In Re Weilein
ORDER RE MOTION FOR FINDING OF CIVIL CONTEMPT AND TRUSTEE’S REPORT OF SALE
This matter came before the undersigned on October 27, 2004 pursuant to assignment. Debtors Daniel Weilein and Sandra LaFave were represented by attorney Michael Dunbar. Creditor Scott Bowman was represented by attorneys John Titter and Ann Laverty. After hearing arguments of counsel, the Court took the matter under advisement. The time for filing briefs has now passed and this matter is ready for resolution. This is a core proceeding pursuant to
STATEMENT OF THE CASE
Trustee filed a Notice and Report of Sale of Property. She proposes to sell the bankruptcy estate’s interest in a lawsuit pending in Iowa District Court in Black Hawk County, Weilein v. Bowman, LACV 088675, to Scott Bowman for $1,000. Debtors object to the sale, asserting the sale price is inadequate.
Debtor Daniel Weilein filed a Motion for Finding of Civil Contempt. He asserts Scott Bowman violated the discharge injunction by proceeding with activity in the subject lawsuit. Mr. Bowman resists the contempt motion. He argues that Debt- or’s liability which is the subject of the lawsuit is excepted from discharge under § 523(a)(19).
Mr. Bowman argues Counts II, III and IV of his counterclaim in the lawsuit have survived Debtor’s discharge. Counts II and III assert Iowa and Federal securities law violations, respectively. Count IV asserts Debtor made fraudulent misrepresentations to induce Mr. Bowman to invest in Pangeaa Systems, Inc. Mr. Bowman concedes that Count I, seeking judgment on promissory notes, has been discharged.
Debtors filed their Chapter 7 bankruptcy petition on March 2, 2004. Discharge entered on June 16, 2004. The Black Hawk County lawsuit originated in May 2002 with Debtor’s petition against Mr. Bowman alleging slander, interference with business relations, and fraud relating to the parties’ business interests in Pan-geaa Interment Systems, Inc. In November 2002, Mr. Bowman filed a separate lawsuit in four counts described above,
CONCLUSIONS OF LAW
Legislation signed into law in 2002, known as the Sarbanes-Oxley Act, disallows debts incurred in violation of securities fraud laws from being discharged in bankruptcy.
In re McClung,
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(19) that—
(A) is for-—
(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934), any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or
(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and
(B) results from—
(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor; or
(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.
ISSUES
Debtor argues that a judgment, order or settlement agreement under
CONCLUSIONS OF LAW
As
On the issue of whether Mr. Bowman may assert a Federal securities law violation, one writer has opined that private plaintiffs cannot utilize the exception in
The original language of
Nonetheless, most of the cases decided under the pre-1990 version of the drunk driving exception held that a post-petition judgment was sufficient. The courts often lifted the automatic stay and delayed discharge until a judgment could be obtained. However, the cases decided under former§ 523(a)(9) may no longer be good law. Those opinions were based on policy arguments and congressional intent and were decided before the “plain-language” approach to Bankruptcy Code interpretation had become as firmly entrenched as it is today.
Id. (citations omitted). Another commentator has made a different prediction:
[T]he bankruptcy courts developed a variety of doctrines that allowed a finding of nondischargeability [under the original language of§ 523(a)(9) ] even in the absence of a court judgment or consent decree ... It is possible, even likely, that the experience under the pre-1990 version ofsection 523(a)(9) will repeat itself for the new nondischargeability provision ofsection 523(a)(19) and that courts will develop similar doctrines.
Prof. Robert M. Lawless, Some Thoughts for Bankruptcy Practitioners on Sarbanes-Oxley Related Developments, 091803 ABI-CLE 449 (2003).
Analysis of
The starting point in statutory interpretation is the existing statutory text. It is well established that when the statute’s language is plain, the sole function of the court is to enforce it according to its terms, unless such disposition is absurd.
Lamie v. U.S. Trustee,
If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. “It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think ... is the preferred result.” This allows both of our branches to adhere to our respected, and respective, constitutional roles. In the meantime, we must determine intent from the statute before us.
Id.
at 1034,
The court in
McClung,
By enacting§ 523(a)(19) , Congress intended to “amend the federal bankruptcy code to make judgments and settlements arising from state and federal securities law violations brought by state or federal regulators and private individuals non-dischargeable.” S.Rep. No. 107-146, at 11 (2002).
The legislative history also includes the following statement:
Current bankruptcy law permits wrongdoers to discharge their obligations under court judgments or settlements based on securities fraud and other securities violations. This loophole in the law should be closed to help defrauded investors recoup their losses and to hold accountable those who incur debts by violating our securities laws.
S.R. 107-146, at 10 (2002).
The Court also notes that generally, the Bankruptcy Code provides that debtors’ and creditors’ interests are determined on the petition date. Section 502(b) states that allowance of claims is determined “as of the date of the filing of the petition”.
See In re Waterman,
The issues presented are matters of first impression. In the circumstances, the Court need not rule on Debtor’s allegation that Mr. Bowman may not pursue a securities violation under Federal law. This is a matter of interpretation of subsection (A)(i) of
Of more concern is Debtor’s argument that a judgment, order or settlement agreement under
It is this Court’s conclusion that a judgment, order or settlement agreement must have arisen prior to the bankruptcy filing in order for
The Court is aware that debtors with litigation pending, as is the case here, or facing contingent or unliquidated securities violations claims will be able to discharge their liability through bankruptcy. The statute, however, is clear. If discharge of this type of obligation is to be denied, it must be denied by Congress.
The resolution of this issue does not dispose of Trustee’s Notice and Report of Sale of Property and Mr. Bowman’s objection thereto, or Debtor’s Motion for Finding of Civil Contempt and Mr. Bowman’s resistance thereto. As such, the Court will set a telephonic status conference by separate order to hear the parties’ positions on the effect this ruling has on these pending matters.
WHEREFORE,
FURTHER, a telephonic status hearing will be set by separate order to determine the effect of this ruling on Trustee’s Notice and Report of Sale of Property and Debt- or’s Motion for Finding of Civil Contempt.