Oklahoma Department of Securities Ex Rel. Faught v. Wilcox

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS August 20, 2012
Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court
OKLAHOMA DEPARTMENT OF
SECURITIES, ex. rel. IRVING L.
FAUGHT, Administrator,
Plaintiff - Appellee,
Nos. 10-6056 & 10-6057
v.
MARVIN LEE WILCOX; PAMELA
JEAN WILCOX,
Defendants - Appellants.
______________________________________
OKLAHOMA DEPARTMENT OF
SECURITIES, ex rel. IRVING L.
FAUGHT, Administrator,
Plaintiff - Appellee,
v.
ROBERT WILLIAM MATHEWS,
Defendant - Appellant.
Appeal from the United States District Court
for the WesternDistrict of Oklahoma
(D.C. Nos. 5:09-CV-00186-D and 5:09-CV-00185-D)
Robert N. Sheets, (Robert J. Haupt with him on the briefs), of Phillips Murrah P.C.,
Oklahoma City, Oklahoma for Defendants – Appellants.
Amanda Cornmesser, (Gerri Kavanaugh with her on the briefs), for the Oklahoma
Department of Securities, Oklahoma City, Oklahoma for Plaintiff – Appellee.
Before BRISCOE, Chief Circuit Judge, HOLLOWAY, and O’BRIEN, Circuit Judges.
O’BRIEN, Circuit Judge.
At the behest of the Oklahoma Department of Securities, Oklahoma courts found
early investors in a Ponzi scheme carried out by a third party to have been unjustly
enriched and required disgorgement. Judgments were entered against those investors.
We must decide whether the judgments entered against Robert Mathews, Marvin Wilcox,
and Pamela Wilcox qualify as a nondischargeable debt under 11 U.S.C. § 523(a)(19).
The bankruptcy court decided the debts were nondischargeable because they were “for a
violation” of securities laws. The district court affirmed. We reverse and remand for
further proceedings.1
I. BACKGROUND
In 2005 Marsha Schubert pled guilty to crimes related to a Ponzi scheme2 she used
1
Our jurisdiction derives from 28 U.S.C. § 1291.
2
A Ponzi scheme is:
[a] fraudulent investment scheme in which money contributed by later
investors generates artificially high dividends for the original investors,
whose example attracts even larger investments. Money from the new
investors is used directly to repay or pay interest to earlier investors, usu.
without any operation or revenue-producing activity other than the
-2-
to defraud multiple investors of funds totaling over nine million dollars. Her activities
violated the Oklahoma security laws. Robert Mathews and the Wilcoxes were investors
in Schubert’s Ponzi scheme. After Schubert’s conviction, the Oklahoma Department of
Securities (the Department) sued over 150 of her investors, including Mathews and the
Wilcoxes, to recoup funds distributed in the Ponzi scheme on the grounds of unjust
enrichment, fraudulent transfer, and equitable lien. The Department later requested
summary judgment only on the basis of unjust enrichment. The Oklahoma trial court
granted summary judgment requiring Mathews and the Wilcoxes to repay profits of
approximately half a million dollars each. The Wilcoxes, but not Mathews,
unsuccessfully appealed to the Oklahoma Court of Civil Appeals and subsequently to the
Oklahoma Supreme Court, which reversed and remanded for further proceedings.3 See
Okla. Dep’t. Sec. v. Blair et al, 231 P.3d 645, 670 (Okla. 2010).
Mathews and the Wilcoxes (collectively the Debtors) filed for bankruptcy
protection and the Department initiated adverse proceedings to avoid discharge of the
continual raising of new funds. This scheme takes its name from Charles
Ponzi, who in the late 1920s was convicted for fraudulent schemes he
conducted in Boston.
Black’s Law Dictionary 1198 (8th ed. 2004).
3
The Oklahoma district court ordered the return of all profits, without exception.
The Oklahoma Supreme Court, however, determined repayment of profits paid to
innocent investors was appropriate only if the early investors had received an
unreasonable rate of return and remanded so the state trial court could apply the new
standard. See Okla. Dept. of Sec. v. Blair, 231 P.3d 645, 669 (Okla. 2010). On remand,
the trial court entered an order declining to apply the standard to the Wilcoxes because it
concluded, while not accused directly of securities violations, they were not innocent
investors. The Oklahoma Supreme court affirmed this decision. See Okla. Dep’t. of Sec.
v. Wilcox, 267 P.3d 106, 111 (Okla. 2011).
-3-
judgment debt. The bankruptcy court consolidated the cases and granted summary
judgment to the Department, concluding the debts were not dischargeable because they
fell under the exception in 11 U.S.C. § 523(a)(19) as judgments for the violation of
securities laws. The district court affirmed. The Debtors appeal from the district court’s
judgment.4
II. DISCUSSION
We review the bankruptcy court’s interpretation of a statute de novo. In re Troff,
488 F.3d 1237, 1239 (10th Cir. 2007).
The Supreme Court
has certainly acknowledged that a central purpose of the [Bankruptcy] Code
is to provide a procedure by which certain insolvent debtors can reorder
their affairs, make peace with their creditors, and enjoy a new opportunity
in life with a clear field for future effort, unhampered by the pressure and
discouragement of preexisting debt. But in the same breath that . . . [it]
ha[s] invoked this fresh start policy, . . . [it] ha[s] been careful to explain
that the Act limits the opportunity for a completely unencumbered new
beginning to the honest but unfortunate debtor.
Grogan v. Garner, 498 U.S. 279, 286-87 (1991) (citation and quotation omitted).
“Exceptions to discharge are to be narrowly construed, and because of the fresh start
objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.” In re Sandoval,
541 F.3d 997, 1001 (10th Cir. 2008) (quotation omitted).
Under 11 U.S.C. § 523:
(a) A [bankruptcy] discharge . . . does not discharge an individual debtor
from any debt--
4
Our review calls for us to look past the district court’s opinion to that of the
bankruptcy court. See In re Paul, 534 F.3d 1303, 1310 (10th Cir. 2008).
-4-
(19) 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 . . . .
The burden is on the creditor to show a debt is nondischargeable under § 523(a).
Grogan, 498 U.S. at 283. “Section 523(a)(19) discharge exceptions are often defined by
law external to the Bankruptcy Code.” In re Lichtman, 388 B.R. 396, 409 (Bankr. M.D.
Fla. 2006).
There is a valid state court judgment against the Debtors, entered to require them
to repay profits distributed to them as a result of Schubert’s Ponzi scheme. The only
dispute is whether such a judgment qualifies as one “for a violation” of securities laws
under § 523(a)(19). The Department argues the state court judgment is “for the
violation” of securities laws because the disgorgement was a direct result of Schubert’s
violation of securities laws and because the Debtors materially aided in the violation.5
5
Although the Department argued the debts were nondischargeable under
523(a)(2)(A) in the bankruptcy proceeding it has limited itself on appeal to arguing under
523(a)(19). The Debtors claim the bankruptcy and district courts ignored disputed issues
of fact regarding their level of culpability; the Department makes much of their purported
complicity with Schubert’s scheme. However, the level of culpability of the debtors has
no bearing on our interpretation of 523(a)(19), which only requires us to determine if the
judgments at issue are for a violation of securities laws. The Department chose not to
prosecute Mathews or the Wilcoxes for securities violations. See Blair, 231 P.3d at 652
(“In the trial court the Department explained that it made no allegation that the
defendants violated the securities statutes or materially aided in the violation of those
statutes.”). Our task is not to determine whether they committed such violations but
whether the judgment against them is “for” securities violations. We therefore focus not
-5-
The Debtors contend the judgment is not a debt incurred “for the violation” of securities
laws because they have never been charged with such violations.
[W]e begin with the understanding that Congress says in a statute what it
means and means in a statute what it says. . . . [W]hen the statute’s
language is plain, the sole function of the courts--at least where the
disposition required by the text is not absurd--is to enforce it according to
its terms.
Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)
(quotations and citations omitted). These debts do not fall under the 523(a)(19) exception
according to the plain language of the statute. The judgments at issue are not “for a
violation” of securities laws but for unjust enrichment resulting from someone else’s
violation of those statutes. 6 Although the Department argues such unjust enrichment is a
violation of the securities laws, the Oklahoma Supreme Court clearly stated “[t]he
defendants were not charged with securities violations.” Blair, 231 P.3d at 650.
During oral argument, the Department attempted to analogize this case to
McKowen v. IRS, in which we concluded nondischargeable debt “for a tax” included a
transferee’s liability to pay taxes assessed to his defunct business. 370 F.3d 1023 (10th
Cir. 2004). We determined the transferee tax liability was still primarily for a tax
on the underlying facts but on the nature of the judgments at issue. The Wilcoxes’ appeal
(or Mathews’ lack thereof) in Oklahoma does not affect our decision because the
Oklahoma Supreme Court focused on whether the parties had been unjustly enriched, a
completely different question.
6
The Oklahoma Supreme Court rejected an explicit grant of power in the
securities statutes as a basis for jurisdiction in the underlying action basing the
Department’s right to recovery entirely in equity. Blair, 231 P.3d at 652, 661.
-6-
notwithstanding the fact that responsibility for it had been transferred.7 Id. In contrast,
the debtors’ liability in the instant case was never for a violation of securities laws but
only for unjust enrichment. It is not a single type of liability that was transferred from
one party to another, as in McKowen, but a completely different type of liability.
Examining the history behind the statute does not lead us to a different conclusion.
11 U.S.C. § 523(a)(19) was enacted as part of the Sarbanes-Oxley Act in 2002. The
Senate Report on the draft legislation indicates it was enacted to address perceived
loopholes in securities laws after the Enron debacle.8 The early language of §
523(a)(19)(A) excepted from discharge a judgment that “arises under a claim relating to”
securities violations. S. Rep. No. 107-146 at 27. The language was subsequently
changed to except a judgment that “is for” securities violations. 11 U.S.C. §
523(a)(19)(A).
The Department relies heavily on the Senate Report as indication that the law was
7
Additionally, in McKowen we were faced with the need to interpret the
bankruptcy provisions in a manner that did not run afoul of seemingly conflicting
provisions of the tax code, which dictated transferred tax liability be collectible “in the
same manner and subject to the same provisions and limitations as in the case of the taxes
with respect to which the liabilities were incurred.” Id. at 1027 (quotation omitted).
Here, our interpretation of the exception to discharge, which must be construed narrowly,
is constrained by no such conflict.
8
Current bankruptcy law permits wrongdoers to discharge their obligations
under court judgments or settlements based on securities fraud and other
securities violations. This loophole in the law should be closed to help
defrauded investors recoup their losses and to hold accountable those who
incur debts by violating our securities laws.
S. Rep. No. 107-146 at 8.
-7-
intended to “help defrauded investors recoup their losses . . . .” S. Rep. No. 107-146 at 8.
Assuming the report could be a useful tool of statutory construction, it is of little help to
the Department as it consistently refers to “hold[ing] accountable those who incur debts
by violating our securities laws” and explains “the bill protects victims’ rights to recover
from those who have cheated them.” Id. at 8, 11 (emphasis added). It is evident from the
text of § 523(a)(19)(A) that Congress intended to penalize the perpetrators of such
schemes by denying them relief from their debts. Adopting the Department’s
interpretation would impose the heavy penalty of nondischargeability on violators and
nonviolators alike. That Congress intended such an extreme result is evident neither in
the text of the statute9 nor in the historical record.
The Department cites an unpublished order in Crawford v. Myers, No. 09-1211
(Bankr. D. Colo., July 20, 2009, Order on Motion to Dismiss Complaint)10 and SEC v.
Sherman, 406 B.R. 883 (C.D. Cal. 2009). The judge in the Myers case concluded the
statute was intended to reach innocent investors. As we have explained, we do not
believe the statute supports such a reading. Similarly, the debtor in Sherman “had
obtained funds derived from a [third party’s] violation of federal securities laws to which
9
The Department points out the statute uses language limiting exceptions to
actions “by the debtor” in other sections and that no such limitation is imposed here.
This is a valid point but doesn’t answer the basic question of whether the underlying
judgment was “for a violation” of securities laws. The judgments at issue here were not
part of the proceedings instituted against Schubert but were an entirely separate action.
The funds were to be disgorged because they were unfairly distributed to the recipients,
not because the recipients violated securities laws.
10
Myers was eventually dismissed on stipulation after settlement.
-8-
he had no legitimate claim of ownership.” Id. at 885. The bankruptcy judge determined
the debt was dischargeable but the district court reasoned the SEC was merely reaching
through the debtor to collect assets in which the debtor had no equitable interest and cited
the bankruptcy decision in this case, concluding the repayment order was a
nondischargeable debt in part because to permit discharge would “frustrate the ability of
the SEC to enforce federal securities laws.” Id. at 887.
Following the briefing and oral argument in the case before us, however, the Ninth
Circuit reversed the district court’s decision in Sherman. Sherman v. SEC, 658 F.3d
1009, 1010 (9th Cir. 2011). Recognizing the merits of the same arguments made by the
dissent here, the court nonetheless concluded the narrow construction applied to
discharge exclusions and the purpose of bankruptcy to provide a fresh start to honest but
unfortunate debtors precluded a reading of the statute to include debtors who are not
charged with securities violations. Id. at 1015-16. Similar to the situation here, Sherman
was not necessarily an “innocent” in acquiring the funds he was ordered to disgorge, but
he had not been accused of a securities violation. As the court noted:
[If the third party in question has actually aided or abetted a securities
violation, that party may be prosecuted for a violation of securities laws in
addition to the primary violator. . . . If a creditor can show that a debtor has
concealed property or funds from the bankruptcy court, a discharge can be
denied in its entirety, 11 U.S.C. § 727(a)(2), or revoked after it is granted,
11 U.S.C. § 727(d). . . . In short, the Bankruptcy Code already includes
protections against attempting to conceal assets or defraud creditors, or
otherwise failing to disgorge available assets. There is no additional need
for us to expand the scope of § 523(a)(19) to cover innocent debtors in
order to accomplish this goal.
Id. at 1018.
-9-
 Although the Department claims these debtors are not innocent parties, it declined
to prosecute them for securities laws violations. Had it done so successfully, any
judgment it obtained would no doubt be considered nondischargeable under § 523(a)(19).
Instead, it argues these debts are immune from discharge merely because someone
violated the securities laws and they coincidently profited. Permitting debtors, who were
not personally found to be in violation of securities laws, to obtain relief from a judgment
intended only to redistribute funds among multiple victims of a Ponzi scheme is in
accordance with the plain language of the statute. It in no way frustrates the ability of the
various securities regulators to carry out their responsibilities or to bring proceedings
against violators.
The Department’s position conveniently serves its ends and perhaps (in the
abstract) a public good. But the language of the statute cannot reasonably be stretched
that far.
REVERSED AND REMANDED to the Bankruptcy Court for further
proceedings.
- 10 -
10-6056, In re Wilcox and 10-6057, In re Mathews
BRISCOE, Chief Judge, dissenting.
I respectfully dissent. In my view, the majority errs in two important respects.
First, and most significantly, the majority misinterprets 11 U.S.C. § 523(a)(19) to render
nondischargeable only those debts that arose from the debtor’s personal violation of
federal or state securities laws. Nothing in the plain language of § 523(a)(19),
particularly when read together with the rest of the statute, supports such an
interpretation. Instead, § 523(a)(19) must be read more broadly to encompass not only
those debts that arose from the debtor’s own violation of federal or state securities laws,
but also those debts that are representative of violations of federal or state securities laws
committed by others. Second, the majority fails to recognize that, even under its unduly
narrow interpretation of § 523(a)(19), the judgment entered against the Wilcoxes in the
Oklahoma state courts is nondischargeable because the Wilcoxes were found to have
knowingly participated in violating Oklahoma state securities laws.
As a result of these differences, I would affirm the bankruptcy court’s decision
concluding that the Oklahoma state court judgment entered against Mathews was
nondischargeable under § 523(a)(19). As for the Wilcoxes, I would remand to the district
court with directions to remand the matter to the bankruptcy court for further proceedings.
On remand, the bankruptcy court should treat the final judgment entered against the
Wilcoxes in state district court as nondischargeable under § 523(a)(19).
I
The underlying Ponzi scheme
From approximately May 1992 through October 2004, Martha Schubert, an
Oklahoma resident, worked as a registered agent of two registered investment broker-
dealers in Oklahoma: AXA Advisors (from 1992 through May 2004) and Wilbanks
Securities (from May 2004 to October 2004). As a registered agent, Schubert “plac[ed]
investments [for clients] in legitimate accounts with recognized national brokerage
houses.” App. at 470. Beginning in or about 2001, Schubert, unbeknownst to AXA
Advisors, began engaging in outside securities activities by offering and selling so-called
Investment Program Interests to individual clients. “Schubert directed [i]nvestors to
make their checks payable to her personally or to Schubert and Associates,” id. at 262, an
unincorporated association, id. at 470. “Schubert did not disclose to [i]nvestors how she
would invest their money, but generally stated that the money would be used to make
trades in option contracts,” and she “promised that the investments were ‘fool proof’” and
would yield “thirty percent (30%) annual interest.” Id. at 262. Schubert’s program,
however, was a sham. To begin with, “[t]he Investment Program Interests were not
registered as securities under” Oklahoma law. Id. Further, “Schubert used new [i]nvestor
money to pay principal and/or profits to [i]nvestors who had previously invested.” Id. In
short, Schubert’s program was a Ponzi scheme.
“In April of 2004, AXA Advisors conducted an audit on Schubert regarding wire-
fund activity involving her customers’ brokerage accounts and deposits from . . . Schubert
2
and Associates.” Id. at 261. “In May of 2004, AXA Advisors permitted Schubert to
resign while she was still under investigation.” Id. Following her resignation, Schubert
began working for Wilbanks Securities. Schubert continued her fraudulent investment
scheme, apparently while working for Wilbanks, until approximately October 2004.
In 2005, Schubert was indicted by a federal grand jury. Schubert subsequently
pled guilty to a single count of money laundering and was sentenced to a term of
imprisonment of 120 months.
The state lawsuit against certain investors
On May 11, 2005, the Oklahoma Department of Securities (ODS) filed suit against
158 individuals (described in the complaint as “Relief Defendants”), including Robert
Mathews and Marvin and Pamela Wilcox, who had invested money with Schubert and in
turn “received cash and other property and/or control property that [we]re the proceeds of
the unlawful activities of . . . Schubert.” Id. at 307. ODS’s complaint alleged that the
Relief Defendants “received . . . over $6,000,000 of the $9,000,000 lost in th[e] Ponzi
scheme.” Id. at 314. ODS asserted claims against the Relief Defendants under the
Oklahoma Uniform Securities Act, Okla. Stat. tit. 71 § 1-101 et seq., for unjust
enrichment.
ODS moved for summary judgment, alleging that each Relief Defendant “opened
an investment account with AXA Advisors, with Schubert acting as investment advisor,
and transacted certain purchases, sales and withdrawals in those accounts,” id. at 473, and
that “all monies received into [those] AXA accounts were accounted for in statements
3
provided by AXA, but that each [Relief Defendant] also received additional sums from
commingled Schubert bank accounts without supporting statements,” id.
On December 12, 2006, the state district court granted ODS’s motion for summary
judgment against Mathews and entered judgment against Mathews and in favor of the
ODS. Less than two months later, on February 5, 2007, the state district court granted
ODS’s motion for summary judgment against the Wilcoxes and entered judgment against
them and in favor of ODS. In each instance, the state district court entered judgment in
favor of ODS in an amount equal to the additional sums received by Mathews and the
Wilcoxes.
Some of the defendants in the state court action against whom judgments were
entered, including the Wilcoxes but not Mathews, appealed to the Oklahoma Court of
Civil Appeals (OCCVA). On April 13, 2007, the OCCVA “h[e]ld that, under
[Oklahoma] laws, disgorgement may be ordered in securities cases against those other
than actual violators of the Act, where such relief is appropriate under the facts and
circumstances of the case,” and that the ODS “[wa]s the proper party to bring such an
action.” Id. at 477. In turn, the OCCVA held that the state district court correctly granted
summary judgment in favor of ODS on its unjust enrichment claims. The OCCVA noted
that, aside from the amount each Relief Defendant deposited into his or her AXA account,
each “received sums from Schubert which were purportedly profits from option contracts
or day trading in securities.” Id. at 487. However, the OCCVA noted, “[i]t [wa]s
uncontroverted that such profits did not exist and the additional sums [the Relief
4
Defendants] received were instead fraudulently obtained from other investors with
Schubert and Associates.” Id. In short, the OCCVA concluded, the Relief Defendants
were “in possession of funds which, in equity and good conscience, belong[ed] to other
investors.” Id.
The federal court proceedings
In 2007, following issuance of the OCCVA’s decision, Mathews and the Wilcoxes
filed for Chapter 7 bankruptcy. The ODS responded by filing adversary proceedings
against Mathews and the Wilcoxes seeking “exceptions to the[ir] . . . discharges for fraud
pursuant to 11 U.S.C. § 523(a)(2) and securities-related fraud pursuant to § 523(a)(19).”
Id. at 571. In support, the ODS alleged that Schubert’s Ponzi scheme included a “check
exchange scheme,” id., under which “Schubert would use other people’s checking
accounts to ‘float’ payments to investors as their purported profits.” Id. at 571-72. The
ODS further alleged that Mathews and the Wilcoxes “knowingly participated in the check
exchange scheme by allowing Schubert to funnel money through their checking
accounts,” and thereby “materially aided Schubert in her securities fraud scheme.” Id. at
572. Mathews and the Wilcoxes denied those allegations.
On December 12, 2008, the bankruptcy court granted summary judgment in favor
of the ODS. In doing so, the bankruptcy court noted that the exception to dischargeability
set forth in 11 U.S.C. § 523(a)(19) “has two elements: (1) a debt that is for a violation of
state securities laws; and (2) that debt results from a judgment or order in a federal or
state judicial proceeding.” Id. at 574. The bankruptcy court in turn concluded that these
5
elements were satisfied with respect to Mathews and the Wilcoxes:
A review of the opinion of the [OCCVA] makes clear that the disgorgement
judgment against the Defendants was made pursuant to Oklahoma securities
law. Although the Defendants strongly argue they were innocents caught in
the web of Schubert’s fraudulent scheme, it is of no legal consequence since
Oklahoma law does not require wrongful intent. The Oklahoma Court of Civil
Appeals explained, “We agree with the assertion by the Department . . . and
Receiver that Appellants’ . . . defense of being ‘innocent victims’ has no merit
under the facts here. Appellants are in possession of funds which, in equity
and good conscience, belong to other investors.” Thus, the Plaintiff has
clearly established that the debt is for a violation of Oklahoma securities law.
Id. at 575 (citation omitted).
Mathews and the Wilcoxes appealed from the bankruptcy court’s decision and
elected to have their appeals “heard by the United States District Court, Western District
of Oklahoma.” Id. at 586. Mathews and the Wilcoxes argued, in pertinent part, that “the
Bankruptcy Court erred because § 523(a)(19) is limited to judgments resulting from the
debtor’s direct violation of the state securities law.” Id. at 58. On February 10, 2010, the
district court, reviewing the bankruptcy court’s legal conclusions de novo, granted
summary judgment in favor of the ODS and against Mathews and the Wilcoxes.
On March 5, 2010, Mathews and the Wilcoxes filed notices of appeal from the
district court’s judgment.
The Oklahoma Supreme Court’s Blair decision
During the pendency of the federal court proceedings, the defendants in the
Oklahoma state proceedings who had unsuccessfully appealed to the OCCVA, including
the Wilcoxes, sought certiorari review in the Oklahoma Supreme Court (OSC). The OSC
6
granted review and, on February 23, 2010, issued a published decision reversing the
OCCVA’s decision (the OCS’s decision was subsequently corrected and reissued on
April 6, 2010). Okla. Dep’t of Securities ex rel. Faught v. Blair, 231 P.3d 645 (Okla.
2010) (Blair). The OSC held that the ODS “may proceed against the innocent investors
to recover unreasonable profits received in excess of their investments in the Ponzi
scheme.” Id. at 649 (emphasis in original). Although the OSC “agree[d] with the [ODS]
that the nature of the transaction between the Ponzi operator and innocent investor may be
inequitable and the innocent investor’s right to the funds becomes merely possessory,” it
“disagree[d] that the profit [wa]s, as a matter of law, inequitable and thereby subject to a
restitution proceeding.” Id. at 658 (emphasis in original). Instead, the OSC concluded,
the ODS “must prove that an innocent investor’s conduct of possessing a Ponzi-scheme
profit is, by itself, active wrongdoing or possession against equity and good conscience
sufficient to justify a constructive trust imposed by a District Court.” Id. at 659
(emphasis in original). In that regard, the OSC concluded, the ODS “may seek relief
against Ponzi investors who received profits that are artificially high dividends,” but may
not “seek restitution from innocent Ponzi-scheme investors who received their investment
with a reasonable interest thereon.” Id. at 663.
Applying its holdings to the facts presented, the OSC concluded that the state
district court improperly granted summary judgment “based upon the principle that a
profit to a Ponzi-scheme investor is, as a matter of law, unjust enrichment, and subject to
an action by the [ODS] for restitution.” Id. at 669. Accordingly, the OSC remanded the
7
action to the state district court “for further proceedings consistent with [the OSC’s]
opinion.” Id. at 670.
Post-Blair proceedings
On remand from the OSC, the state district court, on October 18, 2010, granted
partial summary judgment in favor of the ODS and against the Wilcoxes “on the issue of
liability relative to [ODS’s] cause of action for unjust enrichment.” Aplee.’s Supp. Br.,
Exh. 1 at 2. In doing so, the state district court concluded that “by virtue of their
participation in the Schubert check-kiting scheme, the Wilcoxes were not innocent
investors and the standard for recovery from investors in Ponzi schemes set forth in Blair
did not apply.” Okla. Dep’t of Sec. v. Wilcox, 267 P.3d 106, 109 (Okla. 2011).
The ODS subsequently “filed a second motion for summary judgment, asserting
that further documentation received from the Wilcoxes demonstrated that no issue of
material fact remained as to the amount the Wilcoxes netted from Schubert’s Ponzi
scheme.” Id. “The Wilcoxes did not respond to the motion.” Id. Consequently, on
December 17, 2010, the state district court “entered judgment in favor of [the ODS] and
against the Wilcoxes in the amount of $509,505.00, plus prejudgment and post-judgment
interest and costs.” Id. at 110.
The Wilcoxes appealed. On October 11, 2011, the OSC affirmed the judgment
entered by the state district court, concluding “that there [wa]s no dispute of material fact
justifying trial on th[e] issue” of whether the Wilcoxes were “‘innocent’ investors entitled
to the equitable treatment provided to innocent investors in Blair.” Id. at 111. In
8
reaching this conclusion, the OSC noted that the ODS “offered admissible evidence that
the Wilcoxes were not ‘innocent investors’ or ‘innocent victims’ of the Ponzi scheme, but
were in fact partners with Schubert whose bank accounts were actively used in Schubert’s
check-kiting scheme.” Id. The OSC further noted that “[t]he Wilcoxes did not deny the
existence of or their active participation in Schubert’s check-kiting scheme.” Id.
II
“Our review of the bankruptcy court’s decision is governed by the same standards
of review that govern the district court’s review of the bankruptcy court.” In re Roser,
613 F.3d 1240, 1243 (10th Cir. 2010) (internal quotation marks omitted). “Because this
case presents no disputed factual issues but only matters of law, our review is de novo.”
Id.
Section 523(a)(19) of the Bankruptcy Code provides, in pertinent part, that a
bankruptcy discharge:
does not discharge an individual debtor from any debt–
***
(19) 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 . . . ; and
(B) results, before, on, or after the date on which the [bankruptcy]
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
9
payment, attorney fee, cost, or other payment owed by the
debtor.
11 U.S.C. § 523(a)(19).
The majority summarily concludes that, under “the plain language of th[is]
statute,” “[t]he judgments at issue are not ‘for a violation’ of securities laws but for unjust
enrichment resulting from someone else’s violation of those statutes.” Maj. Op. at 6. The
majority also states, in a related footnote, that the ODS “chose not to prosecute Mathews
or the Wilcoxes for securities violations.” Id. at 5-6 n.5. Thus, in sum, the majority
apparently reads § 523(a)(19) as requiring the debt at issue to have arisen from the
debtor’s personal violation of federal or state securities laws.
In my view, this is an unduly restrictive reading of § 523(a)(19). “Statutory
construction must begin with the language employed by Congress and the assumption that
the ordinary meaning of that language accurately expresses the legislative purpose.”
Gross v. FBL Fin. Servs., Inc., 557 U.S. 167, 175 (2009) (internal quotation marks
omitted). As noted, § 523(a)(19) prohibits, in pertinent part, the discharge in bankruptcy
of “any debt . . . that . . . is for . . . the violation of . . . any of the State securities laws.”
11 U.S.C. § 523(a)(19). The word “debt” “is defined in the [Bankruptcy] Code as
‘liability on a claim,’ § 101(12), a ‘claim’ is defined . . . as a ‘right to payment,’ §
101(5)(A), and a ‘right to payment,’ [the Supreme Court has] said, ‘is nothing more nor
less than an enforceable obligation.’” Cohen v. de la Cruz, 523 U.S. 213, 218 (1998)
(quoting Penn. Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 559 (1990)). In turn,
10
the word “for” means “[r]epresenting” or “as representative of,” Oxford English
Dictionary (2d ed. 1989) (online version); see Cohen, 523 U.S. at 220-21 (concluding that
the phrase “debt for,” as used in § 523(a), “means ‘debt arising from’ or ‘debt on account
of’”), and the word “violation” refers to an “[i]nfringement,” “breach,” or “flagrant
disregard or non-observance,” Oxford English Dictionary (2d ed. 1989). Considered
together, § 523(a)(19) thus refers to every enforceable obligation of the debtor to another
that represents or is representative of an infringement or breach of “any of the Federal
securities laws . . . , any of the State securities laws, or any regulation or order issued
under such Federal or State securities laws.” See generally Cohen, 523 U.S. at 220
(concluding that “‘debt for’ is used throughout [§ 523(a)] to mean ‘debt as a result of,’
‘debt with respect to,’ ‘debt by reason of,’ and the like.”).
As so defined, nothing in the statutory language of § 523(a)(19) limits the scope of
nondischargeable obligations to those arising out of federal or state securities violations
committed by the debtor. More specifically, it is entirely possible for an obligation — in
particular a court judgment for unjust enrichment — to represent or be representative of a
federal or state securities violation committed by someone other than the person against
whom the judgment was entered. Had Congress intended to limit the scope of §
523(a)(19) to only those obligations arising out of the debtor’s personal violation of
federal or state securities laws, it would have said so. Indeed, a review of some of §
523(a)’s other subsections confirms this. For example, § 523(a)(6) renders
nondischargeable any debt “for willful and malicious injury by the debtor to another
11
entity or to the property of another entity.” 11 U.S.C. § 523(a)(6) (emphasis added).
Similarly, § 523(a)(9) renders nondischargeable any debt “for death or personal injury
caused by the debtor’s operation of a motor vehicle if such operation was unlawful
because the debtor was intoxicated from using alcohol, a drug, or another substance.” 11
U.S.C. § 523(a)(9) (emphasis added). Because Congress did not include any such
limiting language in § 523(a)(19), the only reasonable conclusion is that Congress
intended § 523(a)(19) to be broad enough to encompass circumstances in which the
debtor personally violated federal or state securities laws, as well as circumstances in
which a third party has violated federal or state securities laws and the debtor, for one
reason or another, has been held financially responsible for that violation.
The majority, obviously finding no support for its interpretation in the language of
§ 523(a)(19) itself, cites to the legislative history. To the extent the legislative history is
relevant, it is as, if not more, supportive of my interpretation than the majority’s.
Subsection (a)(19) was added to § 523 in 2002 by the Sarbanes-Oxley Act of 2002, Pub.
L. No. 107-204, § 803(3), 116 Stat. 745.1 The overall focus of that Act, which was
introduced in the wake of the Enron and other corporate scandals, was to “restore
[corporate] accountability” by “provid[ing] prosecutors with new and better tools to
effectively prosecute and punish those who defraud our Nation’s investors,” “provid[ing]
tools [to] improve the ability of investigators and regulators to collect and preserve
1
The Act was also known in the Senate as the Public Company Accounting
Reform and Investor Protection Act, and in the House as the Corporate and Criminal
Fraud Accountability Act of 2002.
12
evidence which proves fraud,” and “protect[ing] victims’ rights to recover from those
who have cheated them.” 148 Cong. Rec. S1783-01, S1786 (2002). As I see it, it is
entirely consistent with the Act to treat as nondischargeable any debts that arose from
violations of federal or state securities laws, regardless of whether or not the debtor was
personally involved in those violations. Indeed, to hold otherwise would result in a
windfall to the debtor. And, although there are certainly comments in the legislative
history indicating that Congress’s prime focus in enacting § 523(a)(19) was to prevent
“corporate officers” from “be[ing] able to misuse the bankruptcy laws to discharge
liabilities based upon securities fraud,” 148 Cong. Rec. H4683-01, H4685 (2002), nothing
in the legislative history or, more importantly, the text of the statute, indicates that
Congress intended to allow so-called innocent investors to effectively benefit from those,
or similar, securities violations.
Lastly, the majority cites with approval the Ninth Circuit’s decision in Sherman v.
SEC, 658 F.3d 1009 (9th Cir. 2011). The panel in Sherman, in a 2-to-1 decision, held
“that § 523(a)(19) only prevents the discharge of a debt for a securities violation when the
debtor is responsible for that violation.” 658 F.3d at 1012. In support, the panel majority
in Sherman relied not on § 523(a)(19)’s “text and structure,” which it found inconclusive,
but rather on a combination of “a rule of construction interpreting exceptions to discharge
narrowly,” id. at 1015, and what it characterized as “modest additional support for [its]
interpretation” in “[t]he legislative history of § 523(a)(19),” id. at 1016.
In my view, the dissenting opinion in Sherman is substantially more persuasive
13
and properly takes the Sherman majority to task for “disregard[ing] the plain meaning of .
. . § 523(a)(19).” Id. at 1019. As the dissent correctly notes, a debt can be “for the
violation of any of the Federal securities laws,” § 523(a)(19)(A)(i), “when the debtor
[personally] committed the violation” or “when it is an obligation to return the proceeds
of the violation being held in trust for the wrongdoer,” 658 F.3d at 1019 (emphasis
omitted). By construing § 523(a)(19) narrowly to encompass only the first of these
possibilities, the panel majority in Sherman “misconstrues the plain text [of the statute],
distorts the statutory structure and actually defeats the proper objectives of bankruptcy
policy and the securities laws.” Id. at 1029.
Having outlined what I believe to be the proper interpretation of § 523(a)(19), the
next task is to apply that interpretation of § 523(a)(19) to the facts presented in these
consolidated appeals. Turning first to Mathews’ appeal, it is undisputed that the state
district court entered judgment against him and in favor of the ODS for unjust enrichment
under the Oklahoma Uniform Securities Act, and that Mathews did not appeal from this
judgment. Although the state district court did not make any findings that
Mathews was directly involved in the underlying violations of Oklahoma state securities
laws, it is beyond dispute that the judgment entered against Mathews was intended to be
representative of the infringement of Oklahoma state securities laws committed by
Schubert.2 Consequently, that judgment falls within the scope of § 523(a)(19) and is not
2
To be sure, the judgment against Mathews was entered prior to, and thus is not
consistent with, the OSC’s decision in Blair. But, as noted, Mathews did not appeal from
(continued...)
14
dischargeable in Mathews’ bankruptcy proceedings.
The Wilcoxes’ appeal presents a different situation. The judgment that was
originally entered against the Wilcoxes was reversed by the OSC in Blair and remanded
to the state district court for further proceedings. On remand, the state district court
granted summary judgment in favor of the ODS, finding that the undisputed evidence
established “that by virtue of their participation in the Schubert check-kiting scheme, the
Wilcoxes were not innocent investors.” Wilcox, 267 P.3d at 109. The state district court
further “entered judgment in favor of [ODS] and against the Wilcoxes in the amount of
$509,505.00, plus prejudgment and post-judgment interests and costs.” Id. at 110. On
appeal, the OSC affirmed that judgment, noting, in pertinent part, that “[t]he Wilcoxes did
not deny the existence of or their active participation in Schubert’s check-kiting scheme.”
Id. at 111.
Accordingly, I believe the appropriate course of action is to remand the Wilcoxes’
appeal with directions to the bankruptcy court to treat the judgment entered in favor of the
2
(...continued)
the judgment, and there is no indication in the record on appeal that he has sought, let
alone been granted, relief from the judgment based upon Blair.
15
ODS and against the Wilcoxes as nondischargeable under § 523(a)(19).3
3
The judgment entered against the Wilcoxes should also, in my view, be
considered nondischargeable under the majority’s narrow interpretation of § 523(a)(19),
given the state district court’s finding regarding the Wilcoxes’ knowing involvement in
Schubert’s criminal scheme. The same would also be true under the Sherman majority’s
similarly narrow interpretation of § 523(a)(19). See 658 F.3d at 1019 (holding that “§
523(a)(19) prevents the discharge of debts for securities-related wrongdoings . . . where
the debtor is responsible for that wrongdoing”).
16