Bartenwerfer Argument Invites the Supreme Court to Depart from ‘Plain Meaning’

Hearing argument on December 6, the Supreme Court will decide in Bartenwerfer v. Buckley whether a debtor is saddled with a nondischargeable debt for a false representation or actual fraud under Section 523(a)(2)(A) based entirely on the fraud of a partner or an agent.

In other words, does vicarious liability for fraud also result automatically in nondischargeability, or will the Court impute extra words to the statute and hold that the debtor must have some degree of scienter before the debt is excepted from discharge?

The ‘Innocent’ Wife

A couple owned a home. They moved out to renovate and then sell the home. The husband oversaw the renovations. The wife had little to do with the renovations. After renovation, they sold the home.

The buyers sued in state court, alleging fraud in the disclosure statement for failure to disclose known defects in the home. A jury found the couple liable, resulting in a judgment against them for about $540,000, plus interest. The wife was liable for the husband’s fraud because the relationship between the husband and wife was found to be a partnership under state law.

The couple filed a chapter 7 petition, and the bankruptcy court ruled that the debt was nondischargeable as to the husband.

The bankruptcy court discharged the debt as to the wife, finding that she neither knew nor should have known that the disclosures were fraudulent. See Buckley v. Bartenwerfer (In re Bartenwerfer), 596 B.R. 675 (Bankr. N.D. Cal. 2019). The Ninth Circuit Bankruptcy Appellate Panel affirmed in a nonprecedential opinion. See Bartenwerfer v. Buckley (In re Bartenwerfer), 16-1277, 2017 BL 461730, 2017 Bankr. Lexis 4396, 2017 WL 6553392 (B.A.P. 9th Cir. Dec. 22, 2017).

The Ninth Circuit reversed in a nonprecedential opinion and directed the bankruptcy judge to enter judgment in favor of the creditor, declaring the debt to be nondischargeable. Buckley v. Bartenwerfer (In re Bartenwerfer), 860 Fed. Appx. 544 (9th Cir. Aug. 12, 2021).

On the same question, the circuits are split. The Second, Fourth, Seventh and Eighth Circuits hold that the debtor must have some degree of scienter before an imputed liability for fraud becomes nondischargeable.

To the contrary, the Fifth, Sixth, Ninth and Eleventh Circuits hold that a debt is nondischargeable as to an entirely innocent debtor based on the fraud of a partner or agent.

Raising the circuit split, the debtor-wife filed a petition for certiorari one year ago. The Supreme Court granted the petition on May 2 and held argument on December 6. To read one of ABI’s stories on Bartenwerfer, click here.

The debtor’s petition stated the question presented as follows:

May an individual be subject to liability for the fraud of another that is barred from discharge in bankruptcy under 11 U.S.C. § 523(a)(2)(A), by imputation, without any act, omission, intent or knowledge of her own?

Oral Argument Focuses on Limits

Arguably, the debtor is asking the Supreme Court to add words to the statute. Section 523(a)(2)(A) says that a discharge under Section 727 “does not discharge an individual debtor from any debt . . . for money . . . to the extent obtained by . . . a false representation, or actual fraud . . . .”

At oral argument, the justices uniformly seemed to say that the statute favors nondischargeability. Unlike Sections 523(a)(2)(B) or (a)(6), for instance, Section 523(a)(2)(A) has no reference to the conduct of the debtor.

The outcome, however, is not open and shut. The content of Section 523(a) is the product of more than 100 years of piecemeal legislation by Congress. One justice said that the statute seems “haphazard,” and another asked whether the different formulations were the result of “carelessness” by Congress.

Many of the justices’ questions probed the extent to which Section 523(a)(2)(A) must be read literally. Justices Clarence Thomas and Sonia Sotomayor offered hypotheticals to test “plain meaning.”

Justice Thomas imagined a case where an infant child was a partner. Would a debt for fraud be nondischargeable as to an infant? Justice Sotomayor offered a case where a loan was obtained fraudulently, but the borrower transferred the debt to someone not aware of the fraud. Would the debt be nondischargeable as to the transferee, she asked?

The debtor argued that state law establishes rules for vicarious liability but does not define dischargeability. In contrast, the Bankruptcy Code points in a different direction by narrowing the grounds on which a debt is nondischargeable, the debtor said. In the decision that might come down in the first quarter of 2023, the Court may explore the extent to which state law formulations of vicarious liability control the outcome under Section 523.

Sarah M. Harris, from the Washington, D.C., office of Williams & Connolly LLP, argued for the debtor.

Zachary D. Tripp, from the Washington, D.C., office of Weil Gotshal & Manges LLP, argued for the creditor. Assistant Solicitor General Erica L. Ross argued as amicus for the government on behalf of the creditor.

Prediction

At least two justices were worried about reading the statute literally, offering exaggerated situations where nondischargeability would offend notions of fairness. On the other hand, it would be difficult for the Court to insert words into a statute that has been amended repeatedly by Congress.

In an era where the Supreme Court hews to statutory language, this writer presumes that the justices will affirm and find the debt to be nondischargeable, because the wife was a partner under state law. This writer suspects that the Court’s opinion will attempt to limit the holding to the facts of the case without insinuating that plain language must control in every conceivable circumstance.

On the other hand, reversing and discharging the debt would be a watershed moment in interpreting the Bankruptcy Code. Reversal would reinvigorate the equity powers of the bankruptcy court after years of erosion by the Supreme Court.