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Debt over spouse’s fraud can’t be discharged, high court rules

While it was her husband who made misrepresentations about San Francisco real estate to a buyer, the wife's consent to such sale makes her financially culpable.

WASHINGTON (CN) — The Supreme Court ruled unanimously Wednesday that a woman must stay on the hook for fraudulent omissions that her husband made when the couple flipped a house in San Francisco for $2.1 million.

The high court heard the case in December, agreeing to review a Ninth Circuit decision that said, “regardless of her knowledge of the fraud," Kate Bartenwerfer could not discharge a fraud-related debt imputed to her by her husband and partner.

Justice Amy Coney Barrett penned Wednesday's opinion, writing that the woman’s debt was not dischargeable via bankruptcy.

“Innocent people are sometimes held liable for fraud they did not personally commit, and, if they declare bankruptcy, bars discharge of that debt. So it is for Bartenwerfer, and we are sensitive to the hardship she faces,” Barrett wrote. "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,’ , and it is not our role to second-guess that judgment."

Bartenwerfer and her husband were not yet married in 2005 when they paid about $900,000 for the house in San Francisco's Noe Valley neighborhood. Three years later, they sold it for more than twice that amount. The buyer, Kieran Buckley, soon found problems with the house at 549 28th Street and filed suit. In 2012, a jury found that the Bartenwerfers concealed the property's history of water leaks, among other issues like defective windows, a missing fire escape and permit problems, and entered a special verdict that pushed the couple $200,000 into bankruptcy.

Zachary Tripp, an attorney for Buckley with the firm Weil Gotshal & Manges, applauded the outcome at the Supreme Court on Wednesday. 

“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 said. “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. We are proud to have helped achieve this important result.”

Tripp had argued before the high court that Bartenwerfer's liability was mandated under bankruptcy law since she obtained his client’s money by actual fraud.

Initially a federal judge determined that the wife's judgment of fraud could be discharged because she had not known about her husband's misrepresentation of the property. The case reached the Supreme Court last year, however, because the Ninth Circuit determined that fraud judgements cannot be discharged from a bankruptcy case even if the person did not have knowledge about the fraud.

In affirming that result, Barrett pointed to precedent stretching back nearly two centuries. Quoting from the 1855 case Strang v. Bradner, Barrett noted that the fraud of one partner is the fraud of all because “each partner was the agent and representative of the firm with reference to all business within the scope of the partnership.” 

The reason for this rule was clear, she continued, since “the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business.”

 “The relevant legal context — the common law of fraud — has long maintained that fraud liability is not limited to the wrongdoer,” Barrett wrote. “For instance, courts have traditionally held principals liable for the frauds of their agents. They have also held individuals liable for the frauds committed by their partners within the scope of the partnership.”

Clarifying the limited scope of the ruling, Justice Sonia Sotomayor penned a concurring opinion Wednesday joined by Justice Ketanji Brown Jackson.

“The Bankruptcy Court found that petitioner and her husband had an agency relationship and obtained the debt at issue after they formed a partnership. Because petitioner does not dispute that she and her husband acted as partners, the debt is not dischargeable under the statute,” Sotomayor wrote. “The Court here does not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor. Instead, ‘[t]he relevant legal context’ concerns fraud only by ‘agents’ and ‘partners within the scope of the partnership.’”

Kate Bartenwerfer was represented by Sarah Harris of Williams & Connolly at arguments. She did not immediately respond to a request for comment about the ruling.

Erica Ross, assistant to the U.S. solicitor general, had urged the court to affirm for the buyer.

Categories: Appeals Financial

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