The Supreme Court ruled unanimously on Feb. 22 that a woman whose husband defrauded a man who bought their San Francisco home is financially responsible even though she did not participate in the fraudulent scheme.
Kate Bartenwerfer, who filed for bankruptcy after the ill-fated real estate deal, appealed after the U.S. Court of Appeals for the 9th Circuit ruled she cannot escape from the debt that is non-dischargeable in a bankruptcy proceeding.
The couple had purchased and renovated a house. They moved out, and the husband, David Bartenwerfer, handled the sale of the house with his wife’s permission but without any substantial involvement on her part. Without the wife’s knowledge, the husband made false representations to the buyer, the respondent Kieran Buckley.
Buckley sued Kate and David Bartenwerfer after finding the structural defects in the house that the sellers failed to disclose. A California state jury found the Bartenwerfers liable in 2012 for not divulging a leaky roof, defective windows, a missing fire escape, and permit problems. The jury found the Bartenwerfers liable for more than $200,000 for breach of contract, negligence, and nondisclosure of material facts.
Unable to pay, both Bartenwerfers declared bankruptcy after losing to Buckley. Kate Bartenwerfer, who under California law was deemed jointly liable for the transaction because she had entered into a business partnership with David Bartenwerfer, who became her spouse after the transaction, argued she should not be held liable for his misdeeds. After a two-day bench trial, a federal bankruptcy court disagreed, refusing to excuse the couple from the debt.
The 9th Circuit’s Bankruptcy Appellate Panel later found the law barred the wife from discharging the debt only if she knew or had reason to know of her husband’s fraud. It directed the bankruptcy court to apply that standard and retry the case. After a second bench trial, that court found that the wife did not possess the required knowledge of the husband’s fraud and was therefore able to discharge the debt owed to Buckley.
The appellate panel affirmed the ruling but the full 9th Circuit then reversed, citing the Supreme Court’s 1885 ruling in Strang v. Bradner and holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. Kate Bartenwerfer’s debt to Buckley remained on the books.
Kate Bartenwerfer’s arguments were not persuasive, Barrett wrote.
Although Bartenwerfer painted “a picture of liability imposed willy-nilly on hapless bystanders, the law of fraud does not work that way,” the justice wrote.
The federal bankruptcy code generally permits debtors to discharge pre-bankruptcy liabilities, but there is an exception when debt was incurred by way of fraud. The ability to discharge such debts is dependent on how the money was obtained–in this case by means of fraud—rather than on who committed the fraud itself.
And even though debtors can argue in bankruptcy court that they deserve a fresh start, the federal bankruptcy code does not exclusively favor the interests of debtors, and instead attempts to balance the interests of creditors and debtors, the justice wrote.
“All of this said, innocent people are sometimes held liable for fraud they did not personally commit, and, if they declare bankruptcy, [the code] bars discharge of that debt.”
“So it is for Bartenwerfer, and we are sensitive to the hardship she faces,” the opinion states.
“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,’” the opinion continues, citing Grogan v. Garner (1991).
“[I]t is not our role to second-guess that judgment,” the opinion concluded, finding that “Kate Bartenwerfer’s debt is not dischargeable in bankruptcy.”
Justice Sonia Sotomayor filed a concurring opinion, which Justice Ketanji Brown Jackson joined.
Buckley’s attorney, Zachary D. Tripp of Weil Gotshal and Manges LLP, said, “We are thrilled by the Supreme Court’s decision.”
“This marks a complete victory for our client, Kieran Buckley, who has been fighting to recover his losses since he was defrauded nearly 15 years ago,” Tripp told The Epoch Times by email.
“And it marks an important win for other victims of fraud, as the Court’s decision shows the Bankruptcy Code cannot be used as a shield for those who profit from fraud,” Tripp said.
Bartenwerfer attorney Iain A. Macdonald of Macdonald Fernandez told The Epoch Times by email, “I decline to comment.”
