SEC v. Bilzerian , 153 F.3d 1278 ( 1998 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
FILED
U.S. COURT OF APPEALS
No. 96-3634 ELEVENTH CIRCUIT
09/09/98
THOMAS K. KAHN
D.C. Docket No. 96-513-CIV-T-23B CLERK
91-10466-8P7
IN RE: PAUL A. BILZERIAN,
Debtor.
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
PAUL A. BILZERIAN,
Defendant-Appellant.
Appeal from the United States District Court for the
Middle District of Florida
(September 9, 1998)
Before DUBINA and MARCUS, Circuit Judges, and CLARK, Senior Circuit Judge.
PER CURIAM:
Paul A. Bilzerian appeals the district court’s order applying collateral
estoppel in the Securities and Exchange Commission's (SEC) action to except a debt
from discharge in bankruptcy. The district court found that Bilzerian’s previous
criminal conviction for securities fraud, combined with a civil judgment requiring
Bilzerian to disgorge fraudulently obtained profits, satisfied the requirements for
application of 11 U.S.C. § 523(a)(2)(A), which excepts from discharge in bankruptcy
debts for money obtained by fraud. Bilzerian also raises a constitutional challenge
to the grant of exception from discharge. We affirm.
FACTS
Bilzerian was convicted of federal securities fraud for his failure to
properly report his stock transactions with two corporations, Cluett, Peabody &
Company, Inc. (Cluett) and Hammermill Paper Company (Hammermill). The
securities laws require investors who commence a tender offer of a publicly traded
company to make certain disclosures to the SEC in order to inform investors about
any potential takeover attempt. Bilzerian did not file the required disclosures in a
timely fashion, and his disclosures were misleading because he listed as “personal
funds” money he had actually borrowed. He also failed to disclose that he had
entered into an accumulation agreement with a broker. As a result of Bilzerian’s
misleading disclosures, Cluett and Hammermill believed that Bilzerian posed a
2
credible threat to mount a hostile takeover, and they sought the aid of friendly “white
knights,” who eventually outbid Bilzerian. Bilzerian then sold his shares in Cluett
and Hammermill for a substantial profit.
In 1989, Bilzerian was convicted of nine counts of securities fraud for
violations of § 10(b) of the Securities Exchange Act of 1934, which is the general
anti-fraud provision of the securities laws.1 Subsequently, the SEC brought civil
proceedings against Bilzerian to force him to disgorge his fraudulently obtained
profits. The district court for the District of Columbia found that, on the basis of his
criminal conviction, Bilzerian was collaterally estopped from challenging the civil
action and ordered Bilzerian to disgorge approximately $33 million plus interest. The
D.C. Circuit Court upheld the civil judgment.2
During the litigation in the district court, Bilzerian filed for bankruptcy.
After the disgorgement award was upheld, the SEC sought to except the disgorgement
award from discharge in bankruptcy under § 523(a)(2)(A) on the ground that it was
a debt for money obtained by fraud. The SEC argued that the doctrine of collateral
estoppel compelled a decision in their favor. The bankruptcy court disagreed, holding
that the SEC did not have standing to pursue a § 523(a)(2)(A) claim, and that the
1
United States v. Bilzerian, 926 F.2d 1285 (2d Cir.), cert. denied, 502 U.S. 813, 112
S.Ct. 63, 116 L.Ed.2d 39 (1991).
2
SEC v. Bilzerian, 29 F.3d 689 (D.C.Cir. 1994).
3
complaint failed to state a claim because obtaining illegal profits was not part of
§ 523(a)(2)(A). The district court reversed, holding that because Bilzerian owed the
SEC money, it had standing to pursue exception from discharge. On remand, the
bankruptcy court granted summary judgment for Bilzerian, holding that the previous
judgments against Bilzerian did not meet the loss and reliance requirements of
§ 523(a)(2)(A).3 The district court again reversed, finding all elements of collateral
estoppel well established in the record.4 Bilzerian appeals the district court’s order
reversing the bankruptcy court.
DISCUSSION
This court reviews the bankruptcy court’s order independently of the
district court, reviewing conclusions of law de novo and factual findings under a
clearly erroneous standard.5 The bankruptcy court found that “this Court is satisfied
that there are no genuine issues of material fact, and now the only remaining question
is whether the SEC is entitled to a judgment as a matter of law based on the
undisputed facts.”6
3
In re Bilzerian, 196 B.R. 907 (Bankr. M.D. Fla. 1996).
4
In re Bilzerian, (M.D. Fla. Oct 22, 1996).
5
In re Bush, 62 F.3d 1319, 1322 (11th Cir. 1995).
6
In re Bilzerian, 196 B.R. at 910.
4
Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in
bankruptcy any debt “for money . . . to the extent obtained by . . . false pretenses, a
false representation, or actual fraud.”7 We agree with the district court that
Bilzerian’s debt is one for money, and that the disgorgement judgment was designed
to remedy fraudulent behavior. Bilzerian owes the SEC a judgment in the form of
money. It is well established that the term "debt" in the Bankruptcy Code
encompasses a “right to payment,”8 and that this includes a money judgment entered
by a court of competent jurisdiction.9
The question in this case is whether a criminal conviction for securities
fraud, combined with a civil disgorgement judgment in favor of the SEC, satisfies the
requirements of collateral estoppel for determining “fraud” under § 523(a)(2)(A).
Collateral estoppel requires that: (1) the issue be identical in both the prior and current
action; (2) the issue was actually litigated; (3) the determination of the issue was
critical and necessary to the judgment in the prior action; and (4) the burden of
persuasion in the subsequent action not be significantly heavier.10 Because discharge
7
11 U.S.C. § 523(a)(2)(A).
8
Cohen v. De La Cruz, --- U.S. ---, ---, 118 S.Ct. 1212, 1216, --- L.Ed.2d --- (1998).
9
See St. Laurent, II v. Ambrose, 991 F.2d 672, 678-79 (11th Cir. 1993).
10
In re Bilzerian, 100 F.3d 886, 892 (11th Cir. 1996), cert. denied, 118 S.Ct. 1559(1998).
5
under § 523(a)(2)(A) only requires proof by a preponderance of the evidence
standard,11 only the first three elements are disputed in this case.
Courts have generally interpreted § 523(a)(2)(A) to require the
traditional elements of common law fraud. A creditor must prove that: (1) the debtor
made a false representation to deceive the creditor, (2) the creditor relied on the
misrepresentation, (3) the reliance was justified, and (4) the creditor sustained a loss
as a result of the misrepresentation.12 Elements one and three are easily met, because
Bilzerian’s criminal conviction for securities fraud established that he made a false
statement on which a reasonable investor would have relied.13 The District of
Columbia district court found that Bilzerian had violated the reporting requirements
of the securities laws, specifically, “Exchange Act § 10(b) by engaging in fraudulent
activity with respect to the purchases and sales of Cluett and Hammermill
securities.”14 The issues in this case, then, are whether the other two elements, loss
and actual reliance, were critical to the previous litigation and resolved in favor of the
SEC.
11
See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
12
See In re Bilzerian, 100 F.3d at 892. See also Field v. Mans, 516 U.S. 59, 73-75, 116
S.Ct. 437, 445-46, 133 L.Ed.2d 351 (1995) (holding that § 523(a)(2)(A) requires justifiable
rather than reasonable reliance).
13
See United States v. Bilzerian, 926 F.2d at 1298.
14
SEC v. Bilzerian, 814 F.Supp. 116, 121, aff’d, 29 F.3d 689 (D.C.Cir. 1994).
6
Common law fraud and securities fraud have traditionally had related but
distinct causation requirements. Whereas common law fraud requires proof of loss
and reliance, securities fraud has substituted the concept of “materiality.”15 Rule 10b-
5 makes it unlawful to “employ any device, scheme, or artifice to defraud . . . make
any untrue statement of a material fact” or “engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.”16 As the district court
recognized, courts require proof of causation and loss as elements of a private cause
of action based on violations of Rule 10b-5.17
While some courts have not required proof of actual reliance in SEC
enforcement actions,18 we nevertheless believe that the causation requirement of
15
The elements of a primary section 10b-5 claim are: "(1) a misstatement or omission
(2) of a material fact (3) made with scienter (4) upon which the plaintiff relied (5) that
proximately caused the plaintiff's loss." McDonald v. Alan Bush Brokerage Co., 863 F.2d 809,
814 (11th Cir.1989)(citation omitted).
16
17 CFR § 240.10b-5 (1997).
17
See Basic, Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 989, 99 L.Ed.2d 194(1988) (“We agree that reliance is an element of a Rule 10b-5 cause of action.”); Kowal v. MCI
Communications Corp., 16 F.3d 1271, 1276 (D.C.Cir. 1994) (“To state a claim for securities
fraud under Rule 10b-5, a plaintiff must allege that the defendant knowingly or recklessly made
a false or misleading statement of material fact in connection with the purchase or sale of a
security, upon which plaintiff reasonably relied, proximately causing his injury.”).
18
See SEC v. Rana Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1993) (proof of
reliance not necessary in SEC action to enjoin violations of Rule 10b-5); SEC v. Rind, 991 F.2d
1486, 1490 (9th Cir. 1993) (“a district court may grant the Commission’s request for
disgorgement even where no injured investors can be identified”), cert. denied, 510 U.S. 963,
7
“materiality” in Rule 10b(5) satisfies the requirement for actual reliance necessary to
apply collateral estoppel in a § 523(A)(2)(A) case.19 Any other decision would
conflict with the general principles behind § 523(a)(2)(A). This court has taken an
expansive view of “debts obtained by fraud” because “the malefic debtor may not
hoist the Bankruptcy Code as protection from the full consequences of fraudulent
conduct.”20
In appealing the disgorgement award, Bilzerian argued that disgorgement
was not proper because no one was injured by his fraudulent schemes.21 Although the
D.C. Circuit Court stated that whether his actions injured others was irrelevant, the
court found that “others were injured by Bilzerian’s deceptions – investors paid
Bilzerian an inflated price for his stocks because of his illegal actions.”22 The injured
parties are identifiable — the “white knights” West Point Pepperell and International
114 S.Ct. 439, 126 L.Ed.2d 372 (1993).
19
See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456,
1472, 31 L.Ed.2d 741 (1972)(causation in fact presumed if plaintiff’s claim based on defendant’s
failure to disclose material information); see also Basic Inc. v. Levinson, 485 U.S. at 243-47, 108
S.Ct. at 989-91(fraud-on-the-market theory permits plaintiffs to rely on integrity of open, well-
developed markets rather than requiring proof of direct reliance).
20
St. Laurent, 991 F.2d at 680 (11th Cir. 1993) (holding that punitive damage award
would be excepted from discharge in bankruptcy under § 523(a)(2)(A)).
21
SEC v. Bilzerian, 29 F.3d at 697.
22
Id.8
Paper Company.23 We affirm the district court’s holding that collateral estoppel
prevents Bilzerian from challenging the SEC’s action to except the discharge of his
debt in bankruptcy.24
Bilzerian also raises constitutional objections, claiming that an order
holding the disgorgement judgment nondischargeable would violate the Double
Jeopardy Clause and would constitute an excessive fine in violation of the Eighth
Amendment. These constitutional claims are groundless. A civil remedy following
criminal conviction only constitutes “punishment” for purposes of the Double
Jeopardy Clause when it is so severe or so unrelated to remedial goals that it amounts
to a second criminal punishment.25 While the fraud exception to discharge does have
a deterrent goal, it is clearly not “punitive,” because Bilzerian’s disgorgement was
23
814 F.Supp. at 118-120.
24
Recently, this court faced this same issue involving the same debtor and a private
creditor who had won a judgment against Bilzerian. In re Bilzerian, 100 F.3d 886 (11th Cir.
1996). In a previous case, the creditor had alleged that Bilzerian made a series of
misrepresentations in order to induce it to invest $20.4 million in a limited partnership, and that
he had agreed to purchase the creditor’s interest in the partnership at the creditor’s election. Id.
at 888. The facts do not specify whether the creditor suffered an actual loss, although a jury had
awarded the creditor $19.839 million in compensatory damages and $1.224 million in punitive
damages. Id. Bilzerian argued that the creditor did not sustain a loss, and this court addressed
that argument in one sentence: “Finally, Bilzerian’s argument that [the creditor] did not sustain a
loss is meritless in light of the money judgment entered in favor of [the creditor] in the [previous
action]. Id. at 892-93. We follow that panel’s approach, and deduce from the award of judgment
to the SEC in the disgorgement action that a loss occurred.
25
United States v. Ursery, 518 U.S. 267, 287-88, 116 S.Ct. 2135, 2147, 135 L.Ed.2d 549(1996).
9
explicitly limited to profits resulting from illegal conduct.26 Moreover, exception
from discharge in bankruptcy is not an excessive fine because it is not
disproportionate to the wrongful conduct it was designed to remedy.27
The district court's ruling is AFFIRMED.
26
See SEC v Bilzerian, 29 F.3d at 696.
27
See United States v. One Parcel Property Located at 427 and 429 Hall Street, 74
F.3d 1165, 1172 (11th Cir. 1996).
10