Supreme Court Expands Bankruptcy Nondischargeability Rule

In late-February, the United States Supreme Court issued its opinion in Bartenwerfer v. Buckley, unanimously holding that a debtor cannot discharge a debt obtained by fraud even if the debtor themselves did not personally commit the fraud. This decision can have far reaching implications for financial institutions in Ohio and their ability to hold fraudulent debts non-dischargeable in bankruptcy cases.

In Bartenwerfer, Kate Bartenwerfer and her boyfriend renovated a house. Kate was largely uninvolved in the project, but she jointly signed various disclosures when the property was sold to Kieran Buckley. Those disclosures failed to disclose various defects with the house. As such, Buckley subsequently sued Bartenwerfer and her now-husband David for more than $200,000.

Bartenwerfer and her husband filed chapter 7 bankruptcy to try and avoid repaying the judgment. The Bankruptcy Code provides debtors such as Kate and David with the ability to discharge debts except for, among other debts, debts:

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition…

11 U.S.C. § 523(a)(2). Buckley filed an adversary case against the debtors seeking to hold the judgment non-dischargeable. The case against David was relatively clear. However, Kate argued that because she lacked knowledge of David’s fraud, she was, as a result, an innocent co-debtor. The Supreme Court disagreed.

The Court explained that Congress intended the exception of discharge to apply under § 523(a)(2)(A), regardless of whether the debtor was the actor or not, so long as the debt itself was incurred by false pretenses, a false representation, or actual fraud.

The Court related the Bartenwerfer case to other cases in which the Supreme Court had previously held that business partners can be denied a discharge for debts incurred by the fraud of a business partner. Finally, the Court rejected Bartenwerfer’s arguments that the decision was unfair and was contrary to the Bankruptcy Code’s interests in providing debtors with a fresh start. 

This case helps expand a financial institution’s ability to hold debts non-dischargeable when those debts were obtained through false pretenses, a false representation, or actual fraud. As such, we recommend contacting experienced legal counsel to assist with any bankruptcy issues.