Westlb AG v. Kelley

• Decision Date: 23 April 2015
• Docket Number: Nos. 13–CV–3611 PJS,13–CV–3618 PJS.,13–CV–3614 PJS,13–CV–3616 PJS,s. 13–CV–3611 PJS
• Citation: 531 B.R. 783
• Parties: WESTLB AG, Appellant, v. Douglas A. KELLEY, Chapter 11 Trustee; Unsecured Creditors Committee, Appellees. 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, Appellants, v. Douglas A. Kelley, Chapter 11 Trustee; Unsecured Creditors Committee, Appellees. DZ Bank AG Deutsche Zentralgenossenschaftsbank, Frankfurt Am Main, Appellant, v. Douglas A. Kelley, Chapter 11 Trustee; Unsecured Creditors Committee, Appellees. Epsilon Global Active Value Fund I–B Ltd.; Epsilon Global Active Value Fund II, L.P.; Epsilon Global Active Value Fund II–B, L.P.; Epsilon Global Active Value Fund II–B, Ltd.; Epsilon Global Active Value Fund III Ltd.; Epsilon Global Active Value Fund Ltd. ; Epsilon Global Active Value Fund, L.P. ; Epsilon Global Asset Management Ltd.; Epsilon Global Master Fund II, L.P., a/k/a Epsilon Global Master Fund II, L.P., Sub. 1; Epsilon Global Master Fund, L.P. ; Epsilon Structured Strategies Master Fund, L.P., f/k/a Epsilon Global Master Fund Iii Structured Strategies, L.P.; Epsilon Investment Management, LLC ; Stafford Town Ltd.; Westford Asset Management, LLC ; Westford Global Asset Management Ltd.; Westford Special Situations Fund Ltd.; Westford Special Situations Fund, L.P.; Westford Special Situations Master Fund, L.P.; Steve G. Stevanovich, Appellants, v. Douglas A. Kelley, Chapter 11 Trustee; Unsecured Creditors Committee, Appellees.
• Court: U.S. District Court — District of Minnesota

531 B.R. 783

WESTLB AG, Appellant

v.Douglas A. KELLEY, Chapter 11 Trustee;

Unsecured Creditors Committee, Appellees.

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, Appellantsv.Douglas A. Kelley, Chapter 11 Trustee;

Unsecured Creditors Committee, Appellees.

DZ Bank AG Deutsche Zentralgenossenschaftsbank, Frankfurt Am Main, Appellant

v.Douglas A. Kelley, Chapter 11 Trustee;

Unsecured Creditors Committee, Appellees.

Epsilon Global Active Value Fund I–B Ltd.;

Epsilon Global Active Value Fund II, L.P.;

Epsilon Global Active Value Fund II–B, L.P.;

Epsilon Global Active Value Fund II–B, Ltd.;

Epsilon Global Active Value Fund III Ltd.;

Epsilon Global Active Value Fund Ltd. ;

Epsilon Global Active Value Fund, L.P. ;

Epsilon Global Asset Management Ltd.;

Epsilon Global Master Fund II, L.P., a/k/a Epsilon Global Master Fund II, L.P., Sub. 1;

Epsilon Global Master Fund, L.P. ;

Epsilon Structured Strategies Master Fund, L.P., f/k/a Epsilon Global Master Fund Iii Structured Strategies, L.P.;

Epsilon Investment Management, LLC ;

Stafford Town Ltd.;

Westford Asset Management, LLC ;

Westford Global Asset Management Ltd.;

Westford Special Situations Fund Ltd.;

Westford Special Situations Fund, L.P.;

Westford Special Situations Master Fund, L.P.;

Steve G. Stevanovich, Appellantsv.Douglas A. Kelley, Chapter 11 Trustee;

Unsecured Creditors Committee, Appellees.

Nos. 13–CV–3611 PJS

13–CV–3614 PJS

13–CV–3616 PJS

13–CV–3618 PJS.

United States District Court, D. Minnesota.

Signed April 23, 2015.

Patrick J. McLaughlin and Thomas O. Kelly III, Dorsey & Whitney LLP, for appellant in Case No. 13–CV–3611.

Kannon K. Shanmugam, Joseph G. Petrosinelli, and Jonathan M. Landy, Williams & Connolly LLP; John R. McDonald and Kari S. Berman, Briggs and Morgan, P.A., for appellants in Case No. 13–CV–3614.

H. Peter Haveles, Jr., Kaye Scholer LLP; Thomas H. Boyd and Michael A. Rosow, Winthrop & Weinstine, P.A., for appellant in Case No. 13–CV–3616.

Robert T. Kugler and Bryant D. Tchida, Stinson Leonard Street LLP, for appellants in Case No. 13–CV–3618.

Mark D. Larsen, Kirstin D. Kanski, Daryle L. Uphoff, James A. Lodoen, Terrence J. Fleming, and Adam C. Ballinger, Lindquist & Vennum LLP, for appellee Douglas A. Kelley.

David E. Runck and Lorie A. Klein, Fafinski Mark & Johnson, PA, for appellee Unsecured Creditors Committee.

ORDER

PATRICK J. SCHILTZ, District Judge.

Four groups of lenders appeal from the November 22, 2013 order of Chief United States Bankruptcy Judge Gregory F. Kishel granting the trustee's motion to substantively consolidate nine bankruptcy estates.¹ Appellees—the bankruptcy trustee and the unsecured creditors committee (collectively “the trustee”)—move to dismiss these appeals on the basis that appellants lack standing to appeal. For the reasons that follow, the trustee's motion is granted, and these appeals are dismissed.

I. BACKGROUND

These appeals arise out of the jointly administered bankruptcy proceedings of Petters Company, Inc. (“PCI”) and eight “special-purpose entities” (“SPEs”) wholly owned and controlled by PCI or Thomas J. Petters.² These entities sought bankruptcy protection in October 2008 shortly after an insider reported to the FBI that Petters was running a multi-billion-dollar Ponzi scheme through PCI. United States v. Petters, 663 F.3d 375, 379 (8th Cir.2011). Petters was eventually convicted of 20 counts of fraud, conspiracy, and money laundering and was sentenced to 50 years' imprisonment for his role in what turned out to be “the largest case of investor fraud in Minnesota history and one of the largest in United States history.” In re Petters Co., 499 B.R. 342, 346 (Bankr.D.Minn.2013) ; Petters, 663 F.3d at 378.

Appellants are lenders who extended financing to one or more of the SPEs either directly or indirectly through one of the other lenders. All of the appellants were net winners from the Ponzi scheme. Tr. App. 5581. In other words, appellants not only regained their initial investments in the SPEs, but they also garnered tens or even hundreds of millions of dollars in profits—profits that were funded with money stolen from other investors. Because they were net winners, none of the appellants has filed a proof of claim in the bankruptcy proceeding. Nor would there appear to be anything for appellants to claim; at the time of the FBI's raid in September 2008, none of the SPEs had any assets. App. 221–22.

Appellants seek review of Judge Kishel's order granting the trustee's motion for substantive consolidation of PCI and the SPEs. Substantive consolidation is a common-law doctrine under which a bankruptcy court may combine separate bankruptcy estates into a single estate. In re Owens Corning, 419 F.3d 195, 205 (3d Cir.2005). As with corporate-veil piercing and similar doctrines, substantive consolidation is generally justified at least partly on the ground that the separate corporate existence of the debtors was disregarded in practice and therefore should be disregarded in law. Id. (“The concept of substantively consolidating separate estates begins with a commonsense deduction. Corporate disregard as a fault may lead to corporate disregard as a remedy.” (footnote omitted)).

When a court grants substantive consolidation, creditors' claims against the separate debtors become claims against the consolidated entity, and liabilities among the consolidated entities are erased. Id. This has the effect of providing a bigger pool of assets from which creditors can draw, but it can also work to the disadvantage of creditors whose potential recovery is diluted. In particular, a creditor whose debtor had some assets may now be forced to share those assets with creditors of debtors who had no assets.

After an exhaustive review of the evidence, Judge Kishel granted the trustee's motion for substantive consolidation. Judge Kishel found that PCI and the SPEs were interrelated; that the lenders did not rely (or did not reasonably rely) on the corporate separateness of the SPEs; that reconciling intercompany transfers between PCI and the SPEs would be an extremely complex and expensive task whose result would not be particularly reliable; that the benefits of consolidation outweigh any harm to creditors; and that failing to consolidate would prejudice creditors. These appeals followed.

II. ANALYSIS

The trustee moves to dismiss for lack of jurisdiction, arguing that, because appellants are net winners from the Ponzi scheme who have no claims against the bankruptcy estate, they lack standing to appeal the substantive-consolidation order. Appellants respond that (1) the trustee should be estopped from raising the issue of standing, and (2) they do, in fact, have standing to appeal. The Court considers each issue in turn.

A. Estoppel

Appellants first argue that the trustee should be estopped from raising the issue of standing because earlier in these proceedings he argued that this Court has jurisdiction over this appeal. The Court disagrees.³

Judicial estoppel is an equitable doctrine under which a court may prevent a party from deliberately changing its position on a legal or factual issue during the course of a lawsuit. New Hampshire v. Maine, 532 U.S. 742, 749–50, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001). The purpose of the doctrine is to protect the integrity of the judicial process. Id. Among the factors a court may consider in deciding whether to apply the doctrine are (1) whether the party's current position is “clearly inconsistent” with its former position; (2) whether the party succeeded in persuading the court to accept its earlier position; and (3) whether the party would derive an unfair advantage or impose an unfair detriment on the opposing party if it were not estopped. Id. at 750–51, 121 S.Ct. 1808.

Application of the doctrine is not warranted when the party's prior position was the product of inadvertence or mistake. Id. at 753, 121 S.Ct. 1808 ; EEOC v. CRST Van Expedited, Inc., 679 F.3d 657, 680 (8th Cir.2012). Whether to apply judicial estoppel is within the discretion of the Court. New Hampshire, 532 U.S. at 750, 121 S.Ct. 1808.

Shortly after these appeals were docketed, the trustee filed motions to certify them for immediate appeal to the Eighth Circuit. In his briefing in support of the motions, the trustee represented that “[t]his Court has jurisdiction over this motion and the pending appeal pursuant to 28 U.S.C. §§ 158(a) and 1334 and Federal Rule of Bankruptcy Procedure 8001(f).” See, e.g., Case No. 13–CV–3611, ECF No. 13 at 3. In its order denying the trustee's motions, the Court found that it had jurisdiction under § 158(a)(1), which permits appeals as of right from “final judgments, orders, and decrees[.]” ECF No. 32 at 4 n. 1. Alternatively, the Court granted permission to appeal under § 158(a)(3), which allows the court to grant leave to appeal from interlocutory orders. Id.

Appellants argue that the trustee's earlier argument that this Court has jurisdiction should estop him from now arguing that appellants lack standing. The Court disagrees. As an initial matter, the trustee's earlier assertion regarding jurisdiction is not “clearly inconsistent” with his current assertion that appellants lack standing, because the trustee was earlier addressing the issue of finality, while now he is addressing the issue of standing. Whether an order regarding substantive consolidation is a “final” order appealable as of right under § 158(a)(1) is not entirely clear. The trustee correctly anticipated that the Court would be concerned about the issue of finality, and the trustee quite appropriately focused on that issue. Given the context, the trustee's earlier statement about jurisdiction appears to concern only the issue of finality under § 158(a) and not the...