Boccarsi v. Simon, 1:17-cv-09362

Background

In 2008 Mark Simon sued Constantino Boccarsi and others in Arizona state court alleging securities fraud, common-law fraud, and negligent misrepresentation based on representations that Simon’s funds would be invested in a stock‑trading program that never lost money.
Simon invested $200,000 in 2006 after representations that the program would generate short‑term profits; defendants never invested the funds and returned only $34,000; state court claims against the Debtors proceeded and their answer was struck after they failed to appear.
On November 24, 2010 the Arizona court entered a default judgment against the Debtors, awarding Simon $243,359 (final judgment amended May 19, 2011).
The Debtors filed Chapter 7 in 2016; Simon brought an adversary action seeking a determination that the state‑court judgment debt was non‑dischargeable under 11 U.S.C. § 523(a)(19).
The Bankruptcy Court granted Simon summary judgment, concluding the default judgment qualified as a “judgment” under § 523(a)(19) and the state‑court complaint’s allegations (deemed admitted) established a violation of Arizona securities law.
The district court affirmed, holding the complaint adequately pled securities fraud under Ariz. Rev. Stat. § 44‑1991 and that § 523(a)(19)’s “any judgment” language requires giving preclusive effect to the default judgment for dischargeability purposes.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a state‑court default judgment qualifies as a “judgment” under § 523(a)(19) such that the debt may be non‑dischargeable	Simon: § 523(a)(19) applies to “any judgment,” so the default judgment is sufficient	Debtors: default judgments lack ordinary preclusive effect and thus should not trigger § 523(a)(19)	Held: § 523(a)(19) alters normal collateral estoppel rules; default judgment counts as a “judgment” for § 523(a)(19) purposes
Whether the state‑court complaint (deemed admitted by default) sufficiently alleges a violation of Arizona securities law	Simon: complaint alleges material false statements about the investment program and lack of any program—satisfies § 44‑1991 and Arizona Rule 9(b) pleading requirements	Debtors: complaint failed to plead securities fraud with required particularity and thus did not establish a § 44‑1991 violation	Held: Allegations are sufficiently particular and state a securities‑fraud claim under § 44‑1991
Whether scienter is required to prove a § 44‑1991 violation based on false statements	Simon: scienter not required for claims based on false or misleading statements under § 44‑1991	Debtors: argue scienter must be pled with particularity	Held: Scienter is not an element for false‑statement claims under § 44‑1991; not required here
Whether the debt resulting from the default judgment is non‑dischargeable under § 523(a)(19)	Simon: debt arises from a state securities law violation memorialized in a judgment, so nondischargeable	Debtors: contest the sufficiency of the state‑court pleadings and preclusive effect	Held: Debt is non‑dischargeable under § 523(a)(19) because the judgment established a securities‑law violation

Key Cases Cited

Stamat v. Neary, 635 F.3d 974 (7th Cir.) (standard of review for bankruptcy appeals)
Meyer v. Rigdon, 36 F.3d 1375 (7th Cir.) (statutory language requiring preclusive effect for “any” judgment, including defaults)
Zandford, 535 U.S. 813 (2002) (securities‑fraud liability can encompass schemes where funds are misappropriated rather than invested)
Grogan v. Garner, 498 U.S. 279 (1991) (bankruptcy discharge policy and exceptions)
Circle K. Corp. v. Indus. Comm’n of Ariz., 880 P.2d 642 (Ariz. Ct. App.) (default judgments generally lack preclusive effect under Arizona law)
Aaron v. Fromkin, 994 P.2d 1039 (Ariz. Ct. App.) (materiality and no scienter required for false‑statement violations of § 44‑1991)
Steinberger v. McVey ex rel. Cty. of Maricopa, 318 P.3d 419 (Ariz. Ct. App.) (pleading standard for fraud under Arizona law)
Tamayo v. Blagojevich, 526 F.3d 1074 (7th Cir.) (permissibility of inconsistent legal theories in pleadings)