U.S. Supreme Court Bankruptcy Roundup

• Jurisdiction: United States,Federal
• Law Firm: Jones Day
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Sovereign Immunity: Public Sector Government, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Christopher DiPompeo and Mark Douglas
• Published date: 31 March 2023

Exception from Discharge of Debts for Fraud Committed by Business Partner

On February 22, 2023, the U.S. Supreme Court handed down its ruling in Bartenwerfer v. Buckley, No. 21-908, 2023 WL 214441 (U.S. Feb. 22, 2023), where it resolved a circuit split in ruling that a debt based on fraud committed by, or a false representation made by, the debtor's partner or agent is nondischargeable in the debtor's bankruptcy case.

Under section 523(a)(2)(A) of the Bankruptcy Code, a discharge of debts under section 727 and parallel sections of other chapters of the Bankruptcy Code does not apply to "any debt ... for money ... obtained by ... false pretenses, a false representation, or actual fraud."

Although liability for fraud committed by a partner or agent can be imputed to other partners or a principal, the circuits and lower courts have long disagreed as to whether a debtor must have some degree of scienter (i.e., the debtor knew or should have known of its partner's or agent's fraud or false representation) before the debt based on that liability is deemed nondischargeable in the debtor's bankruptcy. See generally Collier on Bankruptcy ' 523.08[3] (16th ed. 2023) (discussing cases beginning with the Supreme Court's decision in Strang v. Bradner, 114 U.S. 555 (1885), under the since-repealed Bankruptcy Act of 1867).

The chapter 7 debtor in Bartenwerfer argued that she should not be held liable for the fraud committed by her husband because, even though she was her husband's business partner, she was not involved in or aware of the fraud, the fraud should not be imputed to her, and the debt should not be excepted from the scope of her chapter 7 discharge under section 523(a)(2)(A).

In a unanimous opinion authored by Justice Amy Coney Barrett, the Court disagreed, holding that section 523(a)(2)(A) turns on how the money that is subject to a creditor claim was obtained, rather than on who committed the fraud to obtain the money.

In so ruling, the Court agreed with the Ninth Circuit's 2021 decision below in In re Bartenwerfer, 860 F. App'x 544 (9th Cir. 2021), aff'd, No. 21-908, 2023 WL 214441 (U.S. Feb. 22, 2023).

Cases Pending Before Supreme Court

On January 13, 2023, the U.S. Supreme Court agreed to hear two cases involving or potentially impacting issues of bankruptcy law.

In Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227 (U.S.), the Court granted certiorari to review a decision handed down by a divided panel of the U.S. Court of Appeals for the First Circuit holding that section 106(a) of the Bankruptcy Code...