In re Petters Co., Court File Nos. 08–45257

• Decision Date: 22 November 2013
• Docket Number: 08–45331(GFK).,08–45330(GFK).,08–45258(GFK).,08–45371(GFK).,08–45392(GFK).,08–45326(GFK).,Court File Nos. 08–45257,08–45327(GFK).,08–45329(GFK).,08–45328(GFK).
• Citation: 506 B.R. 784
• 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

506 B.R. 784

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 File 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.

Signed Nov. 22, 2013.

Adam C. Ballinger, K. Jon Breyer, Terrence J. Fleming, Kirstin D. Kanski, Mark D. Larsen, James A. Lodoen, George H. Singer, Sandra S. Smalley–Fleming, Jeffrey D. Smith, Lindquist & Vennum LLP, Minneapolis, MN, Richard B. Drubel, Ethan Frechette, Matthew J. Henken, Kimberly H. Schultz, Boies, Schiller & Flexner, LLP, Oakland, CA, Elisebeth Collins Cook, Joseph L. Fogel, Michael J. Kelly, Neal H. Levin, Patrick J. Woytek, Freeborn & Peters LLP, Chicago, IL, Sarah E. Doerr, Issa K. Moe, Moss & Barnett, Minneapolis, MN, Adam A. Gillette, Thomas E. Jamison, Lori A. Johnson, Douglas L. Elsass, Fruth Jamison & Elsass PLLC, Minneapolis, MN, Stacy L. Kabele, Josiah O. Lamb, Patricia A. Pedersen, Steven E. Wolter, Kelley Wolter & Scott PA, Minneapolis, MN, The Law Office of Mark A. Weisbart, Winderweedle, Haines, Ward & Woodman, P.A., Withers BVI, Rassers NV, for Douglas A. Kelley, Kelley & Wolter PA (Trustee).

Matthew J. Henken, Ethan Frechette, Richard B. Drubel, Matthew J. Henken, Kimberly H. Schultz, Richard B. Drubel, Boies, Schiller & Flexner LLP, Hanover, NH, James A. Lodoen, Jeffrey D. Smith, James A. Lodoen, Jeffrey D. Smith, Lindquist & Vennum, Minneapolis, MN, for Debtor.

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

ORDER GRANTING TRUSTEE'S MOTION FOR SUBSTANTIVE CONSOLIDATION

GREGORY F. KISHEL, Chief Judge.

INTRODUCTION

In the 1990s and the early years of the 2000s, Thomas J. Petters was a large public presence in the business and social community of Minnesota. Through holding companies he acquired full or partial ownership of several prominent business operations, including Sun Country Airlines, the Polaroid Corporation, and the Fingerhut Companies. Through other entities in his enterprise structure, he held himself out as an adept intermediator of consumer goods at the distribution level of the retail supply chain.

On September 24, 2008, the Federal Bureau of Investigation executed a search warrant at the Petters corporate headquarters in Minnetonka and other locations. On October 3, 2008, Tom Petters was arrested by the federal authorities. Soon after, he was charged in the United States District Court with the offenses of mail and wire fraud, money laundering, and conspiracy.

At the instance of the United States, a receivership proceeding over Tom Petters and a number of other persons and entities was commenced as an ancillary to the criminal cases. Between October 11 and 19, 2008, the Receiver filed petitions for bankruptcy relief under Chapter 11 for a number of the corporate entities in Tom Petters's business structure. This commenced the cases at bar. The cases were put under joint administration. On later motion of the United States Trustee, a trustee was appointed in all the cases.¹

By the motion at bar, the Trustee seeks to have the estates of the lead-named Debtor, Petters Company, Inc. (“PCI”), and those of all but one of the rest of the Debtors, substantively consolidated.²

By this relief, a group of subsidiary-entities would be consolidated into their parent, for all remaining administration in bankruptcy that relates to all of them.

In the detail relevant to that: in Tom Petters's original enterprise structure, PCI functioned both as an ostensibly-operating enterprise and as a holding company for all but one of the remaining Debtors that are subject to this motion. Tom Petters was the sole shareholder of PCI.³

In terms of function, the remaining Debtors all served separately as special purpose entities; that is to say, as vehicles for the execution of lending and security transactions with particular “investors”—i.e., lenders—that provided financing for PCI on a sustained basis.⁴ Each special purpose entity (“SPE”) was identified to a single lender or a single grouping of affiliated lenders. On PCI's application, the financing was given to fund the ostensible purchase and resale of large lots of consumer electronic goods.⁵ The pretense was that PCI was actually negotiating and arranging transactions. As a general matter, the resulting financial attributes—the receipt of and the obligation for the credit, the repayment of the loan, and any collateral security related to the underlying diverting transaction—were to repose with an SPE.⁶

In reality—as the evidence for this motion and throughout many other legal proceedings has established without controversy—the ostensible business and its transactional structure were virtually all a facade. For a decade or more, there were few true third-party “diverting” transactions behind Tom Petters's requests for outside financing. This whole part of his enterprise structure was run as a huge Ponzi scheme.⁷

At least seven particular lenders (or groups of closely-affiliated lenders) transacted as “investors” with PCI through their own dedicated, PCI-related Debtor-entity. The other two provided “senior lending,” i.e., financing, to one of the direct lenders to facilitate its infusions into Tom Petters's operations. The identification between each Debtor–SPE and its associated lender(s) is as follows:

PC Funding, LLC (“PC Funding”)

Opportunity Finance, LLC, et al (collectively, “Opportunity Finance”); senior lenders, DZ Bank AG Deutsche Zentral–Genossensschaftsbank, Frankfurt am Main (“DZ Bank”) and WestLB AG, New York Branch (“WestLB”)

Thousand Lakes, LLC (“Thousand Lakes”)

Lancelot Investment Management, LLC, et al (collectively, “Lancelot”)

SPF Funding, LLC, f/k/a Petters Finance, LLC (“SPF”)

Opportunity Finance; senior lenders, DZ Bank and WestLB

PL Ltd., Inc., f/k/a/ Petters Ltd., Inc. (“PL”)

Westford Special Situations Master Fund, L.P., Epsilon Global Active Value Fund Ltd., et al (collectively, “Epsilon/Westford”)

Edge One LLC (“Edge One”)

A to Z Investors Fund; Edge Capital, LP; Ark Discovery II, LP

MGC Finance, Inc., f/k/a Petters I, Inc. (“MGC Finance”)

Arrowhead Capital Finance, Ltd., et al; Metro Gem Capital, LLC, et al; Arrowhead Capital Management Corp. (“Arrowhead”), servicer

PAC Funding, LLC (“PAC Funding”)

Acorn Capital Group, LLC, et al (“Acorn”)

Palm Beach Finance Holdings, Inc., f/k/a/ Petters Capital, Inc. (“Palm Beach”)

Palm Beach Finance Partners Holdings, LLC, et al

THIS MOTION, IN CONTEXT

Via the motion at bar, the Trustee seeks to have the bankruptcy estates of the PCI-related debtors, including PCI, substantively consolidated. He wants this grant of relief to be made effective as of October 11, 2008, the date on which the first cases in this grouping were commenced.

Five parties in interest or groupings of such parties actively opposed this request. The Committee of Unsecured Creditors for the cases supported it.

All of the objectors were defendants in adversary proceedings commenced by the Trustee in his “clawback” effort in the administration of the bankruptcy estates.⁸ They challenged the Trustee on the merits of his case, both his evidentiary showing and the legal merits of granting such relief. They also accused the Trustee of seeking the relief for inappropriate strategic advantage in the avoidance litigation against them.

An evidentiary hearing on the Trustee's motion consumed three long days in the courtroom. The Trustee's opponents presented a united front against ordering any such relief on the general posture of these cases. In addition, each opponent linked to a particular Debtor challenged the consolidation of that Debtor's estate with any other estate.

Requests for substantive consolidation of bankruptcy estates are very rare in this district. Since 1979 there have been no more than a small handful of active contests within that limited number. Binding precedent from the Eighth Circuit Court of Appeals recognizes the availability of substantive consolidation in cases under the Bankruptcy Code of 1978. That precedent is somewhat sparse, one fairly short opinion. Both before and after the issuance of the Eighth Circuit's decision, other circuits have spoken to the remedy in very different ways.

This made the field of argument wide open. The Trustee's opponents urged that the non-precedential appellate case law be considered and applied, on the pitch that its elaborations are not inconsistent with the Eighth Circuit's ruling. The Trustee relied on the very brevity of the Eighth Circuit precedent in the first instance; then he accommodated the other approaches in the buildout of his case. The record, then, requires careful consideration of a wide variety of evidence and legal principles alike.

SUBSTANTIVE CONSOLIDATION, IN GENERAL

The remedy of substantive consolidation has been variously described as “a construct of federal common law, eminat[ing] from equity,” In re Owens Corning, 419 F.3d 195, 205 (3rd Cir.2005); as available “by virtue of [the] general equitable powers” of the federal courts, In re Auto–Train Corp., Inc., 810 F.2d 270, 276 (D.C.Cir.1987); and as having “no express statutory basis, but [being] a product of judicial gloss,” In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2nd Cir.1988).⁹

The remedy had its antecedents in other principles of general equity jurisprudence-piercing of the corporate veil, “alter ego” liability, and the like. In re Owens Corning, 419 F.3d at 205–206. However, in its specific construct, directed to the administration of an estate in a bankruptcy case under federal law, substantive consolidation had its origin in a 1941 decision of the United States Supreme Court, Sampsell v. Imperial Paper & Color Corp., 313 U.S....