Uren v. Schuholz (In re Schuholz), Case No. 18-13108

• Decision Date: 18 October 2019
• Docket Number: Adv. No. 18-1071,Case No. 18-13108
• Parties: In re: STEVEN EDWARD SCHUHOLZ Debtor JAMES UREN, ET AL. Plaintiffs v. STEVEN EDWARD SCHUHOLZ Defendant
• Court: U.S. Bankruptcy Court — Southern District of Ohio

In re: STEVEN EDWARD SCHUHOLZ Debtor

JAMES UREN, ET AL. Plaintiffs v. STEVEN EDWARD SCHUHOLZ Defendant

Case No. 18-13108

Adv. No. 18-1071

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION

October 18, 2019

Chapter 7

Judge Buchanan

MEMORANDUM DECISION DENYING DEBTOR'S MOTION FOR JUDGMENT ON THE PLEADINGS [Docket Number 10]

[This opinion is not intended for publication or citation.]

This matter is before this Court on the Debtor's Motion for Judgment on the Pleadings [Docket Number 10] ("Motion"); the Plaintiffs' Response in Opposition to Debtor's Motion for Judgment on the Pleadings [Docket Number 13]; and the Reply in Support of Motion for Judgment on the Pleadings [Docket Number 14].

In his Motion, Defendant-Debtor Steven Edward Schuholz ("Mr. Schuholz") argues that he is entitled to judgment and denial of the Plaintiffs', James T. Uren and Josephine Khoo-Smith ("Plaintiffs"), claims that an $864,534.16 class-action state court judgment debt is excepted from discharge pursuant to 11 U.S.C. § 523(a)(19), § 523(a)(2)(A) and/or § 523(a)(6).¹ Mr. Schuholz asserts that the judgment does not qualify for exception from discharge under these provisions because it is based on unjust enrichment rather than securities laws violations or any fraud or intentional wrongdoing on the part of Mr. Schuholz. Instead, Mr. Schuholz asserts that Glen Galemmo, a convicted Ponzi scheme operator, is the person who violated Ohio securities laws and committed fraudulent or intentional acts injuring the plaintiff-investors in the scheme. Arguing that a debt cannot be held nondischargeable based on securities violations and/or the wrongdoing of another person, Mr. Schuholz requests a determination that the judgment debt is not excepted from discharge under § 523(a)(19), § 523(a)(2)(A), and § 523(a)(6).

Although a split of authority exists on the issue, this Court agrees with Mr. Schuholz that a debt cannot be held nondischargeable under § 523(a)(19) based on the securities violations of another person. Nonetheless, in this case, the state court judgment includes an explicit determination that Mr. Schuholz, himself, violated Ohio securities laws by receiving money, without having a license, for recruiting investors into Galemmo's Ponzi scheme. Because the pleadings do not establish what portion, if any, of the state court judgment award is attributable toMr. Schuholz's Ohio securities laws violation, the portion of the debt that may be held nondischargeable pursuant to § 523(a)(19) must be determined through subsequent dispositive motions or trial. With respect to the Plaintiffs' other nondischargeability claims, while the State court did not make specific findings that would establish certain elements required to hold the debt nondischargeable under § 523(a)(2)(A) and § 523(a)(6), the lack of such findings does not preclude this Court from making its own determination of those issues at trial. Accordingly, Mr. Schuholz's Motion is denied.

I. JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The parties have consented to final judgment being rendered by this Court in this adversary proceeding [Docket Number 12].

II. BACKGROUND

Plaintiffs filed an Amended Complaint to determine the dischargeability of a state court class-action judgment debt against Mr. Schuholz [Docket Number 4] ("Amended Complaint"). In the Amended Complaint, the Plaintiffs allege that they were appointed as class representatives and lead plaintiffs by the Court of Common Pleas of Hamilton County, Ohio, ("State Court"), in Case No. A1406892, captioned Uren v. Scoville, et al. ("Class Action") [Id., ¶ 4]. They were appointed on behalf of the following class of plaintiffs: "All persons or entities, individually and collectively, who invested money in or through Glen Galemmo or his affiliated entities from January 1, 2002 to July 26, 2013 and suffered a net loss (i.e., the funds invested exceeded the total of all funds received in the form of purported income or return of principal)" (the "Plaintiff Class") [Id.].

Mr. Schuholz was a defendant in the Class Action and the matter proceeded to trial against him [Id., ¶ 5]. On July 11, 2017, following a bench trial, the State Court entered final judgment in favor of the Plaintiff Class and against Mr. Schuholz in the amount of $864,534.16 plus interest and costs [Id.].

In the Amended Complaint, the Plaintiffs summarize findings and conclusions from the State Court, but do not provide a copy of the State Court's judgment [Id., ¶¶ 9-22]. However, Mr. Schuholz incorporates and attaches copies of the State Court's Final Judgment Entry and Findings of Fact and Conclusions of Law to his Answer [Docket Number 7, Exs. A and B]. The State Court Judgment Entry and Findings of Fact and Conclusions of Law include almost identical findings and conclusions. Accordingly, this Court lists the findings and conclusions from the State Court Judgment Entry except where stated:

Glen Galemmo operated a Ponzi scheme that began as early as 2008 and continued through approximately July 2013 [Id., Ex. A, p. 3].

The Ponzi scheme continued because of willful and criminal acts [by Galemmo] including fraudulent misrepresentations, fraud while acting in a fiduciary capacity, and theft [Id., Ex. A, p. 3; Ex. B, p. 1].²

As a result of Glen Galemmo's Ponzi scheme, the Plaintiff Class suffered a net loss of $34,599,085.46 [Id., Ex. A, p. 4].

Plaintiffs' expert, Elliott Lieb, C.F.E., submitted a spreadsheet that identified all of the transactions between Defendant Schuholz and the Galemmo Ponzi scheme [in certain exhibits]. All of the transfers from the Galemmo Ponzi scheme to Defendant Schuholz . . . were both actually and constructively fraudulent [Id., Ex. A, p. 4].

Defendant Schuholz was associated with Total Care & Repair, LLC ("TC&R") as an owner. For each bank account identified during trial on which TC&R was identified as an account holder, Defendant Schuholz was also identified as an account holder on the same account [Id., Ex. A, p. 4].

Plaintiffs' expert correctly counted transactions from the Galemmo Ponzi scheme to a TC&R bank account as a fraudulent transfer attributable to Defendant Schuholz because Defendant Schuholz was named on the TC&R bank accounts and had unfettered access to, and exercised control and dominion over, those bank accounts [Id., Ex. A, p. 4].

Plaintiffs' expert testified that he believed that some (but not all) of the transfers from the Galemmo Ponzi scheme to a TC&R bank account were made in consideration for materials or labor performed by TC&R. He thus correctly excluded those transactions from his calculations of the amount of the fraudulent transfers received by Defendant Schuholz. In other words, Plaintiffs' expert did not count non-investment receipts when calculating Schuholz's net profit [Id., Ex. A, pp. 4-5].

Defendant Steven Schuholz received a net profit from the Galemmo Ponzi scheme of $864.534.16. In other words, the Galemmo Ponzi scheme transferred $864,534.16 more to Schuholz than Schuholz transferred to Galemmo. This all constitutes money obtained as a result of the fraudulent Ponzi scheme. Plaintiffs have proven the existence of a Ponzi scheme and all of the elements of these fraudulent transfers to Defendant Schuholz by clear and convincing evidence [Id., Ex. A, p. 5; Ex. B, p. 3].³

Defendant Schuholz failed to plead the affirmative defense of good faith or reasonably equivalent value and those defenses are therefore waived. Even if he had pled such affirmative defenses, Schuholz failed to carry his burden at trial as to any such affirmative defense [Id., Ex. A, p. 5].

Defendant Schuholz was included on a list of four individuals used as references by Glen Galemmo while operating his Ponzi scheme. Galemmo encouraged potential investors to contact Schuholz as they evaluated whether to invest their money with Galemmo. Potential investors did, in fact, reach out to Schuholz before they transferred money to the Ponzi scheme [Id., Ex. A, p. 5].

Schuholz was not licensed to sell securities or to broker the sale of securities. Yet, Schuholz received money on account of people being recruited into the Galemmo Ponzi scheme [Id., Ex. A, p. 5].

Because their money was transferred to Defendant Schuholz, the members of the Plaintiff Class conferred a benefit upon Defendant Schuholz. Defendant Schuholz received the Plaintiffs' money and knew he had received the money [Id., Ex. A, p. 7].

In a Ponzi scheme, fraudulent "intent is presumed because the Debtor undeniably knows that 'future investors will not be paid', thus evidencing an intent to defraud creditors". In re Independent Clearing House Co., 77 B.R. 84 (D. Utah 1987); Bash v. Textron Financial Corp., 483 B.R. 630, 656 (N.D. Ohio 2012) [Id., Ex. A, p. 7].

Courts hold that the existence of a Ponzi scheme establishes as a matter of law that any transfers pursuant to the scheme are constructively fraudulent because (1) the investors do not provide reasonably equivalent value for their "fictitious profits" and (2) the Ponzi scheme is inherently insolvent because each new investor has a tort claim that cannot be repaid. See Scholes v. Lehmann, 57 F.3d 750, 755 (7th Cir. 1995) [Id., Ex. A, p. 8].

Defendant Schuholz's receipt of money for people being recruited into the Galemmo Ponzi scheme is a violation of Ohio's state securities laws. See R.C. 1707.14(A); R.C. 1707.44(A) [Id., Ex. A, p. 8].

Plaintiffs have clearly and convincingly proven that Defendant Schuholz was unjustly enriched by his receipt of the money belonging to the members of the Plaintiff Class, to the detriment of the members of the Plaintiff Class, and it would be unjust for Defendant Schuholz to retain such money without providing compensation to the Plaintiff Class [Id., Ex. A, p. 8].

It would be inequitable for Defendant

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