In re: Phillip Michael Spencer Phillip Michael Spencer
SC-16-1253-FBJu
| 9th Cir. BAP | Aug 11, 2017Background
- From 2004 three members (Spencer, Buckman, Campbell) formed Family Investment Management Group, LLC (FIMG) governed by an Operating Agreement; members later took monthly disbursements based on their “books of accounts.”
- In 2010 Campbell moved out, stopped contributing, and the other two members (Debtors) consulted counsel and an accountant who advised they owed Campbell nothing and could treat him as withdrawn; Debtors executed an amendment removing Campbell without his signature and covertly converted the entity to a partnership.
- Debtors continued limited communications with Campbell but did not inform him they had terminated his ownership or provide FIMG financials; Campbell later received an erroneous K-1.
- In June 2013 an arbitrator found Debtors wrongfully excluded Campbell, breached fiduciary duties, and awarded him >$250,000; the state court confirmed the award.
- Debtors filed chapter 7 in late 2014; Campbell sued under 11 U.S.C. § 523(a)(4) to except the arbitration judgment from discharge as defalcation in a fiduciary capacity. The bankruptcy court gave preclusive effect to most arbitration findings but declined to preclude relitigation of Debtors’ intent; after trial it found Debtors misled Campbell but relied in good faith on advice and lacked the culpable intent required for defalcation.
Issues
| Issue | Campbell's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether arbitral findings about intent are issue-preclusive in the §523(a)(4) action | Arbitrator unequivocally found intentional misconduct; preclusion should apply | Arbitrator’s findings on intent were ambiguous and bankruptcy court may adjudicate intent | Bankruptcy court properly declined preclusion as arbitrator’s findings on intent were contradictory and ambiguous |
| Whether Debtors could raise advice-of-counsel as evidence of good-faith negating intent | Campbell: Debtors were precluded from asserting this defense because they did not raise it in arbitration | Debtors: Advice of counsel is not a separate defense but evidence of good faith and may be considered on intent | Debtors could present reliance on counsel/accountant; Ninth Circuit rule treats advice as evidence of good faith |
| Whether the bankruptcy court clearly erred in finding Debtors actually relied in good faith on counsel/accountant | Campbell: No credible evidence counsel advised as claimed and Debtors did not follow advice | Debtors: Credible, consistent testimony from Debtors, counsel, and accountant that advice was sought and followed | Findings affirmed; court did not clearly err in crediting testimony that Debtors relied on advice in good faith |
| Whether Debtors’ misleading silence and failure to account constituted defalcation under §523(a)(4) | Campbell: Silence and failure to disclose finances/state conversion show reckless or knowing misconduct (defalcation) | Debtors: Conduct was motivated by fear of litigation and based on (erroneous) advice, not culpable state of mind | Court held conduct was misleading but not fraudulent/defalcatory; lacked requisite culpable state of mind for nondischargeability |
Key Cases Cited
- Bisno v. United States, 299 F.2d 711 (9th Cir. 1961) (advice of counsel is evidence of good faith, not a separate defense)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (defalcation requires knowledge or gross recklessness; culpable state of mind standard)
- United States v. Silverman, 861 F.2d 571 (9th Cir. 1988) (de novo review requires fresh consideration as if no prior decision)
- United States v. Hinkson, 585 F.3d 1247 (9th Cir. 2009) (standards for abuse of discretion review)