Recent Developments in Bankruptcy Litigation 2024

Editors

§ 1.1.1. Supreme Court

Bartenwerfer v. Buckley, 598 U.S. 69, 143665 (2023). In this case the Court was confronted with the Bankruptcy Code’s exception to discharge for any debt obtained by fraud (contained in Section 523(a)(2)(A)). While this provision clearly applies to the active fraudster, the Court noted that sometimes a debtor may be liable for fraud that she did not personally commit. “For example, deceit practiced by a partner or an agent.” The question for the Court was whether the bar extends to this latter situation.

In 2005, Kate and David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel the house and sell it at a profit. David took charge of the project. Kate was largely uninvolved. Kate and David ultimately married and sold the house to Kieran Buckley. In connection with the sale, Kate and David attested that they had disclosed all material facts relating to the property. After closing, Buckley discovered several undisclosed defects. Buckley sued Kate and David and obtained a judgment in his favor. Kate and David were unable to pay Buckley and sought Chapter 7 bankruptcy protection. Buckley filed an adversary complaint alleging that the money owed on the state-court judgment fell within Section 523(a)(2)(A)’s exception to discharge for any debt for money obtained by fraud. The bankruptcy court ruled in Buckley’s favor holding that David’s fraudulent intent would be imputed to Kate because they had formed a legal partnership to execute the renovation and resale project. The Ninth Circuit bankruptcy appellate panel agreed as to David’s fraudulent intent but did not agree as to Kate. The panel concluded that the Code only barred her from receiving a discharge if she knew or had reason to know of David’s fraud. The Ninth Circuit reversed, holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari to resolve confusion in the lower courts.

The Court began its analysis with the text of the Code. Justice Barrett wrote that “this text precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” There was no dispute that Kate was an individual debtor nor that the judgment was a debt. The focus of the Court’s analysis, and the arguments of the parties, revolved around whether the debt arose from money obtained by false pretenses, a false representation, or actual fraud. Kate disputed this last premise. She admitted that the statute was written in the passive voice, which does not specify a fraudulent actor. But she argued that the statute should be most naturally read to bar discharge of debts for money obtained by the debtor’s fraud. In other words, she argued that the passive voice hides the relevant actor in plain sight. The Court disagreed finding that the passive …