Race the Cresting Curl, LLC v. Papermaster

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Introduction In this case, the Court once again considers whether a state court judgment that awards judgment to a creditor "on its claims asserted in this cause against" the debtor had, in fact, the effect of awarding judgment on the claims asserted in the cause against the debtor. The Court once again determines that the plain text of the order says what it says. In this case, that means that the debtor's more-than-ten- million-dollar debt to the creditors is nondischargeable.

Background

Debtor, Steven Gerald Papermaster, filed his individual chapter 11 case on October 7, 2025.¹Creditors Race the Cresting Curl, LLC ("Race") and Leap of Ruleset, LLC ("Leap") timely commenced this adversary proceeding objecting to the discharge of the debts owed to them by Mr. Papermaster.²Race and Leap assert that their claims against Mr. Papermaster are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), and (a)(19).

On March 12, 2026, Race and Leap filed their Motion for Summary Judgment [ECF No. 15], seeking summary judgment on their § 523(a)(19) claim. Mr. Papermaster timely filed a response [ECF No. 18], and Race and Leap timely filed a reply [ECF No. 19].

Legal Standard

Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."³"When seeking summary judgment, the movant bears the initial responsibility of demonstrating the absence of an issue of material fact with respect to those issues on which the movant bears the burden of proof at trial."⁴The burden then shifts to the non-moving party to "present evidence that there is a genuine issue for trial."⁵When evaluating a motion for summary judgment, courts must view the

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evidence in the light most favorable to the non-moving party.⁶"Unsubstantiated assertions, improbable inferences, and unsupported speculation are not sufficient to defeat a motion for summary judgment."⁷

Jurisdiction and Authority

The Court has jurisdiction to hear this matter and authority to enter a final judgment. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and is a part of the claims allowance process.⁸In addition, both parties have consented to this Court entering a final judgment in this case.⁹

Analysis

The Bankruptcy Code prohibits debtors from receiving a discharge of certain types of debt, including those emerging from the violation of securities laws. The provision is broadly drafted. Section 523(a)(19) of the Bankruptcy Code denies the discharge to any debt that "is for the violation of any of the Federal securities laws[,] . . . any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or common law fraud, deceit, or manipulation in connection with the purchase or sale of any security." This provision was passed in the wake of the Enron scandal and was then expanded somewhat in the 2005 Bankruptcy Code amendments.¹⁰

Most items in § 523's list of nondischargeable debts need not be liquidated before they are held to be nondischargeable, and the bankruptcy court may itself liquidate the amount of the claims as well as determining their eligibility for discharge.¹¹That said, if the debt has been liquidated elsewhere—for instance in a state court judgment or an arbitration award—the court will engage in a familiar collateral estoppel analysis to determine what sort of preclusive effect it should be

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given, usually based on whether the relevant issues were fully and fairly litigated below.¹²

Section 523(a)(19) is somewhat different. On the one hand, although courts are divided on this, the provision seems to suggest that the debt must be liquidated elsewhere, not in the bankruptcy court.¹³This requirement can make it somewhat harder for creditors to obtain the nondischargeable judgment because they may have to go litigate in another venue first. On the other hand, the creditor is aided by the fact that the nondischargeable debt can arise from a wide variety of sources: "any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding."¹⁴And this language does not seem to require a full preclusion analysis (as confirmed by various decisions cited below, including the widely cited Minardi case¹⁵). This may ease creditors' way, at times, giving force to default judgments, settlement agreements, and other writings that might not always pass a full preclusion analysis.

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Here, Race and Leap sued Mr. Papermaster in state court for claims arising out of alleged securities fraud, including (1) violations of the Texas Securities Act,¹⁶

(2) fraud, (3) statutory fraud, and (4) unjust enrichment.¹⁷Race and Leap obtained and the state court entered a consent judgment in their favor, awarding each party

"judgment on its claims asserted in this cause against Defendant Steven G. Papermaster."¹⁸

In Mr. Papermaster's main case, this Court previously opined about the applicability of § 522(q)(1)(B)(i), a provision of the Bankruptcy Code that limits a debtor's homestead exemption if the debtor owes a debt arising out of certain securities laws violations.¹⁹Mr. Papermaster timely filed a notice of appeal of that ruling.²⁰While the analysis under § 523(a)(19) is similar in many ways to § 522(q), the two provisions are not identical. ²¹

For these reasons, the Court will independently analyze the parties' arguments under § 523(a)(19) and does not merely regurgitate the reasoning in its previous ruling. A. A consent decree can serve as the basis for a nondischargeable debt, and it can do so without the necessity of a full preclusion analysis. For most nondischargeability actions, a state court order is subject to a collateral estoppel analysis before it can be used preclusively.²²But the situation is somewhat altered in the context of § 523(a)(19). As cases cited by both parties confirm, ²³

the typical preclusion analysis is not required. ²⁴

Because the statute

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explicitly contemplates a finding of nondischargeability for a qualifying debt arising from "any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding," there is no need for the Court to consider the underlying circumstances of the order. So long as the judgment, order, consent order, or decree reflects a debt deriving from any one of the enumerated predicates, the inquiry ends there.²⁵The debt is not discharged.

B. Two of the claims resolved against Mr. Papermaster in the state court order are each qualifying predicates for nondischargeability under § 523(a)(19). The state court judgment awards Race and Leap each "judgment on its claims asserted in this cause against Defendant Steven G. Papermaster."²⁶To determine to which claims the state court judgment refers, the Court looks to the live pleading in the state court case.²⁷The claims asserted in the cause against Defendant Steven G. Papermaster were (1) violations of the Texas Securities Act, (2) fraud, (3) statutory of issue preclusion principles." (citing Minardi, 536 B.R. at 192)); Hardwick v. Anderson [hereinafter Hardwick II], 658 B.R. 123, 129-30 (E.D. Tex. 2024). Although Mr. Papermaster's response cites Minardi for this principle, he nonetheless attempts to make a "backdoor" preclusion argument, arguing, for example, that there was never "any determination of the merits of the claims brought by Leap or Race." Def.'s Resp. ¶¶ 16, 26. Under the prevailing case law, this analysis is simply not required for the purposes of 11 U.S.C. § 523(a)(19), so the Court rejects this argument. See, e.g., Osborne, 2017 WL 1232407, at *5 ("Thus, any lack of particularized findings in this context is of no consequence.").

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fraud, and (4) unjust enrichment.²⁸The violations of the Texas Securities Act qualify as predicates for nondischargeability under § 523(a)(19)(A)(i), which contemplates a debt for the violation of "any of the State securities laws."²⁹The fraud claim qualifies as a debt for "common law fraud . . . in connection with the purchase or sale of any security." ³⁰

This leaves the claims for statutory fraud and unjust enrichment, which do not qualify under the plain language of the text of § 523(a)(19). Mr. Papermaster's response contends that the state court order "recites that it disposes of all claims and all parties, but makes no finding or conclusion with respect to any particular claim."³¹However, this is not true: the state court order explicitly awards judgment to Race and Leap on their "claims asserted in this cause against"

Mr. Papermaster. This judgment obviously includes, therefore, the two claims that are statutory predicates for nondischargeability under § 523(a)(19). The clarity of this judgment can be illustrated by contrasting it with the state court order in Hardwick³²(a case that Mr. Papermaster denies controls, but makes no attempt to distinguish³³). In Hardwick, the state court order did not enter judgment on any claims, but merely entered judgment "in favor of the Plaintiff" and "finally dispos[ed] of all claims against" the defendant."³⁴Because the state court order in Hardwick did not enter judgment on any particular claim (or on all claims), the bankruptcy court had to investigate the causes of action in the state court case to determine what the judgment could have been for.³⁵Because all of the causes of

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action were predicate offenses for purposes of § 523(a)(19), the bankruptcy court was able to hold that the judgment was "for" those predicate offenses.³⁶The district court affirmed.³⁷

Here, not all of the claims asserted against Mr. Papermaster are within the scope of § 523(a)(19).³⁸So, superficially, this looks like a more difficult case than Hardwick. But because judgment here was explicitly awarded to each of Race and Leap on "its claims asserted in this cause against Defendant Steven G. Papermaster,"

there is no ambiguity or room to argue that the judgment was only awarded on certain claims (i.e., the ones that do not trigger § 523(a)(19) liability). In other words, unlike the state court judgment in Hardwick, the judgment here is not unclear on the grounds on which it was entered.³⁹It is not necessary for every claim in this case to be a predicate offense for the purposes of § 523(a)(19). Judgment was awarded for state securities laws violations and fraud arising out of the sale of securities to Race and to Leap.

C. Mr. Papermaster's cited cases do little to support his position. Mr. Papermaster cites several § 523(a)(19) cases purportedly in support of his position.⁴⁰However, each of these cases are distinguishable, especially upon review of the state court order at issue in each case. Notably, Mr. Papermaster has not pointed to a single case where a debt based on a state court order that explicitly awarded judgment against the debtor for securities law violations was found to be dischargeable by a bankruptcy court.

In Mollasgo v. Tills, the creditor attempted to use a settlement agreement to establish nondischargeability.⁴¹The court considered Congress's intent in allowing

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a settlement agreement to satisfy § 523(a)(19), observing that even "a settlement agreement that settles allegations of securities violations and is silent to fault may be sufficient."⁴²But because the settlement agreement expressly stated that "fault and liability are not conceded," the agreement was insufficient.⁴³ Here, unlike Tills, Race and Leap attempt to use a state court judgment, not a settlement agreement, to establish nondischargeability of Mr. Papermaster's debts to them. And, unlike Tills, where "fault and liability" were not conceded, this judgment enters judgment on the claims against Mr. Papermaster, which under Texas law is a finding of liability on those claims.

The facts of Barton v. Stalter⁴⁴are similar to Tills. In Stalter, the parties resolved a state court lawsuit with a settlement agreement that expressly "reserved any admission of liability."⁴⁵The related, stipulated state court judgment, which is available on the docket in that case, only enters a judgment amount and does not enter judgment on any claims against the defendants.⁴⁶

Likewise, in McKinny v. Allison,⁴⁷the district court upheld the bankruptcy court's decision to deny summary judgment on a similar federal court order because

"The stipulated judgment did not reference any of the underlying asserted claims; it only referenced the settlement agreement, which expressly stated the parties admitted no liability."⁴⁸Plainly, Stalter and Allison are both distinguishable from Mr. Papermaster's case where there is no reservation language.⁴⁹

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Mr. Papermaster also brings forward Lyndon v. SEC,⁵⁰in which a consent judgment was entered against the debtor in a federal securities action specifically

"without admitting or denying the allegations of the Complaint (except as to jurisdiction)." ⁵¹

However, the consent judgment also explained that "the facts alleged in the SEC's complaint would be deemed true" for the purpose of determining damages.⁵²The facts alleged in the SEC's complaint included federal securities laws violations.⁵³Thus the court determined: "Preclusion analysis is not necessary here; the terms of the [judgment] make it crystal clear that [the debtor's] debt is 'for' securities law violations."⁵⁴Mr. Papermaster is correct that the consent judgment here, unlike in Lyndon, does not explicitly state that the facts in the complaint were to be deemed true. But, also unlike in Lyndon, there was no "without admitting or denying" language here—to the contrary, judgment was entered against Mr. Papermaster on the claims alleged in the case, without any reservations. There is nothing inconsistent about this Court's ruling and the Lyndon case. Finally, Mr. Papermaster cites Wong v. Bergan,⁵⁵a 2026 case out of the Southern District of Texas in which the court granted summary judgment on § 523(a)(19).⁵⁶The underlying state court judgment in that case explicitly found violations of state securities laws.⁵⁷However, it was a default judgment, which was not preclusive under the applicable state law.⁵⁸The court affirmed that traditional issue preclusion did not apply, and that the default judgment could still serve as a basis of nondischargeability for § 523(a)(19).⁵⁹Although the judgment in Bergan was more explicit than the judgment against Mr. Papermaster here, the legal principle is the same: no preclusion analysis is required. D. Even if a preclusion analysis were required, this judgment would pass it. As established above, no preclusion analysis is required for this Court to find that the state court judgment establishes a nondischargeable debt under § 523(a)(19). That said, under Texas law, as the Court has already found in its related opinion

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under § 522(q), the opinion here would pass the collateral estoppel test under governing Texas law.⁶⁰The judgment is final, unambiguous, and was never appealed. It stands as a matter of law.

Conclusion

Regardless of the circumstances or intent of the order, a judgment was entered by the state court, which awarded Race and Leap "judgment on [their] claims asserted in this cause against Defendant Steven G. Papermaster." Upon review of the live pleading in that case, the claims asserted in that cause against Mr. Papermaster included violations of state securities laws and fraud in connection with the sale of securities. Therefore, Mr. Papermaster owes a debt for "the violation of . . . any of the State securities laws and "common law fraud . . . in connection with the sale of any security,"⁶¹and this debt results from a "judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding."⁶²

These facts are subject to no real dispute and are not eligible to be relitigated by Mr. Papermaster in this Court. Therefore, summary judgment is entered on

11 U.S.C. § 523(a)(19). Mr. Papermaster's debts to Race and Leap are nondischargeable.

IT IS SO ORDERED that Plaintiffs' Motion for Summary Judgment [ECF No. 15] is granted.

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