May is usually a busy month on the Supreme Court before the justices head off for some summer R&R. It is historically a time when many opinions are issued, and May 2016 has been no exception. Financial services companies should cheer two opinions issued by the Supreme Court yesterday (May 16, 2016) – Husky International Electronics, Inc. v. Ritz and Spokeo, Inc. v. Robins.
Husky and Non-Dischargeability of Fraudulent Transfers
Husky was an electronics company that sold $164,000 in products to Chrysalis Manufacturing Corp. Daniel Lee Ritz was a director and partial owner of Chrysalis. In 2006 and 2007, Ritz drained Chrysalis of assets through a series of transfers to related entities, leaving the debt to Husky unpaid. In 2009, Husky sued Ritz personally and sought to hold him liable for the outstanding Chrysalis debt. Ritz filed a Chapter 7 bankruptcy petition and Husky filed a bankruptcy adversary proceeding to have the debt declared “non-dischargeable” under the Bankruptcy Code.
11 U.S.C. § 523(a)(2)(A) says that a debt for money, property or services cannot be discharged in bankruptcy if that debt arose from “a false representation, or actual fraud”. Ritz argued that the debt to Husky could be discharged because he had never made any false representation to Husky. The district court agreed, and the Fifth Circuit affirmed. However, the Supreme Court reversed and held that a fraudulent transfer could constitute “actual fraud” to make a debt non-dischargeable.
Although the case did not involve a financial services party, it is significant because it confirms that owners of small businesses may be held liable for fraudulently transferring assets under certain circumstances and cannot discharge that liability in bankruptcy. This gives lenders a strong new weapon to use in negotiating a better recovery from debtors who were involved in fraudulently transferring company assets.
Spokeo and Standing to Assert Statutory Violations
Spokeo is an internet search engine that conducts a computerized search on a person’s name and provides a report which compiles the results of that search. Mr. Robins obtained a copy of his report and determined that some of the information (such as age, marital status, employment, etc.) was incorrect. He filed a class-action lawsuit against Spokeo on his own behalf and on behalf of those similarly situated alleging a violation of the Fair Credit Reporting Act. The district court granted Spokeo’s motion to dismiss on the ground that Mr. Robins had failed to allege that he had suffered any actual injury sufficient to give him standing to sue. The Ninth Circuit reversed and held that “the violation of a statutory right is usually a sufficient injury in fact to confer standing.”
Financial service companies were rightly concerned by the Ninth Circuit’s opinion since it meant that they could potentially be subjected to class action litigation by parties claiming a statutory violation even with no allegations or proof of actual damages caused by the violation.
Fortunately, the Supreme Court held that the Ninth Circuit’s analysis was flawed and reversed for a new determination on the question of standing. In particular, the Supreme Court held that an injury must be “concrete”, “real”, and not every statutory violation would lead to actual damages.
A violation of one of the FCRA’s procedural requirements may result in no harm. For example, even if a consumer reporting agency fails to provide the required notice to a user of the agency’s consumer information, that information regardless may be entirely accurate. In addition, not all inaccuracies cause harm or present any material risk of harm. An example that comes readily to mind is an incorrect zip code.
While the case lives on before the Ninth Circuit on remand, at least financial services companies can breathe a collective sigh of relief that not every statutory violation (no matter how minor or procedural) will automatically subject them to class action litigation and damages.
Questions regarding this case update or financial services litigation can be addressed to Will Esser at email@example.com / 704-372-9000. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.