On a question where the lower courts are divided, the Ninth Circuit Bankruptcy Appellate Panel has decided that a prior decision by a state or federal court finding a violation of securities laws is not required for the bankruptcy court to declare that a debt is nondischargeable under Section 523(a)(19).

As Bankruptcy Judge Robert J. Faris said for the BAP in his November 25 opinion, “An order of the bankruptcy court deciding [the debtors’] liability for a securities violation under Utah law could satisfy § 523(a)(19).”

The Dischargeability Complaint

A creditor loaned $100,000 to a couple for the couple to invest. When the investment turned sour, the creditor sued the couple in state court for violation of state securities laws. Before trial, the couple filed chapter 7 petitions.

In bankruptcy court, the creditor filed a complaint alleging that the debt was nondischargeable under Sections 523(a)(2), (4), (6) and (19). Before trial, the bankruptcy judge acknowledged that courts go both ways but ruled that a finding of a securities law violation must have been made before bankruptcy by a state or federal court before the bankruptcy court can find the debt nondischargeable under Section 523(a)(19).

At trial, the creditor did not present evidence under Section 523(a)(19). After trial, the bankruptcy court found that the creditor had failed to prove a case under Sections 523(a)(2), (4) and (6). Having previously decided that Section 523(a)(19) was not available, the bankruptcy court dismissed the dischargeability complaint.

The creditor appealed to the BAP, alleging error under Sections 523(a)(2), (4), (6) and (19).

Section 523(a)(19) Is Unambiguous

In pertinent part, Section 523(a)(19) provides that a debt is not dischargeable if it

(A) is for — (i) the violation of any of the Federal securities laws . . . , any of the State securities laws, or any regulation or order issued under such Federal or State securities laws . . . ; and

(B) results, before, on, or after the date on which the petition was filed, from — (i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding . . . .

[Emphasis added.]

Citing the Collier treatise and decisions by bankruptcy courts on both sides, Judge Faris recognized that there “is a split of authority both inside and outside of this circuit over whether the bankruptcy court may enter the judgment or order required by subparagraph (B).” He was also “unaware of any appellate decision directly confronting this question.”

There being no controlling authority, Judge Faris began his examination “with the language of the statute itself,” focusing on the words “any Federal or State judicial or administrative proceeding.” He concluded,

Nothing in the text or context of § 523(a)(19) suggests that we should deviate from the ordinary, broad meaning of the term “any.” Thus, a bankruptcy judgment is “any order or judgment,” and “any” federal or state proceeding includes a proceeding before a federal bankruptcy court.

Judge Faris identified reasons supporting the conclusion. “Generally,” he said, “bankruptcy courts may determine both the liability on and amount of nondischargeable debts,” unless “the Bankruptcy Code explicitly states otherwise.” Furthermore, “civil claims against the debtor for securities law violations are within the bankruptcy court’s subject matter jurisdiction.”

Judge Faris ruled that the bankruptcy court committed no error in finding that the creditor had failed to prove a case under Sections 523(a)(2), (4) and (6). Finding the language in Section 523(a)(19) to be “unambiguous,” he held, “An order of the bankruptcy court deciding [the debtors’] liability for a securities violation under Utah law could satisfy § 523(a)(19).”

Because the creditor had been effectively precluded at trial from introducing evidence to show a securities law violation, Judge Faris remanded “this issue to the bankruptcy court for further proceedings on [the creditor’s] § 523(a)(19) claim.”