House flipper liable for partner’s fraud

A SCOTUS ruling issued today impacts some small business deals. This is a common arrangement when a general partnership is formed to invest in real estate.

A Supreme Court decision issued today in the Bartenwerfer case may be of interest to small business investors. A partnership among three people formed to purchase, remodel and sell a residential home went bad 18 years ago. One partner acted fraudulently without the other partners knowing. The partnership was sued for fraud and owed money on the resulting judgement. SCOTUS reversed the appeals court decision and upheld the financial responsibility for the debt of the partner, even after her personal bankruptcy.

At least three morales to this story:

1) some debts cannot be discharged in bankruptcy ,

2) ignorance is not bliss,

3) a general partnership is not the best way to invest in a deal like this, especially if your only contribution is financial.

21-908 Bartenwerfer v. Buckley (02/22/2023) (supremecourt.gov)

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