In re: Simon Vernon Rodriguez and Marilyn Kay Schipull

FILED
APR 3 2023
ORDERED PUBLISHED
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NV-22-1174-CBG
SIMON VERNON RODRIGUEZ
and MARILYN KAY SCHIPULL, Bk. No. 2:21-bk-14112-MKN
Debtors.
Adv. No. 2:21-ap-01228-MKN
SIMON VERNON RODRIGUEZ,
Appellant,
v.
STEVEN A. HOTCHKISS; ANTHONY OPINION
WHITE; ROBIN SUNTHEIMER; TROY
SUNTHEIMER; STEPHENS
GHESQUIERE; JACKIE STONE; GAYLE
CHANY; KENDALL SMITH;
GABRIELLE LAVERMICOCCA;
ROBERT KAISER,
Appellees.
Argued and Submitted February 24, 2023 at Las Vegas, Nevada
Appeal from the United States Bankruptcy Court
for the District of Nevada
Mike K. Nakagawa, Bankruptcy Judge, Presiding
Before: CORBIT, BRAND, and GAN, Bankruptcy Judges.
APPEARANCES:
Matthew C. Zirzow of Larson & Zirzow LLC argued for appellant; David
Liebrader of the Law Offices of David Liebrader argued for appellees
CORBIT, Bankruptcy Judge:
INTRODUCTION
After a business enterprise went awry, several investors obtained a
judgment in state court against Mr. Simon Vernon Rodriguez for violations
of Nevada state securities laws (“Judgment Holders”). Mr. Rodriguez filed
for bankruptcy and attempted to discharge the judgment debt. Although a
debtor may discharge most debts in bankruptcy, a debtor may not
discharge debts that result from a court judgment “for the violation of . . .
securities laws.” § 523(a)(19). 1 The Judgment Holders filed an adversary
proceeding in which they asserted that § 523(a)(19)(A)(i) barred Mr.
Rodriguez from discharging the judgment debt.
Mr. Rodriguez answered that he was only vicariously and
secondarily liable for the violations of securities law and argued that
§ 523(a)(19)(A)(i) exempts debts from discharge only when the debtor is the
primary violator of the securities law. Because the state court specifically
found that Mr. Rodriguez violated Nevada securities law, the bankruptcy
court did not err in granting summary judgment on the Judgment Holders’
§ 523(a)(19) claim and excepting Mr. Rodriguez’s judgment debt from
discharge, and we AFFIRM. We publish to discuss the scope of debtor
culpability required by Sherman v. SEC (In re Sherman), 658 F.3d 1009 (9th
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532 and all “NRS” references are to the Nevada
Revised Statutes.
2
Cir. 2011), abrogated on other grounds by Bullock v. BankChampaign, N.A., 569
U.S. 267 (2013).
FACTS
A. History
Mr. Simon Vernon Rodriguez, Appellant, was the Treasurer and
Chief Financial Officer of Virtual Communications Corporation (“VCC”). 2
He was also a Director of VCC and owned over 11 % of the company.
VCC was involved in many enterprises through its subsidiaries.3 One
of the products VCC developed was a virtual receptionist. However, VCC
needed additional capital to get the new technology to market. VCC raised
the money by issuing promissory notes to outside investors.
VCC created a PowerPoint presentation to show potential investors.
The presentation explained the technology VCC wanted to market and
promised investors a 9% annual interest return. Investors were assured the
investment was safe because the notes (defined as “securities” in the
presentation) were personally guaranteed by R.J. Robinson, Chief
2
The facts are taken from the state trial court’s factual findings as stated in the
Memorandum Decision, Findings of Facts and Conclusions of Law, and Judgment.
Hotchkiss v. Robinson, No. A-17-762264-C, 2020 WL 13158120 (Nev. Dist. Ct. Apr. 27,
2020); Hotchkiss v. Robinson, No. A-17-762264-C, 2020 WL 13158121 (Nev. Dist. Ct. Aug.
20, 2020); Hotchkiss v. Robinson, No. A-17-762264-C, 2020 WL 13158119 (Nev. Dist. Ct.
Aug. 21, 2020).
3 VCC is a holding company that manages its wholly-owned subsidiaries
including WinTech, LLC.
3
Executive Officer of VCC. The investor presentation explained that
investing in VCC was a wise and financially secure investment.
Importantly, the investor presentation included information about
Mr. Rodriguez. Potential investors learned Mr. Rodriguez was the Chief
Financial Officer of VCC and that Mr. Rodriguez had “over 40 years of
senior management experience,” and that he was “specially qualified to
oversee the operations, marketing and development” of the company. The
final slide of the investor presentation included Mr. Rodriguez’s contact
information and directed any questions about the note offering to Mr.
Rodriguez.
B. State Court Action
As a result of the investor presentations, VCC raised over four
million dollars. However, in February 2015 VCC defaulted after failing to
make payments on the outstanding notes. In September 2017 several
investors filed a Nevada state court action against Mr. Rodriguez, Mr.
Robinson, and others for the losses incurred related to the purchase of the
notes. The complaint alleged claims for: (1) fraud, misrepresentations and
omissions, (2) violation of Nevada securities laws NRS 90.310, 90.460
(licensing and registration); and (3) violation of NRS 90.570 and 90.660
(misrepresentations and omissions), and (4) breach of a written contract.
After a two-day bench trial and submission of closing briefs, the state
court issued a (1) memorandum decision followed by (2) findings of facts
and conclusions of law on liability, and (3) findings of facts and
4
conclusions of law on damages and attorney’s fees, (collectively, the “State
Court Decisions”).
In summary, the Nevada trial court held that (1) the notes issued by
VCC constituted a security within the meaning of the Nevada Securities
Act, NRS 90.295, (2) VCC sold unregistered nonexempt securities to the
Plaintiffs in violation of NRS 90.460, and (3) Mr. Rodriguez and Mr.
Robinson were both control persons of VCC as defined under Nev. Admin.
Code 90.0354 and therefore, responsible for VCC selling unregistered
securities in violation of Nevada securities laws.
The state court entered judgment against both Mr. Rodriguez and
Mr. Robinson jointly and severely pursuant to NRS 90.660 (civil liability
under Nevada Securities Laws) (“Judgment”). Mr. Rodriguez did not
appeal the State Court Decisions or the Judgment. 5
C. Bankruptcy
On August 20, 2021, Mr. Rodriguez and his wife, Marilyn Kay
Schipull filed a voluntary Chapter 7 petition. Soon thereafter, the Judgment
Holders from the state court action timely commenced an adversary
4 Nevada defines a "control person" as an individual who (1) owns or controls 10
percent or more of the voting stock of a corporation; (2) is an officer or director of a
corporation; or (3) is in a position to influence the decision-making processes of a
corporation. Nev. Admin. Code 90.035.
5 Pursuant to Fed. R. Evid. 201(b) we exercise our discretion to take judicial notice
of materials electronically filed in the underlying cases. See Atwood v. Chase Manhattan
Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003); see also Burbank-
Glendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998)
(taking judicial notice of court filings in a state court case).
5
proceeding in which they objected to Mr. Rodriguez discharging the debt
resulting from the state court Judgment (“Judgment Debt”). Id.The adversary complaint sought a determination of
nondischargeability of the Judgment Debt based on § 523(a)(19)(A)(i),
which dictates a debt nondischargeable if the debt “is for . . . the violation
of any . . . Federal . . . [or] State securities laws” and the debt results from
“any judgment [or] order” filed “before, on, or after the date on which the
petition was filed.” § 523(a)(19)(A)(i), (B)(i).6
1. Cross motions for summary judgment in the bankruptcy
adversary proceeding.
After filing the adversary complaint, the Judgment Holders filed a
motion for summary judgment. In the motion, the Judgment Holders
argued that the State Court Decisions and Judgment, when read together,
had preclusive effect in establishing the elements for excepting the
Judgment Debt from Mr. Rodriguez’s discharge under § 523(a)(19).
According to the Judgment Holders, the Nevada trial court found
that Mr. Rodriguez violated Nevada securities law and the resulting
Judgment was entered against Mr. Rodriguez based on his securities law
violations. Therefore, the Judgment Holders argued that Mr. Rodriguez’s
Judgment Debt “result[ed] . . . from a[] judgment” that was “for the
violation of . . . [Nevada] State securities laws” and should not be
discharged. § 523(a)(19)(A)(i), (B)(i).
6
Mr. Rodriguez’s wife was not named in the adversary complaint.
6
Mr. Rodriguez opposed the motion for summary judgment and filed
a countermotion for summary judgment. Mr. Rodriguez assured the court
he was not trying to collaterally attack the underlying decisions nor was he
seeking review of the factual findings of the state court. Rather, he was
calling into question whether the State Court Decisions made sufficient
findings for purposes of satisfying § 523(a)(19).
According to Mr. Rodriguez, despite the plain language of the
statute, the Ninth Circuit holding in Sherman imposes an additional
requirement; that the debtor be the primary wrongdoer before determining
the debt is “for” a securities violation and therefore, nondischargeable
under § 523(a)(19). In re Sherman, 658 F.3d at 1018.
Mr. Rodriguez argued that his liability for violating securities law
was imputed solely due to his positions within the company and not
because of any actions on his part related to the note offerings. Mr.
Rodriguez posited that he was not the actual wrongdoer who committed
the securities law violation, rather, he was only secondarily and vicariously
liable for violating Nevada securities laws. Consequently, Mr. Rodriguez
reasoned, the State Court Decisions were insufficient for the bankruptcy
court to conclude that his Judgment Debt was “for” a violation of securities
law and excepted from discharge under § 523(a)(19).
The Judgment Holders filed a reply arguing that contrary to Mr.
Rodriguez’s assertions, nothing in § 523(a)(19) distinguishes between
primary or control person liability, mentions vicarious liability, or requires
7
intentional conduct by the debtor. Furthermore, unlike the debtor in
Sherman who was not a named party in the securities law violation action
nor found liable of any securities violations, Mr. Rodriguez was a named
party and found jointly and severely liable for a securities law violation.
Hence, the holding of Sherman did not provide a valid basis to dispute
whether the Judgment Debt was “for” a securities violation.
2. The bankruptcy court grants the Judgment Holders’ motion
for summary judgment.
After extensive briefing and a hearing, the bankruptcy court issued a
written decision. The court found summary judgment appropriate after
rejecting Mr. Rodriguez’s interpretation of Sherman. The court explained
that unlike the debtor in Sherman, Mr. Rodriguez was a responsible
wrongdoer as to the securities law violation. Whereas the debtor in
Sherman was a third party who was neither named in a securities law
violation action nor found liable of securities violations, Mr. Rodriguez was
both a named party and found liable in the securities law violation action.
Therefore, contrary to Mr. Rodriguez’s assertions, the holding of Sherman
did not create a genuine dispute as to whether the Judgment Debt was
“for” a securities violation.
The bankruptcy court also found issue preclusion applied after
rejecting Mr. Rodriguez’s claims that the Nevada trial court failed to fully
consider or rule on his personal liability as to the securities law violation.
The bankruptcy court cited to portions of the State Court Decisions in
8
which the state court explicitly found that Mr. Rodriguez was aware of,
and involved in, VCC’s selling of unregistered securities in violation of
Nevada securities law. Therefore, despite Mr. Rodriguez’s assertions to the
contrary, the bankruptcy court concluded that the evidentiary record
demonstrated that the claim for violation of NRS 90.660 was actually and
necessarily litigated on the merits in the State Court Action and resulted in
a final judgment against the Mr. Rodriguez for his violation of Nevada
securities law.
Accordingly, the bankruptcy court applied issue preclusion to the
State Court Decisions and Judgment after finding the underlying decisions
fully satisfied the requirements of § 523(a)(19). Because there was no
genuine issue of material fact left for the bankruptcy court to decide, the
Judgment Holders’ § 523(a)(19) motion for summary judgment was
granted and the Judgment Debt was excepted from Mr. Rodriguez’s
discharge.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err in granting summary judgment to the
Judgment Holders on their § 523(a)(19) claim based on the issue preclusive
effect of the State Court Decisions and Judgment?
9
STANDARDS OF REVIEW
We review de novo the bankruptcy court's summary judgment
rulings and its determination to except a debt from discharge. Ilko v. Cal. St.
Bd. of Equalization (In re Ilko), 651 F.3d 1049, 1052 (9th Cir. 2011). We also
review de novo the bankruptcy court's determination that issue preclusion
is available. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R.
99, 103 (9th Cir. BAP 2007).
If we determine that issue preclusion is available, we then review the
bankruptcy court's decision to apply it for an abuse of discretion. Id. A
bankruptcy court abuses its discretion if it applies the wrong legal standard
or its findings of fact are illogical, implausible or without support in the
record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
DISCUSSION
A. Legal standards for summary judgment and issue preclusion.
1. Summary judgment standards
Summary judgment is appropriate when the pleadings and
supplemental materials show that there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(a) (incorporated by Fed. R. Bankr. P. 7056); Roussos v.
Michaelides (In re Roussos), 251 B.R. 86, 91 (9th Cir. BAP 2000), aff'd, 33 F.
App'x 365 (9th Cir. 2002). The moving party bears the initial burden of
demonstrating an absence of a genuine issue of material fact. Once the
moving party has met its initial burden, the non-moving party must show
10
specific facts establishing the existence of genuine issues of fact for trial.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).
2. Issue preclusion standards
Issue preclusion applies in dischargeability proceedings to preclude
relitigation of state court findings relevant to exceptions to discharge.
Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). Bankruptcy courts may
apply the doctrine to an existing state court judgment as the basis for
granting summary judgment. See Khaligh v. Hadaegh (In re Khaligh), 338 B.R.
817, 832 (9th Cir. BAP 2006), aff'd, 506 F.3d 956 (9th Cir. 2007). Issue
preclusion in nondischargeability proceedings is governed by the
preclusion law of the state in which the judgment was issued, which in this
case is Nevada. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th
Cir. 2001).
Under Nevada law, issue preclusion applies if (1) the issue decided in
the prior litigation is identical to the issue presented in the current action;
(2) the initial ruling was on the merits and has become final; (3) the party
against whom the judgment was asserted is the party or is in privity with a
party to the prior litigation; and (4) the issue was actually and necessarily
litigated. Five Star Cap. Corp. v. Ruby, 194 P.3d 709, 713 (Nev. 2008).
B. Exceptions to discharge under § 523(a)(19)
Usually, all debts arising prior to the filing of the bankruptcy petition
will be discharged. Although this is the general rule, the statutory
provisions of § 523(a) (governing nondischargeable debt) reflect a
11
congressional decision to exclude certain liabilities from discharge ensuring
the Bankruptcy Code's fresh start policy is only available to “honest but
unfortunate debtor[s].” Grogan, 498 U.S. at 287.
At issue in this case is § 523(a)(19)(A)(i) which prohibits debtors from
discharging debts for securities violations. Section 523(a)(19) was added as
an additional exception to discharge in 2002 as part of the Sarbanes-Oxley
Act to “prevent wrongdoers from using the bankruptcy laws as a shield
and to allow defrauded investors to recover as much as possible.” In re
Sherman, 658 F.3d at 1016 (quoting 148 Cong. Rec. S7418-19 (2002)
(statement of Sen. Leahy)).
Specifically, Section 523(a)(19) makes nondischargeable 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
12
(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.
As evidenced by the plain language of the statute, § 523(a)(19)(A)(i),
(B)(i) sets forth an expedited process that accords preclusive effect to
appropriately memorialized judgments arising from liability for securities
law violations and securities fraud.
Prior to the addition of § 523(a)(19), a judgment creditor was often
required to relitigate the securities violations in bankruptcy court because
the elements of a state or federal securities violation did not align with the
elements necessary to establish nondischargeability under § 523(a). S. Rep.
No. 107-146, at 2-16 (2002). By adding § 523(a)(19), Congress created an
expedited preclusive process intended to protect a victim’s ability to
recover their losses by both eliminating the need to relitigate the securities
violations in bankruptcy court and by making the judgments and
settlements based upon securities law violations nondischargeable. See id.
at 2-8.
C. The bankruptcy court did not err in applying issue preclusion
because the State Court Decisions and Judgment expressly state
that Mr. Rodriguez violated Nevada securities law.
Mr. Rodriguez argues that the bankruptcy court erred in applying
issue preclusion because the state court did not decide his personal
culpability as to the securities violations and therefore his violation of
13
securities laws was not actually and necessarily litigated. In the alternative,
Mr. Rodriguez argues that he was only found to be secondarily or
vicariously liable of violating Nevada securities laws and therefore, the
issue decided in the state court action was not identical to the finding
necessary to exempt a debt from discharge pursuant to § 523(a)(19)(A)(i).
1. Mr. Rodriguez’s various arguments against preclusion are
without merit and are belied by the plain language of the
State Court Decisions and Judgment.
Contrary to Mr. Rodriguez’s assertions, the bankruptcy court did not
abuse its discretion in finding that Mr. Rodriguez violated a state securities
law and applying issue preclusion to the State Court Decisions and
Judgment.
After conducting a preclusion analysis, the bankruptcy court found
Nevada’s requirements for applying issue preclusion satisfied. The
bankruptcy court found that the same parties were in both actions and that
the state court rendered a valid and final judgment on the merits. The
bankruptcy court also found that the claims alleged involved violations of
Nevada securities law and that the claims of securities law violations were
actually and necessarily litigated culminating at a trial at which the
credibility of the evidence and witnesses were assessed including that of
Mr. Rodriguez.
The bankruptcy court properly rejected Mr. Rodriguez’s assertion
that his liability for the securities violation stemmed solely from his
14
position within the company and not from any overt acts on his part and
therefore, his liability was not actually and fully litigated. Drawing upon
the extensive evidentiary record, the bankruptcy court found that Mr.
Rodriguez’s primary defense at the trial court was his characterization of
himself as an innocent bystander who was unaware and not involved in
VCC’s notes offering until after VCC defaulted. The trial court, however,
was not persuaded; instead, finding Mr. Rodriguez personally liable for the
securities law violation because he was aware, involved, and influenced
VCC’s issuance of the notes.
In its decision, the bankruptcy court identified specific evidence and
testimony cited in the State Court Decisions demonstrating that the trial
court rejected Mr. Rodriguez’s attempts to minimize his involvement and
liability.7 According to the trial court, Mr. Rodriguez failed to present any
evidence demonstrating that he was not directly or indirectly involved in
the acts regarding the violation of Nevada security regulations. Rather, the
preponderance of the evidence demonstrated that both Mr. Robinson and
Mr. Rodriguez were directly and intimately involved in creating the
material to sell the Notes.8
7
For example, the state trial court found that Mr. Rodriguez was the CFO, was
designated as the point of contact for investors who had questions about the promissory
note offering, was fully involved in the finances of the company, and was aware of the
PowerPoint presentations that were prepared by VCC to show to prospective investors.
8 Because Mr. Rodriguez chose not to appeal the State Court Decisions or
Judgment, the Nevada trial court’s factual findings are not in dispute.
15
To the extent that Mr. Rodriguez argued that others were the primary
violators or more culpable, the bankruptcy court properly found such
assertions irrelevant when determining whether Mr. Rodriguez’s Judgment
Debt should be excepted from discharge under § 523(a)(19)(A)(i).
Based on the record, the bankruptcy court did not abuse its discretion
in giving preclusive effect to the State Court Decisions and Judgment
because Mr. Rodriguez fully participated in the state court action resulting
in a full and fair opportunity to dispute his liability. The state trial court
found Mr. Rodriguez personally violated Nevada securities laws based on
testimony and evidence presented. Therefore, the elements for
nondischargeability under § 523(a)(19)(A)(i) were actually litigated and
necessarily decided in rendering the State Court Decisions and Judgment.
2. Because proof of the entry of the State Court Decisions and
Judgment was tendered to the bankruptcy court, the
Judgment Debt was rendered nondischargeable under
§ 523(a)(19) without proof of any additional element.
Importantly, the bankruptcy court’s issue preclusion analysis was
unnecessary because the plain language of the State Court Decisions
confirms that Mr. Rodriguez violated securities law and the resulting
Judgment was “for” a securities law violation. There is no need to look
behind a judgment to a trial court’s factual findings when the judgment is
against the debtor (as opposed to a third party) and the judgment and
underlying decision found the debtor violated a state or federal securities
law. Accordingly, once a determination of a securities violation has been
16
made, and proof of the entry of that order is tendered to the bankruptcy
court, the debt is rendered nondischargeable under § 523(a)(19) without
proof of any additional element or analysis.
D. The bankruptcy court did not err in granting summary judgment
because there was no genuine dispute that the Judgment Debt was
for a securities violation.
The bankruptcy court did not err in granting summary judgment and
rejecting Mr. Rodriguez’s attempts to impose a primary liability element to
§ 523(a)(19)(A)(i).
1. Sherman does not impose a primary liability requirement.
Mr. Rodriguez argues the bankruptcy court erred by failing to
impose a “primary liability” standard he contends flows from the holding
of Sherman. Mr. Rodriguez is mistaken. Although Mr. Rodriguez is correct
that the Sherman court focused its analysis on the culpability of the debtor,
the Sherman court did not impose a primarily liable or most liable standard
as Mr. Rodriguez insists.
In Sherman, the SEC brought an enforcement action against certain
companies. 658 F.3d at 1010. Sherman was an attorney who represented
some of the defendants in the enforcement action. Id. As part of the action,
Sherman was ordered to disgorge retainer advances “he had received . . .
but had not [yet] earned” from his clients/defendants. Id. The SEC did not
accuse or charge Sherman with any securities violations.9 Id.9
The disgorgement order was not at issue in Sherman as “Sherman lacked any
17
After being ordered to disgorge the advancements, Sherman filed for
chapter 7 bankruptcy relief. Id. In a related adversary proceeding, Sherman
sought a declaratory judgment finding that the debt to the SEC resulting
from the disgorgement order did not arise from a violation of securities
laws and was therefore dischargeable. Id. at 1011. The bankruptcy court
granted summary judgment in Sherman's favor, concluding as a matter of
law that the SEC disgorgement order did not arise from the debtor's
violation of a securities law. Id. The district court reversed, adopting a
broad interpretation of § 523(a)(19). Id.
On appeal, the Ninth Circuit reversed the district court. Id. at 1018.
After analyzing the statutory history of § 523(a)(19) and the goals of
bankruptcy, the Sherman court held that § 523(a)(19) only prevents the
discharge of a debt for a securities violation “when the debtor is
responsible for that violation.” Id. at 1019. Because Sherman was a third
party and he was not named in the securities law violation action nor was
he found liable for violating securities law, the debt was not “for” a
securities law violation. 10 Id. at 1018. According to the Sherman court,
interest in the money because he was obligated by the California Rules of Professional
Conduct to return the amount by which his advances exceeded his ultimate fee.” In re
Sherman, 658 F.3d at 1010.
10 The Sherman court found that wrongdoing could not be imputed to the debtor
based on the disgorgement order. According to the Sherman court, requiring Sherman to
disgorge the retainer advancements was very different from deciding that he was
prevented from discharging those debts in bankruptcy. The “theories and the reasons
behind disgorgement and discharge are quite distinct.” In re Sherman, 658 F.3d at 1017.
18
Sherman was the “honest but unfortunate debtor,” § 523(a)(19) was
inapplicable, and the debt was discharged. Id.
2. Mr. Rodriguez’s Judgment Debt is “for” a securities violation.
In this case, Sherman is distinguishable, and Mr. Rodriguez’s attempts
to analogize his facts to Sherman are in vain. In Sherman, the court refused
to find a debt was “for” a securities violation when the wrongdoer was a
third party, not the debtor. Thus, Sherman stands only for the proposition
that the debtor be culpable for the securities violation, holding that
§ 523(a)(19) only “prevents the discharge of a debt for a securities violation
when the debtor is responsible for that violation” and does not apply to
debtors who receive funds derived from a securities law violation. In re
Sherman, 658 F.3d at 1017-19. Sherman does not stand for the proposition
that the debtor must be the most culpable or the primary violator as
advocated by Mr. Rodriguez. 11
Accordingly, the bankruptcy court did not err in finding there was no
genuine issue of material fact that the Judgment Debt was “for” a securities
law violation and granting summary judgment to the Judgment Holders.
CONCLUSION
On this record, we conclude that issue preclusion was available with
respect to the securities violation claim based on the State Court Decisions
11 The cases cited by Mr. Rodriguez on appeal add little to the argument as each
pertains to a different subsection of § 523(a) and/or were published prior to the
enactment of the Sarbanes-Oxley Act, and thus predate the creation of the § 523(a)(19)
exception.
19
and that the bankruptcy court did not abuse its discretion in applying issue
preclusion to the State Court Decisions and Judgment. As that left no
genuine dispute of material fact for the bankruptcy court to adjudicate, it
did not err in granting summary judgment in the Judgment Holders' favor
and finding that the Judgment Debt was nondischargeable under §
523(a)(19). We AFFIRM.
20