OKLAHOMA DEPARTMENT OF SECURITIES, еx. rel. IRVING L. FAUGHT, Administrator, Plaintiff - Appellee, v. MARVIN LEE WILCOX; PAMELA JEAN WILCOX, Defendants - Appellants. OKLAHOMA DEPARTMENT OF SECURITIES, ex rel. IRVING L. FAUGHT, Administrator, Plaintiff - Appellee, v. ROBERT WILLIAM MATHEWS, Defendant - Appellant.
Nos. 10-6056 & 10-6057
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
August 20, 2012
PUBLISH. FILED United States Court of Appeals Tenth Circuit. Elisabeth A. Shumaker Clerk of Court. Appeal from the United States District Court for the Western District of Oklahoma (D.C. Nos. 5:09-CV-00186-D and 5:09-CV-00185-D)
Amanda Cornmesser, (Gerri Kavanaugh with her on the briefs), for the Oklahoma Department of Securities, Oklahoma City, Oklahoma for Plaintiff - Appellee.
Before BRISCOE, Chief Circuit Judge, HOLLOWAY, and O‘BRIEN, Circuit Judges.
O‘BRIEN, Circuit Judge.
At the behest of the Oklahoma Department of Securities, Oklahoma courts found early investors in a Ponzi scheme carried out by a third party to have been unjustly enriched аnd required disgorgement. Judgments were entered against those investors. We must decide whether the judgments entered against Robert Mathews, Marvin Wilcox, and Pamela Wilcox qualify as a nondischargeable debt under
I. BACKGROUND
In 2005 Marsha Schubert pled guilty to crimes related to a Ponzi scheme2 she used
Mathews and the Wilcoxes (collectively the Debtors) filed for bankruptcy protection and the Department initiated adverse proceedings to avoid discharge of the
II. DISCUSSION
We review the bankruptcy court‘s interpretation of a statute de novo. In re Troff, 488 F.3d 1237, 1239 (10th Cir. 2007).
The Supreme Court
has certainly acknowledged that a central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear field fоr future effort, unhampered by the pressure and discouragement of preexisting debt. But in the same breath that . . . [it] ha[s] invoked this fresh start policy, . . . [it] ha[s] been careful to explain that the Act limits the opportunity for a completely unencumbered new beginning to the honest but unfortunate debtor.
Grogan v. Garner, 498 U.S. 279, 286-87 (1991) (citation and quotation omitted).
“Exceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor‘s favor.” In re Sandoval, 541 F.3d 997, 1001 (10th Cir. 2008) (quotation omitted).
Under
(a) A [bankruptcy] discharge . . . 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 . . . .
The burden is on the creditor to show a debt is nondischargeable under
There is a valid state court judgment against the Debtors, entered to require them to repay profits distributed to them as a result of Schubert‘s Ponzi scheme. The only dispute is whether such a judgment qualifies as one “for a violation” of securities laws under
The Debtors contend the judgment is not a debt incurred “for the violation” of securities laws because they have never been charged with such violations.
[W]e begin with the understanding that Congress says in a statute what it means and means in a statute what it says. . . . [W]hen the statute‘s language is plain, the sole function of the courts--at least where the disposition required by the text is not absurd--is to enforce it according to its terms.
Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (quotations and citations omitted). These debts do not fall under the
During oral argument, the Department attempted to analogize this case to McKowen v. IRS, in which we concluded nondischargeable debt “for a tax” included a transferee‘s liability to pay taxes assessed to his defunct business. 370 F.3d 1023 (10th Cir. 2004). We determined the transferee tax liability was still primarily for a tax
notwithstanding the fact that responsibility for it had been transferred.
Examining the history behind the statute does not lead us to a different conclusion.
The Department relies heavily on the Senate Report as indication that the law was
intended to “help defrauded investors recoup their losses . . . .” S. Rep. No. 107-146 at 8.
The Department cites an unpublished order in Crawford v. Myers, No. 09-1211 (Bankr. D. Colo., July 20, 2009, Order on Motion to Dismiss Complaint)10 and SEC v. Sherman, 406 B.R. 883 (C.D. Cal. 2009). The judge in the Myers case concluded the statute was intended to reach innocent investors. As we have explained, we do not believe the statute supports such a reading. Similarly, the debtor in Sherman “had obtained funds derived from a [third party‘s] violation of federal securities laws to which
he had no legitimate claim of ownership.” Id. at 885.
Following the briefing and oral argument in the case before us, however, the Ninth Circuit reversed the district court‘s decision in Sherman. Sherman v. SEC, 658 F.3d 1009, 1010 (9th Cir. 2011). Recognizing the merits of the same arguments made by the dissent here, the court nonetheless concluded the narrow construction applied to discharge exclusions and the purpose of bankruptcy to provide a fresh start to honest but unfortunate debtors precluded a reading of the statute to include debtors who are not charged with securities violations. Id. at 1015-16. Similar to the situation here, Sherman was not necessarily an “innocent” in acquiring the funds he was ordered to disgorge, but he had not been accused of a securities violation. As the court noted:
[If the third party in question has actually aided or abetted a securities violation, that party may be prosecuted for a violation of securities laws in addition to the primary violator. . . . If a creditor can show that a debtor has concealed property or funds from the bankruptcy court, a discharge can be denied in its entirety,
11 U.S.C. § 727(a)(2) , or revoked after it is granted,11 U.S.C. § 727(d) . . . . In short, the Bankruptcy Code already includes protections against attempting to conceal assets or defraud creditors, or otherwise failing to disgorge available assets. There is no additional need for us to expand the scope of§ 523(a)(19) to cover innocent debtors in order to accomplish this goal.
Although the Department claims these debtors are not innocent parties, it declined to prosecute them for securities laws violations. Had it done so successfully, any judgment it obtained would no doubt be considered nondischargeable under
The Department‘s position conveniently serves its ends and perhaps (in the abstract) a public good. But the language of the statute cannot reasonably be stretched that far.
REVERSED AND REMANDED to the Bankruptcy Court for further proceedings.
BRISCOE, Chief Judge, dissenting.
I respectfully dissent. In my view, the majority errs in two important respects. First, and most significantly, the majority misinterprets
As a result of these differences, I would affirm the bankruptcy court‘s decision concluding that the Oklahoma state court judgment entered against Mathews was nondischargeable under
I
The underlying Ponzi scheme
From approximately May 1992 through October 2004, Martha Schubert, an Oklahoma resident, worked as a registered agent of two registered investment broker-dealers in Oklahoma: AXA Advisors (from 1992 through May 2004) and Wilbanks Securities (from May 2004 to October 2004). As a registered agеnt, Schubert “plac[ed] investments [for clients] in legitimate accounts with recognized national brokerage houses.” App. at 470. Beginning in or about 2001, Schubert, unbeknownst to AXA Advisors, began engaging in outside securities activities by offering and selling so-called Investment Program Interests to individual clients. “Schubert directed [i]nvestors to make their checks payable to her personally or to Schubert and Associates,” id. at 262, an unincorporated association, id. at 470. “Schubert did not disclose to [i]nvestors how she would invest their money, but generally stated that the money would be used to make trades in option contracts,” and she “promised that the investments were ‘fool proof’ and would yield ‘thirty percent (30%) annual interest.‘” Id. at 262. Schubert‘s program, howеver, was a sham. To begin with, “[t]he Investment Program Interests were not registered as securities under” Oklahoma law. Id. Further, “Schubert used new [i]nvestor money to pay principal and/or profits to [i]nvestors who had previously invested.” Id. In short, Schubert‘s program was a Ponzi scheme.
“In April of 2004, AXA Advisors conducted an audit on Schubert regarding wire-fund activity involving her customers’ brokerage accounts and deposits from . . . Schubert
In 2005, Schubert was indicted by a federal grand jury. Schubert subsequently pled guilty to a single count of money laundering and was sentenced to a term of imprisonment of 120 months.
The state lawsuit against certain investors
On May 11, 2005, the Oklahoma Department of Securities (ODS) filed suit against 158 individuals (described in the complaint as “Relief Defendants“), including Robert Mathews and Marvin and Pamela Wilcox, who had invested money with Schubert and in turn “received cash and other property and/or control property that [we]re the proceeds of the unlawful activities of . . . Schubert.” Id. at 307. ODS‘s complaint alleged that the Relief Defendants “received . . . over $6,000,000 of the $9,000,000 lost in th[e] Ponzi scheme.” Id. at 314. ODS asserted claims against the Relief Defendants under the Oklahoma Uniform Securities Act,
ODS moved for summary judgment, alleging that each Relief Defendant “opened an investment account with AXA Advisors, with Schubert acting as investment advisor, and transacted certain purchases, sales and withdrawals in those accounts,” id. at 473, and that “all monies received into [those] AXA accounts were accounted for in statements
On December 12, 2006, the state district court granted ODS‘s motion for summary judgment against Mathews and entered judgment against Mathews and in favor of the ODS. Less than two months later, on February 5, 2007, the state district court granted ODS‘s motion for summary judgment against the Wilcoxes and entered judgment against them and in favor of ODS. In each instance, the state district court entered judgment in favor of ODS in an amоunt equal to the additional sums received by Mathews and the Wilcoxes.
Some of the defendants in the state court action against whom judgments were entered, including the Wilcoxes but not Mathews, appealed to the Oklahoma Court of Civil Appeals (OCCVA). On April 13, 2007, the OCCVA “h[e]ld that, under [Oklahoma] laws, disgorgement may be ordered in securities cases against those other than actual violators of the Act, where such relief is appropriate under the facts and circumstances of the case,” and that the ODS “[wa]s the proper party to bring such an action.” Id. at 477. In turn, the OCCVA held that the state district court correctly granted summary judgment in favor of ODS on its unjust enrichment claims. The OCCVA noted that, aside from the amount each Relief Defendant deposited into his or her AXA account, each “received sums from Schubert which were purportedly profits from option contracts or day trading in securities.” Id. at 487. However, the OCCVA noted, “[i]t [wa]s uncontroverted that such profits did not exist and the additional sums [the Relief
The federal court proceedings
In 2007, following issuance of the OCCVA‘s decision, Mathews and the Wilcoxes filed for Chapter 7 bankruptcy. The ODS responded by filing adversary proceedings against Mathews and the Wilcoxes seeking “exceptions to the[ir] . . . discharges for fraud pursuant to
On December 12, 2008, the bankruptcy court granted summary judgment in favor of the ODS. In doing so, the bankruptcy court noted that the exception to dischargeability set forth in
A review of the opinion of the [OCCVA] makes clear that the disgorgement judgment against the Defendants was made pursuant to Oklahoma securities law. Although the Defendants strongly argue they were innocents caught in the web of Schubert‘s fraudulent scheme, it is of no legal consequence since Oklahoma law does not require wrongful intent. The Oklahoma Court of Civil Appeals explained, “We agree with the assertion by the Department . . . and Receiver that Appellants’ . . . defense of being ‘innocent victims’ has no merit under the facts here. Appellants are in possession of funds which, in equity and good conscience, belong to other investors.” Thus, the Plaintiff has clearly established that the debt is for a violation of Oklahoma securities law.
Id. at 575 (citation omitted).
Mathews and the Wilcoxes appealed from the bankruptcy court‘s decision and elected to have their appeals “heard by the United States District Court, Western District of Oklahoma.” Id. at 586. Mathews and the Wilcoxes argued, in pertinent part, that “the Bankruptcy Court erred because
On March 5, 2010, Mathews and the Wilcoxes filed notices of appeal from the district court‘s judgment.
The Oklahoma Supreme Court‘s Blair decision
During the pendency of the federal court proceedings, the defendants in the Oklahoma state proceedings who had unsuccessfully appealed to the OCCVA, including the Wilcoxes, sought certiorari review in the Oklahoma Supreme Court (OSC). The OSC
Applying its holdings to the facts presented, the OSC concluded that the state district court improperly granted summary judgment “based upon the principle that a profit to a Ponzi-scheme investor is, as a matter of law, unjust enrichment, and subject to an action by the [ODS] for restitution.” Id. at 669. Accordingly, the OSC remanded the
Post-Blair proceedings
On remand from the OSC, the state district court, on October 18, 2010, granted partial summary judgment in favor of the ODS and against the Wilcoxes “on the issue of liability relative to [ODS‘s] cause of action for unjust enrichment.” Aplee.‘s Supp. Br., Exh. 1 at 2. In doing so, the state district court concluded that “by virtue of their participation in the Schubert check-kiting scheme, the Wilcoxes were not innocent investors and the standard for recovery from investors in Ponzi schemes set forth in Blair did not apply.” Okla. Dep‘t of Sec. v. Wilcox, 267 P.3d 106, 109 (Okla. 2011).
The ODS subsequently “filed a second motion for summary judgment, asserting that further documentation received from the Wilcoxes demonstrated that no issue of material fact remained as to the amount the Wilcoxes netted from Schubert‘s Ponzi scheme.” Id. “The Wilcoxes did not respond to the motion.” Id. Consequently, on December 17, 2010, the state district court “entered judgment in favor of [the ODS] and against the Wilcoxes in the amount of $509,505.00, plus prejudgment and post-judgment interest and costs.” Id. at 110.
The Wilcoxes appealed. On October 11, 2011, the OSC affirmed the judgment entered by the state district court, concluding “that there [wa]s no dispute of material fact justifying trial on th[e] issue” of whether the Wilcoxes were “‘innocent’ investors entitled to the equitable treatment provided to innocent investors in Blair.” Id. at 111. In
II
“Our review of the bankruptcy court‘s decision is governed by the same standards of review that govern the district court‘s review of the bankruptcy court.” In re Roser, 613 F.3d 1240, 1243 (10th Cir. 2010) (internal quotation marks omitted). “Because this case presents no disputed factual issues but only matters of law, our review is de novo.” Id.
Section 523(a)(19) of the Bankruptcy Code provides, in pertinent part, that a bankruptcy discharge:
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 . . .; and
(B) results, before, on, or after the date on which the [bankruptcy] petition was filed, 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.
The majority summarily concludes that, under “the plain language of th[is] statute,” “[t]he judgments at issue are not ‘for a violation’ of securities laws but for unjust enrichment resulting from someone else‘s violation of those statutes.” Maj. Op. at 6. The majority also states, in a related footnote, that the ODS “chose not to prosecute Mathews or the Wilcoxes for securities violations.” Id. at 5-6 n.5. Thus, in sum, the majority apparently reads
In my view, this is an unduly restrictive reading of
As so defined, nothing in the statutory language of
The majority, obviously finding no support for its interpretation in the language of
evidence which proves fraud,” and “protect[ing] victims’ rights to recover from those who have cheated them.” 148 Cong. Rec. S1783-01, S1786 (2002). As I see it, it is entirely consistent with the Act to treat as nondischargeable any debts that arose from violations of federal or state securities laws, regardless of whether or not the debtor was personally involved in those violations. Indeed, to hold otherwise would result in a windfall to the debtor. And, although there are certainly comments in the legislative history indicating that Congress‘s prime focus in enacting
Lastly, the majority cites with approval the Ninth Circuit‘s decision in Sherman v. SEC, 658 F.3d 1009 (9th Cir. 2011). The panel in Sherman, in a 2-to-1 decision, held “that
In my view, the dissenting opinion in Sherman is substantially more persuasive
Having outlined what I believe to be the proper interpretation of
dischargeable in Mathews’ bankruptcy proceedings.
The Wilcoxes’ appeal presents a different situation. The judgment that was originally entered against the Wilcoxes was reversed by the OSC in Blair and remanded to the state district court for further proceedings. On remand, the state district court granted summary judgment in favor of the ODS, finding that the undisputed evidence established “that by virtue of their participation in the Schubert check-kiting scheme, the Wilcoxes were not innocent investors.” Wilcox, 267 P.3d at 109. The state district court further “entered judgment in favor of [ODS] and against the Wilcoxes in the amount of $509,505.00, plus prejudgment and post-judgment interests and costs.” Id. at 110. On appeal, the OSC affirmed that judgment, noting, in pertinent part, that “[t]he Wilcoxes did not deny the existence of or their active participation in Schubert‘s check-kiting scheme.” Id. at 111.
Accordingly, I believe the appropriate course of action is to remand the Wilcoxes’ appeal with directions to the bankruptcy court to treat the judgment entered in favor of the