In re Petters Co.

• Decision Date: 19 June 2013
• Docket Number: 08–45371(GFK).,08–45258(GFK).,08–45330(GFK).,08–45328(GFK).,No. 08–45257,08–45331(GFK).,08–45326(GFK).,08–45329(GFK).,08–45327(GFK).,08–45392(GFK).,08–45257
• Citation: 494 B.R. 413
• Parties: In re PETTERS COMPANY, INC., et al., Debtors. (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc. Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.).
• Court: U.S. Bankruptcy Court — District of Minnesota

494 B.R. 413

In re PETTERS COMPANY, INC., et al., Debtors.

(includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc. Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.).

Nos. 08–45257, 08–45258(GFK), 08–45326(GFK), 08–45327(GFK), 08–45328(GFK), 08–45329(GFK), 08–45330(GFK), 08–45331(GFK), 08–45371(GFK), 08–45392(GFK).

United States Bankruptcy Court,

D. Minnesota.

June 19, 2013.

Kirstin D. Kanski, Terrence J. Fleming, K. Jon Breyer, Adam C. Ballinger, Mark D. Larsen, James A. Lodoen, Sandra S. Smalley–Fleming, Jeffrey D. Smith, Lindquist & Vennum LLP, Minneapolis, MN, Sarah E. Doerr, Issa K. Moe, Moss & Barnett, Minneapolis, MN, Richard B. Drubel, Ethan Frechette, Matthew J. Henken, Kimberly H. Schultz, Boies, Schiller & Flexner LLP, Hanover, NH, Joseph L. Fogel, Michael J. Kelly, Neal H. Levin, Patrick J. Woytek, Freeborn & Peters LLP, Chicago, IL, Adam A. Gillette, Lori A. Johnson, Thomas E. Jamison, Fruth Jamison & Elsass PLLC, Minneapolis, MN, Stacy L. Kabele, Josiah O. Lamb, Patricia A. Pedersen, George H. Singer, Kelley Wolter & Scott PA, Minneapolis, MN, for Douglas A Kelley, Trustee.

Ethan Frechette, Richard B. Drubel, Boies, Schiller & Flexner LLP, Hanover, NH, James A. Lodoen, Lindquist & Vennum P.L.L.P, Minneapolis, MN, for Petters Company, Inc., Debtor.

Michael R. Fadlovich, Robert Raschke, Michael E. Ridgway, US Trustee Office, Minneapolis, MN, for U.S. Trustee.

FIRST MEMORANDUM ON “CONSOLIDATED ISSUES” TREATMENT OF MOTIONS FOR DISMISSAL IN TRUSTEE'S LITIGATION FOR AVOIDANCE AND RECOVERY: STATUTE OF LIMITATIONS AND TIMELINESS OF SUIT

GREGORY F. KISHEL, Chief Judge.

PREFACE

These bankruptcy cases were commenced after the collapse of the enterprise structure of Thomas J. Petters, a Minnesota-based business promoter. In early October, 2008, Tom Petters was arrested and charged with multiple fraud-based federal criminal offenses. The United States District Court for this district (Montgomery, J.) appointed Douglas A. Kelley, Esq. as receiver, to take control of the assets of Tom Petters. Those assets included exclusive ownership interests in numerous artificial business entities that Tom Petters had controlled, most of which he had created himself. Between October 11, 2008 and October 19, 2008, the Receiver filed petitions to commence cases under Chapter 11 for the debtor-entities named above. Kelley was later appointed as Trustee pursuant to 11 U.S.C. § 1104(a) for all of these cases. ¹

After the arrest of Tom Petters, the complicated activity that he had purveyed through his enterprise structure was termed a “Ponzi scheme” in local and national media. That nomenclature carried into the array of legal proceedings that were brought under federal jurisdiction (criminal, civil, and bankruptcy) to address the consequences of the downfall.²

In the late summer and early fall of 2010, the Trustee commenced over 200 adversary proceedings in these cases. In almost all of them, he sought to avoid transfers of property that the Debtors had made to the defendants before the bankruptcyfilings. He sought judgments for recovery of money to effectuate the avoidance. His requests for relief were framed under various legal theories, most prominently federal and state fraudulent-transfer statutes.

The commencement of this litigation was part of the Trustee's general strategy in the bankruptcy process: to rectify the de facto outcomes that otherwise would have resulted from the status quo as it lay when the Petters enterprise structure collapsed. Over a period of more than two decades, the Petters-controlled entities had made tens of thousands of transfers, almost all in the form of money, to a large number and variety of lenders, “investors,” charitable donees, and other parties.

By the time of the bankruptcy filings, the status quo had three salient features. First, the debt structures in the bankruptcy cases included a much smaller number of late investors into the Petters operation, that were left unsatisfied on very large and late-created debt obligations. In the pre-bankruptcy operation of the debtor-entities, a much greater number of lenders and other creditor-participants had been repaid earlier. They had the benefit of earlier satisfaction of the debts owing to them. Finally, there was a huge, and sad, insolvency; by the time of the bankruptcy filings, very little money was left in the coffers of the business entities involved, and there were relatively few hard assets to show for all of the pre-petition activity.

This sort of litigation-undertaking by a receiver, trustee, or other appointed fiduciary is made to address the large imbalance between the positions of those who got out, versus those who were still in at the collapse. It bears the unfortunate name of “clawback” in lawyers' jargon and in media reportage. In the law, however, there is no specific, dedicated set of legal remedies to address the failure of a Ponzi scheme, as such. The inequities in a post-failure status quo seem obvious; but how to gauge and prioritize those inequities, and how to redress them, in a fashion that is procedurally regular, transparent, and substantively principled?

The federal processes of receivership, bankruptcy, and other court-supervised liquidation measures have been the resort taken, as the phenomenon of failed investment schemes has burgeoned in recent years.³ Intuitively, this is appropriate given the baseline circumstance: the deep, fundamental insolvency of the persons and entities involved in the purveying, by the time of collapse. However, the progress of all such cases has been difficult. The reason is the patchy and incomplete match between the phenomenon at issue and the existing state of the law.

Ultimately, the shortfalls of existing statutory remedies highlight the deep underlying tensions in any legal response to failed, large-scale, and long-term fraudulent schemes.⁴ The uncertainty is highlightedby the subject matter of this memorandum: if, indeed, existing bankruptcy remedies are to be used to recapture ill-gotten gains earlier paid out, and all who transacted with a fraud are to be put onto a parity through the administration of an estate that is funded by recaptured as well as relict value, what should be recaptured and how far back should the process go?

It obviously cannot be a matter solely of “fairness,” gauged subjectively and judicially imposed long after the fact. Our legal system is structured to protect seated property rights and to promote the reliance that underpins free commerce and the ready flow of capital. A deal is a deal, presumptively final as made; and transfers of property regular on their face are to be treated as final unless there is a specific basis, justified in established law, to disturb and reverse them.⁵ Particularly when a recapture in “clawback” would ensnare unwitting recipients of past payment—those who transacted with the fraud's purveyor without knowledge of the wrongdoing—the need for definitive, principled, and limiting substantive rules is obvious. And yet there is that nagging point under it all: the money given to earlier recipients was likely mulcted from later-coming investors and lenders; so how “just” is it to allow earlier participants to keep the benefit of funds that had been “stolen” from others before they received them?

Limited as they are to the structures of preexisting general law, serving as they do the interests of a defined group of unpaid and unsatisfied creditors, those charged with unraveling failed Ponzi schemes have resorted to the existing law of fraudulent transfer and related creditors' remedies for the authority to recapture value from those who got clear of the purveyor before the downfall.

THIS LITIGATION, AND ITS MANAGEMENT

The Trustee in these cases has done just that. The law of fraudulent transfer is the centerpiece theory of most of his “clawback” litigation. That structure comes with benefit for its invoker, but it is also subject to its original internal limitations. The exercise at bar is an effort to outline part of the extent and some of the limitations, against the incomplete state of the underlying law.

After the Trustee served complaints in the 200–odd adversary proceedings, he proposed a coordinated treatment of this large docket of litigation. He acknowledged that every proceeding had its own distinct facts. Tom Petters had transacted in a large variety of ways with a wide array of individuals, business entities, and organizations, through the vehicles of the debtor-entities. Nonetheless, as the Trustee correctly noted, there were several issues common to blocks of the adversary proceedings, that could be framed for broader rulings on the governing law. The issues would be purely ones of law—i.e., which interpretation of existing statute was the correct one, considering legislative history and intent to the extent it could be gleaned? Or, had the Trustee adequately pleaded the fundaments of his cases against the defendants?

Most of these issues could not be matched to definitive, on-point binding precedent from state or federal appellate courts. Much of the Trustee's theory of recovery had never been advanced in litigationvenued in Minnesota. Little of the theory had ever been ruled on by an appellate court, and there was no precedent from local appellate courts state or federal. Thus, were individual motions for dismissal to be treated proceeding-by-proceeding, it portended greater difficulty in maintaining consistency of outcome—and then a lengthy process of uncoordinated appeals.

So, the Trustee proposed to “consolidate” the presentation of issues that were common to the defense in large numbers of adversary proceedings, and that went either to the content of his pleading or to the applicable rule of decision as a matter of law alone. The vehicle for presentation would be motions for dismissal by defendants,...