On February 22, 2023, the Supreme Court unanimously decided in Bartenwerfer v. Buckley that a debtor filing for bankruptcy could be held liable for a partner’s fraud, regardless of their own guilt. So, in simpler terms, if your partner benefits from fraud and you also enjoy those benefits, you can be held responsible for the debt, even if you didn’t commit any fraudulent actions yourself.
A Troubling Scenario
Bartenwerfer v. Buckley tells the story of a married couple, David and Kate Bartenwerfer, who renovated and sold a home in San Francisco, California, to Kieran Buckley. After the sale, Buckley discovered the house had numerous defects that David Bartenwerfer had knowingly concealed. Consequently, she sued the Bartenwerfers and was awarded damages.
But, the Bartenwerfers had an ace up their sleeve, or so they thought. They tried to pull a Michael Scott from The Office and declare bankruptcy to solve their problems. Not so fast!
A Tangent on Bankruptcy
Bankruptcy is an essential tool because it allows individuals and businesses facing insurmountable debt a path to financial recovery. It has been around since the founding of the country.
Bankruptcy exists for two primary purposes:
1. It encourages economic risks that have a net-positive impact on society. For example, without bankruptcy, getting a loan to start a business would be a lot riskier.
2. It provides a fresh start when things go wrong. Starting at zero is not great, but it’s much better than starting deep in the negatives.
However, certain debts are not dischargeable. These include student loans, recent tax debt, and child support and alimony, to name a few. Exactly which debts are relieved is case by case and decided through a legal process. Therefore, when you commit fraud, bankruptcy does not free you from fraudulent debt.
A Clear-Cut Case?
For David Bartenwerfer, the ruling was straightforward: he committed fraud, and bankruptcy would not absolve him of his debt. But what about his wife, Kate? Although she was aware of the fraud, she didn’t engage in any illegal actions herself.
The question then became: was she merely an innocent bystander, a victim of her husband’s greed, or an accomplice responsible for repaying Buckley? Kate Bartenwerfer’s case eventually reached the Supreme Court, where the nine justices unanimously ruled against her. The text of the statute, the bankruptcy code, and the court precedents all favored Buckley.
There are several important lessons to be learned from Bartenwerfer v. Buckley:
1. Choose your partners carefully, whether they are family, friends, or business associates.
2. If you benefit from something, you may be held responsible for how those benefits were gained. Passivity is not a defense against fraud liability.
3. Bankruptcy protection is intended for those with good intentions, not for those who commit fraud or other crimes.
This 9–0 ruling serves as a reminder that bankruptcy is reserved for genuine cases, not those attempting to escape the consequences of fraud or other illegal activities. Unfortunately, both Kieran Buckley and Kate Bartenwerfer suffered in this situation. Still, ultimately, the responsibility falls on those who choose their partnerships and must face the outcomes that come with those decisions.