Kelley v. Kanios

• Decision Date: 20 May 2019
• Docket Number: Case No. 18-cv-823 (SRN/SER)
• Citation: 383 F.Supp.3d 852
• Parties: Douglas A. KELLEY, in his capacity as the PCI Liquidating Trustee for the PCI Liquidating Trust, Plaintiff, v. Chris M. KANIOS; Chris M. Kanios 401(k) Savings Plan; National City Bank, as Custodian of the Chris M. Kanios 401(k) Savings Plan; and Steve Papadimos, Defendants.
• Court: U.S. District Court — District of Minnesota

383 F.Supp.3d 852

Douglas A. KELLEY, in his capacity as the PCI Liquidating Trustee for the PCI Liquidating Trust, Plaintiff,

v.Chris M. KANIOS; Chris M. Kanios 401(k) Savings Plan; National City Bank, as Custodian of the Chris M. Kanios 401(k) Savings Plan; and Steve Papadimos, Defendants.

Case No. 18-cv-823 (SRN/SER)

United States District Court, D. Minnesota.

Signed May 20, 2019

Elizabeth M. Forsythe, Michael E. Rowe, J. David Jackson, and Lucas J. Olson, Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, MN, 55402, for Plaintiff.

Henry B. Roberts, Jr., H. Buswell Roberts, Jr. PLLC, 200 Country Club Road Southwest, Suite B1, Blacksburg, VA 24060, and Michael L. Gust, Anderson, Bottrell, Sanden & Thompson, PO Box 10247, Fargo, ND, 58106, for Defendants.

MEMORANDUM ORDER AND OPINION

SUSAN RICHARD NELSON, United States District Judge This case arises out of the wreckage of local businessman Tom Petters's infamous, years-long Ponzi scheme, which lasted from the mid-1990s through June 2008, and which left Petters's creditors with over three billion dollars in unpaid liabilities. In this particular case, Plaintiff, the Liquidating Trustee for one of Petters's now-defunct companies, Petters Company Inc. ("PCI"), seeks to "avoid," or "claw back," approximately four million dollars of interest payments, or "transfers," received by Defendants Steve Papadimos and Chris M. Kanios during the heyday of Petters's scheme, i.e. , 1997 to 2006, on grounds that those interest payments (and the promissory notes underlying the payments) were made directly in furtherance of Petters's fraud, and are therefore subject to "claw back" under the Trustee's interpretation of the Minnesota Uniform Fraudulent Transfers Act ("MUFTA"). Because the Court agreed with the Trustee's interpretation of MUFTA during a November 2018 jury trial the Court conducted in a companion case to this one, see Kelley v. Boosalis , No. 18-cv-868 (SRN/TNL), 2018 WL 6322631 (D. Minn. Dec. 3, 2018), and because the Trustee believes there are no material facts in dispute that would warrant another jury trial here, the Trustee now moves for summary judgment.

Defendants not only oppose the motion, but argue that they , not the Trustee, are the parties entitled to summary judgment. This is so, Defendants argue, because the Court erred in the Boosalis case. And, Defendants continue, were the Court to adopt the "proper" interpretation of MUFTA here, the Trustee's case would fail as a matter of law. In the alternative, Defendants also argue that the Court should certify the meaning of certain critical terms under MUFTA to the Minnesota Supreme Court, so that that Court could resolve what Defendants describe as "unsettled" questions of state law. Defendants further contend that, at the least, the Trustee's summary judgment motion should be denied on grounds that a jury trial is still needed to resolve genuine disputes of material fact.

For the reasons explained below, the Court grants the Trustee's summary judgment motion in full. Judgment will accordingly be entered for the Trustee.

I. BACKGROUND

A. Factual History¹

1. Defendants Lend Millions of Dollars to Petters Company, Inc., Between 1997 and 2006, and Receive Millions of Dollars of Interest in Return

Steve Papadimos and Chris Kanios (collectively, "Defendants") are a married couple that live in the suburbs of Toledo, Ohio. Papadimos is a government attorney and Kanios is a physician. (See Pl.'s Ex. 30 [Doc. No. 110-3] ("Kanios Dep.") at 6-7.) At some point in 1997, Papadimos heard about an investment opportunity with a Minneapolis businessman named Tom Petters, and, more specifically, with a "diverting" business that Petters was running with consumer goods. In short, Papadimos believed, Petters needed Papadimos's money so that Petters could buy large lots of older, unsold consumer goods from wholesalers, and then re-sell, or "divert," those goods to retailers at a substantial profit. (See, e.g. , Pl.'s Ex. 23 [Doc. No. 110-2] ("Papadimos Dep. I") at 46-47 (Q: What did you think were funding? A: Oh, that I was lending money... there would be promissory notes, and that Petters, PCI was buying distressed goods, bankruptcy goods, liquidated goods, and re-selling them."). Papadimos also thought that, because Petters was working with "distressed goods and bankruptcy goods," Petters would be generating 40 to 60 percent in "annual rate[s] of return." (See Defs.' Ex. B. [Doc. No. 105-1] ("Papadimos Dep. II") at 17 (describing a conversation he had with one of Petters's associates).)

Before investing with Petters, though, Papadimos did some due diligence. Among other things, he (a) had a short meeting with Petters in Minneapolis, and, while there, observed that Petters owned actual warehouses and retail stores that had "thousands of boxes" inside of them (see Papadimos Dep. II. at 13-14), (b) spoke with Thomas Hays (a well-regarded lawyer who worked with Petters) on multiple occasions, and learned that Hays was confident about Petters's business acumen (id. at 15-19), (c) talked to at least one business that Petters had purportedly conducted a merchandise transaction with, Montgomery Ward, and confirmed that a business relationship existed between the two companies (id. at 34, 76), and (d) read articles in the Minneapolis Star-Tribune newspaper about Petters's businesses (thus again confirming the fact that the businesses did exist) (id. at 31, 76, 132).

Consequently, in July 1997, Papadimos decided to begin lending to Petters's wholly-owned company, Petters Company, Inc. ("PCI").² (See Defs.' Ex. J [Doc. No. 105-2] ("July 8, 1997 Promissory Note").) Papadimos first lent money to PCI in 30- or 60-day loans, with an annualized interest rate averaging about 38 percent. (See Pl.'s Ex. 22 [Doc. No. 110-2] ("Martens – Papadimos Tracing Report") at ECF p. 494.) As time went on, however, Papadimos lent Petters larger sums of money, and often simply "rolled" his principal investment from one promissory note to another, so as to keep receiving interest payments without putting any "new" money into PCI. (See Pl.'s Ex. 20 [Doc. No. 110-2] ("Martens – Papadimos Transfers Report") at ECF p. 445 (showing that Papadimos stopped investing new principal into PCI in 2001).)

Moreover, in March 2000, Papadimos also convinced his wife, Chris Kanios, to invest some of her personal 401(k) retirement fund with PCI, too, on virtually identical terms to his own loans. (See Kanios Dep. at 7-8; accord Pl.'s Ex. 29 [Doc. No. 110-3] ("Martens – Kanios Tracing Report") at ECF p. 54.) Kanios relied entirely on her husband's due diligence, and "had no understanding of what PCI's business was." (Kanios Dep. at 11.)

The couple continued to lend money to PCI until 2005, when PCI told them that it only wanted to work with larger-scale investors, like hedge funds, from then on out. (See Papadimos Dep. II at 13, 17.) Shortly thereafter, PCI re-paid Defendants their principal investment(s) in full. (See Papadimos Dep. I at 107.)

In sum, between July 1997 and March 2006, Papadimos lent $ 3,297,300 to PCI, arising out of at least 87 promissory notes and 115 related "transactions." (See Martens – Papadimos Tracing Report ¶¶ 9, 12; see also id. at n.2 (noting that "the difference between the 115 transactions and the 87 promissory notes" arose for "one of the following reasons": "(1) rolling of principal and/or interest on certain notes; (2) multiple interest and/or principal payments on the same note; or (3) reversals due to insufficient funds, uncollected checks, or missing endorsements").) In return, PCI paid Papadimos $ 3,126,524.37 in interest. (See id. ¶ 9.)³

Similarly, between March 2000 and March 2006, Kanios lent $ 690,000 to PCI, arising out of at least 13 promissory notes and 21 related transactions. (See Martens – Kanios Tracing Report ¶¶ 9, 12.) In return, PCI paid Kanios $ 572,500.22 in interest. (See id. ¶ 9; accord Kanios Dep. at 14-15 (admitting that she received this amount in interest income).)

Notably, during this entire time period, it is undisputed that Defendants believed they were investing in PCI's "diverting" business, and in the merchandise purchases and re-sales undergirding that business; they did not believe they were providing general business loans to PCI. (See supra at 858-59.) In fact, the vast majority of the promissory notes Defendants signed with PCI included a security interest in a specific order of merchandise that PCI had purportedly bought with Defendants' money, as well as in any proceeds from sales of that merchandise. (See Matens – Papadimos Tracing Report ¶ 33 (stating that 74 of Papadimos's promissory notes referenced a security agreement and accompanying "purchase order" underlying that agreement); Martens – Kanios Tracing Report ¶ 28 (same, with respect to nine of Kanio's promissory notes).) What's more, these security agreements contained language confirming that the express purpose of Defendants' loans was to allow PCI to purchase, and then re-sell, merchandise, i.e. , "[t]his Security Interest is granted to secure payment of funds loaned to [PCI] which has enabled or is intended to enable [PCI] to acquire rights in or use of certain merchandise , which the parties understand and anticipate that [PCI] intends to resell as part of its business ." (See generally Defs.' Ex. M [Doc. Nos. 105-3 to 105-4] ("Defendants' Loan Documentation") (approximately 100 pages of promissory notes, security agreements, and purchase orders exchanged between PCI and Defendants, all containing materially identical language).) These purchase orders and security agreements constituted an "important factor" in encouraging Defendants to invest with PCI. (Papadimos Dep. I at 84.)⁴

2. In 2008, the Public Learns that PCI Was Actually a Massive, Years-Long Ponzi Scheme, In Which Funds from Investors Like Defendants Were Primarily Used to Re-Pay Other Investors, Rather Than to Finance Legitimate Commercial Transactions

In reality,...