Nondischargeability For “Willful And Malicious Injury” Cannot Be Based On Vicarious Liability (M.O. v. Rosario)

By: Donald L Swanson

Nondischargeability for “willful and malicious injury by the debtor to another entity or to the property of another entity,” under § 523(a)(6), cannot be based on a principal-agent theory of vicarious liability.

That’s the holding of M.O. v. Rosario (In re Rosario), Case No. CC-24-1163 (9th Cir. BAP, decided May 2, 2025).

What follows is a summary of the M.O. v. Rosario opinion.

U.S. Supreme Court Backdrop (Bartenwerfer v. Buckley)

In Bartenwerfer v. Buckley, 598 U.S. 69 (2023), an honest debtor’s vicarious liability under state law for a partner’s misconduct establishes grounds for excepting all resulting debts from the honest debtor’s discharge, under § 523(a)(2)(A).

• Said § 523(a)(2)(A) reads: a bankruptcy discharge “does not discharge an individual debtor from any debt— . . . (2) for money, property, services, or an extension, renewal, or refinancing of credito, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud.”

So, the creditor in M.O. v. Rosario claims that Debtor should be denied a discharge under § 523(a)(6) for “willful and malicious injury,” because of the wrongful actions of Debtor’s child—on a principal-agent theory of vicarious liability.

Distinguishing Bartenwerfer

The Ninth Circuit Bankruptcy Appellate Panel allows Debtors’ debts to be discharged, in M.O. v. Rosario, by making the following Bartenwerfer distinctions.  

Fundamental tenets of modern bankruptcy law are:

• debts of the “honest but unfortunate debtor” should be discharged; and
• § 523(a) exceptions to discharge should be narrowly construed.

Bartenwerfer acknowledges these principles but still finds an honest partner’s vicarious liability for a partner’s fraud as grounds for nondischargeability under § 523(a)(2)(A).

–Statutory Text

Bartenwerfer begins its analysis “with the text of the statute.”  Under  § 523(a)(2)(A):

• “the passive-voice statute does not specify a fraudulent actor”;
• “the debt must result from someone’s fraud, but Congress was ‘agnostic’ about who committed it”;
• such passive voice and agnosticism is consistent with the age-old rule that individual debtors can be liable for fraudulent schemes they did not devise;
• the passive nature of § 523(a)(2)(A) is:
  • unlike § 523(a)(2)(B)(iv) (which requires a misrepresentation “that the debtor caused to be made or published with intent to deceive”); and
  • unlike § 523(a)(2)(C) (which requires the consumer debts at issue to be for “luxury goods or services incurred by an individual debtor” and any cash advances be “obtained by an individual debtor”) (emphases added); and
• § 523(a)(2)(A) is properly viewed as excluding debtor culpability, “given that (B) and (C) expressly hinge on it.”   

–Precedent & Congress’s Reaction

Bartenwerfer next examines a prior Supreme Court precedent—and Congress’ response to it—to confirm its textual analysis:

• in Strang v. Bradner, 114 U.S. 555 (1885), the operative statute excepts from discharge any “debt created by the fraud or embezzlement of the bankrupt” (emphasis added), yet the Court holds debtor’s debt nondischargeable, based on imputed fraud of a partner; and
• then, in the Bankruptcy Act of 1898, Congress removes the phrase “of the bankrupt” from the new exception to discharge statute, which embraces Strang’s holding that an innocent partner’s vicarious liability for another partner’s fraud should be nondischargeable.

Distinguishing § 523(a)(6)

11 U.S.C. § 523(a)(6) says that a bankruptcy discharge “does not discharge an individual debtor from any debt— . . . (6) for willful and malicious injury by the debtor to another entity or to the property of another entity” (emphasis added).

Bartenwerfer does not support the assertion that § 523(a)(6) excepts from discharge debts arising from vicarious liability.  Here’s why.  In Bartenwerfer:

• the presence of the phrase “by the debtor” in § 523(a)(6) is critical and determinative—to hold otherwise would violate the very statutory interpretation on which Bartenwerfer is based;
• the presence in § 523(a)(6) of the phrase “by the debtor” must be given at least the same weight as Bartenwerfer gave its omission from § 523(a)(2)(A)—§ 523(a)(6) is the polar opposite of § 523(a)(2)(A);
• the 1898 Bankruptcy Act omitted any reference to “of the bankrupt” or “by the debtor” when excepting debts “for willful and malicious injuries” from discharge;  
• it was not until enactment of the Bankruptcy Code that Congress added “by the debtor” language back into the “willful and malicious injuries” exception to discharge—
  • the “unmistakable implication” of which is that Congress knowingly required that the debtors themselves must “willfully and maliciously” injure a creditor, to establish a § 523(a)(6) discharge exception.

Conclusion

Here’s a “Thank you” to the Ninth Circuit BAP for providing the M.O. v. Rosario analysis on distinguishing § 523(a)(6) from the U.S. Supreme Court’s Bartenwerfer opinion and analysis.

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