Imputing Fraud to a Spouse in a Bankruptcy Case

A dispute which began over the manner in which a Tennessee horse farm owner charged his clients who kept their horses at his farm eventually became an argument over whether that owner’s wife should bear some of the financial consequences of what appeared to be fraudulent behavior on his part. A group of creditors of the owner, John Shart, sued Shart, his wife and others for making multiple misrepresentations to creditors regarding the acquisition and sale of horses, and that there were disputed expenses for trade shows, construction costs, real estate, personal property acquisitions, and other related matters. All of the claims, except one for unjust enrichment focusing on Shart’s wife as well as himself, applied exclusively to Mr. Shart.  Eventually that Tennessee state court entered an order granting the creditors possession of the horses, their request for injunctive relief, and authorization to inspect the Greystone premises but never got to the point of rendering a monetary award.

Subsequently, Mr. Shart and his wife, an attorney in California, filed what was initially a Chapter 11 bankruptcy that was later converted to a Chapter 7 bankruptcy case.  The creditors of Shart’s horse farm filed a proof of claim in the bankruptcy case on January 21, 2011, in the amount of $2,600,000. Debtors objected to the claim on June 3, 2011, arguing that they did not owe the money. Eight months later this same group initiated an adversary proceeding against Mr. Shart and his wife contending, that because of the fraudulent nature of representations made by Shart to induce them to board and maintain their horses on his farm, the two debtors should not be permitted to discharge their claims. After a trial on the allegations presented in their petition, the bankruptcy court determined that his wife had not been actively involved in the fraudulent behavior and representations of Mr. Shart. It did, however, agree that the exemption from discharge of the debt did apply to Mr. Shart and accordingly entered a judgment in favor of Creditors and against Mr. Shart for $860,726.43 as a debt excepted from discharge under § 523 of the bankruptcy code.

On appeal, these same creditors sought a ruling that the fraud should also be imputed to Shart’s wife. But upon remand to the bankruptcy court, that judge in the case of In re Shart, 505 BR 13 (Bankr. Court, CD California 2014) refused to impute the fraud to his wife and hence, permitted her to discharge any debt she had to those creditors.  The court engaged in a lengthy discussion of how bankruptcy affords debtors a “fresh start” and applicable precedent does not warrant imputation of her husband’s fraud to her as her involvement in the affairs of the horse farm did not rise to the level that would establish she participated in any fraud.  So while Shart himself will still bear responsibility after the Chapter 7 bankruptcy for the sums still owed those creditors, his wife will not have to be so encumbered by such debts.  

Inr Albuquerque, Giddens & Gatton Law, PC has attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.