Greenpond S., LLC v. Gen. Elec. Capital Corp.

• Decision Date: 24 October 2016
• Docket Number: No. A16–0350.,A16–0350.
• Citation: 886 N.W.2d 649
• Parties: GREENPOND SOUTH, LLC, Appellant, v. GENERAL ELECTRIC CAPITAL CORPORATION, Respondent.
• Court: Minnesota Court of Appeals

886 N.W.2d 649

GREENPOND SOUTH, LLC, Appellant,

v.GENERAL ELECTRIC CAPITAL CORPORATION, Respondent.

No. A16–0350.

Court of Appeals of Minnesota.

Oct. 24, 2016.

Review Granted Jan. 17, 2017.

Stay Granted Jan. 17, 2017.

Timothy D. Kelly, Dykema Gossett, PLLC, Minneapolis, MN; and K. John Shaffer (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP, Los Angeles, CA, for appellant.

Jerome A. Miranowski, Charles F. Webber, Julie R. Landy, Faegre Baker Daniels LLP, Minneapolis, MN; and Miles N. Ruthberg (pro hac vice), Latham & Watkins LLP, New York, NY, for respondent.

Considered and decided by PETERSON, Presiding Judge; HOOTEN, Judge; and BRATVOLD, Judge.

OPINION

HOOTEN

, Judge.

Appellant challenges the dismissal of its claims against an earlier lender for damage from a Ponzi scheme,¹ claiming that the earlier lender is liable for civil conspiracy to commit fraud and aiding and abetting fraud. Appellant argues that the district court erred by concluding that it lacked authority to bring its claims and, alternatively, by dismissing its claims on the pleadings. Because appellant has failed to allege an injury separate and distinct from the injury suffered by the business entities that were utilized in the Ponzi scheme, and the fraud-related claims arising out of the Ponzi scheme were settled in bankruptcy court, we affirm.

FACTS

Appellant Greenpond South, LLC, as successor in interest to Acorn Capital Group, LLC, brought claims of civil conspiracy to commit fraud and aiding and abetting fraud against respondent General Electric Capital Corporation (GECC). Greenpond argues that GECC's actions contributed to the success of a Ponzi scheme operated by Thomas Petters through a number of business entities under his control.

Greenpond's Factual Allegations

Greenpond alleges the following facts in its amended complaint and the attached exhibits. As early as 1995 and continuing until September 2008, Petters solicited numerous lenders² to provide capital to his various entities, ostensibly so that the entities could purchase electronics merchandise at liquidation prices and sell it to retailers at a profit. However, neither the electronics merchandise nor the purchase orders from retailers actually existed. Instead, the entities were engaged in a Ponzi scheme whereby earlier lenders were repaid with capital provided by later lenders.

GECC was one lender that provided capital to Petters. Before doing so, GECC ran a background check on Petters and discovered that he had a criminal history that included past financial crimes. Nevertheless, GECC agreed to lend money to Petters, but GECC retained certain cash controls. In March 1998, GECC established a revolving credit facility³ with Petters Capital, Inc., a Petters entity, to fund Petters Capital's purported purchases of electronics merchandise. In December 1999, GECC also established a revolving credit facility with RedtagBiz, Inc. (Redtag), another Petters entity, to finance accounts receivable resulting from the sale of electronics merchandise purchased over the Internet.

In January 2000, Richard Menczynski, at that time a GECC assistant vice president, provided a recommendation letter to Petters. The letter, which was written on GECC letterhead and addressed “To Whom It May Concern,” described Petters Capital as “an excellent customer” and stated that the transactions under the Petters Capital credit facility had “performed well.” Menczynski added that “on a personal level” he had known Petters for over two years and had “found him to be of high character and possessing strong moral values.” Menczynski knew that his statements regarding Petters' character were false when he made them. No restrictions were imposed on Petters' use of the letter, and GECC understood that Petters intended to use the letter to raise capital from third-party lenders. In April 2000, Petters made a job offer to Menczynski, and Menczynski accepted the position of Redtag's vice president of finance in September 2000.

In October 2000, months after the recommendation letter was written, GECC discovered Petters' fraud. The chain of events that led to GECC's discovery of the fraud began in the spring of 2000, when a series of accounts receivable, allegedly generated from electronics merchandise sales to Costco, became past due. After unsuccessfully trying to enforce some of its protections under the Petters Capital credit facility, GECC contacted Costco in October 2000, seeking to authenticate certain pending Costco purchase orders, representing approximately $60 million in purported sales. Costco informed GECC that Costco had never agreed to any of the purported purchases and that there were no Costco accounts receivable. As a result, GECC learned that Petters' operation was engaged in fraud, GECC's purported collateral did not exist, and the payments it had received from the Petters entities came from a source other than merchandise sales. At this time, GECC had more than $50 million in outstanding loans to Petters Capital and Redtag. In an attempt to recoup full payment on the Petters Capital and Redtag credit facilities, GECC decided not to expose Petters' fraud.

By December 2000, the Petters Capital credit facility was satisfied in full, including “success fees,” and closed. The funds used to satisfy the Petters Capital credit facility were paid not by Petters Capital, but by another Petters entity, Petters Company, Inc., using funds obtained from new lenders. GECC was told that the funds used to repay the Petters Capital credit facility were from Petters' “investors.”

Petters requested that GECC lend additional funds under the Redtag credit facility, telling GECC that the additional draw was to purchase inventory from other Petters entities. Petters presented GECC with cancelled checks ostensibly showing amounts Costco paid for merchandise, but GECC discovered that these checks were fraudulent and declined to provide any additional draws to the Redtag credit facility. The Redtag credit facility was satisfied in full and closed in March 2001. GECC had no further lending relationship with Petters or any of his entities.

At the end of 2000, before the closing of the Redtag credit facility, Redtag asked GECC to document the “nature of defaults, if any” on the Redtag credit facility, in order to provide information to Redtag's auditor, Ernst & Young. GECC responded on January 30, 2001. Although GECC understood that Petters' conduct comprised multiple events of default under the Redtag credit facility, GECC indicated only that Redtag had defaulted on a net worth covenant requiring that Redtag's net worth be at least $8.1 million. Ernst & Young issued the 2001 Redtag audit opinion without knowledge of Petters' fraud. GECC knew that the Ernst & Young audit opinion would be used to induce later lenders to loan capital to the Petters entities.

The audit opinion stated that the financial statements included in the opinion “present fairly, in all material respects, the financial position of [Redtag.]” The opinion also indicated, however, that Redtag's “recurring losses and negative cash flows from operations raise substantial doubts about its ability to continue as a going concern.” With regard to Redtag's relationship with GECC, the opinion stated that in January 2001 Redtag's borrowing capacity was reduced from $55 million to $600,000 and that Redtag “was in violation of certain covenants of the revolving credit facility [as of] December 31, 2000.”

After GECC was paid in full, Petters invited Acorn to enter into a lending relationship with Redtag. On April 24, 2001, Marlon Quan, on behalf of Acorn, met with Petters, Redtag's CEO and majority and controlling shareholder, and Menczynski, now Redtag's CFO. At this meeting, Petters and Menczynski provided Quan with Menczynski's January 2000 recommendation letter and Ernst & Young's January 2001 audit opinion. Petters and Menczynski represented to Quan that GECC had enjoyed a successful lending relationship with Petters Capital and Redtag and that the reason why GECC was no longer lending to the Petters entities was because GECC would not expand the size of its credit facilities.

Acorn agreed to loan money to Redtag, and beginning in 2002, with a number of other Petters entities. Acorn specifically relied on the January 2000 recommendation letter, the January 2001 audit opinion, and the April 2001 meeting in making each of its decisions to lend money to the Petters entities. Petters' Ponzi scheme was uncovered in September 2008, and Acorn lost approximately $141 million.

The Petters Bankruptcy

In addition to the allegations set forth in Greenpond's complaint, the record also contains the following facts regarding the Petters bankruptcy, In re Petters Co., No. 08–45257 (Bankr.D.Minn.).⁴ The Petters business entities entered into receivership. The receiver filed bankruptcy proceedings on behalf of the Petters entities and was appointed the Chapter 11 trustee of the bankruptcy actions.

Asset Based Resource Group, LLC (ABRG), Acorn's successor servicer, filed claims seeking recovery of the losses sustained by Acorn in the Petters bankruptcy actions. In October 2010, the Petters bankruptcy trustee filed a clawback action against GECC, alleging numerous counts of fraudulent transfer.⁵ The trustee sought to recover and preserve the property of the estate by recovering the value of the transfers made to GECC “for the benefit of defrauded individuals and organizations that are creditors of [the Petters entities].” The trustee alleged that GECC was liable for actual fraud because GECC knew of Petters' fraud, failed to disclose the fraud in order to receive payment on its loans, and knew that it was repaid from other Petters entities and lenders.

With respect to the claims brought in the trustee's complaint against GECC, the bankruptcy court approved a settlement by the parties in an order filed June 25, 2012. The bankruptcy court found that the trustee was authorized to enter into the...