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In Re Bartenwerfer Webinar

On Behalf of | Mar 30, 2023 | Firm News

The webinar led by Judge Albert and J. Scott Bovitz discussed the implications of the United States Supreme Court decision in In re Bartenwefer. Judge Albert highlighted that, historically under the United States Bankruptcy Code, you have to have a “bad actor” to deny discharge. Judge Albert drew attention to the concept of the “honest but unfortunate debtor” that the United States Bankruptcy Code provides relief for. Judge Albert argued that the Supreme Court’s decision in In re Bartenwerfer dramatically altered both of these concepts.

The question presented to the Supreme Court in In re Bartenwerfer was: May an individual be subject to liability for the fraud of another – in this case a spouse – that is barred from discharge in bankruptcy under 11 U.S.C. § 523(a)(2)(A), by imputation, without any act, omission, intent or knowledge of her own? The Court held that yes, a debtor without any act, omission, intent or knowledge of fraud on her own may be held liable for the fraud of another, and denied discharge.

Justice Amy Comey Barrett wrote for the unanimous court, “The Bankruptcy Code strikes a balance between the interests of insolvent debtors and their creditors. It generally allows debtors to discharge all prebankruptcy liabilities, but it makes exceptions when, in Congress’s judgment, the creditor’s interest in recovering a particular debt outweighs the debtor’s interest in a fresh start. One such exception bars debtors from discharging any debt for money “obtained by … fraud.” 11 U.S.C. § 523(a)(2)(A). The provision obviously applies to a debtor who was the fraudster. But sometimes a debtor is liable for fraud that she did not personally commit—for example, deceit practiced by a partner or an agent. We must decide whether the bar extends to this situation too. It does. Written in the passive voice, § 523(a)(2)(A) turns on how the money was obtained, not who committed fraud to obtain it.” Bartenwerfer v. Buckley, 598 U.S. __, 2023 WL 2144417, at *4 (U.S. Feb. 22, 2023).

Justice Barrett continued, “Kate Bartenwerfer admits that, as a grammatical matter, the passive-voice statute does not specify a fraudulent actor. But in her view, the statute is most naturally read to bar the discharge of debts for money obtained by the debtor’s fraud. … We disagree: Passive voice pulls the actor off the stage. … The debt must result from someone’s fraud, but Congress was ‘agnosti[c]’ about who committed it.” Bartenwerfer v. Buckley, 598 U.S. __, 2023 WL 2144417, at *5 (U.S. Feb. 22, 2023)

Judge Albert opined that the Bartenwerfer opinion runs contrary to well established law. Powerfully, Judge Albert declared that it is no longer the honest but unfortunate debtor; there’s an addition: unless the debtor had the misfortune to have a bad agent or partner. Judge Albert expressed fear with respect to the implications of Bartenwerfer, stating that assuming full responsibility for ones’ agent is a heavy burden to bear. Judge Albert further argued that Congress is not actually thinking about the Court’s interpretation when they write code, nor is Congress expecting the Court to parse out words in the way that Justice Barrett did in this opinion. Judge Albert stated that the Supreme Court Justices are “frozen in the actual language”; the Justices are not contextualists, they are strict Scalia-style textualists in the way of reading law into facts.

Judge Albert addressed the fact that, under California law, there are measures of protection in place for partners when the violation of another partner is outside the scope of their partnerships, but, he argues that this decision muddies such a protection. Given this decision, Judge Albert asks, what is outside the scope of partnership? Should pre-nuptial agreements include protections? Would those hold up? Judge Albert predicts that Bartenwerfer will plague courts; the recurring question will be: were they or were they not acting within the “scope of their partnership”. Judge Albert foresees that some partnerships will be limited by state law, and other partnerships might attempt to limit liability by agreement. Judge Albert warned that creditors are going to take advantage of Bartenwerfer, and claim all agents are liable for fraud committed by partners, and therefore shouldn’t receive discharge.

The webinar concluded with Bovitz and Judge Albert posing two questions:

1. Should a lawyer ever represent a couple (married or not) when one party appears to be a classic innocent spouse?

2. Is Tsurakawa still good law? In re Tsurukawa, 287 B.R. 515, 527 (B.A.P. 9th Cir. 2002) (“We have held, therefore, that in order to impute fraud to a spouse, there must be a ‘partnership or other agency relationship.’ Tsurukawa I, 258 B.R. at 198. See also Luce v. First Equip. Leasing Corp. (In re Luce), 960 F.2d 1277, 1284 n. 10 (5th Cir.1992) (per curiam) (holding where there are no facts showing individual culpability on the part of an ‘innocent’ spouse, fraud can still be imputed under partnership or agency principles if that spouse is also a business partner of the fraudulent spouse).