SCOTUS Holds Debts Incurred by Fraud Are Ineligible for Bankruptcy Relief

In Bartenwerfer v. Buckley, 598 U.S. ____ (2023), the U.S. Supreme Courtroom held that debts incurred by fraud just can’t be discharged in a Chapter 7 individual bankruptcy, even if a debtor was not culpable for the fraud. Justice Amy Coney Barrett wrote on behalf of the unanimous Court docket.

Facts of the Circumstance

Kate and David Bartenwerfer resolved to remodel a jointly owned household in San Francisco and then provide it for a gain. David took demand of the task, although Kate remained mostly uninvolved. They finally sold the residence to respondent Kieran Buckley. In conjunction with the sale, Kate and David attested that they had disclosed all materials information similar to the residence.

Right after the purchase, Buckley identified numerous defects that the Bartenwerfers had failed to disclose. Buckley sued in California state courtroom and received, leaving the Bartenwerfers jointly accountable for far more than $200,000 in damages. Not able to pay that judgment or their other lenders, the Bartenwerfers submitted for Chapter 7 individual bankruptcy. Buckley then filed an adversary criticism in the bankruptcy continuing, alleging that the personal debt owed him on the condition-court judgment was non-dischargeable less than the Bankruptcy Code’s exception to discharge of “any debt…for money…to the extent attained by…false pretenses, a wrong illustration, or real fraud.”

The Bankruptcy Court observed that David had fully commited fraud and imputed his fraudulent intent to Kate mainly because the two had shaped a lawful partnership to renovate and sell the property. The Bankruptcy Appellate Panel disagreed as to Kate’s culpability, holding that §523(a)(2)(A) barred her from discharging the debt only if she knew or had rationale to know of David’s fraud. On remand, the Personal bankruptcy Court determined that Kate lacked these types of know-how and could for that reason discharge her personal debt to Buckley. While the Individual bankruptcy Appellate Panel affirmed, the Ninth Circuit reversed. Invoking Strang v. Bradner, 114 U.S. 555 (1885), in which the Court docket held that the fraud of 1 associate ought to be imputed to the other associates, who “received and appropriated the fruits of the fraudulent conduct,” the Ninth Circuit held that a debtor who is liable for her partner’s fraud are unable to discharge that personal debt in bankruptcy, irrespective of her personal culpability.

Supreme Court’s Selection

The Supreme Courtroom held that Part 523(a)(2)(A) precludes Kate Bartenwerfer from discharging in personal bankruptcy a personal debt attained by fraud, no matter of her have culpability. “The provision of course applies to a debtor who was the fraudster. But sometimes a debtor is liable for fraud that she did not personally commit — for instance, deceit practiced by a husband or wife or an agent,” Justice Barrett wrote on behalf of the Courtroom. “We must determine regardless of whether the bar extends to this scenario as well. It does.”

In reaching its final decision, the Supreme Courtroom rejected Kate Bartenwerfer’s argument that “money attained by fraud” should be interpreted to imply dollars attained by the unique debtor’s fraud. In accordance to Justice Barrett, the textual content of the Bankruptcy Code does not guidance this kind of a examining. Rather, the exception “turns on how the income was acquired, not who fully commited fraud to obtain it.”

The Supreme Court docket also turned down Bartenwerfer’s reliance on §523(a)(2)(A)’s neighboring provisions, the two of which involve motion by the debtor herself to assist her position. In accordance to Justice Barrett, if there is an inference to be drawn, it would not favor Bartenwerfer. As an alternative, the more most likely inference is that (A) excludes debtor culpability from thing to consider offered that the other provisions expressly hinge on it.

Justice Barrett went on to make clear that ”any remaining doubt about the textual analysis” is eliminated by the Court’s conclusion in Strang and Congress’s subsequent response. As Justice Barrett mentioned, when Congress following amended the Personal bankruptcy Code subsequent the Court’s choice in Strang, it deleted the phrase “of the bankrupt” from the discharge exception for fraud. “By accomplishing so, Congress reduce from the statute the strongest textual hook counseling versus the final result in Strang,” she wrote. “The unmistakable implication is that Congress embraced Strang’s keeping — so we do too.”