The discharge provided in bankruptcy is fundamental, allowing the “honest but unfortunate” debtor a fresh start. There are various exceptions to the discharge found in Sections 523 and 727 of the Bankruptcy Code—designed to prevent the discharge of debts incurred as the result of dishonest acts—such as false pretenses or actual fraud. 11 U.S.C. §523(a)(2)(A) specifically exempts a debtor from discharging debts of money, property, services, or an extension, renewal of financing of credit, if such debts were obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”
In a decision handed down on February 22, 2023, Bartenwerfer v. Buckley, the United States Supreme Court ruled that the bankruptcy process cannot be used to discharge debts incurred through fraud, even when the debtor was not the individual that defrauded creditors. The decision was authored by Justice Amy Coney Barrett, with a concurring opinion by Justice Sonia Sotomayor who was joined by Justice Ketanji Brown Jackson.
The facts in Bartenwerfer were fairly straightforward. In 2005, Kate Bartenwerfer and her then-boyfriend David Bartenwerfer purchased a house in San Francisco, with the intention of renovating it and flipping it for a profit. Kate was largely uninvolved with the project, whereas David hired and supervised architects, engineers and contractors to complete the remodel. Although there were difficulties with the project, the Bartenwerfers were able to complete it and get the house on the market, where it was purchased by Kieran Buckley. Following the purchase, Buckley became aware of numerous problems with the house that, while known to the Bartenwerfers, were never disclosed. These issues included a leaky roof, defective windows, a missing fire escape, and permit problems. Buckley sued the Bartenwefers in California State Court and obtained a judgment in excess of $200,000.
The Barternwerfers were unable to satisfy the judgment entered against them and filed for relief under Chapter 7 of the Bankruptcy Code seeking a fresh start. Buckey sued the Bartenwerfers seeking a determination that the state court judgment could not be discharged because the obligation had been obtained by false pretenses, a false representation, or actual fraud. The Bankruptcy Court found in favor of Buckley, and decided that neither David or Kate could discharge the judgment. The Bankruptcy Court found that David had knowingly concealed the house’s defects from Buckley and imputed his fraudulent intent to Kate because the two had formed a partnership to execute the resale project.
On appeal, the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals (the “BAP”) reversed the trial court, ruling that §523(a)(2)(A) only barred Kate from a discharge if she knew or had reason to know of David’s fraud. On remand, the trial court concluded that Kate lacked the requisite knowledge and could discharge her liability to Buckley. The BAP affirmed this decision and Buckley appealed to the Ninth Circuit Court of Appeals, which reversed the BAP, finding that a debtor who is liable for her partner’s fraud cannot discharge the debt regardless of her own culpability.
The United States Supreme Court granted certiorari to resolve the split regarding the requirement of §523(a)(2)(A) and ruled that Kate could not discharge the debt to Buckley. The Supreme Court reasoned that the passive voice of the statutory provision indicates that Congress framed it to focus on an event rather than a specific actor, and without respect to any actor’s intent or culpability. In the words of the Court, “the debt must result from someone’s fraud, but Congress was agnostic about who committed it.”
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