in re: john shart and elke gordon schardt, 9th cir. bap (2013)

7/25/2019 In re: John Shart and Elke Gordon Schardt, 9th Cir. BAP (2013)

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1 Thi s di sposi t i on i s not appr opr i at e f or publ i cat i on.Al t hough i t may be ci t ed f or whatever persuasi ve val ue i t may have( see Fed. R. App. P. 32. 1) , i t has no pr ecedent i al val ue. See 9t hCi r . BAP Rul e 8013- 1.

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UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUITI n r e: ) BAP No. CC- 12- 1495- PaKi Ta

)J OHN SHART and ELKE GORDON SCHARDT, ) Bk. No. 10- 29973- BR

)Debt or s. ) Adv. No. 10- 02555- BR

___________________________________))

WENDY HAI G; GREG SADLER; SHOWCASE )81, LLC, )

)Appel l ant s, )

)

v. ) M E M O R A N D U M1)J OHN SHART; ELKE GORDON SCHARDT, )

)Appel l ees. )

___________________________________)

Ar gued and Submi t t ed on Mar ch 22, 2013,at Pasadena, Cal i f or ni a

Fi l ed - Apr i l 2, 2013

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Cent r al Di st r i ct of Cal i f or ni a

Honor abl e Bar r y Russel l , Bankrupt cy J udge, Pr esi di ng

Appear ances: J esse Sequoi a Fi nl ayson of Fi nl ayson Wi l l i amsTof f er Roosevel t & Li l l y LLP ar gued f or appel l ant sWendy Hai g, Gr eg Sadl er , and Showcase 81, LLC;El ke Gordon Schardt argued f or appel l ees J ohn Shartand El ke Gor don Schardt .

Bef ore: PAPPAS, KI RSCHER and TAYLOR, Bankr upt cy J udges.

FILEDAPR 02 2013

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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2 Unl ess ot her wi se i ndi cat ed, al l chapt er , sect i on and r ul er ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532, andt o the Feder al Rul es of Bankrupt cy Pr ocedur e, Rul es 1001- 9037.The Feder al Rul es of Ci vi l Pr ocedur e ar e r ef er r ed t o as Ci vi lRul es.

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Cr edi t or s Wendy Hai g ( Ms. Hai g) , Gr eg Sadl er ( Mr . Sadl er )

and t hei r company, Showcase 81, LLC ( t ogether , Cr edi t ors) appeal

t hat por t i on of t he j udgment of t he bankrupt cy cour t hol di ng t hat

Cr edi t or s cl ai ms agai nst chapt er 72 debt or El ke Gordon- Schardt

( Ms. Schar dt ) wer e not except ed f r om di schar ge i n her bankrupt cy

case under 523( a) ( 2) ( A) . Whi l e we AFFI RM t he bankrupt cy cour t s

det er mi nat i on t hat Ms. Schar dt was not di r ect l y l i abl e f or f r aud,

we VACATE i n par t t he bankrupt cy cour t s j udgment and REMAND t he

act i on t o t he bankrupt cy cour t t o consi der whet her Ms. Schar dt s

spouse s f r aud may be i mput ed t o her .

FACTS

Ms. Hai g and Mr . Sadl er ar e a mar r i ed coupl e who l i ved i n

Sant a Fe, New Mexi co. They are act i ve equest r i ans, own horses,

and par t i ci pat e i n hor se shows.

Ms. Schar dt i s mar r i ed t o J ohn Hans Shar t ( Mr . Shar t and,

t oget her wi t h Ms. Schar dt , Debt or s) . Mr . Shar t l i ves i n

Lynvi l l e, Tennessee; Ms. Schar dt r esi des i n Act on, Cal i f or ni a.

Mr . Shar t i s t he 100 per cent owner of Mal i bu Equest r i an Est at es,

I nc. ( MEE) . Mr . Shar t and MEE oper at ed a hor se- r el at ed busi ness

under t he busi ness name Gr eyst one Equest r i an Cent er ( Gr eyst one)

i n Lynvi l l e, Tennessee. The 85- acr e par cel wher e Gr eyst one

oper at es i s owned j oi nt l y by Mr . Shar t and Ms. Schar dt ( t he

Far m) . Ms. Schar dt i s an at t or ney wi t h a l aw pr act i ce i n Act on,

Cal i f orni a.


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Fr om2002 t hr ough 2008, Cr edi t or s pur chased hor ses f r om Shar t

or MEE. Unt i l ear l y 2007, al l of t he pur chased hor ses wer e

boar ded at f aci l i t i es i n New Mexi co not af f i l i at ed wi t h Mr . Shar t

or MEE.

Ms. Hai g and Mr . Shar t devel oped bot h a busi ness r el at i onshi p

and f r i endshi p f r om2002 t hr ough 2008. Ms. Hai g woul d pur chase

hor ses and r el y on Mr . Shar t f or t r ai ni ng advi ce. They met

soci al l y, wi t h Ms. Hai g occasi onal l y st ayi ng at Gr eyst one.

Even i n t he ear l y per i od of t hei r r el at i onshi p, t her e was

consi der abl e conf usi on over Mr . Shar t s bi l l i ng f or t he pur chase

and care of Cr edi t ors horses. On or about November 22, 2006,Ms. Hai g sent Mr . Shar t a l et t er , l i st i ng payment s she had made t o

Mr . Har t or MEE bet ween May 2005 and Sept ember 2006 t ot al i ng

$1, 849, 000. 00, al l egi ng t hat t he payment s were a combi nat i on of

pur chases and l oans, and aski ng Mr . Shar t s hel p i n i dent i f yi ng

t he pur pose of each payment .

I n Febr uary 2007, Ms. Hai g and Mr . Shart at t ended a horse

show i n Gul f por t , Mi ssi ssi ppi . Whi l e at t he Gul f por t show,

Ms. Hai g agr eed t o have at l east t he maj or i t y of her hor ses

boar ded and t r ai ned at Gr eyst one. Bet ween Mar ch 2007 and December

2008, Cr edi t or s boar ded on aver age t went y t o t went y- f i ve hor ses at

Gr eyst one.

On or about J anuary 23, 2007, Ms. Hai g al l egedl y pur chased

t wo motor homes, payi ng $245, 495. 00 f or t he f i r st ( Motor Home 1")

and $240, 973. 00 f or t he second ( Motor Home 2") . The pur chases

were negot i ated and i mpl ement ed wi t h t he deal er by Mr . Shart .

Ti t l e t o Mot or Home 1 was pl aced i n Ms. Hai g s name, but t i t l e t o

Motor Home 2 was pl aced i n Mr . Shar t s name. Ms. Hai g woul d l ater


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cl ai m t hat she i nst r uct ed Mr . Shar t t o pl ace t i t l e t o bot h mot or

homes i n her name.

I n 2007, Mr . Shart const r uct ed a barn to house some of

Cr edi t or s hor ses ( t he Bar n) and t o pr ovi de l i vi ng quar t er s f or

Ms. Hai g dur i ng Gr eyst one vi si t s and t o pr ovi de f our sui t es f or

gr ooms. I t i s di sput ed whet her Mr . Shar t or Ms. Hai g pr ovi ded t he

f unds f or t he Bar n s const r uct i on. Ms. Hai g al so ar gued t hat

Mr . Shar t pr omi sed t o const r uct t he Bar n as an i ncent i ve f or

Cr edi t or s t o boar d t he hor ses at Gr eyst one.

On May 10, 2007, J er r y and Bever l y Fl owers r ecor ded a deed

t r ansf er r i ng a f our t een- acre par cel adj acent t o t he Far m t oMr . Shar t ( t he Fl ower s Land) . Ti t l e was vest ed i n Mr . Shar t ,

but t he par t i es di sput e whet her Debt or s or Cr edi t or s pr ovi ded t he

f unds f or t he pur chase of t he Fl ower s Land, and whet her t i t l e

shoul d have been vest ed i n Mr . Shar t or Ms. Hai g.

On Sept ember 14, 2007, Ms. Hai g al l egedl y pai d $162, 250. 43

f or t he pur chase of a Kenwor t h t r uck. Mr . Shar t negot i at ed t he

pur chase wi t h t he deal er . Ti t l e t o t he t r uck was pl aced i n t he

name of Gr eyst one. I n her t est i mony, Ms. Hai g al l eged t hat ,

al t hough she aut hor i zed Mr . Shar t t o negot i at e t he pur chase of t he

t r uck, she expr essl y i nst r uct ed hi m t o t i t l e t he t r uck i n her

name.

Bet ween 2007 and 2009, t her e were cont i nui ng di sput es bet ween

Debt or s and Cr edi t or s r egar di ng boar di ng f ees, document at i on on

i nvoi ces, and t he aut hor i t y of Mr . Shar t t o sel l hor ses st abl ed by

Cr edi t or s at Gr eyst one. I n one i nst ance, t wo of Cr edi t or s hor ses

were sol d by Mr . Shar t on December 18, 2008. Ms. Hai g was pr esent

and obj ect ed t o t he sal e. Gi ven t he par t i es escal at i ng


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di sagr eement s, on J anuar y 7- 9, 2009, Cr edi t or s r epr esent at i ves

t r avel ed t o t he Far m t o pi ck up t he r emai ni ng hor ses. Mr . Shar t

demanded payment f r omCr edi t ors of al l eged and di sput ed arr ear ages

bef or e r el easi ng t he hor ses, and event ual l y or der ed Cr edi t or s

r epr esent at i ves t o l eave wi t hout r ecover i ng t he hor ses.

On Febr uar y 9, 2009, Cr edi t or s sued Mr . Shart , Ms. Schar dt ,

and MEE i n st at e cour t . Hai g v. Shar t , dkt . no. 4394 ( Chancer y

Ct . , Gi l es Cnt y. , Tennessee, Febr uar y 9, 2009) . The compl ai nt

al l eged t hat t he def endant s made mul t i pl e mi sr epr esent at i ons t o

Cr edi t or s r egar di ng t he acqui si t i on and sal e of hor ses, and t hat

t her e wer e di sput ed expenses f or t r ade shows, const r uct i on cost s,r eal est at e, per sonal pr oper t y acqui si t i ons, and ot her mat t er s

r el at ed t o t he def endant s act i vi t i es on behal f of Cr edi t or s.

Not abl y, t he compl ai nt f ocused on t he act i ons of Mr . Shar t , and

onl y sought r ecover y agai nst Ms. Schar dt f or unj ust enr i chment .

On March 9, 2009, t he Tennessee Chancery Cour t ent ered an Agreed

Tempor ar y I nj unct i on, prohi bi t i ng Debt or s f r om sel l i ng any

addi t i onal hor ses or per sonal pr oper t y owned by Cr edi t or s,

i ncl udi ng t he Kenwor t h t r uck.

Cr edi t or s r epr esent at i ves r et ur ned t o t he Far m on Mar ch 5,

2009, t o remove t he r emai ni ng horses and personal pr oper t y of

Cr edi t or s. Mr . Shar t per mi t t ed t hem t o r emove el even hor ses and

some ot her i t ems of pr oper t y.

By Apr i l 2009, Cr edi t or s had det er mi ned t hat at l east f i ve of

t hei r hor ses wer e st i l l st abl ed at Gr eyst one. The st at e cour t

ent er ed an or der gr ant i ng Cr edi t or s possessi on of t he hor ses,

t hei r r equest f or i nj unct i ve r el i ef , and aut hor i zat i on t o i nspect

t he Gr eyst one pr emi ses. The bankrupt cy cour t woul d ul t i mat el y


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f i nd t hat Cr edi t or s never r ecover ed seven of t hei r hor ses.

I n November 2009, Mr . Shar t sol d the Kenwor t h t r uck t o MHC

Kenwort h f or $80, 000.

Debt or s f i l ed a chapt er 11 pet i t i on i n t he Cent r al Di st r i ct

of Cal i f or ni a on May 18, 2010. Debt or s i ndi cat ed i n t hei r

schedul e A t hat t hey owned t he Barn and the Fl owers Land.

Schedul e F l i st ed a di sput ed, cont i ngent , and unl i qui dat ed debt t o

Cr edi t or s f or $1 mi l l i on. On Sept ember 21, 2010, t he bankrupt cy

cour t conver t ed Debt or s case t o a chapt er 7 case, and a t r ust ee

was appoi nt ed.

Cr edi t or s f i l ed a pr oof of cl ai m i n t he bankr upt cy case onJ anuar y 21, 2011, i n t he amount of $2, 600, 000. Debt or s obj ect ed

t o t he cl ai m on J une 3, 2011, ar gui ng t hat t hey di d not owe t he

money.

Meanwhi l e, on August 23, 2010, Cr edi t or s f i l ed an adver sary

proceedi ng agai nst Debt ors. As amended on March 9, 2011,

Cr edi t or s compl ai nt al l eged t hat Debt or s made mi sr epr esent at i ons

t o Cr edi t or s wi t h t he i nt ent of decei vi ng t hem i nt o payi ng $1. 1

mi l l i on t o const r uct t he Barn and pur chase t he Fl owers Land, among

ot her t hi ngs, and t hat t hi s debt shoul d be except ed f r om di schar ge

under 523( a) ( 2) ( A) . The compl ai nt f ur t her al l eged t hat Debt or s

had engaged i n f r aud or def al cat i ons as f i duci ar i es r el at ed t o t he

$1. 1 mi l l i on, and t hat t he debt shoul d be except ed f r om di schar ge

under 523( a) ( 4) . Fi nal l y, t he compl ai nt asser t ed t hat Debt or s

wi l l f ul l y, mal i ci ousl y, and i nt ent i onal l y i nj ur ed t he Cr edi t or s

and conver t ed t hei r pr oper t y and t he r esul t i ng debt shoul d be

except ed f r om di schar ge under 523( a) ( 6) . I n an answer f i l ed on

Apr i l 6, 2011, Debt or s gener al l y di sput ed t hese al l egat i ons.


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On December 29, 2011, t he bankrupt cy cour t approved the

par t i es J oi nt Pr et r i al Or der bot h set t i ng f or t h undi sput ed f act s

( whi ch ar e i ncor por at ed i n t hi s f act ual di scussi on) , and out l i ni ng

t he di sput ed i ssues of f act and l aw.

Over sever al mont hs, t he bankr upt cy cour t conduct ed a

f i ve- day consol i dat ed t r i al concer ni ng Debt or s obj ect i on t o

Cr edi t or s cl ai m, and Cr edi t or s 523( a) compl ai nt , whi ch

concl uded on J ul y 25, 2012. I n addi t i on t o t he document ar y

evi dence submi t t ed by the par t i es, t he bankrupt cy cour t hear d

t est i mony f r om numer ous wi t nesses, i ncl udi ng Ms. Hai g, Mr . Sadl er ,

Mr . Shar t and Ms. Schar dt .Af t er l i st eni ng t o t he par t i es cl osi ng ar gument s, t he

bankrupt cy cour t oral l y announced i t s deci si on. I n par t , t he

cour t st at ed t hat Mr . Shar t s cr edi bi l i t y, qui t e f r ankl y, i s zer o

as f ar as I m concer ned. . . . I t was cl ear t o me t hat he wi l l

say and di d say at any t i me i n t hi s case what he want ed t o.

Tr i al Tr . 101: 14- 23, J ul y 25, 2012. The cour t t hen concl uded t hat

i t agr eed wi t h al l ar gument s made by Cr edi t or s t hat Mr . Shar t had

i nt ent i onal l y made f al se st at ement s to Hai g. Tr i al Tr . 102: 1- 2.

The cour t exami ned each component of Cr edi t or s cl ai m, r ul i ng

whi ch components woul d be al l owed, whi ch woul d be except ed f r om

di schar ge, and whi ch woul d not .

As t o Cr edi t or s 523( a) cl ai ms agai nst Ms. Schar dt , t he

bankrupt cy cour t concl uded t hat she had not been act i vel y i nvol ved

i n t he f r audul ent behavi or and r epr esent at i ons of Mr . Shar t :

Ot her t han l et s say at t he end hel pi ng wi t h e- mai l s and t hi ngs,

I don t t hi nk she had anythi ng t o do wi t h t he act ual t r ansact i ons

whi ch ar e t he basi s f or t he cl ai ms as wel l as


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3 I n t hei r br i ef , Cr edi t or s not e t hat , subsequent t o ent r yof t he j udgment on appeal , on Oct ober 29, 2012, t he bankr upt cycour t ent er ed an or der al l owi ng t he Cr edi t or s cl ai m i n t hebankr upt cy case f or $1, 817, 104. 19 as a communi t y cl ai m undersect i on 524( a) ( 3) . Thi s or der was not appeal ed.

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nondi schar geabi l i t y. Tr i al Tr . 100: 21- 25. Havi ng concl uded t hat

she had not hi ng t o do wi t h t he f al se repr esent at i ons or f r audul ent

act i vi t y of Mr . Shar t , t he bankrupt cy cour t det er mi ned t hat

Cr edi t or s cl ai ms agai nst her woul d not be except ed f r om

di schar ge. I n par t i cul ar , as t o Cr edi t or s ar gument s that

Ms. Schar dt coul d be hel d l i abl e because a spouse s f r aud can be

i mput ed t o t he other spouse under pr i nci pl es of agency and

par t ner shi p, t he cour t r ul ed I don t t hi nk t her e s any

i mput at i on[ . ] Tr i al Tr . 100: 3- 4. The cour t pr ovi ded no

expl anat i on and made no f i ndi ngs t o suppor t t hat r ul i ng, except t o

quest i on t he cor r ect ness of t he Panel s deci si on i n Tsur ukawa v.Ni kon Pr eci si on, I nc. ( I n r e Tsur ukawa) , 287 B. R. 515 ( 9t h Ci r .

BAP 2002) ( Tsur ukawa I I ) .

On Sept ember 13, 2012, t he bankr upt cy cour t ent ered a

j udgment i n f avor of Cr edi t or s and agai nst Mr . Shar t f or

$860, 726. 43 as a debt except ed f r omdi schar ge under 523;

al t hough t he j udgment di d not speci f y whi ch subsect i on of t hat

st at ut e appl i ed. The j udgment al so decl ar ed t hat Cr edi t or s

cl ai ms agai nst Ms. Schar dt were di schar ged. 3

Cr edi t or s f i l ed a t i mel y appeal on Sept ember 27, 2012,

chal l engi ng onl y t hat par t of t he J udgment hol di ng t hat t hei r

cl ai ms agai nst Ms. Schar dt were not except ed f r om di schar ge.

JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on under 28 U. S. C. 1334


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and 157( b) ( 2) ( I ) . We have j ur i sdi ct i on under 28 U. S. C. 158.

ISSUES

Whether t he bankrupt cy cour t er r ed i n r ul i ng t hat Ms. Schar dt

was not di r ect l y l i abl e f or f r aud.

Whether t he bankrupt cy cour t er r ed i n deci di ng that

Mr . Shar t s l i abi l i t y t o Cr edi t or s f or f r aud shoul d not be i mput ed

t o Ms. Schar dt f or pur poses of 523( a) ( 2) ( A) .

STANDARDS OF REVIEW

Whet her a cl ai m i s except ed f r om di schar ge under

523( a) ( 2) ( A) pr esent s mi xed i ssues of l aw and f act whi ch we

r evi ew de novo. Di amond v. Kol cum ( I n r e Di amond) , 285 F. 3d 822,826 ( 9t h Ci r . 2001) . We r evi ew t he bankrupt cy cour t ' s f i ndi ngs of

f act f or cl ear er r or . Honkanen v. Hopper ( I n r e Honkanen) ,

446 B. R. 373, 378 ( 9t h Ci r . BAP 2011) . Cl ear er r or i s f ound when

t he r evi ewi ng cour t has a def i ni t e and f i r m convi ct i on t hat a

mi st ake has been commi t t ed. Lewi s v. Ayer s, 681 F. 3d 992, 998

( 9t h Ci r . 2012) . De novo r evi ew r equi r es t he Panel t o

i ndependent l y revi ew an i ssue, wi t hout gi vi ng def er ence t o the

bankrupt cy cour t ' s concl usi ons. See Cal . Fr anchi se Tax Bd. v.

Wi l shi r e Cour t yar d ( I n r e Wi l shi r e Cour t yar d) , 459 B. R. 416, 423

( 9t h Ci r . BAP 2011) ( ci t i ng Fi r st Ave. W. Bl dg. , LLC v. J ames

( I n r e Onecast Medi a, I nc. ) , 439 F. 3d 558, 561 ( 9t h Ci r . 2006) ) .

DISCUSSION

I.

The bankruptcy court did not err in ruling thatMs. Schardt was not directly liable for fraud under 523(a)(2)(A).

At t he hear i ng i n t hi s appeal , counsel f or Cr edi t or s seemed


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t o concede t hat Cr edi t or s wer e not chal l engi ng t he bankrupt cy

cour t s r ul i ng t hat Ms. Schar dt had not di r ect l y engaged i n any

f r aud. I n t he event t he Panel i s i ncor r ect i n t hi s assumpt i on,

however , we af f i r m t he bankrupt cy cour t s concl usi on t hat

Ms. Schar dt di d not have di r ect l i abi l i t y f or f r aud.

Thi s appeal has been char act er i zed by a hi gh degree of

i mpr eci si on. Cr edi t or s compl ai nt sought except i ons to di schar ge

f or t he f ul l amount of t hei r cl ai ms agai nst bot h Mr . Shar t and

Ms. Schar dt under 523( a) ( 2) ( A) , ( a) ( 4) and ( a) ( 6) . I n t r i al

ar gument and post - t r i al br i ef i ng, t he par t i es cont i nued t o di sput e

al l t hr ee subsect i ons of 523. However , t he bankrupt cy cour t sj udgment si mpl y excepted f r om di schar ge Cr edi t or s cl ai m agai nst

Mr . Shar t per sonal l y under 523, wi t h no r ef er ence t o t he

subsect i ons. Because i n i t s r ul i ng t he cour t di d not di scuss

Debt or s f i duci ar y dut i es, embezzl ement , nor wi l l f ul and mal i ci ous

conduct , but r at her f ocused on Mr . Shar t s mi sr epr esent at i ons and

f r aud, we assume that t he bankr upt cy cour t s j udgment gr ant ed t he

except i on t o di schar ge agai nst Mr . Shar t under 523( a) ( 2) ( A) .

Thi s assumpt i on i s but t r essed i n Cr edi t or s br i ef s. They

f ocus t hei r argument on appeal on whether t he bankr upt cy cour t

er r ed i n not i mput i ng t he f r aud of Mr . Shar t t o Ms. Schar dt based

on t hi s Panel s rul i ngs i n Tsur ukawa I I . Tsur ukawa I I , di scussed

bel ow, deal s sol el y wi t h i mput i ng f r aud t o a spouse under

523( a) ( 2) ( A) . Si nce Cr edi t or s i ncl uded no ar gument s on appeal

r el at i ng t o Ms. Schar dt s f i duci ar y dut i es, embezzl ement , or

wi l l f ul and mal i ci ous conduct , we assume i n t hi s sect i on t hat

Cr edi t or s chal l enge onl y t he bankrupt cy cour t s r ul i ng t hat t her e

was no act i ve i nvol vement by Ms. Schar dt i n Mr . Shar t s


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mi sr epr esent at i ons and f r aud under 523( a) ( 2) ( A) .

Sect i on 523( a) ( 2) ( A) pr ovi des t hat : "A di schar ge . . . does

not di schar ge an i ndi vi dual debt or f r om any debt . . . ( 2) f or

money, pr oper t y, servi ces, or an extensi on, r enewal , or

r ef i nanci ng of credi t , t o t he ext ent obt ai ned, by ( A) f al se

pr et enses, a f al se r epr esent at i on, or actual f r aud[ . ] " To

demonst r ate t o t he bankr upt cy cour t t hat a debt shoul d be except ed

f r om di schar ge under 523( a) ( 2) ( A) , a cr edi t or must pr ove f i ve

el ement s: ( 1) mi sr epr esent at i on, f r audul ent omi ssi on or decept i ve

conduct by the debt or ; ( 2) knowl edge of t he f al si t y or

decept i veness of hi s st at ement or conduct ; ( 3) an i nt ent t odecei ve; ( 4) j ust i f i abl e r el i ance by t he credi t or on t he debt or ' s

st at ement or conduct ; and (5) damage t o t he credi t or pr oxi mat el y

caused by i t s r el i ance on t he debt or ' s st at ement or conduct .

Ghomeshi v. Sabban ( I n r e Sabban) , 600 F. 3d 1219, 1222 ( 9t h Ci r .

2010) ; Oney v. Wei nber g ( I n re Wei nber g) , 410 B. R. 19, 35 (9t h

Ci r . BAP 2009) . The cr edi t or bear s t he bur den of pr ovi ng al l f i ve

el ement s by a pr eponderance of t he evi dence. Gr ogan v. Garner ,

498 U. S. 279, 291 ( 1991) ; I n r e Wei nberg, 410 B. R. at 35.

The bankrupt cy cour t hear d t est i mony f r om Ms. Hai g t hat

Ms. Schardt never made a f al se r epr esent at i on t o her about t he

f i nanci al i ssues i n quest i on:

COUNSEL FOR DEBTORS: Di d [Ms. Schardt ] ever t el l youanythi ng t hat l at er t ur ned out t o be f al se?

HAI G: Wel l , I doubt ed when she sol i ci t ed me as hercl i ent i n t he Mer r i l l Lynch case, I doubt ed t hat she' dever had an exper i ence wi t h Mer r i l l Lynch, and shest ated she she had had cases bef or e agai nst Mer r i l lLynch.

THE COURT: But ot her t han t hat , t her e was nothi ng t hatyou f ound out l ater was not t r ue as f ar as you know?


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Even t hat you apparent l y have some quest i on about ?

HAI G: I have some quest i on about t hat comment .

THE COURT: But ot her t han t hat ?

HAI G: No, she di dn' t I don' t t hi nk she I don' t know.I t was most l y j ust conver sat i ons.

THE COURT: Okay.

Tr i al Tr . 83: 1684: 4, Apr i l 26, 2012.

Si nce we r evi ew t he bankrupt cy cour t s f act ual f i ndi ngs f or

cl ear er r or , and because the recor d i ncl udes Ms. Hai g s t est i mony

t hat Ms. Schar dt made no f al se r epr esent at i ons t o her , t he

bankrupt cy cour t di d not er r i n concl udi ng t hat Cr edi t or s had notest abl i shed t he el ement s r equi r ed f or except i on t o di schar ge under

523( a) ( 2) ( A) , and i nst ead concl udi ng t hat I don t t hi nk she had

anythi ng t o do wi t h t he act ual t r ansact i ons whi ch ar e t he basi s

f or t he cl ai ms as wel l as nondi schar geabi l i t y. Tr i al Tr . 100: 22-

25.

We ther ef or e AFFI RM t he bankrupt cy cour t s deci si on t hat

Ms. Shar dt di d not engage di r ect l y i n any f r aud.

II.

The bankruptcy court made inadequate findings to supportits decision not to impute liability to Ms. Schardt forthe fraud of her spouse and, consequently, we mustvacate the portion of the judgment regarding her andremand for findings consistent with this Panelsholdings in Tsurukawa.

The second i mpreci si on i n t hi s appeal concer ns t he bankrupt cy

cour t s r ul i ng t hat I don t t hi nk t her e s any i mput at i on of

Mr . Shar t s f r audul ent behavi or t o hi s spouse, Ms. Schar dt . The

bankrupt cy cour t had been gi ven extensi ve br i ef i ng f r om t he

par t i es concer ni ng t he Panel s publ i shed opi ni on i n Tsur ukawa I I ,


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wher e i t hel d t hat , even i n t he absence of any di r ect f r aud,

i mput at i on of l i abi l i t y was possi bl e i n a 523( a) ( 2) ( A)

pr oceedi ng wher e the cour t f i nds a par t ner shi p or agency

r el at i onshi p exi st ed bet ween t he spouses. 287 B. R. at 527. Based

on our r evi ew of t he r ecor d, evi dence was pr oduced by Cr edi t ors

whi ch may pr ovi de a basi s f or i mput i ng such l i abi l i t y. Despi t e

t hi s, t he bankrupt cy cour t made no f i ndi ngs t o suppor t i t s

concl usi on t hat i mput at i on was not appr opr i at e i n t hi s case. Thi s

i s pr obl emat i c.

Rather t han make speci f i c f i ndi ngs based on Tsurukawa or

addr ess any of t he ar gument s on i mput ed l i abi l i t y pr esent ed bybot h par t i es, t he bankrupt cy cour t si mpl y r ul ed t hat t he BAP got

i t wr ong. Thi s i s not a f i ndi ng of f act . Si meonof f v. Hi ner ,

249 F. 3d 883, 891 ( 9t h Ci r . 2001) ( unsuppor t ed concl usory

st at ement s not f i ndi ngs) . Even i f , i n maki ng t hi s st at ement , t he

bankrupt cy cour t deci ded t hat i t was not r equi r ed t o f ol l ow

Tsur ukawa I I , t hi s Panel i s bound t o f ol l ow and enf or ce i t s own

publ i shed deci si ons i n subsequent appeal s. I n r e Si er r a Pac.

Br oadcast er s, 185 B. R. 575, 577 n. 7 ( 9t h Ci r . BAP 1995) . We

t her ef or e t ur n our at t ent i on once agai n t o t he Tsurukawa

deci si ons. Doi ng so, we concl ude we must vacate t he port i on of

t he cour t s j udgment r egardi ng Ms. Schardt and remand f or

r econsi derat i on of whet her she was i nvol ved i n a par t ner shi p or

agency r el at i onshi p wi t h Mr . Shar t such t hat hi s f r audul ent

behavi or shoul d be i mput ed t o Ms. Schardt f or t he pur poses of

except i on t o di schar ge under 523( a) ( 2) ( A) .

The Panel i ssued t wo Tsurukawa deci si ons. I n Tsur ukawa v.

Ni kon Pr eci si on, I nc. ( I n r e Tsur ukawa) , 258 B. R. 192 ( 9t h Ci r .


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BAP 2001) ( Tsur ukawa I ) , i t addr essed t he except i on f r om di schar ge

of a $2 mi l l i on st i pul at ed j udgment debt agai nst t he debt or under

523( a) ( 2) ( A) , based on i mput ed l i abi l i t y f or f r aud commi t t ed by

t he debt or s husband. We hel d t hat "a mar i t al uni on al one,

wi t hout a f i ndi ng of a par t ner shi p or ot her agency r el at i onshi p

bet ween spouses, cannot serve as a basi s f or i mput i ng f r aud f r om

one spouse t o t he ot her . " I d. at 198. However , i n Tsurukawa I

t he Panel onl y i nf er ent i al l y deci ded whet her , based on a f i ndi ng

t hat an agency or par t ner shi p r el at i onshi p exi st ed bet ween

spouses, such a f i ndi ng woul d suppor t an except i on t o di schar ge.

I d. That quest i on was set t l ed af f i r mat i vel y i n Tsur ukawa I I ,287 B. R. at 519 ( I n a 523( a) ( 2) ( A) act i on, one spouse' s f r aud

may be i mput ed t o the ot her spouse under agency pr i nci pl es when,

as i n t hi s case, t hey ar e al so busi ness par t ner s. ) .

The Tsur ukawa I panel surveyed t he case l aw r egar di ng

i mput at i on of f r aud i n bankrupt cy cases, observi ng t hat ear l y

Supr eme Cour t cases were r el uct ant t o i mput e f r aud. Tsur ukawa I ,

258 B. R. at 196 ( di scussi ng Neal v. Cl ar k, 95 U. S. 704, 704

( 1877) ) . I n t he Cl ar k deci si on, t he Supr eme Cour t i nt er pr et ed

bankrupt cy l aw except i ng debt s f or f r aud as t ar get i ng a debt or s

act ual or posi t i ve f r aud, not f r aud i mpl i ed i n l aw. Cl ar k,

95 U. S. at 709. Because t he debt or di d not di r ect l y cause t he

f r aud, he was ent i t l ed t o a di schar ge of t hat debt . I d.

However , i n St r ang v. Br adner , 114 U. S. 555 ( 1885) , t he

Supreme Cour t i mput ed f r aud commi t t ed by one par t ner t o ot her

par t ner s. I d. at 560- 561. I n St r ang, t he debt or s and t he

wr ongdoer were par t ners. The Supr eme Cour t hel d t hat because

t her e was a par t ner shi p r el at i onshi p wi t h t he debt or s, and because


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t he wr ongdoi ng i nvol ved a par t ner shi p t r ansact i on, t he wr ongdoi ng

of a par t ner was pr oper l y i mput ed t o t he par t ner s, t hat i s, t he

debt or s.

Rel yi ng on St r ang, var i ous cour t s have i mput ed t he f r audul ent

conduct of one par t ner t o anot her i n bankrupt cy si t uat i ons. I n

BancBost on Mor t g. Cor p. v. Ledf or d ( I n r e Ledf or d) , 970 F. 2d 1556

( 6t h Ci r . 1992) , t he cour t , ci t i ng St r ang, hel d t hat t he wr ongf ul

act s of a par t ner wer e i mput ed t o an i nnocent par t ner f or pur poses

of 523( a) ( 2) ( A) when ( 1) t he debt or was a par t ner , ( 2) t he

debt or ' s par t ner commi t t ed f r aud whi l e act i ng on behal f of t he

par t ner shi p i n t he or di nar y cour se of busi ness, and ( 3) t hedebt or / part ner r eaped t he monet ar y benef i t s of t he unl awf ul

conduct . I d. at 1561.

The Fi f t h Ci r cui t r eached a si mi l ar concl usi on i n Luce v.

Fi r st Equi p. Leasi ng Cor p. ( I n r e Luce) , 960 F. 2d 1277 ( 5t h Ci r .

1992) ( per cur i am) . I n Luce, t he cour t hel d t hat a debt or i s

l i abl e f or a debt i ncur r ed by t he decept i on of hi s spouse/ par t ner

i f t he debt or benef i t ed monet ar i l y f r om such decept i on. I d. at

1283. I ndeed, t he cour t vi ewed " t he i mput at i on i ssue as one about

busi ness par t ners" and st ated t hat " t he concept s of l aw we empl oy

do not t ur n on t he nat ur e of t he mar i t al r el at i onshi p, but on t he

nat ur e of t he busi ness r el at i onshi p bet ween t he [ busi ness

par t ner s] . " I d. at 1284 n. 10. But al so see Al l i son v. Rober t s

( I n r e Al l i son) , 960 F. 2d 481 ( 5t h Ci r . 1995) , wher e t he Fi f t h

Ci r cui t r ef used t o i mput e f r aud t o an i nnocent spouse wher e t her e

was "no basi s f or appl yi ng t he agency f r aud t heor y. I d. at 486.

I mpor t ant l y, t he Ni nt h Ci r cui t , i n La Tr at t or i a, I nc. v.

Lansf or d ( I n r e Lansf or d) , 822 F. 2d 902 ( 9t h Ci r . 1987) , i n di ct a


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4 Tsurukawa I and I I ar ose f r omt he same bankrupt cy case.I n Tsurukawa I , t he bankrupt cy cour t r ul ed t hat t he debt or wasl i abl e t o cr edi t or based on her knowi ng par t i ci pat i on i n, andbenef i t f r om, t he f r audul ent busi ness of her husband, butdecl i ni ng t o f i nd ei t her f r audul ent i nt ent or t hat she and herhusband wer e par t ner s i n t he f r audul ent busi ness. On appeal , t hePanel r eversed and r emanded f or a determi nat i on as t o whether( 1) an agency r el at i onshi p exi st ed between Debt or and [ herhusband] or ( 2) Debt or had t he requi si t e f r audul ent i nt ent t odecei ve[ . ] Tsurukawa I , 258 B. R. at 197. On r emand, t hebankr upt cy cour t concl uded t hat debt or and spouse were busi ness

par t ner s, i nf er r i ng t hei r i nt ent t o creat e such a r el at i onshi pf r om t hei r act s and f ound t he exi st ence of a pr i nci pal - agentr el at i onshi p. Tsur ukawa I I at 520. The Tsur ukawa I I panelaf f i r med. Tsur ukawa I I , 287 B. R. at 521. The Panel agr eed wi t ht he bankrupt cy cour t t hat t he debt or per f or med subst ant i alact i vi t i es f or t he busi ness . . . and assumed an act i ve r ol e i n[ t he company] t hat goes beyond merel y hol di ng a communi t y pr oper t yi nt er est i n her husband s busi ness and per f or mi ng mi nor servi cesf or t hat busi ness. I d. at 522- 23.

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has st at ed t hat i f i t wer e "t o r el y on st r i ct agency or

par t ner shi p pr i nci pl es, " i t mi ght have been f or ced t o concl ude

t hat a spouse who was not di r ect l y l i abl e f or f r aud was l i abl e f or

her husband' s f r aud. I d. at 904- 05.

The year af t er Tsur ukawa I was deci ded, t he Panel deci ded

Tsur ukawa I I . 4 I n i t s opi ni on, t he Panel expr essl y adopt ed t he

r ul e t hat f r aud may be i mput ed t o a spouse under part nershi p/

agency pr i nci pl es i n a 523( a) ( 2) ( A) act i on. The Panel s rul i ng

has s i nce been accept ed bot h wi t hi n and out si de the Ni nt h Ci r cui t .

Hawki ns v. Fr anchi se Tax Bd. ( I n r e Hawki ns) , 430 B. R. 225, 239

n. 25 ( Bankr . N. D. Cal . 2010) ( ci t i ng Tsur ukawa I I f or t hepr oposi t i on t hat , One spouse can be vi car i ousl y l i abl e f or bad

act s of t he ot her spouse commi t t ed i n f ur t her ance of a busi ness

par t ner shi p i ncl udi ng bot h spouses. ) , af f d 447 B. R. 191 ( N. D.

Cal . 2011) ; St evens v. Ant oni ous ( I n r e Ant oni ous) , 358 B. R. 172,

185 ( Bankr . E. D. Pa. 2006) ( extensi vel y quot i ng f r om Tsur ukawa I I

i n adopt i ng t he r ul e) ; I n r e Banke, 275 B. R. 317, 329 ( Bankr . N. D.


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I owa 2002) ( I f a husband and wi f e ar e par t ner s i n a busi ness,

separ at e f r om t he mar i t al r el at i onshi p, bot h may be hel d

r esponsi bl e f or t he f r audul ent act s of one of t hem. ) .

The t eachi ngs of Tsur ukawa I I can be summar i zed i n t hree

pr i nci pl es:

Fi r st , mar r i age al one i s not suf f i ci ent t o i mput e f r aud f r om

one spouse t o another . A busi ness part nershi p between a debt or

and spouse f or deni al of di schar ge pur poses exi st s wher e t he

debt or assumed an act i ve r ol e i n t he [ spouse s busi ness] t hat goes

beyond merel y hol di ng a communi t y pr opert y i nt erest i n [ t he

spouse s] busi ness and per f or mi ng mi nor servi ces i n t hatbusi ness. Tsur ukawa I I , 287 B. R. at 521.

Second, f r aud may be i mput ed t o a spouse under

agency/ par t ner shi p pr i nci pl es i n a 523( a) ( 2) ( A) act i on. I d. at

525. Whet her an agency or par t ner shi p suf f i ci ent t o j ust i f y

i mput at i on of f r aud t o a spouse exi st s i s a quest i on t o f act t o be

deci ded under st at e l aw. Cal i f or ni a l aw appl i es i n t hi s case. A

Cal i f or ni a par t ner shi p i s " an associ at i on of t wo or mor e per sons

t o car r y on as co- owner s a busi ness f or pr of i t . " CAL. CORP. CODE

16101( 7) ( 2013) . Whet her par t i es have ent er ed i nt o a

par t ner shi p r el at i onshi p, r at her t han some ot her f or m of

r el at i onshi p, i s a quest i on of f act t o be det er mi ned by the t r i er

of f act f r om t he evi dence and i nf er ences t o be dr awn t her ef r om

and depends on whether t hey i nt ended t o shar e i n t he pr of i t s,

l osses and the management and cont r ol of t he ent erpr i se. See Bank

of Cal . v. Connol l y, 36 Cal . App. 3d 350, 364 ( Cal . Ct . App.

1973) ; Nel son v. Abr aham, 177 P. 2d 931, 933 ( Cal . 1947) . Propert y

co- owner shi p of any sor t , as wel l as pr of i t - shar i ng, ar e f act or s


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whi ch t end t o est abl i sh par t ner shi p. But see Hol mes v. Ler ner , 88

Cal . Rpt r . 2d 130, 138 ( Cal . Ct . App. 1999) ( hol di ng t hat shar i ng

of pr of i t s i s one evi dence of par t ner shi p, but not a r equi r ed

el ement ) .

Each par t ner i s an agent of t he par t ner shi p f or t he pur pose

of i t s busi ness. CAL. CORP. CODE 16301( a) ( 2013) . Each part ner

act s as pr i nci pal f or hi msel f or her sel f and as agent f or t he

copar t ner s i n t he t r ansact i on of par t ner shi p busi ness. Tuf t s v.

Mann, 2 P. 2d 500, 503 ( Cal . 1931) . I n addi t i on, "a gener al

par t ner ' s l i abi l i t y i s t he same as t hat of a pr i nci pal f or t he

f r aud of hi s agent whi l e act i ng wi t hi n t he scope of hi saut hor i t y. " Pear son v. Nor t on, 230 Cal . App. 2d 1, 14- 15 ( Cal .

Ct . App. 1964) ( f i ndi ng par t ner - wi f e l i abl e f or par t ner - husband' s

f r aud i n sal e of par t ner shi p pr oper t y) .

Thi r d, i t i s not necessar y t o prove any knowl edge on t he

i nnocent debt or s par t of t he f r audul ent conduct f or i mput ed

l i abi l i t y pur poses. I d. at 525. Of cour se, i f t he debt or

par t i ci pat ed di r ect l y i n t he spouse s f r aud, t hat coul d be gr ounds

f or f i ndi ng di r ect l i abi l i t y r at her than i mput ed l i abi l i t y. I d.

at 527.

I n t hi s case, evi dence was pr esent ed whi ch t he bankr upt cy

cour t coul d r evi ew i n det er mi ni ng t he exi st ence of an agency or

par t ner shi p bet ween Debt or s suf f i ci ent t o i mput e l i abi l i t y f or t he

f r audul ent act i ons of Mr . Shar t t o Ms. Schar dt . For exampl e, t he

evi dence showed t hat : ( 1) Ms. Schar dt may have pr epared and mai l ed

al l egedl y f r audul ent account i ng st at ement s t o Ms. Hai g ( t est i mony

of J ohn Shar p, an assi st ant t o Ms. Hai g and f or mer vi ce

pr esi dent / gener al manager wi t h Hi l t on I nt er nat i onal ) ;


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5 At t he argument bef ore t he Panel , Ms. Schardt suggest edt hat some of her communi cat i ons on behal f of her husband may have

been under t aken i n her r ol e as hi s at t or ney. We have caref ul l yexami ned t he recor d bef ore the bankr upt cy cour t and f i nd noi nst ance wher e ei t her Ms. Schar dt or Mr . Shar t asser t ed suchar gument t o t he bankrupt cy cour t . Bar r i ng except i onalci r cumst ances, we wi l l not r evi ew on appeal an i ssue not r ai sedi n t he bankrupt cy cour t . Smi t h v. Ar t hur Ander son LLP, 421 F. 3d989, 1000 ( 9t h Ci r . 2005) .

Mor eover , we not e t hat , i n t he bankrupt cy cour t , Ms. Schar dtf r equent l y deni ed t hat she had anyt hi ng t o do wi t h her husband sbusi ness. When asked by counsel at t r i al whether she had gi venhi m l egal advi ce, she t est i f i ed not ever :

Q: And even t hough you r e an at t orney and you al r eadysuspected l i t i gat i on was l i kel y, you di dn t f eel anyneed t o counsel your husband i n t erms of how what heshoul d say i n [ t he l et t er of December 26] .

SCHARDT: You di dn t know my husband. I don t counsel myhusband what he says.

( cont i nued. . . )

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( 2) Ms. Schardt may have mai ntai ned one bank account and check

r egi st er f or Mr . Shar t s busi ness and assi st ed i n pr epar at i on of

t ax ret ur ns ( t est i mony of Ms. Schar dt ) ; ( 3) Ms. Schar dt may have

made handwr i t t en not es on bi l l i ng di sput es wi t h Cr edi t or s and

f or war ded t hem t o Mr . Shar t ( t est i mony of Ms. Schar dt ) ;

( 4) Ms. Schardt may have revi ewed and edi t ed Mr . Shart s r esponses

t o t he bi l l i ng di sput es ( t est i mony of Ms. Schar dt ) ;

( 5) Ms. Schardt may have di r ect ed her bookkeeper t o i gnore

Ms. Hai g s compl ai nt s about her bi l l s ( t est i mony of Ms. Schar dt ) ;

( 6) Ms. Schar dt may have pr ovi ded advi ce t o Mr . Shar t i n hi s

negot i at i ons wi t h Ms. Hai g ( deposi t i on of Ms. Hai g) ;( 7) Ms. Schardt may have pr epared some of t he bi l l s sent t o

Ms. Hai g ( deposi t i on of J ohn Shar p) ; ( 8) Ms. Schar dt si gned

l et t er s on Gr eyst one l et t er head r el at i ng t o Gr eyst one busi ness

mat t ers. 5


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5( . . . cont i nued)Q: Al l r i ght .

SCHARDT: Not ever .

Tr i al Tr . 100: 23101: 4, May 3, 2012.

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Al l of t he poi nt s not ed above wer e r ef er enced i n t est i mony

and ot her evi dence at t r i al . Of cour se, eval uat i ng t he wei ght t o

be assi gned t o such evi dence i s t he pr ovi nce of t he bankrupt cy

cour t . See Gr oves v. Pi cket t , 420 F. 2d 1119, 1126 ( 9t h Ci r . 1970)

( I nvadi ng t he ext r emel y del i cat e ar ea of passi ng on t he

credi bi l i t y of wi t nesses i s not our f uncti on. ) . Per haps, i n t hi s

case, t he bankrupt cy cour t consi der ed t hese poi nt s and di scount ed

t hem. But on t hi s recor d, we si mpl y cannot know.

Fi ndi ngs must be made and suf f i ci ent l y expl i ci t t o pr ovi de

t he appel l at e cour t wi t h an under st andi ng of t he basi s of t he

t r i al cour t ' s deci si on and t he gr ounds upon whi ch t he t r i al cour tr eached t hat deci si on. Keane v. Comm r of I nt ernal Revenue,

865 F. 2d 1088, 1091 ( 9t h Ci r . 1989) . I f t he f i ndi ngs ar e so

concl usor y or i ncompl et e that t he appel l at e cour t i s unabl e to

r evi ew t hem "i n t he l i ght of t he evi dence i n t he r ecor d and

appl i cabl e l egal pr i nci pl es, " t he appel l at e cour t must r emand t o

t he t r i al cour t t o make t he mi ssi ng f i ndi ngs. Sumner v. San Di ego

Ur ban League, I nc. , 681 F. 2d 1140, 1142 ( 9t h Ci r . 1982) .

Whi l e t he bankrupt cy cour t s or al comment s at t he concl usi on

of t he t r i al adequat el y evi dence i t s f i ndi ng t hat Ms. Schar dt di d

not engage i n di r ect , act i ve f r aud, t hey do not suf f i ci ent l y

addr ess whether a part nershi p or agency r el at i onshi p may have

exi st ed bet ween t he spouses her e so as t o j ust i f y i mput at i on of


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l i abi l i t y f or t he f r aud of Mr . Shar t t o her . We ar e t her ef or e

l ef t wi t h one opt i on: we must VACATE t hat port i on of t he j udgment

t hat det er mi ned t hat Ms. Schar dt s debt s t o Cr edi t or s wer e

di schar ged and REMAND t hi s act i on t o t he bankr upt cy cour t f or

consi der at i on of , and t he ent r y of , f act f i ndi ngs whet her she was

i nvol ved i n a par t ner shi p or agency r el at i onshi p wi t h Mr . Shar t

such t hat hi s f r audul ent behavi or shoul d be i mput ed t o Ms. Schar dt

f or t he pur poses of except i on t o di schar ge under 523( a) ( 2) ( A) as

set f or t h i n Tsurukawa I and Tsurukawa I I .

CONCLUSION

We AFFI RM t hat por t i on of t he bankrupt cy cour t s deci si on

concl udi ng t hat Ms. Schar dt di d not di r ect l y engage i n any

f r audul ent conduct . However , because Mr . Shart s f r aud may be

i mput ed t o her , we VACATE that por t i on of t he j udgment r el at i ng t o

Ms. Schardt and REMAND t hi s act i on t o t he bankr upt cy cour t f or

f ur t her pr oceedi ngs consi st ent wi t h t hi s deci si on.

in re: john shart and elke gordon schardt, 9th cir. bap (2013)

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