Kelley v. Safe Harbor Managed Account 101, Ltd.

• Decision Date: 21 April 2022
• Docket Number: 20-3330
• Citation: 31 F.4th 1058
• Parties: Douglas A. KELLEY, in his capacity AS the TRUSTEE OF the PCI LIQUIDATING TRUST, Appellant v. SAFE HARBOR MANAGED ACCOUNT 101, LTD., Appellee
• Court: U.S. Court of Appeals — Eighth Circuit

31 F.4th 1058

Douglas A. KELLEY, in his capacity AS the TRUSTEE OF the PCI LIQUIDATING TRUST, Appellant

v.SAFE HARBOR MANAGED ACCOUNT 101, LTD., Appellee

No. 20-3330

United States Court of Appeals, Eighth Circuit.

Submitted: October 20, 2021

Filed: April 21, 2022

Stacy Ann Broman, Meagher & Geer, Minneapolis, MN, Shira R. Isenberg, Neal H. Levin, Freeborn & Peters, Chicago, IL, for Appellant.

Thomas Charles Atmore, Martin & Squires, Saint Paul, MN, Frank R. Jakes, Angelina E. Lim, Michael C. Markham, Johnson & Pope, Tampa, FL, for Appellee.

Before COLLOTON, SHEPHERD, and KELLY, Circuit Judges.

SHEPHERD, Circuit Judge.

This case is one of many arising from the multi-billion-dollar fraud perpetuated by former Minnesota businessman Thomas Petters through his company, Petters Company, Inc. (PCI). Appellant Douglas A. Kelley, in his capacity as Trustee of the PCI Liquidating Trust (Kelley), filed this adversary proceeding against Appellee Safe Harbor Managed Account 101, Ltd. (Safe Harbor) to recover nearly $6.9 million transferred to Safe Harbor as a subsequent transferee of an entity that Kelley had previously obtained a default judgment against for transfers made to it by a PCI subsidiary. The district court granted summary judgment in favor of Safe Harbor, concluding that 11 U.S.C. § 546(e) shielded Safe Harbor from Kelley's avoiding powers. Having jurisdiction under 28 U.S.C. § 1291, we affirm in part, reverse in part, and remand for further consideration.

I.

Under Chapter 5 of the Bankruptcy Code (the Code), bankruptcy trustees have the authority to avoid certain pre-petition transfers made by the debtor and " ‘recaptur[e] the value of those avoided transfers for the benefit of the estate.’ ... Sections 544 through 553 of the Code outline the circumstances under which a trustee may pursue avoidance." Merit Mgmt. Grp., LP v. FTI Consulting, Inc., ––– U.S. ––––, 138 S. Ct. 883, 888, 200 L.Ed.2d 183 (2018) (first alteration in original) (citation omitted). These avoiding powers allow trustees "[t]o maximize the funds available for, and ensure equity in, the distribution to creditors in a bankruptcy proceeding." Id. at 887-88. If a transfer is avoided, the trustee may recover the property transferred or its value from "the initial transferee of such transfer or the entity for whose benefit such transfer was made" or "any immediate or mediate transferee of such initial transferee," i.e., any subsequent transferee. 11 U.S.C. § 550(a). A trustee's avoiding powers are not boundless, however; "[t]he Code sets out a number of limits on the exercise of these avoiding powers." Merit Mgmt., 138 S. Ct. at 889. This case concerns the limitation, or safe harbor, set forth under 11 U.S.C. § 546(e), which provides in relevant part:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer ... that is a transfer made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract, as defined in section 741(7), ... that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

In simpler terms, where a transaction involves a transfer by, to, or for the benefit of a "financial institution" and that transfer is made "in connection with a securities contract," § 546(e) provides the financial institution immunity from the trustee's avoiding powers. See id. The only qualifying transfers exempt from § 546(e) are those that are actually fraudulent transfers under 11 U.S.C. § 548(a)(1)(A). See id. Section 546(e) "was enacted ‘to minimiz[e] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.’ "

Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC ), 773 F.3d 411, 416 (2d Cir. 2014) (alteration in original) (citation omitted). "The theory underlying this section is that, ‘[i]f a firm is required to repay amounts received in settled securities transactions, it could have insufficient capital or liquidity to meet its current securities trading obligations, placing other market participants and the securities markets themselves at risk.’ " Id. (alteration in original) (citation omitted); see also Deutsche Bank Tr. Co Ams. v. Large Priv. Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig. ), 946 F.3d 66, 93 (2d Cir. 2019) ("A lack of protection against the unwinding of securities transactions would create substantial deterrents, limited only by the copious imaginations of able lawyers, to investing in the securities market."), cert. dismissed in part sub nom. Deutsche Bank Tr. Co. v. Robert R. McCormick Found., ––– U.S. ––––, 141 S. Ct. 728, 208 L.Ed.2d 448 (2020), cert. denied sub nom. Deutsche Bank Tr. Co. Ams. v. Robert R. McCormick Found., ––– U.S. ––––, 141 S. Ct. 2552, 209 L.Ed.2d 568 (2021).

The present matter stems from the bankruptcies that resulted from the collapse of Petters's Ponzi scheme,¹ the details of which have been documented in several of this Court's prior opinions. See, e.g., Stoebner v. Opportunity Fin., LLC, 909 F.3d 219, 221-22 (8th Cir. 2018) ; United States v. Petters, 663 F.3d 375, 379-80 (8th Cir. 2011) ; Ritchie Special Credit Invs., Ltd. v. U.S. Tr., 620 F.3d 847, 850-51 (8th Cir. 2010). The facts we recite today are those most relevant to the present appeal. Through PCI and its subsidiaries, Petters "purported to run a ‘diverting’ business that purchased electronics in bulk and resold them at high profits to major retailers." Ritchie Cap. Mgmt., LLC v. Stoebner, 779 F.3d 857, 859 (8th Cir. 2015). In actuality, no such diverting business existed, and Petters was running a scam held up by continuously enticing new investors. Petters's fraud was uncovered in September 2008, and in October 2008, PCI and other entities owned or controlled by Petters were placed into civil receivership. Subsequently, Kelley caused these entities to file voluntary petitions for relief under Chapter 11 of the Code. The bankruptcy court authorized joint administration of these cases, and Kelley was later appointed as Trustee for the PCI Liquidating Trust. Kelley has filed hundreds of lawsuits seeking to recover payments that these entities made to early investors for the benefit of later investors who lost their entire investments to Petters's Ponzi scheme. See Kelley, 974 F.3d at 888.

To understand how Safe Harbor became a target of Kelley's efforts to recover assets on behalf of the PCI Liquidating Trust, it is necessary to know the underlying players and understand their relationships with one another. MGC Finance, Inc. (MGC Finance) was a wholly owned subsidiary of PCI that served as a special purpose entity (SPE)² used by PCI to carry out its fraudulent activities. Arrowhead Capital Partners II, L.P. (Arrowhead) was a limited partnership formed and managed by Arrowhead Capital Management Corp. for the purpose of serving as a PCI feeder fund for Arrowhead's investors. Metro I, LLC (Metro), formerly known as Metro Gem Capital, LLC, was formed by Arrowhead Capital Management Corp.’s CEO as an SPE of Arrowhead.³ Metro's sole purpose was to facilitate the transfer of funds from Arrowhead to PCI through MGC Finance. On July 18, 2001, MGC Finance entered into a Credit Agreement with Metro, which provided that Metro would make loans evidenced by promissory notes to MGC Finance (the MGC Finance Notes) for the purpose of financing PCI's diverting business. That same day, Arrowhead and Metro entered into a Note Purchase Agreement, under which the promissory notes Metro received from MGC Finance were transferred directly to and held for the sole benefit of Arrowhead.

In 2002, making what it believed to be a typical investment, Safe Harbor invested a total of $6 million in Arrowhead. In connection with its investment, Safe Harbor entered into a Limited Partnership Agreement and Subscription Agreement with and became an equity holder of Arrowhead. Pursuant to the Private Placement Memorandum⁴ for Arrowhead and the Custodial Agreement referenced therein, Safe Harbor wired funds into a "custodial" account held by Wells Fargo Bank (Wells Fargo). The funds held in the Wells Fargo account were used by Arrowhead to purchase the MGC Finance Notes from Metro, and when Arrowhead received payment from MGC Finance on the notes it had purchased from Metro pursuant to the Note Purchase Agreement, those funds would flow back through the Wells Fargo account to repay investors such as Safe Harbor. This was the case in September 2003 when Safe Harbor redeemed its investment in Arrowhead and received two wire transfers totaling nearly $6.9 million from the Wells Fargo account: one for $6 million as the return for its initial investment and another for $898,923.39 as the return on that investment.

In October 2010, Kelley commenced an adversary proceeding against Arrowhead seeking to avoid the transfers made by MGC Finance to Arrowhead. Arrowhead failed to answer or otherwise defend the case, and in March 2018, the bankruptcy court found that the transfers received by Arrowhead were avoidable "under 11 U.S.C. §§ 544(b), 548(a)(1)(A), 548(a)(1)(B), 550(a), 551, and 1106," Minnesota statutes, and "principles of unjust enrichment and disgorgement," and it granted Kelley in his capacity as Trustee of the PCI Liquidating Trust a $941,704,263.66 default judgment against Arrowhead, plus costs and prejudgment interest. See R. Doc. 22-10, at 3. On August 25, 2017, Kelley filed the adversary proceeding that is the subject of this appeal, alleging that the nearly $6.9 million Arrowhead subsequently transferred to Safe Harbor was recoverable under 11 U.S.C. §§ 550(a) and 551. Safe Harbor filed a motion to dismiss Kelley's complaint, alleging that § 546(e) precluded Kelley from recovering from Safe Harbor "because the subject transfers were ‘settlement payments’ or transfers ‘in connection with a securities contract’ made ‘by or to (or...