Kelley v. BMO Harris Bank N.A.
| Decision Date | 13 March 2020 |
| Docket Number | Case No. 19-cv-1756 (WMW),Case No. 19-cv-1826 (WMW),Case No. 19-cv-1869 (WMW) |
| Parties | 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. BMO Harris Bank N.A., as Successor to M&I Marshall and Ilsley Bank, Appellant, v. Douglas A Kelley, Appellee. BMO Harris Bank N.A., as Successor to M&I Marshall and Ilsley Bank, Appellant, v. Douglas A Kelley, in his capacity as the Trustee of BMO Litigation Trust, Appellee. |
| Court | U.S. District Court — District of Minnesota |
In these related bankruptcy matters, Appellant-Defendant BMO Harris Bank N.A. (BMO Harris) moves for leave to file an interlocutory appeal of the June 27, 2019 Order of the United States Bankruptcy Court for the District of Minnesota, which denied BMO Harris's motion for summary judgment. (Case No. 19-cv-1826, Dkt. 2-6.) BMO Harris also moves to stay the bankruptcy proceedings and for an order accepting a document under seal. (Case No. 19-cv-1756, Dkt. 41; Case No. 19-cv-1826, Dkt. 19; Case No. 19-cv-1869, Dkt. 3.) Plaintiff-Appellee Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust (the Trustee), opposes each of BMO Harris's motions. For the reasons addressed below, BMO Harris's motions are denied.
These matters arise from a Ponzi scheme orchestrated by Thomas J. Petters and his associates between 1994 and 2008. Petters was the owner, director, and CEO of Petters Company, Inc. (PCI). During the course of the Ponzi scheme, PCI obtained billions of dollars from investors through fraud, false pretenses, and misrepresentations about PCI's purported business. Billions of dollars were wired into and out of PCI's depository account at National City Bank, which was acquired by M&I Marshall and Ilsley Bank (M&I) in July 2001. BMO Harris is the successor to M&I, and the claims at issue in these bankruptcy matters pertain to M&I's handling of PCI's account.
Plaintiff-Appellee Douglas A. Kelley was appointed as the equity receiver for PCI on October 6, 2008. See In re Petters Co., 401 B.R. 391, 398 (D. Minn. Bankr. 2009). Kelley filed for Chapter 11 bankruptcy relief on behalf of PCI and was appointed as the Chapter 11 Trustee. Id. at 414. The bankruptcy court confirmed PCI's Second AmendedPlan of Chapter 11 Liquidation, which transferred certain assets, including the causes of action at issue here, to the BMO Litigation Trust.
The Trustee subsequently filed a complaint alleging that BMO Harris was complicit in the Ponzi scheme through its dealings with Petters, PCI, and PCI's account. The complaint alleges that BMO Harris failed to respond to irregularities as required by banking regulations that, together with other acts and omissions, legitimized and facilitated the Ponzi scheme. The bankruptcy court granted in part and denied in part BMO Harris's motion to dismiss on February 24, 2017. In re Petters Co., 565 B.R. 154 (D. Minn. Bankr. 2017). Four claims remain: Count I alleges that BMO Harris violated the Minnesota Uniform Fiduciaries Act, Count II alleges that BMO Harris breached fiduciary duties it owed to PCI, Count III alleges that BMO Harris aided and abetted fraud against PCI, and Count IV alleges that BMO Harris aided and abetted the breach of fiduciary duties owed to PCI. See id.
BMO Harris moved for summary judgment on the remaining four claims, arguing that the Trustee lacked standing and that BMO Harris's in pari delicto defense precludes the Trustee from recovery. The bankruptcy court denied BMO Harris's motion for summary judgment on both grounds. BMO Harris now moves for leave to file an interlocutory appeal of the bankruptcy court's summary judgment order.
BMO Harris seeks this Court's leave to appeal the bankruptcy court's June 27, 2019 Order, which denied BMO Harris's motion for summary judgment. When abankruptcy court's order is not a final order, a party may file an interlocutory appeal to the district court only "with leave of the court." 28 U.S.C. § 158(a)(3). A district court's decision to grant or deny a motion for leave to appeal an interlocutory bankruptcy order "is purely discretionary." In re M & S Grading, Inc., 526 F.3d 363, 371 (8th Cir. 2008). "Such leave, however, should be sparingly granted and only in exceptional cases." In re Arch Coal, Inc., 592 B.R. 853, 856 (B.A.P. 8th Cir. 2018). The party seeking interlocutory appeal "must demonstrate that exceptional circumstances exist, not merely that the issue is hard, unique, or the case is difficult." In re Nat'l Metalcraft Corp., 211 B.R. 905, 906 (B.A.P. 8th Cir. 1997) (internal citation omitted). When deciding whether to grant leave to appeal, courts consider whether refusal to do so would result in wasted litigation and expense, whether the appeal involves a controlling question of law for which there is a substantial basis for difference of opinion, and whether an immediate appeal would materially advance the ultimate termination of the litigation. Id.; accord In re Arch Coal, 592 B.R. at 856.
BMO Harris argues that the foregoing considerations warrant granting its motion for leave to appeal the bankruptcy court's June 27, 2019 Order because the bankruptcy court's rulings as to standing and BMO Harris's in pari delicto defense depart from established law and reversal of those rulings would terminate or substantially narrow this litigation. The Trustee counters that the bankruptcy court's rulings do not involve questions of law for which there is a substantial basis for differing opinion as the rulings are based on well-settled law and, in part, on disputed material facts. The Court addresses each bankruptcy court ruling in turn.
The bankruptcy court rejected BMO Harris's standing arguments, concluding that the Trustee's claims against BMO Harris belong to the bankruptcy estate under Minnesota law because the claims involve direct harm to the debtor and only indirect harm to the creditors. BMO Harris argues that there are substantial grounds for a difference of opinion as to this conclusion.
It is a bankruptcy trustee's duty to "collect and reduce to money the property of the estate for which such trustee serves." 11 U.S.C. § 704(a)(1). The property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Because a cause of action is an interest in property that is included in an estate, a bankruptcy trustee has authority under Section 704(a)(1) "to assert causes of action that belonged to the debtor at the time of filing bankruptcy."1 In re Senior Cottages of Am., LLC, 482 F.3d 997, 1001 (8th Cir. 2007). State law governs "[w]hether a particular cause of action arising under state law belonged to the debtor in bankruptcy or to someone else." Id.
Applying these legal standards, the bankruptcy court concluded that Minnesota law permits a corporation to bring claims involving direct harm to the corporation and that the fraudulent depletion of corporate assets that results in the inability to repay creditors is a direct harm to the corporation. The bankruptcy court also concluded that, under Minnesota law, when harm to a corporation only indirectly harms all similarly situated creditors, the creditors' derivative claims arising from the indirect harm belong to the corporation that was directly harmed. But a corporation cannot bring claims that belong solely to the creditor, the bankruptcy court concluded. The bankruptcy court concluded that the claims brought by the Trustee in this case belong to the estate because the claims involve direct harm to PCI and they are merely derivative claims of PCI's similarly situated creditors that were indirectly harmed. As such, the bankruptcy court denied BMO Harris's motion for summary judgment as to this issue.
In seeking leave to file an interlocutory appeal, BMO Harris argues there are substantial grounds for a difference of opinion as to the bankruptcy court's foregoing legal conclusions. A substantial ground for a difference of opinion exists when there are "a sufficient number of conflicting and contradictory opinions." Union County v. Piper Jaffray & Co., 525 F.3d 643, 647 (8th Cir. 2008) (quoting White v. Nix, 43 F.3d 374, 378 (8th Cir. 1994)). BMO Harris offers several arguments in support of its position.
BMO Harris first contends that the Trustee cannot recover "creditor losses labeled as amounts the debtor is unable to repay." According to BMO Harris, the bankruptcy court's decision improperly recharacterizes creditor losses as harm to PCI. But when a corporation's assets are fraudulently depleted, rendering the corporation unable to repaycreditors, it is the corporation—not the creditors—that is directly harmed, and the claim belongs to the bankruptcy estate. See Senior Cottages, 482 F.3d at 1006; accord Greenpond S., LLC v. Gen. Elec. Capital Corp., 886 N.W.2d 649, 657 (Minn. Ct. App. 2016) (). "Simply because the creditors of an estate may be the primary or even the only beneficiaries of [the estate's] recovery does not transform the action into a suit by the creditors" because, if that were the case, a bankruptcy trustee could never pursue claims on behalf of an estate that has insufficient funds to pay all creditors. Senior Cottages, 482 F.3d at 1006 (quoting Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 348-49 (3d Cir. 2001)). The fact that fraudulent dissipation of corporate assets limits a corporation's ability to repay its debts "is not . . . a concession that only the creditors, and not [the corporation] itself, have sustained any injury." Id. (quoting Smith v. Arthur Andersen LLP, 421...
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