Mukamal v. Gen. Elec. Capital Corp. (In re Palm Beach Fin. Partners, L.P.)

568 B.R. 874

IN RE: PALM BEACH FINANCE PARTNERS, L.P., Palm Beach Finance II, L.P., Debtor(s).

Barry Mukamal, Plaintiff,

v.General Electric Capital Corporation, Defendant.

CASE NO.: 09–36379–BKC–PGH

CASE NO.: 09–36396–BKC–PGH (jointly administered)

ADV. NO.: 12–1979–BKC–PGH–A

United States Bankruptcy Court, S.D. Florida, West Palm Beach Division .

Signed June 15, 2017

Michael S. Budwick, Esq., Meland Russin & Budwick, PA, Miami, FL, Solomon B. Genet, Zachary N. James, David S. Mandel, Esq., Miami, FL, for Plaintiff.

Sean M. Berkowitz, David S. Foster, Chicago, IL, Patricia A. Redmond, Miami, FL, for Defendant.

ORDER DENYING MOTIONS FOR SUMMARY JUDGMENT

Paul G. Hyman, Jr., Judge, United States Bankruptcy Court

THIS MATTER came before the Court upon the Motion for Summary Judgment ("GECC's Motion for Summary Judgment") (ECF No. 510) filed by Defendant General Electric Capital Corporation ("GECC") and the Motion for Partial Summary Judgment (the "Plaintiff's Motion for Summary Judgment") (ECF No. 509) filed by Plaintiff Barry Mukamal (the "Plaintiff") in his capacity as Liquidating Trustee for the Palm Beach Finance Liquidating Trust and the Palm Beach Finance II Liquidating Trust (together known as the "Palm Beach Liquidating Trusts"). Having considered the extensive briefing¹ submitted by both GECC and the Plaintiff and for the reasons discussed below, the Court denies both Motions for Summary Judgment.

UNDISPUTED FACTS AND PROCEDURAL BACKGROUND

The following relevant² facts are undisputed by virtue of the parties' Joint Statement of Undisputed Facts (the "Joint Statement") (ECF No. 537).

I. The Petters Ponzi Scheme

From 1995 through September 2008, Thomas J. Petters ("Petters") perpetrated a Ponzi scheme or schemes³ (the "Petters Ponzi Scheme") through Petters Company, Inc. ("PCI"), a special purpose entity wholly owned and controlled by Petters, along with several other special purpose entities (the "Petters SPEs"). Joint Statement, ¶¶ 116, 126–27. PCI created the Petters SPEs over the years to facilitate the hedge funds' lending, and through which funds would provide their financing. The Petters SPEs consisted of: PC Funding, LLC, Thousand Lakes LLC, SPF Funding LLC, PL Ltd. Inc., Edge One LLC, MGC Finance Inc., PAC Funding LLC and Petters Capital, Inc. ("Petters Capital"). All of the Petters SPEs were owned by PCI except for Petters Capital,⁴ which Petters owned directly. The Petters SPEs were managed in conjunction with PCI. Id. at ¶¶ 140, 148.

Deanna Coleman ("Coleman"), who began working for Petters in 1993, was a central participant who worked closely with Petters in perpetrating the Petters Ponzi Scheme. Id. at ¶¶ 117, 123. Coleman and Bob White ("White") were the primary forgers of the forged documents created in order to perpetrate the Petters Ponzi Scheme. Id. at ¶ 123. Coleman generally acted at Petters' direction in connection with her activities at PCI. Id. at ¶ 128.

The Petters Ponzi Scheme included defrauding lenders by misrepresenting that PCI and the Petters SPEs were engaged in real transactions, selling real inventory to real customers, providing real collateral to lenders, and paying lenders from the proceeds of real transactions rather than from money sourced from other defrauded lenders. Id. at ¶ 133. According to Coleman, "By 1995 investors who were putting their money in PCI were basically all investing in fake deals at that point." Id. at ¶ 124. Indeed, soon after being incorporated in 1994, PCI began to borrow money from lenders by misrepresenting the legitimacyof fake transactions. Id. at ¶¶ 125, 130. In or around 1998 or 1999, White began making fake documents for PCI at the direction of Petters and Coleman to provide to PCI's lenders. The fake documents included fake retailer purchase orders, fake bank statements, fake tax returns, fake bills of lading, and fake checks. White also created fake purchase orders to misrepresent that PCI sold merchandise to big-box retailers such as Costco and Sam's Club, while Coleman created fake purchase orders to misrepresent that PCI purchased merchandise from suppliers. Petters and Coleman provided the fake documents to PCI lenders in order to deceive them. In fact, there was generally no merchandise that was resold to the retailers, and substantially all of PCI's business and transactions were fake. Id. at ¶¶ 131, 142–43.

Petters generally portrayed PCI to lenders as a "diverter" of goods that bought consumer electronic goods from wholesale suppliers and resold those goods to large "big-box" retailers. At times these big-box retailers included Costco, Sam's Club, BJ's Wholesale Club, Rex and Boscov's. Id. at ¶ 139. In or around 2002, Petters approached Larry Reynolds ("Reynolds") and Michael Catain ("Catain") to have businesses pose as PCI wholesale suppliers. Catain utilized a company called Enchanted Family Buying Company ("Enchanted"). Reynolds utilized a company called Nationwide International Resources ("Nationwide"). PCI provided lenders with forged purchase orders that purported to show PCI buying goods from Enchanted or Nationwide, and others purporting to show a vendor, typically a big-box retailer, purchasing the merchandise from PCI. In those instances, the lender would wire funds directly to the purported wholesale supplier. The inventory seller would then wire nearly all the funds to a bank account number XXXXXXX (the "PCI Account") that PCI maintained at Marshall & Ilsley Bank, usually on the same day, while retaining a portion for itself. Meanwhile, PCI represented to its lenders that it received payments into the PCI Account directly from its purported big-box retailer customers. Id. at ¶ 149 & n. 9. PCI of course rarely received payments from big-box retailers because PCI rarely entered into real diverting transactions. Id. at ¶ 181.

PCI used the funds raised from deceived lenders—and often routed through fake wholesale suppliers to the PCI Account—to repay other lenders or, in some instances, to repay the lender that provided the funds in the first instance, to pay salaries and bonuses and other overhead costs, to fund the business operations of other Petters entities, to fund other business transactions, such as the acquisitions of Polaroid, Sun Country Airlines, and Fingerhut, and for Petters' personal use. Id. at ¶¶ 149, 181.

II. GECC's investment relationship with Petters

In March 1998, GECC established a $50 million revolving credit line (the "GECC–Petters Capital Line") with Petters Capital. In December 1999, GECC established a separate revolving credit facility (the "Redtag Line") with redtagoutlet.com, Inc. ("Redtag"), a company for which Petters was the CEO and one of the shareholders. Joint Statement, ¶¶ 1, 2. Draws on the Petters Capital Line were to be used in connection with the purchase and resale of merchandise and not for general operations or working capital. Petters told GECC that all deals were "pre-sold," meaning that when Petters Capital purchased inventory, it had already secured a purchaser for those same goods. Petters Capital used the vast majority of the money advanced by GECC to engage in fraudulenttransactions. According to Coleman, all the transactions GECC funded were either fake or mostly fake. Id. at ¶¶ 190–92.

Richard Menczynski, an employee of GECC at all relevant times, helped underwrite the GECC–Petters Capital Line and was the primary account manager for the GECC–Petters Capital Line from 1999 to August 2000. Id. at ¶¶ 8, 193. Sometime before October 1999, Menczynski informed Petters that he was having personal financial difficulties. By October 1999, Petters loaned at least $37,000.00 to Menczynski. Menczynski's first installment payment on his loan was due on January 1, 2000. Menczynski did not make any repayments on the loan. Id. at ¶ 195. On January 4, 2000, upon a request from Petters, Menczynski signed and transmitted a reference letter (the "January 4, 2000, Letter") to Petters. Id. at ¶¶ 10, 196; Joint Notice of Filing of Exhibits ("Joint Exhibits") (ECF No. 540), Ex. 5. The January 4, 2000, Letter, written on General Electric ("GE") letterhead and signed by Menczynski as Assistant Vice President, stated:

To Whom It May Concern:

I am writing this letter for the purpose of a personal and business reference on Mr. Thomas J. Petters. Petters Capital, Inc. ("Petters") and General Electric Capital Corporation ("GE Capital") closed a $50.0MM Senior Secured Revolving Credit Facility on March 26, 1998. During this time, the transactions under the Credit Facility have performed well and Petters continues as an excellent customer.

On a personal level, I have known Mr. Petters for a little over two years and have found him to be of high character and possessing strong moral values.

Joint Exhibits, Ex. 5. Menczynski's final day of employment at GECC was September 15, 2000. Menczynski began working at Redtag in September 2000. Joint Statement, ¶¶ 204, 205.

On October 9, 2000, Petters Capital and GECC entered into a letter agreement related to the termination of the GECC–Petters Capital Line. Petters repaid the GECC–Petters Capital Line by December 8, 2000. On December 14, 2000, GECC sent Petters a letter attaching executed UCC termination statements for Petters Capital. Petters did not file the terminations. On March 12, 2001, GECC provided a letter to Redtag confirming termination of the Redtag Line and enclosing UCC termination statements. There were no further loans made by GECC to Petters or his companies after the Redtag credit facility was closed in March 2001. Id. at ¶¶ 3–7.

III. The Palm Beach Funds' investment relationship with Petters

In 2002, David Harrold ("Harrold") and Bruce Prevost ("Prevost") were recruited by Petters' associate Frank Vennes ("Vennes") to provide an additional source of financing for what Petters contended to be an inventory financing business. Ultimately, Harrold and Prevost decided to go forward with providing financing to Petters in what they testified they understood to be a...