Unpublished Disposition, 876 F.2d 896 (9th Cir. 1989)

MEMORANDUM^** 

Charles H. Frost appeals the bankruptcy court's holding that a debt to Audrey G. Pullens, in the amount of $75,000, is nondischargeable. We affirm.

FACTS AND PROCEEDINGS BELOW

Frost and William C. Power were general partners of several limited partnerships. Pullens invested a total of $75,000 in three of these partnerships after Power represented to her that her investment would be used to purchase second deeds of trust on certain condominium units, the partnerships would use the funds to service the first deeds of trust on the properties, the investment would be returned to her within one year, and she would receive monthly interest payments at the rate of 20%.

Pullens was paid interest for four months, after which time she received no further payments. Her investment was not, in fact, used to service the first deeds of trust, and was never deposited in the accounts of the limited partnerships. Instead, the funds were diverted to an entity owned by Power. Shortly after Pullens made her investment, Power filed for individual bankruptcy. The limited partnerships, unable to service the debt or make the promised payments to investors, filed for protection under Chapter 11. The automatic stay was lifted to allow foreclosure by the holders of the first deeds of trust on the properties. The foreclosure wiped out Pullens' security, and she lost her entire investment of $75,000.

Frost filed for bankruptcy under Chapter Seven. Pullens filed this adversary action for a determination that the debt of $75,000 was nondischargeable under 11 U.S.C. § 523(a) (2). The bankruptcy court held a trial, awarded judgment to Pullens for $75,000 with interest at a rate of 20%, and held that the debt was nondischargeable on two alternative ground: under Sec. 523(a) (2), on the grounds of actual fraud, and under Sec. 523(a) (4), because Frost was a fiduciary and trustee over the partnership assets.¹  The bankruptcy appellate panel affirmed. This appeal followed.

DISCUSSION

This court reviews the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986).

Frost argues that he is not liable for any fraud perpetrated against Pullens because he made no misrepresentations, and, in fact, never spoke to her regarding her investment. The trial court held him responsible for the fraud because of his partnership relationship with Powers, and because of his participation in the fraudulent investments.

Under California law, and general agency principles, a partner is liable for the fraud perpetrated by his partner. See In re Cecchini, 780 F.2d 1440, 1444 (9th Cir. 1986); Cal.Corp.Code Secs. 15013-15014 (West 1977); Unif.Partnership Act Secs. 13-14, 6 U.L.A. 1, 163-74 (1969 & 1989 Supp.). But fraud for purposes of Sec. 523(a) (2) (A) requires positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law, which may exist without imputation of bad faith or immorality. In re Ophaug, 827 F.2d 340, 342 (8th Cir. 1987); In re Black, 787 F.2d 503, 505 (10th Cir. 1986); In re Hunter, 780 F.2d 1577, 1579 (11th Cir. 1986).

As a result, the cases are split as to whether a debt resulting from the fraud of a partner is dischargeable under Sec. 523(a) (2) (A). See In re Paolino, 75 Bankr. 641, 645-50 (Bankr.E.D. Pa. 1987) (fraud of agent is imputed to principal); In re Beleau, 35 Bankr. 259, 262 (Bankr.R.I.1983) (same); 3 Collier on Bankruptcy p 523.08 (15th ed. 1979) (same); In re Klein, 58 Bankr. 397, 398 (Bankr.E.D. Pa. 1986) (fraud of husband not imputed to wife); In re Anderson, 29 Bankr. 184, 190-91 (Bankr.N.D. Iowa 1983) (intent to deceive is not imputed to an innocent partner).

We need not decide whether an innocent partner should be held liable under Sec. 523(a) (2) (A) for the fraud of a partner, however, because Frost cannot be characterized as an innocent partner. Frost actively participated in, and knew of, the fraud. He signed the documents, including the promissory note and deed of trust. Instead of depositing the funds in the partnership accounts, Frost lent the money to Powers. He subsequently testified that he did not know what eventually happened to the actual funds received from Pullens.

Where a partner participated in, condoned, or at least knew, or should have known, of the fraud, the debt is nondischargeable under Sec. 523(a) (2) (A). In re Walker, 726 F.2d 452, 454 (8th Cir. 1984) (agent's fraud will be imputed to principal where principal actively participated in the fraud, or knew or should have known about the fraud). See also In re Betz, 64 Bankr. 248, 251 (Bankr.N.D. Ohio 1986); Anderson, 29 Bankr. at 190-91. Because Frost participated in and knew of the fraud, the $75,000 debt owed to Pullens is nondischargeable under Sec. 523(a) (2) (A).

AFFIRMED.