Circuits Now Split on Dischargeability for Third Party’s Violation of Securities Laws
The Eleventh Circuit created a conflict of circuits by holding that an individual cannot discharge a debt even if someone else was responsible for conduct that led to a judgment for violation of securities laws.
Circuit Judge Robin S. Rosenbaum concurred with the judgment on another ground while criticizing the majority’s opinion for being internally inconsistent and creating confusion about an individual’s nondischargeable liability for someone else’s conduct.
The case turned on Section 523(a)(19)(A)-(B), which provides that a debt of an individual is nondischargeable if it “is for . . . violation of any” state or federal securities law and “results . . . from . . . any judgment” by a state or federal court.
The debtor was an executive in a company that sold securities to a plaintiff who later sued the company and the executive in state court to rescind the sale. The state court ordered arbitration, but the arbitration was initially stayed when the executive filed bankruptcy.
After the bankruptcy court allowed the arbitration to proceed, the arbitrator awarded the plaintiff more than $600,000. The state court confirmed the award and entered judgment jointly and severally against the company and the executive.
In bankruptcy court, the plaintiff prevailed in an adversary proceeding declaring that the judgment against the executive was nondischargeable under Section 523(a)(19). The executive appealed, lost in district court, and lost a second time in the Feb. 15 majority opinion by Circuit Judge William Pryor.
Judge Pryor upheld the conclusion about nondischargeability because the bankruptcy judge properly interpreted the arbitrator’s award as finding that the executive himself violated state securities laws.
Even if the arbitrator had not found a securities law violation by the executive himself, Judge Pryor went on to rule that the debt was nondischargeable even if the conduct was attributable to a third party.
Violations committed by a third party are sufficient, Judge Pryor said, because the text of the statute “applies irrespective of debtor conduct.” “Unambiguously,” he said, the section precludes discharge of debts “for violation of” securities laws. The Supreme Court, he said, has interpreted “debt for” to mean “debt as a result of.”
Judge Prior mentioned other subsections in Section 523 that require events “caused” by the debtor. “Because Congress rendered discharge in some subsections dependent on debtor conduct but never did so for Section 523(a)(19)(A), we infer that the limit does not extend to Section 523(a)(19)(A).”
Judge Pryor said that opinions to the contrary from the Ninth and Tenth Circuits were unpersuasive.
Judge Rosenbaum concurred with respect to the finding that the debtor himself violated securities laws but said she would not have reached the alternative ground: making the debt nondischargeable based on someone else’s conduct. “Sometimes one reason is enough,” she said.
“That alternative holding,” based on the conduct of a third party, “may or may not prove to be correct,” she said. “[B]ut by reaching it in this case, where we do not need to do so, we have needlessly created confusion.” She went on to say that “internal inconsistency in the panel’s reasoning will no doubt create confusion.”
Judge Rosenbaum would have left “the issue addressed by the alternative holding to a case where it is better developed” from “advocacy on these issues by parties with an actual interest in them. We don’t have that here.”