March 1, 2023
By: Robert E. Kaelin and Zachary J. Gregoricus
The U.S. Supreme Court issued a unanimous decision yesterday holding that a debtor may be barred from discharging a debt for money obtained by the fraud of a partner. In Bartenwerfer v. Buckley, the creditor, who had obtained a pre-petition judgment against the debtor and her husband based on her husband’s misrepresentations during the purchase and sale of real property, filed an adversary proceeding against the debtor alleging that the judgment was excepted from discharge pursuant to Section 523(a)(2)(A) of the Bankruptcy Code as a debt for money obtained by false pretenses, a false representation, or actual fraud. The debtor, however, asserted that the debt was dischargeable because she was an innocent party to the transaction, and did not make any misrepresentations to the creditor.
In determining that the judgment debt was excepted from discharge, the Court analyzed the plain language and history of Section 523(a)(2)(A) and determined that Section 523(a)(2)(A)’s focus was on the event that occurred – not the specific actor and their intent or culpability. The Court noted that, while “[t]he debt must result from someone’s fraud, but Congress was ‘agnosti[c]’ about who committed it.”
The Court also reviewed the traditional principals of fraud, finding that “fraud liability is not limited to the wrongdoer,” and that “individual debtors can be liable for fraudulent schemes they did not devise,” including through frauds committed by partners within the scope of the partnership. Accordingly, where the underlying state law allows for a finding of a person’s liability for the fraud of another, such liability will be excepted from discharge as a debt for money obtained by fraud under Section 523(a)(2)(A).
Whether your business is facing financial challenges or you are doing business with someone who is – Murtha Cullina has an experienced Bankruptcy & Creditors’ Rights team with a proven track record to achieve your business goals in an efficient and cost effective manner.
For more information, please contact:
Robert E. Kaelin at 860.240.6036 or rkaelin@murthalaw.com
Zachary J. Gregoricus at 617.457.4154 or zgregoricus@murthalaw.com
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