In re Mones
| Decision Date | 26 July 1994 |
| Docket Number | Bankruptcy No. 88-01037. Adv. No. 89-0014. |
| Parties | In re Bruce E. MONES, Debtor. Harvey JACOBS and Jerome Shapiro, Plaintiffs, v. Bruce E. MONES, Defendant. |
| Court | United States Bankruptcy Courts. District of Columbia Circuit |
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David Lynn, Docter & Docter, P.C., Washington, DC, for defendant.
Glenn M. Cooper, Paley, Rothman, Goldstein, Rosenberg & Cooper, Chtd., Bethesda, MD, for plaintiffs.
DECISION DENYING DEFENDANT'S MOTION TO DISMISS DISCHARGEABILITY COMPLAINT
This is a suit against an investment adviser for fraudulently inducing the plaintiffs to invest in risky options and seeking to hold the claims nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). The defendant seeks to dismiss the plaintiffs' amended complaint for failure to state a claim upon which relief can be granted. The court has sua sponte reconsidered its prior oral ruling and decides in this decision to deny the defendant's motion to dismiss the plaintiffs' amended complaint.
By their amended complaint, the plaintiffs, Harvey Jacobs and Jerome Shapiro ("plaintiff"), trustees under the trust ("the Trust") established by the will of Gilbert Shapiro, seek a judgment fixing damages against the debtor, Bruce E. Mones, and declaring the judgment to be nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4).
Plaintiffs assert five counts against the defendant. Count I alleges securities fraud in violation of 15 U.S.C. § 78j(b) (Section 10(b) of the Securities Act of 1934) and 12 C.F.R. § 240.10b-5 (Rule 10b-5). Count II alleges violations of the District of Columbia's securities laws, D.C.Code Ann. § 2-2613. Damages sought for Counts I and II total $184,785.25 plus interest. Count III is a common law fraud action. Count IV alleges breach of fiduciary duty. Damages sought for Counts III and IV total $877,024.49.
For purposes of a motion to dismiss, the allegations of a complaint must be accepted as true. The amended complaint alleges the following.
Mones, an investment adviser registered with the Securities and Exchange Commission, was hired by the Trust sometime prior to November of 1986. As an adviser, defendant invested the Trust's funds in stocks traded on the New York Stock Exchange ("the Exchange"), utilizing an investment strategy that was relatively conservative and resulted in moderate but steady gains. In May of 1987, Mones suggested that the Trust invest in his "option income program" ("option program") which Mones described as very safe and relatively risk-free. Unlike the prior investments which generated a 1% commission for Mones, he received an annual commission of 2% of the portfolio value for managing an option program account. Relying on Mones' representations, the Trust invested in excess of $757,000 in the option program.
Upon Mones' suggestion, on July 15, 1987 the Trust opened a securities account with Tucker, Anthony, & R.L. Day, Inc. ("Tucker"), a broker-dealer of securities. At this time, Mones was granted a power of attorney to buy and sell securities on the Trust's behalf. As of September 30, 1987, the Trust's account at Tucker had a balance of $709,617. In mid-October of 1987, the value of the securities on the Exchange dropped precipitously, causing large losses in the account. As of October 31, 1987, the account with Tucker had a debit balance of $167,407.49.
Mones misrepresented and omitted material facts concerning the risk involved in investing in the option program. Mones was well aware of the true risks associated with trading options but purposely misled the Trust in order to generate greater commissions for his personal benefit. As a result of these untrue and misleading representations and omissions, the Trust suffered a loss in excess of $877,024.49. Additional facts alleged by the amended complaint are discussed below.
Plaintiffs allege that any judgment awarded pursuant to Counts I, II and/or III is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) on the basis that the debtor fraudulently misrepresented the nature and risk of the option program. Plaintiffs additionally allege that a debt founded upon Count IV is excepted from discharge pursuant to § 532(a)(4) as such debt was incurred by defendant's fraud or defalcation while acting in a fiduciary capacity.
Plaintiffs claim that the debtor obtained money by false representations or actual fraud in violation in 11 U.S.C. § 523(a)(2)(A) by falsely representing that the option program was a relatively conservative investment that was free of significant risk of loss. In addition, plaintiffs allege that the defendant fraudulently failed to disclose that (1) the program was risky; (2) losses could mount the longer it took to exit a losing position; (3) a falling market could lead to huge losses; and (4) the trust could lose funds in excess of the amount in its account.1
As a preliminary matter, the court must consider whether the debt sought to be held nondischargeable is a debt for "obtaining money."2 Defendant contends that even if the court assumes that fraud was involved, the only money "obtained" by the defendant was his commissions and, therefore, any exception to discharge pursuant to § 523(a)(2)(A) must be limited to that amount.
Courts disagree whether a debtor himself must actually receive the money that he has obtained by fraud before nondischargeability can apply. Three different views have emerged. In re Wade, 43 B.R. 976 (Bankr. D.Colo.1984) (). The first view, which is that set forth by the defendant, requires that the debtor personally receive the money that he obtained by fraud. The second approach, characterized as the "receipt of benefits theory," requires only that the debtor derive a benefit from the money that the debtor obtained by fraud; whom the money was obtained for is irrelevant. Finally, the third approach holds that the exception applies whenever the debtor fraudulently obtains money, irrespective of whether it is for himself and whether the debtor received any benefit.
Although this court initially indicated its agreement with the first view in its earlier oral decision, after closer analysis, the court finds its earlier view to be incorrect and rejects the first view. Requiring that the debtor obtain money for himself limits the meaning of the term "obtain" when no such limitation is expressly or implicitly found in the provision's language. See In re Winfree, 34 B.R. 879 (Bankr.M.D.Tenn.1983) (citing In re Kunkle, 40 F.2d 563, 563-64 (E.D.Mich.1930)). Moreover, the courts that have adopted this view fail to offer any basis for requiring that the debtor himself receive the money. See In re Jacobs, 54 B.R. 791 (Bankr.E.D.N.Y.1985); In re Cohen, 69 B.R. 9 (Bankr.E.D.N.Y.1986); In re Rifkin, 142 B.R. 61, 64-65 (Bankr.E.D.N.Y.1992).3 And although exceptions to discharge are to be construed narrowly, that canon of construction does not provide an avenue for imposing limitations that are not implicit in either the provision itself or the supporting legislative history. Therefore, this court finds no justification for limiting the statute's application, as the defendant urges, to those instances where the money obtained by fraud was obtained by the debtor for himself.
With respect to the second view, several courts have noted that In re Holwerda, 29 B.R. 486, 489 (Bankr.M.D.Fla.1983) () (citing Hyland v. Fink, 178 N.Y.S. 114, 115 (N.Y.App.Div.1919)); Winfree, 34 B.R. at 883 ().
Only Wade, 43 B.R. at 981-82, and In re Ward, 115 B.R. 532, 538 (W.D.Mich.1990), actually hold that absent the debtor's receipt of a benefit the debt is discharged: in the other cases a benefit was found to be present. Likewise, only Wade and Ward () articulate any basis for adhering to the second view instead of the third view.
Because a benefit was conferred on the debtor here, it is unnecessary to decide whether Wade and Ward were correctly decided. But I must at least respectfully question the three grounds set forth in Wade and Ward for rejecting the third view.
First, Congress was not confronted with a longstanding receipt of benefits theory. As the Supreme Court held in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 246 and n. 8, 109 S.Ct. 1026, 1033 and n. 8, 103 L.Ed.2d 290 (1989), a statutory interpretation that is not uniformly accepted at the time Congress acts is "certainly not the type of `rule' that we assume Congress was aware of. . . ." See also Dewsnup v. Timm, ___ U.S. ___, ___, 112 S.Ct. 773, 779, 116 L.Ed.2d 903 (1992) (). Here, the lower state and federal courts were divided and the Supreme Court has never ruled on the question.
Second, the requirement of narrow construction of discharge exceptions announced in Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915) (), is that the exceptions to discharge are limited to those plainly expressed. The requirement ought not be employed to supply a requirement of benefit neither plainly expressed nor even implicitly contemplated. The benefit requirement is not...
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