U.S. Supreme Court: Bankruptcy Discharge Standard Of Proof As Precedent In Other Contexts (E.M.D. Sales v. Carrera)

The U.S. Supreme Court doesn’t issue a lot of bankruptcy opinions. But it does use its bankruptcy opinions as precedents in non-bankruptcy opinions.

One such precedent example is E.M.D. Sales, Inc. v. Carrera, 144 S. Ct. 483 (2025), which holds:

“Fair Labor Standards Act of 1938 requires employers to pay their employees a minimum wage and overtime compensation”; and
the preponderance-of-evidence standard “governs when an employer attempts to demonstrate that an employee is exempt.”

Such holdings are based on:

the reality that use of “a heightened standard of proof” is “uncommon” in civil cases; and
the preponderance-of-evidence standard for “bankruptcy discharges” is a good precedent (citing Grogan v. Garner, 498 U.S. 279. 286-287 (1991)).

Grogan v. Garner

The Grogan v. Garner opinion is from the early years of the Bankruptcy Code: decided on January 15, 1991.

Grogan v. Garner offers an explanation of:

some basic principles of bankruptcy law under the Bankruptcy Code; and
why bankruptcy discharge disputes are governed by the preponderance-of-evidence standard, with the burden of proof upon the party challenging debtor’s discharge.

What follows is a summary of the basic principles of bankruptcy law applying to bankruptcy discharge litigation, as described in Grogan v. Garner.

–Language of § 523(a)

The language of § 523 does not prescribe the standard of proof for discharge exceptions. Such absence is inconsistent with the view that a special, heightened standard of proof is intended.

The preponderance-of-evidence standard applies in bankruptcy discharge litigation because it:

results in a roughly equal allocation of the risk of error between litigants;
is used in civil actions, unless “particularly important individual interests or rights are at stake”; and
a bankruptcy debtor has no constitutional or fundamental right to a discharge—so, the right to a discharge is insufficient to require a heightened standard of proof.

–Fresh Start Policy

The “fresh start” policy of the Bankruptcy Code does not require a clear-and-convincing standard:

a central purpose of the Bankruptcy Code is to enable insolvent debtors to reorder their affairs, make peace with creditors, and enjoy “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debts”; but
that purpose is limited to and intended for only the “honest but unfortunate” debtors.

“We think it unlikely that Congress” favored “giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud.”

And the preponderance-of-evidence standard for bankruptcy discharges “reflects a fair balance.”

–Clear-And-Convincing Standard Under State Laws

It is true that a majority of states require a heightened clear-and-convincing standard for proving claims of fraud.

But such fact does not translate to a clear-and-convincing standard for the “fraud” exception to discharge under § 523(a). Here’s why:

§ 523(a) identifies a variety of exceptions to discharge, without indicating that any particular exception is subject to a special standard of proof—such omission “implies that the legislators intended the same standard” for all § 523(a) exceptions, whether on grounds of “fraud” or “child support and alimony”;
since preponderance-of-evidence is sufficient to establish the nondischargeability of some of the types of claims under § 523(a), that same standard should apply to all § 523(a) exceptions;
Congress chose the preponderance-of-evidence standard in creating civil causes of action for fraud under federal law (see, e. g., False Claims Act, civil penalties for fraud of financial institutions, Medicare and Medicaid fraud, antifraud provisions of securities laws, civil actions under RICO, and § 727(a)(4) bankruptcy discharge denial for fraud on the court); and
nondischargeability is a question of federal law, independent of the issue of the validity of the underlying claim.

–Collateral Estoppel

Application of the preponderance-of-evidence standard permits the exception from discharge of all fraud claims that creditors have reduced to judgment in non-bankruptcy courts.

The principles of collateral estoppel apply in bankruptcy proceedings, which means:

if nondischargeability must be proved only by a preponderance-of-evidence, all creditors who have secured fraud judgments outside bankruptcy, the elements of which are the same as those of the fraud discharge exception, will be exempt from discharge under collateral estoppel principles; but
if nondischargeability must be proved by clear-and-convincing evidence, creditors who secured fraud judgments based only on the preponderance standard would not be assured of qualifying for the fraud discharge exception.

Conclusion

Even without a ruling on a bankruptcy question, the U.S. Supreme Court still provides a reminder of how a bankruptcy law, and the reasoning behind it, serves as precedent . . . in the recent non-bankruptcy opinion of E.M.D. Sales, Inc. v. Carrera.

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