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Scotus 02/22/23 bankruptcy ruling - what does it mean for future debtors?

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  • justbroke
    The court did talk about the fact that they were unmarried when they entered into this venture... and the venture itself is the "business relationship" in which the court rules. They purchased it together -- their venture -- to renovate and sell the property (a flip). Because it was sold by them -- their venture -- and there was fraud, the court says it doesn't matter that she didn't know because she benefited from the fraud. The code is pretty clear on money obtained by fraud and the bankruptcy code doesn't talk about a "person" doing the fraud... they talk about the fraud itself.

    The language they use is pretty twisted, and that's because the court is trying to walk through what they mean by the fraud itself and a person committing a fraud.

    The debt is non-dischargeable. I think they could only pay the debt if they paid the entire thing. Since this debt has accrued interest and other fees, it may actually exceed Chapter 13 guidelines. Their only recourse would likely be Chapter 11.

    ("Agency relationship" just means that the husband had control of the sale, but in so represented her interests as well. The partnership was that they agreed to, and did, purchase the home and renovate it for the purposes of resale. She is bound by any malfeasance he did as her agent.. at least as far as "the fraud itself" is concerned.)

    At least that's my reading. She didn't commit the fraud, but her agent, her husband, did commit the fraud to her benefit. It's the "fraud" itself that the court is excepting from discharge. That "fraud" was apparently $200K and is now over $1M due to interest and court fees.

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  • Barbisi
    justbroke, as I understand it, they were not married at the time the house was purchased and fraudulently "renovated ", so maybe that is why they formed a partnership(?) They married sometime after the sale or once the litigation began(?)
    I couldn't find out if they are still married, but if my husband had done something criminal like that, I can't imagine not divorcing him!
    I do wonder how the buyer will actually collect much of the money owed him at all since both are apparently still bankrupt.
    Would they be eligible to file a Chapter 13 to repay the monies owed over 5 years or not?
    Otherwise, he might have to resort to garnishing their wages, tax refunds and eventually, their SS checks and after their deaths, any inheritance left to their relatives. (None of the articles I read mentioned any children.)
    At any rate, I think this case was quite interesting but also quite sad - imagine entering your retirement years with a million-dollar judgement hanging over your head like the sword of Damocles.

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  • justbroke
    I read part of this, since I get a newsfeed from Bloomberg Law every day. This was a unanimous decision. The court essentially said that despite the woman trying to get a fresh start, the underlying asset, the home, was obtained fraudulently and the court was not going to condone that issue.

    The court is correct and this is fair. To understand you have to see that this wasn't merely husband and wife with one engaging in a fraud. They were business partners. From reading the full opinion, it's not so simple because this isn't about their marriage. They formed a "legal partnership" in order to renovate and sell that home. She also signed an affidavit at the time of sale attesting to certain disclosures.

    “We are sensitive to the hardship she faces. But Congress has ‘evidently concluded that the creditors’ interest in recovering full payment of debts’ obtained by fraud ‘outweigh[s] the debtors’ interest in a complete fresh start,’” Justice Amy Coney Barrett wrote for the court.

    Apparently this made it all the way to the Ninth Circuit which overturned the lower courts (Bankruptcy, USDC, Bankrupt Appellate). The lower courts said she could discharge the debtor of her partner. The 9th Circuit said... wait a minute... the lower courts need to go back and read Strang v. Bradner, 114 U. S. 555. In that case, Strang, the court held that "a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability" (emphasis added is mine). The 9th then certified the question for SCOTUS who took the case.

    Her lawyers then tried to argue that she deserves a "fresh start" but the higher courts (both the 9th Circuit and SCOTUS) disagreed.

    I would say that if there were fraudulent disclosures in a home that I purchased, I'd seek redress with the sellers and then obtain legal counsel to pursue a lawsuit. In this case, this is exactly what happened. These two people purchased a home to fix up and do so under a "legal partnership" (it doesn't say if it was an LLC). They then fixed it up and sold it, and David apparently didn't disclose certain things. They lost the $200K case and then tried to discharge it in bankruptcy, only to lose there.

    "The Bankruptcy Court found that petitioner and her husband had an agency relationship and obtained the debt at issue after they formed a partnership. Because petitioner does not dispute that she and her husband acted as partners, the debt is not dischargeable under the statute" (emphasis is mine).

    Yup... they were partners in the fraud because even if she didn't know of the fraud, she benefited from the fraud as a partner. (By partner, I am not talking about husband-wife.)

    I think this is a fair outcome.

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  • Scotus 02/22/23 bankruptcy ruling - what does it mean for future debtors?

    justbroke and shipo what is your understanding and interpretation of the ruling against the Chapter 7 female debtor who argued that she was not responsible for home misrepresentation that caused both she and her spouse to be sued for fraudulently obtaining money by the buyer many years ago?
    The couple filed for BK7 because they couldn't pay the 200K judgement that has grown now to more than one million dollars. What was at issue was her culpability since she claims her husband committed the fraud without her knowledge or consent. The court ruled in essence her innocence didn't matter - she was still responsible anyway. Is this fair in your opinion?
    It reminds me of the money pit we gutted that directly caused our BK13; of course, no one accused us of fraud when we sold the house, and we repaid what we could of our CC debt in our subsequent BK13 filing. (I wonder if we could have had a case against those sellers, mortgage broker, realtors, etc as another realtor told us? She actually advised us to sue once she saw the condition of the basement , LOL!)

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