By Erica L. Kravchenko –
June 21, 2022
The two basic tenets of bankruptcy are to provide an honest but financially distressed debtor the opportunity to achieve a fresh start and to give creditors an equal chance to recover what is owed to them by the debtor. Achieving both, and promoting fairness between the parties, often involves a delicate balancing act, sometimes resulting in the denial of a debtor’s discharge or denial of discharge of certain debts. Take for example section 523(a)(2)(A) of the Bankruptcy Code, which excludes from discharge debts that arise from false pretenses, false representation, or actual fraud. Denying discharge of debts from a debtor who commits such acts is reconcilable, but what happens when these acts are committed by the partnership of an allegedly innocent debtor. Can fraudulent actions be imputed onto innocent parties?
On May 2, 2022, when presented with this very issue, the Supreme Court granted certiorari in Bartenwerfer to resolve the growing split of authority among the circuit courts. In Bartenwerfer, a husband-and-wife team purchased, renovated, and later sold a home to Kieran Buckley. Shortly after the completion of the sale, Buckley found alleged defects and sued the Bartenwerfers in state court for breach of contract, negligence, nondisclosure of material facts, negligent misrepresentation, and intentional misrepresentation. Judgment was rendered in Buckley’s favor. Subsequently, Bartenwerfers filed for bankruptcy.
Buckley then filed an adversary proceeding seeking a determination of dischargeability of the debt owed to him pursuant to section 523(a)(2)(A). After initially determining that the debt was nondischargeable and that, despite the wife’s contention that she was innocent, the husband’s fraudulent conduct could be imputed upon her, the 9th Circuit BAP remanded on the imputed liability finding . In adopting the Eighth Circuit’s “known or should have known” standard, the BAP instructed the bankruptcy court to determine whether the wife knew or should have known of the husband’s fraud. On remand, the bankruptcy court, utilizing this standard, reversed course finding that the husband’s fraud could not be imputed upon the wife. On appeal, the 9th Circuit reversed again, applying basic partnership principals espoused in Strang v. Bradner,, and holding that partners cannot escape the pecuniary responsibility of another partner’s false or fraudulent misrepresentation.
The issue of imputation has created three divergent lines of authority. Under the Eighth Circuit standard mentioned above, fraudulent debts are nondischargeable only if the innocent debtor knew or should have known of the fraud. Under the Fifth and Ninth Circuits, partners are indeed liable for their partners fraudulent acts.  In other words, fraudulent acts are imputed on innocent partners. Lastly, the Sixth Circuit requires some form of benefit to be received prior to finding such debts are nondischargeable.
The legislative history of section 523(a)(2)(A) provides little guidance as to Congress’s intent regarding imputation. However, by codifying Neal v. Clark,  wherein the Supreme Court reversed the lower court’s holding imputing fraud on an innocent party, one commentor suggests that Congress may have rejected the application of the vicarious liability theory for section 523(a)(2)(A). Interestingly, the legislative history does not address Strang and its holding, decided less than a decade later.
The concepts of bankruptcy and agency law upon which these two cases were decided were less developed and espoused different policy goals than today. With the expansion of the concepts of agency and partnership law, coupled with the shifting policy goals of bankruptcy, it will be interesting to see if the Supreme Court will stand by the legal principal of stare decisis or if it will find these changes in policy and law require a different ruling.
 Bartenwerfer v. Bartenwerfer (In re Bartenwerfer), 860 F. App’x 544 (9th Cir. 2021).
 114 U.S. 555, 561 (1885).
 Sachan v. Huh (In re Huh), 506 B.R. 257 (B.A.P. 9th Cir. 2014).
 Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746 (5th Cir. 2001);
Supra fn. 1.
 95 U.S. 704 (1877).