Volume 30, Issue 6: This Report summarizes opinions issued on February 22 and 28, 2023 (Part I); and cases granted review on February 27 and March 6, 2023 (Part II).

Opinion: Bartenwerfer v. Buckley, 21-908

Bartenwerfer v. Buckley, 21-908. The Court unanimously held that the Bankruptcy Code prohibits a debtor from discharging a debt obtained by fraud regardless of whether the debtor was the fraudster. Kate Bartenwerfer bought a house with her then-boyfriend, David Bartenwerfer, in 2005. They acted as business partners with a plan to remodel the house and sell it for a profit. David took charge of the remodel, and Kate was mostly uninvolved. After they sold the home, the buyer sued them for failing to disclose all material defects regarding the property. A California jury found in favor of the buyer and awarded more than $200,000 in damages, for which David and Kate were jointly liable. They later filed for Chapter 7 bankruptcy seeking to discharge their debt. The buyer filed an adversary complaint alleging that the state-court judgment was not dischargeable under 11 U.S.C. §523(a)(2)(A). That section bars debtors from discharging any debt for money “obtained by . . . fraud.” The bankruptcy court held a two-day trial and found that David had knowingly concealed the house’s defects from the buyer. After imputing David’s fraud to Kate, the court ruled that neither party could discharge their debt. The Ninth Circuit’s Bankruptcy Appellate Panel reversed as to Kate, reasoning that §523(a)(2)(A) applied only if she knew or had reason to know of David’s fraud. Following a second trial, the bankruptcy court determined that Kate lacked the requisite knowledge of David’s fraud and thus could discharge her debt. The Bankruptcy Appellate Panel affirmed, but the Ninth Circuit reversed in relevant part. It held that under Strang v. Bradner, 114 U.S. 555 (1885), Kate could not discharge her debt irrespective of her own culpability in committing the fraud. In an opinion by Justice Barrett, the Court affirmed.

The Court concluded that the plain language of §523(a)(2)(A) precluded Kate from discharging her debt. The statute prohibits an “individual debtor” from discharging any “debt” for “money . . . obtained by . . . false pretenses, a false representation, or actual fraud.” As the Court explained, Kate does not dispute that she is an “individual debtor” within the meaning of the statute, or that the state-court judgment constitutes a “debt.” Rather, she fights the third premise, arguing that although “the passive-voice statute does not specify a fraudulent actor,” it “is most naturally read to bar the discharge of debts for money obtained by the debtor’s fraud.” The Court disagreed, reasoning that “[p]assive voice pulls the actor off the stage.” The Court explained that Congress framed the statute to focus on “how the money was obtained, not who committed fraud to obtain it.” In the Court’s view, the “debt must result from someone’s fraud, but Congress was ‘agnosti[c]’ about who committed it.” For the Court, the “relevant legal context” confirmed as much, as the common law of fraud “has long maintained that fraud liability is not limited to the wrongdoer.” And the Court reasoned that “§523(a)(2)(A)’s neighboring provisions, which both require action by the debtor herself” for certain discharge exceptions to apply, further supported its reading of §523(a)(2)(A). As the Court noted, “‘[w]hen Congress includes particular language in one section of a statute but omits it in another section of the same Act,’ we generally take the choice to be deliberate.”

The Court further stated that its “precedent, along with Congress’s response to it, eliminates any possible doubt about our textual analysis.” The Court explained that an earlier version of the discharge exception for fraud provided that “[N]o debt created by the fraud or embezzlement of the bankrupt . . . shall be discharged under this act.” While this language “seemed to limit the exception to fraud committed by the debtor herself,” the Court “held otherwise in Strang v. Bradner.” When Congress overhauled the bankruptcy law 13 years later, “it deleted ‘of the bankrupt’ from the discharge exception for fraud.” “By doing so,” the Court continued, “Congress cut from the statute the strongest textual hook counseling against the outcome in Strang.” The Court concluded, “The unmistakable implication is that Congress embraced Strang’s holding—so we do too.” Finally, the Court rejected Kate’s policy-based arguments, stating that it would not second-guess Congress’s decision to favor creditors over debtors when it comes to debts for money obtained by fraud.

Justice Sotomayor filed a concurring opinion, which Justice Jackson joined. Justice Sotomayor read the Court’s opinion as holding “that 11 U.S.C. §523(a)(2)(A) bars debtors from discharging a debt obtained by fraud of the debtor’s agent or partner.” This holding, Justice Sotomayor stated, is consistent with Congress’s incorporation of common-law fraud principles into the statute. Because Kate does not dispute that she and David acted as partners when they sold their property, Justice Sotomayor wrote, “the debt is not dischargeable under the statute.” Justice Sotomayor stated that the “Court here does not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.” With that understanding, Justice Sotomayor joined the Court’s opinion.