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Bankruptcy Litigation United States Supreme Court

Innocent Business Partner’s Fraud Liability Survives Bankruptcy

The decision by the Supreme Court has practical significance for corporate officers and others in an agency or partnership relationship, and also may have serious consequences for corporate Chapter 11 debtors whenever a “domestic governmental unit” is a creditor.

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“[S]ometimes a debtor is liable for fraud that she did not personally commit,” held the U.S. Supreme Court on Feb. 22, 2023, when the debtor’s business partner had deceptively obtained money by fraud, thereby making the innocent partner liable for a nondischargeable debt under Bankruptcy Code (Code) §523(a)(2)(A) (“any debt from money “obtained by … fraud” not dischargeable and survives debtor’s bankruptcy). Bartenwerfer v. Buckley, 2023 WL 2144417 (Feb. 22, 2023). Unanimously affirming the Ninth Circuit and resolving “confusion in the lower courts,” the Court explained that the common law and precedent precluded an innocent debtor from discharging a debt obtained by the fraud of the debtor’s agent or partner. Id. at *8. The innocent debtor here thus could not use bankruptcy to avoid liability. More important, the decision has practical significance for corporate officers and others in an agency or partnership relationship. The decision also may have serious consequences for corporate Chapter 11 debtors whenever a “domestic governmental unit” is a creditor.

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