News & Insights

Case of Interest where U.S. Supreme Court ruled that a purported unknowing bankruptcy debtor can be held liable for her husband’s fraud

May 12, 2023

In Bartenwerfer v. Buckley, 598 U.S. —–, 143 S.Ct. 665 (2023), the Supreme Court unanimously ruled in favor of a home buyer who was attempting to regain losses from sellers due to fraud for the purchase of a house at an inflated price and with concealed defects and permitting issues. The core issue addressed by the Supreme Court was whether under 11 U.S.C. § 523(a)(2)(A) debt stemming from another person’s fraudulent act could be discharged when the debtor did not actively participate in the fraud. The Court held that debt which resulted from another person’s fraudulent act cannot be wiped out in bankruptcy even if the debtor did not personally commit the fraud.

The underlying facts involved a couple who decided to remodel a house that they jointly owned and sell it for a profit. Fiancé/husband took charge of the project while fiancé/wife remained largely uninvolved. At the time the house was sold to a buyer, both sellers attested that they had disclosed all material facts related to the property. The buyer discovered significant material defects that the sellers had not disclosed along with permitting issues. The buyer sued in a California court and won, leaving the sellers jointly responsible for over $200,000 in damages. Sellers filed for Chapter 7 bankruptcy. The judgment creditor filed an adversary complaint seeking determination that the debt could not be discharged because the Chapter 7 debtors fraudulently concealed material defects in the property sold to him before the bankruptcy petition. The bankruptcy court affirmed the judgment to debtor-husband and the debtor-wife holding that the liability was a debt obtained by actual fraud under 11 U.S.C. § 523(a)(2)(A). After several lower court hearings, the Ninth Circuit affirmed the holding that the debtor-wife’s debt was non-dischargeable despite her lack of involvement and intent in the fraud. The Supreme Court affirmed the Ninth Circuit’s ruling.

No information in this communication is intended to constitute specific legal advice. For specific legal advice, please contact an attorney, and if you have any such questions or would like more information about this issue, please contact William “Pat” Huttenbach at 713.752.8616, or email at phuttenbach@craincaton.com.

Thanks,

Pat

Bartenwerfer v Buckley