cccccccce cocccccces

Duell v. Brewer,

92 F.2d 59 (2d Cir. 1937) ..............

Emil v. Hanley,

BD PS OU CEOED cccccccccccccce cee

Field v. Mans,

516 U.S. 59 (1995)

Florida Dept. of Revenue v. Piccadilly,

128 S.Ct. 2326 (2008) ..................

Food & Drug Admin. v.

Brown & Williamson Tobacco Corp.,

DED sccsstec ceecse ccc

PAGE(S)

see 15

‘on 8

PAGE(S)

Freeman v. First Union Nat. Bank,

865 So.2d 1272 (Fla. Sup. Ct. 2004)..... 19

Hall v. United States,

a ne meee 28

In re Glunk,

343 B.R. 754 (Bankr. E.D. Penn. 2006) .. 15

In re Lawson,

791 F.3d 214 (ist Cir. 2015).............. 35

In re Wakefield,

207 Fed. 180 (N.D.N.Y. 1913) .... .. 26

Keene Corp. v. United States,

et. 0 lk We &

Law v. Siegel,

Rs I a i eee ieee 28, 29

Mack v. Newton,

737 F.2d 1343 (5th Cir. 1984)......... : 19

Mackey v. Lanier Collection

Agency and Service, Inc.,

BR Ee re 10

Magten Asset Management Corp. v.

Paul, Hastings, Janofsky & Walker, LLP,

2007 WL 129003 (D.Del 2007).......... 15, 19

Mann v. GTCR Goldner Rauner, L.L.C..,

483 F.Supp. 2d 884 (D.Ariz. 2007) ....... 19

McClellan v. Cantrell,

217 F.3d 890 (7th Cir. 2000)...... .... passim

Moriyama uv. Allen,

13 F.2d 117 (9th Cir. 1926)...6, 20, 25, 26, 34

PAGE(S)

National Federation of Independent

Business v. Sebelius,

132 S.Ct. 2666 (2012) ... ... .. ....22, 27, 28

Neal v. Clark,

fF ef. ae 4, 29, 30, 31

Palmacci v. Umpierrez,

121 F.3d 781 (1st Cir. 1997)..... ........ 35

Pennsylvania Dep't of

Public Works v. Davenport,

Ss SE ckcacenckace euessaens 6

Radlax Gateway Hotel, LLC

v. Amalgamated Bank,

i 7,12

Radzanower v. Touché Ross & Co.,

et eedaweds 12

Russello v. United States,

a ae eaeen 8

Thomson v. Hanson,

168 Wash.2d 738

ee ns ccitcéccendeweeas 16

Twyne’s case,

3 Co. Rep. 80a (Star Chamber 1601)..... 17

Union Bank v. Wolas,

I Ss vc cin deccuedeunuwendne 24

Warne Investments, Ltd. v. Higgins,

219 Ariz. 186

(Ariz. Ct. of Appeals 2008) ............... 19

PAGE(S)

Statutes:

Se ED sc ecucndenes «6 xcvee ane 8

11 U.S.C. § 523.... 20. 0. oe. ws we Ze

11 U.S.C. § 623(a)(2)(A) .............. . ...passim

Oe Ot ecas dgnehucsabunauesdunnns 8,13

Be le Oe ED ev ccescecsconcasseus 8, 18, 24

By Ss SEED vinos conccctcdeccseecssas 18

Be EEN S dncdnccdiccctcucducanacs 18

AIRE Rn eA Eee en EG 7

i em passim

Be Bs chs cccasees 0-0: 4,11, 14, 35

Be ly OF PU EED ovcuce dcccee 0-00 10, 11, 22

Oy SS Ue CEE hod d i didevdrseddedes. 056.02 3, 7

Be Bes eB IE ho vedicdccecesncs. one 26

Bankruptcy Act of 1898, Pub. L. No. 62,

section 14b, 30 Stat. 550

a 20

Other Authorities:

35 Cong. Rec. H6940 (June 17,1902). ....... 21

67 Cong. Rec. H7677 (April 17,1926)......... 22

124 Cong. Rec. H11,095-96

(Daily ed. Sept. 28, 1978)... .... .... 30

124 Cong. Rec. H32,392

(Daily ed. Sept.28, 1978) ..... .......... 30

vill

124 Cong. Rec. H33,399

(Daily ed. Sept.28, 1978)

124 Cong. Rec. S17, 412-13

(Daily ed. Oct. 6, 1978) ................

4 Collier on Bankruptcy,

para 523.08[1]}[a] (16th ed.) . ...... ..

6 Collier on Bankruptcy,

para 727.LH[1] (16th ed. 2014). ... .

Black's Law Dictionary ...............0000-

Commission Report, 93rd Cong. Ist Sess.,

H. Doc. No. 93-137, Part II..... .. ...

English Oxford Dictionary.. ..............

Felix Frankfurter, Some Reflections

on the Reading of Statutes,

47 Col. L. Rev. 527 (1947) .............

i PE TED Kaicvcudbddvcéecesdesce

le es, I an cnceccbcseencecess

Charles Jordan Tabb, The Historical

Evolution of the Bankruptcy Discharge,

65 Am. Bankr. L. J. 325 (1991)........

PAGE(S)

30

ses 30

_ 15

ses 23

— 15

‘ne 22

jee 15

vee 27

vee 22

soe 22

ie 21

INTEREST OF AMICI CURIAE'

The amici? are a group of law professors who

have devoted their careers to the study and

teaching of bankruptcy law. The amici represent

no institution, group, or association. Their

interest is to underscore that the Bankruptcy

Code (the “Code”) has specific provisions relating

to fraudulent transfers, and that whether a debt

arising from such a transfer is to be discharged

should be determined in light of the text, history,

and overall structure of such provisions.

The amici are keenly interested in this appeal

because the Circuit Courts of Appeals, including

the court below, in addressing whether fraudulent

transfers are covered by the “actual fraud” provision

of section 523(a)(2)(A) of the Code, have mistak-

enly assumed that the controlling question is

whether a false representation is an essential

! Pursuant to Rule 37 of the Rules of this Court, the

amici file this brief with the written consent of both parties,

which are on file with the Clerk. No person or entity includ-

ing the amici or their counsel made a monetary contribution

for the preparation or submission of this brief.

2 The amici are the following law professors who teach at

the law schools indicated next to their names: Richard Aaron,

University of Utah, S.J.Quinney College of Law; Jagdeep S.

Bhandari, Wake Forest University School of Law; Susan Block-

Lieb, Fordham Law School; Jessica Gabel Cino, Georgia State

University College of Law; Linda E. Coco, Barry University

School of Law; Bruce Grohsgal, Widener University Delaware

Law School; Edward Janger, Brooklyn Law School; George W

Kuney, University of Tennessee College of Law; C. Scott Pryor,

Campbell University School of Law; Theresa J. Pulley Radwan,

Stetson University College of Law; and Michael D. Sousa,

University of Denver Sturm College of Law. Amicus Laura M.

Spitz devotes full time to her duties as Vice Provost of Cornell

University, and thus is not currently a law teacher.

2

element of that section’s “actual fraud” provision.

However, the amici respectfully submit that such

question actually never arises because the

discharge of fraudulent transfer debt is exclusively

controlled by section 727(a) of the Code. Under the

specific provisions of section 727(a) regarding

fraudulent transfers, such debt is discharged

unless incurred within one year before the bank-

ruptcy filing. Further, both the plain meaning of

that statute and a century of practice show that

the “actual fraud” provision of section 523(a)(2)(A)

was not enacted to address, much less to except,

fraudulent transfer debt from the discharge

ultimately received by a chapter 7 debtor. Rather,

Congress made a deliberate policy choice that

section 727(a) governs the discharge of such debt.

SUMMARY OF ARGUMENT

The amici submit that asking whether a

misrepresentation is an essential element of an

“actual fraud” under section 523(a)(2)(A) disguises

Petitioner’s false presupposition, namely, that a

debt arising from a transfer made to hinder, delay

or defraud creditors is capable of being within

the scope of section 523(a)(2)(A)’s “actual fraud”

provision and thus excepted from a discharge later

received by a chapter 7 debtor under section 727(a).

That false presupposition leads to an unnecessary

inquiry whether a misrepresentation is required

for a fraudulent transfer to constitute an “actual

fraud” under section 523(a)(2)(A). The amici would

avoid that entire inquiry They submit that the

“actual fraud” provision is wholly inapplicable to

fraudulent transfer debt. This is because the

discharge of a debt arising from a transfer made

to hinder, delay, or defraud creditors is exclusively

3

regulated by sections 727(a) and 727(b), which

discharge such debt, unless incurred within one

year before the bankruptcy.

Simply stated, Petitioner and its allies attempt

to use the “actual fraud” provision of section

523(a)(2)(A) to circumvent a debtor's entitlement

to a discharge of fraudulent transfer debt occur-

ring outside the statutory one year period. That

circumvention is impermissible as a matter of

statutory construction, and violates century-old

practice and a deliberate congressional policy, for

the discharge of such debt.

To begin, there are compelling arguments which

make it evident that fraudulent transfer debt is

governed exclusively by section 727(a), and is

outside the scope of section 523(a)(2)(A).

First, the plain meaning of section 727(a)

establishes that only it governs the discharge of

fraudulent transfer debt, that is, debt arising from

transfers to “hinder, delay or defraud” creditors,

thereby preventing creditors from reaching the

debtor’s assets to satisfy their claims.

Second, fraudulent transfer debt, unlike other

debts, does not arise from the particularized

injury incurred by one creditor. Rather, fraudulent

transfers injure all creditors, each of whom is

blocked by the transfer from reaching the debtor's

property In light of the central principle of the

Code for equality of distribution to similarly

situated creditors, section 727(a) should be under-

stood as the sole basis governing the discharge of

fraudulent transfer debt. Section 523(a)(2)(A),

dealing with injury to a single creditor, does not

fit within the Code’s structure for the discharge of

such debt.

4

Third, by express Congressional design, section

523(a)(2)(A), unlike section 727(a), does not

address, or even mention, debts arising from

transfers to “hinder, delay, or defraud creditors.”

It deals with other sorts of fraud.

Fourth, to read section 523(a)(2)(A) as in any

way applying to fraudulent transfer debts creates

an impermissible contradiction with, or redun-

dancy of, section 727(a).

Fifth, the specific provisions of section 727(a)

prevail over the general ones of section 523(a)(2)(A).

Sixth, “actual fraud,” as used in section

523(a)(2)(A), does not apply to fraudulent transfers

because of its threshold requirement that property

be obtained from a creditor by fraud, which is not

met in this case.

Next, most fundamentally, it is a matter of

Congressional policy and statutory text, extending

for over a century, that fraudulent transfer debts

outside the reach-back period of section 727(a)(2)

and its predecessors are to be discharged.

Petitioner’s attempt to bring fraudulent transfers

within the scope of section 523(a)(2)(A) based on

Congress’ codification of Neal v. Clark, 95 U.S.

704 (1877) is simply misplaced because Neal v.

Clark is not a fraudulent transfer case.

Indeed, there is a compelling policy reason why

fraudulent transfer debt is governed by section

727(a), which affects the claims of all creditors,

and cannot be made nondischargeable by a single

creditor under section 523(a)(2)(A): fraudulent

transfers hide the debtor’s assets from all

creditors, not just from a single creditor. Thus,

fraudulent transfer debt that arises within section

727(a)’s one year period results in a denial of

5

discharge so as to enable all creditors to pursue

their remedies post bankruptcy, rather than only

_a single creditor.To allow a single creditor to except

its claim alone from the discharge discriminates

against the remaining creditors. Of course, that

Congress elected the one year period is entirely a

matter of its legislative discretion. The precedents

of this Court establish that such a Congressional

policy choice must be preserved by this Court,

even were it to disagree with that policy.

Finally, based on the foregoing, it becomes clear

that the principal cases relied on by Petitioner are

in error. Those cases fall prey to an erroneous pre-

conclusion that fraud of any kind must always be

punished by denial of discharge. Congress,

however, has imposed that consequence only for a

fraudulent transfer that occurs within one year

before bankruptcy, and if this policy is dis-

agreeable, the solution lies with Congress.

Consequently, the amici respectfully ask this

Court to uphold the result reached by the Court of

Appeals below, namely, that Respondent’s debt, if

any, for making the transfers in suit cannot be

excepted under the “actual fraud” provision of

section 523(a)(2)(A) from the discharge he may

ultimately receive. However, the reasons advanced

by the amici to support that result are profoundly

different from those employed by the court below.

6

ARGUMENT

POINT I

DISCHARGE OF DEBT ARISING FROM A

FRAUDULENT TRANSFER IS GOVERNED

EXCLUSIVELY BY SECTION 727(a)

A. The scope and plain meaning of Code

section 727(a)

1. Section 727(a) provides for the

discharge of fraudulent transfer debt

unless incurred within one year of

bankruptcy

Section 727(a), on its face, discharges fraudulent

transfer debt incurred more than one year before

bankruptcy. Section 727(a)’s introductory clause

broadly directs that “[t]the court shall grant the

debtor a discharge” (emphasis added) and is

followed by 12 numbered subsections that specify

grounds for denial of the discharge. Clause (2) of

section 727(a) denies a discharge if a transfer was

made “with intent to hinder, delay or defraud a

creditor” of “(A) property of the debtor, within one

year before the date of the filing of the petition.”

This provision in clause (2)(A) for denial of a

discharge would not be required if the broad

discharge under section 727(a) did not in the first

instance discharge all debt. This Court employed

like reasoning in Pennsylvania Dep’t of Public

Works v. Davenport, 495 U.S. 552, 562 (1990)

(“Had Congress believed that restitution

obligations were not ‘debts’ giving rise to ‘claims,’

it would have had no reason to except such

obligations from discharge in section 523(a)(7).”).

See also Moriyama uv. Allen, 13 F.2d 117, 118 (9th

7

Cir. 1926) (“By declaring that a fraudulent transfer

within the four-month period is a bar to a discharge,

Congress by implication declared that a transfer

prior to that date will have no such effect.”).

Accordingly, section 727(a) facially discharges

fraudulent transfer debt where it is incurred

beyond the one year reach-back period.

2. Read together, the plain meaning of

sections 727(a) and 727(b) demon-

strates that section 523(a)(2)(A) does

not cover fraudulent transfer debt

The plain meaning of interacting subsections (a)

and (b) of section 727 shows that section 523(a)(2)(A)

is not a basis to except fraudulent transfer debt

from a discharge, and Petitioner’s reliance on

section 727(b) is misplaced. First, section 727(a)

expressly provides for granting a discharge to

the debtor unless he or she made a fraudulent

transfer within one year before the bankruptcy

filing. Then, immediately thereafter, section

727(b) states that a discharge discharges all of the

debtor’s pre-petition debt “[e]xcept as provided in

section 523.” Clearly, however, Congress did not

intend the general section 523 exception provided

by section 727(b) to nullify its specific provisions

governing the discharge of fraudulent transfer

debt under the immediately preceding section

727(a). See Radlax Gateway Hotel, LLC uv.

Amalgamated Bank, 132 S.Ct. 2065, 2071 (2012)

(“the specific governs the general”). Accordingly,

Congress clearly understood section 523(a)(2)(A)

to except from a discharge only debts other than

fraudulent transfer debts. It would make no sense

to read section 523(a)(2)(A) and its inclusion in

section 727(b) in any other way.

8

B. Because section 523(a)(2)(A), unlike

sections 548 and 727, does not address

debts arising from transfers to “hinder,

delay, or defraud” a creditor, it is pre-

sumed that Congress acted intentionally to

exclude such debt from section 523(a)(2)(A)

Section 727(a) expressly addresses the discharge

(or denial of discharge) of debts to “hinder, delay,

or defraud” creditors. This identical phrasing is

also used in section 548(a)(1)(A) of the Code to

provide for the avoidance of fraudulent transfers,

and in section 522(0)(4) to reduce the amount of a

debtor’s exempt property for filing for bankruptcy

“with intent to hinder, delay, or defraud a

creditor” within 10 years prior to bankruptcy.

Congress’ use of wholly different language, namely,

“actual fraud,” in section 523(a)(2)(A) obviously

refers to something other than fraudulent

transfers to hinder, delay, or defraud creditors.

As this Court has stated, “where Congress

includes particular language in one section of a

statute but omits it in another ... it is generally

presumed that Congress acts intentionally in the

disparate ... exclusion.” Keene Corp. v. United

States, 508 U.S. 200, 208 (1993); accord Curtis v.

United States, 511 U.S. 485 (2001); BFP v.

Resolution Trust Corp., 511 U.S. 531, 538 (1994);

Russello v. United States, 464 U.S. 16. 23 (1983).

The omission of the words “hinder, delay, or

defraud” from section 523(a)(2)(A) controls this

case because those are words of art used to signify

fraudulent transfers and they fail to appear in

that provision. Accordingly, section 523(a)(2)(A)

should not be read to subvert the discharge

provisions of section 727(a) governing transfers to

hinder, delay or defraud creditors.

9

C. Petitioner’s reading of section 523(a)(2)(A)

renders it either contradictory with, or

redundant of, section 727(a)

Petitioner attempts to use the “actual fraud”

provision of section 523(a)(2)(A) to defeat a

debtor’s entitlement to a section 727(a) discharge

of fraudulent transfer debt. See McClellan v.

Cantrell, 217 F.3d 890, 892 (7th Cir. 2000)

(hereinafter, “McClellan”) (explicitly acknowl-

edging the creditor’s effort to use section 523(a)(2)(A)

to prevent the discharge of a fraudulent transfer

debt under section 727(a)); Cf., amicus brief filed

in this case by the National Association of

Bankruptcy Trustees (“NABT”) candidly conceding

that because the transfers at issue in this case

were made more than one year before the bank-

ruptcy filing, a bankruptcy trustee or creditors

would be unable to block the discharge of such

debt under section 727(a)—because “that relief

was not available.” See NABT’s brief at 11-12. Yet,

NABT nevertheless asks this Court to give,

through section 523(a)(2)(A), the very relief it

acknowledges to be expressly precluded by section

727(a).

Moreover, reading section 523(a)(2)(A) as

covering fraudulent transfer debt would make it

inconsistent with section 727(a). It would defeat

section 727(a)’s provision for discharging such

debt incurred prior to the one year period. It is, of

course, a fundamental principle that statutes are

to be construed consistently and harmoniously

with each other. Food & Drug Admin. v. Brown &

Williamson Tobacco Corp., 529 U.S. 120, 133

(2000) (A court must “fit, if possible, all parts [of a

statute] into an harmonious whole.”).

10

NABT’s only justification for letting section

523(a)(2)(A) contradict section 727(a) is speculation

that debtors will defer their bankruptcy filings until

at least one year after making fraudulent transfers

in order to “block their chapter 7 trustees and

creditors from objecting to their general discharge

under section 727(a)(2)(A) of the Code.” NABT’s

brief at 4. It is doubtful, however, that debtors who

are individuals are sufficiently knowledgeable of the

bankruptcy law to make a calculated deferral of a

bankruptcy filing, or otherwise able to defer a

needed bankruptcy filing for more than a year. In

any event, NABT’s concern should be addressed by

it to the Congress, not this Court.

Alternatively, if Petitioner’s reading of section

523(a)(2)(A) does not contradict section 727(a),

then that provision becomes superfluous for the

following reason. If the debtor makes an

intentional fraudulent transfer and the debtor

does not ultimately receive a discharge, an order

making such debt nondischargeable under section

523(a)(2)(A) as an “actual fraud” will not have

been needed because the debt would survive the

bankruptcy on its own accord as undischarged

debt. But statutes should not be construed so as to

be unnecessary or redundant. See Mackey v.

Lanier Collection Agency and Service, Inc., 486

U.S. 825, 837 (1988) (“[Wle are hesitant to adopt

an interpretation of a Congressional enactment

which would render superfluous another portion of

the same law.”).

Significantly, while the Fifth Circuit Court of

Appeals in the present case did not base its

holding on section 727(a), that court expressly

suggested that fraudulent transfer debt is

governed by section 727(a), not by section

1]

523(a)(2)(A). In this regard, the Fifth Circuit

correctly observed:

We also note another provision of the

Bankruptcy Code, Section 727(a)(2),

excepts from discharge certain fraudulent

transfers, 11 U.S.C. sec 727(a)(2)(A) (“The

court shall grant the debtor a discharge,

unless ... the debtor, with intent to

hinder, delay, or defraud a creditor ...

has transferred ... property of the debtor

.). It would appear odd, at the very

least, for Congress to have intended the

“actual fraud” provision cover fraudulent

transfers, when there is another provision

directly addressing such transfers. See

United States v. $92,203.00 in U.S.

Currency, 537 F.3d 504, 509 (5th Cir.

2008) (“We are to read a statute as a

whole, so as to give effect to each of its

provisions without rendering any

language superfluous.”)

Id. at 320-21. (emphasis added). The Fifth Circuit,

however, went on to rule only on whether a

misrepresentation is a required element of an

“actual fraud.”

Accordingly, section 523(a)(2)(A) is not a vehicle

for barring the discharge of fraudulent transfer

debt.

D. The specific provisions of section 727(a)

prevail over the “actual fraud” general

provision in section 523(a)(2)(A)

Petitioner’s position that a debt arising from a

transfer to hinder, delay, or defraud, specifically

described in section 727(a), may be excepted from

12

a discharge under the general fraud section

523(a)(2)(A), sharply conflicts with the weil-

established canon of statutory construction that

“the specific governs the general.” Radlax

Gateway Hotel, LLC, 132 S.Ct. at 2071 (quoting

Morales v. Trans World Airlines, Inc., 504 U.S.

374, 384 (1992)). Moreover, this principle would

not change even if the general statute were enacted

more recently than the specific one. Radzanower

v. Touché Ross & Co., 426 U.S. 148, 153 (1976) (“It

is a basic principle of statutory construction that a

statute dealing with a narrow, precise, and specific

subject is not submerged by a later enacted

statute covering a more generalized spectrum.”).

Applying this canon is particularly appropriate

in this case. As is discussed infra, Congress’

specific provision for the discharge of fraudulent

transfer debt reflects its strong policy formulated

many years ago and re-enacted thereafter in each

of its major modifications of the bankruptcy law.

In each instance, Congress made it clear that it

intended that the discharge of fraudulent transfer

debt be dealt with at the discharge stage of the

case, and that the debtor should be freed of such

debt unless it was incurred within one year before

the bankruptcy filing. As this Court made clear in

Radlax, it is “particularly true” that “the specific

governs the general” where, as here, “Congress

has enacted a comprehensive scheme and has

deliberately targeted specific problems with

specific solutions,” Radlax, 132 S.Ct. at 2071,

quoting Varity Corp. v. Howe, 516 U.S. 489, 519

(1996) (Thomas, J., dissenting).

Thus, even if section 523(a)(2)(A)’s general

language could be read as broad enough to cover

fraudulent transfer debt, it should nevertheless be

13

construed as being superseded by tke specific

provisions of section 727(a). See D. Ginsberg &

Sons, Inc. v. Popkin, 285 U.S. 204, 208 (1932) (citing

United States v. Chase, 135 U.S. 255, 260 (1890)) (A

“general enactment must be taken to affect only

such cases within its general language as are not

within the provisions of the particular enactment.”).

Section 523(a)(2)(A) is just not a vehicle for the

nondischarge of fraudulent transfer debt.

E. “Actual Fraud” as used in section 523

does not apply to fraudulent transfers

There is a fundamental difference between

fraudulent transfers and other types of fraud: a

fraudulent transfer does not use deceit to trick

people out of their money, property, or services;

rather, it surreptitiously keeps a debtor’s assets

away from the reach of his or her creditors. A

fraudulent transfer is sui generis, and must be

understood as differing from other frauds. That is

why the special sections of the Code that are

devoted to fraudulent transfers (sections 548 and

727(a)) do not address other kinds of fraud, and it

is also why, correlatively, the special section of the

Code devoted to other frauds (section 523(a)(2)(A))

does not address fraudulent transfers.

1. Section 523(a)(2)(A) applies only

where property is “obtained” from a

creditor

a. The plain meaning of the statute

is that property be “obtained”

from a creditor

Petitioner candidly acknowledges that section

523(a)(2)(A) applies where a debtor “received

property” belonging to its creditor. Pet Op Br 50.

14

(emphasis in original) Moreover, perhaps

unwittingly, Petitioner actually concedes that

“[s]ection 727(a)(2) applies only where the debtor

diminishes the bankruptcy estate by transferring

property away from the reach of its creditors.” Id.

Effectively, this mirrors the plain text of section

523(a)(2)(A), where the “actual fraud” provision

applies only if something of the creditor’s (money,

property, services, or credit) has been “obtained

by” the debtor. Because in a fraudulent transfer

nothing is obtained from the creditor, and only

involves a transferor’s own property, section

523(a)(2)(A) is inapplicable.

In this case, nothing was obtained from the

transferor’s creditor by means of the transfers

made by the debtor. What Petitioner describes as

the Respondent’s wrongful conduct consists of a

classic fraudulent transfer—allegedly draining

funds out of a company and transferring them to

other entities to place them beyond the reach of a

creditor. Nothing of the aggrieved creditor, Husky,

was obtained; what was obtained in this case was

money of the transferor.*

Dictionary definitions reinforce this conclusion.

This Court relies on such definitions for the mean-

3 Even if section 523(a)(2)(A) applied to a fraudulent

transfer debt, such debt could not be excepted under that

provision from the discharge the debtor may ultimately

receive in this case. This is because the goods purchased

from the creditor in this case were not “obtained by .

fraud,” as required for a debt to be nondischargeable under

that provision. As stated by the Fifth Circuit below,

purchases of those goods were made over several years

pursuant to a written contract, and the Petitioner “had not

established that [Respondent] perpetuated an ‘actual fraud’

on [Petitioner].” Jn re Ritz, 787 F.3d 312, 314.

15

ing of words. See. e.g., Baker Botts L.L.P. v.

Asarco LLC, 135 S.Ct. 2158, 2165 (2015); Bullock

v. BankChampaign, 133 S.Ct. 1754, 1758 (2013).

The English Oxford dictionary offers the following

as the primary definition of the word “obtain”: “To

come into possession of; to procure; acquire or

secure.” Black’s Law Dictionary likewise defines

“obtain” as meaning “[t]o bring into one’s own

possession; to procure.” Here, Respondent never

‘came into possession’ or ‘procured’ or ‘acquired’

anything of Husky’s.

As aptly stated in Jn re Glunk, 343 B.R. 754

(Bankr. E.D. Penn. 2006), in dismissing a pro-

ceeding to except a debt from a discharge for a

failure to allege that the debtor obtained anything

from his creditor:

The plain language of the statute

unambiguously requires, as a threshold

matter, that something of value... be

transferred to the debtor from the creditor to

sustain a claim under section 523(a)(2)(A).

Id. at 758, citing In re Rountree, 330 B.R. 166, 171

(E.D. Va. 2004) (emphasis added). Accord, Magten

Asset Management Corp. v. Paul, Hastings,

Janofsky & Walker, LLP, 2007 WL 129003 at *2

(D.Del 2007); 4 Collier on Bankruptcy, para

523.08[1][a] at p. 523-43. (16th ed.).

Petitioner’s contention that the “actual fraud”

provision covers fraudulent transfer debt invites

this Court to disregard the threshold requirement

of section 523(a)(2)(A) that something be “obtained”

from the debtor’s creditor. This is because

Petitioner’s lengthy discussion of the common law

meaning of actual fraud, Pet Op Br 18-32, like

that of its amici supporters, does not address the

16

particular meaning and specific treatment of

fraud in the context of the discharge of fraudulent

transfer debt under section 727(a) and its

numerous predecessors enacted by Congress over

more than the last 100 years. Petitioner’s

presentation boils down to an argument that

because a transferor commits a fraud by

fraudulently transferring property, such a fraud

necessarily falls within the “actual fraud”

provision. This conclusory contention, however, is

faulty because (among other reasons) it disregards

the threshold coverage requirement of section

523(a)(2)(A) that property be “obtained” from the

debtor’s creditor. Petitioner’s argument that

“Actual Fraud is Any Intentional Fraud,” Pet Op

Br 20, utterly fails to be cognizant of section

727(a)’s specific and controlling treatment of

fraudulent transfer debt.

b. The historical understanding of

fraudulent transfers has always

been that they involve transfers

of property of the debtor, not

obtaining property from a

creditor

Historically, fraudulent transfers under the

bankruptcy laws have never been understood as

addressing a debtor wrongfully obtaining property

from a creditor, which section 523(a)(2)(A)

addresses. Rather, they have been understood as

transfers involving the debtor’s own property,

designed to hinder, delay, or defraud his or her

creditors by placing his or her own property beyond

their reach. See Thomson v. Hanson, 168 Wash.2d

738, 744 (Wash. en banc. 2009) (“In general, a

fraudulent transfer occurs where one entity

transfers an asset to another entity, with the

17

effect of placing the asset out of the reach of a

creditor with either the intent to delay or hinder

the creditor or with the effect of insolvency on the

part of the transferring entity.”). That, of course,

is the situation addressed by section 727(a).

Through the ages, a fraudulent transfer was

understood as a transfer of property by a debtor to

shield his assets from creditors, not to obtain

property from his creditor Fraudulent transfer

law originated in English law at least as early as

the Statute of Elizabeth over 400 years ago to deal

with transfers by a debtor to “hinder, delay, or

defraud” creditors so as to place his own property

beyond the reach of his creditors. That statute, as

understood in the 1601 opinion in Twyne’s case, 3

Co. Rep. 80a (Star Chamber 1601), was designed

to provide a remedy to an unpaid creditor to reach

property of the debtor that was transferred by the

debtor in order to prevent his creditor from collect-

ing a judgment by executing against his property.

Accordingly, section 523(a)(2)(A) is not a basis

for excepting a fraudulent transfer debt from the

discharge that may ultimately be received by a

transferor, a transferee, or other person who may

be liable on account of such a transfer.

2. Congress did not intend for transfer-

ors and transferees to have different

discharge consequences

Congress intended that the test for determining

whether a fraudulent transfer debt is to be

discharged should be the same for the transferor

and the transferee. By its plain text, section

727(a) covers the discharge of all manner of

fraudulent transfer debt, whether incurred by the

transferor or a transferee who intends to “hinder,

18

delay, or defraud a creditor.” Specifically, a

transferee who intentionally “concealed” property

that became part of his or her estate upon receiv-

ing it from the transferor, is denied a discharge

under section 727(a) because of such conduct only

if such concealment occurred within one year

before the bankruptcy.

Moreover, where an intentional fraudulent

transfer has been avoided pursuant to section

548(a)(1)(A), the transferee, as the “initial trans-

feree,” is obligated by section 550(a)(1) to return the

transferred property or its value. A “mediate” (subse-

quent) transferee incurs a like obligation under

section 550(a)(2). A transferee who intentionally

participates in a fraudulent transfer thereby incurs

a debt that is integral to the fraud. As such, the

transferee’s debt, like that of the transferor, is

covered by the discharge provisions of section 727(a).

Contrariwise, McClellan, discussed in depth in

Point III infra, asserts in conclusory fashion that,

just as a transferor’s fraudulent transfer creates a

“new debt” that differs from his earlier debt to his

creditor, the transferee likewise incurs a “new

debt” as “his accomplice in fraud.” However, that

court concluded, erroneously, that because the

debts of the transferor and transferee based on

fraud were new debts, they were nondischargeable

under section 523(a)(2)(A). McClellan, 217 F.3d at

895. McClellan got it wrong. These new debts consti-

tuted fraudulent transfer debts, and their discharge

was governed exclusively by section 727(a) for the

reasons offered by this brief. Because they were

new debts cannot by means of section 523(a)(2)(A)

change their character as fraudulent transfer

debts covered by section 727(a) into nondischarge-

able debts under section 523(a)(2)(A).

19

Additionally, a transferee is no more culpable in

participating in such transfer than is the trans-

feror in making the transfer Because the

transferor is discharged under section 727(a) from

such debt incurred more than one year before the

bankruptcy, Congress could not have intended to

deny a discharge to a transferee under the same

circumstances even though a transferee is no more

culpable than the transferor. Congress would not

have provided for the discharge of the transferor’s

debt and at the same time imposed the harsh

consequences of nondischargeability on others for

conduct of like quality.

Moreover, the appellate courts that have

addressed this issue have generally held that a

creditor does not have a cause of action against a

person for aiding and abetting the making of a

fraudulent transfer. See Duell v. Brewer, 92 F.2d

59, 61 (2d Cir. 1937) (per L. Hand, J.) (“Moreover,

courts have generally held as to fraudulent con-

veyances that a person who assists another to

procure one, is not liable in tort to the insolvent’s

creditors.”); Magten Asset Management Corp.,

2007 WL 129003 at *3. See also Freeman uv. First

Union Nat. Bank, 865 So.2d 1272, 1273 (Fla. Sup.

Ct. 2004) (answering a question certified by the

llth Circuit Court of Appeals); Mack v. Newton,

737 F.2d 1343, 1357-58 (5th Cir. 1984); Warne

Investments, Ltd. v. Higgins, 219 Ariz. 186, 196-97

(Ariz. Ct. of Appeals 2008); Mann v. GTCR

Goldner Rauner, L.L.C., 483 F.Supp. 2d 884, 918

(D.Ariz. 2007). Moreover, even if the Court were to

reject the prevailing rule that a person does not

incur liability for aiding and abetting a fraudulent

transfer, the debt resulting from such action

20

would nevertheless be discharged under section

727(a) because, as here, it arose more than one

year before the bankruptcy.

Accordingly, the discharge of debt of a

transferor, a transferee and of any other person

sustaining liability for a role in a fraudulent

transfer, is governed exclusively by section 727(a).

POINT II

IT IS ESTABLISHED CONGRESSIONAL

POLICY TO DISCHARGE FRAUDULENT

TRANSFER DEBTS OUTSIDE THE

ONE YEAR REACH-BACK PERIOD

OF SECTION 727(a)

A. The discharge provisions of section

727(a) represent a long-standing policy

choice by Congress

The discharge of fraudulent transfer debt was

not new to the 1978 Code. Section 727(a) reflects a

policy choice made by Congress over 100 years

ago, and repeatedly reaffirmed since then. The

predecessor of section 727(a), enacted in 1903 as

section 14b(4) of the Bankruptcy Act of 1898,

provided for the discharge of fraudulent transfer

debt that arose prior to a four month reach-back

period. See Bankruptcy Act of 1898, Pub. L. No.

62, section 14b, 30 Stat. 550 (amended 1903) (A

discharge shall be granted unless the debtor “(4)

at any time subsequent to the first day of the four

months immediately preceding the filing of the

petition transferred ... any of his property with

intent to hinder, delay, or defraud his creditors.”).

See Moriyama, 13 F.2d at 118 (applying former

section 14b(4)’s four month reach-back provision).

21

Prior to the 1903 amendment, the Bankruptcy

Act of 1898 had no provision requiring the denial

of a discharge because of the debtor's incurrence of

fraudulent transfer debt, and section 14b of the

1898 Act enabled the debtor to obtain a discharge

of all debt, unless the debtor, during the bank-

ruptcy, concealed property of the estate from the

trustee, or fraudulently concealed his true financial

condition from the trustee. The 1898 Act, more-

over, limited the exception from a discharge based

on fraud to those cases in which a judgment was

already issued against the debtor on a cause of

action based on fraud.

The liberal provisions of the 1898 Act, enabling

the debtor easily to obtain a discharge from debts

incurred by reason of fraud, led to a widespread

reaction in the creditor community calling for

Congress to amend the bankruptcy discharge

provision. Some creditors asserted that the

bankruptcy law went too far helping debtors, and

that the ease with which debtors obtained broad

discharges encouraged commercial dishonesty. See

Charles Jordan Tabb, The Historical Evolution of

the Bankruptcy Discharge, 65 Am. Bankr. L. J.

325, 366 (1991) (summarizing the criticism of the

original section 14b discharge provision of the

1898 Act). Congress responded five years later by

the enactment in 1903 of amendments to the 1898

Bankruptcy Act, which included new section

14b(4) providing for a four month reach-back

period. Congress’ purpose in enacting the 1903

amendment was to “stamp out” such abuse of the

bankruptcy system; its 1902 bankruptcy bill would

have refused a discharge for “making a fraudulent

transfer of property.” See 35 Cong. Rec. H6940

(June 17, 1902). Congress, however, in its

22

judgment, did not view as abusive the discharge of

fraudulent transfer debts incurred more than four

months before bankruptcy.

After enacting the 1903 provisions for discharge

of fraudulent transfer debts, Congress addressed

such debts in 1926 by lengthening the reach-back

period under section 14b(4) to one year. See 67

Cong. Rec. H7677 (April 17, 1926). Thereafter,

Congress chose to carry forward the substance of

section 14b(4) into the bankruptcy law it enacted

in 1938. Subsequently, the Congressionally

authorized July 1973 Report of the Commission on

the Bankruptcy Laws of the United States

provided for continuing in effect the substance of

section 14b(4). See Commission Report, 93rd

Cong., lst Sess., H. Doe. No. 93-137, Part II, page

132, lines 2-7. Congress deferred to the 1973

Commission Report by carrying the one year

reach-back provision into the present Code in

1978 as section 727(a)(2)(A). See H. Rep. 95-595 at

384 (1977) and S.Rep. 95-989 at 98 (1978).‘

When Congress wrote the one year reach-back

provision into section 727(a)(2)(A) of the present

Code, it did not write on a clean slate. As noted by

this Court in Emil v. Hanley, 318 U.S. 515, 521

(1948), “[Wjhen Congress wrote [a] four months

proviso [into the then current Bankruptcy Act of

1938] it was not writing on a clean slate.” Prior

history of a statute guides our understanding

of Congressional enactments. That Congress

4 The Congressional history does not provide an

explicit explanation for the length of the reach-back period

chosen by Congress, but none is needed because Congress

has “great latitude” to make such choice in exercising its

constitutional powers. National Federation of Independent

Business v. Sebelius, 132 S.Ct. 2566, 2579 (2012).

23

legislates in the context of the history is especially

relevant in bankruptcy where numerous prior

statutes had been in effect when the Code was

passed in 1978. This Court has recognized that,

except to the extent explicitly changed under the

Code, Congress intended the pre-Code law to

remain in effect. BFP, 511 U.S. at 544-45; Bank of

America, N.A. v. Caulkett, 135 S.Ct. 1995, 2000

(2015) (reaffirming Dewsnup v. Timm, 502 U.S.

410, 419-20 (1992).).

Section 727(a) thus represents a clear con-

tinuation of a policy choice made by Congress over

100 years ago. Significantly, ever since its enact-

ment of the Code in 1978, Congress has not

changed its treatment of fraudulent transfer debt,

although it had the opportunity to do so at each of

the several times after 1978 when it amended the

Code. See 6 Collier on Bankruptcy para 727.LH[1]},

p. 727-82 (16th ed. 2014). In light of the history of

this provision, it would be odd to attribute to

Congress an intent that section 523(a)(2)(A)’s

“actual fraud” provision would be a basis to except

from a debtor’s discharge a fraudulent transfer

debt that it intended would be discharged under

section 727(a).

B. The Congressional policy regarding the

discharge of fraudulent transfer debt

makes sense because section 727(a)

implements the central policy of equality

of distribution to all creditors

Although this Court’s precedents require

deference to the policy choices of Congress, it is

always reassuring when a plausible reason can be

given for a policy choice. Such a reason exists

here: equality of treatment of creditors, which this

24

Court recognizes as a central bankruptcy policy.

Begier v. I.R.S., 496 U.S. 53, 58 (1990) (“Equality

of distribution among creditors is a central policy

of the Bankruptcy Code.”); Union Bank v. Wolas,

502 U.S. 151, 161 (1991) (recognizing that equality

of distribution is a prime bankruptcy policy).

Fraudulent transfers diminish the bankruptcy

estate generally. By making a fraudulent transfer

within the one year reach-back period grounds for

denial of discharge it permits all creditors, each of

whom is equally injured by the transfer, to benefit

equally. This is because all creditors are free to

pursue recovery of their debts if the transfer

occurred within one year before the bankruptcy.

In contrast, denial of dischargeability benefits

only one creditor, thereby violating the Code’s

eentral policy of equality of distribution.

The Code itself, in section 548(a)(1)(A), makes

clear that, by authorizing the trustee as the one to

avoid a fraudulent transfer, for the benefit of all

creditors, Congress would not have intended to

allow one creditor, by means of section 523(a)(2)(A),

to gain an advantage over all of the other creditors

through excluding only his own claim from the

debtor’s discharge. Moreover, if one creditor were

allowed so to use section 523(a)(2)(A), then every

creditor could bring a proceeding under that

provision, which would result in unnecessary

duplicative litigation over the same issue, i.e.,

whether the debtor made a fraudulent transfer of

his property, rather than by decision in a single

proceeding under section 727(a) governing the

discharge of debt.

Because a fraudulent transfer impairs the

collective rights of the creditors, fraudulent

transfer debt is addressed exclusively by section

25

727(a). Under that provision, all creditors, not just

one, would have the right after the bankruptcy to

pursue collection on an equal footing of their

fraudulent transfer claims that arose within one

year before the bankruptcy. Using section

523(a)(2)(A) to except from the discharge a

particular fraudulent transfer debt, however long

ago it was incurred, simply does not fit within the

structure of the Code regarding the discharge of

such debt. The discharge of such debt is governed

exclusively by section 727(a).

C. Congress’ policy determination must be

respected

In Moriyama, 13 F.2d at 117, a creditor objected

to the grant of a discharge because the debtor had

fraudulently encumbered his property by

mortgaging it. In reversing the judgment below

and directing the lower court to grant a discharge

because the mortgages in question were made

before the beginning of the four month reach-back

period then in effect, the court stated:

It would be sufficient, under that sub-

division, if it appeared that the mortgages

were executed at a time subsequent to the

first date of the four months immediately

preceding the filing of the petition; but

the petition contains no such allegation,

whereas the evidence shows without

contradiction that the mortgages were in

fact executed long prior to the beginning

of the four-month period. By declaring

that a fraudulent transfer within the four-

month period is a bar to a discharge,

Congress by implication declared that a

transfer prior to that date will have no

26

such effect. The objecting creditor seems

to contend that a discharge may be denied

on moral or ethical grounds, regardless of

the statute; but this contention is wholly

unfounded.

Id. (emphasis added).

In In re Wakefield, 207 Fed. 180 (N.D.N.Y.

1913), the court likewise discharged a debtor's

fraudulent transfer debt where incurred more

than four months prior to the bankruptcy, despite

the judge's disagreement with Congress’ discharge

policy:

Personally | would remove the limitation

to the four months preceding the filing of

the petition; but the courts do not

legislate, and here there is no opening for

a construction of the language.

Id. at 183.

Indeed, Congress’ policy for the discharge of all

but recently incurred fraudulent transfer debt is

so strong that it did not limit it to chapter 7. In

addition to chapter 7, when enacting the Code in

1978 Congress also made section 727(a)’s

provision for discharging such debt applicable to

an individual debtor in chapter 11 by means of

section 1141(d)(3})(C) of the Code.

This Court holds that where a statute is clear, a

court must enforce it as written, even though it

may disagree with the policy choice made by

Congress. As succinctly stated by this Court in

Florida Dept. of Revenue v. Piccadilly, 128 S.Ct.

2326, 2338 (2008), “it is not for us to substitute

our view ... of policy for the legislation which has

been passed by Congress.” (quoting United Parcel

27

Service v. U.S. Postal Service, 604 F.3d 1370, 1381

n. 16 (2010) (“Our function as jurists is to require

compliance with those statutes enacted by

Congress. In this case it is not for us to substitute

our view of postal policy for the legislation which

has been passed by Congress.”)

More recently, this Court expressed the same

notion in National Federation of Independent

Business v. Sebelius, 132 S.Ct. at 2569 (“Members

of this Court ... possess neither the expertise nor

the prerogative to make policy decisions. Those

decisions are entrusted to our Nation’s leaders.”).

See also Felix Frankfurter, Some Reflections on

the Reading of Statutes, 47 Col. L. Rev. 527,553

(1947) (“Whatever temptations the statesmanship

of policy-making might wisely suggest, construc-

tion must eschew interpolation and evisceration.”).

Moreover, in a bankruptcy case decided scarcely a

few months ago, this Court underscored its

declination to depart from statutory text, stating:

“But these lines were set by Congress, not this

Court.”). See Bank of America, N.A. v. Caulkett,

135 S.Ct. at 1999.

This rationale is rooted in the enumerated

power of Congress to make all Laws, as conferred

by Article I, section 8 of the Constitution.

Sebelius, 132 S.Ct. at 2579. This Court has long

read this Article of the Constitution to give

Congress great latitude in excising its power, and

has recognized that Congress is in the best

position to make policy judgments. This is

particularly so in bankruptcy cases in light of

Congress’ specific power under Article I, section 8,

clause 4 of the Constitution to enact bankruptcy

laws. Congress’ judgment regarding the discharge of

fraudulent transfer debt should thus be respected.

28

As this Court aptly stated in a similar context

where it affirmed respect for a controversial

Congressional bankruptcy policy judgment:

Certainly, there may be compelling policy

reasons for treating postpetition income

tax liabilities as nondischargeable. But if

Congress intended that result, it did not so

provide in the statute. Given the statute’s

plain language, context, and structure, it

is not for us to rewrite the statute

particularly in this complex terrain of

interconnected provisions and exceptions

enacted over nearly three decades.

Hall v. United States, 132 S.Ct. 1882, 1893 (2012).

This Court has left no doubt as to its respect for

Congressional policy underpinning legislation. See

Piccadilly, 128 S.Ct. at 2338; Sebelius, 132 S.Ct.

at 2569.

This Court should respect the policy judgment

made by Congress regarding the discharge of

fraudulent transfer debt.

This Court le:: no doubt in Law v. Siegel, 134

S.Ct. 1188 (2014) that the Code must be applied

according to its plain text, not “based on whatever

considerations [the courts] deem appropriate.” 134

S. Ct. at 1196. In that case, the debtor fabricated

a loan and falsified a mortgage in order to

increase the amount of his homestead exemption

under section 522. Despite the debtor’s egregious

misconduct, this Court held that the bankruptcy

courts lacked statutory authority to surcharge the

debtor’s exempt property for the legal costs

incurred as a consequence.

29

This Court explained:

We acknowledge that our ruling forces

Siegel to shoulder a heavy financial

burden resulting from Law's egregious

misconduct, and that it may produce

inequitable results for trustees and

creditors in other cases. ... For the

reasons we have explained, it is not for

courts to alter the balance struck by the

statute. [citations omitted].

Id. at 1197-98. Likewise, in deciding whether

fraudulent transfer debt would be discharged or

survive bankruptcy, Congress made the choice

that such a debt would survive only if it was

incurred within one year before bankruptcy. Its

choice is entitled to deference.

D. Neal v. Clark did not involve a fraudu-

lent transfer of property, and by codifying

the rule in Neal v. Clark when enacting

section 523(a)(2)(A), Congress did not

intend to allow fraudulent transfer debt

to be excepted from a debtor’s discharge

Contrary to Petitioner’s contention, the codifica-

tion of Neal v. Clark by Congress in enacting

section 523(a)(2)(A) was not intended by it to

bring fraudulent transfers within its “actual

fraud” provision. A careful reading of Neal v.

Clark, and of the Congressional history of that

provision, demonstrates that the view held by

Petitioner, and of the two Circuit Courts of

Appeals on which it relies, is wrong.

When enacting section 523(a)(2)(A), Congress

stated that it intended to codify the rule in Neal v.

30

Clark, 95 U.S. 704 (1877). See 124 Cong. Rec. H

32,392, 33,399 (Daily ed. Sept. 28, 1978).

Representative Edwards, as floor manager of the

1978 bankruptcy legislation, there explained that

“Subparagraph (A) [of proposed section 523(a)(2)|

is intended to codify current case law, e.g., Neal v.

Clark, 95 U.S. 704 (1877), which interprets ‘fraud’

to mean actual or positive fraud rather than fraud

implied in law” See 124 Cong. Rec. H11,095-

11,096 (Daily ed. Sept. 28, 1978); 124 Cong. Rec.

S17, 412-13 (Daily ed. Oct. 6, 1978) (“Subpara-

graph A [of section 523(a)(2)(A)] is intended to

codify current case law which interprets fraud to

mean actual or positive fraud rather than fraud

implied in law.”).

The amici submit that in codifying Neal v. Clark

Congress did not bring fraudulent transfer debt

within the “actual fraud” provision of section

523(a)(2)(A). This is because Neal v. Clark did not

involve or even mention fraudulent transfer debt.

Congress codified Neal v. Clark to evidence its

intent that in cases to which section 523(a)(2)(A)

would apply—to wit, cases other than those

involving fraudulent transfers—positive fraud, not

constructive fraud, had to be established.

Neal v. Clark involved the sale of property of a

decedent’s estate by its executor. The executor

sold securities of the estate to a purchaser at a dis-

counted price. It later appeared that the executor

used the proceeds for his own personal purposes

and was financially unable to make the estate

whole for its loss. The executor’s conduct was

culpable, but not a fraudulent transfer to keep

property beyond the reach of creditors. A

successor executor tried to recover for the loss

31

from the purchaser, who then filed in bankruptcy.

In that bankruptcy, the successor executor asserted

that the debtor-purchaser should be held liable for

the loss sustained by the decedent’s estate. In

holding for the debtor-purchaser, this Court

concluded that the debtor-purchaser “was not

chargeable with actual fraud, but in view of the

circumstances attending the purchase, he had

committed constructive fraud, which implicated

him in the devastavit.” Neal v. Clark, 95 U.S. at

707. Because Neal v. Clark did not involve a

fraudulent transfer of a debtor’s property to keep

it beyond the reach of his creditors, the codification

of Neal v. Clark cannot be understood as indicat-

ing Congressional intent to bring fraudulent

transfer debt within the “actual fraud” provision

of section 523(a)(2)(A).

Section 523(a)(2)(A) was enacted to provide for

excepting from discharge debts for fraud other

than those arising from fraudulent transfers.

Whatever the scope of “actual fraud” under section

523(a)(2)(A) may be, it is clear that that provision

was not enacted to except from a debtor's

discharge fraudulent transfer debt incurred more

than one year before his or her bankruptcy.

Accordingly, it is evident that when Congress

approved the rule of Neal v. Clark when enacting

section 523(a)(2)(A), Congress’ only purpose was to

make clear that, in a case involving a fraud of the

type that is covered by section 523(a)(2)(A), a

finding that the debtor committed an “actual

fraud” must be based on positive fraud by the

debtor, not on constructive fraud implied in law.

32

POINT III

THE McCLELLAN AND LAWSON CASES

WERE WRONGLY DECIDED

Each of the Circuit Courts of Appeals that

addressed the discharge of fraudulent transfer

debt concluded, erroneously, as does Petitioner

and its amici supporters, that an intentional

fraudulent transfer falls within the “actual fraud”

provision of section 523(a)(2)(A). In doing so, they

failed to recognize that the discharge of such debt

is governed exclusively by section 727(a). The

leading decision that so erred is McClellan, 217

F.3d 890, which is the principal authority on

which Petitioner relies.

In McClellan, the debtor’s brother purchased

machinery to be paid for in installments. After the

brother defaulted and the seller commenced a

collection suit to recover the unpaid sales price,

the brother made a gratuitous “sale” for $10 of his

own property to his sister, who resold it for a

substantial amount. Two years later the sister

commenced a chapter 7 bankruptcy case. The

creditor brought a proceeding in the bankruptcy

court to collect the unpaid price from the debtor-

sister on the theory that the transfer to her was

an intentional fraudulent transfer. The bank-

ruptcy court dismissed the action on the ground

that the debt was dischargeable, and the district

court affirmed on the ground that a debt could not

be excepted from a discharge as an “actual fraud”

under section 523(a)(2)(A) absent a material

misrepresentation, relying on Field v. Mans, 516

U.S. 59, 68 (1995). McClellan, 217 F.3d at 892.

33

In reversing, the Court of Appeals in McClellan

held, erroneously, that a debt arising from a trans-

fer made in a deliberate attempt to thwart the

creditor's collection effort is excepted from the

debtor’s discharge as an “actual fraud” within

section 523(a)(2)(A). According to that court’s mis-

understanding of the Code, a fraudulent transfer

debt should be treated the same as all other debt,

and thus may be excepted from a discharge as an

“actual fraud” under section 523(a)(2)(A). More-

over, that court’s “new debt” theory cannot change

a fraudulent transfer debt, from which the debtor

is entitled to be discharged under section 727(a),

into a nondischargeable debt by means of section

523(a)(2)(A). See Point I.E.2 supra. That court,

however, in its quest to prevent the debtor from

using bankruptcy to discharge a debt for fraud,

failed to comprehend that section 727(a), like its

several predecessors, accorded special treatment

to fraudulent transfer debt, by which such debt is

discharged unless incurred within one year before

bankruptcy. As the court stated in McClellan:

Pressed at argument, [the debtor’s] lawyer

was unable to suggest any reason why the

type of fraud presented by the allegations

of McClellan’s complaint should be treated

differently from other types of fraud. The

two-step routine that McClellan alleges

and that we must take as true—in which

debtor A transfers valuable property to B

for nothing in order to keep it out of the

hands of A’s creditor and B then sells the

property and declares bankruptcy in an

effort to shield herself from liability for

having colluded with A to defeat the

rights of A’s creditor—is as blatant an

34

abuse of the Bankruptcy Code as we can

imagine. It turns bankruptcy into an

engine for fraud.

Id. at 893. (emphasis added).

It is understandable that a court may wish not

to allow a person who committed a fraud ever to

be freed by bankruptcy from the resulting debt.

However, that is not what Congress wrote in

section 727(a). If the fraudulent transfer is made

within one year before bankruptcy, discharge is

denied, which is no small consequence; otherwise,

the debt is discharged. As shown above, what

Congress actually wrote is to be accorded deference

and its policy upheld, even if the court were to

disagree with that policy. McClellan’s funda-

mental error was to deny a discharge of fraudulent

transfer debt on moral and ethical grounds, in

disregard of clear Congressional policy expressed

in statutory text. As stated in Moriyama:

The objecting creditor seems to contend

that discharge may be denied on moral

and ethical grounds; regardless of the

statute; but this contention is wholly

unfounded.

13 F.2d at 118 (emphasis added).

To the McClellan court, the notion that fraud

cannot be discharged in bankruptcy under any

circumstances was so strong that, in its view, “[n]o

learned inquiry into the history of fraud is

required. ...” McClellan, 217 F.3d at 893. That

court’s a priori zeal in McClellan to draw fraudu-

lent transfer debt into section 523(a)(2)(A) may

well have inhibited its own inquiry into the history,

provisions, and structure of the discharge provi-

sions of the Code. Having failed to focus on the

35

discharge provisions of the Code, that court erred in

assuming that fraudulent transfer debt is covered

as an “actual fraud” under section 523(a)(2)(A).

McClellan was simply wrongly decided.

The Petitioner also relies heavily on Jn re

Lawson, 791 F.3d 214 (1st Cir. 2015), cert. pending

sub nom. Sauer v. Lawson, Docket No. 15-113. The

fraudulent transfer debt in Lawson, as in McClellan,

arose more than one year before the bankruptcy.

Nevertheless, the court in Lawson, relying heavily

on McClellan, likewise erroneously held that

“knowingly accepting a fraudulent conveyance

that the transferee knew was intended to hinder

the transferor’s creditors” may be excepted from

the debtor’s discharge under the “actual fraud”

provision of section 523(a)(2)(A). In so holding, the

Circuit Court in Lawson disapproved the bank

ruptcy court’s reading of the Lawson Court's

earlier decision in Palmacci v. Umpierrez, 121 F.3d

781 (1st Cir. 1997) as requiring a misrepresentation

as an element of an “actual fraud.” Significantly,

however, Lawson failed to take note of the specific

mention of section 727(a)(2) in the court’s own

decision in Palmacci, 121 F.3d at 786. Like

McClellan, the court in Larson simply failed to

comprehend that fraudulent transfer debt is

governed by, and discharged under, section 727(a).

CONCLUSION

The discharge provisions in section 727(a) of the

Code reflect an explicit legislative judgment. This

judgment, made by Congress through the

democratic process, in turn reflects the circum-

stances in which a debtor who is an individual

should be placed upon emerging from bankruptcy,

36

namely unburdened by fraudulent transfer debt

incurred more than one year before filing for

bankruptcy relief.

Based on the foregoing, the order appealed from

should be affirmed because the transfers in suit

cannot be excepted under the “actual fraud” pro-

vision of section 523(a)(2)(A) from the discharge

the Respondent may ultimately receive.

Respectfully submitted,

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR OF LAW

ST. JOHN’S UNIVERSITY

SCHOOL OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

LLM@stjohns.edu

Attorney for Amici Curiae

Professors

Of Counsel,

JOHN COLLEN

ADJUNCT PROFESSOR OF LAW

ST. JOHN’S UNIVERSITY

SCHOOL OF LAW

January 25, 2016