On February 22, the U.S. Supreme Court ruled that individual bankruptcy debtors cannot obtain a bankruptcy discharge regarding debts incurred through fraud, even in situations where the debtor was not the one who personally deceived the creditor.

In the underlying facts, Kate Bartenwerfer sought a bankruptcy discharge regarding debts arising from a home sale in San Francisco on the basis that she was not aware of fraudulent omissions her husband made in selling the house.

She had attempted to discharge a debt owed to the buyer, Kieran Buckley, who had sued Kate and David Bartenwerfer for selling him their house while withholding information about major defects, like a leaky roof and defective windows. Ms. Bartenwerfer was apparently unaware of the failure to disclose this information.

Justice Amy Coney Barrett stated the bankruptcy code allows a person, although unaware of the deceit, to still be held liable as the law "turns on how the money was obtained, not who committed fraud to obtain it.”

After Buckley bought the house, he discovered undisclosed defects and sued. After a California state court jury awarded him $200,000, the couple filed for Chapter 7 bankruptcy and sought to discharge the debt. David Bartenwerfer was barred from obtaining a discharge regarding the debt to Buckley after a judge concluded he knowingly concealed the house’s defects, and the 9th U.S. Circuit Court of Appeals in 2021 found his wife could be held liable too, prompting a further appeal.

Creditors should consult with knowledgeable bankruptcy counsel to maximize the chances of recovery from debtors. Bankruptcy is a complex area of the law, and Erickson|Sederstrom’s bankruptcy attorneys are available to assist.