On February 22, 2023, in Bartenwerfer v. Buckley, 598 U.S. __ (2023), the U.S. Supreme Court ruled that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability.

In this case, Kate and David Bartenwerfer decided to remodel a house they jointly owned and sell it for a profit. David handled the remodel and Kate was largely uninvolved. Before selling the house to Kieran Buckley, the couple filled out a required disclosure statement, falsely saying they were unaware of leaks or other defects and that alterations or repairs had been made with necessary permits and in accordance with building codes. However, after the purchase, Buckley discovered misrepresentations and defects the Bartenwerfers failed to disclose.

Buckley prevailed in California state court and the Bartenwerfers were jointly responsible for more than $200,000 in damages. Unable to pay that judgment or their other creditors, the Bartenwerfers filed for Chapter 7 bankruptcy. Buckley then filed an adversary complaint in the bankruptcy proceeding, alleging that the debt owed pursuant to the judgment was nondischargeable under the Bankruptcy Code’s exception to discharge of “any debt….for money…to the extent obtained by….false pretenses, a false representation, or actual fraud.” 11 U.S.C. §523(a)(2)(A). The Bankruptcy Court ultimately determined that Kate was not involved and lacked knowledge of the fraud and as such the debt was dischargeable as to her. The Bankruptcy Appellate Panel affirmed. Buckley took the case to the Ninth Circuit, which reversed, holding that the debt was nondischargeable because it was procured by fraud irrespective of Kate’s apparent lack of involvement.

In a unanimous opinion authored by Justice Amy Coney Barrett, the Supreme Court affirmed the Ninth Circuit’s decision and found that Section 523(a)(2)(A) turns on how the money subject to a creditor claim was obtained, not on who committed the fraud to obtain it. In other words, a debt incurred by fraud cannot be discharged through a Chapter 7 bankruptcy even if a debtor isn’t culpable for the fraud.

Expanding on the holding, Justice Coney Barrett wrote, “the provision obviously applies to a debtor who was the fraudster. But sometimes a debtor is liable for fraud that she did not personally commit — for example, deceit practiced by a partner or an agent…We must decide whether the bar extends to this situation too. It does.” The Court went on to note that fraud liability is generally not limited to the wrongdoer but may encompass everybody who is involved in the fraud, such as principals being held liable for the fraud of their agents. Partners in a general partnership are also liable for their other partners’ fraud within the scope of the partnership.

This decision invokes an 1885 ruling in the case of Strang v. Brander, 114 U.S. 555, which held that that a debtor cannot escape liability for a partner’s fraud even if they did not know about the fraud. Debtors who incurred claims of liability resulting from fraudulent acts by their business partner could not receive a discharge even though they weren’t guilty of wrongdoing.

If you need help with New York bankruptcy matters or other related topics, please reach out to attorney Esther S. Gabriel at (315) 214-2016 and egabriel@harrisbeach.com, Kevin W. Tompsett at (585) 419-8738 and ktompsett@harrisbeach.com, or the Harris Beach attorney with whom you most frequently work.

This alert is not a substitute for advice of counsel on specific legal issues.

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