SEC. 1404. DEBTS NONDISCHARGEABLE IF INCURRED IN VIOLATION OFSECURITIES FRAUD LAWS.

(a) PREPETITION AND POSTPETITION EFFECT- Section 523(a)(19)(B) of title 11, UnitedStates Code, is amended by inserting ‘, before, on, or after the date on which the petition wasfiled,’ after ‘results’.

(b) EFFECTIVE DATE UPON ENACTMENT OF SARBANES-OXLEY ACT- The amendmentmade by subsection (a) is effective beginning July 30, 2002.

separate Order and Judgment will be entered granting Plaintiff’s motion for summary judgmentand excepting from the Defendant Robert N. Shearburn’s discharge the sum of $19,492,991.64.This Memorandum of Decision includes the Court’s Findings of Fact and Conclusions of Lawpursuant to F.R.B.P. 7052.

FINDINGS OF FACT

Local Bankruptcy Rule (“LBR”) 7056-1(a)(3) provides: “All material facts in the movingparty’s Statement of Uncontroverted Facts are deemed admitted unless controverted by aStatement of Genuine Issues filed by the opposing party.” Defendant failed to file a Statement ofGenuine Issues setting forth specific facts establishing any genuine issues of material fact.Instead, Defendant’s response sets forth its own set of uncontroverted facts. Therefore, byoperation of LBR 7056-1(a)(3) the following Plaintiff’s uncontroverted facts are deemedadmitted:

1. Plaintiff is the regulatory agency for the State of California in charge of overseeingand administering the Corporate Securities Laws of 1968 found at section 25000 et seq. of theCalifornia Corporations Code (“Corporations Code”).

2. On September 16, 2004, following an investigation of Defendant leading to the filingof a civil action alleging violation of the Corporate Securities Law, the state completed a four-day bench trial in the San Diego County Superior Court, State of California. The court entered aFinal Judgment against the Defendant, Robert N. Shearburn, and his company, InnovativeFinancial Services, Inc., for violations of sections 25110, 25210, and 25401 of the CorporationsCode. (Exhibit (“Ex.”) 1 attached to the Plaintiff’s memorandum of law, Docket No. 11).

3. Defendant was found to have unlawfully offered and sold unqualified non-exempt

securities involving purported investments in life insurance policy death benefits, without therequired license and by means of misrepresentations and omissions of material facts, ultimatelydefrauding 226 investors of millions of dollars, in violation of the California securities laws.(Ex. 1 attached to Docket No. 11).

4. The trial court entered Judgment against Defendant in the amount of $19,492,991.64,comprised of $14,512,025 in restitution, $4,972,500 in civil penalties, and $8,466.64 in costs.(Ex. 1).

5. Defendant filed his bankruptcy petition on May 14², 2004 (Ex. 2 attached to Docket11).

6. The Plaintiff’s pre-filing claim was brought to trial after the commencement of thebankruptcy case, following an Order entered by this Court on June 9, 2004, granting relief fromthe automatic stay. (Ex. 3 attached to Docket No. 11).

7. Plaintiff filed its Proof of Claim on October 8, 2004 (Proof of Claim No. 92). (Ex. 4attached to Docket No. 11). There has been no objection to Plaintiff’s Proof of Claim filed bythe Defendant or Trustee.

8. Defendant appealed the superior court Judgment to the Fourth District Court ofAppeal, Division 1, which affirmed the Judgment in a non-published written decision onDecember 6, 2005, as amended and filed on February 17, 2006. (Ex. 5 attached to Docket No.11).

²The Plaintiff’s Statement of Uncontroverted Facts states that the filing date of thepetition is May 1, 2004, which is the date on Ex. 2. However, the docket in Defendant’s Chapter7 bankruptcy Case No. 04-61472-7 shows that the petition was filed on May 14, 2004, and theCourt finds that the petition date is as reflected on the docket.

9. Defendant then filed a Petition for Review with the California Supreme Court, whichwas denied without a decision on the merits on May 10, 2006 (Ex. 6 attached to Docket No. 11)

10. Plaintiff filed a Complaint for Determination of Dischargeability pursuant to 11U.S.C. § 523(a)(19)(A)(i) and § 523(a)(19)(B)(iii) on June 27, 2006.

11. Defendant filed his answer to the Complaint on July 26, 2006.

Additional undisputed facts gleaned from the docket of Case No. 04-61472-7, includethat the deadline for filing dischargeability complaints was extended and expired on March 10,2005. A Discharge of Joint Debtors under 11 U.S.C. § 727 was entered in Case No. 04-61472-7on November 17, 2005 (Docket No. 114). The back page of the Discharge lists certain “Debtsthat are Not Discharged” including: “e. Debts for most fines, penalties, forfeitures, or criminalrestitution obligations; . . . h. Debts that the bankruptcy court specifically has decided or willdecide in this bankruptcy case are not discharged”.

DISCUSSIONA. Contentions of the Parties.

Plaintiff moves for summary judgment excepting its claim in the amount of$19,492,991.64 from Defendant’s discharge as a matter of law under § 523(a)(19)(A)(i) and §523(a)(19)(B)(iii) based upon the California court judgment, which was based on violations ofthe California Corporate Securities law. Plaintiff argues that its § 523(a)(19) claims may bebrought at any time under F.R.B.P. 4007 since the complaint is not brought under § 523(c) of theBankruptcy Code. Plaintiff contends that the parties actually litigated the issues in the CaliforniaSuperior Court and the judgment was affirmed and is final and therefore Plaintiff is entitled tosummary judgment.

Defendant contends that Plaintiff’s attorney “is a very vindictive attorney and has avendetta against me”. Defendant also argues this Court’s comment that he moved to Montana tofile bankruptcy is legally prejudicial to him because he planned on retiring in Montana.Defendant contends that Plaintiff’s complaint is untimely because it was filed after the deadlinefor filing dischargeability complaints under F.R.B.P. 4007(c) and § 523(a)(19) “is not a savingprovision”, and that the Plaintiff’s claim therefore is discharged consistent with Defendant’s“fresh start”.

B. Standard for Summary Judgment.

Summary judgment is governed by FED.R.BANKR.P. 7056. Rule 7056, incorporatingFED.R.CIV.P.56(c), states that summary judgment “shall be rendered forthwith if the pleadings,depositions, answers to interrogatories, and admissions on file, together with the affidavits, ifany, show that there is no genuine issue as to any material fact and that the moving party isentitled to judgment as a matter of law.” “The proponent of a summary judgment motion bears aheavy burden to show that there are no disputed facts warranting disposition of the case on thelaw without trial.” Younie v. Gonya (In re Younie), 211 B.R. 367, 373 (9^th Cir. BAP 1997)(quoting Grzybowski v. Aquaslide “N’ Dive Corp. (In re Aquaslide “N” Dive Corp.), 85 B.R.545, 547 (9th Cir. BAP 1987)). The manner in which this burden is proven depends on whichparty has the burden on a particular claim or defense at the time of trial.

If the moving party will bear the burden of persuasion at trial, that party mustsupport its motion with credible evidence–using any of the materials specified inRule 56(c)–that would entitle it to a directed verdict if not controverted at trial.Such an affirmative showing shifts the burden of production to the party opposingthe motion and requires that party either to produce evidentiary materials thatdemonstrate the existence of a “genuine issue” for trial or to submit an affidavitrequesting additional time for discovery. If the burden of persuasion at trial wouldbe on the non-moving party, the party moving for summary judgment may satisfyRule 56's burden of production in either of two ways. First, the moving party maysubmit affirmative evidence that negates an essential element of the nonmovingparty's claim. Second, the moving party may demonstrate to the Court that thenonmoving party's evidence is insufficient to establish an essential element of thenonmoving party's claim.

Celotex Corp. v. Catrett, 477 U.S. 317, 330-34, 106 S.Ct. 2548, 2557, 91 L.Ed.2d 265 (1986)(Brennan dissent) (citations omitted). See also Nissan Fire & Marine Ins. Co., Ltd. v. FritzCompanies, Inc., 210 F.3d 1099, 1102-06 (9th Cir. 2000) (discussing burdens for withstandingsummary judgment).

When seeking summary judgment, the moving party must initially identify those portionsof the record before the Court which it believes establish an absence of material fact. T.W. Elec.Serv., Inc. v. Pacific Elec. Contractors Ass’n., 809 F.2d 626, 630 (9th Cir. 1987). If the movingparty adequately carries its burden, the party opposing summary judgment must then “set forthspecific facts showing that there is a genuine issue for trial.” Kaiser Cement Corp. v. Fischback& Moore, Inc., 793 F.2d 1100, 1103-04 (9th Cir. 1986), cert. denied, 469 U.S. 949 (1986); FED.R.CIV.P.56(e). See also Frederick S. Wyle Prof’l. Corp. v. Texaco, Inc., 764 F.2d 604, 608 (9thCir. 1985) (“the opponent must affirmatively show that a material issue of fact remains indispute”). That is, the opponent cannot assert the “mere existence of some alleged factualdispute between the parties.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct.2505, 2510, 91 L.Ed.2d 202 (1986). Moreover, “[a] party opposing summary judgment may notsimply question the credibility of the movant to foreclose summary judgment.” Far Out Prods.,Inc. v. Oskar, 247 F.3d 986, 997 (9^th Cir. 2001). �

To demonstrate that a genuine factual issue exists, the objector must produce affidavitswhich are based on personal knowledge and the facts set forth therein must be admissible intoevidence. Aquaslide, 85 B.R. at 547. All reasonable doubt as to the existence of genuine issuesof material fact must be resolved against the moving party. Liberty Lobby, 477 U.S. at 247-48,106 S.Ct. at 2509. However, “[d]isputes over irrelevant or unnecessary facts will not preclude agrant of summary judgment.” T.W. Elec. Serv., 809 F.2d at 630 (citing Liberty Lobby, 477 U.S.at 248, 106 S.Ct. at 2510). “A ‘material’ fact is one that is relevant to an element of a claim ordefense and whose existence might affect the outcome of the suit. The materiality of a fact isthus determined by the substantive law governing the claim or defense.” Id.

If a rational trier of fact might resolve disputes raised during summary judgmentproceedings in favor of the nonmoving party, summary judgment must be denied. T.W. Elec.Serv., 809 F.2d at 630; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587,106 S.Ct. 1348, 1356, 89 L.Ed.2d 202 (1986). Thus, the Court’s ultimate inquiry is to determinewhether the “specific facts” set forth by the nonmoving party, viewed along with the undisputedbackground or contextual facts, are such that a rational or reasonable jury might return a verdictin its favor based on that evidence. T.W. Elec. Serv., 809 F.2d at 631.

Because Defendant failed to submit a statement of genuine factual issues, and because hisresponse otherwise lists his own Statement of Uncontroverted Facts, the Court concludes that nodisputed facts exist and the facts are admitted as set forth above by operation of LBR 7056-1(a)(3). In the absence of any disputed material facts, the inquiry shifts to whether the movingparty is entitled to judgment as a matter of law. Celotex, 477 U.S. at 323, 106 S.Ct. at 2552-53.

C. § 523(a)(19) and Standard for Issue Preclusion (Collateral Estoppel).

Plaintiff seeks summary judgment under § 523(a)(19)(A)(i) and § 523(a)(19)(B)(iii)based on the California state court Final Judgment against the Defendant, Ex. 1, finding

violations of California Corporate Securities Law sections 25110, 25210, and 25401 of theCorporations Code. Section 523(a)(19) provides in pertinent part:(a) A discharge under section 727, . . . of this title does not discharge an individual debtorfrom any debt –* * * *(19) that —(A) is for —(i) the violation of any of the Federal securities laws . . ., any of theState securities laws, or any regulation or order issued under suchFederal or State securities laws;* * * *; and(B) results from, before, on, or after the date on which the petition wasfiled —* * * *(iii) any court or administrative order for any damages, fine,penalty, citation, restitutionary payment, disgorgement payment,attorney fee, cost, or other payment owed by the debtor.

Section 523(a)(19) was added to § 523 by the Sarbanes-Oxley Act passed on July 30,2002, Pub.L. No. 107-204, § 803(3), 116 Stat. 745. In re Sherman, 441 F.3d 794, 817 n.34 (9^th Cir. 2006). Section 523(a)(19) applies to all bankruptcies pending at the time it was enacted, andthus applies to the instant Chapter 7 and adversary proceeding. Id.; Smith v. Gibbons, 289 B.R.588, 591-97 (Bankr. S.D. N.Y. 2003), aff’d, 311 B.R. 402 (S.D. N.Y. 2004), aff’d, 155 Fed.Appx 534 (2d Cir. 2005) (unpublished). Congress added this exception to bankruptcy dischargeto “disallow debts incurred in violation of securities fraud laws from being discharged inbankruptcy.” In re McClung, 304 B.R. 419, 424 (Bankr. D. Idaho 2004) (quoting Gibbons).

Ex. 1 shows that Defendant violated of California Corporate Securities Law sections25110, 25210, and 25401. Ex. 1, pp. 9, 15-16. Thus, the state court Judgment based onCalifornia securities law, Ex. 1, may satisfy the requirement of § 523(a)(19)(A)(i) for

nondischargeability upon a showing of violation of “State securities laws”, and the fines,

restitution and costs awarded by the state court at Ex. 1, pp. 19-21, may satisfy §

523(a)(19)(B)(iii).

As explained by the BAP in In re Baldwin, 245 B.R. 131, 134 (9^th Cir. BAP 2000), aff’d,

249 F.3d 912 (9^th Cir. 2001):

The doctrine of collateral estoppel, or issue preclusion, is intended to protect

parties from multiple lawsuits and the possibility of inconsistent decisions, and to

preserve judicial resources. See Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th

Cir. BAP 1995), aff'd, 100 F.3d 110 (9th Cir.1996). Collateral estoppel applies in

dischargeability proceedings. See Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct.

654, 112 L.Ed.2d 755 (1991). The burden of proof is on the party seeking to assert

collateral estoppel and in order to sustain this burden, "a party must introduce a

record sufficient to reveal the controlling facts and pinpoint the exact issues litigated

in the prior action." Kelly, 182 B.R. at 258. "Any reasonable doubt as to what was

decided by a prior judgment should be resolved against allowing the collateral

estoppel effect." Id.

The preclusive effect of a state court judgment in a subsequent federal action

is determined by the law of the state in which the judgment was entered. See Gayden

v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995). In order for a

prior judgment to be entitled to collateral estoppel effect under California law³, the

following five elements must be met:�

(1) The issue sought to be precluded from relitigation must be identicalto that decided in a former proceeding;(2) The issue must have been actually litigated in the former proceeding;(3) It must have been necessarily decided in the former proceeding;(4) The decision in the former proceeding must be final and on themerits; and(5) The party against whom preclusion is sought must be the same as, orin privity with, the party to the former proceeding.

Younie v. Gonya (In re Younie), 211 B.R. 367, 373 (9th Cir. BAP 1997) (citationomitted), aff'd, 163 F.3d 609 (9th Cir.1998).

See alsoHarmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9^th Cir. 2001) (stating California

³The elements for collateral estoppel are the same under either California or federal law.Kelly, 182 B.R. at 258 n.3.

collateral estoppel law), and Paine v. Griffin (In re Paine), 283 B.R. 33, 38-39 (9^th Cir. BAP 2002)(clarifying terms of res judicata and collateral estoppel under evolution of concepts from theRESTATEMENT (SECOND) OF JUDGMENTS.

Applying the California test for collateral estoppel, with the burden on the Plaintiff Stateof California, this Court concludes that the Plaintiff has satisfied its burden of establishing thefive requirements. The issues sought to be precluded from relitigation in the instant adversaryproceeding, Defendant’s alleged violations of California state securities laws, are identical to thatdecided in the former proceeding in the California courts. Plaintiff seeks exception fromDefendant’s discharge based on Defendant’s violations of California Corporate Securities Lawsections 25110, 25210, and 25401. Second, those issues were actually litigated in the formerproceeding in San Diego Superior Court, Case No. GIC 785226.

Third, that court necessarily decided Defendant’s violations of California CorporateSecurities Law sections 25110, 25210, and 25401. Ex. 1, pp. 15-16. Defendant is the same partyas Robert N. Shearburn in Case No. GIC 785226. Ex. 1. Lastly, Ex. 5 and 6 show that theDefendant’s appeal of the state court judgment were unsuccessful and the decision in Ex. 1 is nowfinal and on the merits. All the California requirements for collateral estoppel are established andtherefore Ex. 1 is entitled to collateral estoppel with respect to Plaintiff’s claims for exceptionfrom Defendant’s discharge under § 523(a)(19)(A)(i) for violation of “State securities laws”, andunder satisfy § 523(a)(19)(B)(iii) for the fines, restitution and costs awarded by the state court atEx. 1, pp. 19-21.

D. § 523(c) and F.R.B.P. 4007.

Defendant contends that Plaintiff’s claim was discharged and that its complaint was filed

after the deadline for dischargeability complaints had expired under Rule 4007(c). This ruleprovides:A complaint to determine the dischargeability of any debt pursuant to § 523(c) ofthe Code shall be filed not later than 60 days following the first date set for themeeting of creditors held pursuant to § 341(a). The Court shall give all creditorsnot less than 30 days of the time so fixed in the manner provided in Rule 2002.On motion of any party in interest, after hearing on notice, the court may for causeextend the time fixed under this subdivision. The motion shall be filed before thetime has expired.

Slagle v. Eagen (In re Eagen), 17 Mont. B.R. 65, 66 (Bankr. D. Mont. 1998).Section 523(c)(1) provides:Except as provided in subsection (a)(3)(B) of this section, the debtor shall be

discharged from a debt of a kind specified in paragraph (2), (4), (6), or (15) ofsubsection (a) of this section, unless, on request of the creditor to whom such debtis owed, and after notice and a hearing, the court determines such debt to beexcepted from discharge under paragraph (2), (4), (6), or (15) of subsection (a) ofthis section.

Defendant argues that Plaintiff’s claim is discharged and that its complaint based upon §523(a)(19) is untimely because it was not filed before the expiration of the deadline for filingdischargeability complaints. However, it is clear that subsection 523(a)(19) is not among thelisted paragraphs (2), (4), (6), or (15) of subsection (a) of § 523(c). The bankruptcy court inMcClung wrote that § 523(c)(1) does not apply to proceedings to determine the dischargeabilityof debts under § 523(a)(19). 304 B.R. at 424. Thus, Rule 4007(c) governing complaints filedunder § 503(c) does not apply. Rule 4007(b), “Time for Commencing Proceeding Other thanunder § 523(c)” applies and states in pertinent part: “A complaint other than under § 523(c) maybe filed at any time.” SeeFife v. Keating (In re Fife), 20 Mont. B.R. 134, 137 (Bankr. D. Mont.2002). Because Rule 4007(b) and not 4007(c) applies, Defendant’s contention that the Plaintiff’s

complaint is after the deadline and its claim is discharged lacks merit.

Lastly, Plaintiff’s complaint requests in addition to the $19,492.991.64 an award of costsand attorney’s fees. However, there is no discussion in the Plaintiff’s motion for summaryjudgment or supporting brief showing authority under § 523(a)(19) or state statute. Ex. 1 did notinclude an award of attorney’s fees. The American Rule denies attorney’s fees in the absence ofcontract, applicable statute, or other exceptional circumstances, and any exceptions to theAmerican Rule are narrowly circumscribed. In re Acequia, Inc., 34 F.3d 800, 819 (9^th Cir. 1994)(quoting Richardson v. Alaska Airlines, Inc.,750 F.2d 763, 765 (9^th Cir. 1984)). The Courtdeems Plaintiff’s prayer for attorney’s fees in its complaint abandoned, and based on theAmerican Rule Plaintiff’s request for attorney’s fees is denied.

CONCLUSIONS OF LAW

1. This Court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334(b).�

2. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) to determine thedischargeability of the Plaintiff’s particular debt.

3. The Plaintiff satisfied its burden of showing that there are no genuine issues ofmaterial fact.

4. The Plaintiff satisfied its burden under the five-part test for determining whether issuepreclusion (collateral estoppel) applies: (1) The issues sought to be precluded from relitigation areidentical to those decided in the former proceeding in the California Superior Court, San DiegoCounty, Case No. GIC 785226, Ex. 1, which were affirmed on appeal; (2) The issues of violationof state securities law and fines, restitution and costs resulting from the former proceeding, wereactually litigated in the former proceeding, Ex. 1; (3) The issues were necessarily decided in the

former proceeding, Ex. 1; (4) The decision in the former proceeding is final and was on the merits,Ex. 5, 6; and (5) The Defendant – party against whom preclusion is sought in the instant adversaryproceeding – is the same as a party to the former proceeding.

5. The state court Judgment, Ex. 1, is entitled to issue preclusion (collateral estoppel) withrespect to Plaintiff’s claims for exception from Defendant’s discharge under § 523(a)(19)(A)(i)for violation of “State securities laws”, and under § 523(a)(19)(B)(iii) for the fines, restitutionand costs awarded by the state court at Ex. 1, pp. 19-21.

6. Section 523(a)(19) is not among the listed paragraphs (2), (4), (6), or (15) ofsubsection (a) of § 523(c). Therefore § 523(c)(1) does not apply to proceedings to determine thedischargeability of debts under § 523(a)(19) and F.R.B.P. Rule 4007(c) governing complaintsfiled under § 523(c) does not apply.

7. Plaintiff’s claim against Defendant was not discharged and its complaint based upon §523(a)(19) may be filed at any time under F.R.B.P. Rule 4007(b) and was neither untimely nortime-barred.

8. Plaintiff’s prayer for attorney’s fees in its complaint is denied based upon waiver andthe American Rule.

IT IS ORDERED a separate Order shall be entered in accordance with the above,overruling the Defendant’s objection (Docket No. 22), granting Plaintiff’s motion for summaryjudgment (Docket Nos. 9/10), denying the State of California an award for attorney’s fees, andordering Judgment entered against Defendant Robert N. Shearburn in favor of the Plaintiff Stateof California excepting from Defendant’s discharge the amount of $19,492,991.64 under 11U.S.C. § 523(a)(19)(A)(i) and 11 U.S.C. § 523(a)(19)(B)(iii).