589 B.R. 818
Bankr. N.D. Ill.2018Background
- Debtor Todd Horlbeck ran a hedge fund (HCM L.P.) from 2002–2009; seven members/entities of the Tillman family invested $3,120,000 and recovered only part of that after liquidation.
- Horlbeck issued periodic account statements that were inaccurate; he admits knowingly overstating account values beginning January 2008 and later accepted FINRA investigators’ findings, consenting to an industry bar.
- The Tillmans negotiated a Settlement Agreement (Sept. 27, 2010) releasing claims in exchange for $22,500 and a promissory note for $1,242,500; Horlbeck executed a Financial Affidavit (Oct. 14, 2010) that omitted contingent liabilities to other investors.
- Tillman sued state-court for breach of the promissory note; Horlbeck filed Chapter 7 (Aug. 21, 2015). Tillman commenced adversary proceeding seeking nondischargeability under 11 U.S.C. §§ 523(a)(19), (a)(2)(A), and (a)(2)(B).
- Cross-motions for summary judgment decided on undisputed record: court concludes § 523(a)(19) claim fails, but § 523(a)(2)(A) and § 523(a)(2)(B) claims are established.
Issues
| Issue | Plaintiff's Argument (Tillman) | Defendant's Argument (Horlbeck) | Held |
|---|---|---|---|
| Whether the Settlement debt is nondischargeable under § 523(a)(19) as a debt “for” securities law violations or fraud | The debt arises from securities fraud (false NAV statements) and is memorialized by the Settlement Agreement | Settlement contains no admission; Tillman cannot show required elements (loss causation, reliance in some contexts) | Denied for Tillman; granted for Horlbeck — § 523(a)(19) not met (10b‑5 loss causation and anti‑reliance defeat other securities claims) |
| Whether debt is nondischargeable under § 523(a)(2)(A) for money obtained by false pretenses/representations/actual fraud (mischaracterizations and nondisclosure about fund mismanagement and FINRA investigation) | Horlbeck made false statements/omissions and concealed FINRA investigation to procure releases/promissory note; Tillman justifiably relied | Argues Tillman suspected wrongdoing and thus did not justifiably rely; also disputes intent | Held for Tillman (court infers intent, finds justifiable reliance); summary judgment entered sua sponte for Tillman under § 523(a)(2)(A) |
| Whether debt is nondischargeable under § 523(a)(2)(B) for materially false written statement respecting debtor’s financial condition (Financial Affidavit omitted contingent liabilities) | Financial Affidavit omitted substantial contingent liabilities (promissory notes/offers), was materially false, and Tillman reasonably relied | Argues no duty to disclose mere possibilities and disputes actual/reasonable reliance (timing of affidavit vs. settlement) | Held for Tillman — omission was material, intent to deceive can be inferred, and reliance was reasonable; summary judgment for Tillman under § 523(a)(2)(B) |
| Scope of bankruptcy court jurisdiction to adjudicate underlying securities liability under § 523(a)(19) | Tillman: bankruptcy court may determine liability for § 523(a)(19) purposes | Horlbeck argued the underlying liability must be determined in non‑bankruptcy forum | Court holds bankruptcy courts have jurisdiction to determine liability under § 523(a)(19) but finds substantive elements lacking on the record in this case |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (burden of proof for nondischargeability is preponderance of the evidence)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (elements of securities fraud; loss causation requirement)
- Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (private causes of action under the Investment Advisers Act are limited)
- Field v. Mans, 516 U.S. 59 (justifiable reliance under § 523(a)(2)(A) is subjective)
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standards and burdens)
- United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (statutory interpretation begins with plain text)
- Brown v. Felsen, 442 U.S. 127 (courts may look behind settlement’s no‑admission clause for nondischargeability analysis)