468 B.R. 916
Bankr. E.D. Wash.2012Background
- Debtors Gary and Barbara Bundy allegedly obtained funds totaling $205,000 from Westad and $166,000 from the Tereks through alleged securities-law violations under Washington law RCW 21.20 et seq.
- Plaintiffs claim the funds were for the purchase of securities; Bundys contend the funds were loans.
- The adversary seeks a partial summary judgment on whether the obligation arising from the securities-law violation is subject to discharge under 11 U.S.C. § 523(a)(19).
- The central issue is whether the bankruptcy court may determine whether a securities-law violation occurred, or whether such a determination must come from an administrative or other non-bankruptcy tribunal.
- BAPCPA amended § 523(a)(19) to allow timing of liability determinations pre-petition, post-petition, or during, but requires the determination to come from a tribunal other than the bankruptcy court.
- The court concludes this is a narrow issue and ultimately denies the motion, holding that the bankruptcy court lacks jurisdiction to determine a securities-law violation absent a non-bankruptcy tribunal’s finding; dischargeability decision follows that determination.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(19) allows the bankruptcy court to determine that a securities-law violation occurred. | Westad/ Terek argue liability can be determined by the bankruptcy court under § 523(a)(19). | Bundys contend liability must be determined by a non-bankruptcy tribunal (regulator or court). | Determination must come from a non-bankruptcy tribunal; bankruptcy court cannot determine the violation. |
| Effect of BAPCPA's timing provision on authority to determine liability. | Plaintiffs rely on the amendment to allow post-petition determinations within the bankruptcy context. | Defendant argues timing does not authorize the bankruptcy court to make the liability finding itself. | Amendment changes timing, not the bankruptcy court's authority to determine liability itself. |
| Whether the liability finding, once made by another tribunal, is conclusive for dischargeability under § 523(a)(19). | Plaintiffs seek nondischargeability upon the tribunal's finding of violation. | Defendant argues dischargeability is governed by the bankruptcy court's analysis after liability is established elsewhere. | Once a non-bankruptcy tribunal determines liability, the bankruptcy court may determine dischargeability. |
| Does interpreting § 523(a)(19) so that the bankruptcy court may decide liability render § 523(a)(19)(B) superfluous? | Not expressly stated; emphasis on separate tribunals for liability. | Interpreting otherwise would render § 523(a)(19)(B) meaningless. | The statute requires a non-bankruptcy tribunal to determine liability; otherwise § 523(a)(19)(B) would be superfluous. |
| Should the stay be lifted to allow a securities-arising determination in a related forum? | Not explicitly argued here; relates to exploitation of arbitration or related forums. | Not explicitly argued here; focus is on whether the bankruptcy court may decide liability. | Not the sole focus of this motion; the court emphasizes non-bankruptcy forum determination is required. |
Key Cases Cited
- In re Pujdak, 462 B.R. 560 (Bankr.D.S.C.2011) (holds that existence of securities-law violation must be determined by a tribunal other than the bankruptcy court)
- In re Jafari, 401 B.R. 494 (Bankr.D.Colo.2009) (compares § 523(a)(19) with other subsections; liability must be determined outside bankruptcy court)
- In re Chan, 355 B.R. 494 (Bankr.E.D. Pa.2006) (says § 523(a)(19) provides concurrent jurisdiction; liability determination may occur outside bankruptcy court)
- In re Zimmerman, 341 B.R. 77 (Bankr.N.D. Ga.2006) (stays arbitration to determine securities-law violation; bankruptcy court retains dischargeability jurisdiction)