FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: ANDREA P.
SHERMAN; RICHARD G. SHERMAN,
Debtors,
No. 09-55880
RICHARD G. SHERMAN,
Appellant, D.C. No.
2:08-cv-02517-CAS
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
October 7, 2010—Pasadena, California
Filed September 19, 2011
Before: Raymond C. Fisher and Jay S. Bybee, Circuit
Judges, and Lyle E. Strom, Senior District Judge.*
Opinion by Judge Bybee;
Dissent by Judge Fisher
*The Honorable Lyle E. Strom, Senior District Judge for the U.S. Dis-
trict Court for Nebraska, Omaha, sitting by designation.
17725
17728 IN THE MATTER OF SHERMAN
COUNSEL
M. Jonathan Hayes, Law Offices of M. Jonathan Hayes,
Northridge, California, for the appellant.
Hope Hall Augustini, Senior Litigation Counsel, Securities
and Exchange Commission, for the appellee.
OPINION
BYBEE, Circuit Judge:
Ordinarily, an individual’s debts may be discharged in
Chapter 7 bankruptcy under 11 U.S.C. § 727. However, a debt
may not be discharged if it results from a violation of state or
federal securities laws. 11 U.S.C. § 523(a)(19)(A)(i). The
question in this case is whether the exception to discharge in
§ 523(a)(19)1 applies when the debtor himself is not culpable
for the securities violation that caused the debt. The bank-
ruptcy court held that the debt was subject to discharge; the
district court disagreed and held that the debt was excepted
1
For purposes of brevity, unless otherwise indicated, references to statu-
tory sections throughout this opinion will refer to sections of the Bank-
ruptcy Code (Title 11).
IN THE MATTER OF SHERMAN 17729
from discharge in bankruptcy. We agree with the bankruptcy
court that the exception to discharge applies only to those who
have themselves violated the securities laws. We thus reverse
the judgment of the district court.
I
We have previously described the facts in this case, which
we will relate briefly. See In re Sherman (“Sherman I”), 491
F.3d 948, 953-56 (9th Cir. 2007). In 1997, the SEC instituted
an enforcement action against several companies, which,
among other things, led to the court appointment of a receiver.2
See id. at 953-54 & n.3 (citing SEC v. Whitworth Energy Res.
Ltd., 243 F.3d 549 (9th Cir. 2000) (unpublished table deci-
sion)). Debtor-Appellant Richard Sherman is an attorney who
represented some of the defendants in this enforcement
action. Id. at 954.
As part of the enforcement action, the receiver ordered
Sherman to disgorge two separate sums of money. Id. First,
he was ordered to disgorge $54,980 that he withdrew from his
clients’ litigation trust account in violation of a freeze order
issued by the district court. Id. This debt is not at issue in this
case. Second, the receiver ordered Sherman to return money
he had received and retained, but had not earned, in a separate
contingency case. Id. at 954-55. The district court calculated
2
The receiver was, in relevant part,
immediately authorized, empowered, and directed . . . 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, Williston, Amerivest and their subsidiaries
and affiliates, including but not limited to Insured Energy Drill-
ing Program 1986-4, a limited partnership, et al. v. Trust Com-
pany of the West, a California trust company, et al., Case No. BC
108-297, pending in Los Angeles County Superior Court.
Sherman I, 491 F.3d at 953 n.2 (internal quotation marks omitted).
17730 IN THE MATTER OF SHERMAN
that he was responsible for disgorging $581,313.43 plus inter-
est. The court held that Sherman lacked any interest in the
money because he was obligated by the California Rules of
Professional Conduct to return the amount by which his
advances exceeded his ultimate fee. Importantly for our pur-
poses, the SEC conceded that Sherman had not been found to
have committed any securities violations on his own. See id.
at 974 n.33 (“[T]he 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.”).
Four days before the hearing on the disgorgement motion,
Sherman and his wife filed a petition for Chapter 7 bank-
ruptcy. Id. at 954. The SEC and the receiver responded by fil-
ing a motion to dismiss the petition. Id. at 955. The receiver
independently filed a motion seeking a determination by the
court that Sherman’s debts arising from the disgorgement
order should be held nondischargeable under § 523(a)(4) and
(6)3 of the Bankruptcy Code. Id. The bankruptcy court denied
the motion, and the SEC appealed to the district court, which
reversed. Id. at 955-56. While the appeal was pending, the
bankruptcy court granted Sherman a discharge under 11
U.S.C. § 727. Id. at 955. In Sherman I, we addressed a num-
ber of standing-related questions4 and held that Sherman’s
conduct did not constitute “cause” sufficient to warrant dis-
3
Section 523(a)(4) creates an exception to discharge for debts “for fraud
or defalcation while acting in a fiduciary capacity, embezzlement, or larce-
ny.” Section 523(a)(6) excepts debts “for willful and malicious injury by
the debtor to another entity or to the property of another entity.”
4
Specifically, we held that because the disgorgement judgment gave the
SEC an enforceable right against Sherman that had not been extinguished
by a settlement agreement, the SEC was considered a creditor with respect
to the disgorgement order and therefore had Article III standing to seek
dismissal of the Shermans’ bankruptcy petition. Sherman I, 491 F.3d at
965. We also held that the bankruptcy court’s entry granting discharge
under § 727 did not moot the appeal because it did not terminate the bank-
ruptcy petition. Id.
IN THE MATTER OF SHERMAN 17731
missal under § 707(a) of the Code, which allows a bankruptcy
court to dismiss petitions filed in bad faith. Id. at 975. We
then mentioned that “the SEC could have filed—and still
could file—a complaint under § 523(a)(7) or (19),” though we
did not explicitly conclude whether the SEC would prevail
under either provision.5 Id. at 975 n.39.
In a subsequent adversary proceeding, the Shermans sought
declaratory relief to establish that their debt to the SEC had
been discharged under § 727 notwithstanding § 523(a)(19)’s
discharge exception. The bankruptcy court granted summary
judgment for the Shermans. It concluded, as a matter of law,
that the SEC’s disgorgement order did not arise from a viola-
tion of securities laws. It further ruled that “[s]ection
523(a)(19) was intended to apply to ‘wrongdoers’ and not to
persons who are simply found to owe a debt which the SEC
is authorized to enforce.”
The SEC appealed to the district court, which reversed the
bankruptcy court. The district court adopted a broad interpre-
tation of § 523(a)(19), treating as paramount the Sarbanes-
Oxley Act’s goal of “protect[ing] investors by improving
accuracy and reliability of corporate disclosures made pursu-
ant to the securities laws.” It expressed particular concern that
“[r]eading a limitation into the SEC’s ability to enforce its
powers to obtain disgorgement of ill-gotten funds in an appro-
priate case . . . would frustrate the ability of the SEC to
enforce the federal securities laws.” Sherman appeals.6
5
We also noted that the SEC was time-barred from seeking non-
dischargeability under § 523(a)(2), (4), (6), and (15). Sherman I, 491 F.3d
at 975 n.39.
6
We review de novo a district court’s decision on appeal from a bank-
ruptcy court. Greene v. Savage (In re Greene), 583 F.3d 614, 618 (9th Cir.
2009). We review the bankruptcy court’s conclusions of law de novo, but
defer to its factual findings unless they are clearly erroneous. Id.
17732 IN THE MATTER OF SHERMAN
II
We begin by making it clear that, in this case, the validity
of the disgorgement order against Sherman is not at issue. We
have previously held that a so-called “nominal defendant”
may be ordered to disgorge funds that are traceable to fraud.
See SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998)
(“[A]mple authority supports the proposition that the broad
equitable powers of the federal courts can be employed to
recover ill gotten gains for the benefit of the victims of
wrongdoing, whether held by the original wrongdoer or by
one who has received the proceeds after the wrong.”). The
courts can order the disgorgement of proceeds of fraud held
by “nominal defendants” because they “ ‘hold[ ] the subject
matter of the litigation in a subordinate or possessory capacity
as to which there is no dispute.’ ” Id. at 676 (quoting SEC v.
Cherif, 933 F.2d 403, 414 (7th Cir. 1991)). A nominal defen-
dant is “not a real party in interest because ‘he has no legiti-
mate claim to the disputed property.’ ” SEC v. Ross, 504 F.3d
1130, 1141 (9th Cir. 2007) (quoting Colello, 139 F.3d at 676).7
We found that Sherman “was effectively acting as a deposi-
tory for those funds, as he legitimately obtained them in the
first place but no longer had a valid claim to retain them,” and
thus could be ordered to disgorge “money . . . retained in
excess of his fee for the services rendered in the contingency
suits.” Sherman I, 491 F.3d at 959.
The only question at issue here is whether Sherman’s debt
resulting from the disgorgement order can be discharged
7
In Ross, we carefully distinguished between someone, such as an “em-
ployee or vendor,” who “receive[s] compensation in return for services
rendered,” and someone who receives funds as a result of his “own viola-
tions of the securities laws.” Ross, 504 F.3d at 1142. Here, as in Ross,
“nothing in the underlying [securities] action establishes that [Sherman]
has violated the securities laws. He was not a party to that action and, so
far as we can tell, had no reason to know that his own activities in connec-
tion with [the companies] were in question.” Id. No adverse inference may
be derived from the fact that Sherman is subject to a disgorgement order.
IN THE MATTER OF SHERMAN 17733
under § 727 of the Bankruptcy Code (“Code”), or whether it
falls under the exception to discharge created by § 523(a)(19).
The Code provides, in relevant part, that “[a] discharge under
§ 727 . . . does not discharge an individual from any debt,”
§ 523(a), that 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
connection with the purchase or sale of any security
...
11 U.S.C. § 523(a)(19)(A). The bankruptcy court, siding with
Sherman, held that a debt cannot be “for” a securities viola-
tion when the debtor has not committed such a violation. The
district court, siding with the government, held that
§ 523(a)(19) is not limited to “persons who have been accused
or found guilty of violations of the securities laws.” Although
the question is a close one, we agree with the bankruptcy
court and hold that § 523(a)(19) only prevents the discharge
of a debt for a securities violation when the debtor is responsi-
ble for that violation.
A
[1] We begin with the statute. The question is whether a
debt can be “for” one of the violations listed in
§ 523(a)(19)(A) when the debtor has not committed any of
those violations. The dictionary definition of the word “for”
does not give us a clear answer. The word “for” is capacious,
meaning, among other things, “[a]s the price of, or the penalty
on account of”; “[i]n requital of”; or “[i]n order to obtain”;
and “[i]n consequence of, by reason of, as the effect of.” VI
OXFORD ENGLISH DICTIONARY 24-26 (2d ed. 1989), available at
17734 IN THE MATTER OF SHERMAN
http://www.oed.com/view/Entry/72761. On the one hand, in
some sense, Sherman’s debt was “the penalty on account of”
the securities violations committed by his clients. On the other
hand, we cannot say that Sherman owes the debt “in requital
of” fraudulent conduct — Sherman’s debt results from the
fact that he never “earned” the money he owes, and not
because he committed any wrongdoing.
The plain language of the statute alone does not clearly
resolve the interpretive question before us. But it does bring
into focus the interpretive dilemma in reading
§ 523(a)(19)(A): Should that section be read as if it said that
a debt shall not be discharged if it “is for the violation by the
debtor of any of the Federal securities laws”? Or, should the
section be read as if it said that a debt shall not be discharged
if it “is for the violation by the debtor or anyone else of the
Federal securities laws”?
The government encourages us to focus on the absence of
any explicit textual indication that the underlying violation
must be committed by the debtor. Essentially, the government
supports a bright-line interpretive rule: if the text of a dis-
charge exception does not contain the limiting words “by the
debtor” (or equivalent language), then the exception must be
given its broadest natural reading.
There is some merit to the government’s argument. Indeed,
the text of a number of other discharge exceptions specifically
targets debts resulting from the conduct of the debtor. See,
e.g., 11 U.S.C. § 523(a)(2)(B) (exception for fraudulent writ-
ten statements “that the debtor caused to be made or pub-
lished with intent to deceive (emphasis added)); id.
§ 523(a)(6) (exception for debts “for willful and malicious
injury by the debtor to another entity or to the property of
another entity” (emphasis added)); id. § 523(a)(8)(B) (excep-
tion for educational loans “incurred by a debtor who is an
individual” (emphasis added)); id. § 523(a)(9) (exception “for
death or personal injury caused by the debtor’s operation of
IN THE MATTER OF SHERMAN 17735
a motor vehicle, vessel, or aircraft [while intoxicated]”
(emphasis added)); id. § 523(a)(15) (exception for spousal
and child support payments “incurred by the debtor” in the
course of divorce or separation proceedings (emphasis
added)). The government’s argument is corollary to the famil-
iar doctrine of inclusio unius est exclusius alterius (the inclu-
sion of one is the exclusion of another). When Congress
included the phrase “by the debtor” in these discharge excep-
tions, it excluded application of the discharge exception to all
others. Conversely, it is a reasonable inference that, when
Congress omitted the phrase “by the debtor” in
§ 523(a)(19)(A)(i), it intended to cover debtors and others to
whom the exception might reasonably apply. We might there-
fore conclude that Congress knew how to make it clear that
a discharge exception should apply only to debtor-
wrongdoers. Cf., e.g., Astrue v. Ratliff, 130 S. Ct. 2521, 2527
(2010) (concluding that “the [Social Security Act]’s express
authorization of . . . payments [to prevailing claimants’ attor-
neys] . . . shows that Congress knows how to make fees
awards payable directly to attorneys where it desires to do
so,” and rejecting the claim that 28 U.S.C. § 2412(d) should
therefore be interpreted to authorize fee compensation to a
prevailing litigant, and not her attorney); Hardt v. Reliance
Standard Life Ins. Co., 130 S. Ct. 2149, 2156 (2010) (“The
contrast between [29 U.S.C. § 1132(g)(1) and (2)] makes
clear that Congress knows how to impose express limits on
the availability of attorney’s fees in ERISA cases.”).
We do not think this point, although based on sound princi-
ples of statutory interpretation, is the end of the analysis. A
number of other discharge exceptions in § 523 do not explic-
itly refer to the debtor’s conduct, even though at first glance,
they seem to be best interpreted as targeting only debtors who
are also wrongdoers. See, e.g., 11 U.S.C. § 523(a)(2)(A)
(exception for debts “for money, property, services, or an
extension, renewal, or refinancing of credit, to the extent
obtained by . . . false pretenses, a false representation, or
actual fraud, other than a statement respecting the debtor’s or
17736 IN THE MATTER OF SHERMAN
an insider’s financial condition”); id. § 523(a)(4) (exception
for debts “for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny”); id. § 523(a)(5) (excep-
tion for debts “for a domestic support obligation”).
For example, § 523(a)(2)(A) creates an exception to dis-
charge for debts “for money, property, services, or an exten-
sion, renewal, or refinancing of credit, to the extent obtained
by . . . actual fraud.” Even though the text of the statute does
not state that the fraudulent conduct must have been the debt-
or’s, we have nonetheless incorporated that assumption into
our understanding of the provision. See, e.g., Ghomeshi v.
Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010)
(“[M]aking out a claim of non-dischargeability under
§ 523(a)(2)(A) requires the creditor to demonstrate . . . [that]
the debtor made representations; . . . that at the time he knew
they were false; [and] that he made them with the intention
and purpose of deceiving the creditor.” (emphasis added));
Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1086 (9th
Cir. 1996) (“[T]o prove actual fraud, a creditor must establish
. . . that the debtor made the representations . . . .” (emphasis
added)). In fact, we have recently suggested that the debtor’s
involvement in the fraudulent activity might be the only rele-
vant consideration in determining whether the exception
applies. See Sabban, 600 F.3d at 1222 (holding that a debtor
need not have received a benefit from the fraudulent activity
in order for § 523(a)(2)(A) to prevent a discharge).
[2] We have read § 523(a)(4) in a similar fashion.
Although the statute only prohibits the discharge of debts “for
fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny”—again, without any mention that
the misconduct must have been by the debtor—we have
strongly suggested that it applies only in cases where the
debtor is responsible for the misconduct. See, e.g., Cal-Micro,
Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1128 (9th Cir.
2003) (rejecting a claim under § 523(a)(4) because the defen-
dant was not a fiduciary).
IN THE MATTER OF SHERMAN 17737
A contrary reading of these provisions would extend the
discharge exceptions to the “honest but unfortunate debtor,”
Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934), in cases
where the debtor was unwittingly involved with, and unknow-
ingly received benefits from, a wrongdoer. For example, sup-
pose we had not construed § 523(a)(2)(A) to apply only in
those cases where the debtor committed the fraud. Suppose,
further, that a bank loaned money to an innocent person under
the express condition that the loan be guaranteed by a third
party who had greater assets. If the third party lies about his
assets in order to qualify to be the guarantor, then the bor-
rower will have, in effect, obtained “money . . . by . . . false
pretenses, a false representation, or actual fraud,” even if she
did not know or have reason to know about the guarantor’s
misconduct. If she is subsequently unable to repay her loan
and is driven to bankruptcy, we think it would contravene the
“fresh start” purposes of the system to deny her a discharge
on the basis of a third party’s misconduct.8
Admittedly, nothing in the text of any of these provisions
makes it clear that the exceptions should apply only to debtors
who are responsible for the wrongdoing that caused the debt.
However, the government’s rule would require us to adopt the
8
The dissent rejects this comparison, arguing that “[nominal-defendant]
[d]isgorgement of the proceeds of a violation is owed for the violation,
whereas repayment of a loan is owed for the loan, not a fraud committed
antecedent to the granting of the loan.” Dissenting Op. at 17751 n.8. We
have previously recognized that the term “nominal defendant” encom-
passes both the “paradigmatic” case—a bank or trustee who has a custo-
dial claim to the property—and “persons who are in possession of funds
to which they have no rightful claim.” Ross, 504 F.3d at 1141.
It would be more accurate to say that Sherman owes the debt “for” the
advance payment he received from Whitworth and his subsequent failure
to earn those funds, rather than stating that Sherman owes the debt for the
violation of the securities laws. For example, if a bank-trustee misappro-
priates trust funds and the owner of a trust seeks to use those funds to pay
a loan, it would be more accurate to say that the bank-trustee owes a debt
“for” its misappropriation, and that the owners owes a debt “for” the loan,
than it would be to say that the bank-trustee owes a debt “for” the loan.
17738 IN THE MATTER OF SHERMAN
opposite presumption: that exceptions should be applied
broadly unless expressly confined to guilty debtors. We do
not think the structure of § 523, taken alone, enables us to
resolve this question. We must therefore examine
§ 523(a)(19) in light of the purposes of the Bankruptcy Code.
B
Although § 523(a)(19)’s text and structure do not resolve
the dispute before us, we believe that guidance from Supreme
Court, as well as our previous opinions, strongly favor the
bankruptcy court’s interpretation of the statute. At the core of
the Bankruptcy Code are the twin goals of ensuring an equita-
ble distribution of the debtor’s assets to his creditors and giv-
ing the debtor a “fresh start.” See BFP v. Resolution Trust
Corp., 511 U.S. 531, 563 (1994). Put simply, the Bankruptcy
Code accomplishes this goal by including the bulk of the
debtor’s property in the bankruptcy estate, see 11 U.S.C.
§ 541(a), distributing that property to creditors in accordance
with various provisions of the Code, and finally discharging
the debtor’s remaining debts unless those debts either fall into
an exception or there is reason to deny a discharge altogether,
see id. § 727(a). Accordingly, the exceptions to discharge
enumerated in § 523 necessarily prevent a debtor from receiv-
ing a completely fresh start, as the debt remains a burden even
after all other debts are legally satisfied.
[3] With this in mind, the Supreme Court has adopted a
rule of construction interpreting exceptions to discharge nar-
rowly. See Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998)
(“[E]xceptions to discharge should be confined to those
plainly expressed” (internal quotation marks omitted)); Jett v.
Sicroff (In re Sicroff), 401 F.3d 1101, 1104 (9th Cir. 2005);
see also 4 COLLIER ON BANKRUPTCY ¶ 523.05 (2010) (“In deter-
mining whether a particular debt falls within one of the excep-
tions of § 523, the statute should be strictly construed against
the objecting creditor and liberally in favor of the debtor. Any
other construction would be inconsistent with the liberal spirit
IN THE MATTER OF SHERMAN 17739
that has always pervaded the entire bankruptcy system.”). We
also recognize that the Bankruptcy Code “limits the opportu-
nity for a completely unencumbered new beginning to the
‘honest but unfortunate debtor.’ ” Grogan v. Garner, 498 U.S.
279, 286-87 (1991). Taken together, these two basic princi-
ples suggest that exceptions to discharge should be limited to
dishonest debtors seeking to abuse the bankruptcy system in
order to evade the consequences of their misconduct.
[4] Likewise, if we adopt the government’s interpretation
of § 523(a)(19), an innocent9 recipient of funds obtained by
another party’s participation in a securities violation can not
only be ordered to disgorge, but must also continue paying off
that debt even if he becomes insolvent and is forced to file for
bankruptcy. Although we do not dispute Colello’s conclusion
that a court may order recipients of these funds to disgorge
any funds that remain in their possession, we do not think
Congress wanted to immunize these debts from discharge in
bankruptcy, when the debtor has not been found guilty of any
wrongdoing.
C
[5] The legislative history of § 523(a)(19) offers modest
additional support for our interpretation. We begin by observ-
ing that it is unlikely that Congress actually considered the
specific question of whether innocent third parties subject to
disgorgement orders should be subject to a discharge excep-
tion. See Albernaz v. United States, 450 U.S. 333, 341 (1981)
(“Congress cannot be expected to specifically address each
9
We do not suppose that every debtor who owes a disgorgement-based
debt is necessarily an innocent recipient for purposes of the rule we adopt.
For instance, in Colello itself, we found Colello liable in part because he
invoked his Fifth Amendment privilege not to testify and drew the adverse
inference that the funds he received were ill-gotten. 139 F.3d at 677. How-
ever, in cases like this one, where neither party claims that the debtor is
responsible for any securities-related wrongdoing, we believe the debtor
must be treated like an “innocent” one for purposes of § 523(a)(19).
17740 IN THE MATTER OF SHERMAN
issue of statutory construction which may arise.”). The
§ 523(a)(19) exception, enacted as part of the Sarbanes-Oxley
Act, responded to concerns that the Bankruptcy Code “per-
mit[ted] wrongdoers to discharge their obligations under court
judgments or settlements based on securities fraud and other
securities violations.” S. Rep. No. 107-146, at 8 (2002). Spe-
cifically, Congress sought to address the obstacles posed by
the fact that the elements of various securities violations do
not perfectly overlap with the elements of fraudulent conduct
within the meaning of § 523(a)(2)(A), frequently forcing the
SEC to relitigate otherwise resolved cases before a bank-
ruptcy judge because the violator was not collaterally estop-
ped from challenging the claim of fraud. 148 Cong. Rec.
S7418, S7419 (2002). In other words, one reason Congress
enacted the exception was to target those parties who are
guilty of securities violations, in order to ensure that judg-
ments for securities violations are treated, in bankruptcy, like
judgments for fraud. This provides further support for our
reading; as we note above, we have previously held that a
debt falls into the discharge exception for fraud only when the
debtor engaged in the fraudulent conduct. See Sabban, 600
F.3d at 1222.
[6] The government offers a contrary reading of the legis-
lative history, citing Senator Leahy’s explanation that
§ 523(a)(19) was intended to “prevent wrongdoers from using
the bankruptcy laws as a shield and to allow defrauded inves-
tors to recover as much as possible.” 148 Cong. Rec. S7418,
S7419 (2002). The government interprets this statement to
mean that Congress implemented the exception to further the
independently important goals of punishment and compensa-
tion. We disagree with this interpretation. It is unlikely that
Congress sought to divorce the two goals from each other. A
better understanding of Senator Leahy’s comments is that
Congress wanted to compensate defrauded investors by recap-
turing the ill-gotten gains of those who were responsible for
the fraud in the first place. Hence, Senator Leahy, like the
Senate Report on Sarbanes-Oxley, referred to “wrongdoers”
IN THE MATTER OF SHERMAN 17741
who might “discharge their obligations under court judgments
or settlements based on securities fraud and other securities
violations.” Id. (emphasis added). The emphasis on prevent-
ing “wrongdoers” from using the bankruptcy laws can only
refer to debtors who are also wrongdoers; neither statement
supports denying discharge to debtors who have been drawn
into a securities fraud but are not themselves “wrongdoers.”
D
The government encourages us to adopt the district court’s
reasoning, which characterized Sherman “as a constructive
trustee of the funds he received,” and concluded that a trustee
“cannot avoid his obligation to return funds he held in trust
for a third party by filing for bankruptcy.” At first glance, this
reasoning appears to follow naturally from the disgorgement
order against Sherman. We think, however, that this argument
confuses disgorgement of funds with discharge in bankruptcy.
In Colello—which was not a bankruptcy case—we described
so-called “nominal defendants” as parties who “hold[ ] the
subject matter of the litigation in a subordinate or possessory
capacity as to which there is no dispute.” 139 F.3d at 676
(internal quotation marks omitted). Since Sherman was in
possession of funds that he had received from his clients but
had not yet earned, the district court properly relied on a
Colello theory when issuing its disgorgement order. But
requiring Sherman to disgorge whatever he has retained is
very different from deciding that he is prevented from dis-
charging those debts in bankruptcy. The theories and the rea-
sons behind disgorgement and discharge are quite distinct.
Even if Sherman nominally held the funds in some kind of
fiduciary capacity as the dissent suggests, Dissenting Op. at
17751-52, the applicable exception would be § 523(a)(4), not
§ 523(a)(19). That section prohibits the discharge of debts
“for fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny.” For instance, if the government’s
position were that Sherman was not entitled to the funds and
17742 IN THE MATTER OF SHERMAN
had improperly appropriated that money, then it could have
sought a determination that Sherman was guilty of embezzle-
ment. See Littleton v. Transamerica Commercial Fin. Corp.
(In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991) (listing, as
the elements of embezzlement, “(1) property rightfully in the
possession of a nonowner; (2) nonowner’s appropriation of
the property to a use other than which it was entrusted; and
(3) circumstances indicating fraud” (internal quotation marks
omitted)). If, as the dissent suggests, Sherman was essentially
a trustee of Whitworth’s money and improperly spent advance
funds instead of placing them in a trust, see Dissenting Op. at
17750-51, the government could have urged that Sherman be
found responsible for “defalcation while acting in a fiduciary
capacity.” See Blyler v. Hemmeter (In re Hemmeter), 242
F.3d 1186, 1190-91 (9th Cir. 2001) (“The definition of defal-
cation includes both the misappropriation of trust funds or
money held in any fiduciary capacity; and the failure to prop-
erly account for such funds.” (internal quotation marks omit-
ted)). Indeed, “[e]ven innocent acts of failure to fully account
for money received in trust will be held as non-dischargeable
defalcations; no intent to defraud is required.” Id. Had the
government sought to except Sherman’s debt from discharge
on § 523(a)(4) grounds, it might well have prevailed. Indeed,
it would be far more accurate to say that Sherman’s debt is
“for” his own breach of his fiduciary duties than it is to say
that it is owed “for” Whitworth’s securities violation. As we
noted in Sherman I, however, the SEC is time-barred from
seeking a determination that § 523(a)(4)’s exception prohibits
the discharge of Sherman’s debt. 491 F.3d at 975 n.39.
E
The district court also expressed concern that, under the
interpretation we adopt today, “persons who would otherwise
be liable to make disgorgement of funds derived from a secur-
ities law violation would be able to avoid their debts by filing
for protection under the bankruptcy laws.” In particular, the
court sought to avoid the possibility that “one party could vio-
IN THE MATTER OF SHERMAN 17743
late the securities laws and transfer the proceeds derived from
the violation to a third party who could insulate those funds
from disgorgement by filing for bankruptcy.”
[7] This concern is flawed in at least two respects. First, as
Sherman notes, if the third party in question has actually
aided or abetted a securities violation, that party may be pros-
ecuted for a violation of securities laws in addition to the pri-
mary violator. Although Sherman’s retention (and subsequent
loss) of unearned fees from a contingency case in which his
client’s securities violation may appear suspect, the SEC’s
concession that Sherman had not violated any securities laws
undermines its subsequent attempts to leverage this appear-
ance of culpability into any legal consequence.
Second, it is not clear how a third party could “insulate” a
securities violator’s ill-gotten gains by taking those gains and
filing for bankruptcy. If a creditor can show that a debtor has
concealed property or funds from the bankruptcy court, a dis-
charge can be denied in its entirety, 11 U.S.C. § 727(a)(2), or
revoked after it is granted, 11 U.S.C. § 727(d). Otherwise, any
funds possessed by the debtor at the time the discharge has
been granted will presumably have been included in the bank-
ruptcy estate and distributed to creditors.10 See 11 U.S.C.
§ 541. On the other hand, if Sherman is not granted a dis-
10
The dissent argues that our decision enables Sherman to insulate funds
from the disgorgement judgment because the money subject to disgorge-
ment is actually Whitworth’s money held in trust and therefore never
entered the estate. Dissenting Op. at 17750-52. Indeed, the dissent argues
that we should treat the money subject to disgorgement as money actually
held in trust. See, e.g., Dissenting Op. at 17746 (“[Sherman] owes the SEC
because he held the proceeds of fraud in trust.”). While this might be via-
ble if the money were actually part of a trust (and was therefore still avail-
able for satisfying the disgorgement judgment), nothing in the record
indicates that this was the case here. While Sherman’s failure to place
these funds in a trust might, as we have noted, constitute a breach of his
fiduciary duties, the mere fact that he had a duty to place the money in a
trust (which he might have failed to fulfill) does not mean that we may act
as if the funds were actually in a trust.
17744 IN THE MATTER OF SHERMAN
charge, he will not simply have to hand over funds in his pos-
session — rather, the SEC will be entitled to money that
Sherman does not yet have in order to satisfy the debt, pre-
venting Sherman from receiving the “fresh start” promised by
bankruptcy.
[8] In short, the Bankruptcy Code already includes protec-
tions against attempting to conceal assets or defraud creditors,
or otherwise failing to disgorge available assets. There is no
additional need for us to expand the scope of § 523(a)(19) to
cover innocent debtors in order to accomplish this goal.
III
[9] We hold that 11 U.S.C. § 523(a)(19) prevents the dis-
charge of debts for securities-related wrongdoings only in
cases where the debtor is responsible for that wrongdoing.
Debtors who may have received funds derived from a securi-
ties violation remain entitled to a complete discharge of any
resulting disgorgement order.
REVERSED.
FISHER, Circuit Judge, dissenting:
I respectfully dissent because the majority disregards the
plain meaning of “for” in 11 U.S.C. § 523(a)(19) and miscon-
strues Sherman’s role as a so-called “honest but unfortunate”
debtor. The majority holds that a debt is only “for the viola-
tion of any of the Federal securities laws,” § 523(a)(19)(A)(i),
when the debtor committed the violation. Maj. Op. 17733.
The word “for” carries no such limitation. A debt is also “for”
a violation of the securities laws when it is an obligation to
return the proceeds of the violation being held in trust for the
wrongdoer — which describes Sherman’s debt. The word
“for” has many meanings, but as the majority concedes, one
IN THE MATTER OF SHERMAN 17745
of them is “because of,” “on account of,”1 “as a result of,”2
“having (the thing mentioned) as a reason or cause.”3 In con-
text, that is plainly how § 523(a)(19) uses the preposition. See
Brown v. Gardner, 513 U.S. 115, 118 (1994) (“Ambiguity is
a creature not of definitional possibilities but of statutory con-
text . . . .”). Causation is not the only possible meaning of
“for,” but it is the most ordinary and natural one and thus the
controlling one. See Engine Mfrs. Ass’n v. S. Coast Air Qual-
ity Mgmt. Dist., 541 U.S. 246, 252 (2004) (“Statutory con-
struction must begin with the language employed by Congress
and the assumption that the ordinary meaning of that language
accurately expresses the legislative purpose.”) (quoting Park
‘N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194
(1985) (internal quotation marks omitted)); United States v.
Alvarez-Sanchez, 511 U.S. 350, 357 (1994) (holding that
when a term “is not defined in the statute, we must construe
the term ‘in accordance with its ordinary or natural mean-
ing.’ ”) (quoting FDIC v. Meyer, 510 U.S. 471, 476 (1994)).
The majority acknowledges that my plain reading is plausi-
ble, but then attempts to undermine it with various flawed the-
ories. Principally, the majority relies on the proposition that
it would be best if “for” had a different meaning, because that
would better suit the bankruptcy policy that honest debtors
deserve a fresh start. “With a plain, nonabsurd meaning in
view, we need not proceed in this way.” Lamie v. U.S.
Trustee, 540 U.S. 526, 538 (2004). Whatever the majority’s
conception of the competing policy concerns in § 523(a)(19),
“[o]ur unwillingness to soften the import of Congress’ chosen
words even if we believe the words lead to a harsh outcome
1
Webster’s Third New International Dictionary 886 (2002) (definition
8a, e.g., “shouted ~ joy,” “decorated ~ bravery”).
2
American Heritage Dictionary of the English Language 686 (4th ed.
2000) (definition 7, e.g., “jumped for joy”).
3
Oxford Dictionaries (definition 5, e.g., “[t]hree other men were also
jailed for their subordinate roles in the operation”), available at
http://english.oxforddictionaries.com (last visited Aug. 5, 2011).
17746 IN THE MATTER OF SHERMAN
is longstanding.” Id. Nevertheless, the majority decides to
read words into the statute, resulting “ ‘not [in] a construction
of [the] statute, but, in effect, an enlargement of it by the
court, so that what was omitted, presumably by inadvertence,
may be included within its scope.’ ” Id. (alterations in origi-
nal) (quoting Iselin v. United States, 270 U.S. 245, 251
(1926)). In reaching to interpret the statute to reflect the
“best” policy, the majority misconstrues the plain text, distorts
the statutory structure and actually defeats the proper objec-
tives of bankruptcy policy and the securities laws.
The majority opinion’s first flaw is its assertion that “we
cannot say that Sherman owes the debt ‘in requittal of’ fraud-
ulent conduct [because] Sherman’s debt results from the fact
that he never ‘earned’ the money he owes, and not because he
committed any wrongdoing.” Maj. Op. 17734. It does not
matter whether Sherman’s debt is “in requittal of” a securities
law violation because that is not what “for” means in
§ 523(a)(19); but even granting the majority its definition of
“for,” there is no dilemma. One certainly can requite a debt
for a violation he did not commit if he is a nominal defendant
holding money in trust for the violator and has been ordered
to turn over the money.4 As acknowledged by the majority
and explained below, a nominal-defendant disgorgement
judgment like that owed by Sherman is premised on the nomi-
nal defendant’s lack of legitimate claim to the money subject
to disgorgement.5 Maj. Op. 17732. Sherman does not owe the
SEC simply because he never earned the advance fees from
his client; rather, he owes the SEC because he held the pro-
ceeds of fraud in trust. The money Sherman owes was never
4
Requittal is the “act of return or repayment for something.” Webster’s
Third New International Dictionary 1929 (2002) (definition 1); see also
American Heritage Dictionary of the English Language 1482 (4th ed.
2000) (definition 2: defining “requittal” as “[r]eturn, as for an injury or
friendly act”); Oxford Dictionaries (Apr. 2010) (defining “requite” as to
“make appropriate return for (a favor, service, or wrongdoing)”), available
at http://english.oxforddictionaries.com (last visited Aug. 5, 2011).
5
Nominal defendants are also known as “relief defendants.”
IN THE MATTER OF SHERMAN 17747
his own and he must disgorge it to the SEC because the owner
would have been required to disgorge it had the money not
been held in trust by Sherman.
The majority opinion’s second flaw is to rely on precedent
to suggest that reading “by the debtor” into the statute is
advisable, when none of the precedent actually argues for that
result, interprets the word “for,” or otherwise refutes the logic
of recognizing Sherman’s debt as one “for” violations of the
securities laws. Although we have interpreted the exception
from discharge “for money . . . obtained by . . . false pre-
tenses, a false representation, or actual fraud,” 11 U.S.C.
§ 523(a)(2)(A), to require that the “debtor made [false] repre-
sentations,” In re Sabban, 600 F.3d 1219, 1222 (9th Cir.
2010) (quoting In re Hashemi, 104 F.3d 1122, 1125 (9th
Cir.1996)) (internal quotation marks omitted), there is no indi-
cation that our precedent ever considered the possibility of a
nominal-defendant disgorgement judgment. Moreover, the
“only issue” in Sabban — the majority’s chief precedent —
was whether a particular state court judgment was proxi-
mately caused by a false representation. Id. at 1223. Even less
relevant are the majority’s cases on the exception from dis-
charge “for fraud or defalcation while acting in a fiduciary
capacity.” 11 U.S.C. § 523(a)(4). In In re Cantrell, 329 F.3d
1119 (9th Cir. 2003), there was no eligible fiduciary relation-
ship between any two parties, so we did not consider whether
the debtor needed to be the fiduciary. See id. at 1127. Having
not confronted the problem of nominal-defendant disgorge-
ment, this holding is simply inapposite and should not affect
our analysis.
To the extent there is any tension between the plain mean-
ing of § 523(a)(19) and our interpretations of other subsec-
tions of § 523, the canon of statutory construction that favors
consistent interpretation of parallel language cannot trump
§ 523(a)(19)’s plain meaning. See BedRoc Ltd. v. United
States, 541 U.S. 176, 183 (2004) (“The preeminent canon of
statutory interpretation requires us to ‘presume that the legis-
17748 IN THE MATTER OF SHERMAN
lature says in a statute what it means and means in a statute
what it says there.’ ”) (quoting Conn. Nat’l Bank v. Germain,
503 U.S. 249, 253-54 (1992)) (alteration omitted); Garcia v.
United States, 469 U.S. 70, 74 (1984) (describing a canon of
construction as “only an instrumentality for ascertaining the
correct meaning of words”) (quoting Harrison v. PPG Indus.,
Inc., 446 U.S. 577, 588 (1980)) (internal quotation marks
omitted). If we look to the text of § 523 rather than our
glosses on it, we see that Congress knew how to explicitly
require conduct “by the debtor,” compare § 523(a)(19), with
§ 523(a)(6), and the accretion of faulty interpretations cannot
obscure that fact. See Patterson v. Shumate, 504 U.S. 753,
760 (1992) (imposing “an ‘exceptionally heavy’ burden of
persua[sion]” to overcome clear text in the Bankruptcy Code)
(quoting Union Bank v. Wolas, 502 U.S. 151, 156 (1991)); K
Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) (“In
ascertaining the plain meaning of the statute, the court must
look to the particular statutory language at issue, as well as
the language and design of the statute as a whole.” (emphasis
added)). We should not disregard the plain meaning of
§ 523(a)(19) because past interpretations of different statutes
in cases confronting dissimilar facts may implicitly suggest a
different outcome.6
The majority opinion’s third flaw is to mistake the relation-
ship between securities and bankruptcy policy in
§ 523(a)(19). The majority’s discussion of policy concerns
fails to mention that “[d]isgorgement plays a central role in
the enforcement of the securities laws.” SEC v. Gemstar-TV
Guide Int’l, Inc., 401 F.3d 1031, 1047 (9th Cir. 2005) (en
banc) (quoting SEC v. Rind, 991 F.2d 1486, 1491 (9th Cir.
6
Congress also demonstrated its awareness of the modifier “by the debt-
or” within § 523(a)(19) itself. To be excepted from discharge a debt must
not only be for a violation of the securities laws, but must also “result[ ]
. . . from” an obligation “owed by the debtor.” 11 U.S.C. § 523(a)(19)(B)
(emphasis added). Congress clarified that the debt must be owed by the
debtor, but omitted the majority’s desired language that the securities vio-
lation must be committed by the debtor.
IN THE MATTER OF SHERMAN 17749
1993)) (internal quotation marks omitted). Disgorgement is an
equitable remedy for fraud, based on the truism that the viola-
tor “has no right to retain the funds illegally taken from the
victims.” SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109,
1113 (9th Cir. 2006) (quoting SEC v. Colello, 139 F.3d 674,
679 (9th Cir. 1998)) (internal quotation marks omitted). The
remedy “is designed to deprive a wrongdoer of unjust enrich-
ment, and to deter others from violating securities laws by
making violations unprofitable.” Id. (quoting SEC v. First
Pacific Bancorp, 142 F.3d 1186, 1191 (1998)) (internal quo-
tation marks omitted). The SEC’s efforts to deter securities
violations “would be greatly undermined if securities law vio-
lators were not required to disgorge illicit profits.” Gemstar,
401 F.3d at 1047 (quoting Rind, 991 F.2d at 1491) (internal
quotation marks omitted). Accordingly, where the ill-gotten
gains are held by a third-party “in a subordinate or possessory
capacity,” Colello, 139 F.3d at 676 (quoting SEC v. Cherif,
933 F.2d 403, 414 (7th Cir. 1991) (internal quotation marks
omitted), “the SEC may name [such] 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,” id. at 677.
See also SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998)
(“Federal courts may order equitable relief against a person
who is not accused of wrongdoing in a securities enforcement
action where that person: (1) has received ill-gotten funds;
and (2) does not have a legitimate claim to those funds.”).
Critically, a nominal defendant by definition “has no legiti-
mate claim to the disputed property,” Colello, 139 F.3d at
676, and is joined “ ‘purely as a means of facilitating collec-
tion,’ ” id. (quoting Cherif, 933 F.2d at 414) (internal quota-
tion marks omitted). See also CFTC v. Kimberlynn Creek
Ranch, Inc., 276 F.3d 187, 191-92 (4th Cir. 2002) (quoting
Colello); Cherif, 933 F.2d at 414 (“A ‘nominal defendant’ is
a person who can be joined to aid the recovery of relief with-
out an assertion of subject matter jurisdiction only because he
has no ownership interest in the property which is the subject
of litigation.”). “The paradigmatic nominal defendant is ‘a
17750 IN THE MATTER OF SHERMAN
trustee, agent, or depositary,’ ” Colello, 139 F.3d at 676
(quoting Cherif, 933 F.2d at 414), or “bank . . . [that] has only
a custodial claim to the property,” id. at 677.7
A nominal defendant’s lack of legitimate claim to the
money subject to disgorgement has powerful consequences in
bankruptcy. If a “debtor does not own an equitable interest in
property . . . [it] is not ‘property of the estate,’ ” Beiger v. IRS,
496 U.S. 53, 59 (1990) (quoting 11 U.S.C. § 541(a)(1)), and
therefore is not available for creditors. See 11 U.S.C. § 726(a)
(limiting liquidation to “property of the estate”); In re Cal.
Trade Technical Sch., Inc., 923 F.2d 641, 645-46 (9th Cir.
1991) (“Bankruptcy law does not view property held in trust
by the debtor as property of the estate available for general
creditors.”); In re Unicom Computer Corp., 13 F.3d 321, 324
(9th Cir. 1994) (“[S]omething held in trust by a debtor for
another is [not] property of the bankruptcy estate.”). Whit-
7
When I refer to a “nominal defendant” in this dissent, I am referring
only to these paradigmatic examples, which all invoke the concept of an
express or resulting trust intentionally created by the transferee. See
Restatement (Third) of Trusts § 2 (2003) (defining “express trust”); id. § 7
(defining “resulting trust”). Constructive trustees can also be nominal
defendants but we need not consider whether a disgorgement judgment
against such a defendant would be dischargeable. See FTC v. Network
Servs. Depot, Inc., 617 F.3d 1127, 1137, 1141-42 (9th Cir. 2010) (holding
that an attorney was properly ordered to disgorge fees received with
knowledge the money was derived from securities fraud); SEC v. Ross,
504 F.3d 1130, 1142-44 (9th Cir. 2007) (suggesting that a “mere puppet”
or “empty vessel into which the true wrongdoers funneled their proceeds”
would be a nominal defendant); CFTC v. Walsh, 618 F.3d 218, 226 (2d
Cir. 2010) (“The receipt of property as a gift, without the payment of con-
sideration, does not create a ‘legitimate claim’ sufficient to immunize the
property from disgorgement.”).
Whereas a constructive trust is an equitable remedy to vindicate the
fraud victims’ superior interest in the property, see Network Servs., 617
F.3d at 1141, Sherman’s debt is the direct result of the wrongdoer’s inter-
est, as explained more fully below — Sherman held the violator’s money
in express trust for the violator, and thus must disgorge it because the vio-
lator would have been ordered to disgorge it to the SEC absent the transfer
to Sherman.
IN THE MATTER OF SHERMAN 17751
worth’s money, held by Sherman in trust, is therefore insu-
lated from Sherman’s creditors. The majority thus frustrates
the SEC’s enforcement efforts based on a hollow policy argu-
ment; payment of the disgorgement judgment would not in
fact harm an honest debtor’s “fresh start.” An honest debtor
has nothing to fear from a disgorgement judgment — the
money owed is shielded from creditors; and he has nothing to
gain from a discharge — he has no right to do anything with
the money other than disgorge it.8
Sherman admits he is not an honest debtor — he spent all
of the advance payments from his client, Whitworth Energy.
According to the California Rules of Professional Conduct,
Sherman was required to keep the “funds belonging in part to
a client and in part presently or potentially to [him]” in a trust
account. Cal. Rules of Prof’l Conduct R. 4-100(A)(2). Money
held in a client trust account is held in an express trust as the
client’s fiduciary. See Banks v. Gill Dist. Ctrs., Inc., 263 F.3d
862, 871 (9th Cir. 2001). The attorney cannot claim the
advance fees until he earns them. See Brother v. Kern, 64 Cal.
Rptr. 3d. 239, 249 (Ct. App. 2007) (holding that “so long as
funds were in the client trust account, they were still [the cli-
ent’s] funds”). Sherman’s debt is to disgorge only the portion
of the advance payments from Whitworth that he did not earn
8
Nominal-defendant disgorgement is distinguishable from the majori-
ty’s hypothetical loan induced by fraud. Maj. Op. 17736-37. The recipient
of a loan does not owe a debt because of the fraud of a third party in the
loan approval process in the same way that a nominal defendant owes a
debt to turn over money belonging to the wrongdoer because of the
wrongdoing. Disgorgement of the proceeds of a violation is owed for the
violation, whereas repayment of a loan is owed for the loan, not a fraud
committed antecedent to the granting of the loan. This is hardly the first
time the law has presented a slippery question of causation, but there is
a common sense distinction here. The majority’s counterintuitive conclu-
sion turns on a linguistic difference between § 523(a)(19) and § 523(a)(2),
which excepts from discharge debts “for money . . . obtained by . . .
fraud.” (Emphasis added.) The phrase “obtained by” may sweep as
broadly as the majority fears, and impair the fresh starts of honest debtors,
but the problem does not extend to § 523(a)(19).
17752 IN THE MATTER OF SHERMAN
and thus did not own. Sherman therefore owes the SEC
$581,313.43 of Whitworth’s money.9
An accurate appraisal of the policy concerns implicated by
this case only reinforces the plain meaning of § 523(a)(19). It
is logical that if Whitworth could not have avoided disgorging
the money by filing for bankruptcy — which is undoubtedly
true — Sherman similarly cannot avoid disgorging Whit-
worth’s money by filing his own bankruptcy. The majority
focuses on Sherman’s lack of personal culpability for a secur-
ities law violation, and loses sight of the fact that SEC is try-
ing to prevent discharge of a debt to repay money that never
belonged to Sherman. We have already held that Sherman’s
disgorgement judgment serves to “further the SEC’s goals of
deterring securities laws violations and compensating
defrauded investors.” In re Sherman, 491 F.3d 948, 964-65
(9th Cir. 2007). Further, the majority admits that Congress
enacted § 523(a)(19) to deter securities fraud and compensate
victims by preventing wrongdoers from using bankruptcy to
avoid disgorging their ill-gotten gains, and yet the majority’s
countertextual interpretation of § 523(a)(19) does just the
opposite. If the SEC cannot recover Whitworth’s money,
some fraction of the profit from Whitworth’s securities fraud
will remain at large and victims of the fraud will go uncom-
pensated.
In sum, I would adhere to the plain language of
§ 523(a)(19) and affirm Judge Snyder’s sensible decision. A
debt is “for” a violation of the securities laws when it is
caused by such a violation. Sherman’s debt is caused by a
9
Sherman alleges the excess payments were agreed to be an interest free
loan, in contravention of his ethical duties, and thus he spent them but
should not be held accountable to repay the “loan” after his bankruptcy
discharge. Although there may have been such an agreement, and thus
Sherman may have had a legitimate claim to the money, Sherman did not
contest the disgorgement judgment. The district court identified Sher-
man’s ethical obligations as one basis for his lack of legitimate claim to
the money, so I focus on that basis for his nominal defendant status.
IN THE MATTER OF SHERMAN 17753
securities law violation because he is legally obligated to dis-
gorge the ill-gotten gains of such a violation that he held in
trust for the violator.