On June 7, 2022, the Fourth Circuit Court of Appeals unanimously held that the exceptions to discharge found in section 523(a) of the Bankruptcy Code, which ordinarily exclusively apply to individual debtors, also apply to small business corporate debtors in chapter 11 bankruptcy under subchapter V, if the debtor confirms a cramdown plan. In re Cleary Packaging, LLC (No. 21-1981) signals a departure from the trend of lower courts that have considered the issue and places more pressure on subchapter V debtors to confirm consensual plans in the Fourth Circuit.

The Bankruptcy Code (11 U.S.C. § 101 et seq.) generally allows a debtor to discharge unsecured debt. However, it also provides a list of non-dischargeable debts that includes three types of non-priority tax debts: (1) tax debts of a debtor who fails to file tax returns (11 U.S.C. §523(a)(1)(B)(i)); (2) tax debts of a debtor who filed fraudulent tax returns (11 U.S.C. §523(a)(1)(C)); and, (3) tax debts of a debtor who filed late tax returns if a bankruptcy petition is filed within two years after the date the late return was filed. 11 U.S.C. § 523(a)(1)(B)(ii).

The Result: This decision brings the Second Circuit in line with the Fifth and Tenth Circuits on this issue. However, neither the Bankruptcy Court's decision below nor the Second Circuit's decision on appeal determined the circumstances under which loans may be discharged in bankruptcy pursuant to 11 U.S.C. § 523(a)(8)(A)(i) or 523(a)(8)(B).Looking Ahead: Private student loans may still be dischargeable under Section 523(a)(8)(A)(i) or 523(a)(8)(B) as "qualified education loans," which the court in Homaidan did not consider.

Included within this list are claims for “money, property, services or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud.” See 11 U.S.C. § 523(a)(2)(A). While this language appears simple, a split exists among the Circuit Courts of Appeals as to whether “actual fraud” requires that the debtor make a false representation to a creditor.

We have previously blogged about Bartenwerfer v. Buckley, No. 21-908, a Supreme Court case concerning the scope of the fraud exception to the dischargeability of debts in bankruptcy. Section 523 of the Bankruptcy Code exempts from discharge “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud. . . .” 11 U.S.C. § 523(a)(2)(A). Bartenwerfer considers whether the fraud required by this section need be the debtor’s fraud or fraud known to the debtor. On February 22, the Supreme Court answered no.To review, Kate and David Bartenwerrfer were sued by Kieran Buckley, who obtained a damages award against them for breach of contract, negligence, and nondisclosure of material facts. The Bartenwerfers then filed for bankruptcy. Buckley brought an adversary proceeding against them and argued that the state court judgment he had obtained was nondischargeable under section 523(a)(2)(A) because it was a debt that had been obtained through fraud. Kate Bartenwerfer (“Bartenwerfer”) argued that because she had no knowledge of the false representations, the debt she owed pursuant to th

The first, Section 523(a)(2)(A), covers all fraud “other than a statement respecting the debtor’s … financial condition.” 11 U.S.C. § 523(a)(2)(A) (emphasis added). If the fraudulent statement is made “respecting the debtor’s … financial condition,” the second exception, Section 523(a)(2)(B) applies.

ircuit (the “Ninth B.A.P.”).Factual Background and Procedural HistoryIn 2005, Kate Bartenwerfer (the “Debtor”) and her then-boyfriend, David, purchased a home as business partners with the intent of renovating and selling the same. David controlled renovations while the Debtor remained largely uninvolved. The pair sold the home and, in the process, attested that they had disclosed all material facts relating to the property. The purchaser soon discovered undisclosed defects with the home and sued the Debtor and David in California state court. A jury found in the purchaser’s favor resulting in a judgment against the Debtor and David, jointly and severally, of more than $200,000 (the “Judgment”).The Debtor and David subsequently filed for chapter 7 relief in the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”). The purchaser commenced an adversary proceeding in the chapter 7 case asserting that the Judgment was nondischargeable pursuant to Bankruptcy Code section 523(a)(2)(A), as a “debt . . . for money . . . obtained by . . . false pretenses, a false representation, or actual fraud . . . .”[2] The Bankruptcy Court: (i) found that David had knowingly committed fraud by concealing the home’s defects; (ii) imputed David’s fraudulent intent to the Debtor; and (iii) held that neither could discharge the Judgment. On appeal, the Ninth B.A.P. held that the Debtor could discharge the Judgment unless she knew or should have known of David’s fraud. On remand, the Bankruptcy Court found that the Debtor lacked such knowledge and could discharge her liability for the Judgment, which finding was affirmed by the Ninth B.A.P. The Ninth Circuit reversed, holding that a debtor liable for a partner’s fraud could not discharge a debt arising therefrom, regardless of the debtor’s culpability.The Court’s RationaleOn appeal, the Court affirmed the Ninth Circuit’s decision in an opinion penned by Justice Barrett. The Court, beginning with a straightforward analysis of Bankruptcy

lished with permission.The United States Supreme Court recently answered the question of whether a debtor in bankruptcy can discharge a debt resulting from another person’s fraud, even if the debtor is not aware of the fraud. On February 22, 2023, the high court decidedBartenwerfer v. Buckley,1 ruling unanimously that a debtor could not use the protection of bankruptcy to avoid paying a debt that resulted from the fraud of a partner. The debt is nondischargeable in bankruptcy even though the debtor had no culpability—she did not know and could not have known about the fraud.A cornerstone of modern bankruptcy law is the discharge. The discharge is the statutory forgiveness of liability for debts not otherwise addressed in a bankruptcy case. It facilitates the “fresh start” policy of the bankruptcy laws by freeing the honest, but unfortunate, debtor from the financial burdens of debt. Bankruptcy, however, strikes a balance between the interests of debtors and creditors. Congress enacted §523 of the Bankruptcy Code to reflect a policy that certain debts should be excepted from the discharge when the creditor’s interest in recovering a particular debt outweighs the debtor’s interest in a fresh start. One such exception is set forth in §523(a)(2)(A), which precludes a debtor from discharging any debt for money to the extent “obtained by… fraud.”Factual backgroundKieran Buckley sued Kate and David Bartenwerfer after discovering defects in a San Francisco house that he purchased from the couple in 2007. The Bartenwerfers remodeled the home after purchasing it to resell it at a profit. They subsequently sold the property for more than $2 million to Buckley, a real estate developer. The couple made disclosures in connection with the sale and attested that they had disclosed all material facts relating to the property. Buckley later discovered several undisclosed defects with the home.Buckley sued the Bartenwerfers in state court for misrepresentation, arguing that the couple were partners in the remod

The recent bankruptcy case of Lee v. Weatherford (In re Weatherford), Adv. Proc. 21-03059 (Bankr. N.D. Tex., January 19, 2022) interprets 11 U.S.C. § 523(a)(6).Bar room brawls and bankruptcy don’t often overlap, but they do in this bankruptcy adversary proceeding. In this case, the Bankruptcy Court considered whether a debtor who had attacked at man during a barroom brawl is entitled to a discharge of a prepetition judgment debt resulting from his chapter 11 bankruptcy case.

This adversary proceeding in Rennaker v.Davis, Case No. 20-04065 (Bankr. N.D. Tex., Nov. 9, 2021), involves a litany of non-dischargeability allegations – both under 11 U.S.C. §523 and §727. Judge Mark Mullin’s opinion provides a good analysis of the various elements of various non-dischargeability causes of action.