Kelley v. Westford Special Situations Master Fund, L.P.

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Douglas A. Kelley, in his capacity as Trustee of the PCI Liquidating Trust, Plaintiff, v. Westford Special Situations Master Fund, L.P.; Westford Global Asset Management, Ltd.; Westford Special Situations Fund, Ltd.; Westford Special Situations Fund, L.P.; Westford Asset Management, LLC; Epsilon Global Master Fund, L.P.; Epsilon Global Active Value Fund, Ltd.; Epsilon Global Active Value Fund I-B Ltd.; Epsilon Global Active Value Fund, L.P.; Epsilon Global Master Fund II, L.P. a/k/a Epsilon Global Master Fund II, L.P., Sub 1; Epsilon Global Active Value Fund II, Ltd., f/k/a Westford Investment Fund Ltd.; Epsilon Global Active Value Fund II-B Ltd.; Epsilon Global Active Value Fund II-G Ltd.; Epsilon Global Active Value Fund II, L.P.; Epsilon Global Active Value Fund II-B, L.P.; Epsilon Global Active Value Fund II-G, L.P.; Epsilon Global Asset Management, Ltd.; Epsilon Investment Management, LLC; Epsilon Structured Strategies Master Fund, L.P., f/k/a Epsilon Global Master Fund III - Structured Strategies, L.P.; Epsilon Global Active Value Fund III Ltd.; Stafford Towne, Ltd.; and Steve Goran Stevanovich; Defendants.

No. 19-cv-1073 (KMM/JFD)

United States District Court, D. Minnesota

November 13, 2024

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OF DECISION

Katherine Menendez, United States District Judge

I. INTRODUCTION

This case arises from the massive Ponzi scheme perpetrated by Thomas Petters between 1994 and 2008 through Petters Company Inc. (“PCI”). Petters and his associates purported to operate a “diverting” business that purchased consumer goods at low prices and resold them at significant profit to big box retailers, but “[i]n reality, PCI engaged in almost no purchase and sale transactions.” Kelley v. Boosalis, 974 F.3d 884, 887 (8th Cir. 2020). To finance those fictitious deals PCI sought investment from lenders to whom Petters and PCI offered high interest rates. Petters and his associates also attached fabricated purchase orders to promissory notes issued to lenders to signal the legitimacy of the transactions. When it was able, PCI paid back lenders their principal and the agreed interest, but because the transactions were a sham, the funds weren't generated from profit generated by the sale of goods at markup to the retailers. Instead, Petters was paying off early lenders with their own funds and the funds he obtained from new “investors” that were defrauded into lending money into the same scheme.

Eventually the scheme came crashing down when one of Petters's associates, Deanna Coleman, walked into the U.S Attorney's Office in Minneapolis and exposed the years-long fraud. As often happens in a Ponzi scheme, many of those who loaned money to the Petters scheme early on were able to recoup their original investment and realize a profit, but those who made loans to PCI toward the end of the scheme lost everything.

Petters was convicted of 20 counts of fraud. PCI was placed in receivership, and in October 2008, it declared bankruptcy.

The Plaintiff in this case, Douglas A. Kelley, is the liquidating Trustee for the PCI Liquidating Trust (“Plaintiff” or the “Trustee”). For years, the Trustee has engaged in litigation in efforts to recover funds for distribution to PCI's unfortunate creditors. The Defendants in this case include several related master hedge funds and feeder funds, investment management companies, and Defendant Steve Goran Stevanovich, who is now pro se. The Trustee brought this case in October 2010 as an adversary proceeding in the United States Bankruptcy Court for the District of Minnesota. The Second Amended Complaint, which is now the operative pleading, includes claims under the Bankruptcy Code and Minnesota's Uniform Fraudulent Transfer Act (“MUFTA”).^[1] The Trustee seeks to avoid and recover money transfers to Defendants by PCI and PL Ltd., a Petters company that transacted with Defendants.^[2]

On September 19, 2023, the Trustee for the PCI Liquidating Trust (“Plaintiff” or “the Trustee”), executed a stipulation with the Corporate Defendants and pro se Defendant Steve Goran Stevanovich waiving their rights to a jury trial and agreeing to try their case based on a paper record and trial briefs. Trial Stip. ¶¶ 6-9 (Doc. 232). The parties agreed that the Court's decision granting in part and denying in part the Trustee's motion regarding “law of the case” had significantly narrowed the disputed issues in this case.^[3] Id. ¶ 3. As stipulated by the parties:

Specifically, the Parties agree that only three issues remain for trial. The first two issues concern Defendants' affirmative defense of “good faith,” which requires Defendants to prove that they received transfers from the Ponzi scheme in “[1] in good faith and [2] for a reasonably equivalent value.” Minn. Stat. § 513.48(a); see also 11 U.S.C. § 548(c); 11 U.S.C. § 550(b). The third issue is “tracing”-whether the Trustee can prove that Defendants received transfers from the Ponzi scheme.

Id. ¶ 4.^[4]

In accordance with Federal Rule of Civil Procedure 52(a), and after reviewing the entire trial record, the Court makes the findings of fact and conclusions of law set out below. Three preliminary points apply throughout the following decision. First, all findings of fact in this case are made subject to the preponderance-of-the-evidence standard. Second, while the Plaintiffs bear the burden of proof on the elements of their claims under the Bankruptcy Code and MUFTA, the Defendants bear the burden of proof on their affirmative defenses, including the obligation to demonstrate that the at-issue transfers were made “in good faith” and for “reasonably equivalent value.” And third, “[t]o the extent any findings of fact have been designated in error as conclusions of law they should be deemed findings of fact and any conclusions of law designated in error as findings of fact shall be deemed conclusions of law.” Ridings v. Maurice, 444 F.Supp.3d 973, 981 n.5 (W.D. Mo. 2020) (cleaned up).

FINDINGS OF FACT

I. The Petters Scheme

1. Between 1994 and 2008, Tom Petters (“Petters”) operated a multi-billion Ponzi scheme.^[5] Trustee's Am. Statement of Facts-1 (“TSF-00X”) (Doc. 278).^[6]

2. Petters purported to run a “diverting” business through PCI, purchasing consumer goods and reselling them at markup. TSF-2.

3. In reality, there was almost no merchandise, and the ostensible business and its transactional structure were all a facade. The money coming into PCI was from loans and investments, which were themselves fraudulently induced and used to repay earlier investors. Petters operated the fraud by tricking people into lending money and then funneling that new money to repay old debts while falsely claiming the new money came from the profits of the non-existent business venture. TSF-3-5.

4. Petters and Deanna Coleman (“Coleman”), PCI's Vice President of Operations, solicited short-term loans, purportedly to finance merchandise transactions from “big box” retailers like BJ's and Costco (“Retail Customers”). Stip. as to Undisputed Facts-1 (“UF-X”) (Doc. 237); TSF-9.

5. The purported transactions involved obtaining merchandise from “Vendors.” The Vendors involved were Nationwide International Resources, Inc. (“Nationwide”), and Enchanted Family Buying Company (“Enchanted”). Nationwide and Enchanted purported to buy merchandise that would be re-sold to the Retailer-customers. TSF-6.

6. Coleman or Petters would contact potential investors and tell them Petters had a deal with a Retail-Customer, and needed payment from the investor to complete the transaction. UF-2.

7. Coleman would then falsify the purchase orders from PCI for the transaction to Nationwide or Enchanted based on pricing from publicly available advertisements for actual retailers. UF-3. Petters and a third member of PCI, Bob White, also participated in the creation of fake purchase orders. TSF-11.

8. To obtain loaned funds from investors, Petters used special purpose entities (“SPE”). TSF-16-17.

9. There was substantial identity between PCT and the SPEs, including: (1) a high degree of structural and de facto operational interrelatedness, (2) the SPEs' governance had no independence from PCI; (3) a failure to observe functional, transaction-specific boundaries, (4) a unity of equity interests and ownership, and (5) commingling of assets and business functions. TSF-19.

10. PCI or Petters owned and controlled each SPE. TSF-18, TSF-20. The SPEs were not managed independently from PCI, did not convene meetings of their own boards of directors, and they did not have their own office space, phone lines, employees, fax lines, or email addresses. TSF-20. The SPEs' ostensible business and transactional structure were virtually all a facade, they did not engage in business transactions with third parties independently from PCI, and they conducted no legitimate and non-collusive business activity to generate revenue. TSF 21.

11. PCI paid the SPEs' costs and expenses and would transfer any excess back to PCI. TSF-24.

12. Through the SPEs, Petters presented fictitious transactions to lenders, the lenders transferred a loan to the SPEs' bank accounts, and the SPEs then executed promissory notes in favor of the lenders. TSF-25. Each loan was memorialized with a promissory note stating the principal amount, term (often 60 days), and interest to be paid upon maturity. UF-4.

13. The SPE transferred the funds out of the SPE's bank account, ending up in PCI's bank account at M&I Bank. TSF-26. PCI then transferred funds from the M&I account back to the SPE's account, ostensibly having completed the sale to the retailer. TSF-27. The SPE used the funds it received from PCI to pay off the principal and interest owed to the lender pursuant to the promissory note. TSF-28.

14. PCI ...