Kelley v. Boosalis, No. 19-1079

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Writing for the Court: LOKEN, Circuit Judge.
• Citation: 974 F.3d 884
• Parties: Douglas A. KELLEY, in his capacity AS PCI Liquidating TRUSTEE FOR the PCI LIQUIDATING TRUST Appellee v. Gus BOOSALIS Appellant Douglas A. Kelley, in his Capacity as PCI Liquidating Trustee for the PCI Liquidating Trust Appellee v. Chris M. Kanios and Steve Papadimos Appellants
• Decision Date: 11 September 2020
• Docket Number: No. 19-1079, No. 19-2376, No. 19-2452, No. 19-2382

974 F.3d 884

Douglas A. KELLEY, in his capacity AS PCI Liquidating TRUSTEE FOR the PCI LIQUIDATING TRUST Appellee
v.
Gus BOOSALIS Appellant

Douglas A. Kelley, in his Capacity as PCI Liquidating Trustee for the PCI Liquidating Trust Appellee
v.
Chris M. Kanios and Steve Papadimos Appellants

No. 19-1079
No. 19-2376
No. 19-2382
No. 19-2452

United States Court of Appeals, Eighth Circuit.

Submitted: February 11, 2020
Filed: September 11, 2020
Rehearing and Rehearing En Banc Denied October 30, 2020

Andrew B. Brantingham, J. David Jackson, John Marti, DORSEY & WHITNEY, Minneapolis, MN, for Appellee in 19-1079.

Daniel J. Frisk, Mark A. Schwab, SCHWAB & THOMPSON, West Fargo, ND, Don R. Grande, GRANDE & FRISK, Fargo, ND, Erwin O. Switzer, III, GREENSFELDER & HEMKER, Saint Louis, MO, for Appellant Gus Boosalis.

Elizabeth Marie Forsythe, J. David Jackson, Michael E. Rowe, III, DORSEY & WHITNEY, Minneapolis, MN, for Appellee in 19-2376, 19-2382 and 19-2452.

Thomas Henry Boyd, Kyle Robert Kroll, Michael A. Rosow, WINTHROP & WEINSTINE, Minneapolis, MN, Michael Leonard Gust, ANDERSON & BOTTRELL, Fargo, ND, Henry Buswell Roberts, Jr., H. BUSWELL ROBERT, JR., PLLC, Blacksburg, VA, for Appellant Chris M. Kanios and Steve Papadimos.

Before LOKEN, BENTON, and KELLY, Circuit Judges.

LOKEN, Circuit Judge.

This litigation arose from the financial losses caused by a $3.5 billion Ponzi scheme¹ perpetrated by Thomas Petters from 1994 to 2008 through his company, Petters Company, Inc. ("PCI"). The unfortunate saga has been documented in numerous cases throughout this circuit. See generally Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857, 859-60 (8th Cir. 2015) ; United States v. Petters, 663 F.3d 375, 379-80 (8th Cir. 2011), cert. denied, 566 U.S. 990, 132 S.Ct. 2417, 182 L.Ed.2d 1024 (2012) ; Ritchie Special Credit Investments, Ltd. v. U.S. Tr., 620 F.3d 847, 849-52 (8th Cir. 2010) ; In re Petters Co., 494 B.R. 413, 417-20 (Bankr. D. Minn. 2013). We will limit this opinion to facts necessary to resolve these appeals.

PCI "purported to run a ‘diverting’ business that purchased electronics in bulk and resold them at high profits to major retailers." Ritchie Capital Mgmt., 779 F.3d at 859. Petters and his associates persuaded individual investors to make secured loans to finance specific purchases of electronics for resale. In reality, PCI engaged in almost no purchase and sale transactions. Instead, it diverted the loan proceeds and used the proceeds of new loans to repay interest due on outstanding loans -- one of the largest Ponzi schemes ever created.

974 F.3d 888

See id. When the scheme collapsed, Petters was convicted of multiple federal offenses and currently serves a fifty year prison sentence. PCI filed for bankruptcy. Douglas A. Kelley is the liquidating trustee for the PCI Liquidating Trust ("the Trustee") in a consolidated Chapter 11 bankruptcy. He has filed more than two hundred cases seeking to recover ("claw back") PCI's interest payments to early PCI lenders for the benefit of later lenders who lost their entire loans to the Ponzi scheme. See In re Petters Co., 494 B.R. at 417-18.

These appeals involve the Trustee's separate claw back claims against lenders Gus Boosalis, a former floor trader on the Pacific Exchange, and government attorney Steve Papadimos and his wife, physician Chris Kanios, who live in a Toledo, Ohio suburb (collectively "Defendants"). The Trustee asserted claims under 11 U.S.C. § 544(b)(1), which permits a trustee to "avoid any transfer of an interest of the debtor ... that is voidable under applicable law by a creditor holding an unsecured claim." Here, the "applicable law" is the Minnesota Uniform Fraudulent Transfers Act ("MUFTA"). Minn. Stat. §§ 513.41 et seq. ² The principal balances of Defendants’ loans were repaid when PCI shifted its borrowing to large institutional lenders some time before it filed for bankruptcy. The Trustee asserted claw back claims under MUFTA seeking only to recover payments of interest to Defendants on their loans to PCI.

Between 1995 and 2001, Boosalis was paid over $3.5 million in interest on loans to PCI. After lengthy discovery and a one week jury trial, the jury found that all interest payments were fraudulent transfers under MUFTA, and that Boosalis failed to prove an affirmative defense. Based on this verdict, the district court awarded approximately $3.5 million in damages and $2.9 million in prejudgment interest. Between July 1997 and March 2006, Papadimos loaned PCI $3,297,300.00 in many separate transactions. PCI paid $3,126,524.37 in interest on annual rates ranging from 12 to 48 percent. Kanios loaned PCI $690,000.00 in over twenty promissory note transactions. She was paid $572,500.22 interest at rates ranging from 12 to 39.66 percent. Following trial of the Trustee's claims against Boosalis, the district court granted the Trustee's motion for summary judgment against Papadimos and Kanios, concluding the record conclusively established that each of PCI's interest payments constituted "actual fraud" under MUFTA and these Defendants failed to establish the statutory affirmative defense to actual fraud. The court awarded the Trustee actual damages and prejudgment interest totaling $5,852,168.36 against Papadimos and $1,071,594.93 against Kanios.

All three Defendants appeal, raising numerous issues, many but not all of which overlap. Without consolidating the appeals, we heard oral arguments on the same day and now resolve the appeals in a combined opinion. On the major overlapping issue, we conclude the district court erred in applying the Supreme Court of Minnesota's controlling MUFTA decision in Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015), and the Minnesota law of void contracts. This requires reversing summary judgment against Papadimos and Kanios. In the Boosalis case, we likewise reverse and remand because the district court erred in instructing the jury on the MUFTA elements of "good faith" and "reasonably

974 F.3d 889

equivalent value." In both cases, we conclude the district court erred in concluding that Minnesota rather than federal law governed the award of prejudgment interest. We reject Defendants’ other arguments.

I. Background

A. Boosalis. Boosalis first learned of Petters in 1995 when a friend said he was lending to Petters and suggested Boosalis do the same. At a meeting in San Francisco, Petters claimed to be in the business of "diverting merchandise" -- purchasing discounted merchandise and selling it to large retailers like Sam's Club or Costco – and outlined his plan to build several retail stores. Thinking the business would be even more successful than Costco, Boosalis, after consulting his attorney, agreed to lend PCI approximately $50,000. PCI repaid that loan and a second loan in full. Boosalis continued lending on a regular basis, memorializing each loan in a promissory note and, in most transactions, a security agreement pledging as collateral the goods PCI would buy with the loan proceeds.³ To maintain Petters's transaction facade, PCI's Vice President of Operations, Deanna Coleman, attached fake purchase orders and invoices to many promissory notes. Petters also built several stores around the Twin Cities area that Boosalis occasionally visited. But PCI primarily used the proceeds of new loans to repay interest and principal to earlier lenders.

As the lending continued, Boosalis "rolled" the principal of his outstanding notes when PCI repaid interest every 90 days, counting outstanding unpaid principal toward the principal of a new note. By the end of 1998, unpaid principal on loans to Boosalis totaled $2.1 million, with PCI paying over $460,000 in interest. The amount fluctuated but, at one point, Boosalis had as much as $3.1 million outstanding. Boosalis encouraged business associates, family members, and the "Boosalis Family Limited Partnership" to lend to PCI, becoming the point of contact for what PCI called the "California Group." When PCI needed money, its employees would call Boosalis, and he would connect them to a lender. In 2001, millions of dollars of PCI checks to Boosalis and his family bounced. Boosalis contacted Petters, who promptly paid the debt, and Boosalis loaned PCI another $500,000. Before that note was due, Petters said he had secured better financing and offered a new interest rate of 18 percent. Boosalis quit lending. By October 2001, PCI repaid him in full.

B. Papadimos and Kanios. Papadimos learned of the opportunity to make short-term loans to PCI's diverting business in 1997. He met with Petters at PCI headquarters in Minnesota and visited a warehouse filled with goods purchased by PCI for resale. Papadimos received assurances of PCI's legitimacy from its insurers, other references, and Minnesota government agencies. Thomas Hay, an attorney and adviser to Petters, told Papadimos that PCI's long-term plan was to progress from loans from individual investors to large credit facilities provided by institutional investors. Papadimos began making loans and, at his recommendation, Kanios began making loans to PCI through her 401(k)

974 F.3d 890

plan. Nearly every promissory note included a security agreement granting the lender a security interest in the goods to be purchased. Papadimos and...