Understanding Unliquidated Securities Claims Under [section] 523(a) (19) in Chapter 7 Cases.

• Author: Maura, Eduardo Ayala
• Position: Bankruptcy Code of 1978

In bankruptcy, some claims or debts are "unliquidated." This simply means that the amount of the debt has not been established yet as a specific amount. Some of these claims can be based on violations of "securities" laws. (1) When your Ch. 7 bankruptcy claim against a debtor is based on a properly pleaded securities claim--even if that claim is unliquidated--the 60-day deadline to file a claim does not apply. Now, rarely does your regular Ch. 7 involve a "securities" claim against a debtor. Stockbrokers or advisors are generally affluent people not found as Ch. 7 debtors. It does occur, however, and when it does, claims on their securities-related work by investors follow special rules. This is what this article explains.

Imagine a plaintiff in state court that has a viable claim for violations of federal and Florida securities laws against a defendant. Shortly after the state court complaint is filed, the defendant files for bankruptcy under Ch. 7. This filing stays (freezes) the state court case. The state court plaintiff then weighs his options and decides to file an adversary proceeding in the bankruptcy court where the defendant's case is pending. An adversary proceeding is a litigation case within the bankruptcy forum and is governed by Fed. R. Bankr. P. 7001. While all this plays out, Bankruptcy Rule 4007(c)--the 60-day deadline for filing a complaint objecting to the dischargeability of debts--has lapsed. What options, if any, does our state court plaintiff have?

11 U.S.C. [section]523(a)(19): Securities and Fraud Claims

Under the Bankruptcy Code, certain debts are not dischargeable. (2) These debts survive the bankruptcy case and remain enforceable against the debtor. (3) In 2002, Congress enacted 11 U.S.C. [section]523(a)(19) in an effort to "close a 'loophole' which allowed debtors convicted of securities fraud or other securities violations to discharge the debt owed to their victims." (4) "By enacting [section]523(a)(19), Congress intended to amend the federal bankruptcy code to make judgments and settlements arising from state and federal securities law violations brought by state or federal regulators and private individuals non-dischargeable." (5)

Bankruptcy Code [section]523(a)(19) provides, in relevant part, that:

(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--(19) that--(A) is for (i) the violation of any of the Federal securities laws..., any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or (ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

(B) results...