Assume the debtor is liable as the transferee of a fraudulent transfer made by someone else who had actual intent to hinder, delay or defraud.

In Bartenwerfer v. Buckley, 143 S. Ct. 665 (Sup. Ct. Feb. 22, 2023), the Supreme Court held that a partner who herself was innocent of fraud is nonetheless saddled with a nondischargeable debt resulting from the fraud of her partner. Does Bartenwerfer mean that a debtor’s debt as recipient of a fraudulent transfer is nondischargeable under Section 523(a)(2)(A), even though the debtor did not share the transferor’s fraudulent intent?

Bankruptcy Judge Margaret M. Mann of San Diego said that Bartenwerfer did not change the law. The debtor must have her own fraudulent intent before the debt is considered nondischargeable. In her June 1 opinion, Judge Mann held that Husky International Electronics Inc. v. Ritz, 578 U.S. 355 (2016), “imposes a fraudulent intent requirement for transferees of fraudulent conveyances” before debts can be declared nondischargeable.

Nefarious Activities in Divorce

A couple divorced. The former husband owed child support to the former wife. Before the former husband married a second time, he transferred $400,000 to the woman who became his new wife.

The former wife sued the husband and the new wife in state court, alleging that the transfer was a fraudulent transfer with actual intent to hinder, delay or defraud under California law.

With regard to the new wife’s liability as transferee, Section 3439.08(b) of the California Civil Code is similar to Section 550(b)(1) of the Bankruptcy Code: The transferee is liable unless the transferee took the transfer for value and in good faith. Section 3439.08(b) does not require fraudulent intent on the part of the transferee before the transferee is liable for receipt of the fraudulent transfer.

The state court held the new wife liable as transferee because she did not show good faith. According to Judge Mann, the state court made no finding that the new wife shared the husband’s fraudulent intent.

The New Wife’s Bankruptcy

After judgment in state court, the new wife filed a chapter 7 petition. The former wife filed a complaint for a declaration that the judgment was nondischargeable under Section 523(a)(2)(A) as a debt “obtained by . . . false pretenses, a false representation, or actual fraud.”

Initially, Judge Mann denied the second wife’s motion to dismiss, saying that the judgment in state court was inconclusive about the second wife’s fraudulent intent. After Bartenwerfer came down, the former wife filed a motion for summary judgment, contending that Bartenwerfer imputed the husband’s fraudulent intent into the second wife.

While the former wife wrapped herself in the flag of Bartenwerfer, the new wife flew the flag of Husky. To read ABI’s reports on Bartenwerfer and Husky, click here and here. Judge Mann began by parsing Husky.

In Husky, the Supreme Court held that a debt can be nondischargeable for “actual fraud” under Section 523(a)(2)(A) of the Bankruptcy Code in the absence of a fraudulent misrepresentation to the creditor. However, the Court distinguished actual from implied fraud by saying that actual fraud requires wrongful intent.

Judge Mann cited a nonprecedential opinion from the Ninth Circuit that said that the recipient of a fraudulent transfer must have fraudulent intent before the debt is considered nondischargeable. See Bonnett v. Moirbia Scottsdale LLC, 860 F. App’x 473, 475 (9th Cir. 2021).

Finding Bonnett “persuasive,” Judge Mann held “that the recipient of a fraudulent conveyance . . . must individually possess the fraudulent intent” before the debt is deemed nondischargeable.

Bartenwerfer

But what about Bartenwerfer? Did it change the law? In nondischargeability suits, is fraudulent intent imputed after Bartenwerfer? Can Bartenwerfer coexist with Husky?

Looking at the plain language of the statute, Judge Mann quoted Bartenwerfer as holding that Section 523(a)(2)(A) “bars debtors from discharging a debt obtained by fraud of the debtor’s agent or partner.” Bartenwerfer, supra, 143 S. Ct. at 676. Judge Mann then quoted the concurrence in Bartenwerfer as based on the “understanding” that the holding was limited to partnerships and agencies.

Because the case before her did not involve a partnership or an agency, Judge Mann said that the Bartenwerfer imputation of intent did not apply.

Judge Mann said that the second wife was not being held liable for the husband’s debt, “but for her own different role in the transfers.” She said that the “state court did not impute [the husband’s] fraud to [the second wife], but instead made separate findings” about not receiving the property in good faith to make her liable as the transferee.

Judge Mann said that the second wife incurred a different debt from the husband’s liability to the former wife. “Since [the second wife’s] different debt was not based on ‘actual fraud,’ it will be discharged if [the former wife] fails to prove the [second wife’s] necessary fraudulent intent at trial.”

Judge Mann denied the motion for summary judgment and scheduled a trial to determine whether the second wife had “the necessary” fraudulent intent.