In re Civiello

• Decision Date: 15 August 2006
• Docket Number: Bankruptcy No. 02-65172.,Adversary No. 05-6020.
• Citation: 348 B.R. 459
• Parties: In re Carmen P. CIVIELLO and Nancy J. Civiello, Debtors. Leland E. Frost, et al., Plaintiffs, v. Carmen P. Civiello, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

Page 459

348 B.R. 459

In re Carmen P. CIVIELLO and Nancy J. Civiello, Debtors Leland E. Frost, et al., Plaintiffs, v. Carmen P. Civiello, Defendant.

Bankruptcy No. 02-65172.

Adversary No. 05-6020.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

August 15, 2006.

Edwin H. Breyfogle, Massillon, OH, for Debtors.

MEMORANDUM OF DECISION (WRITTEN OPINION)

RUSS KENDIG, Bankruptcy Judge.

This matter is before the court on the motion for partial summary judgment filed by Plaintiffs Leland E. Frost, Jackie S. Frost and Tracy Kolarovsky (hereafter "Plaintiffs").¹ Plaintiffs filed amended complaints against Defendant-Debtor Carmen Civiello (hereafter "Civiello" or "Defendant") alleging grounds for nondischargeability under 11 U.S.C. § 523(a)(2), (4) and (19). Defendant denied the allegations in the complaints and submitted a response to Plaintiffs' motion for partial summary judgment. Plaintiffs thereafter submitted a reply to Defendant's brief.

JURISDICTION

The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and the general order of reference entered in this district on July 16, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

PROCEDURAL AND FACTUAL HISTORY

Defendant filed a joint Chapter 7 petition on October 25, 2002, received a discharge on April 14, 2004, and the case was closed on April 19, 2004. On October 26, 2004, Debtor moved to reopen the case to add creditors who may have the right to assert claims against him. The court granted the motion and the case was reopened on November 2, 2004. Debtor then added several creditors who were given an opportunity to contest disagreeability. Plaintiffs Leland E. Frost and Jackie S. Frost filed a complaint objecting to the discharge on February 21, 2005, as did Plaintiff Tracy Kolarovsky. The adversary complaints were consolidated, by order of the court, on June 22, 2005.

There is relatively no dispute on the facts of this adversary proceeding. Debtor was an insurance agent who solicited investments in Aquadyn Water Treatment Units. He would arrange sale of the units from customers like Plaintiffs and the units would be purchased from an entity known as Forward Marketing, which would in turn lease the units to Aquadyn Technologies, Inc. (hereafter "Aquadyn"). Each unit cost $16,000.00 and Defendant received a fifteen percent commission on each sale.

Plaintiffs contend that Defendant made representations to them about the nature of their investments, including the lack of risk, the security of the original investment, and the monetary return on the investment. Additionally, Plaintiffs allege that Defendant failed to disclose his interest. in Aquadyn, including his commission on the sales.

Based on the representations made to them, Plaintiffs invested in the water treatment systems. The Frost Plaintiffs invested $336,000.00, representing their entire pension from American Electric Power ("AEP"). Plaintiff Kolarovsky invested $48,000.00. Plaintiffs lost their entire investments following the failure of Aquadyn.

Defendant and his actions became the subject of a review by the Ohio Division of securities. In December 2003, the Division of Securities entered a cease and desist order and found that the sales of the units were sales of unregistered securities and Defendant had violated Ohio Revised Code Chapter 1707. The findings issued by the Division of Securities included the following:

(15) Civiello, as described in Paragraphs (4) through (8), sold securities to Ohio residents, without having been licensed by the Division of Securities a dealer and therefore, in violation of R.C. 1707.44(A)(1);

* * * * * *

(17) The securities described in paragraphs (4) through (7) are not exempt under R.C. 1707.02 from the registration requirements of the Ohio Securities Act, not the subject matter of an exempt transaction under R.C. 1707.03, 1707.04 or 1707.34, not registered by description, coordination or qualification, and not the subject matter of a transaction that was registered by description, and, therefore, were sold in violation of R.C. 1707.44(C)(1).

* * * * * *

WHEREAS, based on the foregoing paragraphs, the Division finds that Civiello violated the provisions of Revised Code sections 1707.44(C)(1) and 1707.44(A)(1).

During the course of the Division of Securities' investigation, Defendant was served via certified mail with a Notice of Opportunity of Hearing and Division Order No. 03-204 and failed to request an adjudicatory hearing. The order contains appeal rights which were not exercised by Defendant. Although Defendant was found to have violated Ohio securities law, as set forth in the cease and desist order, the order does not contain any determination of liability for the violations.

ARGUMENTS

Plaintiffs move for summary judgment on Count II of their complaint seeking to find' the debt nondischargeable under 11 U.S.C. § 523(a)(19). According to Plaintiffs, the cease and desist order entered by the Division of Securities is a determination of a violation of state securities laws, thereby meeting the requirement in subsection (A). Plaintiffs posit that subsection (B) is satisfied because the violation cited in the order entitles them to damages, including a refund of their purchase price. Plaintiffs recognize that the cease and desist order did not include damages, but argue that entitlement to damages brings them under subsection (B)(i). If this were not the case, Plaintiffs contend that (B)(iii) would be superfluous.

As an alternative argument, Plaintiffs urge the court to find that relitigation of issues addressed by the order is barred under the doctrine of collateral estoppel. Plaintiffs claim that administrative orders have been found to be subject to preclusion by collateral estoppel when the administrative body acted in a judicial capacity, the findings of fact were based on investigation and hearing, and Defendant had a full and fair opportunity to protect his rights throughout the process. Plaintiffs contend that all four elements are present.

Defendant counters Plaintiffs' collateral estoppel argument, asserting that the administrative order was a result of an investigative, not judicial, function. According to Defendant, under Ohio law, collateral estoppel only applies to administrative decisions where the administrative body was acting in a judicial capacity. Defendant also claims that whether he had the requisite scienter is a factual question and therefore summary judgment is not appropriate.

LAW AND ANALYSIS

I. Standard of review

The procedure for granting summary judgment is found in Federal Rule of Civil Procedure 56(c), made applicable to this proceeding through Federal Rule of Bankruptcy Procedure 7056, which provides in part:

[t]he judgment sought shall be rendered forthwith if the pleading, depositions answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56(c).

To succeed on a motion for summary judgment, the movant must demonstrate each of the elements of its claim. R.E. Cruise, Inc. v. Bruggeman, 508 F.2d 415, 416 (6th Cir.1975). In considering a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party, Adickes v. S.H.Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970), and all reasonable inferences are to be drawn in favor of the non-moving party. Matsushita Elect. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 582, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). When "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party," the court should grant a motion for summary judgment. Id. at 587, 106 S.Ct. 1348.

II. 11 U.S.C. § 523(a)(19)

Section 523(a)(19) is a relatively recent addition to the bankruptcy code, added as part of the Sarbanes-Oxley Act of 2002. According to legislative history, the purpose of section 523(a)(19) was to protect investors:

Current bankruptcy law may permit such wrongdoers to discharge their obligations under court judgments or settlements based on securities fraud and other securities violations. This loophole in the law should be closed to help defrauded investors recoup their losses and to hold accountable those who violate securities laws after a government unit or private suit results in a judgment er settlement against the wrongdoer.

Smith v. Gibbons (In re Gibbons), 289 B.R. 588, 592 (Bankr.S.D.N.Y.2003) (citing Pub.L. No. 107-204, 116 Stat. 745 (2002)); see also Fishbach v. Simon (In re Simon), 311 B.R. 641 (Bankr.S.D.Fla.2004); Harve v. Lewandowski (In re Lewandowski), 325 B.R. 700 (Bankr.M.D.Penn.2005).

Pursuant to 11 U.S.C. § 523(a)(19), debts arising from proscribed securities transactions are not dischargeable. The section provides, in applicable part:

(a) A discharge under 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any 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, 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 by the debtor; or

(iii) any court or administrative order for any damages, fine, penalty, citation,...