FILED
AUG 11 2017
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. SC-16-1253-FBJu
)
6 PHILLIP MICHAEL SPENCER, ) Bk. Nos. 3:14-bk-09514-MM
) 3:14-bk-08384-MM
7 Debtor. )
_____________________________ ) Adv. Nos. 3:15-ap-90039-MM
8 ) 3:15-ap-90042-MM
In re: )
9 )
MARK S. BUCKMAN, )
10 )
Debtor. )
11 _____________________________ )
)
12 NEIL F. CAMPBELL, )
)
13 Appellant, )
)
14 v. ) MEMORANDUM*
)
15 PHILLIP MICHAEL SPENCER; )
MARK S. BUCKMAN, )
16 )
Appellees. )
17 ______________________________)
18 Argued and Submitted on July 27, 2017
at Pasadena, California
19
Filed – August 11, 2017
20
Appeal from the United States Bankruptcy Court
21 for the Southern District of California
22 Honorable Margaret M. Mann, Bankruptcy Judge, Presiding
23 Appearances: Mark Scott Bagula of Bagula Riviere Coates and
Associates argued on behalf of appellant; Gregory
24 S. Hood argued on behalf of appellees.
25
26 *
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
28 9th Cir. BAP Rule 8024-1.
1 Before: FARIS, BRAND, and JURY, Bankruptcy Judges.
2
INTRODUCTION
3
Creditor Neil F. Campbell appeals from the bankruptcy
4
court’s judgment on his § 523(a)(4)1 nondischargeability claim in
5
favor of chapter 7 debtors Phillip Michael Spencer and Mark S.
6
Buckman (collectively, “Debtors”). The bankruptcy court held
7
that a state court judgment on an arbitration award precluded
8
relitigation of all issues except the Debtors’ intent; after a
9
trial, it found that the Debtors misled Mr. Campbell and failed
10
to disclose certain information, but did so on the advice of
11
counsel and did not intend to commit defalcation. We discern no
12
error and AFFIRM.
13
FACTUAL BACKGROUND
14
A. The joint business venture
15
In or around 2004, the Debtors, Mr. Campbell, and Gay Reeves
16
formed Family Investment Management Group, LLC (“FIMG”), which
17
offered clients financial advice and investment services. The
18
members signed an agreement (“Operating Agreement”) governing the
19
operation of FIMG. Among other things, it dictated the proper
20
procedure in the event that a member exited the company. It also
21
provided that the parties would share equally in FIMG’s profits.
22
The arrangement later evolved (without a formal, written change
23
to the Operating Agreement) to allow each member to receive
24
monthly disbursements based on profits from their own “book of
25
26 1
Unless specified otherwise, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
all “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure.
2
1 accounts.”
2 In 2007, Ms. Reeves decided to leave FIMG. The Operating
3 Agreement provided that the remaining members were to purchase
4 her interest in FIMG. They prepared a written exit agreement,
5 but Ms. Reeves never signed it. They orally agreed that, in lieu
6 of a payout or distribution, Ms. Reeves could instead take her
7 “book of accounts” when she withdrew from the business. The
8 remaining members then amended the Operating Agreement to reflect
9 that each held a one-third interest in FIMG.
10 Between 2008 and 2010, Mr. Campbell created FUTR Family
11 Management LLC and began working primarily under that company.
12 On September 18, 2010, he physically moved out of FIMG’s office.
13 He indicated that he would no longer contribute to FIMG.
14 According to the trial testimony, the Debtors consulted
15 their attorney, Paul Thomas, as to how to handle Mr. Campbell’s
16 withdrawal. He told them to proceed in the same way that they
17 handled Ms. Reeves’ departure – in other words, that they did not
18 owe Mr. Campbell anything. He told them that Mr. Campbell was
19 not entitled to receive information about FIMG’s finances and
20 that they should minimize their contact with Mr. Campbell.
21 The Debtors also testified that they consulted their
22 accountant, Jeanne Goddard, who also advised them that they did
23 not owe Mr. Campbell anything.
24 In October 2010, the Debtors (but not Mr. Campbell) executed
25 an amendment to the Operating Agreement that reduced the members
26 to only Mr. Spencer and Mr. Buckman. The amendment provided that
27 the Debtors accepted Mr. Campbell’s “voluntary withdrawal.”
28 Later, without notice to Mr. Campbell, the Debtors attempted
3
1 to convert FIMG from an LLC into a limited partnership with only
2 the Debtors as general partners.
3 After the Debtors formed the limited partnership, FIMG sent
4 Mr. Campbell a K-1 tax form that indicated that Mr. Campbell held
5 an interest in the FIMG partnership. According to Ms. Goddard,
6 the partnership issued the K-1 form by mistake.
7 Between October 2010 and May 2012, the Debtors communicated
8 with Mr. Campbell but failed to inform him that they had
9 terminated his ownership interest in FIMG or changed FIMG’s
10 corporate structure. They also did not provide him with FIMG’s
11 financial information or disclose their conversations with
12 Mr. Thomas or Ms. Goddard.
13 B. The state court arbitration
14 In June 2013, Mr. Campbell initiated arbitration proceedings
15 against the Debtors for, among other things, breach of contract,
16 breach of fiduciary duty, accounting, and constructive fraud.
17 The arbitrator held that the Debtors had wrongfully excluded or
18 expelled Mr. Campbell from FIMG and were liable for breach of
19 contract and breach of fiduciary duty. He awarded Mr. Campbell
20 over $250,000 plus interest. The state court confirmed the
21 arbitration award.
22 C. Bankruptcy proceedings
23 In late 2014, the Debtors filed individual chapter 7
24 bankruptcy petitions. Mr. Campbell filed nondischargeability
25 complaints against the Debtors in their respective cases under
26 § 523(a)(4). The bankruptcy court later consolidated the
27 adversary proceedings at Mr. Campbell’s request.
28
4
1 D. The motion to dismiss
2 The Debtors filed a motion to dismiss Mr. Campbell’s
3 complaint. The bankruptcy court held that most of the
4 arbitrator’s findings were entitled to preclusive effect, but it
5 declined to give preclusive effect to the arbitrator’s findings
6 concerning the Debtors’ intent. It noted that the arbitrator
7 found that the Debtors’ actions “clearly were done purposefully
8 (and therefore willfully) . . . to deny [Campbell] the benefits
9 of ownership as a Member of [FIMG]” which amounted “to
10 intentional misconduct violating the statutory duty of care owed
11 by one member to another[;]” yet he also found that the Debtors’
12 actions were “fueled more by frustration, impatience with the
13 elusiveness of an exit agreement with Campbell, failure to
14 appreciate the need for strict compliance with the requirements
15 of the LLC Agreement, and perhaps an unjustified fear of being
16 sued by Campbell . . . rather than an intent to deceive.” The
17 bankruptcy court declined to give issue preclusive effect to the
18 arbitrator’s findings on the issue of intent because those
19 findings were not sufficiently clear.
20 E. The motion to amend
21 Following the bankruptcy court’s denial of the motion to
22 dismiss, the Debtors answered the adversary complaint. Shortly
23 thereafter, they filed motions for leave to amend their answers.
24 They sought to add an affirmative defense that they had
25 reasonably relied on the advice of their attorney and accountant.
26 Mr. Campbell opposed the motions to amend, arguing that the
27 Debtors’ failure to raise this defense during the arbitration
28 precluded them from raising it in the bankruptcy court and that
5
1 the defense also lacked merit.
2 The bankruptcy court held that the Debtors did not need to
3 raise the advice-of-counsel issue in the state court or in their
4 answer in the adversary proceeding. The court quoted Bisno v.
5 United States,
299 F.2d 711, 719-20 (9th Cir. 1961): “Advice of
6 counsel is not regarded as a separate and distinct defense but
7 rather as a circumstance indicating good faith which the trier of
8 fact is entitled to consider on the issue of fraudulent intent.”
9 F. Trial
10 Following a two-day trial on the limited issue of intent,
11 the bankruptcy court held that the Debtors did not have an intent
12 to defalcate. The bankruptcy court found that the Debtors
13 consulted their attorney and accountant as to how they should
14 handle Mr. Campbell’s departure from FIMG. It found that they
15 had presented Mr. Thomas and Ms. Goddard with “all material facts
16 regarding Campbell’s changing relationship with FIMG[,]” and it
17 found that the Debtors relied upon their advice in good faith.
18 Ms. Goddard informed the Debtors that they “did not owe Campbell
19 any money.” Mr. Thomas “was emphatic that Campbell had
20 voluntarily withdrawn and was no longer an owner of FIMG when
21 Campbell moved his office on September 18, 2010.” The court
22 found that, “[e]ven though Thomas’ advice and understanding of
23 the Operating Agreement was incorrect, Debtors believed in good
24 faith the advice was correct and proper and acted accordingly.”
25 The bankruptcy court found that the Debtors’ statements to
26 Mr. Campbell (and their silence) were “misleading” but not
27 fraudulent and were “motivated by a fear of litigation, and not
28 an intent to harm Campbell.”
6
1 Based on these findings, the bankruptcy court concluded that
2 the Debtors
3 did not knowingly or even recklessly, create a risk of
harm to Campbell since they honestly, if erroneously,
4 believed he would not be harmed by the termination of
FIMG. This belief was based on the advice of their
5 counsel and accountant, since Debtors also believed
Campbell had intentionally withdrawn from FIMG on
6 September 18, 2010. Debtors did not believe that they
would benefit at his detriment since he had no interest
7 of value to appropriate for themselves. They did not
intend to cheat Campbell.
8
9 Mr. Campbell timely filed a notice of appeal.
10 JURISDICTION
11 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
12 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
13 § 158.
14 ISSUE
15 Whether the bankruptcy court erred in determining that the
16 Debtors’ obligation to Mr. Campbell was not excepted from
17 discharge under § 523(a)(4).
18 STANDARDS OF REVIEW
19 In bankruptcy discharge appeals after trial, we review the
20 bankruptcy court’s findings of fact for clear error and
21 conclusions of law de novo, and we apply de novo review to mixed
22 questions of law and fact. Oney v. Weinberg (In re Weinberg),
23
410 B.R. 19, 28 (9th Cir. BAP 2009), aff’d, 407 F. App’x 176 (9th
24 Cir. 2010) (citation omitted). De novo review requires that we
25 consider a matter anew, as if no decision had been rendered
26 previously. United States v. Silverman,
861 F.2d 571, 576 (9th
27 Cir. 1988).
28 We review the bankruptcy court’s findings of fact for clear
7
1 error. Honkanen v. Hopper (In re Honkanen),
446 B.R. 373, 378
2 (9th Cir. BAP 2011). A factual finding is clearly erroneous if,
3 after examining the evidence, the reviewing court “is left with
4 the definite and firm conviction that a mistake has been
5 committed.” Anderson v. City of Bessemer City,
470 U.S. 564, 573
6 (1985). The bankruptcy court’s choice among multiple plausible
7 views of the evidence cannot be clear error. United States v.
8 Elliott,
322 F.3d 710, 714 (9th Cir. 2003).
9 The availability of issue preclusion is reviewed de novo,
10 but “[i]f issue preclusion is available, the decision to apply it
11 is reviewed for abuse of discretion.” Lopez v. Emergency Serv.
12 Restoration, Inc. (In re Lopez),
367 B.R. 99, 103 (9th Cir. BAP
13 2007) (citations omitted). To determine whether the bankruptcy
14 court has abused its discretion, we conduct a two-step inquiry:
15 (1) we review de novo whether the bankruptcy court “identified
16 the correct legal rule to apply to the relief requested” and
17 (2) if it did, whether the bankruptcy court’s application of the
18 legal standard was illogical, implausible, or without support in
19 inferences that may be drawn from the facts in the record.
20 United States v. Hinkson,
585 F.3d 1247, 1262–63 & n.21 (9th Cir.
21 2009) (en banc).
22 DISCUSSION
23 A. Section 523(a)(4) excepts from discharge debts arising from
fraud or defalcation and requires a culpable state of mind.
24
25 Section § 523(a)(4) excepts from discharge any debt “for
26 fraud or defalcation while acting in a fiduciary capacity
27
28
8
1 . . . .”2 “The creditor must establish three elements for
2 nondischargeability under this provision: (1) an express trust;
3 (2) that the debt was caused by fraud or defalcation; and
4 (3) that the debtor was a fiduciary to the creditor at the time
5 the debt was created.” Nahman v. Jacks (In re Jacks),
266 B.R.
6 728, 735 (9th Cir. BAP 2001) (citation omitted).
7 In order to prove defalcation, the creditor must establish a
8 “culpable state of mind . . . involving knowledge of, or gross
9 recklessness in respect to, the improper nature of the relevant
10 fiduciary behavior.” Bullock v. BankChampaign, N.A.,
133 S. Ct.
11 1754, 1757 (2013). The conduct must involve bad faith, moral
12 turpitude, other immoral conduct, or an intentional wrong
13 (meaning conduct that the fiduciary knows is improper or if the
14 fiduciary “consciously disregards” or is willfully blind to “a
15 substantial and unjustifiable risk” that his conduct will violate
16 a fiduciary duty).
Id. at 1759.
17 B. The bankruptcy court properly held a trial on the limited
issue of Mr. Campbell’s intent.
18
19 Mr. Campbell argues that the bankruptcy court should have
20 applied issue preclusion to the question of the Debtors’ intent
21 because the arbitrator “unequivocally” found that the Debtors
22 “acted intentionally when they breached their fiduciary duty.”
23 We disagree.
24 Because the judgment in question was rendered by a
25 California court, the California law of preclusion applies.
26
2
27 Section 523(a)(4) also covers debts for embezzlement or
larceny, but Mr. Campbell did not claim that the Debtors’ actions
28 amounted to either embezzlement or larceny.
9
1 Plyam v. Precision Dev., LLC (In re Plyam),
530 B.R. 456, 462
2 (9th Cir. BAP 2015) (citing Harmon v. Kobrin (In re Harmon),
3
250 F.3d 1240, 1245 (9th Cir. 2001)). Under California law,
4 issue preclusion applies if a five-part test is satisfied:
5 (1) the issue must be identical to the issue litigated in the
6 prior proceeding; (2) the issue must have been actually
7 litigated; (3) the issue must have been necessarily decided in
8 the prior proceeding; (4) the decision in the prior proceeding
9 must be final and on the merits; and (5) the party against whom
10 preclusion will be applied must be the same as, or in privity
11 with, the original party. Sturgeon-Garcia v. Cagno,
567 B.R.
12 364, 370 (N.D. Cal. 2017). Moreover, there is an “‘additional’
13 inquiry into whether imposition of issue preclusion in the
14 particular setting would be fair and consistent with sound public
15 policy.” Khaligh v. Hadaegh (In re Khaligh),
338 B.R. 817,
16 824-25 (9th Cir. BAP 2006), aff’d,
506 F.3d 956 (9th Cir. 2007)
17 (citations omitted) (applying California law).
18 “The party asserting issue preclusion has the burden of
19 proving these requirements have been met, and ‘reasonable doubts
20 about what was decided in the prior action should be resolved
21 against the party seeking to assert preclusion.’”
22
Sturgeon-Garcia, 567 B.R. at 370 (quoting In re Honkanen,
23 446 B.R. at 382).
24 Mr. Campbell selectively cites the arbitrator’s findings
25 that the Debtors acted “purposefully (and therefore willingly)”
26 and engaged in “intentional misconduct violating the statutory
27 duty of care owed by one member to another.” Normally, these
28 findings would be preclusive as to a debtor’s intent. But the
10
1 arbitrator also found that the Debtors’ actions were the result
2 of “frustration, impatience . . . failure to appreciate the need
3 for strict compliance with the requirements of the Operating
4 Agreement and perhaps unjustified fear of being sued by
5 Mr. Campbell.” He went on to state that “it does not appear that
6 any non-disclosure was done with intent to deceive . . . .
7 [T]heir actions betray more of a simple ignorance of and perhaps
8 cavalier attitude toward the formalities of business organization
9 and governance.”
10 Given these contradictory findings, the bankruptcy court did
11 not abuse its discretion in declining to apply issue preclusion
12 to the arbitrator’s findings on intent. It did not need to give
13 issue preclusive effect to an unclear or ambiguous decision: “The
14 discretionary aspect of issue preclusion is settled as a matter
15 of federal law. . . . Thus, reasonable doubts about what was
16 decided in a prior judgment are resolved against applying issue
17 preclusion.” In re
Lopez, 367 B.R. at 107-08 (noting that
18 “California law is consistent with federal law on the question of
19 discretionary application of issue preclusion”); see Catholic
20 Soc. Servs., Inc. v. I.N.S.,
232 F.3d 1139, 1152 (9th Cir. 2000)
21 (“[W]hen a decision in prior litigation is unclear, that decision
22 does not preclude subsequent litigation on that issue.”); Genesis
23 VJ, Inc. v. Nguyen (In re Nguyen), BAP No. CC-11-1379-LaPaMk,
24
2012 WL 603680, at *7 (9th Cir. BAP Feb. 17, 2012) (“As a matter
25 of fairness, when faced with serious questions about the scope of
26 a ruling, the bankruptcy court should err on the side of caution
27 and avoid applying issue preclusion when a state court’s exact
28 determination is ambiguous.”).
11
1 California law is equally clear that courts have broad
2 discretion to apply issue preclusion: “In California, issue
3 preclusion is not applied automatically or rigidly, and courts
4 are permitted to decline to give issue preclusive effect to prior
5 judgments in deference of [sic] countervailing considerations of
6 fairness.” In re
Lopez, 367 B.R. at 108. In other words, even
7 if the arbitrator’s findings were clear, the bankruptcy court had
8 broad discretion to refuse to give his findings issue preclusive
9 effect.
10 The bankruptcy court properly resolved doubts about the
11 arbitrator’s findings against Mr. Campbell, the party asserting
12 issue preclusion. The bankruptcy court did not err when it
13 required additional litigation.
14 C. The Debtors could properly rely on the advice of counsel and
established that they did so in good faith.
15
16 Mr. Campbell argues that (1) the bankruptcy court should not
17 have allowed the Debtors to argue that they relied on the advice
18 of their attorney and accountant and (2) the court erred in
19 finding that they relied on such advice. We discern no error.
20 1. The Debtors were entitled to assert their reliance on
the advice of their attorney and accountant.
21
22 Mr. Campbell argues that the Debtors were precluded3 from
23 asserting an advice-of-counsel defense because they did not raise
24
3
“Issue preclusion” is the modern term for “collateral
25 estoppel,” while “claim preclusion” is the modern term for “res
26 judicata.” Mr. Campbell uses the term “res judicata” without
distinguishing between issue preclusion and claim preclusion and
27 cites cases that deal with both issue preclusion and claim
preclusion. We assume that Mr. Campbell intends to invoke issue
28 preclusion because claim preclusion cannot apply in this context.
12
1 it during the earlier arbitration. He cites various out-of-
2 circuit cases and cases standing for the general proposition that
3 defenses not raised in an earlier proceeding can be precluded in
4 subsequent litigation.
5 However, the Ninth Circuit has explicitly held that
6 “[a]dvice of counsel is not regarded as a separate and distinct
7 defense but rather as a circumstance indicating good faith which
8 the trier of fact is entitled to consider on the issue of
9 fraudulent intent.”
Bisno, 299 F.2d at 719. In the context of
10 bankruptcy and dischargeability, the Ninth Circuit has stated:
11 It is true that “[g]enerally, a debtor who acts in
reliance on the advice of his attorney lacks the intent
12 required to deny him a discharge of his debts.” That
reliance, however, must be “in good faith.” This court
13 has held that the advice of counsel claim is not a
separate defense, but rather “a circumstance indicating
14 good faith which the trier of fact is entitled to
consider on the issue of fraudulent intent.”
15
16 Maring v. PG Alaska Crab Inv. Co. LLC (In re Maring),
338 F.
17 App’x 655, 658 (9th Cir. 2009) (internal citations and emphasis
18 omitted).
19 Based on the well-settled rule in the Ninth Circuit, the
20 Debtors did not need to plead advice of counsel as an affirmative
21 defense. A debtor may raise advice of counsel as evidence of its
22 good faith and to negate an allegation of fraudulent intent. In
23 other words, it is of no consequence that the Debtors did not
24 affirmatively assert their reliance on Mr. Thomas’ and
25 Ms. Goddard’s advice in the arbitration proceeding or earlier in
26 the bankruptcy case.
27 Mr. Campbell states, “[t]o introduce a new ‘issue’ at trial
28 contradicted the earlier order of the Bankruptcy Court that only
13
1 one issue would be tried.” But there was only one issue: whether
2 the Debtors had the necessary intent to commit fraud or
3 defalcation. They were entitled to argue that they did not have
4 such intent because they relied on the advice of their counsel.
5 2. The court properly found that the Debtors relied on
Mr. Thomas’ advice.
6
7 Mr. Campbell also contends that the bankruptcy court’s
8 factual findings about advice of counsel were wrong. He claims
9 that the Debtors did not follow their attorney’s advice and there
10 is no evidence that he even provided such advice. But the
11 court’s findings were based on the consistent testimony of the
12 Debtors, Mr. Thomas, and Ms. Goddard, which the court found
13 credible. The court did not clearly err in determining that the
14 Debtors properly sought and relied upon the advice of counsel.
15 D. The bankruptcy court properly considered and rejected
Mr. Campbell’s arguments regarding failure to account.
16
17 Mr. Campbell also contends that the bankruptcy court erred
18 when it neglected to consider whether the Debtors intentionally
19 failed to account. He is wrong.
20 The bankruptcy court addressed the communications between
21 the Debtors and Mr. Campbell and the Debtors’ failure to disclose
22 certain information to Mr. Campbell. The bankruptcy court
23 disapproved of the Debtors’ conduct, stating that it was
24 “regrettable,” “misleading,” and marked by “some prevaricating
25 and less than candid conduct.” Thus, Mr. Campbell is wrong that
26 the bankruptcy court ignored the accounting issue.
27 Mr. Campbell asserts that, even if the bankruptcy court
28 ruled on the failure to account, it applied the wrong legal
14
1 standard because the Debtors admitted that they were motivated by
2 fear of litigation. But the bankruptcy court made clear that the
3 Debtors’ desire to avoid litigation with Mr. Campbell caused them
4 to rely on Mr. Thomas’ and Ms. Goddard’s advice; it did not rule
5 that a fear of litigation excuses an intent to defalcate. The
6 bankruptcy court did not misapply any legal standard.
7 E. There is no merit to the alleged factual errors.
8 Mr. Campbell identifies a smattering of alleged errors or
9 omissions in the court’s factual findings. We have carefully
10 reviewed the record, and we hold that none of these purported
11 mistakes amounts to clear error.
12 Mr. Spencer further argues that the bankruptcy court
13 improperly ignored evidence that would support his case. Simply
14 stated, Mr. Campbell is upset that the bankruptcy court did not
15 accept his version of events. There is no indication that the
16 bankruptcy court “ignored” evidence; it weighed the competing
17 pieces of evidence and decided which were more plausible.
18 CONCLUSION
19 The bankruptcy court did not err. Accordingly, we AFFIRM.
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15
