In re: Mark E. Phillips
5 Phillips, 2016
| 9th Cir. BAP | 2016Background
- Mark E. Phillips was sole director/officer/majority shareholder of Banana Corp.; investor Robert Arnold contributed about $5.5M for a 15% interest.
- Phillips directed numerous transfers from Banana to related entities and himself (large "consulting fees," loans to A‑Dot and a friend, wires, tax payments, and credit‑card reimbursements) without board approval or business justification.
- Washington state court (later affirmed on appeal) found Phillips engaged in self‑dealing, breached fiduciary duties, looted corporate funds, and entered a $4,190,000 judgment in favor of Arnold's estate (assignee of Banana).
- Phillips filed Chapter 7 and the Arnold estate filed an adversary to except the state judgment from discharge under §523(a)(2)(A), (a)(4), and (a)(6); the bankruptcy court granted summary judgment only on §523(a)(4) (embezzlement).
- Phillips appealed, arguing the state court did not make the specific fraud finding required for §523(a)(4) and that Washington law lacks a civil embezzlement cause; the BAP reviewed de novo and applied Washington issue‑preclusion law.
Issues
| Issue | Plaintiff's Argument (Arnold estate) | Defendant's Argument (Phillips) | Held |
|---|---|---|---|
| Whether the state court judgment precludes relitigation of the fraud/intent element of §523(a)(4) embezzlement | State court findings and judgment establish indicia of fraud and wrongful intent; issue preclusion applies under Washington law | No explicit finding of fraud; Washington has no civil embezzlement cause and state conversion/waste findings do not equate to the federal embezzlement intent requirement | Court held issue preclusion proper; state findings (now final) supply sufficient indicia of fraud for §523(a)(4) nondischargeability |
Key Cases Cited
- Harmon v. Kobrin (In re Harmon), 250 F.3d 1240 (9th Cir. 2001) (issue preclusion may bar relitigation in nondischargeability actions)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (embezzlement requires wrongful intent)
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud under §523(a)(2)(A) can encompass schemes without traditional misrepresentation)
- Transamerica Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551 (9th Cir. 1991) (three‑part test for embezzlement under §523(a)(4))
- Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219 (9th Cir. 2010) (standard of review for §523 appeals)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (willful and malicious injury standard for §523(a)(6))