In a unanimous decision handed down on Feb. 22, 2023, the Supreme Court reinforced one of the Bankruptcy Code’s important creditor protections. In Bartenwerfer v. Buckley, No. 21-908, 598 U.S. ___ (2023), the Court confirmed, in an opinion authored by Justice Barrett, that the Bankruptcy Code bars the discharge by individual debtors of debts fraudulently obtained by the debtor’s agent or business partner.

The petitioner in the case (the debtor) purchased a house with her boyfriend (later spouse), who was also her business partner, in order to remodel the house and sell it for a profit. The debtor was not primarily involved in the project, leaving it to her partner to hire the architect, engineer, and contractors and to oversee the work. When the project was complete, the debtor and her partner sold the house to Buckley and in connection with the sale executed disclosures which proved to be false, as the house turned out to be defective.

Buckley sued in state court and won a judgment against the debtor and her partner for damages based on their misrepresentations. Both filed Chapter 7 bankruptcy petitions, and Buckley brought an adversary proceeding that alleged his claim should not be discharged based on fraud. After extensive litigation, including a remand of the case from the Ninth Circuit Bankruptcy Appellate Panel, the bankruptcy court held that the debt was nondischargeable as to the debtor’s partner based on his fraudulent intent, but dischargeable as to the debtor, who lacked fraudulent intent. The Ninth Circuit Court of Appeals reversed, holding that, under the Supreme Court’s pre-Bankruptcy Code decision in Strang v. Bradner, 114 U.S. 555 (1885), Buckley’s claim was also nondischargeable as to the debtor based on the debtor’s business partnership with the individual who actually committed the fraud.

The case before the Supreme Court turning on the interpretation of Section 523(a)(2)(A) of the Bankruptcy Code, which (in relevant part) excepts from an individual debtor’s discharge “any debt . . . to the extent obtained by false pretenses, a false representation or actual fraud.” The Debtor argued that this statutory language implicitly limits nondischargeability to debts obtained by fraud directly committed by the debtor. The court disagreed, holding that, read naturally, the passive voice in the statute “pulls the actor off the stage” — making it irrelevant that the debtor was never herself found to have acted with fraudulent intent. Thus, the debtor could not discharge Buckley’s debt because it was obtained by her partner’s fraud.

The court’s earlier decision in Strang  supported the holding. Strang  was decided under the 1867 Bankruptcy Act, which limited the relevant discharge exception to “fraud or embezzlement of the bankrupt.” Notwithstanding that statutory language — notably narrower than the exception in modern Section 523(a)(2)(A) — the court held that business partners were mutually liable for one partner’s fraud, because they each acted as agents and representatives of the partnership, and because each benefited from the “fruits of the fraudulent conduct.” Strang, 114 U.S. at 561. Congress subsequently deleted the phrase “of the bankrupt” in the 1898 Bankruptcy Act. This implicit adoption of the holding in Strang has carried over to the modern Bankruptcy Code.

In Bartenwerfer  the court was careful to note that state law, not Section 523(a) itself, defines the contours of liability for fraud. This guards against “liability imposed willy-nilly on hapless bystanders” because “ordinarily, a faultless individual is responsible for another’s debt only when the two have a special relationship” and those individuals often have defenses to liability. In a separate concurrence, Justice Sotomayor, joined by Justice Jackson, wrote that she understands the holding to not extend Section 523(a)(2)(A) liability to “a person bearing no agency or partnership relationship to the debtor.”

The Bartenwerfer  decision reinforces the balance the Bankruptcy Code strikes between granting honest individual debtors a “fresh start” by discharging their debts and competing interests, including in protecting creditors against a debtor’s fraudulent behavior.