What I like the most about Judge Bybee's opinion is that he admits that the issue is a close one. In addition, near the end of his opinion, he makes arguments that go a long way towards persuading me that even though it might not be equitable to allow the debtor to get a discharge here, there are alternative ways of avoiding that consequence apart from the path taken by the government in this litigation. That was important to me.
But I think that, in the end, I'm still leaning towards Judge Fisher's dissent. Though I too admit that the issue is indeed a close one.
The statute doesn't necessarily tell you what to do; everyone admits that the language is ambiguous (which it is). In the end, although both the majority and the dissent have good policy arguments, I'm left with the same impression I had at the beginning. An attorney gets money from someone who's violated the securities laws. He's supposed to put that money in trust, but instead spends it. He then promptly files for bankruptcy. Is he shielded by the bankruptcy laws from having to give that money back? (Or, perhaps more accurately, does he obtain a discharge that says because he doesn't have the money, he doesn't have to pay it back?)
It just seems to me that we shouldn't allow this. Judge Bybee's correct that the lawyer didn't commit the securities fraud himself. But he got money from it regardless. It's "from" the fraud. Moreover, it's money that should have been held in trust -- that wasn't even the lawyer's in the first place. He essentially stole it. Now, Judge Bybee says that maybe the government should have charged the debtor with defalcation or fraud, both of which preclude a discharge. That sounds right to me, and it was that section of the opinion that had me the most on board. But the government can't do that since they're time-barred. So should we stick it to the government -- which is seeking recovery for the defrauded investors -- and let the wrongdoing debtor enjoy the fruits? Maybe. It just sticks in my craw. And if there's an alternative way out, as Judge Fisher argues there is, maybe we should take it.
Plus, I'm not sure that Judge Bybee adequately responds to the possibility that the majority's holding will provide a safe haven for illegitimate transfers of ill-gotten booty. What's to stop someone who defrauded investors, once he's caught, from giving all the money to his lawyer (or a friend) and then having that third party declare bankruptcy?
Judge Bybee first argues that if the third party participated in the underlying fraud, they'd be an aider and abettor and thus not granted a discharge. But that's substantially nonresponsive; in our hypotheticals, the third party didn't do so. They're an attorney, grandmother or friend. Judge Bybee then argues that a third party can be denied discharge in these cases if they don't disclose assets to the bankruptcy court. This is again substantially nonresponsive; the third party in these cases would indeed disclose the ill-gotten money, but would nonetheless seek a discharge. So far, it works. And why not do it?
Judge Bybee's best response is his final one, in which he argues that such a scheme wouldn't really benefit a debtor because they'd have to give the money to creditors anyway (since, after all, they're going bankrupt). But that's not true either. There are lots of exemptions. Move to Florida. Buy a multi-million dollar house with the proceeds. And then file for bankruptcy and claim that the entire amount is exempt. Seems like that works to me. You've now got money that you wouldn't otherwise have, and Judge Bybee's opinion doesn't permit the government (or defrauded investors) to get it back. Indeed, after today's holding, why wouldn't defendants and third parties do this? The culpable party's been caught and is going to have to disgorge the money anyway. And the benefits that accrue to the third party -- the multimillion dollar home -- seem to be worth the bankruptcy filing and resulting fight (if any). Grandma gets a mansion and the defrauded investors get the shaft.
I understand Judge Bybee's desire to give the debtor a fresh start. Which is indeed a fundamental purpose of the bankruptcy code. But I'm also worried about the adverse consequences of this rule. If the statute clearly created those consequences, well then, so be it. But it doesn't. At least not necessarily.
I'm sure my reaction here is colored by the fact that it's an attorney who's the debtor. The guy took money -- lots of it (over a half million dollars) -- that should have been held in trust and that he didn't earn. By taking that money and spending it, he benefitted. And now he largely gets off. He has to repay the money if he has it, of course. But he doesn't. He spent -- and enjoyed -- it. That seems wrong, at least if there's a way out.
So I agree with Judge Bybee that it's a close case. But I think I still lean towards Judge Fisher's side. Judge Bybee comes close to persuading me. But only close.