Discharge Exception, Fraud
Bartenwerfer v. Buckley, Slip Op. 2022 October Term Docket 21-908
The United States Supreme Court issued an important ruling pertaining to the fraud exception to a debtor’s discharge.
U.S. bankruptcy law permits an eligible debtor to discharge (or be released of) liability for pre-petition debts. The laws pertaining to such discharge however contain a number of exceptions to the applicability of the discharge including any debt for money obtained by fraud.
In this case, a judgment had been entered pre-bankruptcy against husband and wife debtors by a buyer of real property that the debtors had sold her. The judgment was rooted in fraud, however the debtor-wife was unaware of the circumstances that led to the fraud. The Supreme Court was asked to decide whether the fraud exception to discharge should extend to the wife who did not personally commit the fraud, but ended up being indebted as a result of it.
The Supreme Court’s unanimous decision held that the fraud discharge exception did apply to the debtor-wife because the Bankruptcy Code section that excepts debts obtained by fraud from discharges turned on how the money was obtained (i.e. how the debt was incurred) rather than who committed the fraud to obtain it.
Discharge Order
Taggart v. Lorenzon, 587 U.S. ____ (2019)
A primary benefit of seeking relief under the U.S. Bankruptcy Code is the potential for a bankruptcy debtor to obtain a discharge. A discharge is a federal bankruptcy court order that releases the debtor from liability for most pre-bankruptcy debts. The discharge injunction bars creditors from collecting or attempting to collect on any debt covered by a debt covered by the discharge order.
The U.S. Supreme Court in a 2019 case, Taggart v. Lorenzon, 587 U.S. ____ (2019) discussed the ability of a banrkutpcy court to hold a prepetition creditor in contempt, though concluded thgat “civil contempt [of a discharge order] may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be unlawful.”
One complicating factor is that the discharge order a debtor receives is generally general and often refers to the relevant statutory section pertaining to a discharge in the relevant chapter of the Bankruptcy Code (i.e., chapter 7, 11, 12, or 13). It is therefore crucial to have an understanding of what debts are in fact discharged by the relevant statute referred to in the relevant chapter of the Bankruptcy Code. The complexity of the Bankruptcy Code and its interlocking statutes should encourage the prudent potential-debtor to seek competent counsel before considering filing for bankruptcy.
Full case: Link
Exceptions to Discharge
Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215
The Supreme Court issued a ruling today regarding the non-dischargeability of certain statements. The Court performed a close reason of Bankruptcy Code section 523(a)(2) which is the fraud exception to bankruptcy discharge. In this case, the Court held that a statement in question did not bar the debtor from obtaining a discharge. While a bankruptcy discharge broadly releases a good faith debtor from personal obligation to pre-filing debts, it is crucial to understand that the Bankruptcy Code also contains numerous exceptions, such as certain tax debts, student loans, domestic support obligations (alimony, child support), and relevant in this case certain debts obtained by false pretenses or fraud. It is important to speak to an experienced attorney if you are considering filing a bankruptcy to understand the effects and possible pitfalls of the bankruptcy process.
Full case: Link
Discharge of Debts Related to Fraud
Husky Int’l v. Ritz, U.S. Supreme Court, No. 15-145
Recent case, decided on May 16, 2016, which overruled two lower federal courts and significantly expanded the meaning of the term “actual fraud” to broaden an exception to a bankruptcy discharge.
The bankruptcy code states that a “discharge does not discharge an individual debtor from any debt for [a debt] obtained by …actual fraud…” 11 U.S.C. 523(a)(2)(A). While the terms “debt obtained by..actual fraud,” may have led many, including many practitioners and federal judges to resolve this to mean a debt obtained through an intentional misrepresentation by a debtor in order to induce the creditor to lend, the Supreme Court, in a 7-1 decision (Justice Thomas dissenting), broadened the scope to include a fraudulent conveyance (a transfer of money or property either to avoid payment of a debt or made without payment for same) not involving any false representation or even fraudulent conduct by the debtor.
While this decision is a clear win for creditors who will be able to challenge bankruptcy discharges for certain types of debt, on a more practical level, it is an important reminder to potential bankruptcy filers to fully disclose any transfers of property or money made prior to filing a bankruptcy case.
Full case: Link
Stern v. Marshall, U.S. Supreme Court, No. 10-179
Tremendously important case in the bankruptcy world (concerning Anna Nicole Smith, no less) that defined and limited a bankruptcy court judge’s ability to make final determinations regarding certain non-bankruptcy-related matters.
Full case: Link