Bloomberg Law
Feb. 22, 2023, 3:27 PMUpdated: Feb. 22, 2023, 4:10 PM

Justices Say Bankruptcy Can’t Erase Debt From Others’ Fraud (1)

James Nani
James Nani

The US Supreme Court ruled that a bankrupt California woman can’t wipe out debts incurred through her husband’s fraudulent conduct in a home sale.

Kate Bartenwerfer had argued that she was unaware of her husband’s actions. But she can’t use bankruptcy to discharge the debt obtained by fraud, the high court said in a unanimous decision Wednesday.

The bankruptcy code generally allows debtors to discharge pre-bankruptcy liabilities, but there’s an exception for situations in which the debt was incurred through fraud. Because the code turns on how the money was obtained, and not who committed the fraud, the exception extends to Bartenwefer, the justices found.

“We are sensitive to the hardship she faces. But Congress has ‘evidently concluded that the creditors’ interest in recovering full payment of debts’ obtained by fraud ‘outweigh[s] the debtors’ interest in a complete fresh start,’” Justice Amy Coney Barrett wrote in the 16-page opinion, citing Grogan v. Garner.

Justice Sonia Sotomayor filed a concurring opinion, which was joined by Justice Ketanji Brown Jackson.

Bartenwerfer’s attorney, Sarah Harris of Williams & Connolly LLP, told the justices during oral arguments in December that imputing liability to her from her husband’s fraud would amount to a “financial death sentence” for her and others in similar situations.

The buyer of the San Francisco house, Kieran Buckley—who sued Kate and David Bartenwerfer after discovering defects in 2007—argued that the couple were partners in the sale transaction who should have known the nature of the disclosures being made. Bartenwerfer petitioned the Supreme Court after the US Court of Appeals for the Ninth Circuit sided with Buckley.

The case is Bartenwerfer v. Buckley, U.S., No. 21-908, opinion 2/22/23.

(Updated with additional background from the opinion )

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