Bankruptcy Judge Klinette H. Kindred of Alexandria, Va., embraced the concurring opinion in this term’s Bartenwerfer opinion from the Supreme Court by holding that a poor schlub who was an unwitting accomplice in someone else’s fraud isn’t saddled with a nondischargeable debt for fraud or larceny.
Although the debtor was an indispensable cog in the fraud, the debt was dischargeable because the debtor was neither a partner nor an agent of the fraudster, unlike the debtor in Bartenwerfer v. Buckley, 143 S. Ct. 665 (Sup. Ct. Feb. 22, 2023). To read ABI’s report, click here.
Like all frauds, the scheme in the case before Judge Kindred was complex. To grasp the Bartenwerfer issues, the facts boil down to this:
The alleged fraudster was the executive director of an economic development agency in a Virginia town. The unsophisticated debtor had been a friend of the fraudster for years. Unbeknownst to the debtor, the fraudster misappropriated $285,000 from the agency to purchase a home that the fraudster put in the debtor’s name.
The debtor testified credibly before Judge Kindred that he attended the closing and signed documents (without reading them) that he believed were forms for a credit check to buy a home of his own. The debtor did not know he became the titular owner of the home until the fraudster needed to sell the home.
To close the sale, the debtor attended the closing, where he learned that sale proceeds would be deposited into his bank account. From the account, the debtor later made disbursements as directed by the fraudster. The debtor credibly testified that he believed the disbursements were to pay off liens on the home.
Evidently, the fraudster orchestrated the sale so that some of the proceeds remained with the debtor.
After the debtor filed a chapter 7 petition, the agency filed a $285,000 claim and an adversary proceeding to declare the debt nondischargeable as fraud or larceny under Sections 523(a)(2)(A) and (a)(4).
Needless to say, the fraudster took the Fifth Amendment when called to testify at the trial before Judge Kindred, who took the resulting negative inferences.
Judge Kindred first dealt with nondischargeability for larceny under Section 523(a)(4). Largely based on inferences from the fraudster’s invocation of her constitutional rights, Judge Kindred held that the elements of larceny had been proven. The development agency wanted Judge Kindred to impute the fraudulent acts to the debtor, citing Bartenwerfer.
In Bartenwerfer, the debtor was a wife who did not partake in an actual fraud committed by her husband. Because the wife admitted to being in partnership with her husband, the Supreme Court held that the debt was nondischargeable as to the wife under Section 523(a)(2)(A).
Judge Kindred pointed out how Section 523(a)(4), like Section 523(a)(2)(A), does not refer to debts “of the debtor.” Based on Bartenwerfer, she therefore concluded “that the fraud exception under 523(a)(4) is not limited to debts obtained by a debtor’s conduct.”
Judge Kindred then cited the concurring opinion in Bartenwerfer by Justices Sotomayor and Jackson. They concurred in the opinion of the Court based on the “understanding” that fraud is imputed only to “agents” and “partners within the scope of the partnership.” Bartenwerfer, id., 143 S. Ct. at 677.
Bartenwerfer and the case before her “differ in one significant aspect,” Judge Kindred said. In Bartenwerfer, state law made the wife liable for fraud because she was a partner. In the suit by the development agency, Judge Kindred found that that the fraudster and the debtor were not partners.
Finding that the debtor was an unwitting “pawn” in the fraudulent scheme, Judge Kindred held that the debtor’s actions also did not create an agency, based on the preponderance of the evidence. She dismissed the Section 523(a)(4) nondischargeability claim for larceny.
Turning to nondischargeability for actual fraud under Section 523(a)(2)(A), Judge Kindred found that the facts satisfied all elements of fraud. However, she could not “find that the actions of [the fraudster] may be imputed to the Debtor in this case.” Among other things, she found that the debtor “certainly was not aware” that he had purchased the home with stolen funds, even though he “demonstrated extremely bad judgment” by signing documents he never read.
Since the debtor was not a partner and the plaintiff had not proven the debtor to be an agent, Judge Kindred dismissed the nondischargeability claim under Section 523(a)(2)(A).
Bankruptcy Judge Klinette H. Kindred of Alexandria, Va., embraced the concurring opinion in this term’s Bartenwerfer opinion from the Supreme Court by holding that a poor schlub who was an unwitting accomplice in someone else’s fraud isn’t saddled with a nondischargeable debt for fraud or larceny.
Although the debtor was an indispensable cog in the fraud, the debt was dischargeable because the debtor was neither a partner nor an agent of the fraudster, unlike the debtor in Bartenwerfer v. Buckley, 143 S. Ct. 665 (Sup. Ct. Feb. 22, 2023).