Kelley v. Opportunity Fin., LLC (In re Petters Co.)

561 B.R. 738

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.)

Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC, Plaintiffs,

v.Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Opportunity Finance Securitization III, LLC; International Investment Opportunities, LLC; Sabes Family Foundation; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; Deutsche Zentralgenossenschaftbank AG ; West Landesbank AG; and the Minneapolis Foundation, Defendants.

JOINTLY ADMINISTERED UNDER CASE 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)

ADV. 10–4301

United States Bankruptcy Court, D. Minnesota.

December 1, 2016.

Shari L. J. Aberle, Monica L. Clark, Elizabeth A. Hulsebos, Thomas O. Kelly, III, Patrick J. McLaughlin, Eric R. Sherman, Dorsey & Whitney LLP, Kari Berman, Benjamin Gurstelle, Max C. Heerman, Briggs and Morgan P.A., Thomas F. Berndt, Thomas C. Mahlum, John R. McDonald, David L. Mitchell, Robins Kaplan LLP, Michael Rosow, Winthrop & Weinstine, Minneapolis, MN, Jefferey D. Bailey, Jonathan M. Landy, Christopher J. Mandernach, Joseph G. Petrosinelli, Williams & Connolly LLP, Washington, DC, for Defendant.

Adam C. Ballinger, Kirstin D. Kanski, Mark D. Larsen, James A. Lodoen, Jeffrey D. Smith, Daryle Uphoff, Lindquist & Vennum LLP, Michael Rosow, Winthrop & Weinstine, Minneapolis, MN, Clinton J. Dockery, Robert S. Loigman, Quinn Emanuel & Sullivan, LLP, New York, NY, for Plaintiff.

ORDER ON OPPORTUNITY FINANCE DEFENDANTS' MOTION FOR DISMISSAL & REMAINING UNIQUE ISSUES

KATHLEEN H. SANBERG CHIEF UNITED STATES BANKRUPTCY JUDGE

This adversary proceeding is part of the Chapter 11 cases of Petters Company, Inc., and related entities. The history of these cases is well documented and, for the sake of brevity, will not be repeated here.¹ The Opportunity Finance defendants,² as well as WestLB³ and the Minneapolis Foundation, filed Motions to Dismiss containing numerous bases for dismissal.⁴ Many of those arguments have already been addressed by the Court.⁵ Most of the remaining bases for dismissal have been referred to as "Unique Issues"⁶ because they present questions unique to the particular parties in this adversary proceeding.⁷ This decision addresses all remaining bases for dismissal asserted by the Defendants.

Oral argument was presented on November 18, 2015, and the matters were taken under advisement.⁸ James A. Lodoen, Adam C. Ballinger, and Mark D. Larsen appeared for Trustee Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC (collectively the "Plaintiff"). Joseph G. Petrosinelli and John R. McDonald appeared for the Opportunity Finance defendants. David E. Runck appeared on behalf of the Official Committee of Unsecured Creditors. Eric R. Sherman, Thomas Kelly, and Darryn Beckstrom appeared for defendant WestLB.

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 is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

This adversary proceeding and the main bankruptcy cases were reassigned 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.

Introduction

The Defendants filed their original Motions to Dismiss in March 2011.⁹ The original motions shared arguments in common with motions filed in other clawback adversaries. The Court addressed these common arguments in a series of memoranda decisions issued in the summer of 2013.¹⁰ In addition to those common issues, the parties in this adversary identified a number of issues unique to this adversary as grounds for dismissal.¹¹

Both the Plaintiff and the Defendants filed their Statement of Unique Issues for adversary proceeding 10–4301 in May 2012.¹² After the Plaintiff amended the complaint in response to the Common Issues rulings,¹³ the Minnesota Supreme Court issued its ruling in Finn v. Alliance Bank (" Finn").¹⁴ The Plaintiff then filed a Third Amended Complaint ("Complaint").¹⁵

The Court issued decisions on the impact of substantive consolidation and the effect of the Finn decision in May of 2016. Only the remaining unique issues need to be addressed. These unique issues are really 12(b)(6) arguments that the Plaintiff has failed to state a claim for relief.¹⁶

Discussion

I. Standing

In this case, the Plaintiff seeks to avoid transfers made by debtor-entities under 11 U.S.C. §§ 544(b) and 548, as well as recover other transfers as preferences under § 547. Section 544(b) empowers a trustee to step into the shoes of an actual unsecured creditor and utilize whatever state or nonbankruptcy federal law remedies that particular creditor may have.¹⁷ Thus, to have standing under § 544(b), the Plaintiff is required to plead the existence of a creditor that would have standing to pursue fraudulent transfer claims under state law.¹⁸ Most of the Defendants' F.R.C.P 12(b)(6) arguments center around the question of whether the Plaintiff has adequately pleaded his standing to prosecute an action against the Defendants. The rest concern the substance of the Plaintiff's allegations. The Court finds that the Plaintiff has sufficiently pleaded his standing to pursue claims under §§ 544(b) and 547, but not under § 550.

The standing issues in this adversary are unique to the Defendants due to the corporate structure through which they engaged with Petters and his enterprise. The Defendants allege that they only dealt with PC Funding and SPF Funding, which were special purpose entities ("SPEs"). These two SPEs in particular were set up to be bankruptcy remote.¹⁹ What makes the SPEs bankruptcy remote is that they were corporate entities separate from PCI and they had no other creditors. By being removed from PCI, the Defendants were supposedly insulated from any failure of PCI.²⁰ Also, since the SPEs would not have any other creditors, if the SPEs themselves were to fail and end up in bankruptcy, the Defendants would be insulated from fraudulent transfer liability since no other creditors could furnish a trustee with standing under § 544(b).²¹ Additionally, if there were no other creditors then, in theory, avoiding any transfer under §§ 547 or 548 would not benefit of the estate since the Defendants would be the sole creditor of the estate to whom the benefit would inure.²² Therefore, a trustee would not have standing under any Bankruptcy Code provision to pursue fraudulent transfer remedies.

In response to this corporate structure, the Plaintiff has propounded a number of legal theories that would give him standing to pursue claims. First, the Plaintiff argued that substantive consolidation provided him a creditor that would provide standing under § 544(b) by expanding creditor liability from PCI to the SPEs.²³ The Court disagreed and held that substantive consolidation only consolidates the bankruptcy estates and does not reach back beyond the petition date to alter the debtor-creditor relationship between any parties under state law.²⁴

a. PC Funding/SPF Funding have their own creditors that provide standing under § 544(b)

The Plaintiff argues that PC Funding and SPF Funding have creditors other than the Defendants.²⁵ The original complaint contained the allegation that "[a]t all times material hereto, there was and is at least one or more creditors who held and who hold unsecured claims against the Debtors that were, and are, allowable under the Bankruptcy Code § 502."²⁶ The Court ruled this was insufficient and the Plaintiff was directed to identify a creditor by name that would provide him with standing under § 544(b).²⁷ In the Third Amended Complaint, the Plaintiff identified Interlachen Harriet Investments Limited ("Interlachen") as an unsecured creditor of both PC Funding and SPF Funding.²⁸

In 2011, the Defendants argued that the Plaintiff's allegations that the SPEs had other creditors were conclusory recitations of the element of the cause of action.²⁹ The Defendants further argued that the Plaintiff's conclusory assertion that Interlachen has a tort claim against each of Petters' entities is unsupported by the allegations in the Complaint.³⁰ The Third Amended Complaint does not resolve these deficiencies.

To properly plead standing under § 544(b), a plaintiff must allege facts that support a plausible inference that the creditor has an allowable claim against the debtor as of the petition date.³¹ The creditor's claim must have allowed the creditor to avoid a transfer under nonbankruptcy law, in this case Minn. Stat. § 513.41 et. seq.³² ("MUFTA"). The allegations in the Third Amended Complaint that Interlachen filed a proof of claim against every Petters entity and that they have an allowed claim against the "PCI Debtors,"³³ does not plausibly establish Interlachen could have avoided transfers made by the SPEs under Minnesota law.

First, the proof of claim does not establish the bases of the claims against the SPEs.³⁴ This allegation does not plausibly allege that Interlachen had an allowable claim against either of the SPEs. The fact allegations in the Complaint detail how Interlachen lent to PCI and not to the SPEs.³⁵ Absent from these allegations is an allegation that Interlachen had any lending or...