Bartenwerfer v. Buckley,
cert. granted, 142 S. Ct. 2675 (2022).
Oral argument not yet scheduled.
Issue: Bankruptcy law prohibits the discharge of debts acquired via fraud. Can a debtor be denied discharge of a debt when the fraud was perpetrated by a business partner, and the debtor had no actual knowledge of it?
The Bankruptcy Code of 1978 offers debtors a fresh start via the ability to discharge past debts. This system comes with many caveats, however, one of which is that debts “obtained by . . . false pretenses, a false representation, or actual fraud” cannot be discharged. 11 U.S.C. § 523(a)(2)(A). This case challenges the limits of that rule by asking whether it should apply to someone who claims she had no actual knowledge of a fraud perpetrated by a business partner.
The parties’ dispute arises from a real estate transaction. Bartenwerfer v. Buckley, 860 F. App’x 544, 545 (9th Cir. 2021), cert. granted, 142 S. Ct. 2675 (2022). David and Kate Bartenwerfer renovated and then sold a house in San Francisco to Kieran Buckley. Id. After the sale, Mr. Buckley alleged defects with the house and sued the Bartenwerfers on several theories, among them nondisclosure of material facts. Id. The jury found in favor of Mr. Buckley on the nondisclosure claim and awarded damages. Id.
The Bartenwerfers subsequently filed for bankruptcy, and Mr. Buckley challenged the discharge of his judgment against them under 11 U.S.C. § 523(a)(2)(A). Id. The bankruptcy court sided with Mr. Buckley, holding that the nondisclosure of material facts by Mr. Bartenwerfer fit the definition of fraud under § 523(a)(2)(A), and that this fraud could be imputed to Mrs. Bartenwerfer based on their partnership in the remodel. Id. at 545-46.
A bankruptcy appellate panel then found that Mr. Bartenwerfer’s fraud should not be imputed to Mrs. Bartenwerfer if she did not know of the fraud. Bartenwerfer, 860 F. App’x at 545. On remand, the bankruptcy court concluded that Mrs. Bartenwerfer did not know of the fraud and, thus, the fraud could not be imputed to her. Id. The bankruptcy appellate panel affirmed. Id. However, the Ninth Circuit reversed that decision, holding that “Mrs. Bartenwerfer's debt is nondischargeable regardless of her knowledge of the fraud.” Id. at 546-47. It based its ruling on a Supreme Court case, which held that “if, in the conduct of partnership business, . . . one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons, . . . his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge.” Id. at 546 (quoting Strang v. Bradner, 114 U.S. 555, 561 (1885)).
This decision brings the Ninth Circuit in line with the Fifth, Sixth, and Eleventh Circuits, which have followed Strang to the conclusion that a debtor is responsible for the fraud of a partner even if they lack actual knowledge of the fraud. The Second, Fourth, Seventh, and Eighth Circuits follow a different standard from Walker v. Citizens Bank, 726 F.2d 452 (8th Cir. 1984), which provides that the debt is nondischargeable if the debtor “knew or should have known” of their business partner’s fraud.
The Supreme Court is now poised to determine whether direct knowledge of a fraud is required to forfeit the ability to discharge a debt in bankruptcy.
WHAT’S AT STAKE
Older adults are disproportionately victimized by fraud. The COVID-19 pandemic only made things worse; in 2020, the FTC estimated that adults ages 60 and older lost at least $602 million to fraud, scams and financial exploitation schemes. It is especially difficult for older adults living on a fixed income to recover from a financial loss. A ruling in favor of Bartenwerfer will foreclose an avenue of recovery for older adults who are victims of fraud.
At the same time, with nearly 400,000 consumers filing for bankruptcy in 2021, this case also carries consequences for cohabitating couples, spouses, and people in informal business partnerships with regard to their potential vulnerability to non-dischargeable debt. People age 55+ make up the majority of home sellers, and greater than 70 percent sell their home with a spouse or as part of an unmarried couple. If the Supreme Court affirms the Ninth Circuit decision, it will be especially important for older adults to be cautious when pursuing business ventures with a partner and protect themselves by limiting their liability when possible.