On February 22, 2023, the U.S. Supreme Court decided Bartenwerfer v. Buckley, No. 21-908, and affirmed the Ninth Circuit in holding that 11 U.S.C. § 523(a)(2)(A), which bars debtors from discharging debts obtained by fraud, holding that it applies to debtors who are liable for fraud even though they did not personally commit the underlying relevant actions.
Kate Bartenwerfer (“Kate”) jointly purchased a home with her business partner, David Bartenwerfer (David”). They worked to remodel the home and sold it at a large profit. David performed most of the remodeling services and Kate was largely uninvolved in those actions. When the remodeling was finished, Kate and David (hereinafter may be referred to as the “Sellers”) sold the house to Kieran Buckley (“Buckley”), and as part of the sale process they certified that they disclosed all material facts related to the property. After the sale was consummated, Buckley noticed that many substantial defects were concealed from her prior to the sale and commenced a suit alleging misrepresentation and secured a judgment against both of the Sellers for the remodel for breach of contract, negligence, and nondisclosure of material facts.
The Sellers then jointly filed for bankruptcy in an attempt to discharge Buckley’s judgment. The Bankruptcy Court concluded that the judgment against Kate was non-dischargeable under section 523(a)(2)(A), which bars 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. The Bankruptcy Appellate Panel reversed in part and remanded for determination of whether Kate had specific knowledge of David’s fraud. On remand, the Bankruptcy Court concluded that Kate lacked any information regarding David’s fraud and therefore the judgment against her could be discharged. The Ninth Circuit reversed, holding that a debtor who is liable for a partner’s fraud cannot discharge that debt in bankruptcy, even if there is no evidence of that debtor’s responsibility or blame.
An appeal was taken up to the U.S. Supreme Court, which held that the text of section 523(a)(2)(A) precluded Kate from discharging the judgment debt insofar as the debt emanated 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 so concluding, the Supreme Court recognized that the statute 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).
Further, the Supreme Court analyzed 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 Supreme Court stated that when Congress enacts a statute, it is presumed to be aware of the Court’s precedents and that the presumption is especially strong when Congress changes the statutory text to embrace one of the Court’s prior holdings or interpretations of the statute.
The Court also did not accept 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 Supreme Court stated that Congress struck a careful balance between debtors and creditors under the bankruptcy code, which the Court is not at liberty to rewrite. This decision resolves a circuit split as to whether these types of debts are dischargeable.