A business divorce can be a long, painful process. Breaking off from fellow shareholders or partners could have significant legal, financial and emotional consequences. There might be moments where you consider walking away without finalizing an agreement to protect your interests. However, the failure to tie up loose ends with the assistance of an experienced attorney could come back to haunt you even after everyone has gone their separate ways.
The U.S. Supreme Court in Bartenwerfer v. Buckley was faced with a case involving a husband-and-wife partnership. David and Kate Bartenwerfer formed a legal entity to purchase, renovate and sell a house in San Francisco. From the outset, David handled the project, including the hiring of contractors, while Kate remained on the sidelines. Eventually, the Bartenwerfer partnership sold the home to Kieran Buckley.
Once Buckley purchased the residence, he found numerous significant defects that had not been disclosed to him. Subsequently, he won a verdict exceeding $200,000 in a lawsuit against the Bartenwerfers. This result, along with other debts, led the couple to file for Chapter 7 bankruptcy. Buckley sued, alleging that the debt to him should not be discharged, Section 523(a)(2)(A) of the Bankruptcy Code bars the discharge of “any debt… for money… to the extent obtained by… false pretenses, a false representation, or actual fraud.”
Kate Bartenwerfer argued that because she lacked knowledge of her partner’s misrepresentations, she should be not responsible for the debt to Buckley. However, in a unanimous decision authored by Justice Amy Coney Barrett, the Supreme Court held that a debtor cannot discharge a debt arising from a partner’s fraud—even if the debtor personally lacked knowledge or culpability.
Given this precedent, partners in the midst of a business divorce need to be aware of the possibility that they could face liability for acts that that they did not know about. You and your attorney might want to investigate your partner’s conduct and allocate responsibility in case a subsequent claim does arise.
About Finney Law Firm, LLC
Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation. FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.
FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.
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Media Contact: Mickey McClanahan; mickey@finneylawfirm.isoc.net; 513.797.2850.
