Husky International Electronics, Inc. v. Ritz: Rethinking Actual Fraud, Badges of Fraud, and Pleading Standards in Federal Bankruptcy Litigation

Meagan George

The Supreme Court came to the right decision in its holding in Husky, but it also opened the door to creditor recovery under Section 523(a)(2)(A) in situations where a debtor might be innocent but vulnerable. This overly wide net is a result of “badges of fraud,” a set of objective factors courts and state legislatures have used to evaluate fraud in bankruptcy. When taken in aggregate, badges of fraud indicate that a debtor was fraudulent, but they could also be present due to circumstances completely unrelated to fraud. To remedy this disconnect between the intentional fraud that Congress meant to prevent with Section 523(a)(2)(A) and the types of debtors that can now be held liable under it, Congress should enact a new pleading standard similar to that used in securities litigation. Private securities litigants must plead a “strong inference” of fraudulent intent, which places more responsibility on judges and juries to determine whether the debtor had intent to act fraudulently, rather than unwittingly meeting a list of “badges of fraud.” A “strong inference” pleading standard would  reduce instances of litigation abuse and clearly set the tone of Congress's objectives for its inclusion of “actual fraud” in Section 523(a)(2)(A).