Bartenwerfer v. Buckley
598 U.S. 69 (2023)
Rule of Law:
Section 523(a)(2)(A) of the Bankruptcy Code, which bars the discharge of debts for money obtained by fraud, applies even when the debtor herself did not personally commit the fraud, provided she is liable for the fraud of another (e.g., a partner or agent) under state law.
Facts:
- In 2005, Kate and David Bartenwerfer jointly purchased a house in San Francisco.
- Acting as business partners, the Bartenwerfers decided to remodel the house and sell it for a profit, with David taking charge of the project and Kate remaining largely uninvolved.
- The Bartenwerfers sold the renovated house to Kieran Buckley.
- In conjunction with the sale, Kate and David Bartenwerfer attested that they had disclosed all material facts related to the property.
- After the purchase, Buckley discovered several undisclosed defects in the house, including a leaky roof, defective windows, a missing fire escape, and permit problems.
- Buckley alleged that he had overpaid in reliance on the Bartenwerfers' misrepresentations.
Procedural Posture:
- Kieran Buckley sued Kate and David Bartenwerfer in California state court, alleging breach of contract, negligence, and nondisclosure of material facts.
- A state court jury found in Buckley's favor on his claims, holding the Bartenwerfers jointly responsible for over $200,000 in damages.
- The Bartenwerfers filed for Chapter 7 bankruptcy.
- Buckley filed an adversary complaint in the bankruptcy proceeding, alleging that the debt owed to him on the state-court judgment was nondischargeable under 11 U. S. C. § 523(a)(2)(A).
- The Bankruptcy Court found that David Bartenwerfer had committed fraud and imputed his fraudulent intent to Kate Bartenwerfer because they had formed a legal partnership.
- The Ninth Circuit's 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 reason to know of David's fraud.
- On remand, the Bankruptcy Court determined that Kate Bartenwerfer lacked such knowledge and could therefore discharge her debt to Buckley.
- The Bankruptcy Appellate Panel affirmed the Bankruptcy Court's decision on remand.
- The Ninth Circuit Court of Appeals reversed in relevant part, holding that a debtor who is liable for her partner's fraud cannot discharge that debt in bankruptcy, regardless of her own culpability.
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Issue:
Does Section 523(a)(2)(A) of the Bankruptcy Code preclude an individual debtor from discharging a debt for money obtained by fraud when the debtor did not personally commit the fraud but is liable for it under state law (e.g., through a partnership or agency relationship)?
Opinions:
Majority - Justice Barrett
Yes, Section 523(a)(2)(A) precludes an individual debtor from discharging a debt for money obtained by fraud, regardless of her own culpability, if she is liable for that fraud under state law. The Court relied on the plain text of § 523(a)(2)(A), noting its use of the passive voice ("obtained by") focuses on the event of obtaining money through fraud rather than requiring a specific fraudulent actor, thereby remaining "agnosti[c]" about who committed it. This interpretation aligns with the common law of fraud, which traditionally holds principals liable for the frauds of their agents and partners liable for the frauds of their associates within the scope of the partnership. The Court further noted that Bartenwerfer's argument for personal debtor culpability was undermined by the principle that specific language included in some statutory provisions but omitted from others (like the explicit culpability requirements in § 523(a)(2)(B) and (C) compared to (A)) indicates a deliberate choice by Congress. Moreover, the Court found its precedent in Strang v. Bradner, which held that the fraud of one partner could be imputed to others under an earlier bankruptcy discharge exception that explicitly used the phrase "of the bankrupt," to be highly persuasive. Congress's subsequent deletion of "of the bankrupt" from the statute after Strang further implied legislative embrace of that holding. Finally, the Court rejected Bartenwerfer's "fresh start" policy argument, explaining that the Bankruptcy Code balances multiple, often competing interests, and that § 523(a)(2)(A) merely takes the debt as it finds it from the underlying state law, which generally provides defenses for truly innocent parties.
Concurring - Justice Sotomayor
Yes, Section 523(a)(2)(A) bars debtors from discharging a debt obtained by the fraud of the debtor's agent or partner. Justice Sotomayor agreed with the majority's conclusion, emphasizing that Congress incorporated common-law principles of fraud into the statute, which inherently include agency and partnership principles. She highlighted that Strang v. Bradner confirmed this reading and Congress embraced it through subsequent statutory amendments. The concurring opinion noted that the specific facts of this case involved an agency and partnership relationship between the petitioner and her husband, and thus the debt was nondischargeable under the statute. It clarified that the Court did not confront situations involving fraud by a person bearing no agency or partnership relationship to the debtor.
Analysis:
This case clarifies the scope of the fraud discharge exception under § 523(a)(2)(A), confirming that a debtor does not need to personally commit fraud to be denied a discharge, so long as they are liable for the fraud of an associate (like a partner or agent) under state law. This ruling strengthens creditor protection against debts arising from fraud by expanding the categories of non-dischargeable liabilities beyond direct perpetrators. It reinforces the balance between a debtor's 'fresh start' and a creditor's right to recovery in cases of fraud, reaffirming that the Bankruptcy Code respects established state law principles of imputed liability. Future cases will likely focus on the specific nature of the relationship between the debtor and the fraudster, and the scope of liability under state law, to determine if fraud can be imputed to a debtor for non-dischargeability purposes.
