United States v. Petters

United States of America, Plaintiff,

v.Thomas Joseph Petters, Defendant.

Crim. No. 08-364 (RHK/AJB)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

Date: January 24, 2013

MEMORANDUM OPINIONAND ORDER

James S. Alexander, Assistant United States Attorney, Minneapolis, Minnesota, for Plaintiff.

Christine N. Lindblad, David B. Galle, Marie L. van Uitert, Rebecca G. Sluss, Michelle R. Schjodt, Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota, for Petitioner Crown Bank.

INTRODUCTION

Third party Crown Bank ("Crown") has filed Verified Petitions (Doc. Nos. 503, 505) under 21 U.S.C. § 853(n), asserting interests in two properties previously owned by Defendant Thomas Joseph Petters and forfeited to the United States as part of the criminal case against him.¹ Presently before the Court are the parties' cross-Motions forSummary Judgment. For the reasons that follow, the Government's Motion will be denied and Crown's Motion granted.

BACKGROUND²

I. The underlying fraud and the Preliminary Order of Forfeiture

Petters was charged with wire fraud, mail fraud, money laundering, and conspiracy in connection with a large Ponzi scheme he orchestrated for more than a decade. Following a lengthy trial, he was found guilty in December 2009 on all 20 counts in the Superseding Indictment. He then waived his right to a jury determination whether forfeiture of certain property identified in the Superseding Indictment was appropriate.

On March 26, 2010, the Court issued a Preliminary Order (Doc. No. 395) forfeiting to the Government, inter alia, Petters's interests in two pieces of real property, one located at 320 Elk Circle, Dillon, Colorado (the "Keystone Property") and one located at 15823 50th Avenue North, Plymouth, Minnesota (the "Plymouth Property") (collectively, the "Properties"). The Court determined that the Properties "constitute[] or [were] derived from proceeds traceable to" wire and mail fraud and had been "involved in" money laundering, as each had been acquired using tainted funds. (Id. (citing 18 U.S.C. §§ 981-82).)

II. The Verified Petitions and the Motion to Dismiss

On October 20, 2011, Crown filed Verified Petitions with this Court under 21 U.S.C. § 853(n) and Federal Rule of Criminal Procedure 32.2, asserting interests in the Properties. It alleged that it had loaned Petters money under a line of credit and on September 25, 2008, in consideration for funds previously advanced, he had executed in the bank's favor a mortgage on the Plymouth Property and a deed of trust for the Keystone Property. (Doc. No. 503, ¶ 2(c); Doc. No. 505, ¶ 2(c).) Accordingly, it alleged that it was a bona fide purchaser for value of its Property interests, and as a result it sought an Order amending the Court's Preliminary Order of Forfeiture to reflect those interests.

The Government responded by moving to dismiss the Verified Petitions. It argued that Crown was not a bona fide purchaser for value because it had obtained its Property interests as security for pre-existing debt. (See Doc. No. 530 at 7-8.) It also argued that Crown could not prevail because it "knew, or should have known, that the . . . [P]roperties were subject to forfeiture" when its interests arose. (Doc. No. 522 at 20 n.2.)

On April 24, 2012, the Court denied the Government's Motion. United States v. Petters, 857 F. Supp. 2d 841 (D. Minn. 2012) (Kyle, J.). It concluded that "acquiring an interest in property as security for an antecedent debt," as Crown had done here, "is a bona fide purchase for value." Id. at 847. It also concluded that the record was too undeveloped at the pleading stage to determine whether Crown could (or could not) prevail on its Petitions. Id. ("The Court simply cannot tell at this juncture what Crown knew . . . about Defendant's fraud, and little in the way of evidence has been submittedon that question. Accordingly, the Court determines that it cannot dismiss the Verified Petitions with regard to the Keystone and Plymouth Properties on this basis at the present time."). The parties were therefore ordered to develop a plan for discovery and the filing of dispositive motions. See Fed. R. Crim. P. 32.2(c)(1)(B) (before determining merits of third-party petition, court "may permit the parties to conduct discovery," and "[w]hen discovery ends, a party may move for summary judgment under Federal Rule of Civil Procedure 56").

III. The circumstances surrounding Crown's Property interests

Following the Court's Order, the parties undertook discovery regarding Crown's interests in the Properties, which revealed the following undisputed facts:

From 2002 to 2008, Crown loaned money to Petters through an unsecured credit line. The original line provided him with credit of up to $500,000, but over the years the limit was steadily increased to $2,250,000. Petters's primary contact at the bank was Kevin Howk, the President of its Edina branch, with whom he had maintained a banking relationship since the 1990s (when Howk worked at a different bank).

Crown renewed the credit line on an annual basis, and in August 2008 it was again up for renewal. At the time, the line was fully extended, that is, the balance due was $2,250,000. In connection with the renewal, Petters provided Howk with information regarding his assets, financial condition, and business activities, and Howk in turn prepared a loan "write up" (also called a "credit display") to be presented to the bank's loan committee for approval. The write up noted Petters's position as CEO of Petters Group Worldwide ("PGW") and its affiliated companies, including Polaroid, SunCountry Airlines, and Fingerhut. It also noted the substantial assets held by Petters, including $29 million in cash and marketable securities and real estate valued at more than $20 million, as well as the longstanding relationship between Petters and Howk. The write up recommended that the credit line be renewed; that recommendation was adopted on September 9, 2008.

Approximately two weeks later, on September 24, 2008, dozens of law-enforcement officers raided PGW's headquarters. Howk's mother-in-law called him late that morning and reported "a whole lot" of police cars at Petters's offices. Howk called Petters on his cell phone and reached him in Las Vegas; he was "agitated" and reported that the raid was nothing to be concerned about and had resulted from an employee being investigated for embezzlement.

After speaking with Petters, Howk contacted Peter Dahl, Crown's CEO, who directed him to try to obtain collateral for the credit line. Dahl was concerned because the line was unsecured and the bank could not be sure whether the raid indicated that others might make a claim to Petters's personal assets. Howk, too, was concerned that the so-called embezzlement could affect Petters's ability to repay the credit line, and collateral would provide extra security to the bank. Howk then telephoned Petters and demanded collateral, and Petters indicated that he owned two pieces of unencumbered real estate that he could pledge. Howk asked for additional details about the properties, which Petters agreed to provide. Howk also asked to meet with Petters the following day, upon his return to Minnesota, and Petters agreed.

The raid at PGW was widely reported in the media. Howk saw a televised news broadcast about it the morning it occurred, although scant details were provided. Another report aired on Minnesota Public Radio later that afternoon. That report, as well as an article published in the Minneapolis Star Tribune the following morning (September 25, 2008), indicated that Petters's home had been searched in connection with the Government's investigation into a "multi-billion dollar fraud," but Petters maintained he was not involved in any wrongdoing. In addition, on September 25, 2008, Howk was served with a grand jury subpoena seeking all of Crown's records since 2002 regarding Petters and one of his companies (Petters Company, Inc. ("PCI")).

At approximately 4:00 p.m. on September 25, 2008, Howk traveled to PGW, where Petters signed a deed of trust and mortgage granting Crown first priority interests in the Keystone and Plymouth Properties, respectively, as security for funds advanced under the credit line. Petters reiterated at that time that the raid concerned embezzlement by a specific employee, and he denied being personally involved in any criminal activity. On Friday, September 26, 2008, Crown sent the deed of trust and mortgage via Federal Express to be recorded in their respective jurisdictions. Each was recorded the following Monday, September 29, 2008.

In the interim, several more news reports were published regarding the raid, some of which indicated that the Government believed Petters was involved in a massive fraud scheme. In addition, Petters contacted Howk and asked him to redeem $390,000 in certificates of deposit he held at Crown (either individually or through his businesses) and wire the funds to prominent local criminal-defense attorney Jon Hopeman. Pettersclaimed he "needed the money for his attorney." On September 29, 2008, the Star Tribune reported that Petters had resigned as Chairman and CEO of PGW and its affiliated companies. He was arrested four days later, and his assets were frozen pursuant to an order from this Court. The Government filed notices of lis pendens against the Properties in November 2008, indicating its intention to forfeit them as the proceeds of fraud.

Based on the foregoing facts, the parties now cross-move for summary judgment on the forfeitability of Crown's interests in the Properties. The Motions have been fully briefed, and the Court heard oral argument on January 9, 2013. The Motions are now ripe for disposition.

STANDARD OF REVIEW

Summary judgment is proper if, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Celotex Corp. v....