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The issue before the Court was whether 11 U.S.C. § 523(a)(2)(A) excludes from discharge a debtor’s liability for money obtained by the fraud of their partner or agent, even if the debtor did not personally commit the fraud. In Bartenwerfer v. Buckley, the Supreme Court of the United States resolved confusion in the lower courts over the scope and application of 11 U.S.C. § 523(a)(2)(A), which prohibits debtors from discharging debt through bankruptcy when such debt was obtained as a result of fraudulent actions. In an unanimous ruling, the Court affirmed the United States Court of Appeals for the Ninth Circuit’s decision that Section 523(a)(2)(A) (unlike subsequent subsections of that statute) applies to debtors who are liable for fraud—even if they did not personally commit that fraud.
In this case, the petitioner, Kate Bartenwerfer, and her then-boyfriend, David Bartenwerfer, jointly purchased a home they intended to renovate and resell for a profit. David was responsible for all aspects of the renovation project while Kate remained largely uninvolved. Once completed, the pair sold the property to Kieran Buckley. Following the closing, Buckley began discovering significant defects in the property and its renovations, including a leaking roof, defective windows, a missing fire escape as well as permit issues. Feeling that he was duped, Buckley filed a lawsuit against the Bartenwerfers and ultimately was awarded in excess of $200,000 in damages against them. Unable to satisfy the judgment, the Bartenwerfers filed for protection under Chapter 7 of the United States Bankruptcy Code, seeking a discharge of their debts―including Buckley’s judgment. Buckley commenced an adversary proceeding in the bankruptcy case, requesting a ruling that his judgment was nondischargeable under Bankruptcy Code Section 523(a)(2)(A), which prohibits the discharge of “any debt… for money, property, [or] services… obtained by… false pretenses, a false representation, or actual fraud.” At trial, the Bankruptcy Court found that David Bartenwerfer had knowingly concealed the house’s defects from Buckley, and further, that this fraudulent intent could be imputed to Kate Bartenwerfer because the pair had formed a legal partnership regarding the renovation and resale of the property, notwithstanding the fact that she was largely uninvolved. Following a series of appeals and remands, the Ninth Circuit ultimately determined the debt to be nondischargeable, holding that a debtor who is liable for a partner’s fraud cannot discharge that debt in bankruptcy, even if the debtor did not commit the fraud itself. Kate Bartenwerfer filed a petition for certiorari, which was ultimately granted by the Supreme Court.
The issue before the Court was whether 11 U.S.C. § 523(a)(2)(A) excludes from discharge a debtor’s liability for money obtained by the fraud of their partner or agent, even if the debtor did not personally commit the fraud. Central to the Court’s analysis was an examination of the text of the statute itself. Bankruptcy Code Section 523(a)(2)(A) provides, in relevant part, that “any debt… for money… obtained… false pretenses, a false representation, or actual fraud” is prohibited from discharge. The Court focused on the fact that the statute is written in the passive voice, and consequently, does not specify the identity of the person who actually commits the fraud. Instead, to the extent the debt at issue results from someone’s fraud, the Court concluded, such debt is, without question, barred from discharge pursuant to Section 523(a)(2)(A). In support of this conclusion, the Supreme Court analyzed precedent that had interpreted a predecessor statute to Bankruptcy Code Section 523(a)(2)(A). That prior statute provided “no debt created by the fraud or embezzlement of the bankrupt… shall be discharged under this act.” See Act of Mar. 2, 1867 § 33, 14 Stat. 533 (emphasis added). While the language of this historical statute seemed to imply that the nondischargeability of a fraudulent debt is based on whether the fraud was committed by the debtor itself, the Supreme Court found in Strang v. Bradner, 114 U.S. 555, 561 (1885) that three business partners were jointly barred from discharging a fraudulent debt caused by only one of the partners. Following the Strang decision, Congress specifically removed the preexisting language that focused on the individual debtor’s fraud, signaling to the Supreme Court that Congress embraced the holding of Strang and intended the nondischargeability exception to focus on the “event” of fraud rather than the culpability of the debtor itself. Finally, the Supreme Court rejected the argument that precluding a “faultless” debtor from discharge is inconsistent with Congress’ policy of providing debtors a “fresh start” under the Bankruptcy Code. While acknowledging the credence of the argument, the Court ultimately declined to adopt it, noting that Congress, in the Bankruptcy Code, struck a balance between debtors and creditors’ interests and concluded that a creditors’ interest in recovering full payment of debts obtained by fraud outweighs a debtors’ interest in a completely fresh start.
The Supreme Court’s decision in Bartenwerfer v. Buckley resolves a circuit split over the scope and application of the nondischargeability provisions relevant to fraudulent conduct, even when a debtor may not be the fraudulent actor. In its ruling, the Supreme Court has provided guidance and protection in favor of fraud victims, preventing those who have obtained money through fraudulent acts from discharging that debt in bankruptcy, regardless of whether they were the fraudulent actor. Such a ruling protects victims’ efforts to obtain just compensation for their losses.
If you have any questions about this Alert, please contact Lawrence J. Kotler, Drew S. McGehrin, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact. Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
