Cmty. First Bank v. First United Funding, LLC, No. A12–40.
| Decision Date | 16 July 2012 |
| Docket Number | No. A12–40. |
| Citation | 822 N.W.2d 306 |
| Parties | COMMUNITY FIRST BANK, a Wisconsin banking corporation, Respondent, v. FIRST UNITED FUNDING, LLC, Defendant, Lighthouse Management Group, Inc., as Receiver for First United Funding, LLC, Respondent, Corey N. Johnston, Respondent, Hillcrest Bank, a Kansas banking corporation, Respondent, v. Community Financial Bank, a Wisconsin banking corporation, intervenor, Respondent, Community State Bank of Prentice, a Wisconsin banking corporation, intervenor, Respondent, Choice Financial Group, intervenor, Respondent, MinnWest Bank Luverne, intervenor, Respondent, First International Bank and Trust, a North Dakota banking corporation, intervenor, Respondent, Maple Bank, intervenor, Respondent, The Bank, Weatherford Texas, intervenor, Respondent, LNV Corporation, intervenor, Respondent, Republic Bank of Chicago, intervenor, Respondent, The National Bank, intervenor, Appellant, v. John Doe, et al., Additional Defendants, and Western National Bank, Respondent, v. First United Funding, LLC, Defendant, Lighthouse Management Group, as Receiver for First United Funding, LLC, Respondent. |
| Court | Minnesota Court of Appeals |
OPINION TEXT STARTS HERE
Syllabus by the Court
In an equitable proceeding to compensate the victims of a Ponzi scheme, the district court has broad discretion to adopt a method that fairly and reasonably distributes the recovered funds.
T. Chris Stewart, Anastasi & Associates, Stillwater, MN, for respondent Community First Bank.
Ryan T. Murphy, Joseph J. Cassioppi, Fredrikson & Byron, P.A., Minneapolis, MN, for respondents Lighthouse Management Group, Inc., receiver for First United Funding, LLC and Non–Exempt assets of Corey N. Johnston.
Robert L. Meller, Jr., Best & Flanagan, LLP, Minneapolis, MN, for Hillcrest Bank.
Community Financial Bank, Prentice, WI, respondent.
Community State Bank of Prentice, Prentice, WI, respondent.
Tracy A. Kennedy, Zimney Foster, P.C., Grand Forks, ND, respondent Choice Financial Group.
Kathryn J. Bergstrom, Gray, Plant, Mooty, Mooty & Bennett, PA, Minneapolis, MN, respondent Minnwest Bank Luverne.
Kevin D. Hofman, Halleland Habicht, P.A., Minneapolis, MN, and Kirstin D. Kanski, Lindquist & Vennum, P.L.L.P., Minneapolis, MN, for respondent First International Bank and Trust.
Maple Bank, Champlin, MN, respondent.
Steven M. Phillips, Anthony Ostlund Baer & Louwagie, P.A., Minneapolis, MN, for respondent The Bank, Weatherford, Texas.
LNV Corporation, respondent.
Mychal A. Bruggeman, Shane H. Anderson, Mackall, Crounse & Moore, PLC, Minneapolis, MN, for respondent Republic Bank of Chicago.
Timothy W. Waldeck, Lindsey J. Woodrow, Waldeck & Lind, P.A., Minneapolis, MN, and
Richard A. Davidson (pro hac vice), Lane & Waterman LLP, Davenport, IA, for appellant.
Patrick W. Michenfelder, Gries & Lenhardt, P.L.L.P., St. Michael, MN, for respondents Chez & Tabes, LLC, Brian Carney, and Edwad Rapee.
Lowell P. Bottrell, Fargo, ND, for respondent Bank Forward.
Kevin M. Busch, Moss & Barnett, Minneapolis, MN, for respondent Border State Bank.
Charter Bank, Eau Claire, WI, respondent.
David Galle, Oppenheimer Wolff & Donnelly, Minneapolis, MN, for respondent CLMG Corp.
William F. Stute, Jr., Faegre Baker Daniels LLP, Minneapolis, MN, for respondent Western National Bank.
Brett M. Larson, Saliterman & Siefferman, P.C., Minneapolis, MN, for respondent Corey N. Johnston.
First Southern National Bank, respondent.
Labette Bank, respondent.
Sonoran Bank, N.A., respondent.
Mortgage Electronic Registration Systems, Inc., respondent.
Considered and decided by SCHELLHAS, Presiding Judge; KALITOWSKI, Judge; and CHUTICH, Judge.
Appellant, The National Bank (National Bank), appeals the district court's distribution of funds recovered from a Ponzi scheme under a net-investment distribution method. Because the district court did not abuse its discretion in selecting that method, we affirm.
Beginning in 2002, First United Funding, LLC (First United) and Corey Johnston sold loan participations to banks, promising impressive returns. A loan participation is a common banking practice in which a bank participant provides funds to a lender, which then lends the funds to a borrower. First United and Johnston were, in fact, conducting a fraudulent scheme by overselling the loan participations.First United and Johnston sold participations to banks that had already been sold to other banks and sold participations in nonexistent loans. Early bank participants were paid with funds deposited by later participants, until the scheme inevitably collapsed. In August 2010, the United States Attorney's Office for the District of Minnesota indicted Johnston on charges related to operating a Ponzi scheme. 1 Johnston pleaded guilty and was sentenced to six years in prison.
In September 2009, Community First Bank, a victim of the Ponzi scheme, commenced this action, seeking a temporary restraining order and appointment of a receiver. The suit expanded to include 19 victim banks that collectively were owed approximately $135 million in unpaid principal, interest, and fees. In October 2009, the district court appointed Lighthouse Management Group, Inc. (Lighthouse or the receiver) as the receiver to recover and to liquidate assets to pay the participant banks' outstanding claims.
The receiver recommended, and the district court approved, a pro rata distribution method with the goal of treating all participant banks “equitably as they relate to each other.” The banks, however, disagreed over the specific type of pro rata method that the receiver should use to calculate the distributions—the net-investment method or the principal-and-interest method. Under the net-investment method, a bank's claim amount is based on the amount a bank has invested, minus any funds it has recovered. Every dollar that First United had paid a bank is subtracted from the bank's principal investment, regardless of whether it was considered an interest or principal payment when the payment was made. The principal-and-interest method, by contrast, bases a bank's claim on the amount each bank was owed on the date that the receiver was appointed. Under both methods, the receiver would then determine each bank's ratable, or proportional, distribution, based on the ratio of the bank's individual claim to the total claims.
The receiver's method of calculating the banks' claims has a major impact on the amount to be recovered by some of the banks. This difference is caused by the varying amounts of interest and fees that the banks had collected over the course of dealing with First United. For example, banks that invested with First United for long periods of time, such as National Bank, have received more interest and fee payments. Under the net-investment method, all those payments would be deducted from their claim amount.2 By contrast, banks that more recently invested with First United, such as Republic Bank of Chicago (Republic Bank), did not receive many interest and fee payments. Their claims, under the net-investment method, would therefore be closer to their initial investment amounts.
Lighthouse ultimately proposed a net-investment distribution plan. After an evidentiary hearing, multiple rounds of briefing, and several oral arguments concerning the method of distribution, the district court entered final judgment approving the net-investment distribution method. National Bank now appeals, challenging the district court's adoption of the receiver's net-investment distribution method and the final calculations. Republic Bank and the receiver filed responsive briefs, arguing for affirmance.
Did the district court abuse its discretion by approving the receiver's net-investment distribution method and claims calculations for compensating victims of a Ponzi scheme?
A receivership is an equitable remedy, in which the court has the discretion “to do what is best for all concerned.” Minn. Hotel Co., Inc. v. ROSA Dev. Co., 495 N.W.2d 888, 893 (Minn.App.1993). We review the district court's equitable determinations for an abuse of discretion. City of N. Oaks v. Sarpal, 797 N.W.2d 18, 23 (Minn.2011). An abuse of discretion occurs if the district court disregards facts or the applicable principles of equity. See Edin v. Jostens, Inc., 343 N.W.2d 691, 693 (Minn.App.1984).
Minnesota caselaw does not specifically address distribution methods to remedy a Ponzi scheme; federal courts, however, have reviewed such decisions for an abuse of discretion. Quilling v. Trade Partners, Inc., 572 F.3d 293, 298 (6th Cir.2009); S.E.C. v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331 (5th Cir.2001); Commodity Futures Trading Comm'n v. Topworth Int'l., Ltd., 205 F.3d 1107, 1115 (9th Cir.1999); see also Sonenstahl v. L.E.L.S., Inc., 372 N.W.2d 1, 4 (Minn.App.1985) (). In such proceedings, the appellate court “affords broad deference to the court's supervisory role.” Topworth, 205 F.3d at 1115 (quotation omitted).
Here, insufficient funds are available for the participant banks to recover the full amount of their original investments; the district court had to determine, therefore, an equitable way to distribute the available funds among the banks. The district court concluded that a “net investment plan would provide a more equitable distribution of assets to the participants than a [principal] and interest plan.” See S.E.C. v. Byers, 637 F.Supp.2d 166, 168 (S.D.N.Y.2009) (). Federal courts have approved receivership distribution based on the net-investment methodology in similar situations. See, e.g., id. at 182;Topworth, 205 F.3d at 1116. National Bank asserts a variety of arguments as to why the district court abused its discretion in approving the net-investment method.
First, National Bank contends that ...
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