Sunday, May 22, 2016

Fee Fi Fo Feoffmentes

I wanted to understand a recent U.S. Supreme Court decision pertaining to bankruptcy law, an area I'm unfamiliar with, so I attempted to do some research:

On Monday, the U.S. Supreme Court decided Husky International Electronics, Inc. v. Ritz. Justice Sotomayor wrote the decision, which reversed the lower court's narrow reading of "Actual Fraud." To support this decision the Court set out to revive the common law definition of "Actual Fraud."

This case involved 11 U.S.C. § 523(a)(2)(A)
§ 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
I noticed no dictionary definitions of "Actual Fraud" were cited in the Court's opinion, so I pulled up Spinelli's Law Library Reference Shelf, a database on HeinOnline, to take a closer look.

Here is the earliest definition in Bouvier's famous dictionary:

"Frauds may be also divided into actual or positive and constructive frauds. An actual or positive fraud is the intentional and successful employment of any cunning, deception or artifice, used to circumvent, cheat or deceive another. 1 Story, Eq. Jur. § 186; Dig. 4,3,1,2; Id. 2,14,7,9."
Bouvier's Law Dictionary, Adapted To The Constitution And Laws Of The United States Of America, And Of The Several States Of The American Union 590 (2d ed. 1843).

It is followed by the definition of Constructive Fraud:

"By constructive fraud is meant such a contract or act, which, though not originating in any actual evil design or contrivance to perpetrate a positive fraud or injury upon other persons, yet, by its tendency to deceive or mislead them, or to violate private or public confidence, or to impair or injure the public interests, is deemed equally reprehensible with positive fraud, and, therefore, is prohibited by law, as within the same reason and mischief, as contracts and acts done malo animo. Constructive frauds are such as are either against public policy, in violation of some special confidence or trust, or operate substantially as a fraud upon private rights, interests, duties, or intentions of third persons; or unconscientiously compromit, or injuriously affect the private interests, rights or duties of the parties themselves. 1 Story, Eq. ch. 7, § 258 to 440." 

The Court did cite to Joseph Story's Commentaries on Equity Jurisprudence twice. First, the Court cited  "1 J. Story, Commentaries on Equity Jurisprudence §189, p. 221 (6th ed. 1853) (Story) (“Fraud . . . being so various in its nature, and so extensive in its application to human concerns, it would be difficult to enumerate all the instances in which Courts of Equity will grant relief under this head”)," not  § 186. This edition came out after the 1843 reference in Bouvier's, but during my research I also read the definition of "Actual Fraud" in the 1871 14th edition of Bouvier's dictionary, which was revised and greatly enlarged by Daniel A. Gleason, and the 1871 definition also referenced § 186. I turned to the Commentaries on Equity Jurisprudence. The Court was kind enough to provide language from the section in its parenthetical, so I did a full text search in HeinOnline for "being so various in its nature, and so extensive in its application." One of the nine results was the 6th edition and it turned out the entire sixth chapter is devoted to "Actual or Positive Fraud" running from § 184 to § 258 (pages 211 to 288).

Next, the Court cited to Story §353, at 393 (“[T]he statute of 13 Elizabeth . . . has been universally adopted in America, as the basis of our jurisprudence on the same subject”). The Court did this in a section devoted to Statute of 13 Elizabeth to ultimately show that the common law definition of Actual Fraud is broad enough to contain fraudulent conveyences. The language in the ellipses says "ch. 5, as to creditors." §353 is contained in chapter 7, which deals with Constructive Fraud. As far as I can tell, all references to 13 Elizabeth in Equity Jurisprudence occur in Chapter 7, which deals with "Constructive Fraud."

Here's an excerpt from the case that quotes the Statute of 13 Elizabeth. I couldn't really understand the language the Court was citing, but I wanted to share my appreciation of the "superior letter" in "Grauntes," which I thought was fun for the Court to include. It made me do a double-take when I first saw it (and I confirmed that's how it appears in the Statute).


I did a phrase search in Westlaw's all case database, adv: "fraudulent Feoffmentes Gyftes," to see if other cases draw language from this old English law. Aside from this case, there was a single case Hood v. Jones, 5 Del. Ch. 77 (1875), from the Court of Chancery of Delaware. It's a forgotten case, only cited in five other cases (the latest being from 1933). Interestingly, Westlaw includes the superior letter in Hood v. Jones, "Grauntes," but for Husky International Electronics, Inc. v. Ritz it just writes "Grauntes." I broadened my search, adv: "13 Eliz!" /p actual /s fraud!, and found 14 cases at the U.S. Supreme Court and the Circuit Court of Appeals that fit within my search parameter. No time to explore them or read the briefs (though I did a quick ctrl+f and two briefs discuss 13 Elizabeth, that of The Justice Department and Prof. Richard Aaron et al.), but the only U.S. Supreme Court case from the past century is BFP v. Resolution Trust Corp..

I think a lot more can be said about this opinion and the Statute of 13 Elizabeth, but I am not knowledgeable about bankruptcy law. Husky relies on BFP v. Resolution Trust Corp. to get to its result, specifically this language:
"The modern law of fraudulent transfers had its origin in the Statute of 13 Elizabeth, which invalidated “covinous and fraudulent” transfers designed “to delay, hinder or defraud creditors and others.” 13 Eliz., ch. 5 (1570). English courts soon developed the doctrine of “badges of fraud”: proof by a creditor of certain objective facts (for example, a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration) would raise a rebuttable presumption of actual fraudulent intent. See Twyne's Case, 3 Coke Rep. 80b, 76 Eng.Rep. 809 (K.B. 1601); O. Bump, Fraudulent Conveyances: A Treatise upon Conveyances Made by Debtors to Defraud Creditors 31–60 (3d ed. 1882). Every American bankruptcy law has incorporated a fraudulent transfer provision; the 1898 Act specifically adopted the language of the Statute of 13 Elizabeth. Bankruptcy Act of July 1, 1898, ch. 541, § 67(e), 30 Stat. 564–565."
BFP v. Resolution Trust Corp., 511 U.S. 531, 540-41 (1994) (emphasis mine)

The decision was 7-1, but the dissent did not go into the common law definition of "Actual Fraud." In dissent, Justice Thomas focused on context instead. However, before going into his context driven argument he cited to a treatise and I thought that language warrants sharing:
"In my view, 'actual fraud' within the meaning of §523(a)(2) does not encompass fraudulent transfer schemes. There are two types of fraudulent transfer schemes: 'transfers made with actual intent to hinder, delay, or defraud creditors, referred to as actual fraudulent transfers” and “transfers made for less than reasonably equivalent value when a debtor was in financial trouble, [which is] referred to as constructive fraudulent transfers.' 2 Bankruptcy Law Manual §9A:29, p. 333 (5th ed. 2015). I do not quibble with the majority’s conclusion that the common-law definition of “actual fraud” included fraudulent transfers. Ante, at 4–6."
I don't know nearly enough about old English laws, but I think this is a potential area for scholarship if someone wants to "quibble" with the majority's conclusion about the common-law definition of "actual fraud." I'm still confused, but I like the result the Court arrived at, which closes a dangerous loophole (though the Court does not say that policy is driving their reasoning). One thing is for sure, I need to learn my bankruptcy law before swimming in the deep end.

No comments: