In re Petters Co.

557 B.R. 711

In re: Petters Company, Inc., et al, Debtors.

(includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., In.; Edge One LLC; MGC Finance, Inc.; PAC Funding LLC; Palm Beach Finance Holdings, Inc.)

In re: Polaroid Corporation, et al., Debtors.

(includes: Polaroid Holding Company; Polaroid Consumer Electronics, LLC ; Polaroid Capital, LLC; Polaroid Latin America I Corporation ; Polaroid Asia Pacific LLC ; Polaroid International Holding LLC; Polaroid New Bedford Real Estate, LLC; Polaroid Norwood Real Estate, LLC; Polaroid Waltham Real Estate, LLC)

In re: Petters Capital LLC, Debtor.

Douglas A. Kelley, Trustee for Petters Company, Inc. and Petters Group Worldwide, LLC; John R. Stoebner, Trustee for Polaroid Corporation, et. al.; and Randall L. Seaver, Trustee for Petters Capital, LLC, Plaintiffs,

v.JPMorgan Chase & Co.; JPMorgan Chase Bank, N.A.; One Equity Partners LLC; Jacques A. Nasser; Lee M. Gardner ; Charles F. Auster; James W. Koven; Rick A. Lazio; J. Michael Pocock; William L. Flaherty; and Ira H. Parker, Defendants.

JOINTLY ADMINISTERED UNDER CASE NO. 08-45257

Court File No. 08-45257

Court File Nos: 08-45258 (KHS)

08-45326 (KHS)

08-45327 (KHS)

08-45328 (KHS)

08-45329 (KHS)

08-45330 (KHS)

08-45331 (KHS)

08-45371 (KHS)

08-45392 (KHS)

JOINTLY ADMINISTERED UNDER CASE NO. 08-46617

Court File. No. 08-46617

Court File Nos. 08-46621 (KHS)

08-46620 (KHS)

08-46623 (KHS)

08-46624 (KHS)

08-46625 (KHS)

08-46626 (KHS)

08-46627 (KHS)

08-46628 (KHS)

08-46629 (KHS)

CASE NO. 09-43847

ADV. 10-4443, ADV. 10-4444, ADV. 10-4445

United States Bankruptcy Court, D. Minnesota.

Signed August 31, 2016

Richard B. Drubel, Colleen A. Harrison, Boies, Schiller & Flexner LLP, Hanover, NH, Douglas L. Elsass, Lori A. Johnson, Nilan Johnson Lewis PA, Adam A. Gillette, Thomas E. Jamison, Fruth, Jamison & Elsass PLLC, Kevin M. Magnuson, Kelley Wolter & Scott PA, Minneapolis, MN, Jonathan R. Voegele, Boies Schiller & Flexner LLP, Hanover, NH, for Plaintiffs.

Kevin M. Decker, Benjamin Gurstelle, John R. McDonald, Briggs and Morgan, P.A., Minneapolis, MN, William T. Pilon, Isaac M. Rethy, Thomas C. Rice, David J. Woll, Simpson Thacher & Bartlett LLP, New York, NY, for Defendants.

ORDER GRANTING DEFENDANTS' MOTION FOR DISMISSAL

KATHLEEN H. SANBERG, CHIEF UNITED STATES BANKRUPTCY JUDGE

These adversary proceedings originate from the failure of the Tom Petters Ponzi scheme, the history of which has been well documented¹ in this district as well as others nationwide.² They are brought jointly by the trustees of various Petters owned or controlled entities—Douglas A. Kelley as the trustee for Petters Company, Inc. (“PCI”) and Petters Group Worldwide, LLC (“PGW”) (either “ PCI Kelley” or “PGW Kelley”, or collectively “Kelley”), John Stoebner (“Stoebner”) as the Trustee for Polaroid Corporation, et al. (“Polaroid”), and Randall L. Seaver (“Seaver”) as the trustee for Petters Capital, LLC (“Petters Capital”) (together, the “Plaintiffs”)—against JPMorgan Chase & Co. (“JPMorgan”), JPMorgan Chase Bank, N.A. (“JPM Chase Bank”) (together “JPMC”), One Equity Partners, LLC (“One Equity”), (together, the “JPMC Defendants”), Jacques A. Nasser, Less M. Gardner, Charles F. Auster, James W. Koven, Rick A. Lazio, J. Michael Pocock, William L. Flaherty, and Ira H. Parker (together, the “Individual Defendants”), (all together, the “Defendants”).³

These adversary proceedings are before the Court for ruling on the Defendants' motions to dismiss the three pending adversary proceedings under Fed. R. Civ. P. 12(b) (6), as incorporated by Fed. R. Bankr. P. 7012(b).⁴ These adversary proceedings were brought jointly by the Plaintiffs (“Joint Adversary Proceedings”). The complaints in all three cases are identical, as are the motions to dismiss and the voluminous briefing submitted in support thereof.

The Defendants appeared by their attorneys David J. Woll, Isaac M. Rethy, and John R. McDonald. The Plaintiffs appeared by their attorneys Thomas E. Jamison, Lori A. Johnson, Richard B. Drubel, Jr., and Jonathan R. Voegele. This decision is based on the written submissions for all of the motions, the Joint Adversary Complaints (or “Complaint”), as well as the arguments of counsel at oral argument on October 22, 2014.

This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157(b)(1) & 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

These adversary proceedings and the main bankruptcy cases were reassigned when then Chief Judge Gregory F. Kishel retired on May 31, 2016. The undersigned hereby certifies familiarity with the record and determines that the matter at bar may be treated without prejudice to the parties in accordance with Fed. R. Civ. P. 63, as incorporated by Fed. R. Bankr. P. 9028.

I. PROCEDURAL HISTORY

The underlying bankruptcy case of each debtor was commenced in late 2008, with the exception of Petters Capital, which was commenced in early 2009. These adversary proceedings were commenced in the Fall of 2010, along with over 200 other adversary proceedings aimed at clawback and remediation of the failed Petters Ponzi scheme. In February 2011, after their motion to withdraw the reference was denied, the Defendants filed these motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) in lieu of filing an answer. These particular adversary proceedings did not proceed on the same procedural track⁵ as the majority of the clawback cases since these adversary proceedings posed unique⁶ fact and complex legal issues. Over the course of the next three years, numerous supplementary memoranda were filed by both sides and the motions were set for oral argument in the fall of 2014.

Prior to oral argument, the parties entered into a stipulation dismissing Counts I and IX in the Joint Adversary Proceedings without prejudice.⁷ The Plaintiffs' claim for unjust enrichment in Count VIII was treated in Common Issues III,⁸ where the Court held the claims must be dismissed. The Plaintiffs concede that the holding in Common Issues III applies to their unjust enrichment claims and withdraw Count VIII⁹ . The only remaining claims at issue are the fraudulent transfer claims under Chapter 5 of the Bankruptcy Code and the Minnesota enactment of the Uniform Fraudulent Transfer Act (“MUFTA”).¹⁰

The motions were presented at oral argument on October 22, 2014. At the conclusion of oral argument the matters were taken under advisement.

II. FACTS

The following facts are derived from those alleged in the Complaint that is the subject of these motions to dismiss. The Court has not considered any supplementary or extrinsic facts or documents on these motions to dismiss, as discussed below.

In 2002, One Equity, then a subsidiary of Bank One Corporation, acquired a majority stake in Polaroid,¹¹ which was a publicly-traded company. One Equity became affiliated with JPMorgan when Bank One merged with JPMorgan in 2004. At the end of 2002, Petters Company, Inc. (“PCI”) entered into a brand licensing agreement with Polaroid. Tom Petters created a business called Petters Consumer Brands, LLC (“PCB”) to use the license. PCB began selling consumer electronics under the Polaroid name pursuant to the licensing agreement in 2003.

In 2004, Polaroid's market for its product was declining and the JPMC Defendants decided to sell their interest in Polaroid. The Plaintiffs allege that the JPMC Defendants targeted Tom Petters and PCB as buyers because of PCB's use and reliance on the licensing agreement. The JPMC Defendants allegedly threatened Petters with termination of the licensing agreement if he did not purchase Polaroid. Ultimately, Tom Petters, using PCB, agreed to purchase Polaroid under an agreement executed in January 2005. The funds for the purchase were to be deposited into one of two escrow accounts in the name of PGW and/or PCB (“Escrow Accounts”).

During the sale process, JPMC acted as an advisor to Polaroid and to Tom Petters, in his individual capacity for a fee of approximately $4 million.

On April 27, 2005, the deal closed and PCB bought the outstanding shares of Polaroid stock for $12.08 per share for an approximate total purchase price of $426 million. The JPMC Defendants received approximately $241 million and certain Individual Defendants, collectively, received approximately $15.4 million for their shares of stock. The Plaintiffs allege that JPMC financed PCB's acquisition of Polaroid. They also allege, however, that none of JPMC's money was used for the purchase as Tom Petters diverted Ponzi scheme funds from his other companies and other investors and deposited those funds into the Escrow Accounts.

On April 28, 2005, the day after the sale closed, Polaroid closed on a credit facility with JPMC (“Polaroid Obligation”). The credit facility had two components: a $125 million Term Loan and a $225 million Revolver (together, the “Polaroid Credit Facility”). The full Term Loan Proceeds were disbursed and approximately half of the Revolver, or $60 million, was advanced. In order to secure the Polaroid Credit Facility, Polaroid granted JPMC a first lien on all of its assets (“Polaroid Pledge”). The JPMC Defendants were allegedly paid $4.5 million in commitment fees for the Credit Facility. (These fees are treated as part of the Polaroid Credit Facility Transfers.)

The Plaintiffs allege that the Polaroid Credit Facility proceeds were used to pay the debt incurred to fund the Escrow Accounts for the acquisition of Polaroid by Tom Petters.

Over the next three years, the Term Loan and Revolver were paid in full, and ahead of schedule, although Polaroid was not generating sustainable profits. The Term Loan was repaid by late spring of 2007 and the Revolver was repaid by February 2008. Polaroid paid these obligations by selling assets (real estate and intellectual property) and borrowing $40 million from PCI....