As part of the Sarbanes-Oxley Act of 2002, Congress added Section 523(a)(19) to the Bankruptcy Code, which states that a debt is excepted from discharge if it arose from a violation of securities laws or fraud in the purchase or sale of securities.
The Tenth Circuit became the first appeals court to hold that a default judgment on a securities fraud claim is automatically nondischargeable.
The Jan. 13 opinion by Circuit Judge Paul R. Kelly Jr. rejected the debtor’s argument that a default judgment for securities fraud should not be given preclusive effect, similar to the treatment of a debt for fraudulently obtained property under Section 523(a)(2).
Judge Kelly noted that the invocation of Section 523(a)(19) requires the existence of a judgment. Section 523(a)(2), by comparison, does not. The difference, in Judge Kelly’s opinion, means that a securities fraud judgment has preclusive effect in bankruptcy discharge litigation.
As part of the Sarbanes-Oxley Act of 2002, Congress added Section 523(a)(19) to the Bankruptcy Code, which states that a debt is excepted from discharge if it arose from a violation of securities laws or fraud in the purchase or sale of securities.