In re Weilein, 04-00667.

• Decision Date: 29 December 2004
• Docket Number: No. 04-00667.,04-00667.
• Citation: 319 B.R. 175
• Parties: Daniel WEILEIN, Sandra LaFave, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

319 B.R. 175

Daniel WEILEIN, Sandra LaFave, Debtors.

No. 04-00667.

United States Bankruptcy Court, N.D. Iowa.

December 29, 2004.

Michael C. Dunbar, Waterloo, IA, for Debtors.

ORDER RE MOTION FOR FINING OF CIVIL CONTEMPT AND TRUSTEE'S REPORT OF SALE

PAUL J. KILBURG, Chief Judge.

This matter came before the undersigned on October 27, 2004 pursuant to assignment. Debtors Daniel Weilein and Sandra LaFave were represented by attorney Michael Dunbar. Creditor Scott Bowman was represented by attorneys John Titler and Ann Laverty. After hearing arguments of counsel, the Court took the matter under advisement. The time for filing briefs has now passed and this matter is ready for resolution. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (G) and (I).

STATEMENT OF THE CASE

Trustee filed a Notice and Report of Sale of Property. She proposes to sell the bankruptcy estate's interest in a lawsuit pending in Iowa District Court in Black Hawk County, Weilein v. Bowman, LACV 088675, to Scott Bowman for $1,000. Debtors object to the sale, asserting the sale price is inadequate.

Debtor Daniel Weilein filed a Motion for Finding of Civil Contempt. He asserts Scott Bowman violated the discharge injunction by proceeding with activity in the subject lawsuit. Mr. Bowman resists the contempt motion. He argues that Debtor's liability which is the subject of the lawsuit is excepted from discharge under § 523(a)(19).

Mr. Bowman argues Counts II, III and IV of his counterclaim in the lawsuit have survived Debtor's discharge. Counts II and III assert Iowa and Federal securities law violations, respectively. Count IV asserts Debtor made fraudulent misrepresentations to induce Mr. Bowman to invest in Pangeaa Systems, Inc. Mr. Bowman concedes that Count I, seeking judgment on promissory notes, has been discharged.

Debtors filed their Chapter 7 bankruptcy petition on March 2, 2004. Discharge entered on June 16, 2004. The Black Hawk County lawsuit originated in May 2002 with Debtor's petition against Mr. Bowman alleging slander, interference with business relations, and fraud relating to the parties' business interests in Pangeaa Interment Systems, Inc. In November 2002, Mr. Bowman filed a separate lawsuit in four counts described above, which was consolidated with Debtor's lawsuit. Debtor alleges Mr. Bowman violated the discharge injunction by requesting a trial scheduling conference in these actions in September 2004.

CONCLUSIONS OF LAW

Legislation signed into law in 2002, known as the Sarbanes-Oxley Act, disallows debts incurred in violation of securities fraud laws from being discharged in bankruptcy. In re McClung, 304 B.R. 419, 424 (Bankr.D.Idaho 2004). This legislation was added to the Code as subsection (19) to 11 U.S.C. § 523(a), and states:

(a) A discharge under section 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 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).

ISSUES

Debtor argues that a judgment, order or settlement agreement under § 523(a)(19)(B) must be in existence at the time the bankruptcy petition is filed in order for that section to except a debt from discharge. He also argues that, as to Mr. Bowman's Count III in the state court lawsuit, only the SEC can pursue a securities violation under Federal law and Mr. Bowman has no private right of action thereunder.

CONCLUSIONS OF LAW

As § 523(a)(19) was recently enacted, there is little case law interpreting it. See In re Gibbons, 311 B.R. 402, 404 (S.D.N.Y. 2004) (approving application of § 523(a)(19) to case filed before its enactment); In re Simon, 311 B.R. 641, 646 (Bankr.S.D.Fla.2004) (holding § 523(a)(19) does not violate constitutional requirement for uniformity in bankruptcy laws); McClung, 304 B.R. at 424 (finding State of Idaho Department of Finance had standing to assert § 523(a)(19) exception to discharge); In re Whitcomb, 303 B.R. 806, 810 (Bankr.N.D.I11.2004) (applying § 523(a)(19) to prepetition securities fraud settlement agreement). None of the reported cases interpreting § 523(a)(19) address the issues presented here.

On the issue of whether Mr. Bowman may assert a Federal securities law violation, one writer has opined that private plaintiffs cannot utilize the exception in § 523(a)(19)(A)(i). Keith N. Sambur, The Sarbanes-Oxley Act's Effect on Section 523 of the Bankruptcy Code: Are All Securities Laws Debts really nondischargeable?, 11 Am. Bankr.Ins. L.Rev. 561, 573 (2003). The private plaintiff has the ability, however, to plead the elements of subsection (A)(ii) for "common law fraud, deceit, or manipulation in connection with" a securities transaction. Id. at 574. The Court believes Count III of Mr. Bowman's state court petition can be interpreted to come within the province of subsection (A)(ii), even if it is not viable under subsection (A)(1).

Section 523(a)(19)(B) provides that the discharge exception applies to a securities violation debt that "results from" a judgment, order or settlement agreement. It has been noted that "it is not clear whether the judgment, order or settlement agreement must be entered pre-petition." Prof. G. Ray Warner, Accounting Reform Law Adds Broad Securities Fraud Discharge Exception, 21-SEP Am. Bankr. Inst. J. 6, 44 (2002) (hereinafter "Warner"). Mr. Bowman argues that, like cases under the original version of § 523(a)(9), the language of § 523(a)(19) can be interpreted to encompass debts for securities violations which have not yet proceeded to judgment or settlement.

The original language of § 523(a)(9) excepted from discharge a debt "to the extent that such debt arises from a judgment or consent decree ... as a result of the debtor's operation of a motor vehicle while legally intoxicated." Congress subsequently rewrote subsection (a)(9) to except from discharge a debt "for death or personal injury caused by the debtor's operation of motor vehicle if such operation was unlawful because the debtor was intoxicated." 11 U.S.C. § 523(a)(9). The Congressional Record explains that the new language was intended to close the loophole which allowed drunk drivers to escape payment to their victims prior to entry of a judgment or consent decree. See S.R. 101-434, at 6 (1990), reprinted in 1990 U.S.C.C.A.N. 4065, 4069.

Section 523(a)(19)(B) requires that the debt "results from" a judgment, order or settlement agreement. "A similar requirement in the original version of the § 523(a)(9) 'drunk driving' exception to discharge was removed in 1990 by Congress precisely because of these interpretive problems." Warner, supra, at 45.

Nonetheless, most of the cases decided under the pre-1990 version of the drunk driving exception held that a post-petition judgment was sufficient. The courts often lifted the automatic stay and delayed discharge until a judgment could be obtained. However, the cases decided under former § 523(a)(9) may no longer be good law. Those opinions were based on policy arguments and congressional intent and were decided before the "plain-language" approach to Bankruptcy Code interpretation had become as firmly entrenched as it is today.

Id. (citations omitted). Another commentator has made a different prediction:

The bankruptcy courts developed a variety of doctrines that allowed a finding of nondischargeability under the original language of § 523(a)(9) even in the absence of a court judgment or consent decree ... It is possible, even likely, that the experience under the pre-1990 version of section 523(a)(9) will repeat itself for the new nondischargeability provision of section 523(a)(19) and that courts will develop similar doctrines.

Prof. Robert M. Lawless, Some Thoughts for Bankruptcy Practitioners on Sarbanes-Oxley Related Developments, 091803 ABI-CLE 449 (2003).

Analysis of § 523(a)(19) must begin "with the language of the statute itself." United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). When a "statute's language is plain, the sole function of the courts is to enforce it according to its terms.... The plain meaning of legislation should be conclusive, except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intention of its drafters." Id. Focus on the text of the Bankruptcy Code has been the hallmark of Supreme Court bankruptcy jurisprudence for more than a decade. In re Colsen, 311 B.R. 765, 771 (Bankr.N.D.Iowa 2004).

The starting point in statutory interpretation is the existing statutory text. It is well established that when the statute's language is plain, the sole function of the court is to enforce it according to its terms, unless such disposition is absurd. Lamie v. U.S. Trustee, 540 U.S. 526, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004).

If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. "It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think ... is the preferred result." This allows both of our branches to adhere to our respected, and respective, constitutional roles. In the meantime, we must

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