U.S. Supreme Court says bankruptcy can’t nix debts for others’ frauds

Feb 22 (Reuters) – The U.S. Supreme Court on Wednesday ruled that individuals cannot use the bankruptcy process to wipe out debts incurred through fraud even in instances when they were not the ones who personally deceived their creditors.

The high court unanimously rejected Kate Bartenwerfer’s bid to use bankruptcy to eliminate debts stemming from a home sale in San Francisco on the grounds that she was unaware of fraudulent omissions her husband made in selling their house.

She had sought to discharge a debt owed to the buyer, Kieran Buckley, who had sued Kate and David Bartenwerfer for selling him their house while withholding information about major defects, like a leaky roof and defective windows.

But conservative Justice Amy Coney Barrett said the bankruptcy code allows someone like Kate Bartenwerfer, who was unaware of the deceit, to still be held liable as the law “turns on how the money was obtained, not who committed fraud to obtain it.”

She noted the bankruptcy code’s bar on debtors discharging debts for money “obtained by . . . fraud,” was written in the passive voice without singling out the wrongdoer. She rejected Bartenwerfer’s claim that the context shows it meant the fraudster.

“Quite the opposite: The relevant legal context—the common law of fraud—has long maintained that fraud liability is not limited to the wrongdoer,” Barrett wrote.

Justice Sonia Sotomayor, in a concurring opinion joined by fellow liberal Justice Ketanji Brown Jackson, noted the ruling’s limits, as it did not address when a debtor was not a fraudster’s agent or partner.

Zachary Tripp, a lawyer for Buckley at Weil, Gotshal & Manges, in a statement said the ruling “marks an important win for other victims of fraud, as the Court’s decision shows the Bankruptcy Code cannot be used as a shield for those who profit from fraud.”

Sarah Harris, a lawyer for Bartenwerfer at Williams & Connolly, did not respond to a request for comment.

Kate and David Bartenwerfer, who were business partners in addition to being married, bought the house in 2005 with the intention of flipping it. David Bartenwerfer took charge of the project, while Kate was largely uninvolved.

After Buckley bought the house, he discovered several undisclosed defects and sued. After a California state court jury awarded him $200,000, the couple filed for Chapter 7 bankruptcy and sought to discharge the debt.

But David Bartenwerfer was barred from doing so after a judge concluded he knowingly concealed the house’s defects, and the 9th U.S. Circuit Court of Appeals in 2021 found his wife could be held liable too, prompting a further appeal.

The case is Bartenwerfer v. Buckley, U.S. Supreme Court, No. 21-908.

For Bartenwerfer: Sarah Harris of Williams & Connolly

For Buckley: Zachary Tripp of Weil Gotshal & Manges

Related stories:

Justices skeptical of bankruptcy protection for ‘unwitting’ beneficiaries of fraud

U.S. Supreme Court to weigh whether wife liable in bankruptcy for husband’s fraud

Reporting by Nate Raymond in Boston

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