Business Law
Griffithe v. Samec: BAP Affirms Nondischargeability of Securities Fraud Debt Despite State Court Dismissal
The following is a case summary written by Gary M. Kaplan, a partner at Farella Braun + Martel LLP in San Francisco, analyzing Griffithe v. Samec (In re Griffithe), 674 B.R. 91 (B.A.P. 9th Cir. Oct. 30, 2025), a recent decision of interest.
Summary
In Griffithe, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) held that dismissal of a lawsuit in state court did not preclude a finding of nondischargeability of the debt owed by the debtor-defendant to plaintiffs-creditors in bankruptcy court, affirming a decision from the U.S. Bankruptcy Court for the Central District of California, the Hon. Theodor C. Albert, presiding.
Facts
The individual debtor sold stock in a corporation that was a Ponzi scheme. The creditors (a married couple) invested $150,000 in the fraudulent stock. The debtor later filed a Chapter 7 bankruptcy petition, which listed the creditors’ claims in the schedule of debts. After the bankruptcy filing, the Securities and Exchange Commission sued the debtor, alleging fraud in the $4.85 million sale of “Ponzi-like” securities. The debtors entered into a consent decree with the SEC providing that any resulting debts would be nondischargeable in debtor’s bankruptcy case under Bankruptcy Code Section 523(a)(19), which excepts from discharge debts arising from violation of securities law. The district court subsequently entered judgment finding that 25 investors (including the creditors) were defrauded of $4.85 million. The judgment obligated the debtor to disgorge about $2.9 million as “ill-gotten gains” and to pay a civil penalty of about $2.1 million.
The creditors filed a complaint in debtor’s bankruptcy case alleging that the debts to them were nondischargeable under Bankruptcy Code Sections 523(a)(2), (a)(4), (a)(6) and (a)(19). The bankruptcy court also modified the automatic stay (which generally prohibits legal action against a debtor in bankruptcy) to permit the creditors to sue the debtor in California state court. After trial, the bankruptcy court found the debtor’s debts were nondischargeable under Section 523(a)(2) for having arisen from false pretenses, as well as under Section 523(a)(19) for violating securities laws (although ascribing no preclusive effect from the judgment in the SEC suit in district court).
Between the time the bankruptcy court rendered its opinion and time it entered its
judgment of nondischargeability, the state court dismissed the creditors’ suit at the debtor’s request in view of the bankruptcy court’s decision (as to which the creditors did not object). After entry of the bankruptcy court’s judgment on nondischargeability, the debtor appealed to the BAP, which, in a decision authored by the Honorable William J. Lafferty (who also serves as a Bankruptcy Judge for the Northern District of California Bankruptcy Court), affirmed.
Reasoning
In the BAP, the debtor contended that the prior dismissal of the suit in state court precluded later entry of the nondischargeability judgment in bankruptcy court. As a threshold matter, the BAP noted that “[n]otwithstanding California law on claim preclusion . . . claim preclusion does not apply to nondischargeability proceedings.” Citing Ninth Circuit authority, the BAP explained that claim preclusion does not apply to nondischargeability proceedings because “the bankruptcy courts have exclusive jurisdiction over claims under § 523(a)(2), and thus state court judgments of fraud cannot preclude bankruptcy courts from presiding over a claim over which only bankruptcy courts may preside.” The BAP thus found that “the state court did not, and could not, decide a claim of nondischargeability under § 523.” Therefore, the BAP held that the “Debtor did not meet his burden of establishing that either claim or issue preclusion barred the bankruptcy court’s entry of the Nondischargeability Judgment.”
The BAP also cited policy considerations supporting its ruling, finding that “application of either claim or issue preclusion in the manner Debtor requests would undermine the purpose of these doctrines.” First, there would be no preservation of judicial resources, because the bankruptcy court had already held a trial and issued detailed findings of fact and conclusions of law. Second, “and crucially,” the BAP found that “application of either doctrine in this matter would pervert, instead of preserve, the integrity of the judicial system.” The BAP noted that the state court dismissed the suit “not because it analyzed the merits of Plaintiffs’ claims against Debtor but because such merits had already been assessed and determined by a different court.” The BAP pointed out “[t]o use preclusion doctrines in this fashion would not only degrade judicial integrity but would promote chicanery.”
The BAP also found “Debtor’s arguments are barred by the doctrine of judicial estoppel,” noting that in state court, the debtor argued “that he should be dismissed because the bankruptcy court already had disposed of Plaintiffs’ claims against him,” while in bankruptcy court and on appeal, the debtor contrarily asserted “that the State Court Dismissal precluded any disposition of Plaintiffs’ claims by the bankruptcy court.” The BAP accordingly ruled that “[f]or the same reasons highlighted above, and to protect the integrity of this Panel, Debtor should now be estopped from arguing preclusion.”
Author Commentary
Griffithe is a reminder that claim preclusion does not apply to nondischargeability proceeding because bankruptcy courts have exclusive jurisdiction over claims under Bankruptcy Code Section 523. The case also reinforces that courts will not countenance debtors seeking to “game the system” by using clever arguments to undo adverse rulings. In particular, the BAP’s carefully written discussion of judicial estoppel principles is a warning to litigants seeking to gain an unfair advantage by taking contrary positions in different courts.
It’s worth noting that Plaintiffs’ complaint included a claim under Section 523(a)(19) to except the debt from discharge as one arising from violations of securities laws. Section 523(a)(19) automatically excepts such debts from discharge without the need for the filing of a complaint. 11 U.S.C. § 523(c) requires complaints only for debts under subsections (a)(2), (a)(4), and (a)(6). But, the Plaintiffs in this case did not yet have a money judgment. So, they proceeded to obtain from the bankruptcy court a money judgment and a determination that the debt was excepted from discharge under subsections (a)(2) and (a)(19). Once the debt was determined to be one arising from securities fraud, the homestead cap under Section 522(q) could have also come into play had the debtor owned real property. If you are representing a creditor with an (a)(19) type claim, be sure to timely file an objection to any claimed homestead exemption that exceeds the 522(q) cap.
Lastly, the BAP’s decision discusses the issue of whether the appeal was timely because the bankruptcy court’s memorandum decision was entered 18 months prior to the judgment which was appealed. If the memorandum decision had clearly evidenced the judge’s intention that it be the court’s final act, then the appeal would have been untimely and subject to mandatory dismissal. But, the memorandum decision in fact required that plaintiffs submit a form of judgment consistent with the memorandum. As such, the court’s intention was clear that the separate judgment would be the court’s final act.
These materials were prepared by ILC member Gary M. Kaplan, a partner at Farella Braun + Martel LLP in San Francisco (gkaplan@fbm.com), with editorial contributions from Ed Hays of Marshack Hays Wood LLP, in Irvine and the Hon. (ret.) Meredith A. Jury.