U.S. Supreme Court to assess whether wife liable in bankruptcy for husband’s fraud

A arrives at the U.S. Bankruptcy Court for the Southern District of New York in Manhattan, New York, U.S., January 9, 2020. REUTERS/Brendan McDermid

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  • Husband’s cheating on house sale could impact his bankrupt wife
  • Buyer says wife can’t avoid damage even though she didn’t know about fraud

(Reuters) – The U.S. Supreme Court on Monday agreed to hear a case to determine whether a bankrupt person is responsible for the fraud of her business partner – and husband – even though she was unaware actions of his partner.

California resident Kate Bartenwerfer has asked the High Court to overturn an August 9th ruling by the United States Circuit Court of Appeals that she cannot use bankruptcy to escape a judgment resulting from fraudulent omissions that her husband made when selling their house. The pair were business partners in addition to being married, having originally purchased the home with the intention of flipping it, according to court documents.

Bartenwerfer’s lawyers argued in his December speech petition for certiorari that the issue “potentially affects any joint transaction or venture that could be construed as a partnership, including transactions involving married people and couples, even the sale of a family home.”

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The dispute arose after a San Francisco homebuyer, Kieran Buckley, sued the Bartenwerfers, alleging they hid information about major defects and led him to believe the home was in “good condition. health,” Buckley’s attorneys said in court documents.

A lawyer for Buckley declined to comment.

The couple said Bartenwerfer had no way of knowing the house’s structural flaws, in part because the couple had not lived in the house in the months leading up to the sale.

After a California jury returned a verdict in Buckley’s favor in 2012, awarding him more than $600,000 in damages and attorneys’ fees, the couple jointly filed for bankruptcy.

While bankruptcy is generally used to clear debts, those resulting from fraudulent activity cannot be discharged through bankruptcy proceedings.

The 9th Circuit ruled in August that Bartenwerfer could not discharge damages “regardless of his knowledge of the fraud.” The court relied on the 1885 Supreme Court decision in Strang v. Bradner, that a person cannot escape a monetary judgment based on the fact that it was incurred by the actions of his business partner without his knowledge.

Bartenwerfer appealed to the Supreme Court, arguing that the court should take the case to resolve a circuit split. While the 9th Circuit’s decision was consistent with the 5th and 11th Circuits’ decisions, the 7th and 8th Circuits concluded that a debtor must have some knowledge of his partner’s fraudulent activity to be held liable.

The case is Bartenwerfer v. Buckley, United States Supreme Court, No. 21-908.

For Bartenwerfer: Iain Macdonald and Reno Fernandez of Macdonald Fernandez

For Buckley: Zachary Tripp of Weil Gotshal & Manges; and Janet Marie Brayer of the Law Offices of Janet Brayer

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