Securities Law Judgment Excepted from Discharge

On the same day the court decided Appling (below), the Eleventh Circuit issued a second bankruptcy-discharge opinion, this time addressing one of the more obscure exceptions from discharge, § 523(a)(19)(A)’s exception for judgments for securities law violations. Lunsford v. Process Technologies Services, LLC (In re Lunsford), 2017 WL 603845 (11th Cir. Feb. 15, 2017).  Judge Bill Pryor again wrote for the court, with another concurrence by Judge Robin Rosenbaum.  And the majority opinion again differed with the views of other circuits.

The debtor was accused in a Mississippi state court of violating Mississippi securities laws. The court ordered the parties to arbitrate the dispute.  Before judgment, the debtor filed for bankruptcy, but the bankruptcy court permitted the arbitration to proceed and damages were awarded to the plaintiff.  The state court confirmed the arbitration award and entered judgment against the debtor and others, jointly and severally.  The plaintiff then sought to have the debt excepted from discharge in the bankruptcy court under section 523(a)(19)(A), which was added to the Code by the Sarbanes-Oxley Act of 2002 in the wake of the Enron collapse.  The bankruptcy court construed the arbitration award to include findings that the debtor violated the Mississippi securities laws and excepted the debt from discharge.  The debtor appealed to the district court, contending that the liability actually arose from a third party’s securities violation, but the district court affirmed.

On appeal, the Eleventh Circuit concluded that the bankruptcy court properly utilized issue preclusion to determine the dischargeability issue. The arbitrator, the court reasoned, had sufficiently determined that the debtor had individually violated securities laws.  The majority opinion also determined, alternatively, that the § 523(a)(19)(A) exception applies irrespective of the debtor’s conduct, unlike other paragraphs of § 523(a), which expressly require proof of certain conduct by the debtor.  It is sufficient that the debt sought to be discharged was caused by a securities law violation.  The court rejected two contrary cases from the Tenth and Ninth Circuits. Okla. Dep’t of Sec., ex rel. Faught v. Wilcox, 691 F.3d 1171, 1173, 1175 (10th Cir. 2012); Sherman v. SEC (In re Sherman), 658 F.3d 1009, 1010 (9th Cir. 2011).

Judge Rosenbaum wrote separately, concluding that the arbitration award found that the debtor violated securities laws and seeing no reason to delve into the majority’s alternative ground for affirmance: “These matters raise some difficult questions, and we would, no doubt, benefit from advocacy on these issues by parties with an actual interest in them.  We don’t have that here.”

Posted by Tom Byrne.

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