SUPREME COURT RULES THAT INNOCENT DEBTOR CANNOT DISCHARGE A PARTICULAR DEBT DUE TO FRAUDULENT CONDUCT OF A PARTNER
The “honest debtor” did not have a good day before the US Supreme Court in Bartenwerfer v. Buckley, 143 S. Ct. 665, 214 L. Ed. 434, decided on February 22, 2023. In said case the (now) married couple decided to remodel a home they jointly owned and sell it for a profit. The husband took charge of the project, while the wife remained largely uninvolved. As part of the sale process, both sellers signed disclosure statements as to the property’s condition, but only the husband knew there were undisclosed defects. After the closing the purchaser discovered several defects and sued both sellers in State Court, obtaining a significant judgment. The couple filed a joint Chapter 7, and the issue that ended up in the Supreme Court revolved around whether 11 USC § 523(a)(2)(A) precluded the wife from discharging a debt rooted in the husband’s fraud, regardless of her own lack of culpability.
After seriously parsing the language of § 523(a)(2)(A), the Supreme Court ruled the debt was not dischargeable by the wife. Section 523(a)(2)(A) renders non-dischargeable money, property or services “obtained by … false pretenses, a false representation or actual fraud …”, but the statute does not require the fraudulent acts to have been performed by the individual debtor. The Court ruled that “Section 523(a)(2)(A) turns on how the money was obtained, not who committed the fraud to obtain it”. The Court further noted that the statute focuses “on an event that occurs without respect to a specific actor, and therefore without respect to any actor’s intent or culpability”. The net result is that §523(a)(2)(A) can prevent an individual debtor from discharging a debt obtained by fraud that was committed solely by another. It will be interesting (but not for debtors) to see how far other Courts extend this reasoning.
In a concurring opinion, Justices Sotomayor and Jackson applied common law agency and partnership principals to limit the ruling to fraudulent debts obtained by agents or partners within the scope of the partnership, indicating that the Court’s opinion would not apply to “a situation involving fraud by a person bearing no agency or partnership relationship to the debtor”.
Expect more nondischargeability litigation in Bankruptcy Court based upon this case.