Bankr. M.D.N.C.: In re Gilley- Dischargablity of SEC Settlements under 11 U.S.C. § 523(a)(19)


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.

For a copy of the opinion, please see:

Gilley- Dischargablity of SEC Settlements under 11 U.S.C. § 523(a)(19).pdf


1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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