Matthew Bruce Hintze v. John Spence

• Court: Court of Appeals for the Eleventh Circuit
• Decided: September 13, 2018
• Docket: 18-11720
• Status: Unpublished

Opinion

Case: 18-11720 Date Filed: 09/13/2018 Page: 1 of 14

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 18-11720 Non-Argument Calendar ________________________

D.C. Docket No. 1:17-cv-00018-MCR-GRJ, Bkcy No. 13-bkc-01007-KKS

In re:

MATTHEW BRUCE HINTZE, LARINA K. HINTZE,

Debtors. __________________________________________________________________

1:17-CV-00018-MCR-GRJ

Plaintiffs - Appellants,

versus

JOHN SPENCE, SHEILA SPENCE, INTERMED BIOLOGICAL SERVICE, INC., DAVID WHITNEY, FLH HOLDINGS OF FLORIDA LLC,

Defendants - Appellees. Case: 18-11720 Date Filed: 09/13/2018 Page: 2 of 14

________________________________________________________________

1:17-CV-00101-MCR-GRJ

THERESA M. BENDER,

Defendant - Appellee.

________________________

Appeal from the United States District Court for the Northern District of Florida ________________________

(September 13, 2018)

Before TJOFLAT, MARTIN, and HULL, Circuit Judges.

PER CURIAM:

Matthew and Larina Hintze1 appeal from the district court’s order denying

the discharge of debt to the Hintzes in their Chapter 7 bankruptcy proceeding. The

district court found that the Hintzes’ transfer of assets from their tutoring company

to a friendly creditor before filing personal bankruptcy was an attempt to “hinder,

delay, or defraud a creditor” under 11 U.S.C. § 727(a)(2)(A). The court’s finding

rested on two alternative holdings: (1) the transfer of assets “destroyed” the 1 Because the Hintzes share a last name, we distinguish between them by referencing their first. 2 Case: 18-11720 Date Filed: 09/13/2018 Page: 3 of 14

Hintzes’ membership interests in their tutoring company; or (2) the transfer of

assets was a transfer of “property of the debtor,” because the tutoring company was

the Hintzes’ alter ego. On appeal, the Hintzes challenge both of these holdings.

After careful consideration, we affirm.

I.

On November 1, 2012, the Hintzes filed for personal bankruptcy. 2 At the

time, they owned 100% of their tutoring company, TutoringZone, LC.

TutoringZone offered tutoring services to university students and, as of 2010, had

more than $1.6 million in gross revenues.

Before the Hintzes became 100% owners of TutoringZone, Ethan Fieldman

was a part owner. In 2010, Matthew and Fieldman had a falling out. Matthew

wanted to buy Fieldman’s 50% ownership interest in the company, but the

$835,000 price was too high for the Hintzes to afford by themselves. They

borrowed money from others including: $443,578.08 from John and Sheila

Spence; InterMed Biomedical Services, Inc.; David Whitney; and FLH Holdings

of Florida, LLC (“Creditors”), collectively. Three of the four promissory notes

with these creditors pledged TutoringZone’s assets, as well as the Hintzes’

personal property, as collateral. The pledge-of-asset provisions also stated that

2 This history is derived from the findings of the bankruptcy court. The Hintzes have not disputed these findings before the district court or this Court. 3 Case: 18-11720 Date Filed: 09/13/2018 Page: 4 of 14

proceeds from the sale of any TutoringZone assets exceeding $10,000 must first be

applied to pay off the note.

After selling his stake in TutoringZone to the Hintzes, Fieldman set up a

rival tutoring company, Study Edge. Study Edge did well and TutoringZone’s

revenues and cash flow fell significantly. By May 2012, the Hintzes had to ask the

Creditors for more money to help TutoringZone pay its employees, but the

Creditors refused. The Hintzes then turned to Christopher James.

James is a finance professor and Matthew’s friend and mentor. He had lent

the Hintzes $475,000 in 2010 and 2011, $100,000 of which went toward buying

Fieldman out. With the help of an attorney, James and the Hintzes came up with a

plan—chronicled in emails—to rescue TutoringZone and the Hintzes from

financial ruin. According to this plan, James would start a new company called

TutoringZone II, Inc. (“TZ II”), and the Hintzes would transfer most of the assets

of the first TutoringZone to the second. Then they would allow the first

TutoringZone to fail and the second to carry on the business.

On May 22, 2012, TutoringZone leased its intellectual property and some

other assets to James for $75,000, which it used to pay employees. The leased

assets included “[v]ideo and audio, workbooks, tests, instructional materials,

graphics, logos, and other materials developed by [TutoringZone] for delivery of

tutoring services, including the source codes and source documents, . . . and all

4 Case: 18-11720 Date Filed: 09/13/2018 Page: 5 of 14

intellectual property rights therein,” as well as physical assets like desks and

computers. On June 4, 2012, TutoringZone transferred these assets to TZ II. 3

TutoringZone received no payment from TZ II. Instead, James forgave $200,000

of the $475,000 owed to him by the Hintzes. In an email, James described his

“involvement in Tutoring Zone” as an effort “to shelter the business from some

creditors.” He said Matthew “stills runs his business but is now an employee of

[TZ II].”

The Hintzes deliberately did not tell the Creditors about the transfer of assets

or the creation of TZ II. Although the Creditors requested financial information

about TutoringZone several times from May 2012 through July, the Hintzes

delayed or failed to respond to these requests. They warned each other about the

need to complete the scheme “prior to ANYONE fil[ing] lawsuits” and the need to

“be very careful in communications.” The Hintzes continued to operate as

TutoringZone through the summer of 2012. In August, Matthew received his first

paycheck from TZ II and eventually all but two of TutoringZone’s employees were

working for TZ II. TZ II used the same business name (“TutoringZone”), logo,

phone numbers, web address, advertising materials, and tutoring materials that

TutoringZone had, making it appear TutoringZone remained in business.

3 The Hintzes executed the lease and transfer documents for TutoringZone. 5 Case: 18-11720 Date Filed: 09/13/2018 Page: 6 of 14

Before the asset transfer, the Hintzes’ membership interest in TutoringZone

was their only non-exempt asset of value. At that time, the company was valued at

$350,000 on the low end and $3 million on the high end. 4 After the transfer,

TutoringZone “was left a shell with no assets and no income.” Notably, in their

bankruptcy petition, the Hintzes valued their membership interest in TutoringZone

at $100. After the Hintzes filed for bankruptcy, the Creditors discovered the

deception and objected to discharge of the Hintzes’ indebtedness to them.

After a bench trial, the bankruptcy court found in favor of the Creditors,

determining that the Hintzes’ debt could not be discharged under § 727(a)(2)(A).

The district court affirmed on appeal.

II.

This Court “sits as a second court of review” in a bankruptcy case. In re

Fisher Island Invs., Inc., 778 F.3d 1172, 1189 (11th Cir. 2015) (quotation marks

omitted). “Where the district court affirms the bankruptcy court’s order, we

review the bankruptcy court’s decision.” Id. We “examine[] independently the

factual and legal determinations of the bankruptcy court and employ[] the same

standards of review as the district court.” Id. (quotation marks omitted). Because

4 The $350,000 valuation came from Fieldman, who offered to buy TutoringZone that summer as well. Matthew valued the company at $1.5 million based on its 2011 income and $2 million based on its 2012 income, but wanted a $3 million valuation. Larina valued the company at $2,520,000. 6 Case: 18-11720 Date Filed: 09/13/2018 Page: 7 of 14

the Hintzes do not challenge the bankruptcy court’s findings of fact, we review

only the legal conclusions in this case. These we review de novo. Id.

III.

“The Bankruptcy Code favors discharge of an honest debtor’s obligations.”

In re Jennings, 533 F.3d 1333, 1338 (11th Cir. 2008) (per curiam). Under 11

U.S.C. § 727(a)(2)(A), a debtor can be denied a discharge if “property of the

debtor” is transferred or destroyed “by the debtor or with the debtor’s permission

within one year of the filing of the bankruptcy petition, and . . . with the intent to

hinder, delay, or defraud a creditor.” Id. at 1339. To stop a discharge under

§ 727(a)(2)(A), a creditor must show by a preponderance of the evidence that the

challenged action (1) happened in the year before the bankruptcy petition was

filed; (2) was done “with actual intent to hinder, delay, or defraud a creditor”; (3)

was an act of the debtor; and (4) involved the transfer, removal, destruction,

mutilation, or concealment of “property of the debtor.” Id.

The Hintzes don’t challenge the bankruptcy court’s findings of fact and

present no argument about the first three Jennings factors.5 Thus, at issue in this

5 The Hintzes describe the bankruptcy court’s findings in a way that does not acknowledge the holding that they acted with intent to hinder, delay, or defraud a creditor. Their characterization of some of these findings also appears to reflect disagreement with them. Nonetheless, they presented no argument that any of these findings are clearly erroneous. Their failure to do so, here and before the district court, means their challenge is abandoned. See Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678, 681–82 (11th Cir. 2014). 7 Case: 18-11720 Date Filed: 09/13/2018 Page: 8 of 14

case is the fourth factor. The bankruptcy court found the Creditors satisfied their

burden in two, alternative ways by showing the Hintzes: (1) “destroyed” their

100% membership interest in TutoringZone when they transferred TutoringZone’s

assets to TZ II for no consideration because the transfer left TutoringZone a “shell

with no assets and no income”; or (2) “transferred” “property of the debtor” when

they transferred TutoringZone’s assets to TZ II. The district court affirmed both

those holdings.

The Hintzes first argue that their membership interest in TutoringZone was

not “destroyed” because the deal between TutoringZone and TZ II brought in

$75,000 and the membership interest was sold by the bankruptcy court for

$120,000 in 2016. They also argue that a “reduction in value” is not a synonym

for “destroy,” particularly when the value reduction could be repaired. 6 The

Hintzes challenge the second holding by arguing that TutoringZone’s assets are not

“property of the debtor.” They argue that the bankruptcy court improperly

expanded the reach of § 727(a)(2)(A) by using “alter ego” and “reverse veil

piercing” theories under Florida law to conclude that TutoringZone’s assets were

6 In the district court’s order, the court stated the Hintzes belatedly raised an argument that their membership interest was not “property of the debtor” and declined to consider it. The Hintzes appear to make the same argument here on appeal, insofar as they rely on the same authority, but they argue that the authority shows “destroy” cannot mean “reduction in value.” To the extent this argument is an attempt to raise again the argument that was not properly before the district court, we decline to consider it. See Ramirez v. Sec’y, U.S. Dep’t of Transp., 686 F.3d 1239, 1249–50 (11th Cir. 2012). But, to the extent this is offered as support for the Hintzes’ main argument that they did not “destroy” their membership interest in TutoringZone, we consider it. 8 Case: 18-11720 Date Filed: 09/13/2018 Page: 9 of 14

“property of the debtor.” Last, they argue that even if such theories were

appropriate, the bankruptcy court’s findings of fact do not meet the veil-piercing

requirements of Florida law.

A.

We begin with the Hintzes’ 100% membership interest in TutoringZone

because there is no dispute that this was “property of the debtor.” The Hintzes

accept the bankruptcy court’s findings, so there is no dispute that the value of their

membership interest was, at the very least, significantly reduced by their transfer of

assets from TutoringZone to TZ II. The only questions before us are legal ones:

What does it mean to “destroy” property? Can it include a significant reduction in

value or does it require a complete annihilation of value? For something to be

destroyed, must it be beyond repair forever?

We start with the plain meaning of the text. See Am. Bankers Ins. Grp. v.

United States, 408 F.3d 1328, 1332 (11th Cir. 2005). Webster’s defines “destroy”

in several ways: “[t]o ruin completely,” “[t]o tear down or break up,” “[t]o put an

end to,” “[t]o kill,” “[t]o render useless or ineffective,” and “[t]o subdue or defeat

completely.” Webster’s New College Dictionary 314 (3d ed. 2008). Considering

these meanings altogether, two things become clear. First, the meaning of

“destroy” depends somewhat on the object that follows. Second, most meanings of

“destroy” have some sense of permanence attached to them. While some of these

9 Case: 18-11720 Date Filed: 09/13/2018 Page: 10 of 14

indicate the state of being destroyed is an irreparable condition, others indicate that

it is not an easily remedied condition. For example, a fire might “destroy” a room

so that it is “ruin[ed] completely.” Rebuilding the room is possible, but it would

require investment of significant labor and resources, the same or nearly the same

as building a room from scratch.

Applying these understandings, we first reject the Hintzes’ argument that

“destroy” can only mean “physical destruction.” Ordinary use of the word

includes its application to intangible things, such as “confidence” and “reputation.”

And as “property of the debtor” includes intangible property, “destroy” as used in

§ 727(a)(2) means more than just “physical destruction.” See In re Coady, 588

F.3d 1312, 1316 (11th Cir. 2009) (per curiam) (affirming the bankruptcy court’s

conclusion that debtor’s “equitable interest in businesses he never legally owned []

constitute[d] ‘property of the debtor’ within the scope of § 727(a)(2)(A)”).

The Hintzes next argue that a reduction in value is not enough to conclude

property was “destroyed” within the meaning of § 727(a)(2). This is true, as far as

it goes, but we reject the idea that the statute requires a total, irreparable reduction

in value. Instead, for intangible property like a membership interest in a company,

we understand “destroy” to require a significant enough reduction in value such

that restoring the membership interest’s value would require the same or nearly the

10 Case: 18-11720 Date Filed: 09/13/2018 Page: 11 of 14

same investment of labor and resources as building it from scratch. That is what

happened here.

The Hintzes had a 100% membership interest in the company, so the value

of the membership interest was coextensive with the value of TutoringZone. As

the bankruptcy court found, before the transfer of assets, TutoringZone was valued

at a minimum of $350,000 and at a maximum of $3 million dollars. The court also

found that, after the transfer of assets, TutoringZone was left a shell with no assets

or income. When they filed their bankruptcy petition, the Hintzes valued their

interest at $100.

One hundred dollars is, of course, still some value. Yet restoring the

membership interest’s value would require restoring TutoringZone to a functioning

company with assets and income. And that would require the same or nearly the

same investment of resources as starting the company from scratch: The asset

transfer included transfer of intellectual property, so restoring TutoringZone would

require development of whole new lesson plans, workbooks, tests, software, and

the like. It would require purchasing computers and physical desks. It would

require development of new logos, graphics, websites, and advertising material.

And because TutoringZone has no employees, it would also need to hire new ones

to deliver its tutoring services and manage its affairs. Last, TutoringZone would

need to restore its reputation with the students it serves. These are not easy things.

11 Case: 18-11720 Date Filed: 09/13/2018 Page: 12 of 14

We thus conclude the Hintzes’ transfer of assets from TutoringZone to TZ II

“destroyed” the value of their membership interest in TutoringZone. 7

The Hintzes argue their membership interest had more value than just $100.

They first note that the asset lease brought in $75,000 and that they sold some

nontransferred assets for cash. However, the asset lease was entered into before

the asset transfer and the money was used to pay TutoringZone’s employees at the

time. And the nontransferred assets consisted of only 500–600 chairs sold for a

few thousand dollars on Craigslist. That is not enough to change our conclusion.

The Hintzes also point out that their membership interest was eventually

sold for $120,000. 8 The district court found the $120,000 value “lay in the

litigation rights that were simultaneously transferred with the membership

interest.” The Hintzes do not challenge this finding by the district court and the

record supports it: The bankruptcy trustee determined TutoringZone had a

fraudulent transfer action against TZ II and put up for sale standing to bring that

suit along with the membership interest. The two high bidders were James, who

owns TZ II ($45,000), and TZ Acquisitions, a company owned by Fieldman

7 In a single sentence and without citing to any supporting authority, the Hintzes argue the value of the membership interest could be “‘repaired’ via avoidance actions to recover the transferred [] assets.” This argument is abandoned for failure to adequately brief it. See Sapuppo, 739 F.3d at 681–82. 8 The Hintzes refer here to the record of the associated bankruptcy case. Over the Creditors’ objection, the district court took judicial notice of this record. The district court made findings based on what that record showed. On appeal to us, the Hintzes do not challenge those findings and the Creditors do not challenge the district court’s ruling on judicial notice. 12 Case: 18-11720 Date Filed: 09/13/2018 Page: 13 of 14

($120,000). If James bought the membership interest, he would no longer have to

worry about a lawsuit against TZ II. And if TZ Acquisitions bought the

membership interest, it could sue for return of TutoringZone’s assets. Thus, the

two high bidders were both motivated by the litigation rights, and not

TutoringZone itself. The district court rejected the Hintzes’ argument that their

membership interest had value based on this right to sue, holding that accepting it

would be against the equitable nature of bankruptcy proceedings.

We reject the Hintzes’ argument that their membership interest had a value

of $120,000 based on TutoringZone’s right to sue for fraudulent transfer. First, the

$120,000 valuation of the litigation rights does not change the fact that

TutoringZone was no longer a functioning company when the Hintzes filed for

bankruptcy.

Second, we agree with the district court that accepting this argument would

be contrary to the equitable nature of bankruptcy proceedings. Any fraudulent

transfer action brought by TutoringZone would necessarily be based on the

Hintzes’ transfer of assets from TutoringZone to TZ II for no consideration or in

consideration for $200,000 of personal loan forgiveness. Thus, the Hintzes’

argument can be summed up as follows: Their fraudulent conduct created a new

valuable asset—right to sue for fraudulent transfer—and thus they did not

fraudulently destroy the value of their membership interest. Because “courts of

13 Case: 18-11720 Date Filed: 09/13/2018 Page: 14 of 14

bankruptcy are essentially courts of equity, and their proceedings inherently

proceedings in equity,” this argument cannot save the Hintzes from the denial of a

discharge under § 727(a)(2). See Pepper v. Litton, 308 U.S. 295, 304, 60 S. Ct.

238, 244 (1939); Jennings, 533 F.3d at 1338.

B.

Our conclusion that the Hintzes destroyed the value of their membership

interest in TutoringZone within the meaning of § 727(a)(2) is enough to affirm the

bankruptcy court’s denial of discharge. Thus, we need not and do not consider

their arguments challenging the bankruptcy court’s alternative holding.

AFFIRMED.