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Supreme Courtroom Holds That Fraud Exception to Debt Discharge can Embody Fraud by Somebody Different Than the Debtor

Now we have beforehand blogged about Bartenwerfer v. Buckley, No. 21-908, a Supreme Courtroom case regarding the scope of the fraud exception to the dischargeability of money owed in chapter. Part 523 of the Chapter Code exempts from discharge “any debt . . . for cash, property, providers, or an extension, renewal, or refinancing of credit score, to the extent obtained by . . . false pretenses, a false illustration, or precise fraud. . . .” 11 U.S.C. § 523(a)(2)(A). Bartenwerfer considers whether or not the fraud required by this part want be the debtor’s fraud or fraud identified to the debtor. On February 22, the Supreme Courtroom answered no.

To assessment, Kate and David Bartenwerrfer have been sued by Kieran Buckley, who obtained a damages award towards them for breach of contract, negligence, and nondisclosure of fabric information. The Bartenwerfers then filed for chapter. Buckley introduced an adversary continuing towards them and argued that the state court docket judgment he had obtained was nondischargeable below part 523(a)(2)(A) as a result of it was a debt that had been obtained by means of fraud.

Kate Bartenwerfer (“Bartenwerfer”) argued that as a result of she had no data of the false representations, the debt she owed pursuant to the judgment was not lined by part 523(a)(2)(A) and was dischargeable. The Ninth Circuit finally held that part 523(a)(2)(A)’s software didn’t rely upon the debtor’s data of the fraud, and so was relevant to Bartenwerfer.

The Supreme Courtroom affirmed. In a unanimous opinion by Justice Barrett, the Courtroom targeted on part 523(a)(2)(A)’s textual content, and significantly that it’s written within the passive voice: the part refers to a debt “obtained by” fraud with out specifying an actor. The Courtroom rejected Bartenwerfer’s arguments that context restricted “obtained by” to actions of the debtor.

The related context, the Courtroom defined, is the widespread legislation of fraud, which maintains that legal responsibility for fraud just isn’t restricted to the wrongdoer—for instance, principals may be responsible for the frauds of their brokers and companions may be responsible for the frauds of their companions. Likewise, the Courtroom rejected Bartenwerfer’s argument, counting on the precept that exceptions to discharge needs to be narrowly construed and noting that the Courtroom had by no means invoked this precept to artificially slender unusual which means.

The Supreme Courtroom additionally rejected an argument Bartenwerfer made regarding the relationship between part 523(a)(2)(A) and part 523(a)(2)(B). Part 523(a)(2)(B), which governs statements respecting a debtor’s monetary situation, requires that the false assertion be made by the debtor with intent to deceive. (Part 523(a)(2)(A) exempts statements respecting a debtor’s monetary situation.)

Bartenwerfer argued that it is not sensible for debtors to be topic to a stricter normal in subpart (A) than in subpart (B). Counting on Discipline v. Mans, 516 U.S. 59 (1995), the Courtroom responded that Congress could have enacted a extra debtor-friendly rule in (B) out of concern for instances through which client finance corporations inspired debtors to submit false monetary statements for the aim of insulating their claims from discharge.

The Supreme Courtroom additionally famous that it had interpreted earlier statutes offering for a fraud exception to discharge to not be restricted to fraud dedicated by the debtor, and that Congress within the late nineteenth century had deleted “of the bankrupt” from the discharge exception that was a precursor to part 523(a)(2)(A). Lastly, the Courtroom rejected Barternwerfer’s arguments based mostly on the recent begin coverage of chapter legislation, reasoning that the Chapter Code balances a number of competing pursuits, and noting that the precise scope of legal responsibility for an additional’s fraud is outlined and restricted by state legislation.

Justice Sotomayor, joined by Justice Jackson, filed a concurrence. She famous her settlement with the Courtroom’s holding, stating that Congress integrated the common-law ideas of fraud into the statute. Nevertheless, Justice Sotomayor additionally said that the Courtroom was not confronting a state of affairs the place the fraud was dedicated by somebody with no company or partnership relationship to the debtor, and the common-law context invoked by the Courtroom pertained solely to a state of affairs the place such a relationship existed. She joined the Courtroom’s opinion on that understanding.



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