The Supreme Court on Wednesday ruled in a unanimous decision that a California woman cannot use US bankruptcy protection to avoid paying a $200,000 debt incurred by her partner’s cheating.
The court said the woman, Kate Bartenwerfer, owed the debt even though she was unaware of her husband David’s false statements about the condition of a home when she sold it to San Francisco real estate developer Kieran Buckley for more than $2 million sold.
Buckley had sued the couple and won a verdict over these misrepresentations.
The 9-0 ruling, authored by Judge Amy Coney Barrett, resolves a disagreement between several federal appeals courts over whether an innocent party can protect himself from debt for someone else’s fraud after filing for bankruptcy.
The ruling cites and reinforces an 1885 Supreme Court decision that found two partners in a New York wool company liable for debts arising from fraudulent claims made by a third partner, although they themselves were not “guilty of wrong.” .
Barrett rejected Bartenwerfer’s grammatical argument that claimed that the relevant section of the Bankruptcy Code, written in the passive voice as “money obtained by fraud”, referred to “money obtained by fraud of the individual debtor”.
“Innocent people are sometimes held liable for fraud they did not personally commit, and when they file for bankruptcy, [the bankruptcy code] prohibits exemption from that debt,” Barrett wrote.
According to Janet Brayer, the San Francisco attorney who represented Buckley in a home sale lawsuit, the debt to Buckley, which was originally a $200,000 court judgment awarded in 2012, is due to interest at more than 1.1 million dollars grown.
Brayer said the debt is growing at a current rate of 10% annually and that doesn’t include legal fees to which she is entitled under California law.
“We’ve been working on this since 2008 and it’s finally been confirmed and justice has been done for all the victims of the scam,” Brayer said. “That’s why I’m a happy girl today.”
Iain MacDonald, an attorney for Bartenwerfer, did not immediately comment on the ruling and said he plans to discuss the decision with her.
Judge Sonia Sotomayor, in a unanimous opinion joined by Judge Ketanji Brown Jackson, noted that the ruling concerns individuals who have acted in partnership and not “a situation involving fraud by a person who lacks agency or agency.” has a partnership relationship with the debtor”.
“With this understanding, I concur with the opinion of the court,” wrote Sotomayor.
The judgment in the Bartenwerfer case came 18 years after the events that triggered the dispute.
Bartenwerfer and her then-boyfriend, David Bartenwerfer, bought a home together in San Francisco in 2005 and planned to remodel it and sell it for a profit, the ruling said.
While David hired an architect, engineer, and general contractor, oversaw their progress, and paid for the work, “Kate was largely uninvolved,” Barrett wrote.
The home was eventually purchased by Buckley after the Bartenwerfers “confirmed that they had disclosed all material facts relating to the property,” Barrett noted.
But Buckley learned that the house had “a leaking roof, broken windows, a missing fire escape and
He then sued the couple, claiming that he overpaid for the home due to their misrepresentations of ownership.
A jury ruled in his favor and awarded him $200,000 from the Bartenwerfers.
Unable to pay the price or other creditors, the couple filed for protection under Chapter 7 of the Bankruptcy Act, which normally allows people to pay off all of their debts.
But “not all debts are recoverable,” Barrett wrote in her ruling.
“The Code makes several exceptions to the general rule, including those at issue in this case: Section 523(a)(2)(A) prohibits exemption from ‘all debt…for money…to the extent obtained by… false claims, misrepresentation or actual fraud,’” Barrett wrote.
Buckley challenged the couple’s move to cancel their debt to him for this reason.
A US bankruptcy court judge ruled in his favor, saying “neither David nor Kate Bartenwerfer would be able to pay their debts to Buckley,” Barrett’s statement said.
“Based on testimonies from parties, real estate agents and contractors, the court found that David knowingly concealed the shortcomings of the home from Buckley,” Barrett wrote.
“And the court found Kate David’s fraudulent intent because the two entered into a legal partnership to carry out the renovation and resale project,” she added.
The couple appealed the verdict.
The US Bankruptcy Appellate Panel of the 9th Circuit Court of Appeals found that David Buckley still owed debts as a result of his fraudulent intent.
But the same panel disagreed that Kate owed the debt.
“As the panel saw it [a section of the bankruptcy code] only stopped her from paying off the debt if she knew or had reason to know about David’s fraud,” Barrett wrote.
Bartenwerfer later asked the Supreme Court to hear her appeal against that ruling.
In her opinion, Barrett noted that the text of the Bankruptcy Act specifically prevents Chapter 7 from being used by a debtor to settle a debt when that obligation was the result of “false pretense, misrepresentation or actual fraud.”
Barrett wrote, “By its terms, this text bares Kate Bartenwerfer from fulfilling her liability for the state court’s verdict.”
The judiciary found that Kate denied Bartenwerfer, although she admitted “that the passive statute does not require a fraudulent actor for grammatical reasons”.
“But in their view, the law is most naturally designed to prevent payment of debt for money obtained by defrauding the debtor,” Barrett wrote.
“We disagree: Passive pulls the actor off the stage,” Barrett wrote.
The judiciary wrote that in drafting the relevant section of the bankruptcy law, Congress “to focus on ‘[s] to an event that occurs without regard to any particular actor and therefore without regard to the intention or fault of any actor.’ “