The High Court unanimously decision It ruled Wednesday that a woman cannot use the protections of U.S. bankruptcy law to avoid paying a debt that was the result of her partner’s fraud.
Court she said the woman Kate Bartenwerferowed a debt to San Francisco real estate developer Kieran Buckley, even though she didn’t know or couldn’t have known about what her now-husband David false statements about the house they sold Buckley for more than $2 million.
The decision resolves differing opinions among several federal circuit courts of appeals on whether an innocent party can be held liable in bankruptcy for another person’s fraud.
The 9-0 decision was written by Justice Amy Coney Barrett underscored the Supreme Court’s 1885 decision that found that two partners va New York the woolen company was liable for a debt due to the fraudulent claims of a third partner, even though they themselves were not “guilty of mistake”.
Barrett rejected Bartenwerfer’s grammar-oriented argument that the relevant part of the bankruptcy code, written in the passive voice as “money obtained by fraud,” refers to “money obtained by fraud of an individual debtor.”
“Innocent people are sometimes held responsible for fraud they did not personally commit, and if they declare bankruptcy, [the bankruptcy code] prevents the fulfillment of that debt,” Barrett wrote.
“So it is for Bartenwerfer and we are sensitive to the hardships he is facing,” she wrote.
The debt owed to Buckley, which was originally a $200,000 judgment imposed in 2012, has since grown to more than $1.1 million due to interest, according to Janet Brayer, an attorney who represented Buckley in the lawsuit over the sale of the home .
Brayer said the debt is growing at the current rate of 10% per year and that it does not include the attorney fees she is entitled to under California law.
“We’ve been working on this since 2008 and now we’ve finally been vindicated and justice has been served for all the victims of the fraud,” Brayer said. “That’s why I’m a happy girl today.”
Iain MacDonald, Bartenwerfer’s lawyer, had no immediate comment on the decision, saying he planned to discuss the decision with her.
Justice Sonia Sotomayor, in a concurring opinion joined by Justice Ketanji Brown Jackson, noted that the ruling concerned people who acted together in a partnership, not “a situation involving fraud by a person who has no agency or partnership relationship with the debtor.”
“With that understanding, I join the court’s opinion,” Sotomayor wrote.
The decision in Bartenwerfer’s case came 18 years after the events that sparked the dispute.
Bartenwerfer and her then-boyfriend, David Bartenwerfer, bought the San Francisco home together 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 “confirmed it
they disclosed all material facts regarding the property,” Barrett noted.
But Buckley found the house to have “a leaky roof, faulty windows, a missing fire escape and
permission problems.”
The couple then sued, claiming they overpaid for the home based on their false information about the property.
A jury found in his favor and awarded him $200,000 from the Bartenwerfers.
The couple was also unable to pay other creditors and filed for Chapter 7 bankruptcy protection, which normally allows people to discharge all their debts.
But “not all debts are due,” Barrett wrote in her ruling.
“The Code contains several exceptions to the general rule, including the one at issue in this case: § 523(a)(2)(A) prohibits the satisfaction of “any debt … for money … to the extent obtained by false pretenses, by false representation or actual fraud,” Barrett wrote.
Buckley challenged the couple’s move to cancel their debt to him on this ground.
A U.S. Bankruptcy Court judge ruled in his favor, saying “neither David nor Kate Bartenwerfer could repay their debt to Buckley,” Barrett said in his opinion.
“Based on the testimony of the parties, real estate agents and contractors, the court finds that David knowingly concealed the home’s defects from Buckley,” Barrett wrote.
“And the court imputed David’s fraudulent intent to Kate because the two entered into a legal partnership to undertake the renovation and resale project,” she added.
The couple appealed against the verdict.
The US Bankruptcy Board of Appeals for the 9th Circuit Court of Appeals found that David still owed Buckley a debt due to his fraudulent intent.
But the same panel disagreed that Kate owed the debt.
“As the panel saw it [a section of the bankruptcy code] prohibited her from repaying the debt only if she knew or had reason to know of David’s fraud,” Barrett wrote.
Bartenwerfer later asked the Supreme Court to hear her appeal of that decision.
In her opinion, Barrett noted that the text of the bankruptcy law specifically prohibits a debtor’s use of Chapter 7 to discharge a debt if that obligation was the result of “false pretenses, misrepresentation, or actual fraud.”
Barrett wrote, “By its terms, this text excludes Kate Bartenwerfer from liability for the state court judgment.”
The judge noted that Kate Bartenwerfer contested that, while conceding, “that as a matter of grammar, the passive voice statute does not designate a fraudulent actor.”
“But in her view, the statute is most naturally construed to prohibit the discharge of debts for money obtained by the debtor’s fraud,” Barrett wrote.
“We Disagree: The Passive Voice Takes the Actor Off the Stage,” Barrett wrote.
The justice wrote that Congress wrote the relevant part of the bankruptcy law “setting it up so that[s] to an event that occurs without regard to a particular actor, and therefore without regard to the intention or culpability of any actor.'”
