In a unanimous decision Bartenwerfer v Buckley, No. 21-908, 598 U.S.      (2023), the U.S. Supreme Court reviewed the breadth of the U.S. Bankruptcy Code’s discharge provision – and exceptions thereto – and held that a debt resulting from fraud (even where the debtor was not directly involved) is, nevertheless, nondischargeable. While the Court’s principles provide a roadmap for analyzing potentially nondischargeable claims, it also expands what was originally thought to be a “narrow” exception to discharge.

Debtor & Partner Tried House Flip; Partner Fails To Disclose Defects

Here, the debtor and her husband jointly purchased a home as business partners. The husband was responsible for all aspects of renovation of house as the general contractor. The debtor was largely uninvolved. When the partners sold the house, they were required to disclose all material facts relating to the property, and there were certain defects that the husband did not disclose. Ultimately, the home purchaser sued both the debtor and her husband for breach of contract, negligence and non-disclosure of material facts resulting in a judgment of approximately $200,000.

Buyer Sues To Preserve Claim Postbankruptcy

In the subsequent bankruptcy case of the debtor, the homebuyer argued that her claims against the debtor were non-dischargeable pursuant to § 523(a)(2)(A) of the Bankruptcy Code because the debt was obtained by false pretenses, a false representation or actual fraud. The debtor argued that she was entitled to a discharge because the debt did not “arise” from her actions or any fraud on her part. After a somewhat tortured appellate process, the Ninth Circuit ultimately held that the debt was nondischargeable, regardless of the debtor’s own involvement in the acts giving rise to the debt.

Court Focuses On Nature Of Debt

The Court began by highlighting the Bankruptcy’s Code policy of providing a fresh start to “faultless debtors.” Nevertheless, the Court noted that Congress identified certain debts excepted from that policy. The statutory text of § 523(a)(2)(A) of the Bankruptcy Code as written by Congress determines whether a debt is non-dischargeable. Naturally, the debtor argued that the tenor of the exception must be based on whether debtor’s actions were fraudulent to give rise to the debt. However, the Court focused on the statutory language. That section makes clear that a debt for money obtained by a false representation is not dischargeable. The statutory language is focused on the debt – not the actor’s actions giving rise to the debt. Therefore, liability is not limited to the wrongdoer; the nature of events giving rise to the liability governs.

Focusing on the controlling statutory language, the Court reviewed the nature of the event giving rise to the debt against the debtor. Here, the underlying state court determined that the debt arose from the failure to make the requisite seller’s disclosures by a partnership. That debt arose from a false representation/lack of required disclosure. The nature of that debt made the debt itself statutorily non-dischargeable for anyone who owed it. Since the debtor was a partner in the partnership (and co-liable for the debt), the liability arising from that false representation (lack of disclosure) was nondischargeable as against the debtor. 

Court Analysis Preserves Debtor Against Debtor 

Therefore, the exclusion from the discharge applied – and the debt was not dischargeable - regardless of a debtor’s active involvement.