Directors, Officers and Other Responsible Persons Be Aware - Your Vicarious Liability for Your Company’s Violations of Securities Laws May Not Be Dischargeable

March 06, 2017

A debtor ordinarily may discharge debts in bankruptcy, unless one of several exceptions apply. One of the preclusions to dischargeability of certain debts, found in Section 523(a)(19) of the U.S. Bankruptcy Code, generally provides that the bankruptcy discharge does not apply to an individual debtor’s debt if the debt “(A) is for—the violation of any…Federal or State securities laws...; and (B) results…from—(i) any [Federal or State court] judgment….” This exception from discharge was added to the Bankruptcy Code by the Sarbanes-Oxley Act of 2002 in the wake of Enron’s collapse, and although the legislative history is scant, one purpose is to “prevent wrongdoers from using the bankruptcy laws as a shield...” to avoid payment for securities law violations. See 148 Cong. Rec. S7418-01, *S7418 (daily ed. July 26, 2002).

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