Supreme Court Rules Debtors Are Liable for Partner’s Fraud in Bankruptcy Actions

Generally, bankruptcy allows for the discharge of debts. There are some exceptions to the general rule, however. For example, any debt obtained via fraud or false representations is not dischargeable. While it is obvious that people could not discharge debts incurred due to their own fraud, it was not clear whether people could be deemed responsible for debts arising out of another party’s fraud if they were unaware of the fraudulent activity. The United States Supreme Court recently resolved the issue, though, holding that debtors cannot discharge debts brought about by fraud, regardless of whether it was their fraud or another individual’s deceitful acts. If you are interested in learning more about debt relief, it is wise to meet with a California bankruptcy lawyer to evaluate your options.

Facts of the Case

It is reported that the debtors, a married couple, renovated a house in San Francisco and sold it to a buyer who later sued them after discovering defects. The buyer won the case and was awarded damages. The couple then filed for bankruptcy. During the bankruptcy proceedings, the buyer argued that the debt from his judgment against the debtors was not dischargeable because it was obtained through fraud.

Allegedly, the bankruptcy court agreed. The court found that the husband had knowledge of the factual misrepresentations. Further, it held that his fraudulent conduct could be imputed onto his wife due to their partnership. The debtors appealed, and the appellate court remanded the imputed liability finding back to the bankruptcy court, instructing them to determine whether the wife “knew or should have known” of the fraud. The court held that the wife did not know of the fraud and thus was not liable for her husband’s fraudulent conduct. The appellate court affirmed, but the buyer appealed.

Liability for Fraud in Bankruptcy Cases

The sole question on appeal was whether a debtor is responsible for their partner’s fraud and, therefore, cannot discharge that debt in bankruptcy, regardless of their own fault. In a unanimous decision, the Court ruling in the affirmative.

The ruling clarified that Section 523(a)(2)(A) of the Bankruptcy Code prohibits the discharge of any debt that is obtained by actual fraud, false pretenses, or false representation. The Court clarified that the identity of the wrongdoer is irrelevant for purposes of Section 523(a)(2)(A); rather, the sole concern was whether a debt was obtained via fraud. The Court elaborated that neither the adjacent provisions of the Code nor the Court’s prior rulings supported an alternative reading of the provision.

The concurring opinion noted, however, that the ruling was based on the agency relationship between the debtor and their partner and that it does not consider the provision’s applicability when no such agency or partnership relationship exists.

Meet with a Trusted California Bankruptcy Attorney

While most debts are dischargeable in bankruptcy, some are not, and it is important for anyone seeking debt relief to understand the rules before filing for bankruptcy. If you have significant debts you struggle to pay, it is in your best interest to talk to a lawyer about what relief may be available. Matthew D. Roy is a trusted California bankruptcy lawyer with ample experience helping people regain control of their finances through bankruptcy, and if you hire him, he will diligently pursue the best outcome possible under the facts of your case. You can reach out to Mr. Roy via the form online or by calling (916) 361-6028 to set up a meeting.