The SEC filed a complaint against the Debtor and two other individuals in 2005 alleging they had engaged in a $60 million Ponzi scheme, specifically alleging that the Debtor unlawfully sold unregistered securities, was not registered as a broker-dealer when selling certain billboards, and failed to disclose material information to investors. In 2006, the Debtor and the SEC filed a consent judgment wherein the Debtor agreed to, among other terms, disgorge nearly $2 million. In 2008, the district court imposed a $5,000 civil penalty against the Debtor as his “violations were not particularly reprehensible or egregious.”
After filing bankruptcy, the Debtor brought an adversary proceeding seeking a determination that the $2 million was dischargeable, as he had neither admitted nor denied the allegations of fraud made by the SEC. The Debtor further argued that $5,000 civil penalty was dischargeable as the District Court, having already certified the settlement with the SEC as final, lacked jurisdiction to enter the later judgment.
11 U.S.C. § 523(a)(19) was intended to “amend the Bankruptcy Code to make judgments and settlements based upon securities law violations non-dischargeable, protecting victims’ ability to
recover their losses.” 148 Cong. Rec. S1787 (daily ed. March 12, 2002) (statement of Sen. Leahy). This notwithstanding, the general rule is that “[d]ue to the fresh start objectives of bankruptcy, any doubt as to an exception to discharge is to be resolved in the debtor’s favor. New Neighborhoods, Inc. v. West Virginia Workers’ Comp. Fund, 886 F.2d 714, 719 (4th Cir. 1989). Accordingly, the Debtor, having previously neither admitted nor denied the allegations of fraud in the settlement, had stated a plausible claim for dischargablity and the 12(b)(6) motion of the SEC was denied.
As to the $5,000 civil penalty, however, the bankruptcy court found that it was improper for it to question the jurisdiction of the district court more than four years after the entry of the judgment, so this portion of the debt was non-dischargeable.
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