Tillman Enters., LLC v. Horlbeck (In re Horlbeck)

589 B.R. 818

IN RE: Todd S. HORLBECK, Debtor.

Tillman Enterprises, LLC, Plaintiff,

v.Todd S. Horlbeck, Defendant.

Bankruptcy Case No. 15 B 28696

Adversary Case No. 16 A 00026

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed September 14, 2018

Amy Galvin-Grogan, Garelli, Grogan, Hesse & Hauert, Elmhurst, IL, for Plaintiff.

John S. Burke, Jared M. Schneider, Higgins Burke, P.C., St. Charles, IL, Jordan B Dorrestein, Griffin Williams LLP, Geneva, IL, for Defendant.

MEMORANDUM OPINION

Janet S. Baer, United States Bankruptcy Judge

Todd Horlbeck filed a chapter 7 bankruptcy petition on August 21, 2015. During the pendency of Horlbeck's case, Tillman Enterprises, LLC ("Tillman") filed a three-count adversary complaint seeking a determination that a debt Horlbeck owes to Tillman is not dischargeable pursuant to 11 U.S.C. §§ 523(a)(19), (a)(2)(A), and (a)(2)(B) (Counts I, II, and III, respectively).¹ The matter is now before the Court for ruling on the parties' cross-motions for summary judgment. For the reasons set forth below, the motions are granted in part and denied in part. Horlbeck is entitled to summary judgment on Count I under § 523(a)(19), and Tillman is entitled to summary judgment on Counts II and III under §§ 523(a)(2)(A) and (a)(2)(B).

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

BACKGROUND

A careful review of the pleadings and motions, as well as the statements and exhibits attached thereto, reveals that there is no genuine dispute as to any material fact. Not surprisingly, Horlbeck and Tillman tell different versions of the same story, but the material facts are the same. At its heart, this case involves a hedge fund manager, a wealthy family, the investment of over $3,000,000, and the loss of much of that investment between 2007 and 2008.

Todd Horlbeck, the debtor in the underlying bankruptcy case, managed a hedge fund from its inception in 2002 to its liquidation in 2009. During those years, seven members of the Tillman family (collectively, the "Tillman Family") invested their money through the hedge fund, either in an individual capacity or through a legal entity.² Upon liquidation of the hedge fund, the members of the Tillman Family received only a fraction of their total investment. As a result, they investigated Horlbeck and learned that the quarterly statements that he supplied to investors had been inaccurate. Horlbeck maintains that most of the inaccurate values reported in the statements were the result of miscalculations. He admits, however, that he began to knowingly report inflated account values after January 9, 2008. Eventually, Horlbeck agreed to pay the Tillman Family $1,265,000 in exchange for the release of potential claims against him. Despite that agreement, he failed to pay the Tillman Family and subsequently filed bankruptcy.

A. The Horlbeck-Tillman Investment Relationship

Horlbeck first met a member of the Tillman Family when he approached Warner Tillman at his place of business in 1992. (Adv. No. 16-00026, Dkt. No. 106-2 at 3.³ ) Soon thereafter, Warner began to use Horlbeck as an investment advisor. (Id. ) In 2002, after a decade of managing investments for Warner, Horlbeck established a hedge fund called HCM L.P. (Id. ) The hedge fund was structured as a limited partnership of which Horlbeck Capital Management LLC was the general partner, and investors were limited partners. (Id. ) Todd Horlbeck served as the manager of Horlbeck Capital Management LLC, which in turn served as the manager of HCM L.P. (Id. )

Between 2003 and 2008, the Tillman Family invested a total of $3,120,000 through HCM L.P. on eleven separate occasions, on the dates and in the amounts set forth in the following table:

Account Holder Date Amount
Tillman Enterprises, LLC     12/24/2002     $1,000,000
Josh Tillman                 01/02/2003       $250,000
Burton Tillman               12/24/2003       $200,000
Warner Tillman Trust         01/02/2004       $200,000
Warner Tillman Trust         09/29/2006       $500,000
Joel Tillman                 01/15/2007        $60,000
Julie Tillman                01/18/2007        $60,000
Julie Tillman                04/01/2007       $100,000
Joel Tillman                 04/30/2007       $100,000
Sam and Jenny Wiley          06/30/2007        $50,000
Estate of Burton Tillman     01/03/2008       $600,000
                             Total $3,120,000

(Adv. Dkt. 85-37 at 2-3, Exs. 2A-2G.) The investments were memorialized by subscription agreements that contained anti-reliance clauses. (Id. ) Under those clauses, the members of the Tillman Family represented that, in making the decision to invest, they relied solely upon a private placement memorandum and its ancillary documents and materials, along with their own investigations. (Id. ) Further, they acknowledged that no representations outside of the memorandum and partnership agreement had been made. (Id. )

B. The False Account Statements and HCM L.P.'s Collapse

Throughout the life of HCM L.P., Horlbeck sent quarterly statements to investors that reflected the number of shares owned, the net asset value per share,⁴ and the total value of each account. (Adv. Dkt. 107-1 at 6.) At some point, Horlbeck decided not to disclose the actual 2007 year-end values to investors. (Id. ) He made that decision "in an effort to make the fund's performance appear better than it was." (Adv. Dkt. 106-2 at 15.) Specifically, Horlbeck admits that after January 7, 2008, he began to knowingly overstate account values, starting with the statement for the fourth quarter of 2007 and continuing with each statement issued through the end of 2008. (Adv. Dkt. 107-1 at 8.) Horlbeck says that he learned in May or June of 2009 that the values in the statements had also been inaccurate for the first three quarters of 2007. (Id. ) In fact, the values in the statements had been inaccurate since the inception of the hedge fund. (See Adv. Dkt. 106-2 at 14-15.) After Horlbeck issued the last account statement in January 2009, he wrote letters to investors to advise them that HCM L.P. would be closing in April 2009. (Id. at 10-11.) Subsequently, Horlbeck liquidated HCM L.P., and then he returned $554,162.42 to Tillman and the Warner Tillman Trust, $1,145,837.58 less than the $1,700,000 that they invested. (Id. at 11.) No evidence was offered of losses incurred by other members of the Tillman Family.

C. Investigations and Settlements

After HCM L.P.'s liquidation, several parties launched parallel investigations into Horlbeck's management of the hedge fund. Among them, the Financial Regulatory Authority, Inc. ("FINRA"),⁵ a securities industry regulator, sent both requests for information and investigative questions to Horlbeck and also conducted an on-the-record interview with him. (Id. at 11-31.) Eventually, Horlbeck executed a letter of acceptance, waiver, and consent with FINRA (the "AWC Agreement"), agreeing to a permanent bar from the securities industry. (Id. at 31.) The Tillman Family initially engaged in direct correspondence with Horlbeck but eventually hired an attorney to formally investigate and negotiate a settlement. (Id. at 26-31.)

On May 19, 2009, soon after Horlbeck had liquidated the hedge fund, he wrote a letter to Warner Tillman. The letter informed Warner that there had been "performance and reporting inaccuracies" in the quarterly statements but that "these inaccuracies ha[d] not altered the overall results ... or the amount of [Warner's] final distribution." (Id. at 19-20.) Around the same time, FINRA sent Horlbeck a list of investigative questions about his management of the hedge fund. (Adv. Dkt. 111-1 at 13-14.) On July 9, 2009, Horlbeck responded to FINRA by admitting that "in an effort to make the fund's performance appear better than it was, [he] reported to partners a valuation that was not accurate .... [He] reported to partners a valuation that was better than the actual valuation." (Adv. Dkt. 107-1 at 16, Ex. M.)

Less than two months later, on August 28, 2009, Horlbeck sent letters to several of the hedge fund's investors, including members of the Tillman Family. (Id. at 9.) In those letters, Horlbeck claimed that he "had discovered errors with the [n]et [a]sset [v]alue of ... HCM L.P.," that "some partners were inadvertently overpaid ... approximately $464,988," and that members of the Tillman Family were owed additional amounts due to the overpayments. (Adv. Dkt. 85-37 at 6, Ex. 11.) The letters did not disclose that Horlbeck was subject to an investigation by FINRA. Instead, Horlbeck self-servingly quoted his own letter to FINRA about compensation stating: "I did not take all the performance based compensation to which I was entitled, and I left virtually all of my investment in the fund throughout its existence ...." (Id. ) In the August 2009 letters, Horlbeck offered to sign promissory notes for repayment of the additional amounts owed in exchange for releases of claims against him. (Id. )

After the members of the Tillman Family received the letters, they hired an attorney to investigate Horlbeck and negotiate a settlement. (Adv. Dkt. 106-2 at 26-31.) Throughout the negotiations, Horlbeck continued to seek the release of claims against him. In a November 10, 2009 letter to investors, Horlbeck wrote, "I have received most of the settlements and releases back." (Adv. Dkt. 85-37 at 7, Ex. 12.) For investors who had not already settled, Horlbeck enclosed photocopies of checks that would be sent upon the receipt of signed releases. (Id. ) The checks were not for the full amounts that Horlbeck claimed to owe, so he again offered to send promissory notes for repayment of the remaining amounts. (Id. ) Later, in a November 20, 2009 email to Warner, Horlbeck again sought release and threatened that his "other option [was]...