Friday, January 17, 2020
Panel Says Obligation Amounting to Millions of Dollars Is Nondischargeable Notwithstanding Proviso In Settlement Agreement With State Over Securities Violations That No Wrongdoing Was Admitted
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has affirmed a determination that a man who was sued by the state for securities violations, and entered into a settlement under which he agreed to provide restitution to victims, cannot skirt the obligation to pay by declaring bankruptcy, rejecting his contention that the agreement did not establish wrongful conduct—which would bar dischargeablity of the debts—because it was specified that he was making no admissions.
The extent of the liability to 433 investors, his lawyer on appeal has acknowledged, amounts to “millions of dollars.”
In a memorandum opinion filed Tuesday, a three-judge panel declared that the Bankruptcy Court and the District Court for the Central District of California correctly determined that Christopher Epsha, a Woodland Hills attorney with the Sasooness Law Group, remains liable to investors in light of 11 U.S.C. §523(a)(19). That provision says that a debt arising from “the violation of…any of the State securities laws” is nondischargeable.
Wording of Accord
Epsha insisted that securities violations were not established in the action brought by the state in light of this wording in the settlement agreement (with the emphasis he added in his opening brief in the District Court):
“The Parties acknowledge that this Settlement Agreement has been executed in connection with the compromise and settlement of disputed claims. The Settlement Agreement and the actions taken pursuant thereto do not constitute an acknowledgment or admission on the part of any Defendant of liability for any matter, nor do they constitute a precedent upon which liability may be assessed. Neither this Settlement Agreement nor the circumstances leading to its execution shall be deemed an acknowledgment by Defendants that, as of the date of this Agreement, any claim by Plaintiff is meritorious. Neither the Interlocutory Judgment nor this Settlement Agreement may be relied upon or introduced in any proceeding against Defendant other than an action between the Parties to enforce this Settlement Agreement or if otherwise admissible in any future actions brought by the commissioner against the Defendants.”
Epsha argued that the state “could have bargained for language” under which he waived his “right to argue that he did not commit securities violations,” but “did not.”
District Court Judge Manuel L. Real (since deceased) on July 18, 2018, denied an appeal from the Bankruptcy Court’s decision that the debt is nondischargeable.
At oral argument before the Ninth Circuit in Pasadena on Dec. 9 of last year, Beverly Hills attorney Michael Jay Berger, representing Epsha, maintained that “several presumptions” have all been ignored in the prior decisions in the case. He enumerated two before being cut off by questioning.
“First, of course, is the presumption of giving a fresh start to a debtor,” he said, remarking that the state was arguing that the objective is inapplicable to Epsha because, as he characterized its stance, “There’s something wrong with this guy.”
The second presumption which Berger said was flouted is that “in favor of settlement.” He told the panel:
“No one has really addressed that, but normally, you have something settled, you want it to remain settled—and in this case, we’ve got a settlement agreement that very clearly states that no one’s admitting anything.”
The panel—composed of Circuit Judges Kim Wardlaw and Kenneth Kiyul Lee, along with District Court Judge Matthew F. Kennelly of the Northern District of Illinois, sitting by designation—pointed out in its opinion that prior to the state filing its civil action on Jan. 13, 2011, an administrative action was taken.
The commissioner of the California Department of Business Oversight on Feb. 18, 2009 issued a desist and refrain (“D&R”) order to Epsha, his company, and another managing member of the company based on violations of state securities laws. An administrative law judge (“ALJ”) upheld the D&R finding that there had been sales of unqualified, non-exempt securities and that material information had not been provided potential investors.
“Although the Settlement Agreement contains a non-liability provision, courts may ‘look behind’ the settlement agreement to find that the settlement debt arose from fraud and is thus nondischargeable,” Tuesday’s opinion declares, adding:
“Here, the Administrative Decision upholding the D&R Order satisfies the § 523(a)(19) provision that a debt for securities law violation cannot be discharged.”
The opinion adds that the ALJ found that Epsha had personally persuaded an investor, one Juan Rodriguez, who expressed “buyer’s remorse,” not to back out of an investment.
Epsha contended that the Bankruptcy Court and Real erred by applying the doctrine of collateral estoppel. The administrative proceeding, he maintained, was against his company, not him, and the issues were disparate.
At oral argument, Berger conceded that “there clearly was a securities violation, and that really was selling these unlicensed securities,” but represented that the commissioner’s allegations were “pretty much all against” Epsha’s company, not against his client.
The opinion sets forth:
“Contrary to Epsha’s assertions, the administrative proceeding (1) involved the same factual allegations, (2) the parties actually litigated Epsha’s violations, (3) the ALJ necessarily decided the issue, (4) the administrative decision was final and on the merits, and (5) Epsha was a party to the administrative action. Accordingly, the district and bankruptcy courts properly applied issue preclusion to the ALJ’s finding that Epsha violated securities law.”
The case is Epsha v. People of the State of California, 18-56108.
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