The U.S. Court of Appeals for the Ninth Circuit has found that debts relating to a securities law violation could be discharged in a Chapter 7 bankruptcy proceeding if the debtor himself was not responsible for violating federal securities laws.

The debtor, an attorney, represented his client in an Securities and Exchange Commission enforcement action. A receiver appointed in the enforcement action directed the debtor to disgorge sums for legal fees the debtor received from his client on retainer but had not yet used. The debtor filed for bankruptcy and sought to discharge his obligation to disgorge the retainer account sums.

Section 523(a)(19) of the bankruptcy code provides that a debtor should not be discharged from any debt that is for “the violation of any of the Federal securities laws.” The debtor argued that the section required that the debtor himself violate the securities laws. The bankruptcy court agreed and found that because the debtor did not violate any securities laws – but merely held funds belonging to a person who had – the debt was dischargeable. The district court, taking a broader view, found that the section was not so limited and refused to discharge the debt.