Oklahoma Department of Securities Ex Rel. Faught v. Wilcox
691 F.3d 1171
10th Cir.2012Background
- Schubert ran a Ponzi scheme defrauding investors of over $9 million; Mathews and the Wilcoxes were investors.
- Oklahoma Department of Securities sued hundreds of investors, including Debtors, for unjust enrichment, fraudulent transfer, and equitable lien, later seeking summary judgment on unjust enrichment.
- Oklahoma trial court granted summary judgment against Mathews and the Wilcoxes for approximately $500k each; Blair reversed and remanded on appeal.
- Debtors filed bankruptcy; the Department sought nondischargeability under 11 U.S.C. § 523(a)(19), arguing judgments were for securities-law violations.
- Bankruptcy court and district court held the debts nondischargeable under § 523(a)(19) as for violations of securities laws; appellate review followed.
- Oklahoma Supreme Court Blair held that innocent investors may be pursued for unjust enrichment profits in Ponzi schemes, remanding for further proceedings consistent with Blair.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the judgments are for a securities-law violation | Mathews/Wilcoxes: judgments arise from securities violations via unjust enrichment | Mathews/Wilcoxes: not personally charged with violations; not for a violation | No; judgments not for a violation under § 523(a)(19) |
| Scope of § 523(a)(19) to cover non-debtor violations | § 523(a)(19) broad enough to include third-party securities violations with debtor liability | § 523(a)(19) limited to violations personally by the debtor | Narrowly construed here; not for a debtor’s own violation |
| Role of state-court unjust enrichment judgments in bankruptcy dischargeability | disgorgement profits from Ponzi victims reflect securities-law violation; nondischargeable | unjust enrichment judgments do not prove debtor violated securities laws | Not dischargeable under § 523(a)(19) absent debtor’s violation |
| Effect of Blair and related precedent on dischargeability | Blair supports recovering profits from innocent investors and potential nondischargeability | Blair does not convert all unjust enrichment judgments into nondischargeable debt | Blair does not compel broad nondischargeability here |
Key Cases Cited
- Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000) (statutory text governs dischargeability; plain meaning controls)
- Grogan v. Garner, 498 U.S. 279 (1991) (discharge exceptions construed narrowly in favor of debtor)
- Okla. Dep’t of Sec. v. Blair, 231 P.3d 645 (Okla. 2010) (innocent Ponzi-investor profits may be subject to restitution; remand for proceedings)
- Sherman v. SEC, 406 B.R. 883 (C.D. Cal. 2009) (Ninth Circuit discussion later reversed; narrowly read § 523(a)(19) to debtor’s violations)
- McKowen v. IRS, 370 F.3d 1023 (10th Cir. 2004) (interpreting tax-transfer liability alongside bankruptcy provisions)
- In re Troff, 488 F.3d 1237 (10th Cir. 2007) (statutory interpretation de novo review; framework for dischargeability)