Supreme Court Rules a Partner’s Fraud Could Become Your Debt

In Bartenwerfer v. Buckley, the nine Justices of the Supreme Court had a rare moment of agreement. They ruled unanimously that a person cannot use the Bankruptcy Code to discharge fraudulent debt incurred by a spouse. 

Debts incurred via fraud usually are among the few debts that bankruptcy cannot discharge. The issue was that Kate Bartenwerfer did not know and could not have known that her partner ran up debt by committing fraud. 

The Bartenwerfer Case

Kate and David Bartenwerfer decided to remodel a home they both owned. They then sold it for a profit. David took charge of the project, and Kate was mostly uninvolved. 

David made certain real estate disclosures, as is required in most states when you sell a home.

After the purchase, the buyer discovered defects the seller had failed to disclose. The buyer sued the Bartenwerfers and won, resulting in a debt of $200,000. 

They then filed for Chapter 7. The buyer, Kieran Buckley, said that the debt was nondischargeable because the debt was the result of fraud

The Supreme Court upheld a lower court’s decision to impute David’s fraudulent intent to Kate because the two had formed a legal partnership. In addition, the case began in California, which does extend liability to honest partners. The Supreme Court noted that other states have different laws. 

The decision did hinge on the partnership. “Ordinarily,” said Justice Amy Coney Barrett in the Court’s opinion, “A faultless individual is responsible for another’s debt only when the two have a special relationship.” 

Ordinarily, individuals who are victims of fraud still have defenses to liability. Nevertheless, the Supreme Court also mentioned that “innocent people are sometimes held liable for the fraud they did not personally commit.” It doesn’t seem fair, but unfortunately, that’s the reality of life in America at times. 

Do you have a business partner?

New Jersey laws governing partnership liability are complex. There are times when both partners would be liable, and there would be times when only one partner is. Much would depend on the facts of your specific case.

In addition, you should look into specific methods of structuring your business that would shield you and your partner from personal liability from any debts your business may incur. The Bartenwerfers had not structured their partnership as a business, and that’s part of what got Kate Bartenwerfer into trouble. 

If you have a business partner, it is good practice to know what that partner is up to, even if that partner is your fiancée or spouse. Your lack of knowledge may not be sufficient to protect you if your partner commits fraud, even in New Jersey. 

Get Help Today

A bankruptcy attorney can help you anticipate any sticky liability issues that arise from potentially non-dischargeable debt in your specific bankruptcy case and can help work out a plan for addressing the issue.

That’s one of the many reasons why it’s essential to work closely with an attorney from the moment you determine bankruptcy might be the correct answer to your specific set of challenges.

Want a free consultation? Contact our office today. 

See also:

DIY Filing by the Numbers: Why You Need a Bankruptcy Attorney in Newark, NJ 

Can Newark, NJ Residents File Bankruptcy on Back Taxes? 

Can New Jersey Nursing Homes Sue You for Your Family Member or Friend’s Care Debt?