ORDER
THIS MATTER comes before the Court on the Motion for Judgment on the Pleadings and to Strike Certain Defenses (“Motion”) (Doc. No. 21), filed by Janet Voss (“Plaintiff’) in response to the Answer and Defenses (“Answer”) (Doc. No. 20) filed by Kenneth Joseph Pujdak and Jo Ellen Sands Pujdak (“Defendants”), in this action to except certain debts from discharge pursuant to 11 U.S.C. § 523(a). Plaintiff seeks relief from the Court under Federal Rules of Civil Procedure 12(c) and (f), made applicable to this adversary proceeding by Federal Bankruptcy Rule 7012. A Response and Opposition by Defendants to Motion to Strike and Motion for Judgment on the Pleadings (“Response”) (Doc. No. 22) was filed by Defendants. Plaintiff filed a supplemental Memorandum in Support of Plaintiffs Motion for Judgment on the Pleadings (“Memorandum”) (Doc. No. 25) on April 27, 2011. A hearing on this matter was held on April 21, 2011.
The Court has jurisdiction under 28 U.S.C. §§ 157 and 1334 and Local Civil Rule 83.XI.01, DSC. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I) and venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409.
Undisputed Facts and Procedural History
The State Court Action
Plaintiff previously filed an action in the Court of Common Pleas for Greenville County, South Carolina against Defendants and their businesses. Voss
v. Pujdak, et al.,
C/A No. 07-CP-23-0180 (2007). In the state court action, Plaintiff alleged that,
inter alia,
by inducing Plaintiff to
Defendants appeared in that action through an attorney and filed an Answer. However, after the state court found that Defendants failed to comply with discovery orders, the court struck Defendants’ answer and found them in default. The court then referred the matter to the Master in Equity for a determination of damages. A damages hearing was conducted where the Plaintiff testified to her damages as well as “to the scheme and publication of various promises by Defendants as investment potentials.” Id., Ex. 3 at 2. Defendants’ counsel was present at the damages hearing; however, Defendants did not attend. On March 31, 2008, a judgment was entered in favor of Plaintiff against Defendants and their businesses. The state court, entering judgment, specifically held that:
The Court finds that ... Defendants caused [Plaintiff] damage in the amount of $41,541.96 ... and $1,288.72 ....
Defendants, being in default, are liable for violation of the SC Securities Act, SC Code 35-1-509; common law negligence, fraud and constructive fraud, quantum meruit, and SC Unfair Trade Practices Act. Accordingly, under these theories of liability, this Court finds Plaintiff is damaged under each theory and Defendants are liable in the actual amount of $42,830.68.
However, in terms of recovery, Plaintiff can only recover under one theory of damages. Plaintiff elects recovery under SCUTPA.
Under the SCUTPA claim, specifically SC Code 39-5-140, Plaintiff is entitled to a trebling of damages, and costs and attorney fees. Damages are awarded in the amount of $128,492.04. By separate affidavit, counsel for Plaintiff has submitted fees and costs in the amount of $7,132.50.
Id., Ex. 3 at 2-4.
The Adversary Proceeding Pursuant to 11 U.S.C. § 523
Defendants filed a voluntary chapter 7 petition for relief on August 6, 2010. Plaintiff initiated this adversary proceeding on September 7, 2010, by filing a Complaint seeking to have the debt established in the state court judgment excepted from Defendants’ discharge under 11 U.S.C. § 523(a)(2)(A) and (a)(19). 5
Defendants filed a Motion to Dismiss claiming that by electing the SCUTPA remedy in state court, Plaintiff lost her right to pursue this action in bankruptcy court alleging any other theory of recovery. On February 9, 2011, this Court entered an Order Denying Motion to Dismiss and granting Plaintiff leave to amend the Complaint. (Doc. No. 19). The relevant portions of that order are incorporated herein by reference. The Amended Complaint attached and incorporated a copy of the state court complaint, answer and judgment (Doc. No. 12). Thereafter, Defendants filed an Answer (Doc. No. 20) reasserting those challenges set forth in their Motion to Dismiss (Doc. Nos. 4 & 5). In addition, Defendants raised defenses in response to allegations asserted in the Amended Complaint for this adversary proceeding and set out in the state court complaint. See Doc. No. 20 at 3-10.
In response to Defendants’ Answer, Plaintiff filed a Motion and Memorandum claiming that the defenses raised in the Answer should be stricken because res judicata precludes Defendants from relit-
Discussion and Conclusions of Law
Pursuant to the Federal Rules, “[t]he court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). “When presented with a motion to strike, ‘the court must view the pleading under attack in a light most favorable to the pleader.’ ”
Monster Daddy LLC v. Monster Cable Products, Inc.,
C/A No. 6:10-1170-HMH,
Plaintiff asserts that portions of Defendants’ Answer revisit issues already decided in the Court’s Order Denying Motion to Dismiss (Doc. No. 19). The Court agrees and therefore strikes Defendants’ defenses which claim that by electing the SCUTPA remedy in state court, Plaintiff lost her right to pursue this action in bankruptcy court alleging any other theory of recovery.
Further, Plaintiff asserts that Defendants are attempting to relitigate matters already decided in the state court in violation of the preclusion doctrine; therefore, Rule 12(f) requires the Court to strike the remainder of Defendants’ Answer. If the Court agrees, then Plaintiff asserts that a judgment on the pleadings is warranted under Rule 12(c) because no disputed facts would remain. See Doc. Nos. 21 & 25.
The Preclusion Doctrine
“The doctrine of res judicata bars subsequent suits involving claims that have already been reduced to judgments ... [and] represents ‘society’s interest in the finality of judgments.’ ”
In re Rodgers,
Adv. Pro. No. 10-00171-8-JRL,
The “preclusion doctrine encompasses two strands: res judicata and collateral estoppel.”
Sartin v. Macik,
Res judicata, or claim preclusion, bars relitigation of claims that were or could have been raised in a prior proceeding between the same parties.... Collateral estoppel, or issue preclusion, bars the relitigation of specific issues that were actually determined in a prior action .... Both are estoppel doctrines,but they have differing preclusive effects in bankruptcy dischargeability litigation.
Hasalia v. Walker (In re Walker),
In determining whether the preclusion doctrine applies, “[fjederal courts are required to refer to the preclusion law of the state in which the judgment was rendered.”
Rodgers,
In this matter, the judgment in question was entered after the state court struck Defendants’ answer and found them to be in default and, therefore, liable to Plaintiff for damages resulting from fraud and a violation of state securities laws. This Court must determine what effect, if any, that judgment has on this litigation.
Section 523(a)(2)(A) prohibits the discharge of debt obligations “obtained by false pretenses, a false representation, or actual fraud ...” 11 U.S.C. § 523(a)(2)(A). Section 523(a)(19) excepts from discharge any debt 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, before, on, or after the date on which the 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.
11 U.S.C. § 523(a)(19) (emphasis added). After reading the judgment from the state court and these two sections of the Bankruptcy Code, it would appear that the matter would be easily ended with a finding that the parties are not allowed to reliti-gate the issue of Defendants’ fraud or violation of securities laws. However, the answer is not as simple as it initially appears.
Res Judicata and Actions Under § 523(a)
Under South Carolina law, “[r]es judicata requires proof of three elements: 1) a final, valid judgment was entered on the merits of the first suit; 2) the parties to both suits are the same; and 3) the subsequent action involves matters properly included in the first action.”
Judy v. Judy,
It is well-established that default judgments may be entitled to a preclusive
However, in the bankruptcy context, there is a general rule that state court judgments do not have res judicata effect on nondischargeability actions under § 523. “Under
Brown v. Felsen,
The general principle that res judicata does not apply to nondischargeability claims in bankruptcy court was set forth in
Brown.
The circumstances there were the following: (1) Brown sued Felsen in state court seeking money that (Brown said) Felsen had obtained through fraud; (2) the state court entered a consent decree embodying a stipulation providing that Felsen would pay Brown a certain amount; (3) neither the decree nor the stipulation indicated the payment was for fraud; (4) Felsen did not pay; (5) Felsen entered bankruptcy; and (6) Brown asked the Bankruptcy Court to look behind the decree and stipulation and to hold that the debt was nondis-chargeable because it was a debt for money obtained by fraud.
Archer v. Warner,
The Supreme Court recognized that state law claim preclusion principles would bar Brown from reasserting a claim based on the same cause of action.
Id.
at 131,
Brown,
a Bankruptcy Act case, was reaffirmed and extended by the Supreme Court in the Bankruptcy Code case of
Archer v. Warner,
Applying the
Brown
Court’s basic reasoning, the
Archer
Court held that extrinsic evidence may be considered by the bankruptcy court in order to determine the dischargeability of a debt where the parties settle the state court action based on fraud, even where there is no resulting judgment entered by the state court.
Id.
at 319-22,
Since the holdings of
Brown
and
Archer
prohibit the application of res judicata to nondischargeability claims asserted under § 523(a)(2)(A), the Court must determine whether collateral estop-pel precludes Defendants from asserting certain defenses. “[T]he party asserting collateral estoppel must demonstrate that the issue in the present law suit was (1) actually litigated in the prior action; (2) directly determined in the prior action; and (3) necessary to support the prior judgment.”
Cross v. Deutsche Bank Trust Co. Americas,
C/A No. 3:11-1010-CMC-PJG,
Section 27 [of the Restatement] states: “When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or different claim.”
State v. Bacote,
The State Court Default Judgment for Fraud and Plaintiffs Action Under § 523(a)(2)(A)
A set of facts similar to the instant case were presented in
Sartin v. Macik,
Like the Sartin case, these Defendants’ answer was stricken and a default judgment was issued against them for failure to comply with discovery orders. The state court found Defendants liable for, inter alia, fraud and constructive fraud, based on the allegations of Plaintiffs state court complaint and Defendants’ admission thereof (as a result of the default). However, there is no evidence that the issue of whether Defendants incurred the debt as a result of false pretenses, a false representation, or actual fraud was actually litigated before the judgment was entered. Therefore, the requirements for collateral estoppel have not been met by the underlying state court action. As a federal court applying South Carolina law, the Court holds that the default judgment against Defendants is not entitled to collateral estoppel effect in this subsequent bankruptcy proceeding with regard to the § 523(a)(2)(A) claim. Thus, there is no basis to strike any portions of Defendants’ Answer related to the § 523(a)(2)(A) cause of action.
The State Court Default Judgment and this Plaintiffs Action Under § 523(a)(19)
The effect of prior judgments on a determination of dischargeability under § 523(a)(19) is distinguishable from nondischargeability claims under § 523(a)(2), (4), and (6) in a number of ways. The latter are governed by § 523(c)(1), which provides that:
a debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
11 U.S.C. § 523(c)(1). This provision is supplemented by Bankruptcy Rule 4007(c), which establishes a sixty (60) day deadline from the meeting of the creditors under § 341(a) to file a complaint to determine the dischargeability of a debt under § 523(c). Fed. R. Bankr.P. 4007(c). “In other words, the Bankruptcy Code and the Bankruptcy Rules contemplate that dis-chargeability determinations under § 523(a)(2), (4) and (6) will be made exclusively by the bankruptcy court and that a debt will be discharged unless a discharge-ability determination is requested in the bankruptcy court ...”
In re Chan,
Section 523(a)(19) was adopted on July 30, 2002, as part of Title VII of the Sar-banes-Oxley Act of 2002. Title VJI of the Act is entitled “the Corporate and Criminal Fraud Accountability Act of 2002” (“CCFAA”). Section 803 of the CCFAA added § 523(a)(19) to the Bankruptcy Code as an additional exception to discharge. Congress provided that one of the main purposes of the CCFAA was “to disallow debts incurred in violation of securities fraud laws from being discharged in bankruptcy ...” S.Rep. No. 107-146, at 2 (2002). The section by section analysis and discussion of the CCFAA submitted by its author, Senator Patrick Leahy, provides that enacting § 523(a)(19):
would amend the Bankruptcy Code to make judgments and settlements based upon securities law violations non-dis-chargeable, protecting victims’ ability to recover their losses. Current bankruptcy law may permit such 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 violate securities laws after a government unit or private suit results in a judgement [sic] or settlement against the wrongdoer.
Id. at 16 (emphasis added). The Act’s legislative history also emphasized that such an amendment to the Code was necessary because:
Under current laws, state regulators are often forced to “reprove” their fraud cases in bankruptcy court to prevent discharge because remedial statutes often have different technical elements than the analogous common law causes of action. Moreover, settlements may not have the same collateral estoppel effect as judgments obtained through fully litigated legal proceedings. In short, with their resources already stretched to the breaking point, state regulators must plow the same ground twice in securities fraud cases. By ensuring securities law judgments and settlements in state cases are non-dis-chargeable, precious state enforcement resources will be preserved and directed at preventing fraud in the first place.
Id. (emphasis added).
Section 523(a)(19) was subsequently amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) to state that the provision applies to such debts memorialized in judgments, orders, etc., that result “before, on, or after the date on which the petition was filed.” 11 U.S.C. § 523(a)(19)(B). As amended, § 523(a)(19) provides that a discharge under § 727 does not discharge a debt 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 thepurchase or sale of any security; and
(B) results before, on, or after the date on which the 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 or administrative order for any damages, fíne, penalty, citation, res-titutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.
11 U.S.C. § 523(a)(19) (emphasis added). The amending language furthered Congress’ goal of punishing those who commit securities-related misdeeds by expanding the timeframe for the underlying judgment, settlement, order or decree to be entered.
After § 523(a)(19) was enacted in 2002 and prior to the BAPCPA amendment in 2005, it was well-settled that the provision required a pre-bankruptcy judgment, settlement agreement, or order memorializing the debtor’s liability for the underlying securities law violation as a condition precedent to the nondischargeability action in the bankruptcy court. However, the BAPCPA’s amending language has caused a split among bankruptcy courts as to whether § 523(a)(19) now allows a bankruptcy court to render its own determination of liability for securities law violations or whether the liability determination must still be made outside of the bankruptcy court.
Compare Chan,
The Court is persuaded by the reasoning set forth in
Jafari,
thereby requiring a non-bankruptcy forum to determine liability on Plaintiffs claim that Defendants violated securities laws. The court, therefore, concludes that “[o]ne of the required elements for a finding of non-dischargeability under [§ 523(a)(19) ] is that the
liability
determination has been made outside of the bankruptcy court. Other subsections contain no such requirements, such as subsections (a)(1)-(4), (a)(6) ...”
Jafari,
Even if this Court’s agreement with
Jafari
is incorrect and the bankruptcy court enjoys concurrent jurisdiction over the liability determination to enter an order that satisfies § 523(a)(19), the Court finds that when that determination has already been made by another court, the plain language of § 523(a)(19) along with
[T]he merits of the § 523(a)(19) discharge exception are indistinguishable from the merits of the underlying legal claim. Unlike other subsections of § 523(a) [ (i.e., § 523(a)(2), (4), (6), (7), and (9)) ], which establish exceptions to discharge defined by elements specified in the Bankruptcy Code, the § 523(a)(19) discharge exception is defined, at least in part, in terms of claims established under specified non-bankruptcy statutes.
Chan,
Section 523(a)(19) parallels other nondis-chargeability provisions that require a determination outside the bankruptcy court as a condition precedent for finding the debt dischargeable. Subsections 523(a)(11) and (13)
9
are similar to (a)(19) because “[i]n each of these'subsections, the bankruptcy court does not litigate the underlying claim, but only whether such a claim has already been established ...”
the [bankruptcy] court does not determine whether the debtor is guilty of a title 18 crime and/or whether restitution should be awarded. “The [bankruptcy] court merely determines whether the order at issue has imposed an obligation that is in the nature of ‘restitution’ and whether it was issued under the federal criminal code.”
Id.
(quoting
In re Jensen,
These limitations on the bankruptcy court’s jurisdiction necessarily indicate that Congress intended the underlying non-bankruptcy decisions or settlements to have preclusive effect in nondischargeability actions before the bankruptcy court. Specifically, when analyzing the preclusive effect of a non-bankruptcy court judgment in a nondischargeability action based on § 523(a)(11), the Seventh Circuit held that Congress preempted the common law collateral estoppel principle by enacting § 523(a)(11).
Meyer v. Rigdon,
provided in any final judgment, unre-viewable order, or consent order or decree entered in any court of the United States or of any State, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreement entered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union.
11 U.S.C. § 523(a)(11) (emphasis added). Like § 523(a)(19), (a)(11) provides for an underlying determination of liability that, in itself, serves as the basis for rendering a debt nondischargeable.
The
Meyer
court found that “[t]he plain language of section 523(a)(11) requires the bankruptcy court [to] give preclusive effect to dispositions, like default judgments (a default judgment is
any
judgment) and non-court approved settlement agreements, that would not be given preclusive effect under the common law.”
Meyer,
The holding of
Meyer,
extending collateral estoppel to give preclusive effect to decisions not “actually litigated,” was recognized by the court in
Mollasgo v. Tills (In re Tills),
Although Tills involved a settlement agreement, the court acknowledged and agreed that “subsections 523(a)(11) and (19) expand the Court’s ability to utilize issue preclusion ...” Id. (emphasis added). 13 The Tills court went on to find that when expanding collateral estoppel:
the Meyer court, in the default judgment context, looked behind the default judgment to the text of the complaint to determine whether the findings required for non-dischargeability were sufficiently plead to have been necessarily decided for application of [collateral] estoppel.
Id.
at 456 (internal citations omitted). Because § 523(a)(11) also extends the preclu-sive effect to judgments and the
Meyer
court specifically contemplated a default judgment scenario, the reasoning of
Meyer
and its § 523(a)(11) analysis are equally applicable to the instant case as they were in
Tills.
The Court is therefore able to apply issue preclusion to those matters not “actually litigated” and look to the face of the state court complaint, which is incorporated into the Amended Complaint for this adversary proceeding, to determine whether it sufficiently alleges those requirements set forth by § 523(a)(19). Consequently, South Carolina’s traditional approach to collateral estoppel, requiring that matter be “actually litigated,” is altered in § 523(a)(19) actions.
See Meyer,
In the case at hand, the state court struck Defendants’ answer and found them in default after they failed to comply with discovery orders. The court then referred the matter to the Master in Equity for a determination of damages. Defendants did not appear at the damages hearing; however, them counsel and Plaintiff and her counsel were present. Plaintiff testified at the damages hearing and thereafter a judgment was entered in favor of Plaintiff against Defendants and their businesses. Defendants’ Answer in this dischargeability action admits that the state court entered a default judgment against them, finding Defendants liable for, inter alia, violating the SC Securities Act, common law negligence, fraud and constructive fraud. See Doc. No. 20 at ¶¶ H, viii-ix. In addition, Defendants’ Answer admits that the state court awarded the Plaintiff costs and damages for $42,830.68. 14 See id. at ¶ H, ix. However, Defendants’ Answer also inconsistently asserts defenses to the state court complaint by denying any violations of the SC Securities Act. Id. at ¶ H, vii # 25-47.
Like the debtor/defendant in
Meyer,
the Defendants had their chance to defend the claim for violation of the SC Securities Act in state court and substantially participated in that action. Although whether Defendants violated the SC Securities Act was not “actually litigated” in state court, § 523(a)(19) alters the collateral estoppel effect of that judgment.
See supra
p. 23-34;
see also Meyer,
Plaintiffs Motion for Judgment on the Pleadings
A party may move for a judgment on the pleadings after the pleadings are closed, but early enough to avoid a delay of trial. Fed.R.Civ.P. 12(c).
A motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) may be granted “where there are no material facts in dispute and the moving party is entitled to judgment as a matter of law.” ... “The standard of review for a 12(b)(6) and a 12(c) motion is nearly the same ... with the real difference being that on a 12(c) motion, the Court considers the [ajnswer as well as the [cjomplaint.”
Garcia-Contreras v. Brock & Scott, PLLC,
“[A] court considering a motion for judgment on the pleadings must base its decision solely on information obtained from the pleadings.”
Med-Trans
Many defenses asserted in response to the § 523(a)(2)(A) cause of action remain in the pleadings and have not been stricken. Thus, there are material facts in dispute and the Plaintiff is not entitled to judgment on the pleadings under § 523(a)(2)(A).
However, the Court has stricken all substantive defenses raised in response to the § 523(a)(19) claim; therefore, there are no material facts in dispute. For a judgment on the pleadings to be issued, the Court must determine whether the requirements of § 523(a)(19) have been satisfied. In order for a debt to be excepted from discharge under § 523(a)(19), “two elements must be established: (1) a debt that is for a violation of state securities laws; and (2) the debt results from a judgment or order in a federal or state judicial proceeding.”
Okla. Dept. of Sec. ex rel. Faught v. Mathews,
In the case at hand, there is a valid judgment issued by the state court against the Defendants prior to the petition date. The Defendants’ Answer admits that the state court’s judgment held Defendants liable for violating the SC Securities Act. See Doc. No. 20 at ¶¶ H, viii-ix. Therefore, the second requirement (i.e., Subsection B) is satisfied and the Court must determine whether the Complaint sufficiently alleges that the debt owed by Defendants to Plaintiff “is for the violation of any of the.... State securities laws ...” 11 U.S.C. § 523(a)(19)(A).
The Plaintiffs state court complaint 17 alleged that Defendants and their companies violated various provisions of the SC Securities Act, rendering them liable under S.C.Code Ann. § 35-1-509. Section 35-1-509 18 of the South Carolina Securities Act:
creates a civil cause of action against one who sells a security either (1) in violation of the Act’s registration requirements or (2) “by means of an untrue statement of a material fact or omission to state a material fact necessary in order to make the statement made, in light of the circumstances under which it is made, not misleading....” S.C.Code § 35-1-509. Sections 35-1-501 and 35-1-509 apply to any person who offers or sells a security. Section 35-1-509(b) relates to a seller’s untrue statement or omission to state a material fact and provides the basis for the defendants’ alleged violations.
May v. Peninger,
C/A No. 2:07-cv-00864-CWH,
Plaintiffs state court complaint specifically alleged that her investment in one of Defendants’ companies is a security and that it “is not registered with the State or with the federal Securities Exchange Commission.” (Doc. No. 12, Ex. 1 at 4). In addition, Plaintiffs complaint alleged that, by inducing Plaintiff to invest in the business, Defendants made a sale of a security that violated the securities registration requirement of S.C.Code Ann. § 35-1-301 because the security was not registered and neither the security nor the sale were exempted from registration. Furthermore, Plaintiff alleged that Defendants misled her with false claims and she was damaged as a result.
The Court finds that Plaintiff sufficiently alleged the requirements for a cause of action under S.C.Code Ann. § 35-1-509. The effect of the default judgment deems these allegations true; thus, the requirement set forth in Subsection A of § 523(a)(19) is fulfilled.
See Partington v. Am. Int’l Specialty Lines Ins. Co.,
The Plaintiff is entitled to a judgment on the pleadings in her favor under § 523(a)(19) because all elements of § 523(a)(19) are met and there are no material facts in dispute.
It is hereby ORDERED that:
1. Plaintiff’s Motion to Strike is granted with regard to any defenses that raise issues already decided by this Court’s Order Denying Motion to Dismiss (Doc. No. 19);
2. Plaintiffs Motion to Strike is denied with regard to the remaining defenses asserted in response to the § 523(a)(2)(A) claim;
3. Plaintiffs Motion to Strike is granted with regard to the remaining defenses asserted in response to the § 523(a)(19) claim;
4. Plaintiffs Motion for Judgment on the Pleadings is denied with regard to the § 523(a)(2)(A) claim; and
5. Plaintiffs Motion for Judgment on the Pleadings is granted with regard to the § 523(a)(19) claim. Therefore, the damages awarded in the state court judgment in the amount of $42,830.68 for Defendants’ violation of the SC Securities Act are excepted from any discharge granted to Defendants in the bankruptcy proceeding.
AND IT IS SO ORDERED.
Notes
. Specifically, Plaintiff alleged that Defendants and their company, Advantage Advisory Services, violated S.C.Code Ann. §§ 35-1-501 and 502 and that Defendants and their company, The Rhythm Club, violated S.C.Code Ann. §§ 35-1-301, 501, and 502. See Doc. No. 12, Ex. 1 at 3-5.
. Under the SC Securities Act:
‘'Security” means any note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security, certificate of deposit, or group or index of securities, including an interest therein or based on the value thereof; put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; or, in general, an interest or instrument commonly known as a "security”; or a certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. The term ...
(D) includes an investment in a common enterprise with the expectation of profits to be derived primarily from the efforts of a person other than the investor and a "common enterprise” means an enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a third party, or other investors ...
S.C.Code Ann. § 35-1-102(29).
. Pursuant to the SC Securities Act:
“Sale” includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value, and "offer to sell” includes every attempt or offer to dispose of, or solicitation of an offer to purchase, a security or interest in a security for value. Both terms include:
(A) a security given or delivered with, or as a bonus on account of, a purchase of securities or any other thing constituting part of the subject of the purchase and having been offered and sold for value;
(B) a gift of assessable stock involving an offer and sale; and
(C) a sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer and a sale or offer of a security that gives the holder a present or future right or privilege to convert the security into another security of the same or another issuer, including an offer of the other security.
S.C.Code Ann. § 35-1-102(26).
. The SC Securities Act states that: “It is unlawful for a person to offer or sell a security in this State unless: (1) the security is a federal covered security; (2) the security, transaction, or offer is exempted from registration under Sections 35-1-201 through 35-1-203; or (3) the security is registered under this chapter.” S.C.Code Ann. § 35-1-301.
. Further reference to the Bankruptcy Code, 11 U.S.C. § 101 et seq., will be by section number only.
. In support of its decision, the court stated that "[ojther authoritative sources confirm that the Restatement accurately describes the
traditional
rule that default judgments have no collateral estoppel effect, while acknowledging that some courts have created exceptions to this traditional rule.”
Sartin v. Macik,
.Conversely, under § 523(a)(2):
If a determination of fraud has already been made in a non-bankruptcy court forum, then the bankruptcy court will analyze whether that prior adjudication is entitled to collateral estoppel in a § 523 proceeding. If the other forum’s decision is not final or if it is the result of a default judgment it may not be entitled to collateral estoppel. Similarly, if the parties entered into a settlement agreement, admitting fraud, the bankruptcy court might not give collateral estoppel effect if the matter had not been “actually litigated.” If the admission or prior determination is not entitled to preclusive effect, then nothing in the statute prevents the bankruptcy court from hearing and determining if the debt arises from fraud, without regard to the prior determination. If the language of § 523(a)(19) had ended after its Subsection A requirement, it would have paralleled this language of § 523(a)(2)(A) and clearly the bankruptcy court would have been able to determine liability if it were not bound by a prior determination.
By including the Subsection B requirement in § 523(a)(19), however, Congress sought to signal something different.
Nusse v. Jafari (In re Jafari),
. In fact, § 523(a)(19) does not require a judgment at all, as consent orders, settlement orders, and "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” will suffice. 11 U.S.C. § 523(a)(19)(B).
. Pursuant to the Bankruptcy Code a debtor is not discharged of a debt that is "for any payment of an order of restitution issued under title 19, United States Code.” 11 U.S.C. § 523(a)(13).
. Section 523(a)(4) states that a debtor is not discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4).
. In
Meyer v. Rigdon,
. Specifically, the court analyzed "whether the default judgment entered against [debtor] arose from ‘any act of fraud or defalcation while acting in a fiduciary capacity.’ ” Id. at 1382 (quoting 11 U.S.C. § 523(a)(11)).
. The Court also finds support in the legislative histories of § 523(a)(11) and (19) for expanding the preclusive effect of collateral es-toppel for § 523(a)(19) as the Meyer court did for § 523(a)(11). During the floor debate on § 523(a)(11), Congressman Jack Brooks stated that the changes set forth in the provision:
are changes to the Bankruptcy Code which close off the bankruptcy escape hatch for bank and thrift insiders [who commit] acts of financial fraud and malice ... Banking regulators will now be able to prosecute these con artists with the needed confidence that the victories won in enforcement proceedings will not be nullified in bankruptcy proceedings.
136 Cong. Rec. H13288, 13289 (daily ed. Oct. 27, 1990) (statement of Rep. Brooks) (emphasis added). This statement parallels the legislative intent for enacting § 523(a)(19) because it was intended to close the loophole that allowed securities law violators to discharge their obligations imposed under court judgments or settlements and to prevent state regulators from having to "reprove” their securities law violations in bankruptcy court. S.Rep. No. 107-146, at 16 (2002);
see also Jafari,
. The amount of Plaintiff's damages was trebled under the South Carolina Unfair Trade Practice Act (SCUTPA).
.
Hodges v. Buzzeo,
Unlike the
Meyer
court, the court in
Buzzeo
found that, under
Archer,
the settlement agreement did not preclude the court from examining the underlying facts to determine whether the plaintiff’s claims were nondis-chargeable under § 523(a)(19).
Id.
at 583. However, with regard to Mr. Buzzeo, the bankruptcy court concluded that summary
The Defendants in the instant case are more like Mr. Buzzeo than Mrs. Buzzeo. Their state court action was more than a mere default situation because they actively participated in the litigation by filing an answer, but later did not respond to discovery orders, resulting in default. In addition, looking beyond the judgment to the Plaintiff's state court complaint, she alleged wrongdoing committed by the Defendants that results in a claim under § 523(a)(19). See infra at p. 28-30. The Defendants are not like Mrs. Buzzeo because the judgment is entered against both of them and they were both named as defendants in all relevant actions.
. In the alternative, Plaintiff asserts that Defendants should be precluded from asserting defenses to the state court complaint by the
Rooker-Feldman
doctrine. (Doc. No. 25 at 6). “The
Rooker-Feldman
doctrine prevents the lower federal courts from exercising jurisdiction over cases brought by 'state-court losers' challenging 'state-court judgments rendered before the district court proceedings commenced.’ ”
Lance v. Dennis,
. The Court is not certain whether it should review the Amended Complaint filed in this adversary proceeding for sufficient allegations or the state court complaint that led to the judgment, or both. However, in this case such a clarification is unnecessary because Plaintiff attached and incorporated the state court complaint into its dischargeability complaint.
. The applicable subsection of S.C.Code Ann. § 35-1-509 provides that:
A person is liable to the purchaser if the person sells a security in violation of Sections 35-1-301 or 35-1-501 or, by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statement made, in light of the circumstances under which it is made, not misleading, the purchaser not knowing the untruth or omission and the seller not sustaining the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission....
S.C.Code Ann. § 35-l-509(b).