BANKRUPTCY CORNER
BANKRUPTCY CORNER
Be Careful with Who You are Doing Business
JASON S . RIGOLI
On February 22 , 2023 , the Supreme Court issued its opinion in Bartenwerfer v .
Buckley , Case No . 21-908 , 2023 U . S . LEXIS 943 ( 2023 ) ( unanimous ), in which it ruled the debts for a partner ’ s fraud are nondischargeable under 11 U . S . C . § 523 ( a )( 2 )( A ). 2023 U . S . LEXIS 943 , at * 6 .
The Supreme Court considered and applied canons of statutory interpretation and began their analysis with the plain language of § 523 ( a )( 2 )( A ), which reads , in pertinent part :
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . .
( 2 ) for money , property , services , or an extension , renewal , or refinancing of credit , to the extent obtained by —
( A ) false pretenses , a false representation , or actual fraud , other than a statement respecting the debtor ’ s or an insider ’ s financial condition .”
11 U . S . C . § 523 ( a )( 2 )( A ). The Supreme Court held that § 523 ( a )( 2 )( A ) is written in a passive voice , which does not require the debtor to be the party to have committed the fraud , just that the debt is “ for money , property , services , or an extension , renewal , or refinancing of credit … extent obtained by … fraud .” See 2023 U . S . LEXIS 943 , at * 9-18 ( complete analysis ).
The Supreme Court makes it clear , however , that this application will not impose liability “ willy-nilly on hapless bystanders [.]” Id . at * 19 . Because , “§ 523 ( a ) ( 2 )( A ) does not define the scope of one person ’ s liability for another ’ s fraud [, t ] hat is the function of the underlying law [.]” Id . at * 19 . “ Ordinarily , a faultless individual is responsible for another ’ s debt only when the two have a special relationship , and even then , defenses to liability are available .” Id . at * 19-20 .
The issue then resides in the underlying claim and whether the applicable nonbankruptcy law can hold the faultless individual liable for another ’ s fraud , such as in certain principal-agent relationships in which the agent is acting within their scope , authority , or ordinary course of business . Id . * 19-21 .
Application to Section 523 ( a )( 19 )
The Supreme Court ’ s interpretation in Bartenwerfer has the broader impact of essentially affirming the holding in Lunsford v . Process Tech . Servs ., LLC ( In re
Lunsford ), 848 F . 3d 963 , ( 11th Cir . 2017 ), that “§ 523 ( a )( 19 ) does not require Defendant herself to have violated securities laws because a debt for a securities law violation by a third party is nondischargeable ‘ as long as the securities violation caused the debt .’ ” Id . at 967-68 . The language of 523 ( a )( 19 ) is similarly passive in nature and does not require the debtor to have been the person intending on violating the securities laws to have a debt determined non-dischargeable .
However , the Bartenwerfer decision does not seem to expand the application of 523 ( a ) ( 19 ) any further then what already existed in the Eleventh Circuit , and does not seem to overrule the distinction made by Judge Russin in Nationwide Judgment Recovery , Inc . v . Reefe ( In re Reefe ), 2022 Bankr . LEXIS 1282 , 638 B . R . 834 ( Bankr . S . D . Fla . 2022 ), which is discussed in the July / August 2022 Palm Beach County Bar Bulletin .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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