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In Re v. John Shart; Elke Gordon Schardt

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


April 2, 2013

IN RE:
JOHN SHART AND ELKE GORDON SCHARDT,
DEBTORS.
WENDY HAIG; GREG SADLER; SHOWCASE 81, LLC, APPELLANTS,
v.
JOHN SHART; ELKE GORDON SCHARDT, APPELLEES.

Appeal from the United States Bankruptcy Court for the Central District of California Honorable Barry Russell, Bankruptcy Judge, Presiding Bk. No. 10-29973-BR Adv. No. 10-02555-BR

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on March 22, 2013, at Pasadena, California

Filed - April 2, 2013

Before: PAPPAS, KIRSCHER and TAYLOR, Bankruptcy Judges.

Creditors Wendy Haig ("Ms. Haig"), Greg Sadler ("Mr. Sadler") and their company, Showcase 81, LLC (together, "Creditors") appeal that portion of the judgment of the bankruptcy court holding that Creditors' claims against chapter 7*fn2 debtor Elke Gordon-Schardt ("Ms. Schardt") were not excepted from discharge in her bankruptcy case under § 523(a)(2)(A). While we AFFIRM the bankruptcy court's determination that Ms. Schardt was not directly liable for fraud, we VACATE in part the bankruptcy court's judgment and REMAND the action to the bankruptcy court to consider whether Ms. Schardt's spouse's fraud may be imputed to her.

FACTS

Ms. Haig and Mr. Sadler are a married couple who lived in Santa Fe, New Mexico. They are active equestrians, own horses, and participate in horse shows. Ms. Schardt is married to John Hans Shart ("Mr. Shart" and, together with Ms. Schardt, "Debtors"). Mr. Shart lives in Lynville, Tennessee; Ms. Schardt resides in Acton, California. Mr. Shart is the 100 percent owner of Malibu Equestrian Estates, Inc. ("MEE"). Mr. Shart and MEE operated a horse-related business under the business name Greystone Equestrian Center ("Greystone") in Lynville, Tennessee. The 85-acre parcel where Greystone operates is owned jointly by Mr. Shart and Ms. Schardt (the "Farm"). Ms. Schardt is an attorney with a law practice in Acton, California.

1 From 2002 through 2008, Creditors purchased horses from Shart 2 or MEE. Until early 2007, all of the purchased horses were 3 boarded at facilities in New Mexico not affiliated with Mr. Shart 4 or MEE.

5 Ms. Haig and Mr. Shart developed both a business relationship 6 and friendship from 2002 through 2008. Ms. Haig would purchase 7 horses and rely on Mr. Shart for training advice. They met 8 socially, with Ms. Haig occasionally staying at Greystone. 9 Even in the early period of their relationship, there was 10 considerable confusion over Mr. Shart's billing for the purchase 11 and care of Creditors' horses. On or about November 22, 2006, 12 Ms. Haig sent Mr. Shart a letter, listing payments she had made to 13 Mr. Hart or MEE between May 2005 and September 2006 totaling 14 $1,849,000.00, alleging that the payments were a combination of 15 purchases and loans, and asking Mr. Shart's help in identifying 16 the purpose of each payment.

17 In February 2007, Ms. Haig and Mr. Shart attended a horse 18 show in Gulfport, Mississippi. While at the Gulfport show, 19 Ms. Haig agreed to have at least the majority of her horses 20 boarded and trained at Greystone. Between March 2007 and December 21 2008, Creditors boarded on average twenty to twenty-five horses at 22 Greystone.

23 On or about January 23, 2007, Ms. Haig allegedly purchased 24 two motor homes, paying $245,495.00 for the first ("Motor Home 1") 25 and $240,973.00 for the second ("Motor Home 2"). The purchases 26 were negotiated and implemented with the dealer by Mr. Shart. 27 Title to Motor Home 1 was placed in Ms. Haig's name, but title to 28 Motor Home 2 was placed in Mr. Shart's name. Ms. Haig would later 1 claim that she instructed Mr. Shart to place title to both motor 2 homes in her name.

3 In 2007, Mr. Shart constructed a barn to house some of 4 Creditors' horses (the "Barn") and to provide living quarters for 5 Ms. Haig during Greystone visits and to provide four suites for 6 grooms. It is disputed whether Mr. Shart or Ms. Haig provided the 7 funds for the Barn's construction. Ms. Haig also argued that 8 Mr. Shart promised to construct the Barn as an incentive for 9 Creditors to board the horses at Greystone.

10 On May 10, 2007, Jerry and Beverly Flowers recorded a deed 11 transferring a fourteen-acre parcel adjacent to the Farm to 12 Mr. Shart (the "Flowers Land"). Title was vested in Mr. Shart, 13 but the parties dispute whether Debtors or Creditors provided the 14 funds for the purchase of the Flowers Land, and whether title 15 should have been vested in Mr. Shart or Ms. Haig.

16 On September 14, 2007, Ms. Haig allegedly paid $162,250.43 17 for the purchase of a Kenworth truck. Mr. Shart negotiated the 18 purchase with the dealer. Title to the truck was placed in the 19 name of Greystone. In her testimony, Ms. Haig alleged that, 20 although she authorized Mr. Shart to negotiate the purchase of the 21 truck, she expressly instructed him to title the truck in her 22 name.

23 Between 2007 and 2009, there were continuing disputes between 24 Debtors and Creditors regarding boarding fees, documentation on 25 invoices, and the authority of Mr. Shart to sell horses stabled by 26 Creditors at Greystone. In one instance, two of Creditors' horses 27 were sold by Mr. Shart on December 18, 2008. Ms. Haig was present 28 and objected to the sale. Given the parties' escalating 1 disagreements, on January 7-9, 2009, Creditors' representatives 2 traveled to the Farm to pick up the remaining horses. Mr. Shart 3 demanded payment from Creditors of alleged and disputed arrearages 4 before releasing the horses, and eventually ordered Creditors' 5 representatives to leave without recovering the horses. 6 On February 9, 2009, Creditors sued Mr. Shart, Ms. Schardt, 7 and MEE in state court. Haig v. Shart, dkt. no. 4394 (Chancery 8 Ct., Giles Cnty., Tennessee, February 9, 2009). The complaint 9 alleged that the defendants made multiple misrepresentations to 10 Creditors regarding the acquisition and sale of horses, and that 11 there were disputed expenses for trade shows, construction costs, 12 real estate, personal property acquisitions, and other matters 13 related to the defendants' activities on behalf of Creditors.

14 Notably, the complaint focused on the actions of Mr. Shart, and 15 only sought recovery against Ms. Schardt for "unjust enrichment." 16 On March 9, 2009, the Tennessee Chancery Court entered an Agreed 17 Temporary Injunction, prohibiting Debtors from selling any 18 additional horses or personal property owned by Creditors, 19 including the Kenworth truck.

20 Creditors' representatives returned to the Farm on March 5, 21 2009, to remove the remaining horses and personal property of 22 Creditors. Mr. Shart permitted them to remove eleven horses and 23 some other items of property.

24 By April 2009, Creditors had determined that at least five of 25 their horses were still stabled at Greystone. The state court 26 entered an order granting Creditors possession of the horses, 27 their request for injunctive relief, and authorization to inspect 28 the Greystone premises. The bankruptcy court would ultimately 1 find that Creditors never recovered seven of their horses.

2 In November 2009, Mr. Shart sold the Kenworth truck to MHC 3 Kenworth for $80,000.

4 Debtors filed a chapter 11 petition in the Central District 5 of California on May 18, 2010. Debtors indicated in their 6 schedule A that they owned the Barn and the Flowers Land. 7 Schedule F listed a disputed, contingent, and unliquidated debt to 8 Creditors for $1 million. On September 21, 2010, the bankruptcy 9 court converted Debtors' case to a chapter 7 case, and a trustee 10 was appointed.

11 Creditors filed a proof of claim in the bankruptcy case on 12 January 21, 2011, in the amount of $2,600,000. Debtors objected 13 to the claim on June 3, 2011, arguing that they did not owe the 14 money.

15 Meanwhile, on August 23, 2010, Creditors filed an adversary 16 proceeding against Debtors. As amended on March 9, 2011, 17 Creditors' complaint alleged that Debtors made misrepresentations 18 to Creditors with the intent of deceiving them into paying $1.1 19 million to construct the Barn and purchase the Flowers Land, among 20 other things, and that this debt should be excepted from discharge 21 under § 523(a)(2)(A). The complaint further alleged that Debtors 22 had engaged in fraud or defalcations as fiduciaries related to the 23 $1.1 million, and that the debt should be excepted from discharge 24 under § 523(a)(4). Finally, the complaint asserted that Debtors 25 willfully, maliciously, and intentionally injured the Creditors 26 and converted their property and the resulting debt should be 27 excepted from discharge under § 523(a)(6). In an answer filed on 28 April 6, 2011, Debtors generally disputed these allegations.

1 On December 29, 2011, the bankruptcy court approved the 2 parties' Joint Pretrial Order both setting forth undisputed facts 3 (which are incorporated in this factual discussion), and outlining 4 the disputed issues of fact and law.

5 Over several months, the bankruptcy court conducted a 6 five-day consolidated trial concerning Debtors' objection to 7 Creditors' claim, and Creditors § 523(a) complaint, which 8 concluded on July 25, 2012. In addition to the documentary 9 evidence submitted by the parties, the bankruptcy court heard 10 testimony from numerous witnesses, including Ms. Haig, Mr. Sadler, 11 Mr. Shart and Ms. Schardt.

12 After listening to the parties' closing arguments, the 13 bankruptcy court orally announced its decision. In part, the 14 court stated that Mr. Shart's "credibility, quite frankly, is zero 15 as far as I'm concerned. . . . It was clear to me that he will 16 say and did say at any time in this case what he wanted to." 17 Trial Tr. 101:14-23, July 25, 2012. The court then concluded that 18 it agreed with all arguments made by Creditors that Mr. Shart had 19 intentionally made false statements to Haig. Trial Tr. 102:1-2. 20 The court examined each component of Creditor's claim, ruling 21 which components would be allowed, which would be excepted from 22 discharge, and which would not.

23 As to Creditors' § 523(a) claims against Ms. Schardt, the 24 bankruptcy court concluded that she had not been actively involved 25 in the fraudulent behavior and representations of Mr. Shart: 26 "Other than let's say at the end helping with e-mails and things, 27 I don't think she had anything to do with the actual transactions 28 which are the basis for the claims as well as nondischargeability." Trial Tr. 100:21-25. Having concluded that she had nothing to do with the false representations or fraudulent activity of Mr. Shart, the bankruptcy court determined that Creditors' claims against her would not be excepted from discharge. In particular, as to Creditors' arguments that Ms. Schardt could be held liable because a spouse's fraud can be imputed to the other spouse under principles of agency and partnership, the court ruled "I don't think there's any imputation[.]" Trial Tr. 100:3-4. The court provided no explanation and made no findings to support that ruling, except to question the correctness of the Panel's decision in Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515 (9th Cir. BAP 2002) (Tsurukawa II).

On September 13, 2012, the bankruptcy court entered a judgment in favor of Creditors and against Mr. Shart for $860,726.43 as a debt excepted from discharge under § 523; although the judgment did not specify which subsection of that statute applied. The judgment also declared that Creditors' claims against Ms. Schardt were discharged.*fn3 Creditors filed a timely appeal on September 27, 2012, challenging only that part of the Judgment holding that their claims against Ms. Schardt were not excepted from discharge.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 1 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUES

3 Whether the bankruptcy court erred in ruling that Ms. Schardt 4 was not directly liable for fraud. 5 Whether the bankruptcy court erred in deciding that 6 Mr. Shart's liability to Creditors for fraud should not be imputed 7 to Ms. Schardt for purposes of § 523(a)(2)(A).

8 STANDARDS OF REVIEW

9 Whether a claim is excepted from discharge under 10 § 523(a)(2)(A) presents mixed issues of law and fact which we 11 review de novo. Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 12 826 (9th Cir. 2001). We review the bankruptcy court's findings of 13 fact for clear error. Honkanen v. Hopper (In re Honkanen), 14 446 B.R. 373, 378 (9th Cir. BAP 2011). Clear error is found when 15 the reviewing court has a definite and firm conviction that a 16 mistake has been committed. Lewis v. Ayers, 681 F.3d 992, 998 17 (9th Cir. 2012). De novo review requires the Panel to 18 independently review an issue, without giving deference to the 19 bankruptcy court's conclusions. See Cal. Franchise Tax Bd. v. 20 Wilshire Courtyard (In re Wilshire Courtyard), 459 B.R. 416, 423 21 (9th Cir. BAP 2011) (citing First Ave. W. Bldg., LLC v. James 22 (In re Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006)).

23 DISCUSSION

I.

25 The bankruptcy court did not err in ruling that Ms. Schardt was not directly liable for fraud under 26 § 523(a)(2)(A). 27 28 At the hearing in this appeal, counsel for Creditors seemed 1 to concede that Creditors were not challenging the bankruptcy 2 court's ruling that Ms. Schardt had not directly engaged in any 3 fraud. In the event the Panel is incorrect in this assumption, 4 however, we affirm the bankruptcy court's conclusion that 5 Ms. Schardt did not have direct liability for fraud. 6 This appeal has been characterized by a high degree of 7 imprecision. Creditors' complaint sought exceptions to discharge 8 for the full amount of their claims against both Mr. Shart and 9 Ms. Schardt under § 523(a)(2)(A), (a)(4) and (a)(6). In trial 10 argument and post-trial briefing, the parties continued to dispute 11 all three subsections of § 523. However, the bankruptcy court's 12 judgment simply excepted from discharge Creditors' claim against 13 Mr. Shart personally under "§ 523", with no reference to the 14 subsections. Because in its ruling the court did not discuss 15 Debtors' fiduciary duties, embezzlement, nor willful and malicious 16 conduct, but rather focused on Mr. Shart's misrepresentations and 17 fraud, we assume that the bankruptcy court's judgment granted the 18 exception to discharge against Mr. Shart under § 523(a)(2)(A).

19 This assumption is buttressed in Creditors' briefs. They 20 focus their argument on appeal on whether the bankruptcy court 21 erred in not imputing the fraud of Mr. Shart to Ms. Schardt based 22 on this Panel's rulings in Tsurukawa II. Tsurukawa II, discussed 23 below, deals solely with imputing fraud to a spouse under 24 § 523(a)(2)(A). Since Creditors included no arguments on appeal 25 relating to Ms. Schardt's fiduciary duties, embezzlement, or 26 willful and malicious conduct, we assume in this section that 27 Creditors challenge only the bankruptcy court's ruling that there 28 was no active involvement by Ms. Schardt in Mr. Shart's 1 misrepresentations and fraud under § 523(a)(2)(A).

2 Section 523(a)(2)(A) provides that: "A discharge . . . does 3 not discharge an individual debtor from any debt . . . (2) for 4 money, property, services, or an extension, renewal, or 5 refinancing of credit, to the extent obtained, by -- (A) false 6 pretenses, a false representation, or actual fraud[.]" To 7 demonstrate to the bankruptcy court that a debt should be excepted 8 from discharge under § 523(a)(2)(A), a creditor must prove five 9 elements: (1) misrepresentation, fraudulent omission or deceptive 10 conduct by the debtor; (2) knowledge of the falsity or 11 deceptiveness of his statement or conduct; (3) an intent to 12 deceive; (4) justifiable reliance by the creditor on the debtor's 13 statement or conduct; and (5) damage to the creditor proximately 14 caused by its reliance on the debtor's statement or conduct. 15 Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 16 2010); Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 35 (9th 17 Cir. BAP 2009).

The creditor bears the burden of proving all five 18 elements by a preponderance of the evidence. Grogan v. Garner, 19 498 U.S. 279, 291 (1991); In re Weinberg, 410 B.R. at 35. 20 The bankruptcy court heard testimony from Ms. Haig that 21 Ms. Schardt never made a false representation to her about the 22 financial issues in question:

23 COUNSEL FOR DEBTORS: Did [Ms. Schardt] ever tell you anything that later turned out to be false? HAIG: Well, I doubted -- when she solicited me as her 25 client in the Merrill Lynch case, I doubted that she'd ever had an experience with Merrill Lynch, and she 26 stated she -- she had had cases before against Merrill Lynch.

THE COURT: But other than that, there was nothing that 28 you found out later was not true as far as you know? 1 Even that you apparently have some question about? 2 HAIG: I have some question about that comment. 3 THE COURT: But other than that? 4 HAIG: No, she didn't -- I don't think she -- I don't know. It was mostly just conversations.

THE COURT: Okay.

7 Trial Tr. 83:16--84:4, April 26, 2012. 8 Since we review the bankruptcy court's factual findings for 9 clear error, and because the record includes Ms. Haig's testimony 10 that Ms. Schardt made no false representations to her, the 11 bankruptcy court did not err in concluding that Creditors had not 12 established the elements required for exception to discharge under 13 § 523(a)(2)(A), and instead concluding that "I don't think she had 14 anything to do with the actual transactions which are the basis 15 for the claims as well as nondischargeability." Trial Tr. 100:22- 16 25.

17 We therefore AFFIRM the bankruptcy court's decision that 18 Ms. Shardt did not engage directly in any fraud.

II.

20 The bankruptcy court made inadequate findings to support its decision not to impute liability to Ms. Schardt for 21 the fraud of her spouse and, consequently, we must vacate the portion of the judgment regarding her and 22 remand for findings consistent with this Panel's holdings in Tsurukawa.

24 The second imprecision in this appeal concerns the bankruptcy 25 court's ruling that "I don't think there's any imputation" of 26 Mr. Shart's fraudulent behavior to his spouse, Ms. Schardt. The 27 bankruptcy court had been given extensive briefing from the 28 parties concerning the Panel's published opinion in Tsurukawa II, 1 where it held that, even in the absence of any direct fraud, 2 imputation of liability was possible in a § 523(a)(2)(A) 3 proceeding where the court finds a partnership or agency 4 relationship existed between the spouses. 287 B.R. at 527. Based 5 on our review of the record, evidence was produced by Creditors 6 which may provide a basis for imputing such liability. Despite 7 this, the bankruptcy court made no findings to support its 8 conclusion that imputation was not appropriate in this case. This 9 is problematic.

10 Rather than make specific findings based on Tsurukawa or 11 address any of the arguments on imputed liability presented by 12 both parties, the bankruptcy court simply ruled that "the BAP got 13 it wrong." This is not a finding of fact. Simeonoff v. Hiner, 14 249 F.3d 883, 891 (9th Cir. 2001) (unsupported conclusory 15 statements not findings). Even if, in making this statement, the 16 bankruptcy court decided that it was not required to follow 17 Tsurukawa II, this Panel is bound to follow and enforce its own 18 published decisions in subsequent appeals. In re Sierra Pac. 19 Broadcasters, 185 B.R. 575, 577 n.7 (9th Cir. BAP 1995). We 20 therefore turn our attention once again to the Tsurukawa 21 decisions. Doing so, we conclude we must vacate the portion of 22 the court's judgment regarding Ms. Schardt and remand for 23 reconsideration of whether she was involved in a partnership or 24 agency relationship with Mr. Shart such that his fraudulent 25 behavior should be imputed to Ms. Schardt for the purposes of 26 exception to discharge under § 523(a)(2)(A).

27 The Panel issued two Tsurukawa decisions. In Tsurukawa v. 28 Nikon Precision, Inc. (In re Tsurukawa), 258 B.R. 192 (9th Cir. 1 BAP 2001) (Tsurukawa I), it addressed the exception from discharge 2 of a $2 million stipulated judgment debt against the debtor under 3 § 523(a)(2)(A), based on imputed liability for fraud committed by 4 the debtor's husband. We held that "a marital union alone, 5 without a finding of a partnership or other agency relationship 6 between spouses, cannot serve as a basis for imputing fraud from 7 one spouse to the other." Id. at 198. However, in Tsurukawa I 8 the Panel only inferentially decided whether, based on a finding 9 that an agency or partnership relationship existed between 10 spouses, such a finding would support an exception to discharge.

11 Id. That question was settled affirmatively in Tsurukawa II, 12 287 B.R. at 519 ("In a § 523(a)(2)(A) action, one spouse's fraud 13 may be imputed to the other spouse under agency principles when, 14 as in this case, they are also business partners.").

15 The Tsurukawa I panel surveyed the case law regarding 16 imputation of fraud in bankruptcy cases, observing that early 17 Supreme Court cases were reluctant to impute fraud. Tsurukawa I, 18 258 B.R. at 196 (discussing Neal v. Clark, 95 U.S. 704, 704 19 (1877)). In the Clark decision, the Supreme Court interpreted 20 bankruptcy law excepting debts for fraud as targeting a debtor's 21 actual or positive fraud, not fraud implied in law. Clark, 22 95 U.S. at 709. Because the debtor did not directly cause the 23 fraud, he was entitled to a discharge of that debt. Id. 24 However, in Strang v. Bradner, 114 U.S. 555 (1885), the 25 Supreme Court imputed fraud committed by one partner to other 26 partners. Id. at 560-561. In Strang, the debtors and the 27 wrongdoer were partners. The Supreme Court held that because 28 there was a partnership relationship with the debtors, and because 1 the wrongdoing involved a partnership transaction, the wrongdoing 2 of a partner was properly imputed to the partners, that is, the 3 debtors.

4 Relying on Strang, various courts have imputed the fraudulent 5 conduct of one partner to another in bankruptcy situations. In 6 BancBoston Mortg. Corp. v. Ledford (In re Ledford), 970 F.2d 1556 7 (6th Cir. 1992), the court, citing Strang, held that the wrongful 8 acts of a partner were imputed to an innocent partner for purposes 9 of § 523(a)(2)(A) when (1) the debtor was a partner, (2) the 10 debtor's partner committed fraud while acting on behalf of the 11 partnership in the ordinary course of business, and (3) the 12 debtor/partner reaped the monetary benefits of the unlawful 13 conduct. Id. at 1561.

14 The Fifth Circuit reached a similar conclusion in Luce v. 15 First Equip. Leasing Corp. (In re Luce), 960 F.2d 1277 (5th Cir. 16 1992)(per curiam). In Luce, the court held that a debtor is 17 liable for a debt incurred by the deception of his spouse/partner 18 if the debtor benefited monetarily from such deception. Id. at 19 1283. Indeed, the court viewed "the imputation issue as one about 20 business partners" and stated that "the concepts of law we employ 21 do not turn on the nature of the marital relationship, but on the 22 nature of the business relationship between the [business 23 partners]." Id. at 1284 n.10. But also see Allison v. Roberts 24 (In re Allison), 960 F.2d 481 (5th Cir. 1995), where the Fifth 25 Circuit refused to impute fraud to an innocent spouse where there 26 was "no basis for applying the agency fraud theory." Id. at 486. 27 Importantly, the Ninth Circuit, in La Trattoria, Inc. v. 28 Lansford (In re Lansford), 822 F.2d 902 (9th Cir. 1987), in dicta 1 has stated that if it were "to rely on strict agency or 2 partnership principles," it might have been forced to conclude 3 that a spouse who was not directly liable for fraud was liable for 4 her husband's fraud. Id. at 904-05.

5 The year after Tsurukawa I was decided, the Panel decided 6 Tsurukawa II.*fn4 In its opinion, the Panel expressly adopted the 7 rule that fraud may be imputed to a spouse under partnership/ 8 agency principles in a § 523(a)(2)(A) action. The Panel's ruling 9 has since been accepted both within and outside the Ninth Circuit. 10 Hawkins v. Franchise Tax Bd. (In re Hawkins), 430 B.R. 225, 239 11 n.25 (Bankr. N.D. Cal. 2010) (citing Tsurukawa II for the 12 proposition that, "One spouse can be vicariously liable for bad 13 acts of the other spouse committed in furtherance of a business 14 partnership including both spouses."), aff'd 447 B.R. 191 (N.D. 15 Cal. 2011); Stevens v. Antonious (In re Antonious), 358 B.R. 172, 16 185 (Bankr. E.D. Pa. 2006) (extensively quoting from Tsurukawa II 17 in adopting the rule); In re Banke, 275 B.R. 317, 329 (Bankr. N.D.

1 Iowa 2002) ("If a husband and wife are partners in a business, 2 separate from the marital relationship, both may be held 3 responsible for the fraudulent acts of one of them."). 4 The teachings of Tsurukawa II can be summarized in three 5 principles:

6 First, marriage alone is not sufficient to impute fraud from 7 one spouse to another. A business partnership between a debtor 8 and spouse for denial of discharge purposes exists where "the 9 debtor assumed an active role in the [spouse's business] that goes 10 beyond merely holding a community property interest in [the 11 spouse's] business and performing minor services in that 12 business." Tsurukawa II, 287 B.R. at 521.

13 Second, "fraud may be imputed to a spouse under 14 agency/partnership principles in a § 523(a)(2)(A) action." Id. at 15 525. Whether an agency or partnership sufficient to justify 16 imputation of fraud to a spouse exists is a question to fact to be 17 decided under state law. California law applies in this case. A 18 California partnership is "an association of two or more persons 19 to carry on as co-owners a business for profit." CAL. CORP. CODE 20 § 16101(7) (2013). Whether parties have entered into a 21 partnership relationship, rather than some other form of 22 relationship, is a question of fact "to be determined by the trier 23 of fact from the evidence and inferences to be drawn therefrom" 24 and depends on whether they intended to share in the profits, 25 losses and the management and control of the enterprise. See Bank 26 of Cal. v. Connolly, 36 Cal. App. 3d 350, 364 (Cal. Ct. App. 27 1973); Nelson v. Abraham, 177 P.2d 931, 933 (Cal. 1947). Property 28 co-ownership of any sort, as well as profit-sharing, are factors 1 which tend to establish partnership. But see Holmes v. Lerner, 88 2 Cal. Rptr. 2d 130, 138 (Cal. Ct. App. 1999) (holding that sharing 3 of profits is one evidence of partnership, but not a required 4 element).

5 Each partner is an agent of the partnership for the purpose 6 of its business. CAL. CORP. CODE 16301(a) (2013). Each partner 7 acts as principal for himself or herself and as agent for the 8 co-partners in the transaction of partnership business. Tufts v. 9 Mann, 2 P.2d 500, 503 (Cal. 1931). In addition, "a general 10 partner's liability is the same as that of a principal for the 11 fraud of his agent while acting within the scope of his 12 authority." Pearson v. Norton, 230 Cal. App. 2d 1, 14-15 (Cal. 13 Ct. App. 1964) (finding partner-wife liable for partner-husband's 14 fraud in sale of partnership property).

15 Third, it is not necessary to prove "any knowledge on the 16 'innocent' debtor's part of the fraudulent conduct" for imputed 17 liability purposes. Id. at 525. Of course, if the debtor 18 participated directly in the spouse's fraud, that could be grounds 19 for finding direct liability rather than imputed liability. Id. 20 at 527.

21 In this case, evidence was presented which the bankruptcy 22 court could review in determining the existence of an agency or 23 partnership between Debtors sufficient to impute liability for the 24 fraudulent actions of Mr. Shart to Ms. Schardt. For example, the 25 evidence showed that: (1) Ms. Schardt may have prepared and mailed 26 allegedly fraudulent accounting statements to Ms. Haig (testimony 27 of John Sharp, an assistant to Ms. Haig and former vice 28 president/general manager with Hilton International);

1 (2) Ms. Schardt may have maintained one bank account and check 2 register for Mr. Shart's business and assisted in preparation of 3 tax returns (testimony of Ms. Schardt); (3) Ms. Schardt may have 4 made handwritten notes on billing disputes with Creditors and 5 forwarded them to Mr. Shart (testimony of Ms. Schardt);

6 (4) Ms. Schardt may have reviewed and edited Mr. Shart's responses 7 to the billing disputes (testimony of Ms. Schardt); 8 (5) Ms. Schardt may have directed her bookkeeper to ignore 9 Ms. Haig's complaints about her bills (testimony of Ms. Schardt); 10 (6) Ms. Schardt may have provided advice to Mr. Shart in his 11 negotiations with Ms. Haig (deposition of Ms. Haig); 12 (7) Ms. Schardt may have prepared some of the bills sent to 13 Ms. Haig (deposition of John Sharp); (8) Ms. Schardt signed 14 letters on Greystone letterhead relating to Greystone business 15 matters.*fn5

1 All of the points noted above were referenced in testimony 2 and other evidence at trial. Of course, evaluating the weight to 3 be assigned to such evidence is the province of the bankruptcy 4 court. See Groves v. Pickett, 420 F.2d 1119, 1126 (9th Cir. 1970) 5 ("Invading the extremely delicate area of passing on the 6 credibility of witnesses is not our function."). Perhaps, in this 7 case, the bankruptcy court considered these points and discounted 8 them. But on this record, we simply cannot know.

9 Findings must be made and sufficiently explicit to provide 10 the appellate court with an understanding of the basis of the 11 trial court's decision and the grounds upon which the trial court 12 reached that decision. Keane v. Comm'r of Internal Revenue, 13 865 F.2d 1088, 1091 (9th Cir. 1989). If the findings are so 14 conclusory or incomplete that the appellate court is unable to 15 review them "in the light of the evidence in the record and 16 applicable legal principles," the appellate court must remand to 17 the trial court to make the missing findings. Sumner v. San Diego 18 Urban League, Inc., 681 F.2d 1140, 1142 (9th Cir. 1982). 19 While the bankruptcy court's oral comments at the conclusion 20 of the trial adequately evidence its finding that Ms. Schardt did 21 not engage in direct, active fraud, they do not sufficiently 22 address whether a partnership or agency relationship may have 23 existed between the spouses here so as to justify imputation of 1 liability for the fraud of Mr. Shart to her. We are therefore 2 left with one option: we must VACATE that portion of the judgment 3 that determined that Ms. Schardt's debts to Creditors were 4 discharged and REMAND this action to the bankruptcy court for 5 consideration of, and the entry of, fact findings whether she was 6 involved in a partnership or agency relationship with Mr. Shart 7 such that his fraudulent behavior should be imputed to Ms. Schardt 8 for the purposes of exception to discharge under § 523(a)(2)(A) as 9 set forth in Tsurukawa I and Tsurukawa

II. CONCLUSION

11 We AFFIRM that portion of the bankruptcy court's decision 12 concluding that Ms. Schardt did not directly engage in any 13 fraudulent conduct. However, because Mr. Shart's fraud may be 14 imputed to her, we VACATE that portion of the judgment relating to 15 Ms. Schardt and REMAND this action to the bankruptcy court for 16 further proceedings consistent with this decision.


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