BILL PARKER, Bankruptcy Judge.
ON THIS DATE the Court considered the Plaintiff's Motion for Summary Judgment (the "Motion") filed by the Plaintiff, Lillian Kostak Kokas (the "Plaintiff"), in the above-referenced adversary proceeding, together with the response in opposition to the Motion filed by the Debtor-Defendant, William A. Osborne (the "Defendant"), and the Plaintiff's reply thereto. Though the original complaint filed in this adversary proceeding claims that the debt owed to the Plaintiff by the Defendant should be declared nondischargeable under various subsections of § 523(a) of the Bankruptcy Code, the Plaintiff seeks summary judgment only upon the cause of action brought pursuant to 11 U.S.C. § 523(a)(19) which excepts from discharge any debt arising from any judgment, decree or settlement based upon a debtor's violation of securities law. Upon due consideration of the pleadings, the proper summary judgment evidence submitted by the parties, and the relevant legal authorities, the Court concludes that the Plaintiff has demonstrated that there is no genuine issue as to any material fact and that she is entitled to judgment as a matter of law that the debt owed to her by the Defendant arising from the post-answer default judgment issued by the 151st Judicial District Court in and for Harris County, Texas, is nondischargeable under § 523(a)(19). This memorandum of decision disposes of all issues before the Court.
In December 2014, the Plaintiff, Lillian Kostak Kokas, initiated litigation against the Defendant, William A. Osborne d/b/a Assurance Management Group ("AMG") before the 151st Judicial District Court in and for Harris County, Texas, under cause no. 2014-73887 (the "State Court Litigation"). The state court petition alleged that the Plaintiff and her husband, Robert V. Kokas, had been falsely and improperly solicited to purchase securities issued by the Defendant for a total price approaching $800,000.00. The petition, as subsequently amended, sought rescissionary damages, plus interest, exemplary damages, and attorneys' fees based upon various theories of liability including alleged violations of the registration requirements and the anti-fraud provisions of the Texas Securities Act, negligent misrepresentation, fraud by nondisclosure, common law fraud, violations of the Texas Deceptive Trade Practices Act, and conspiracy.
During the pendency of the State Court Litigation, on May 18, 2016, the Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in this Court under Case No. 16-40903. On June 17, 2017, the Plaintiff timely filed her Complaint commencing this adversary proceeding and seeking either to deny the entry of any discharge order in favor of the Debtor-Defendant or, alternatively, seeking to except her claim from the scope of any discharge otherwise granted to the Defendant. On that same date, the Plaintiff sought a modification of the automatic stay in the Defendant's bankruptcy case to allow the completion of the State Court Litigation. On July 19, 2016, this Court, the Hon. Brenda T. Rhoades, presiding, modified the stay over the objection of the Defendant to permit the State Court Litigation to proceed to judgment.
With proper notice to the Defendant, the Plaintiff procured a new trial setting in the State Court Litigation for October 2016. On October 14, 2016, the State Court Litigation was called for trial; however, despite proper notice, the Defendant failed to appear for trial. The Plaintiff appeared with counsel and moved for a post-answer default judgment. On that date, the state court conducted an evidentiary hearing, admitted both documentary and testimonial evidence, and entertained argument from the counsel for the Plaintiff.
On December 5, 2016, the Court granted the Plaintiff's motion for a post-answer default judgment against the Defendant, including judgment "on Plaintiff's claims for Violation of § 33(A)(1) of the Texas Securities Act,
No appeal of the Final Judgment was taken by the Defendant. The Plaintiff subsequently filed this Motion for Summary Judgment in this adversary proceeding, asserting that the entry of the Final Judgment in the State Court Litigation renders the judgment debt owed by the Defendant nondischargeable under § 523(a)(19).
The Plaintiff brings her Motion for Summary Judgment in this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7056. That rule incorporates Federal Rule of Civil Procedure 56 which provides that summary judgment shall be rendered "if the pleadings, 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 judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986), (quoting FED. R. CIV. P. 56(c)). The party seeking summary judgment always bears the initial responsibility of informing the court of the basis for its motion and identifying those portions of the "pleadings, depositions, answers to interrogatories, and affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party asserting that a fact cannot be genuinely disputed must support that assertion by:
FED. R. CIV. P. 56(c).
The operation of the summary judgment standard depends upon which party will bear the burden of persuasion at trial. If, as in this case, the burden of persuasion is on the moving party, "that party must support its motion with credible evidence-using any of the materials specified in Rule 56(c)-that would entitle it to a directed verdict if not controverted at trial." Celotex, 477 U.S. at 331. Upon a prima facie showing of entitlement to judgment as a matter of law, the non-movant may not rest upon the mere allegations or denials in its pleadings, but rather must demonstrate in specific responsive pleadings the existence of specific facts constituting a genuine issue of material fact for which a trial is necessary. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986) (citing FED. R. CIV. P. 56(e)). If the nonmoving party cannot muster sufficient evidence to demonstrate a genuine issue of material fact, a trial would be useless. The substantive law will identify which facts are material. Id.
In this case, the Plaintiff bears the burden to present a prima facie case for non-dischargeability. Thus, the Plaintiff is entitled to a summary judgment only if there exists no genuine issue of material fact as to each essential element under § 523(a)(19). Since § 523(a)(19) represents a rather unusual basis for the determination of nondischarge-ability, a brief review of its purpose and provisions is appropriate.
Section 523(a)(19): Debt Arising from Securities Violation or Related Fraud and Expansion of General Issue Preclusion Principles.
Section § 523(a)(19) of the Bankruptcy Code provides that:
This nondischargeability section was added to the Bankruptcy Code by Title VII of the Sarbanes-Oxley Act of 2002 in wake of the Enron "debacle" in order "to make judgments and settlements based upon securities law violations nondischargeable, protecting victims' ability to recover their losses." In re Chan, 355 B.R. 494, 503 (Bankr. E.D. Pa. 2006). The subsection was also intended to preclude the necessity of securities regulators and investors to spend precious enforcement resources to "reprove" securities law violations in the bankruptcy court in order to protect securities-related judgments and settlements from discharge. See S. REP. NO. 107-146, at 16 (2002) [recognizing that the "loophole" which allowed a discharge in bankruptcy "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 judgement or settlement against the wrongdoer"].
Section 523(a)(19) was subsequently modified upon the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") by expanding the time frame under which the judgment, settlement, order or decree documenting a securities violation or related fraud could be entered. Tripodi v. Capital Concepts, LLC, 2014 WL 2967941 at *8 (D. Utah, July 1, 2014). Debts are now rendered nondischargeable under § 523(a)(19) not only from statutory securities violations, but also those arising from common law fraud occurring in securities transactions. Frost v. Civiello (In re Civiello), 348 B.R. 459, 464 (Bankr. N.D. Ohio 2006). Thus, to have a debt excepted from discharge pursuant to § 523(a)(19), an objecting creditor must prove that:
McGraw v. Collier (In re Collier), 497 B.R. 877, 902 (Bankr. E.D. Ark. 2013); Faris v. Jafari (In re Jafari), 401 B.R. 494, 496 (Bankr. D. Colo. 2009).
This Court has previously stated that the "proper interpretation of § 523(a)(19), even as amended, requires that a tribunal other than the bankruptcy court determine the liability aspect — e.g., whether a federal or state securities violation or some type of related fraud has occurred." Wright v. Minardi (In re Minardi), 536 B.R. 171, 192 (Bankr. E.D. Tex. 2015) (emphasis added) (citing Collier, 497 B.R. at 902-03; Terek v. Bundy (In re Bundy), 468 B.R. 916 (Bankr. E.D. Wash. 2012)); see also, In re Robben, 562 B.R. 469, 477-78 (Bankr. D. Kan. 2017). However, once a determination of a securities violation or related fraud has been made by a non-bankruptcy tribunal, and proof of the entry of that order or the existence of a settlement of such charges is tendered to the bankruptcy court, the debt is rendered nondischargeable under § 523(a)(19) without proof of any additional element in a manner outside the traditional analysis of issue preclusion principles. Id. As one court succinctly concluded in this context:
Voss v. Pujdak (In re Pujdak), 462 B.R. 560, 575-76 (Bankr. D.S.C. 2011) (citations omitted and emphasis added) [giving preclusive effect under § 523(a)(19) to a default judgment after the state court struck the defendants' answer due to discovery abuse].
Thus, § 523(a)(19) incorporates a process under which a debt arising from a securities law violation may be rendered nondischargeable by awarding a preclusive effect to memorialized judicial decisions, or even settlements, which establish such a liability and which can be documented to a bankruptcy court. Such an expedited process effectively supersedes any necessity to resort to the common law principles of issue preclusion normally arising in dischargeability litigation.
The Defendant objects to the motion for summary judgment based upon a mistaken assumption that the Plaintiff's motion is based upon a "normal" application of issue preclusion principles.
The United States Supreme Court has concluded that a debt that is declared nondischargeable under § 523(a) should include the full amount associated with the conduct at issue, including any "debt arising from" or "debt on account of" that conduct. Cohen v. de la Cruz, 523 U.S. 213, 220-21 (1998). Though the facts in Cohen specifically addressed a liability rendered nondischargeable under the actual fraud prong of § 523(a)(2)(A), its rationale to prevent a discharge of all liability arising from circumstances that render a debt nondischargeable under § 523(a) is applicable in this case. Thus, the exemplary damages award is rendered nondischargeable because such fraud constitutes a proper basis under Texas law for the recovery of exemplary damages, 2B TEX. CIV. PRAC. & REM. CODE ANN. § 41.003(a)(1) (Vernon 2015); Goldstein v. Mortenson, 113 S.W.3d 769, 782 (Tex. App.—Austin 2003, no pet.), Tex. Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, 774 (Tex. App.—Houston [1st Dist.] 2001, pet. denied) and § 523(a)(19) specifically renders nondischargeable a "debt . . . that is for . . . common law fraud, deceit, or manipulation in connection with the purchase or sale of any security. 11 U.S.C. § 523(a)(19)(A)(ii). It also encompasses the attorneys' fees awarded to the Plaintiff under the statutory authority provided by TEX. REV. CIV. STAT. ANN. art. 581-33D(7) (Vernon 2010); Keeton v. Flanagan (In re Flanagan), 2014 WL 764371, at *10 (B.A.P. 9th Cir. Feb. 26, 2014), aff'd, 642 F. App'x. 784 (9th Cir. 2016). Thus, in light of the jurisprudence that § 523(a) should be properly construed to bar the discharge of all liability arising from the categories of misconduct that render a debt nondischargeable, thereby insuring "that the creditors' interest in recovering full payment of debts in these categories outweigh[s] the debtors' interest in a complete fresh start," Cohen, 523 U.S. at 222, the Court concludes that the damages awarded to the Plaintiff in the State Court Judgment for exemplary damages and attorneys' fees based upon the Defendant's misconduct must also be rendered nondischargeable under § 523(a)(19).
Accordingly, upon due consideration of the pleadings, the proper summary judgment evidence submitted by the Plaintiff, the relevant legal authorities and for the reasons set forth herein, the Court concludes that there is no genuine issue as to any material fact germane to a determination of dischargeability and that the Plaintiff, Lillian Kostak Kokas, is entitled to summary judgment that the debt owed to her by the Debtor-Defendant, William A. Osborne, arising from the State Court Judgment is non-dischargeable under the provisions of 11 U.S.C. § 523(a)(19). An appropriate order will be entered which is consistent with this opinion.
