A bungled home sale, a bankrupt couple, and a statutory puzzle involving money owed incurred by means of fraud


The court docket will hear its second chapter case of the week subsequent Tuesday, with Bartenwerfer v. Buckley following shut on the heels of the Monday argument in MOAC Mall Holdings LLC v. Rework Holdco LLC. The instances may hardly be extra completely different. MOAC Mall Holdings entails the task of a shopping-center lease in a big company reorganization. Bartenwerfer presents a single impecunious debtor making an attempt to discharge a debt incurred by means of the fraud of her husband.

The case entails the sale of a home in San Francisco from David and Kate Bartenwerfer to Kieran Buckley. Dissatisfied with the acquisition, Buckley finally obtained a judgment in a California state court docket based mostly on the failure of the Bartenwerfers to reveal details about the home on the standard-form Switch Disclosure Assertion. Below California regulation (which isn’t in the slightest degree uncommon on this level), each of the spouses are collectively liable for that judgment, regardless that David was rather more instantly concerned than Kate within the repairs and renovations associated to the poor disclosures.

Later, the Bartenwerfers filed for chapter reduction. The Chapter Code provides debtors a broad discharge of obligations that they incurred earlier than submitting for chapter, however an exception (Part 523(a)(2)(A)) protects – and thus preserves – any declare for “cash … obtained by … precise fraud.” Reasoning that Buckley’s declare falls below that exception, the chapter court docket held that David couldn’t discharge it.

The chapter court docket thought Kate’s state of affairs needs to be completely different, as a result of she lacked any “precise data” of the deficiencies within the disclosure assertion. As a result of Buckley’s declare didn’t contain cash obtained by her fraud, the chapter court docket dominated that Kate may discharge that declare. The court docket of appeals, against this, concluded that the discharge exception protects any declare for cash obtained by fraud; it doesn’t matter if the debtor dedicated the fraud. The query earlier than the Supreme Courtroom, then, is whether or not Part 523 activates the frame of mind of the debtor (is that this an trustworthy or fraudulent debtor?) or the state of the declare (was this debt incurred legitimately or fraudulently?). The arguments on the 2 sides are crisp and logical.

Bartenwerfer factors first to the court docket’s articulation of a clear-statement rule, below which the exceptions to discharge are narrowly restricted to people who are “plainly expressed” within the statute. As a result of the statute bars the discharge of “a person debtor from any debt … for cash … obtained by … fraud,” it’s pure, Bartenwerfer argues, to learn the textual content as describing the fraud of the person debtor slightly than the fraud of a 3rd celebration that the statute doesn’t point out.

Turning from the literal textual content to the broader statutory context, Bartenwerfer emphasizes the following subparagraph of the statute. Part 523(a)(2) as an entire supplies a discharge exception for “cash, property, companies, or an extension, renewal, or refinancing of credit score,” however solely “to the extent obtained by” considered one of three types of misconduct – described in subparagraphs (A) (at concern in Bartenwerfer), (B) and (C). Throughout the provision, the place subparagraph (A) offers typically with “false pretenses, a false illustration, or precise fraud,” subparagraph (B) offers with monetary statements (“an announcement respecting the debtor’s or an insider’s monetary situation”). In subparagraph (B), the exception to discharge applies provided that “the debtor prompted [the statement] to be made or revealed with intent to deceive.” Thus, Bartenwerfer emphasizes, legal responsibility below subparagraph (B) plainly is restricted to the debtor’s personal conduct. It will be “weird,” she contends, for the legal responsibility below subparagraph (A) to depart a debtor unable to discharge a debt incurred by means of the fraud of one other when the parallel provision for fraudulent monetary statements clearly is restricted to the debtor’s personal malfeasance.

Extra broadly, as a coverage matter, Bartenwerfer emphasizes how burdensome it will be to restrict the discharge in instances like this: Below Buckley’s studying of the statute, a partner who learns of fraudulent habits of her husband and responds by instantly divorcing her husband and distancing herself from his monetary affairs would stay eternally unable to discharge her duty for the debt.

Buckley, against this, argues that the plain and literal that means of the statute compels the safety the declare from discharge. The statute refers back to the discharge of “any” debt obtained by “fraud.” Not a phrase of subparagraph (a)(2)(A) means that the id of the fraudster is related. If state regulation holds a celebration accountable to compensate the sufferer of the fraud, Buckley causes, the Chapter Code should defend the declare from discharge.

Buckley additionally emphasizes a Supreme Courtroom resolution from 1885 (not a typo), Strang v. Bradner. Strang rejected the discharge of a debt in strikingly related circumstances: Debtors had been obligated to victims for fraud perpetrated by the debtors’ accomplice on behalf of a partnership. Though the statute of the time (the Chapter Act of 1867) required precise fraud “of the bankrupt” to guard a declare from discharge, the Supreme Courtroom held that such a debt was “created by [the debtors’] fraud [because the fraud of one partner is] imputed … to all.” Strang brings into play Buckley’s interpretive canon – below which the Supreme Courtroom reads the Chapter Code as incorporating jurisprudence below older chapter statutes except the Chapter Code instantly rejects it. (For what it’s value, I’m fairly positive the Supreme Courtroom has by no means thought of utility of that precept to its instances below the traditional Chapter Act of 1867!) On this case, if something the language of Part 523 is broader than the language at concern in Strang, as a result of it omits the limitation of the exception to fraud by the person debtor. Accordingly, Buckley causes, the court docket ought to learn Part 523 as carrying ahead the rule of Strang that the discharge exception activates the fraudulent foundation for the declare slightly than the conduct of the person debtor.

The previous dialogue pitches the case as a debate between a clear-statement rule calling for slender interpretation of discharge exceptions and a clear-statement rule calling for preservation of pre-Code observe. I ought to throw yet another thought within the combine: the trope of the “trustworthy however unlucky debtor,” a phrase from the Melancholy-era Supreme Courtroom resolution in Native Mortgage Co. v. Hunt. Hunt’s conception of the Chapter Code as designed to guard the “trustworthy however unlucky debtor” has been an nearly ubiquitous characteristic of the court docket’s opinions in chapter instances involving particular person debtors; the court docket has referred to Hunt in additional than two dozen of its later instances. Justices wedded to that conception nicely may come down in favor of a discharge right here for Kate.

Competing interpretive canons. A reality sample worthy of a law-school classroom. And, whereas I’m at it, a pair of skilled advocates acquainted to the justices (Lisa Blatt and Zachary Tripp). What’s to not love. It’s truthful to count on that the justices may have a superb time with this one on Tuesday.