In re Ritz,___F.3d ___, 2016 Westlaw 4253552 (5th Cir. 2016)
In re Ritz,___F.3d ___, 2016 Westlaw 4253552 (5th Cir. 2016): The US Fifth Circuit Court of Appeals held that when a corporations controlling shareholder “loots” (takes without right) money or assets of the corporation, that the controlling shareholder does that, that looting qualifies as an “actually fraudulent” transfer, which can be recovered from the insider, possibly by “piercing the corporate veil”. In Ritz, a supplier sold merchandise to a corporation. The corporation’s controlling shareholder siphoned off its assets for his own benefit. Following the shareholder’s bankruptcy filing, the supplier sought to pierce the corporate veil in order to hold the shareholder (now the bankruptcy debtor) personally liable for the company’s debt. After a tortuous procedural history (which included a trip to the United States Supreme Court), the Fifth Circuit essentially ruled in favor of the creditor. The Fifth Circuit held that under Texas law, if the creditor could establish that the transfer of the company’s assets was a fraudulent transfer undertaken with actual fraudulent intent, that fact would be sufficient to justify veil-piercing, even in the absence of a direct misrepresentation made to the credito, stating:
[E]stablishing that a transfer is fraudulent under the actual fraud prong of [the Uniform Fraudulent Transfer Act] is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made “with the actual intent to hinder, delay, or defraud any creditor” … necessarily “involves ‘dishonesty of purpose or intent to deceive.’
The court then remanded the case for further findings. Almost all states have adopted some version of the Uniform Fraudulent Transfer Act, or its successor, the Uniform Voidable Transactions Act. So though this case involved the Texas version of that statute, the case may be applicable to fraudulent transfers under CA state law, or most other states law, instead of just applying under Texas state fraudulent transfer law. If this rule is widely adopted, it will mean that fraudulent transfer defendants can be held liable not only for the value of the assets transferred but for all debts of the looted company, a potentially much greater exposure. In turn, that threat will empower bankruptcy trustees to force defendants to enter into larger and quicker settlements.