Finn v. Alliance Bank

• Decision Date: 18 February 2015
• Docket Number: A12–2092.,Nos. A12–1930,s. A12–1930
• Citation: 860 N.W.2d 638
• Parties: Patrick FINN and Lighthouse Management Group, Inc., Appellants/Cross–Respondents, v. ALLIANCE BANK, Respondent/Cross–Appellant, Home Federal Bank, Respondent/Cross–Appellant, KleinBank, Respondent/Cross–Appellant, Merchant's Bank, Respondent/Cross–Appellant, M & I Marshall & Ilsley Bank, Respondent/Cross–Appellant, American Bank of St. Paul et al., Defendants.
• Court: Minnesota Supreme Court

860 N.W.2d 638

Patrick FINN and Lighthouse Management Group, Inc., Appellants/Cross–Respondents

v. ALLIANCE BANK, Respondent/Cross–AppellantHome Federal Bank, Respondent/Cross–AppellantKleinBank, Respondent/Cross–AppellantMerchant's Bank, Respondent/Cross–AppellantM & I Marshall & Ilsley Bank, Respondent/Cross–AppellantAmerican Bank of St. Paul et al., Defendants.

Nos. A12–1930

A12–2092.

Supreme Court of Minnesota.

Feb. 18, 2015.

Larry B. Ricke, Karl E. Robinson, Sweeney & Masterson, P.A., Saint Paul, MN, and William M. Hart, Meagher & Geer, P.L.L.P., Minneapolis, MN, for appellants/cross-respondents Patrick Finn and Lighthouse Management Group, Inc.

Christopher R. Morris, Bassford Remele, P.A., Minneapolis, MN, for respondent Alliance Bank.

Kevin M. Decker, Benjamin E. Gurstelle, Briggs and Morgan, P.A., Minneapolis, MN, for respondent/cross-appellant Home Federal Bank.

Shari L.J. Aberle, Andrew Brattingham, Dorsey & Whitney LLP, Minneapolis, MN, for respondent/cross-appellant KleinBank.

Mark A. Merchlewitz, Benson & Merchlewitz, Winona, MN, for respondent/cross-appellant Merchant's Bank.

Keith S. Moheban, Peter J. Schwingler, Katherine E. Devlaminck, Stinson Leonard Street LLP, Minneapolis, MN, for respondent/cross-appellant M & I Marshall & Ilsley Bank.

Richard T. Thomson, Lapp, Libra, Thomson, Stoebner & Pusch, Chartered, and Kevin D. Hofman, Halleland Habicht P.A., Minneapolis, MN, for amici curiae City National Bank et al.

Paul L. Ratelle, Fabyanske Westra Hart & Thomson, Minneapolis, MN, and Karen E. Wagner, Andrew S. Gehring, Davis Polk & Wardwell LLP, New York, NY, attorneys for amicus curiae The Clearing House Association L.L.C.

Thomas H. Boyd, Michael A. Rosow, Jacob B. Sellers, Winthrop & Weinstine, P.A., Minneapolis, MN, and H. Peter Haveles, Jr., Kaye Scholer LLP, New York, NY, and James P. Conway, Jaspers, Moriarty & Walburg, P.A., Shakopee, MN, and Tobias S. Keller, Keller & Benvenutti LLP, San Francisco, CA, and Joseph G. Petrosinelli, Jonathan M. Landy, Christopher J. Mandernach, Williams & Connolly LLP, Washington, D.C., attorneys for amici curiae DZ Bank AG et al.

James J. White, University of Michigan Law School, Ann Arbor, MI, and David Woll, Michael Freedman, Isaac Rethy, Simpson Thacher & Bartlett LLP, New York, NY, and Bruce J. Douglas, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., Minneapolis, MN, attorneys for amicus curiae JPMorgan Chase Bank, N.A.

Bruce Jones, Stephen M. Mertz, Jerome A. Miranowski, Julie R. Landy, Faegre Baker Daniels LLP, Minneapolis, MN, attorneys for amicus curiae Minnesota Defense Lawyers Association.

Steven E. Wolter, Kelley & Wolter & Scott, P.A., Minneapolis, MN, and Connie A. Lahn, David E. Runck, Fafinski Mark & Johnson, P.A., Eden Prairie, MN, attorneys for amici curiae Douglas A. Kelley, as Chapter 11 Trustee and the Official Committee of Unsecured Creditors of Petters Company, Inc. and Petters Group Worldwide, LLC.

OPINION

STRAS, Justice.

This case requires us to decide two questions of first impression under Minnesota's Uniform Fraudulent Transfer Act (“MUFTA”), Minn.Stat. §§ 513.41 –.51 (2014). The first question is whether the so-called “Ponzi-scheme presumption,” adopted by a number of federal courts, applies to claims brought under MUFTA. On that question, the court of appeals divided the Ponzi-scheme presumption into three separate components, each of which relates to an element of a MUFTA claim. The court held that a Ponzi-scheme operator acts with fraudulent intent and is insolvent as a matter of law when it makes “interest” or “profit” payments to investors, but it rejected the presumption that a Ponzi-scheme operator can never receive “reasonably equivalent value” for those payments. We agree with the court of appeals' conclusion on the inapplicability of the reasonably-equivalent-value component of the Ponzi-scheme presumption, but conclude that the fraudulent-intent and insolvency components also lack support in MUFTA.

The second question is whether the statute of limitations governing claims “for relief on the ground of fraud,” Minn.Stat. § 541.05, subd. 1(6) (2014), or the one governing claims “upon a liability created by statute,” Minn.Stat. § 541.05, subd. 1(2), applies to MUFTA claims. On that question, the court of appeals adopted a bifurcated approach. For MUFTA claims based on “constructive fraud,” the court applied the statute of limitations for claims “upon a liability created by statute,” whereas for MUFTA claims based on “actual fraud,” it applied the statute of limitations for claims “for relief on the ground of fraud.” Because we conclude that the Receiver's complaint fails to adequately allege a claim of constructive fraud, we consider only the limitations period applicable to actual-fraud claims. For those claims, we agree with the court of appeals that the statute governing claims “for relief on the ground of fraud” applies. Accordingly, we affirm the decision of the court of appeals as modified and remand to the district court for further proceedings consistent with this opinion.

I.

This case involves the largely fraudulent lending operations of First United Funding, LLC (“First United”), an entity controlled by Corey N. Johnston. First United acted as a conduit between borrowers and lenders by making loans to borrowers and then selling “participation” interests in those loans to financial institutions. Beginning in 2002, First United began selling participation interests that exceeded the amount of the underlying loans (“oversold participations”), or that did not rest on any underlying loans at all (“fictitious participations”). Even after 2002, however, not all of the participation interests sold by First United were fraudulent.

The respondents in this case, which include Home Federal Bank, Klein Bank, Merchant's Bank, M & I Marshall & Ilsley Bank (collectively “the Respondent Banks”), and Alliance Bank, each purchased participation interests from First United that were real, not fraudulent. Nevertheless, First United commingled funds from its legitimate participation interests with those that were fraudulent. Consequently, First United financed many of its payouts to earlier “investors” at least in part through the payments made by later “investors,” according to a structure commonly known as a “Ponzi scheme.”

The scheme unraveled in September 2009, when two banks sued First United and asked the court to appoint a receiver. The district court appointed appellants/cross-respondents Patrick Finn and Lighthouse Management Group (collectively “the Receiver”) to recover and liquidate First United's remaining assets and to distribute them to the victims of First United's scheme. The district court later expanded the scope of the Receiver's duties, authorizing it to pursue claims against third parties. For his part in the scheme, Johnston pleaded guilty in September 2010 to federal charges of bank fraud and filing a false tax return.

The Receiver commenced this action in May 2011, seeking to claw back payments made by First United, before its collapse, to various financial institutions, including Alliance Bank and the Respondent Banks. The Receiver alleged in its complaint that the payments made by First United were voidable under MUFTA, both as actually fraudulent transfers, Minn.Stat. § 513.44(a)(1), and as constructively fraudulent transfers, Minn.Stat. §§ 513.44(a)(2), 513.45(a).

The allegations against Alliance Bank were based on its purchase of a participation interest in a $3.18 million loan made to Jerry Moyes, an Arizona businessman. The loan was real, not fictitious, and it was not oversold. First United renewed the loan to Moyes several times until he paid it in full by June 2007. Over the life of the loan, First United paid roughly $4.3 million to Alliance Bank, or approximately $1.2 million more than the principal amount of the loan.

According to the complaint, each of the Respondent Banks purchased participation interests between 2002 and 2004 in one or more loans, each of which the borrower paid in full approximately one year later. The last month in which any of the Respondent Banks received a principal or interest payment from First United was March 2005. First United paid the Respondent Banks sums beyond the principal amounts of the underlying loans, resulting in profits ranging from $78,000 to roughly $338,000. The participation interests of the Respondent Banks were neither fictitious nor oversold.

Alliance Bank and the Respondent Banks moved to dismiss the Receiver's complaint under Minn. R. Civ. P. 12.02(e), arguing both that the Receiver failed to bring the action in a timely fashion and to state claims upon which relief could be granted. The district court concluded that the 6–year statute of limitations for actions “upon a liability created by statute” applied to the Receiver's claims. Minn.Stat. § 541.05, subd. 1(2). Accordingly, it dismissed the claims brought against the Respondent Banks, none of which had received a payment from First United after March 2005. It also dismissed the claims against Alliance Bank to the extent they arose from transfers made prior to May 12, 2005—exactly 6 years before the filing of the Receiver's complaint.

The court also concluded, however, that the Receiver had pleaded legally sufficient claims against each of the financial institutions that had participated in First United's loan-participation scheme. The court based its conclusion in part on a “Ponzi-scheme presumption,” which the court described as a rule providing that “the profits that good-faith investors enjoy in connection with a Ponzi scheme are recoverable as fraudulent transfers.” Accordingly, it allowed the remaining claims against Alliance Bank to proceed.

Following discovery, both the Receiver and Alliance Bank moved for summary judgment. The district court granted the Receiver's motion and denied Alliance Bank's motion, again relying on the Ponzi-scheme presumption. The court entered judgment in favor of the Receiver for...