U.S. Supreme Court Disallows Innocent Partner's Discharge Of Debt From Partner's Fraud

• Jurisdiction: United States,Federal
• Law Firm: Riker Danzig LLP
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Court Procedure, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Michael O'Donnell, Kevin Hakansson, James V. Mazewski and Kori Pruett
• Published date: 15 March 2023

On February 22, 2023, the United States Supreme Court ("the Supreme Court") issued its Opinion in the matter of Bartenwerfer v. Buckley, No. 21-908, LEXIS 943 (Feb. 22, 2023), holding that per 11 U.S.C. ' 523(a)(2)(A), a partnership member is not entitled to discharge a debt incurred by the fraud of another partnership member, regardless of the fact the innocent member had no knowledge of the fraud.

Background

In 2005, Kate Bartenwerfer ("Plaintiff") and her then-boyfriend and later husband, David Bertenwerfer ("David"), jointly purchased a San Francisco home with the intention of remodeling the property and "flipping" it for a profit. The two formed a legal partnership and undertook the renovations as ostensible equal partners; however, in reality, David handled all facets of the remodeling project and Plaintiff remained uninvolved. The home was eventually listed for sale and purchased by Kieran Buckley ("Defendant"), based, in part, on attestations by both Plaintiff and David that there were no defects in the property. Contrary to these attestations, post-purchase Defendant discovered numerous significant property defects, including permitting issues, roof leaks, and defective windows. Defendant sued Plaintiff and David for these defects in California state court, ultimately prevailing and obtaining a joint judgment against them for more than $200,000 in damages ("the Judgment").

Plaintiff and David subsequently filed for Chapter 7 bankruptcy seeking to discharge the Judgment. Defendant opposed, submitting an adversary complaint alleging the Judgment was nondischargeable under section 11 U.S.C. ' 523(a)(2)(A) of the Federal Bankruptcy Code, which prohibits the discharge of "any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud." The dischargeability issue proceeded to trial, where Plaintiff claimed she had no knowledge that the attestations were fraudulent. While this assertion was true, the bankruptcy court nevertheless held that neither party could discharge the Judgment, holding that David had knowingly concealed the defects from Defendant and "imput[ing] David's fraudulent intent to [Plaintiff] because the two had formed a legal partnership" for the renovation project.

The Road to the Supreme Court

This outcome was appealed to the Ninth Circuit Bankruptcy Appellate Panel, which disagreed with the lower court, holding that David's fraudulent intent could only be imputed to Plaintiff if...