FILED
APR 02 2013
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-12-1495-PaKiTa
)
6 JOHN SHART and ELKE GORDON SCHARDT,) Bk. No. 10-29973-BR
)
7 Debtors. ) Adv. No. 10-02555-BR
___________________________________)
8 )
WENDY HAIG; GREG SADLER; SHOWCASE )
9 81, LLC, )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 JOHN SHART; ELKE GORDON SCHARDT, )
)
13 Appellees. )
___________________________________)
14
Argued and Submitted on March 22, 2013,
15 at Pasadena, California
16 Filed - April 2, 2013
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Barry Russell, Bankruptcy Judge, Presiding
19
20 Appearances: Jesse Sequoia Finlayson of Finlayson Williams
Toffer Roosevelt & Lilly LLP argued for appellants
21 Wendy Haig, Greg Sadler, and Showcase 81, LLC;
Elke Gordon Schardt argued for appellees John Shart
22 and Elke Gordon Schardt.
23
Before: PAPPAS, KIRSCHER and TAYLOR, Bankruptcy Judges.
24
25
26
1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may have
(see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28 Cir. BAP Rule 8013-1.
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1 Creditors Wendy Haig (“Ms. Haig”), Greg Sadler (“Mr. Sadler”)
2 and their company, Showcase 81, LLC (together, “Creditors”) appeal
3 that portion of the judgment of the bankruptcy court holding that
4 Creditors’ claims against chapter 72 debtor Elke Gordon-Schardt
5 (“Ms. Schardt”) were not excepted from discharge in her bankruptcy
6 case under § 523(a)(2)(A). While we AFFIRM the bankruptcy court’s
7 determination that Ms. Schardt was not directly liable for fraud,
8 we VACATE in part the bankruptcy court’s judgment and REMAND the
9 action to the bankruptcy court to consider whether Ms. Schardt’s
10 spouse’s fraud may be imputed to her.
11 FACTS
12 Ms. Haig and Mr. Sadler are a married couple who lived in
13 Santa Fe, New Mexico. They are active equestrians, own horses,
14 and participate in horse shows.
15 Ms. Schardt is married to John Hans Shart (“Mr. Shart” and,
16 together with Ms. Schardt, “Debtors”). Mr. Shart lives in
17 Lynville, Tennessee; Ms. Schardt resides in Acton, California.
18 Mr. Shart is the 100 percent owner of Malibu Equestrian Estates,
19 Inc. (“MEE”). Mr. Shart and MEE operated a horse-related business
20 under the business name Greystone Equestrian Center (“Greystone”)
21 in Lynville, Tennessee. The 85-acre parcel where Greystone
22 operates is owned jointly by Mr. Shart and Ms. Schardt (the
23 “Farm”). Ms. Schardt is an attorney with a law practice in Acton,
24 California.
25
26 2
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Federal Rules of Civil Procedure are referred to as Civil
28 Rules.
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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
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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
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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
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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.
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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
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1 nondischargeability.” Trial Tr. 100:21-25. Having concluded that
2 she had nothing to do with the false representations or fraudulent
3 activity of Mr. Shart, the bankruptcy court determined that
4 Creditors’ claims against her would not be excepted from
5 discharge. In particular, as to Creditors’ arguments that
6 Ms. Schardt could be held liable because a spouse’s fraud can be
7 imputed to the other spouse under principles of agency and
8 partnership, the court ruled “I don’t think there’s any
9 imputation[.]” Trial Tr. 100:3-4. The court provided no
10 explanation and made no findings to support that ruling, except to
11 question the correctness of the Panel’s decision in Tsurukawa v.
12 Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515 (9th Cir.
13 BAP 2002) (Tsurukawa II).
14 On September 13, 2012, the bankruptcy court entered a
15 judgment in favor of Creditors and against Mr. Shart for
16 $860,726.43 as a debt excepted from discharge under § 523;
17 although the judgment did not specify which subsection of that
18 statute applied. The judgment also declared that Creditors’
19 claims against Ms. Schardt were discharged.3
20 Creditors filed a timely appeal on September 27, 2012,
21 challenging only that part of the Judgment holding that their
22 claims against Ms. Schardt were not excepted from discharge.
23 JURISDICTION
24 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
25
26 3
In their brief, Creditors note that, subsequent to entry
of the judgment on appeal, on October 29, 2012, the bankruptcy
27 court entered an order allowing the Creditors’ claim in the
bankruptcy case for $1,817,104.19 as “a community claim under
28 section 524(a)(3).” This order was not appealed.
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1 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
2 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
24 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
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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
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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?
24
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.
27
THE COURT: But other than that, there was nothing that
28 you found out later was not true as far as you know?
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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.
5
THE COURT: Okay.
6
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.
19 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.
23
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,
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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.
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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
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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
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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.4 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.
18
4
19 Tsurukawa I and II arose from the same bankruptcy case.
In Tsurukawa I, the bankruptcy court ruled that the debtor was
20 liable to creditor based on her knowing participation in, and
benefit from, the fraudulent business of her husband, but
21 declining to find either fraudulent intent or that she and her
husband were partners in the fraudulent business. On appeal, the
22 Panel reversed and remanded “for a determination as to whether
(1) an agency relationship existed between Debtor and [her
23 husband] or (2) Debtor had the requisite fraudulent intent to
deceive[.] Tsurukawa I, 258 B.R. at 197. On remand, the
24 bankruptcy court concluded that debtor and spouse “were business
partners, inferring their intent to create such a relationship
25 from their acts” and “found the existence of a principal-agent
relationship.” Tsurukawa II at 520. The Tsurukawa II panel
26 affirmed. Tsurukawa II, 287 B.R. at 521. The Panel agreed with
the bankruptcy court that the debtor “performed substantial
27 activities for the business . . . and assumed an active role in
[the company] that goes beyond merely holding a community property
28 interest in her husband’s business and performing minor services
for that business.” Id. at 522-23.
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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
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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 copartners 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);
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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.5
16
5
17 At the argument before the Panel, Ms. Schardt suggested
that some of her communications on behalf of her husband may have
18 been undertaken in her role as his attorney. We have carefully
examined the record before the bankruptcy court and find no
19 instance where either Ms. Schardt or Mr. Shart asserted such
argument to the bankruptcy court. Barring “exceptional
20 circumstances,” we will not review on appeal an issue not raised
in the bankruptcy court. Smith v. Arthur Anderson LLP, 421 F.3d
21 989, 1000 (9th Cir. 2005).
22 Moreover, we note that, in the bankruptcy court, Ms. Schardt
frequently denied that she had anything to do with her husband’s
23 business. When asked by counsel at trial whether she had given
him legal advice, she testified “not ever”:
24
Q: And even though you’re an attorney and you already
25 suspected litigation was likely, you didn’t feel any
need to counsel your husband in terms of how — what he
26 should say in [the letter of December 26].
27 SCHARDT: You didn’t know my husband. I don’t counsel my
husband what he says.
28 (continued...)
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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
24
25
5
(...continued)
26 Q: All right.
27 SCHARDT: Not ever.
28 Trial Tr. 100:23–101:4, May 3, 2012.
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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.
10 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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