Imagine buying a game from a seller and promising to repay him at a later date. However, instead of repayment, you decide to give the game to your friend, who in turn allows you to use it. Then your friend declares bankruptcy to discharge the price of the game from his debts, thus allowing you both to use it without paying. This repayment runaround is the issue that the First and Fifth Circuits were asked to decide in two recent cases. Specifically, the question was whether a debt incurred by “actual fraud” may be discharged by the recipient of the transfer without a misrepresentation of repayment.
The Bankruptcy Code (“the Code”) serves as a vehicle to help those who have encountered unsuccessful ventures to discharge their obligations and start anew. The Code does not, however, grant a debtor the absolute right of discharge, as many exceptions exist to prevent fraudulent behavior. One of these exceptions is 11 U.S.C. § 523(a)(2)(A), which excepts from discharge any debt obtained by “false pretenses, a false representation, or actual fraud.” Circuit courts have differed in their application of the statute, thus creating a circuit split concerning whether a debtor must make a misrepresentation in order to constitute “actual fraud.” This Note argues that “actual fraud” is meant to encompass a fraudulent transferee’s intent to defraud and does not require a misrepresentation concerning the prospect of repayment. By focusing on the transferee’s intent, these debts would be nondischargeable, thus requiring repayment to the seller.