The case is Bartenwerfer v. Buckley, court file 21-908.
The petitioner, Kate Bartenwerfer, who filed for bankruptcy after an ill-fated real estate deal, appealed after the U.S. Court of Appeals for the 9th Circuit ruled she can’t escape from a debt that is non-dischargeable in a bankruptcy proceeding, even though she had nothing to do with her husband’s fraudulent conduct in the sale of their San Francisco home.
The couple had purchased and renovated the house. They moved out, and the husband handled the sale of the house with his wife’s permission but without any substantial involvement on her part. Without the wife’s knowledge, the husband, David Bartenwerfer, made false representations to the buyer, the respondent Kieran Buckley.
Buckley sued Bartenwerfer and her husband after finding the structural defects in the house that the sellers failed to disclose. The Bartenwerfers both declared bankruptcy after a California state court jury sided with Buckley in 2012. The wife, who under California law was deemed jointly liable for the transaction because she was married to her husband, argues that an innocent spouse should not be held liable for the misdeeds of another spouse.
In papers filed with the Supreme Court, Bartenwerfer argued there was “an intractable split” among federal courts of appeal on what to do in such situations but Buckley said the 9th Circuit made the right decision.
Bankruptcy law “excepts from discharge all debts for money that was ‘obtained by’ actual fraud, without regard to the debtor’s involvement in, or state of mind as to, the underlying fraud itself,” Buckley argued.
The federal government supports Buckley’s position, arguing in court papers that letting Bartenwerfer discharge the debt would lead to “perverse results.” Her argument “finds no foothold in text, context, history, or sound bankruptcy policy.”
Bartenwerfer’s attorney, Sarah M. Harris, told the justices during oral arguments on Dec. 6 that federal bankruptcy law “gives honest but unfortunate debtors a fresh start by extinguishing all their debts. Exceptions are narrow, must be clearly expressed, and reflect debtors’ intentional wrongs, not someone else’s.”
The bankruptcy code “does not bar unwitting debtors like petitioner from discharging debts for others’ fraud,” she added.
“Congress did not irrationally bar debtors who committed no fraud themselves from discharging debts for others’ fraud,” Harris said.
Buckley’s “sweeping theory” would impose a “financial death sentence [that] would fall mostly on unsophisticated spouses who do not realize routine transactions in marriage, like selling homes, create business partnerships in the eyes of the law.”
“Dishonest debtors cannot escape their creditors but the court does not consign unwitting debtors the same fate,” the lawyer said.
Justice Elena Kagan seemed unimpressed, telling Harris that the text of the bankruptcy law “cuts against you.”
Justice Ketanji Brown Jackson said even if the justices agree with “your reading that it has to be the debtor’s fraud, I don’t understand how you get away from principles of vicarious liability.”
Chief Justice John Roberts told Harris that Bartenwerfer “knew about the fraud [and] didn’t do anything about it.” Despite this, Harris is arguing that her client may still benefit from the fraud by discharging her debt, he said.
Justice Sonia Sotomayor asked Harris if she had “abandoned the argument that a debtor is responsible for fraud he or she knew or should have known?”
Harris said that was still a prong of the argument but the more important prong is that “the debtor must actually have committed the fraud him or herself” to be held responsible for it.
Buckley’s attorney, Zachary Tripp, told the justices the issue before the court was “whether the fraud exception to discharge [in bankruptcy law] includes an additional unwritten requirement that the debtor personally intend or know of the fraud above and beyond whatever it takes to hold her liable for the fraud in the first place.”
“And the answer is no. The words just aren’t there,” Tripp added.
Justice Sonia Sotomayor then offered a hypothetical involving her colleague, Justice Clarence Thomas, to flesh out what kind of legal test Tripp thought should be applied.
In the example, Sotomayor said she obtained a loan fraudulently and then sold it to Thomas, “who has no idea about the fraud.”
Thomas “struggles to pay the debt and he files for bankruptcy. He wants to discharge the debt. Can he?” she said.
Tripp answered “yes.” Because there is no “agency relationship,” Thomas “would not be liable on the fraud itself.”
The Supreme Court is not likely to decide the case for several months.
