No Relief for Debt Brought On by a Partner’s Fraud, Supreme Court Rules

The U.S. Supreme Court on Wednesday ruled that a woman could not discharge a $200,000 debt through Chapter 7 bankruptcy stemming from her husband and business partner’s fraudulent behavior in selling their home.

The woman, Kate Bartenwerfer, and her husband had purchased a San Francisco home together in 2005 and undertook renovations to flip it. Bartenwerfer’s husband and business partner did most of the renovations himself while Bartnewerfer had little involvement. When the couple later sold the home, they were sued by the new owner for failing to disclose major issues, including a leaky roof. The new owner won a judgment against the couple for more than $200,000. 

The couple then filed for bankruptcy to discharge the debt, but the bankruptcy court found Bartenwerfer’s husband had committed fraud and imputed that fraudulent intent onto Bartenwerfer due to their legal partnership formed to renovate the property.

The Court’s ruling hinged on the wording of the bankruptcy code provision (11 U.S.C. § 523(a)(2)(A)) that prohibits debtors from discharging debts for money obtained by fraud. The opinion noted that the code focuses on “how the money was obtained, not who committed fraud to obtain it.”

Bartenwerfer asserted that because she was unaware of the fraud, the bankruptcy rule should not apply. The bankruptcy appellate panel agreed with her, holding that the provision only barred discharge if the debtor knew or should have known of the fraud. But the Ninth Circuit reversed, holding that a debtor’s personal culpability was not a relevant factor.

The Supreme Court agreed, addressing Bartenwerfer’s argument that bankruptcy law is meant to provide a “fresh start” by noting that the bankruptcy code “balances multiple, often competing interests.” And that the relevant bankruptcy code provision “takes the debt as it finds it, so if California did not extend liability to honest partners, §523(a)(2)(A) would have no role to play.”

Additional Reading

U.S. Supreme Court says bankruptcy can’t nix debts for others’ fraud, Reuters (February 22, 2023)

Woman whose husband failed to disclose home defects can’t discharge buyer’s award in bankruptcy, SCOTUS rules, ABA Journal (February 22, 2023)

Bartenwerfer v. Buckley, 598 U.S. ___ (2023)

Image Credit: MedRocky /