Kelley v. Bmo Harris Bank N.A. (In re Petters Co.), Jointly Administered under BKY 08-45257
| Decision Date | 27 June 2019 |
| Docket Number | 08-45392,08-45331,Court File Nos.: 08-45258,08-45371,08-45327,08-45328,08-45326,Jointly Administered under BKY 08-45257,08-45330,ADV 12-4288,08-45329 |
| Citation | 603 B.R. 424 |
| 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.) Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust, Plaintiff, v. BMO Harris Bank N.A., as successor to M & I Marshall and Ilsley Bank, Defendant. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
William Bornstein, Michael A. Collyard, Sarah E. Friedricks, Peter C. Ihrig, Thomas L. Hamlin, Valerie A. Stacey, Chelsea A. Walcker, Robins Kaplan LLP, J. Jackson, Dorsey & Whitney LLP, Minneapolis, MN, Sherli Furst, Carly Ann Kessler, Michael D. Reif, Robins Kaplan LLP, New York, NY, for Plaintiff.
Michael B. Apfeld, Sean O'D. Bosack, John L. Kirtley, Godfrey & Kahn, S.C., Gary A. Isaac, Milwaukee, WI, Debra Bogo-Ernst, Christopher S. Comstock, Ethan A. Hastert, Thomas S. Kiriakos, Lucia Nale, Thomas V. Panoff, Joshua D. Yount, Lori Zahalka, Mayer Brown LLP, Chicago, IL, Andrew J. Calica, Gina L. Del Tatto, Richard A. Spehr, Mayer Brown LLP, New York, NY, Keith S. Moheban, Adine S. Momoh, Stinson Leonard Street LLP, Minneapolis, MN, for Defendant.
ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
On March 5, 2019, the Court heard oral argument on Defendant's Motion for Summary Judgment. Keith Moheban appeared for Defendant and Thomas Hamlin appeared for Plaintiff.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070–1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
This adversary proceeding arises out of the Petters' Ponzi scheme orchestrated by Thomas J. Petters ("Petters") and his associates. Liquidating Trustee Douglas A. Kelley ("Plaintiff") filed this adversary proceeding against BMO Harris Bank N.A.1 ("Defendant") for its alleged participation in the Ponzi scheme, claiming violations of the Minnesota Uniform Fiduciaries Act ("MUFA"), breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud, and civil conspiracy.
Defendant moves for summary judgment on all claims that remain after the Court's Order on Defendant's Motion to Dismiss (the "Order").2 Defendant's Motion for Summary Judgment is based on two arguments: 1) that Plaintiff lacks standing to pursue the claims, and 2) that Plaintiff's claims are barred by the doctrine of in pari delicto .
Plaintiff's response requested judgment as a matter of law confirming standing and rejecting the defense of in pari delicto .3 Plaintiff reiterated this request at oral argument. Defendant objected as Plaintiff did not bring a motion for summary judgment.4 Plaintiff's request could be proper pursuant to Federal Rule of Civil Procedure 56(f) if notice and a reasonable time to respond had been given. Here, however, the Court did not give notice that it would consider Plaintiff's request for summary judgment and give Defendant time to respond. Plaintiff's request is not properly before the Court.
For the reasons discussed below, Defendant's motion is denied.
The facts about Petters' Ponzi scheme are well known.5 Between 1994 and 2008, Petters and his associates orchestrated a Ponzi scheme through PCI and its affiliates.
Petters was the sole owner, only director, and CEO of PCI.6 Over many years, PCI, Petters, and his associates operated the Ponzi scheme by obtaining billions of dollars from investors through fraud, false pretenses, and misrepresentations about PCI's purported business of purchasing and selling consumer electronic goods to big-box retailers.7 Instead of using the investments to purchase consumer goods for sale to retailers, the funds were used to pay other investors, to pay those assisting with the Ponzi scheme, and to pay for Petters' extravagant lifestyle.8 Tens of billions of dollars in Ponzi scheme funds were routed through PCI's depository checking account at National City Bank, opened in December 1999 (the "PCI Account").9 M & I acquired National City Bank in July 2001.10 The allegations in this adversary proceeding concern M & I's actions in handling the PCI Account.
The Petters' Ponzi scheme ended in 2008.11 In 2009, former officers Deanna Coleman and Robert White pleaded guilty on account of their roles in the Ponzi scheme.12 Later that year, Petters was tried and convicted of wire fraud, mail fraud, money laundering, and conspiracy.13 In 2010, PCI pled guilty to wire fraud and conspiracy to commit mail fraud, wire fraud, and money laundering.14
On October 6, 2008, Judge Ann Montgomery of the United States District Court for the District of Minnesota appointed Plaintiff, Douglas Kelley, as the equity receiver for PCI and its affiliates (the "Receivership Order").15 The Receivership Order granted Kelley the full power of an equity receiver.16 On October 11, 2008, pursuant to his authority as receiver, Plaintiff filed for Chapter 11 relief on behalf of PCI.17 Plaintiff was then appointed to be the Chapter 11 Trustee on February 26, 2009.
In the main bankruptcy case, Judge Gregory F. Kishel confirmed PCI's Second Amended Plan of Chapter 11 Liquidation on April 15, 2016 (the "Plan").18 The Plan established the BMO Litigation Trust, which is administered by Plaintiff as the Liquidating Trustee.19 The Plan transferred the BMO Litigation Trust Assets, including the causes of action asserted in this adversary, to the BMO Litigation Trust.20
After the Plan was confirmed, Plaintiff filed the First Amended Complaint (the "Complaint") on October 20, 2016.21 The Complaint alleges that Defendant was complicit in the Ponzi scheme by its actions and inactions in its dealings with PCI, Petters, and the PCI Account.22 The Complaint alleges that instead of responding to irregularities, as required by banking regulation and shutting down the PCI Account, Defendant served as a "critical lynchpin" in legitimizing and facilitating the Ponzi scheme as billions of dollars were laundered through the PCI Account.23 Defendant signed Deposit Account Control Agreements ("DACAs") allegedly in order to placate investors and to prevent the scheme from becoming public.24 Plaintiff further alleges that Defendant failed to act despite fraud alerts and other "red flags;" instead, it continued to execute transfers to and from the PCI Account.25
On October 24, 2016, Defendant filed its Motion to Dismiss arguing that Plaintiff lacked standing to pursue the claims, as it does here.26 In its Order, the Court found that Plaintiff had standing to pursue any claim to recover for harm done to PCI.27 The Court also held that Plaintiff could pursue derivative claims for harm to all creditors similarly situated because, under Minnesota law, an insolvent corporation's derivative claims include those to recover for harm to creditors.28 The Court then made specific standing-related determinations for each cause of action.29
Four claims remain following the Order: Claim I for violation of MUFA; Claim II for breach of fiduciary duties owed to PCI to the extent it states a claim for direct harm to PCI; Claim III for aiding and abetting fraud against PCI; and Claim IV for aiding and abetting breaches of fiduciary duties owed to PCI. Defendant moves for summary judgment on these remaining claims, again alleging a lack of standing and the defense of in pari delicto .
The Court will address the new arguments about standing and in pari delicto raised by Defendant's Motion for Summary Judgment.
Federal Rule of Civil Procedure 56, made applicable to this adversary pursuant to Federal Rule of Bankruptcy Procedure 7056, provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."30 Once the movant has made its showing, the burden shifts to the nonmoving party, who must establish that there are specific and genuine issues of material fact warranting a trial.31 In ruling on a motion for summary judgment, courts "view the record in the light most favorable to the nonmoving party and afford that party all reasonable inferences."32
A party must have standing for a court to decide the merits of a particular dispute.33 In order to have standing, a party must assert its own legal rights and interests and cannot seek relief solely on the legal rights or interests of third parties.34 Under 11 U.S.C. §§ 704(1) and 1106(a), bankruptcy trustees have standing to pursue claims belonging to the estate on the date of filing in order to fulfill their duty to "collect and reduce to money the property of the estate."35 Property of the bankruptcy estate includes all legal or equitable interests of the debtor in property as of the commencement of the case.36 "Whether a particular cause of action arising under state law belonged to the debtor in bankruptcy or to someone else is determined by state law."37
As discussed in the Order, Minnesota law provides that a corporation may bring a claim when it has been injured for either direct or derivative harm.38 Thus, Plaintiff, as Trustee for PCI, has standing to assert causes of action that remedy the harm done to the estate.39 Plaintiff, however, cannot bring direct claims that belong solely to a creditor.40
State law controls the analysis of whether a claim is direct or derivative.41 In making this determination, the Minnesota Supreme Court has held that courts...
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