Court Opinion

ID: 4126465
Source: CourtListenerOpinion
Date Created: 2017-02-15 21:01:32.646489+00
Date Added: 2024-06-11T14:30:57.776419
License: Public Domain

Case: 16-11578   Date Filed: 02/15/2017   Page: 1 of 18

                                                                     [PUBLISH]

             IN THE UNITED STATES COURT OF APPEALS

                     FOR THE ELEVENTH CIRCUIT
                       ________________________

                              No. 16-11578
                        ________________________

          D.C. Docket Nos. 1:15-cv-02323-SCJ; 12-bkc-80136-CRM

In re: JON E. LUNSFORD, SR.,

                                                                        Debtor.
___________________________________________________

JON E. LUNSFORD, SR.,

                                                          Plaintiff - Appellant,
                                  versus

PROCESS TECHNOLOGIES SERVICES, LLC,

                                                         Defendant - Appellee.

                        ________________________

                Appeal from the United States District Court
                   for the Northern District of Georgia
                       _______________________

                            (February 15, 2017)
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Before WILIAM PRYOR and ROSENBAUM, Circuit Judges, and UNGARO, *
District Judge.

WILLIAM PRYOR, Circuit Judge:

       This appeal requires us to decide whether a bankruptcy court made a finding

of fact that a debtor violated state securities laws. After a business venture went

awry, Process Technologies obtained a judgment in state court against Jon

Lunsford for violations of state securities laws. Lunsford then filed for bankruptcy.

A debtor ordinarily may discharge debts in bankruptcy, 11 U.S.C. § 727, but not if

the debt “is for the violation of . . . securities laws” and results from a court

judgment, § 523(a)(19)(A)–(B). Process Technologies filed an adversary

proceeding in which it complained that section 523(a)(19)(A) barred Lunsford

from discharging the debt. Lunsford answered that his liability arose from a third

party’s violation of securities laws and that the bar under section 523(a)(19)(A)

from a discharge applies only when the debtor violates securities laws. Lunsford

also sought leave to amend his answer to assert that Process Technologies

fraudulently obtained the judgment. Lunsford’s arguments fail: the bankruptcy

court made a finding of fact that Lunsford violated securities laws; alternatively,

section 523(a)(19)(A) applies irrespective of debtor conduct; and Lunsford is

*
  Honorable Ursula Ungaro, United States District Judge for the Southern District of Florida,
sitting by designation.

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estopped from arguing that the award was procured by fraud. We affirm the order

that excepted the debt from discharge and denied leave to amend.

                                I. BACKGROUND

      In 2009, Process Technologies Services, LLC, met with MIPCO, LLC, and

its president, Jon Lunsford, to discuss purchasing securities in MIPCO. MIPCO

sent Process Technologies documents that stated that MIPCO maintained $1.2

million in tangible assets and $500,000 in intangible assets. Not knowing that title

problems plagued the tangible assets and that MIPCO had not acquired the

intangible assets, Process Technologies invested $300,000.

      After discovering the asset problems, Process Technologies sued in a

chancery court in Mississippi to rescind the sale. The chancery court ordered the

parties to arbitrate the dispute. Lunsford filed for bankruptcy, but the bankruptcy

court stayed the action pending the arbitration. The arbitrator ruled in favor of

Process Technologies and awarded the company $606,892. The chancery court

confirmed the award and entered a final judgment against Lunsford, MIPCO, and

another individual as jointly and severally liable. Lunsford neither objected to the

confirmation nor appealed to the Supreme Court of Mississippi.

      The bankruptcy court then lifted the stay of its proceeding, and Process

Technologies filed an adversary proceeding, complaining that Lunsford could not

discharge the debt because the debt was “for the violation” of securities laws, 11

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U.S.C. § 523(a)(19)(A). After Lunsford filed an answer, he sought leave to amend

that answer to assert that Process Technologies fraudulently obtained the

arbitrator’s award. The bankruptcy court then directed Lunsford to pursue that

argument in the chancery court. Lunsford filed a motion for relief from judgment

in the chancery court, but the chancery court declined to set aside its judgment.

      Lunsford’s motion for relief from judgment having been resolved, the

bankruptcy court ruled that section 523(a)(19)(A) prohibited Lunsford from

discharging the debt. The bankruptcy court determined that the arbitrator “found

that [Lunsford] violated the [Mississippi Securities] Act. More specifically, the

Arbitrator found that [Lunsford] violated the Act by offering and selling an

unregistered security. The Arbitrator also found that [Lunsford] violated the Act by

making an offer that contained untrue statements.” The bankruptcy court ruled that

the arbitration award constituted a judgment “for a violation” of securities laws

against Lunsford because “there is a determination outside the Bankruptcy Court

that [Lunsford] violated securities laws” and because the state courts confirmed the

arbitration award.

      Lunsford appealed to the district court on the ground that section

523(a)(19)(A) bars discharge only when the debtor committed a securities

violation, not when his liability arose from a third-party’s violation. The district

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court held that section 523(a)(19)(A) applies irrespective of debtor conduct and

that Lunsford is not entitled to amend his complaint.

                          II. STANDARD OF REVIEW

      This court is the second appellate court to review decisions from the

bankruptcy court. In re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996). We

“assess the bankruptcy court’s judgment anew, employing the same standard of

review the district court itself used.” In re Globe Mfg. Corp., 567 F.3d 1291, 1296

(11th Cir. 2009). “Thus, we review the bankruptcy court’s factual findings for clear

error, and its legal conclusions de novo.” Id.

                                 III. DISCUSSION

      We divide our discussion in two parts. First, we explain that Lunsford

cannot discharge his debt because the bankruptcy court made a finding of fact that

Lunsford violated securities laws and, in the alternative, section 523(a)(19)(A)

applies irrespective of whether Lunsford violated securities laws. Second, we

explain that Lunsford is not entitled to leave to amend his complaint.

                      A. Lunsford Cannot Discharge the Debt.

      Section 523(a)(19)(A) provides that a person cannot discharge a debt in

bankruptcy if the debt “is for the violation of securities laws”:

      (a) A [bankruptcy] discharge . . . does not discharge an individual
          debtor from any debt—
      ...

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             (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, 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.
11 U.S.C. § 523(a)(19) (emphases added).

      Lunsford argues that the bankruptcy court and the arbitrator never found that

he violated securities laws, only that he is liable for a third party’s violation of

securities laws. Relying on this premise, Lunsford argues that the bar under section

523(a)(19)(A) from a discharge applies only if he violated securities laws. We

reject both arguments.

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     1. The Bankruptcy Court Made a Finding of Fact That Lunsford Violated
                                Securities Laws.

       Lunsford concedes that section 523(a)(19)(A) prohibits discharge if the

bankruptcy court found that Lunsford violated securities laws, but he argues that

the bankruptcy court “adopted the arbitrator’s award” and applied collateral

estoppel only to determine that it was “possible” to conclude that Lunsford

violated securities laws. He maintains that the bankruptcy court never made a

specific finding of culpability. We agree that the district court “adopted” the

findings of the arbitrator, but by adopting those findings, the bankruptcy court

determined that Lunsford violated securities laws.

       The bankruptcy court stated that it “should focus not on the underlying facts

but on the nature of the judgment at issue” to avoid “the need to re-litigate the

matter [of culpability] in bankruptcy court,” but the bankruptcy court did not, as

Lunsford contends, fail to make findings of fact. Instead, by precluding relitigation

of facts, “the bankruptcy court utilized issue preclusion to reach conclusions about

facts that the court would then consider as ‘evidence of nondischargeability.’” In re

Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987) (emphasis added). In adopting the

arbitrator’s award, the district court adopted the facts that the arbitrator found. The

bankruptcy court could not have applied section 523(a)(19)(A) without first

finding a violation because the section applies only if there exists a “violation” of

securities laws that a “debt . . . is for.”

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      Lunsford contends that the bankruptcy court could not have found that

Lunsford violated securities laws because the arbitrator did not find as much, but

the findings of the bankruptcy court rest on ample support from the arbitrator’s

award. On the first page of its award, the arbitrator stated that “the use of ‘MIPCO’

will include Mr. Lunsford . . . unless . . . referenced individually.” Later, the

arbitrator determined that section 75-71-401 of the Mississippi Code, part of the

Mississippi Securities Act, “makes it unlawful for any person to offer or sell a

security unless it is registered, an exempt transaction, or a federal security.” The

arbitrator found that “MIPCO” violated securities laws because “the securities

were unregistered and MIPCO has not established that the . . . transactions were

exempt from registration,” and nobody disputes that the securities were not federal.

The arbitrator did not limit these findings to MIPCO, so the bankruptcy court had

sufficient reason to determine that the arbitrator made a specific finding that

Lunsford violated securities laws. Because Lunsford agrees that section

523(a)(19)(A) prohibits discharge of debts where a debtor violated securities laws,

Lunsford cannot discharge his debt.

      2. Alternatively, Section 523(a)(19)(A) Applies Irrespective of Debtor
                                      Conduct.
      Even if the bankruptcy court had not made a finding that Lunsford violated

securities laws, we would reject his argument that the Bankruptcy Code prohibits

discharge of a debt that is for the violation of state securities laws only when the

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debtor violated the securities laws, not when the debtor’s liability arises from

securities violations committed by a third party. The text of section 523(a)(19)(A)

makes no such distinction; the statute applies irrespective of debtor conduct.

       The text and structure of section 523(a)(19)(A) unambiguously prevent

discharge of debts “for the violation” of securities laws irrespective of debtor

conduct. The term “for” in section 523(a)(19)(A) denotes causation. The Supreme

Court has interpreted the term “debt for” to mean “‘debt as a result of,’ ‘debt with

respect to,’ ‘debt by reason of,’ and the like.” Cohen v. de la Cruz, 523 U.S. 213,

220 (1998) (citing American Heritage Dictionary 709 (3d ed. 1992); Black’s Law

Dictionary 644 (6th ed. 1990)). Although section 523(a)(19)(A) includes the

slightly different phrase “debt that is for,” this alteration only serves as a drafting

tool to enable the division found in section 523(a)(19). Section 523(a)(19)(A)

employs the phrase “debt that is for,” and section 523(a)(19)(B) employs the

phrase “debt that . . . results . . . from.” But “debt for” is used in similar but

undivided subparts of 523(a). § 523(a)(1)–(2), (4)–(6), (9), (12)–(13), (16)–(17).

Congress did not materially alter the phrase “debt for” when it inserted a pronoun

and a linking verb, so “debt that is for” retains the same meaning as “debt for” and

refers to debt caused by a violation of securities laws. See Antonin Scalia & Bryan

Garner, Reading Law: The Interpretation of Legal Texts 170 (2012).

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      Because Congress also did not restrict section 523(a)(19)(A) to subsets of

causation, we should not construct such a limit. If Congress had wanted to limit

section 523(a)(19)(A) based on debtor conduct, it could have done so as it did with

other provisions in the statute. Even within section 523(a)(19), the text considers

debtor conduct, but it considers debtor conduct in a provision not pertinent to this

appeal. For a debt to be excepted from discharge, it must be “for” a violation of

securities laws, § 523(a)(19)(A), but it must also “result[] . . . from” a court order

or “any settlement agreement entered into by the debtor,” § 523 (a)(19)(B)(i)–(ii)

(emphasis added). Other subsections similarly limit application based on debtor

conduct. Debts cannot be discharged if they are “for willful and malicious injury

by the debtor to another entity,” § 523(a)(6) (emphasis added), or “for death or

personal injury caused by the debtor’s operation of a motor vehicle,” § 523(a)(9)

(emphasis added). Nor can debts be discharged if they are “obtained by use of a

statement in writing . . . that the debtor caused to be made or published,”

§ 523(a)(2)(B)(iv) (emphasis added), or are “for a tax or a customs duty with

respect to which the debtor made a fraudulent return,” § 523(a)(1)(C) (emphasis

added). Because Congress rendered discharge in some subsections dependent on

debtor conduct but never did so for section 523(a)(19)(A), we infer that the limit

does not extend to section 523(a)(19)(A). See Scalia & Garner, supra, at 107;

Russello v. United States, 464 U.S. 16, 23 (1983). The whole text establishes that

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section 523(a)(19)(A) precludes discharge regardless of whether the debtor

violated securities laws as long as the securities violation caused the debt.

      The Tenth Circuit arrived at a contrary conclusion, but even if we found its

reasoning persuasive, its decision involved circumstances inapplicable here. After

Oklahoma obtained judgments for unjust enrichment against investors in a Ponzi

scheme, the Tenth Circuit held that the debtors could discharge their debts because

“[t]he judgments at issue [we]re not ‘for a violation’ of securities laws but for

unjust enrichment resulting from someone else’s violation of those statutes.” Okla.

Dep’t of Sec., ex. rel. Faught v. Wilcox, 691 F.3d 1171, 1173, 1175 (10th Cir.

2012). In contrast, Lunsford’s debt does not arise from a judgment against him for

unjust enrichment. Lunsford was a party to the same decision in which the state

courts entered a judgment against MIPCO for a violation of securities laws.

      The Ninth Circuit also arrived at a contrary decision, but it too is

unpersuasive. In that decision, a client had pre-paid an attorney with funds derived

from violations of securities laws. By the time the matter settled, the attorney had

not billed enough work to justify all the pre-paid funds, but after a receiver ordered

the attorney to disgorge those funds, the attorney filed for bankruptcy to shield the

funds. In re Sherman, 658 F.3d 1009, 1010 (9th Cir. 2011), abrogated on other

grounds by Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013). The Ninth

Circuit acknowledged that the plain language of section 523(a)(19)(A) did not limit

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application based on debtor conduct, but determined that the text was ambiguous in

the light of circuit precedent that had held that similar portions of section 523

required inquiry into debtor conduct. To further the supposed “purpose” of the

Bankruptcy Code to allow a “fresh start” and to protect “the honest but unfortunate

debtor,” the Ninth Circuit limited section 523(a)(19)(A) to debts caused by the

debtor. In re Sherman, 658 F.3d at 1013–15 (quoting Local Loan Co. v. Hunt, 292
U.S. 234, 244 (1934)). We depart from the Ninth Circuit because it grounded its

decision on precedent that does not bind us and followed prescriptions of general

statutory purpose over the text.

           B. Lunsford Is Not Entitled to Leave to Amend His Complaint.
      Lunsford argues that Process Technologies fraudulently obtained the

arbitration award. He maintains that because “the bankruptcy court is not obligated

to recognize a judgment procured by fraud and perjury,” he should be granted

leave to amend. We disagree.

      Lunsford is not entitled to leave to amend his complaint because Mississippi

law precludes him from relitigating the claim of fraud. We “give preclusive effect

to a state court judgment to the same extent as would courts of the state in which

the judgment was entered.” Battle v. Liberty Nat’l Life Ins. Co., 877 F.2d 877, 882

(11th Cir. 1989). In Mississippi, collateral estoppel precludes Lunsford “from

relitigating a specific issue actually litigated, determined by, and essential to the

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judgment in a former action, even though a different cause of action is the subject

of the subsequent action.” Dunaway v. W.H. Hopper & Assoc., Inc., 422 So. 2d
749, 751 (Miss. 1982). Twice, state courts rebuffed Lunsford’s claim of fraud. And

because his argument, if successful, would have defeated the complaint against

him, the decision of the state court as to the claim of fraud was essential to the

judgment against Lunsford. Lunsford is not entitled to leave to amend his

complaint to allege a futile claim barred by an earlier judgment. Bryant v. Dupree,

252 F.3d 1161, 1163 (11th Cir. 2001).

                                IV. CONCLUSION

      We AFFIRM the judgment against Lunsford.

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ROSENBAUM, Circuit Judge, concurring:

      Sometimes one reason is enough. That’s the case here. As Judge Pryor ably

demonstrates, Lunsford cannot discharge the debt of $606,892 under 11 U.S.C. §

523(a)(19)(A) because the bankruptcy court correctly determined that the

arbitration award found that he violated securities laws.      This is not a close

question; the answer is clear. I would have stopped there.

      The panel opinion, however, goes on to reach an alternative holding—

concluding that “section 523(a)(19)(A) precludes discharge regardless of whether

the debtor violated securities laws as long as the securities violation caused the

debt.” Maj. Op. at 11. That alternative holding may or may not prove to be

correct, but by reaching it in this case, where we do not need to do so, we have

needlessly created confusion about how that holding should be applied in cases

where an innocent third party has a judgment against it that results from someone

else’s securities fraud.

      The panel suggests that we might not apply § 523(a)(19)(A)’s discharge

preclusion if the situation that arose in Oklahoma Department of Securities, ex. rel.

Faught v. Wilcox, 691 F.3d 1171 (10th Cir. 2012), presented itself in our Circuit.

See Maj. Op. at 11. But this suggestion creates confusion as to how our alternative

holding should be applied in cases involving innocent third parties.

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       In Wilcox, a Ponzi schemer defrauded investors of millions of dollars and

pled guilty to various crimes related to her activities. Wilcox, 691 F.3d at 1173.

The scheme also violated Oklahoma’s securities laws.                 Id.    Following the

schemer’s conviction, the Oklahoma Department of Securities sued more than 150

investors—including several who were entirely innocent—to recover the funds

distributed in the Ponzi scheme. Id. The Oklahoma trial court granted summary

judgment for the Department on grounds of unjust enrichment and ordered return

of the investors’ profits. 1 Id. Some of the investors filed for bankruptcy and

sought to discharge the debt from the Department’s judgment against them. Id.

Because the bankruptcy and district courts concluded that these debts fell under §

523(a)(19)(A), they declined to discharge them. Id.

       The Tenth Circuit reversed. Though it noted that the investors “were not

charged with securities violations,” id. at 1175 (citation and quotation marks

omitted), the Tenth Circuit nonetheless observed that the valid state-court

judgment against them “require[d] them to repay profits distributed to them as a

result of [the schemer’s] Ponzi scheme,” id. at 1174 (emphasis added)—in other

words, as a result of a third party’s securities violations.

       1
         Though the Oklahoma lower court ordered return of all profits without exception, the
Oklahoma Supreme Court determined that innocent investors had to return profits only to the
extent that they had received an unreasonable rate of return. Wilcox, 691 F.3d at 1173 n.3.

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      So under the Majority’s reasoning, though the judgments that were the cause

of the debts at issue in Wilcox were for unjust enrichment, they nonetheless also

seem to be “debt as a result of,” see Maj. Op. at 9 (citations and quotation marks

omitted), a securities-fraud violation and therefore non-dischargeable under §

523(a)(19)(A). Yet the panel suggests that § 523(a)(19)(A)’s preclusion did not

apply to the Wilcox investors’ situation because “‘[t]he judgments at issue [in

Wilcox] [we]re not ‘for a violation’ of securities laws but for unjust enrichment

resulting from someone else’s violation of those statutes.’” Id. at 9 (quoting

Wilcox, 691 F.3d at 1175). This internal inconsistency in the panel’s reasoning

will no doubt create confusion about how courts and litigants in this Circuit are to

construe and apply our alternative holding.

      Maybe the panel reaches this conclusion because the judgment against the

Wilcox investors was not, in name, a judgment for securities violations, though this

interpretation would seem to require us to construe the meaning of “judgment” in §

523(a)(19)(B)’s language:

      (b) A [bankruptcy] discharge . . . does not discharge an individual
          debtor from any debt—
      ...
             (19) that—
      ...
                    (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;

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                          (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)(B) (emphasis added). That issue, of course, is not before

us. So we have not had the benefit of briefing on it. And if we reached out and

grabbed the issue, anyway, our analysis on that question would be mere dicta,

since Lunsford’s case, in fact, does involve a decision against him for securities

fraud and therefore does not require us to resolve the question of whether the

judgment must, on its face, find securities violations.

      Plus, if the panel’s alternative holding is implicitly based on the conclusion

that the judgment must actually be on a securities-violation cause of action (as

opposed to unjust enrichment or other non-securities-violation causes of action),

that would create significant potential for uneven application of § 523(a)(19)’s

discharge preclusion—particularly when it comes to innocent third parties. Under

those circumstances, whether an innocent debtor could discharge his debt would

depend on the way in which the state or private party chose to prosecute its claim

against the innocent debtor.

      And if, contrary to its distinguishing of Wilcox, the panel intends for all

judgments that ultimately result from securities violations—including judgments

against entirely innocent investors—to be subject to § 523(a)(19)’s discharge

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preclusion, that interpretation appears to be at odds with “a central purpose” of the

Bankruptcy Code to provide “a completely unencumbered new beginning to the

honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87 (1991)

(citation and quotation marks omitted).

      These matters raise some difficult questions, and we would, no doubt,

benefit from advocacy on these issues by parties with an actual interest in them.

We don’t have that here. For these reasons, I concur in only our holding that the

bankruptcy court correctly concluded that the arbitration award found that

Lunsford violated securities laws, so § 523(a)(19)(A)’s preclusion applies to the

debt at issue in this case. I would leave the issue addressed by the alternative

holding to a case where it is better developed.

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