Sherman v. Securities and Exchange Commission

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Bankruptcy Law
  • Date Filed: 09-19-2011
  • Case #: 09-55880
  • Judge(s)/Court Below: Circuit Judge Bybee for the Court; Senior District Judge Strom; dissent by Circuit Judge Fisher
  • Full Text Opinion

“11 U.S.C. § 523(a)(19) prevents the discharge of debts for securities-related wrongdoings only in cases where the debtor is responsible for that wrongdoing. Debtors who may have received funds derived from a securities violation remain entitled to a complete discharge of any resulting disgorgement order.”

Sherman, an attorney, filed for Chapter 7 bankruptcy under 11 U.S.C. § 727. The SEC argued that certain debts could not be discharged because the funds fell under 11 U.S.C. §523(a)(19)(A)(i). Specifically, before declaring bankruptcy, Sherman was ordered to disgorge to the SEC $581,313.43 plus interest that he had received, but not yet earned, from a client. In obtaining the funds, the client had violated SEC regulations but Sherman had not. The bankruptcy court held in favor of Sherman because the disgorgement order did not arise from a violation of securities laws. The district court reversed holding that 11 U.S.C. §523(a)(19)(A)(i) applied even though Sherman himself had not actually violated securities laws. The Ninth Circuit noted (1) that the goals of the Bankruptcy Code are to distribute a debtor’s assets to creditors and give the debtor a fresh start, and (2) that “the Supreme Court has adopted a rule of construction interpreting exceptions to discharge narrowly. The Ninth Circuit concluded “that exceptions to discharge should be limited to dishonest debtors seeking to abuse the bankruptcy system in order to evade the consequences of their misconduct.” The Ninth Circuit held that “11 U.S.C. § 523(a)(19) prevents the discharge of debts for securities-related wrongdoings only in cases where the debtor is responsible for that wrongdoing. Debtors who may have received funds derived from a securities violation remain entitled to a complete discharge of any resulting disgorgement order.” REVERSED.

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