The U.S. Bankruptcy Code does not allow a debtor to discharge debt obtained through fraud. On February 22, 2023, the U.S. Supreme Court (USSC) in the case of Bartenwerfer v. Buckley ruled that a debtor who is liable for their partner’s fraud cannot discharge the debt in bankruptcy either, regardless if they did not engage in fraud personally. The USSC’s ruling affirms that this Bankruptcy Code fraud provision is intended to focus on how the money was obtained, not who committed the fraud to obtain it.
The case of Bartenwerfer v. Buckley centers on a debtor who purchased a home with her business / romantic partner. The couple decided they wanted to “flip” it for a profit. During the sales process, the couple signed the required disclosures statements stating they were unaware of leaks and other defects with the property. Ms. Buckley was not aware of any defects but her partner was and he concealed them. After the purchase, the buyer discovered the defects and sued the couple for their failure to disclose the issues, ultimately winning at trial and being awarded more than $200,000 in damages. Ms. Buckley attempted to discharge this debt through a Chapter 7 bankruptcy, claiming she was unaware of her partner’s acts of fraud during the sale process. The USSC determined that Ms. Buckley cannot discharge the debt, even if she was unaware of the fraud that resulted in the judgment against her.
This USSC ruling solidifies that individuals can be liable for debt resulting for fraud committed by their business partners and agents. It also emphasizes the importance of having proper partnership agreements in place that address critical issues, including fraudulent actions. Contact the business attorneys at Chauvel & Glatt to discuss your business partnership and who to protect yourself.
The material in this article, provided by Chauvel & Glatt, is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute, legal advice or promise similar outcomes. For information on your particular circumstances, please contact Chauvel & Glatt at 650-573-9500.