Holzhueter v. Groth (In re Holzhueter)

• Citation: 575 B.R. 444
• Decision Date: 18 October 2017
• Docket Number: Adversary No.: 16–79,Case No.: 16–13134–11
• Parties: IN RE: Aaron HOLZHUETER, Debtor. Aaron Holzhueter, Plaintiff and Counter–Defendant, v. David J. Groth, Gale I. Groth, David J. Heinecke, Judith A. Heinecke, James G. Pritchard, John W. Tesch, Patricia D. Tesch, Carl A. Nicholson, Gwendolyn R. Nicholson, And Barbara L. Wegner, Defendants and Counter–Claimants.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin

575 B.R. 444

IN RE: Aaron HOLZHUETER, Debtor.

Aaron Holzhueter, Plaintiff and Counter–Defendant,
v.
David J. Groth, Gale I. Groth, David J. Heinecke, Judith A. Heinecke, James G. Pritchard, John W. Tesch, Patricia D. Tesch, Carl A. Nicholson, Gwendolyn R. Nicholson,¹ And Barbara L. Wegner, Defendants and Counter–Claimants.

Case No.: 16–13134–11
Adversary No.: 16–79

United States Bankruptcy Court, W.D. Wisconsin.

Signed October 18, 2017

575 B.R. 448

Nicholas Hahn, Esq., Paul G. Swanson, Esq., Steinhilber Swanson LLP, Oshkosh, WI, for Plaintiff and Counter–Defendant.

April Rockstead Barker, Esq., Patrick J. Schott, Esq., Schott, Bublitz & Engel S.C., Brookfield, WI, for Defendants and Counter–Claimants.

MEMORANDUM DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

This matter is before the Court on the motion of Aaron Holzhueter ("Plaintiff") for summary judgment pursuant to Fed. R. Civ. P. 56, made applicable to bankruptcy proceedings through Fed. R. Bankr. P. 7056. Plaintiff filed this adversary proceeding seeking a Declaratory Judgment under 28 U.S.C. §§ 2201 and 2202 and 11 U.S.C. § 502. On November 17, 2016, the Defendants filed an answer and counterclaims alleging their claims are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(6), and 523(a)(19).²

FACTS

Plaintiff filed a voluntary chapter 11 petition under title 11 of the Bankruptcy Code on September 12, 2016. He filed this adversary proceeding seeking a declaration that he is not liable for debts allegedly owed to the Defendants in connection with his father's fraudulent conduct. The Defendants filed an answer and counterclaims against Plaintiff alleging the debts are nondischargeable.

Plaintiff graduated from Carroll College with a degree in accounting. In 2002, at the request of his father, Loren Holzhueter ("Loren"), he began to work at Insurance Services Center ("ISC"). Sometime around 2005, Plaintiff was named ISC's Vice President, Treasurer, and Director.

In 2009, Quality Tax and Accounting Services LLC ("Quality Tax") was formed. It provided tax preparation services. In 2011, Plaintiff became the owner of 98% of Quality Tax. Plaintiff alleges that in 2014 Quality Tax changed the default setting in its tax preparation software. Before the change, Loren's name appeared as the preparer on all tax returns done by Quality Tax. Once that setting in the software changed, Plaintiff's name appeared as the preparer regardless of who actually did the taxes.³ This change is undisputed.

575 B.R. 449

In July of 2015, Plaintiff assumed the role of the Chief Executive Officer of ISC. In his various roles at ISC, Plaintiff had authority to write checks on the ISC accounts and occasionally served as a backup to ISC's long-time bookkeeper, Bonnie Jaeger ("Jaeger").

During the many years that Loren operated ISC, he apparently solicited funds from investors which he used to repay prior investments in the traditional Ponzi scheme manner. Checks from investors were deposited into ISC's general account. Jaeger would then record the investments in ISC's accounting software and write monthly checks for payments back to investors. Rather than put the funds toward investments as he promised, Loren would pay the investors using money from new investors. In total, Loren deceived approximately 150 individuals and families.

In 2013, Loren's scheme began to fray at the edges. On November 7, 2013, the Internal Revenue Service raided ISC's offices, questioned its employees, and seized some of ISC's records. The Milwaukee Journal Sentinel published an article about the scheme in November 2014.

In January of 2015, the Securities and Exchange Commission ("SEC") filed a complaint against ISC in the Western District of Wisconsin alleging securities violations and the existence of a Ponzi scheme.⁴ On January 28, 2015, the District Court granted a Temporary Restraining Order ("TRO") that prohibited ISC from repaying individuals who had lent or invested money in ISC. Plaintiff and his mother, Arlene Holzhueter ("Arlene"), were added to that action as relief defendants to disgorge any funds they may have received from the Ponzi scheme.

On January 1, 2015, Plaintiff took over the management of ISC when Loren resigned from his position with the company. An Independent Monitor was appointed on February 11, 2015. On April 21, 2015, Loren died. Since 2015, Plaintiff has served as ISC's CEO. The District Court appointed a Receiver on October 20, 2016.

Mr. and Mrs. Groth

On September 29, 2014, shortly before the Ponzi scheme became public knowledge, Mr. and Mrs. Groth exchanged a $30,000 check for a promissory note from ISC. Loren signed the note. The Groths thought the transaction was an investment and expected to receive interest payments of 7% every six months. At the time, they expected to be able to pull their money out whenever they desired. The Groths did not interact with Plaintiff in the negotiation of that transaction.

In December 2014, the Groths learned they would not be able to withdraw their investment. It is unclear how the Groths learned about the Ponzi scheme. They appear to have heard the rumors about ISC and to have read a newspaper article about it.

Over the course of the Groths' relationship with Loren, they assert he repeatedly represented that Plaintiff "knew everything" about their account. Still, the first interaction the Groths had with Plaintiff was at Loren's funeral in April of 2015, well after their investment and after the filing of the District Court action. In that interaction, Plaintiff told Mr. Groth that he would get his money back. David Groth later spoke with Plaintiff on the phone and the assurance was repeated. The checks the Groths sent to and received from ISC are signed by Loren.

Mr. and Mrs. Heinecke

Judith and David Heinecke started investing with Loren over 20 years ago.

575 B.R. 450

They contributed money to their investment account with ISC most recently in April 2011. In total, they put over $200,000 into investments with Loren.

The Heineckes were introduced to Plaintiff sometime in 2009 or 2010. Other than the initial introduction, the Heineckes admit they had no other interaction with Plaintiff. Loren told them Plaintiff would do their taxes. However, that was never verified directly with Plaintiff or any other source besides Loren. It is unclear who actually prepared the taxes and to what degree Plaintiff was involved in that process. Loren's name appears on the 2012 taxes as the preparer. The 2013 tax returns list Plaintiff as the preparer.

In April of 2011, Judith received checks as a payout from Pekin Life Insurance Company. The Heineckes signed the checks and then gave them to Loren for investment. The checks appear to be endorsed by Plaintiff for deposit to ISC.

In 2014, the IRS visited the Heineckes' house to discuss Loren's financial dealings. Concerned about their investment, the Heineckes called Loren to ask about what was going on. Loren told them not to worry about it. The Heineckes discovered that Loren was running a Ponzi scheme.

In summary, the Heineckes admit they never had any direct contact with Plaintiff besides the brief introduction in 2009. Indeed, when asked what led them to connect Plaintiff with the Ponzi scheme, Mr. Heinecke admits the only connecting threads were Plaintiff's signature on some deposited checks and Loren's statements about preparation of tax returns.

Mr. and Mrs. Tesch

The Tesches began investing with Loren around 2003. Over the years, they invested about $80,000. Loren gave them printed accounting statements, but they never received a 1099 or other official form related to their investment.

The Tesches also did their taxes with Loren through Quality Tax. It is unclear precisely how long Loren had done their taxes, but Quality Tax did them from at least 2010 through 2015.

The Tesches met Plaintiff in January 2015, when he and Loren came to their home. The Tesches acknowledge that by that time "the whole world" knew about the Ponzi scheme. At that meeting, Loren assured the Tesches they would get their money back and Plaintiff sat silently at his side. Still, Mr. Tesch represents neither he nor his wife spoke directly with Plaintiff about the investments.

The next time the Tesches saw Plaintiff was at Loren's funeral. Plaintiff told Mr. Tesch he would get all his money back, which Mr. Tesch says he understood to include interest.

The Tesches also did their taxes with Quality Tax through 2014. By the spring of 2015, the Tesches were using a different tax preparer, Matthew De Mark. The tax returns prepared by Mr. De Mark show investment income from the ISC investment, but the Tesches do not recall receiving a 1099. Like the other Defendants, the Tesches believe Plaintiff was involved in the Ponzi scheme because at some time Loren told them Plaintiff "knows what's going on."

James Pritchard

In 2004, James Pritchard became involved in Loren's Ponzi scheme when he invested over $300,000. Loren...