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. 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.” 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. 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). 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. 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. Thereafter, Bocchino filed for chapter 13 bankruptcy protection. The SEC petitioned the bankruptcy court for a judgment declaring the judgments against Bocchino nondischargeable under Section 523(a)(2)(A). The SEC argued that Bocchino had obtained the funds “by… false pretenses, a false representation, or actual fraud.” Bocchino had sought investors for two ventures that turned out to be fraudulent. He began seeking out investments without doing any independent research into the ventures, despite there being cause for suspicion. 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.” 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). Bocchino appealed this finding. On appeal, the district court affirmed the bankruptcy court’s decision, and thereafter, the Third Circuit also affirmed the lower court.