Kelley v. Opportunity Fin., LLC (In re Petters Co.)
| Decision Date | 11 June 2015 |
| Docket Number | Court File No. 08–45257, 08–45371 GFK, 08–45330 GFK, 08–45331 GFK,ADV 10–4301, 08–45392 GFK, 08–45326 GFK, 08–45328 GFK,Court File Nos: 08–45258 GFK, ADV 10–4352, 08–45329 GFK,JOINTLY ADMINISTERED UNDER CASE NO. 08–45257, 08–45327 GFK |
| Citation | 532 B.R. 100 |
| 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 court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc., PC Funding, LLC, and SPF Funding, LLC, Plaintiff, v. Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Opportunity Finance Securitization III, LLC; International Investment Opportunities, LLC; Sabes Family Foundation; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; Deutsche Zentralgenossenschaftbank AG ; West Landesbank AG; WestLB AG New York Branch ; and The Minneapolis Foundation; Defendants, and Metro Gem, Inc.; Metro Gem LLC; Northwestern Foundation; and Frank E. Vennes, Jr., Defendants. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Ethan Frechette, Boies, Schiller & Flexner LLP, Hanover, NH, James A. Lodoen, Lindquist & Vennum PLLP, Minneapolis, MN, for Debtors.
These adversary proceedings are before the court on motions for dismissal made by Defendants Sabes Family Foundation (“the Sabes Foundation”) and The Minneapolis Foundation (in ADV 10–4301) and Defendant Northwestern Foundation (in ADV 10–4352).1
In his original and amended complaints, the Plaintiff sought to avoid payments of money that one or more of the Debtors had made to those three defendants. The Plaintiff pleaded Minnesota's enactment of the Uniform Fraudulent Transfer Act (“MUFTA”) as his principal legal authority. The motions at bar focus on a 2012 amendment to MUFTA. The movants now assert the 2012 amendment as a complete defense to the Plaintiff's claims under MUFTA. Mark D. Larsen and James A. Lodoen of Lindquist & Vennum PLLP appear for the Plaintiff (“the Trustee”). Joseph G. Petrosinelli of Williams & Connolly LLP and John R. McDonald of Briggs and Morgan, P.A. appear for the Sabes Foundation. Thomas C. Atmore of Leonard, O'Brien, Spencer, Gale & Sayre, Ltd. appears for the Northwestern Foundation. David L. Mitchell of Robins, Kaplan, Miller & Ciresi L.L.P. appears for The Minneapolis Foundation.
These adversary proceedings are part of a large docket of avoidance litigation commenced in the underlying bankruptcy cases. The cases and the litigation address the Ponzi scheme perpetrated by Thomas J. Petters, which failed in 2008. The Trustee is charged with remediating the end-damage caused by the scheme. He seeks to do so primarily by recovering payments that the Debtor-entities made to satisfy parties that had lent to them earlier in the history of the scheme. As a general matter, the Trustee alleges, lenders made their cash infusions for the ostensible business activity—pretensed and nonexistent—that served as the cover for the Petters scheme; but under the classic Ponzi-structure of Tom Petters's operation, such infusions were largely directed to paying earlier lenders and the later repayment was funded by infusions from later lenders.2
Among the defendants sued were a number of entities that had held themselves out as charitable organizations during the time they dealt with the Debtors. They had received payments of money from Debtor Petters Company, Inc. (“PCI”) or one of its affiliated debtor-entities. As part of a settlement effort to reduce the litigation docket, mediation was conducted between the Trustee and members of several classes of parties sued by him, including the “charity-defendants.”
After the mediation stage, the only charity-defendants3 still under suit are the three movants at bar.4 All of the movants were sued jointly with other persons or entities that were associated with them, in their interface with the Petters entity structure. The Trustee seeks to avoid specific transfers made to each of the movants. His claims for avoidance against the movants are factually distinct from the claims against their co-defendants.
Early in the litigation, the charity-defendants moved for dismissal, in their own right and solely as to the Trustee's claims against them. Those motions raised many of the same issues as the motions made by non-charity defendants. All of them were subject to the same procedures order.
During the pendency of the litigation, however, the Minnesota legislature amended MUFTA in 2012. The amendments added a retroactively-effective provision to limit the scope and nature of transfers to a qualifying charitable organization, that may be subjected to avoidance at the instance of a plaintiff empowered to invoke MUFTA.5
Under the procedures order, the broader litigation docket first moved through an effort to address numerous issues common to the defense in most of the adversary proceedings.6 After that, the Northwestern Foundation insisted on an early treatment of its demand for the protection of the 2012 amendment to MUFTA. The Minneapolis Foundation joined in that demand.7 The parties stipulated to a further amendment to the Trustee's complaints specific to those issues.8 After that, the issues were queued up when the movants filed targeted motions for dismissal on the specific ground of shelter under the 2012 amendment. Substantial briefing was submitted. After oral argument, the record was closed. This memorandum sets forth the rulings on the issue submitted.
The issue presented by the movants is somewhat abstruse and esoteric, but it has large consequence for their exposure to the Trustee's avoidance powers.
The movants all received money from one or more of the Debtors, on multiple occasions. The Trustee sues to recapture those monies, on the theory that the payments were transfers fraudulent on the Debtor-transferors' creditors, i.e. the lenders then or later ensnared in the Ponzi scheme and the current and future trade creditors of the Debtors. He sues under theories of actual and constructive fraud, as those concepts would apply to the dynamic of a Ponzi scheme.9 His theory of suit was that any such payment-transfer worked such a fraud via the relinquishment of the value transferred. The major premise of that theory was an inherent and pervasive fraudulence within any Ponzi scheme and the intrinsic insolvency of such schemes ab initio .
Many courts and commentators have observed that Ponzi schemes are sustained on the projected semblance of high success in the pretensed economic activity, which would imply the ability to repay on lending or to produce returns on investment. Under this view, perpetrators bolster the pretense of success by means not directly connected to the falsely-portrayed, ostensible business or investment. Such means include lavish gifts to persons close to the purveyor and large, well-publicized charitable contributions. Kathy Bazoian Phelps and Steven Rhodes, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (2012), §§ 2.03[1][d] and 3.02[5]. The notion of such an ancillary pretense is logical. The phenomenon might be called a “luster factor.”
At least intuitively, the proposition is reasonable: splashy charitable giving could add such luster to a perpetrator and its ostensible business. Reasons for using it are obvious, however corrupted they may be. Prominent displays of charity attract public attention generally. They can attract new investor-victims through the general semblance of success and a charity-specific “affinity factor.” And, they put up a broad cover of good will that can mask the perpetrator's underlying dishonesty. When presented with such giving as a historical fact, those charged with remediation of failed frauds feel compelled to seek the disgorgement of monies disbursed under such ostensible benevolence. Connotatively, there is justification for this: the monies donated were most likely diverted from funds received from third parties in the scheme's operation, to the compounded detriment of earlier and later victim-investors.
Yet recipient-charities have equities of their own to call up. Absent a case of actual knowledge and collusion, they can claim that they had not been motivated by profit when they took the money, and were only carrying out their own benevolent functions in receiving and using it unwittingly. By the time they are called to account, charity-recipients have usually expended the donated funds on their mission—many times without capital enhancement from the expenditure. Finally, charities might have to resort to diverting funding received from current donors in order to respond to avoidance. This could erode their credibility with donors and the public, and frustrate the charitable purposes for which such later donations were made.
With all that in tow, this invocation of fraudulent transfer remedies presents a snarl of conflicting public policy considerations. It is a troubling conundrum for any court that presides over such litigation.10
Starting in 2008, bankruptcy cases and receivership proceedings were commenced in the state and federal courts in Minnesota to address the failure of the Petters Ponzi scheme and several smaller ones locally perpetrated by other persons. Those responsible for the remediation in these matters sued locally-based charity-recipients for avoidance. In 2012, the Minnesota Legislature amended MUFTA, with a provision that facially matched to this sort of litigation and all of the policy-based tensions that roil within it.
The change was made to MUFTA's definitional provision, Minn.Stat. § 513.41. Prior to that, the definition for “transfer,” at (12) of ...
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