On February 22, 2023, the Supreme Court of the United States weighed in on a bankruptcy case involving fraud. The court ruled that debtors whose debts were incurred by fraud may not have such debts discharged even if the debtor did not participate in or even have knowledge of the fraud.
In the case of Bartenwerfer v. Buckley, Mr. and Mrs Bartenwerfer (who were not yet married at the time) sold a remodeled home to Mr. Buckley. Mr. Bartenwerfer was in charge of remodeling the home, and his wife was uninvolved. To sell the home, the Bartenwerfers attested that they had disclosed all material facts regarding the condition of the home to Mr. Buckley. Buckley, however, discovered several defects in the home that were not disclosed by the Bartenwerfers. Buckley sued the Bartenwerfers, bringing claims for breach of contract, negligence, and nondisclosure of material facts. A jury found in favor of Buckley, awarding him $200,000.
The Bartenwerfers filed for Chapter 7 bankruptcy, and Buckley filed an adversary complaint alleging that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A). The bankruptcy court agreed with Buckley. The bankruptcy court ruled that Bartenwerfer had knowingly concealed certain defects within the home, and his fraudulent intent could be imputed to his wife because they had a partnership to sell the home.
Mrs. Bartenwerfer appealed the decision, holding that she was unaware of her husband’s fraudulent intent and was not involved in the remodel of the home. The Ninth Circuit Bankruptcy Appellate Panel reversed the decision, holding that Mrs. Bartenwerfer was entitled to bankruptcy discharge because she was not aware of her husband’s fraudulent intent. A second appeal reversed the Appellate Panel’s ruling, holding that the debt was non-dischargeable regardless of whether or not she was aware of the fraud.
SCOTUS unanimously affirmed the Ninth Circuit, holding that Mrs. Bartenwerfer’s debt was not dischargeable under 11 U.S.C. § 523(a)(2)(A), which exempts as dischargeable debts obtained by false pretenses, false representation, or actual fraud.
Justice Barrett reasoned that the use of the passive voice in 11 U.S.C. § 523(a)(2)(A) removes the fraudulent actor from consideration. In other words, the individual does not need to be aware that fraud has been committed in order for the debt to be non-dischargeable under Chapter 7. 11 U.S.C. § 523(a)(2)(A) thus applies to all debts that arise from fraud, not just those that the individual was aware of.
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