BANKRUPTCY CORNER
How Broad is the Exception to Discharge under § 523 ( a )( 19 )?
JASON S . RIGOLI
The Honorable Peter Russin issued an opinion on April 28 , 2022 , which touched upon the scope of the exceptions from discharge for debts arising from securities violations . See Nationwide Judgment Recovery , Inc . v . Reefe ( In re Reefe ), 2022 Bankr . LEXIS 1282 , 638 B . R . 834 ( Bankr . S . D . Fla . 2022 ).
Summary of Facts in Reefe
Paul Burks and other top executives of Rex Venture Group , LLC operated a massive Ponzi and pyramid scheme through ZeekRewards . The SEC filed an action against Paul Burks and Rex Venture Group . The debtor was not a named defendant . As a result of the SEC action a receive was appointed to take control of Rex Venture Group . Subsequently , the Receiver brought actions to recover money lost in the scheme including against the net winners , of which the debtor was one . A judgment was entered against the debtor for the net winning plus prejudgment interest . The judgment however did not find that the debtor as a net winner participated in the fraud or committed any violation of securities law or committed common law fraud with the purchase or sale of securities . Reefe , 2022 Bankr . LEXIS 1282 at * 9 .
Section 523 ( a )( 19 ) Exception for Securities Violations
Section 523 ( a )( 19 ) excepts from discharge any debt that ( A ) is for — ( i ) the violation of any of the Federal securities laws ( as that term is defined in section 3 ( a )( 47 ) of the Securities Exchange Act of 1934 ), any of the State securities laws , or any regulation or order issued under such Federal or State securities laws ; or ( ii ) common law fraud , deceit , or manipulation in connection with the purchase or sale of any security ; 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 ; ( ii ) any settlement agreement entered into by the debtor ; or ( iii ) any court or administrative order for any damages , fine , penalty , citation , restitutionary payment , disgorgement payment , attorney fee , cost , or other payment owed by the debtor .
11 U . S . C . § 523 ( a )( 19 ).
The plaintiff relied upon Lunsford v . Process Tech . Servs ., LLC ( In re Lunsford ), 848 F . 3d 963 , 967-68 ( 11th Cir . 2017 ) for the “ proposition that § 523 ( a )( 19 ) does not require Defendant herself to have violated securities laws because a debt for a securities law violation by a third party is nondischargeable ‘ as long as the securities violation caused the debt .’ ” Id . at * 10 . However , in reviewing the Lunsford opinion Judge Russin noted that the 11th Circuit distinguished its holding from a 10th Circuit opinion , Okla . Dep ’ t . of Sec . v .
Wilcox , 691 F . 3d 1171 , 1176 ( 10th Cir . 2012 ), wherein the unjust enrichment debt of the debtor was dischargeable even though it was attributable to securities violations of a third-party who orchestrated a Ponzi scheme . 2022 Bankr . LEXIS 1282 at * 11-12 .
The distinction is made where the debtor in Lunsford was a party to the state court lawsuit in which judgment was entered against the third-party for the securities violation , versus Wilcox and Reefe , each “ net winners ” in the third-party ’ s respective scheme , ( i ) were not part of the securities violation litigation and ( ii ) did not have judgments determining the debtor had violated any securities laws or committed any such fraud connected thereto . Therefore , the judgment or orders entered in Wilcox and Reefe did not arise from the required securities violation . Id . at * 16 .
Additional Issues in Reefe and the effect of the Bartenwerfer Case to be Decided by the Supreme Court in the October 2022 Term
Judge Russin also dismissed the plaintiff ’ s § 523 ( a )( 2 )( A ), because the debtor as a net winner did not have the actual fraudulent
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intent necessary to determine the debt to be non-dischargeable .
Scienter of the debtor , with respect to § 523 ( a )( 2 )( A ) is the issue before the Supreme Court in Bartenwerfer v . Buckley , 21-908 ( Sup . Ct .). If the Supreme Court determines that scienter of the debtor to commit the fraud is necessary for a debt to be nondischargable under § 523 ( a )( 2 )( A ), cases brought under § 523 ( a )( 19 ) may be impacted as well depending on the scope of the opinion .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com .
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