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The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust

Summarizing by Amir Shachmurove


Case Type:
Case Status:
BAP No. NV221174CBG (9th Circuit, Apr 03,2023) Published
Section 523(a)(19) of the Bankruptcy Code does not require a judgment creditor to re-litigate securities violations in bankruptcy court if a court of competent jurisdiction has entered a judgment finding the debtor liable for state or federal securities law violations. Section 523(a)(19) lets bankruptcy courts apply issue preclusion principles to determine whether the judgment debt is nondischargeable and does not create a requirement that the debtor be adjudged primarily liable for the securities law violation.
Procedural context:
Holders of a state court judgment against the male debtor for violating Nevada securities laws commenced an adversary proceeding against the male debtor, seeking to have their judgment debt deemed nondischargeable under 11 U.S.C. § 523(a)(19)(A)(i) and (B)(i). The parties filed competing summary judgment motions. The primary point of contention was whether the state court's findings of fact were sufficient for 11 U.S.C. § 523(a)(19). The bankruptcy court granted the judgment creditors' summary judgment motion, and the debtor appealed.
Simon Vernon Rodriguez was the Treasurer and Chief Financial Officer of Virtual Communications Corporation (“VCC”). He also owned over 11% of VCC's equity and was a Director of VCC. VCC developed a virtual receptionist technology product and needed additional capital to take the product to market. VCC raised the money by issuing promissory notes to outside investors. In connection with its capital raise, VCC created a PowerPoint presentation that promised investors a 9% annual return. The presentation identified the promissory notes as securities and claimed they were safe because VCC's chief executive officer personally guaranteed the notes. The presentation also included information about Mr. Rodridguez, including his contact information. After raising over $4 million, VCC defaulted on the notes in 2015. In 2017, several investors sued Mr. Rodriguez and others in state court, alleging that the defendants violated Nevada securities laws. After a trial, the state court ruled that the notes were securities under Nevada law, that VCC wrongfully sold unregistered securities, that Mr. Rodriguez was a control person of VCC, and, under Nevada law, liable for selling unregistered securities. Judgment was entered on a joint and several basis against Mr. Rodriguez and VCC's chief executive officer. Mr. Rodriguez and his wife filed a Chapter 7 petition in August 2021. The judgment creditors timely filed an adversary proceeding seeking to have Mr. Rodriguez's judgment debt deemed nondischargeable.
CORBIT, BRAND, and GAN, Bankruptcy Judges

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