Can the fraud of one spouse be imputed to an innocent spouse, thereby making the debt nondischargeable to both in a bankruptcy?
The law has been well established that the fraudulent acts of one spouse cannot be imputed to a spouse that did not know, or should not have had a reason to know, of the fraudulent conduct. However, when it comes to discharging debts in bankruptcy, it may not be quite as clear.
Recently the case of Bartenwerfer v. Buckley presented an unexpected finding. The case involved a husband and wife that sold real property with defects that were not disclosed. The husband was found to have committed fraud, which is a specific intent cause of action, in the sale of real property. While the wife did not know, and had no reason to know, of the defects, with both the husband and wife signed disclosure agreements concerning property defects.
Both husband and wife filed bankruptcy. As expected, the creditor filed an appropriate pleading to find the fraudulent debt nondischargeable as to the husband, which was granted. However, as to the wife, while the trial Court found the debt to be dischargeable, the Supreme Court found otherwise, and as nondischargeable under the strict language of 11 USC 523(a)(2)(A) using the key parced language, "does not discharge an individual debtor from any debt … obtained by … false pretenses, a false representation, or actual fraud."
