Summary:
In 2005, David Allison approached Elizabeth McKinny with an investment opportunity in Venture Capital In Motion (“VCIM”), wherein McKinny would, as an “approved investor”, obtain irrevocable bank guarantees for her $500,000 investment. When VCIM failed and the funds were lost, McKinny brought suit against Allison alleging claims for breach of the promissory note, common law fraud, and securities fraud, alleging violation of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b- 5. In November 2009, the action was settled with Allison agreeing to may six installment payments totaling $650,000. The Settlement specifically stipulated both that it would “not be deemed an admission of any wrongdoing or liability” by Allison and that, if Allison filed bankruptcy, the Settlement would be void ab initio, reviving all of McKinny’s claims. Allison defaulted on payments and in March 2010, a stipulated judgment was entered against Allison for nearly $850,000. The stipulated judgment was silent as to liability for securities law violations or fraud. Allsion filed bankruptcy on June 17, 2011, and McKinny brought an adversary proceeding seeking a determination that the stipulated judgment was non-dischargeable pursuant to 11 U.S.C. § 523(a)(2) and (19). The Motion for Summary Judgment filed by McKinny was denied, with the bankruptcy court reasoning that the Settlement and stipulated judgment did not contain a finding of fact regarding a securities law violation. McKinny appealed.
For a debt to be non-dischargeable under 11 U.S.C. § 523(a)(19) there must be a showing of
1. There was a violation of securities law or fraud in connection with the sale of a security; and
2. The violation resulted in debt that was memorialized in a judgment, settlement, or decree.
This requires an actual violation of securities law, not merely an allegation of such. Further, following Brown v. Felson, 422 U.S. 127, 138-39 (1979), the district court held that “that the bankruptcy court is not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of [debtor] respondent’s debt.” Id. at 138-39. Accordingly, when a settlement agreement contains an express statement that fault and liability are not conceded, the settlement agreement is insufficient to satisfy § 523(a)(19)(A).
Traditional collateral estoppel, also known as issue preclusion, requires that issues be “actually litigated and necessary to the outcome of the first action” to be given preclusive effect in subsequent litigation. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 n.5 (1979) (citations omitted). Following, Meyer v. Rigdon, 36 F.3d 1375, 1378-80 (7th Cir. 1994), the district court, however, held that a Consent Judgment or Settlement would not support collateral estoppel as the “general rule is that issues underlying a consent judgment generally are neither actually litigated nor essential to the judgment.”
For a copy of the opinion, please see:
McKinny v. Allison- Denial of Summary Judgment for Securities Fraud based on Consent Judgment
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