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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2015

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0604%3A10. Public record. Not legal advice.