536 B.R. 171
Bankr. E.D. Tex.2015Background
- Debtor Raymond S. Minardi was manager of RMGT Investments II, LLC, general partner of RSM Forex Fund LP II (Forex Fund II); Forex Fund II solicited investor capital to trade foreign currency using an automated program called “SAM.”
- Plaintiffs Mack and Alice Wright, unsophisticated retired investors, were solicited in Dec. 2009 by agent Nyle Field and invested $100,000 (two $50,000 checks); they received one $50,000 promissory note and a false acknowledgement that they had received the Private Placement Memorandum (PPM), which they never saw.
- Forex Fund II never engaged in active trading; funds were used as bridge loans and for expenses; Plaintiffs recovered nothing and sued in federal court asserting securities violations, fraud, and related claims.
- In the Northern District of Texas the court deemed admissions under Fed. R. Civ. P. 36, granted summary judgment to Plaintiffs on multiple claims, and entered a judgment against Minardi for $427,472.43 (including exemplary damages and fees).
- Minardi filed Chapter 7 bankruptcy. Plaintiffs sued in this adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(19). The bankruptcy court held trial and issued findings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) (fraud/false representation) | Wrights: Judgment reflects fraud and false representations inducing investment; § 523(a)(2)(A) bars discharge. | Minardi: He made no representations to Wrights; agent Field made the misrepresentations; any imputation of fraud to Minardi is barred by Delaware LLC law. | Denied as to § 523(a)(2)(A): Plaintiffs failed to prove Minardi personally made or knowingly participated in representations; agent fraud cannot be imputed to Minardi individually under Delaware law. |
| Whether debt is nondischargeable under § 523(a)(4) (larceny/embezzlement) | Wrights: Funds were wrongfully appropriated constituting larceny/theft under Texas law, nondischargeable. | Minardi: No personal unlawful appropriation or intent to deprive with respect to Plaintiffs' funds. | Denied as to § 523(a)(4): Plaintiffs failed to prove Minardi personally committed larceny or embezzlement. |
| Whether debt is nondischargeable under § 523(a)(19) (securities violations / related fraud) | Wrights: Federal Court Judgment established securities law violations and fraud in connection with a security; § 523(a)(19) makes such judgments nondischargeable. | Minardi: Judgment arose from deemed admissions and not actually litigated; collateral estoppel limits preclusive effect. | Granted as to § 523(a)(19): § 523(a)(19) requires only a prior judgment for securities violations or related fraud; the Federal Court Judgment satisfies the statute and renders the debt nondischargeable (Sanctions award excluded). |
| Whether post-judgment sanctions/fees are nondischargeable under § 523(a)(19) | Wrights: Sanctions arose from misconduct and should be nondischargeable as related to enforcement of judgment. | Minardi: Sanctions are separate and not within § 523(a)(19) coverage. | Sanctions (attorney fee award for contempt) are dischargeable; $2,940 sanctions not covered by § 523(a)(19). |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (establishes preponderance standard for exceptions to discharge)
- Field v. Mans, 516 U.S. 59 (defines justifiable reliance standard in § 523(a)(2)(A) context)
- RecoverEdge L.P. v. Pentecost, 44 F.3d 1284 (5th Cir.) (distinguishes actual fraud from false pretenses/representations under § 523(a)(2)(A))
- Luce v. First Equipment Leasing Corp., 960 F.2d 1277 (imputation of agent/partner fraud for nondischargeability)
- Tummel & Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314 (5th Cir.) (imputing partner/agent fraud where appropriate under state law)
- Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355 (5th Cir.) (exceptions to discharge construed narrowly but fraud exceptions treated with limits)
- Vichi v. Koninklijke Philips Electronics, N.V., 85 A.3d 725 (Del. Ch.) (Delaware law on scope of employment and vicarious liability for agent torts)