This blog previously covered the Supreme Court's decision in Bartenwerfer v. Buckley, 598 U.S. 69 (2023), which held that, under Section 523(a)(2) of the Bankruptcy Code, an individual debtor may not discharge through bankruptcy debts fraudulently obtained by the debtor's agent or business partner, even absent the debtor's direct participation in the fraud. The decision reaffirmed the applicability in bankruptcy of the common law understanding of liability for fraud as well as the Court's (much) earlier, pre-Bankruptcy Code decision in Strang v. Bradner, 114 U.S. 555 (1885). We noted at the time that the decision reflected the Bankruptcy Code's careful balance between granting a "fresh start" to honest but unfortunate individual debtors and protecting creditors against fraudulent conduct.
Perhaps reinforcing that Bartenwerfer was a restatement of old law rather than an extension of the Code's reach—along with the axiom that exceptions to discharge are generally to be narrowly construed—a recent decision from the Ninth Circuit Bankruptcy Appellate Panel declined to extend Bartenwerfer to create vicarious liability for other categories of nondischargeable debts under Section 523(a). In M.O. v. Rosario (In re Rosario), Adv. No. 1:24-ap-01018-VK (B.A.P. 9th Cir. May 2, 2025), the debtors were parents of a minor child who placed a pen in a classmate's seat, injuring him. The victim sued the debtor's child and the debtor in state court for battery and intentional infliction of emotional distress. Although the BAP noted that the state court complaint contained no allegations that the debtors were directly involved in their child's misconduct, and only a conclusory statement that the debtors were vicariously liable for their son's actions, the plaintiff obtained a more than $1 million judgment against the debtors as the result of terminating sanctions for discovery misconduct.
When the debtors attempted to discharge the judgment in a chapter 7 bankruptcy, the plaintiff objected to discharge of his judgment under Section 523(a)(6), which states that a bankruptcy discharge "does not discharge an individual from any debt for willful and malicious injury by the debtor to another entity or the property of another entity." 11 U.S.C. § 523(a)(6). The debtors moved to dismiss on the grounds that the plaintiff had failed to allege that the debtors themselves committed any tortious, or willful and malicious, acts and that Section 523(a)(6) doesn't extend to vicarious liability. In response, the debtor argued that the debtors were precluded from challenging the nondischargeability of the state court judgment and that under Bartenwerfer, the debtors' vicarious liability for another party's intentional torts was nondischargeable.
The bankruptcy court granted the debtors' motion to dismiss, and the plaintiff appealed to the BAP. The BAP also found the plaintiff's arguments unavailing. The panel noted that Bartenwerfer's statutory analysis of Section 523(a)(2)(A) focused on the "passive voice" of the statute, specifically, that it excepts from discharge debts "obtained by" certain fraudulent acts, without specifying who the fraudster must have been. In contrast, other provisions under Section 523(a)(2) explicitly limit nondischargeability to other categories of fraudulent conduct that the debtor must have committed. The panel disagreed with plaintiff's argument that Bartenwerfer should be read to ignore the phrase "by the debtor" in Section 523(a)(6) and elsewhere in Section 523, noting that the absence of such "active voice" language in Section 523(a)(2)(A), in fact, underpinned Bartenwerfer such that the inclusion of "by the debtor" reflected Congress' intent that an objecting creditor must prove that "the debtors themselves willfully and maliciously injured the creditor." The BAP also rejected the plaintiff's arguments that issue preclusion prevented the debtors from litigating the applicability of Section 523(a)(6), because the record contained no evidence that the issue was actually litigated in the state court.
Bankruptcy law is largely grounded in the Bankruptcy Code itself, and generally speaking, the Code says what it means, and means what it says. Bartenwerfer itself can be viewed through this lens; Section 523(a)(2)(A)'s conspicuous lack of language limiting nondischargeability to fraud committed by a debtor, particularly in contrast to other provisions of Section 523, indicated Congressional intent to incorporate common law liability for fraud by partners and agents and the holding in Strang into the Bankruptcy Code. Similarly, the inclusion of "by the debtor" language in Section 523(a)(6) and elsewhere in Section 523 clearly signals that those discharge exceptions are applicable only to acts committed by debtors. The Rosario decision reflects that creative efforts to extend Bartenwerfer beyond its own scope are likely to meet significant headwinds.
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