Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_15-cv-04744/USCOURTS-cand-3_15-cv-04744-2/pdf.json

Parties Involved:
Benjamin Pui-Yun Chui
Appellee
Tradex Global Advisors LLC
Appellant
Tradex Global Master Fund SPC Ltd
Appellant

Document Text:

United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

TRADEX GLOBAL MASTER FUND

SPC LTD., and TRADEX GLOBAL

ADVISORS LLC,

Appellants,

 v.

BENJAMIN PUI-YUN CHUI,

Appellee. /

No. C 15-04744 WHA

Br. No. 12-30953 HLB

Adv. Proc. No. 12-3102 HLB

ORDER AFFIRMING DECISION

OF BANKRUPTCY COURT

INTRODUCTION

In this appeal of an adversary proceeding relating to appellee’s bankruptcy proceedings,

appellants contend that the bankruptcy court should have given preclusive effect to a cease and

desist order from the Securities and Exchange Commission. For the reasons stated below, the

decision of the bankruptcy court is AFFIRMED.

STATEMENT

Appellee Benjamin Pui-Yun Chui was an investment advisor registered with the

Securities and Exchange Commission who managed (via an investment management company)

several segregated portfolio funds. Among the funds that Chui managed was the American

Pegasus Auto Loan Fund. 

Appellant Tradex Global Master Fund SPC, Ltd., operated as a segregated portfolio

company, and appellant Tradex Global Advisors LLC was the investor for the segregated

portfolio company (collectively, “Tradex”). In 2006, Tradex began evaluating whether to invest

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in APALF. Throughout 2006 and 2007, Chui and his colleagues made several presentations to

Tradex encouraging it to invest in APALF and issued an offering memorandum. The

presentations and offering memorandum promoted APALF as a niche hedge fund comprising

sub-prime auto loans that sourced its assets from multiple auto-loan suppliers.

Tradex invested nearly two million dollars in APALF with four separate investments

between March 2007 and August 2008. Although Tradex redeemed some of its investment in

the regular course of business without problem, when it sought to redeem all that remained of

its investment in late 2008, the investment had been lost.

In 2009, the Securities and Exchange Commission conducted an audit of Chui’s

business dealings and opened a formal investigation in 2010. Before the SEC filed formal

charges, Chui offered to settle with the SEC. In December 2010, the SEC issued an “Order

Instituting Administrative and Cease and Desist Proceedings.” The order set forth the following

findings, noting that Chui, his colleagues, and his investment funds consented to the order

“without admitting or denying the findings [t]herein” (Appx. Exh. 11 at 220). 

The SEC order found as follows. In June 2007, Chui, via a holding company, bought

Synergy Acceptance Corp., which supplied portfolios of auto loans to APALF. Chui financed

the purchase with more than eighteen million dollars from APALF, including a loan of more

than thirteen million dollars to finance the acquisition of Synergy Acceptance. Synergy

Acceptance became the sole supplier of auto loans and servicing for APALF, and Synergy

Acceptance derived virtually all of its income from APALF. This created a pervasive conflict

of interest. Chui and his colleagues did not disclose the purchase of Synergy Acceptance to the

independent directors of Chui’s investment management company until March 2009, and

investors did not learn of it until the SEC’s audit in April 2009.

The SEC order further found that between 2007 and 2009, Chui directed APALF to loan

approximately twelve million dollars (unsecured) to several other funds operated by his

investment management company. This generated a further conflict of interest, and Chui did

not apprise the independent directors of his investment fund of these loans. 

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Accordingly, the SEC found that although the offering memorandum for APALF

indicated that its objective was to purchase only sub-prime auto loans, United States Treasury

securities, and interest-rate derivatives, forty percent of APALF’s assets consisted of loans to

Chui’s investment company, its parent, and another fund — not auto loans. 

Meanwhile, the SEC order found, Chui continued to represent that APALF sourced its

auto loans from multiple independent funds (not solely Synergy Acceptance) and never

disclosed his conflict of interest due to his stake in Synergy Acceptance or APALF’s assets that

did not meet its stated objectives. Thus, the SEC concluded that Chui had engaged in

fraudulent conduct in violation of various securities laws and ordered Chui to cease and desist

from engaging in further similar conduct and from working as an investment advisor.

As stated, Chui consented to entry of the SEC order but did not admit or deny the facts

represented therein, as follows (Appx. Exh. 11 at 2):

In anticipation of the institution of these proceedings, Respondents

have submitted Offers of Settlement (the “Offers”) which the

Commission has determined to accept. Solely for the purpose of

these proceedings and any other proceedings brought by or on

behalf of the Commission, or to which the Commission is a party,

and without admitting or denying the findings herein, except as to

the commission’s jurisdiction over them and the subject matter of

these proceedings, which are admitted, Respondents consent to the

entry of this Order Instituting Administrative and Cease-andDesist Proceedings . . . .

Chui petitioned for Chapter 7 bankruptcy in 2012. Chui’s bankruptcy case proceeded

before Judge Thomas E. Carlson (Bk. Case No. 12-30953). During the pendency of Chui’s

bankruptcy proceeding, Tradex commenced the instant adversary proceeding against Chui

seeking an exception to discharge in his bankruptcy. Judge Hannah L. Blumenstiel heard the

adversary proceeding in the bankruptcy court (Adv. Proc. Case No. 12-3102). 

In its complaint, Tradex alleged that had it known the true facts of Chui’s conduct as

reflected in the SEC order, it would not have invested in APALF or would have withdrawn its

investment earlier. Tradex sought a determination that its claim for damages resulting from

Chui’s alleged misrepresentations could not be discharged in his bankruptcy proceedings.

Tradex moved for summary judgment that its damages from Chui’s conduct were not

dischargeable in bankruptcy. Tradex argued, inter alia, that the SEC’s order preclusively

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established a debt resulting from a violation of securities law and thus could not be discharged

in bankruptcy. Following full briefing, the bankruptcy court issued a tentative ruling denying

Tradex’s motion because the SEC order did not meet the requirements for collateral estoppel

against Chui (Appx. Exh. 14). Oral argument was held in January 2015. At oral argument,

Tradex asked the bankruptcy court to consider an academic article and a decision from the

Seventh Circuit, raised for the first time in its reply and not addressed in the tentative ruling

(Appx. Exh. 15 at 279). 

In its final order on Tradex’s motion for summary judgment, the bankruptcy court

thoroughly examined the authority cited for the first time in Tradex’s reply and found it

unpersuasive. Thus, the bankruptcy court’s order held that the SEC order did not preclusively

establish a non-dischargeable securities violation and factual disputes existed requiring a trial. 

After a two-day trial on the merits and post-trial briefing, the bankruptcy court issued a

memorandum opinion finding that the evidence insufficient to establish that Chui had

committed the alleged securities violations (Appx., Exh. 22). Judgment in favor of Chui was

entered accordingly (Appx., Exh. 23).

Tradex now appeals the denial of its motion for summary judgment, contending that the

bankruptcy court should have given the SEC order preclusive effect. Tradex’s appeal does not

concern the findings and conclusions following the trial or any other basis for the denial of its

motion for summary judgment. This order follows full briefing.

ANALYSIS

This Court has jurisdiction over Tradex’s appeal of the bankruptcy court’s final

judgment pursuant to Section 158(a)(1) of Title 28 of the United States Code. The bankruptcy

court’s denial of Tradex’s motion for summary judgment is properly reviewed on appeal from

final judgment following a trial on the merits inasmuch as the issue raised — whether the

bankruptcy court should have given preclusive effect to the SEC order — is solely a question of

law that, if not made, would have required granting the motion. Escriba v. Foster Poultry

Farms, Inc., 743 F.3d 1236, 1243 (9th Cir. 2014). A district court reviews the bankruptcy

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court’s resolution of questions of law de novo. Blausey v. U.S. Trustee, 552 F.3d 1124, 1132

(9th Cir. 2009).

The only issue on appeal is whether the bankruptcy court should have given the SEC

order preclusive effect pursuant to Section 523(a)(19) of Title 11 of the United States Code. 

Tradex has not appealed the bankruptcy court’s determination that disputes of fact precluded

summary judgment or the bankruptcy court’s findings of fact and conclusions of law made

following the trial.

Section 523(a)(19) provides that bankruptcy 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 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.

In other words, Section 523(a)(19) establishes that a debt is not dischargeable through

bankruptcy if both of two elements are satisfied. First, the debt must be “for” a securities law

violation or fraud in connection with the sale of a security. Second, the debt must “result from”

some judicial or administrative proceeding or a settlement agreement. 

In a section-by-section analysis of the Criminal Fraud Accountability Act of 2002,

which added Section 523(a)(19) to the Bankruptcy Code, one of the Act’s authors, Senator

Patrick Leahy, discussed the issue targeted by that section as follows:

Section 3 of this bill would amend the Bankruptcy Code to make

judgments and settlements based upon securities law violations

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non-dischargeable, 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 or settlement against the wrongdoer. State securities

regulators have indicated their strong support for this change in the

bankruptcy law. 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-dischargeable, precious state

enforcement resources will be preserved and directed at preventing

fraud in the first place.

S.Rep. No. 107-146 at 16 (2002).

In its motion for summary judgment below, Tradex contended the SEC order

preclusively satisfied the requirements of Section 523(a)(19), under the doctrine of collateral

estoppel. The bankruptcy court rejected that argument, which rejection forms the basis for this

appeal.

Generally, collateral estoppel as to an issue is appropriate when:

(1) there was a full and fair opportunity to litigate the issue in the

previous action; (2) the issue was actually litigated in that action;

(3) the issue was lost as a result of a final judgment in that action;

and (4) the person against whom collateral estoppel is asserted in

the present action was a party or in privity with a party in the

previous action.

In re Palmer, 207 F.3d 566, 568 (9th Cir. 2000).

The bankruptcy court held that in light of the stated limitations of the SEC order, namely

that it was entered “[s]olely for the purpose of these proceedings and any other proceedings

brought by or on behalf of the Commission, or to which the Commission is a party” and that

Chui consented to its entry “without admitting or denying the findings [t]herein” the SEC

order’s conclusions regarding Chui’s alleged securities violations had not been “actually

litigated” and so could not give rise to collateral estoppel as to whether Chui violated any

securities laws. The bankruptcy court further held that the SEC order, even if it could be

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conclusive evidence of a securities violation, did not establish a debt owed by Chui to Tradex

— it made no mention of Tradex at all. Thus, because the debt allegedly owed to Tradex did

not “result from” the SEC order, that order did not satisfy Section 523(a)(19). Since factual

issues remained, Tradex’s motion for summary judgment was denied.

Our court of appeals has not addressed whether a settlement agreement with the SEC in

which the alleged perpetrator did not concede liability could satisfy Section 523(a)(19). The

bankruptcy court relied primarily on Mollasgo v. Tills, 419 B.R. 444, 453 (Bankr. S.D. Cal.

2009) (Judge Laura S. Taylor). In Tills, an investor had sued the manager of a real estate

investment fund for securities law violations. The dispute went to arbitration and culminated in

a settlement agreement requiring the manager to pay the agreement in full. The manager

entered the agreement “without conceding any fault or liability.” The manager filed a Chapter 7

petition.

The investor moved for summary judgment seeking preclusion based on the settlement

agreement under Section 523(a)(19). Judge Taylor rejected that argument, finding that the plain

language of Section 523(a)(19) limits is application to circumstances in which there has been a

securities “violation,” not merely “resolutions of allegations of securities violations.” Id. at

451. Judge Taylor held that Section 523(a)(19) allows us to establish a violation based on a

settlement agreement, but only where the settling party is a “wrongdoer.” Id. at 453. She

confirmed that Senator Leahy’s review of Section 523(a)(19) focused on culpability, which was

lacking in the settlement agreement.

The bankruptcy court herein relied primarily on Tills in holding that the SEC order

failed to preclusively establish a dischargeable debt, because Chui agreed to the SEC’s consent

order without admitting liability. A decision that Tradex contends constituted reversible error.

This order affirms the bankruptcy court’s decision, but on a narrower ground than that

advanced by Chui here. As the bankruptcy court held, “the SEC Order makes no mention of

[Tradex] or any debt owed to [Tradex]. The debt allegedly owed by [Chui] to [Tradex] clearly

does not ‘result from’ the SEC Order, and for that reason, cannot satisfy 523(a)(19)” (Appx.

Exh. 16 at 295). 

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Tradex assigns error to the bankruptcy court on that point because the bankruptcy court

cited no authority for its conclusion, but Tradex cites none either. For all the record shows, the

securities scheme leading to the SEC settlement involved different victims and Tradex is simply

pretending it was a victim.

Although this order declines to address whether the SEC order could be used

preclusively at all, it holds that the bankruptcy court correctly denied Tradex’s motion for

summary judgment on the narrower ground that the SEC order failed to establish a debt to

Tradex that resulted from the alleged violation. 

CONCLUSION

For the reasons stated above, the bankruptcy court’s denial of Tradex’s motion for

summary judgment is AFFIRMED. Judgment shall be entered accordingly. The Clerk shall

please CLOSE THE FILE.

IT IS SO ORDERED.

Dated: September 30, 2016. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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