It is well established that bankruptcy protection will not be provided for debts incurred due to fraud, but what happens when the individual debtor was not personally aware of the fraud? The U.S. Supreme Court ruled on this matter and the decision should encourage people to be extremely diligent about matters that might have serious financial consequences down the road. 

Bartenwerfer v. Buckley stemmed from a home renovation deal that touched off an allegation of fraud. The Bartenwerfers are a married couple and members of a partnership that fixed up a San Francisco property and sold it to Kieran Buckley. After the transaction was completed, Buckley learned that representations made to him in order to secure the sale were fraudulent. He sued the couple in state court and won substantial damages, leading the Bartenwerfers to file for bankruptcy.

When Buckley invoked the fraud exception in order to collect what he was owed in the judgment, Kate Bartenwerfer said she should be entitled to bankruptcy protection because she did not have personal knowledge of the fraud that was perpetrated by her husband in his discussions with Buckley. Decisions leading up to the Supreme Court case came down on both sides of the issue of whether the misrepresentation of her husband and partner should be imputed to the unwitting Kate.

In a unanimous decision authored by Justice Barrett, the Supreme Court held that as a partner in the venture that perpetrated the fraud, Kate Bartenwerfer would not able to discharge the debt to Buckley.  The Court cited how the common law of fraud has held individuals liable for partnership judgments even if that individual played no role in the wrongdoing that led to the judgment. 

For individuals impacted by a partner's fraudulent actions, alternative legal remedies may still be available outside of bankruptcy proceedings. Civil lawsuits, criminal prosecutions and other legal avenues can be pursued to hold the responsible party accountable for their misconduct and seek restitution for victims. Spouses and others who might have a personal relationship, but not a legal partnership, with someone who engaged in fraud also have a better chance to discharge related debts. 

These cases can be very complex, so you should consult with an experienced bankruptcy attorney if you have a severe financial problem stemming from someone else’s misconduct or any other issue. The Law Offices of James C. Zimmermann handles a wide range of bankruptcy concerns for New Jersey residents.  You can schedule a free consultation by calling 973-764-1633 or contacting us online. We have offices in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley.