The Passive Voice Strikes Again: § 523(a)(2)(A) Excepts the Debt, Not the Debtor

Congress’s decision to use the passive voice has cost at least one debtor the discharge of a significant debt. The U.S. Supreme Court in Bartenwerfer v. Buckley ended a long journey through the Ninth Circuit for a debtor whose husband committed fraud and when she sought to discharge the debt that resulted from a judgment for that fraudulent action.[1] Instead of analyzing whether the debtor was culpable in the fraud, the Supreme Court instead held that the debt — not the debtor — was the subject of 11 U.S.C. § 523(a)(2)(A), and since the debt itself resulted from fraud, it could not be discharged.

The debtor at issue in this case (Mrs. Bartenwerfer) and her husband, who filed chapter 7 with her as a co-debtor in 2013, had sold a house without disclosing extensive problems related to the property. After litigation surrounding those disclosure issues, a California trial court determined that the debtor and her husband owed the buyer over $200,000 in damages. The couple later filed a chapter 13 in an attempt to address this and other debts. Again, litigation ensued surrounding this same judgment. The bankruptcy court and the bankruptcy appellate panel passed the debtors back and forth several times as they ruled in turn whether the debt was dischargeable under § 523(a)(2)(A) as to either Mrs. Bartenwerfer, her husband, or both.

Results from the lower-court litigation largely hinged on culpability for the fraud. The first bankruptcy judgment determined that the couple as a whole could not discharge the debt, as they were both liable for the fraud.[2] The Ninth Circuit BAP then reversed as to Mrs. Bartenwerfer and asked the bankruptcy court to analyze whether her culpability could be determined under a “knew or should have known” standard.[3]

On remand, the bankruptcy court examined the debtor’s whereabouts during the renovations resulting in the property defects, and her memory regarding the disclosure statements necessary for the property transfer, and determined she did not know, nor could she have known, about the fraud.[4] The Ninth Circuit BAP agreed,[5] but the Ninth Circuit reversed, holding instead that liability should be imputed to the wife, who ultimately benefited from the fraudulent conduct.[6] Each opinion analyzed the behavior and relationship of the debtors.

The Supreme Court issued an opinion in which all justices unanimously disagreed with every lower-court opinion. Section 523(a)(2)(A), it said, does not say anything about the individual debtor’s behavior. Rather, it addresses the type of debt. Section 523(a)(2)(A) states that a “discharge … does not discharge an individual debtor from any debt … for money … to the extent obtained by … false pretenses, a false representation, or actual fraud….” It does not specify that the fraudulent behavior in the last clause must be of the individual debtor identified in the first.[7]

The Court read Congress’s use of the passive voice to be deliberate, as elsewhere in the text the discharge exception is directed at the debtor’s behavior. And while the Court seemingly agreed with the Ninth Circuit’s imbuement of fraud through Mrs. Bartenwerfer’s benefits under the standard set in the 19th century by Strang v. Bradner,[8] it also said that it need not even look at Strang other than as background for the current text of § 523(a)(2)(A). This in turn addressed many of the briefs, both by petitioner and amici, that Strang is outdated.

The “honest but unfortunate debtor” is now in a bind. One partner, in marriage or business, may commit fraud and bind the other, or others, to their judgment. Counsel for debtors and creditors must now more fully investigate those debts that may involve others. And English teachers everywhere now chorus, “We told you so.”