ORDER DENYING APPEAL

MANUEL L. REAL, District Judge.

This matter comes before the Court on appeal from the United States Bankruptcy Court for the Central District of California. Appellant filed his opening brief on December 18, 2017. (Dkt. 8). Having been thoroughly briefed by both parties, this Court took the matter under submission on March 29, 2018.

On February 18, 2009, the Commissioner of the California Department of Business Oversight ("Commissioner"), issued a Desist and Refrain Order ("D&R Order") to Appellant, Investco Management & Development LLC ("IM&D"), and Steven Thompson. Appellant is a managing member of IM&D. The Commissioner issued the D&R Order based on a finding that Appellant, Thompson, and IM&D had been selling unqualified, non-exempt securities, in violation of state law. The Commissioner ordered Appellant, Thompson, and IM&D to desist and refrain from the future offer or sale of securities unless qualified or exempt, and to desist and refrain from misrepresenting or omitting material facts in connection therewith.

Appellant challenged the D&R Order. The parties had a three-day hearing in front of an administrative law judge ("ALJ") from the California Department of Corporations. The hearing was adversarial in nature: the parties had pre-hearing discovery, Appellant was represented by counsel, the parties introduced and objected to evidence, and they were allowed to examine witnesses testifying under oath. The ALJ's decision ("Administrative Decision") made the following findings of fact.

Appellant founded IM&D on February 17, 2006, and was one of its managing members. Appellant's App. to Opening Br. ("AA") Tab 13A, 280. Beginning in June 2006, Appellant formed a series of California limited liability companies starting with Investco AV7 LLC and numbered consecutively through AV22 LLC (with the exception of AV 13 LLC, which does not exist). Id. at 281. IM&D was the managing member of each. Id. IM&D offered and sold securities in the form of interests in several of these limited liability companies, including Investco 12 LLC. Id. at 281. Similar to the representations made to prospective members of these several limited liability companies, IM&D represented to prospective Investco AV12 members that their investment funds would be used by IM&D to negotiate and contract to purchase specific real property in the rural Los Angeles County at a favorable price, to manage the property for a period of time in anticipation of appreciation due to projected population growth, and then to sell the property either "as is" or developed. Id.

In connection with these offers and sales, IM&D omitted disclosing the following material facts. "For each Investco LLC formed, IM&D had formed and were managers of a corresponding consecutively numbered Landco LLC, specifically Landco AV7 LLC through Landco AV22 LLC. Except for real property purchased directly by Investco AV10 LLC and Investco AV11 LLC, for each real property purchased by an Investco LLC, a Landco LLC had first purchased the same property one to nine months earlier at a substantially lower price." Id. Specifically, Investco 12 investors "were not told that the real property they purchased from Landco AV12 LLC (Landco 12) for $375,000 (with an escrow closing date of September 17, 2007) had been purchased by Landco 12 for $207,850 one month earlier (with an escrow closing date of August 14, 2007)," and that "IM&D was to receive 81.9% of the net profit from the sale of the real property by Landco 12 to Investco 12 and a total of $150,000 in profit, commissions, and management fees and expenses." Id. at 281-82.

On or around July 25, 2007, investor Juan Rodriguez had buyer's remorse. Id. at 288. Rodriguez testified that he phoned Appellant to tell him that he had begun to cancel his investment, but Apellant reassured him to proceed with the investment. Id. Five days later, Apellant faxed Rodriguez Investco 12's pro forma estimates to sign and return. Id. "At no time did anyone from IM&D tell Rodriguez that the Investco 12 property had previously been purchased (or was in the process of being purchased) by another IM&D affiliate at a substantially lower price. Rodriguez understood that Investco 12 would buy the property on the market at a very good price." Id. at 289

The Administrative Decision made the following conclusions of law. "The first issue in this case is whether the securities offered and sold by IM&D in the form of interest in the Investco limited liability companies were exempt from qualification, under Corporations Code section 25102, subdivision (f). . . . The Investco LLC securities offered and sold by IM&D did not meet the requirements of Corporations Code section 25102, subdivision (f), for exemption from qualification." Id. at 297, 299.

"The second issue in this case is whether IM&D violated Corporations Code section 25401 by failing to disclose to potential Investco LLC investors the prior purchase of the property by a Landco LLC at a substantially lower price. . . . IM&D violated Corporations Code section 25401 by failing to disclose to potential Investco LLC investors the prior purchase of the property by a Landco LLC at a substantially lower price." Id. at 299, 300.

Finally, "Corporations Code section 25532 authorizes the Corporations Commissioner to issue the Desist and Refrain Order against respondents." Id. at 300. Thus, the Administrative Decision upheld the Commissioner's D&R Order in its entirety, finding that Appellant, IM&D, and Thompson had violated state securities law by selling unqualified, non-exempt securities. The Commissioner adopted the Administrative Decision on April 7, 2010. No appeals or writs were taken, and the D&R Order and Administrative Decision became final.

On January 13, 2011, the Commissioner filed a civil action in state court against Appellant, Thompson, and IM&D. The Complaint alleged the same facts and violations that were alleged in the D&R Order and upheld by the Administrative Order. The parties settled the matter on May 12, 2012. Under the Settlement Agreement, Appellant and the other individually-named defendants agreed to jointly and severally provide investors' with 70-77.5% of the investors' initial investment if the future property sales do not cover the investors' initial investment. The Settlement Agreement expressly denies liability for securities law violations. It states that "the Settlement Agreement and the actions taken pursuant thereto do not constitute an acknowledgment or admission on the part of any Defendant of liability for any matter, nor do they constitute a precedent upon which liability may be assessed." AA Tab 7, 101.

On December 7, 2016, Appellant filed a petition with the United States Bankruptcy Court for the Central District of California seeking to discharge the debt arising from the Settlement Agreement. On March 13, 2017, the Commissioner timely filed a Complaint to Determine Non-Dischargeability of Debt under 11 U.S.C. § 523(a)(19). Appellant answered the Complaint, and he admitted that the debt arose from the Settlement Agreement, but he denied that the Administrative Decision established the state securities law violation required for non-dischargeability under § 523(a)(19). On October 13, 2017, the bankruptcy court granted the Commissioner's motion for judgment on the pleadings and entered judgment in favor of the Commissioner. The bankruptcy court held that Appellant's debt from a settlement agreement for state securities violations is non-dischargeable under 11 U.S.C. § 523(a)(19).

Appellant appeals the bankruptcy court's October 13, 2017, Order. This Court has jurisdiction over the appeal of the bankruptcy court under 11 U.S.C. § 158. In re Frontier Props., Inc., 979 F.2d 1358, 1362 (9th Cir. 1992). The issues on appeal are:

On appeal from an order of a bankruptcy court, the district court reviews conclusions of law de novo and findings of fact for clear error. In re Greene, 583 F.3d 614, 618 (9th Cir. 2009). "The availability of collateral estoppel is a mixed question of law and fact which [the reviewing court] reviews de novo." Eilrich v. Remas, 839 F.2d 630, 632 (9th Cir. 1988). If collateral estoppel is available, this Court reviews the bankruptcy court's decision giving preclusive effect for an abuse of discretion." Id.

Under § 523(a)(19), a debt is non-dischargeable if it is "for the violation of . . . any of the State securities laws . . . and results . . . from . . . any settlement agreement entered into by the debtor." 11 U.S.C. § 523(a)(19). Thus, two elements that must be satisfied in order for a debt to be non-dischargeable under § 523(a)(19). "First, the debt must be `for' a securities law violation or fraud in connection with the sale of a security. Second, the debt must `result from' some judicial or administrative proceeding or settlement agreement." Tradex v. Global Master Fund Spc Ltd. v. Chui, 559 B.R. 520, 524 (N.D. Cal. 2009). In this case, the parties agree that Appellant's debt results from the Settlement Agreement, so the second element is not at issue. The only issue is whether the Administrative Decision sufficiently satisfied the statute's requirement of a state securities law violation. See 11 U.S.C. § 523(a)(19)(A).

Appellant contends that in order to satisfy § 523(a)(19) both elements must be established in the same document. However, nothing in the statute requires that to be the case. The plain language of the statute shows that each element should be considered independently. "Section 523(a)(19) has two separate conditions for non-dischargeability separated by a semicolon and the word `and.' The statute, thus, plainly indicates that the conditions must be independently satisfied—securities violations must have occurred and a settlement (or other final resolution of the claim) must be completed." In re Tills, 419 B.R. 444, 451 (S.D. Cal. 2009). While settlement agreements can independently satisfy § 523(a)(19), this is not always the case. Id. at 453. "[W]here a debt sought to be excepted from discharge in bankruptcy arises out of a settlement agreement that resolved a prior lawsuit, and where the settlement documents contain no admissions or stipulations concerning the basis of liability, the bankruptcy court is charged with looking behind the settlement documents to determine whether the nature of the debt, as shown by the debtor's conduct, fits within the scope of the nondischargeability provision at issue, which inquiry is not barred by the doctrine of claim preclusion." In re Pierce, 563 B.R. 698, 704 (C.D. Ill. 2017). Therefore, while a settlement agreement that disclaims fault or liability cannot form the sole basis for a finding a debt non-dischargeable under § 523(a)(19), it may be considered in conjunction with another document to determine if the debt is non-dischargeable. See In re Tills, 419 B.R. at 451. Thus, the bankruptcy court did not err by considering both the Settlement Agreement and Administrative Decision to establish the elements of § 523(a)(19).

Appellant also contends that the bankruptcy court erred in giving preclusive affect to the Administrative Decision because the court misapplied the elements of collateral estoppel. The use of collateral estoppel is proper in bankruptcy proceedings. Grogan v. Garner, 498 U.S. 279, 284-85 (1991). Administrative decisions have the same preclusive effect as a court decision when "an administrative agency is acting in a judicial capacity and resolves issue of fact properly before it which the parties have had an adequate opportunity to litigate." B&B Hardware Inc. v. Hargies Indus., 135 S.Ct. 1293, 1303 (2015). The parties do not dispute that the administrative agency acted in a judicial capacity and that the hearing was conducted in a judicial-like matter. In this case, both parties had a full and fair opportunity to argue their version of the facts, conduct discovery, cross-examine witnesses, and seek review of any adverse findings. Therefore, the Court agrees that the agency acted in a judicial capacity when it heard the dispute between Appellant and Commissioner. See United States v. Utah Constr. & Mining Co., 384 U.S. 394, 431 (1966).

Federal courts apply the preclusion law of the state in which the judgment was rendered. Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Under California law, collateral estoppel applies if the following requirements are met. "First, the issue sought to be precluded from litigation must be identical to that decided in a former proceeding. Second, this issue must have actually been litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding." Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990). "The sixth element is a mandatory `additional' inquiry into whether imposition of issue preclusion in the particular setting would be fair and consistent with sound public policy." In re Khaligh, 338 B.R. 817, 824-25 (B.A.P. 9th Cir. 2006).

In this case, the requirements for collateral estoppel were satisfied, and the bankruptcy court did not abuse its discretion by granting preclusive effect to the Administrative Decision. First, the factual issue decided in the Administrative Decision, whether Appellant violated state securities laws by selling unqualified and non-exempt securities in the Investco LLCs, is identical to the issue at the heart of the state court litigation that gave rise to the Settlement Agreement. The Administrative Decision concluded that Appellant had violated state securities laws "by failing to disclose to potential investors [in Investco LLCs] the prior purchase of the property by a Landco LLC at a substantially lower price." AA Tab 13A, 300. The state action that resulted in the Settlement Agreement made identical factual allegations to those adopted by the Administrative Decision.

In the bankruptcy proceeding, Appellant attempted to re-litigate the same issue—whether Appellant violated securities laws by selling unqualified, non-exempt securities in the Investco LLCs and failing to disclose to potential investors that the land had already been purchased by a Landco LLC. The bankruptcy court correctly observed that "[t]he liability created by the settlement agreement resulted from the conduct discussed in the Desist and Refrain order and the Administrative Law Judge's March 2010 order. The findings of the commissioner and those of the Administrative Law Judge, which have not been set aside and have become final, are that the debtor violated state securities laws." AA Tab 18, 428. Accordingly, The Settlement Agreement and Administrative Decision address "identical factual allegations." Lucido, 51 Cal. 3d at 342. This element is satisfied.

The other elements of the Lucido test are met as well. In this case, the parties held an adversarial hearing before an ALJ and actually litigated whether Appellant's conduct constituted a state securities law violation. The issue was necessarily decided on the merits, because the Administrative Decision could not have upheld the D&R Order against Appellant without finding that he, in his individual capacity, had violated state securities laws. Although Appellant contends that the Administrative Decision determined that only the offer and sale of securities in Investco 12 violated state securities laws, that is not the case. The Administrative Decision determined that the offer and sale of securities in all of the Investco LLCs violated state laws. See AA Tab 13A, 297-300. The Administrative Decision was not narrowly tailored only to Investco 12, but plainly identified unlawful conduct with regard to all Investco LLCs. The Administrative Decision is final, as Appellant did not file a writ or otherwise appeal it. Finally, Appellant and Commissioner were both parties to the administrative proceeding, state court action, and bankruptcy proceeding. Although Appellant states that he was not individually named in the Administrative Decision, he is mistaken. The Administrative Decision clearly lists Appellant as a party in the caption, and the Order specifically identifies Appellant's conduct throughout.

Last, this Court finds that the bankruptcy court did not abuse its discretion in deciding that applying collateral estoppel would be fair and consistent with public policy. In this case, Appellant was found to have violated state securities laws after a three-day adversarial hearing before an administrative agency. The bankruptcy court properly precluded Appellant from re-litigating identical securities law violations based on identical operative facts between identical parties. Applying collateral estoppel here promotes judicial economy and prevents inconsistent verdicts. Once the bankruptcy court decided to apply collateral estoppel, it was required to give full effect to the findings of fact and conclusions of law in the D&R Order and Administrative Decision. See Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501 U.S. 104, 107-08 (1991). Therefore, the bankruptcy court properly applied the elements of collateral estoppel to the Administrative Decision.

The bankruptcy court properly gave preclusive effect to the Administrative Decision to determine whether Appellant had committed a securities violation. The Administrative Decision made findings of fact and conclusions of law that he had committed such violations. Accordingly, the Administrative Decision sufficiently satisfied § 523(a)(19)(A)'s requirement of a state securities law violation. Because the settlement agreement satisfied § 523(a)(19)(B)(ii), the bankruptcy court properly granted judgment on the pleadings in favor of the Commissioner that Appellant's debt is non-dischargeable under §523(a)(19).

IT IS HEREBY ORDERED that Appellant's appeal is DENIED. (Dkt. 8).