Monday, February 27, 2023


            In 2005 Kate and her boyfriend David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel and sell it. David took charge by hiring an architect, structural engineer, designer, and general contractor. David monitored their work, reviewed invoices, and signed checks.

            Kate was uninvolved.

            David married Kate. Kieran Buckley bought the house. In conjunction with the sale, David and Kate stated that they had disclosed all material facts related to the property. But after closing Buckley discovered a leaky roof, defective windows, missing fire escape, and permit problems.

            Buckley sued Kate and David in State court. The jury awarded damages to Buckley of $200,000+.

            Kate and David could not pay Buckley, not to mention their other creditors. So they filed for Chapter 7 bankruptcy relief, which allows debtors to get a “fresh start” by discharging their debts.

            Unfortunately, however, not all debts are dischargeable. The Bankruptcy Code bars the discharge of debts to the extent obtained by false pretenses, false representation, or actual fraud.

            Buckley filed an adversary complaint alleging that the monies owed on the State-court Judgment fall within this exception, and should not be discharged. After trial, the Bankruptcy Court agreed that neither Kate nor David could discharge their debt to Buckley.

            Based on the testimony from the parties, real estate agent, and contractors, the Bankruptcy Court found that David had knowingly concealed the defects from Buckley. And – the compelling part for lawyers – the Bankruptcy Court imputed David’s fraudulent intent to Kate.

            Meaning, neither could discharge the Buckley debt in the context of their Chapter 7 bankruptcy.

            Recall that Kate had virtually nothing to do with this, other than formation of a partnership. So Kate appealed.

            The Bankruptcy Appellate Panel agreed as to David’s fraudulent intent but disagreed as to Kate’s. So the case was remanded back to Bankruptcy Court, where this time the Court concluded that Kate lacked the requisite knowledge of David’s fraud and therefore Kate could discharge her liability to Buckley.

            Liking this outcome better, the Bankruptcy Appellate Panel affirmed the judgment. So Buckley appealed.

            The Supreme Court of the United States of America agreed to review it. Doing so, SCOTUS used 10 pages of legal prose to determine that it hardly matters who perpetrates the fraud. The statutory analysis goes like this:

(1) Question: Is there an individual debtor? Answer: Yes, Kate.

(2) Question: Is there a debt? Answer: Yes, owing to Buckley.

(3) Question: Did the debt arise due to false pretenses, false representation, or actual fraud? Answer: Yes, as determined previously by other courts.

             Not relevant to the analysis is who, exactly, committed the fraud.

            What is relevant here is that a debt + fraud = non-discharge in bankruptcy. Full stop. “The debt must result from someone’s fraud, but Congress was ‘agnostic’ about who committed it.”

            Kate Bartenwerfer’s debt is not dischargeable in her bankruptcy proceeding. See

Kate Bartenwerfer v. Kieran Buckley; Supreme Court of the United States; February 22, 2023:

 Note that this case had its inception in 2005, close to 20 years ago!

             Questions / Issues:

  1. Did that result surprise you? I had guessed that a debtor required some level of active participation to be stuck with a non-dischargeable debt. But then I am not a bankruptcy lawyer. Perhaps the bankruptcy specialists anticipated exactly this result. However, if this was the obvious result then an appeal to SCOTUS would not have been required.
  1. What does this mean to your investments in partnerships, corporations, joint ventures, limited liability companies, and similar passive entities? If those in a control position make poor choices, could the liability extend to you?
  1. If you are nervous about Q2, then do you have / can you get indemnities from those in a control position? But indemnities are just more words on more paper. Can you get collateral or security to backstop the indemnity?

                                                                                 Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York


Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

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