Bartenwerfer v. Buckley, 143 S. Ct. 665 (2023)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

The United States Supreme Court, relying on textual interpretation, the principles of common-law fraud, precedent from the 1800s, and legislative intent, held that the debt incurred because of the fraud of a spouse or partner is imputed to the other partner and therefore is non-dischargeable in that person’s bankruptcy under the provisions of 11 U.S.C. § 523(a)(2)(A).  Bartenwerfer v. Buckley, 143 S. Ct. 665 (2023).

To view the opinion, click here.

FACTS

Debtor Kate Bartenwerfer (Kate) and her then-boyfriend, David Bartenwerfer (David), purchased a home in San Francisco to remodel and then sell.  David was in charge of the remodel, with Kate largely uninvolved.  When the remodel was concluded and they marketed the property, David provided the necessary disclosures about the condition of the property, without the knowledge or input of Kate.  After the sale closed, David’s disclosures turned out to be false, resulting in damages to the buyer.  The buyer sued in state court and obtained a judgment against both sellers for breach of contract, negligence and – most pertinent to this opinion – fraud for nondisclosure of material facts.

Both Kate and David filed chapter 7 bankruptcy.  The buyer filed an adversary proceeding, asserting that the judgment debt was nondischargeable under the provisions of 11 U.S.C. § 523(a)(2)(A), which excepts from discharge “any debt…for money…to the extent obtained by…false pretenses, a false representation, or actual fraud.”  After a trial, the bankruptcy court first entered a nondischargeable judgment against both debtors, finding that David concealed the house defects from the buyer and that his fraud was imputed to Kate.  On appeal, the Ninth Circuit’s Bankruptcy Appellate Panel (the BAP) affirmed the judgment as to David, but remanded with regard to Kate because, under its own precedent, exception to discharge as to her required Kate to know or have reason to know of David’s fraud.  On remand, the bankruptcy court concluded that Kate lacked the requisite knowledge and discharged the debt.  The BAP affirmed.

On further appeal, the Ninth Circuit reversed.  Relying on nineteenth century Supreme Court precedent, Strang v Bradner, 114 U.S. 555 (1885), it held that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her personal culpability.  The Supreme Court (the Court) granted certiorari and affirmed.

REASONING

The Court analyzed the issue on three different fronts, all of which led to the conclusion Kate’s liability was nondischargeable.  First, it considered the precise words of the statute, which did not specify the relevant actor – “any debt…for money…to the extent obtained by false pretenses, a false representation or actual fraud…” – and found that Kate’s liability met those conditions.  It referred to such statute as a “passive-voice statute” which did not specify the fraudulent actor.  It rejected Kate’s argument that the word “debtor’s” fraud was implied in the wording because the passive voice intentionally pulls the actor off the stage.  It noted that the relevant legal context, common law fraud, “has long maintained that fraud liability is not limited to the wrongdoer.” (emphasis in the original) Longstanding precedents have demonstrated that principals are liable for the fraud of their agents and partners for the fraud of their partners.  It also rejected Kate’s assertion that because subparagraphs (B) and (C) of § 523(a)(2) both identified the debtor as the required actor, (A) must intend to do the same.  That argument flips the statutory canon that “‘[w]hen Congress includes particular language in one section of a statute but omits it in another section of the same Act’ we generally take the choice to be deliberate.”

The Court then examined its own precedent, along with Congress’s response.  In the late nineteenth century, the discharge exception for fraud included the words “of the bankrupt,” specifying the relevant actor.  Notwithstanding those words, in Strang v. Bradner, the Court held three partners liable for each other’s fraud.  After that decision, Congress overhauled the bankruptcy law with the Act of 1898 and deleted “of the bankrupt” from the statute.  Certainly, Congress knew of the holding of Strang and its apparent conflict with the wording of the prior statute.  Notwithstanding that knowledge, it not only did not reinforce the wording which the Court had distinguished, but it eliminated it altogether, embracing the holding.

Finally, in the face of Kate’s assertion that to impute David’s fraud to her would deny her the “‘fresh start’ policy of modern bankruptcy law,” the Court noted that the Bankruptcy Code balanced multiple, often competing interests.  By including the exceptions to discharge provided by § 523(a), Congress had made it clear that bankruptcy did not necessarily wipe “the bankrupt’s slate clean.”  Why else would § 523(a) exist if not to show that not all debtors, or at least not all acts of a debtor, could be forgiven if the damage she caused a creditor had greater weight than the fresh-start discharge of that debtor?  After reaching that conclusion, the Court reminded the reader that under long-standing state law “a faultless individual is responsible for another’s debt only when the two have a special relationship, and even then, defenses to liability are available.”  This last point was echoed in the concurrence of Justices Sotomayor and Jackson to the unanimous opinion authored by Justice Barrett.  Their concurrence reminded the reader that “‘[t]he relevant legal context’ concerns fraud only by ‘agents’ and ‘partners within the scope of the partnership.’”

AUTHOR’S COMMENTS

First, this opinion by one of our most recent appointees to the Court is delightfully readable.  Even a non-bankruptcy specialist or layperson will easily follow its analysis.  Second, the reasoning is solidly based in our principles of common law fraud, where the debt of a partner or agent has long been imputed to others.  The Court is telling us that these principles are equally applicable to debts in bankruptcy. The Court’s final reminder that the Bankruptcy Code is a well-structured balance of the interests of both debtors and creditors is something that all who work in this field should keep in mind.  Personally, I believe this imposition of nondischargeable liability is harsh, but it is not new in our common law precedent and seemingly has been embraced by Congress.  I cannot criticize the Court for the conclusions it reached, as they are sound.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.