11 U.S.C. §§ 362(a), 523(a)(2), (4), (6), (19); Dischargeability; Arbitration; Sarbanes-Oxley Act
Holland v. Zimmerman, 341 B.R. 77, Adv. No. 06-06047 (Bankr. N.D. Ga. April 18, 2006)(Bonapfel)
The debtor, a registered securities salesperson and investment advisor, advised the plaintiffs with regard to their investment accounts. Plaintiffs alleged in their adversary complaint that the debtor fraudulently steered them into a risky hedge fund controlled by the debtor, and that they collectively lost more than $1 million as a result of the debtor’s actions. Plaintiffs’ complaint sought an order excepting their debt from discharge pursuant to §523(a)(2), (4), (6) and (19), and they requested that the automatic stay be lifted so that could proceed with the arbitration that was pending pursuant to the Federal Arbitration Act.
The court noted that absent the debtor’s bankruptcy filing, the Arbitration Act would require that a court compel arbitration. However, that mandate may be overridden by contrary congressional command. If a core proceeding involves Code sections that inherently conflict with the Arbitration Act or if arbitration would “necessarily jeopardize” the objectives of the Code, the court may override the general policy favoring arbitration. The debtor opposed arbitration on the grounds that the “fresh start” policy of the Bankruptcy Code required that the Bankruptcy Court determine the dischargeability of any debts, and that the debtor would bear the additional burden of defending the arbitration. Moreover, arbitration involves limited discovery rights, arbitrators are not bound by the rules of evidence and do not need to provide reasons for their award and there is limited judicial review.
The court stated that its initial inclination was to deny the plaintiff’s motion. The “fresh start” policy would be hindered if the court sent a debtor to another forum to obtain rights the Bankruptcy Code confers, and a debt is not discharged pursuant to §523(a)(2), (4) or (6) unless so determined by the Bankruptcy Court. For these and other reasons, the Bankruptcy Court should ordinarily decline to relinquish jurisdiction over dischargeability issues and deny a request to modify they stay to allow arbitration to proceed.
Notwithstanding the above policy, the plaintiffs had amended their complaint to invoke the dischargeability exception found in § 523(a)(19). This section excepts from discharge many debts arising from violations of securities laws and fraud, deceit or manipulation in connection with the purchase and sale of securities. This section>, while enacted with the BAPCPA, was effective as of the date of enactment of the Sarbanes-Oxley Act, which was July 30, 2002. Section 523(a)(19) expressly contemplates a postpetition determination of liability by a nonbankruptcy forum, and § 362(c)(1) does not require the Bankruptcy Court to determine dischargeability. Taken together, these sections express a Congressional intent to allow creditors asserting a debt of this nature to have the right to pursue their claims in a nonbankruptcy forum.
Based upon the above, the court modified the stay to allow the plaintiffs to proceed with arbitration and stayed the adversary pending the conclusion of the arbitration. While some of the plaintiffs’ claims may invoke §523(a)(2), (4) or (6) and no § 523(a)(19), the court would determine dischargeability of such debts after the arbitration. It would be inefficient to proceed simultaneously in two forums with the same facts applying to both cases.