OPINION ANALYSIS

Justices narrow bankruptcy relief from debts incurred by fraud

Wednesday’s unanimous decision in Bartenwerfer v. Buckley took a straightforward and matter-of-fact approach, holding that the text of the Bankruptcy Code bars a discharge of Kate Bartenwerfer’s obligation to pay a debt incurred by the fraud of another. That decision will surprise few, as the discussion at oral argument was most unfavorable to Bartenwerfer’s position.

When individuals file for relief in bankruptcy, as Bartenwerfer did, the Bankruptcy Code generally discharges them from obligations that they incurred before the bankruptcy filing. The statute, though, contains several exceptions to the discharge, generally describing debts that Congress regarded as so important or reflecting such objectionable behavior that it is inappropriate for the debtor to discharge them. Bartenwerfer involves Section 523(a)(2)(A) of the Bankruptcy Code, which  protects – and thus preserves from the discharge – any creditor’s claim for “money … obtained by … actual fraud.”

The obligation here arises from a transaction in which Bartenwerfer and her then-boyfriend (later husband) sold a house without full disclosure of its condition. A California state court concluded that they were liable to the buyer for that nondisclosure, though the bankruptcy court concluded that Kate herself did not participate in the fraud. Relying on that factual finding, Bartenwerfer argues that she should be able to discharge the debt because she was not herself the “fraudster.”

Justice Amy Coney Barrett’s brief opinion readily rejects that contention, reasoning that the exception “turns on how the money was obtained, not who committed fraud to obtain it.” For Barrett, the case begins and ends with the language of the statute. As she comments after quoting the statutory provision, the text “[b]y its terms … precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” Bartenwerfer’s central contention rested on the passive voice of the statute – which refers to money “obtained by … fraud.” As Barrett explains, Bartenwerfer contended that notwithstanding the failure of the statute to “specify a fraudulent actor,” the phrase is “most naturally read” to apply only to the debtor’s fraud.

Barrett takes on that contention head-on: “We disagree: Passive voice pulls the actor off the stage.” Thus, quoting two earlier cases, Barrett concludes that the statute applies “without respect to a specific actor, and therefore without respect to any actor’s intent. … The debt must result from someone’s fraud, but Congress was agnostic about who committed it” (cleaned up).

Bartenwerfer also relied on neighboring provisions of Section 523(a)(2), in which it is clear that the debtor’s own malfeasance is required for any limitation of the discharge. She argued that it would “have made no sense” for the debtor’s participation to be dispositive in one case but not the other. Barrett responds, though, that Bartenwerfer’s argument improperly “flips the rule” that courts should respect the inclusion of language in one provision that is omitted from an adjacent one.

Barrett’s last major point discusses an 1885 Supreme Court decision (Strang v. Bradner) that denied a discharge to one partner based on a debt incurred by the fraud of another partner. Barrett notes the presumption that Congress enacts statutes with awareness of the Supreme Court’s relevant decisions, and so comments that “if Congress had reenacted the discharge exception for fraud without discharge, we would assume it meant to incorporate Strang’s interpretation.” In this case, though, “Congress went even further than mere reenactment,” as it revised the statute at issue in Strang – which discharged debts except upon fraud “of the bankrupt” – to the current version. Because the change from that language to the current statute “cut from the statute the strongest textual hook counseling” in Bartenwerfer’s favor,” the “unmistakable implication is that Congress” rejected Bartenwerfer’s position.

This case will make no big waves in bankruptcy jurisprudence or elsewhere. Some might wish that the justices showed more sympathy to Bartenwerfer’s plight, but it is hard to doubt that they gave a fair reading to the statute Congress adopted.