US Supreme Court rules bankruptcy debtor liable for partner’s fraud News
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US Supreme Court rules bankruptcy debtor liable for partner’s fraud

The US Supreme Court Wednesday ruled in a slip opinion that a Chapter 7 bankruptcy debtor cannot discharge a debt that resulted from her partner’s fraudulent activity under 11 U.S.C. § 523(a)(7)(A). Justice Amy Coney Barrett authored the unanimous opinion.

The statute at issue bars debtors from discharging debts “for money…obtained by…fraud.” The court ruled that because the statute’s text is written in the passive voice, the statute turns on how the money was obtained, not who committed the fraud to obtain the money. Therefore, the court ruled that a debtor is liable for their partner’s fraud and cannot discharge the debt in bankruptcy, regardless of their own culpability in the fraud. The opinion noted that because the statute is written in the passive voice, Congress framed the law to focus on the “event that occurs without respect to a specific actor.”

The lawsuit arose when Kate and David Bartenwerfer remodeled their home in California to sell for a profit. David failed to disclose defects in the house to the buyer before the sale. The buyer later sued and obtained a $200,000 judgment in California state court. The Bartenwerfers could not pay the judgment and filed for Chapter 7 bankruptcy. The US Court of Appeals for the Ninth Circuit ruled that Kate’s debt, which was the result of her partner’s fraud, was nondischargeable under 11 U.S.C. § 523(a)(7)(A), regardless of her culpability. Kate filed a petition for a writ of certiorari with the Supreme Court, arguing that the court should rule the way Eighth Circuit has in the past and require at least a minimum level of scienter to bar discharge.

Justice Sonia Sotomayer issued a concurring opinion with Justice Ketanji Brown Jackson. The concurrence noted that Kate did not dispute the fact that she and her husband had an agency relationship when selling the home. As a result, the concurrence stated that the court’s opinion does not rule on a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.