644 B.R. 158
Bankr. E.D. Tex.2022Background
- Debtor Pamela Sorrells invested $1,570.65 in ZeekRewards, which operated as a Ponzi scheme, and received $32,752.04 in returns, making her a "net winner."
- The SEC sued ZeekRewards and its operator; a receiver later obtained fraudulent-transfer judgments against net winners, including Sorrells, for $41,875.07. The receiver assigned the judgment to Nationwide Judgment Recovery, Inc.
- Sorrells filed Chapter 7 (May 2020) and received a discharge (Nov. 2020); Nationwide filed an adversary complaint seeking nondischargeability under 11 U.S.C. §§ 523(a)(19) and 523(a)(2)(A).
- Nationwide moved for summary judgment; Sorrells responded late but the court considered the response because there was no prejudice.
- The bankruptcy court denied Nationwide’s motion: it held § 523(a)(19) applies only where the debtor personally committed securities-law violations, found no summary-judgment support that Sorrells committed securities fraud or common-law securities fraud, and found genuine factual disputes as to Sorrells’ intent for § 523(a)(2)(A).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(19) bars discharge when judgment arises from securities violations by a third party | Section applies regardless of debtor's personal culpability so long as the judgment arises from securities-law violations | § 523(a)(19) requires the debtor personally have committed the securities violation; exceptions to discharge should be narrow | Court adopts majority view (Ninth/Tenth Circuits): § 523(a)(19) applies only where debtor committed the securities violation; summary judgment denied because material facts remain about debtor's role |
| Whether prior judgment establishes common-law fraud "in connection with" purchase/sale of a security under § 523(a)(19)(A)(ii) | The state-court summary judgment supports finding of securities-related common-law fraud | The state-court order was a fraudulent-transfer judgment and did not find that net winners committed securities fraud or that transactions involved purchase/sale of securities | Court: no summary-judgment evidence that Sorrells committed common-law securities fraud; other courts confronted the same argument reached same conclusion; SJ denied on this ground |
| Whether transfers to debtor constitute "actual fraud" under § 523(a)(2)(A) (intent element) | Receipt of fraudulent transfers, large profits, recruitment activity, and alleged willful blindness show wrongful intent; Ponzi presumption supports inferring intent | Debtor denies knowledge; lacked sophistication and did not participate in operations; SEC characterized investors as having no role in operations | Court: Husky permits treating fraudulent-transfer schemes as "actual fraud," but wrongful intent by debtor is required; genuine disputes of material fact exist regarding intent and whether Ponzi presumption applies to debtor (presumption applies to perpetrators only); SJ denied |
| Whether debtor’s late opposition to SJ should be considered | Plaintiff argued late filing should be disregarded | Debtor offered no explanation but delay caused no prejudice | Court exercised discretion to consider late objection because no prejudice; opposition considered |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary-judgment standard)
- Grogan v. Garner, 498 U.S. 279 (bankruptcy discharge exceptions construed narrowly; fresh start policy)
- Husky Int'l Elecs., Inc. v. Ritz, 578 U.S. 356 (actual fraud can encompass fraudulent-transfer schemes)
- In re Sherman, 658 F.3d 1009 (9th Cir.) (§ 523(a)(19) requires debtor culpability; exceptions narrow)
- Oklahoma Dep't of Secs. ex rel. Faught v. Wilcox, 691 F.3d 1171 (10th Cir.) (§ 523(a)(19) applies only if debtor committed securities violation)
- In re Lunsford, 848 F.3d 963 (11th Cir.) (held § 523(a)(19) can apply where securities-law violation caused the debt; reached opposite conclusion)
- Janvey v. Brown, 767 F.3d 430 (5th Cir.) (Ponzi-scheme presumption of fraudulent intent applicable to perpetrators)
- Selenberg v. Bates (Matter of Selenberg), 856 F.3d 393 (5th Cir.) (elements and proof of actual fraud under § 523(a)(2)(A))