Background/Facts of the Case
Bartenwerfer v. Buckley clarifies a business partner’s enduring responsibility when filing for bankruptcy in the aftermath of another’s fraud. The Supreme Court examined whether a person who did not perpetrate the fraud could find financial relief through Chapter 7 bankruptcy.
Kieran Buckley purchased a renovated house in California from David and Kate Bartenwerfer. David Bartenwerfer assumed primary responsibility over the house’s remodeling and sale. Following the purchase, Buckley took up residence in the house, finding several defects which the Bartenwerfers neglected to disclose. Buckley successfully sued the couple for $200,000 in a California state court for breach of contract, negligence, and nondisclosure. Subsequently, the Bartenwerfers filed for bankruptcy to discharge their significant debt. The United States Bankruptcy Code generally allows “Chapter 7” debtors such as the Bartenwerfers to forgo paying their creditors. Chapter 7 bankruptcy is “liquidation bankruptcy,” where an individual must sell certain possessions to repay creditors but may discharge the majority of the remaining debt.
However, the Bankruptcy Code features special exceptions when fraud leads to a debt. Buckley sued the Bartenwerfers again in bankruptcy court, citing 11 U.S.C. § 523(a)(2)(A). This section of the United States Code specifies that a debtor cannot escape fraudulent debt through Chapter 7 bankruptcy. The bankruptcy court sided with Buckley. Although Mrs. Bartenwerfer filed for bankruptcy while her husband was the individual who perpetrated the fraud, Mrs. Bartenwerfer still holds liability for the debt as a result of the business partnership.
However, the Ninth Circuit Bankruptcy Appellate Panel ordered the bankruptcy court to reexamine the facts and verify if Mrs. Bartenwerfer knew of her husband’s deception. Upon finding that she was not aware of the renovated house’s poor conditions, the bankruptcy court found her not responsible and therefore eligible for bankruptcy.
Once more, the U.S. Court of Appeals for the Ninth Circuit contested the holding, asserting that the bankruptcy courts must adhere to precedent. In prior cases, the Supreme Court and Circuit Court ruled that business partners cannot file for relief from fraudulent debt, even if they are not personally culpable. A challenge to the interpretation of 11 U.S.C. § 523(a)(2)(A) sent the case to the Supreme Court in 2022.
In a 9-0 ruling, the Supreme Court held that Mrs. Bartenwerfer could not find relief for fraudulent debt through bankruptcy, irrespective of whether she perpetrated that fraud. The Court determined her liability through the specific phrasing of 11 U.S.C. § 523(a)(2)(A). This provision pinpoints money “obtained by…fraud,” employing passive voice when describing the exception. With the use of passive voice, the statement emphasizes the fraud itself, not whether the person filing for bankruptcy was the one who initiated the fraud.
Mrs. Bartenwerfer’s defense claimed the Court should read the passive-voice construction as applying only to debtors who committed the fraud themselves. For instance, the defense used the example, “Jane’s clerkship was obtained through hard work.” Logically, Jane probably accomplished her clerkship through her own work, even though the sentence is passive. The Court disagreed, asserting that Congress drafted this section of the Bankruptcy Code to be purposefully “agnostic” about the perpetrator.
Ultimately, the justices ruled that a business partner cannot dismiss a fraudulent debt through bankruptcy, holding Mrs. Bartenwerfer accountable for the consequences of her husband’s deceit. Although neighboring sections of the Bankruptcy Code specify a fraudulent actor’s own responsibilities, the Court interpreted the absence of such specifications in 11 U.S.C. § 523(a)(2)(A) as Congress’ deliberate way of ensuring a business partner’s responsibility.
Bartenwerfer v. Buckley elucidates the financial obligations of business partners and imposes clear limits on the use of bankruptcy to avoid fraudulent debt. Despite an absence of personal culpability, an associate cannot employ Chapter 7 bankruptcy to escape such debt .
In future cases, this interpretation of 11 U.S.C. § 523(a)(2)(A) should prevent business partners from filing bankruptcy claims that could mitigate the financial burden of the fraud’s perpetrator. By enforcing the consequences of fraud, Bartenwerfer v. Buckley might forestall business partners from asserting their own innocence in order to provide relief to both themselves and the perpetrator. This ruling might also encourage business partners to more actively supervise their associates to ensure that their company does not run the risk of incurring such debt.
Kara Bivens is from Waxhaw, NC, studying Political Science, Statistical Science, and Spanish.