Jon E. Lunsford, Sr. v. Process Technologies Services, LLC, 848 F.3d 963

Background

Process Technologies invested $300,000 after MIPCO (and its president Jon Lunsford) represented certain tangible and intangible assets; the assets were misrepresented.
Process Technologies obtained an arbitration award (then confirmed by Mississippi chancery court) ordering Lunsford, MIPCO, and another individual jointly and severally liable for $606,892; Lunsford did not appeal or contest confirmation in state court.
Lunsford filed for bankruptcy; Process Technologies filed an adversary proceeding seeking a determination that the debt is nondischargeable under 11 U.S.C. § 523(a)(19)(A) (debts "for the violation of" federal or state securities laws resulting from a judgment/order/etc.).
Lunsford argued (1) the debt arose from a third party’s securities violation so § 523(a)(19)(A) does not apply unless the debtor personally violated securities laws, and (2) sought leave to amend his answer to allege the arbitration award was procured by fraud.
The bankruptcy court applied issue preclusion to adopt the arbitrator’s findings (including that the securities were unregistered and that Lunsford was encompassed in the term “MIPCO”), held the debt nondischargeable, and denied leave to amend because Mississippi law barred relitigation of fraud.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the bankruptcy court made a factual finding that Lunsford violated securities laws	Process Tech: the arbitrator and state court judgment found a securities-law violation against Lunsford	Lunsford: the arbitration and judgment imposed liability based on a third party’s violation and did not find he personally violated securities laws	Court: by adopting the arbitrator’s findings via issue preclusion, the bankruptcy court made the factual finding that Lunsford violated securities laws; nondischargeable under § 523(a)(19)(A)
Whether § 523(a)(19)(A) applies only when the debtor personally committed the securities violation	Process Tech: statute applies to any debt "for" a securities-law violation that results from a covered judgment/order, regardless of which party committed the violation	Lunsford: the provision should be limited to debts arising from the debtor’s own securities violations	Held: statutory text and structure show "for" denotes causation, not limited to debtor conduct; § 523(a)(19)(A) applies irrespective of who committed the violation
Whether Lunsford could amend to allege the arbitration award was procured by fraud	Process Tech: state-court determinations preclude relitigation; amendment would be futile	Lunsford: bankruptcy court must recognize that judgments procured by fraud need not be honored; leave to amend should be allowed	Held: Mississippi preclusion law bars relitigation; two state-court rulings rejected fraud claim, so amendment is futile and denied
Whether alternative appellate precedent (e.g., Tenth/Ninth Circuit) requires a different result	Process Tech: distinctions in facts and statutory text make those cases inapposite	Lunsford: relied on differing circuit interpretations to argue for discharge	Held: Court distinguished Tenth and Ninth Circuit decisions and followed plain-text statutory analysis; those cases not controlling here

Key Cases Cited

Cohen v. de la Cruz, 523 U.S. 213 (Sup. Ct. 1998) (interpreting "debt for" to mean debt "as a result of" or "by reason of")
In re Glados, Inc., 83 F.3d 1360 (11th Cir. 1996) (appellate standard for reviewing bankruptcy court decisions)
In re Globe Mfg. Corp., 567 F.3d 1291 (11th Cir. 2009) (same: clear-error for facts, de novo for law)
In re Halpern, 810 F.2d 1061 (11th Cir. 1987) (issue preclusion and use of prior findings as evidence of nondischargeability)
Okla. Dep’t of Sec. v. Wilcox, 691 F.3d 1171 (10th Cir. 2012) (contrasting Tenth Circuit view that judgments for unjust enrichment from another’s securities violations were not "for" securities-law violations)
In re Sherman, 658 F.3d 1009 (9th Cir. 2011) (Ninth Circuit limited § 523(a)(19)(A) to debts caused by debtor’s own conduct)
Battle v. Liberty Nat’l Life Ins. Co., 877 F.2d 877 (11th Cir. 1989) (federal courts must give state-court judgments the same preclusive effect as state courts)
Bryant v. Dupree, 252 F.3d 1161 (11th Cir. 2001) (denial of leave to amend when amendment would be futile due to preclusion)
Grogan v. Garner, 498 U.S. 279 (Sup. Ct. 1991) (Bankruptcy Code’s fresh-start purpose cited in related circuit decisions)
Russello v. United States, 464 U.S. 16 (Sup. Ct. 1983) (canon against inferring omitted limitations when Congress included limits elsewhere)