As part of the Sarbanes-Oxley Act of 2002, Congress made it easier to deny someone’s discharge for violating securities laws, as demonstrated by a Tenth Circuit opinion on Nov. 14 explaining why the ordinary strictures of collateral estoppel do not apply to Section 523(a)(19).
Customers commenced an arbitration against their stockbroker in the Financial Industry Regulatory Authority, alleging he sold them more than $600,000 in highly speculative securities as part of an offering in violation of state and federal securities laws. The broker told the arbitrators that he would not show up or present a defense.
The proceedings went ahead, and the arbitrators ruled that the broker committed “multiple violations” of federal and Colorado securities laws. Along with a monetary award to the plaintiffs, the arbitrators said their findings were “not precedential in nature.”
After the broker filed a chapter 7 petition, the plaintiffs won a modification of the automatic stay and prevailed on a state court to confirm the FINRA award. Again, the broker did not appear or defend.
Next, the plaintiffs mounted an adversary proceeding under Section 523(a)(19) to deny discharge of the arbitration award based on “the violation of any” state or federal securities laws resulting from “any judgment” in “any Federal or State judicial or administrative proceeding.”
On summary judgment, the bankruptcy court denied discharge. The broker appealed, lost in district court and lost a second time in the Tenth Circuit opinion by Chief Circuit Judge Timothy M. Tymkovich.
Arguing that the issues were not “actually litigated,” the broker contended that summary judgment was improper because the arbitration did not satisfy the rules of collateral estoppel. Rejecting the theory, Judge Tymkovich explained that “Congress departed from the common-law understanding of collateral estoppel and issue preclusion principles” in adopting Section 523(a)(19) along with Sarbanes-Oxley.
Since “any judgment” or settlement “by the debtor” can be the basis for denial of discharge, Judge Tymkovich said that a “court may give preclusive effect to a default judgment,” even when ordinary state rules of collateral estoppel would bar use of a prior judgment if the issues were not actually litigated.
The broker argued that the arbitration award did not make fact findings to support a denial of discharge. Again rejecting the argument, Judge Tymkovich said that the plaintiffs made the factual showing required by Section 523(a)(19) because the broker’s “failure to defend means that he admitted all the facts plaintiffs asserted in their Claim.”
The arbitrators’ statement that their decision was “not precedential” was no defense, either. Once again, Judge Tymkovich said that the statute’s use of “any judgment” does not require a “precedential decision.” “[F]or that matter,” he said, the statute permits use of “‘any settlement agreement entered into by the debtor’” as the basis for denial of discharge, “whether or not incorporated into a precedential decision.”