In an Unpublished Opinion, the 11th Circuit Discusses Rarely Used 523(a)(19) Exception to Discharge and Types of Default Judgments That Can Cause Issue Preclusion

In an Unpublished Opinion, the 11th Circuit Discusses Rarely Used 523(a)(19) Exception to Discharge and Types of Default Judgments That Can Cause Issue Preclusion

On August 7, 2019, the Eleventh Circuit Court of Appeals determined that the Debtors were not eligible for discharge under 11 U.S.C. § 362(a)(19).

Prior to the bankruptcy filing, the Debtors were sued by Plaintiffs in Illinois state court alleging that the Debtors sold them unregistered securities without a license and made material misrepresentations about the investment violating Illinois and Florida securities laws. The Debtors answered the state court complaint asserted affirmative defenses and responded to motions. However, they refused to respond to interrogatories or request for production despite orders compelling discovery. The state court ultimately sanctioned the Debtors by entering a default judgment against them for $981,010.63 plus $547.00 in costs.

Afterwards, the Securities Department of the Illinois Secretary of State brought an administrative action against the Debtors and their companies accusing them of violating Illinois securities laws similar to the lawsuit brought by Plaintiffs. The parties had a contested three-day hearing.

Thereafter the Debtors filed for bankruptcy protection. After the filing of the bankruptcy but before the entry of the discharge order the Secretary entered an order injoining the Debtors in their companies from selling securities in Illinois and fined one of the Debtors and the companies $10,000 apiece.

The Plaintiffs then filed an adversary proceeding in the bankruptcy court arguing that Section 523(a)(19) excepted the debt from discharge and that the Debtors were precluded from relitigating the issue because of the default judgment and administrative order. The Debtors argued that they wanted to prove they were not liable and that the debt was invalid . The bankruptcy court ruled in favor of the Plaintiffs and that the Debtors were precluded from challenging the debt and that the debt was non-dischargeable. The District Court affirmed.

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