Lunsford, Sr. v. Process Technologies Services, LLC (In re Lunsford, Sr.)
- Case Type:
- Case Status:
- 16-11578 (11th Circuit, Feb 15,2017) Published
- The Eleventh Circuit held that the bankruptcy court made a finding of fact that the debtor violated state securities laws based on a state court judgment confirming an arbitration award entered against the debtor and other defendants and that the debt was non-dischargeable under section 523(a)(19)(A) irrespective of debtor’s conduct. The Eleventh Circuit also gave preclusive effect to the state court judgment in holding that the debtor was estopped from arguing the arbitration award was precluded by fraud.
- Procedural context:
- Appeal from the United States District Court for the Northern District of Georgia affirmed.
- Progress Technologies, LLC (“Progress”) sued MIPCO, LLC (“MIPCO”) and its president, Jon Lunsford (“Lunsford”), to rescind the sale of securities in MIPCO. The Mississippi chancery court ordered the parties to arbitration, and Lunsford filed bankruptcy. The arbitrator entered a $606,892 award in favor of Progress, and the chancery court confirmed the award and entered a final judgment against MIPCO, Lunsford, and another individual as jointly and severally liable. Lunsford did not object to the confirmation or appeal the final judgment. Process filed an adversary proceeding in Lunsford’s bankruptcy case to have the debt determined non-dischargeable under section 523(a)(19)(A) because the debt was for the violation of securities law. Lunsford contended that section 523(a)(19)(A) was inapplicable because the bankruptcy court and arbitrator only found that he was liable for a third party’s violation of securities law. The Eleventh Circuit agreed with the bankruptcy court’s conclusion that the arbitrator made a specific finding that Lunsford violated securities laws because the arbitrator did not limit his findings to MIPCO and the award provided that the use of “MIPCO” included Lunsford unless specifically referenced. Alternatively, the Eleventh Circuit ruled that the debt was non-dischargeable regardless of the debtor’s conduct because the text of section 523(a)(19)(A) bars the discharge of debts “for the violation” of securities laws, regardless of whether the debtor’s liability arises from securities violations committed by a third party, departing from the existing precedent established by Ninth Circuit and Tenth Circuit. The Eleventh Circuit also held that Lunsford was precluded from amending his complaint, notwithstanding Lunsford’s claims that the arbitration award was procured by fraud.
Judge Rosenbaum filed a concurring opinion. He agreed that the bankruptcy court correctly determined that the arbitration award found that Lunsford violated securities law and that the debt was non-dischargeable on that basis. However, Judge Rosenbaum was concerned with the application of section 523(a)(19)(A) with respect to innocent third parties and believed that the issue of whether the debt was dischargeable regardless of debtor conduct should be decided in a case where the issue is better developed.
- Pryor and Rosenbaum, Circuit Judges, and Ungaro, District Judge
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