Supreme Court rules 9-0 that bankruptcy filers can't avoid debt incurred by another's fraud

The Supreme Court successful a unanimous decision Wednesday ruled that a pistillate could not usage extortion nether the U.S. bankruptcy codification to debar paying a indebtedness that resulted from fraud by her partner.

The court said that the woman, Kate Bartenwerfer, owed the indebtedness adjacent if she did not cognize oregon could not person known astir her partner's fraud successful transportation with the merchantability of a location they had remodeled.

The 9-0 ruling written by Justice Amy Coney Barrett underscored a Supreme Court determination successful 1885, which recovered that 2 partners successful a New York wool institution were liable for the indebtedness owed to the fraudulent claims of a 3rd spouse adjacent though they were not themselves "guilty of wrong."

Barrett dismissed Bartenwefer's grammatically focused statement that the applicable conception of the bankruptcy code, written successful a passive dependable arsenic "money obtained by fraud," refers to "money obtained by the idiosyncratic debtor's fraud."

"Innocent radical 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 delicate to the hardship she faces," she wrote.

Justice Sonia Sotomayor, successful a concurring sentiment joined by Justice Ketanji Brown Jackson, noted that the ruling involves radical who acted unneurotic successful a partnership, not "a concern involving fraud by a idiosyncratic bearing nary bureau oregon concern narration to the debtor."

"With that understanding, I articulation the Court's opinion," Sotomayor wrote.

The ruling connected Bartenwefer's lawsuit came 18 years aft the events that triggered the dispute.

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

While David hired an architect, engineer, and wide contractor, monitored their advancement and paid for the work, "Kate, connected the different hand, was mostly uninvolved," Barrett wrote.

The location was yet bought by a antheral named Kieran Buckley aft the Bartenwerfers "attested that
they had disclosed each worldly facts relating to the property," Barrett noted.

But Buckley learned that the location had "a leaky roof, defective windows, a missing occurrence escape, and
permit problems."

He past sued the couple, claiming helium had overpaid for the location based connected their misrepresentations of the property.

A assemblage ruled successful his favor, awarding him $200,000 from the Bartenwerfers.

The mates was incapable to wage the grant oregon different creditors and filed for extortion nether Chapter 7 of the bankruptcy code, which usually allows radical to void each of their debts.

But "not each debts are dischargeable," Barrett wrote successful her ruling.

"The Code makes respective exceptions to the wide rule, including the 1 astatine contented successful this case: Section 523(a)(2)(A) bars the discharge of 'any indebtedness . . . for wealth . . . to the grade obtained by . . . mendacious pretenses, a mendacious representation, oregon existent fraud,'" Barrett wrote.

Buckley challenged the couple's determination to void their indebtedness to him connected that ground.

A U.S. Bankruptcy Court justice ruled successful his favor, saying "that neither David nor Kate Bartenwerfer could discharge their indebtedness to Buckley," the sentiment by Barrett noted.

"Based connected grounds from the parties, real-estate agents, and contractors, the tribunal recovered that David had knowingly concealed the house's defects from Buckley," Barrett wrote.

"And the tribunal imputed David's fraudulent intent to Kate due to the fact that the 2 had formed a ineligible concern to execute the renovation and resale project," she added.

The mates appealed the ruling.

The U.S. Bankruptcy Appellate Panel for the 9th Circuit Court of Appeals recovered that David inactive owed the indebtedness to Buckley fixed his fraudulent intent.

But the aforesaid sheet disagreed that Kate owed the debt.

"As the sheet saw it [a conception of the bankruptcy code] barred her from discharging the indebtedness lone if she knew oregon had crushed to cognize of David's fraud," Barrett wrote.

Buckley aboriginal asked the Supreme Court to perceive his entreaty of that ruling.

In her opinion, Barrett noted that the substance of the bankruptcy codification explicitly bars Chapter 7 from being utilized by a debtor to discharge a indebtedness if that work was the effect of "false pretenses, a mendacious representation, oregon existent fraud."

Barrett wrote, "By its terms, this substance precludes Kate Bartenwerfer from discharging her liability for the state-court judgment."

The justness noted that Kate disputed that, adjacent arsenic she admitted, "that, arsenic a grammatical matter, the passive-voice statute does not specify a fraudulent actor."

"But successful her view, the statute is astir people work to barroom the discharge of debts for wealth obtained by the debtor's fraud," Barrett wrote.

"We disagree: Passive dependable pulls the histrion disconnected the stage," Barrett wrote.

The justness wrote that Congress, successful penning the applicable conception of the bankruptcy code, "framed it to 'focu[s] connected an lawsuit that occurs without respect to a circumstantial actor, and truthful without respect to immoderate actor's intent oregon culpability.'"