By: Megan Kuzniewski
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
11 U.S.C. Section 523 lists certain debts that may not be discharged by a debtor’s bankruptcy.[1] In particular, 11 U.S.C. Section 523(a)(2)(A) (“Section 523(a)(2)(A)”) provides that a debtor who files a bankruptcy will not be discharged of debts that were obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”[2] False representations, such as those described in Section 523(a)(2)(A), carry a scienter requirement which requires that it be shown that an individual knowingly made false statements or representations.[3] In In re Bocchino, the Court of Appeals for the Third Circuit found that gross recklessness satisfies the scienter requirement of Section 523(a)(2)(A).[4] In S.E.C. v. Bocchino, the Securities and Exchange Commission (the “SEC”) filed a lawsuit against Bocchino, a stockbroker, in the District Court of the Southern District of New York.[5] The district court found Bocchino civilly liable for “inducing investors via high pressure sales tactics and material misrepresentations” and entered a judgment against him totaling $178,967.55, including disgorgement of fees, interest, and civil penalties.[6] Thereafter, Bocchino filed for chapter 13 bankruptcy protection.[7] The SEC petitioned the bankruptcy court for a judgment declaring the judgments against Bocchino nondischargeable under Section 523(a)(2)(A).[8] The SEC argued that Bocchino had obtained the funds “by… false pretenses, a false representation, or actual fraud.”[9] Bocchino had sought investors for two ventures that turned out to be fraudulent.[10] He began seeking out investments without doing any independent research into the ventures, despite there being cause for suspicion.[11] The bankruptcy court found that, although “Bocchino did not knowingly make any false statements,” the scienter requirement of Section 523(a)(2)(A) “may be satisfied by grossly reckless behavior.”[12] The bankruptcy court discharged the civil penalty portion of the judgment but concluded that the remaining portions of the judgment were nondischargeable under Section 523(a)(2)(A).[13] Bocchino appealed this finding.[13] On appeal, the district court affirmed the bankruptcy court’s decision,[15] and thereafter, the Third Circuit also affirmed the lower court.[16]
Under Section 523(a)(2)(A), a person who obtains property by fraudulent means will not be discharged for claims relating to falsely obtained property.[17] Courts have consistently found that gross recklessness satisfies the scienter requirement of Section 523(a)(2)(A).[18] For example, in In re White, the district court reversed the bankruptcy court’s finding that the scienter requirement was satisfied even though the defendants had not knowingly made false representations.[19] On appeal, the Fourth Circuit found that “a showing of reckless indifference to the truth is sufficient to demonstrate the requisite intent to deceive.”[20] In that decision, the Fourth Circuit reasoned that a showing of gross recklessness satisfies Section 523(a)(2)(A) because “the overwhelming failure [of defendants] to do any real investigation . . . characterizes their recklessness. [The defendants’] actions evidence that they wanted to receive commission without asking the hard questions.”[21] Additionally, in Bullock v. BankChampaign, N.A., the Supreme Court, while discussing a different provision of Section 523, “interpreted § 523(a)(4) so as to include a prohibition on discharge for defalcation committed by gross recklessness.”[22] The Bocchino Court relied on the Supreme Court decision, reasoning that “[t]o read § 523(a)(2)(A) so restrictively as to sanction Bocchino’s gross recklessness would be at odds with the general principles of the act.”[23] The decision adopted the rule that where evidence clearly shows that the debtor acted recklessly by making representations without doing his or her proper due diligence, a showing of gross recklessness satisfies the scienter requirement.[24] This was similarly followed by other courts, although Section 523(a)(2)(A) does not state this explicitly.[25]
In re Bocchino reaffirmed the unique purpose of Section 523(a)(2)(A).[26] Section 523(a)(2)(A) is very specific and strictly construed because the Bankruptcy Code is supposed to help those who are “honest but unfortunate.”[27] But courts have consistently found that this does not include those who act recklessly and make representations without making the proper inquiries.[28] Not allowing a showing of gross recklessness to fulfill the scienter requirement would effectively allow thieves to deceive others, and then when caught, to declare bankruptcy protection and never have to pay for their crime. In re Bocchino served as an important reaffirmation of a rule applied by most courts that those who act with gross recklessness cannot have their debts relating to that reckless act discharged.[29]
[1] 11 U.S.C. § 523(a)(2)(A).
[2] Id.
[3] In re Bocchino, 504 B.R. 403, 405 (Bankr. M.D. Pa. 2013).
[4] In re Bocchino, 794 F.3d 376, 382 (3rd. Cir. 2015).
[5] S.E.C. v. Bocchino, No. 98 Civ. 7525, 2002 WL 31528472, at *2 (S.D.N.Y. Nov. 8, 2002).
[6] 794 F.3d 376 at 378.
[7] Id.
[8] Id.
[9] 11 U.S.C. § 523(a)(2)(A).
[10] In re Bocchino, 794 F.3d at 378.
[11] Id. (“This lack of investigation occurred despite Bocchino’s awareness that [one of the venture’s] principal’s ‘full-time “job” was a law student.’”).
[12] Id. at 379.
[13] Id.
[14] Id.
[15] In re Bocchino, 794 F.3d 376, 379 (3rd. Cir. 2015).
[16] Id. at 380.
[17] In re White, 128 Fed. Appx. 994, 998 (4th Cir. 2005) (finding that showing of requisite level of recklessness may demonstrate intent to deceive).
[18] In re Bocchino, 794 F.3d at 378.
[19] 128 Fed. Appx. 994 at 998.
[20] Id. (citing Palmacci v. Umpierrez, 121 F.3d 781, 787 (1st Cir. 1997)).
[21] Id. at 1001.
[22] 133 S.Ct. 1754, 1759 (2013) (holding that scienter requirement of 11 U.S.C. § 523(a)(4) can be fulfilled by showing of gross recklessness).
[23] In re Bocchino, 794 F.3d at 382.
[24] Id.
[25] Id.
[26] Id.
[27] Id. 794 F.3d at 380 (citing Grogan v. Garner, 498 U.S. 279, 286–87 (1991)).
[28] See In re Bocchino, 794 F.3d 376, 379 (3rd. Cir. 2015); see also In re White, 128 Fed. Appx. 994 (4th Cir. 2005), Bullock, 133 S.Ct. 1754, 1759 (2013).
[29] See In re Bocchino, 794 F.3d 376; see also 128 Fed. Appx. 994; and Bullock, 133 S.Ct. 1754.