On February 22, 2023, the U.S. Supreme Court decided Bartenwerfer v. Buckley, No. 21-908, affirming the Ninth Circuit and holding that 11 U.S.C. § 523(a)(2)(A), which bars debtors from discharging any debt obtained by fraud, applies even to debtors who are liable for fraud they did not personally commit.
Kate Bartenwerfer jointly purchased a home with her then-boyfriend David Bartenwerfer. As business partners, they worked to remodel the home and resell it at a profit. Kate was largely uninvolved in the remodeling project, with David taking charge. When the remodeling project was completed, the Bartenwerfers sold the house to Kieran Buckley, and in so doing, attested that they had disclosed all material facts related to the property. Buckley later discovered several undisclosed defects with the home, sued alleging misrepresentation, and secured a judgment against both David and Kate Bartenwerfer as partners in the remodel and resell business partnership for breach of contract, negligence, and nondisclosure of material facts.
The Bartenwerfers later sought to discharge their debts, including the judgment, in bankruptcy. The Bankruptcy Court concluded that the judgment against Kate was non-dischargeable under section 523(a)(2)(A), which prohibits the discharge of “any debt . . . (2) for money, property, [or] services . . . obtained by . . . (A) false pretenses, a false representation, or actual fraud,” because David’s knowing concealment of the home’s defects could be imputed to Kate through the remodel and resell partnership. The Bankruptcy Appellate Panel reversed in part and remanded for determination of whether Kate had individual knowledge of David’s fraud. On remand, the Bankruptcy Court concluded that Kate lacked knowledge of David’s fraud, and accordingly, her judgment debt could be discharged. The Ninth Circuit reversed, holding a debtor who is liable for a partner’s fraud cannot discharge that debt in bankruptcy, even if the debtor has no culpability.
In a unanimous decision, the Supreme Court affirmed and held that the text of section 523(a)(2)(A) precluded Kate from discharging the judgment debt. Because the debt derived from “the sale proceeds obtained by David’s fraudulent misrepresentations, it is a debt ‘for money . . . obtained by . . . false pretenses, a false representation, or actual fraud.’” In reaching this conclusion the Court recognized that the statutory text is written in the passive voice and does not concern itself with who committed the fraud — if debt results from someone’s fraud, it is non-dischargeable under section 523(a)(2)(A), period.
In addition, the Court looked to its precedent interpreting a prior version of the statute — where it held two innocent partners were prohibited from discharging debts arising out of the fraud of another partner — and Congress’s decision to enact a new version of the statute echoing the Court’s holding. The Court emphasized that when Congress enacts a statute, it is presumed to be aware of the Court’s precedents, and that presumption is particularly strong when Congress changes the statutory text to embrace one of the Court’s prior holdings or interpretations of the statute.
The Court rejected Kate’s argument that “[p]recluding faultless debtors from discharging liabilities run up by their associates” is inconsistent with Congress’s policy of giving debtors a fresh start. The Court noted that Congress struck a balance between debtors and creditors in the bankruptcy code, which the Court is not free to rewrite. Finally, the Court remarked that the scope of who is liable for fraud is a creature of state law — if state law did not extend liability for fraud to a partner, section 523(a)(2)(A) would not preclude discharge of that debt.
Justice Barrett authored the opinion for a unanimous court. Justice Sotomayor filed a concurring opinion, in which Justice Jackson joined.
