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 May 10, 2023

Supreme Court rules bankruptcy filers cannot avoid debt acquired through fraud

A recent 9-0 decision by the United States Supreme Court found that a California woman could not use the protections of the U.S. bankruptcy code to avoid paying a $200,000 debt caused by her partner's fraud.

According to a report by The Conservative Brief, the decision could be a monumental one, possibly ending in a ripple effect for banks across the nation.

The court ruled that the woman before them, Kate Bartenwerfer, still owed the debt even though she didn't know that her husband, David, had made misrepresentations about the condition of their house when they sold it.

The property in question was a piece of San Francisco real estate sold to developer Kieran Buckley for over $2 million. Buckley subsequently sued the couple and won the judgement for misrepresentations, as CNBC reported at the time.

“The 9-0 decision written by Justice Amy Coney Barrett resolves a difference of opinion between several federal circuit appeals courts on the question of whether an innocent party can shield themselves from debt for another person’s fraud after filing for bankruptcy," the outlet added.

"The ruling cited and reinforces a Supreme Court decision in 1885, which found that two partners in a New York wool company were liable for the debt due to the fraudulent claims of a third partner even though they were not themselves ‘guilty of wrong.’

"Barrett dismissed Bartenwerfer’s grammar-focused argument, which claimed that the relevant section of the bankruptcy code, written in the passive voice as ‘money obtained by fraud,’ refers to ‘money obtained by the individual debtor’s fraud.'”

In the decision handed down by the court, Barrett stated, “Innocent people are sometimes held liable for the fraud they did not personally commit, and, if they declare bankruptcy, [the bankruptcy code] bars discharge of that debt,” Barrett said. “So it is for Bartenwerfer, and we are sensitive to the hardship she faces.”

“The Code makes several exceptions to the general rule, including the one at issue in this case: Section 523(a)(2)(A) bars the discharge of ‘any debt … for money … to the extent obtained by … false pretenses, a false representation, or actual fraud,’” Barrett wrote.

“Based on testimony from the parties, real estate agents, and contractors, the court found that David had knowingly concealed the house’s defects from Buckley. And the court imputed David’s fraudulent intent to Kate because the two had formed a legal partnership to execute the renovation and resale project.”

Following the ruling Colorado became the most recent state that would “recognize that a borrower’s bankruptcy discharge does not accelerate secured installment debt or trigger the final statute of limitations period to recover the debt.”

Lexology reported that the state supreme court looked at the court of appeals' decision that Colorado's six-year deadline to collect on a borrower's home loan debt started when the borrower's bankruptcy was overturned in 2012.

Because six years had passed since the propertied start of the statute of limitations, the court asserted that the lender couldn't do anything about the debt.

But the Colorado Supreme Court overturned the ruling of the appeals court, saying that a bankruptcy discharge cannot speed up or start the clock on monthly payments that have not yet come due.

Written By:
Charlotte Tyler

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