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In re Lunsford

United States Court of Appeals, Eleventh Circuit

February 15, 2017

In re: JON E. LUNSFORD, SR., Debtor.
v.
PROCESS TECHNOLOGIES SERVICES, LLC, Defendant-Appellee. JON E. LUNSFORD, SR., Plaintiff-Appellant,

         Appeal from the United States District Court Nos. 1:15-cv-02323-SCJ; 12-bkc-80136-CRM for the Northern District of Georgia

          Before WILIAM PRYOR and ROSENBAUM, Circuit Judges, and UNGARO, [*] District Judge.

          WILLIAM PRYOR, Circuit Judge.

         This appeal requires us to decide whether a bankruptcy court made a finding of fact that a debtor violated state securities laws. After a business venture went awry, Process Technologies obtained a judgment in state court against Jon Lunsford for violations of state securities laws. Lunsford then filed for bankruptcy. A debtor ordinarily may discharge debts in bankruptcy, 11 U.S.C. § 727, but not if the debt "is for the violation of . . . securities laws" and results from a court judgment, § 523(a)(19)(A)-(B). Process Technologies filed an adversary proceeding in which it complained that section 523(a)(19)(A) barred Lunsford from discharging the debt. Lunsford answered that his liability arose from a third party's violation of securities laws and that the bar under section 523(a)(19)(A) from a discharge applies only when the debtor violates securities laws. Lunsford also sought leave to amend his answer to assert that Process Technologies fraudulently obtained the judgment. Lunsford's arguments fail: the bankruptcy court made a finding of fact that Lunsford violated securities laws; alternatively, section 523(a)(19)(A) applies irrespective of debtor conduct; and Lunsford is estopped from arguing that the award was procured by fraud. We affirm the order that excepted the debt from discharge and denied leave to amend.

         I. BACKGROUND

         In 2009, Process Technologies Services, LLC, met with MIPCO, LLC, and its president, Jon Lunsford, to discuss purchasing securities in MIPCO. MIPCO sent Process Technologies documents that stated that MIPCO maintained $1.2 million in tangible assets and $500, 000 in intangible assets. Not knowing that title problems plagued the tangible assets and that MIPCO had not acquired the intangible assets, Process Technologies invested $300, 000.

         After discovering the asset problems, Process Technologies sued in a chancery court in Mississippi to rescind the sale. The chancery court ordered the parties to arbitrate the dispute. Lunsford filed for bankruptcy, but the bankruptcy court stayed the action pending the arbitration. The arbitrator ruled in favor of Process Technologies and awarded the company $606, 892. The chancery court confirmed the award and entered a final judgment against Lunsford, MIPCO, and another individual as jointly and severally liable. Lunsford neither objected to the confirmation nor appealed to the Supreme Court of Mississippi.

         The bankruptcy court then lifted the stay of its proceeding, and Process Technologies filed an adversary proceeding, complaining that Lunsford could not discharge the debt because the debt was "for the violation" of securities laws, 11 U.S.C. § 523(a)(19)(A). After Lunsford filed an answer, he sought leave to amend that answer to assert that Process Technologies fraudulently obtained the arbitrator's award. The bankruptcy court then directed Lunsford to pursue that argument in the chancery court. Lunsford filed a motion for relief from judgment in the chancery court, but the chancery court declined to set aside its judgment.

         Lunsford's motion for relief from judgment having been resolved, the bankruptcy court ruled that section 523(a)(19)(A) prohibited Lunsford from discharging the debt. The bankruptcy court determined that the arbitrator "found that [Lunsford] violated the [Mississippi Securities] Act. More specifically, the Arbitrator found that [Lunsford] violated the Act by offering and selling an unregistered security. The Arbitrator also found that [Lunsford] violated the Act by making an offer that contained untrue statements." The bankruptcy court ruled that the arbitration award constituted a judgment "for a violation" of securities laws against Lunsford because "there is a determination outside the Bankruptcy Court that [Lunsford] violated securities laws" and because the state courts confirmed the arbitration award.

         Lunsford appealed to the district court on the ground that section 523(a)(19)(A) bars discharge only when the debtor committed a securities violation, not when his liability arose from a third-party's violation. The district court held that section 523(a)(19)(A) applies irrespective of debtor conduct and that Lunsford is not entitled to amend his complaint.

         II. STANDARD OF REVIEW

         This court is the second appellate court to review decisions from the bankruptcy court. In re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996). We "assess the bankruptcy court's judgment anew, employing the same standard of review the district court itself used." In re Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir. 2009). "Thus, we review the bankruptcy court's factual findings for clear error, and its legal conclusions de novo." Id.

         III. DISCUSSION

         We divide our discussion in two parts. First, we explain that Lunsford cannot discharge his debt because the bankruptcy court made a finding of fact that Lunsford violated securities laws and, in the alternative, section 523(a)(19)(A) applies irrespective of whether Lunsford violated securities laws. Second, we explain that Lunsford is not entitled to leave to amend his complaint.

         A. Lunsford Cannot Discharge the Debt.

         Section 523(a)(19)(A) provides that a person cannot discharge a debt in bankruptcy if the debt "is for the violation of securities laws":

(a) A [bankruptcy] discharge . . . does not discharge an individual debtor from any debt-
(19) that-
(A)is for- ...

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