In In re Simon Vernon Rodriguez and Marilyn Kay Schipull (“Rodriguez/Schipull“), BAP No. NV-22-1174-CBG, the United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) found that, because the Nevada state court determined a debtor had violated Nevada securities law, the bankruptcy court did not err in excepting the debtor’s judgment debt from discharge.
In Rodriguez/Schipull, the debtor was the treasurer and Chief Financial Officer of a failed company (“Debtor”). Following the company’s downfall, several of the company’s investors obtained judgments against Debtor for Nevada securities law violations, which led to Debtor filing a Chapter 7 bankruptcy. In response to Debtor filing for bankruptcy, the judgment holders filed an adversary proceeding challenging the dischargeability of their judgments under § 523(a)(19)(A)(i). Debtor argued that, because he was secondarily liable – not primarily liable – for securities law violations, Section 523(a)(19)(A)(i) did not apply to him. However, the BAP did not agree.
The BAP focused on the language of Section 523(a)(19), which states that a debtor may not discharge debts that result from a court judgment for the violation of securities laws. Contrary to Debtor’s position that Section 523(a)(19)(A)(i) contains a primary liability standard, the BAP highlighted that the language does not support that assertion. Further, the BAP distinguished the facts of the case from those in Debtor’s chief cited case, Sherman v. SEC (In re Sherman), 658 F.3d 1009 (9th Cir. 2011). In Sherman, the Ninth Circuit held that Section 523(a)(19) only prevents the discharge of a debt for a securities violation “when the debtor is responsible for that violation.” Because in Sherman, the debtor was a third party, and he was not named in any securities law violation action nor was he found liable for violating securities law, the debt he sought discharge for was not exempted by Section 523(a)(19). Here, the BAP highlighted, Debtor was both named in a securities law violation action, and a state court determined that Debtor did engage in securities violations.
Thus, the BAP concluded that Sherman further undermined Debtor’s position, and instead provided the Court with further support in affirming the bankruptcy court’s determination that, under Section 523(a)(19)(A)(i), the judgment related to securities violations committed by Debtor as determined by a Nevada State court was properly excepted from discharge.