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

550 B.R. 457

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 court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC, Plaintiff

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; WestLB AG New York Branch ; and the Minneapolis Foundation, Defendants.

JOINTLY ADMINISTERED UNDER CASE NO. 08-45257

Court File Nos: 08-45258 GFK

08-45326 GFK

08-45327 GFK

08-45328 GFK

08-45329 GFK

08-45330 GFK

08-45331 GFK

08-45371 GFK

08-45392 GFK

ADV 10-4301

United States Bankruptcy Court, D. Minnesota.

Filed May 31, 2016

Adam C Ballinger, Kirstin D. Kanski, Mark D Larsen, James A. Lodoen, Jeffrey D. Smith, Daryle Uphoff, Lindquist & Vennum LLP, Minneapolis, MN, for Plaintiff.

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

West Landesbank AG, pro se.

MEMORANDUM RE: EFFECT OF FINN V. ALLIANCE BANK ON PLAINTIFF'S CLAIMS OF FRAUDULENT TRANSFER

GREGORY F. KISHEL, CHIEF UNITED STATES BANKRUPTCY COURT

INTRODUCTION

The origin of this adversary proceeding is amply familiar from locally-generated case law. E.g., In re Petters Co., Inc., 401 B.R. 391 (Bankr.D.Minn.2009), aff'd, 620 F.3d 847 (8th Cir.2010) ; In re Petters Co., Inc., 440 B.R. 805 (Bankr.D.Minn.2010) ; In re Petters Co., Inc., 506 B.R. 784 (Bankr.D.Minn.2013) ; In re Petters Co., Inc., 548 B.R. 551 (Bankr.D.Minn.2016). See also In re Polaroid Corp., 472 B.R. 22 (Bankr.D.Minn.2012), aff'd, 779 F.3d 857 (8th Cir.2015). The Plaintiff, as trustee,¹ was charged with the remediation of a failed, massive Ponzi scheme, perpetrated for over a decade by Thomas J. Petters through Debtor Petters Company, Inc. (“PCI”) and related Debtor-entities as instrumentalities. He undertook to recover monies that had been paid out to past, satisfied investors into the scheme, by suing them for avoidance of the payments under the theory that they had received transfers fraudulent on the Debtors' other creditors. His primary substantive authority was the Minnesota Enactment of the Uniform Fraudulent Transfer Act, Minn. Stat. §§ 513.41 —513.51 (2014) (“MUFTA”), under the empowerment of 11 U.S.C. § 544(b).² The Trustee used an analysis that other courts had developed to respond to similar remediation efforts for failed Ponzi schemes, relying on their local enactments of the Uniform Fraudulent Transfer Act.

Before the great financial downturn of 2007–2008, there had been no litigation effort of this sort and magnitude locally. There was no local case law, state or federal, in treatment of the theories that the Trustee was invoking. Because the Trustee sued out more than 200 adversary proceedings on his theory, a “common issues” procedure was ordered to present various threshold questions as matters of law toward filling that gap. This was staged through the vehicle of motions for dismissal that dozens of defendants had filed. The procedure resulted in three “common issues” memoranda, In re Petters Co., Inc., 494 B.R. 413 ; In re Petters Co., Inc., 495 B.R. 887 ; and In re Petters Co., Inc., 499 B.R. 342 (all Bankr.D. Minn.2013) (respectively, the First, Second, and Third Memoranda).

Among those rulings, a “Ponzi scheme presumption” on actual fraudulent intent was adopted, 495 B.R. at 912 ; “reasonably equivalent value” was held to be lacking in the ostensible payment of interest to lenders into a Ponzi scheme, 499 B.R. at 359 ; and the statutorily-required financial distress of a transferor-entity—insolvency, insufficiency of capital or intent to incur debt beyond repayment ability—was properly pled, and could be proven, by the transferor's operation of a Ponzi scheme and its funding of payments to the transferee through the operation of the scheme, i.e. with money lent by later investors, diverted from the purposes for which the lending was intended, 495 B.R. at 924–925. These rulings were based on various guiding principles in the earlier case law from federal courts that had presided over similar litigation.

The rulings were applied after that common memorialization, when the motions for dismissal were denied for the majority of the Trustee's fraudulent-transfer actions. That was done in the adversary proceedings that featured lesser amounts in controversy and similar, more straightforward transactional histories within their fact-pleading. After that, the rulings were to be applied on motions for summary judgment that the Trustee contemplated bringing en masse after a coordinated discovery process.

A smaller number of the Trustee's fraudulent-transfer actions were carved out of that coordinated treatment, due to the “unique issues” posed by fact-pleading of more complicated transactional structures and processes, variance in the nature of the original liabilities running between the Debtors and their particular defendants, and so forth. This adversary proceeding was among the latter group.

As the litigation docket was queuing up to go forward in earnest on these two tracks, the Minnesota Supreme Court issued Finn v. Alliance Bank, 860 N.W.2d 638 (Minn.2015). Finn came out of a lawsuit brought in the Minnesota state courts by a court-appointed receiver, in a different remediation effort similar to the Trustee's and styled under the same substantive authority, MUFTA. In Finn, however, the receiver-plaintiff was denied relief in avoidance against several banks that had received repayment on debt incurred by the perpetrator of a Ponzi scheme. The perpetrator in Finn had incurred debt to investors in legitimate transactions (involving underlying investments that existed in reality and that really performed) and in fraudulent transactions (for which there were no underlying deals in reality, the perpetrator inducing the investor by falsely representing that there were). Both types of investment had been procured with the same sort of business transaction in mind—some existing and the rest bogus.

The receiver-plaintiff in Finn had argued for the use of a “Ponzi scheme presumption” from the same federal case law that gave the basis for the common-issues rulings here. He argued that the presumption had to be given “conclusive” effect. And for the application of his urged analysis and the operation of the presumption, the receiver did not see any distinction between transfers in consequence of investment into legitimate, real business transactions and those on investment induced by false pretenses; the common originator-entity and the similarity of the transactions' structures was enough for him.

The Finn court outlined a Ponzi scheme presumption in three components, which it gleaned from the prior federal case law. The components went to the intent of the transferor (i.e. actually fraudulent or not); the transferor's solvency at the time of the transfer; and whether the transferor received a reasonably equivalent value for the interest-component of the payment made to the investor.

The Finn court ruled on the viability of the presumption under MUFTA in all three parts. It then treated the concept of reasonably equivalent value as it applied to the record before it; and it made less prominent rulings on the adequacy of pleading for a claim under MUFTA premised on facts involving a Ponzi scheme. The tone and articulation of most of Finn 's rulings suggested that they were formulated as a response to the common issues memoranda issued in the PCI litigation docket.³

Defense counsel here quickly questioned the viability of this court's rulings in light of Finn . They pressed to bring a challenge at an early date. In light of the gravity of the issue, this adversary proceeding was chosen as a sole, free-standing vehicle to bring the issue into the litigation docket in the PCI cases. A motion for dismissal by the Opportunity Finance defendants⁴ was still pending and unaddressed when Finn was issued. The parties to that motion were ordered to present the issue, connotatively tagged “the effect of Finn, ” under the rubric of that motion.

When the hearing was convened for that presentation, James A. Lodoen, Adam C. Ballinger, and Mark D. Larsen appeared for the Trustee. 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. Michael A. Rosow and H. Peter Haveles, Jr. appeared for defendant DZ Bank. Eric R. Sherman, Thomas Kelly, and Darryn Beckstrom appeared for defendant WestLB. This memorandum is entered to memorialize the disposition of that discrete issue, for later application in the entry of a final order on the motions for dismissal.

WHAT FINN DID REACH AND DO; WHAT IT DID NOT

1. Rejection of Presumptions

Finn's most salient rulings lie in its rejection of the Ponzi scheme presumptions. The Finn court organized the bulk of its discussion around the viability of the presumptions; the tripartite rejection is its one ruling on general principles of law.

A presumption operates as an evidentiary device. “Through presumptions, the existence of one fact is presumed from proof of another.... The ‘true presumption’ creates...