Supreme Court Holds Debts Incurred by Fraud Are Ineligible for Bankruptcy Relief

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

Facts of the Case

Kate and David Bartenwerfer decided to remodel a jointly owned house in San Francisco and then sell it for a profit. David took charge of the project, while Kate remained largely uninvolved. They eventually sold the house to respondent Kieran Buckley. In conjunction with the sale, Kate and David attested that they had disclosed all material facts related to the property.

After the purchase, Buckley discovered several defects that the Bartenwerfers had failed to disclose. Buckley sued in California state court and won, leaving the Bartenwerfers jointly responsible for more than $200,000 in damages. Unable to pay that judgment or their other creditors, the Bartenwerfers filed for Chapter 7 bankruptcy. Buckley then filed an adversary complaint in the bankruptcy proceeding, alleging that the debt owed him on the state-court judgment was non-dischargeable under the Bankruptcy Code’s exception to discharge of “any debt…for money…to the extent obtained by…false pretenses, a false representation, or actual fraud.”

The Bankruptcy Court found that David had committed fraud and imputed his fraudulent intent to Kate because the two had formed a legal 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 reason to know of David’s fraud. On remand, the Bankruptcy Court determined that Kate lacked such knowledge and could therefore discharge her debt to Buckley. While the Bankruptcy Appellate Panel affirmed, the Ninth Circuit reversed. Invoking Strang v. Bradner, 114 U.S. 555 (1885), in which the Court held that the fraud of one partner should be imputed to the other partners, 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 cannot discharge that debt in bankruptcy, regardless of her own culpability.

Supreme Court’s Decision

The Supreme Court held that Section 523(a)(2)(A) precludes Kate Bartenwerfer from discharging in bankruptcy a debt obtained by fraud, regardless of her own culpability. “The provision obviously applies to a debtor who was the fraudster. But sometimes a debtor is liable for fraud that she did not personally commit — for example, deceit practiced by a partner or an agent,” Justice Barrett wrote on behalf of the Court. “We must decide whether the bar extends to this situation too. It does.”

In reaching its decision, the Supreme Court rejected Kate Bartenwerfer’s argument that “money obtained by fraud” should be interpreted to mean money obtained by the individual debtor’s fraud. According to Justice Barrett, the text of the Bankruptcy Code does not support such a reading. Rather, the exception “turns on how the money was obtained, not who committed fraud to obtain it.”

The Supreme Court also rejected Bartenwerfer’s reliance on §523(a)(2)(A)’s neighboring provisions, both of which require action by the debtor herself to support her position. According to Justice Barrett, if there is an inference to be drawn, it would not favor Bartenwerfer. Instead, the more likely inference is that (A) excludes debtor culpability from consideration given that the other provisions expressly hinge on it.

Justice Barrett went on to explain that ”any remaining doubt about the textual analysis” is eliminated by the Court’s decision in Strang and Congress’s subsequent response. As Justice Barrett noted, when Congress next amended the Bankruptcy Code following the Court’s decision in Strang, it deleted the phrase “of the bankrupt” from the discharge exception for fraud. “By doing so, Congress cut from the statute the strongest textual hook counseling against the outcome in Strang,” she wrote. “The unmistakable implication is that Congress embraced Strang’s holding — so we do too.”