Kelley v. BMO Harris Bank N.A. (In re Petters Co., Inc.)

565 B.R. 154

IN RE: PETTERS COMPANY, INC., et al, Debtors.

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

Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust, Plaintiff,

v.BMO Harris Bank N.A., as successor to M & I Marshall and Ilsley Bank, Defendant.

Jointly Administered under BKY 08–45257

ADV 12–4288

United States Bankruptcy Court, D. Minnesota.

Signed February 24, 2017

William Bornstein, Michael A. Collyard, Sarah E. Friedricks, Thomas L. Hamlin, Michael D. Reif, Robins Kaplan LLP, Mark Enslin, Terrence J. Fleming, James A. Lodoen, Michael Olafson, Daryle Uphoff, Lindquist & Vennum LLP, Sandra S. Smalley–Fleming, Fredrikson & Byron, Minneapolis, MN, for Plaintiff.

Michael B. Apfeld, Sean O'D. Bosack, John L. Kirtley, Godfrey & Kahn S.C., Milwaukee, WI, Debra Bogo–Ernst, Thomas S. Kiriakos, Lucia Nale, Joshua D. Yount, Mayer Brown LLP, Chicago, IL, Keith S. Moheban, Adine S. Momoh, Stinson Leonard Street LLP, Minneapolis, MN, for Defendant.

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

KATHLEEN H. SANBERG, CHIEF UNITED STATES BANKRUPTCY JUDGE

This adversary proceeding originates from the failure of the Petters Ponzi scheme orchestrated by Thomas J. Petters and his associates, the history of which has been well documented in this district as well as others nationwide.¹ Liquidating Trustee Douglas A. Kelley ("Plaintiff") filed this adversary proceeding against BMO Harris Bank N.A., as successor to M & I Marshall and Ilsley Bank ("Defendant"), alleging violations of the Minnesota Uniform Fiduciaries Act ("MUFA"), breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud, and civil conspiracy.

Defendant filed a Motion to Dismiss Adversary Proceeding ("Motion") on October 24, 2016.² Plaintiff filed a response on November 11, 2016.³ The Court heard oral argument on January 5, 2017. Joshua Yount, Thomas Kiriakos, and Adine Momoh appeared for the Defendant. Thomas Hamlin and Michael Rief appeared for the Plaintiff.

After oral argument, the Court ordered supplemental briefing on the issue of judicial estoppel.⁴ The parties submitted their supplemental briefing and Ritchie Special Credit Investments, Ltd, and Ritchie Capital Management SEZC, Ltd, filed a Statement regarding their standing to sue BMO on January 31, 2017.⁵

This Court has jurisdiction over this adversary proceeding 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.

This adversary proceeding was reassigned to the undersigned when Chief Judge Gregory F. Kishel retired on May 31, 2016. The undersigned hereby certifies familiarity with the record and determines that this matter may be addressed without prejudice to the parties in accordance with Fed. R. Civ. P. 63, as incorporated by Fed. R. Bankr. P. 9028.

The Motion is granted in part and denied in part for the reasons that follow.

Background and Procedural History

After Petters' Ponzi Scheme was uncovered in late 2008, Judge Ann Montgomery of the United States District Court for the District of Minnesota appointed the Plaintiff, Douglas Kelley, as the equity receiver for Petters Company Inc. and its affiliates ("PCI"). On October 11, 2008, the Plaintiff filed a Chapter 11 petition on behalf of PCI. The Plaintiff was appointed the Chapter 11 Trustee on February 26, 2009. On November 14, 2012, Plaintiff filed this adversary proceeding against Defendant.

The Court confirmed the Second Amended Plan of Chapter 11 Liquidation on April 15, 2016. The Plan established the BMO Litigation Trust, which is administered by the Plaintiff, as Liquidating Trustee. The Plan transferred the BMO Litigation Trust Assets, including the causes of action asserted in this adversary proceeding, into the BMO Litigation Trust.⁶

The Plaintiff filed the First Amended Complaint ("Complaint") on October 20, 2016.⁷ Generally, the Complaint alleges that the Defendant provided banking and related services to Petters and PCI.⁸ The Complaint also alleges that Defendant was complicit in the Ponzi scheme, that Defendant "was presiding" over the checking account ("M & I account") through which virtually all funds involved in the Ponzi scheme "were laundered", and that Defendant served as a "critical lynchpin" legitimizing and facilitating the Ponzi scheme by signing Deposit Control Agreements ("DCAs") to placate investors, among other actions.⁹

The Complaint states five causes of action:

1. Count I alleges that Defendant violated Minn. Stat. § 520.08, the Minnesota Uniform Fiduciaries Act.

2. Count II alleges that the Defendant breached its fiduciary duties to PCI and PCI's investors.

3. Count III alleges that Defendant aided and abetted Petters and his associates' fraud.

4. Count IV alleges that Defendant aided and abetted Petters and his associates' breach of fiduciary duties.

5. Count V alleges that Defendant engaged in a civil conspiracy with Petters and his associates.

Standard of Review

In reviewing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), a court must accept as true all of the factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor.¹⁰ Although the factual allegations need not be detailed, they must be sufficiently plead to "raise a right to relief above the speculative level ...."¹¹ The complaint must state a right to relief that is plausible on its face.¹² Further, Rule 9(b) requires that allegations of fraud, including allegations of aiding and abetting fraud, must be plead with particularity.¹³ Rule 9(b) must be read "in harmony with the principles of notice pleading."¹⁴

Defendant's Motion contains six arguments for dismissal under Federal Rules of Civil Procedure 12(b)(1) and (6). (The Court will not address the sixth issue, judicial estoppel, because Count V, to which it pertains, is dismissed as discussed below.)

I. Plaintiff has standing to pursue corporate claims.

Defendant's first main argument is that Plaintiff lacks standing to pursue claims on behalf of PCI or creditors.

A motion to dismiss attacking a party's standing under Rule 12(b)(1) is a challenge to the Court's subject matter jurisdiction. In deciding a motion under Rule 12(b)(1), the Court must first "distinguish between a ‘facial attack’ and a ‘factual attack.’ "¹⁵ Here, because Defendant's challenge to Plaintiff's standing rests not on the truthfulness of Plaintiff's pleadings, but on the sufficiency of Plaintiff's pleadings, Defendant's jurisdictional challenge is facial and the Court applies the same standard of review as the Court applies to a motion brought under Rule 12(b)(6).¹⁶

In order for a court to decide the merits of a particular dispute, a party must have standing.¹⁷ Standing requires that a party assert its own legal rights and interests and cannot rest its claims to relief solely on the legal rights or interests of third parties.¹⁸

A bankruptcy trustee has standing, pursuant to 11. U.S.C. §§ 704(1) and 1106(a), to pursue claims or causes of action that belonged to the bankruptcy estate on the date of filing in order to fulfill its duty to "collect and reduce to money the property of the estate ..."¹⁹ Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case, including causes of action.²⁰

A. The Plaintiff may pursue claims to recover for harm to PCI.

In Minnesota, a corporation may bring a claim when it has been injured.²¹ The Complaint here alleges many instances of wrongdoing by the Defendant that hurt the debtor. Thus, the Plaintiff, as trustee of the BMO Litigation Trust, may pursue any claim to recover for harm done to PCI. These will be fully addressed count by count below.

B. The Plaintiff may pursue derivative claims on behalf of creditors.

Defendant's next standing argument is that the Plaintiff cannot bring causes of action on "behalf of creditors" because, to have standing, the Plaintiff must assert his own legal rights and not those of others. While this prudential limitation on standing is consistently applied in the bankruptcy context, it is only applied when the claims at issue are solely direct claims of creditors.²² That is not the case here. The Plaintiff is properly pursuing derivative claims of the estate, with two exceptions discussed below.

A derivative action arises when a person seeks redress for harm to a corporation, on behalf of the corporation, rather than for harm the person suffered individually.²³ Derivative suits belong to the corporation in the first instance, but they are usually brought by shareholders against wrongdoers on behalf of the corporation because the corporation is unwilling or unable to do so.²⁴ Corporate shareholders may sue on behalf of the corporation because they share the risk of loss due to their status as shareholders.²⁵ This is what happens when a corporation is solvent.

Under Minnesota law, when a corporation is insolvent, or on the verge of insolvency, its directors and officers become fiduciaries of the corporate assets, which are held for the benefit of creditors .²⁶ This shift takes place "because insolvency expands the risk of corporate loss beyond shareholders to corporate creditors."²⁷ Thus, when a corporation is insolvent, the corporation's derivative claims include claims to recover for harm to creditors. A corporation that executes a Ponzi scheme is by definition insolvent.²⁸ Thus, here, the estate's derivative claims for harm to creditors are properly pursuable by the Plaintiff who stands in the shoes of the debtor.²⁹

The Court now turns to the method for determining whether the causes of action asserted by the Plaintiff to recover for harm...