FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: RICHARD G. SHERMAN; In re: 

ANDREA PEARL SHERMAN,

Debtors,

No. 03-56601

RICHARD G. SHERMAN; ANDREA D.C. No. PEARL SHERMAN,  CV-02-05571-CAS Appellants,

OPINION

v.

SECURITIES AND EXCHANGE

COMMISSION,

Appellee. 

Appeal from the United States District Court

for the Central District of California

Christina A. Snyder, District Judge, Presiding

Argued and Submitted

April 5, 2005—Pasadena, California

Filed March 23, 2006

Before: Sidney R. Thomas and Marsha S. Berzon,

Circuit Judges, and James C. Mahan,* District Judge.

Opinion by Judge Berzon

*The Honorable James C. Mahan, United States District Judge for the

District of Nevada, sitting by designation. 

3097
COUNSEL

Arthur A. Greenberg, Harold Gutenberg, and Don Lanson,

Greenberg & Bass, Encino, California, for the appellants. 

Giovanni P. Prezioso, Jacob H. Stillman, Katharine B.

Gresham, and Hope Hall Augustini, Securities and Exchange

Commission, Washington, D.C., for the appellee. 

OPINION

BERZON, Circuit Judge:

Richard Sherman (Sherman) was the attorney for several

defendants in an enforcement action brought by the Securities

and Exchange Commission (SEC) and in other actions in

which those defendants were parties. Sherman and his wife,

Andrea Sherman, filed a Chapter 7 bankruptcy petition. The

SEC brought a motion to dismiss the Shermans’ Chapter 7

bankruptcy petition pursuant to 11 U.S.C. § 707(a), maintaining that there was “cause” for dismissal. Although the bankIN RE: SHERMAN 3101
ruptcy court denied the SEC’s motion, the district court

reversed. 

We are presented with three questions on appeal. First, we

must consider whether the SEC has standing. The SEC has an

interest in the Shermans’ bankruptcy petition because part of

the debt that the Shermans sought to discharge resulted from

orders against Sherman issued in the SEC enforcement action.

Before the district court decided the appeal, however, Sherman and Thomas Lennon, the receiver appointed in the SEC

action (Receiver), entered into a settlement agreement. We

must initially decide whether the SEC had an interest in the

Shermans’ bankruptcy petition sufficient to confer standing.

We must then decide whether the settlement agreement extinguished any interest the SEC initially had in the Shermans’

bankruptcy petition, divesting the SEC of standing to proceed.

Second, we address whether this appeal is moot because the

bankruptcy court has already granted the Shermans a discharge. Finally, we are presented with a merits question: Did

the bankruptcy court err in denying the SEC’s motion to dismiss the petition for cause? 

We hold that the SEC has standing because it retained a

pecuniary interest as a creditor in some of the Shermans’ debt,

an interest not extinguished by the settlement agreement

between Sherman and the Receiver. In addition, we conclude

that the fact that the bankruptcy court granted the Shermans

a discharge does not render the case moot, because the bankruptcy court lacked jurisdiction to do so. Finally, we decide

that the bankruptcy court did not err in denying the SEC’s

motion to dismiss the petition for cause. Other provisions of

the Bankruptcy Code address the misconduct that the SEC

argued constituted “cause” justifying dismissal. Thus, under

Neary v. Padilla (In re Padilla), 222 F.3d 1184 (9th Cir.

2000), the petition could not be dismissed for “cause” under

11 U.S.C. § 707(a). 

3102 IN RE: SHERMAN
I. Factual and Procedural Background 

The current appeal arises from a somewhat Byzantine set

of events: 

In 1997, the SEC commenced a securities fraud action

against Whitworth Energy Resources, Ltd., Williston Basin

Holding Corp., and Amerivest Financial Group, Inc., along

with their principals (Whitworth action), in the United States

District Court for the Central District of California. The complaint alleged, among other things, that the defendants operated a Ponzi-like scheme by representing that investors were

receiving income from oil and gas production when, in fact,

distributions were made from receipts obtained from new

investors or assessments of existing investors. The district

court entered an order freezing the corporate entities’ assets

and appointing Thomas Lennon as permanent receiver for the

defendant entities and their subsidiaries and affiliates, including Oxford Oil and Gas, Inc. and the Oxford Group of Companies, Ltd.1

 The district court ordered that the Receiver was

to have 

full powers of an equity receiver, including, but not

limited to, full power over all funds, assets, property,

securities, premises (whether owned, leased, occupied, or otherwise controlled), choses in action,

books, records, and other property belonging to or in

the possession of or control of Whitworth, Williston,

Amerivest, and any of their subsidiaries and affiliates.2

1We refer to Oxford Oil and Gas, Inc. and the Oxford Group of Companies, Ltd. collectively as the “Oxford companies.” 

2

In relevant part, the order specified that the Receiver was “immediately

authorized, empowered and directed” to do the following: 

A. to have access to and to collect and take custody, control,

possession, and charge of all funds, assets, property, securities, premises (whether owned, leased, occupied or otherwise controlled), choses in action, books, records, papers,

IN RE: SHERMAN 3103
The district court granted the SEC’s partial summary judgment motion, concluding that the principal defendants had

violated section 17(a) of the Securities Act of 1933, 15 U.S.C.

§ 77q(a), section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.3

 In 1999, the district court

entered final judgment. The relief ordered included an injunction and provisions requiring the principal defendants to disgorge specified amounts of ill-gotten gains to the Receiver

and pay civil penalties.

and other property of Whitworth, Williston and Amerivest,

and their subsidiaries and affiliates, with full power to control, manage, sue, foreclose, marshal, collect, receive, and

take into possession all such property; 

. . . . 

D. to take such action as is necessary and appropriate to preserve and take control of and to prevent the dissipation,

devaluation, concealment, or disposition of any funds,

assets, property, securities and premises of Whitworth, Williston and Amerivest, and their subsidiaries and affiliates; 

E. to make a further accounting, as soon as practicable to this

Court and the Commission of the assets and financial condition of Whitworth, Williston, Amerivest, and their subsidiaries and affiliates, and to file the accounting with the Court

and deliver copies thereof to all parties; [and] 

. . . . 

G. to employ attorneys and others to investigate and, where

appropriate, to defend, institute, pursue, and prosecute all

claims and causes of action of whatever kind and nature

which may now or hereafter exist as a result of the activities

of present or past employees or agents of Whitworth, Williston, Amerivest and their subsidiaries and affiliates, including

but not limited to Insured Energy Drilling Program 1986-4,

a limited partnership, et al. v. Trust Company of the West,

a California trust company, et al., Case No. BC 108-297,

pending in Los Angeles County Superior Court. 

3We later affirmed this decision. SEC v. Whitworth Energy Res. Ltd.,

243 F.3d 549 (9th Cir. 2000) (unpublished table decision). 

3104 IN RE: SHERMAN
Appellant Richard Sherman, an attorney for several of the

defendants in the Whitworth action, violated the Whitworth

district court’s freeze order by withdrawing a total of $54,980

from the companies’ litigation trust account and soliciting

additional funds from investors. The SEC and the Receiver

sought a judgment of civil contempt against Sherman from

the Whitworth district court. In February 2000, that court

found Sherman in contempt and ordered him to disgorge “to

the Receiver” $54,980 plus prejudgment interest.4 We

affirmed. SEC v. Whitworth Energy Res. Ltd., 243 F.3d 549

(9th Cir. 2000) (unpublished table decision).

In separate proceedings, commenced before the Whitworth

action, the Oxford companies had filed, in state court, several

suits concerning the ownership rights to various natural gas

assets in Texas (contingency suits).5 Sherman represented the

Oxford companies’ investors in these actions, pursuant to a

contingency fee agreement. The agreement provided that

Sherman was to receive forty percent of the amount of benefits paid to the plaintiffs after deducting litigation-related

costs and disbursements. Also, the Oxford companies were to

pay Sherman periodically throughout the litigation as an

advance against his contingency fees, and any money Sherman retained in excess of his fees would be treated as an

interest-free loan. 

In early 2001, the Receiver settled the contingency suits. A

year later, the Receiver filed a motion in the Whitworth suit

seeking an order requiring Sherman to disgorge money he had

received and retained, but not earned, in connection with his

representation in the contingency suits. The SEC joined the

motion shortly thereafter. Four days before the hearing on the

disgorgement motion, Sherman and his wife, Andrea Sherman, filed a voluntary Chapter 7 bankruptcy petition with the

4We refer to this order as the “contempt judgment” or “contempt order.”

5The district court’s order appointing Lennon to be the permanent

receiver referred to one of these cases. See supra note 2, ¶ G. 

IN RE: SHERMAN 3105
bankruptcy court. Sherman did not file an opposition to the

disgorgement motion with the Whitworth district court, nor

did he appear at the hearing on the motion. 

In March 2002, the Whitworth district court issued its decision on the disgorgement motion. It found that the Receiver

was subject to the automatic stay provisions of 11 U.S.C.

§ 362(a)(1), but that, under § 362(b)(4), the SEC was not.6 On

the merits, the district court found that the Receiver had set6Section 362 provides, in relevant part: 

(a) Except as provided in subsection (b) of this section, a petition filed under section 301 [covering voluntary petitions] [or]

302 [covering joint petitions] . . . of this title . . . operates as a

stay, applicable to all entities, of — 

(1) the commencement or continuation, including the

issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was

or could have been commenced before the commencement

of the case under this title, or to recover a claim against the

debtor that arose before the commencement of the case under

this title . . . , 

(b) The filing of a petition under section 301 [or] 302 . . . does

not operate as a stay — 

. . . . 

(4) under paragraph (1) . . . of subsection (a) of this section, of the commencement or continuation of an action or

proceeding by a governmental unit . . . to enforce such governmental unit’s . . . police and regulatory power, including

the enforcement of a judgment other than a money judgment,

obtained in an action or proceeding by the governmental unit

to enforce such governmental unit’s . . . police or regulatory

power . . . . 

11 U.S.C. § 362(a)(1), (b)(4). The question of the propriety of the stay

ruling is not before us in this proceeding. 

Unless otherwise indicated, all citations to the U.S. Code are to the version of the Code in effect at the time of the relevant lower court decisions

in 2002. Later amendments to the Code are not relevant to our disposition

of the present case and have therefore, with one exception, not been noted.

3106 IN RE: SHERMAN
tled the contingency suits for $750,000, and that Sherman was

therefore entitled to $300,000 in fees. The court also found

that as of the time of the settlement, Sherman had collected

$881,313.43 in advances. Thus, pursuant to the contingency

fee agreement, Sherman owed the Oxford companies

$581,313.43, the difference between the advances Sherman

had received and retained and the actual fee for his representation. The district court granted the motion for disgorgement

(disgorgement judgment) and ordered Sherman to pay

$581,313.43 plus interest. The disgorgement order did not

specify to whom Sherman was to remit this money. 

In May 2002, the SEC filed a motion in bankruptcy court

to dismiss the Shermans’ Chapter 7 petition pursuant to 11

U.S.C. § 707(a). The Receiver joined the motion shortly

thereafter. A few weeks later, the Receiver independently

filed an action (nondischarge action) against Sherman in

bankruptcy court, seeking a determination that the debt Sherman owed the Receiver for the contempt judgment and the

retention of money in excess of his fees in connection with

the contingency suits, totaling $636,293.43, was nondischargeable.7

The bankruptcy court denied the SEC’s motion to dismiss

the bankruptcy in June 2002, stating that “[t]his is just a runof-the-mill bankruptcy.” The SEC filed a notice of appeal in

July 2002. The appeal was heard by the Whitworth district

court. On October 1, 2002, while the appeal was pending in

the district court, the bankruptcy court entered an order granting the Shermans a discharge under 11 U.S.C. § 727. 

7The Receiver’s motion for non-discharge invoked 11 U.S.C.

§ 523(a)(4) and (6). The former exempts from discharge debts “for fraud

or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). The latter exempts from discharge debts “for

willful and malicious injury by the debtor to another entity or to the property of another entity.” Id. § 523(a)(6). 

IN RE: SHERMAN 3107
In December 2002, Sherman and the Receiver entered into

a settlement agreement (Agreement). As part of the Agreement, Sherman “agree[d] to execute a Stipulation for Entry of

Judgment in the amount of $636,293.43 plus interest.” The

bankruptcy court entered an order shortly thereafter granting

the stipulation for entry of judgment. 

In relevant part, the stipulation stated the following:

A. On February 28, 2000, the U.S. District

Court, Central District of California (the “District

Court”) in SEC v. Whitworth Energy Resources

entered a contempt judgment against Defendant

[Sherman] and various other individuals (the “Contempt Judgment”). The Contempt Judgment found

that Defendant received $54,980 in violation of a

TRO and Preliminary Injunction previously issued

by the District Court.

B. In addition, the Receiver has asserted a claim

against Defendant for $581,313.43 plus interest for

attorneys’ fees Defendant received as purported

advances against an anticipated contingent fee (the

“Disgorgement Claim”). 

. . . .

D. On May 24, 2002, Plaintiff [the Receiver]

filed a complaint (the “Complaint”) against Defendant pursuant to 11 U.S.C. Section 523 to determine

the dischargeability of debts totaling $636,293.43

plus interest based on the Contempt Judgment and

the Disgorgement Claim (the “Adversary Action”).

. . . .

NOW THEREFORE, in consideration of the recitals set forth above, and in consideration of the

3108 IN RE: SHERMAN
mutual promises, undertakings, terms and conditions

hereinafter set forth, the parties stipulate as follows:

1. Subject to the terms and conditions of the Settlement Agreement and for the sole purposes of the

Settlement Agreement, Defendant agrees and stipulates that the Contempt Judgment and Disgorgement

Claim are nondischargeable pursuant to 11 U.S.C.

§ 523(a).

2. Defendant agrees to make payments totaling

$50,000 to Plaintiff as follows in full and final settlement of Plaintiff’s claims against Defendant as set

forth in the Adversary Action . . . . 

. . . .

3. Defendant stipulates to entry of a judgment in

the amount of $636,293.43 plus interest (the “Judgment”), based on the following terms and conditions:

As long as Defendant makes all payments . . . ,

Receiver shall forebear from filing, entering, recording, enforcing or executing on the Judgment. . . . 

. . . .

5. Upon receipt of the Final Payment . . . , the

Receiver shall immediately dismiss the Adversary

Action.

The district court reversed the bankruptcy court’s order

denying the SEC’s motion to dismiss the petition. The court

concluded that there was no specific remedy under the Bankruptcy Code for the SEC to pursue, and that under our opinion

in Padilla, it could therefore proceed to the “cause” inquiry.

Analyzing the SEC’s motion to dismiss the Shermans’ petition for “cause” under § 707(a), the district court held that the

timing and circumstances of the Shermans’ petition, along

IN RE: SHERMAN 3109
with the misrepresentations made in it, were sufficient to constitute “cause.” Specifically, the district court held that 

Sherman filed for bankruptcy to prevent this Court

from ordering Sherman to disgorge the funds he

wrongfully obtained from the companies. By filing

for bankruptcy, the Court finds that Sherman

intended to obtain a discharge of his obligations to

the SEC, while simultaneously — because he turned

over no assets for liquidation — maintaining the lifestyle he currently enjoys, a lifestyle funded in part by

the money Sherman obtained by deceiving his clients and by violating this Court’s orders.

The district court therefore reversed the bankruptcy court and

remanded with instructions to dismiss “for cause,” pursuant to

§ 707(a). From this decision the Shermans timely appeal.

II. Standing 

On appeal, the Shermans argue for the first time that the

SEC lacks standing to seek dismissal of their Chapter 7 petition, because the SEC’s interest in the contempt and disgorgement judgments was extinguished when the Receiver and

Sherman entered into the Agreement.8 We must address Arti8The prudential appellate standing doctrine, see Fondiller v. Robertson

(In re Fondiller), 707 F.2d 441 (9th Cir. 1983), is not pertinent under the

present circumstances. This doctrine provides that “[o]nly those persons

who are directly and adversely pecuniarily affected by an order of the

bankruptcy court . . . have standing to appeal that order.” Id. at 442. 

The doctrine of prudential appellate standing “exists to fill the need for

an explicit limitation on standing to appeal in bankruptcy proceedings.

This need springs from the nature of bankruptcy litigation which almost

always involves the interests of persons who are not formally parties to the

litigation.” Id. at 443. We have not, however, invoked this doctrine in

instances in which the appellant was the party that brought the motion at

issue on appeal. Instead, we have invoked it when the appellant is a party

other than the moving party. See, e.g., Duckor Spradling & Metzger v.

3110 IN RE: SHERMAN
cle III standing questions regardless of whether they were

raised below. See Biggs v. Best, Best & Krieger, 189 F.3d

989, 998 & n.7 (9th Cir. 1999). 

To establish standing under Article III, a party 

must demonstrate that “(1) it has suffered an ‘injury

in fact’ that is (a) concrete and particularized and (b)

actual or imminent, not conjectural or hypothetical;

(2) the injury is fairly traceable to the challenged

action of the defendant; and (3) it is likely, as

opposed to merely speculative, that the injury will be

redressed by a favorable decision.” 

City of Sausalito v. O’Neill, 386 F.3d 1186, 1197 (9th Cir.

2004) (quoting Friends of the Earth, Inc. v. Laidlaw Envtl.

Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000)). 

At argument, the SEC expressly waived any contention that

its role as statutory guardian of the federal securities laws supplies a non-pecuniary interest sufficient to create standing. Cf.

SEC v. U.S. Realty & Improvement Co., 310 U.S. 434, 459-60

(1940). Instead, the SEC now premises its standing solely on

its asserted status as a “creditor” under the Bankruptcy Code

with respect to the contempt and disgorgement judgments.

The SEC argues that because it is a “creditor” under the

Bankruptcy Code and its debts could be discharged if the petition is not dismissed, it has Article III standing. 

Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 776-77 (9th Cir. 1999);

Tilley v. Vucurevich (In re Pecan Groves of Ariz.), 951 F.2d 242, 244 (9th

Cir. 1991); Fondiller, 707 F.2d at 442. Here, the SEC brought the dismissal motion in the first place and therefore was formally a party to the

dismissal litigation. We therefore conclude that the SEC need not establish

prudential appellate standing in addition to Article III standing in the present case. 

IN RE: SHERMAN 3111
We therefore must decide whether the SEC is a “creditor”

for purposes of the Bankruptcy Code with respect to the contempt judgment or the disgorgement judgment. We conclude

that the SEC is a creditor with respect to the disgorgement

judgment. Because we so conclude, we do not reach the question of whether the SEC is also creditor with respect to the

contempt judgment.9 In Part II(A), we explain why the SEC

was a creditor under the Bankruptcy Code in the absence of

a settlement agreement, and in Part II(B), we address why the

Agreement between Sherman and the Receiver did not extinguish the SEC’s right to enforce the disgorgement judgment.

A. SEC’s Right To Enforce the Disgorgement

Judgment

[1] We first decide whether the SEC is a “creditor” for purposes of the Bankruptcy Code with respect to the disgorgement judgment, assuming the absence of a settlement

agreement. Neither the Supreme Court nor any federal court

of appeals has addressed the question whether the SEC can be

a creditor under the Bankruptcy Code if the agency has

obtained a monetary judgment entered in an SEC enforcement

action. The Bankruptcy Appellate Panel of the Ninth Circuit

and several bankruptcy courts have, however, concluded that

the SEC can in such circumstances have standing as a creditor

under the Bankruptcy Code. See, e.g., SEC v. Cross (In re

Cross), 218 B.R. 76, 78-80 (B.A.P. 9th Cir. 1998); SEC v.

Hodge (In re Hodge), 216 B.R. 932, 935-36 (Bankr. S.D.

9The “creditor” analysis for the two judgments is slightly different. The

contempt order in the Whitworth action, entered on a motion brought by

the SEC and the Receiver, was premised on the finding that Sherman violated the freeze order in the SEC action. In the contempt order, the court

required Sherman to pay $54,980 plus prejudgment interest “to the

Receiver.” 

The disgorgement motion was granted only with respect to the SEC and

did not specify who was to receive the disgorged funds. Furthermore, the

legal theories underlying the Receiver’s interest in the money at issue differed from the legal theory underlying the SEC’s interest in the same

money. See infra Part II(B). 

3112 IN RE: SHERMAN
Ohio 1998); SEC v. Kane (In re Kane), 212 B.R. 697, 700

(Bankr. D. Mass. 1997); SEC v. Maio (In re Maio), 176 B.R.

170, 171-72 (Bankr. S.D. Ind. 1994). In concert with these tribunals, we hold that in the present case, the SEC is a “creditor” for purposes of the Bankruptcy Code, assuming the

absence of a settlement agreement extinguishing its rights.10

[2] The Bankruptcy Code’s definition of “creditor”

includes an “entity that has a claim against the debtor that

arose at the time of or before the order for relief concerning

the debtor.”

11 11 U.S.C. § 101(10)(A). The Code provides that

the term “ ‘entity’ includes . . . governmental unit,” id.

§ 101(15), and the Code defines “claim” as a 

(A) right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated, fixed,

contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

10The foregoing cases address whether the SEC has standing as a creditor under the Bankruptcy Code to file a complaint under 11 U.S.C. § 523

to determine the dischargeability of a particular debt. See 11 U.S.C.

§ 523(c); FED. R. BANKR. P. 4007(a) (“[A]ny creditor may file a complaint

to obtain a determination of the dischargeability [under § 523] of any

debt.” (emphasis added)). In contrast, in the present case, the SEC argues

that it has standing under the Bankruptcy Code to pursue the dismissal of

the bankruptcy petition under 11 U.S.C. § 707(a), which does not in terms

require that any motion be brought by a creditor. Nonetheless, the SEC’s

basis for asserting Article III standing is that it is a creditor for purposes

of the Bankruptcy Code, so the pertinent standing considerations are the

same. 

11The Bankruptcy Act of 1898, in effect before the adoption of the

Bankruptcy Code, defined a “creditor” as “anyone who owns a debt,

demand, or claim provable in bankruptcy.” 11 U.S.C. § 1(11) (1976)

(repealed 1978) (emphasis added). Under the Code, the creditor is no longer required to “own” a claim, only to “ha[ve]” one. See 2 COLLIER ON

BANKRUPTCY § 101.10 (Alan N. Resnick & Henry J. Sommer eds., 15th ed.

rev. 2005); see also Fezler v. Davis (In re Davis), 194 F.3d 570, 577 (5th

Cir. 1999) (noting this difference). The change appears to accord with the

broad definition of “claim” in the Code, which includes “the right to an

equitable remedy.” 11 U.S.C. § 101(5)(B). 

IN RE: SHERMAN 3113
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable

remedy is reduced to judgment, fixed, contingent,

matured, unmatured, disputed, undisputed, secured,

or unsecured. 

Id. § 101(5). The Supreme Court has stated that “Congress

intended by this language to adopt the broadest available definition of ‘claim’ ” and has held that “ ‘right to payment’

[means] nothing more nor less than an enforceable obligation.” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991)

(alteration in original) (one set of internal quotation marks

omitted) (quoting Penn. Dep’t of Pub. Welfare v. Davenport,

495 U.S. 552, 559 (1990)). 

Applying these provisions to the present case, we see that

whether the SEC is a creditor turns on whether it “has” a

“right to payment” — i.e., an “enforceable obligation” —

“against” the Shermans with respect to the disgorgement

judgment. 11 U.S.C. § 101(10)(A), (5); Johnson, 501 U.S. at

83. This determination depends, in turn, on the nature of the

disgorgement judgment entered in favor of the SEC, the consideration to which we now turn.

Under the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act), “[w]henever it shall

appear to the [SEC] that any person is engaged or is about to

engage in acts or practices” that violate the securities laws,

the SEC may bring an action “to enjoin such acts or practices.” 15 U.S.C. § 78u(d)(1) (covering the 1934 Act); see

also id. § 77t(b) (covering the 1933 Act and using materially

identical language). Although injunctive relief is the only

relief that the statutes expressly authorize, we have held that

federal courts have “inherent equitable authority to issue a

variety of ‘ancillary relief’ measures in actions brought by the

SEC to enforce the federal securities laws.” SEC v. Wencke,

622 F.2d 1363, 1369 (9th Cir. 1980). In particular, a court

3114 IN RE: SHERMAN
may impose a receivership, see id., freeze assets, see SEC v.

Hickey, 322 F.3d 1123, 1131 (9th Cir. 2003), amended on

other grounds on denial of reh’g, 335 F.3d 834 (9th Cir.

2003), and order the disgorgement of the proceeds of fraud

held by defendants, see SEC v. Wencke, 783 F.2d 829, 837 n.9

(9th Cir. 1986), and by third-party nominal defendants, SEC

v. Colello, 139 F.3d 674, 676-77 (9th Cir. 1998). 

In the present case, the SEC brought the Whitworth action

pursuant to its authority under 15 U.S.C. §§ 78u(d)(1) and

77t(b). The SEC obtained the disgorgement judgment against

Sherman pursuant to Colello. See id. at 677. Colello authorizes courts to order the disgorgement of ill-gotten gains held

by third parties who are acting as depositories and have no

legitimate claim to the funds.12 See id. Here, the $581,313.43

at issue in the disgorgement judgment was money Sherman

retained in excess of his fee for the services rendered in the

contingency suits. According to the contingency fee agreement, Sherman was to return this money to the Oxford companies. In the meantime, he was effectively acting as a

depository for those funds, as he legitimately obtained them

in the first place but no longer had a valid claim to retain

them. Although the disgorgement motion was brought by both

the Receiver and the SEC, the disgorgement judgment was

rendered pursuant to the motion of the SEC alone, because the

Receiver, but not the SEC, was subject to the automatic stay.

The pertinent question is whether the SEC’s interest in the

disgorgement judgment is sufficient to confer creditor status

on it for purposes of the Bankruptcy Code even though the

SEC was not to obtain any funds for its own coffers. In

Nathanson v. NLRB, 344 U.S. 25 (1952), the Supreme Court

considered the circumstances in which a governmental entity

can, by virtue of its authority to require payments from one

party to another, be a creditor under the Bankruptcy Act of

12The parties do not argue that the district court’s disgorgement judgment was in error under Colello. 

IN RE: SHERMAN 3115
1898.13 Nathanson held that the National Labor Relations

Board (Board) was a creditor under the Bankruptcy Act with

respect to the Board’s order to a debtor to pay certain employees back pay, notwithstanding that it was the employees, and

not the Board, who would eventually receive the money at

issue. See id. at 26-27. The Court reasoned as follows: 

The Board is the public agent chosen by Congress to

enforce the National Labor Relations Act. A back

pay order is a reparation order designed to vindicate

the public policy of the statute by making the

employees whole for losses suffered on account of

an unfair labor practice. Congress has made the

Board the only party entitled to enforce the Act. A

back pay order is a command to pay an amount owed

the Board as agent for the injured employees. The

Board is therefore a claimant in the amount of the

back pay. 

Id. at 27 (citations omitted). 

Under Nathanson, the SEC has standing as a creditor with

respect to these judgments. Like the Board in Nathanson, the

SEC in the present case “is the public agent chosen by Congress to enforce” the securities laws. Id. In addition, the disgorgement judgment is “designed to vindicate the public

policy of the statute.” Id. As we explained in SEC v. Rind, 991

F.2d 1486 (9th Cir. 1993), “[b]y deterring violations of the

securities laws, disgorgement actions further the [SEC’s] public policy mission of protecting investors and safeguarding the

integrity of the markets.” Id. at 1491. In Colello, we explained

that “the SEC may name a non-party depository as a nominal

13The Bankruptcy Act provision at issue in Nathanson defined “creditor” slightly differently from the Code, as “anyone who owns a debt,

demand, or claim provable in bankruptcy, . . . includ[ing] his duly authorized agent, attorney, or proxy.” 11 U.S.C. § 1(11) (1946) (repealed 1978),

quoted in Nathanson, 344 U.S. at 27 n.1. 

3116 IN RE: SHERMAN
defendant to effect full relief in the marshalling of assets that

are the fruit of the underlying fraud.” 139 F.3d at 677. 

The present case may at first seem different from Nathanson in two respects. First, Nathanson noted that the Board was

the “only party entitled to enforce the” statute at issue, 344

U.S. at 27 (emphasis added), but the SEC is not the only

enforcer of some of the sections of the statute at issue in the

Whitworth action. In the Whitworth action, the SEC was

enforcing two statutes and one rule promulgated thereunder:

section 17(a) of the 1933 Act, section 10(b) of the 1934 Act,

and Rule 10b-5 promulgated thereunder. While there is no

express private cause of action under any of these provisions

and no implied private cause of action under section 17(a) of

the 1933 Act, see Puchall v. Houghton, Cluck, Coughlin &

Riley (In re Wash. Pub. Power Supply Sys. Sec. Litig.), 823

F.2d 1349, 1357-58 (9th Cir. 1987) (en banc), there is an

implied private cause of action under section 10(b) of the

1934 Act and Rule 10b-5 promulgated thereunder, see Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983);

Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S.

6, 13 n.9 (1971). Second, Nathanson stated that “[a] back pay

order is a command to pay an amount owed the Board as

agent for the injured employees,” 344 U.S. at 27 (emphasis

added), but the disgorgement order in the present case is not

to be paid directly to the SEC as agent for the injured investors. As explained below, however, we conclude that these

possible distinctions lack force, and that the SEC has creditor

status under the Bankruptcy Code. 

First, that the SEC is not the sole enforcer of all sections

of the statute at issue in the Whitworth action does not deprive

the SEC of creditor status. The two circuits that have

addressed whether an entity can be a creditor if it is not the

sole enforcer of a statute have come to conclusions in some

tension with each other.14 Compare Davis, 194 F.3d at 575

14Several bankruptcy courts have held that the fact that the SEC is not

the sole enforcer of the securities laws does not deprive the SEC of creditor status under Nathanson. See Hodge, 216 B.R. at 936; Kane, 212 B.R.

at 700; Maio, 176 B.R. at 171-72. 

IN RE: SHERMAN 3117
(“[A]gencies need not be the only party entitled to enforce the

Acts as their standing as creditors in the nondischargeability

actions obtains regardless of whether the actual beneficiaries

were authorized under federal law to prosecute the action in

their own right.”), with, Missouri ex rel. Ashcroft v. Cannon

(In re Cannon), 741 F.2d 1139, 1142 (8th Cir. 1984) (holding

that the state of Missouri was not a creditor under the statute

at issue and distinguishing Nathanson by noting, among other

differences, that “under the Missouri statutory scheme, the

Attorney General is not the only party entitled to enforce” the

statute because it “provides for a private right of action”).15 In

accordance with the Fifth Circuit’s opinion in Davis, we hold

that the fact that the SEC is not the sole enforcer of the securities laws does not deprive it of creditor status. 

To hold otherwise “would be contrary to legislative intent.”

Maio, 176 B.R. at 172. Congress created an express cause of

action for violations of section 17(a) of the 1933 Act, section

10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, but it did so only for the SEC, not for private parties. See

15 U.S.C. § 77t(b) (expressly creating a cause of action for

the SEC under the 1933 Act); id. § 78u(d)(1) (expressly creating a cause of action for the SEC under the 1934 Act and

rules promulgated thereunder). And, although courts have

implied a private cause of action under section 10(b) of the

1934 Act and Rule 10b-5, see Herman & MacLean, 459 U.S.

at 380, they have not done so under section 17(a) of the 1933

15Davis distinguished Cannon as a case in which: 

the Attorney General of Missouri lacked standing to object to the

discharge of debts owed by the debtor to eight individuals under

the Missouri Merchandising Practicing Act because the Act did

not grant him authority to sue on behalf of private individuals in

a private action to seek the restitution payments; rather, the Attorney General could only seek an injunction on behalf of the state

itself prohibiting the underlying unlawful practice. 

Davis, 194 F.3d at 576. That distinction holds here as well, as the SEC,

like the Administratrix in Davis, is not limited to injunctive relief. 

3118 IN RE: SHERMAN
Act, see Puchall, 823 F.2d at 1353-58. By creating an express

cause of action only for the SEC under these sections and by

implicitly precluding a private cause of action under section

17(a) of the 1933 Act, Congress evinced an intent not to leave

enforcement of the securities laws to private parties. 

[3] To hold that, nonetheless, the SEC has lesser status in

bankruptcy proceedings when private enforcement is permitted would both reverse Congress’s assignment of basic

enforcement authority to the SEC and “unduly hinder enforcement of the Securities Act.” Maio, 176 B.R. at 172. That private parties may have been able to bring actions seeking

payment of some or all of the money at issue in the disgorgement judgment should not affect the SEC’s ability to enforce

the disgorgement order that it did obtain. Otherwise, the ultimate enforcement of securities laws would depend, in part, on

potential action by private parties, as only private parties to

securities actions could have creditor status in bankruptcy,

participate in distribution of the estate, and file nondischarge

actions. Yet, the decided congressional preference was for

SEC enforcement of securities laws. Private parties may not

always have the incentive or financial wherewithal to enforce

those laws, and can only do so to the extent that they can

recover for their own losses. See DCD Programs, Ltd. v.

Leighton, 90 F.3d 1442, 1446 (9th Cir. 1996). We therefore

hold that the fact that the SEC is not the sole enforcer of the

securities laws does not deprive it of creditor status.

[4] Nor does it matter to the SEC’s status as a creditor that

the Receiver may have an enforceable interest as well in the

disgorgement judgment. That judgment does not make clear

to whom the money at issue is to be paid. Even if the Receiver

could enforce the disgorgement judgment on the ground that

he was the intended recipient of the funds at issue, the Receiver’s right to enforce the judgment should not strip the SEC of

its right to do so. We agree with the Bankruptcy Appellate

Panel of the Ninth Circuit’s reasoning in Cross:

IN RE: SHERMAN 3119
As the chief enforcer of the securities laws, the

[SEC] should not have to depend on the Receiver to

enforce its judgments. In some cases, limited funds

in the receivership estate might actually prevent the

Receiver from doing so. This result, however, conflicts with the Commission’s role as a statutory

guardian charged with safeguarding the public interest. In addition, any costs incurred by the receivership estate in connection with enforcing the

Disgorgement Judgment would reduce recovery to

the defrauded investors in this case, whereas allowing the Commission to proceed preserves resources.

218 B.R. at 79. 

Second, while Nathanson stated, vaguely, that “a back pay

order is a command to pay an amount owed the Board as

agent for the injured employees,” 344 U.S. at 27 (emphasis

added), the fact that the disgorgement order in the present

case is not paid to the SEC, even in the first instance, does not

affect the SEC’s creditor status. As an initial matter, we do

not read the quoted statement in Nathanson as indicating that

the funds were literally to be paid to the Board. Earlier in the

opinion, the Court characterized the Board’s order by noting

that the Board “ordered the bankrupt to pay certain employees

back pay.” Id. at 26 (emphasis added). Furthermore, the

underlying Board order at issue in Nathanson stated that the

respondent companies were to “make [the discriminatees]

whole for any loss of pay . . . by payment to each of them of

a sum of money.” In re Hill Transp. Co., 75 N.L.R.B. 1203,

1216 (1948) (emphasis added).16 Thus, Nathanson could not

16The National Labor Relations Board Compliance Manual in effect

today requires that, absent exceptional circumstances, respondents pay

injured employees by issuing them a check and sending the check to the

Board for delivery, or by directly paying the discriminatees. See NAT’L

LABOR RELATIONS BOARD, CASEHANDLING MANUAL (PART THREE), COMPLIANCE PROCEEDINGS §§ 10635.1-.4 (1993), available at http://www.nlrb.gov/

nlrb/legal/manuals/chm3-11.pdf (describing the usual payment procedures); id. §§ 10640.1-.2 (describing the circumstances in which payment

is made to the Board). 

3120 IN RE: SHERMAN
have meant that the Board had creditor status because payment was actually to be deposited with the Board, as the order

in question did not so require. It must have meant merely that

the back pay order was to be considered, for purposes of the

Bankruptcy Act, as an “amount owed the Board.” 

Moreover, even if the Court in Nathanson did assume that

the payment was to be made to the Board in the first instance,

we do not think creditor status could turn on that circumstance. Whether a governmental agency initially collects a

back pay award for distribution to the directly affected individuals or, instead, simply obtains in its name an equitable

order requiring payments directly to private individuals does

not in any meaningful way affect the agency’s interest in the

money in question. In either instance, the authority to enforce

the order to make payment of funds resides in the holder of

the judgment — in Nathanson, the Board, here, the SEC. In

either instance, the agency does not end up with the funds, but

assures that affected individuals are compensated. And in

either event, the agency has an “enforceable obligation” to

require the debtor to pay money, Johnson, 501 U.S. at 83, the

sine qua non of creditor status. 

[5] Thus, the fact that the disgorgement judgment did not

order that Sherman deposit the money at issue with the SEC

does not affect the SEC’s creditor status. Cf. Cross, 218 B.R.

at 79 (“The Receiver’s role as depository [for disgorged

funds] . . . did not deprive the [SEC] of creditor status [for

purposes of a § 523 dischargeability action related to a disgorgement judgment].”)17

17Cannon did accord significance to its understanding that in Nathanson, the money was to be passed through the agency. See Cannon, 741

F.2d at 1142 (holding that the state of Missouri was not a creditor under

the statute at issue and distinguishing Nathanson by stating that in contrast

to Nathanson, “[i]n this case the state court specifically ordered restitution

be made to the individuals”). However, as noted, Cannon involved a different statutory scheme than the one at issue here, and also, in our view,

did not properly understand Nathanson. 

IN RE: SHERMAN 3121
[6] We conclude that the SEC is a “creditor” in the present

case, as that term is used by the Bankruptcy Code, unless the

Agreement extinguished its interest in the disgorgement judgment, a consideration to which we now turn. 

B. Whether the Agreement Extinguished the SEC’s

Rights

We conclude that the Agreement, entered into after the

bankruptcy court denied the SEC’s dismissal motion, did not

extinguish the SEC’s right to enforce the disgorgement judgment. First, the Receiver did not purport to settle the SEC’s

claim. Second, the Receiver and the SEC are independent

entities, and the Receiver did not have the authority to compromise the SEC’s claim. Third, the rights at issue in the

Agreement are different from the rights at issue in the disgorgement judgment. 

[7] As to the first point, the Receiver did not purport to settle the SEC’s claim with respect to the disgorgement judgment. Although the Agreement was reached while the SEC’s

appeal of its motion to dismiss was pending, the SEC was not

a party to the Agreement. Only Sherman and the Receiver

were parties. In addition, the Agreement stated that “[e]ach of

the Parties to this Agreement acknowledges that no other

party, nor any agent or attorney of any other party, has made

any promise, representation, inducement or warranty whatsoever, express or implied, which is not expressly contained in

this Agreement.” The SEC thus never itself relinquished its

rights to enforce the disgorgement judgment or to pursue its

motion to dismiss the bankruptcy petition, and the Agreement

so recognized. 

Moreover, the only pending action addressed in the Agreement was the Receiver’s nondischarge action. The stipulation

filed pursuant to the Agreement noted that Sherman’s payments would be “in full and final settlement of [the Receiver’s] claims against Defendant as set forth in the [Receiver’s

3122 IN RE: SHERMAN
nondischarge action].” The SEC’s disgorgement judgment

was not at issue in the nondischarge action. Instead, the nondischarge action involved only a separate, unadjudicated

claim, albeit for the same money at issue in the disgorgement

judgment: The stipulation stated that “the Receiver has

asserted a claim against Defendant for $581,313.43 plus interest for attorneys’ fees Defendant received as purported

advances against an anticipated contingent fee (the ‘Disgorgement Claim’),” and noted that the Receiver’s nondischarge

action was based on the “Contempt Judgment and the Disgorgement Claim.” (emphasis added). The SEC’s pending appeal

of the bankruptcy court’s denial of its motion to dismiss is not

mentioned in the stipulation or in the Agreement, nor is the

disgorgement judgment in favor of the SEC.18 Thus, the

Receiver did not purport to compromise the disgorgement

judgment entered in favor of the SEC.

[8] As to the second point, the Receiver had no authority

to compromise claims of the SEC. True, the Receiver was

appointed pursuant to the SEC’s motion, but the Receiver’s

authority is circumscribed by the order appointing him. That

order makes clear that he is to marshal the assets of the

receivership estates and can bring actions to do so, but it does

not give him authority to compromise judgments in favor of

the SEC or otherwise act on behalf of the agency. Thus, the

Receiver did not have the authority to settle the SEC’s claims

against Sherman. 

[9] Finally, as to the third point, the rights at issue in the

Agreement were not the same as the rights at issue in the

SEC’s disgorgement judgment, and the latter rights were not

18While the stipulation filed pursuant to the Agreement states that Sherman “agree[d] and stipulate[d] that the Contempt Judgment and Disgorgement Claim are nondischargeable pursuant to 11 U.S.C. § 523(a),” this

stipulation was “for the sole purposes of the Settlement Agreement.” The

SEC, therefore, may not — and has not attempted to — prevail on the theory that the debts have been deemed nondischargeable. 

IN RE: SHERMAN 3123
fully extinguished when the former rights were. The SEC and

the Receiver played different roles with respect to the money

at issue in the disgorgement judgment and had interests in the

money predicated on separate legal theories. The Receiver’s

claim for this money stemmed from his role as the collector

of the assets of the corporations and was premised on two

independent theories for collecting the money: (1) the

Receiver was entitled to the money under the terms of the

contract Sherman and the Oxford companies entered into for

Sherman’s representation in the contingency suits; and (2) the

Receiver was entitled to the money under the California Rules

of Professional Conduct, which state that attorneys shall

“[p]romptly pay or deliver, as requested by the client, any

funds . . . in the possession of the [attorney] which the client

is entitled to receive.” CAL. RULES OF PROF’L CONDUCT R. 4-

100(B)(4), available at http://www.calbar.ca.gov/calbar/pdfs/

ethics/2006_Rules-Prof-Conduct.pdf. 

In contrast, the SEC’s claim to this money stemmed from

its role as the public enforcer of the federal securities laws

and was obtained under a Colello theory. Under Colello, so

long as Sherman retained some of the funds fraudulently

obtained by his clients as a deposit on possible future fees, the

SEC retained an interest in requiring that he disgorge those

funds. Such a disgorgement would further the SEC’s goals of

deterring securities laws violations and compensating

defrauded investors. See Colello, 139 F.3d at 677. That the

Receiver recovered some of the money at issue in the disgorgement judgment to settle his contract and ethics claims does

not mean that the SEC’s securities law claim was extinguished.19

19We note that while the Agreement did not extinguish the SEC’s interest in the disgorgement judgment, it may have affected the amount of

money that the SEC could require Sherman to pay. Under the federal

securities laws, the SEC is entitled to seek the disgorgement of ill-gotten

gains only for the purpose of preventing unjust enrichment, not as a penalty. See Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993) (holding that the

disgorgement judgment is not “a fine levied against the petitioners as pun3124 IN RE: SHERMAN
[10] For all of these reasons, the Agreement did not entirely

extinguish the SEC’s right to enforce the disgorgement judgment. The SEC is therefore a creditor under the Bankruptcy

Code with respect to the disgorgement judgment. 

[11] As a creditor, the SEC has Article III standing to pursue the dismissal of the Shermans’ bankruptcy petition

because, given that status, it satisfies all three prongs of the

Article III standing test. First, the SEC suffered the requisite

“injury in fact” because the pendency of the bankruptcy

action did affect the SEC’s ability to enforce its judgments: If

the bankruptcy petition was not dismissed, Sherman’s debt

resulting from the SEC’s disgorgement judgment, like all of

his other debts, might be discharged. Second, the SEC’s

injury is “fairly traceable” to the Shermans’ bankruptcy petition, City of Sausalito, 386 F.3d at 1197 (internal quotation

marks omitted), because the filing of the bankruptcy petition

made it likely that the disgorgement judgment would not be

fully paid. Third, “it is likely, as opposed to merely speculative” that the SEC’s injury will be redressed by a favorable

decision, as such a result would mean that the disgorgement

judgment will not be discharged in bankruptcy. Id. (internal

quotation marks omitted).

ishment for their conduct” but rather “is the means by which the petitioners are required to remedy the unjust enrichment”). It follows that the

amount of money Sherman can be required to pay must be offset by any

amount already disgorged pursuant to the Agreement. See Cross, 218 B.R.

at 80 (“Both the Receiver and the Commission are entitled to only a single

non-duplicative recovery.”); see also SEC v. Penn. Cent. Co., 425 F. Supp.

593, 599 (E.D. Pa. 1976) (holding that when the SEC seeks disgorgement

and some money has been disgorged pursuant to a private law suit involving the same allegations, the amount paid in the private law suit must offset the judgment for disgorgement sought by the SEC); cf. Litton Indus.,

Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1076 (S.D.N.Y.

1990) (“[O]nce ill-gotten gains have been disgorged to the SEC, there

remains no unjust enrichment and, therefore, no basis for further disgorgement in a private action.”). 

IN RE: SHERMAN 3125
III. Mootness20

The Shermans argue that even if the SEC did have standing, this appeal is moot because the bankruptcy court has

already entered an order granting them a discharge under 11

U.S.C. § 727. We conclude, however, that the bankruptcy

court lacked jurisdiction to enter an order granting the discharge at the time that it did. As that order is therefore void,

this appeal is not moot. 

Federal Rule of Bankruptcy Procedure 4004 determines

when a bankruptcy court may grant a discharge under 11

U.S.C. § 727. The version of Rule 4004(c) in effect prior to

the Shermans’ discharge stated that on the “expiration of the

time fixed for filing a complaint objecting to discharge and

the time fixed for filing a motion to dismiss the case under

Rule 1017(e) [which governs motions to dismiss under

§ 707(b)], the court shall forthwith grant the discharge,”

unless one of several conditions exists, none of which are

present in the instant case. FED. R. BANKR. P. 4004(c) (2000)

(amended 2002).21

Rule 4004(a) states that a “complaint objecting to the debtor’s discharge under § 727(a) of the Code shall be filed no

later than 60 days after the first date set for the meeting of

creditors under § 341(a).” FED. R. BANKR. P. § 4004(a). It

appears that the first date set for the meeting of creditors was

March 25, 2002. The expiration of the time fixed for filing a

20The Shermans raise the mootness argument for the first time in their

reply brief filed with this court. Although we ordinarily do not address

issues raised for the first time in reply briefs, Smith v. Marsh, 194 F.3d

1045, 1052 (9th Cir. 1999), mootness is a jurisdictional issue under Article

III and one we therefore must resolve, see Dittman v. California, 191 F.3d

1020, 1025 (9th Cir. 1999). 

21Rule 4004(c) was later amended in 2002 to add as an exception that

a motion to dismiss under § 707(a) is pending. See FED. R. BANKR. P.

4004(c) (Supp. II 2002). That amendment was not effective, however,

until December 1, 2002, after the purported discharge in this case. See id.

3126 IN RE: SHERMAN
complaint was therefore May 24, 2002. See FED. R. BANKR. P.

9006(a) (describing rules for time computations).

[12] Because none of the conditions listed in Rule 4004(c)

applied to the present case, Rule 4004(c) called for the bankruptcy court to grant the discharge “forthwith” — that is, soon

after May 24, 2002, the end of the sixty-day objection period.

At that time, the SEC’s motion to dismiss was pending in the

bankruptcy court. The bankruptcy court did not, however,

enter a formal order granting the discharge until October 1,

2002. By that date, the bankruptcy court had denied the SEC’s

motion to dismiss, the SEC had filed a notice of appeal, and

the appeal of the denial of the motion to dismiss was pending

in the district court. No party objected to the delay in issuing

the discharge order. 

[13] Padilla addressed the interaction between a dismissal

motion and a discharge order with regard to a time sequence

quite similar to the one in this case. In Padilla, the Bankruptcy Appellate Panel had reversed a bankruptcy court’s

order dismissing a bankruptcy petition. See 222 F.3d at 1187.

A timely notice of appeal concerning that reversal had been

filed. See id. We held that the bankruptcy court did not have

jurisdiction to grant a discharge while the appeal was pending

in this court and that the discharge was thus void. See id. at

1190. We concluded that the appeal was therefore not moot.

See id. 

Here, the SEC filed a timely notice of appeal of the bankruptcy court’s denial of its motion to dismiss, on July 5, 2002.

The bankruptcy court issued an order granting the Shermans

a discharge on October 1, 2002, while the appeal of the bankruptcy court’s denial of the motion to dismiss was pending in

the district court. Under Padilla, the bankruptcy court lacked

jurisdiction on October 1 to grant the discharge, so the appeal

is not moot. 

IN RE: SHERMAN 3127
The Shermans argue, however, that although the bankruptcy court did not enter a formal order granting the discharge until October 1, 2002, we should deem the discharge

to have been entered on the first business day following the

date the sixty-day period expired, citing Ross v. Mitchell (In

re Dietz), 914 F.2d 161 (9th Cir. 1990), for this proposition.

As the sixty-day period expired on May 24, 2002, the discharge, using that approach, would be deemed entered on

May 28, 2002.22 Citing In re Morgan, 290 B.R. 246 (Bankr.

D. Del. 2003), the Shermans argue that this case is moot

because the discharge was deemed granted while the motion

to dismiss was pending in bankruptcy court, prior to the date

that the SEC filed its notice of appeal of the denial of the

motion to dismiss. 

While the argument is creative, we cannot accept it. The

statute says nothing about an automatic discharge, nor does it

specify a date on which a discharge is “deemed” to occur,

without an order so stating. Where, as here, a motion that

would obviate the viability of a discharge order was pending

when the sixty-day period expired, there was good reason for

the bankruptcy court to refrain from issuing a discharge order.

Moreover, Dietz did not hold that the discharge must be

deemed to have been entered upon the expiration of the sixtyday period. Rather, Dietz held that a bankruptcy court may

deem the discharge to have been entered at that time, as doing

so is ordinarily “consistent[ ] with the spirit of the bankruptcy

rules.” 914 F.2d at 164. In Dietz, the bankruptcy court itself

retroactively deemed the discharge to have been entered upon

the expiration of the sixty-day period, so that it could cure a

statutory gap that would have otherwise precluded a motion

to revoke the discharge; there was no other later order that

purported to be an order of discharge. See id. We upheld the

bankruptcy court’s discretion to deem the discharge to have

22May 24, 2002, was a Friday, and May 27, 2002, was Memorial Day,

so the next business day after May 24, 2002, was May 28, 2002. 

3128 IN RE: SHERMAN
been entered upon the expiration of the sixty-day period. See

id. 

In the present case, in contrast, the record does not reveal

that the bankruptcy court ever deemed the discharge to have

been entered at any time prior to the formal order granting the

discharge, issued on October 1, 2002. Indeed, there would

have been no reason to enter the October 1 order if the bankruptcy court believed that there had been a “deemed” discharge months earlier. We therefore consider the discharge

entered on October 1, 2002, not earlier. 

[14] On October 1, the bankruptcy court was without jurisdiction to enter the discharge, so the order granting the discharge was void. This case is therefore not moot. 

IV. Dismissal “for Cause”

This multitude of preliminaries over, we now reach the

merits of the appeal: Should the SEC’s motion to dismiss the

petition “for cause” under 11 U.S.C. § 707(a) have been

granted, as the district court maintained, or not, as the bankruptcy court decided?23 We hold that the bankruptcy court did

not err in denying the SEC’s motion to dismiss the bankruptcy

petition. In so holding, we do not suggest that no vehicles

were available to the SEC to ensure that Sherman paid the

contempt and disgorgement judgment debts or to sanction

Sherman for the behavior that the district court found reprehensible. To the contrary, our holding is that the SEC and the

district court chose the wrong vehicle — § 707(a) — for

23The SEC’s sole argument regarding the merits is that the petition

should be dismissed “for cause” under § 707(a). The bankruptcy court

declined to dismiss the petition; it was the district court on appeal that

ordered dismissal. We therefore do not reach the question of whether the

bankruptcy court in this case would have had inherent authority to dismiss

the petition as filed in bad faith. See Padilla, 222 F.3d at 1193 n.6; see

also Chambers v. NASCO, Inc., 501 U.S. 32, 43-46 (1991); Knupfer v.

Lindblade (In re Dyer), 322 F.3d 1178, 1196-97 (9th Cir. 2003). 

IN RE: SHERMAN 3129
ensuring that Sherman paid the contempt and disgorgement

judgment debts and did not misuse the bankruptcy process. 

We review the district court’s decision on appeal from a

bankruptcy court de novo. See Preblich v. Battley, 181 F.3d

1048, 1051 (9th Cir. 1999). We review the bankruptcy court’s

conclusions of law de novo. See Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003). Thus, we review

de novo whether a type of misconduct can constitute “cause”

under § 707(a). Cf. Padilla, 222 F.3d at 1190-91 (“In essence,

we review de novo whether the bankruptcy court erred in concluding that bad faith is a ground for dismissal under

§ 707(a).”). Having done so, we review a bankruptcy court’s

decision to grant or deny a motion to dismiss for misconduct

that constitutes “cause” for abuse of discretion. See Price v.

U.S. Tr. (In re Price), 353 F.3d 1135, 1138 (9th Cir. 2004)

(holding, in a case addressing § 707(b), that “[w]e review a

bankruptcy court’s decision to dismiss a case for abuse of discretion”). 

[15] Under § 707(a), a “court may dismiss a case under this

chapter only after notice and hearing and only for cause,

including” three enumerated causes. 11 U.S.C. § 707(a); see

also Padilla, 222 F.3d at 1193 (holding that “cause” rather

than “bad faith” is the proper standard for evaluating a motion

to dismiss under § 707(a)). No party contends that any of the

three “causes” listed in § 707(a) apply to the present case.24

24Section 707(a) provides, in full: 

(a) The court may dismiss a case under this chapter only after

notice and a hearing and only for cause, including — 

(1) unreasonable delay by the debtor that is prejudicial to

creditors; 

(2) nonpayment of any fees or charges required under

chapter 123 of title 28; and 

(3) failure of the debtor in a voluntary case to file, within

fifteen days or such additional time as the court may allow

3130 IN RE: SHERMAN
[16] That being so, Padilla prescribes a two-part inquiry:

First, we must consider whether the circumstances asserted to

constitute “cause” are “contemplated by any specific Code

provision applicable to Chapter 7 petitions.” Id. If the asserted

“cause” is contemplated by a specific Code provision, then it

does not constitute “cause” under § 707(a). See id. at 1194. If,

however, the asserted “cause” is not contemplated by a specific Code provision, then we must further consider whether

the circumstances asserted otherwise meet the criteria for

“cause” for discharge under § 707(a). See id. at 1193-94. 

The SEC alleges that the Shermans engaged in three interrelated types of misconduct that together constitute “cause.”

First, the SEC alleges that “the Shermans used the bankruptcy

as a refuge from the district court’s jurisdiction, and to thwart

the Commission’s efforts to obtain a disgorgement judgment.”

Second, the SEC alleges that the Shermans used the bankruptcy as a “ ‘scorched earth’ tactic” to disfavor the SEC.25

Third, the SEC alleges that the Shermans “deliberately exaggerated their liabilities and expenses in order to create the

after the filing of the petition commencing such case, the

information required by paragraph (1) of section 521, but

only on a motion by the United States trustee. 

11 U.S.C. § 707(a). 

25The SEC does not explain what it means by “ ‘scorched earth’ tactic.”

It is likely the SEC used this vague term to bring the Shermans’ conduct

within the reach of Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829

(8th Cir. 1994), which suggests that “using bankruptcy as a ‘scorched

earth’ tactic against a diligent creditor” can constitute “cause” for dismissal under § 707(a). Id. at 832. We assume that when the SEC states

that the Shermans used bankruptcy as a “ ‘scorched earth’ tactic,” it means

that the Shermans structured their financial transactions so as to pay debts

owed to other creditors to the maximum extent possible but to avoid paying debts owed to the SEC. In particular, the SEC intimates that the Shermans depleted their assets so that no assets were left for the SEC once they

filed for bankruptcy. For convenience, we will refer to this preference

prong of the SEC’s argument as the “scorched earth” theory of cause, even

though the terminology is not particularly descriptive. 

IN RE: SHERMAN 3131
misleading impression that they were in dire financial need of

bankruptcy relief.”

The only sensible way to approach the first part of the

Padilla inquiry is to examine whether other specific Code

provisions address the type of misconduct alleged, not

whether other specific provisions covering the actual misconduct alleged would give rise to relief under the Code. If

another Code provision addresses the general type of misconduct but does not cover the actual misconduct, that omission

is best understood as demonstrating that Congress did not

mean to reach the actual misconduct at issue. Any other

approach would preclude bankruptcy relief in circumstances

in which all indications suggest that Congress made a considered decision about the coverage of the Code and intended to

provide bankruptcy relief.

We assume, but do not decide, that the record substantiates

that the Shermans engaged in the three types of misconduct

the SEC alleges. So assuming, we hold that the asserted misconduct cannot constitute “cause” under § 707(a). These three

types of misconduct are each contemplated by a specific

Bankruptcy Code provision, and therefore, under Padilla,

cannot constitute “cause” for § 707(a) purposes. 

[17] First, § 362 addresses misconduct related to using

bankruptcy as a refuge from the jurisdiction of other courts.

Section 362(a) provides that the filing of a bankruptcy petition automatically operates as a stay of judicial actions, except

for actions enumerated in § 362(b). 11 U.S.C. § 362(a). Section 362(b) excepts several types of judicial actions from

imposition of the automatic stay, id. § 362(b), and § 362(d)

provides a mechanism for “part[ies] in interest” to challenge

the imposition of the stay in several circumstances, including

“for cause,” id. § 362(d)(1). The Bankruptcy Code therefore

accounts for the fact it may not always be appropriate to permit debtors to take advantage of the automatic stay.26 Thus, to

26Section 362(d)(1) provides: 

(d) On request of a party in interest and after notice and a

3132 IN RE: SHERMAN
the extent that debtors like the Shermans use bankruptcy to

seek refuge from another court, § 362(b) and (d) describe the

circumstances in which such conduct is impermissible, which

parties may challenge such conduct, and the appropriate remedy. 

There is nothing problematic about an individual filing a

legitimate bankruptcy petition with the intention of taking

advantage of the automatic stay provisions. Indeed, the legislative history of the Bankruptcy Code makes clear that one of

the purposes of the automatic stay is to give a debtor a

“breathing spell from his creditors” during which the debtor

can “attempt a repayment . . . plan, or simply . . . be relieved

of the financial pressures that drove him into bankruptcy.”

H.R. REP. NO. 95-595, at 340 (1977), as reprinted in 1978

U.S.C.C.A.N. 5963, 6296-97 (observing that another purpose

of the automatic stay is to protect creditors by providing “an

orderly liquidation procedure under which all creditors are

treated equally” rather than “a race of diligence by creditors

for the debtor’s assets”); see also Stringer v. Huet (In re

Stringer), 847 F.2d 549, 551-52 (9th Cir. 1988) (citing this

legislative history and noting the purposes of the automatic

stay). While it is troubling to allow an individual filing an illegitimate bankruptcy petition, such as one based on misrepresentations, to take advantage of automatic stay provisions, the

viability of such a bankruptcy petition is addressed under the

provisions of the Bankruptcy Code that protect against illegitimate filings of petitions (such as § 727) and under the

“cause” provision of § 362(d)(1).

hearing, the court shall grant relief from the stay provided under

subsection (a) of this section, such as by terminating, annulling,

modifying, or conditioning such stay — 

(1) for cause, including the lack of adequate protection of

an interest in property of such party in interest . . . . 

11 U.S.C. § 362(d)(1). 

IN RE: SHERMAN 3133
The remedy in the “cause” provision of § 362(d)(1) is a

considerably more direct way to deal with a debtor who is

improperly using bankruptcy as a refuge from the jurisdiction

of another court than the remedy in the “cause” provision of

§ 707(a). Preventing a debtor from taking advantage of the

stay is a remedy tailored to the problem of improper avoidance of jurisdiction of another court. In contrast, § 707(a)’s

remedy — the dismissal of the bankruptcy petition altogether

— is too powerful a medicine for the problem at hand, as it

precludes adjudication of the bankruptcy even where there are

debts aside from pending litigation that exceed assets. 

It is worth noting that in this case, any attempt to avoid

entirely the jurisdiction of the district court in the disgorgement action did not work, precisely because of the operation

of § 362. The district court found the exception contained in

§ 362(b)(4) applicable and did adjudicate the disgorgement

motion to judgment. To now include an unsuccessful attempt

to avoid jurisdiction as an aspect of “cause” to dismiss the

bankruptcy petition altogether is to tinker with a complex statutory scheme that specifies when — and how — to deal with

various kinds of debtor misconduct and, as the fate of the

automatic stay argument in this case indicates, is fully capable

of doing so. In contrast, were we to hold that the Shermans’

use of bankruptcy to avoid the jurisdiction of another court is

“cause” to dismiss the bankruptcy, we would be sanctioning

a readjustment of the finely wrought statutory scheme. See

Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1190 (9th

Cir. 2003) (describing Walls v. Wells Fargo Bank, 276 F.3d

502 (9th Cir. 2002), as “[n]oting that ‘it is not up to us to read

other remedies into the carefully articulated set of rights and

remedies set out in the Bankruptcy Code’ ” and “reject[ing]

Walls’ invitation to read § 105(a) as a catch-all private right

of action for the enforcement of other Bankruptcy Code provisions” (quoting Walls, 276 F.3d at 507)). 

[18] Second, § 547(b) addresses misconduct related to

using bankruptcy as what the SEC terms a “scorched earth”

3134 IN RE: SHERMAN
tactic.27 Section 547(b) makes certain prepetition transfers of

a debtor’s interest in property “avoid[able]” as a preference.

11 U.S.C. § 547(b). To be avoidable, such transfers must meet

several requirements, including that they were made “to or for

the benefit of a creditor,” and “on or within 90 days before the

date of the filing of the petition” or “between ninety days and

one year before the date of the filing of the petition, if such

creditor at the time of such transfer was an insider.”

28 Id.

§ 547(b)(1), (4). The Bankruptcy Code thus “contemplates”

27In addition, § 727(a)(2) addresses some debtor conduct that might be

characterized as engaging in “scorched earth” tactics. Under § 727(a)(2),

a bankruptcy court is to grant the debtor a discharge unless, inter alia, the

debtor transferred property “within one year before the date of the filing

of the petition,” “with intent to hinder, delay, or defraud a creditor.” 11

U.S.C. § 727(a)(2) 

28Section 547(b) provided in full: 

(b) Except as provided in subsection (c) of this section, the

trustee may avoid any transfer of an interest of the debtor in property — 

(1) to or for the benefit of a creditor; 

(2) for or on account of an antecedent debt owed by the

debtor before such transfer was made; 

(3) made while the debtor was insolvent; 

(4) made — 

(A) on or within 90 days before the date of the filing

of the petition; or 

(B) between ninety days and one year before the date

of the filing of the petition, if such creditor at the time of

such transfer was an insider; and 

(5) that enables such creditor to receive more than such

creditor would receive if — 

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and 

(C) such creditor received payment of such debt to the

extent provided by the provisions of this title. 

11 U.S.C. § 547(b). 

IN RE: SHERMAN 3135
the notion that a debtor may favor some creditors over others

by making prepetition transfers, and describes the circumstances in which such conduct is impermissible, which parties

may challenge such conduct, and the appropriate remedy for

the misconduct. 

Ordinarily, an avoidance action under § 547 can be filed

only by a trustee, not a creditor. See id. § 547(b) (“[T]he

trustee may avoid any transfer of an interest of the debtor in

property . . . .” (emphasis added)); Avalanche Mar., Ltd. v.

Parekh (In re Parmetex, Inc.), 199 F.3d 1029, 1031 (9th Cir.

1999) (holding that although “a trustee must generally file an

avoidance action under Chapter 7,” creditors may bring such

an action “where the trustee stipulated that the Creditors could

sue on his behalf and the bankruptcy court approved that stipulation”). That a creditor cannot usually file an avoidance

action is not, however, inconsistent with the conclusion that

the Bankruptcy Code “contemplates” the “misconduct” of

debtors who use “scorched earth” tactics. To the contrary, that

restriction provides support for the notion that courts should

not allow other parties to seek similar relief under § 707(a),

as doing so would undermine Congress’s considered judgment regarding who may seek such relief. Like the remedy

under § 362, the remedy under § 547 is tailored to deal with

a particular tactic, including, as in this instance, a debtor

attempting to use bankruptcy to hurt a particular, disfavored

creditor. If, therefore, the Shermans impermissibly engaged in

a so-called “scorched earth” tactic, then the appropriate vehicle for dealing with such misconduct is § 547(b). 

[19] Third, § 727(a)(4)(A) addresses misconduct related to

debtors’ misrepresentations of liabilities and expenses. Section 727(a)(4)(A) states that “[t]he court shall grant the debtor

a discharge, unless . . . the debtor knowingly and fraudulently,

in or in connection with the case [ ] made a false oath or

account.” 11 U.S.C. § 727(a)(4)(A). This mechanism for dealing with debtors who make misrepresentations describes the

circumstances in which such conduct is impermissible, which

3136 IN RE: SHERMAN
parties may challenge such conduct, and the appropriate remedy for the misconduct. In particular, the Bankruptcy Code

imposes a mens rea element, indicating that Congress

intended to sanction only culpable misrepresentations. To the

extent, then, that the allegations of misstating liabilities and

expenses are true, the proper remedy is in the bankruptcy

court under § 727(a)(4)(A). 

Notably, the SEC does not argue that there was any debtspecific misconduct, which would, alone or in conjunction

with other misconduct, constitute “cause” under § 707(a) for

dismissal of the petition. Had the SEC made such an argument, we would need to decide whether § 523 of the Bankruptcy Code, the section that makes specific debts

nondischargeable, “contemplated” such misconduct.29 See,

29In its brief to the district court in the appeal of the denial of the motion

to dismiss, the SEC stated that it believed that relief would have been

available under § 523 for the contempt judgment but not for the disgorgement judgment. 

IN RE: SHERMAN 3137
e.g., id. § 523(a)(2),30 (4),31 (6),32 (7);33 see also id.

30In relevant part, § 523(a)(2) excepts from discharge debt: 

(2) for money . . . obtained by — 

(A) false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s or an insider’s

financial condition; 

(B) use of a statement in writing — 

(i) that is materially false; 

(ii) respecting the debtor’s or an insider’s financial condition; 

(iii) on which the creditor to whom the debtor is liable

for such money, property, services, or credit reasonably

relied; and 

(iv) that the debtor caused to be made or published with

intent to deceive . . . . 

11 U.S.C. § 523(a)(2)(A)-(B). It appears that in many cases in which the

SEC is attempting to ensure that a debtor in bankruptcy disgorges funds

as required by the securities laws, it does so by invoking § 523(a)(2). See

Cross, 218 B.R. at 78; Hodge, 216 B.R. at 933; Kane, 212 B.R. at 699.

Unlike the cited cases, the present case involves a debtor who was not

found to have himself violated the securities laws and has not been alleged

to have committed other acts of fraud by the SEC. The SEC has indicated

that this distinction is the reason it did not file a nondischarge action.

Whether that distinction matters or whether, instead, § 523(a)(2) nonetheless applies to the present circumstances because the funds themselves

meet the statutory standard and Sherman was essentially a depository of

the funds, having no rightful claim to them, is a question we do not decide.

See Colello, 139 F.3d at 676-77. 

31Section 523(a)(4) excepts from discharge debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11

U.S.C. § 523(a)(4). 

32Section 523(a)(6) excepts from discharge debt “for willful and malicious injury by the debtor to another entity or to the property of another

entity.” 11 U.S.C. § 523(a)(6). 

33Section 523(a)(7) excepts from discharge debt: 

(7) to the extent such debt is for a fine, penalty, or forfeiture

payable to and for the benefit of a governmental unit, and is not

3138 IN RE: SHERMAN
§ 523(a)(19) (Supp. II 2002).34

compensation for actual pecuniary loss, other than a tax penalty

— 

(A) relating to a tax of a kind not specified in paragraph

(1) of this subsection; or 

(B) imposed with respect to a transaction or event that

occurred before three years before the date of the filing of

the petition . . . . 

11 U.S.C. § 523(a)(7). 

34Section 523(a)(19) excepted from discharge debt: 

(19) 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 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. 

11 U.S.C. § 523(a)(19) (Supp. II 2002). Section 523(a)(19) was added to

§ 523 by the Sarbanes-Oxley Act, passed on July 30, 2002. See SarbanesOxley Act of 2002, Pub. L. No. 107-204, § 803(3), 116 Stat. 745; see also

Smith v. Gibbons (In re Gibbons), 289 B.R. 588, 591-97 (Bankr. S.D.N.Y.

2003) (holding that § 523(a)(19) applies to all bankruptcies pending at the

time it was enacted), aff’d, 311 B.R. 402 (S.D.N.Y. 2004), aff’d, No. 04-

4617-BK, 2005 WL 3134156 (2d Cir. Nov. 21, 2005) (unpublished). SecIN RE: SHERMAN 3139
[20] Thus, under the first part of the Padilla inquiry,

because other Code provisions contemplate (1) taking refuge

from the jurisdiction of another court; (2) engaging in a

“scorched earth” tactic against a particular creditor; and (3)

making misrepresentations in bankruptcy filings, we conclude

that there is no “cause” to dismiss the Shermans’ bankruptcy

petition because of any such behavior. To respect the complex

statutory scheme that Congress has created to deal with malfeasance associated with bankruptcy petitions, we are loath to

hold that a factor constitutes “cause” unless the Bankruptcy

Code regime is incapable of righting wrongs of the kind

alleged. 

Our holding hardly leaves the SEC unprotected, as the SEC

could have pursued — and did pursue — several vehicles for

protecting itself. In particular, the SEC was protected against

the use of bankruptcy to avoid the jurisdiction of another

court because, under § 362(b)(4), it was not subject to the

automatic stay. Further, the SEC could have sought to avoid

some of the Shermans’ prepetition transfers as preferences

had it been concerned that the Shermans had engaged in a

“scorched earth” tactic. In addition, the SEC could have tried

to protect itself against misrepresentations in the bankruptcy

petition by filing a complaint under § 727(a)(4)(A).35 Moretion 523(a)(19) was amended slightly by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 1404(a),

119 Stat. 23. 

The SEC has not argued that § 523(a)(19) applies to the contempt or

disgorgement judgments, and we therefore express no opinion on this matter. We note, however, that if it does apply, the SEC is not time-barred

from taking advantage of its protections. See infra note 36. 

35The SEC was eligible as a creditor to file a complaint under § 727. See

11 U.S.C. § 727(c)(1) (stating that “a creditor . . . may object to the granting of a discharge under subsection (a) of this section”). 

As for timing requirements, as noted earlier, a “complaint objecting to

the debtor’s discharge under § 727(a) of the Code shall be filed no later

3140 IN RE: SHERMAN
over, the SEC may have been able — and may still be able

— to avoid discharge of the contempt and disgorgement judgments under § 523.36 Finally, had the SEC been concerned

about an abuse of process, it could have sought a remedy

under the bankruptcy court’s inherent authority to sanction

debtors who file bankruptcy petitions in bad faith. See Chambers v. NASCO, Inc., 501 U.S. 32, 43-46 (1991); Dyer, 322

F.3d at 1190 n.14, 1196; Caldwell v. Unified Capital Corp.

(In re Rainbow Magazine, Inc.), 77 F.3d 279, 284 (9th Cir.

1996).

than 60 days after the first date set for the meeting of creditors under

§ 341(a).” FED. R. BANKR. P. 4004(a). It appears that the first date set for

the meeting of creditors was March 25, 2002. The time fixed for filing a

complaint therefore expired on May 24, 2002. If the SEC had wanted to

file a complaint objecting to the Shermans’ discharge under

§ 727(a)(4)(A), then it would have needed to do so by May 24, 2002. 

36The SEC was, and is, eligible as a creditor to file complaints under

§ 523. FED. R. BANKR. P. 4007(a) (“[A]ny creditor may file a complaint to

obtain a determination of the dischargeability [under § 523] of any debt.”).

Timing requirements for filing § 523 nondischargeability complaints

differ depending on which subsection of § 523(a) is invoked. “A complaint to determine the dischargeability of a debt under § 523(c) [then covering § 523(a)(2), (4), (6), and (15)] shall be filed no later than 60 days

after the first date set for the meeting of creditors under § 341(a).” FED.

R. BANKR. P. § 4007(c). Hence, had the SEC wanted to file a complaint

under § 523(a)(2), (4) or (6), then it appears that it would have needed to

have done so by May 24, 2002. 

In contrast, “[a] complaint other than under § 523(c) may be filed at any

time. A case may be reopened without payment of an additional filing fee

for the purpose of filing a complaint to obtain a determination under this

rule.” FED. R. BANKR. P. § 4007(b). It thus appears the SEC could have

filed — and still could file — a complaint under § 523(a)(7) or (19). 

Alternatively, the SEC may have been able — and may still be able —

to take advantage of the protections afforded by § 523(a)(7) and (19) by

attempting to collect the debt in a nonbankruptcy court, where the applicability of § 523(a)(7) and (19) could have been litigated. See Rein v.

Providian Fin. Corp., 270 F.3d 895, 904 n.15 (9th Cir. 2001). 

IN RE: SHERMAN 3141
[21] In sum, the SEC’s and the district court’s frustration

with Sherman’s behavior both before and after the filing of

the bankruptcy petition is understandable. Padilla does not,

however, permit a free-floating concept of cause for dismissal

to substitute for careful application of the bankruptcy scheme

Congress devised, including the multitude of remedies for

abusive behavior or behavior harmful to the public interest.

The bankruptcy court’s discharge of the Shermans’ debts in

bankruptcy is void, the district court’s decision is reversed,

and the case is remanded for further proceedings consistent

with this opinion.

REVERSED.

3142 IN RE: SHERMAN