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Bankruptcy And Debts Incurred Through Fraud

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Can debtors in South Florida have debts discharged if those debts were incurred through the fraud of the debtor’s spouse? In other words, can an innocent debtor discharge the fraudulent debts of a spouse in a bankruptcy case? The answer to this question might seem like an obvious one — you might be assuming that the answer is no — but the question is one that the U.S. Supreme Court is considering in the case of Bartenwerfer v. Buckley. Our West Palm Beach bankruptcy attorneys want to provide you with more information about the case, and what its implications could be for future bankruptcy filings in South Florida.

Learning More About Bartenwerfer v. Buckley 

In Bartenwerfer, a married couple, the Bartenwerfers, filed for bankruptcy. Prior to filing for bankruptcy, the Bartenwerfers bought a house and planned renovations, and the wife later moved out before the property was renovated. The husband later sold the house to the defendant, Kieran Buckley. The sale was made with the wife’s consent, but the wife was not involved in the sale. After purchasing the house, Buckley discovered defects and filed a claim against the Bartenwerfers and won. The Bartenwerfers then filed for bankruptcy. The lower court determined that Mr. Bartenwerfer knew about the defects and “had actual knowledge of the factual misrepresentations,” according to oyez.org. The court also determined that “Mr. Bartenwerfer’s fraudulent conduct could be imputed onto Mrs. Bartenwerfer because of their partnership relationship.”

As SCOTUSblog explains, the federal circuit courts are split about whether a debtor can be liable for the fraudulent debt of a spouse. According to the petition for writ of certiorari, “one camp of circuit courts requires at least some level of scienter [intent or knowledge of wrongdoing] on the part of the debtor, and another camp imposes nondischargeable liability upon individuals acknowledged to be ‘innocent debtors.’”

Potential Implications of the U.S. Supreme Court Decision 

In hearing the case, the U.S. Supreme Court will need to decide whether a debtor can be liable for the fraud of a partner (or spouse) for purposes of a bankruptcy discharge even if the debtor did not have any actual knowledge of the fraud or any intent to defraud. In other words, can a debt be imputed to a debtor through a marriage or partnership — and be nondischargeable in bankruptcy — even if the debtor did not have actual knowledge of the fraud and did not intend to defraud?

The Court’s decision will impact any future cases in which a debtor files for bankruptcy and seeks to discharge a debt that was incurred fraudulently, but where the debtor had no knowledge of the fraud and had no intent to defraud. The case was argued before the Court on December 6, 2022, and a decision will likely come out by June 2023.

Contact Our West Palm Beach Bankruptcy Lawyers 

Do you have questions about discharging certain debts in your bankruptcy case? It is important to seek advice from one of the experienced West Palm Beach bankruptcy attorneys at Kelley, Fulton, Kaplan & Eller who can assist you. Do not hesitate to get in touch with our firm to learn more about your options or to have one of our lawyers evaluate your circumstances.

Sources:

scotusblog.com/case-files/cases/bartenwerfer-v-buckley/

scotusblog.com/2022/12/justices-debate-bankruptcy-treatment-of-debts-incurred-by-fraud/

oyez.org/cases/2022/21-908

supremecourt.gov/DocketPDF/21/21-908/205574/20211217155123168_41563%20pdf%20Bartenwerfer%20br.pdf

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