FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: RICHARD G. SHERMAN; In re:
ANDREA PEARL SHERMAN,
Debtors,
No. 03-56601
RICHARD G. SHERMAN; ANDREA D.C. No.
PEARL SHERMAN, CV-02-05571-CAS
Appellants, AMENDED
v. OPINION
SECURITIES AND EXCHANGE
COMMISSION,
Appellee.
Appeal from the United States District Court
for the Central District of California
Christina A. Snyder, District Judge, Presiding
Argued and Submitted
April 5, 2005—Pasadena, California
Filed March 23, 2006
Amended July 3, 2007
Before: Sidney R. Thomas and Marsha S. Berzon,
Circuit Judges, and James C. Mahan,* District Judge.
Opinion by Judge Berzon
*The Honorable James C. Mahan, United States District Judge for the
District of Nevada, sitting by designation.
7891
IN RE: SHERMAN 7895
COUNSEL
Arthur A. Greenberg, Harold Gutenberg, and Don Lanson,
Greenberg & Bass, Encino, California, for the appellants.
Giovanni P. Prezioso, Jacob H. Stillman, Katharine B.
Gresham, and Hope Hall Augustini, Securities and Exchange
Commission, Washington, D.C., for the appellee.
OPINION
BERZON, Circuit Judge:
Richard Sherman (Sherman) was the attorney for several
defendants in an enforcement action brought by the Securities
and Exchange Commission (SEC) and in other actions in
which those defendants were parties. Sherman and his wife,
Andrea Sherman, filed a Chapter 7 bankruptcy petition. The
SEC brought a motion to dismiss the Shermans’ Chapter 7
bankruptcy petition pursuant to 11 U.S.C. § 707(a), maintain-
ing that there was “cause” for dismissal. Although the bank-
ruptcy court denied the SEC’s motion, the district court
reversed.
We are presented with three questions on appeal. First, we
must consider whether the SEC has standing. The SEC has an
7896 IN RE: SHERMAN
interest in the Shermans’ bankruptcy petition because part of
the debt that the Shermans sought to discharge resulted from
orders against Sherman issued in the SEC enforcement action.
Before the district court decided the appeal, however, Sher-
man and Thomas Lennon, the receiver appointed in the SEC
action (Receiver), entered into a settlement agreement. We
must initially decide whether the SEC had an interest in the
Shermans’ bankruptcy petition sufficient to confer standing.
We must then decide whether the settlement agreement extin-
guished any interest the SEC initially had in the Shermans’
bankruptcy petition, divesting the SEC of standing to proceed.
Second, we address whether this appeal is moot because the
bankruptcy court has already granted the Shermans a dis-
charge. Finally, we are presented with a merits question: Did
the bankruptcy court err in denying the SEC’s motion to dis-
miss the petition for cause?
We hold that the SEC has standing because it retained a
pecuniary interest as a creditor in some of the Shermans’ debt,
an interest not extinguished by the settlement agreement
between Sherman and the Receiver. In addition, we conclude
that this case is not moot, because the grant of the motion to
dismiss could have had an impact on the parties despite the
grant of a discharge order while the appeals were pending.
Finally, we decide that the bankruptcy court did not err in
denying the SEC’s motion to dismiss the petition for cause.
Other provisions of the Bankruptcy Code address the miscon-
duct that the SEC argued constituted “cause” justifying dis-
missal. Thus, under Neary v. Padilla (In re Padilla), 222 F.3d
1184 (9th Cir. 2000), the petition could not be dismissed for
“cause” under 11 U.S.C. § 707(a).
I. Factual and Procedural Background
The current appeal arises from a somewhat Byzantine set
of events:
IN RE: SHERMAN 7897
In 1997, the SEC commenced a securities fraud action
against Whitworth Energy Resources, Ltd., Williston Basin
Holding Corp., and Amerivest Financial Group, Inc., along
with their principals (Whitworth action), in the United States
District Court for the Central District of California. The com-
plaint alleged, among other things, that the defendants oper-
ated a Ponzi-like scheme by representing that investors were
receiving income from oil and gas production when, in fact,
distributions were made from receipts obtained from new
investors or assessments of existing investors. The district
court entered an order freezing the corporate entities’ assets
and appointing Thomas Lennon as permanent receiver for the
defendant entities and their subsidiaries and affiliates, includ-
ing Oxford Oil and Gas, Inc. and the Oxford Group of Com-
panies, Ltd.1 The district court ordered that the Receiver was
to have
full powers of an equity receiver, including, but not
limited to, full power over all funds, assets, property,
securities, premises (whether owned, leased, occu-
pied, or otherwise controlled), choses in action,
books, records, and other property belonging to or in
the possession of or control of Whitworth, Williston,
Amerivest, and any of their subsidiaries and affiliates.2
1
We refer to Oxford Oil and Gas, Inc. and the Oxford Group of Compa-
nies, Ltd. collectively as the “Oxford companies.”
2
In relevant part, the order specified that the Receiver was “immediately
authorized, empowered and directed” to do the following:
A. to have access to and to collect and take custody, control,
possession, and charge of all funds, assets, property, securi-
ties, premises (whether owned, leased, occupied or other-
wise controlled), choses in action, books, records, papers,
and other property of Whitworth, Williston and Amerivest,
and their subsidiaries and affiliates, with full power to con-
trol, manage, sue, foreclose, marshal, collect, receive, and
take into possession all such property;
....
7898 IN RE: SHERMAN
The district court granted the SEC’s partial summary judg-
ment motion, concluding that the principal defendants had
violated section 17(a) of the Securities Act of 1933, 15 U.S.C.
§ 77q(a), section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated there-
under, 17 C.F.R. § 240.10b-5.3 In 1999, the district court
entered final judgment. The relief ordered included an injunc-
tion and provisions requiring the principal defendants to dis-
gorge specified amounts of ill-gotten gains to the Receiver
and pay civil penalties.
Appellant Richard Sherman, an attorney for several of the
defendants in the Whitworth action, violated the Whitworth
district court’s freeze order by withdrawing a total of $54,980
D. to take such action as is necessary and appropriate to pre-
serve and take control of and to prevent the dissipation,
devaluation, concealment, or disposition of any funds,
assets, property, securities and premises of Whitworth, Wil-
liston and Amerivest, and their subsidiaries and affiliates;
E. to make a further accounting, as soon as practicable to this
Court and the Commission of the assets and financial condi-
tion of Whitworth, Williston, Amerivest, and their subsidia-
ries and affiliates, and to file the accounting with the Court
and deliver copies thereof to all parties; [and]
....
G. to employ attorneys and others to investigate and, where
appropriate, to defend, institute, pursue, and prosecute all
claims and causes of action of whatever kind and nature
which may now or hereafter exist as a result of the activities
of present or past employees or agents of Whitworth, Willis-
ton, Amerivest and their subsidiaries and affiliates, including
but not limited to Insured Energy Drilling Program 1986-4,
a limited partnership, et al. v. Trust Company of the West,
a California trust company, et al., Case No. BC 108-297,
pending in Los Angeles County Superior Court.
3
We later affirmed this decision. SEC v. Whitworth Energy Res. Ltd.,
243 F.3d 549 (9th Cir. 2000) (unpublished table decision).
IN RE: SHERMAN 7899
from the companies’ litigation trust account and soliciting
additional funds from investors. The SEC and the Receiver
sought a judgment of civil contempt against Sherman from
the Whitworth district court. In February 2000, that court
found Sherman in contempt and ordered him to disgorge “to
the Receiver” $54,980 plus prejudgment interest.4 We
affirmed. SEC v. Whitworth Energy Res. Ltd., 243 F.3d 549
(9th Cir. 2000) (unpublished table decision).
In separate proceedings, commenced before the Whitworth
action, the Oxford companies had filed, in state court, several
suits concerning the ownership rights to various natural gas
assets in Texas (contingency suits).5 Sherman represented the
Oxford companies’ investors in these actions, pursuant to a
contingency fee agreement. The agreement provided that
Sherman was to receive forty percent of the amount of bene-
fits paid to the plaintiffs after deducting litigation-related
costs and disbursements. Also, the Oxford companies were to
pay Sherman periodically throughout the litigation as an
advance against his contingency fees, and any money Sher-
man retained in excess of his fees would be treated as an
interest-free loan.
In early 2001, the Receiver settled the contingency suits. A
year later, the Receiver filed a motion in the Whitworth suit
seeking an order requiring Sherman to disgorge money he had
received and retained, but not earned, in connection with his
representation in the contingency suits. The SEC joined the
motion shortly thereafter. Four days before the hearing on the
disgorgement motion, Sherman and his wife, Andrea Sher-
man, filed a voluntary Chapter 7 bankruptcy petition with the
bankruptcy court. Sherman did not file an opposition to the
disgorgement motion with the Whitworth district court, nor
did he appear at the hearing on the motion.
4
We refer to this order as the “contempt judgment” or “contempt order.”
5
The district court’s order appointing Lennon to be the permanent
receiver referred to one of these cases. See supra note 2, ¶ G.
7900 IN RE: SHERMAN
In March 2002, the Whitworth district court issued its deci-
sion on the disgorgement motion. It found that the Receiver
was subject to the automatic stay provisions of 11 U.S.C.
§ 362(a)(1), but that, under § 362(b)(4), the SEC was not.6 On
the merits, the district court found that the Receiver had set-
tled the contingency suits for $750,000, and that Sherman was
therefore entitled to $300,000 in fees. The court also found
that as of the time of the settlement, Sherman had collected
$881,313.43 in advances. Thus, pursuant to the contingency
6
Section 362 provides, in relevant part:
(a) Except as provided in subsection (b) of this section, a peti-
tion filed under section 301 [covering voluntary petitions] [or]
302 [covering joint petitions] . . . of this title . . . operates as a
stay, applicable to all entities, of —
(1) the commencement or continuation, including the issu-
ance or employment of process, of a judicial, administrative,
or other action or proceeding against the debtor that was or
could have been commenced before the commencement of
the case under this title, or to recover a claim against the
debtor that arose before the commencement of the case under
this title . . . .
(b) The filing of a petition under section 301 [or] 302 . . . does
not operate as a stay —
....
(4) under paragraph (1) . . . of subsection (a) of this sec-
tion, of the commencement or continuation of an action or
proceeding by a governmental unit . . . to enforce such gov-
ernmental unit’s . . . police and regulatory power, including
the enforcement of a judgment other than a money judgment,
obtained in an action or proceeding by the governmental unit
to enforce such governmental unit’s . . . police or regulatory
power . . . .
11 U.S.C. § 362(a)(1), (b)(4). The question of the propriety of the stay rul-
ing is not before us in this proceeding.
Unless otherwise indicated, all citations to the U.S. Code are to the ver-
sion of the Code in effect at the time of the relevant lower court decisions
in 2002. Later amendments to the Code are not relevant to our disposition
of the present case and have therefore, with one exception, not been noted.
IN RE: SHERMAN 7901
fee agreement, Sherman owed the Oxford companies
$581,313.43, the difference between the advances Sherman
had received and retained and the actual fee for his represen-
tation. The district court granted the motion for disgorgement
(disgorgement judgment) and ordered Sherman to pay
$581,313.43 plus interest. The disgorgement order did not
specify to whom Sherman was to remit this money.
In May 2002, the SEC filed a motion in bankruptcy court
to dismiss the Shermans’ Chapter 7 petition pursuant to 11
U.S.C. § 707(a). The Receiver joined the motion shortly
thereafter. A few weeks later, the Receiver independently
filed an action (nondischarge action) against Sherman in
bankruptcy court, seeking a determination that the debt Sher-
man owed the Receiver for the contempt judgment and the
retention of money in excess of his fees in connection with
the contingency suits, totaling $636,293.43, was nondischarge-
able.7
The bankruptcy court denied the SEC’s motion to dismiss
the bankruptcy in June 2002, stating that “[t]his is just a run-
of-the-mill bankruptcy.” The SEC filed a notice of appeal in
July 2002. The appeal was heard by the Whitworth district
court. On October 1, 2002, while the appeal was pending in
the district court, the bankruptcy court entered an order grant-
ing the Shermans a discharge under 11 U.S.C. § 727.
In December 2002, Sherman and the Receiver entered into
a settlement agreement (Agreement). As part of the Agree-
ment, Sherman “agree[d] to execute a Stipulation for Entry of
Judgment in the amount of $636,293.43 plus interest.” The
7
The Receiver’s motion for non-discharge invoked 11 U.S.C.
§ 523(a)(4) and (6). The former exempts from discharge debts “for fraud
or defalcation while acting in a fiduciary capacity, embezzlement, or larce-
ny.” 11 U.S.C. § 523(a)(4). The latter exempts from discharge debts “for
willful and malicious injury by the debtor to another entity or to the prop-
erty of another entity.” Id. § 523(a)(6).
7902 IN RE: SHERMAN
bankruptcy court entered an order shortly thereafter granting
the stipulation for entry of judgment.
In relevant part, the stipulation stated the following:
A. On February 28, 2000, the U.S. District
Court, Central District of California (the “District
Court”) in SEC v. Whitworth Energy Resources
entered a contempt judgment against Defendant
[Sherman] and various other individuals (the “Con-
tempt Judgment”). The Contempt Judgment found
that Defendant received $54,980 in violation of a
TRO and Preliminary Injunction previously issued
by the District Court.
B. In addition, the Receiver has asserted a claim
against Defendant for $581,313.43 plus interest for
attorneys’ fees Defendant received as purported
advances against an anticipated contingent fee (the
“Disgorgement Claim”).
....
D. On May 24, 2002, Plaintiff [the Receiver]
filed a complaint (the “Complaint”) against Defen-
dant pursuant to 11 U.S.C. Section 523 to determine
the dischargeability of debts totaling $636,293.43
plus interest based on the Contempt Judgment and
the Disgorgement Claim (the “Adversary Action”).
....
NOW THEREFORE, in consideration of the recit-
als set forth above, and in consideration of the
mutual promises, undertakings, terms and conditions
hereinafter set forth, the parties stipulate as follows:
1. Subject to the terms and conditions of the Set-
tlement Agreement and for the sole purposes of the
IN RE: SHERMAN 7903
Settlement Agreement, Defendant agrees and stipu-
lates that the Contempt Judgment and Disgorgement
Claim are nondischargeable pursuant to 11 U.S.C.
§ 523(a).
2. Defendant agrees to make payments totaling
$50,000 to Plaintiff as follows in full and final settle-
ment of Plaintiff’s claims against Defendant as set
forth in the Adversary Action . . . .
....
3. Defendant stipulates to entry of a judgment in
the amount of $636,293.43 plus interest (the “Judg-
ment”), based on the following terms and conditions:
As long as Defendant makes all payments . . . ,
Receiver shall forebear from filing, entering, record-
ing, enforcing or executing on the Judgment. . . .
....
5. Upon receipt of the Final Payment . . . , the
Receiver shall immediately dismiss the Adversary
Action.
The district court reversed the bankruptcy court’s order
denying the SEC’s motion to dismiss the petition. The court
concluded that there was no specific remedy under the Bank-
ruptcy Code for the SEC to pursue, and that under our opinion
in Padilla, it could therefore proceed to the “cause” inquiry.
Analyzing the SEC’s motion to dismiss the Shermans’ peti-
tion for “cause” under § 707(a), the district court held that the
timing and circumstances of the Shermans’ petition, along
with the misrepresentations made in it, were sufficient to con-
stitute “cause.” Specifically, the district court held that
Sherman filed for bankruptcy to prevent this Court
from ordering Sherman to disgorge the funds he
7904 IN RE: SHERMAN
wrongfully obtained from the companies. By filing
for bankruptcy, the Court finds that Sherman
intended to obtain a discharge of his obligations to
the SEC, while simultaneously — because he turned
over no assets for liquidation — maintaining the life-
style he currently enjoys, a lifestyle funded in part by
the money Sherman obtained by deceiving his cli-
ents and by violating this Court’s orders.
The district court therefore reversed the bankruptcy court and
remanded with instructions to dismiss “for cause,” pursuant to
§ 707(a). From this decision the Shermans timely appeal.
II. Standing
On appeal, the Shermans argue for the first time that the
SEC lacks standing to seek dismissal of their Chapter 7 peti-
tion, because the SEC’s interest in the contempt and disgorge-
ment judgments was extinguished when the Receiver and
Sherman entered into the Agreement.8 We must address Arti-
8
The prudential appellate standing doctrine, see Fondiller v. Robertson
(In re Fondiller), 707 F.2d 441 (9th Cir. 1983), is not pertinent under the
present circumstances. This doctrine provides that “[o]nly those persons
who are directly and adversely pecuniarily affected by an order of the
bankruptcy court . . . have standing to appeal that order.” Id. at 442.
The doctrine of prudential appellate standing “exists to fill the need for
an explicit limitation on standing to appeal in bankruptcy proceedings.
This need springs from the nature of bankruptcy litigation which almost
always involves the interests of persons who are not formally parties to the
litigation.” Id. at 443. We have not, however, invoked this doctrine in
instances in which the appellant was the party that brought the motion at
issue on appeal. Instead, we have invoked it when the appellant is a party
other than the moving party. See, e.g., Duckor Spradling & Metzger v.
Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 776-77 (9th Cir. 1999);
Tilley v. Vucurevich (In re Pecan Groves of Ariz.), 951 F.2d 242, 244 (9th
Cir. 1991); Fondiller, 707 F.2d at 442. Here, the SEC brought the dis-
missal motion in the first place and therefore was formally a party to the
dismissal litigation. We therefore conclude that the SEC need not establish
prudential appellate standing in addition to Article III standing in the pres-
ent case.
IN RE: SHERMAN 7905
cle III standing questions regardless of whether they were
raised below. See Biggs v. Best, Best & Krieger, 189 F.3d
989, 998 & n.7 (9th Cir. 1999).
To establish standing under Article III, a party
must demonstrate that “(1) it has suffered an ‘injury
in fact’ that is (a) concrete and particularized and (b)
actual or imminent, not conjectural or hypothetical;
(2) the injury is fairly traceable to the challenged
action of the defendant; and (3) it is likely, as
opposed to merely speculative, that the injury will be
redressed by a favorable decision.”
City of Sausalito v. O’Neill, 386 F.3d 1186, 1197 (9th Cir.
2004) (quoting Friends of the Earth, Inc. v. Laidlaw Envtl.
Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000)).
At argument, the SEC expressly waived any contention that
its role as statutory guardian of the federal securities laws sup-
plies a non-pecuniary interest sufficient to create standing. Cf.
SEC v. U.S. Realty & Improvement Co., 310 U.S. 434, 459-60
(1940). Instead, the SEC now premises its standing solely on
its asserted status as a “creditor” under the Bankruptcy Code
with respect to the contempt and disgorgement judgments.
The SEC argues that because it is a “creditor” under the
Bankruptcy Code and its debts could be discharged if the peti-
tion is not dismissed, it has Article III standing.
We therefore must decide whether the SEC is a “creditor”
for purposes of the Bankruptcy Code with respect to the con-
tempt judgment or the disgorgement judgment. We conclude
that the SEC is a creditor with respect to the disgorgement
judgment. Because we so conclude, we do not reach the ques-
tion of whether the SEC is also creditor with respect to the
contempt judgment.9 In Part II(A), we explain why the SEC
9
The “creditor” analysis for the two judgments is slightly different. The
contempt order in the Whitworth action, entered on a motion brought by
7906 IN RE: SHERMAN
was a creditor under the Bankruptcy Code in the absence of
a settlement agreement, and in Part II(B), we address why the
Agreement between Sherman and the Receiver did not extin-
guish the SEC’s right to enforce the disgorgement judgment.
A. SEC’s Right To Enforce the Disgorgement
Judgment
[1] We first decide whether the SEC is a “creditor” for pur-
poses of the Bankruptcy Code with respect to the disgorge-
ment judgment, assuming the absence of a settlement
agreement. Neither the Supreme Court nor any federal court
of appeals has addressed the question whether the SEC can be
a creditor under the Bankruptcy Code if the agency has
obtained a monetary judgment entered in an SEC enforcement
action. The Bankruptcy Appellate Panel of the Ninth Circuit
and several bankruptcy courts have, however, concluded that
the SEC can in such circumstances have standing as a creditor
under the Bankruptcy Code. See, e.g., SEC v. Cross (In re
Cross), 218 B.R. 76, 78-80 (B.A.P. 9th Cir. 1998); SEC v.
Hodge (In re Hodge), 216 B.R. 932, 935-36 (Bankr. S.D.
Ohio 1998); SEC v. Kane (In re Kane), 212 B.R. 697, 700
(Bankr. D. Mass. 1997); SEC v. Maio (In re Maio), 176 B.R.
170, 171-72 (Bankr. S.D. Ind. 1994). In concert with these tri-
bunals, we hold that in the present case, the SEC is a “credi-
the SEC and the Receiver, was premised on the finding that Sherman vio-
lated the freeze order in the SEC action. In the contempt order, the court
required Sherman to pay $54,980 plus prejudgment interest “to the
Receiver.”
The disgorgement motion was granted only with respect to the SEC and
did not specify who was to receive the disgorged funds. Furthermore, the
legal theories underlying the Receiver’s interest in the money at issue dif-
fered from the legal theory underlying the SEC’s interest in the same
money. See infra Part II(B).
IN RE: SHERMAN 7907
tor” for purposes of the Bankruptcy Code, assuming the
absence of a settlement agreement extinguishing its rights.10
[2] The Bankruptcy Code’s definition of “creditor”
includes an “entity that has a claim against the debtor that
arose at the time of or before the order for relief concerning
the debtor.”11 11 U.S.C. § 101(10)(A). The Code provides that
the term “ ‘entity’ includes . . . governmental unit,” id.
§ 101(15), and the Code defines “claim” as a
(A) right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undis-
puted, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of per-
formance if such breach gives rise to a right to pay-
ment, whether or not such right to an equitable
10
The foregoing cases address whether the SEC has standing as a credi-
tor under the Bankruptcy Code to file a complaint under 11 U.S.C. § 523
to determine the dischargeability of a particular debt. See 11 U.S.C.
§ 523(c); FED. R. BANKR. P. 4007(a) (“[A]ny creditor may file a complaint
to obtain a determination of the dischargeability [under § 523] of any
debt.” (emphasis added)). In contrast, in the present case, the SEC argues
that it has standing under the Bankruptcy Code to pursue the dismissal of
the bankruptcy petition under 11 U.S.C. § 707(a), which does not in terms
require that any motion be brought by a creditor. Nonetheless, the SEC’s
basis for asserting Article III standing is that it is a creditor for purposes
of the Bankruptcy Code, so the pertinent standing considerations are the
same.
11
The Bankruptcy Act of 1898, in effect before the adoption of the
Bankruptcy Code, defined a “creditor” as “anyone who owns a debt,
demand, or claim provable in bankruptcy.” 11 U.S.C. § 1(11) (1976)
(repealed 1978) (emphasis added). Under the Code, the creditor is no lon-
ger required to “own” a claim, only to “ha[ve]” one. See 2 COLLIER ON
BANKRUPTCY § 101.10 (Alan N. Resnick & Henry J. Sommer eds., 15th ed.
rev. 2005); see also Fezler v. Davis (In re Davis), 194 F.3d 570, 577 (5th
Cir. 1999) (noting this difference). The change appears to accord with the
broad definition of “claim” in the Code, which includes “the right to an
equitable remedy.” 11 U.S.C. § 101(5)(B).
7908 IN RE: SHERMAN
remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured,
or unsecured.
Id. § 101(5). The Supreme Court has stated that “Congress
intended by this language to adopt the broadest available defi-
nition of ‘claim’ ” and has held that “ ‘right to payment’
[means] nothing more nor less than an enforceable obliga-
tion.” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991)
(alteration in original) (one set of internal quotation marks
omitted) (quoting Penn. Dep’t of Pub. Welfare v. Davenport,
495 U.S. 552, 559 (1990)).
Applying these provisions to the present case, we see that
whether the SEC is a creditor turns on whether it “has” a
“right to payment” — i.e., an “enforceable obligation” —
“against” the Shermans with respect to the disgorgement
judgment. 11 U.S.C. § 101(10)(A), (5); Johnson, 501 U.S. at
83. This determination depends, in turn, on the nature of the
disgorgement judgment entered in favor of the SEC, the con-
sideration to which we now turn.
Under the Securities Act of 1933 (1933 Act) and the Secur-
ities Exchange Act of 1934 (1934 Act), “[w]henever it shall
appear to the [SEC] that any person is engaged or is about to
engage in acts or practices” that violate the securities laws,
the SEC may bring an action “to enjoin such acts or prac-
tices.” 15 U.S.C. § 78u(d)(1) (covering the 1934 Act); see
also id. § 77t(b) (covering the 1933 Act and using materially
identical language). Although injunctive relief is the only
relief that the statutes expressly authorize, we have held that
federal courts have “inherent equitable authority to issue a
variety of ‘ancillary relief’ measures in actions brought by the
SEC to enforce the federal securities laws.” SEC v. Wencke,
622 F.2d 1363, 1369 (9th Cir. 1980). In particular, a court
may impose a receivership, see id., freeze assets, see SEC v.
Hickey, 322 F.3d 1123, 1131 (9th Cir. 2003), amended on
other grounds on denial of reh’g, 335 F.3d 834 (9th Cir.
IN RE: SHERMAN 7909
2003), and order the disgorgement of the proceeds of fraud
held by defendants, see SEC v. Wencke, 783 F.2d 829, 837 n.9
(9th Cir. 1986), and by third-party nominal defendants, SEC
v. Colello, 139 F.3d 674, 676-77 (9th Cir. 1998).
In the present case, the SEC brought the Whitworth action
pursuant to its authority under 15 U.S.C. §§ 78u(d)(1) and
77t(b). The SEC obtained the disgorgement judgment against
Sherman pursuant to Colello. See id. at 677. Colello autho-
rizes courts to order the disgorgement of ill-gotten gains held
by third parties who are acting as depositories and have no
legitimate claim to the funds.12 See id. Here, the $581,313.43
at issue in the disgorgement judgment was money Sherman
retained in excess of his fee for the services rendered in the
contingency suits. According to the contingency fee agree-
ment, Sherman was to return this money to the Oxford com-
panies. In the meantime, he was effectively acting as a
depository for those funds, as he legitimately obtained them
in the first place but no longer had a valid claim to retain
them. Although the disgorgement motion was brought by both
the Receiver and the SEC, the disgorgement judgment was
rendered pursuant to the motion of the SEC alone, because the
Receiver, but not the SEC, was subject to the automatic stay.
The pertinent question is whether the SEC’s interest in the
disgorgement judgment is sufficient to confer creditor status
on it for purposes of the Bankruptcy Code even though the
SEC was not to obtain any funds for its own coffers. In
Nathanson v. NLRB, 344 U.S. 25 (1952), the Supreme Court
considered the circumstances in which a governmental entity
can, by virtue of its authority to require payments from one
party to another, be a creditor under the Bankruptcy Act of
1898.13 Nathanson held that the National Labor Relations
12
The parties do not argue that the district court’s disgorgement judg-
ment was in error under Colello.
13
The Bankruptcy Act provision at issue in Nathanson defined “credi-
tor” slightly differently from the Code, as “anyone who owns a debt,
demand, or claim provable in bankruptcy, . . . includ[ing] his duly autho-
rized agent, attorney, or proxy.” 11 U.S.C. § 1(11) (1946) (repealed 1978),
quoted in Nathanson, 344 U.S. at 27 n.1.
7910 IN RE: SHERMAN
Board (Board) was a creditor under the Bankruptcy Act with
respect to the Board’s order to a debtor to pay certain employ-
ees back pay, notwithstanding that it was the employees, and
not the Board, who would eventually receive the money at
issue. See id. at 26-27. The Court reasoned as follows:
The Board is the public agent chosen by Congress to
enforce the National Labor Relations Act. A back
pay order is a reparation order designed to vindicate
the public policy of the statute by making the
employees whole for losses suffered on account of
an unfair labor practice. Congress has made the
Board the only party entitled to enforce the Act. A
back pay order is a command to pay an amount owed
the Board as agent for the injured employees. The
Board is therefore a claimant in the amount of the
back pay.
Id. at 27 (citations omitted).
Under Nathanson, the SEC has standing as a creditor with
respect to these judgments. Like the Board in Nathanson, the
SEC in the present case “is the public agent chosen by Con-
gress to enforce” the securities laws. Id. In addition, the dis-
gorgement judgment is “designed to vindicate the public
policy of the statute.” Id. As we explained in SEC v. Rind, 991
F.2d 1486 (9th Cir. 1993), “[b]y deterring violations of the
securities laws, disgorgement actions further the [SEC’s] pub-
lic policy mission of protecting investors and safeguarding the
integrity of the markets.” Id. at 1491. In Colello, we explained
that “the SEC may name a non-party depository as a nominal
defendant to effect full relief in the marshalling of assets that
are the fruit of the underlying fraud.” 139 F.3d at 677.
The present case may at first seem different from Nathan-
son in two respects. First, Nathanson noted that the Board was
the “only party entitled to enforce the” statute at issue, 344
U.S. at 27 (emphasis added), but the SEC is not the only
IN RE: SHERMAN 7911
enforcer of some of the sections of the statute at issue in the
Whitworth action. In the Whitworth action, the SEC was
enforcing two statutes and one rule promulgated thereunder:
section 17(a) of the 1933 Act, section 10(b) of the 1934 Act,
and Rule 10b-5 promulgated thereunder. While there is no
express private cause of action under any of these provisions
and no implied private cause of action under section 17(a) of
the 1933 Act, see Puchall v. Houghton, Cluck, Coughlin &
Riley (In re Wash. Pub. Power Supply Sys. Sec. Litig.), 823
F.2d 1349, 1357-58 (9th Cir. 1987) (en banc), there is an
implied private cause of action under section 10(b) of the
1934 Act and Rule 10b-5 promulgated thereunder, see Her-
man & MacLean v. Huddleston, 459 U.S. 375, 380 (1983);
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S.
6, 13 n.9 (1971). Second, Nathanson stated that “[a] back pay
order is a command to pay an amount owed the Board as
agent for the injured employees,” 344 U.S. at 27 (emphasis
added), but the disgorgement order in the present case is not
to be paid directly to the SEC as agent for the injured inves-
tors. As explained below, however, we conclude that these
possible distinctions lack force, and that the SEC has creditor
status under the Bankruptcy Code.
First, that the SEC is not the sole enforcer of all sections
of the statute at issue in the Whitworth action does not deprive
the SEC of creditor status. The two circuits that have
addressed whether an entity can be a creditor if it is not the
sole enforcer of a statute have come to conclusions in some
tension with each other.14 Compare Davis, 194 F.3d at 575
(“[A]gencies need not be the only party entitled to enforce the
Acts as their standing as creditors in the nondischargeability
actions obtains regardless of whether the actual beneficiaries
were authorized under federal law to prosecute the action in
14
Several bankruptcy courts have held that the fact that the SEC is not
the sole enforcer of the securities laws does not deprive the SEC of credi-
tor status under Nathanson. See Hodge, 216 B.R. at 936; Kane, 212 B.R.
at 700; Maio, 176 B.R. at 171-72.
7912 IN RE: SHERMAN
their own right.”), with, Missouri ex rel. Ashcroft v. Cannon
(In re Cannon), 741 F.2d 1139, 1142 (8th Cir. 1984) (holding
that the state of Missouri was not a creditor under the statute
at issue and distinguishing Nathanson by noting, among other
differences, that “under the Missouri statutory scheme, the
Attorney General is not the only party entitled to enforce” the
statute because it “provides for a private right of action”).15 In
accordance with the Fifth Circuit’s opinion in Davis, we hold
that the fact that the SEC is not the sole enforcer of the securi-
ties laws does not deprive it of creditor status.
To hold otherwise “would be contrary to legislative intent.”
Maio, 176 B.R. at 172. Congress created an express cause of
action for violations of section 17(a) of the 1933 Act, section
10(b) of the 1934 Act, and Rule 10b-5 promulgated thereun-
der, but it did so only for the SEC, not for private parties. See
15 U.S.C. § 77t(b) (expressly creating a cause of action for
the SEC under the 1933 Act); id. § 78u(d)(1) (expressly creat-
ing a cause of action for the SEC under the 1934 Act and
rules promulgated thereunder). And, although courts have
implied a private cause of action under section 10(b) of the
1934 Act and Rule 10b-5, see Herman & MacLean, 459 U.S.
at 380, they have not done so under section 17(a) of the 1933
Act, see Puchall, 823 F.2d at 1353-58. By creating an express
cause of action only for the SEC under these sections and by
implicitly precluding a private cause of action under section
17(a) of the 1933 Act, Congress evinced an intent not to leave
enforcement of the securities laws to private parties.
15
Davis distinguished Cannon as a case in which:
the Attorney General of Missouri lacked standing to object to the
discharge of debts owed by the debtor to eight individuals under
the Missouri Merchandising Practicing Act because the Act did
not grant him authority to sue on behalf of private individuals in
a private action to seek the restitution payments; rather, the Attor-
ney General could only seek an injunction on behalf of the state
itself prohibiting the underlying unlawful practice.
Davis, 194 F.3d at 576. That distinction holds here as well, as the SEC,
like the Administratrix in Davis, is not limited to injunctive relief.
IN RE: SHERMAN 7913
[3] To hold that, nonetheless, the SEC has lesser status in
bankruptcy proceedings when private enforcement is permit-
ted would both reverse Congress’s assignment of basic
enforcement authority to the SEC and “unduly hinder enforce-
ment of the Securities Act.” Maio, 176 B.R. at 172. That pri-
vate parties may have been able to bring actions seeking
payment of some or all of the money at issue in the disgorge-
ment judgment should not affect the SEC’s ability to enforce
the disgorgement order that it did obtain. Otherwise, the ulti-
mate enforcement of securities laws would depend, in part, on
potential action by private parties, as only private parties to
securities actions could have creditor status in bankruptcy,
participate in distribution of the estate, and file nondischarge
actions. Yet, the decided congressional preference was for
SEC enforcement of securities laws. Private parties may not
always have the incentive or financial wherewithal to enforce
those laws, and can only do so to the extent that they can
recover for their own losses. See DCD Programs, Ltd. v.
Leighton, 90 F.3d 1442, 1446 (9th Cir. 1996). We therefore
hold that the fact that the SEC is not the sole enforcer of the
securities laws does not deprive it of creditor status.
[4] Nor does it matter to the SEC’s status as a creditor that
the Receiver may have an enforceable interest as well in the
disgorgement judgment. That judgment does not make clear
to whom the money at issue is to be paid. Even if the Receiver
could enforce the disgorgement judgment on the ground that
he was the intended recipient of the funds at issue, the Receiv-
er’s right to enforce the judgment should not strip the SEC of
its right to do so. We agree with the Bankruptcy Appellate
Panel of the Ninth Circuit’s reasoning in Cross:
As the chief enforcer of the securities laws, the
[SEC] should not have to depend on the Receiver to
enforce its judgments. In some cases, limited funds
in the receivership estate might actually prevent the
Receiver from doing so. This result, however, con-
flicts with the Commission’s role as a statutory
7914 IN RE: SHERMAN
guardian charged with safeguarding the public inter-
est. In addition, any costs incurred by the receiver-
ship estate in connection with enforcing the
Disgorgement Judgment would reduce recovery to
the defrauded investors in this case, whereas allow-
ing the Commission to proceed preserves resources.
218 B.R. at 79.
Second, while Nathanson stated, vaguely, that “a back pay
order is a command to pay an amount owed the Board as
agent for the injured employees,” 344 U.S. at 27 (emphasis
added), the fact that the disgorgement order in the present
case is not paid to the SEC, even in the first instance, does not
affect the SEC’s creditor status. As an initial matter, we do
not read the quoted statement in Nathanson as indicating that
the funds were literally to be paid to the Board. Earlier in the
opinion, the Court characterized the Board’s order by noting
that the Board “ordered the bankrupt to pay certain employees
back pay.” Id. at 26 (emphasis added). Furthermore, the
underlying Board order at issue in Nathanson stated that the
respondent companies were to “make [the discriminatees]
whole for any loss of pay . . . by payment to each of them of
a sum of money.” In re Hill Transp. Co., 75 N.L.R.B. 1203,
1216 (1948) (emphasis added).16 Thus, Nathanson could not
have meant that the Board had creditor status because pay-
ment was actually to be deposited with the Board, as the order
in question did not so require. It must have meant merely that
16
The National Labor Relations Board Compliance Manual in effect
today requires that, absent exceptional circumstances, respondents pay
injured employees by issuing them a check and sending the check to the
Board for delivery, or by directly paying the discriminatees. See NAT’L
LABOR RELATIONS BOARD, CASEHANDLING MANUAL (PART THREE), COMPLI-
ANCE PROCEEDINGS §§ 10635.1-.4 (1993), available at http://www.nlrb.gov/
nlrb/legal/manuals/chm3-11.pdf (describing the usual payment proce-
dures); id. §§ 10640.1-.2 (describing the circumstances in which payment
is made to the Board).
IN RE: SHERMAN 7915
the back pay order was to be considered, for purposes of the
Bankruptcy Act, as an “amount owed the Board.”
Moreover, even if the Court in Nathanson did assume that
the payment was to be made to the Board in the first instance,
we do not think creditor status could turn on that circum-
stance. Whether a governmental agency initially collects a
back pay award for distribution to the directly affected indi-
viduals or, instead, simply obtains in its name an equitable
order requiring payments directly to private individuals does
not in any meaningful way affect the agency’s interest in the
money in question. In either instance, the authority to enforce
the order to make payment of funds resides in the holder of
the judgment — in Nathanson, the Board, here, the SEC. In
either instance, the agency does not end up with the funds, but
assures that affected individuals are compensated. And in
either event, the agency has an “enforceable obligation” to
require the debtor to pay money, Johnson, 501 U.S. at 83, the
sine qua non of creditor status.
[5] Thus, the fact that the disgorgement judgment did not
order that Sherman deposit the money at issue with the SEC
does not affect the SEC’s creditor status. Cf. Cross, 218 B.R.
at 79 (“The Receiver’s role as depository [for disgorged
funds] . . . did not deprive the [SEC] of creditor status [for
purposes of a § 523 dischargeability action related to a disgor-
gement judgment].”)17
[6] We conclude that the SEC is a “creditor” in the present
case, as that term is used by the Bankruptcy Code, unless the
17
Cannon did accord significance to its understanding that in Nathan-
son, the money was to be passed through the agency. See Cannon, 741
F.2d at 1142 (holding that the state of Missouri was not a creditor under
the statute at issue and distinguishing Nathanson by stating that in contrast
to Nathanson, “[i]n this case the state court specifically ordered restitution
be made to the individuals”). However, as noted, Cannon involved a dif-
ferent statutory scheme than the one at issue here, and also, in our view,
did not properly understand Nathanson.
7916 IN RE: SHERMAN
Agreement extinguished its interest in the disgorgement judg-
ment, a consideration to which we now turn.
B. Whether the Agreement Extinguished the SEC’s
Rights
We conclude that the Agreement, entered into after the
bankruptcy court denied the SEC’s dismissal motion, did not
extinguish the SEC’s right to enforce the disgorgement judg-
ment. First, the Receiver did not purport to settle the SEC’s
claim. Second, the Receiver and the SEC are independent
entities, and the Receiver did not have the authority to com-
promise the SEC’s claim. Third, the rights at issue in the
Agreement are different from the rights at issue in the disgor-
gement judgment.
[7] As to the first point, the Receiver did not purport to set-
tle the SEC’s claim with respect to the disgorgement judg-
ment. Although the Agreement was reached while the SEC’s
appeal of its motion to dismiss was pending, the SEC was not
a party to the Agreement. Only Sherman and the Receiver
were parties. In addition, the Agreement stated that “[e]ach of
the Parties to this Agreement acknowledges that no other
party, nor any agent or attorney of any other party, has made
any promise, representation, inducement or warranty whatso-
ever, express or implied, which is not expressly contained in
this Agreement.” The SEC thus never itself relinquished its
rights to enforce the disgorgement judgment or to pursue its
motion to dismiss the bankruptcy petition, and the Agreement
so recognized.
Moreover, the only pending action addressed in the Agree-
ment was the Receiver’s nondischarge action. The stipulation
filed pursuant to the Agreement noted that Sherman’s pay-
ments would be “in full and final settlement of [the Receiv-
er’s] claims against Defendant as set forth in the [Receiver’s
nondischarge action].” The SEC’s disgorgement judgment
was not at issue in the nondischarge action. Instead, the non-
IN RE: SHERMAN 7917
discharge action involved only a separate, unadjudicated
claim, albeit for the same money at issue in the disgorgement
judgment: The stipulation stated that “the Receiver has
asserted a claim against Defendant for $581,313.43 plus inter-
est for attorneys’ fees Defendant received as purported
advances against an anticipated contingent fee (the ‘Disgorge-
ment Claim’),” and noted that the Receiver’s nondischarge
action was based on the “Contempt Judgment and the Disgor-
gement Claim.” (emphasis added). The SEC’s pending appeal
of the bankruptcy court’s denial of its motion to dismiss is not
mentioned in the stipulation or in the Agreement, nor is the
disgorgement judgment in favor of the SEC.18 Thus, the
Receiver did not purport to compromise the disgorgement
judgment entered in favor of the SEC.
[8] As to the second point, the Receiver had no authority
to compromise claims of the SEC. True, the Receiver was
appointed pursuant to the SEC’s motion, but the Receiver’s
authority is circumscribed by the order appointing him. That
order makes clear that he is to marshal the assets of the
receivership estates and can bring actions to do so, but it does
not give him authority to compromise judgments in favor of
the SEC or otherwise act on behalf of the agency. Thus, the
Receiver did not have the authority to settle the SEC’s claims
against Sherman.
[9] Finally, as to the third point, the rights at issue in the
Agreement were not the same as the rights at issue in the
SEC’s disgorgement judgment, and the latter rights were not
fully extinguished when the former rights were. The SEC and
the Receiver played different roles with respect to the money
18
While the stipulation filed pursuant to the Agreement states that Sher-
man “agree[d] and stipulate[d] that the Contempt Judgment and Disgorge-
ment Claim are nondischargeable pursuant to 11 U.S.C. § 523(a),” this
stipulation was “for the sole purposes of the Settlement Agreement.” The
SEC, therefore, may not — and has not attempted to — prevail on the the-
ory that the debts have been deemed nondischargeable.
7918 IN RE: SHERMAN
at issue in the disgorgement judgment and had interests in the
money predicated on separate legal theories. The Receiver’s
claim for this money stemmed from his role as the collector
of the assets of the corporations and was premised on two
independent theories for collecting the money: (1) the
Receiver was entitled to the money under the terms of the
contract Sherman and the Oxford companies entered into for
Sherman’s representation in the contingency suits; and (2) the
Receiver was entitled to the money under the California Rules
of Professional Conduct, which state that attorneys shall
“[p]romptly pay or deliver, as requested by the client, any
funds . . . in the possession of the [attorney] which the client
is entitled to receive.” CAL. RULES OF PROF’L CONDUCT R. 4-
100(B)(4), available at http://www.calbar.ca.gov/calbar/pdfs/
ethics/2006_Rules-Prof-Conduct.pdf.
In contrast, the SEC’s claim to this money stemmed from
its role as the public enforcer of the federal securities laws
and was obtained under a Colello theory. Under Colello, so
long as Sherman retained some of the funds fraudulently
obtained by his clients as a deposit on possible future fees, the
SEC retained an interest in requiring that he disgorge those
funds. Such a disgorgement would further the SEC’s goals of
deterring securities laws violations and compensating
defrauded investors. See Colello, 139 F.3d at 677. That the
Receiver recovered some of the money at issue in the disgor-
gement judgment to settle his contract and ethics claims does
not mean that the SEC’s securities law claim was extinguished.19
19
We note that while the Agreement did not extinguish the SEC’s inter-
est in the disgorgement judgment, it may have affected the amount of
money that the SEC could require Sherman to pay. Under the federal
securities laws, the SEC is entitled to seek the disgorgement of ill-gotten
gains only for the purpose of preventing unjust enrichment, not as a pen-
alty. See Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993) (holding that the
disgorgement judgment is not “a fine levied against the petitioners as pun-
ishment for their conduct” but rather “is the means by which the petition-
ers are required to remedy the unjust enrichment”). It follows that the
amount of money Sherman can be required to pay must be offset by any
IN RE: SHERMAN 7919
[10] For all of these reasons, the Agreement did not entirely
extinguish the SEC’s right to enforce the disgorgement judg-
ment. The SEC is therefore a creditor under the Bankruptcy
Code with respect to the disgorgement judgment.
[11] As a creditor, the SEC has Article III standing to pur-
sue the dismissal of the Shermans’ bankruptcy petition
because, given that status, it satisfies all three prongs of the
Article III standing test. First, the SEC suffered the requisite
“injury in fact” because the pendency of the bankruptcy
action did affect the SEC’s ability to enforce its judgments: If
the bankruptcy petition was not dismissed, Sherman’s debt
resulting from the SEC’s disgorgement judgment, like all of
his other debts, might be discharged. Second, the SEC’s
injury is “fairly traceable” to the Shermans’ bankruptcy peti-
tion, City of Sausalito, 386 F.3d at 1197 (internal quotation
marks omitted), because the filing of the bankruptcy petition
made it likely that the disgorgement judgment would not be
fully paid. Third, “it is likely, as opposed to merely specula-
tive” that the SEC’s injury will be redressed by a favorable
decision, as such a result would mean that the disgorgement
judgment will not be discharged in bankruptcy. Id. (internal
quotation marks omitted).
III. Mootness20
amount already disgorged pursuant to the Agreement. See Cross, 218 B.R.
at 80 (“Both the Receiver and the Commission are entitled to only a single
non-duplicative recovery.”); see also SEC v. Penn. Cent. Co., 425 F. Supp.
593, 599 (E.D. Pa. 1976) (holding that when the SEC seeks disgorgement
and some money has been disgorged pursuant to a private law suit involv-
ing the same allegations, the amount paid in the private law suit must off-
set the judgment for disgorgement sought by the SEC); cf. Litton Indus.,
Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1076 (S.D.N.Y.
1990) (“[O]nce ill-gotten gains have been disgorged to the SEC, there
remains no unjust enrichment and, therefore, no basis for further disgorge-
ment in a private action.”).
20
The Shermans raise the mootness argument for the first time in their
reply brief filed with this court. Although we ordinarily do not address
7920 IN RE: SHERMAN
The Shermans argue that even if the SEC did have stand-
ing, this appeal is moot because the bankruptcy court has
already entered an order granting them a discharge under 11
U.S.C. § 727. We conclude, however, that although the bank-
ruptcy court retained jurisdiction to enter an order granting
the discharge while the SEC appealed the denial of its motion
to dismiss, this appeal is not moot because the entry of a dis-
charge order alone did not terminate the Shermans’ bank-
ruptcy petition, and a grant of the dismissal order could have
triggered reconsideration of the discharge order.
[12] Federal Rule of Bankruptcy Procedure 4004 deter-
mines when a bankruptcy court may grant a discharge under
11 U.S.C. § 727. The version of Rule 4004(c) in effect prior
to the Shermans’ discharge stated that on the “expiration of
the time fixed for filing a complaint objecting to discharge
and the time fixed for filing a motion to dismiss the case
under Rule 1017(e) [which governs motions to dismiss under
§ 707(b)], the court shall forthwith grant the discharge,”
unless one of several conditions exists, none of which are
present in the instant case. FED. R. BANKR. P. 4004(c) (2000)
(amended 2002).21
Rule 4004(a) states that a “complaint objecting to the debt-
or’s discharge under § 727(a) of the Code shall be filed no
later than 60 days after the first date set for the meeting of
creditors under § 341(a).” FED. R. BANKR. P. § 4004(a). It
appears that the first date set for the meeting of creditors was
March 25, 2002. The expiration of the time fixed for filing a
issues raised for the first time in reply briefs, Smith v. Marsh, 194 F.3d
1045, 1052 (9th Cir. 1999), mootness is a jurisdictional issue under Article
III and one we therefore must resolve, see Dittman v. California, 191 F.3d
1020, 1025 (9th Cir. 1999).
21
Rule 4004(c) was amended in 2002 to add as an exception that a
motion to dismiss under § 707(a) is pending. See FED. R. BANKR. P.
4004(c) (Supp. II 2002). That amendment was not effective, however,
until December 1, 2002, after the purported discharge in this case. See id.
IN RE: SHERMAN 7921
complaint was therefore May 24, 2002. See FED. R. BANKR. P.
9006(a) (describing rules for time computations).
Because none of the conditions listed in Rule 4004(c)
applied to the present case, Rule 4004(c) called for the bank-
ruptcy court to grant the discharge “forthwith” — that is, soon
after May 24, 2002, the end of the sixty-day objection period.
At that time, the SEC’s motion to dismiss was pending in the
bankruptcy court. The bankruptcy court did not, however,
enter a formal order granting the discharge until October 1,
2002. By that date, the bankruptcy court had denied the SEC’s
motion to dismiss, the SEC had filed a notice of appeal, and
the appeal of the denial of the motion to dismiss was pending
in the district court. No party objected to the delay in issuing
the discharge order.
The Shermans argue that although the bankruptcy court did
not enter a formal order granting the discharge until October
1, 2002, we should deem the discharge to have been entered
on the first business day following the date the sixty-day
period expired, citing Ross v. Mitchell (In re Dietz), 914 F.2d
161 (9th Cir. 1990), for this proposition. As the sixty-day
period expired on May 24, 2002, the discharge, using that
approach, would be deemed entered on May 28, 2002.22 Cit-
ing In re Morgan, 290 B.R. 246 (Bankr. D. Del. 2003), the
Shermans argue that this case is moot because the discharge
was deemed granted while the motion to dismiss was pending
in bankruptcy court, prior to the date that the SEC filed its
notice of appeal of the denial of the motion to dismiss.
While the argument is creative, we cannot accept it. The
statute says nothing about an automatic discharge, nor does it
specify a date on which a discharge is “deemed” to occur,
without an order so stating. Where, as here, a motion that
would obviate the viability of a discharge order was pending
22
May 24, 2002, was a Friday, and May 27, 2002, was Memorial Day,
so the next business day after May 24, 2002, was May 28, 2002.
7922 IN RE: SHERMAN
when the sixty-day period expired, there was good reason for
the bankruptcy court to refrain from issuing a discharge order.
Moreover, Dietz did not hold that the discharge must be
deemed to have been entered upon the expiration of the sixty-
day period. Rather, Dietz held that a bankruptcy court may
deem the discharge to have been entered at that time, as doing
so is ordinarily “consistent[ ] with the spirit of the bankruptcy
rules.” 914 F.2d at 164. In Dietz, the bankruptcy court itself
retroactively deemed the discharge to have been entered upon
the expiration of the sixty-day period, so that it could cure a
statutory gap that would have otherwise precluded a motion
to revoke the discharge; there was no other later order that
purported to be an order of discharge. See id. We upheld the
bankruptcy court’s discretion to deem the discharge to have
been entered upon the expiration of the sixty-day period. See
id.
In the present case, in contrast, the record does not reveal
that the bankruptcy court ever deemed the discharge to have
been entered at any time prior to the formal order granting the
discharge, issued on October 1, 2002. Indeed, there would
have been no reason to enter the October 1 order if the bank-
ruptcy court believed that there had been a “deemed” dis-
charge months earlier. We therefore consider the discharge
entered on October 1, 2002, not earlier.
[13] The discharge order was entered, then, after the SEC
filed its notice of appeal. We conclude that the bankruptcy
court nonetheless retained jurisdiction to enter the discharge
order but that under the particular facts of this case, the appeal
is not moot.
The timely filing of a notice of appeal to either a district
court or bankruptcy appellate panel will typically divest a
bankruptcy court of jurisdiction “over those aspects of the
case involved in the appeal.” See Padilla, 222 F.3d at 1190;
10 COLLIER ON BANKRUPTCY ¶ 8001.04 (15th ed. 2006). The
bankruptcy court retains jurisdiction over all other matters
IN RE: SHERMAN 7923
that it must undertake “to implement or enforce the judgment
or order,” although it “may not alter or expand upon the judg-
ment.” See Padilla, 222 F.3d at 1190. If a party wants to stay
all of the proceedings in bankruptcy court while an appeal is
pending, it must file a motion for a stay. See FED. R. BANKR.
P. 8005 (instructing the appealing party to file “[a] motion for
a stay of the judgment, order, or decree of a bankruptcy judge
. . . pending appeal”).23 In the instant case, the SEC did not
obtain such a stay. As a result, the bankruptcy court retained
jurisdiction to enter the discharge order; the only matter over
which it lacked jurisdiction was the motion to dismiss — the
very order being appealed. See In re Combined Metals Reduc-
tion Co., 557 F.2d 179, 201-03 (9th Cir. 1977) (holding that
the lower court lacked jurisdiction to vacate an order that had
been appealed once the notice of appeal had been filed, but
also recognizing that the bankruptcy court, absent a stay,
could continue to exercise jurisdiction over other proceedings
related to the petition).24
23
The role of the stay is further underscored by 28 U.S.C.
§ 158(d)(2)(D). Under that statutory provision,
[a]n appeal under this paragraph [to the court of appeals] does not
stay any proceedings of the bankruptcy court, the district court,
or the bankruptcy appellate panel from which the appeal is taken,
unless the respective bankruptcy court, district court, or bank-
ruptcy appellate panel, or the court of appeals in which the appeal
is pending, issues a stay of such proceeding pending the appeal.
Section 158(d)(2)(D) was not enacted until 2005 and, therefore, does not
apply to the Shermans’ petition.
24
In contrast, in Padilla, we held that the bankruptcy court lacked juris-
diction to enter the discharge order while the appeal was pending, thus
rendering the discharge order void and the appeal not moot. 222 F.3d at
1189. The appeal in Padilla, however, stemmed from the bankruptcy
court’s decision to grant a motion to dismiss. Id. at 1188. Such an order
is a final one. Id.; Zolg v. Kelly (In re Kelly), 841 F.2d 908, 911 (9th Cir.
1988). A decision to deny a motion to dismiss, on the other hand, is an
interlocutory order. See New Life Health Ctr. Co. v. IRS (In re New Life
Health Ctr. Co.), 102 F.3d 428, 428 (9th Cir. 1996); Dunkley v. Rega
Props., Ltd. (In re Rega Props., Ltd.), 894 F.2d 1136, 1138-39 (9th Cir.
7924 IN RE: SHERMAN
Despite this set of circumstances, this appeal is not moot.
A bankruptcy court proceeding is not moot even after a dis-
charge order has been entered so long as “the appellate court
[can] fashion relief that is both effective and equitable.” See
Spirtos v. Moreno (In re Spirtos), 992 F.3d 1004, 1006 (9th
Cir. 1993). In determining whether effective and equitable
relief is available, we consider first, (1) whether both parties
are still before the court, and (2) whether they were both
aware of the pending appeal. See id. at 1007 (holding that it
could address the merits on appeal because both parties were
part of the appeal, and because it was the debtor who “filed
a notice of appeal to this court long after the assets [at issue]
were distributed”); Salomon v. Logan (In re Int’l Envtl.
Dynamics, Inc.), 718 F.2d 322, 326 (9th Cir. 1983); Credit
Alliance Corp. v. Dunning-Ray Ins. Agency, Inc. (In re
1990). The appeal from the bankruptcy court’s final order divested the
bankruptcy court of its jurisdiction to enter the discharge order, see
Padilla, 222 F.3d at 1189, but that same result is not achieved when an
interlocutory order is appealed absent a stay of the proceedings.
We note that the interlocutory nature of the bankruptcy court’s order
does not affect our jurisdiction to hear this appeal. Although a court of
appeals cannot directly review a bankruptcy court’s interlocutory order,
see 28 U.S.C. § 158(a), we have jurisdiction to hear the instant appeal
under 28 U.S.C. § 1291, which gives “courts of appeals . . . jurisdiction
of appeals from all final decisions of the district courts of the United
States.” This is true, even when the district court is acting in its bank-
ruptcy appellate capacity. See Conn. Nat’l Bank v. Germain, 503 U.S. 249,
253-54 (1992) (rejecting the argument that it could not rely on § 1291 as
its jurisdictional basis when reviewing “orders issued by district courts sit-
ting pursuant to § 158(a) as courts of appeals in bankruptcy,” and explain-
ing that “[§] 1291 confers jurisdiction over appeals from ‘final decisions
of the district courts’ acting in any capacity”); Vylene Enters., Inc. v.
Naugles, Inc. (In re Vylene Enters., Inc.), 968 F.2d 887, 891 (9th Cir.
1992) (“Section 1291 affords us jurisdiction over final orders of the dis-
trict court, whether the district court rendered the order in its bankruptcy
trial or bankruptcy appellate capacity.” (citing to Germain, 503 U.S. at
253)). Here, the district court’s decision to reverse the bankruptcy court’s
denial of the SEC’s motion to dismiss is undeniably a final one, a point
that neither party disputes.
IN RE: SHERMAN 7925
Blumer), 66 B.R. 109, 113 (B.A.P. 9th Cir. 1986). Here, both
the SEC and the Shermans remain parties to the appeal and
both parties knew that the motion to dismiss was still being
litigated. In fact, like the debtor in Spirtos, the Shermans filed
the notice of appeal before this court.
We next consider whether there would be the possibility of
effective relief were we to reverse the bankruptcy court’s
decision. See Spirtos, 992 F.3d 1004, 1006. Here, such relief
was a possibility because the entry of a discharge order alone
does not irrevocably terminate bankruptcy proceedings. See
Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th
Cir. 1998) (“A case is not closed simply because a discharge
of the debtor has been granted.”); In re Myatt, 101 B.R. 197,
199 (Bankr. E.D. Cal. 1989). Instead, a Chapter 7 bankruptcy
proceeding is only officially closed after a final report has
been filed and the estate has been certified as “fully adminis-
tered.” See 11 U.S.C. § 350(a); FED. R. BANKR. P. 5009. The
Shermans’ bankruptcy petition, therefore, valid discharge
order notwithstanding, remained open during the appeal and
subject to the jurisdiction of this court. Contra Trone v. Rob-
erts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793,
797 (9th Cir. 1981) (holding that a case was moot, but only
because the reorganization plans had been implemented to the
point where it was impossible to fashion effective relief).
Were we to affirm the district court and grant the SEC’s
motion to dismiss the Shermans’ petition, all recourse by the
SEC would not have been foreclosed: The agency could have
relied, for example, on Rule 60(b) of the Federal Rules of
Civil Procedure to obtain relief from the bankruptcy court’s
discharge order on the ground that that court’s denial of the
motion to dismiss was in error. See FED. R. BANKR. P. 9024
(allowing a party to use Rule 60 of the Federal Rules of Civil
Procedure to apply for relief from a judgment or order).25
25
In particular, in this hypothetical scenario, the SEC could move for
relief under either Rule 60(b)(5) — which grants relief, in part, because
7926 IN RE: SHERMAN
[14] In short, while the bankruptcy court retained jurisdic-
tion to enter the discharge order on October 1, 2002, this case
is not moot because entry of the discharge order alone did not
irrevocably terminate the bankruptcy proceedings, thus leav-
ing us able to fashion effective and equitable relief.
IV. Dismissal “for Cause”
This multitude of preliminaries over, we now reach the
merits of the appeal: Should the SEC’s motion to dismiss the
petition “for cause” under 11 U.S.C. § 707(a) have been
granted, as the district court maintained, or not, as the bank-
ruptcy court decided?26 We hold that the bankruptcy court did
not err in denying the SEC’s motion to dismiss the bankruptcy
petition. In so holding, we do not suggest that no vehicles
were available to the SEC to ensure that Sherman paid the
contempt and disgorgement judgment debts or to sanction
Sherman for the behavior that the district court found repre-
hensible. To the contrary, our holding is that the SEC and the
district court chose the wrong vehicle — § 707(a) — for
ensuring that Sherman paid the contempt and disgorgement
judgment debts and did not misuse the bankruptcy process.
“it is no longer equitable that the judgment should have prospective appli-
cation” — or Rule 60(b)(6) — which allows a party to request relief for
“any other reason justifying relief from the operation of the judgment.”
See FED. R. CIV. P. 60(b). See, e.g., Walsh v. Bracken (In re Davitch), 336
B.R. 241, 254-55 (Bankr. W.D. Pa. 2006) (vacating a discharge order by
relying on Rule 60(b)(6)); Fonner v. Overdorf (In re Fonner), 262 B.R.
350, 356 (Bankr. W.D. Pa. 2001) (using Rule 60(b)(6) to modify a dis-
charge order where “[f]ailure to do so would serve an unconscionable
injustice under the circumstances presented here”).
26
The SEC’s sole argument regarding the merits is that the petition
should be dismissed “for cause” under § 707(a). The bankruptcy court
declined to dismiss the petition; it was the district court on appeal that
ordered dismissal. We therefore do not reach the question of whether the
bankruptcy court in this case would have had inherent authority to dismiss
the petition as filed in bad faith. See Padilla, 222 F.3d at 1193 n.6; see
also Chambers v. NASCO, Inc., 501 U.S. 32, 43-46 (1991); Knupfer v.
Lindblade (In re Dyer), 322 F.3d 1178, 1196-97 (9th Cir. 2003).
IN RE: SHERMAN 7927
We review the district court’s decision on appeal from a
bankruptcy court de novo. See Preblich v. Battley, 181 F.3d
1048, 1051 (9th Cir. 1999). We review the bankruptcy court’s
conclusions of law de novo. See Hanf v. Summers (In re Sum-
mers), 332 F.3d 1240, 1242 (9th Cir. 2003). Thus, we review
de novo whether a type of misconduct can constitute “cause”
under § 707(a). Cf. Padilla, 222 F.3d at 1190-91 (“In essence,
we review de novo whether the bankruptcy court erred in con-
cluding that bad faith is a ground for dismissal under
§ 707(a).”). Having done so, we review a bankruptcy court’s
decision to grant or deny a motion to dismiss for misconduct
that constitutes “cause” for abuse of discretion. See Price v.
U.S. Tr. (In re Price), 353 F.3d 1135, 1138 (9th Cir. 2004)
(holding, in a case addressing § 707(b), that “[w]e review a
bankruptcy court’s decision to dismiss a case for abuse of dis-
cretion”).
[15] Under § 707(a), a “court may dismiss a case under this
chapter only after notice and hearing and only for cause,
including” three enumerated causes. 11 U.S.C. § 707(a); see
also Padilla, 222 F.3d at 1193 (holding that “cause” rather
than “bad faith” is the proper standard for evaluating a motion
to dismiss under § 707(a)). No party contends that any of the
three “causes” listed in § 707(a) apply to the present case.27
27
Section 707(a) provides, in full:
(a) The court may dismiss a case under this chapter only after
notice and a hearing and only for cause, including —
(1) unreasonable delay by the debtor that is prejudicial to
creditors;
(2) nonpayment of any fees or charges required under
chapter 123 of title 28; and
(3) failure of the debtor in a voluntary case to file, within
fifteen days or such additional time as the court may allow
after the filing of the petition commencing such case, the
information required by paragraph (1) of section 521, but
only on a motion by the United States trustee.
11 U.S.C. § 707(a).
7928 IN RE: SHERMAN
[16] That being so, Padilla prescribes a two-part inquiry:
First, we must consider whether the circumstances asserted to
constitute “cause” are “contemplated by any specific Code
provision applicable to Chapter 7 petitions.” Id. If the asserted
“cause” is contemplated by a specific Code provision, then it
does not constitute “cause” under § 707(a). See id. at 1194. If,
however, the asserted “cause” is not contemplated by a spe-
cific Code provision, then we must further consider whether
the circumstances asserted otherwise meet the criteria for
“cause” for discharge under § 707(a). See id. at 1193-94.
The SEC alleges that the Shermans engaged in three inter-
related types of misconduct that together constitute “cause.”
First, the SEC alleges that “the Shermans used the bankruptcy
as a refuge from the district court’s jurisdiction, and to thwart
the Commission’s efforts to obtain a disgorgement judgment.”
Second, the SEC alleges that the Shermans used the bank-
ruptcy as a “ ‘scorched earth’ tactic” to disfavor the SEC.28
Third, the SEC alleges that the Shermans “deliberately exag-
gerated their liabilities and expenses in order to create the
misleading impression that they were in dire financial need of
bankruptcy relief.”
The only sensible way to approach the first part of the
Padilla inquiry is to examine whether other specific Code
28
The SEC does not explain what it means by “ ‘scorched earth’ tactic.”
It is likely the SEC used this vague term to bring the Shermans’ conduct
within the reach of Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829
(8th Cir. 1994), which suggests that “using bankruptcy as a ‘scorched
earth’ tactic against a diligent creditor” can constitute “cause” for dis-
missal under § 707(a). Id. at 832. We assume that when the SEC states
that the Shermans used bankruptcy as a “ ‘scorched earth’ tactic,” it means
that the Shermans structured their financial transactions so as to pay debts
owed to other creditors to the maximum extent possible but to avoid pay-
ing debts owed to the SEC. In particular, the SEC intimates that the Sher-
mans depleted their assets so that no assets were left for the SEC once they
filed for bankruptcy. For convenience, we will refer to this preference
prong of the SEC’s argument as the “scorched earth” theory of cause, even
though the terminology is not particularly descriptive.
IN RE: SHERMAN 7929
provisions address the type of misconduct alleged, not
whether other specific provisions covering the actual miscon-
duct alleged would give rise to relief under the Code. If
another Code provision addresses the general type of miscon-
duct but does not cover the actual misconduct, that omission
is best understood as demonstrating that Congress did not
mean to reach the actual misconduct at issue. Any other
approach would preclude bankruptcy relief in circumstances
in which all indications suggest that Congress made a consid-
ered decision about the coverage of the Code and intended to
provide bankruptcy relief.
We assume, but do not decide, that the record substantiates
that the Shermans engaged in the three types of misconduct
the SEC alleges. So assuming, we hold that the asserted mis-
conduct cannot constitute “cause” under § 707(a). These three
types of misconduct are each contemplated by a specific
Bankruptcy Code provision, and therefore, under Padilla,
cannot constitute “cause” for § 707(a) purposes.
[17] First, § 362 addresses misconduct related to using
bankruptcy as a refuge from the jurisdiction of other courts.
Section 362(a) provides that the filing of a bankruptcy peti-
tion automatically operates as a stay of judicial actions, except
for actions enumerated in § 362(b). 11 U.S.C. § 362(a). Sec-
tion 362(b) excepts several types of judicial actions from
imposition of the automatic stay, id. § 362(b), and § 362(d)
provides a mechanism for “part[ies] in interest” to challenge
the imposition of the stay in several circumstances, including
“for cause,” id. § 362(d)(1). The Bankruptcy Code therefore
accounts for the fact it may not always be appropriate to per-
mit debtors to take advantage of the automatic stay.29 Thus, to
29
Section 362(d)(1) provides:
(d) On request of a party in interest and after notice and a hear-
ing, the court shall grant relief from the stay provided under sub-
section (a) of this section, such as by terminating, annulling,
modifying, or conditioning such stay —
7930 IN RE: SHERMAN
the extent that debtors like the Shermans use bankruptcy to
seek refuge from another court, § 362(b) and (d) describe the
circumstances in which such conduct is impermissible, which
parties may challenge such conduct, and the appropriate rem-
edy.
There is nothing problematic about an individual filing a
legitimate bankruptcy petition with the intention of taking
advantage of the automatic stay provisions. Indeed, the legis-
lative history of the Bankruptcy Code makes clear that one of
the purposes of the automatic stay is to give a debtor a
“breathing spell from his creditors” during which the debtor
can “attempt a repayment . . . plan, or simply . . . be relieved
of the financial pressures that drove him into bankruptcy.”
H.R. REP. NO. 95-595, at 340 (1977), as reprinted in 1978
U.S.C.C.A.N. 5963, 6296-97 (observing that another purpose
of the automatic stay is to protect creditors by providing “an
orderly liquidation procedure under which all creditors are
treated equally” rather than “a race of diligence by creditors
for the debtor’s assets”); see also Stringer v. Huet (In re
Stringer), 847 F.2d 549, 551-52 (9th Cir. 1988) (citing this
legislative history and noting the purposes of the automatic
stay). While it is troubling to allow an individual filing an ille-
gitimate bankruptcy petition, such as one based on misrepre-
sentations, to take advantage of automatic stay provisions, the
viability of such a bankruptcy petition is addressed under the
provisions of the Bankruptcy Code that protect against illegit-
imate filings of petitions (such as § 727) and under the
“cause” provision of § 362(d)(1).
The remedy in the “cause” provision of § 362(d)(1) is a
considerably more direct way to deal with a debtor who is
(1) for cause, including the lack of adequate protection of
an interest in property of such party in interest . . . .
11 U.S.C. § 362(d)(1).
IN RE: SHERMAN 7931
improperly using bankruptcy as a refuge from the jurisdiction
of another court than the remedy in the “cause” provision of
§ 707(a). Preventing a debtor from taking advantage of the
stay is a remedy tailored to the problem of improper avoid-
ance of jurisdiction of another court. In contrast, § 707(a)’s
remedy — the dismissal of the bankruptcy petition altogether
— is too powerful a medicine for the problem at hand, as it
precludes adjudication of the bankruptcy even where there are
debts aside from pending litigation that exceed assets.
It is worth noting that in this case, any attempt to avoid
entirely the jurisdiction of the district court in the disgorge-
ment action did not work, precisely because of the operation
of § 362. The district court found the exception contained in
§ 362(b)(4) applicable and did adjudicate the disgorgement
motion to judgment. To now include an unsuccessful attempt
to avoid jurisdiction as an aspect of “cause” to dismiss the
bankruptcy petition altogether is to tinker with a complex stat-
utory scheme that specifies when — and how — to deal with
various kinds of debtor misconduct and, as the fate of the
automatic stay argument in this case indicates, is fully capable
of doing so. In contrast, were we to hold that the Shermans’
use of bankruptcy to avoid the jurisdiction of another court is
“cause” to dismiss the bankruptcy, we would be sanctioning
a readjustment of the finely wrought statutory scheme. See
Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1190 (9th
Cir. 2003) (describing Walls v. Wells Fargo Bank, 276 F.3d
502 (9th Cir. 2002), as “[n]oting that ‘it is not up to us to read
other remedies into the carefully articulated set of rights and
remedies set out in the Bankruptcy Code’ ” and “reject[ing]
Walls’ invitation to read § 105(a) as a catch-all private right
of action for the enforcement of other Bankruptcy Code pro-
visions” (quoting Walls, 276 F.3d at 507)).
[18] Second, § 547(b) addresses misconduct related to
using bankruptcy as what the SEC terms a “scorched earth”
tactic.30 Section 547(b) makes certain prepetition transfers of
30
In addition, § 727(a)(2) addresses some debtor conduct that might be
characterized as engaging in “scorched earth” tactics. Under § 727(a)(2),
7932 IN RE: SHERMAN
a debtor’s interest in property “avoid[able]” as a preference.
11 U.S.C. § 547(b). To be avoidable, such transfers must meet
several requirements, including that they were made “to or for
the benefit of a creditor,” and “on or within 90 days before the
date of the filing of the petition” or “between ninety days and
one year before the date of the filing of the petition, if such
creditor at the time of such transfer was an insider.”31 Id.
§ 547(b)(1), (4). The Bankruptcy Code thus “contemplates”
the notion that a debtor may favor some creditors over others
by making prepetition transfers, and describes the circum-
a bankruptcy court is to grant the debtor a discharge unless, inter alia, the
debtor transferred property “within one year before the date of the filing
of the petition,” “with intent to hinder, delay, or defraud a creditor.” 11
U.S.C. § 727(a)(2).
31
Section 547(b) provided in full:
(b) Except as provided in subsection (c) of this section, the
trustee may avoid any transfer of an interest of the debtor in prop-
erty —
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of
the petition; or
(B) between ninety days and one year before the date of
the filing of the petition, if such creditor at the time of
such transfer was an insider; and
(5) that enables such creditor to receive more than such
creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
extent provided by the provisions of this title.
11 U.S.C. § 547(b).
IN RE: SHERMAN 7933
stances in which such conduct is impermissible, which parties
may challenge such conduct, and the appropriate remedy for
the misconduct.
Ordinarily, an avoidance action under § 547 can be filed
only by a trustee, not a creditor. See id. § 547(b) (“[T]he
trustee may avoid any transfer of an interest of the debtor in
property . . . . ” (emphasis added)); Avalanche Mar., Ltd. v.
Parekh (In re Parmetex, Inc.), 199 F.3d 1029, 1031 (9th Cir.
1999) (holding that although “a trustee must generally file an
avoidance action under Chapter 7,” creditors may bring such
an action “where the trustee stipulated that the Creditors could
sue on his behalf and the bankruptcy court approved that stip-
ulation”). That a creditor cannot usually file an avoidance
action is not, however, inconsistent with the conclusion that
the Bankruptcy Code “contemplates” the “misconduct” of
debtors who use “scorched earth” tactics. To the contrary, that
restriction provides support for the notion that courts should
not allow other parties to seek similar relief under § 707(a),
as doing so would undermine Congress’s considered judg-
ment regarding who may seek such relief. Like the remedy
under § 362, the remedy under § 547 is tailored to deal with
a particular tactic, including, as in this instance, a debtor
attempting to use bankruptcy to hurt a particular, disfavored
creditor. If, therefore, the Shermans impermissibly engaged in
a so-called “scorched earth” tactic, then the appropriate vehi-
cle for dealing with such misconduct is § 547(b).
[19] Third, § 727(a)(4)(A) addresses misconduct related to
debtors’ misrepresentations of liabilities and expenses. Sec-
tion 727(a)(4)(A) states that “[t]he court shall grant the debtor
a discharge, unless . . . the debtor knowingly and fraudulently,
in or in connection with the case [ ] made a false oath or
account.” 11 U.S.C. § 727(a)(4)(A). This mechanism for deal-
ing with debtors who make misrepresentations describes the
circumstances in which such conduct is impermissible, which
parties may challenge such conduct, and the appropriate rem-
edy for the misconduct. In particular, the Bankruptcy Code
7934 IN RE: SHERMAN
imposes a mens rea element, indicating that Congress
intended to sanction only culpable misrepresentations. To the
extent, then, that the allegations of misstating liabilities and
expenses are true, the proper remedy is in the bankruptcy
court under § 727(a)(4)(A).
Notably, the SEC does not argue that there was any debt-
specific misconduct, which would, alone or in conjunction
with other misconduct, constitute “cause” under § 707(a) for
dismissal of the petition. Had the SEC made such an argu-
ment, we would need to decide whether § 523 of the Bank-
ruptcy Code, the section that makes specific debts
nondischargeable, “contemplated” such misconduct.32 See,
e.g., id. § 523(a)(2),33 (4),34 (6),35 (7);36 see also id.
32
In its brief to the district court in the appeal of the denial of the motion
to dismiss, the SEC stated that it believed that relief would have been
available under § 523 for the contempt judgment but not for the disgorge-
ment judgment.
33
In relevant part, § 523(a)(2) excepts from discharge debt:
(2) for money . . . obtained by —
(A) false pretenses, a false representation, or actual fraud,
other than a statement respecting the debtor’s or an insider’s
financial condition;
(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial con-
dition;
(iii) on which the creditor to whom the debtor is liable
for such money, property, services, or credit reasonably
relied; and
(iv) that the debtor caused to be made or published with
intent to deceive . . . .
11 U.S.C. § 523(a)(2)(A)-(B). It appears that in many cases in which the
SEC is attempting to ensure that a debtor in bankruptcy disgorges funds
as required by the securities laws, it does so by invoking § 523(a)(2). See
Cross, 218 B.R. at 78; Hodge, 216 B.R. at 933; Kane, 212 B.R. at 699.
IN RE: SHERMAN 7935
§ 523(a)(19) (Supp. II 2002).37
Unlike the cited cases, the present case involves a debtor who was not
found to have himself violated the securities laws and has not been alleged
to have committed other acts of fraud by the SEC. The SEC has indicated
that this distinction is the reason it did not file a nondischarge action.
Whether that distinction matters or whether, instead, § 523(a)(2) nonethe-
less applies to the present circumstances because the funds themselves
meet the statutory standard and Sherman was essentially a depository of
the funds, having no rightful claim to them, is a question we do not decide.
See Colello, 139 F.3d at 676-77.
34
Section 523(a)(4) excepts from discharge debt “for fraud or defalca-
tion while acting in a fiduciary capacity, embezzlement, or larceny.” 11
U.S.C. § 523(a)(4).
35
Section 523(a)(6) excepts from discharge debt “for willful and mali-
cious injury by the debtor to another entity or to the property of another
entity.” 11 U.S.C. § 523(a)(6).
36
Section 523(a)(7) excepts from discharge debt:
(7) to the extent such debt is for a fine, penalty, or forfeiture
payable to and for the benefit of a governmental unit, and is not
compensation for actual pecuniary loss, other than a tax penalty
—
(A) relating to a tax of a kind not specified in paragraph
(1) of this subsection; or
(B) imposed with respect to a transaction or event that
occurred before three years before the date of the filing of
the petition . . . .
11 U.S.C. § 523(a)(7).
37
Section 523(a)(19) excepted from discharge debt:
(19) that —
(A) is for —
(i) the violation of any of the Federal securities laws (as
that term is defined in section 3(a)(47) of the Securities
Exchange Act of 1934), 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 connec-
tion with the purchase or sale of any security; and
7936 IN RE: SHERMAN
[20] Thus, under the first part of the Padilla inquiry,
because other Code provisions contemplate (1) taking refuge
from the jurisdiction of another court; (2) engaging in a
“scorched earth” tactic against a particular creditor; and (3)
making misrepresentations in bankruptcy filings, we conclude
that there is no “cause” to dismiss the Shermans’ bankruptcy
petition because of any such behavior. To respect the complex
statutory scheme that Congress has created to deal with mal-
feasance associated with bankruptcy petitions, we are loath to
hold that a factor constitutes “cause” unless the Bankruptcy
Code regime is incapable of righting wrongs of the kind
alleged.
(B) results from —
(i) any judgment, order, consent order, or decree entered
in any Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor;
or
(iii) any court or administrative order for any damages,
fine, penalty, citation, restitutionary payment, disgorgement
payment, attorney fee, cost, or other payment owed by the
debtor.
11 U.S.C. § 523(a)(19) (Supp. II 2002). Section 523(a)(19) was added to
§ 523 by the Sarbanes-Oxley Act, passed on July 30, 2002. See Sarbanes-
Oxley Act of 2002, Pub. L. No. 107-204, § 803(3), 116 Stat. 745; see also
Smith v. Gibbons (In re Gibbons), 289 B.R. 588, 591-97 (Bankr. S.D.N.Y.
2003) (holding that § 523(a)(19) applies to all bankruptcies pending at the
time it was enacted), aff’d, 311 B.R. 402 (S.D.N.Y. 2004), aff’d, No. 04-
4617-BK, 2005 WL 3134156 (2d Cir. Nov. 21, 2005) (unpublished). Sec-
tion 523(a)(19) was amended slightly by the Bankruptcy Abuse Preven-
tion and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 1404(a),
119 Stat. 23.
The SEC has not argued that § 523(a)(19) applies to the contempt or
disgorgement judgments, and we therefore express no opinion on this mat-
ter. We note, however, that if it does apply, the SEC is not time-barred
from taking advantage of its protections. See infra note 37.
IN RE: SHERMAN 7937
Our holding hardly leaves the SEC unprotected, as the SEC
could have pursued — and did pursue — several vehicles for
protecting itself. In particular, the SEC was protected against
the use of bankruptcy to avoid the jurisdiction of another
court because, under § 362(b)(4), it was not subject to the
automatic stay. Further, the SEC could have sought to avoid
some of the Shermans’ prepetition transfers as preferences
had it been concerned that the Shermans had engaged in a
“scorched earth” tactic. In addition, the SEC could have tried
to protect itself against misrepresentations in the bankruptcy
petition by filing a complaint under § 727(a)(4)(A).38 More-
over, the SEC may have been able — and may still be able
— to avoid discharge of the contempt and disgorgement judg-
ments under § 523.39 Finally, had the SEC been concerned
38
The SEC was eligible as a creditor to file a complaint under § 727. See
11 U.S.C. § 727(c)(1) (stating that “a creditor . . . may object to the grant-
ing of a discharge under subsection (a) of this section”).
As for timing requirements, as noted earlier, a “complaint objecting to
the debtor’s discharge under § 727(a) of the Code shall be filed no later
than 60 days after the first date set for the meeting of creditors under
§ 341(a).” FED. R. BANKR. P. 4004(a). It appears that the first date set for
the meeting of creditors was March 25, 2002. The time fixed for filing a
complaint therefore expired on May 24, 2002. If the SEC had wanted to
file a complaint objecting to the Shermans’ discharge under
§ 727(a)(4)(A), then it would have needed to do so by May 24, 2002.
39
The SEC was, and is, eligible as a creditor to file complaints under
§ 523. FED. R. BANKR. P. 4007(a) (“[A]ny creditor may file a complaint to
obtain a determination of the dischargeability [under § 523] of any debt.”).
Timing requirements for filing § 523 nondischargeability complaints
differ depending on which subsection of § 523(a) is invoked. “A com-
plaint to determine the dischargeability of a debt under § 523(c) [then cov-
ering § 523(a)(2), (4), (6), and (15)] shall be filed no later than 60 days
after the first date set for the meeting of creditors under § 341(a).” FED.
R. BANKR. P. § 4007(c). Hence, had the SEC wanted to file a complaint
under § 523(a)(2), (4) or (6), then it appears that it would have needed to
have done so by May 24, 2002.
In contrast, “[a] complaint other than under § 523(c) may be filed at any
time. A case may be reopened without payment of an additional filing fee
for the purpose of filing a complaint to obtain a determination under this
rule.” FED. R. BANKR. P. § 4007(b). It thus appears the SEC could have
filed — and still could file — a complaint under § 523(a)(7) or (19).
7938 IN RE: SHERMAN
about an abuse of process, it could have sought a remedy
under the bankruptcy court’s inherent authority to sanction
debtors who file bankruptcy petitions in bad faith. See Cham-
bers v. NASCO, Inc., 501 U.S. 32, 43-46 (1991); Dyer, 322
F.3d at 1190 n.14, 1196; Caldwell v. Unified Capital Corp.
(In re Rainbow Magazine, Inc.), 77 F.3d 279, 284 (9th Cir.
1996).
[21] In sum, the SEC’s and the district court’s frustration
with Sherman’s behavior both before and after the filing of
the bankruptcy petition is understandable. Padilla does not,
however, permit a free-floating concept of cause for dismissal
to substitute for careful application of the bankruptcy scheme
Congress devised, including the multitude of remedies for
abusive behavior or behavior harmful to the public interest.
The district court’s decision is reversed, and the case is
remanded for further proceedings consistent with this opinion.
REVERSED.
Alternatively, the SEC may have been able — and may still be able —
to take advantage of the protections afforded by § 523(a)(7) and (19) by
attempting to collect the debt in a nonbankruptcy court, where the applica-
bility of § 523(a)(7) and (19) could have been litigated. See Rein v.
Providian Fin. Corp., 270 F.3d 895, 904 n.15 (9th Cir. 2001).