Supreme Court rules bankruptcy no shield to fraud debt

The Supreme Court in a unanimous decision Wednesday ruled that a woman could not use protection under the U.S. bankruptcy code to avoid paying a debt that resulted from fraud by her partner.

The court said that the woman, Kate Bartenwerfer, owed the debt even if she did not know or could not have known about her partner’s fraud in connection with the sale of a home they had remodeled.

The 9-0 ruling written by Justice Amy Coney Barrett underscored a Supreme Court decision in 1885, which found that two partners in a New York wool company were liable for the debt due to the fraudulent claims of a third partner even though they were not themselves “guilty of wrong.”

Barrett dismissed Bartenwefer’s grammatically focused argument that the relevant section of the bankruptcy code, written in a passive voice as “money obtained by fraud,” refers to “money obtained by the individual debtor’s fraud.”

“Innocent people are sometimes held liable for fraud they did not personally commit, and, if they de-
clare bankruptcy, [the bankruptcy code] bars discharge of that debt,” Barrett wrote.

“So it is for Bartenwerfer, and we are sensitive to the hardship she faces,” she wrote.

Justice Sonia Sotomayor, in a concurring opinion joined by Justice Ketanji Brown Jackson, noted that the ruling involves people who acted together in a partnership, not “a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

“With that understanding, I join the Court’s opinion,” Sotomayor wrote.

The ruling on Bartenwefer’s case came 18 years after the events that triggered the dispute.

Bartenwefer, and her then-boyfriend David Bartenwefer, jointly bought a house in San Francisco in 2005, and planned to remodel it and sell it for a profit, the ruling noted.

While David hired an architect, engineer, and general contractor, monitored their progress and paid for the work, “Kate, on the other hand, was largely uninvolved,” Barrett wrote.

The house was eventually bought by a man named Kieran Buckley after the Bartenwerfers “attested that
they had disclosed all material facts relating to the property,” Barrett noted.

But Buckley learned that the house had “a leaky roof, defective windows, a missing fire escape, and
permit problems.”

He then sued the couple, claiming he had overpaid for the home based on their misrepresentations of the property.

A jury ruled in his favor, awarding him $200,000 from the Bartenwerfers.

The couple was unable to pay the award or other creditors and filed for protection under Chapter 7 of the bankruptcy code, which normally allows people to void all of their debts.

But “not all debts are dischargeable,” Barrett wrote in her ruling.

“The Code makes several exceptions to the general rule, including the one at issue in this case: Section 523(a)(2)(A) bars the discharge of ‘any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud,'” Barrett wrote.

Buckley challenged the couple’s move…